Earnings Call Transcript - GRFS Q1 2023

Nuria Pascual, Investor Relations and Sustainability Officer

Hello, everyone, and welcome to the Grifols First Quarter 2023 conference call. Thank you for joining us today. This is Nuria Pascual, Investor Relations and Sustainability Officer, and I'm here with Thomas Glanzmann, our Executive Chairman and CEO; Victor Grifols Deu, our Chief Operating Officer; and Alfredo Arroyo, Chief Financial Officer. This call will last about 60 minutes, including a presentation of approximately 30 minutes followed by a Q&A session. We kindly ask you to limit your questions to a maximum of two. Please note this call is being recorded, and materials for the call are available in the Investor Relations section at grifols.com. The transcript and webcast replay will also be accessible on the Investor Relations website within 24 hours after the live call. Now, I would like to draw your attention to the legal disclaimer and forward-looking statements, which are subject to substantial risks and uncertainties, are accurate only as of the call's original date, and we do not undertake any obligation to update or revise these statements. I will now turn the call over to Thomas Glanzmann.

Thomas Glanzmann, Executive Chairman and CEO

Thank you, Nuria, and thank you everyone for joining the call today. Before we turn to the specifics of our business performance, financials and full year '23 guidance, I would like to make some introductory comments. Over the past few months, we had the opportunity after many years to meet in person with more than 80 investors and 60 investment houses in London and New York, addressing questions and concerns about performance, debt, governance, and whether any fundamental changes will be made directionally at the company of the plans that had been laid out. For me and the management team, these meetings were of great value and I would like to take this opportunity to thank all participants for their honest and often very direct feedback, which was much appreciated. We have indeed taken note of what we heard and were told. In light of that, I would also like to take this opportunity to reiterate my key messages from these meetings. First and very importantly, Grifols is committed to creating value for all our shareholders and restoring our credibility and trust of the financial community. As I noted in our meetings, we understand that to do so, we will need to consistently deliver on our commitments, which we are already doing and will continue to do. Second, the priority set with our Board remains the same. We will improve our financial profile, reduce debt, execute and deliver our operating improvement plan, capture commercial opportunities and unlock Biotest's substantial value. Today's Q1 results should give you confidence that we are very focused on doing just that. Third, we outlined that we would clarify governance, streamline the organization and implement a performance culture that is aligned with our shareholders. In fact, over the last year, the senior leadership team has already made significant strides to reinforce our operational excellence, of which the most important first step was establishing a new organizational model. This involved the creation of four strategic business units and the appointment of new management, under whom we have refocused our strategic efforts to accelerate growth. Upon my appointment as Executive Chairman in February this year, I quickly thought to streamline Grifols' leadership structure, establishing a core senior leadership team with clear responsibility and now, as announced yesterday, my appointment to CEO further clarifies our decision-making process to accelerate Grifols' growth and strategic progress. Victor has been appointed as the Chief Operating Officer and Raimon Grifols has been appointed as the Chief Corporate Officer. We have now clearly defined the responsibilities of our Senior Executive Leadership Team, enabling us to continue to deliver on our successful transformation with the greatest accuracy and speed. I will return to this key topic in more detail later in the presentation. Returning to our commitments, our fourth commitment was to improve our communication with stakeholders, and we are and will certainly do so. We have our quarterly calls and we will follow-up on a regular communication with our global investor base. With the input from some of our investors, we have also decided to expand our IR footprint into the United States to better serve investors in North America. Going forward, we are also determined to expand our reach and continue to engage with equity and fixed income market participants. I hope and trust that you will walk away from this presentation with a sense that Grifols is stepping up and aggressively aligning all the needed pieces to position the company for a successful future. With that, let me turn to Slide 4 to kick off our presentation. In '22, we set clear priorities to reposition the company and made a number of key commitments in our February '23 call. I am pleased to report that in the first quarter of 2023, we are effectively meeting and exceeding our commitments, while we continue to execute on key priorities Grifols is on the rebound, and our operational delivery in this first quarter reflects this, while it also demonstrates the company's strong fundamentals in a growing market. So let me review a few highlights of the first quarter. As I mentioned earlier, we implemented significant changes to our executive governance, clarifying the leadership structure. In Q1, we also strengthened our performance culture by rolling out new short and long-term incentive plans aligned with shareholders' interests. The new plans award participants for overachievement and for Grifols' share price appreciation in the long term. Now, turning to the numbers, we delivered a solid start to the year, meeting and exceeding on our commitments in some key metrics. Revenues grew by 23% and by 14% on a like-for-like basis excluding Biotest, driven by a strong performance of Biopharma, which delivered an increase of 26% and by 15% like-for-like. Excluding Biotest, adjusted EBITDA margin for Q1 was 21%, exceeding the 19% to 20% guidance set for the first half of 2023. Consequently, we are raising our guidance to above 21% for the first half and for the whole year to 22% to 24%. Therefore, we now expect to exceed the EUR1.4 billion EBITDA guidance for H2'23. The execution of our operational improvement plan is also exceeding our expectations with more than 80% of the EUR400 million already deployed as of today. We have identified additional savings and are raising also here our target to more than EUR450 million. This achievement has not been easy, and I would like to take this opportunity to express my gratitude to all those working tirelessly on the front lines to make this happen. The plan, as it stands today, has resulted in a reduction of our cost per liter of more than 15%, driven primarily by a 25% decline in donor compensation, both figures compared to the peak in July of 2022. We are laser-focused on further reducing cost per liter, and we expect this to contribute to EBITDA expansion in the range of 200 to 400 basis points starting in the second half of 2023. Additionally, we continue to make good progress on several workstreams to meet our debt reduction commitment in order to get to a leverage ratio of four times by 2024. Returning to our commercial and innovation priorities, we continue to see significant opportunities for our high margin Alpha-1 PROLASTIN, and our subcutaneous IG product, Xembify. Additionally, we are making significant efforts to accelerate the approval and successful launch of the new Biotest proteins. Once launched, these proteins are expected to have a substantial positive impact on Grifols' financial performance and bringing them to market quickly is a critical aspect of our current integration with Biotest. Turning now to Slide 5. Over the past years, Grifols has made significant strides to reinforce its Board of Directors with diverse competencies, backgrounds and experiences. The Board now consists of 11 members, six independents that are led by Lead Independent Director. The Board operates today very well, and decisions are made by consensus with effective checks and balances while promoting great transparency and accountability. To further enhance its governance, Grifols is currently in the process of hiring a 12th Board member, who will be independent and possess strong credentials. In addition, with the latest appointments, all committees of the Board are now led by independent Board members. As I mentioned before, the Co-CEO Office has transitioned to the senior leadership executive team, which I'm honored to Chair. We have now defined the responsibility of this committee. Victor, as Chief Operating Officer, is responsible for the day-to-day operations and has all the operating units reporting to him. He will also continue to serve on the Board of Directors. Raimon, current Vice Chairman of Grifols in addition to his Board duties, assumes the role of Chief Corporate Officer, focused on optimizing the value of our corporate alliances and partnerships, as well as leading other key ad-hoc initiatives. The senior executive leadership team has a hands-on operating approach and meets weekly to ensure that we deliver. Its responsibilities include capital allocation, the strategy, communication, human resources policies, overall business performance and very importantly oversight of critical projects and priorities. A key priority right now is obviously our operational improvement plan and delivering on our commitment to further improve our operating performance and very importantly reduce our debt level. Now turning to Slide 6. It is important to note that we have also made changes across the organization beyond the senior executive team. In 2022, a new organization model was established to increase focus and build a performance culture that is more efficient, effective, agile, decisive and accountable. These changes included the appointments of new management to lead the Biopharma and plasma procurement business units and a new President for diagnostics. These new leaders have extensive experience in diverse industries, including healthcare, particularly biopharmaceuticals as well as retail distribution channels. Their knowledge will be key to ensure effective product launches, especially considering the key Biotest proteins, while creating the most efficient, advanced and very importantly donor-friendly global plasma network. Finally, as I mentioned before, we have reinforced our performance culture by rolling out short and long-term incentive plans. The new short-term variable remuneration is an important step forward, as it further aligns with our current key priorities. The equity-based long-term incentive plan aims to support and accelerate the achievement of the company's long-term strategy while increasing alignment with shareholders, as the stock price is a key metric. As you can see, much is happening at Grifols to reposition us across the board for the future. Let us now turn to Victor and then Alfredo, and then I will be back for the final remarks and then we will be happy to take your questions.

Victor Grifols Deu, Chief Operating Officer

Thank you, Thomas. Good morning or good afternoon to everyone, and thank you for joining us today. Let's turn to Slide 8 for comments on our business performance. In the first quarter of 2023, Grifols' total revenue grew by 18% at constant currency and 23% on a reported basis, reaching a record level of EUR1,561 million. Excluding Biotest, total revenue was EUR1,444 million, an increase of 9% at constant currency and 14% on a reported basis. This growth was primarily driven by our Biopharma business unit, which grew by 21% at constant currency and 10% at constant currency excluding Biotest, supported by strong underlying demand, favorable pricing, and product mix. Now, moving to Slide 9, we achieved a strong first quarter thanks to the robust performance of our flagship product IG in both US and international markets, which saw a significant growth of 14.5% in Q1 at constant currency. We anticipate that this momentum will continue, supported by solid underlying demand. Our efforts to boost market share and revenue for our subcutaneous immunoglobulin Xembify are paying off with a 34% increase in Q1 2023. Albumin growth was driven by higher demand and price increases in China, offsetting current marketing dynamics in the US. Looking ahead, we expect volume demand to rebound to high-single digit growth, primarily driven by China. Improved product mix was also supported by the albumin in bags container. Finally, Alpha-1 and Specialty & Proteins showed mid-single digit growth, thanks to increased demand for Alpha-1 and a strong customer mix in our Hypers portfolio. Now turning to Slide 10, we maintain a strong position in the IG market with a diverse product portfolio that includes Grifols and Biotest intravenous immunoglobulins, our subcutaneous immunoglobulin launched in the US, which received approvals in several European countries and Australia for PID and secondary immune deficiency in 2022, as well as our hyperimmune products. The global IG market is valued at over EUR40 billion and is projected to grow at high single digits in the coming years, primarily driven by primary and secondary immune deficiencies, which account for about 40% to 55% of the total IG market. The rise in secondary immune deficiencies is notably linked to an aging population and the use of immunosuppressive therapies, particularly immuno-oncology treatments, for which IG is often the preferred or only option. Moreover, increased awareness of the benefits of IG therapy and improvements in diagnosing primary deficiencies have led to more patients receiving IG treatments. With the broader untapped market growing faster than other IG applications, we see this as a significant growth opportunity for our business. Grifols' global strategy for immune products is based on three key pillars: focusing on growth in the US and strategically selected countries, targeting the immunodeficiency market where PID and secondary immune deficiency are growing faster than the overall user base, and advancing the adoption of our subcutaneous Xembify based on the important traction we have gained in recent quarters. To leverage this expected growth, we are dedicating efforts to lifecycle management, which includes pursuing new indications. One of these initiatives is seeking approval for Xembify to treat patients with CLL, the fastest-growing indication within secondary immunodeficiencies, which is expected to grow 9.5% from 2018 to 2025, representing a market potential over $1 billion. We also aim to maintain our leadership in neurology and acute care for autoimmune diseases, where IVIG remains the standard treatment. Our flagship product, Gamunex, is currently the most prescribed IG for CIDP. We intend to build on this success to reinforce our leadership, especially through the continued uptake of our subcutaneous Xembify, which offers an improved patient experience and provides a substantial commercial opportunity. Overall, we are well-positioned to take advantage of the anticipated growth in the IG market, which is expected to outpace any potential impacts from new technologies in the CIDP sector. Additionally, the company has a strong pipeline of IG products in various development stages, with several key milestones expected in 2023. Now moving to Slide 11, as Thomas mentioned, the cost per liter trend is positive, reflecting significant progress in executing our operational improvement plan. According to the fiscal year 2022 results, the declines in cost per liter and donor compensation have improved from 10% and 20% to over 15% and 25%, respectively. This positive trend will have a more pronounced effect on our financial results starting in the second half of 2023 due to the plasma industry’s inventory accounting practices, which involve a nine-month lag. The initiatives contributing to this positive trend in cost per liter include reducing donor compensation, optimizing and cutting staffing and overhead costs, and rationalizing our plasma center network. In the first three months of 2023, we consolidated seven underperforming plasma centers. Currently, with a total of 18 centers closed in Q4 2022, we have shut down more than 75 of our 125 centers to minimize the impact on plasma collection volumes. Going forward, we project further reductions in cost per liter, bolstered by ongoing development and valuation of savings initiatives that focus on implementing lean processes and digitalization. Now looking at Slide 12, we are making progress with our innovation pipeline as we fulfill our commitments in the first quarter. Our Phase 1 and Phase 2 study of the subcutaneous Alpha-1 15% has advanced from single dose to repeat dose phases. In terms of lifecycle management, we have provided final results for the Xembify by-weekly dosing study and are preparing to finalize the complete clinical study report for the IVIG APEX study, which has also concluded, while we are simultaneously wrapping up our CSR data. We expect to enroll and treat patients in the Xembify CLL study very soon. In Q2 2023, we anticipate completing enrollment for the PRECIOSA trial, and the enrollment for the SPARTA trial will conclude in the second half of this year. Biotest milestones for its novel proteins trials in 2023 remain on schedule. For Trimodulin, we expect to initiate the study in the first half, and the Fibrinogen trial is expected to finish with topline study results available in the second half of 2023. The development anticipated for this year is a solid combination of lifecycle management and new proteins like Trimodulin, Fibrinogen, and ATIII in sepsis, which we expect will significantly enhance the company’s plasma economics in the mid-term. Now, moving to Slide 13 for performance in Diagnostic and Bio Supplies, blood typing solutions were the primary drivers of growth in the Diagnostic business unit, achieving a strong high single-digit growth rate in key markets such as the US and China. The performance of NAT technology was affected by pricing concessions made to extend a large contract with a key customer for 15 years. Recombinant proteins saw a 28% increase, including a diagnostic company commercial true-up of 90 million, which was partially offset by reduced joint business profits; without this, revenues would have declined by 32%. Bio Supplies experienced a 70% increase at constant currency and a 78% increase on a reported basis. Following our acquisition of the remaining 51% stake in Access Biologicals in 2022, this move was aimed at achieving higher margins through vertical integration and expanding our commercial footprint in the cell culture market, as well as in vitro diagnostics and diagnostic R&D solutions. It also strengthened our biological products division. Now, I will turn it over to Alfredo.

Alfredo Arroyo, Chief Financial Officer

Thanks, Victor. Hello to everybody. As Thomas mentioned, Grifols delivered solid results for the first quarter of 2023 across all key metrics, beating our EBITDA guidance provided during our last earnings call. We are very confident to meet our updated full-year 2023 guidance, as we will see later. The reported total revenues increased by 23% and by 14% on a like-for-like basis, excluding Biotest, while reported Biopharma revenues were up by 26% and 15% like-for-like excluding Biotest. FX impact had no significant impact on this Q1 of 2023, while our gross margin is still impacted by high cost per liter from the plasma collected in the first half of 2022, due to the nine-month lag in inventory accounting; now we are on the recovery path. Operational leverage together with savings from the operational plan drove our Q1 adjusted EBITDA margin to 21% excluding Biotest, which is above the guidance. Our leverage ratio stands at 7 times with a solid liquidity position of EUR1.3 billion and also with positive operating cash flow excluding the one-off restructuring charge. Plasma collection increased by 11% in Q1, while cost per liter significantly declined to more than 15% by end March from its peak last July. Good news on the execution of our operational improvement plan, which is progressing ahead of initial expectations. We have already deployed more than 80% of the initial EUR400 million cash cost savings and now we have updated this target to more than EUR450 million. Next slide, Grifols is experiencing a turnaround supported by our strong financial performance, revenue continues to show sustainable growth with a high single-digit increase in the first quarter, driven by solid plasma supply and price increases by product mix, backed by our subcutaneous IG. Regarding operating performance, as we see in the second chart, adjusted EBITDA on last 12-month basis reached EUR1.2 billion on the back of operational leverage and savings from the operational plan, showing a sequential improvement both in absolute terms and in margin. The sequential quarterly EBITDA improvement is going to continue throughout 2023. Leverage ratio stood at 7 times, as of March and I reiterate our commitment to debt reduction targeting a 4 times by the end of 2024. We reconfirm our commitment to deleverage and on the back of improvements and the leverage transaction. The adjusted EBITDA bridge shows the improvement in Q1 reaching EUR299 million at a 21% margin excluding Biotest, supported by positive performance for Biopharma, Bio Supplies as well as OpEx reduction. As we explained in the last earnings call, the EUR125 million one-off charge includes a EUR140 million restructuring charge that has been fully booked in this quarter. We have also adjusted for EUR19 million coming from one-off commercial true-up in Diagnostic revenues. We do not expect any further restructuring cost in the upcoming quarters. We are successfully executing our operational improvement plan; as we speak more than 80% of the initial EUR400 million cash cost savings have already been deployed. Furthermore, we have increased this target to more than EUR450 million on the back of further improvements, especially in the plasma operations. All in all, annualized total plasma-related savings now are more than EUR340 million from the initially expected EUR300 million. On the left-hand side of this slide, we can see the previously announced plan and on the right-hand side, the updated plan. In 2023, cash savings will now amount to EUR275 million, and cost savings flowing through the P&L will be EUR130 million. In 2024, we're now expecting additional EUR175 million in cash savings and EUR320 million cost savings that will be recognized in the P&L. As a reminder, the plasma cost accounting rule of this industry, which implies a 9-month inventory lag. Our position in deleveraging and achieving the full leverage ratio target by end of 2024 has not changed. As we can see in this bridge, considering that 50% of the 1.8 times reduction relates to EBITDA improvement, overall the leverage ratio declining from 7 times to 4 times is coming from 70% of EBITDA improvement and 30% from deleverage transaction. A significant piece of this EBITDA improvement is driven by the EUR450 million operational improvement plan. We're making good progress on several work streams of deleverage transactions and we plan, as already mentioned, to complete one transaction during this year. The cash proceeds will be prioritized for debt reduction. We currently have total liquidity of EUR1.3 billion and cash on hand amounting to EUR400 million. Based on our solid performance in Q1, we reiterate our full year guidance for top line and we operate our adjusted EBITDA margin guidance for the first half to more than 21% margin, and for the full year, it will be the new margin range between 22% and 24% excluding Biotest. As a result of this, we're very confident that we can beat the full-year EBITDA of EUR1.4 billion as well as the EUR1.7 billion considering the annualized cash cost savings. These numbers confirm that our strong recovery path is ongoing. And with that, I hand over to Thomas.

Thomas Glanzmann, Executive Chairman and CEO

Thank you, Alfredo. I would like to conclude by reiterating a few points we've already made, but that are worth repeating. My management style is to keep returning to the most critical priorities, those that make us strong and those that need changing to ensure that these are absolutely clear and that we continue to effectively execute against them. The company has clarified its governance and leadership structure and made significant progress in defining the responsibilities of the senior leadership team ensuring focus and accountability. The company has introduced a new operating organizational model, which has resulted in a stronger and more efficient structure. This is supported by a strong focus on a performance-driven culture, which will continue to make the company more efficient, effective, agile, decisive and accountable. The new short and long-term incentive plans will play a key role here. To strengthen a new leadership will be instrumental in driving change and ensuring that the organization is more responsive to the changing market dynamics. Grifols delivered a solid financial start to the year, and we are on track to meet and improved guidance. The company has successfully deployed, as Alfredo mentioned, more than 80% of the initial EUR400 million cash cost savings of its operational improvement plan and updated its target to more than EUR450 million, mainly driven by plasma initiatives. Testament of the execution of the plan is the cost per liter reduction of more than 15%. As has also been mentioned multiple times, deleveraging remains our top priority and our commitment to reduce leverage ratio to 4 by H2'24 remains unchanged. We are advancing on several work streams to execute deleveraging transactions. Adjusted EBITDA margin for the full year excluding Biotest is again as Alfredo mentioned expected to reach the 22% to 24% range, and we are confident on exceeding EUR1.4 billion. Pro-forming the additional EUR320 million, the adjusted EBITDA margin would stand at over EUR1.7 billion setting the base for further expansion of EBITDA in 2024. As promised, we are delivering a step change in performance, as we advance in 2023. We are increasingly better positioned and confident that we will keep building on this positive momentum. As mentioned, and I'll repeat Grifols is on the rebound. Finally, I want to thank our entire Grifols team for making it all happen without everyone's effort, focus and dedication, the progress made in the first quarter of 2023 would not have been possible. I appreciate your attention. And I'll now turn it back to Nuria, who will open it up for your questions. Thank you very much.

Nuria Pascual, Investor Relations and Sustainability Officer

Thank you, Thomas, and thank you all. Let’s start the Q&A session. So let's begin with Jo Walton from Credit Suisse. Jo, thank you. Are you there?

Jo Walton, Analyst

Sorry. Yes, can you hear me?

Nuria Pascual, Investor Relations and Sustainability Officer

Yes. Now, yes. Thank you.

Jo Walton, Analyst

Perfect. I wonder, in order to put some context on it whether you can tell us what the cost per liter, not in relation to July '22, but a pre-COVID world and a couple of clarifications, please. In terms of your sales growth for this year, the 8% to 10%, is that including the 2.5% or so benefit that we get from the first-time consolidation of Biotest on a clean underlying basis. Thank you.

Thomas Glanzmann, Executive Chairman and CEO

I understand the question regarding the cost per liter. When we look at the peak levels we've experienced, and compare these to 2019, the current figures are still above that point. This is largely due to two key factors, both related to inflation. Firstly, the donor commitment compensation or donor fees have increased, as we are all aware. Secondly, the labor costs associated with our plasma operations have also risen. Even when excluding these two items, our costs remain higher than in 2019, though we are gradually narrowing the gap each month as we move forward.

Alfredo Arroyo, Chief Financial Officer

In response to your question about the 8% to 10% revenue growth, as noted in the slide, this includes Biotest. The 10% to 12% growth projection also factors in Biotest, indicating that the total revenue encompasses Biotest for a like-for-like comparison in Biopharma, which is expected to see high-single digit growth. This is our best estimate for the year-end.

Jo Walton, Analyst

My second question, if I could, is a bit more of a perspective on your relationship with Shanghai RAAS, you've talked about China a couple of times as being important, but I think it would be interesting to see how that relationship is going? Many thanks.

Alfredo Arroyo, Chief Financial Officer

First of all, I want to highlight that the plasma business in China is thriving, and the publicly available results from the listed company are very impressive. Secondly, we have an excellent relationship with Shanghai RAAS, collaborating fully in all areas. Additionally, I want to emphasize that they are our distributors for albumin in Biopharma and NAT in Diagnostics, and both business lines in China are experiencing significant growth.

Nuria Pascual, Investor Relations and Sustainability Officer

Thank you, Alfredo. Now, we have a question from James Gordon from JPMorgan. Hi, James.

James Gordon, Analyst

Hello. I hope you can hear me. James Gordon from JPMorgan. Thanks for taking the two questions. The first question was about EBITDA margins. So you took up the H1 margin from 19% to 20% to 21% plus. I don't think you took out the H2 margin, so is that, because this was more about cost savings being pulled forward, or have things actually got a bit better on an underlying basis? And could that be a bit conservative for H2. And while it has got better, is it something else that has got better, or is it just phasing? So that's the first question, please. And the second question also related to cost savings, so I think you're saving more on plasma operations, I read though that there may be smaller cuts in Spain than originally planned. So, is that going to be offset or more than offset by bigger cuts in the US and are we going to see further US plasma centers being shut or are you done on the closures there, where are the further savings coming from, please?

Alfredo Arroyo, Chief Financial Officer

To address the first question regarding the EBITDA margin, the improvement is largely due to better-than-expected performance in the core business. This includes factors like pricing, geographical and product mix, and enhanced operational performance, particularly in plasma and manufacturing costs. It’s important to note that in terms of operating expenses, we are ahead of budget not due to timing but because we are raising our targets. This suggests that the sequential improvement in EBITDA we've observed in Q1 compared to Q4 of last year will persist in the coming quarters. Regarding the cost savings you mentioned, about 80% have already been fully implemented, and we have revised our targets upward. This gives us confidence that we can exceed EUR 1.4 billion by the year's end.

Thomas Glanzmann, Executive Chairman and CEO

I think there was a comment about plasma centers and potential cost savings related to center closures. That is not the case. We believe we have already made all the necessary efforts concerning the closing or consolidating of plasma centers. The improvements we are pursuing in the plasma network are focused at the center level. The restructuring of overhead staff above the center level has already occurred, and now we are concentrating on enhancing efficiencies at the center level by aligning opening hours with donor traffic and improving donor flow time through various activities.

James Gordon, Analyst

Thank you. I’m not sure if you can still hear me, but as a follow-up, Alfredo mentioned that things were actually better on an underlying basis in the first half. So, conditions were improving more than you initially expected during that period. Why wouldn’t that also indicate that profitability is better than you originally anticipated in the second half?

Alfredo Arroyo, Chief Financial Officer

We are indeed looking at this slide and believe that the second half will fall within the range of 23% to 25%. Once we complete the second quarter, we will be able to provide more details about the second half. However, we are very confident that we will exceed the EUR1.4 billion target by the end of the year.

Nuria Pascual, Investor Relations and Sustainability Officer

Thank you, Alfredo. And we have Guilherme Sampaio from CaixaBank BPI. Guilherme?

Guilherme Sampaio, Analyst

Yes. Good morning. Thank you for taking my question. So the first one on donor fees, if you could provide some color on your expectations for additional reduction in donor fees. And secondly, if you could go through the dynamics of albumin markets in China and the US right now? Thanks.

Victor Grifols Deu, Chief Operating Officer

The donor fees have shown a consistent trend of decreasing since their peak in July. We anticipate this trend to persist throughout the year, leading to levels lower than what we see today by December 2023. In the current market, we are witnessing a positive trend in certain types of donor fees as they continue to decline. Regarding albumin, as Alfredo mentioned in his previous remarks, the market in China is thriving with significant demand from Shanghai RAAS, our distributor, which creates an overall positive outlook. In the US, while the market is more competitive with increased product availability, we are actively repositioning our strategy.

Nuria Pascual, Investor Relations and Sustainability Officer

Thank you. Thank you, Victor and thank you, Guilherme. Now is the turn for Berenberg, Tom Jones. Hi, Tom. We have lost Tom?

Tom Jones, Analyst

No, we have not. Hello, hello. Sorry, I'm here. Sorry. You cut off just after you said the next caller comes from, and then it stopped, so I couldn't hear. Sorry. I do have two questions. The first is just on the balance of revenue growth between the three key proteins or three key franchise areas in Q1. IG, we're trending well ahead of the other two. Is that a dynamic do you expect to continue broadly for the rest of the year and what's driving the sort of excessive growth in IG, is it kind of just price and mix or is there a volume component to it too, I guess it pertains to kind of revenue per liter, and then my follow-up question, which is more of a longer-term one on margins, I think we're all well aware of the margin uplift potential from Trimodulin and the Fibrinogen products, but the one that doesn't get a lot of discussions is Biotest's IVIG product in Yimmugo. Given it's a relatively new product, one would assume that it's probably got a higher manufacturing yield than the incumbent products out there. So I just wondered, given how significant even a tiny improvement in yield can be on IVIG manufacturing, whether there's any longer-term margin upside potential, I guess coming from the Yimmugo technology, I know you're going to distribute it for them in the US, but I just wondered if there's any kind of technology transfers you might be considering into your Grifols IVIG Franchise, where you could potentially push the yields on your IVIG manufacturing up a bit.

Thomas Glanzmann, Executive Chairman and CEO

Okay. Hello, Tom. On the first question about the balanced growth among our proteins, clearly IG, it's driving the race here for us. This trend will continue throughout the year, we expect. But the goal of the company, after all the turmoil of the plasma availability and so on is to kind of converge the growth, the pace of growth of the three main proteins for us, IG, Albumin, and Alpha-1, deviates that to go and rebalance our growth for those three proteins in the coming months and during '24 as well. And the second question about the Yimmugo and the yields, yes, we have launched the product in Europe, it has been very well accepted in the markets that they are starting. Manufacturing-wise, they are ramping up, but on the yield side, yes, we are seeing and learning from them about their yield and the performance they have and trying to get all the knowledge and possibly incorporate it into some other product lines. But all in all, it's a great product and it gives us a lot of flexibility now with Gamunex, Flebogamma, Yimmugo product to let's say play with all those brands and use them as needed in a wise manner, let's say, from the geographical standpoint.

Tom Jones, Analyst

Perfect. And then, that's very helpful. And then one follow-up question on margins for Alfredo. Just help me understand the dynamics of this, when you gave the guidance for EUR1.4 billion that was back in February. Since then, the dollar has weakened somewhat against the euro, which is normally bad for your reported EBITDA and even worse for margins. So A, have I got that correct? B, does that not imply that the underlying increase in guidance is probably slightly higher than that revealed by the figures you have given this morning? And then C, and also partially explain your caution regarding margins in the second half of the year, because obviously the dollar impact will be more significant in H2 than it will be in H1 at current rates.

Alfredo Arroyo, Chief Financial Officer

Currently in the first quarter, the impact of foreign exchange on EBITDA is slightly positive, and if we project the share to 1-10 for the rest of the year, the effect compared to the current trend of EBITDA will not be significant. Our desire to be cautious is not related to foreign exchange; rather, we anticipate that the EBITDA margin will continue to grow and improve every quarter. Once we complete the second quarter, we will have greater clarity and will provide updated guidance.

Nuria Pascual, Investor Relations and Sustainability Officer

Perfect. That's very clear, Alfredo. Thank you very much.

Jaime Escribano, Analyst

Hi. Good afternoon. I have a few questions. First, regarding immunoglobulin volumes, are you currently selling higher volumes than in 2019, or is there still room for growth in Europe, other parts of the world, or specific countries that have been previously overlooked? Are you already at pre-COVID volume levels? Second, concerning free cash flow, I understand it has been negative in Q1 due to cost-saving measures. Can you provide some insight on what to expect for Q2? Will there be positive operating free cash flow, and can we anticipate positive free cash flow after CapEx, or will that come later in the year? Thank you.

Thomas Glanzmann, Executive Chairman and CEO

Hello, Jaime. I'll take the first one. We are, let's say grams-wise being sold for us compared to pre-to-'19. We are not yet there, but we are very close after our plasma recovery.

Victor Grifols Deu, Chief Operating Officer

So regarding the operating cash flow in the Q1, as I said, we ended up with a positive operating cash flow, excluding the one-off restructuring charge so that gave us, you know, I would say a positive sentiment that in the Q2 and coming quarters to show a positive operating cash flow. That means, including working capital and CapEx.

Jaime Escribano, Analyst

Thank you very much. I have a final question regarding the donor fee, which ties into some of the guidance questions for the second half of the year. If the donor fee has declined by 25% from peak subcategories, and you indicated a decline of 20%, this suggests that donor fees continued to decrease in Q1. Based on this analysis, should we expect a positive impact from this further decline in the donor fee in the second half of the year, particularly in Q4?

Victor Grifols Deu, Chief Operating Officer

From a cash savings perspective, we expect to see the benefits after the significant decline in the donor fee, and now we are focusing on other costs, such as labor and fixed expenses. One positive aspect is that the market is adjusting our donor fee, reflecting a collective decrease in compensation across the markets. Regarding when this will reflect in the P&L, we expect it to happen in early Q1 of 2024. However, the savings we have already achieved from the end of 2022 and Q1 2023 will impact the P&L this year. Therefore, we anticipate a higher margin in the second half of the year compared to the first half.

Nuria Pascual, Investor Relations and Sustainability Officer

Okay. Thank you.

Charles Pitman, Analyst

Hi. Thank you for taking my questions. I have two. First, regarding deleveraging, while I understand you can’t provide specifics, could you share any directional targets for the funds you expect to raise? You mentioned that 30% of the target would be achieved through deleveraging. What portion of that is anticipated to come from organic free cash flow versus transactions? My second question is about refinancing. In 2025, you will need to pay down debt, and I know you plan to use your deleveraging transaction for that. However, we’ve been hearing from credit investors about how rating agencies are perceiving ongoing performance. Could you update us on your discussions with them and what you believe needs to be demonstrated this year, especially as margins improve, to address their concerns? For instance, I know Moody's currently has a negative outlook. Thank you.

Thomas Glanzmann, Executive Chairman and CEO

Regarding deleverage, our current ratio is 7 times compared to the previous 4 times. There's a 1.8 times figure in the analysis, which comes from both organic and non-organic sources. Half of that, or 0.9 times, is due to EBITDA improvement, while the remainder results from deleverage transactions. Overall, 70% of our total deleverage is driven by EBITDA improvements, which incorporate both organic enhancements and our operational plan, while 30% stems from asset sales. Concerning the 2025 refinancing, we have ongoing dialogues with rating agencies quarterly and annually. We keep them informed about our progress, as we aim for a 4 times ratio by the end of 2024 to secure an upgrade in our credit rating in preparation for potential refinancing. We may also explore other avenues, such as paying down debt early using cash from transactions, which is a top priority for us.

Nuria Pascual, Investor Relations and Sustainability Officer

Thanks very much.

Vineet Agrawal, Analyst

Yeah. Hi, hope you can hear me. Good afternoon, this is Vineet Agrawal on behalf of Peter Verdult. Just have two questions, so the first one is, we have two important Phase 3 readouts coming over the summer first Biotest Fibrinogen data and the FcRn data from MarginX and CIDP, maybe can you remind us how you're thinking about the commercial potential of Fibrinogen, the revenue exposure in CIDP? And why do you think your IG business in CIDP will not be impacted by FcRn?

Alfredo Arroyo, Chief Financial Officer

Okay. Sorry, go ahead.

Vineet Agrawal, Analyst

Sorry. And then, just wanted to better understand how much of a gross margin driver Xembify can be and wondering if you could remind us what percentage of your IG franchisee revenues come from subcu and where would you like this to go over time. Thank you.

Alfredo Arroyo, Chief Financial Officer

The Fibrinogen project is progressing well, and we aim to complete the trial by the end of 2023. We anticipate obtaining the readout and clinical study report and will be prepared for a launch in Europe next year, 2024. We are optimistic about this initiative's success. Concerning CIDP and the company that has postponed its results until July, we will need to see what news they bring to the market. However, aside from that, as we mentioned in today's presentation, the IG market is significant; it is currently valued at EUR14 billion and has been experiencing robust growth historically. Projections indicate that it will continue to grow at rates of around 8% to 9%. Therefore, even with any competitors achieving success, there is ample opportunity for all of us to benefit from this market. We are confident that with our lifecycle management strategy, we will be able to gain substantial value from this market growth in the short to mid-term. Notably, HNB5 in our current IG portfolio represents approximately 5%.

Nuria Pascual, Investor Relations and Sustainability Officer

Okay. Thank you. Thank you, everybody, and with that, we are coming into our hour, two minutes above it, so quite on time. Thank you everybody for taking part and let's continue talking. If you have any questions, you have the full IR team at your disposal, and let's speak very soon. Thank you and bye.

Thomas Glanzmann, Executive Chairman and CEO

Thank you.