Earnings Call Transcript - GRFS Q1 2024

Daniel Segarra, VP of Investor Relations and Sustainability

Hello, everyone, and welcome to Grifols' Conference Call. Today, we will be sharing a business update on our first quarter financial results. Thank you very much for taking the time to join us. My name is Daniel Segarra. I'm Vice President of Investor Relations and Sustainability. Today, I'm joined by Grifols' Executive Chairman, Thomas Glanzmann; Chief Executive Officer, Nacho Abia; and Roland Wandeler, President of Biopharma. Today's call will last about an hour, including a Q&A session. As a reminder, this call is being recorded. All materials used during the call are available on the Investor Relations website at grifols.com. The transcript and media replay will also be available on the Investor Relations website within 24 hours. Turning to Slide #2, I would first like to share a disclaimer on forward-looking statements. Forward-looking statements are subject to substantial risks and uncertainties. They are only valid on the day of the call, and the company is under no obligation to update or revise them. Grifols' financial statements are prepared in accordance with EU IFRS and other applicable reporting provisions. This includes alternative performance measures or APMs, prepared under the group financial reporting model as defined by the guidelines of the European Securities and Markets Authority. Please note that Grifols' management uses APMs to evaluate its financial performance, cash flow and financial position as the basis for its operational and strategic decisions. These APMs are prepared for all time periods presented in this document. Reconciliation tables can be found on our website. With that, I would like to turn the call over to Thomas Glanzmann.

Thomas Glanzmann, Executive Chairman

Thank you, Danny. Good evening, afternoon, and morning to all on the call. It is great to be here with you today. Now let me start by welcoming our new CEO, Nacho Abia, to Grifols. We are truly pleased to have him on board. He has been on the job for only six weeks but has hit the ground running and has come up to speed quickly, as you will see shortly. We look forward to his leadership as we move into the next successful chapter of the company's history. I also welcome Roland to his first earnings call. With the changing of the guard, I would also like to take this moment to thank and recognize Raimon and Victor Grifols who at the end of May will step down from their executive roles and become proprietary directors of Grifols. All of their many great contributions to Grifols over the past years have truly left a lasting imprint on the company. I am very pleased and thankful that they will continue to provide their valuable thoughts, insights, and advice as members of our Board in the future. Thank you, Raimon and Victor. I also want to share with you another significant change at the company. Alfredo Arroyo, who recently turned 67, has decided to pursue his next chapter in life after a very successful career of more than 45 years in finance, including the last 17 as Grifols' CFO. We are grateful to have benefited from Alfredo's leadership and financial expertise since he joined Grifols in 2007, shortly after the company went public. Alfredo has been an invaluable member of the executive team, overseeing the company's successful evolution during our critical growth years and effectively managing the impacts of the pandemic. On behalf of the company and the entire Board of Directors, I would like to thank Alfredo for his contributions over the past 17 years. We have begun searching for Alfredo's successor. The process will be thoughtful and thorough as he or she will be a key part of the management team taking Grifols into the future. Alfredo will remain with the company throughout 2024 to ensure a smooth transition, which I personally very much appreciate. Now let's turn to my presentation. After closing a turnaround year in '23 and delivering on all our commitments, this first quarter of '24, as all of you know, was marked by an unprecedented and completely unwarranted attack by an opportunistic short seller who this morning issued a misleading report for their own financial gain. As you all know, we have already refuted all the false allegations and met all regulatory requirements. The Spanish regulator and our external auditors confirmed and validated our financials and accounting practices. They also confirmed that related party transactions took place at arm's length. Also, as part of our ongoing progress to strengthen our communication and enhance our reporting practices with the regulators and the capital markets, we have expanded our financial disclosures and simplified the use of alternative performance measures. Throughout all this, we have stayed true to our mission and maintained our business focus. We continued to serve donors and deliver our life-saving medicines and healthcare solutions to our patients and customers. Furthermore, we successfully executed and remained focused on our priorities, implementing a series of improvements to our corporate governance, leadership, debt management, and innovation. With this in mind, I am really proud of the entire team who demonstrated an unwavering commitment to the company and to our mission of making a difference to patients, customers, and donors. We have clearly separated management from ownership. Raimon Grifols and Victor Grifols made the thoughtful decision to transition out of their management roles to serve as proprietary directors on our Board. Additionally, the Board will soon be reinforced with two new independent members, both of whom will add value in finance and corporate governance. These appointments are pending approval at the upcoming AGM. Undoubtedly, another key organizational change is the appointment of Nacho as Grifols' CEO, clearly separating the Chairman and CEO roles. I will continue in my executive role until February to support the transition. But at that point in time, the role of the Chairman will no longer be an executive one, all in line with our plan and good corporate governance. Now let me talk about our debt management. I am very pleased to confirm that the Shanghai RAAS transaction will close in June, now that all the domestic and overseas government approvals are in hand. Upon the closing of the transaction, all of the proceeds, as previously communicated, will be fully allocated to reduce secured debt in line with our priority and our commitment. We also made significant progress in addressing the '25 maturities through the completed issuance in April of EUR 1 billion in senior secured notes due in 2030. This transaction will further streamline our maturity profile and, together with the upcoming closing of the Shanghai RAAS transaction, position us well on our path to address our overall debt. Turning briefly to innovation, we were pleased to report that our Phase III top-line results for fibrinogen have met the primary endpoint. We expect the regulatory approval process in Europe and the U.S. to begin in the fourth quarter of this year and are now on track for the launch in '25. Our first quarter performance was overall aligned with our plan and therefore, in line with our full year guidance, which remains intact. Please note all figures are presented on a consolidated basis, which includes Biotest, unless otherwise highlighted. Our first quarter revenues exceeded EUR 1.6 billion, up by 5.5% compared to Q1 '23, a 6.8% increase excluding the EUR 19 million one-time commercial true-up in our Diagnostics business last year. Both of these figures are at constant currency. Revenue growth was primarily driven by the strength of our Biopharma business unit, which saw a 9.4% growth on a year-over-year basis in constant currency. We also delivered solid EBITDA adjusted of EUR 350 million, representing a margin of 21.6%. On a like-for-like basis, which excludes 20% of Shanghai RAAS EBITDA contribution, this represents a 280 basis point increase. Our free cash flow was negative EUR 253 million primarily due to nonrecurring impacts in net working capital as we increased our plasma inventory levels to meet expected revenue growth and simultaneously a delayed commercial payment of USD 150 million from China that was expected for March but came in early April. Improving our free cash flow is Grifols' top priority, and we have a clear line of sight to stronger free cash flow generation through the remainder of 2024. Nacho will address this shortly. The company's leverage ratio, as per the credit agreement, increased in the short term to 6.8x due to the nonrecurring impacts in working capital. Considering this, the pro forma leverage ratio stands at 5.7x at the end of March '24. We remain confident in our continued progress and the improvement of all key financial metrics throughout the year as we drive towards our full year '24 guidance. Lastly, our plasma supply increased by 8% versus Q1 '23, and the cost per liter declined by 2% in March '24 compared to December '23. Taking a closer look at our revenue performance, the first quarter growth was driven primarily by a 9.4% increase of the Biopharma unit, as mentioned, on a constant currency basis. This figure underscores the strong momentum of our plasma business. Led by the growth of Biopharma, Grifols is poised to generate more than EUR 7 billion in revenues in '24, exceeding our record-high revenue in '23. This growth is underpinned by strong market dynamics, including robust underlying demand, supported by a solid plasma supply. Within Biopharma, our key contributors are our flagship immunoglobulin franchise, which grew by 13%, driven by our subcutaneous immunoglobulin, which had a remarkable increase of 62% in the quarter. Albumin increased by 7%. All of these figures are on a constant currency basis. We are observing and benefiting from significant market growth outside the U.S., which is offsetting slower growth in the U.S. Our commercial efforts continue to focus on bolstering our growth trajectory in the U.S. Turning to Diagnostics, the fundamentals of our Diagnostics business remained strong as we saw a 2.7% revenue growth on a constant currency basis, excluding the one-off revenues from the first quarter of '23. Our blood typing solutions reported low double-digit growth, and the performance of NAT was impacted by the timing of shipments to China. Turning to Bio Supplies, despite reporting a significant decline, Bio Supplies performed as we had planned, impacted by phasing, which we anticipate to be more than offset by the robust revenue growth we are expecting starting in the second quarter of this year. Now turning to margin. Adjusted EBITDA increased to EUR 350 million, representing a 21.6% margin, up 280 basis points compared to Q1 '23, like-for-like, which excludes 20% of Shanghai RAAS' contribution. Please bear in mind that since January 1, '24, in light of the upcoming Shanghai RAAS deal, we are considering Shanghai RAAS as an asset held for sale and consolidating only the 6% of its net profit in '24 versus 26% in '23. Therefore, Shanghai RAAS contributes only EUR 0.5 million to EBITDA in Q1 '24. For your reference, these contributions represent EUR 11 million in Q1 '23 and EUR 25 million in Q4 '23. EBITDA margin in Q1 was also impacted by the lower absorption of operating expenses as the weight of revenue in Q1 is lower compared to upcoming quarters. This sales pattern had an impact on profitability this quarter, which we were already factoring in as part of our full year '24 guidance and it is the baseline for the sequential improvement throughout the year. We expect to deliver sequential improvement in profitability in the upcoming quarters, driven by increased revenue, improved product mix, operational leverage, and ongoing benefits from a decline in the cost of goods throughout the remainder of the year, considering the nine months' inventory lag characteristic of the industry. As I mentioned, free cash flow was primarily impacted by nonrecurring items that affected net working capital. The negative free cash flow of EUR 253 million in the first quarter of '24 was driven primarily by negative net working capital of EUR 339 million. Despite this, I want to emphasize our confidence in upcoming improvements and in our underlying actions to make that happen. As the company increased inventories to meet strong anticipated revenue growth in the upcoming quarters, Q1 '24 working capital includes an inventory buildup amounting to EUR 130 million. We believe that there is still room for improvement to optimize this as Nacho will discuss later. Accounts receivable finished EUR 154 million higher due to a delay in the commercial payment of EUR 150 million that I mentioned from our main customer in China, which was subsequently received on April 2. We also had an increase in our accounts payable in the quarter of EUR 55 million as the accounts payable ratio abnormally increased to 60 days in December '23. In Q1 '24, it normalized back to 55 days. So we are not expecting such fluctuations going forward. With a EUR 150 million payment collected and receivables and inventory buildup in the process of being normalized, we expect a meaningful recovery of free cash flow starting in Q2 '24 and then continuing throughout the year. Be assured that generating free cash flow is our highest priority, and we are focused on activating all possible levers to enhance cash generation in the short, medium, and long term. With that, I will now turn the call over to Nacho, who will not only introduce himself but also provide you with our priorities and outlook for the rest of the year as we, together with the Grifols team, continue to move the company forward. I thank you for your attention.

Jose Ignacio Abia Buenache, CEO

Thank you, Thomas, for your words, and thank you, everyone, for joining the call today. First and foremost, as a newcomer to the team, let me begin by sharing a bit about myself. I am an engineer at heart, driven by challenges, and I have a result-oriented mindset and a commitment to facts. This approach has brought me here today, as I'm convinced Grifols offers incredible opportunity to unlock tremendous potential, build upon its rich history and solid foundation in an exciting and growing industry. By building on our legacy, I am committed to steering the company forward and serving as a catalyst for positive change. As you know, I'm originally from Barcelona, and I have spent most of my career at Olympus, serving for more than two decades in a number of capacities and geographies, including the United States for the last 13 years. In my former company, I led significant strategic initiatives that transformed and globalized the company, enhanced operations, and delivered sustainable business improvement. These experiences will serve me well as I define and execute the next chapter of Grifols. First, addressing cash flow and leverage, followed by a sustainable plan to increase revenue and expand margins over the years to come. And all that with the strong backbone of our powerful commitment to improve patients' lives across the world. I see a remarkable combination of opportunities and expertise that will take us to achieve those goals. We are a company with an inspiring mission to enhance patient health and well-being. Having always been passionate myself about the great honor and responsibility to be part of the healthcare industry, I feel that this step in my career is a natural, personal, and professional fit. I want to begin by telling you what I've learned over my first six weeks in this company and why I'm excited for the future to come. During this time, I visited offices and met with people in Spain and the United States. These insightful meetings span across all functions within the organization. The first thing I noticed at Grifols is that our team has an outstanding dedication and devotion to our mission. This idea of human-to-human medicine is truly embraced by all Grifols' employees, and I'm convinced that the solid commitment of our people has been and will be a continuous key success factor. The company also has challenges, and I'll talk later about them. But at the same time, the business foundation is extremely solid. We operate in a market that is nicely growing in the high single digits. This paired with the investments the company has made to be prepared for the future gives me confidence that those challenges will be addressed soon. The COVID-19 pandemic was a difficult period for the plasma industry and for Grifols as well. But as the saying goes, never let a good crisis go to waste. Grifols took full advantage of those times to emerge as a renovated company and the efforts and investments that were made following that period will fuel our profitable growth moving forward. During my first weeks at the company, I have also learned about how capital-intensive this industry is and how critical it is to act decisively and well in advance to meet future demand. Grifols did that, and thanks to it, we are now well prepared to successfully face the years to come. However, as you know well, those necessary investments also increased significantly our leverage and cash consumption. I want to reassure all of you that improving cash flow and reducing leverage will be my most important priority moving forward. We have aligned the organization and started to implement cash flow improvement measures, and I'm confident results will be shown soon. At the same time, we will continue working to strengthen our commercial organization, especially in the United States, to capitalize on existing and strategic initiatives and product launches in order to secure and enlarge our market share. As I'm sure that once the concerns about free cash flow and leverage are substantially mitigated, the focus and your focus as well will be back to growth and further margin expansion. From here, let me share with you my views on the business and what we can expect this year. Allow me to focus on 2024 and not comment beyond that today, as I'm still working with the team to fully assess our mid- and long-term opportunities. For now, the most important point I'd like to reiterate is that, based on all my conversations and observations, my impression is that the company is well on track to reach its full year 2024 guidance, as Tom has already mentioned. In order to do that, following the pattern from previous year, we are forecasting a significant revenue surge in the second half of the year, with growth accelerating to 10% to 12% on a constant currency basis. Let me walk you through the factors that will drive this acceleration to give you more clarity about how we plan to achieve it. The first is growth from our immunoglobulin franchise. We are already seeing significant growth outside the U.S. that will continue. And in the U.S., traditionally, the market tends to increase inventory days in the channels towards year-end that normalize in the first half of the year to accelerate again in the second half. The commercial and supply chain teams are already working closely to ensure the growing demand is met. The second driver is that we expect our highly profitable subcutaneous immunoglobulin to continue gaining traction and contributing to the product mix. This is one of our most relevant products and, despite being launched in 2019, we are seeing it as a critical driver of growth, and we expect to keep tapping its full potential. Our revenue projections are also supported by the improved performance of albumin, as we know, China will continue to grow in the coming quarters. We also see our alpha-1 franchise continuing to show stronger momentum in key markets following the switch of a new specialty pharmacy partner in the U.S., which will further enhance our service offering. In addition to all this, we have a solid deal pipeline that provides good expectations in Diagnostics and Bio Supplies divisions. Biotest will be launching key products in the second half of the year. All in all, I believe we have strong drivers to continue building momentum and to deliver as committed in the upcoming quarters and in the fall of 2024. Following revenue growth, we know it will translate into a significant EBITDA sequential improvement throughout the year, going from 23% to 24% adjusted margins in the first half to 27% to 28% in the second half, allowing us to achieve the EUR 1,800 million EBITDA adjusted for the whole year, as we previously guided. The most relevant driver for this will be, of course, the increase in revenues in the second half of the year, but it will also be supported by an improving product mix, including more subcutaneous immunoglobulin, albumin, alpha-1, specialty proteins, and Bio Supplies, all of them higher margin items. Equally important will be the contribution of lower cost of goods due to initiatives related to cost per liter and yield improvements. Finally, revenue increases throughout the year will trigger a higher absorption of operating expenses, thus having a significant positive impact on our EBITDA. So to conclude with this slide and for the reasons explained, I'm very confident we can achieve the guidance that was provided for 2024. Let me address now the elephant in the room: the cash flow. As I mentioned before, this is going to be my top priority, and we have already started to work on it. Despite the negative free cash flow in Q1 2024, which, as Thomas explained, was impacted by the nonrecurring impact of EUR 150 million, the cash flow development follows the established plan, and the company remains on track to deliver positive free cash flow as per the guidance provided back in February. From now on, we expect a slightly positive free cash flow in Q2 and a clear improvement in the second half. Please note that this 2024 free cash flow trajectory includes extraordinary investment capital expenditures, like the payments related to the acquisition of ImmunoTek in Q2 and Q3, as well as other items, including restructuring and transaction costs, which add up to EUR 480 million for the year. The primary drivers that will bridge us to our fiscal year '24 guidance are: first, the EBITDA expansion, followed by working capital normalization. In addition, we have already started an organization-wide cash flow improvement plan aimed at significantly increasing free cash flow generation, not only in 2024 but in the years to come. As a result of those efforts, we plan to update our fiscal year '24 guidance accordingly as we gain more visibility into any potential upsides broaden that plan in this year. Our cash flow improvement plan started with a simple but solid and effective analysis of the current situation that has already identified opportunities comprising five main levers: working capital normalization, continuous operational improvement, SG&A and spend control, optimizing real estate, and a thorough portfolio analysis. Some of these initiatives will have an impact sooner than others. Some will be recurring improvements while some will be one-off. But altogether, we must consider and plan this exercise as a new mindset for the company. This will be our most important priority until our cash flow generation and our leverage will be at the required level. Particularly important in 2024 will be the optimization of our working capital. Starting with our inventory levels that will be reduced, our revenue will increase in the upcoming quarters, especially in the second half. In addition, as mentioned previously, in the second quarter, we are already seeing a normalization of our receivables and payables that we expect to continue throughout the year. Another important contributor to cash flow in 2024 and beyond will be the implementation of the continuous improvement program that we started last year, which includes more than 50 business-led initiatives to streamline our operations. Some of these projects have already shown impacts on our financials, and its incremental impact in the upcoming years is expected to be very significant. These initiatives include improvements of yields in both plasma donation and our manufacturing operations, including donor fee optimization and industrial process improvements. While the company has made good efforts to rebase its cost structure over the past few years, we will continue to focus on SG&A and spending control to operate more efficiently with a continuous improvement mindset. Finally, and although these two efforts will most likely impact only 2025 and beyond, we have already started the process of reviewing our real estate footprint, which offers some interesting opportunities, and initiated a portfolio analysis of all our projects, affiliates, and businesses to ensure all of them perform at the expected level. I understand you may have many questions about this. But let me manage expectations and say that, at this point, there is still work to do before we can provide information regarding specific activities or guidance for our future cash flows beyond 2024. Please be patient and give us time to work on this matter. Most importantly, it is clear to me that the company has the levers to improve its cash flow profile and generate substantial additional free cash flow in the years to come. Ultimately, cash flow generation will be key to addressing our leverage, and so our deleveraging path will continue moving forward. Our focus remains on reducing our leverage ratio below 4x, and this year, we are expecting to bring our leverage down to 4.5x by the end of 2024, mostly thanks to the proceeds from the Shanghai RAAS divestiture, improvements in EBITDA, and the cash position. As an immediate and important step, as it has been explained already, we are well addressing our 2025 maturities, and this will be primarily accomplished by using the EUR 1 billion private placement to repay the 2025 unsecured notes and the Shanghai RAAS proceeds to reduce the 2025 and 2027 secured notes. I think that's enough of numbers and figures for today. I would like now to share some of my views on what will be the key priorities for Grifols in the years to come. As I already said, I am pragmatic and like to set goals in a way that is simple, focused, and clear. I think this helps the organization to align and progress. Based on that thoughts, our core activities will be solid financial discipline and focusing on cash flow generation. This will not be effective unless we can continue meeting the needs of our patients and donors, continue improving our commercial operations to better meet customer and market demand, and leverage and continue the operational improvements already started. It is also critical to accelerate innovation in a pragmatic and strategic way and bring to market new products and new indications in a time- and cost-efficient manner in order to create a self-reinforcing cycle that aims not only to enhance financial metrics but also to ensure enhanced competitiveness. Over our next interactions, you will hear me talk a lot about these foundational pillars, and I'll be happy to share more as the specific action plans are developed and implemented. For now and in the short term, in addition to the cash flow improvement plan already explained, our immediate focus will be to strengthen our commercial operations to successfully face forthcoming product launches, to work in a talent assessment across the organization to ensure we have the right people in the right place, and to initiate a process that aims to reduce company complexity both in our processes and structures. This slide summarizes what you can expect from me and Grifols in the months and years to come, and I look forward to our continuous dialogue about all these important topics. As a summary, and before we move on to the Q&A, I'd like to reemphasize a few points that we already made but that are worth repeating. The Board of Directors of Grifols asked me to join the company as CEO to lead Grifols by building upon its previous success. To achieve this, we must first improve cash flow generation and reduce leverage. While doing this, we must continue enhancing operational execution, maintain financial discipline, and improve business performance overall. Thanks to our cumulative efforts, today Grifols operates in a solid and growing market, is well-invested in plasma centers, production facilities, a global footprint, and cutting-edge technologies. This positions the company to drive significant and sustainable growth. Therefore, I am convinced that by acting decisively and with a strong focus on execution, we can significantly unleash shareholder value as well. This is my mission, and this is what I plan to do. Finally, I’m pleased to announce that we will be hosting an Investor and Analyst Day on October 10, 2024. We will dive deeper into some of the things mentioned today and in our future plans, with the aim to provide a comprehensive view of the company's long-term goals and strategies. Thank you all for joining us today and for your continued support and engagement. I look forward to meeting many of you in person over the next few weeks and months. And with that, I’ll turn it back to Danny.

Daniel Segarra, VP of Investor Relations and Sustainability

Thank you, Nacho. With regard to our agenda for the rest of the year, we have several key dates to share with you. First, on July 30, we will discuss our financial performance for the second quarter of 2024. As mentioned just now, on October 10, we will host our annual Investor and Analyst Day here in Barcelona. Finally, on November 7, we will be reporting our third quarter financial results. These events play an essential role in our efforts to strengthen our communication and ongoing dialogue with market participants. Now I will open it up for questions.

Peter Verdult, Analyst

It's Pete Verdult from Citi. I have two questions. Nacho, I appreciate your initial impressions after only a few weeks in the role. The market seems very focused on free cash flow. I understand you can't provide guidance beyond this year, but the previous management also emphasized free cash flow. What opportunities do you see this year that make you confident in accelerating efforts to enhance free cash flow? Also, what have you observed during your visits to the Grifols sites? On a different note, since we have Roland on the call and you're highlighting product mix as a significant factor, I want to clarify something. I believe Xembify carries about a 50% premium over IVIG, but it currently accounts for only about 5% of IG sales. Can you correct me if I'm mistaken? Lastly, you mentioned the specialty pharma switch benefiting alpha-1. Could you elaborate on that a bit more?

Jose Ignacio Abia Buenache, CEO

Peter, this is Nacho. I think I cannot add much more than what I already said. I think that the free cash flow or the cash flow focus in general is very well established in the company. I think in the last six weeks, we've been working across the organization to make sure that the mindset is there. I see a lot of activity already moving forward in that direction. To be honest, it's not rocket science. I think it's mostly the five levers I mentioned before. And if I think in 2024, clearly, working capital is going to play a significant role as this is probably the highest impact, but we've been working already for months on a lot of operational improvements that will also generate significant benefits this year. Ultimately, I think we need to control well all our expenses and the things we can control within this year. So there is no magic, Peter. I think that this is all about focus, attention, and mindset—aligning the company in that direction, and that's what we are doing. I think the next question Roland would love to answer.

Roland Wandeler, President of Biopharma

Absolutely. Thank you, Nacho. And Peter, to your first point on Xembify, you're correct on both points; yes, there is a price premium, and especially with Xembify currently at 5%, we see tremendous growth potential for the future for this very important pillar of our immunoglobulin franchise. And to your second question on alpha-1, our switch in Specialty Pharmacy partner will allow us to dramatically enhance our service offering for patients currently on therapy in a big part of the market that relies on home infusion as their way to receive treatment and will also help us in onboarding new patients as we aim to further expand diagnosis rates in a market that still has a lot of untapped potential with 90% of patients not diagnosed yet.

Thomas Jones, Analyst

I had two really. One was just on the potential for future cost savings. You talked quite a lot about them in the prepared remarks, and you're looking to spend EUR 110 million this year on one-off costs related to the extension of the operational improvement plan. That's quite a decent number to spend. So it would be helpful if you could try and at least give us some steer on what future cost savings you might be expecting to come from these projects and perhaps in what areas? And then my second question was just on the leverage target. You did previously have a target of 4x by year-end 2024. I don't know on previous calls, you had said that, that was pretty much out of range unless you consider further asset sales. The slide today sort of suggests 4.5x is where you're going to land for the year-end. Can we conclude from that, that further asset sales are probably not on the cards now for this year? Are they still kind of projects that are underway? Or should we just forget about them forever, really?

Jose Ignacio Abia Buenache, CEO

Tom, I mean just to give you a little bit of color. The operational improvement plan is something that was started last year. Most of the restructuring costs are the last part of the cost of the plan. They started to be implemented, and as has been explained in the past, I think that this plan covers the entire organization, mostly focusing on the operational and industrial parts, but also focusing on procurement activities, generating additional yields in all areas, etc. So I think that the last money you will see in terms of restructuring is coming from the last payment related to the efforts that have been done, and all that is already visible in either our inventory or our operational cost as we move forward. As per the leverage, I will make some comments, and I’m sure Thomas would like to complement. What we have shown today of 4.5x is what we believe is a very realistic expectation based on the Shanghai RAAS divestiture and the operational improvements we are seeing. Of course, we remain committed to achieving below 4x leverage or below, and it will come over time. But I think at this point, and realistically speaking for 2024, we can commit to 4.5x.

Thomas Glanzmann, Executive Chairman

No, happy. Tom, great question. So let me just go back to the fact that we said when we started '23 that 4% was the target that we were aiming at. At that point in time, we also assumed that we would do a major sale of Shanghai RAAS, actually would be selling all of it. And as you know, at this point in time, we're only selling 20% of it. But as Nacho now said, for this year, we are targeting 4.5x and still aiming to get below the 4x. I think at this point, we are not expecting to do any other asset sales for this year, really just focusing now on cash flow generation and free cash flow generation as we address the year.

Thomas Jones, Analyst

That's perfect. And just one cheeky follow-up, if I may, on the IG strategy. I'm kind of reading between the lines, it looks like Yimmugo is probably going to take over as one of your primary brands of IG, but it feels like the ramp-up in production of that is perhaps a little bit behind plan. Any kind of color you can share, some comfort you can give us on that ramp-up? And maybe anything else you can share at this point on the pathway to replacing some of your older legacy IG products with Yimmugo, which I assume has high yield and therefore, significantly higher margin on a per-liter basis?

Roland Wandeler, President of Biopharma

Yes, Tom, Yimmugo indeed adds to our portfolio of immunoglobulins that we have, in addition, of course, to our Gamunex flagship that we have and our Xembify. As we look at it, we see that Yimmugo can play an important role in substituting our Flebogamma in the market, which is an older version of our IG. But with Yimmugo in addition to our portfolio, this opens for us a set of quite interesting strategic possibilities as we think about positioning in the marketplace. It is a key part of our plan to further grow our immunoglobulin franchise.

Thomas Glanzmann, Executive Chairman

I just want to reiterate the point that Yimmugo had a growth of 62% in the first quarter. And as Roland said, it only really represents 5% of our IG franchise. So the opportunity, obviously, is significant for us, particularly when you think that almost 40% of our competitors are already in subcutaneous. So we see this as one of our significant, really big opportunities. And I know that Roland and the team are extremely focused on driving the growth of this product.

Daniel Segarra, VP of Investor Relations and Sustainability

Now we are going to go with Charles Pitman from Barclays.

Charles Pitman, Analyst

It's Charles Pitman from Barclays. A couple from me. Just firstly, can you confirm on the Shanghai RAAS asset sale? I think when you put out a release recently, you talked about announcing features of this deal. Can you just confirm that those features likely related to the comments made on this call about using those to address your FY '25 and FY '27 senior secured bonds? And then just secondly, just coming back to Biotest, the next-level projects and the general consolidation of that part of your business. Can you just talk us through how we've got from it being so dilutive in the past, when you expect it to become accretive, and what the delay has been since the completion of the projects in FY '22 and the reason for the contribution to the working capital impact of 1Q '24 as you've been building up inventory? Yes, I think that would just be helpful based on conversations we've been having with investors.

Thomas Glanzmann, Executive Chairman

Well, first of all, we will close the transaction in June. We will use the proceeds, as you outlined and as we said in our document. On Biotest, clearly, the focus on Biotest right now is to bring the two new products to market, which they are. I mean, I mentioned the fibrinogen trial that has gone extremely well. They're also in the process of ramping up Yimmugo, which they intend to be launching here in the U.S. later. They've launched it in Europe and expect to launch it later in the U.S. Clearly, one of the things we've said all along is that they are actually not going to be contributing to EBITDA until basically the launch of fibrinogen and the new products take place. We stand by that at this point.

Daniel Segarra, VP of Investor Relations and Sustainability

Now it's time for Alvaro.

Alvaro Lenze Julia, Analyst

The first one would be, if you could update us on the capacity situation, both in plasma collection and industrial capacity in terms of fractionation and purification before and what we looked like after you complete the extraordinary capital expenditure efforts that you are doing? And my second question would be regarding the free cash flow guidance. You mentioned that it's a bit too early to provide guidance beyond 2024. But if I'm not mistaken, you had a previous guidance of EUR 2 billion to EUR 2.5 billion of free cash flow cumulative over 2025 and 2027. Just to know whether that guidance still holds?

Jose Ignacio Abia Buenache, CEO

Alvaro, this is Nacho. Let me comment on capacity rates, again on my observations of these first weeks. And again, Thomas might want to complement. I mean, I think what I've seen is that, as I mentioned before, the company is well positioned in terms of capacity. Our investment in plasma collection centers and also in our industrial footprint is well established. I mean, we don't see a significant need for significant investments, at least in the next three to four years to come as both plasma collection and the industrial footprint are ready for the growth that we expect to have in the next years. So I think we are in good shape on that front. As for fiscal year 2025 and beyond cash flow, please be patient. Right now, I just haven't started to work on this. I think we are making good progress. 2024 looks good. The next step will be to focus on 2025, '26, '27, and we will provide you with an update as soon as it's ready.

Thomas Glanzmann, Executive Chairman

To complement what Nacho said, our capacity, particularly on the fractionation, is about 70%. We have significant room to grow in the coming years. Regarding the plasma center, we are well set up right now and do not expect to add any new centers until around 2027, when we anticipate needing to implement about 20 centers going forward. We are also well positioned with the Egypt project, which will have 20 centers; currently, there are 10. Additionally, the Canada project will not only add capacity but also new centers as we progress. Overall, I believe we are very well positioned to seize the significant opportunities ahead in the coming years.

Daniel Segarra, VP of Investor Relations and Sustainability

Now it's time for Bank of America, Graham.

Graham Parry, Analyst

Great. So firstly, on the CMD that you're planning for October, is that a timeframe which we could potentially expect to see some concrete midterm sales, EBITDA or EPS guidance from the company? I think that's something which investors would definitely welcome. Secondly, just on 2024, I guess, in your EBITDA guidance, if you could just give us a feel for the level of confidence that you have in that now. Presumably, you've collected the majority of the plasma, so you know your cost per liter for most of your cost of goods for the year you're contracted to sell at. So what are the variables that could derail you from achieving guidance? Or is that pretty much in the bag now? And then just lastly, I wonder if you could comment on the latest report from your friendly short seller, that Grifols funnels cash to Scranton via BPC, if you could just address that point and confirm all payments to BPC were for plasma at market rates as validated by the CNMV investigation?

Jose Ignacio Abia Buenache, CEO

I'll take the first two, and Thomas will take the last one. As for the Investors Day, we are building the agenda as we speak. Obviously, we plan to provide as much information as possible to the market, but it's early to say how much and what will be the level of detail. We'll be talking to all of you and providing our strategies and directional goals and probably some specific figures in areas we can, but I think it's early to confirm right now what those metrics will be. Regarding EBITDA generation this year, I think for what I stated in my presentation, I spent significant amount of time trying to understand our 2024 situation with the team, both the commercial team and the finance team, and for the reasons I outlined, I feel quite confident that the EUR 1.8 billion plus that we committed at the beginning of the year will be delivered. As for the short seller report, maybe Thomas wants to comment.

Thomas Glanzmann, Executive Chairman

Yes, happy to. First of all, the short seller keeps on dishing out misleading reports and statements. Grifols has provided full details of all its transaction in its financial statements and in specific reports. All the information is public. It's been verified by both the regulator and our auditors, and we really stand by that. We've got nothing more to add to that than standing by that statement. It's quite amazing to have continued misrepresentation from the short sellers like we're seeing now.

Daniel Segarra, VP of Investor Relations and Sustainability

Jaime, please from Banco Santander.

Jaime Escribano, Analyst

A couple of questions from my side. The first one regarding liquidity is at around EUR 700 million. So I just want to know how comfortable you are with this liquidity. You have ImmunoTek commitments for Q2, Q3 amounting to around EUR 500 million. Building on this, would you consider using part of Shanghai RAAS proceeds to be more comfortable with your short-term liquidity? This would be my first question. The second one, in terms of strategic assets, not sure if you probably have time to do an assessment. Is there anything you have identified that you can maybe sell in order to further reduce debt? Another question that probably investors want to know is whether you would consider a capital increase to further deleverage the balance sheet.

Jose Ignacio Abia Buenache, CEO

All right. So on the liquidity level, I mean, again, as you can imagine, this has been one of my focuses in the first weeks to understand where we are. I think we are operating at a liquidity level that is comfortable, and anything above EUR 500 million is something that we can comfortably operate. We are on the EUR 700-plus million with prospects to increase it over the years. So I think we feel confident on that. As for the strategic assets, I knew the question would come. I already anticipated it in my remarks. It's too early to say. We are doing our portfolio analysis. I don't know what the conclusions will be. We're looking at not only potential divesture of assets or acquisitions; it's also about making sure that all the projects we have driving the company operate at the expected level as well. It's too early to confirm anything. The only thing I can assure you is that we are doing the analysis, we are looking everywhere, and we will be doing the work and providing information as it comes. Regarding a capital increase, there is absolutely no plan at this point to consider a capital increase.

Daniel Segarra, VP of Investor Relations and Sustainability

Now we will take a question from Thibault from Morgan Stanley.

Thibault Boutherin, Analyst

Yes, my first question is about financial forecasts. Grifols had indicated that interest expenses might decrease in 2024 compared to 2023, but this seems hard to align with the possibility of refinancing at a higher rate, even with the proceeds from Shanghai RAAS being used for repayment. Could you provide some insight on this? I know you have more visibility on the refinancing rate. My second question relates to the free cash flow bridge you provided after the Q3 results. Are there any aspects that now appear significantly different from when you issued that bridge, such as elements that are notably higher or lower in terms of cash consumption?

Jose Ignacio Abia Buenache, CEO

Let me answer the second one, and Danny will talk about the financial rates. So no, there are no items which are material on the free cash flow bridge that we presented. I think that we have identified all the key elements, and the free cash flow is going to be mostly determined by operational ratios, mostly by working capital and improvements in the operations, as I mentioned. As for the financial rates, Danny, do you want to mention?

Daniel Segarra, VP of Investor Relations and Sustainability

The financial expenses for the year are expected to be lower compared to the current situation. As Thomas was saying, we expect to close the Shanghai RAAS transaction in June. It's going to be the most important lever to see a reduction of our debt that, as Thomas was mentioning as well, we are going to go repaying part of 2025, but also part of 2027, especially in '27, where we will be paying a variable interest expense. So when you consider all in all, even including the private placement for EUR 1 billion at EUR 7.5 billion, the total financial expenses are expected to be lower.

Guilherme Sampaio, Analyst

So, one, I don't know if it is too early, but at least, could you provide us a sense of where you expect the leverage? Or where do you want to put the leverage of this company over the midterm? We understand that it will be about 4x, perhaps 4.5x by 2025, but over the midterm, when do you feel comfortable with? And then the second one is a small question. Just if you could provide some reconciliation of the free cash flow generated in the quarter with the increase in net debt that you reported? I have seen some increase in the IFRS 16-related liabilities. If you can provide some color on this.

Jose Ignacio Abia Buenache, CEO

Yes. On the leverage level, I think that there are many opinions about what the adequate level of leverage a company should have. If you ask my opinion, and this is a general statement applicable to Grifols, I think around 3x to 3.5x is a reasonable level to operate. I think it depends a lot on what strategic considerations you have. At some point, you might need to lower your leverage if you are facing acquisition opportunities. But our work as the first step is obviously our committed 4x leverage, and we are working towards that. Once we get there, we will provide guidance about what the next step will be. As for the free cash flow, Danny, do you want to mention?

Daniel Segarra, VP of Investor Relations and Sustainability

On the free cash flow and net debt, I mean, this first quarter, pretty much the increase we had is connected with the free cash flow we had, basically, from net working capital impacts and nonrecurring items that we were disclosing. This brought about this net debt increase. As Nacho was mentioning on the leveraging path, we expect to recover this piece. It's going to be part of our deleveraging path. So as we expect to generate more cash flow in the next three quarters, it will help support our deleveraging path in connection, not only with an improvement in terms of EBITDA but also a reduction in our net debt on top of the Shanghai RAAS transaction that has been well discussed.

Charles Pitman, Analyst

Just a couple of clarifications. Just earlier where you said capacity on fractionation is at 70%. Can you confirm that's the current utilization of your full capacity and that the centers that you've got to '27, before you start adding centers, that's just on top of what you've already announced? And then did you address the comment around your midterm cash flow cumulative guidance or based on the fact that, naturally, you're still getting to know the company, are we just not talking about that today? Could you reiterate that or should we wait for 2Q?

Thomas Glanzmann, Executive Chairman

The 70% that I mentioned is current capacity utilization. The 20 centers I mentioned that's not until '27. We're well situated today with the centers we have. Again, I reiterate, we got centers coming online in Egypt and in Canada as well. The key focus is to continue improving the efficacy of our current centers in the U.S., which we are in the process of doing.

Jose Ignacio Abia Buenache, CEO

As for the cash flow projection, Charles, I mentioned several times. I think for now, I'm focusing a lot on 2024, and this is where we provide the guidance today. I'm comfortable. I see many opportunities. I see a lot of things that we can do. We have to do the work, but I'm very confident about the cash flow we can generate in the coming years. But I'm not ready yet to give you a number.

Daniel Segarra, VP of Investor Relations and Sustainability

With that, I think that we took all the questions. So I just want to say thank you all for joining us today. If you have any follow-up questions or further inquiries, please contact the IR team. There is a dedicated one to keep engaging with you. Thank you so much.

Thomas Glanzmann, Executive Chairman

Thank you all. Thanks, everybody.

Jose Ignacio Abia Buenache, CEO

Thank you, everybody.

Daniel Segarra, VP of Investor Relations and Sustainability

Thank you. Bye-bye.