Operator: Ladies and gentlemen, welcome to the Full Year Results 2023 Investor and Analyst Conference Call and Live webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode. And the conference is being recorded. The presentation will be followed by a Q&A session.

[Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Albert M. Baehny, CEO ad Interim and Chairman of the Board of Directors. Please go ahead, Sir.

Albert Baehny: Thank you for the introduction.

Good morning, and good afternoon to all of you, and thank you for joining our full year results presentation. I will share our performance at the group and divisional level, Philippe Deecke, our CFO, will present the details of our finances. We will also ensure that there is time at the end to take your questions. Let's start by taking a look at the group results. In 2023, we delivered sales of CHF6.7 billion, corresponding to a sales growth of 10.9% at a constant exchange rate.

A core EBITDA of CHF2 billion delivered a margin of 29.8%. While maintaining high levels of investment with 25% of sales invested in CapEx, we also delivered a free cash flow of around CHF330 million. For 2023, we are proposing a 14% share dividend increase of CHF0.5 to CHF4 per share. We are also continuing to return excess capital to our shareholders via our share buyback program of up to CHF2 billion. Finally, we confirm our midterm guidance 2024 to 2028, which was issued at our Capital Markets Day in October last year.

Looking across our four divisions, we saw softer sales and margin performance in Cell & Gene and Capsules & Health Ingredients. However, there was strong performance in both sales and margin from our Biologics and Small Molecules divisions. Collectively, these two divisions were responsible for more than 70% of our revenues and both delivered a margin of more than 30%. I will take a moment to place Lonza in its industry context. In the last year, we have seen some challenges in the CDMO industry.

2023 was the post-pandemic reset year, and this led to higher levels of uncertainty. Weaknesses in biotech funding were most visible in the early-stage drug product development process, and we saw customer with further inventory destocking. More generally, we also saw new geopolitical uncertainties. All these factors impacted confidence across the business community. However, I want to take this opportunity to underline the strong and attractive long-term potential of the CDMO industry.

Concerns about capacity overbuild can be addressed by the continuing trend towards outsourcing and the sustained commercial demand for manufacturing services. This demand will be sustained by an extensive pipeline in Phase I drug candidates and an accelerating drug approval rates. We have strong visibility on our commercial contracts, which have an average length of seven years. As a result of these trends, we foresee high levels of capacity utilization over the next five years with longer-term demand also being driven by a new wave of innovative therapies. Over the course of 2023, we signed around 130 new CDMO customers and around 350 new clinical and commercial programs.

Looking at our CDMO customers by location, 80% of our sales are focused in Europe and Americas, and these are the areas in which we focused our growth investments. We see a fairly even balance between CDMO sales to small and mid-pharma customers and large-pharma customers. Finally, our top 10 customers continue to represent around half of our sales. This diversified and stable customer base provides us with solid foundations to support our performance and growth. Looking at our ongoing growth projects, we continue to progress with more than 20 projects in 2023, each with more than CHF50 million in CapEx.

Of this, 60% were in construction, 30% were in ramp-up and 10% are already in operation. The growth projects range across nine modalities, with 90% of investment focus on commercial and multipurpose assets. Placing these investments in context, we have invested around 75% of CapEx in growth projects over the last four years. Looking at recent achievements. In September, we saw the groundbreaking of our new dedicated facility for the Vertex Type 1 diabetes cell therapy portfolio at our site in Portsmouth.

In October, we announced a new ADC filling line for a dedicated customer at our site in Stein. In the same month our small molecules mono-plant dedicated to our customer Aurinia became operational in Visp. We have continued to make progress in our sustainability commitments. We have made further reductions in our energy, water and greenhouse gas emission intensity. Compared to our baselines, we have now reduced emissions intensity by 43%, energy intensity by 35% and water intensity by 30%.

Looking at specific initiatives in 2023, we have entered into two purchase -- power purchase agreements that will de-carbonize our scope to electricity emissions across Switzerland, the European Union and China. We have also signed a letter of commitment to the science-based target initiatives to confirm our carbon reduction plan. Finally, we have developed and launched a supplier evaluation program and toolkit to support carbon reductions across our supply chain. Now I will pass to Philippe to discuss the financials in more detail. Philippe, please?

Philippe Deecke: Thank you, Albert.

Good morning and good afternoon to you all. Before we begin, I would like to remind you that growth is reported at actual exchange rates, except sales growth, which is reported at constant exchange rates. I will start by providing a summary of our financial highlights. Overall, we achieved solid results ahead of our revised outlook. This is despite isolated weakness in the early stage and nutraceutical end-markets, which, as you know, are a smaller part of our business.

The group business delivered sales of CHF6.7 billion corresponding to 10.9% of sales growth. Core EBITDA is at CHF2 billion, resulting in a margin of 29.8%. We continue to see some higher availability in the market for small-scale assets used for early-stage work arising from the impact of biotech funding constraints. In the nutraceutical business of our Capsules & Health Ingredients division, we also saw the impact of post-COVID customer inventory destocking. Together, these factors drove assets under utilization and impacted our margins in 2023.

Let me also clarify the year-over-year change in reported IFRS profit. Reported profits reached CHF655 million in 2023, down 46% versus prior year. The decline is driven by a high base in 2022 from divestment gains and from impairment losses in 2023, mainly from the closure of our two sites in Guangzhou, China and Hayward, U.S. as well as impairments following the Moderna contract termination. The more comparable metric, core EBITDA, is flat year-over-year, as mentioned before.

Just two notes on the second half. Higher H2 sales were driven by an acceleration in Biologics. This was due to strong year-end operational execution at our sites, favorable timing of customer deliveries and the Moderna termination, which we communicated at our Capital Markets Day in October 2023. H2 margins were close to 30%, but diluted by inventory adjustments from stock buildup during the pandemic to secure customer orders, plus the expected product mix normalization in Small Molecules. Now let me turn to our sales growth in more detail.

As mentioned, we delivered strong sales growth of 11% in 2023, mainly from our commercial CDMO business. Biologics grew sales by 18%, driven by continued progress on our growth projects as well as strong ramp-up in our bioconjugates and microbial businesses. We are pleased with the continued performance of our Small Molecules business, which delivered more than CHF900 million of sales in 2023, growing 11%. This was supported by strong customer demand for high-value CDMO services, including HP API and the ramp-up of growth assets. In our Cell & Gene business, we saw mixed performance Strong pricing contributed to dynamic growth in BioScience.

In Cell & Gene Technologies, the impact of the Kodiak bankruptcy resulted in a positive contribution as we explained in H1. However, we have seen flat underlying sales growth versus 2022. This, as a result of biotech funding constraints driven by the customer prioritization and delays in clinical programs. We also experienced operational challenges at our Houston site, which has now been addressed. Our Capsules & Health Ingredients business continued to experience a slowdown in the nutraceutical market, which became more pronounced in H2.

While this delivered negative overall sales growth, we have seen first signs of normalization in the nutraceutical market in recent months. 2023 growth benefited from the Moderna contract termination, which we announced in September. We recognized around CHF100 million of compensation and around CHF100 million of deferred revenue. This is on top of around CHF300 million of regular vaccines business from Moderna in the year. So in total, our relationship with Moderna generated around CHF0.5 billion in revenue in 2023.

This, with above-average margins. We have summarized the detail on the financial impact of the Moderna termination in the appendix of this presentation. If we exclude Moderna sales from both 2022 and 2023, we saw strong underlying sales growth for the group at 14% and Biologics at around 25%. Next, we will look at the key drivers for our margin evolution. Between 2022 and 2023, absolute core EBITDA remained flat, resulting in a core EBITDA margin decline of 2.3 percentage points.

This was driven by the factors mentioned before, including the softness in the early-stage CDMO business in Mammalian and Cell & Gene technology and the customer destocking in the Capsules market, impacting our CHI division. Finally, the ramp-up of multiple growth projects also diluted margins year-over-year. These pressures on margins were only partially offset by the positive impact from the Moderna termination alongside cost containment and productivity measures that have been triggered in 2023 and will continue in 2024. Here are the major ones. First, our decision to decommission two small-scale sites in Guangzhou, China and Hayward, U.S.

will help us reduce fixed costs across the network without impacting mid-term growth. Second, we are mitigating margin pressure in Cell & Gene Technologies with commercial initiatives to increase sales and operational improvement programs and cost control initiatives across the network. And third, we are responding to the lower utilization in CHI by optimizing production lines, introducing additional cost control measures and investing in the next generation of production line technology platform. Here, you can see an overview of the divisional performance. Albert will share more divisional details in a moment.

As we move forward, let's look -- let's take a look at our approach to strategic investment. We continue to invest in growth, deploying CHF1.7 billion of CapEx in 2023, which corresponds to 25% of sales. CapEx spend is below our initial guidance for 2023 as we de-prioritized small growth project spend in areas with less growth opportunities as well as selected infrastructure and maintenance investments. We have maintained the pace of investment behind our large growth projects. Around 70% of CapEx is focused on growth projects, mainly for Biologics, which continues to be the growth engine of the company.

We currently operate a diversified portfolio of more than 21 large growth projects across the company, which are designed to deliver an attractive risk and return profile. Our thresholds for project approvals are unchanged with an expected IRR threshold of 15% and a ROIC threshold of 30% at peak. Generally, we are very pleased with the progress in 2023 across our project portfolio. The remainder of investments is deployed in maintenance as well as infrastructure and systems projects to support the growth of our divisions. Let's now turn to free cash flow.

We are pleased to report a strong free cash flow of CHF329 million for 2023, supported by net working capital improvements and CapEx prioritization. Before growth CapEx, we delivered a cash conversion of more than 20%. One year ago, we committed to reduce inventory level by about one month until mid-2024. I am pleased to share that we have now made good progress on our inventory reduction program and that overall inventory levels are now below six months. Net working capital is reduced from 20% of sales to around 13% of sales.

This is driven by lower inventories as a result of strong Q4 operational execution, improved inventory management as well as post-COVID inventory adjustment for shelf life expiry. Historically, low receivables benefited from strong year-end payment collections. We achieved solid results in 2023, but expect net working capital to bounce back slightly next year as current levels of finished goods and work-in-progress inventories are low. Turning to leverage. In 2023, our leverage increased to positive territory which is primarily driven by an increase in net debt of CHF1.1 billion due to investments in organic growth and the share buyback.

While we remain committed to our strong investment-grade rating of BBB Plus and target a midterm leverage of between 1.5 and 2x, our robust balance sheet continues to provide significant headroom for organic growth investments, bolt-on acquisitions and the return of excess capital. Moving on to the dividend increase, at Lonza's AGM on the 8 of May, we will propose a dividend of CHF4. This represents an increase of 14% or CHF0.5 versus the dividend for 2022. The 44% payout ratio is in line with the increased range of 35% to 45% announced at our Capital Markets Day in October. To ensure full financial transparency, let me finish by providing you with an additional guidance on financial metrics.

First, regarding FX, where we have seen recent volatility. As a reminder, our key foreign currency are the U.S. dollar, which accounts for around 40% of sales and the euro, which accounts for around 15%. The strengthening of the Swiss franc versus the U.S. dollar and euro, which accelerated in H2 2023, impacted our sales by around 3% for the full year.

Based on current FX rates in January, we anticipate a similar adverse impact on 2024 sales. Lonza's margins are better protected due to the good natural hedging, which is complemented by our hedging program. In 2023, the FX impact on margin was slightly positive. Looking to 2024 and based on our current view, we anticipate that FX rates will lead to a minimal impact on margins. Finally, let's take a look at our tax rate.

Our tax rate for 2023 was 17%, which included a negative impact from nontax deductible impairment costs. For 2024, we continue to expect our tax rate to remain within the guided range of 16% to 18%. This is despite the implementation of Pillar 2 legislation in several European markets and Switzerland in 2024, which will lead to an increase of our global tax cost. With that, I'm pleased to hand back to Albert, who will now take you through our divisional performance.

Albert Baehny: Thank you, Philippe.

We will now take a look at each of our four divisions. First, the Biologics division delivered 17.6% sales growth despite some market volatility caused by the post-pandemic resets. Excluding the Moderna business in 2022 and 2023, divisional sales growth reached 25%. Margins were slightly diluted by a combination of lower early-stage demand, the ramp-up of new growth projects and product mix. The division signed a number of new long-term customer contract in 2023 with a collective value of around CHF10 billion.

As part of a strategic review of our network footprint, we have decided to decommission our Biologics site in Guangzhou, China, and Hayward, U.S. We will retain a sales presence in China and use our assets in alternative locations to serve our customers. These site closures will trigger asset impairments of around CHF200 million non-core. Looking at our Biologics business units. There was double-digit growth across Mammalian and Microbial.

In Mammalian, we saw softer early stage demand with some continuing post-pandemic supply chain management challenges. However, a solid pipeline of molecules across clinical and commercial has driven the high levels of asset utilization across the network. In Microbial, our new mid-scale facility in Visp is currently in ramp-up and we have signed a new manufacturing agreement with backside in October last year. In bioconjugates, double-digit sales growth was supported by strong market demand. We have ramped up dedicated and multiproduct suites in Visp and strengthened our ADC offering with the acquisition of Synaffix.

The double-digit sales decline in mRNA was mainly driven by the Moderna contract termination announced in Q3 last year. Nonetheless, we remain confident in the long-term therapeutic and commercial potential of the mRNA platform. In this context, we have opened a new small-scale mRNA development and manufacturing facility at our site in Geleen, in Netherlands. Our Drug Product Services business reported double-digit sales growth in 2023 with more than 150 customer projects executed over the course of the year. A new dedicated filling line was agreed with the customer for the commercial supply of ADCs and we acquired an anchor commercial product in Visp.

Our commercial capacity expansion at our drug product facility in Stein is progressing on schedule. Finally, in Licensing, we saw single-digit sales growth. We served more than 500 customers with more than 80 approved therapeutics using our GS Gene expression system. While our acquisition of Synaffix has brought new ADC licensing opportunities, performance was impacted by fewer early-stage opportunities. Turning to our Small Molecules business, we saw sales growth of 11.2% for the full year.

This was driven by our portfolio shift towards high-value and complex customer offerings. The margin improvement was driven by our continuing focus on operational excellence and product mix. A number of multi-year agreements were signed in 2023 with a collective value in excess of CHF1 billion. Customer interest and demand for small molecule services has been driven in part by FDA approvals for multiple oncology treatments. Customers are also attracted by our strong track record and expertise in highly potent APIs.

We have entered into an agreement to manufacture a new commercial drug product at our Tampa site, and extended a commercial drug substance contract with a long-term customer. We have also continued to grow the business with a new dedicated mono-plant brought online in Visp and an expansion of our solid dosage form services facility in Bent U.S. Looking at Cell & Gene, the division reported full year sales growth of 6.6% and a decline in margin. Softer performance was driven by a combination of weaknesses to early-stage funding, delays to clinical trials and operational challenges. Despite these challenges, we continue to see late stage and commercial demand for our bio-seal product and CDMO services.

Looking to the long term, we are confident that divisional performance will be driven by new commercial projects and our differentiated market position supported by our focus on innovation. Looking at our Cell & Gene business units, we saw double-digit growth in Cell & Gene Technologies. This was supported by a onetime effect from our contract termination with Kodiak. We have supported the commercial launch of two new customer products in 2023 meaning that we now support a total of three commercial products. We have also commenced the construction of a new dedicated facility for the Vertex Type 1 diabetes portfolio at our site in U.S.Porthmouth.

In BioScience, we have seen single-digit growth against a high baseline in 2022. Here, our product portfolio supports the Cell & Gene and Biologics markets. Performance has been supported by innovative product launches, including an improved endotoxin testing solution and two new cell culture media products. In Personalized Medicine, we continue to make progress with our Cocoon autologous cell therapy platform. We have an anchor collaboration with Galapagos and more than 100 instruments have been deployed to support multiple clinical trials.

Finally, we turn to Capsules & Health Ingredients. In 2023, we saw sales and margin decline compared to the prior year. Sales were negatively impacted by softer post-pandemic nutraceutical demand and customer inventory destocking. The margin was negatively impacted by higher raw material costs, appreciation of the Swiss franc against the U.S. dollar and the underutilization of some assets.

Despite these challenges, we have seen continued demand for pharma hard empty capsules and a positive initial market response to our new capsule sealing technology. Looking at our market in more detail, we see weaker demand for over-the-counter and preventive health treatments alongside customer destocking. Nonetheless, the pharma market remains robust and we are confident in long-term customer demand for proactive and preventing health solutions. Inside our business, we currently serve more than 7,000 customers. We have seen growing opportunities delivered by our targeted release capsules and multiple opportunities from our titanium dioxide-free capsules.

As we conclude our tour of the divisions, I would like to take a moment to focus on 2024. We expect high single-digit underlying sales growth, driven by strong commercial CDMO business performance and a rebound in Capsules & Health Ingredients. This takes into account flat reported sales due to the year-on-year impact of the lost COVID business from Moderna. Margin are expected in the high 20s, supported by network optimization to improve utilization, improved margin from our Capsules & Health Ingredients business and ongoing productivity gains. Looking at our anticipated performance in 2024, we expect flat sales growth and a core EBITDA margin in the high 20s that is 20% to 29%.

We also continue to invest in our long-term growth with CapEx expected to remain at around 25% of sales in line with 2023. We confirm our midterm guidance for 2024 to 2028 at low teens sales growth and an improved core EBITDA margin within the 32% to 33% range in 2028. This is supported by a strong industry outlook and our new assets coming online, decreasing CapEx to mid-high teens by 2028 and our strong balance sheet. Before we close, I want to confirm my decision to step down as Chairman. As I move away, the Board has proposed Jean-Marc Hyvert as the new Chairman of Lonza.

He will stand for election at the coming AGM in May. Jean-Marc is an experienced Chairman with a good understanding of the consumer, health care and nutrition markets. I want to take this chance to wish Jean-Marc every success in his new role. When I step away from the Chairman role in May, I will continue as CEO ad Interim until a permanent successor is appointed. Let me leave you with a few closing remarks before we move to the Q&A session.

We have delivered a robust performance in 2023 with sales growth of 10.9% and a margin of 29.8%. Looking ahead, we are uniquely positioned in the CDMO market. Our long-term success is supported by a broad customer portfolio of multiyear contracts. Our investments are focused on growing modalities that meet the future needs of our customers. Our ambition will also be enabled by a solid balance sheet and disciplined capital allocation strategy.

With that, I thank you for your time. Philippe and I will be pleased to take your questions following a 2-minute break while we set up the video for the live Q&A. We'll see you shortly.

Operator: [Operator Instructions] The first question comes from Richard Vosser from JPMorgan. Please go ahead.

Richard Vosser: Hi, thanks for taking my question. It's a question on the ramp of the growth projects in '24 and the contribution to margin expansion. I mean, just basically, how is that going? How are they -- how are you seeing them? Are they on track with the expectations at the Capital Market's Day. Just some color there would be great, please. And can I just ask a clarification because I didn't hear very well, Albert, I'm sorry, just on the margin range that you said was that 27% to 29% means high single digit.

Just if you could say it again, that would be very helpful to everybody. Thanks very much.

Albert Baehny: Thank you for the question. And my colleagues have been very careful listening to me, and that told me I made a mistake. So let me correct these high teens for the core EBITDA margin in 2024.

That means 27% to 29% and I said 20% to 29%, sorry for this mistake. So the clarification is margin growing 27% to 29%. Thank you for observing the mistake. On the ramp-up of our growth projects, we are in line with what we said at the CDMO. At the Capital Markets Day, there was no change.

There was no delay. We are in-line with what we said and promised at the CDM.

Operator: The next question comes from Vineet Agrawal from Citi. Please go ahead.

Vineet Agrawal: Hi there.

Vineet Agrawal here from Citi. Thanks for taking my question. So Albert, you showed the performance of different modalities of the Biologics business, which is really very helpful. I'm just wondering if you could help and share the contribution from these individual modalities. And just on your 2024 outlook at the Capital Markets Day, you called out Kodiak Sciences impact.

Now given the recent updates from the company, I just wanted to check if there has been any change in demand expectations there and decide to capture that?

Albert Baehny: Thank you for the question. Philippe will take the second question.

Philippe Deecke: Do you want me to start with the second, yes?

Albert Baehny: Yes.

Philippe Deecke: So thanks, Vineet, for the question on Kodiak. So I think from our point of view in terms of '24 no change what we discussed at the CMD.

We have basically de-risked volumes from Kodiak for 2024. Albert, for the third -- for the first question.

Albert Baehny: No, I'm wondering what you mean exactly about the modalities. You mean the 13 business units, the 13 modalities or you talked about the four divisions.

Vineet Agrawal: No, I was just asking about Mammalian, Microbial, Bioconjugates.

If you could just help us.

Albert Baehny: So basically, during the call, I indicated that both Mammalian and Microbial grew at double-digit growth rates in 2023, very strong performance in both of these business units. Bioconjugates grew also at more than 10%. I indicated that Licensing was below 10% because of a slowdown in the early -- in the funding, in the early heat phase. So basically, in Biologics, all the business unit grew in excess of 10% with the exception of Licensing and of course, now and Licensing now; otherwise, they were all double digits.

So strong performance in the Biologics division and as we said, without Moderna, if we eliminate Moderna 2022 and 2023, the sales growth reached 25% and in mRNA, the sales, of course, declined because of the vaccine business going down.

Operator: The next question comes from Max Smock from William Blair. Please go ahead.

Maxwell Smock: Good morning, guys. Thanks for taking a question.

Talked a little bit about how demand for early stage within both Mammalian and Cell & Gene remain challenged in the back half of the year here. But just wondering if you can provide some additional detail around how performance trended throughout the back half of the year here, whether or not you've seen some stabilization or even an uptick as you move throughout the back half of the year and what you've seen so far here in the first half of 2024 within that early stage bucket?

Albert Baehny: First of all, the demand for commercial Mammalian is very strong, and we are convinced it will stay strong for the next four years. We saw a weakness in the preclinical business because of the low -- the weaknesses in funding. We don't believe internally that there will be a significant rebound in the funding of the biotech this year respective in 2025. And in our forecast outlook two we did not put any rebound in this early phase business.

Operator: The next question comes from Daniel Jelovcan from Stifel. Please go ahead.

Daniel Jelovcan: Yes. Hello as well. Can you help me to understand the kind of the bridge for the guidance for your growth adjusted for Moderna.

I mean you achieved as you said, 14% adjusted growth for the group in '23. And the guidance is for high single-digit unchanged for '24 and actually, your exit rate in the second half was much above this 14%. So what explains this kind of slower momentum. I think you know what I am…

Albert Baehny: Philippe?

Philippe Deecke: Yes. Happy to answer.

Hi,Daniel. So yes, I think we are pointing to an underlying performance of high single digit for 2024, which is below some of our growth that you would have seen this year. Most of it can still be explained by the lower early-stage performance and this would be one. We also have a much higher 2023 base with what we've delivered. So I think this slows down the growth in terms of percentages as well a little bit for 2024 and then again, we've had spectacular growth in Biologics, mainly in the microbial business that will also slow down a little bit next year.

Operator: Okay, the next question comes from Patrick Rafaisz from UBS. Please go ahead.

Patrick Rafaisz: Thanks and good afternoon everyone. A couple of questions on the margin bridge in '24. The first one is on Cell & Gene, would you expect that still to be loss-making at least in the first half of the year? Or do you think you can already break even in the course of 2024, assuming no recovery here in funding levels.

And then also the site network optimization you described with the sites you're closing, how much margin benefit do you expect from that once it's completed in 2025 and also during '24?

Albert Baehny: Thank you for the question. I will take the first one. And Philippe, you take the second. We are not prepared to comment more on 2024. We just give you the guidance, the outlook for the year, but we can't go into this detailed question as of today, this will come along the year when we will be presenting the performance.

So sorry for not answering to your question on this detailed bridge margin, 2024. And on site network optimization, Philippe, a few comments.

Philippe Deecke: Yes, sure, Patrick. So I think, as we said, the site -- both sites will be decommissioned during 2024. So I think the margin benefit for 2024 will be minimal.

As you have a reduction in cost, obviously, but we also have a transfer of volumes, et cetera. And therefore, I think there will be a slightly lower sales for 2024 in these sites in aggregate. And so the benefits will then be more pronounced than in 2025. So minimal in '24, more pronounced in '25.

Albert Baehny: Maybe I'll add one general comment on Cell & Gene Technologies to make sure that we understand each other.

Cell & Gene technology is still an emerging technology. It's not a mature technology, which means -- it will always face some volatility in the coming years because it is an established one. Nevertheless, in 2023, we have three commercial products in our portfolio, we expect to add three additional commercial products in 2024. So the more commercial products we have in this business unit, the more stable of business will be. This is what we can maybe add on 2024 versus 2023, but no more details.

Operator: Okay, thank you. The next question comes from Charles Weston from RBC Europe. Please go ahead.

Charles Weston: What are the key drivers of growth and margin phasing between H1 and H2? And what's your expectation for which half will be the highest, please?

Albert Baehny: Well, you are referring to 2024.

Charles Weston: Yes.

Albert Baehny: Now we will not comment potential differences between H1 and H2 in 2024. This is too early. So we comment only, as I said before, the global outlook for sales and for margin, but not the distinction between H1 and H2, it's much too early to do that.

Charles Weston: Okay. Well, if I couldn't get that one, perhaps I could ask a different and then given the slow perhaps negative raw material price inflation.

What are your expectations for pricing dynamics this year? Or obviously, this is commercially sensitive, but perhaps you can comment qualitatively.

Albert Baehny: You get the answer from Philippe.

Philippe Deecke: Yes. Thank you. So inflation for 2023 was still present.

I think we still saw prices going up also for raw materials. For us, inflation in '23 net was a slight negative like it's been in the year before, but less pronounced. We don't see negative cost inflation yet on raw materials. So I think we don't expect to see prices fall.

Operator: Thank you very much.

The next question comes from Anja Pomrehn from Mirabaud Securities. Please go ahead.

Anja Pomrehn: My question also relates to Cell & Gene. You stated earlier you are about to address the weakness in Cell & Gene by implementing operational improvement programs as well as sales and commercial initiatives. So my question is, does that mean that the loan or commercialization of the four therapies in 2024 will be delayed as you have announced at the Capital Markets Day.

Albert Baehny: The commercialization of course, of these three or four new therapies in our portfolio depend on the successes of our customers. We can't influence it. We expect that we'll be successful. Their therapies will be accepted by the FDA and then that will be entering our commercial portfolio of new products in our Cell & Gene Technologies. Again, we can't say that it will happen 100% because it depends on the successes of our customers' programs.

Anja Pomrehn: So basically, assuming it is -- they are successful that wouldn't impact anything from the challenges you're currently facing within Cell & Gene.

Albert Baehny: It will facilitate it to improve the stability of our sales and our margins, but these three to four therapies are expected to be approved by end of the year. So the impact on 2024 will be limited but important in 2025, if they are successful.

Operator: The next question comes from Charles Pitman from Barclays. Please go ahead.

Charles Pitman: I was just wondering in terms of the CEO interview process that you're currently ongoing. I was wondering if you could just provide us an update on the process on finding a new candidate there? Have you updated your criteria on who you're looking for? And maybe just particularly in terms of kind of future guidance, when -- at any point during this year, we could expect an update to expectations following their appointment and given they will have time to probably get to know the business, interested in your thoughts? Thanks.

Albert Baehny: We have established a long list of eight candidates. These eight candidates are in the process of being interviewed by the Board. We will create a short list of candidates of maximum three during Q1, and we expect being able to communicate the name of my successor as CEO by end of Q1, early Q2.

This is our timetable.

Operator: The next question comes from Peter Welford from Jefferies. Please go ahead.

Peter Welford: Hi, thanks for taking my question. I just wanted to go back to the early-stage biologics.

I wonder if you could just talk a little bit about, given the closures that you've announced does that then put you in a situation where you could see then in the relatively near future potential shortage of early-stage capacity, should there be a rebound in biotech? And what does that do with regards to your profitability looking into 2025 and beyond, given obviously the, I guess, overexpansion IBEX for the early-stage customer that was done before this. And if I can just ask a greater clarity as well. Can you possibly comment on the financial expense we should be thinking for 2024, given the comments on the net debt movement versus '23?

Albert Baehny: Thank you for the questions. I'll start with the first one. The shortage of the tight supply-demand balances in biologics in general, microbial, mammalian bio-conjugates is mainly on the commercial side of the business.

There is enough small-scale capacity in the market for the early-stage biologics. To the second question, Philippe, you want to comment on 2024 -- the commercial expenses, general.

Philippe Deecke: Financial expenses, I think, is what the -- you're asking for. So yes, I think we've seen an increase in our financial expenses in the year, driven by, of course, the increase of a little more than CHF0.5 billion of gross debt, and this at a slightly higher rate. So while we've seen some positive returns on our liquidities, we've also seen a higher cost of debt.

So from that point of view, yes, this is what drove the increase, and you can probably expect some further increase into 2024.

Operator: The next question comes from Thibault Boutherin from Morgan Stanley. Please go ahead.

Thibault Boutherin: Thank you. Two questions on my side, please.

First on the capacity increase across the industry, the capacity increase for Lonza maybe a little bit more modest than what we see as some of your competitors, both on an absolute and relative basis. I'm talking about low-scale commercial capacity. So I was just wondering if this is due to considerations from Lonza in terms of managing CapEx and margin going forward? Or if there was a strategic angle to not pursue volume expansion to the same extent as some of your competitors are doing? And maybe second question on working capital management. You talked about your inventories are going below kind of six months. Just wanted to check if optimization is done on working capital on your side or if you believe you still have room for further improvement on working capital.

Albert Baehny: We are increasing our capacities across our portfolio of modalities, including Mammalian, Microbial, Bioconjugates, Small Molecules. So we are not delaying our investment to increase our capacities. Some of our competitors, you may refer to are mainly investing in Mammalian. Our portfolio is much larger, and we are investing across a much larger portfolio of modalities versus some of our competitors. So we want to spend CapEx, further CapEx to make sure that we have enough capacities to satisfy the need the demand of the market.

On the working capital, Philippe?

Philippe Deecke: So, Thibault, thank you. So we've made great progress in 2023 managing our inventory, as I mentioned before. And I think we will continue to work. This is a continuous effort and we will continue with improvement measures. However, we believe that the level we've achieved now is probably the right one.

There would be some differences between raw materials, work in progress or finished goods inventory. The overall level, we believe, is about right now. So you won't see this going down. As I mentioned, we probably will see a slight uptick or slight normalization in '24 because finished goods inventory is quite low at this point in time.

Operator: The next question comes from Falko Friedrichs from Deutsche Bank.

Please, go ahead.

Falko Friedrichs: Thank you. Good afternoon. My question is around the news of potential restrictions for your Chinese competitor in the U.S. Have you checked to what extent you could potentially benefit from this?

Albert Baehny: We got the news, as you very recently.

And I don't think it's our role to comment on what is happening in the U.S., but this bill will impact we can expect, yes, if we are fair, we can expect some benefits from this potential bill in the U.S., assuming it becomes online, yes, of course. But we don't want to comment on the restriction for the Chinese competitor in the U.S. It is not our role and our mandate.

Operator: Thank you. The next question comes from Sebastian Bray from Berenberg.

Please, go ahead.

Sebastian Bray: Hello. Good afternoon, and thank you for taking my questions. It's on depreciation, please. Could you give an idea of how -- what the core DNA was for 2023? I just want to make sure that I got the right number and how back-end loaded the ramp-up of DNA according to capacity additions could be in 2024 and what kind of magnitude we're talking about?

Albert Baehny: Thank you.

Philippe, I can take the second part. I guess so, yes?

Philippe Deecke: No thanks. Sebastian, look, I think depreciation and amortization has been actually fairly stable over the years, if you look at the last two years, and we don't foresee this to change in percent of sales, it's going to be quite stable.

Operator: Thank you. The next question comes from Yifeng from HSBC.

Please, go ahead.

Yifeng Liu: Hello. Thanks for taking my question. I have a question on the Personalized Medicine, specifically the Cocoon equipment that you said you've deployed over 100 in various clinical trials. I just wonder if you could comment on the commercial opportunities for that specifically? And then also maybe any other partners you're collaborating aside of -- from Galapagos, please?

Albert Baehny: Thank you for the question.

We are -- as I said in my speech, we are mainly -- we have a main anchor customer. This is Galapagos for the development and promotion of this Cocoon project with it this way. we are trying to gain additional anchor customers for the development of this platform. Of course, it is still a project put it this way. So we don't have commercial real commercial sales so far.

It is too early to talk about the commercial potential of this opportunity, it's development. It is early stage, but we are very satisfied with the development what we are doing with Galapago and also with individual customers with this platform. Again, this is an early stage big project for us. And hopefully, at one point in time, it will deliver what we're expecting from this fantastic technology, which is an early phase market introduction.

Operator: The next question comes from Paul Knight from KeyBanc Capital Markets.

Please go ahead.

Paul Knight: Regarding the Cell & Gene therapy market, our contract manufacturers such as Lonza and the biopharmaceutical firms, are you reaching a better understanding of the cost structure and details to make cell therapies? Is that part of what we could see to drive improvement.

Albert Baehny: We are -- I suspect every player in Cell & Gene technology today is trying to improve is cost structure by improving the processes. This is what we are doing, of course. And hopefully, we will be able to simplify the processes, automate the processes and gain additional commercial products and then we will have a business unit with more stable sales and margin profile.

Operator: The next question is from Naresh Chouhan from Intron Health. Please go ahead.

Naresh Chouhan: Hi there. Thanks for taking my question. On Biologics, you've got a significant amount of capacity still to come on stream in the next few years and with a number of facilities still ramping up.

So when we think about margins out to '28, would it make sense to think of gross margins as kind of broadly flat to '26 and then inflecting sharply? Or can -- can you give us a bit of a feel for how those margins should evolve over the next two to three years, please?

Albert Baehny: Philippe, we stick to our guidance, I suspect.

Philippe Deecke: Yes. No. Thanks, Naresh. We said for the group, we would have continually improving margin from '24 to '28.

So you should expect margin progression every year. We will not break that down by year or by division at this point in time.

Operator: The next question comes from Charlie Haywood from Bank of America. Please go ahead.

Charlie Haywood: Yes.

Thanks for taking my questions. Two very quick ones. On your new CEO announcement, will the new Chairman have any say in this appointment? And then secondly, into 2024 without any Moderna revenues, have you quantified the ongoing Moderna costs that will be incurred in 2024 and the estimated EBITDA drag for those?

Albert Baehny: New CEO announcement, it's clear that the new chair will be involved as of immediately in the process of selecting the new CEO and the second part of the -- or the second question, Philippe?

Philippe Deecke: Yes, Charlie, as we mentioned, of course, we are decommissioning the suites of Moderna, and we will have still cost during 2024. These are meaningful but not significant to the division or to the group.

Albert Baehny: And now I have to pay the policeman and ask for the last question, please.

There is no last question, I suspect. So let me say, thank you for your participation, Philippe as well. Thank you, and wish you a nice day and an excellent weekend. Thank you very much. Bye-bye.