Peter Stierli (Executives)
Good morning, ladies and gentlemen. Welcome to the presentation of our half year 2022 results. My name is Peter Stierli, I will be your host today. And I'm here with our CEO, Wolfgang Wienand; and our CFO, Reto Suter.
This session is split in 2 parts. We will first have the presentation of our financial results, together with a strategic outlook. Then we will have a Q&A session. [Operator Instructions]
With that and without further ado, I would like to hand over to our CEO, Wolfgang Wienand.
Wolfgang Wienand (Executives)
Yes. Thank you very much, Peter. And also a warm welcome from my side. And we will be happy to actually guide you through our financial figures and also adding a bit more color on what we did with the company over the past 6 months and what we plan to do with Siegfried in the future.
As always, we try to provide you with a meaningful title, which essentially already contains the most important messages of the following presentation. This time, it is with strong momentum through turbulent times. Siegfried significantly increases sales and profits despite a challenging environment. I think most of us can probably quite well relate to the term of turbulent times. What it meant for Siegfried and how we dealt with that challenge we will talk about in a minute.
So as always, please read our safe harbor statement carefully, take note, feel bound to it and respect the terms of it.
And by that, I come to a slide that we introduced for the first time in February of this year, which is kind of the playing field, the main topics about which we will continue to talk in our reportings. And we will not always touch upon all of them. But clearly, talking about our business, how it is growing, our margins, financing capacity, strong cash flow, that's going to be the part of Reto in a bit. And I will then take over to actually talk about the company itself, facts, strategy, execution and future outlook.
But before we come to the specific financial data, a brief executive summary. In the first half of 2022, Siegfried significantly increases sales and profits despite a challenging environment. Strong profitable growth. Net sales up to a bit more than CHF 586 million, which is a plus of more than 25% in Swiss francs and even more, almost 30% in local currencies. The difference is obviously resulting from significant foreign exchange headwinds.
The core EBITDA, so what we made and how we translated our sales into profit amounted to CHF 130 million, which is up more than 60% as compared to previous year, which leads to an expanded margin of 22.2%. Core net profit at CHF 65 million. And very important for growth business like ours, significant increase of operating cash flow before changes in net working capital.
Based on these strong figures, based on the strong first half 2022, we decided to actually upgrade our full year 2022 outlook, considering that there, of course, still is macro uncertainty. And now we expect the growth in net sales to be above 15% at constant currencies and the core EBITDA margin in the range of the profitability of the first half 2022.
So some highlights already now on which I will elaborate further in the presentation. But I think it's an important message that, I mean, even though being pretty busy with keeping our business, our company on track, of course, we continued to implement our strategy, which is geared towards long-term profitable growth. First and probably foremost proactive management of our business portfolio, which relates to the imperative to mitigate negative effects from macroeconomic challenges on our profit and loss statement through a robust business model. I think we have proven this once more, good customer relations, foresight and planning. We will talk about that in a bit more detail later.
Mission accomplished. So successful integration of the acquired Drug Product sites in Spain, which was a major step for the company, adding almost 40% of associates at the beginning of 2021 and significant capacity and business. Of course, so far, being still part to a large degree when it comes to systems and IT infrastructure of Novartis, with them providing traditional services to us. But of course, that needed to end. And we are actually very close to that end and did it successful so far.
We continue to invest into our network to support long-term growth. The center of excellence in Barcelona is one important topic. We talked about that previously. And the new large-scale production facility for Drug Substances in Minden. We continue to have appetite for M&A. So our outlook and our ambitions are to grow organically as well as acquisitively.
And our ESG journey, important activity at Siegfried also is on track. And that has been recognized and appreciated by an external -- external agency, once more MSCI, which increased its sustainability rating of Siegfried from A to now AA, a very good result, I guess.
And that is going to hand over to Reto, so that he can guide you through the financial facts and figures.
Reto Suter (Executives)
Thank you very much, Wolfgang, and a warm welcome also from my end. It's a pleasure to guide you now through the details of this very good set of numbers of the first half of 2022.
What you see here on this slide is the top line perspective, where we reported a strong increase of net sales to CHF 568.7 million (sic) [ CHF 586.7 million ], a plus of 25.7% in Swiss and a growth of 29.9% in local currencies. Just for the avoidance of doubt, this growth does not include any acquisition effect. It does not include one-offs. It, however, does include, of course, price increases, as mentioned. And it's also fair to say that at this point in time that we compare H1 '22 to a soft H1 '21.
But you see further is that both of our clusters contributed significantly to that growth, with Drug Substance is growing by 23.7% and Drug Products growing even stronger by 28.5%. And that stronger growth, obviously led to the solution, led to the situation that we now record 42% of our sales in the Drug Products cluster and 58% of our sales in the Drug Substances cluster.
You see it from the difference between growth in Swiss and growth in local currency is quite strong. Foreign exchange effects in this first 6 months. We had a depreciation of the euro against the Swiss franc and the appreciation of the U.S. dollar against the Swiss franc. And as we do more than half of our revenue in the euro, and only at around 15% in the dollar, it's clear that the result was headwind, so went against us.
As always, I present the reconciliation, the bridge between the reported numbers under our accounting standards, which is Swiss GAAP FER to core EBITDA and then further down to core net profit. You see on this bridge here that the adjustments are small in numbers. So we adjusted to core EBITDA, only CHF 2.2 million, which is on 2 effects. So on the one hand side, we have adjusted and reclassified the current net interest on foreign pension plans of the CHF 0.6 million down into the financial result. So you will see that again on the adjustments to core net profit. This is something that we do in each and every reporting period.
Then secondly, what we have also done is that we have adjusted for restructuring cost, CHF 1.6 million, which related to performance enhancement program on some of our sites, not the Spanish ones. This is one-off, nonrecurring. So we took that out.
On the adjustments to core net profit, in addition to the reclassification of the interest and foreign pension plans, we have the reversal of the step-up on the deferred taxes of the CHF 0.9 million. Also, this is an adjustment that you see actually in every reporting period.
On this slide, how well did we do in translating the increased sales quantum into profitability? We did that quite well, I'd say, looking at this slide. It was based on a strict cost management, a very strong market position and actually a very continued dialogue with clients, so that we had been able to avoid adverse effects on our cash flow. And actually limit the impact of inflation on to our margin.
However, we also have played offense. So we had positive developments in our businesses, including the vaccines business. And we also have been successful in actively managing our portfolio. So that means that we have not only been able to grow the business significantly, but at the same time, also increase the profitability on all the levels quite significantly.
We have increased the core gross profit to CHF 156.4 million, which translates into a margin of 26.7%. Core EBITDA, which is an important KPI for us, grew to CHF 130.2 million, which corresponds to a margin of 22.2%. Also, core EBIT and core net profit grew substantially, and we actually doubled net profit and resulted in a core net profit margin of 11.1%.
On to the core income statement. I've already touched upon the net sales. I've already touched upon the core gross profit. Let's quickly spend some time on SG&A. And when -- analyzing that, you see that the SG&A block as a total relative to sales was stable. So at around 11% of sales. However, what you see here is that the core admin and general overhead costs, both relatively as well as in absolute term has grown. The reason for that is that we had a soft H1 2021. So a soft basis for comparison in H1 2021, I'm thinking of STI provisions here. So that's the reason for that.
What you also see on this slide is that the core income taxes came in higher, both absolute as well as in relative terms. This is due to a mix as we generated much more pretax profit in higher tax environments than usually. But again, we were able to double core net profit despite these higher taxes.
On to the cash flow statement, which is an important statement for us as generating cash is what we need in order to be able to continue to grow. What you see here is that we have been able to really strongly increase the operating cash flow prior to changes in the net working capital to CHF 128.1 million. And that is really great.
On the net working capital development side, you see that we have continued to significantly invest into our inventory position. For the first 6 months of 2022, we have been really close to our supply chain and have in a regular basis taken proactive decisions on ordering certain raw materials early, on stocking up on certain elements, build safety stock, and the supply chain challenges in some very limited instances also led to reschedulings of production, meaning longer throughput times. All of this has increased the inventory position.
On the cash flow from investing, this is at around CHF 60 million, very much the same as in the -- in H1 2021. And on the cash flow from financing activities, you saw that we have been able to deliver a bit and that we have also purchased some treasury stock here.
On the capital allocation framework, this is a slide that we use internally quite a bit. So what is this all about? You've seen that before. It's about generating cash. How do we do that? By strong top line growth, but at the same time, expand the margin, so increase the quantum of cash generated, which cash that we use them to support our strategy evolve, which means investing in organic growth, not only in CapEx capacity, technology, but also in our capabilities and into our people.
On the funding structure, maybe a word on that, we are currently quite efficiently funded on a Swiss franc basis and are good to go for the next few years. But you also see in terms of funding is that we have been able to delever. So we're currently at a leverage ratio of 1.5, 1.6, which compares to 2.0 at the end of 2021, which means that even in this first 6 months, of 2022, we have increased our financial capabilities and our [ drive pedal ].
These were my remarks. With that, I hand over again back to Wolfgang.
Wolfgang Wienand (Executives)
Yes. Thank you very much, Reto. And let's move on to, I mean, what happened at Siegfried and what actually supported this financial -- set of financial figures. And let's start with what I called mission accomplished in my executive summary, the successful carve-out and integration of the acquired Drug Product sites in Spain. So I mean, 3 pet lines in a way, on time, in full, on budget. But let's go through all those things and spend a bit of time on it.
First of all, the separation of the sites and the post-merger integration is being executed as planned before closing. The carve-out, IT separation, I mean, that affects, I mean, more than 100 systems per site and is pretty complex process from Novartis is successful or underway. Successful in El Masnou, where on April 8, we actually did the cutover without any major issues and the cutover in Barberà del Vallès is due for next Monday. And Barberà del Vallès will also be the site, the first site in the Siegfried network, which will be upgraded to SAP S/4HANA.
I mean that's a huge effort, and it sounds easy now. But behind that are -- I mean, many, many people actually on the site and also from corporate, preparing that diligently together with the colleagues of Novartis. And based on their huge experience from previous acquisitions and actually strong commitment, I would say, and hard work, they have been able and will be able to actually make those typically hard to take moments of IT cutovers to smooth events within the Siegfried network.
Equally important besides those technical issues to really carve out and include the sites into Siegfried is, of course, what is happening on the new business development front for those capacities. First projects have been won and are already in execution on both sides. I think that's good news. The business development team is working hard on that. But actually, is successful already. And we stick to our expectation and our confidence to see noticeable, new business in 2023 or 2024.
So in full, both sides are now really true members also technically of our network, but also mentally. I mean adding 40% of more people, 1,000 to the old Siegfried with 2,500 people, of course, is also mentally quite a disruptive change and how the people on the Spanish sites, but essentially all people at Siegfried managed to actually build this one group, this one family, this one network was actually great to see. We spend a lot of time on that, of course, as well.
And just recently, in May, had our corporate leadership conference in Basel with 150 leaders of Siegfried from all over the network. And these have been extremely productive and reassuring, 3 days of hard work, reassurance and providing clarity on our strategic ambitions, but of course, also on building our, let's say, human network and also having fun.
Alignment of all core processes, including finance, quality, supply chain management in order to really be able to capture the synergies from having these 2 strong assets within our network. Another good sign also for, let's say, the softer side of the integration is that an increasing number of global functions have been transferred to Barcelona as service hubs in the field of finance, for example, and IT. And also the first senior leaders from the 2 sides have assumed global responsibilities in the meantime. So really now working and speaking for the whole network process, which will clearly continue based on the significant talent pool that we acquired together with the sites.
On budget, also important. We are within the initial budget. So no change. We are within the time frame, no change there as well despite the very complex IT carve-out. And what we also did in the course of transforming those captive manufacturing sites into true CDMO capacities, we also increased the level of cost flexibilization at both sites in order to be ready to respond to fluctuating market demands. So mission accomplished on that end.
Let's now briefly reflect on what -- I guess, all of us in different aspects and circumstances, of course, but all of us experienced throughout not only the last 6 months, but probably more 1.5 or 2 years, but especially during the last 6 months. Our ambition is that we stay focused in order to stay where we have been able to stay so far, which is ahead of the wave.
So a few headlines here. COVID-19, of course, we have a continued focus on the protection of our employees, absenteeism still is an issue, of course, because also Siegfried people get ill, and we see a higher amount of absenteeism, which leads to challenges in our production planning. But so far, all our sites have been able to essentially mitigate almost all in any negative impact for us and for our customers.
The war in Ukraine. I mean, I kind of -- I mean, from a Siegfried perspective, good news is that we don't have a direct exposure in terms of sales and supply to the whole region. However, this being a terrible event in the course of European history, I guess, of course, it had consequences in many instances, which also affected Siegfried. And some of the terms later, supply chain disruption, inflation and especially energy crisis are obvious consequences from actually both COVID-19 and the war.
Supply chain disruptions and Reto talked about that. We deliberately decided to actually mitigate those risks by building -- investing essentially is the better term in this case, investing into our inventory by stockpiling raw materials, critical raw materials and also intermediates. And that helped us to actually deliver that strong first half. And we also offer internal backup solutions if desired within our global network and really can play the benefit of having huge capacity being one of the largest, especially in the Drug Substances, a small molecule space, one of the largest CDMO in the world.
Inflation. Extremely important topic, obviously, because with manufacturing costs, energy costs, personnel costs, any kind of cost actually rising significantly over the past 6 to 8 months, we had to respond to that in order to protect ourselves, our customers and also our profit and loss statement. And in that sense, our ability to actually to continue to invest in our future. We did that first and foremost, of course, by stringent cost control because that is the basis so that you can go to your customers and actually ask for reasonable solutions in terms of covering cost increases. And we did that successfully with many of our clients, which help to actually protect -- essentially protect our cash flow. And we continue, of course, to work on our portfolio, which was instrumental in mitigating that impact as well.
Last but not least, energy crisis, very much a European topic where we actually site by site went through the challenges and decided upon how to reduce consumption and how to, as quickly as possible, implement changes to our energy supply and switch to alternative energy sources where possible. And by doing that, we do have pretty good visibility on the individual risks of our sites and feel confident that we will be able to manage impact of energy shortages.
Of course, that is somewhat limited. I mean, at a certain point in time, you will need gas to run a chemical operation, which, for example, applies to Minden and you can only go so far. But in terms of preparing ourselves, taking out risks of our operations, we have gone a long way. What we do, as a further measure, of course, is to work towards the priority status of our manufacturing of our operations in case of a heavy shortage based on the systemic relevance of Siegfried as a manufacturer of essential pharmaceutical products. And we are in good contact with essentially all relevant authorities and governments in the European countries in order to be recognized as such an operation.
We will, and we talked about that before, despite all those challenges, despite, let's say, a certain amount of distraction as well, we will continue to strengthen our core by continued organic investments. And we will continue to use M&A to enter into adjacencies and beyond. The fact that we have been able to successfully integrate the 2 Spanish sites speaks for that. Also the fact that we have been able to continue to invest into our manufacturing network, and I will talk to that later, a proof of this ambition and visibility, I think, that despite those distractions, we will be able to further develop our company.
This is a slide that you know. So it's consistent. It states our ambition, and let's still briefly go through it we do have a time horizon of course. And along those time horizon, we will actually tackle different opportunities, different strategic ambitions.
First and foremost, closest in terms of time line, is to continue to grow the existing core, to grow who we are today. And that is about small molecule Drug Substances. It's about oral, inhalation, solid dosage forms in Drug Products, aseptic fill finish and to further strengthen our integrated Drug Substances and Drug Product development services. So that's going to be going to continue.
We are also ready to add adjacencies, so to diversify into other attractive CDMO market segments, which could be large molecule, formulation particle technologies, encapsulation, drug product delivery systems or ADCs. And probably further out, we also continuously look at opportunities in the field of antibody cell gene therapy, viral vectors, bioengineered vaccines. So M&A, strategy execution always on, also in turbulent times.
What did it mean specifically? And we might separate our activities here into 3 pillars: Organic investments, portfolio management and mergers and acquisitions. Organic investments going on essentially as planned. So the new large-scale production plant in Minden is well underway. It's going to be an investment of up to CHF 100 million as a whole.
Of course, the project team is facing challenges in terms of delay of supply and increased prices as well. And we see that. But still, based on hard work, commitment, support, the project team in Minden, together with the corporate, ladies and gentlemen, has been able so far to keep the project on track, and we will be able to inaugurate that plant in 2024 for manufacturing and actually do the [Foreign Language], I don't know the English word right now next week. So this important project for our Drug Substance network is well on track despite challenges.
Center of excellence in Barcelona, another investment up to CHF 50 million, equally true. That's going to be finished this year and ready to take on new business and to support our customers with high-value development services out of Barcelona. We added a filling line in Hameln. So aseptic finishing a very attractive segment for Siegfried and executed that project also as planned.
The R&D center in Evionnaz will also be implemented and become available to support our business development activities and future growth in the small molecules, drug substances part of our business and digitalization is a topic, always on.
Portfolio management, I won't spend too much time on it. But myself and also Reto referred to that as one important part and root cause for our ability to not only defend our cash flow but also expand our profitability of the overall product portfolio.
M&A is a topic along the lines, along the themes I just discussed. And you please can take from that, that we continue to create opportunities for long-term growth by adding capabilities and expanding capacities for the benefit of our customers, stakeholders and shareholders.
That leads me to the last slide. A bit looking ahead, actually, Siegfried's ambition is unchanged, consequently deliver profitable growth by investing in the global network and executing value-adding M&A. Growth of underlying business at least in line with the CDMO market; active portfolio management; and further strengthen our operational and pricing excellence; continued investments and M&A. And that all is supposed to lead us step by step over time to further evolve as a global leader in the CDMO space; be the strongest team running the most competitive network; have critical size in all our segments; and be the most trusted partner of the pharmaceutical industry. All this culminating, and I'm happy to repeat that.
In the upgraded outlook for the full year 2022, growth in net sales expected to be above 15% at constant currencies with a core EBITDA margin in the range of the profitability of the first half of this year. And with that, I thank you for your attention and actually hand over to Peter to actually guide us through the Q&A session, where we will be happy to take your questions and provide as meaningful answers to you as possible. So thank you very much.