Merck KGaA (MKKGY) Q1 2025 Earnings – Full Coverage

Thank you very much, Belén, and warm welcome also from my side from sunny Darmstadt. And with that, I'm now on slide eight for an overview of our key figures in the first quarter. I would like to emphasize that we had a solid start to 2025 in what is indeed a rapidly evolving economic environment. Net sales increased by 3.1% to 5.028 billion, supported by the acquisitions of Mirus Bio and Unity SC. While FX was still a slight tailwind in Q1, EBITDA pre was up by 5.6% to 1.535 billion euros. Importantly, all three business sectors contributed to EBITDA pre growth, both on an absolute and an organic basis. FX was a slightly lower tailwind on EBITDA pre than on sales, while portfolio had a slightly dilutive effect on EBITDA pre. EPS pre increased by 2.9% to 2 euros per share. Operating cash flow decreased to 556 million, also compared against a higher base. The decline was mainly driven by an increase in receivables and inventories in anticipation of a changing tariff environment, higher bonus payments, and higher tax payments. Net financial debt decreased slightly compared with end of December last year, as operating cash flow was largely consumed by investing cash flow. Let me also briefly comment on our reported results. I'm now on slide nine. EBIT was up by 8% year-on-year. This was higher than the increase in EBITDA pre, as D&A increased at a smaller rate compared with EBIT pre, while adjustments were lower than in Q1 last year. The financial results saw an adverse change of 18 million, from minus 32 million to minus 50 million, which was mainly driven by higher interest expenses and lower results from financial investments. In general, please remember that a financial result consists of more than just the interest result. It also includes outcomes from financial investments, changes in our pension and other long-term provisions, as well as adjustments to the time value of the long-term incentives plan. The effective tax rate came in at 22.8%, which is at the upper end of our guidance range of 21 to 23% and slightly above the effective tax rate of 22.2% in the year-earlier period. The tax rate usually fluctuates over the quarters during the year. For example, Q4 is usually the lowest tax rate quarter for us, bringing down the average from the first nine months. In addition, please be aware that this year is a year of additional uncertainty with all the debates around tax. Reported EPS came in at 1.69, which represents an increase of 5.6% year-on-year. And with that, let's move on to the review by business sector. I'm starting with Life Science on slide 10. Life Science grew organically at 2.5% in Q1, as projected. This is driven by Process Solutions, which grew organically by 11.4% in the first quarter. The vast majority of our customers have started reordering, and we're now seeing our large pharma customers back to normal ordering patterns. Consequently, order intake showed very strong growth again in Q1 2025, and book-to-bill stayed comfortably above one at a similar level to Q4 of last year. Process Solutions is carried by strong demand for consumables, which form more than 90% of our sales in this business segment. We have not seen pre-ordering effects in Q1 2025. Now taking a closer look at Science and Lab Solutions. Sales were down by minus 2.5% organically. US policy changes are in particular affecting academic and government lab spending, amid a still cautious pharma research spending environment, as pharmaceutical customers are still prioritizing late-stage development projects. In addition, China has remained a challenging market for Science and Lab Solutions. And turning to Life Science Services, our third and smallest business within Life Science, sales were down by 6.2% organically, mainly driven by our CDMO activities, as new project starts were impacted by funding constraints and project phasing was unfavorable. EBITDA pre was up by 3.1% organically in Q1. While our EBITDA pre margin increased on an organic basis, FX and portfolio effects were slightly dilutive. I'm now on slide 11 for an overview of the Healthcare business sector. Healthcare delivered solid organic sales growth of plus 3.4% in Q1, well in line with our full-year guidance which we gave in March. By franchise, our CME portfolio was the largest contributor to growth, up 10.6% organically against an easy comp. We saw double-digit organic growth across all therapeutic areas, supported by some favorable phasing. Oncology was down by minus 1.9% organically in Q1. While Bavencio declined in the mid-teens percentage range amid increasing competition, this was largely offset by a solid growth in Erbitux, which was up by 6.2% organically. All key regions contributed to the growth of Erbitux, with Europe and China up in the double-digit percentage range. Our Neurology and Immunology franchise declined by minus 3.7% organically in Q1. Declines of Rebif in line with the interferon market were largely offset by strong growth of Mavenclad, which is up 9.2% organically. Fertility was roughly stable in Q1 despite still high comps, reflecting competitive dynamics. Looking at our pipeline, for pimicotinib, we announced that we exercised the option for commercialization in the US and the rest of the world. We now hold commercialization rights for pimicotinib worldwide. For M9140, our CEACAM5 ADC in Phase 1B expansion, we have seen encouraging activity so far, and we will present the data at ASCO 2025. The robust organic sales growth in Q1, in combination with temporarily lower R&D spend as projected, helped us to achieve 11.7% organic growth in EBITDA pre, which amounted to 796 million in Q1, resulting in a margin of 37.6%, which is an increase of 300 basis points above Q1 2024. On the further evolution of our R&D spending, we do expect a gradual increase of R&D costs over the coming quarters, both in absolute terms and as a percentage of sales. Moving on to Electronics on slide 12. Organically, sales increased slightly by 0.6% in Q1. The Electronics sector showed organic growth thanks to the strong demand in our semiconductor materials business, driven by growth in AI and advanced node technologies in particular. Bear in mind, semiconductor materials is well over 50% of the sales in our Electronics business sector, and it is growing. The strong organic sales growth in semiconductor materials helped Semiconductor Solutions to grow at 2% organically, amid a low double-digit percentage decline in our DSNS business. Customer projects have been pushed out further as our customers try to manage a very dynamic market environment. Our Display Solutions business was organically flat in Q1, with some stabilization in the liquid crystal market. Surface Solutions was down 6.9% organically. The completion of the divestment is on track for the second half of this year. The EBITDA pre margin went up by 30 basis points year-on-year to 25.8%, thanks to cost efficiency and positive mix effects, partially offset by startup costs on new sites. For the further margin evolution during 2025, please note that volume growth would be the most important margin driver. And as we also have said repeatedly, we continue to be convinced of the long-term secular growth of semiconductors and therefore sustain a high level of R&D activities and continue with our capacity expansions in that fast-growing segment. Before handing back to Belén, let me also briefly comment on our balance sheet and cash flow statement. As you can see on slide 13, our balance sheet decreased by 2.22 billion euros compared with the end of December 2024. On the asset side, cash and cash equivalents went down by 1 billion euros from 2.5 billion euros at the end of December 2024, due to the repayment of the US dollar bond which took place in March of this year. Inventories were stable, while receivables went up by 400 million euros following a quarter of strong cash collection at the end of last year. Property, plant and equipment decreased slightly due mainly to FX translation differences. Intangible assets decreased by 800 million due to FX effects and D&A. And other assets were down by 100 million euros due mainly to divestment and revaluation effects. On the liability side, financial debt decreased by 1.6 billion euros, which largely reflects the repayment of the US dollar bond. Pension provisions were down driven by actuarial gains. Payables decreased from 3.1 billion to 3.0 billion, as we saw declines in current payables across our three business sectors. Other liabilities were around flat, and net equity decreased slightly by 100 million euros, as the increase in retained earnings was more than offset by FX differences, mainly resulting from the weakening US dollar. In summary, our equity ratio strengthened further from 58% at the end of December 2024 to 61% at the end of Q1. Now turning to cash flow on slide 14. Operating cash flow went down from 1.035 billion euros in Q1 of last year to 556 million in Q1 2025, despite an increase in profit after tax. That was mainly due to changes in other assets and liabilities, in turn driven by higher bonus payments and taxes in the quarter, as well as an increase in working capital. The increase in working capital was mainly due to an increase in trade receivables, reflecting the phasing after a particularly strong quarter of cash collection in Q4 2024, and compared with a quarter of tight receivable management in Q1 of last year. Cash out for investing activities decreased primarily due to lower payments for investments in intangible assets compared to the same quarter of last year, which were related to Healthcare investments at that time, as well as lower capex on property, plant and equipment. The difference in financing cash flow can be explained by the repayment of the aforementioned US dollar bond in Q1 this year. And with that, let me hand back to Belén for the outlook.

Thank you. I hope you can hear me better now. Regarding the SpringWorks question, we're talking about transaction and integration costs. As per your question, we expect the transaction to be accretive by 2027. As a broad statement, we expect the transaction and integration costs of 50 million each. The majority of the transaction costs will be incurred still this year in 2025, and integration costs will be spread over 2025 and 2027. Regarding synergies, the purpose behind this very exciting deal for us is to unlock potential value still in the United States and mainly outside of the US for these two products. So we are not expecting here major cost synergies — just to frame it like that.

On your question regarding tariffs and impact on margin, obviously the situation as we all observe is very dynamic and we are managing our mitigation actions to adjust accordingly. In our guidance we've reflected a slightly positive impact from the tariffs as we know them as of today—slightly positive on the top line and a slightly dilutive effect on the margin for the full year.

I will end on the guidance very briefly. The reason why we have lowered the upper end is strictly related to SLS. Jean Charles, do you want to comment?