Sartorius AG

Good day and welcome to the Sartorius and Sartorius Thelium Biotech conference call on the Q1 2023 results. Today's conference is being recorded. At this time, it's my pleasure and I would like to turn the conference over to Dr. Joachim Kreutzburg, CEO of Sartorius Group. Please go ahead, sir.

Thank you very much and also welcome from our side to our today's conference call on the Q1 results for 2023 for Sartorius as well as for Sartorius Thelium Biotech. We will run the call slightly differently from the previous times. I will make the introduction as always. Then Rainer will walk you through the main results for the Sartoris Group as well as for the divisions. And then René Faber, who is leading the Bioprocess Solutions Division at Sartoris since four years and now is also the CEO of Sartoris Data Biotech, will then focus on the Sartoris Data Biotech's numbers. Therefore, we will also slightly shift the presentation between BPS and SSB. Usually, we are going into the details when talking about the BPS numbers. This time, we will be a little bit quicker at that end, and then René will focus on saturated state and biotech. And as you know, overlap is 95 plus percent then in the second part of our presentation. And then, of course, we will jointly So let me kick this off by walking you through the highlights and the overview for Q1 2023. We clearly are recording a continued demand normalization as we have expected. I'm sure a lot of our discussion later will be around in how far that was in line with our expectation. So therefore, a quick recap, two and a half years ago, when order intake jumped by around 50% from one quarter to the other, we said, don't extrapolate this. Here are non-sustainable effects playing a role beyond the upcoming demand for Corona vaccine manufacturing. Back then, first players started to prepare themselves for the manufacturing of Corona vaccines. And we clearly always flagged that we were seeing stocking effects in the industry. We discussed pretty much in all calls last year about our expected destocking. It basically then started around mid of last year. We initially would have thought that it started a little bit earlier and would have affected a larger part of 2022. It affected pretty much the second half of 22, but that of course means that it's affecting 23 quite a bit. Our expectation, and it always has been, that this destocking would pretty much influence one year, four quarters. So therefore, this first half of 2023, we expected this impact to be significant. And therefore, when we made our guidance for the full year 2023, I think we made it quite clear that the two halves of this year would look differently. So, again, an expected reduced demand, which we consider to be temporary, and therefore we are also confirming the outlook for the year 2023. Sales revenue is below previous year by 13% in constant currencies, excluding the direct COVID effect. I'm not talking about destocking now. I'm talking about the business that is related to vaccine manufacturing, COVID tests, et cetera. Without that effect, it would have been a more moderate single-digit percentage decline. More details then also later here. And the underlying EBITDA margin is then also, of course, pretty much in line with revenue. As you know, we have quite significant scale effects affected by this lower sales revenue. One word again on this normalization, you will see a chart later on, or two charts actually, one for the group and later one for SSB that show both sales revenue development as well as order intake development. And it clearly shows as the order intake increase has been much more pronounced and steeper at the beginning of the pandemic for the two reasons that I mentioned again, we now also see a more pronounced reduction of order intake. Therefore, the gap between order intake Q123 and previous year is also more significant, but again, pretty much in line with expectations. So, and then René will later also give a little bit more detail on the announced acquisition of Polyplus. We were running a separate call on that two weeks ago already, but nevertheless, we will provide a bit more information again, just in case that there are some further questions.

And with that, I hand over to Rainer. Thanks, Joachim. And first of all, welcome from my side to today's call. So as usually, let's jump into the figures. Joachim mentioned a little bit unusual for us, but absolutely in line with our expectations. we see a decline in revenues and constant currencies of 13.2% to 903 million. Without COVID, the decline would have been in the mid-single-digit range. The 903 million euros only include really a very marginal COVID-related business. As I said already and anticipated at the beginning of the year, COVID will not play a role in the actual numbers in 2023. Order intake. declined by 32% in constant currencies to 765 million. Also here in line with the expectations, keep in mind at the beginning of the year, we anticipated it. We would not be surprised by seeing book to bill ratios below one for the first two quarters. So clearly indication of the softer H1 and with H1, of course, a more pronounced decline in Q1 as we see it already now. So for us in line as we expected it. The order intake, of course, is strongly affected by the customer destocking. Actually, I will show that in the next chart and talk about that a little bit further. And we expect, of course, the normalization to fade out in 2023, the second half of 2023, meaning that there should be an acceleration then of the business in the second half. The underlying EBITDA decreased by 22% to 272 million, which translates to 30.1% EBITDA margin, a reduction of almost four percentage points, but that actually fits to the decline in the revenue. Keep in mind here, of course, we are a volume-driven company, and also we are, and as we pointed out over the last quarters, We are dealing with a higher cost base, of course, also related to the expansions throughout the world that come always with a little bit of additional extra fixed costs. And of course, as we always pointed out in the past, we saw these, let's say, artificial economies of scale due to this tremendous growth during the COVID area where we said these will also not be sustainable. And we're now seeing the 30.1% margin. If you actually look back to before the COVID pandemic in 2019, we actually are above that level in the EBITDA margin on a group level. If we look at the, have a look at the next slide, I want to draw your attention here to the bar all the way to the right. That is actually the sales development in black. That is basically the non-COVID related sales and the yellow part is the COVID related sales and the gray-blue line is the order intake. So if you look in Q1 2023, you see and follow the line horizontally to the left to see, yes, each or Q1 is below each quarter of 2022, but above the quarters of 2021 and respectively 2020 and 2019. To put this in figures, we also put that on top left side. versus 2019 revenues for the quarter increased 105%. If you look at first quarter 2020, it's around 76%. Actually, if you would put the number for the first quarter 2021, it would be around 15%. So, therefore, we are seeing here also that the little black portion above of the horizontal line is most likely then also the impact, but we always said is the stocking part of the revenue during the previous years. This will, of course, as we always said, an impact that we can only see hindsight. One quarter is here, not enough. We'll see it for sure after the second quarter, but it gives us an indication of what the stocking effect was most likely during 2022. You also see here, especially since the beginning of 2021, the spread between the gray line and the black bar, which is quite significant, which of course increased our orders on hand that we still draw from. Therefore, it's absolutely in line and necessary that the order intake decreases in order to come back to our normal growth path. And if you keep in mind that in this presentation of the Q4 results, We also showed actually that we are pretty much a year ahead of the curve. That is exactly all in line. And I hope that these charts combined with the last chart from our presentation helps to understand and puts this overall or this short-term development in a broader perspective in the development of our company. If we go to the next chart, we see actually that this normalization happened pretty much throughout all different geographies. In the Americas, let me start on the left-hand side, revenues declined by 14% to 322 million. Here we have lower sales actually in both divisions. LPS is affected specifically by stronger comps. Also here, we had, as we pointed out over the last quarter, a positive impact in previous quarter of the biolytics business that did very well over the last two years. And also here, we, of course, then have quite high comparable basis. In EMEA, we see a decline of almost 12% to 359 million. In LPS, we actually see a quite robust sales growth, whereas on BPS, we are comparing here against high comps. Keep in mind, and as you all know, the majority of the COVID business was related to that region, and René will talk about that later. Here also we see additional effects from Russia, where we pretty much see a significant drop in our activities in that region quarter over quarter. In Asia Pacific, sales declined by 14.5% to 222 million. Here again, LPS actually growing in that region, but we're definitely not happy and it's actually below our expectations, development of the revenue of our business in China. On the right hand side, the geographical distribution, actually nothing major happened. it's quite in line with what it was at the year end. If you look quickly to the Biopro solutions, and as Joachim said, since René is here as CEO of the Satrucity Biotech subgroup, I'll only run very quickly through these numbers. Order intake decreased by 36.1% in constant currencies to 576 million. Here we see, of course, clearly the destocking effect, and we expect that to fade in H2. Sales revenues decreased by 16.1% in constant currencies to 695 million. Acquisitions contributed here on around one percentage point. And excluding COVID, we would actually see here a sales revenue drop in the upper single digit percentage range. The underlying EBITDA margin declining then to 31.2%. translating to 217 million. Of course, here again, here we can see these, what I called before, these artificial economies of scale that work in both ways. They worked in our favor with a significant jump in the margin from 2019 to 2020, 21, 22. And of course, then with the normalization, we also see then this impacting the profitability when it goes the other way. Yeah, more than from the May side, since BPS and SSB are pretty much, yeah, 95% the same. If we then switch to the LPS side, on here we see sales revenue close to previous year level, to the first quarter. Let me start on the left-hand side with the order intake. We see a decline of almost 16% in constant currencies to 189 million. Here we see or is already reflected the uncertain environment, it would say, particularly for the early-stage biotech companies, also in the U.S. And we also have to keep in mind that in the comparable of Q1-22, we also still had some corona-related business when it comes to membrane and testing kits. On the sales revenue side, we see pretty much on previous year level, 2%. decline in constant currencies to 208 million, excluding COVID, we would actually see here a slight increase in sales. Underlying EBITDA margin is 26.3%, so pretty much on previous year level, and with the absolute value at 55 million, really a result of also, yeah, stringent cost management. And, yeah, that's pretty much it on the LPS side. If we look at some key figures, the underlying EBITDA, of course, weaker level of 272 million also translates into a weaker operating cash flow. You might wonder why is it actually still stronger than Q1 2022. Keep in mind here that in previous year, Q1 2022, we had a strong increase of our working capital that of course we do not see anymore. In Q1 2022, there's only a slight increase. That is pretty much the explanation for that. Investing cash flow reflects the continuation of our substantial CAPEX program. You also know these expansions are related to capacity increases in our long-term basis. Therefore, we are continuing to invest that. The investment ratio jumps then up to 15% against the lower sales value. And of course, we pay attention also there to see maybe what investments we can defer. But overall, we are not changing the CAPEX program in 2023. If I look then at the next slide, we have here our equity ratio at 36.7%. slight decrease from the end of the year, net debt pretty much at same levels, that's 2.4 billion, that of course will change going forward with the acquisition of PolyPlus, but we had our extensive call about that already a few weeks ago, and on the net debt underlying EBITDA, slight increase compared to previous year, of course, here also reflected a little bit of reduction in EBITDA. And with that, I'll hand back to Joachim.

Thank you, Rainer. So outlook 2023, I said that at the beginning we confirmed the outlook for 2023 as we see the always anticipated the different halves of the year and also the different quarters to look quite differently. So therefore clearly the quarters will differ probably by something like up to 20% for the full year. Therefore, of course, it's important that we keep also the way how we are able to manage our capacities quite flexible. This is something that we have, of course, much of an eye on at the moment. But again, I guess we will discuss this later in detail. This chart is really completely unchanged. We expect low single-digit growth for the Sartorius Group top line, excluding COVID, direct COVID effects. It should be high single-digit. We have included here one percentage point of expected growth contribution by acquisitions on a group's level. And that does not include PolyPlus yet as this acquisition has been closed. So therefore it's not 100% clear now for how many months this business will be fully consolidated. We will update this, of course, once this is clear and closed. And we expect the underlying EBITDA margin for the group to be around previous year's level. And that is how this entire chart reads. And therefore, I wouldn't read it out completely. Rainer also made a comment on CapEx. You see this there. It's also, as we always said, there is a certain portion of our costs and increasing over time that we are dedicating to activities to reduce our CO2 footprint. And yeah, again, I'm sure we will discuss this later. So with that, I would now hand over to René for the Central Australian Biotech numbers.

Thank you very much Joachim. And hello everybody from my side. Pleasure joining the call today and report on the Q1 results. of Sartorius Sterling Biotech. Before I walk you through the Q1 numbers, let me start with a brief look at the acquisition of Polyplus, which we have announced recently. Polyplus is a company which specializes on critical materials used in making advanced therapies, which is a strongly growing and increasingly relevant end market for us. The company with 270 employees is based in France. has operations in Belgium, commercial activities or sites in US and China. It's highly profitable business and sales is expected at upper double digit million euro range in this year, 2023. The agreed purchase price is around 2.4 billion euros and we expect to close that acquisition in the Q3 of this year. Looking at the portfolio, the major part are so-called transfection reagents used to make viral vectors, which is one of the key modalities in gene therapies and gene-modified cell therapies. The company expanded also the offering and added complementary plasmid design and plasmid GMP manufacturing capabilities as well recently. These products and services are highly complementary to our existing offering, and we see significant synergies in both upstream and downstream processes of our customers here. Looking at the next slide, PolyPlus for us is an important milestone in increasing our relevance in that as a tool provider for new modalities. As you can see summarized on the chart here, since 2018 we have been very focused on building a portfolio of media and critical materials critical raw materials used in development and manufacturing of cell and gene therapies starting in 2019 with biological industries and then 2021 cellgenics we added media and gross factors both used to make virtually all types of cell therapies xcel then brought specialized media for viral vector manufacturing recombinant albumin from albumetics is used across different types of new modalities and addresses the regulatory trend to move to use chemically defined components in these critical applications. And now, PolyPlus will complement the portfolio with transfection reagents and plasma DNA, and as you can see, making us a quite relevant and attractive supplier to this attractive end market. As said, we see nice synergies across the product, which bring us access to virtually every customer working on cell and gene therapies in the market. Again, closing expected in Q3 this year. Let's move now to the Q1 results, which are very much in sync with the BPS division, which Ryan and Joachim already commented or started to comment on. and also in sync with what we have expected to see for the first quarter and the first half of the year. The numbers very much reflect the post-COVID normalization. We see two effects playing a particular role here. As explained, COVID vaccines demand is down. We see only marginal effects in the numbers here. And secondly, as Rainer Joachim said, the ongoing consumption of inventories which customers built up during the pandemic leads to less orders or decreased order intake. We have seen this not only with COVID customers, meaning customers who either developed or made manufactured vaccines, but also other customers who during the broken supply chains in the pandemic times build up inventories to secure materials for their manufacturing and we also believe what we hear from our clients is that we were ready and prepared to supply those products and that's kind of reflected in the steep increase during the last three years. Since mid of last year we see the normalization going on. The lead times are back to the pre-pandemic levels for most of the products in our portfolio. We expect that it will continue next quarter. The effect of the normalization second half of the year should be, however, significantly reduced or not that relevant, meaning also that we expect to see a stronger second half of 2023. The sales revenues in Q1 normalized down to €726 million, which is 17% reduction compared to previous year's quarter in constant currencies. Acquisitions contributed one percentage point. COVID-related business agreed to take that out. The decrease would be in a range of a high single-digit range for the sales revenues or the intake down by 37.5% to 600 million around due to the effect I just described. And of course, the lower sales and a bit higher cost base are reflected in the underlying EBITDA, which was at 220 million corresponding to around 30% EBITDA margin. We think working on that normalization, it's a good result for us. We have reduced the manufacturing, shorter manufacturing capacities to the demands quickly. We are running strict cost management across all functions in the organization. And yeah, we'll be working on that moving forward as well. and then respective the underlying earnings per share was at 1.43 compared to 2.21 previous year. Looking at the regions geographies, we see similar dynamics across all regions. By the way, we see similar dynamics across all relevant portfolio used in drug manufacturing. In our portfolio, no big difference is there. Looking at regions, Americas and EMEA, both down by around 16%. Asia-Pacific with 21%. In EMEA with high coms, we've seen what we see also is that the region is impacted by additional effects from Russia. with sanctions getting more strict for supplying that market. And in Asia-Pacific, we've seen a bit slower start than expected in China, particularly the rest of the region, as expected. Moving to cash flow reflects the with operating cash flow 3.5% below previous year. Investing in cash flow reflects our continued investment in infrastructure, mostly manufacturing across all regions. To mention few of them, or the few most relevant in Germany, we are adding manufacturing lines for filtration membranes. We are expanding our site in Aubagne in France for single-use bag manufacturing. And we are building new facility in South Korea for manufacturing of main consumables, product categories, filters, bags, and self-cultured media. We also continue investing in localization of manufacturing in China for China. All that activities and capex spend resulting in a ratio of 16% in Q1 that year. On balance sheet, very solid equity ratios of around 50%. comparable to previous year, a slight increase in net debt to underlying EBITDA to 1.1 due to a low EBITDA result. With that, looking at our guidance, again, as I said, we expect the normalization to continue in Q2 with a stronger second half of the year with no significant effects then from destocking, and we confirm the full year moderate sales revenue growth in low single-digit range and underlying EBITDA margin at around previous year level. With that, I think we move to Q&A.

Yes.

Yeah, so the floor is open for Q&A now.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one. If you wish to remove yourself from the question queue, you may press star followed by two. Anyone who has a question may press star followed by one at this time. And our first question is from Zain Ibrahim from JP Mong. Please go ahead.

Hello. Thank you for taking my question and for the course and really helpful. So just on slide five, you laid out your expectation in terms of how much destocking you saw in in Q1 graphically. I'm just wondering if you're able to provide a bit more colour on that in terms of how much de-stocking you've seen so far on your estimates in the order intake and on sales and sort of how much you expect there to be sort of left in the second and potentially third quarter. And my sort of second question is, somewhat tied to that is about the sort of acceleration in the second half. How much of that acceleration, I suppose, is dependent on destocking and normalization being less of a phenomenon in the second half versus potentially the second half benefiting from the high order backlog that you had built up that I think you flagged in the four-year result and had underpinned your guide? And maybe a third question, if I may, just on China, if you're able to expand on what the dynamics are that you're seeing there, why was it sort of softer than expected? Is that mainly due to sort of COVID reopening or is there anything else that we should be thinking about there? Thank you.

Yeah, maybe I'll start, and my colleagues will add to it. So on the destocking part, and, Zane, it's always, of course, the wild card to really quantify because, of course, none of our customers actually tell us exactly if this is for additional destocking or if they will use it right away. So, therefore, when I refer to chart five, and you see on the right-hand side the Q1, where we have the basically 695, or let's say on a group level, our Q1 figure, and draw to the left, what is a surplus? That is the indication that there's destocking in there. On last calls, we actually tried to quantify it a little bit, and we said, look, it's in the three-digit million range there, probably more on the, let's say, yeah, probably on the lower side of the three-digit million, but we is also expect still, as we said before, that H1 overall is going to be softer. Our basic statement that we also said Q2 wouldn't be surprised to see booked a little below 1 also indicates that. So that also explains why we expect an acceleration in H2 that you were referring to, because that is then When the normalization is over, of course, our customers will start or will have to start, at least that is our underlying assumption, also embedded in the guidance that Joachim just presented, to accelerate in H2 again, of course, and then to be ready to deliver these goods. So that is basically the implication by us confirming the guidance with this call. Regarding the dynamics, I don't know if, René, you want to make something. As I said, we thought that we clearly communicated also at the end of last year that H1 is softer and within H1 that Q1 is softer. Yes, it's a 30% decline, but to be honest, that is the behavior. Keep in mind, we don't guide single quarters. We guide full year numbers here. And therefore, hey, YACU-1 is what it is. Maybe, I don't know if you want to come color with me, but otherwise.

Maybe just one addition. I mean, it's basically the same with by using a different KPI that we were also introducing during the last years to be very transparent and clear about also the magnitude of this extraordinary effect. And that was the book-to-bill ratio. And I think we said clearly, and everybody can follow up and make their own calculation anyway, that our like historical pre-pandemic average book-to-bill ratio was 1.08. And during the pandemic, we had two years of 1.25 and 1.28 respectively. So and then it's very clear how significant this surplus has been and the additional order book buildup has been. And we always said, yeah, this has to go out of the system one way or the other. And we also have been very clear that this only started, and it can be easily seen also from that chart that you were referring to again, and that is why we are presenting it, that this effect only kicked in mid of last year. We had a slightly above one book-to-bill ratio even for Q2 last year. So this started only in Q3. So therefore I fully understand that this is maybe a bit unusual for everyone because this high volatilities we all are not used to in most industries, I would say, and also for sure not in the biopharmaceutical life science industry, but it is what it is for very obvious reasons. And it's also clear that we have an underlying growth trajectory. I think it's also very evident. And therefore, the mechanism, as Rainer already explained, is as long as customers have more on stock that they would like to have, and I think we were very, you know, we gave examples in our last call, we said there are some customers that may have a stock level of around 12 months, while they are rather looking forward to run it down again to something between six to nine months maybe, then it's clear that there is a substantial volume that first or where people can or customers can use just from their inventory levels and then only start to reorder again. And that is what we are seeing here. And that is why we are also very confident that this is a temporary effect, even though, as Rainer said, it's not that easy to make razor blade precise precision about the timing and the extent. That's really not possible in our industry. in both directions again. It wasn't possible in the direction when it jumped up, and it's also hard to do it now. There was a question around China. Can you repeat this, please? Because I'm not sure whether we got it here.

Yes, sure. Thank you. That was very clear. On China, if you could provide more color on the softness that you saw there. You said it came in below. Was that more to do with China reopening COVID-19 headwinds, or is there anything else that we should be thinking about there?

Yeah, I can take that, René speaking. Yeah, in China, there definitely has been very significant COVID effects we've seen during the pandemic, both for yeah, COVID manufacturers, developers, COVID vaccine manufacturers, but also the overstocking by Chinese customers. We believe that that plays the major role by far in China. I would say probably it's too early to draw any conclusions on the full year, how that will look in China. Our expectation is that that's going to recover and ramp up in the rest of the year, starting the Q2. We'll need to see that. Great. Thank you.

The next question comes from Petrina Kakota from UBS. Your question, please.

Good afternoon. Petrina Kakota from UBS. The main question the market has is about visibility in our view. Your guidance implies high single-digit sales growth in the next nine months, and your comment in the press release says you assume no impact from normalization in the second half. What level of confidence do you have in that, and what level of visibility? What are you basing the assumption? Thank you.

I think regarding the assumptions, we probably would repeat ourselves here. So therefore, on this, of course, very, very relevant and interesting aspect of visibility. I mean, also regarding that aspect, I think we made our comments already a couple of times. But nevertheless, when we take a longer-term perspective, which I always would recommend to take, we can clearly say that the volatility in our industry has increased. When I look back, let's say 10 years, we very often started into a year and gave a guidance with a bandwidth of two percentage points, maybe three percentage points. We typically landed quite nicely within this bandwidth. Over the last years, we were broadening this bandwidth to at least four percentage points. And nevertheless, we quite for a couple of times had to adjust the guidance pretty much around the middle of the year typically. and that even before the pandemic. And that has to do with the fact that the sector is very dynamic. There's a lot of innovation going on. We had biosimilars kicking in as an additional driver. We now have new modalities that are playing a role. The business has become more global over the last decade, for sure. So more drivers. And the good thing is, pretty much all of them are positive additional growth drivers so but nevertheless what i want to say is this is is an industry uh where i would say it's in the face we are in it's anyhow not very easy to make very precise uh predictions in the first half of the year we always try to do our best i think overall our track record isn't that bad particularly we We do try to give quantitative guidances. There are also players who don't do this and only start doing this in the further course of the year. So, however, but to be, as I said already in my answer to the previous question, to give a razor blade prediction how exactly this will will look like is hard. As I said last year, we thought that this normalization would kick in a little bit earlier than the middle of the year. So let's see how it will play out precisely in 2023. Our expectation, again, is that the difference between the weaker quarters and the stronger quarters will be quite significant. So, and again, our model always is and the way we think about it is that it takes roughly four quarters until we are back on the underlying growth trajectory. But, I mean, growth rates of around 20% or so, we have been able to manage before and we see ourselves clearly in the position to manage that also now in this phase. And as I said, this is what we prepare ourselves for. But of course, it's always a challenge to manage such volatile developments.

Thank you very much.

The next question comes from Matthew Weston from Credit Suisse. Please go ahead.

Thank you very much. Three questions, please, if I can. The first is around pricing in buyer process. You previously said that you were confident in significantly increasing prices in 2023 and that you hoped that they would stick. I'd be very interested in this more challenging environment, whether or not you're seeing signs of any of you or any of your competitors needing to discount the orders that they're submitting and whether that's a risk to midterm guidance going forward. The second question is about China and following on from your previous answer. Some of our channel checks have suggested that Chinese CDMOs may be increasingly adding second source suppliers to their supply chain and may also be looking to domestic Chinese bioprocess suppliers as an option. And I wonder whether or not that's something that you're seeing and consider a midterm risk. And then finally, on the LPS division, you highlight the weakness in U.S. tools I think people will be very interested to understand what you're really saying about the level of biotech uncertainty. I think the magnitude of the LPS decline in the U.S. was far greater than people anticipated. I'd love some more color as to what you see happening in that environment, whether it's a specific type of tool or a particular part of the market.

Maybe I start with the last question and then René will take on the first two. So LPS, I would say to your question around the US, here clearly the market that we are addressing and the business that we are having there much more focused on the life science sector than it is in the other regions that we are serving. So we are more, you could say, also exposed to this sector and therefore, of course, also certain trends in this sector are affecting our US business more than it does in other regions. We have a much broader customer base, also outside life science research in Europe and also in Asia. And that is really the key point. We have been extraordinarily successful in the U.S. in growing our business, our BioAid business in particular, over the last couple of years, outgrowing the market significantly, I would say. gaining overall share and the relevance of our U.S. business has become therefore also more or higher for LPS. But of course, that also means in this temporary weakness of the market, as you rightly summarized, then we also see these effects in the U.S. We wouldn't say that we are directly affected by the SVB situation a couple of weeks ago, but, you know, indirectly, clearly one could say that the sector, early stage biotechs, et cetera, is a little bit more cautious than during the years 21, 22, where a lot of the research activities were significantly expanded in the sector, and now I think there is a bit of a temporary cautiousness, I would say. But clearly what we would say when we look on the market that we are serving, the type of products that we are offering, the applications that we are addressing, we believe we are very competitive and doing well and wouldn't consider that to be any longer-term effect again. René?

Yeah, I'll take the questions on pricing in China. First, pricing for bioprocess division. We are well on track on executing the price increases we have implemented for 2023. Those mostly compensate, offset the price increases we're getting from our suppliers. So well on track here. uh despite the uh the market difficult market situation uh second question was on china we see local suppliers being spec'd in a second source yes we see that i would say that with pandemic situation and supply chain situation during that time kind of accelerating accelerated the buildup of local sources for materials used in bioprocessing, very much supported by Chinese government as well. We see that happening at CDMOs and other customers in China. Today, I would say in less critical process steps in manufacturing process development, but we are expecting that increasing Today we see it as a second alternative source to secure the materials. What we also see is a clear requirement by Chinese customers to have and provide local supply then and that's our response to that development. I mentioned that briefly that we are investing and continue to invest in localizing our manufacturing of single-use products today, going further in localizing the parts, at least parts of the component supply in China, again, responding to that market requirement, emerging market needs to provide a local supply from China to China.

Many thanks.

Next question comes from Paul Knight from KeyBank. Your question, please.

Hi. Thanks for the time on the questions. Regarding, I think, you know, the technologies around or dynamics around your improved second half growth, are you going to be benefiting from the GLP-1 market with the NovoSep business or any other parts? The other, I guess, more general, Joachim, would be do you think the monoclonal antibody market still grows ex-COVID 10% to 15%?

So on the second question, because for the first, I really have to ask you for help. I'm not sure or we are not sure whether we whether we got the first question right, Paul. So, on the second one, we do believe that the monoclonal antibody market will be the most relevant single market that we are addressing and everyone else in this sector is addressing. And therefore, in absolute terms, it will be very relevant and also the absolute figure of growth will be very relevant. However, as you know, we think that the market growth, the underlying market growth should be in the high single digits, but that includes maps as well as other segments, new modalities. René was talking about that, how attractive and relevant and strongly growing that market is. that will provide substantial double-digit growth rates. So that means that the map market would still grow in a very significant upper single-digit range, but we wouldn't say 10 to 15 percent. There might be a single year, but not an average growth rate for maps of 10 to 15 percent. Maybe that's not growth. But, Paul, again, could you help us with the first question, please?

Yeah, the success of the GLP or the obesity drugs, I know they're synthetically created, but does Sartorius have any technology to help in the manufacture of those peptides?

Yeah, thanks for clarifying the question. And yes, you mentioned Novasep. Indeed, that's a part of our portfolio, which addresses the small molecule or peptides, oligonucleotides purification market with the well-established position of Novasep chromatography equipment in this market, so yes. it's a relevant portfolio for that market. And beyond that, of course, filters are being used as well in these processes, definitely. Thank you.

Next question comes from James Quigley from Morgan Stanley. Please go ahead.

Hello, thank you for taking my questions. I've got three, please. So first one, going back to order intake at the start of the year versus orders that you received during the year. So looking back pre-COVID with the two quarter offset, order intake was quite a good predictor of revenue for the year. So in terms of your guidance, how much of the revenue that was implied was already present in orders at the start of the year compared to orders that have come through throughout the year. So just trying to get a sense of basically how large the order book was at the start of the year and how reliant you are on order intake through the year to hit the guidance. Also in terms of the destocking, can you confirm that the first quarter is going to be the worst quarter of the year? The second question on the LPS business, Obviously there was a bit of weakness there as flagged before, but can you give us an idea of how this splits between bioanalytics, which may be impacted a bit more by bias at funding, and the other lab tools space? And then the third question, you may have addressed this on the Polyplus call, and apologies if this is repeating, but for your 2025 targets of 4.2 billion for BPS and 1.3 billion for LPS, Can you give us a little bit more clarity of what you've assumed for M&A within these targets? You mentioned on the call last week that Polyplus was included in the target, suggesting sort of $4 billion of underlying growth. But how much more M&A is in that $4 billion target? Previously, you mentioned that in BPS, M&A would be an underproportionate amount of the growth, but it would be super useful if you could just give us a bit more clarity of what exactly you're assuming for M&A in both of those targets. Thank you.

Yeah, thank you very much. So the first question, indeed, I agree, pre-pandemic, order intake was a good predictor. And that was, you know, going in line with this book-to-bill ratio being rather stable. But now, as I said, we had this huge volatility around order intake, book-to-bill ratio, and an extraordinary high And that means order intake is not so much of an indicator for the future, which a predictor is. It's much more a mirror image of the past and this very high buildup of order book. So I guess it will take another few quarters until order intake will be a good predictor again for sales revenue at the moment. we wouldn't consider order intake to be a good proxy for that. LPS BioA versus our Lab Essentials business as we call it. And then of course, service plays a role for both to some extent, but let's focus on the product side. I would say performance of both has been quite healthy and robust during Q1. different dynamics in lab essentials, less exposure to life science research, as just said. But at the same time, the decline of the COVID business, as far as it relates to LPS, was part of lab essentials largely. Again, as a recap, we were talking about membranes, that were used by customers in COVID test systems, as well as pipettes, pipette tips are also used in COVID test procedures. So therefore, I would say overall comparable robustness and contribution. On your 2025 perspective, We always included in these projections a certain portion of acquisitions in organic growth and therefore also an acquisition of the size of PolyPlus was included in our BPS projections. Maybe more Obviously, one would say that in LPS that there is another inorganic growth contribution necessary to achieve the 1.3. We would feel quite confident that we would achieve a billion plus a bit in LPS without any further inorganic contribution. But that means in turn to reach 1.3, something around 200 million of volume would have to be added to the LPS business roughly to achieve that. Maybe for BPS also we, I mean, there are a couple of interesting opportunities. We might add something here and there, which therefore is also included in our guidance already, but maybe here later. the ratio between existing business and size of a potential acquisition is maybe a bit smaller.

Great, thank you.

And the next question is from Hugo Solvay from BNP. Your question, please.

Hello, thanks for taking my question. A few clarifications, please Joachim. You said it takes four quarters, give or take, to go through this talking is it based on what happened in the past or do you have and sorry to push you on that but more data points in terms of all those delivery being pushed back view and inventories to share with us and on inventory is there a risk or would you say there is a likelihood that inventory at your customers will go below pre-covid baseline which was 69 million and that and restocking could be delayed second on lps and the weak biotech funding environment is there in your view any reason that this could speed over into bps thank you yeah maybe i i started maybe maybe renee adds to that let's let's see so

Our projection that this destocking effect will last roughly four quarters is based on, A, the dynamic that we see at the moment and, as we said, the ratio or there is a context, of course, of the actual book-to-bill ratio and the size of the over the order book surplus, so to say. And therefore, if we take this into consideration, this leads us to this perspective. Of course, we also listen carefully to all those customers who give more precise insights. And the second question that you have is related to that. we don't expect customers to run their stock levels below the pre-COVID level, rather slightly higher than that. And taking these data points, as you said, all together, our conclusion is that this should take roughly four quarters. As I said, to be then, you know, very sharp in the sense of, okay, you know, the month, the exact format of that curve, then that is really hard to take, hard to project. But these four quarters we feel make a lot of sense to us. The spillover from LPS, if I get you right, you meant what I said before, this a little bit more cautious, spending and investment behavior from early stage biotechs at the moment. Typically, the time gap between any early stage activity, be it small biotech, be it large biotech, to something that becomes then relevant to BPS business is several years. And therefore, and it's not just several years, there's then also, of course, this typical dilution and mix effect because it's not just one quarter that moves through time then. So therefore, we wouldn't expect any spillover effects here.

Thank you. And just maybe to follow up on the question that was asked earlier on the impact from pricing on the 2025 target, it seems in the press release this morning that you have probably less room to maneuver in terms of price. And do you expect that to have an impact on the 2025 target? Thank you.

We wouldn't, I mean, pricing, maybe again to go back how our communication has been around that. So during last year when inflation kicked in significantly, we were running in an extraordinary pricing initiative. And we also said as inflation stayed on a quite significant level, we also had a more than or higher than usual price increase for 2023. Our anticipation for the path forward then is that for 2024-2025, price increases should be much more back to normal levels. And that is what we factored into our updated projection 425, which is this 5.5 billion now. So that is our perspective. If boundary conditions change, then we will rethink that, but that is how we, that is our current perspective.

Thank you.

The next question comes from Odise Manisiotis from Berenberg. Please go ahead.

Hello. Thanks for taking my questions. I've got two and a half, please. So, firstly, on the bioprocessing margin, other than the sales decline here, is there anything else that affects profitability in this quarter in particular because we're looking to acquire a margin step up over the next few quarters, potentially above your mid-term guidance even. So, X margin accretion from the Polyplus acquisition. What pressures that you faced this quarter do you expect less of? Or what margin tailwinds should come through later in the year? And secondly, I mean, given the sterility expiry for some of your consumables on the by-processing side, have you seen signs of a secondary market becoming active from your customers with a large stock essentially selling consumables which are near expiry. And on that, does the fact that a lot of this extra stock that your clients have will expire soon back your sort of H2 turnaround confidence? Thank you.

Thanks for the question. I try to answer that. So first of all, what impacts the margin and processing business. Maybe to add one aspect, one factor here is a product mix where, as you can imagine, the stock levels apply to these consumables, which are rather higher margin products than equipment. So I would mention that one. expiry shelf life topic. We don't see that being a major factor here. Also a secondary market for consumables. You see a little bit of that, but it's really nothing which is relevant and quite difficult in regulated industry. So nothing which we would consider being relevant.

I can add a little bit also on the margin development because of course you see economies of scale also work in both directions. With that then steeper volume in H2, we are also of course clearly realizing some economies of scales again. So therefore it's a combination of the product mix but as well of course then utilization of the capacities that we installed.

Perfect. Thank you, Ryan, for the follow-up. Maybe if I add a quick follow-up on that one. So I mean, on your economies of scale point as well, could you help us with some figures perhaps on the average capacity utilization of your plants now compared to 22 or 21?

Difficult to say and a huge bandwidth. But maybe let me come back just briefly to a few comments earlier. And when you look into the segment of players that are very significantly exposed to COVID manufacturing, be it directly, because they are manufacturers, originators, CDMOs, or suppliers of critical materials for that. And there are also a few players that we could think of. And then you can imagine that the capacity utilization at such players is significantly lower than during particularly 21, the high time of vaccine manufacturing, but also 22. And I would say then, of course, there are other parts of the market in the, let's say, more general map space where I would say capacity utilization is pretty much as it has been before. So there's really a very significant bandwidth. So therefore, I think these average numbers would be, I would always digest them with a lot of caution. But yeah, so that is what I would say. And for us, of course, our capacity utilization at this point is also lower than usual, and that is good. because that means we are able to react to the anticipated increase of demand.

Okay, I appreciate the extra comment.

The next question is from Falco Friedrichs from Deutsche Bank. Please go ahead.

Thanks a lot. Good afternoon. I have two questions, please. The first one is a clarification question, please. on the stocking amount that you reflect earlier in your prepared remarks. You said the three-digit million amount. Can you just clarify again what the time horizon is for that? And can you give us a rough ballpark figure for the amount in 2022 and what's left in 2023? Just a rough ballpark would be very helpful. And then my second question, out of curiosity, how do you think about your 2023 guidance now versus when you gave it in January? Would you say it is more of a stretch now, or is it still just as realistic as you thought about it in January? Thank you.

So, yeah, as I said, the, or as we said, Q1 is pretty much in line with our expectations, and therefore our perspective on the full year's guidance is pretty much the same. So I fully understand that for everyone else, when you see, okay, there's a decline of 13%, and then there is an expectation of a certain increase, that you then say, wow, that's quite a challenge. But as we said, we have expected a significantly lower first half of the year in comparison to the second half of the year. So within our projections, we always anticipated quite different halves of the year and therefore also different quarters in the year. So that's pretty much unchanged. And on destocking, we have seen a significant buildup. Rainer said that a very significant three-digit a million euro number of, so to say, order book surplus. And we have seen a certain reduction of this in Q3 and then also more significantly in Q4. Now after Q1, we still would say there still is, as it was a significant three-digit million number, there is still a lower three-digit million number of orders that have to be, you know, like worked through and reduced and therefore destocking that has to happen. But we already have seen quite a bit of this being digested. Let's put it that way.

That's helpful. Thank you.

The next question comes from Ed Ridley-Day from Redburn. Your question, please.

Good afternoon, and thank you for the questions already answered. A couple of follow-ups. First of all, Rene, on the lead times, again, you mentioned that most lead times are now back to pre-COVID levels. I don't know if you want to quantify what most would be. And as we've been discussing, therefore, at least on your side of the business, you would expect normalization in lead times to be complete by early in the third quarter. And the second was just a quick one, Verena. In terms of your FX, obviously there has been a little movement in FX year to date. Can you give us some help on how that might affect margins for the full year?

Yeah, thanks for the question. I think the first one on the lead times when I said for the most of our portfolio that includes virtually all consumables, major consumable products, filters, single use bags, single use assemblies. There are a couple of product categories where we're still working on improving the supply chain situation. On the equipment side, most of the equipment types are also back to pre-COVID lead times. So it's really, really few exceptions where still some components supply the type of issues we are working on.

Good. And regarding FX, so basically if you compare to the previous year quarter, there's actually impact on the margin from the FX side, really slightly, only a little bit of negative one. And we expect, because if you look at how mainly the US dollar developed, we come last year from like a 107 around average. Now we're slightly up 110. But I expect actually that we will not see under the circumstances where we are. Always that disclaimer, a major impact for the remainder of the year on the FX side, to be honest.

That's also helpful. Thank you.

The next question comes from Naresh Kohan from Intron Health. Please go ahead.

Thanks for taking my questions. One on inventories, please. So when we spoke last quarter, you mentioned you would be running down your inventories. They seem to have gone back up again this quarter. So firstly, is that intentional? And secondly, is there any risk that some of your inventory reaches the end of its shelf life and there's potentially a write-down? And then on the margin, maybe I could ask the margin question slightly differently. Off the 490 base points contraction in Stedham, could you... kind of help us understand, obviously there's the economies of scale part, and then there are other costs in there. Could you help us understand what percentage or roughly of that 490 basis points, how much of it came from things other than economies of scale and level utilization? And then related to that, I noticed that you reduced headcount by 3% in the quarter. Should we assume that continues for the rest of the year? So kind of a 10% headcount reduction for 23? Or are we largely done here? Thank you.

Yeah, thank you very much. Maybe I try to answer them first. So inventory level absolutely rides slightly up in Q1. That is pretty much quite a normal effect. We typically see a certain buildup at the beginning of the year and then a reduction towards the end of the year. So that's like the normal curve. The underlying theme, nevertheless, is that we intend to further reduce our inventories. But of course, with very much an eye on being able to react in a very agile and flexible way to the expected then increase of demand and orders again in the further course of the year. So that's a bit the balance that we are trying to manage here. We definitely, as we always said, and you rightly mentioned, Our intended stock level in a normal situation, again, will be below the actual one. But we have to see a little bit more or less volatile situation until this really can be pushed for. Shelf life, you rightly said it. Of course, shelf life management is then also a challenge on any supplier's side and therefore also for us. I think we talked about that last time in our call. It's nevertheless a rather minor effect that we are seeing. But of course, in comparison to previous years, we have seen throughout the pandemic a little bit higher depreciation and sometimes also write-offs on inventories. That's clear, but it's for sure not dominating the equation, I would say. Margin? I mean, bear with us that we don't give too much detail here, but roughly you can say that the larger part, so let's say roughly or the larger contribution of the three factors, scale, cost, mix, the larger factor is scale here, and then uh costs and mix are maybe on the same level that's what that way yeah so maybe we are talking about something like 50 25 25 uh percent of of this effect just to give you an idea um head count um so head count um i i would say uh if it's not if the question is very much on the short term horizon, we might see a little bit of further reduction. But if the perspective is rather towards the end of the year, then it may look already maybe similar to what we have today, even though, of course, we will clearly try to use as many flexible workforce here in this anticipated scenario of increased demand again. So, and the headcount number, just to remind you, the headcount number, because this is how regulation is asking for this report, does not include temporary workers or contingent workers. So, and therefore, there might be a certain shift there, but by and large, short-term, maybe a little bit further reduction. And then if we talk about a couple of quarters, then we will see a moderate increase again.

Thank you very much. That's really helpful.

The next question comes from from HSBC. Your question, please.

Hi, thanks for taking my questions. Most also have been asked, so I'll just have some follow-ups as well. So in China, you mentioned some localization pressures and also some second sourcing. Are there any parts in BPS where there is more alternatives from the local market to your products? And which are the parts of BPS where you see less alternatives to that? And my second question relates to the mix that you've experienced in the first quarter. Was a higher portion of these revenues from older orders compared to previous quarters, which has limited the impact of the price increases?

So on China, local suppliers in China, which products groups from the BPS portfolio we see now being offered or supplied in China from local suppliers? What we see is that happening in the area of single-use bags, and again, like basic bags, 2D, 3D bags used for storage or less critical applications. We see that in some areas of equipment, like pallet tanks used to hold the bags. We see some chromatography systems as well, where we don't see yet relevant local suppliers These bioreactors, for example, most of the filtration products, even though also here new suppliers are showing up, but not that pronounced as the other categories I mentioned. Yeah, that would be our view on that.

Regarding your other question regarding pricing, you can see that we do not see yet the full price increase that we actually did last year in July, realized in 2023. We still have orders, especially also still in Q1, that were from before or from the first half of 2022. So on the price increase side, there will be realized more in the coming quarters.

Okay, thanks very much. That's very helpful.

The next question comes from Virendra Shohan from Alpha Value.

Please go ahead. Yeah, thank you for taking my questions. So I think a while ago you mentioned that the surplus in terms of the order book is now probably a lower three-digit million order surplus versus normalized order. And so my sense is that the order book will continue to, you know, book to bill will continue to be below one for a while. From that perspective, like if you could help me with like, when do you expect order book to be back to growth when you look at it from a quarterly perspective and a sales bottom in terms of over the next couple of quarters? So that would be really helpful if you could share. Thank you.

Sure. So I think Rainer mentioned earlier during our call and during his part of the presentation that we were anticipating and still do that we would have roughly four quarters of a book-to-bill ratio below one. And we have now three quarters of a book-to-bill ratio below one. And that means that And that is still our expectation. So that would mean that if this materializes that way, then for Q3 2023, we would see a book-to-bill ratio above one, and this equals to a growth of the Audible for that quarter. Thank you. Yeah? Yeah. Welcome.

That was our last question and I hand back to Joachim Kreutzburg for closing comments.

Thank you very much for this discussion. First of all, for your interest in Sartorius as well as Sartorius City Biotech, very much appreciated. I think it's really important to have this dialogue, particularly when Things are not like going as every quarter before and one just ticks the boxes, but where it's really important to explain different effects and to hopefully being able to clarify then all questions around that. So thanks for your interest. Thanks for the discussion. Looking forward to next time, which means latest in three months. All the best. Bye-bye. Bye, everybody.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.