Sartorius AG

and welcome to the Sartorius and Sartorius Study in Biotech conference call on the second quarter 2023 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Joaquin Cruzberg, CEO of the Sartorius Group. Please go ahead, sir.

Thank you very much and welcome from our side here as well. Thank you for attending our conference call on a Friday afternoon or Friday morning for some of you, hopefully. We would like to start by walking you through the results of the Sartorius Group and then thereafter through the results of the Sartorius Stadium Biotech Group. We will do this here by myself, Rainer Lehmann, our CFO, and René Faber, Head of the Bioprocess Solutions Division, as well as CEO of Sartorius Stadium Biotech. Let me start by walking you briefly through the main highlights of the first half year's results. As expected, also the second quarter was very much influenced by the temporary early week demand by quite the most of our customer groups, one can say. Of course, the most significant impact has come from the continuous reduction of inventory levels by our customers. At the same time, and this is particularly relevant for the Bioprocess Solutions Division, for both divisions, we also have seen some impact by lower investment activities by customers. Of course, still, there is also some impact from the, I mean, pretty much full omission of the COVID-related business. And Rainer will show you also the impact of both sales revenue for both divisions in a minute. The underlying EBITDA has remained on a quite robust level at around 30% for the group. The cost containment measures that are in place are paying out here. Looking forward, let me flag that here already, of course, it will play a role to prepare for an increasing order intake activity or increasing demand by our customers. And therefore, we are preparing for keeping our delivery times short and our delivery ability high. So that's a key topic going forward. We are confirming the outlook that we have revised five weeks ago. And I also would like to confirm our midterm outlook for 2025 here. And then quite recent news is that we closed our Polyplus acquisition three days ago. We announced that, but we will take the opportunity here today again to introduce the main highlights of this business, the strategic logic, and why we are doing this. René actually will do this in the Sartorial Stadium biotech part of today's presentation. presentation. And with that, I would like to hand over to Rainer for the details of all H1's results. Thank you, Joachim. And also, first of all, welcome to today's earnings poll. Let's have a look how the soft top line development actually translated into the figures for H1. Sales amounted to 1.73 billion. That's a decline of 15%. Excluding COVID, and that's important because really This year, we pretty much do not see any further or related COVID business any longer. This decline would have been in the upper single digit only. It's always important to keep that in mind since last year was still fueled at this point in time with some COVID tailwind. Order intake decreased substantially, but also as expected by a third to 1.45 billion. The decline, as you know, and we have flagged that quite often, related to the destocking that seems to take a bit longer than we initially thought, hence also the update of new guidance that Joachim just referred to in the middle of June, and also some lower investments of activities at our customer side. The underlying EBITDA decreased by almost 26% to 517 million. That's a drop in margin of a good four percentage points. to 29.8%. Nevertheless, still under the circumstances, quite robust margin, functional expenses are back actually on previous year level at this point in time. And as you know, we are volume driven company, as we have seen tremendous economies of scale over the last two years with that two margins up to 34% in a group. Of course, these economies of scale unfortunately also play the other way around. So therefore seeing this development. Underlying earnings per share for the ordinary, two euros and 95 cents dropped by 40%. And for the prefs, it's two euros 96. And again, same drop as for the ordinaries. What's important to know, of course, cost, stringent cost management was key for the first half that will also continue going forward in order to achieve the guidance that also Joachim will reiterate later on. If we go to the next slide, we continue, of course, and I think it's very important to see our current development in perspective and in a broader context over the time. You see here that Q2 has a lower performance or is lower revenue than Q1. We always expected H1 and H2, and we anticipate that actually Q2 now on the order intake, we also hit the bottom. And from here on, we see a recovery in late Q3 and then Q4 order intake picking up for both divisions. If we have the regional view, we see that really all regions have been influenced by the destocking effect and the low investment activities. Sales are, our sales declined in both divisions. LPS was specifically affected here by strong comps. Keep in mind that in the, especially in the US also, we had a very good success with our BioLint portfolio. And that, of course, also now with a bit more tightened environment regarding biotech funding also plays for sure a role here in this normalization. The Americas, we achieved revenues of 646 million. That's a decline of a good 12%. In the EMEA region, we dropped a bit further, almost 16% to 669 million in revenues. LPS was here pretty much stable, we have to say. It was driven by the bioprocess, which, of course, has very high comparables. Most of the COVID-related revenue was stable. related to this region, but also Russia has an influence here. Basically, four percentage points of the drop are attributed to the business or basically the loss of business in Russia. In Asia-Pacific, we see actually sales declines also in LTS. Here, I need to also point out that part of that, and I will come to that when we dive into divisions, but the membrane business, so the basic components for the COVID test played a role. The BPS revenue decreased mainly also due to soft business in China. Yeah, in this regard. And René will add some more color later on during his presentation. When we come to the detail and have a detailed look on the bioprocessing side, we see, and I'll start here on the left-hand side with the order intake, we really see this decrease across all regions, the loss of almost 36% or 35.5% in constant currencies to 1.1 billion is really attributed to that destocking. We can't mention it enough. It took or takes a bit longer than we originally anticipated, as I said, but hopefully, we anticipate that to really bottom out this quarter or last quarter. And sales revenue decreased by 17 and a half percent in constant currencies to 1.35 billion, excluding COVID. And there would be a upper single digit percentage rate decline. When we look at the regional also split here, we actually see that the loss was pretty much across all regions. Again, on the bioprocessing side here, it was around 20% loss. In Americas, a little bit less, only 10%. In Asia Pacific, also 25% revenue decline. Nevertheless, and despite the fact that we lost quite some revenue on the bioprocessing side, we managed to have an underlying ABTA margin. of 30.8%. EBITDA amounted to 414 million. I mentioned it below. We're really here dependent on the economies of scale, which worked or works in both ways. If we have now a look at the LPS division, Electronics and Services, here we really continue to see robust results in a continued challenging market. Also here starting on the left-hand side was the order intake decreased to 348 million. by 22.5%. One of the main drivers here is really the reduction in the OEM membranes that we had some nice business the first six months of 2022. And we also see here clearly the weaker, let's say, market environment when it comes to the early stage biotech funding. Sales revenue. amounted 389 million, a drop of almost 7.5%. Excluding COVID here, we would have a reduction only in the mid single digit range. The underlying EBITDA, I mentioned before, we could continue to keep a high profitability for our LPS division here was 26.3% and amounting to 102 million, really stable outlook or stable performance due to also stringent cost management in that division. We have to look at some key performance indicators underlying everything I just mentioned. If you look at the extraordinary items, of course, they're a little bit higher with 61 million. Let me put some color here. Half of them we relate to the adjustment or to organizational adjustments. Part of that is, for example, our voluntary employee program, as well as ramp-up costs in connection with expansions. but also certain one-time payments with suppliers. So really about this whole topic that we still have the aftermath of the COVID business from last year. And the rest is really integrations and also corporate projects that we normally show in this position. Financial result is influenced, as always, by the volatility of the valuation of the BS separations earn-out liability. So nothing new here. Of course, our interest result or interest expense net has increased due to the funding of the acquisition of Albumedics last year and will, of course, going forward be a lot more substantially influenced by the new acquisition. Underlying net profit amounted to $202 million, a drop of almost 40%. Operating cash flow, and that is actually very happy to report that in these circumstances with that weaker result, we actually were able to increase our operating cash flow by a good 25% to 363 million. Main driver is here that in H1 2022, we had a substantial increase in working capital, which we now could optimize. And also going forward, I really do not expect any further negative development out of that position. Investing cash flow amounted to 327 million. As Joachim pointed out at the beginning, we also continued with our capacity expansions. As you know, a lot of them are in the manufacturing or manufacturing capacities, which, of course, we are adjusting on the timeline a little bit, but therefore we are showing a quite high CAPEX ratio of 17.3%. On the next slide, we have our more indicators, equity ratio, pretty much on last year's level. That's a little bit over 38%. Net debt slight increase to 2.6 billion, which then translate to a net debt divided by underlying EBITDA of 2.1. Slight increase, but of course, with the reduction of the profitability That's a result of that. And with this, I'll give it back to you, Robin. Yeah, thanks, Rainer. So from my side now, just the outlook for 2023. The headline here says 2023 P&L outlook confirmed as revised in June. So that is because we now, of course, factored in the Polyplus acquisition since it's closed since July the 18th. You can see here from the first bullet point below the table that this means that there is one additional percentage points of non-organic sales revenue growth contribution, but no impact on the outlook bandwidth here. And there's also no impact on the approximate profitability outlook that we are giving. The other effect is shown in the last bullet point, the net debt to underlying EBITDA ratio, which is now anticipated to be slightly above four by end of the year. The other numbers are as suggested for five weeks ago. So it's a very busy chart. Apologies for that. But I hope it helps for providing as much transparency as possible here. So therefore, briefly, For the saturated group, we are expecting a low to mid-teens decline in sales revenue. The decline excluding the COVID-related business and the impact from that would be mid to high single digit. Rainer has explained the numbers after H1, so this is the guidance for full year. And the profitability for the group that we are expecting is around 30%. And then it reads the same for the two divisions. And I guess I don't have to read it out here. Then as a recap, because Rana already mentioned CapEx for H1, we expect CapEx to be approximately on the same level for the full year. So, or I mean, the ratio to be around 15%, but the absolute CapEx roughly on the same level. So we are pretty much continuing without changes our capacity expansion program. And let me briefly reiterate why this is. One is because we leave our midterm expectation unchanged. We believe what we are seeing here at the moment is what we always have anticipated, and that is quite significant volatility around our unchanged and positive midterm growth trajectory. And as we didn't change our expectation and our respective activities during strong over amplification of order intake and sales growth because of the buildup of inventories by our customers, we do the same now during this temporary rundown of the inventory levels of our customers. And then, of course, there's also a certain impact from the necessity to build up a certain regionalization of our footprint. We actually have been working on that even before the geopolitical turmoil, but nevertheless, of course, this also adds a bit to our capex as there is particularly to mention the expansion of our North American plant, but as well as the buildup of capacities in Asia. So, and with that, I would like to hand it over for the Saturated State of Biotech Results to René.

Thank you, Achim, and hello everybody also from my side. Welcome to our H1 call. I will start the SSB part with the PolyPlus acquisition we have announced in March and finally closed this week. First of all, a very warm welcome to our new colleagues from PolyPlus. We are very excited to join forces with that great team. PolyPlus is a leading provider of transfection reagents which are used in manufacturing of gene therapies and gene modified cell therapies. The company expanded their offering and added both plasmid design and plasmid manufacturing capabilities and also launched recently new reagents which are used to make lipid nanoparticles for in vivo RNA or DNA gene delivery applications. So highly relevant portfolio for us and very important milestone in our very focused efforts to build a portfolio of cell culture media and critical materials, which are used particularly in making such new therapeutic modalities like cell and gene therapies. Products are highly complementary to our upstream and downstream and fluid management offering we have today and supported by services like cell line and process development, or plasmid design and plasmid manufacturing services. These materials are high quality GMP grade ingredients, which have a strong impact on performance and economics of the manufacturing processes of our customers. They're often used in combination media, for example, with gross factors or transactions reagents are used with cell culture media to make viral vectors so it brings very nice cross-selling opportunities as well. Typically, they are spec'd in preclinical or early clinical development of drugs, and once the drug gets approved, it becomes quite sticky and recurring business. The market for cell and gene therapies is an early, relatively young market, which is becoming increasingly relevant. These new modalities represent now one-third of new biologics pipeline already. the market is growing with 20, 30%. The approved drugs are today rather small indications, typically with regional or country approvals. According to FDA, the expectation is that around 2025, 10 to 20 new approvals might come to the market per year. We have seen quite a nice pickup of approvals recently in the last couple of years. The pipelines are well filled. Two-thirds are early phases, providing for us the opportunity to get those materials packed in early in these processes. PolyPlus here brings quite a nice footprint in these pipelines, both in development but also in already approved drugs. Regarding the financing, Rahner, do you want to take that? Yeah, I'll take this quickly.

So, as you know, we basically communicated that the initial financing is done. We are a bridge facility on Sapporo's AG level. We intend to really long-term refinance this with a bond. We are in the middle of the bond preparation and will most likely go into the market at the beginning of September, with the intent then to refinance mid and long term. That would, of course, bring our dynamic indebtedness, the net debt underlying with the A, substantially higher. As I just said before, on an SAG level, it was 2.1, and it will be slightly above 4. For the SSB dynamic indebtedness, that would be slightly below 4. And it was a clear deleveraging strategy. important to be under 3.0 until 2025.

And with that, back to you, Rene. Yeah, thank you, Rainer. And with that, let's move to the H1 results for Satoshi Steering Biotech. Again, very much in sync with what Joachim and Rainer described for the group, following the exceptionally strong previous year sales revenues declined by 18.5% in constant currencies compared to H1 2022 to now 1.4 billion. Taking COVID revenues out, the decrease was slightly above 10%. Order intake has been impacted even stronger, of course, resulting in a 37% decline, which corresponds to an order-to-book ratio, as we have expected, at slightly above 0.8 for the first half of the year. As expected, normalization of demand, which we have seen going on since the mid of 2022, continued. expect that it ends a bit earlier, so it's now a bit prolonged. We also have seen a general reluctance to invest on part of our customers due to overcapacities. And looking at the EBITDA margin, despite the lower volumes, we achieved a solid EBITDA margin at 29.7%. And, you know, here price effects on both procurement side and customer sides largely offset each other. We have been working very diligently on managing the costs during that period, decreased the headcount or adjusted the headcount to the current demand situation, and we'll continue doing that moving forward. The lower profitability is then reflected in the underlying earnings per share, which was at 2.62 H1 2023 versus 4.4 last year. Putting the sales revenues into perspective, again, very similar picture over the years here, like Raina showed for the group, where sales revenues now doubled when we compare it to 2019 pre-pandemic times, which translates to a strong, almost 20% CAGR growth along this four years. We expect the higher volatilities also continue, not of course at that scale, but in 2024, 2025, there will be, that's our expectation, Then looking at the regions, we see similar normalization effects across all the regions. U.S. is impacted by this stock mainly. Europe below strong comps with additional negative impact. I think that's roughly 5 percentage points coming from Russia business decline. In Asia Pacific, strongest decrease mainly due to soft China business. What we see in China is that the effects of inventories, build-ups, overcapacities, and also the challenging funding environment also apply in China, but are kind of more pronounced there compared to other regions, and also the recovery might take a bit longer in China than in other regions. And we also see a stronger presence now of local competitors in China. Cash flows, again, very much in line with what Raina explained, Here for the group to highlight here again our efforts to reduce inventories, adjust to the demand normalization resulting in low working capital in the light of the strong fundamental growth drivers of our market, which we see we are continuing our global investment program in manufacturing capacities across all regions. Joachim mentioned South Korea, so both Asia, US, we have expanded and just opened new facility in Puerto Rico for cell culture media and continue investing across the portfolio and region moving forward resulted in a capex ratio at 18.7% for the first half of the year. Of course, due to bit lower sales revenues in that time. The company continues to a very solid balance sheet, equity ratio was at 50.2%, net debt stood at 1.8 billion euros, which resulting in a ratio of net debt to underlying EBITDA of 1.2. That brings me now to the outlook for 2023, very much, again, in line with what Joachim already described. Therefore, the bioprocess division, same dynamics here, We're expecting now low to mid-teens decline in sales revenues, excluding COVID-related business, high single-digit to low-teens decline. Acquisitions, including polyplas, are expected to contribute to percentage points, excluding polyplas 1 percentage point. So in underlying EBITDA, we anticipate margin at around 30%, where the positive Margin effects now coming from PolyPlus acquisition is not expected to have a significant impact here due to the timing in this year. The CapEx ratio for the full year 2023, we project at around 15% and the net depth to underlying EBITDA at slightly now below four, which includes the PolyPlus acquisition already. With that, I think we move to the Q&A.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wish to ask a question may press the star followed by one on your touch-tone phone. If you wish to remove yourself from the questioning queue, you may press star two. If you are using a speaker equipment today, please lift the headset before making your selection. Anyone who has a question They press star followed by one at this time. One moment for the first question, please. And our first question comes from Vinic Agraw with Citi.

Yeah, hi. Thanks for taking my question. Just on order intake, are there any particular pockets where you're seeing better visibility for orders than others? I mean, if you peek into some of your largest customers' inventory and maybe based on product shelf lives and our discussions with the customers, are you seeing any particular signs which kind of gives you confidence of recovery in the later part of this year? Thank you.

Thank you very much for the question. Indeed, as you can imagine, in these volatile times, we have – We're in very close contact with our customers with regards to the inventory levels they have and the expectations to reorder or start reordering again. We have been talking to the majority of our largest customers, of course, and what we're hearing from them is that most of them, more than 60% of them, expecting to reach their inventory levels, the target inventory levels in Q3 and start reordering in Q3. And almost every customer we talked to confirmed starting to reorder in the Q4 of this year. So as Raina said, this is now what we expect. Maybe after the summer pandemic, to see uptake in order intakes and then continuing then in Q4.

Thank you.

Our next question comes from Michael Luchten with UBS. Please go ahead.

Thank you. Thank you for taking my questions. Two, please. One, just going back to the prior one, what are you doing different now to get a better handle on where we are in this time of visibility compared to what you were doing before? Is there any difference or is it the same processes and it's just a little bit easier to get the visibility now than maybe it was in Q1? And then a question on China. You mentioned China a few times in terms of softness. Is that now softness beyond the sort of basic materials and products that always was a competitive field in China? Is the local competition now going into areas where previously that wasn't present, or is it still only in the lower tech area and not inspecting processes?

Thank you. Maybe on the difference, and maybe René will add to that, I think customers are a little bit more transparent at this point now about where they stand in this process. I think during the pandemic and shortly thereafter, it was indeed a little bit more difficult to get an overview here. I think that's exactly as you anticipated, the biggest difference. So that makes it also a little bit easier for us and I guess also for other players to get visibility and share that then also with you. On China, if I get it right, you are asking for in how far the market environment has changed, and I think René spoke about that already. On one hand, maybe all the effects that we see on the global level are to be seen there as well, maybe on a little bit more pronounced level. That's one thing. But the other aspect is for sure, and also that has been mentioned, I believe, that As expected, we see now also some competition in China. And I think we always shared with the market that we were expecting this to first play a particular role in, let's say, more standard fluid management applications. And I think that is also something that we can confirm and see here. And in general, I believe, as in other industries as well, the pandemic has been a kind of accelerator and amplifier for those trends that were ongoing anyway. So that's basically, I think, what we can say. The biggest maybe uncertainty here, and that is why we are always flagging also the quite high uncertainty overall in regards to China, is more of a geopolitical So I think the potential within the Chinese market is still very, very significant. But of course, a bit of an uncertainty here for sure is also in how far business might be regulated and limited going forward. Thank you.

Our next question comes from . Ringberg with Kepler Show Group. Please go ahead.

Thanks very much for taking my questions, 3FMA. Can you first talk about market growth where we currently see it excluding any kind of stocking effects? To what extent as to funding pressure and early stage biotech and also the lower investment activity lowered the overall market growth for you? And then second question, just expanding on market share. In the past, you talked about your ability to gain market share. Can you just provide an update? I guess this kind of market share gains in North America and probably also in cell culture media are still valid. On the other side, obviously, you were able to get into some kind of accounts when others were not able to deliver, which may flip back. And also, overall, there's more capacities in the industry. So can you just talk about the dynamics around market share, please? And then third question, if I may, just on the midterm guidance, can you just provide us with the kind of bridge, I mean, to get to the 2025 targets? It requires a bit more than 20% top line growth for bioprocess and STATEM. So how you think about this kind of three components in terms of M&A, destocking, and organic growth? Thanks very much.

Maybe I briefly start with the midterm targets, and then René will answer the two on market growth and market share. So I think when you ask for the bridge from 2023 expectation to 2025 projection and target, then the first important thing to note is that we are talking about roughly half a billion euro of consumption of products from us, and that mostly in bioprocess, i.e. in saturated state and biotech. that we are not selling in 2023. So consumption in 2023 is approximately half a billion higher than sales revenue. So I think that's the most important aspect to note that based on how far we see and understand and know the market dynamics that these are roughly the numbers. And therefore, what we are projecting from there to the year 2025 is then mostly organic growth on a relatively, let's say, average level. But of course, that then already includes also, as you are asking for M&A, the acquisition of Polyplus that we have just closed. So it's not that we are factoring in really very high level of additional MNA for bioprocess here. I think you're asking for SSP and bioprocessing here. For the left division, there is also, of course, this certain offset effect. And here we would expect maybe in proportion, in relation to the size of the division, maybe also a little bit more relevant MNA going forward. but also, of course, again, some substantial organic growth. And again, for the first two questions, I hand over to René.

So on the market growth, of course, the year 2023 particularly is a very difficult one to make a robust information about the market growth as such. taking out the inventory activities and also the slower investment activities. I would say probably slightly below what we have been looking at historically for equipment, tools providers, market, low to mid-teens digit growth rates. How we are looking at that rather is a mid-long-term perspective and the main driver, growth driver, are the drug pipelines of what our customers are developing. Here we expect that the majority, the main, the largest market segment of protein monoclonal antibodies pipelines are continuing to grow. So a growth rate in that segment of high single digit to low double digit rates is something we would expect mid to long term. And the new modalities I've mentioned when I talked about polyplast cell and gene therapies, they are growing over proportionally strong. Gene therapy is maybe around 20%, cell therapy is 30%. We see that as an on top in addition to the protein markets. And yeah, so that the expectation mid long term would be that we continue on that low to mid single digit growth rates for overall business market shares. We have during the pandemic been able to gain market shares due to our ability to supply and the speed of capacity expansions. I would say mostly in the US. We also see, of course, it's not surprising that we will not keep it all, the market shares we gain, but overall, I think we are getting or got out of the pandemic with the net gain of market share, sustainable market share. Mostly US, China, it's different due to the local competitors there. particularly during the COVID pandemic, you could see a preference of local players, local customers to secure their materials from the local competitors. So there I would not talk about market share gains in China, definitely not.

Thanks very much.

Our next question comes from Paul Knight with T-Bank. Please go ahead.

Yeah, thank you on the monoclonal answer. The other is, are GOP ones significant yet for your filter incidents? And then the other question is, would it be fair to say file process, concluded the June quarter kind of as expected, lab products a little weaker. That would be my first two questions.

So maybe the second question first for in how far the two divisions performed up to our expectations. I would say it's not much of a difference here for the two divisions. you can say that typically when you don't have any influence or overlayer from any other significant trends or larger single projects or whatsoever, then the second quarter is a bit below the first quarter, particularly when you have Easter in the second quarter. It sounds maybe a little bit odd, but that is what it is. And this has been the case in 2023. So both divisions basically came in end of June where they expected them to come in. Really no significant, you know, difference that I would highlight here.

And on the GOP, of course, these are different manufacturing processes than cell culture process to make a biologic trucks. But you're right, the filters are used in such processes can be sterilizing crate filters for filtration type of products, so absolutely.

Thank you.

Our next question comes from Joel Walton with Credit Suisse. Please go ahead.

Thank you. I have two questions. I'd just like to go back to the confidence that you have that things will start improving perhaps in the third quarter and definitely in the fourth quarter. I assume that you were speaking to your customers earlier this year. Were they just not telling you anything? And then when you called them back more recently, they were more open? Or why when you spoke to customers, you didn't have visibility before, but now you speak to customers, you do have more visibility. I think people are just trying to really gauge the degree of confidence that you have. And my second question would be relating to China competition. Now, I think we all understand that there's been good local supply. But within the pandemic, we did hear of people able to get hold of Chinese product and integrate it into their processes. And I just wonder if you feel that that Chinese competition is going to be leaking out into other areas, or whether you feel that any short-term use of those products will go away, and once again, people will look for the higher quality products that come from you. And just to clarify on the element of destocking, on the Lonza call just before this one, Lonza talked about having seven months of inventory at the half year, the same as the inventory level that they had at the end of 2022. And they were talking to doing destocking in the second half of the year. So that's one customer where we would get a slightly more pessimistic outlook. Thank you.

So for the confidence regarding order intake development in Q3 and Q4, And then how far the quality or the details that we have got from customers have changed. I think we tried to express that before. We would say that the level of detail that we get from customers is indeed a little bit higher. And therefore, we feel that the outlook is maybe a little bit more robust now. We also would say that a stock level around the six months is rather something that we have seen at many customers before the pandemic, while during the pandemic, stock levels have been very often around the 12-month level. I don't want to comment on any single individual customer here, but our view is that indeed stock levels at customers have been going down quite substantially. And one can read this very clearly from the order intake that we are reporting. But let me clearly say, we try to be very, very transparent here. And I think, as you know, following us for longer, that we have been flagging what we called back then a changed ordering behaviors of customers, I think around, yeah, almost three years ago. And back then we said it's hard to quantify, at that time it was actually impossible to quantify, but we nevertheless flagged that. And we continue doing so even at times where no one, customers as well as competition, was addressing this topic and we are reporting water intake. And this is an information that you cannot see from anyone else. So I would like to claim that we are very, very transparent here and try to share information in that transparent way as we have it available. But of course, we cannot guarantee for any of this information. I think that's clear. but we think that the numbers that we have now, the insight that we have now is a little bit more detailed and robust than before indeed. And then on China, I think what we said, and again, this is something I believe we are talking about in these kinds of calls for a long time and for sure, also quite a while before the pandemic. We always said that we would expect a number of mechanisms in the market that we are addressing to be the same as in other industries as well. So we always said we would expect Chinese competition to become established and to also then gain share for sure, particularly in the Chinese market. And we always said that we would expect this to happen when we talk about consumers in particular first and mostly in the fluid management domain and in the more simple applications here because we don't have any IP protection here. Nobody has any IP protection there. And as said before, what we see now is that for the Chinese market and in the Chinese market, this trend has been a bit amplified and accelerated during the pandemic. I think something that one can see also in some other industries probably. Now, you are asking if I got you right, what we think, how this would develop going forward. And that is quite difficult to project. We still, of course, have this one specific feature of the applications that we are serving in, And that is that for more, let's say, sophisticated applications for the downstream, for instance, the validation of the specification of products that are being used in the manufacturing of a drug plays a larger role. And therefore, the stability of existing business is quite high. one factor that still plays a role. But in how far the Chinese competitors will make inroads to the global markets and how that exactly will play out, I think is really difficult to predict. One thing where we deeply believe in and we always have been therefore pushing forward is that innovation plays a major role in this market. The products that our customers are producing are extremely valuable. That is for sure the case for monoclonal antibodies, but even more the case for cell and gene therapies. And therefore, the key question by our customers always is in how far we can help them to accelerate their processes and to how to improve the productivity of their processes. And that is more important than the price point of the respective product. So differentiation, innovation, productivity gains is really the key factor. But clearly to expect that or we would not expect and build our strategy on whatever that, you know, Chinese competitors would be excluded from global markets. So I don't think that this would be a viable strategy.

Thank you for your very full reply.

Our next question comes from Uwe Solveig with BNP Paribas Exxon. Please go ahead.

Hi, hello. Thanks for taking my questions. I have three. First one on biotech customers. Can you give some more thoughts around the weak funding environment and the impact it has had on your business and say if those type of customers were to go to zero, much would that represent off sales? Second, you have a lot of new capacity coming online in the coming months. Time demand is a bit weaker. Is there a risk that we could see longer-term pressure on the margin from low utilization rates? And third, on Polyplus, now that the transaction has closed, could you just clarify your earlier comment on the bond issue Does that imply that you won't do a right issue? Thank you.

Thank you. This is Rainer speaking. I take the questions one and two. I think Rainer will comment on the third question. So, regarding the biotech customers, for us, of course, it's a very important market segment, customer segment. exposure, revenue exposure to these customers is below 10%. Of course, we also see a slowdown there. You can see that in a way that, for example, in the left division, they would, instead of buying five instruments at a time, do it sequentially. So you see a slowdown there. Cash protection, you see that also in a way that they prioritize, reshuffle, reprioritize their assets, pipeline, drugs. We'd rather see a slowdown in early phase drugs, in early phase or preclinical development, so it's less, you know, less business simply due to the volumes. So overall, yeah, there is an impact, but not that strong definitely not for the bioprocessing business. Capacities, yeah, we are building and expanding manufacturing capacities. Joachim mentioned one driver is regionalization. And yeah, here we want to make sure that we fulfill expectations of customers in Asia and having local footprint in Asia. Is there a risk that we would see a pressure on margins? We will see that so far. So far, not necessarily. We believe that the capacity expansions we are doing, looking at our projections and expectations for the future growth, that will get filled then rather quickly again. And we want to be prepared for these volatilities, which we talked about also, and having capacities ready for the next phase. Reino?

Yeah, so Hugo on the bond. Basically, we're looking here at the plan vanilla bond, anticipating buckets between three to 12 years really to see how it plays out at the end of the day, but it was a fixed coupon. So really straightforward bond. I hope that answered your question.

Our next question comes from Richard Moser with J.P. Morgan. Please go ahead.

Hi. Thanks for taking my questions. A couple, please. Just thinking about the customer reordering in late Q3, have the customers indicated any sort of increase or level of reordering that they expect to you? Just some thoughts there, how they think that to develop? Second question, just it looks as though you still have an order backlog at this point. I know around maybe about 500 million ahead of sales over the last sort of three or four years. Is that the case? And when do you expect that to return to balance? And how much of this is expected to benefit the second half? And then just thinking about that second half and that order backlog and the orders you've taken in the first half, you know, the second half has still got an element of recovery to get to your guidance. So just thinking about the pushes and pulls on that first half versus second half, is that all the backlog? Because the low orders that you've taken in the first half seem to mean that that's relatively challenging. So just, or somewhat challenging. Just some thoughts there. Thanks very much.

Yeah, maybe before René may comment on in how far we see any level and size of orders of customers that have come to an end with their destocking. So we don't call that backlog, I guess, what you are addressing. And therefore, I hope I got your question right and am able to answer it in the right way. So ballpark. uh ballpark 100 maybe 150 million is is the number of maybe what we would say destocking left to happen yeah so so but but you know backlog for us would always be uh a a kind of whatever carryover of of orders which always happens but which is not necessarily subject to any any destocking activities by customers or so so but but i guess If we are talking about the same thing here with maybe slightly different words, then we would say ballpark, it's that number. And what we indeed factored into our H2, as you call it, recovery of sales revenue is the pickup of ordering activity again by customers. So that's basically the most significant aspect that we are expecting here. René?

And Richard, on the size of orders, I would say that's very much Overall, it's, of course, driven by consumption and then by each customer's preference and strategy on inventory levels. What we, however, see and would expect is that other than in the past where some customers would place standing orders for the year-to-year consumption, that we will not see that or see that less and rather more of smaller orders. So that's something we are seeing coming.

Excellent. Thank you very much.

Our next question comes from James Kingley with Morning Story. Please go ahead.

Hello. Thank you for taking my questions. We've got about two left. Just picking up on the question on margins and the impact of capacity coming online. So thinking about your capacity utilization today sort of broadly across your network. So how does that compare now versus pre-COVID levels? Also, is there a mix element as well that maybe might also support higher margins for a similar level of utilization today versus where you were in the 2019 period or so. Just looking on a quarterly basis, the second quarter margin looks a little bit lower than the first quarter. Similarly, on the same topic, in terms of the margin, you mentioned cost-cutting initiatives. So how much of the sort of margin hit has been offset by cost-cutting initiatives? And secondly, on the lower investment by customers, can you talk through some of the drivers here? Is this projects where customers have ordered equipment in advance and received that equipment before this year, or is this more referring to customers being cautious about investing in future projects and deliveries there? Thank you.

Maybe I start. So capacity utilization during the high times of the pandemic in the sense of where we had this very high level of order intake, customers were trying to build up inventories or were de facto building up their inventory levels. The capacity utilization was really at 100% in many product segments, so that included a very significant expansion of our shift models. So there were quite some sites where we were running 24-7 shifts. And now this is back to a more normal level. So if we would now say 24-7 is 100%, then we are now down to, you know, 80%, 75%, depending a little bit also on the product segments and some product segments a little bit lower and some a little bit higher. That's also why the significant capacity expansions that we are still investing into are very relevant in our view because of the midterm growth expectations that we are having. And it's also important that we are not running at 80 plus percent capacity utilization too quickly again, because there's always quite some lead time that it takes to expand capacity. And I think during other times, during different times, we also spoke about this in one of those calls, that there is nothing more expensive than not having capacities available. So that is why we believe this makes sense to continue investing here. Then you were asking for several other effects on profitability besides capacity utilization or the volume effect. Rainer was elaborating on the volume effect earlier today. And you were mentioning mix costs, et cetera. I would like to add to this price. and supply costs, so to say. And that, of course, had quite some impact. We have pretty much been able to offset the higher costs on the supply side by price increases. I think that has been a topic since 15 months, roughly. And so far, I think we are on a good track to continue being able to offset that. the cost adjustments that we were undertaking were compensating only for a smaller part of the volume effect. It's pretty much, I mean, of course, it's always possible to achieve more compensation here, but what we are trying to balance here at the moment is what we addressed earlier in our call here today, and that is being prepared for a pickup or for the intake again, because we then think that we have to adjust outputs again quickly. So therefore, it was only a smaller part that we were offsetting. Rainer, you want to add? Yeah, I can also add some color there, James. Basically, if you look at that we are with our functional expenses, also this, the first six months, 23, our pre-management was the first six months of 22. And when you look in 22, actually, the second half was 10% higher. Then the first half, you see that actually we made quite some progress also in managing really also our functional expenses overall. This is the indication there, and there is a mid-WGD million figure we're talking about there. And then maybe the last question, if I took that down rightly, and that is, in how far customers have been investing into equipment in advance. I don't know, René, whether you want to comment on that. I think one can say in general that we have seen that before, that there have been times where people were expanding capacities very significantly, and one was triggering the other, and then there was a little bit more capacity available. I don't know.

Yeah, absolutely. And you can see it rather at the smaller clients, smaller customers, smaller CDMOs mostly in Asia Pacific, including China, that those companies, you know, kind of driving the wave of high demand during the COVID invested in capacities which are not yet utilized. So that, you know, it's one of the reasons why we see less investments going on now, particularly in that customer service.

Great. Thank you. Just one quick follow-up, if I can. Just in terms of the capacity utilization, at what levels were you sort of pre-COVID? I mean, that might be a bit more of a direct comparison to where you are now, the sort of 80% to 75%. Yeah. Where were you pre-COVID?

So we typically want to stay below 80%, or in other words, as soon as we reach 80%, we want to be able to activate additional capacities relatively quickly. So typically, we try to maneuver between 60% and 80%. It sounds relatively low, but please keep in mind that we are typically growing 10% or more year on year. and that there are quite some lead times to activate additional capacity. So ballpark, 80% is a good number, but again, then new capacities have to be available relatively quickly.

Lovely. Thank you very much.

Our next question comes from Odiseas. My name is Jotis with Beringberg. Please go ahead.

Hi, thanks for taking my questions. First, I want to follow up on Renna's answer around inventory levels earlier. So I mean, if 60% of your customers are expected to reach their target inventory levels at the end of the third quarter, what was that percentage around June or the end of the second quarter? Secondly, could you please give us a bit of a feeling of your cost of debt from 2024 onwards assuming the PolyPlus acquisition is fully debt financed with around 4 to 4.5% be sensible? And thirdly, could you also please talk to us about any progress made around the CFO search and what the expected timelines are? Thank you.

So maybe on the first question, We believe that the vast majority of our customers have not reached their targeted inventory level before the end of Q2. Maybe something below 25% that have reached that level by the end of Q2, but not more than that. And that is basically Going forward, the total debt, because we're still enjoying, to be honest, some lower financing from the past, that the combined debt going forward is probably more around on the 4% range. We expect, of course, the bond to be more between 4.5%. And since we have currently a bit lower rates, the combined one, I would see around 4%. Yeah, I hope, I thought it's clear that this is something that we cannot comment on. But I think it's clear that this is very much on top of the agenda of the supervisory board. And my understanding is that the supervisory board is quite, yeah, driving this process. Yeah, very diligently and well in time.

All clear. Thank you very much.

Our next question comes from Falco with Deutsche Bank. Please go ahead.

Thank you. Good afternoon. My first question is thanks for sharing this 100 to 150 million that is still left to be destocked. Can you help us put that into perspective and share the amount that you've experienced in the first half of this year that was destocked. And then my second question is related to that. How much of the 100 to 150 million still left to be destocked? Do you expect to be destocked in 2024? Or do you expect all of that to be completed by the end of this year? Thank you.

Yeah. So, sorry, we were on mute here. So once again, so yeah, so ballpark, we believe that this will be close to half a billion overall of destocking that we will have seen. We think left will be the 100, maybe a little bit more than the 100, and then there will be something 300 plus that we think has happened so far in H1. So that's ballpark, and we don't expect a significant number to be carried out into 2024.

Okay, thank you.

Our next question comes from Lee Lowertale with SG. Please go ahead.

Yes, hello. Good afternoon. Delphine Lelouet speaking. If I could move a bit on Polyplus, could you let us know the evolution of the mix in between the reagent and the transfection that you see in the future now that you've completed the acquisition? And secondly, I was wondering, because you already mentioned one percentage point additional growth coming out from Polyplus. And we know that the margin are fairly exceptional in the field and you have no contribution to margin. So does your vision and midterm vision or can you give us a bit more idea about what would be the fluctuation of the margin just linked with the incorporation of Polyplus into the business?

Can you please repeat the first question?

I was wondering if you can share your vision about the evolution of the mix in terms of revenue for Polyplus regarding the breakup in between the reagent and so in between the transfection factors and the plasmid. Would that change over time according to you and to your client base, how you see the future? And second question was more about the margin and the aggression to the overall.

Okay, thank you for clarifying. So, product mix evolution for Polyplus we would expect is that, you know, in transaction reagents, Polyplus having already very strong market position versus, and they will continue to grow moving forward. Plasmid, Polyplus is rather a newcomer in the plasmid manufacturing and plasmid design, so here Here we would expect higher growth rates, of course, starting on a bit lower level than transfection reagents. Margins, margins, I think. I can say something. I can comment on that.

The margin we'll see basically on a full year basis, half a percentage point increase on every day. Of course, we'll really see that partially of that this year, but since it's still Within the range of our guidance, we didn't flag that specifically, but it is obviously has a substantial higher margin than the biotrophic solution division so far.

Okay. Thanks.

Our next question comes from Oliver Metzger with OtherBHS. Please go ahead.

Good afternoon. Thanks a lot for taking my questions. Two I have. The first is on the inventory levels at customers. We hear that some customers approach low inventory levels, but the degree of concern is not so high as basically the whole bioprocess industry signals openly that they are able to deliver short-term Do you regard lower inventory level and the tendency potentially to order just in time as a risk or a new normal that also given the higher cost of capital and therefore efforts to reduce working capital so that potentially your assumption that six months inventories, the level we saw before the pandemic is not the old reality or but the new reality might be somewhere below the six months. And my second question is just very quick on PolyPlus. So can you comment on the underlying performance of PolyPlus since the beginning of the year, as basically since over the last months you were not allowed to talk in details, but now we are after the closing, and do you see also some higher volatility at PolyPlus? Thanks a lot.

Maybe I take the first question. Regarding the target inventory levels of our customers, we don't have an indication that they are aiming for a substantially lower level at this point. I fully understand the considerations that you have just explained. On the other hand, many customers still are rather I want to be prepared for future disruptions of supply chains. So at the moment, we don't have any indications that they are aiming for substantially lower inventory levels. And on Polyplus, Rene?

Yeah, the performance is as expected. The few similar effects as we see in the other portfolios by processing, but by far not that pronounced. There are a couple of customers also who build inventories, but again, it's much less pronounced than in other businesses.

Okay. Thank you very much.

Our next question comes from with HSBC. Please go ahead.

Hi, thanks for taking my question, and thanks for the clarification on the financing. Now that NetDebt2Debt is reaching four levels, I know it's going to come down gradually, but what will be your strategy if another opportunity came up? So that's question number one. And question number two is, you mentioned the Russia comps, 4% by Sartorius and 5% by Stedem. When does the base get easier for that? Do you ever expect the business to come back? And are there strategies that you're taking against that? And the last one is on the substantial reduction that we saw in the receivables. We know that it's partially a breaking capital correction, but Did that have, like, further, like, impact, such as, like, the acquisition of the distributor in Turkey or any other change that you saw during the period? Thank you.

So the line was indeed a little bit different. limited here, so don't know whether we got your questions right from an equipment standpoint. Can I repeat them?

Happy to repeat them.

Yeah, that would be great.

Sure. First of all, on the Polyplus acquisition and the financing to bonds you mentioned, equity financing to a student seems to be out for the moment. What would your strategy be in the case of another attractive acquisition opportunity coming up, given that that is coming to close the fork? Second question was on the Russia comps. You mentioned a significant impact on revenues. When do you expect Russia comps to reach a base, and is there structural change there? Do you ever expect this business to come back, or does it get transferred to a different region or to local competition? And the last one is the substantial reduction in receivables that we've seen. Is this just like the working capital correction we have seen, or does it have more to do with the one-time payment to suppliers that you mentioned, or the acquisition of a distributor in Turkey, such and such?

Thank you very much for repeating the three questions. This is now very clear. As you always have said, that we would consider using equity for financing acquisitions in general. That, of course, always depends on the specific case. So, therefore, we would not, you know, like to speculate now about any theoretical case. But in general, we do have the opportunity to use both or either SSB shares in case of an acquisition that would be made by the Sartorius State and Biotech subgroup or Sartorius AG's treasury shares in case it would be an acquisition that would be made by the RPS division. So definitely wouldn't exclude this year, but currently no plans for doing that. Again, depends on a couple of factors, I believe. Russia, first of all, it's important to point out that our business in Russia is extremely reduced and extremely limited. It always has been very focused on the healthcare and biopharma sector anyway. No business outside the sector. I think it goes without saying that no business outside outside any restricted areas or allowed areas, very much down to the level that might stay, but maybe it goes even further down, but it's very, very much reduced now already. And as you are asking for structural changes, I guess you know that they sound maybe easier than they are even even pulling out here is restricted legally and comes with certain risks. So we are trying to manage that very, very diligently, but clearly we are almost completely out of activities there. And to your third question, though, it's the normal course of business that has influenced our network and capital position and the different elements here. As we always have said, we were working on reducing our inventory levels by ourselves. This is a function of the robustness of supply chains, expected orders, that's clear, but on receivables, nothing specific to mention here.

Thanks very much. Just as a follow-up, in terms of the Russia business base, when do you expect the comps to become easier? beginning of the war or in the later court case?

I wouldn't expect any change here anytime soon.

Okay, thanks.

Our next question comes from Naresh Shohan with Intel Health. Please go ahead.

Hi there. Many thanks for taking my question. Just a couple on supply, please. Can you help us understand when each of these kind of different elements of your new supply come on stream and how long it takes to get to full capacity? And then if I heard you correctly, since COVID you added about 10% of capacity a year. Can you also help us understand what kind of amount of capacity we're getting over the next few years?

Thank you. Sorry, Naresh. Could you repeat, especially on the questions? Apologies.

This is the second one we didn't get. Okay. if I heard you correctly, I think you said that you've been adding about 10% of incremental capacity each year over the last few years. I may have misheard that. Can you confirm? And secondly, on that, can you help us understand what percentage of increase in capacity we should be assuming in the coming years out to 25? Thank you.

Thanks again for repeating, but maybe we have a problem here with the quality of the Oreo line. So capacities, what I actually try to bring across is that if you take a prox 10% organic growth, then it means that capacity utilization gets increased by a prox 10 percentage points year on year, just ballpark number, right? So, and that means that we don't feel comfortable to run any manufacturing site above 80% capacity levels because then we hit very soon the ceiling. So that is what we wanted to bring across. The capacity additions, and therefore, of course, you are right. One could translate that into, okay, every year we have to add around 10% capacities. That's right. But when you look into a specific project to extend capacities, then very often they are larger than just 10%. So therefore you typically, the chunks that we are adding, and that now depends very much on the type of technology, product segments, and so on and so forth. But very often, I would rather think of sizes of 30, sometimes 50%, sometimes even larger sizes of additional capacities. And I think we sometimes spoke about that. Sometimes we also do that in a staggered approach that we add quite substantial additional clean room capacities, for instance, that would allow us for even doubling the capacities. But then we fit in machines only for, let's say, additional 25% of capacities and then add the machinery sequentially over the time. So you cannot translate that that easily, but that's roughly what we are seeing. And And the second question, how much additional capacities we will make available over the next couple of years, then ballpark for sure will be rather around 50%. And again, it depends now on the different segments. In some areas, for instance, when we talk about circular media and then reagents, et cetera, it's even more than that. Whereas in other segments, it's maybe rather around that number. But again, keep in mind, cell culture media, reagents, critical materials, et cetera, this is the segment that we have entered. René was elaborating on that earlier today, and where we also expect substantially higher growth rates than the 10% I was talking about. So that's why also the additional capacities that we are building at the moment are larger.

Thank you. And if I could just ask, When would you, do you expect those to come on stream? Is that 2024 or 2025 or beyond?

Yeah. So, you know, it depends. So, for example, additional capacities in Ubania for fluid management technologies, we basically will have available partially already beginning of next year. There are additional capacities in Yaoko for, our single-use technologies, as well as for psychology media, where we are also talking about later this and earlier next year capacities in South Korea, we are rather talking about N25 beginning of 26. So it's really staggered. There is not this one big bang moment. It's really rather over time.

Thank you very much, Peter.

There are no further questions at this time. I hand back to Dr. Joachim Kruzberg for closing comments. Please go ahead.

Yeah, thank you very much, everyone, for your interest in our results and also in all those strategic and operational topics beyond the short-term results only. Appreciate very much the dialogue with you. I hope we were able to answer your questions sufficiently. Looking forward to continue our dialogue latest in three months when we will publish our nine-month results. Wish you a relaxing summer wherever you are. Enjoy your vacation. Talk to you soon. All the best. Bye-bye.

Ladies and gentlemen, the conference is now concluded, and you may now disconnect your line. Thanks for joining, and have a pleasant day. Goodbye.