Tecan Group

Good morning, everyone. Thank you for joining us for our conference call this morning. We are very pleased to discuss with you the results for the fiscal year 2023. With me on the call are our Chief Executive Officer, Dr. Achim von Leo Brechting, and our Chief Financial Officer, Tanja Micki. Before we start, as always, very briefly, some formalities. The corresponding press release announcing our financial results, was issued this morning at 6 a.m. Central European Time. Both this press release as well as the full 2023 Annual Report, including the 2023 Sustainability Report, are available on the company website tecan.com, as always under the Investor Relations tab. I just want to remind you that the call is being webcast over the Internet on our homepage, and we have also posted a PDF of the presentation slides that we will discuss on this call for download. With that, let me now turn the call over to Achim von Leo Breschtig.

Achim von Leo Breschtig Thank you very much, Martin, and good morning, and welcome to the TCAM 2023 full-year results presentation. Before Tanja will discuss the financial results of 2023 in detail, I will give you, as always, an overview of the financial and operational highlights. As you know, we published preliminary topline results for the full year 2023 already in January of this year. I'm glad to be able to say today that TCAM, despite the challenging market environment, delivered a solid performance in 2023. We had already communicated underlying sales growth in January, and I am pleased to report today an increase in profitability and net profit. We generated sales totaling 1 billion 74.4 million Swiss francs, 1.3% below 2022 in local currencies. And as mentioned, we've been able to demonstrate a solid underlying sales growth of 6.3% in local currencies when excluding the effects from lower COVID-related revenues and reduced material cost path through. The second half of 2023, TIKEN reported sales growth of 1% in local currencies, with underlying growth of 5.5%. For the full year, adjusted EBITDA was 220.6 million Swiss francs, and our adjusted EBITDA margin increased to 20.5%. Our adjusted net profit for 2023 increased by 6.5%, to 164.4 million Swiss francs, with adjusted earnings per share of 12.88 Swiss francs, which represents a 6.1 increase over last year. And our operating cash flow increased in 2023 by 25.2% to 160.6 million Swiss francs. We've made substantial progress in the implementation of TCAM strategy during 2023, with a number of successful new product launches and partnerships. We've been able to expand our core offering in laboratory automation in key growth markets and applications. As a standout example is the phase separator, which is an innovative new pipetting capability available on the Fluent Automation Workstation, representing a significant advancement for the strongly growing liquid biopsy application. We also launched the UNO single-cell dispenser, which is a new instrument featuring a unique functional consumable used for isolating single cells in research and drug discovery applications. Another newly introduced module was the MCA96, a pipetting arm with 96 channels for the fluent, which further increases functionality on our flagship platform and that has already seen high demand across all key applications of genomics, proteomics, and cellomics. We added additional new, unique solutions for prorheomic automation with products in the Resolvex product line to further strengthen our position in this important application space. In our partnering business, we've established new partnerships and saw product launches in all our OEM business fields, CAVRO, Synergens, and Paramit. The scaling of our global manufacturing sites has also progressed as planned, with serious production of CAVRO components successfully established at our facilities in Morgan Hill in California and in Penang, Malaysia. We also opened a new final assembly facility in the Shanghai Free Trade Zone in China. An additional benefit of our global manufacturing footprint has been that we've already seen a first reduction in greenhouse gas emissions from the transportation of products. The more localized production has supported our carbon emissions reduction targets. We had those targets validated in 2023 by the science-based targets initiative, which means that our emissions reduction plans have been assessed and found to be credible. This is a significant milestone we have reached as we are moving beyond the stage of having just made the commitment to the initiative and on to implementing the plans and already delivering results. We've progressed in managing our social impact as well with our workplaces in Switzerland, again receiving Great Place to Work certification, and additional workplaces in Germany, in the United States, now achieving that certification as well. There are more details about this and our full sustainability program in the annual report that came out today. At this point, I'd like to share my sincere appreciation for the TCAM teams around the world who've worked closely with our customers and our valued business partners to take us through 2023 and deliver a strong set of results, setting us up well for steady continuation in 2024 and the years ahead. Before I take us into more business updates and the outlook for 2024, I'll hand over to Tanja for more details on the 2023 financial results. Tanja?

Thank you, Achim, and good morning, ladies and gentlemen, from my side as well. I'm happy to be with you this morning to present you our financial results for the full year 2023 in more detail. Let's start with order entry and sales. Full year order entry was 1,028.1 million Swiss francs, down 9.3% year-on-year, or 4.6% in local currencies, compared to the substantial order entry in 2022. As mentioned in August, back in 2022, we still benefited from COVID-related orders, as well as orders related to the material cost pass-through still. With solid inflow of new orders close to the level of sales, the book-to-bill ratio reached a value of 0.96. Excluding the effects of lower COVID-related orders and orders related to the pass-through of material costs, underlying order entry grew in the low single-digit percentage range in local currencies. Order entry improved in the second half of the year and was just 1.9% below the previous year's figure in local currencies after a more significant decline in the first half of the year. Sales, very quickly, as nothing has changed here since we published our preliminary top line results back in January. And going through the wallable chart on the left, with 1,074,000,000 Swiss francs, reported sales decreased by 6.1% in Swiss francs and 1.3% in local currencies. As you can see, the bridge, adjusting for the foreign exchange rate, sales in 2022 were at 1,089,000,000 Swiss francs, when compared to in local currencies, sorry. As we spelled out in the past, we still booked COVID-related sales of around 60 million Swiss francs last year, or FX adjusted an amount of 58.5 million Swiss francs. We also benefited from passing through the substantially higher material costs to customers at Paramit. As we expected, these pass-through revenues decreased substantially as supply chains have normalized again. This happened even sooner and to a much greater extent than anticipated back in March last year. As these sales do not generate a margin from betting on higher material costs, this is a desirable development. The net headwind effect for 2023 was 19.7 million Swiss francs. That brought us to the jump-off basis for our underlying sales of 1.010.8 million Swiss francs. So excluding these two effects, our underlying sales increased by 6.3% in local currencies, which got us to the reported 1 billion 74.4 million Swiss francs. Looking now at the sales performance of our two business segments. Sales in the life sciences business segment reached 451.8 million Swiss francs, a decrease of 8.2% in Swiss francs, or 3% in local currencies, compared to 2022. On the upper left, you can see a similar chart as discussed on the previous slide, now for the life sciences business segment. As it is our end-user business, we generate our revenues in the different regions in the respective local currencies. Therefore, the FX impact is higher as a percentage of sales compared to the partnering business. Also, the majority of COVID-related revenues in 2022 were in this segment, and we estimate the headwind from those revenues as 35.1 million Swiss francs in local currencies. Pass-through revenues were only affecting the partnering business and are not related to this segment. Excluding the impact of lower COVID-related sales, underlying sales increased by 4.9% in local currencies. This was driven by good growth in the service business due to the higher installed base of instruments. As a result, recurring sales of services, consumables, and reagents increased to 52.8% of segment sales compared to 51% in 2022. The partnering business segment generated sales of 622.6 million Swiss francs, which corresponds to a decrease of 4.5% in Swiss francs or just 0.1% in local currencies. Going through the same bridge, adjusting for the FX impact and taking into consideration the impact of lower COVID-related sales and the lower pass-through of material costs, underlying sales increased by 7.4% in local currencies. The increase in underlying sales is primarily due to the double-digit growth in the pyramid product line, driven by the medical business, which also benefited from pent-up demand for certain medical products after the end of the pandemic. By contrast, Sales of scalable OEM components declined substantially, as these products had experienced a significant surge in demand in the prior year period, mitigated disruptions in the supply chain, and in the run-up to the transfer for the production to two new manufacturing sites. Demand for in vitro diagnostic systems for the Synergens product line remained solid, and sales in local currencies were nearly unchanged year on year. New orders in the partnering business for the full year were only slightly lower than sales. The book-to-bill ratio came close to 1. Next, let's look at sales development in the different regions on slide 9. Before discussing the details, I just want to remind you again that this regional split and the respective developments are based on the location of our customers. That means it does not reflect necessarily the regions where our products might end up. This is important as the partnering business. We usually ship products to a central warehouse of a partner, for example, in Europe, and therefore book revenues in Europe, despite these products being distributed globally thereafter by our partner. In the life sciences business, on the other hand, the location of the customer coincides with the place where the products are used. This is why I want to focus here on the life sciences business. You can see the pie chart for the full group on top, And we obviously disclose all the numbers for the partnering business as well in our press release on note 4.1 of the consolidated financial statements. So for the life sciences business segment, starting with North America. In North America, sales in the life sciences business segment increased by 5.1% in local currencies, a very strong performance, considering the high COVID-related basis of comparison and the cautious spending behavior. sales growth in North America accelerated further in the second half of 2023, rising by 13.1% in local currencies. In Europe, sales could not offset the high comparative basis and were 14.1% lower than the previous year in local currencies. In the second half, sales could catch up a bit and decrease by 7.7% in local currencies. In Asia, sales development in the life sciences business segments was very different in the two half-year periods of 2023. As you will recall, the segment recorded a significant increase in sales in local currencies in the first half of the year, but then experienced an almost identical decline in sales of 9.8% in local currencies in the second half of the year. This was mainly due to the market weakness in China. For 2023 as a whole, segment sales in the Asia dust remained almost unchanged, at minus 0.3% in local currency. Our next slide addresses our gross profits. Gross profit reached 390.5 million Swiss francs, which was 47.6 million, or 10.9% below the prior year figure. The decline is mainly due to the lower sales volume, which was also the primary factor behind the gross profit margin of 36.3% of sales. Price increases. Cost improvements and lower revenue from passing on higher material costs without a margin compensated for the decline in volume, but a less favorable product mix, higher depreciation on production equipment for consumables, and acquisition-related integration costs led to the overall lower gross profit margin. On the next slide, some comments regarding our cost structure. Thanks to effective cost control, operating expenses fell by 10.5%, and amounted to 261.3 million Swiss francs, or 24.3% of sales in 2023. Sales and marketing expenses decreased by 10% to 119.6 million Swiss francs. As a percentage of sales, they reached 11.1% of sales. At an absolute level, net research and development expenses increased to 69.7 million Swiss francs. As the share of partnering business sales has increased in relation to total sales and is less development-intensive, as the activities are largely financed by OEM customers, research and development costs decreased slightly to 6.5% of total sales. Overall, R&D activities and gross expenses, including capitalization of development costs and customer funding of OEM projects, were at 89.6 million Swiss francs. They increased slightly as a percentage of sales to 8.3% of sales with higher customer funding of OEM projects and continued investments in innovation to position the business for sustained accelerated growth. Capitalization of development costs increased to 12.3 million Swiss francs, while amortization from previously capitalized development costs was almost unchanged at 16.7 million Swiss francs. General and administration expenses decreased by 11.5% to 72 million Swiss francs and as a percentage of sales to 6.7%. Looking at the EBITDA development in more detail, our adjusted EBITDA, the earnings before interest taxes depreciation and amortization, was slightly below the previous year level, mainly due to lower sales volume and the negative impact from exchange rate movements in major currencies versus the Swiss franc. The adjusted EBITDA margin nevertheless increased to 20.5% of sales due to effective cost control and further efficiency gains. Now, looking at the operating profitability on a segment level, reported EBIT in the life sciences business, that's earning before interest and taxes, reached 84.4 million Swiss francs. The operating profit margin rose to 18.3% of sales, supported by a higher gross margin, price increases, and cost control, and despite the lower sales volumes and an adverse exchange rate effect. Reported debits in the partnering business amounted to 64.4 million Swiss francs, while the operating profit margin reached 10.3% of sales. Keep in mind that the integration costs and amortization of acquired intangible assets in connection with the acquisition of parameters were recognized for the group in the partnering business segment. Other factors negatively impacting the segment margins were the lower sales volumes with corresponding negative economies of scale and a more negative product mix. On the positive side, we implemented tighter cost controls and we also saw price increases in the partnering business as they contractually kicked in at the beginning of the year for our Synergion instruments Net profit on the next slide. Adjusted net profit increased to 164.4 million Swiss francs, 10 million Swiss francs or 6.5% above 2022. Looking at the main factors, adjusted EBIT has decreased. Positive effects came from the financial results and a lower tax rate, which decreased to 1.3% compared to 15% in the prior year period. Yes, the tax rate was at 1.3 percent due to an acceleration of measures related to the Swiss tax reform. While we originally planned to spread the tax benefits of the Swiss tax reform over two years and hence keep the 15 to 17 percent projected tax rate up to and including 2024, we have decided for an earlier switch to the Swiss tax reform related measures and bring the full impact forward to 2023. This is mainly due to the minimum taxation coming in force in 2024, which we are anticipating to impact us with projected tax rates going forward now in the range of rather 17%, 19% as of 2024 onwards from the previous 15% to 17% before. But please keep in mind these higher rates are an IFRS view and they do not fully impact our cash flows. Very quickly, EPS on the next slide. Earnings per share increased to 12.88 Swiss francs, which is the highest level ever achieved. The number of shares outstanding was at 12.8 million at the end of 2023, compared to 12.7 million the year before. Based on the solid underlying sales growth and an increase in profitability, net profit and cash flows for the full year 2023, and on the basis of an ongoing positive business outlook, a board of directors will propose that the company's annual general meeting on April 18, 2024, an increase in the dividend from 2.93 Swiss francs per share. Half of the dividend, that means 1.5 Swiss francs, will be paid out from the available capital contribution reserve and is therefore not subject to withholding tax. We continue with the cash flow on slide 16, and a very positive development after a period that was affected supply chain disruptions, and higher inventories to ensure our delivery capability. Cash flow from operating activities increased by 25.2% to 164.4 million Swiss francs. Again, keep in mind that in the prior year period, we had increased our inventories and 50 stocks. These inventories have now been increasingly reduced again. Also, our DSO, the base sales outstanding, improved to 45 days from 49 days. The cash flow from investment was at 84.2 million Swiss francs. You see some of the elements on the slide. Moving on to the cash flow from financing activities, this figure includes the dividend payments we made in April 2023 in the total amount of 37 million and increased over the prior year period as the dividend was increased steadily over many years now. Thanks to the strong cash flow, our net liquidity position increased to 112.6 million Swiss francs compared to the 41.2 million on December 31, 2022, and 61.7 million on June 30, 2023. With this, I now hand back over to Achim von Leopresting again.

Thank you very much, Tanja. So, I provided earlier some of our 2023 operational highlights, and these and our financial results provide a solid foundation for 2024. I would like to emphasize again just how differentiated TIKEN's position is, spanning across several key growth segments and being at the center of a variety of dynamic healthcare ecosystems. What we're illustrating here is how we support our customers on the research side to better understand diseases, develop more effective medicines from those insights, and help to scale the drug production process. We then support customers to take many of the applications to the clinical side to advance personalized diagnostics, the treatment with more precise therapies, and ultimately improve the management of disease risks. The applications we focus on are all genomic applications, protein analytics, as well as cell and tissue analytics, and more recently, also medical applications in the medical mechatronics space. We thereby serve diverse end markets and customers, working with clients from academia and clinical research, from biotech, pharma, genetic testing and reference labs, as well as direct clinical clients. This progression of innovation from research to the clinic is covered end-to-end by our connected business units, which benefit from synergistic global operations and R&D capabilities, leveraging a continuously expanding range of common platforms, modules, consumables, reagents, and digital solutions. This breadth really differentiates TECAN from many other companies in this space. So with that context in mind, let's look at some of our current areas of innovation. I briefly mentioned earlier the successful launch in 2023 of the phase separator, a new pipetting capability available on the Fluent. The phase separator represents a significant advance in liquid separation technology. It's a unique module that has digitally advanced sensor handling to detect the interface between blood plasma, lymphocytes, and erythrocytes, which is a demand of workflows like cell-free DNA sequencing and single-cell analytics in liquid biopsy. And it's also applicable in fields such as separating the organic solvent phase in sample prep for mass spectrometry workflows. So it can be used as a new way to separate biological samples, including whole blood, and it will impact multiple disease areas, including oncology, tissue transplantation, prenatal testing, neurology, and metabolic disorders. It has broad applications beyond next-generation sequencing and can also be used for downstream multi-omics analysis workflows. The phase separator adds value in all of our end markets and three of the four core application areas. This is a great example of how TCAN has further expanded the toolbox to support customers in both the life science business and the partnering business from research to the clinic. In 2024, we'll be launching an addition to our Resolvix line of products with the Resolvix i300 and the accompanying antibody purification columns. It follows a very similar approach as the phase separator in the sense that it represents a key module to de-bottleneck a strongly growing workflow. The i300 is a fully integrated model that enables the automation of every step of the sample purification process, from sample purification to cleanup, evaporation, and resuspension using positive pressure. Integrating onto the Fluent or our OEM platforms, the Resolvex i300 enables laboratories to deliver new levels of efficiency to proteomics and genomics workflows. This can be used to advance biomarker discovery and drug development, as well as certain applications linked to personalized medicine, which is, as said before, a growing field and one where we expect significant developments in the future. And as always, such new modules broaden our available toolbox utilized in both of our businesses. In this case, the first partnering business program incorporating the Resolve XR-300 is already in advanced development, and we're expecting high levels of interest as we go further into 2024 and beyond. Now, taking a closer look at our partnering business, we saw several new partnerships as well as product launches in 2023. And again, it's key to keep in mind that through our partnering business, TECAN has three synergistic offerings for OAM customers, including life science, diagnostic, and medical companies. We continue to expand our reach serving both type of OEM partners, those who utilize their own R&D capabilities through in-house development programs, and those who prefer to outsource development and production. For our Synergyn's full system development and manufacturing offering, development activities for customized OEM systems picked up in 2023 resulting in a rich project pipeline going into 2024. New systems are increasingly based on our modular hardware and software platforms, and overall, we'll have in 2024 a further production ramp of past launches as well as new introductions. For our CAVRO OEM components, we also see a healthy project pipeline of new and existing partners using our robotic platforms and fluidic components. Kavro is our business where T-CAN offers the building blocks in fluidics and robotics for those companies that want to leverage their own R&D footprint. New innovative products for fluidic pathways lead to opportunities for T-CAN in several market segments. We now also commercialize our precision machining capabilities that we have virtually integrated some years ago for our own product. In the Pyramid product line, our contract development and manufacturing offering, we have expanded our commercial channels, specifically for medical OEM opportunities, and we are now able to leverage broad synergies between all three OEM offerings and have an increased focus on development for manufacturing, making use of existing engineering capabilities in key medical applications. For TCAN, we believe the medical device area offers an addressable market as big as life science and diagnostic combined. and we are expecting several product launches in 2024. A very notable competitive differentiator of TCAN is its leading open digital ecosystem. And what we've done is we've created a suite of digital solutions in the various areas, starting with a highly modular software architecture called Maplings to run our instruments and cater to all core application areas that I mentioned before. We then digitally connect whole fleets of instruments, orchestrate full labs, make instruments really easy to use all the way to enabling better service and support. Today, I will focus on three key launches in 2024 to boost lab personnel and equipment effectiveness. The first launch that created already quite some excitement at the recent SLIS industry trade show in Boston is LabNavigator. Through the LabNavigator software solutions, TCAN boosts personnel and equipment effectiveness by enabling the orchestration of the entire lab workflow, increasing personal productivity and reducing errors. This includes also hardware and configurations in labs which are not necessarily coming from TCAN. We are creating an open ecosystem that will allow us to be at the front and center of application method development. For example, for research at pharma labs, who wish to deploy methods into labs that can be used by people who are not necessarily experts in these solutions. Another 2024 launch is Next Generation Introspect. It brings the latest innovations to the successful and established Introspect lab insights platform. It offers improved usability and uses advanced data analytics to provide actionable insights for maximizing the utilization, quality, and performance of instrument fleets. Existing features focused on run success rates, consumable consumption, and real-time monitoring have also been improved, helping lab managers to make the most of their resources in local labs or even global fleets. Next Generation Introspect also unlocks service excellence by enabling remote diagnostics and service support, leading to higher instrument uptime and cost of ownership improvements, all insights being built into a full digital twin of our customers' instruments. These are very exciting additions to our digital suite and something you can expect we continue to build out further over time. We are convinced that the lab of the future is already here. To summarize, what TECAN is known for is scaling healthcare innovation globally, and we are serving our very attractive end markets from a place of strength, with a proven record of being a trusted partner for life sciences, drug discovery and development, clinical diagnostics, and the medical device industry. offering a full spectrum of solutions from accelerating the discovery of novel medications all the way to personalized diagnosis methods and treatment, and ultimately also offering entirely new options for prevention and early detection of diseases. Ultimately, TCAN is improving patient outcomes and healthcare economics. Being a global player in multiple growth market segments and applications, has been a good source of resilience for TCAN and positions us to benefit from overall growth trends. We have a strong competitive position to benefit particularly from trends like increasing digitalization and personalized medicine, with technologies bridging from research to clinical settings for better management of cancer, metabolic disorders, infectious diseases, and other critical illnesses. And through 2024, both our life science business and partnering business are going to be very busy with the launch of new products and partnerships. Turning now to the financial outlook for 2024, for the reasons just set out, we do expect sales growth in local currencies in 2024, and we anticipate this to be in the low single-digit range. Overall demand in our diverse end markets is expected to remain solid, but we do expect customer spending to remain conservative throughout 2024 and especially in the first half of the year. Our adjusted EBITDA margin, excluding acquisition and integration-related costs, is expected to remain steady at least around 20 percent of sales as we anticipate the positive developments of underlying improvements in profitability and efficiency gains to be balanced out by an assumed negative effect from foreign exchange rates of around 40 basis points and the fact that we anticipate less acquisition and integration-related costs. As the previous disruptions in the supply chains have now normalized, we don't expect any further sales from the pass-through of material costs, which accounted for about 8 million Swiss francs in 2023. Normalization is here a positive development, as these revenues did not generate any margin, but it does need to be factored in as an element when we come to compare 2024 to the previous year. We're seeing continued market softness in China, which has a high comparison base in H1. We expect the current market conditions to impact our direct sales with local Chinese customers, and we assume a further decline in the mid-single-digit percentage range. but also to about the same degree we expect this to impact our indirect China business as our global OEM partners in the partnering business are affected by the same downturn. After two years of double-digit growth, we are expecting demand in the medical OEM business to normalize and come into line with the growth of the group overall in the low single digits. So it is a challenging market environment right now, but the reason we are giving an outlook of growth in the low single digits rather than flat or even negative growth, are the strong building blocks we have in place that we have already enabled us to deliver comparably solid results in the past. Innovative products such as the phase separator and growing and new OEM partnerships, as well as additional new products that we plan to launch in the course of 2024, are expected to drive growth with existing and new customers in both the life sciences and partnering divisions next year and beyond. Mid-term, we expect to continue to outpace the average growth rate of the underlying end markets with a return to average organic growth rates in the mid to high single-digit percentage range in local currencies. We do have strong financial supporting organic and inorganic strategic expansion in the Americas, Europe and Asia, and we also reiterate the mid-term outlook for the adjusted EBITDA margin. We expect to grow the top line while continuously improving profitability and anticipate an average annual increase in the adjusted EBITDA margin of 30 to 50 basis points. Before we go to the Q&A, I would like to draw your attention to our Capital Markets Day, which we are planning for October 24. Please make a note of this date in your calendar. And with this, I thank you very much for your attention, and we can open the lines for our Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Questioners on the phone are requested to use only handsets and eventually turn off the volume of the webcast. Webcast viewers may submit their questions or comments in writing via the relative field. Anyone with a question may press star and 1 at this time. The first question comes from Maja Pataky from Kepler-Chevreux. Please go ahead.

Yes, good morning, and thank you very much for taking my questions. I have two to start with, please. First question, Tonja, could you please elaborate a bit on the COVID headwinds that we've seen on the OEM side? When you're referring to synergens being flat in local currency, Is that assuming excluding any COVID impacts or are you not allocating or can you not allocate COVID to the different lines of Synergens and Carver? That will be my first question. And my second question is like, you know, it's impressive what you're doing on the digital side, but can you help us understand the monetization of your digital innovations, particularly when it is, you know, open systems? Thank you very much.

Thank you, Maya, for your questions and good morning. And I'll start to with the first question. Actually, there were no COVID headwinds in 2022, or rather no sales in 2022 related to synergens in our OEM business. There were mainly consumables. So that would probably not apply from that perspective.

Okay, good.

Yeah, thank you. Good morning also from my side, Maya. I'll take your digital question. I mean, the monetization comes in kind of various, if you want, categories. To some degree, what we do in digitalization in terms of ease of use, fleet management, software to this date is driving gross margin expansion by adding to the value of the systems and allowing us to increase prices as we go through these offering iterations. But there is now a moment with both what I said about introspect, but particularly with Lab Navigator, which is an entirely new software suite that we're launching, to move to a software as a service licensing model, which we're doing starting off 2024. So it's work in progress, but we are very consciously building out the infrastructure, if you want, the ecosystems, and then aiming to add and monetize and also invoice separately some of the software solutions in lab orchestration, in fleet management, but also in other areas like service, serviceability to come. So it's a mixed model, but in 24, for the first time, particularly with Lab Navigator, we're starting a lab-based licensing model and implementation model of these digital suites that we did not have at our disposal before. But it's, like I said, a combination of things driving margin and now branching out into several revenue streams.

Got it. Thank you, Arsham. And just quickly a follow-up on that, or actually it's really not a quick follow-up, but Could you help us understand what the competitive environment on the digital side is? Since it is clearly becoming quite an important feature of your TCAN offering, how do you compare to your competitors on that side?

I would say on many areas, I would think that we are clearly leading right now in the industries that we're serving. So at least that's what we're seeing from the availability of products. We are clearly, when I look back at products like Introspect, this is the only system out there at that scale that can do global fleet management with the features that I mentioned. And we expect, of course, competitors to kind of, you know, raise and gear up to what we have created. But it's something that when we look at trade shows and the response of customers today, we are offering a unique position in the lab and fleet management space. In areas like lab orchestration, there are multiple vendors, but we are concentrating on specific workflows that really incorporate the ability to deploy methods on our, but also third-party machines in a way that is, I would say, not unique, but more elegantly featured and combined with our existing solutions in the space. So I think we are very consciously building on top of our existing lab presence with hardware, the software and infrastructure that deploys and leverage that kind of presence, but it's not limiting us to access labs that only have TIC and equipment. That's probably very important to note. So that open ecosystem idea resonates very well with the market and particularly with those companies that try to close ecosystems in lab management software, where we got the very clear feedback from clients that this is not the preferred way to go. But again, I think I expect this to remain and be a competitive field and more competitive field in the future. But I think with our kind of infrastructure and our ability to both license, partner, but also leverage a very strong in-house digital development team, we are in a very good position.

Great, thanks a lot. The next question comes from Aisha Noor from Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for taking my questions and hope you can hear me. My first one is on the order book. You mentioned in the press release that it's 0.96 or just below one. I know you don't break it out by region, but was China the real region there that drove the below one book to bill? And I guess if you were to exclude China, was the book to bill higher than one? My second one is on the gross margin. If you could explain what drove the close to 300 basis point step down between first half and second half, and whether this mid-30s level could represent a new normal for you going forward. I know you mentioned , but if you could quantify the major drivers for that in the second half, that would be helpful. Thank you.

Probably I start, and good morning from . with the order book. And clearly, I mean, we have to differentiate the views on the life science and partnering side, which is typically how, you know, then also Tanja started to describe the different kind of pie charts that we explained from the revenue attribution. It's a very similar picture from the order side. And clearly, on the partnering side, we get typically more lumpy orders, which makes the comparisons I would say more difficult if an order falls into December or January, a kind of bigger buy-up order that can make a kind of bigger difference. In life sciences, you're right, I think China was a kind of major element of the deceleration, particularly in the second half. And we've seen also, I would say, some differences between Europe and the U.S., which I think were also probably a little bit more seasonal and also customer-specific. So we see, I mean, we're not guiding for the order book, but we see maybe more normalization on the geographies, excluding China. But this is, you know, where we, I would say, normally, I wouldn't exclude, we're going back to a kind of ratio of more than one, but it's clearly right now we are in an area to kind of try to accelerate it book to ship.

Okay, thank you.

And, Ece, if you could please repeat maybe your second question.

The question was on the gross margin and the close to 300 basis point step down between the first half and the second half for 2023 and whether the gross margin of around 35% or so could represent a new normal for you going forward. I know you mentioned this mix and the lower volumes as the kind of headwinds to gross margin for 2023, but the major drivers for the step down in the second half was what I was going after.

Okay. Now, and you can imagine there are many insights on the gross margin. In fact, when I do my bridge, there are quite a few elements. But the most important one, as you mentioned, is the volume. I mean, there clearly that was the largest impact. What partly offset it was the pricing increase, which we had. Quite similar, well, very similar to what we mentioned in the first half of the year, and also when we discussed our pricing in general from the history. So that means that we had the contractual increases in the OEM business, in the partnering business, as we discussed on the instrument sales mainly, and we also had the price increases on our price list that we usually do on our life sciences business. The other, I would say, negative impact mainly was from the paramine dilution, as you mentioned as well. That's normal. That's what we expected as well. On the other hand, we had a positive effect from the pass-throughs because they were lower, as I mentioned before. And then we had some other elements, which usually are the case for us, where we have better efficiencies from our productivity. We had also a slightly better material cost. And on the other hand, we had quite a significant effects impact. So that's overall. Between the two half of the years, I mean, there is very often a difference of 200 to 300 basis points, was maybe less of that, you know, during the COVID times. But that was the case already in pre-COVID, and now we are back to pre-COVID situation, and it's all very much dependent on the volume. So there, this is the biggest impact that we can have from that perspective.

Okay, thank you so much. The next question comes from Odysseus Maniziotis from Bernberg. Please, go ahead.

Hi, thanks for taking my questions. Firstly, your biggest customer will be launching a new version of their flagship robot later this year or early next year. Could you confirm whether you're involved? And does the sale of parts here usually happen well in advance of instrument placement? And secondly, a follow-up on the order side, could you please talk about order trends towards the close of 2023 and early 2024? Have you seen material recovery sequentially in Q4 and Q1, and where has that recovery come from? And can we possibly see H1 books above 1, or is it too early to say for now? Thanks.

No, and good morning, Odysseus, and properly I take the first kind of shot at your questions. I mean, number one, As always, I'm not able to comment on specific customer names, but what I can say, I mean, we in many partnering programs, including those on the medical field, we have typically a very long-ranging partnership, and this includes multi-generational involvement in many products, particularly with customers and relationships ranging back to several decades, back to 2010. I think 2004 in this case. So again, I think we, of course, kind of work our way in these partnerships typically to be included as much as we can in any multi-generational product. But again, please allow me not to be too specific on this one and your question. But this is probably where I would leave it at this moment. But we're very happy with, I would say, all our partnerships on the medical side. And then on the second side, on your order trajectory, I would probably say that, I mean, the dynamics from the second half hadn't really changed material. I think what I said in various other kind of conferences and calls, we see, I would say, quite heterogeneous customer behavior. And in some groups, like in pharma or clinical labs, we see very solid investment and strong investment. We see other clients in the same market segment buckets to be very cautious and holding back orders and delaying decisions. So I think that hasn't materially changed. I think what we also said, I mean, China is not improving on us at the moment. And this is probably, as I said, too early to say how the dynamic works out. I think we are very, I would say, positive, particularly when I look I mean, and this is where we typically make the reference points on the life science business on the funnel and the number of programs and projects that come to us from existing and particularly also new partners and customers on the life science side. But funnel mobility is still, I would say, a difficult piece to project out. And we are working very diligently, as we've done in the second half, to find these that materialize where we get the PO in time and that we can ship and install in a meaningful time frame. So I think that dynamic has changed material. But like I said, the other element that we are very closely following and watching is the response to the newly launched products like phase separator, like the UNO single-cell separating system and consumable as well as software solutions. And that's why I made this cross-reference to the, I think for us in the Lifesize Business, quite important conference called SLRS, which happened in February in Boston. And I would say the attendance levels were very high and the reception, and particularly on our trade show presence, was extremely positive. So I think that gives me some good confidence going into 24 that we are launching the right programs and the right products that resonate with customers. And then, like I said, we're also seeing some new doors opening and also some competitive accounts opening for conversations, which is always what we're aiming for with some of these innovations that we bring to market. So I would say market dynamic hasn't changed with you, but I think we feel pretty strong about our ability to drive good demand with our existing life science products, new products, and also the same on the partnering side. a good pickup, as I said in the call, on programs that are in development that are starting off to become commercialized on more meaningful levels, but also new partnerships in development. So I would say overall, I would say, yeah, the dynamic hasn't changed, so it's probably too early to judge how H1 will shape up.

And as you know, we don't want to guide on order entry. We don't know, and we are looking more at it from a four-year perspective. Not so much H1, H2, apart from the fact that it will most likely be very similar to prior to COVID for sales, but not for order entry. Again, we are not really guiding on that, as you know.

Really appreciate the color, Akin and Tanya. May I add a small rephrasing of the first question? So on the medical mechatronics business, given that we're talking about chancre instruments here, is it sensible to think that ahead of a new launch from one of your clients that the parts ordered from that part of your business are ordered well in advance of the launch?

It depends. I mean, there's not a one-size-fits-all answer, but it's not like there's a kind of multi... quarter pre-order shipment cycles. Typically, I mean, we are very good in online delivery and production. So it's, I would say, more the kind of mid to near-term implications in typical programs. But we have some customers that like to keep more kind of start-off inventory, some have less that kind of intention. But yeah, so in general, I think We came out, I mean, generalized again on the medical side with a kind of two-year history now on double-digit growth, and that's why we're assuming right now that to normalize back to the group kind of guided average in the low single-digit range. So that's all factored in what you're trying to assess here into our full-year guidance.

Understood, and thank you very much for the call.

The next question comes from Jan Koff from Deutsche Bank. Please go ahead.

Good morning, and thanks for taking my questions. I also have three, if I may. I would like to start on the adjusted EVDA margin you have achieved in H2 2023. What are the drivers for the sequential margin improvement, despite having generated less sales in H2 versus H1? I understand that the lower part pool was helpful, but any color here, especially in pricing, would be appreciated. And then secondly, I would like to get a better sense of the sales growth facing in 2024, and China should be an important factor here. Could you remind us of the growth you had in China in H1 and H2 last year? And then lastly, on capital allocation, you have a very strong balance sheet. Would you consider shareable banks or high dividends if you don't find any attractive R&A targets this year?

Thank you very much. And I probably start us off with the last question, if you allow me, on the capital allocation side. I mean, clearly, you know, we are looking at M&A, continue to look at M&A, and particularly after the successful and positive integration of Paramit, looking at M&A as the preferred vehicle in that category. And, of course, constant dialogue with our board of directors, but This is the avenue where we're going, and we see still a very fragmented market ahead of us. We, like I said, have now accomplished the integration of Paramit, and we're very happy now to build on that footprint, which is representative of one-third of our operation capabilities being located in North America, one-third in Europe, and one-third in Asia, which, of course, gives us also for M&A an entirely different and different far more structured, if you want, framework to integrate possible M&A acquisitions into. And I can probably also say on the activity level, we are fully engaged, again, after closing out the pyramid integration and the move of the cargo components into pyramid. And we're looking back at the continuation of our journey, particularly adding where we can strategic elements into the life sciences business with additional reagents, consumables, but also new technologies on the life science space, and selectively looking at capabilities on the pathing side. But the focus clearly is more back now on the life science side to continue the journey that we started prior to the permanent acquisition, become more complete in the application areas, genomics, proteomics, and cell and tissue analytics, to name the kind of three strategic elements. But, of course, I mean, if kind of the time would kind of go into excessive kind of periods where we continue to generate cash as we do. And we are very proud of it as well to consider other means of returning, you know, the profits to our shareholders. But at the moment, the agreement is that we continue to work on a very rich M&A pipeline.

Maybe on your second question on China, it was around minus 5% in H1, minus 15% in H2, so that's a little bit, you know, the balance that I mentioned before, and then on the full year, that added up to about minus 10%.

And then maybe on your first question on the EBDA, at the end of the day, you know, there are, again, different elements that come into consideration. But there was mainly the impact from the OPEX perspective and also the integration costs, which were higher in the second half than in the first half, and then impact, of course, the adjusted EBITDA.

Great. Thank you.

The next question comes from Leonido Delgado from Bader Helvea. Please go ahead.

Hi, good morning, and thanks for taking my questions as well. So the first question is, could you help us understand what has been driving the double digit growth of parameters and what level of growth is considered normal in the midterm? And last question would be, I mean, how can you just touch on the M&A topic? And I would like to understand, so if you have any insights you could share with us in terms of timeline and the type of prices you're looking at. Thank you.

Yeah, and thank you very much for the questions. I probably start off with kind of the medical side, double-digit growth. I mean, when we look back at the past periods, 22 and 23, the medical side was growing very strong, particularly coming out of COVID with kind of, I would say, deferrals and some backlog build, but also some, I would say, slowness of some of these key end applications. in the medical field, which were subdued in COVID. So we saw, I would say, a combination of organic growth, pent-up demand, regional expansion of our partners on the medical field during 22, but particularly also in 23, which were very strong years. And we expect this now to, just on that kind of slope of growth, to normalize down to the kind of low single-digit growth in 24. But midterm, we expect I mean, the medical side, to be in line with the growth of the group mid-term outlook in the mid-single-digit to high single-digit range. So we are, that's what I tried to illustrate in my presentation, adding quite substantially commercial capabilities on the medical side, which are driving funnels and attracting new clients on that front as we speak. And this team is now in full operation. It's fully kind of staffed. And they're concentrating at the moment as the kind of biggest area of growth potential in North America. So I would say very happy with what we said we're going to do after Pyramid. The milestones we achieved in 23 in the ramp up of funds and the commercial efforts. But like I said, the business that we have under management at the moment on the medical side, we expect to normalize back to group average levels. Of course, there's always kind of bigger and smaller dynamics in these accounts, as we know from all our partnering programs, also in the in vitro diagnostic range. So sometimes programs, you know, the launch slope is steeper. Some of the launches are kind of more over multiple years. The same happens on the medical field. So I think very happy to now add to, I would say, kind of a very good group of customers on the medical side, also additional partners that will help us to kind of, if you want, kind of even out some of the individual contributions of single and sometimes large customers in that field over time. So that's probably where we are. And then on the M&A side, again, I would say we are continuing to run a very disciplined process around M&A. It's all strategically motivated to accelerate growth in the strategic elements and areas that are outlined during the webcast, and we are typically not looking at kind of commitment on timeframes because we are very, I would say, discriminative on M&A targets and we do it very deep due diligence, and sometimes we also walk away from M&A targets if we can't retire risks on operations or regulatory or other fields that are important to us. So please allow me not to kind of say, you know, 24 is the year where another M&A will happen. It's possible, but we don't want to lock ourselves in and then being forced to make an acquisition even if it's not a good one. So let's continue the strategy that we drive, but like I said, we are very active, and we see a variety of M&A opportunities, both on what we cultivated you know, on a private or one-on-one basis, but also what we're seeing now from banker-led processes coming in. And it's probably also my last comment on this side is we continue to, of course, get kind of companies offer that are in strategic fitting areas, but are seeing now some of the effects of the economic downturn and being kind of on the, I would say, cash-burning side and being not profitable, these are not targets that we typically consider in that framework of the M&A pipeline. So just to make that point. But prices, I mean, for very profitable, attractive targets are reassuringly high. That's what I can say. The price expectations are not deteriorating for these assets that are quality and profitable and creative.

Thank you.

The last question for today's call comes from Sebastian Vogel from UBS. Please go ahead.

Good morning. I have three questions. I would ask them one by one. The first one is a bit of a clarification. It was with regard to the book-to-bill. I thought I understood that you were saying that book-to-bill should not be above one. Please correct me if I'm wrong there. But if I'm right, then if I understood it correctly, was that more linked to 2024? Was it meant for longer? Or can you give a little bit of context around that statement?

No, I think on the book-to-bill we are saying that we are looking forward to more than one in the full year. But again, it's a little bit early to have any assumption on this. But that's definitely, you know, we are not looking forward to a below one.

Okay, perfect. Then I misunderstood. The second question is a bit of a clarification on the guidance. when you were talking about low single digit, is it fair to assume that would mean like a range like one, something between one and 3.5 as a sort of a starting point, or what's your sort of thinking about this low single digit as a phrase?

I would say our thinking is low single digit in the range that you outlined. I mean, please allow me to kind of narrow it down more, but I mean, clearly what we said, we look at growth in what kind of framework remains to be kind of seen in the dynamic, particularly looking at H1. But we feel pretty good about, like I said, new products, new partners, new kind of doors that we're opening, existing clients, again, kind of behaving the way they behave. And even in that kind of configuration of China being expected down year over year in 24 in the framework that is kind of in the lowest things digital. So please allow me not to kind of narrow it down to it. compared to what in that area.

And the last question is quickly on pyramid. I guess, of course, it's getting harder to really dissect this business from the main business. But nonetheless, I still was trying my luck there for 2023 in terms of revenue numbers. Is that something 350, 360 sort of a decent starting point for the revenue numbers and any sort of margins for this business that you can share that would be appreciated?

I would say it's a good ballpark. It's around 350. As I said, we are probably a little bit even more kind of, you know, I would say hesitant to kind of call out specific margin aspects of it. I mean, we are very happy with the dynamic, as we said, after the integration you've seen in 22, the results. In 23, we continue that journey. And, of course, volume is helpful. On the other side, I mean, you're also aware that we now moved one of our older, our existing legacy TCAM factories from San Jose into Paramit. which makes now the, I would say, profitability allocation nearly impossible on the pyramid versus T-CAN level. So going forward, with that move in particular in mind, we prefer to keep the kind of profitability discussion on the group level. And as I said, on the pyramid side, we're also kind of thinking more around as a kind of product category now rather than a kind of company entity that we will continue to report on in the future. But I would say the progress of margin in light with the kind of growth profile of that part of the business in 23 was very satisfactory.

And we are within the business case we planned, so it's all good.

Good. And if I may squeeze in just a quick follow-up with regard to China, if I may. Is it fair to say that your sort of overall China exposure, given indirect and direct exposure, is maybe somewhere around like 140, 150 million?

Yeah, I think that's a reasonable number. I mean, probably half of it is direct. And, of course, the indirect portion that goes through OEM part as far as it's harder to assess, but we reckon it's in that ballpark that you mentioned, yeah.

Got it. Many thanks.

Good. We have to conclude this call, and if there are remaining questions that came in through the webcast, we would then answer those in the aftermath of this call.

Yeah, done also from my side. Thank you very much, and have a very good day, and look forward to the ongoing discussions.