Sartorius Stedim Biotech SA

PAR:DIM

Earnings Call Transcript 2023-Q1

[Operator]

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

[Joachim Kreuzburg, executive]

Thank you very much, and also welcome from our side to our today's conference call on the Q1 results for 2023 for Sartorius as well as for Sartorius Stedim Biotech. We will run the call slightly differently from the previous times. I will make the introduction, as always, then Rainer will walk you through the main results for the Sartorius Group as well as for the divisions.And then Rene Faber, who is leading the Bioprocess Solutions Division at Sartorius since 4 years and now is also the CEO of Sartorius Stedim Biotech will then focus on the Sartorius Stedim Biotech's numbers. Therefore, we will also slightly shift the presentation between BPS and SSB. Usually, we are going into the details when talking about the BPS numbers. This time we will be a little bit quicker at that. And then Rene will focus on Sartorius Stedim Biotech. And as you know, overlap is 95-plus percent then in the second part of our presentation. And then, of course, we will jointly run the Q&A.So let me kick this off by walking you through the highlights and the overview for Q1 2023. We clearly are recording a continuous demand normalization, as we have expected. I'm sure a lot of our discussion later will be around how far that was in line with our expectation. So therefore, a quick recap. 2.5 years ago when order intake jumped by around 50% from one quarter to the other, we said don't extrapolate this. Here are non-sustainable effects playing a role beyond the upcoming demand for Corona vaccine manufacturing.Back then, first players started to prepare themselves for the manufacturing of Corona vaccines. And we clearly always flagged that we were seeing stocking effects in the industry. We discussed pretty much in all calls last year about our expected destocking. It basically then started around mid of last year.We initially would have thought that it started a little bit earlier and would have affected a larger part of 2022. It affected pretty much the second half of '22. But that, of course, means that it's affecting '23 quite a bit. Our expectation and it always has been that this destocking would pretty much influence 1 year, 4 quarters. So therefore, this first half of 2023, we expect that this impact to be significant.And therefore, when we made our guidance for the full year 2023, I think we made it quite clear that the 2 halves of this year would look differently. So again, an expected reduced demand, which we consider to be temporary. And therefore, we are also confirming the outlook for the year 2023.Sales revenue is below previous year by 13% in constant currencies, excluding the direct COVID effect. I'm not talking about destocking now. I'm talking about the business that is related to vaccine manufacturing, COVID test, et cetera. Without that effect, it would have been a more moderate single-digit percentage decline. More details then also later here. And the underlying EBITDA margin is then also, of course, pretty much in line with revenue. As you know, we have quite significant scale effects affected by this lower sales revenue.One word again on this normalization -- you will see a chart later on -- or 2 charts, actually, one for the group and later one for SSB that show both sales revenue development as well as order intake development. And it clearly shows as the order intake increased, it has been much more pronounced and steeper at the beginning of the pandemic for the 2 reasons that I mentioned. Again, we now also see a more pronounced reduction of order intake. Therefore, the gap between order intake Q1 '23 and previous year is also more significant, but again, pretty much in line with expectations.And then Rene will later also give a little bit more detail on the announced acquisition of Polyplus. We were running a separate call on that 2 weeks ago already. But nevertheless, we will provide a bit more information here again just in case that there are some further questions.And with that, I hand over to Rainer.

[Rainer Lehmann, executive]

Thanks, Joachim. And first of all, also welcome from my side to today's call. So as usually, let's jump into the figures. Joachim mentioned it's a little bit unusual for us, but absolutely in line with our expectations. We see a decline in revenues in constant currencies of 13.2% to EUR 903 million. Without COVID, the decline would have been in the mid-single-digit range. The EUR 903 million only include really the very marginal COVID-related business. As I said already and anticipated at the beginning of the year, COVID will not play a role in the actual numbers in 2023.Order intake declined by 32% in constant currencies to EUR 765 million, also here in line with the expectations. Keep in mind that at the beginning of the year we anticipated that we would not be surprised by seeing book-to-bill ratios below 1 for the first 2 quarters. So clearly, a indication of a softer H1, and with H1, of course, a more pronounced decline in Q1 as we see it already now. So for us in line as we expected it.The order intake, of course, is strongly affected by the customer destocking actually. And I will show that in the next chart and talk about that a little bit further. And we expect, of course, the normalization to fade out in 2023, the second half of 2023, meaning that there should be an acceleration then of the business in the second half.The underlying EBITDA decreased by 22% to EUR 272 million, which translates to 30.1% EBITDA margin, a reduction of almost 4 percentage points. But that actually fits to the decline in the revenue. Keep in mind here -- of course, we are a volume-driven company and also we are -- and as we pointed out over the last quarters, we are dealing with a higher cost base, of course, also related to the expansions throughout the world that come always with a little bit of additional extra fixed cost.And of course, as we always pointed out, in the past we saw these, let's say, artificial economies of scale due to this tremendous growth during the COVID area, where we said these will also not be sustainable, and we are now seeing the 30.1% margin. If you actually look back to before the COVID pandemic in 2019, we actually are above that level in the EBITDA margin on a group level.If we look at the -- have a look at the next slide, I want to draw your attention here to the bar all the way to the right. That is actually the sales development in black that is basically the non-COVID-related sales. And the yellow part is the COVID-related sales. And the gray blue line is the order intake. So if you look in Q1 2023, you see and follow the line horizontally to the left, you see, yes, each -- or Q1 is below each quarter of 2022, but above the quarters of 2021 and respectively 2020 and 2019.To put this in figures, we also put that on the top left side, versus 2019, revenues for the quarter increased 105%. If you look at first quarter 2020, it's around 76%. Actually, if you would put the number for the first quarter 2021, it would be around 15%. So therefore, we are seeing here also that the little black portion above of the horizontal line is most likely then also the impact, what we always said is the stocking part of the revenue during the previous years.This will, of course -- as we always said, an impact that we can only see hindsight. One quarter is here not enough. We'll see for sure after the second quarter. But it gives us an indication of what the stocking effect was most likely during 2022. You also see here especially since the beginning of 2021, the spread between the gray line and the black bar, which is quite significant, which, of course, increased our orders on hand that we are still to draw from.Therefore, it's absolutely in line and necessary that the order intake decreases in order to come back to our normal growth path. And if you keep in mind that in this presentation of the Q4 results, we also showed actually that we are pretty much a year ahead of the curve. That is exactly all in line. And I hope that these charts combined with the last chart from our presentation helps to understand and puts this overall -- this short-term development in a broader perspective in the development of our company.If we go to the next chart, we see actually that this normalization happened pretty much throughout all the different geographies. In the Americas, let me start on the left-hand side, revenues declined by 14% to EUR 322 million. Here, we have lower sales actually in both divisions. LPS is affected specifically by stronger comps. Also here we had, as we pointed out over the last quarter, a positive impact in previous quarter of the biolytic business that did very well under -- over the last 2 years. And also here we, of course, then have quite high comparable basis.In EMEA, we see a decline of almost 12% to EUR 359 million. In LPS, we actually see a quite robust sales growth. Whereas on BPS, we are comparing here against high comps. Keep in mind and as you all know, the majority of the COVID business was related to that region. And Rene will talk about that later. Here also we see additional effects from Russia, where we pretty much see a significant drop in our activities in that region quarter-over-quarter.In Asia Pacific, sales declined by 14.5% to EUR 222 million. Here again, LPS actually growing in that region. But we are definitely not happy and it's actually below our expectations the development of the revenue of our business in China. On the right-hand side, the geographical distribution. Actually, nothing major happened. It's quite in line with what it was at year-end.If we look quickly to the Bioprocess Solutions. And Joachim said -- since Rene is here, CEO of the Sartorius Biotech subgroup, I will only run very quickly through these numbers. Order intake decreased by 36.1% in constant currencies to EUR 576 million. Here we see, of course, clearly the destocking effect, and we expect that to fade in H2. Sales revenues decreased by 16.1% in constant currencies to EUR 695 million.Acquisitions contributed here around 1 percentage point. And excluding COVID, we would actually see here a sales revenue drop in the upper single-digit percentage range. The underlying EBITDA margin declining then to 31.2%, translating into EUR 217 million. Of course, here again -- here we can see these -- what I called before, these artificial economies of scale that work in both ways. It works in our favor with a significant jump in the margin from 2019 to 2020, '21, '22. And of course, then with the normalization, we also see then this impacting the profitability when it goes the other way. More then from Rene's side since BPS and SSD are pretty much, yes, 95% the same.If we then switch to the LPS side. On here, we see sales revenue close to previous year level to the first quarter. Let me start on the left-hand side with the order intake. We see a decline of almost 16% in constant currencies to EUR 189 million. Here, we see -- or it's already reflected the uncertain environment, I would say, particularly for the early-stage biotech companies, also in the U.S. And we also have to keep in mind that in the comparable of Q1 '22, we also still have some Corona-related business when it comes to membrane and testing kits.On the sales revenue side, we see a very -- pretty much on previous year level, 2% decline in constant currencies to EUR 208 million. Excluding COVID, we would actually see here a slight increase in sales. Underlying EBITDA margin is 26.3%. So pretty much on previous year level. And with the absolute value at EUR 55 million, really a result of also, yes, stringent cost management. And yes, that's pretty much it on the LPS side.If we look at some key figures. The underlying EBITDA, of course, a weaker level of EUR 272 million, also translates into a weaker operating cash flow. You might wonder why is it actually still stronger than Q1 '22. Keep in mind here that in previous year Q1 [ 2022 ], we had a strong increase of our working capital. And of course, we do not see any more in Q1 2022. There's only a slight increase. That is pretty much the explanation for that.Investing cash flow reflects the continuation of our substantial CapEx program. You also -- you know these expansions are related to capacity increases on a long-term basis. Therefore, we are continuing to invest that. The investment ratio jumps then up to 15% against a lower sales value. And of course, we pay attention also there to see maybe what investments we can defer. But overall, we are not changing the CapEx program in 2023.If I look then at the next slide, we have here our equity ratio at 36.7%, a slight decrease from the end of the year. Net debt pretty much at the same levels, at EUR 2.4 billion. That of course, will change going forward with the acquisition of Polyplus. But we had our extensive call about that already a few weeks ago. And on the net debt underlying EBITDA, a slight increase compared to previous year. Of course, here also reflected a little bit of reduction in EBITDA.And with that, I'll hand back to Joachim.

[Joachim Kreuzburg, executive]

Yes, thank you, Rainer. So outlook 2023. I said that at the beginning we confirm the outlook for 2023 as we see the -- or always anticipated the different halves of the year and also the different quarters to look quite differently. So therefore, clearly, the quarters will differ probably by something like up to 20% for the full year. Therefore, of course, it's important that we keep also the way how we are able to manage our capacities quite flexible.This is something that we have, of course, much of an eye on at the moment. But again, I guess we will discuss this later in detail. This chart is really completely unchanged. We expect low single-digit growth for the Sartorius Group top line, excluding COVID --direct COVID effect. It should be high single-digit. We have included here 1 percentage point of expected growth contribution by acquisitions on a group's level. And it does not include Polyplus yet as this acquisition hasn't been closed. So therefore, it's not 100% clear now for how many months this business will be fully consolidated. We will update this, of course, once this is clear and closed.And we expect the underlying EBITDA margin for the group to be around previous year's level. And that is how this entire chart reads, and therefore, I wouldn't read it out completely. Rainer also made a comment on CapEx. You see this there. It's also, as we -- as well as I said, there's a certain portion of our costs increasing over time that we are dedicating to activities to reduce our CO2 footprint. And yes, again, I'm sure we will discuss this laterAnd with that, I would now hand over to Rene for the Sartorius Stedim Biotech numbers.

[Rene Faber, executive]

Thank you very much, Joachim. And hello, everybody, from my side. It's a pleasure joining the call today and report on the Q1 results of Sartorius Stedim Biotech. Before I walk you through the Q1 numbers, let me start with a brief look at the acquisition of Polyplus, which we have announced recently. Polyplus is a company which specializes on critical materials used in making advanced therapies, which is a strongly growing and increasingly relevant end market for us.The company with 270 employees is based in France, has operations in Belgium, commercial activities or sites in U.S. and China. It's a highly profitable business, and the sales is expected at upper double-digit million euro range in this year, 2023. The agreed purchase price is around EUR 2.4 billion. And we expect to close that acquisition in the Q3 of this year.Looking at the portfolio, the major part are so-called transfection reagents used to make viral vectors, which is one of key modalities in gene therapies and gene modified cell therapies. The company expanded also the offering and added complementary plasmid design and plasmid GMP manufacturing capabilities as well recently. These products and services are highly complementary to our existing offering, and we see significant synergies in both upstream and downstream processes of our customers here.Looking at the next slide. Polyplus for us is an important milestone in increasing our relevance as a tool provider for new modalities. As you can see summarized on the chart here, since 2018, we have been very focused on building a portfolio of media and critical materials, critical raw materials using development and manufacturing of cell and gene therapies starting in 2019 with Biological Industries and then 2021 CellGenix.We added media and growth factors, both used to make virtually all types of cell therapies. Cell then brought specialized media for viral vector manufacturing. Recombinant albumin from Albumedix is used across different types of new modalities and addresses the regulatory trend to move to use chemically defined components in these critical applications.And now Polyplus will complement the portfolio with transfection reagents and plasmid DNA, and as you can see, making us a quite relevant and attractive supplier to this attractive end market. As said, we've seen nice synergies across the product, which brings us access to virtually every customer working on cell and gene therapies in the market. Again, closing expected in Q3 of this year.Let's move now to the Q1 results, which are very much in sync with the BPS division, which Rainer and Joachim already commented or started to comment, and also in sync with what we have expected to see for the first quarter and the first half of the year. The numbers are very much -- very much reflect the post-COVID normalization. We see 2 effects playing a particular role here. As explained, COVID vaccines, demand is down.We see only marginal effects in the numbers here. And secondly, as Rainer, Joachim said, the ongoing consumption of inventories, which customers built up during the pandemic sterilized orders or decreased order intake. We have seen this not only with COVID customers, meaning customers who either developed or made manufactured vaccines, but also other customers who during the, yes, broken supply chains in the pandemic times build up inventories to secure materials for their manufacturing.And we also believe what we hear from our clients is that we were ready and prepared to supply those products. And that's kind of, yes, reflected in the steep increase during the last 3 years. Since mid of last year, we see the normalization going on. The lead times are back to the pre-pandemic levels for most of the products in our portfolio. We expect that it will continue next quarter. The effect of the normalization in second half of the year should be, however, significantly reduced or not that [indiscernible], meaning also that we expect to see a stronger H second half of 2023.The sales revenues in Q1 normalized down to EUR 726 million, which is 17% reduction compared to previous year's quarter in constant currencies. Acquisitions contributed 1 percentage point. COVID-related business, if we were to take that out, the decrease would be in the range of a high single-digit range for the sales revenues. Order intake down by 37.5% to EUR 600 million around due to the effects I just described.And of course, the lower sales and a bit higher cost base are reflected then in the underlying EBITDA, which was at EUR 220 million, corresponding to around 30% EBITDA margin. We think working on that normalization, it's a good result for us. We have reduced the manufacturing -- short-term manufacturing capacities to the demands quickly.We are running strict cost management across all functions in the organization. And yes, we'll be working on that moving forward as well. And then respective -- the underlying earnings per share was at EUR 1.43 compared to EUR 2.21 previous year.Looking at the regions, geographies. We see similar dynamics across all regions. By the way, we see similar dynamics across all relevant portfolio used in drug manufacturing. In our portfolio, no big difference is there.Looking at regions. Americas and EMEA, both down by around 16%; Asia Pacific with 21%; and EMEA with high comps, we've seen -- what we see also is that the region is impacted by additional effects from Russia with sanctions getting more strict for supplying that market. And in Asia Pacific, we have seen a bit slower start than expected in China particularly, the rest of the region as expected.Moving to cash flow. To reflect the -- with operating cash flow of 3.5% below previous year. Investing cash flow reflects our continued investment in infrastructure, mostly in manufacturing across all regions. To mention a few of them or the few most relevant, in Germany, we are adding manufacturing lines for filtration membranes. We are expanding our site in Aubagne in France for single-use back manufacturing. And we are building a new facility in South Korea for manufacturing of main consumables product categories, filters, bags and cell culture media.We are also continuing investing in localization of manufacturing in China for China. All that activities and CapEx spend resulting in a ratio of 16% in Q1 this year. On balance sheet very solid equity ratio of around 50, comparable to previous year. And a slight increase in net debt to underlying EBITDA to 1.1 due to a low EBITDA result.With that, looking at our guidance, again, as said, we expect the normalization to continue in Q2 with a stronger second half of the year with no significant effects then from destocking. And we confirm the full year moderate sales revenue growth in low single-digit range and underlying EBITDA margin at around previous year level.With that, I think we move to Q&A.

[Rainer Lehmann, executive]

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

[Operator]

[Operator Instructions] And our first question is from Zain Ebrahim from JPMorgan.

[Zain Ebrahim, analyst]

So just on Slide 5, you laid out your expectation in terms of how much destocking you saw in Q1 graphically. I'm just wondering if you're able to provide a bit more color on that in terms of how much destocking you've seen so far on your estimates and the order intake and on sales? And sort of how much you expect that to be sort of left in the second and potentially third quarter?And my sort of second question somewhat tied to that is about the sort of acceleration in the second half. How much of that acceleration, I suppose, is dependent on destocking and normalization being less of a phenomenon in the second half versus potentially the second half benefiting from the high order backlog that you have built up? I think you flagged in the full year results and had underpinned your guide.And maybe a third question, if I may, just on China. If you're able to expand on what the dynamics are that you're seeing there? Why was it sort of softer than expected? Is that mainly due to COVID reopening? Or is there anything else that we should be thinking about there?

[Rainer Lehmann, executive]

Yes, maybe I'll start and my colleagues will add to it. So on the destocking part, Zain, is always, of course, the wildcard to really quantify, because, of course, none of our customers actually tell us exactly if this is for additional destocking or if they will use it right away. So therefore -- and I refer to Chart 5, and you see on the right-hand side the Q1, where we have the basically EUR 695 million, let's say, on a group level our Q1 figure.And if you [ draw ] to the left, what is a surplus. That is the indication that there is destocking in there. Last -- on last calls, we're actually trying to quantify it a little bit, and we said, look, it's in the 3-digit million range there, probably more on the, let's say -- yes, probably on the lower side of the 3-digit million. But we also expect still, as we said before, that H1 overall is going to be softer. Our basically statement that we also said Q2 -- I wouldn't be surprised to see book-to-bill below 1 also indicates that.So that also explains then why we expect an acceleration in H2 that you were referring to, because that is then when the normalization is over. Of course, our customers will start or will have to start at least that is our underlying assumption also embedded in the guidance that Joachim just presented to, yes, accelerate in H2 again, of course, then to be ready to deliver these goods. So that is basically the implication by us confirming the guidance with this call.Regarding the dynamics, I don't know if, Rene, you want to make something. As I said, we thought that we clearly communicated also at the end of last year that H1 is softer, and within H1, that Q1 is softer. Yes, it's a 30% decline. But to be honest, that is the behavior. Keep in mind, we don't guide single quarters. We guide full year numbers here. And therefore, H1, Q1 is what it is. Maybe I don't know if you want to [ comment ], Rene. But otherwise...

[Rene Faber, executive]

Maybe just one addition -- I mean, it's basically the same with -- by using a different KPI that we were also introducing during the last years to be very transparent and clear about also the magnitude of this extraordinary effect, and that was the book-to-bill ratio. And I think we said clearly, and everybody can follow up and make the own calculation anyway, that our, like, historical pre-pandemic average book-to-bill ratio was 1.08. And during the pandemic, we had 2 years of 1.25 and 1.28, respectively.And then it's very clear how significant this surplus has been and the additional order book buildup has been. And we always said, yes, this has to go out of the system one way or the other. And we also have been very clear that this only started -- and it can be easily seen also from that chart that you were referring to again, and that is why we are presenting it, that this effect only kicked in mid of last year. We had a slightly above 1 book-to-bill ratio even for Q2 last year. So this started only in Q3.So therefore, I fully understand that this is maybe a bit unusual for everyone because this high volatility we all are not used to in most industries, I would say, and also for sure not in the biopharmaceutical life science industry. But it is what it is for very obvious reasons. And it's also clear that we have an underlying growth trajectory. I think it's also very evident.And therefore, the mechanism, as Rainer already explained, is as long as customers have more on stock that they would like to have -- and I think we were very -- we gave examples in our last call. We said there are some customers that may have a stock level of around 12 months, while they are rather looking forward to run it down again to something between 6 to 9 months maybe, then it's clear that there is a substantial volume that first -- or where people can -- or customers can like use just from their inventory levels and then only start to reorder again.And that is what we are seeing here. And that is why we are also very confident that this is a temporary effect, even though, as Rainer said, it's not that easy to make razor blade precise precisions about the timing and the extent. That's really not possible in our industry in both directions again. It wasn't possible in the direction when it jumped up and it's also hard to make it -- to do it now.Zain, there was a question around China. Can you repeat this, please, because I'm not sure whether we got it here?

[Zain Ebrahim, analyst]

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

[Rene Faber, executive]

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

[Operator]

The next question comes from Petrina Carcota from UBS.

[Petrina-Oana Carcota, analyst]

Petrina Carcota from UBS. The main question the market has is about visibility in our view. Your guidance implies high single-digit sales growth in the next 9 months. And your comment in the press release says you assume no impact from normalization in the second half. What level of confidence do you have in that? And what level of visibility, what are you basing the assumption?

[Joachim Kreuzburg, executive]

Yes, I think regarding the assumptions, we probably would repeat ourselves here. So therefore on this, of course very, very relevant and interesting aspect of visibility, I mean also regarding that aspect, I think we made our comments already a couple of times. But nevertheless, we clearly -- when we take a longer-term perspective, which I always would recommend to take, we can clearly say that the volatility in our industry has increased.When I look back, let's say, 10 years, we very often started into the year and gave guidance with a bandwidth of 2 percentage points, maybe 3 percentage points. Yes, we typically landed quite nicely within this bandwidth. Over the last years, we were broadening this bandwidth to at least 4 percentage points. And nevertheless, we quite for a couple of times, had to adjust the guidance pretty much around the mid of the year typically.And that even before the pandemic and that has to do with the fact that -- the sector is very dynamic. There's a lot of innovation going on. We had biosimilars kicking in as an additional driver. We now have new modalities that are playing a role. The business has become more global over the last decade for sure so more drivers and good thing is -- pretty much all of them are positive additional growth drivers.So but nevertheless, what I want to say is, this is an industry where I would say it's in the phase we are in, it's anyhow not very easy to make very precise predictions in the first half of the year. We always try to do our best. I think overall, our track record isn't that bad. Particularly, we do try to give quantitative guidance. There are also players who don't do this and only start doing this in the further course of the year.So however, but to be -- as I said already in my answer to the previous question, to give a razor blade prediction, how exactly this will look like is hard. As I said last year, we thought that this normalization would kick in a little bit earlier than mid of the year. So let's see how it will play out precisely in 2023. Our expectation again, will be -- or is that the difference between the weaker quarters and the stronger quarters will be quite significant.So and again, our model always is -- and the way we think on it about it is that it takes roughly 4 quarters until we are back on the underlying growth trajectory. But I mean growth rates of around 20% or so, we have been able to manage before. And we see ourselves clearly in the position to manage that also now in this phase. And as I said, this is what we prepare ourselves for. But of course, it's always a challenge to manage such volatile developments.

[Operator]

The next question comes from Matthew Weston from Credit Suisse.

[Matthew Weston, analyst]

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

[Joachim Kreuzburg, executive]

Yes, maybe I'll start with the last question, and then Rene will take on the first 2. So LPS, I would say to your question around the U.S. here, clearly, the market is or the market that we are addressing and the business that we are having there is much more focused on the life science sector than it is in the other regions that we are serving. So we are more, you could say, also exposed to this sector and therefore, of course, also certain trends in this sector are affecting our U.S. business more than it does in other regions.Yes, we have a much broader customer base also outside life science research in Europe and also in Asia. And that is really the key point. We have been extraordinarily successful in the U.S. in growing our business, our bio-a business, in particular, over the last couple of years, outgrowing the market significantly, I would say, our gaining overall share and the relevance of our U.S. business has become, therefore, also more or higher for LPS.But of course that also means in this temporary weakness of the market, as you rightly summarized, then we also see these effects in the U.S. We wouldn't say that we are directly affected by the SVB situation a couple of weeks ago. But indirectly, clearly one could say that the sector early-stage biotech, et cetera, is a little bit more cautious than during the years '21, '22, where a lot of the research activities were significantly expanded in the sector.And now I think there is a bit a temporary cautiousness, I would say. But clearly, what we would say, when we look on the market that we are serving, the type of products that we're offering, the applications that we are addressing, we believe we are very competitive and doing well and wouldn't consider that to be any longer-term effect again. Renegotiate?

[Rene Faber, executive]

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

[Operator]

Next question comes from Paul Knight from KeyBanc.

[Paul Knight, analyst]

Regarding I think, the technologies around or dynamics around your improved second half growth, are you going to be benefiting from the GLP-1 market with this Novasep business or any other parts. And the other, I guess, more general Joachim would be, do you think the monoclonal antibody market still grows ex COVID, 10% to 15%?

[Joachim Kreuzburg, executive]

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

[Paul Knight, analyst]

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

[Rene Faber, executive]

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

[Operator]

Next question comes from James Quigley from Morgan Stanley.

[James Quigley, analyst]

I've got 3, please, so the first one, going back to order intake at the start of the year versus orders that you received during the year. So looking back pre-COVID with a 2-quarter offset order intake was quite a good predictor of revenue for the year. So in terms of your guidance, how much of the revenue that was implied was already sort of present in orders at the start of the year compared to orders that have come through throughout the year?So just trying to get a sense of basically how large the order book was at the start of the year and how reliant you are on order intake through -- the year to hit the guidance? And also in terms of the destocking, can you confirm that the first quarter is going to be the worst quarter of the year? And the second question on the LPS business. And obviously, there was a bit of weakness there as flagged before. But can you give us an idea of how the split in Bioanalytics, which may be impacted a bit more by Bio's funding and the other lab tools space?And then the third question, you may have addressed this on the Polyplus call, but apologies if this is repeating. But for your 2025 targets of EUR 4.2 billion sort of BPS and EUR 1.3 billion for LPS. Can you give us a little bit more clarity of what you've assumed for M&A within these targets? You mentioned on the call last week, Polyplus was included in the target suggesting sort of EUR 4 billion of underlying growth, but how much more M&A is in that EUR 4 billion target?Previously, you mentioned that in BPS and M&A will be an under proportionate amount of the growth, but it would be sole useful if you could just give us a bit more clarity of what more exactly you're assuming M&A in both those targets?

[Joachim Kreuzburg, executive]

Yes, thank you very much. So the first question, yes indeed, I agree, pre-pandemic order intake was a good predictor. And that was going in line with this book-to-bill ratio being rather stable. But now, as I said, we had this huge volatility around order intake, book-to-bill ratio and an extraordinary high order book. And that means order intake is not so much of an indicator for the future, which a predictor is.It's much more a mirror image of the past and this is very high build-up of order book. So I guess it will take another few quarters until order intake will be a good predictor again for our sales revenue. At the moment, we wouldn't consider order intake to be a good proxy for that. LPS BioA versus our Lab Essentials business, as we call it. And then, of course service plays, a role for both to some extent, but let's focus on the product side.I would say performance of both has been quite healthy and robust during Q1 different dynamics in Lab Essentials, less exposure to life science research, as just said, but at the same time, the decline of the COVID business as far as it relates to LPS was part of Lab Essentials largely. Again, as a recap, we were talking about membranes that are -- that were used by customers in COVID test systems as well as pad-by-pad tips are also used in COVID test procedures.So therefore, I would say, overall comparable robustness and contribution. On your 2025 perspective, we -- exactly, we always included in these projections, a certain portion of acquisitions, inorganic growth, and therefore, also an acquisition of the size of Polyplus was included in our BPS projections, maybe more, obviously, one would say that in LPS, that there is another inorganic growth contribution necessary to achieve the EUR 1.3 billion.We would be -- would feel quite confident that we would achieve EUR 1 billion plus a bit in LPS without any further inorganic contribution. But that means in turn, to reach EUR 1.3 billion something around EUR 200 million of volume would have to be added to the LPS business roughly to achieve that. Maybe for BPS also, we -- I mean, there are a couple of interesting opportunities.We might add something here and there, which therefore, is also included in our guidance already. But maybe here, the ratio between existing business and size of a potential acquisition is maybe a bit smaller.

[Operator]

And the next question is from Hugo Solvet from BNP.

[Hugo Solvet, analyst]

A few clarifications please, Joachim you said it takes 4 quarters give or take to go through the stocking. Is it based on what happened in the past or do you have -- I'm sorry to push you on that, but more data points in terms of order delivery being pushed back view and inventories to share with us?And on inventory, is there a risk or would you say there is a likelihood that inventory at your customers will go below pre-COVID baseline, which was [ EUR 69 ] million , and that -- and restocking could be delayed? Second, on LPS and the weak biotech funding environment, is there in your view and you read that this could spill over into BPS?

[Joachim Kreuzburg, executive]

Yes, maybe I start and maybe Rene adds to that let's see. So our projection that this destocking effect will last roughly 4 quarters is based on: A) the dynamic that we see at the moment. And as we said 1, the ratio or the -- there is a context of course, of the actual book-to-bill ratio and the size of the order book surplus, so to say. And therefore, if we take this into consideration, this leads us to this perspective.Of course, we also listen carefully to all those customers who give more precise insights? And the second question that you have is related to that. We don't expect customers to run their stock levels before the pre-COVID level, rather slightly higher than that. So and taking -- these data points, as you said, altogether, our conclusion is that this should take roughly 4 quarters. As I said, to be then very sharp in the sense of, okay.The months, the exact format of that curve, then that is really hard to take -- hard to project. But these 4 quarters, we feel make a lot of sense to us. The spill over from LPS, if I get you right, you meant what I said before, there's a little bit more cautious spending and investment behavior from early-stage biotechs at the moment. Typically, the time gap between any early-stage activity, be it small biotech, be it large biotech to something that becomes then relevant to BPS business is several years.And therefore -- and it's not just several years then also of course, this typical dilution and mix effect, because it's not just 1 quarter that moves through time then. So therefore, we wouldn't expect any spillover effects yes.

[Hugo Solvet, analyst]

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

[Joachim Kreuzburg, executive]

We wouldn't -- I mean price -- pricing maybe again to go back how our communication has around been around that. So during last year, when inflation kicked in significantly, we were running in an extraordinary pricing initiative. And we also said, as inflation stayed on a quite significant level, we also had a more than -- or higher than usual price increase for 2023.Our anticipation for the path forward then is that for '24, '25, price increases should be much more back to normal levels. And that is what we factored into our updated projection for '25, which is this EUR [ 1.5 ] billion. So that is our perspective if boundary conditions change, then we will rethink that, but that is how we -- that is our current perspective.

[Operator]

The next question comes from Odysseas Manesiotis from Berenberg.

[Odysseas Manesiotis, analyst]

I've got 2.5, please. So firstly, on the bioprocessing margin other than the sales decline here, is there anything else that affects profitability in this quarter, in particular, because we're looking to acquire a margin step-up over the next few quarters, potentially above your midterm guidance even, so ex margin accretion from the Polyplus acquisition, what pressures that you faced this quarter? Do you expect less of or what margin tailwind should come to later in the year?And secondly, I mean, given the stability expiry for some of your consumables on the Bioprocessing side, have you seen signs of a secondary market becoming active from your customers with a large stock essentially selling consumables, which are near expiry. And on that, does the fact that a lot of these extra stock that your clients have will expire soon back your sort of Page 2 turnaround confidence?

[Rainer Lehmann, executive]

Yes, Odysseas thanks for the question. I take try to answer that. So first of all, what impacts the margin in Bioprocessing business maybe to add 1 aspect. 1 factor here is a product mix where, as you can imagine, the stock -- destocking stock levels applied to these consumables, which are rather higher-margin products than equipment. So I would mention that one.On expiry, shelf life topic, we don't see that being a major factor here, also a secondary market for consumables. You see a little bit of that, but there's really nothing which is relevant and quite difficult in a regulated industry. So nothing which we would consider being relevant.

[Joachim Kreuzburg, executive]

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

[Odysseas Manesiotis, analyst]

Perfect, Rainer for the follow-up and maybe if I add a quick follow-up on that one, so I mean on your economies of scale point as well, could you help us with some figures perhaps on the average capacity utilization of your plans now compared to '22 or '21?

[Joachim Kreuzburg, executive]

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

[Operator]

The next question is from Falko Friedrichs from Deutsche Bank.

[Falko Friedrichs, analyst]

I have 2 questions, please. The first 1 is a clarification question, please. On this destocking amount that you flagged earlier in your prepared remarks, you said a 3-digit million amount. Can you just clarify again what is sort of the time horizon is for that? And then can you give us a rough ballpark figure for the amount in 2022 and what's left in 2023? Just sort of ballpark would be very helpful?And then my second question, out of curiosity, how do you think about your 2023 guidance now versus when you gave it in January? Would you say it is more of a stretch now or is it still just as realistic as you thought about it in January?

[Joachim Kreuzburg, executive]

So yes as I said, the -- or as we said, Q1 is pretty much in line with our expectations. And therefore, our perspective on the full year's guidance is pretty much the same. So I fully understand that for everyone else, when you see, okay, there is a decline of 13%, and then there is an expectation of a certain increase that you then say well, that's quite a challenge. But as we said, we have expected a significantly lower first half of the year in comparison to the second half of the year.So within our projections, we always anticipate quite different half of the year and, therefore, also different quarters in the year. So that's pretty much unchanged. So -- and on destocking, we have seen a significant build-up. Rainer said that very significant 3-digit million euro number of, so to say, order book surplus, and we have seen a certain reduction of this in Q3 and then also more significantly in Q4.Now after Q1, we still would say there are -- there still is that it was a significant 3-digit million number. There is still a lower 3-digit million number of order orders that have to be like worked through and reduced and therefore, destocking that has to happen, but we already have seen quite a bit of this being digested. Let's put it that way.

[Operator]

The next question comes from Ed Ridley-Day from Redburn.

[Edward Ridley-Day, analyst]

A couple of follow-ups and first of all in Rene, in terms of the lead times, you -- again, you mentioned that most of our lead times has set now back pre-COVID-19 in levels. I don't know if you want to quantify what most would be. And I've been discussing therefore, at least on your side of the business, you would expect normalization in lead times to be complete by early in the third quarter?And the second one, just a quick 1 for Rainer in terms of your FX obviously, there has been a little movement in FX year-to-date. Can you give us some help on how that might affect margins for the full year?

[Rene Faber, executive]

Yes, thanks for the question. I'll take the first 1 on the lead times. When I said for the most of our portfolio, that includes virtually all of consumables, major consumable products, filters, single-use bags, single-use assemblies. There are a couple of product categories where we're still working on improving the supply chain situation on the equipment side, most of the equipment types are also back to pre-COVID lead times. So it's really -- few exceptions where still some components supply type officials we are working on.

[Rainer Lehmann, executive]

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

[Operator]

The next question comes from Naresh Chouhan from Intron Health.

[Naresh Chouhan, analyst]

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

[Joachim Kreuzburg, executive]

Yes, thank you very much. Maybe I try to answer them first so inventory level, absolutely right, slightly up in Q1 -- that is pretty much and quite a normal effect. We typically see a certain build-up at the beginning of the year and then a reduction towards the end of the year. So that's like the normal curve. The underlying theme nevertheless, is that we intend to further reduce our inventories.But of course, with very much an eye on being able to react in a very agile and flexible way to the expected then increase of demand and orders again in the further course of the year. So that's a bit the balance that we are trying to manage here. We definitely, as we always said, and you rightly mentioned, our intended stock level in a normal situation again will be below the actual one.But we have to see a little bit more or less volatile situation until this really can be pushed for. The shelf life, you rightly said it. Of course, shelf life management is then also a challenge on any supplier side. And therefore, also for us, I think we talked about that last time in our call, it's nevertheless a rather minor effect that we are seeing. But of course, in comparison to previous years, we have seen throughout the pandemic a little bit higher depreciation and sometimes also write-offs on inventories, that's clear.But for sure, not dominating the equation, I would say. Margin and you bear with us that we don't give too much detail here, but roughly you can say that the -- larger part, so let's say, roughly or the larger contribution of the 3 factors: scale, cost, mix. The larger factories scale here and then cost and mix are maybe on the same level let's put it that way. So maybe we are talking about something like 50%, 25%, 25% of this effect, to give you an idea.Headcount, so headcount, I would say if -- the question is very much on the short-term horizon, we might see a little bit of further reduction, but if the perspective is rather towards the end of the year, then it may look already maybe similar to what we have today, even though, of course, we will clearly try to use as many flexible workforce here in this anticipated scenario of increased demand again.So and the headcount number, just to remind you the headcount number, because this is how regulation is asking for this report does not include temporary workers or contingent workers. So and therefore, there might be a certain shift there. But by and large, short-term, maybe a little bit further reduction. And then if we talk about a couple of quarters, then we will see a moderate increase again.

[Operator]

The next question comes from Sezgi Oezener from HSBC.

[Sezgi Oezener, analyst]

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

[Rene Faber, executive]

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

[Rainer Lehmann, executive]

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

[Operator]

The next question comes from Virendra Chauhan from AlphaValue.

[Virendra Chauhan, analyst]

So I think a while ago, you mentioned that the surplus in terms of the order book is now probably a lower 3-digit million or the surplus versus normalized levels. And so my sense is that the order book will continue to -- book-to-bill will continue to be below 1 for a while. From that perspective, like if you could help me with like when do you expect order book to be back to growth when you look at it from a quarterly perspective and sales bottom in terms of -- over the next couple of quarters. So that would be really helpful if you could share?

[Joachim Kreuzburg, executive]

So I think Rainer mentioned earlier -- during our call and during his part of the presentation, that we were anticipating and still do that we would have roughly 4 quarters of a book-to-bill ratio below 1. And we have now 3/4 of a book-to-bill ratio below 1. So and that means that -- and that is still our expectation. So that would mean that if this materializes that way, then -- for Q3, 2023, we would see a book-to-bill ratio above 1, and this equals to a growth of the order book for that quarter.

[Operator]

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

[Joachim Kreuzburg, executive]

Yes, thank you very much for this discussion, first of all for your interest in Sartorius as well as Sartorius Stedim Biotech, very much appreciated. I think it's really important to have this dialogue, particularly when things are not like going as every quarter before and one just ticks the boxes.But where it's really important to explain different effects and to hopefully being able to clarify then all questions around that. So thanks for your interest. Thanks for the discussion. Looking forward to our next time, so which means latest in 3 months, all the best. Bye-bye.

[Rainer Lehmann, executive]

Bye, everybody.

[Rene Faber, executive]

Bye thanks.

[Operator]

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