Sartorius Stedim Biotech SA

PAR:DIM

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and welcome to the Sartorius and Sartorius Stedim Biotech conference call on the H1 2022 results. Today's conference is being recorded.

At this time, I would like to turn the conference over to Dr. Joachim Kreuzburg, CEO. Please go ahead, sir.

[Joachim Kreuzburg, executive]

Thank you very much and also good afternoon and good morning from my side, and welcome to our H1 conference call. I would like to start walking you through the highlights of the first half year 2022 of the Sartorius Group and then hand over to Rainer for the details on the Sartorius Group's numbers to take over then commenting on the guidance for the full year and also walking you through the SSB numbers.

So look on the highlights now. We have achieved double-digit growth of sales revenue in both divisions. The same is for the underlying EBITDA, so the profitability margins remain at the same high levels. And that is despite the inflationary trends that we are seeing as well as headwinds from FX, more details later. In BPS, we have seen a very healthy order situation, but we saw that we could compensate for the normalization and the quicker than initially expected normalization of the corona-related demand.

In LPS, we have seen a very dynamic development, particularly driven by our bioanalytics business, so that we have achieved a really satisfactory growth as well as profit development. We are confirming our outlook for 2022 in regards to all KPI despite the quicker normalization of the corona-related business. But of course, at the same time, we really strongly underline that the uncertainties on a global scale are probably larger than ever. And therefore, that also the uncertainties regarding any guidances that one can give a larger than normal. Therefore, we are also not narrowing the bandwidth of our guidance, which we often have done at this time of the year.

And with that, I would like to hand over to Rainer.

[Rainer Lehmann, executive]

Thanks, Joachim. And first of all, also welcome, everybody, from my side to today's call. So let's have a look at the figures for H1, quite a successful quarter and therefore, also in the first half of the year. Revenues in constant currencies rose by almost 21% to slightly over EUR 2 billion. Order intake, as expected, normalized. We already announced that in the first quarter call and we see a decrease of 0.5 percentage point, which, of course, is impacted by the very high comparable of the previous year, which, of course, included the pandemic and the change of the ordering patterns of our customers.

Without the corona, actually, the growth would have been positive in the mid-single-digit range. The -- we still see that the book-to-bill ratio, so as of H1 is quite healthy. It's over 1 and normalized. If you look at previous year, H1 2021, there, we still were at 1.3. So still the fundamentals are intact. Underlying EBITDA, we could increase by 25.6% to EUR 697 million. This is despite the anticipated higher costs that we already talked about, specifically over the last quarters that we are now seeing and despite some slight FX headwinds. Underlying EBITDA margin, therefore, almost on prior year level was 33.9%. Earnings per share for the ordinaries stand EUR 4.88. And as always, the preference share was EUR 0.01 more at EUR 4.89.

If we have a look at the regional distribution of our revenues, we see on the left-hand side that the Americas grew quite substantially by 27.5% to EUR 726 million, really fueled by both divisions, very dynamic growth, especially I would like to point out our bioanalytics business and our product portfolio, which did very well in this region. In EMEA, we grew 15.5% to EUR 793 million. BPS here, of course, with high comparables, again, keep in mind the strong performance related to the corona-driven revenue last year here. And on the LPS side, we actually see here a very slight decline compared to previous year. This is also attributed to one of the -- a little bit to the business in Russia.

Asia Pacific, we have a solid development of the Bioprocess division. We could grow here by 21.2% to EUR 540 million, and LPS performed also very strongly. And fortunately, we can say that the partial lockdowns in China only had a minor impact on the half year performance. If so, it would only be a timing issue that would be recovered in H2. If you look on the right-hand side, our revenue by the different regions. We see here a slight shift compared to previous year by 3 percentage points from EMEA to Americas, which now has a 35% revenue share. EMEA was 39% and Asia Pacific was 26%. Of course, this shift is due to last year's [ say ], again, strong performance of this region in connection with the corona business.

If we have a deeper look into each of the divisions, let's come first to the Bioprocess Solutions. And here in the middle, let's start with the sales revenue. We grew 23.5% in constant currencies to EUR 1.6 billion, 2 percentage points are related to the acquisitions in this division. And we see here this number already includes a decline of the business with coronavirus vaccines. On the left-hand side, we see the order intake with a negative development, almost 9% in constant currencies, down from EUR 1.8 million to EUR 1.7 billion. This is, of course, related again to the strong prior year figure and -- which was again contained the corona business as well as the changed ordering pattern by some customers.

Here, if we look -- would have looked at the order intake without the corona business, again, would have been in the mid-single digit positively. On the right-hand side, we see the underlying EBITDA margin, a slight decrease. But I would say even comparable almost on previous year level, we see a little bit of headwinds from the FX side. And of course, we see the impact of the higher costs that were planned in order to make sure that we have a sustainable cost base going forward.

On the Lab & Products & Service side, very happy to see the development here. We have a revenue increase of a little bit over 11% to EUR 423 million, really driven here by Americas, where we were in the -- with 23% increase. And Asia Pacific also strong performance, a little bit less, as I mentioned before, slightly negative in EMEA. Order intake and here actually -- sorry, acquisitions actually contributed also 1 percentage points to the revenue growth.

On the order intake, also a very solid number, 15% growth on -- in constant currencies to EUR 452 million. So very happy here also with the book-to-bill ratio. All of this translated to an EBITDA margin on the LPS side, slightly above previous year to 26.4% despite FX headwinds. And this is also attributed to a favorable product mix, especially from the bioanalytics portfolio, which is performing very well. So EBITDA could increase by almost 18% to almost EUR 112 million.

If we look at some financial key indicators, starting again with the underlying EBITDA, we see the growth of 25.6% to almost EUR 700 million. Extraordinary items kept as anticipated, actually on a fairly low level. The financial result, I would like to point out here, as I did in the previous calls, this time positive. This is attributed to the valuation effect in connection with the earn-out liability with BIA Separations. Of course, a decline here of our price -- of our share price led to this valuation income. Again, this is not cash relevant, pure valuation effect.

Underlying net profit, we could increase by 28.5% to EUR 334 million almost. The reported net profit could increase by almost 85% to EUR 371 million. Again, here, keep in mind that the valuation of the earn-out liability has an impact on it. Operating cash flow. We see a decrease compared to previous year period of almost 35% to EUR 287 million here. That's -- this is attributed to the substantial CapEx program that we are still running, which added up to roughly EUR 220 million. And also keep in mind that this -- sorry, the operating cash flow was attributed to working capital increase, not the CapEx, wrong here, but it's also EUR 220 million actually that we build up the working capital.

Investing cash flow is minus EUR 294.5 million. Here now the number, this is, of course, driven by the substantial CapEx program, which is also EUR 220 million CapEx. And also this includes the acquisitions of ALS and Novasep, which together meets the majority of the remaining EUR 75 million.

If we then look at the equity ratio, here we see a increase from 30.2% to 35.9%. This is attributed, of course, not only to the strong earnings and net profit that we could show for H1, but also since we paid out and paid out [ importation ] marks because we issued the shares for the first tranche of the BIA Separations liability that also impacted positively the equity side. Net debt could rose slightly to EUR 1.87 billion, but still on a healthy level. We see here that the net debt divided by underlying EBITDA is down from year-end by 0.1 to 1.4. As you see on the right-hand side, the continuous development, and we still will see -- our anticipation is to see this decreasing over the remainder of 2022.

And with that, I'll hand back to Joachim.

[Joachim Kreuzburg, executive]

Yes. Thank you very much, Rainer. I would now like to walk you through the guidance for 2022, which I think is -- can be a very quick exercise as we are reconfirming the numbers that we have first published at the beginning of this year. So we are expecting a 15% to 19% top line growth for the Sartorius Group, of which 2 percentage points should be attributed or contributed by acquisitions.

For Bioprocess Solutions, this should be 17% to 21% with 2% contributed by acquisitions. And this number we confirm, despite the fact that we are now expecting, as you can see in the first bullet point, a corona-related business overall of just EUR 250 million of the previous expectation of EUR 500 million as the number also has been in 2021. And as you know, by far, the majority of this is -- has been achieved in the Bioprocess business and was expected also for the Bioprocess business.

So for LPS, we are expecting 6% to 10%, of which 1 percentage point should be contributed by acquisitions. And the underlying EBITDA margins also remain unchanged regarding our expectation, which is 34% approx. for the group, 36% for BPS and 26% for LPS, respectively. The 3 further bullet points on the bottom of this slide also are unchanged all in regarding the CO2 emission reduction activities that have a certain impact on our margin as well as CapEx as well as regarding our net debt to underlying EBITDA expectation.

So I'm sure we will talk about that later in more detail. And therefore, I would like to move forward to the SSB set of numbers. As you would expect, they are very much in sync with those that Rainer already has presented on BPS. So we have achieved a constant currency growth of 22%, and have reached EUR 1.72 billion for the first half. Both quarters look very much similar. The same holds true for the order intake, which has been at EUR 1.83 billion, a decline of a good 7% in constant currencies, excluding the corona effect. Rainer talked about that earlier, this would have been a mid-single-digit positive number.

Underlying EBITDA has increased by 24.5%, so slightly stronger than the currency corrected top line growth, which has been 22.1%, but yet given the headwind from currencies, this has translated into a slight decrease of our EBITDA margin to the 35.2%. Additional factors, of course, have been also on the cost side as planned because of additional hirings as well as business trips and other costs that virtually have come back, you could say. Underlying EPS then is up by 26% to EUR 4.40.

Let's have a look on the retail distribution of our growth. Also here, I think most comments already have been made. Americas has shown the highest growth rate. EMEA as expected, a little bit below because of the explosive growth before following the corona vaccine manufacturing, which largely has been taking place, still is taking place in Europe. Asia Pacific, up by 22.5%, therefore, also a little bit of more evenly distributed geographical split of our sales revenues, of course, also impacted by the different FX ratios.

Then with a view on our cash flow related numbers. Also here as BPS plays such a significant role for the Sartorius Group overall. I think I shouldn't repeat all the comments that Rainer already has made a minute before, particularly for instance, on the earn out liability regarding BIA Separations, which has an impact, of course, on the financial results as well as then on the ratio of -- or yes, the respective development of underlying net profit and reported net profit. And again, you can see here that we are executing on a very ambitious and broad capacity expansion program.

Our CapEx ratio is at 10.4% for the first half of the year, and we are expecting even stronger CapEx numbers for the second half. The financial indicators are very robust, I think, as they usually are. Also here pretty similar comments than those that Rainer already made regarding the influence on the equity ratio as well as net debt underlying EBITDA is quite low despite the fact that we are investing significantly and have executed on acquisitions. And we expect this number even to go down further for -- by the end of the year, which leads me to the guidance.

Also here, we are fully confirming all KPIs that we expect for the full year. Significant double-digit top line growth, 15% to 19% with 2 percentage points contributed by acquisitions and the underlying EBITDA margin above 35%. I made the comment already on all those points that are written here on that slide below this small table. And again, I'm sure we will talk about that now in our Q&A.

So thanks for listening to us. And now I think we can open the floor for Q&A.

[Operator]

[Operator Instructions] First question is from the line of Patrick Wood from Bank of America.

[Patrick Andrew Wood, analyst]

It should be 3, fairly short ones, hopefully, pretty straightforward. I guess the first one would be, and apologies if I missed this. Did you guys keep your COVID contribution for sales within BPS for Q2? If you have that, that'd be great. The second one is just any sort of sense on pricing so far in the year. Or what kind of impact we should expect in the full year from the pricing initiatives given it's an inflationary environment? Just trying to get a idea of the very rough quantum of pricing you guys are putting through into the market.

And then the final one, I guess, is the base business is obviously performing, I think, stronger than perhaps you expect there certainly than we expected, just seem to be still running at 30% plus. There were worries about stocking. How are you feeling about that in the market? Do you see any destocking within the order books that would drive a more aggressive normalization? Any incremental color from conversations with customers around that topic? And what would drive that sort of normalization down from that very elevated growth rate?

[Joachim Kreuzburg, executive]

Yes. Thank you very much for your questions. Maybe I start answering 2 and 3, and then Rainer can narrow a little bit the bandwidth for the COVID sales or corona-related sales in Q2 probably. So for pricing, of course, we have seen an impact on the supply side, very obviously. And we have started early this year to pass on price increases that we are facing on the supply side to our customers. We are having a very open, very constructive dialogues with our customers here, also implementing price increases on our price list, where they are relevant. For example, as you would imagine, in the LPS business price list, they have bit a larger role than in BPS. But also in BPS in a certain part of the business or for a certain part of our customer base, they play -- those price lists play a role as well.

So -- and the net effect is basically close to 0, you could say. So we have been able to compensate for the price increases that we have seen so far on -- through price increases that we have been passing to our customers. And so far, we would expect the same to be the case for full year. Now the question is how large will this effect be on the top line. Here, you should keep in mind that the fair number, of course, first should deduct the average price increase that one would have made anyway. And then the second one is -- we should also keep in mind that even though with the price increases that we are facing from our suppliers as well as those that we are passing on to our customers can go up to around the 10% mark even, so like 8%, 10%.

But of course, this is not what you will effectively see for the business in 2022. Think of the strong order book that we have carried over at a certain price level into 2022. And then the time gap that always plays a role between getting an order and then the delivery as well as the fact that, of course, we have certain stock levels for products that we are sourcing from our suppliers. So therefore, this is a transient process. So that maybe a fair assumption would be that the overall pricing effect on the top line would be rather -- so the additional pricing effect, I should say, the additional pricing effect that we will see some full [indiscernible] rather in the -- around the mid-single-digit percentage number, but maybe slightly below, again, deducting the pricing adjustment that we would have implemented anyway.

So base business. This is a question that is not easy to answer because it's the case still that our customers are partially also struggling with their even shorter-term planning. Just think about the manufacturers of corona vaccines and the volatile environment that they have to face and they still have to deal with to some extent. And therefore, I would say that the normalization overall, and that includes maybe a normalized ordering behavior as well as maybe some destocking here and there, that this will not be over before the end of this year, yes.

So we definitely expect that this will play a role until end of 2022. Whether there will be more that we see in 2023 is maybe a little bit too early to say, particularly given the challenging environment that everybody is operating in, also our customers are operating in. And therefore, it's hard to say how they will manage that and the conclusion that they will draw from it. But from today's perspective, I could imagine that by end of this year, this normalization has been -- maybe not completed, but very much advanced by then. And maybe Rainer, some comment on the corona sales Q2?

[Rainer Lehmann, executive]

Yes. So basically, for the [indiscernible] sales number for H1, actually, our growth rate on the revenue side was basically diluted by mid-single-digit number. For BPS and also for the group then.

[Patrick Andrew Wood, analyst]

Yes, that's helpful. I can back it out from that. Really comprehensive answers.

[Operator]

Next question is from the line of Michael Leuchten from UBS.

[Michael Leuchten, analyst]

Two questions, please. One, just going back to the stronger performance of the base business. I was wondering if you could talk to the composition of the order intake now with that stronger growth. Are you seeing any changes? Are they more consumable versus hardware in the order intake? Or is the mix the same and it's just stronger growth throughout? And then a question on this potential second order implications from potential gas supply restrictions. Should there be so base material shortages at some point like polymers or resins and the like? How do you think the industry will deal with that? Will that mean you're going to ramp up inventory now into the second half just in case? Is it a wait and see? Or is it something that we shouldn't worry about too much?

[Joachim Kreuzburg, executive]

Yes. Thanks for these questions. So the mix that we are seeing at the moment in the order intake is not anyhow a different one from what we have seen before, you could say. There's no major shift between consumables and systems or equipment. Pretty much as usual, I would say. And for -- and therefore, I would say it's well balanced, as you can also see from the geographical distribution of our growth. So we continue to be really happy that we can say that there are no particular pockets of growth or pocket of non-growth. It's really evenly distributed.

And then the ordering behavior of our customers, we were talking about this normalization. On our side, we have been building up inventories quite a bit. I think Rainer touched upon that. We have done that and we communicated that I think already during 2020 partially and then in '21 a lot and also in 2022, we continued to apply quite a risk-averse approach to our inventory management instead of trying to like optimize working capital positions here. So that, of course, comes with a certain risk. On one hand, it's the risk-averse strategy, but at the same time, of course, it comes with a risk of high depreciation on inventories. And we have seen that to some extent already. We still think it has been the right policy and the right way to approach it.

But I just want to mention that it's clear when you run high inventories level, you will also have a higher depreciation on it. So -- but I think your question was a little bit broad. What happens now if there is a substantial energy shortage, particularly in Germany. And we have been doing what we could do by our own needs. And that means that we have made sure, I believe that we should be able to switch to oil instead of gas for our own operations. Most of these activities have been completed on a technical side. We are still working on the securing the supply of oil at a sufficient level. But then -- and that is, I think, the core of your question for good reasons. What about the supply chain? And this, I think, is really the $100 million question, hard to answer.

If the chemical industry would be really heavily impacted by energy shortage, I believe there will be hardly any other industry that will be completely not been impacted. Yes. And I don't think that there are any reasonable inventory levels that could hedge for such a scenario. So we believe we are running at risk-averse inventory levels at the moment. We have done a lot to become independent for our own operations from natural gas. But I would clearly say there is quite a general risk remaining, and that is why we are underlining in all our statement, particularly around guidance, the uncertainties are quite high at the moment.

[Operator]

Next question is from the line of Ed Ridley-Day from Redburn.

[Edward Ridley-Day, analyst]

First of all, actually, a related question to the previous one, on your energy supply. Given the excellent progress you've been making more broadly in looking at your energy supply and if you work towards your carbon neutral goals, are there sort of perhaps bigger picture and longer term other initiatives that could help sort of permanently move you away from gas anyway? That would be my first question. And also just on bioanalytics, great to see the growth there. Could you just update us on the level of bioanalytics contribution to the LPS business? And say, and roughly where that is compared to say a year ago?

[Joachim Kreuzburg, executive]

Yes, definitely. So for the first question, maybe first, let's put it into perspective what is to 100% in our own hands. And that is the energy that we are using at our own sites. This roughly makes up for 10% of the CO2 emissions that are associated to the entire, let's say, industrial impact that we are having. We think that our analysis says that we roughly have 40% upstream on the supply side and roughly 50% downstream on the customer side. And again, 10%, that is 100% in our own hands. Just to put it into perspective.

For our own activities, absolutely as you were already addressing in your question, we have multiple initiatives to become increasingly independent from fossil fuels, be it gas, be it oil or whatever. We are using renewable sources for the electrical energy that we are sourcing, but yet based on renewable sources. And then we are doing pretty much the same locally when it is about producing our so-called process heat for the manufacturing processes. That is very much around membrane production as well as running clean rooms, sterilizing product, et cetera.

So there are multiple initiatives that would reduce our dependency on fossil fuel, but at the same time, of course, substantially reduce our carbon dioxide footprint. And it's a -- we are -- as the impact from the upstream and the downstream side is so significant, we are not putting that at the forefront of our communication. But as a matter of fact, our goal is to reduce our CO2 footprint that is in our own hands, pretty much close to 0 within this decade, so exactly because of those measures.

And bioanalytics, Rainer, do you want to take that one?

[Rainer Lehmann, executive]

Sure, I can take that one. So basically, last year, H1 was pretty much a little below 30%. And actually, this year, it's slightly above 30%. So we're gaining a few percentage points there in the share of the overall LPS revenue.

[Edward Ridley-Day, analyst]

And could you give us any more color on the level of growth?

[Rainer Lehmann, executive]

That is actually -- so across the region, actually, they are pretty much growing all in the -- yes, between like around 30%, 30-plus percent.

[Operator]

Next question is from the line of Paul Knight from KeyBanc.

[Paul Knight, analyst]

Joachim, the Lab Products & Services business, very strong. Could you talk to what was behind the growth in the period?

[Joachim Kreuzburg, executive]

Yes. I think Rainer already mentioned the strong growth and gave some of the quantitative guidance here on the very strong growth of our bioanalytics business. What we see here is really that worldwide, there is quite substantial investment being made in the life science field technologies that help researchers and drug developers to accelerate time lines are -- yes, very much sought after. And companies and researchers across the world are investing into such technologies. The portfolio that we have here and have built here largely through acquisitions are all around automating workflows in drug development or in life science research and drug development, including, of course, then a strong digital tools included into such automation strategies and technologies.

For example, pattern recognition based on life cell imaging that would be, for example, our Incucyte technology. So it's a very strong underlying growth in the first place in the core field that we are strategically addressing. But clearly, one would also say we are gaining market share in this field. That's clear, yes, because the portfolio that we have built here so far is really addressing the sweet spot of, as I said, powerful automation yet rather simple to use automation. We are not talking about complex projects with a lot of robots, et cetera, involved. It's really very often like desktop automation or benchtop, I should say, benchtop automation. And then one can also say that some of our initiatives around e-commerce, some investments into our positioning in China and other markets also are paying off.

[Paul Knight, analyst]

And then last question is the lack of biotech funding for early-stage firms. Are you seeing any impact from those early-stage firms and lack of funding?

[Joachim Kreuzburg, executive]

Haven't seen that so far, I would say. We see, of course, that the funding has been going down, haven't been impacted by that. We are anyhow less exposed to this effect than maybe some other players with different portfolios. But we might see some impact as well. I wouldn't say we are completely immune also, but we are for sure less exposed to this effect.

[Operator]

Next question is from the line of James Quigley from Morgan Stanley.

[James Quigley, analyst]

Just trying to understand the dynamics for the underlying growth. So I think Patrick sort of mentioned it was -- it looks like it's in the region of 30% or so, and has obviously been boosted or boosted your guidance excluding COVID. But what are the key drivers here? So is this delayed selling gene therapy products? Is it projects? Is it purely MAMs? Or is it just price that you've seen coming through? So what's different now for the underlying business other than price compared to what you saw back in May?

And the second question is, obviously, given that growth is still pretty strong, and you've reiterated your midterm targets. And I know you've had this question before, but if you take out COVID, the midterm targets suggest around about a 9% CAGR there thereabout. So just quite a step down from what you're currently seeing. So what are the offsets in terms of the dynamics? And clearly, there's a higher comp. But what are the key factors there in terms of that step down in growth to your midterm targets?

And then finally, on CapEx. A number of your competitors are increasing their spend as are a number of your customers. And again, the underlying market is clearly very dynamic here. So how should we think about how that contributes to the CapEx trajectory over next couple of years? What would you say is a normalized level of CapEx from a maintenance and a growth perspective? And over what time frame do you expect to get to that normalized level?

[Joachim Kreuzburg, executive]

Yes. Thanks for these questions. So underlying growth is impacted to a small extent only by the price effect. I was elaborating a little bit or at least try to a few minutes earlier that we have some effect, but not that dominating the equation for sure. Then we clearly, as we always have communicated, as we are always releasing all those numbers, including order intake, it's clear that we have seen this huge growth of order intake running ahead of our sales revenue in 2020 and 2021. And there was pretty much these 5 quarters from, you could say, Q3 '20 until including Q3 '21. And therefore, it was clear that the guidance that we were giving for 2022 at the beginning was based also on a very healthy order book. And therefore, that is also a part of this.

But of course, behind this order book, there is a certain demand for additional manufacturing capacities, et cetera, et cetera, in the industry. So you could say that, by far, the majority of the underlying growth comes from the fact that the industry overall is growing at very healthy rates. As we are seeing still an expansion of the business of originators in the monoclonal antibody space, we are still seeing a very healthy expansion of the biosimilar business. And we are seeing an increasing business also with so-called new modalities, a lot of investments in this space. And that is really across all geographies.

Therefore, you will see, I think, in our numbers, but also at other companies, not completely evenly distributed growth, but quite healthy growth rates in all geographies. In China, for instance, we see since a number of years, the biopharma sector to be amongst those industries that they want to particularly develop in the framework of their 5 years plan. And therefore, there is a continuous high level of investments there. We see Korea, particularly, of course, with Samsung are continuing to expand their activities, think of Lonza and other CDMOs. So you could say that there are a lot of positive drivers, strong underlying positive drivers.

Yes, there have been -- there is an overlay of these -- of the corona effect, like the first round corona effect, how we would call that, our first grade effect, which is the additional demand for particularly manufacturing of corona vaccines. And then the second round effect because of the risk averse ordering pattern from a couple of customers. So -- but again, there is a very healthy underlying growth pattern. So now the next question from you is, of course, strongly related to that. And that is what about your midterm targets. And I mean we have lifted them quite a bit not long ago, and we said we wouldn't do that at the beginning of 2022. And this still holds true, given this very volatile environment where a couple of things should have fully normalized and somehow settled before maybe revising this midterm target.

Just as a reminder, we have kept any corona business excluded from our midterm targets. That's clear. But when making any comps calculations, please keep in mind, there is still corona business in. So when calculating any CAGRs, please take that into account. And then yes, you can imagine we will take a look on that once we see how this has normalized and then, of course, also how certain uncertainties that we were talking about have played out. For CapEx, you are absolutely right. CapEx ratios are at very high levels across the industry, you could say, also for us. There is one additional trend, I think, that has become more important during just the last 1 year or 2 years maybe, and that is the regionalization, partially the nationalization of activities and then a certain demand by government for doing so.

I would say still early innings to clearly say how that will have an impact on our numbers. We already have quite a broad geographical footprint. Part of our investment program at the moment is, for example, the further expansion of our activities in China, further expansion in Korea, further expansion in the U.S. as well and so on and so forth. But nevertheless, that indeed could have an impact on when and how and on what level such CapEx ratio would normalize. So therefore, at the moment, we are talking about 14% that we would expect for 2022. And I really would like to ask for your patience until we come up with a little bit more visibility beyond that. For sure, this number won't stay that high for many years. But we really have to see again how this will play out given the very significant geopolitical tensions that we are seeing at the moment, and in how far this would ask us for making even more, yes, nationally targeted investments.

[Operator]

Next question is from the line of Richard Vosser from JPMorgan.

[Richard Vosser, analyst]

I wanted to go back to the order book normalization. I think Joachim, you said should be fully normalized potentially by the end of the year. And I just wondered how we should think about the timing of that coming through in terms of revenues. I think there was some normalization back in 2016 on the order book and then there was a slowdown in growth in 2017. So is that how we should think about it in terms of a slowdown in '23 as the order book normalizes this year? Or should that all be down in revenues in '22, given the very dynamic underlying market growth?

And then second question, I just wanted to go back to basically that -- the dynamic growth. And just wanted to ask about whether there's a bolus of growth right now as we expect very significant biosimilars to go off patent and biosimilars to launch. So is there some element of ramp up this year that would come -- that we should think about tailing off next year? And then finally, just one thing about China lockdowns that hasn't been covered. It doesn't seem to have much effect at all, but just anything that we should think about around China and demand there going forward.

[Joachim Kreuzburg, executive]

Yes. Thanks for these 3 questions. So for sales revenue, for 2023, I have to say I wouldn't feel comfortable to give any guidance here. It's a bit too early. It's -- as I said, we would expect that the normalization on the order intake side should be basically completed or probably more or less completed by the end of this year. And then, of course, depending on exactly the level that we will see there, we will end the projection for 2023. We will see what would be the growth expectation that we think is reasonable for 2023. And you are saying, well, that could be lower than in 2022. Well, yes, I definitely would not exclude that, given the growth rate that we have seen in 2020, 2021, now in 2022. And given the fact that in 2023, the corona-related business will be maybe even smaller than this year.

So -- but I feel not comfortable to give any quantitative guidance here, particularly, as you say, there are these underlying strong trends. I was partially talking about them earlier. You were highlighting in your second question, the biosimilars. We wouldn't say that the buildup of manufacturing lines here at the moment is dominating our core business growth at the moment. Therefore, I wouldn't particularly expect any tailing off coming from that end in 2023. But of course, it's part of the overall equation. And I think in these times, with so many moving parts, I think it really does make sense to give a guidance for next year only at the beginning of next year.

For China, I -- as you say, I think we had this one bullet point on the chart that -- and Rainer was commenting on that. We haven't seen much of an impact from the lockdown in China in the first half of the year. It was not really that relevant, and we believe that we should fully catch up by the end of the year. China definitely is completely on track to become the largest market in this sector, simply because of the size of their population and the fact that they are heavily investing since a couple of years in this sector at all ends. And I believe they are still in a rather early phase when you compare that to other industries where China has started to invest into 10 -- partially 20 years ago already.

So I think China has a huge potential going forward, and we are very well positioned, I believe, given our brand name and our customer base in China as well as our evolving manufacturing footprint, the size of our team that we have, the footprint that we have with our sites in Beijing and Shanghai and then we are further evolving. I think the only, yes, open question here is, and I tipped on that before is what about geopolitical tensions here. We have seen kind of trade war in the semiconductor field between the U.S. and China. And another question is, will that play a role also in the biopharmaceutical sector. We have seen some things that could have been early measures in that direction a couple of months ago. Now we are seeing a little bit an easing of the situation again, which, of course, would be to the benefit of everybody in the end of the day.

Also given the fact that I think in the end, they will have patience if innovation is happening on a global scale on -- through global corporation as well as building up all the infrastructure as well. So -- but again, China, huge potential and then with a question mark behind the geopolitical situation.

[Operator]

Next question is from the line of Oliver Reinberg from Kepler Cheuvreux.

[Oliver Reinberg, analyst]

Three if I may. The first one would be on capacity ramp-up and supply chain. So when I look at the BPS sales in the second quarter was, I think, 1% above the Q1 level where you obviously have a huge order book. So can you just talk about your ability to increase sales sequentially going forward from an availability of capacity perspective and also in terms of what kind of supply chain issues you're facing?

And secondly, in terms of the guidance on a divisional basis. Your LPS guide now looks quite conservative. You're tracking above it already where the second half comps are probably easier. I'm just trying to understand what is behind it. I guess there's a bit of cyclicality, but bioanalytics is booming. So is there anything we should be aware of? And also, is it a fair assumption that for BPS, we should rather expect the low end of the guidance?

And then the third question, please, just on lead times. So obviously, more capacity went on stream in the industry of order. So to what extent have lead times normalized by now? Is it now lesser concerns by clients? I guess, I try to get an understanding how clean the kind of level of orders is [ all lead by ] now.

[Joachim Kreuzburg, executive]

Yes. Thanks for these 3 questions. So capacity is absolutely a factor exactly as you mentioned. We have been executing quite a number of capacity expansion projects across the board already since a while, particularly in BPS. That is why we think we should have sufficient capacity available to fully achieve our guidance next year -- for this year, sorry, so for the next half year. The supply chain remains to be constrained for sure. And this is particularly for electronics, for sure, not that relevant as for the car industry, but still also relevant for us and then also around plastic raw material plastic parts. So far, we have been able to keep that well under control, but it's really a constant challenge that we and everybody else is facing.

So -- but however, bottom line is if we exclude the very general uncertainty that we were talking about earlier in this call around energy shortage, we believe that we should have both sufficient capacity available as well as a capable supply chain to achieve our guidance. And that would mean that I would definitely not say that in such a scenario, you should expect the lower end of our guidance. As I said earlier, normally, we would narrow the bandwidth around the mid of the year. We wouldn't feel comfortable doing so this year because of the uncertainties. And this is, again, what we are just talking about. We think we are in a good position to execute on this. But of course, there are these uncertainties.

For LPS, it's a bit the same. I fully understand your perspective that you would say, well, you have great momentum, why are you not increasing your guidance? Well, first of all, I mean, Q3 typically is a rather weaker quarter. Q4 should be a strong quarter. So therefore, that is something that one should keep in mind. So we wouldn't talk about huge numbers here anyway. And we, again, wouldn't think that this is a point in time to raise guidance for LPS, again, given the uncertainties. If we would exclude the uncertainties, I definitely would say, yes, we are on a very healthy track here.

Lead times. They have normalized across the industry, which is, I think, like the base for our customers to normalize their ordering behavior again. That's for sure. I think that has started already in the later part of 2021 and has continued to be the case. So it's indeed a less of a concern of our customers. Now I have to say, I think that our teams are doing a great job here. We have got very positive feedback by our customers about our performance here even in these very volatile times. Recently, and this is, for sure, also the case in our -- so lead times are not really a big issue, still something that can be improved further, now a bit influenced by supply chain restrictions, but by and large, not a big problem.

[Operator]

Next question is from the line of Delphine Le Louet from Societe Generale.

[Delphine Le Louet, analyst]

One quick follow-up, please. Regarding the gross pattern on the regional basis, U.S. versus or North America versus Europe, we've been seeing quite a spread now going on since some quarters. Is it structural change as we may think going forward? Can you let us know about that? Or is it due to a change in the COVID pattern or corona-related revenue? Other question regarding this regional specific situation. Can you detail more the pricing and the inflationary pressure that you pass on the customer more specifically on the region by region, please?

[Joachim Kreuzburg, executive]

Yes. So growth pattern North America, Europe. So when you see the geographical distribution of our sales revenues, then I would say a distribution that would mirror the size of the respective markets would rather be the other way around than the numbers that we show. So when talking about Sartorius Stedim Biotech, for example, it's 34% Americas, 40% EMEA and for the group, it would be 35 -- 39, I think. So in other words, there is, for sure, more room for us to grow stronger than in Europe, in the Americas than the other way around. And that pretty much always has been the pattern over the last years with healthy growth rates in Europe, but yet higher growth rates in both the Americas as well as Asia Pacific.

Now for the more near-term past, it has been the other way around exactly for what you said because of the over importunate manufacturing footprint for corona vaccines in Europe, which is just in line with the anyhow very substantial portion that Europe has in vaccine manufacturing overall. So therefore, I would say what we are seeing here at the moment is very normal, very much in line with what we would like to achieve. When we look back a little bit longer than we were sometimes reporting here in our calls, also on our particular measures to further broaden our sales and marketing footprint in the U.S. and how we were executing on that. So we are still working on gaining further market shares in Americas to get close to the market shares that we have in Europe already.

On pricing, you are asking if I got that right, for a geographical breakdown of our pricing activities. There is pretty much no difference from a geographical perspective, given the fact that we are pretty much implementing price increases rather on product group basis because these different product groups are because of the different components and raw materials that are involved in the manufacturing and assembly are impacted to different degrees. And that is also our dialogue with our customers is that we are quite transparent on saying, okay, look, this is what we are facing with on a product group basis. And therefore, we have to discuss this. But on a geographical basis, that doesn't make much of a difference.

[Operator]

Next question is from the line of Odysseas Manesiotis from Berenberg.

[Odysseas Manesiotis, analyst]

So first one on your labor first. You hired quite a few new employees in the last 12 months, about 40 people. So wanted to get a feeling of how this will affect your cost lines. Basically, what portion of these around 40 employees you hired this year are in sales? And how much time on average does a sales person in these positions take to start generating profit?

[Joachim Kreuzburg, executive]

Yes. So absolutely right. We have been hiring a substantial number of additional employees pretty much particularly since mid of last year after most lockdowns have been lifted. And we were able to hire people, particularly also outside manufacturing functions or outside direct labor. And you're absolutely right by highlighting the sales function because given the much higher sales levels on which we are operating by now, this was really necessary to do so. So we have added during the first 6 months of this year, for instance, on a global scale in marketing and sales as we look on it, around 400 people globally.

Of course, if we would look back now, again, another half year, so starting back mid of last year, then maybe the total would be close to 800. And it usually takes something like 6 months. But as you were asking for, I think, fully productive, then you would say maybe even 2 years, yes? So between 6 months and 24 months, you will for sure still see quite a significant further ramp-up of, yes, performance and productivity of a salesperson. But after 6 months, for sure, these sales people are already very productive and generate additional business and help their colleagues because we are running a very focused, tailor-made onboarding program so that these people are able to be productive very soon. And of course, we anyhow also hire, not just rookies, but very often experienced people from the industry.

[Odysseas Manesiotis, analyst]

Very interesting. And a quick follow-up. So I mean, looking at your Americas growth, which was relatively stronger than your other regions this half. Is this more of a product of your Americas sales expansion that you've been communicating lately or so market share gains or more of a broader market strength in the region?

[Joachim Kreuzburg, executive]

Yes. I mean, market share gains, I first would like to see the numbers from competition when -- before I would comment that on the 6-month basis. But in general, what you could say is that we are continuing to gain market share in the Americas. And that, of course, is very much based on and backed by the investments that we are making into our sales organization. They're into our marketing organization there, et cetera. So again, if we forget the 6 months now, maybe for a minute because then [ you all -- some crazy ] factors are the effects playing along the year, then we definitely are getting market share in the U.S.

[Operator]

Next question is from the line of Markus Gola from Stifel.

[Markus Gola, analyst]

So my first one is a follow-up on the energy supply situation. Assuming you need to switch from gas to oil, how meaningful would be the disruption for your operations from the switch? And could this actually affect your rating in a meaningful way? And then maybe related to this, could you provide us with a ballpark percentage figure of your production output, which is located in Germany? And then lastly, on the Omicron adapted vaccine. Is this something where you expect the majority of sales will be generated this year? Or is it reasonable to expect a major spillover effect into '23?

[Joachim Kreuzburg, executive]

Yes. So energy, I mean, of course, usually nobody would switch from natural gas to oil for sure. So everything that we have been doing here so far and probably will continue to do and also then probably have to activate depending on the developments is simply to keep the manufacturing and all other operations up and running, particularly in Germany. So therefore, I also think that this switch would be only a temporary one. So that I would not imagine that there is any impact on our general ESG rating or anything like that because, I mean, this is an extraordinary situation that requires extraordinary answers. And I think, as I said before, 10% of our -- of the overall CO2 equivalent footprint of us is related to our own activities.

And so on this 10%, maybe we have some mid-percentage points being located in Germany, maybe even a little bit less, but let's say, a mid-percentage point, so let's say 5% just for the ease of calculation. And let's assume that by switching to oil, this would be increased by 20%. And by the way, that would be full year's basis. So 20% or 5% would be 1 percentage point of the total and then maybe for a limited period in time only. So that would be my rough guess at this point. Therefore, I wouldn't expect any impact there.

On footprint, manufacturing output would be maybe a misleading figure here. And also one, but we are not communicating publicly. And even it's not a perspective of how we exactly look on it when we run our internal reporting and controlling activities. But of course, we have a clear view on energy consumption, particularly as we were now talking about all those activities, how to mitigate the risk everybody has been facing at the moment. And here, it is the case that one could say, as I just already said, some number in the max 50%, you would say, of our energy heavy production is in Germany. And the reason for that is that the majority of our membrane production is located in Germany, and that is the most energy-intense manufacturing of everything that we are doing. All the rest is relatively energy extended maybe even.

And your last question was on whether we expect no corona business in 2023. Did I get that right?

[Markus Gola, analyst]

No. So it's maybe on -- basically on the Omicron adapted vaccine, whether you expect that sales related to business will be generated to this year or rather next year?

[Joachim Kreuzburg, executive]

Yes, yes. That is -- okay. But that's a good question, hard for me to answer. I think we all know that initially, the main manufacturers for the corona vaccine so far have been first announcing to launch a Omicron specific variant of their vaccine by March or April. It has been postponed to September. The first results from clinical trials that have been like pre-published look promising. But yet, we still have to wait until the point in time when these products will be approved or maybe not approved, we should -- and the reason here is not that anybody should expect that those products, those new vaccines are not effective, but they now will get an approval only if they are substantially more effective than the existing ones, whereas the existing ones have been first-time vaccines, so they got their approval like right away because there was no benchmark.

So therefore, this is a question that I can't answer at this point in time. It's hard to say whether it will be manufacturing of existing vaccines that will be the base for the next vaccination round that it has already started now, I think, in these weeks and will probably peak around autumn or whether it will be a new version. And then how exactly that will look like going forward, it's really difficult to say. It's -- sorry, I think for all of us, it's the first pandemic, and I wouldn't like to make any projections for 2023 at this point.

[Operator]

Next question is from the line of Falko Friedrichs from Deutsche Bank.

[Falko Friedrichs, analyst]

I have 3 quick ones, please. Firstly, on M&A. On one of the last calls, you mentioned that you have about EUR 10 billion firepower at your availability. Is that amount still valid and what we should think about? Then secondly, on the composition of the very strong order intake in the LPS business. Outside of the bioanalytics business, is there still some pent-up demand for the other product categories that was fueling this order intake in the first half? And then thirdly, on the energy topic, could you remind us how much of your exposure to gas and oil is hedged just in case the prices go up even further?

[Joachim Kreuzburg, executive]

Yes. For M&A, the number -- this ballpark number is still pretty much valid. Of course, it depends to some extent on the share price for both Sartorius shares as well as Sartorius Stedim Biotech shares. So therefore, this is a number that is not like carved in stone, but it's still pretty much the correct ballpark figure. For order intake, LPS, I'm not sure whether I got it right. So clearly, the segment that is standing out is the bioa segment from a product perspective. From a geographical standpoint, we are satisfied pretty much with the performance in all geographies. I think Rainer was talking about that earlier. U.S. stands odd a bit here. Here, we have a very strong bioa business as well as then also a lot of headroom to further improve and increase our market share. And I think we are on a good track there.

We would say if we exclude lockdown situations -- and again, I think we were navigating through this lockdown situation in China also quite well. China still offers a lot of growth potential, and we see that also in our numbers. Therefore, Asia is doing well. But we are also doing well in Europe. Here, of course, Russia has played a role. I think Rainer said that. But all other product segments are developing pretty much in line with our expectation, but I wouldn't mention anyone specifically, except for bioa as said before.

And then on hedging for gas and oil, yes, we have hedged our gas supply and the pricing for that. However, I'm sure you are aware of the fact that the new laws and regulations around that will maybe make this hedging ineffective because as you know, the trading companies will have to accept and already have to accept much higher sourcing prices for gas. And there might be a point in time where not just the government pays the difference, but maybe they will be allowed to [ attract ] contracts or [ whatever is fine ]. I'm not so 100% sure whether this hedging that we have for several years will remain effective going forward.

Again, that is not a Sartorius specific statement. That is a very general statement. And we don't have any hedging for oil because we started to enable us to switch to oil, yes, a few months ago, as you would imagine. And that was already in a situation where nobody would give you any hedge for oil.

[Operator]

Next question is from the line of Daniel Wendorff from ODDO BHF.

[Daniel Wendorff, analyst]

Three if I may. The first one is on the bioanalytics performance again in Q2. Can you maybe talk about whether there was some sort of catch-up effect in there? Or is that really truly underlying demand? And maybe looking at customer classes here, is it rather driven still by academic institutions or meanwhile professional clients? Second question would be on the business mix in BPS according to different sizes of customers. Can you maybe talk a bit about the percentage of revenues roughly you generate with really big biopharmaceutical customers versus midsized versus small customers? That would be helpful. And my last question would be on the new modalities and servicing new modalities. How important is this in your BPS portfolio, meanwhile, as a percentage of sales growth driver, et cetera?

[Joachim Kreuzburg, executive]

Yes. Thank you very much for these indeed very interesting questions. However, let me make the comment that I would only be able to answer one more set of questions afterwards for timing reasons. But again, happy to answer these 3 questions and also then one set more. So bioa Q2, no catch-up effect indeed. It's an underlying growth and an underlying demand that we see here. I tried to explain that a little bit before. We see very strong demand for such tools that help accelerating time lines, reducing basically costs reduced, and at the same time, improving the quality of the research that has been done around cell analytics, most what we are doing in cell analytics.

And I mentioned one product because I think it's one that is, a, very relevant, but at the same time, also maybe one can imagine very well, that is life cell imaging. So you can observe the influence that any potential drug candidate has on a cell, for example, the cancer cell life in an incubator. So you get very relevant results. You can store them digitally. You can run digital analysis on it. So it really makes a difference for our customers, and that drives the demand. It's a healthy segment within the industry and the research sector, for sure. And then for this very healthy, very relevant segment, we are offering a very relevant differentiating tool. And that pretty much holds true also for the other tools that we are offering in this space.

You are also asking for a research versus business. Of course, this is a tool that is relevant for researchers in academia, et cetera, but we have a very healthy growing installed base in the industry as well because for drug development, and that is then done in the industry by professional players. These are very, very helpful tools as well. So therefore, it definitely already has made inroads into the industry since a while.

We wouldn't give a percentage breakdown of the revenue in BPS between big, mid-sized and small scale customers. But clearly, a very significant -- the most significant part of sales revenue that we are making in BPS is with rather larger players, as you would imagine. So the key accounts that we are having and then also larger accounts that yet are not key accounts, but still very relevant accounts for us, make up really for the most relevant part of our sales revenue. But then, of course, we do also see a healthy state of mid-scale and smaller scale customers.

And we are highly interested also to serve those even smaller scale customers because even though maybe some of them won't grow significantly by themselves, they will probably sell the product that they have developed or licensed that out to larger players. And then very often, those larger players will use exactly the technology that has been used when developing manufacturing processes for those products. But the composition is pretty much, as you would expect, given the dominating influence also for the manufacturing phase for drugs. And that, of course, is largely run by larger players, including CDMOs.

New modalities was your third and last question, and that is indeed playing an increasing role. We have a sales and marketing group that is focusing on those. We call it advanced therapies in the group that is working cross-divisionally because very often, those players are in need for products of both divisions in a slightly different way than other players would, which has to do with some different manufacturing processes that we see being developed by those players. This business is nicely growing, becoming more and more relevant. And we believe it's moving somewhere towards the 10% mark of our sales revenue within these days.

[Operator]

Next question is from the line of [indiscernible] from HSBC.

[Unknown Analyst]

I'm going to have to reduce it to one. So I'd like to ask about potential structural changes that you're planning to do within your structure, such as, for example, the current structure where management is paid by Sartorius but charge back to Sartorius Stedim. Can you please give a color on your plans? Because I believe you are planning some changes. So any outlooks, guidance on that would be very helpful.

[Joachim Kreuzburg, executive]

Yes. Well, I think we have explained that in our annual report that we have made sure that the payment of the top management, even those people like myself that are having executive roles for both Sartorius as well as Sartorius Stedim Biotech have distinct portions of their salaries being paid by either Sartorius Stedim Biotech or Sartorius. So there basically, we have stopped this reach charging setup that was criticized by some proxy advisers and made this change to, yes, basically, we have to be separate accounting for the salary. So -- and I think we described that in more detail in our annual report.

[Unknown Analyst]

Yes. Any -- in terms of the timelines or any further changes that you are planning? Or of course, it's of course fine to say that you're not paying any further changes?

[Joachim Kreuzburg, executive]

No, indeed, I think we don't plan any further changes here. I think when you see our compensation report, then you see that we have added some components to the variable compensation in the sense of, a, adding our carbon dioxide footprint or more precisely, our carbon dioxide emission intensity KPI to our midterm compensation package. And on the annual compensation, there's one more parameter at it, and that is basically employee satisfaction. So we have made this set of parameters a bit broader and added to the financial parameters. Again, one, which is more on, you could say, social side, employee satisfaction and one that is on the environmental side, which is carbon dioxide footprint. But also this already has been -- is effective in place and at this point, no further changes planned.

[Operator]

There are no further questions at this time, and I would like to hand back to Dr. Joachim Kreuzburg for closing comments. Please go ahead.

[Joachim Kreuzburg, executive]

Yes. I would like to just thank you all for your interest in Sartorius and the number and bandwidth of questions. I really have to say I appreciate that because I'm really happy that all of you are following Sartorius and Sartorius Stedim Biotech so closely. And yes, stay tuned. We will publish our Q3 figures and 9-month figures in 3 months from now. And then I hope to talk to all of you again. Bye-bye. Take care, stay safe and enjoy the summer. Bye-bye.

[Rainer Lehmann, executive]

Bye-bye.

[Operator]

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