Tecan Group AG

SIX:TECN

Earnings Call Analysis

Tecan Reports Solid H1 2023 Despite Challenges

Tecan experienced a 6.8% sales growth in local currencies, excluding lower COVID-related revenue and reduced material cost pass-through. First-half sales totaled CHF 541.5 million, but there was a 3.6% local currency decrease compared to 2022, driven by higher COVID-related sales the previous year. Profits reached CHF 65 million with a CHF 5.16 earnings per share, while adjusted EBITDA was CHF 101.2 million at an 18.7% margin. The Life Sciences Business segment achieved its highest-ever order entry, but the Partnering Business segment saw a minor decline. Net liquidity improved to CHF 857 million from CHF 818 million, and operating cash flow increased by 17.3% to CHF 82.5 million. Forecasting low to mid-single-digit percentage sales growth in local currencies, underlying sales are expected to grow in the high single-digits.

Navigating Headwinds: Tecan's Performance Amid Market Dynamics

Tecan has demonstrated resilience amid economic turbulence, charting a solid underlying sales growth of 6.8% in local currencies. This growth has been achieved by discounting lower revenues from COVID-related demand and reduced pass-through of material costs. Despite a headwind caused by the exceptional COVID-related sales last year, Tecan posted a half-year revenue of CHF 541.5 million, which was a 3.6% decrease on a local currency basis. Strategy adaptation to the market's dynamic nature, marked by longer decision cycles and careful customer expenditure, has reflected a cautious optimism on the part of Tecan's team. With a respectable adjusted earnings per share of CHF 5.16 and an adjusted EBITDA margin of 18.7%, the company expresses confidence in the full year, maintaining its 2023 outlook.

Strategic Expansion: Tecan's Foray into Emerging Markets and Technologies

In a proactive response to evolving market trends, Tecan has enhanced its laboratory automation offerings to tap into growth markets such as liquid biopsy and automated genomics. By nurturing partnerships in these burgeoning fields, particularly in next-generation sequencing, Tecan is set to cater to unique workflow needs and capitalize on opportunities. The establishment of new facilities, including a Shanghai-based assembly plant, signifies Tecan's commitment to the Chinese market. All these steps pivot towards sustaining its business momentum in China and other key markets.

Order Dynamics: Shifting Patterns in Tecan's Sales and Orders

Tecan's order entry reflected a 10.6% year-on-year decline, settling at CHF 536.6 million. This shift, largely attributed to the normalization of supply chains and last year's substantial preorders, has adjusted order patterns back to a book-to-bill ratio close to unity. Despite the deescalation of COVID-triggered demands and material cost throughput, the underlying sales impetus, when excluded from these factors, actually grew by 6.8% in local currency, hinting at sustained core business growth.

Sector Performance: Divergent Trajectories within Life Sciences and Partnering Business

Tecan's Life Sciences Business segment experienced a downturn in sales by 7.3% in local currencies. Deducting the influence of diminished COVID-related sales, the segment saw a life science research and diagnostics stimulated increase in underlying sales of 5.1%. On the other hand, the Partnering Business segment's sales dipped by 0.7% in local currency terms. However, once configured for lesser COVID-related sales and material cost pass-through, a robust growth of 8.2% in local currency emerged – an upshot of strong demand in key life science applications and products.

Operational Efficiency and EBITDA Performance: A Numerical Look

Adjusted EBITDA was impacted, falling 15% to CHF 101.2 million, with the adjusted EBITDA margin at 18.7% against the previous year's 20.8%. Adjusted net profit also slid to CHF 65.8 million, translating to an earnings per share forecast in the CHF 5 to CHF 6 range. These figures reflect the ongoing adjustments in operations and margin pressures.

Prospects and Projections: What Lies Ahead for Tecan in 2023

For Tecan, 2023 is a year of rebalancing, with the forecast pinned on sales growth ranging from low to mid-single-digit percentage in local currencies. The effects of decreased COVID-related sales and less material cost pass-through, which primarily influenced the first half of the year, have been factored into this outlook. Tecan maintains its focus on innovation, with product releases like the Phase Separator which promises heightened efficiency for liquid biopsy processes and more. Unfazed, Tecan looks ahead, banking on its strategic moves, collaborative efforts, and product innovations to drive sustainable growth in the coming months.

Regional Sales Breakdown: Tecan's Performance Across Key Markets

Sales trajectories in different regions present mixed fortunes. Europe faced a substantial, comparative COVID-related base, leading to an 18% decrease in sales, with North America voluntarily posting modest growth from a similarly high base. Asia's sales contraction was attributable to a considerable comparative base, particularly in Japan. Notably, Switzerland emerged as Tecan's largest market, followed by the United States and China, attesting to the company's focused strategic efforts in these territories.

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the half year analyst and media conference call and live webcast. I'm Morris, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Martin Brändle, Senior Vice President, Corporate Communications and Investor Relations. Please go ahead, sir.

[Martin Brandle]

Thank you, and good morning, everyone. Thanks for joining us for our conference call this morning. We are very pleased to discuss with you the results for the first half year 2023. With me on the call are our Chief Executive Officer; Dr. Achim von Leoprechting; and our Chief Financial Officer, Tania Micki.

Before we start, as always, very briefly, some formalities. Corresponding press release announcing our financial results was issued this morning at 6:00 Central European summertime. Both this press release as well as the full 2023 interim report are available on the company website, tecan.com, under the Investor Relations tab. The call is being webcast over the Internet on our homepage, and we have also posted the PDF of the presentation slides that we will discuss on this call for download.

With that, let me now turn the call over to Achim von Leoprechting.

[Achim von Leoprechting, Chief Executive Officer]

Thank you very much, Martin, and good morning, and welcome to the Tecan 2023 Half Year Results Presentation. Before Tania will discuss the financial results of the first half of 2023 in detail, I will give you an overview of the financial and operational highlights.

Our results show solid underlying sales growth of 6.8% in local currencies excluding the impact of lower COVID-related revenue and reduced material cost pass-through. Sales in the first half of 2023 totaled CHF 541.5 million, which is a decrease over the same period last year of 3.6% in local currencies and reflects the higher basis of comparison due to the COVID-related sales last year.

In a very dynamic market environment, we've seen longer sales purchase decisions and cautious investment behavior among many customers and our teams have done an outstanding job of materializing the opportunities that arose. We can report a half year profit of CHF 65 million, resulting in an adjusted earnings per share of CHF 5.16. Adjusted EBITDA reached CHF 101.2 million with an adjusted EBITDA margin of 18.7%. Overall, I am pleased with our performance in the first half of 2023. And I'd like to acknowledge the support of our valued partners and thank our teams around the world for their dedication and they've done a remarkable job.

Underlying sales growth is steady, and we are cautiously optimistic for the second half of the year, and we can confirm the full year outlook previously given for 2023.

Now looking at some of the operating highlights of the first half of the year. We have expanded our core offering in laboratory automation in key growth markets including in the rapidly developing field of liquid biopsy, and I will tell you more about this later in this call.

We've also broadened our automated genomics portfolio and our reagents offering and developed unique solutions to meet workflow needs that were previously unaddressed. We're expanding our life sciences partnerships, especially in the growing field of next-generation sequencing. As an example, in addition to existing partnerships in the short-read sequencing space, we now build an alliance with Oxford Nanopore for their specific long-read sequencing library preparation needs.

We've also developed several new partnerships and supported various customers with product launches in the Partnering Business. This includes customized OEM systems, OEM components as well as contract development and manufacturing services. These new customers are working in growth areas and key applications in life science research, diagnostics and the medical market, and they have a rich project pipeline for new development and manufacturing projects.

We've continued to scale Tecan's global production and operational footprint in the first half of 2023. Series production of our Cavro components is now fully attached in our facilities at Morgan Hill and Penang, Malaysia, which expands the production capacity for these OEM components and makes it possible to meet the anticipated increase in demand for these products in the future.

Tecan has also opened a new assembly facility in the Shanghai Free Trade Zone, which fulfills local manufacturing requirements for goods destined for the Chinese market and offers new opportunities to advance Tecan's business in China. This new set-up will allow us to serve local customers in China even better and meet their specific needs. In the first half of the year, manufacturer of liquid handling and detection products was fully underway in this facility.

Local production also has the advantage of aligning with our efforts to reduce greenhouse gas emissions, which we've committed to do in line with climate science. Tecan's science-based emissions reduction target was submitted to the science-based targets initiative for validation in the first half of 2023 and we'll give you more detail around this in our annual report and on the sustainability page at tecan.com.

Our focus on sustainability is pragmatic, building initiatives into our ongoing activities to ensure consistent results. We have achieved ISO14001 certification of our headquarters in Männedorf this year, following an independent audit of our environmental management system. We already had this certification for our Penang facility and we continue to work to leverage best practices at our sites around the world. Now with this, let me hand over to Tania for a closer look at the half-year financial results, and then I will say more about our key product launches and the outlook for the rest of '23. Tania?

[Tania Micki, Chief Financial Officer]

Thank you, Achim. Good morning, ladies and gentlemen, from my side as well. I'm happy to be with you today to present our financial results for the first half of 2023 in more detail. So let's start with order entry and sales. Order entry reached CHF 536.6 million.

This was a decline of 10.6% year-on-year or 7.1% in local currency. Keep in mind, though, that in the first half of 2022, we recorded a substantial order entry. First, COVID-related orders still contributed significantly and in addition, higher inventories, for example, of OEM components were created by customers due to disrupted supply chain. As supply chains largely normalized in the first half of this year, customers no longer needed to place orders as far in advance as they did in the prior year period. As a result, the book-to-bill ratio also returned to normal at a level of around 1.

With CHF 541.5 million, reported sales decreased by 7.3% in Swiss francs and 3.6% in local currencies. In the chart, you can see the bridge. Adjusting for the foreign exchange rates, sales in H1 '22 were at CHF 561.8 million when compared in local currency. As we spelled out in the past, we still booked COVID-related sales of around CHF 50 million in the first half of last year or FX adjusted an amount of CHF 48 million. We also communicated that our sales last year benefited from passing through the substantially higher material cost to customers [indiscernible].

As we expected, and also included in our guidance for this year, this pass-through revenue decreased substantially as supply chains have started to normalize again. The net effect of this kind of revenues in the 2 half years 2022 and 2023 was CHF 7 million. That brought us to the jump-off basis for our underlying sales of CHF 506.6 million. Excluding these 2 effects, our underlying sales increased by 6.8% in local currency. Let's now look at the sales performance of our two business segments.

Sales in the Life Sciences Business segment reached CHF 228.6 million, a decrease of 11.8% in Swiss francs or 7.3% in local currencies compared to the first half of 2022. On the upper left, you can see a similar chart as discussed on the previous slide for the Life Sciences Business segment.

As it is our end-user business, we generate our revenues in the different regions in the respective local currencies Therefore, the FX impact is higher compared to the Partnering Business. Also, the majority of COVID-related revenues in H1 '22 were in this segment, we estimate CHF 29 million in local currencies or 6% of total COVID-related sales. Pass-through revenues were only affecting the Partnering Business and are not related to this segment.

Excluding the impact of lower COVID-related sales, underlying sales increased by 5.1% in local currency. This was driven by good growth in the service business due to the higher installed base of instruments.

As a result, recurring sales of service, consumables and reagents increased to 51.5% of segment sales compared to 50.9% in H1 '22. Overall, we can say that underlying demand for life science research and diagnostic solutions remain solid in many application areas despite ongoing global economic uncertainties and more cautious spending patterns overall. In addition, the good demand for existing products such as DreamPrep NGS, newly launched products for growth areas have already enjoyed strong interest in the market. Achim has already touched upon those and will provide more details later. With order entry at the same level as sales, the book-to-bill ratio reached 1.

Including COVID-related orders, the Life Sciences Business segment recorded its highest ever order entry in the first half year. Moving now to the Partnering Business segment. This generated sales of CHF 312.9 million, which corresponds to a decrease of 3.7% in Swiss francs or 0.7% in local currency. Going through the same bridge, adjusting for the FX impact and taking into consideration the impact of lower COVID-related sales and the lower pass-through of material costs, underlying sales increased by 8.2% in local currency.

The main driver behind this robust underlying growth was Paramit. Here, we reported strong double-digit growth, which was supported by the fulfillment and subsequent revenue recognition of the high order backlog from 2022 and some pent-up demand for medical products. By contrast, sales of Cavro OEM components declined substantially as these products have experienced a significant surge in demand in the prior year period. This was related to efforts on our customer side to mitigate disruption in the supply chain and in the run-up to the transfer production to the 2 Paramit manufacturing sites.

As mentioned before, customers no longer needed to place orders as far in advance in the first half of this year.

Underlying demand in the Partnering Business remained solid and as order entry was only marginally lower than sales, the book-to-bill ratio was close to 1. Now let's look at sales development in the different regions on Slide 9. Before discussing the details, I just want to remind you that this regional fleet and the respective developments are based on the location of our customers. That means it does not necessarily reflect the regions where our products might end up.

This is important as the Partnering Business now has a larger share of revenues and in an OEM business, we might ship to a central warehouse of a partner, for example, in Europe, and therefore, book revenues in Europe despite these products being distributed globally, thereafter by our partner.

In the Life Sciences Business, on the other hand, the location of the customer coincides with the place where the products are used. Now starting with Europe. In Europe, our sales in the first 6 months of 2023 were still characterized by a COVID-related high comparative base from the prior year period and develop accordingly with minus 18% in Swiss francs and minus 15.1% in local currency. Against this high comparative basis, sales in the Life Sciences Business were 20.1% lower than the previous year in local currency. And in the Partnering Business, they declined by 11% in local currency.

In North America, sales grew by 3.5% in Swiss francs and by 6.9% in local currencies. Despite the high COVID-related basis of comparison and more cautious spending behavior, sales in the Life Sciences Business segment declined by only 1.8% in local currency. The Partnering Business segment, on the other hand, reported a 13.2% increase in sales in local currencies, driven by the strong sales growth at Paramit, which more than offset COVID-related sales in other product categories from the first half of 2022.

In Asia, sales decreased by 16.4% in Swiss francs and 10.4% in local currencies against a high COVID-effect comparative base, particularly in Japan. Due to the high basis of comparison, sales of the Partnering Business segment decreased by 26.7% in local currency. Life Sciences Business segment, on the other hand, recorded a 9.6% increase in sales local currencies with sales in China growing at the same rate as the Life Sciences Business in the Asia region as a whole. In China, we also saw that some of our customers were benefiting from the loan program that was in place, which supported our good solid growth in the Life Sciences Business. Keep in mind, though, that this was only a temporary program and has ended.

We also believe that some of these investments did not come on top of the regular project, that means we believe some of it was more of a pull-forward effect. Our next slide addresses our gross profit. Gross profit reached CHF 204.6 million, which was CHF 28.3 million below the prior year figure, given net revenues were CHF 42.5 million lower.

The reported gross profit margin was at [indiscernible] of sales, and the main effects explaining difference of 210 basis points in the margin where the volume effect with the corresponding negative economies of scale, the mix effect, including the effects from the strong growth at Paramit. Compared To H1 '22, more of the integration cost has to be booked in the cost of goods sold versus OpEx and that impact of around 40 basis points.

On the positive side, we were able to increase prices. And as mentioned before, we reported less pass-through revenues result and margin. On the next slide, some comments regarding our cost structure. Overall, our operating expenses developed in line with revenues and were at CHF 143.1 million or 26.4% of sales. Looking at sales and marketing.

Here, costs decreased slightly more than revenues, which is mainly reflecting the lower volumes as this also meant lower revenue-based compensation and net freight costs. Research and development expenses stayed constant in absolute terms, as we continued our investments in innovation. As a percentage of sales, R&D increased to 7.1% of sales. Overall, R&D activities and gross expenses, what we call gross R&D, were CHF 9.5 million higher compared to the prior year period. In absolute terms, gross R&D was at CHF 38.5 million or 8.9% of organic sales.

In addition to customer funding of OEM projects, this also includes capitalization of development costs. Amortization of previously capitalized development cost was about CHF 2.4 million higher than what we newly capitalized in the first half of the year. General and administration expenses decreased more than revenues, keeping in mind that H1 '22 included same one-off cost. Looking now at the EBITDA development in more detail. Our adjusted EBITDA, the earnings before interest, taxes, depreciation and amortization, decreased by 15% to CHF 101.2 million.

The adjusted EBIT margin amounted to 18.7% of sales. [indiscernible] obviously the lower sales volume, the product mix impact that I have already mentioned on the negative side. And on the positive side, we saw the higher prices and efficiency gains that we always strive for. Now looking at the operating profitability on a segment level. Report EBIT in the Life Sciences Business, that's earnings before interest and taxes, reached CHF 40.3 million.

Operating profit margin amounted to 17.2% of sales and also here, obviously mainly due to the lower sales volume in the first half of the year. Also, price increases were a positive factor here. And I also want to point out that in the Life Sciences Business, we were able to increase our gross profit margin by more than 100 basis points. Reported EBIT in the Partnering Business amounted to CHF 30.8 million, while the operating profit margin reached 9.8% of sales. Keep in mind that the integration costs and amortization of acquired intangible assets in connection with the acquisition of Paramit were recognized for the group in the Partnering Business segment.

And here with an increase of integration costs to CHF 5 million versus CHF 3.3 million in H1 '22. Other factors that negatively impacted the segment margin were also here the lower sales volume with the corresponding negative economies of sale and as mentioned before, a more negative product mix. On the positive side, we also saw price increases in the Partnering Business as they contractually kicked in at the beginning of this year for our Synergence instrument business. Now let's move on to the net profit on the next slide.

Adjusted net profit amounted to CHF 65.8 million, CHF 14.8 million below H1 '22.

Looking at the main factors, adjusted EBIT was already down by CHF 20 million. Positive effects came from the financial results and a lower tax rate, which decreased to 51 -- 15.1% compared to 16.4% in the prior year period. The multiyear overview, you can see the very positive development in net profit with the COVID [indiscernible]. Let's now move on to earnings per share on the next slide very quickly. Earnings per share decreased only slightly more than adjusted net profit due to a small increase in the share count.

The number of shares outstanding was at 12.8 million on June of this year compared to 12.7 million last year. Also here, you can see positive development over the last years. We continue with the cash flow on Slide 16 and the positive development after a period that was affected by supply chain disruptions and higher inventories to ensure our delivery capability.

Cash flow from operating activities increased by 17.3% to CHF 82.5 million. As mentioned in the prior period, we have increased our inventories and safety stocks.

These inventories have now been increasingly reduced again, and I expect further reduction by the end of the fiscal year. Also, our DSO, the Days Sales Outstanding, improved to 44 days from 49 days. In addition, looking at our accounts payable, we were able to increase our -- payables outstanding from 45 days compared to 33 days in H1 '22. The cash flow from investment was at CHF 27 million. You see some of the elements on this slide.

And cash flow from financing activities. This figure includes the dividend payments we made in April 2023 and the total amount of CHF 37 million, an increase over the prior year period as the dividend was increased again. Thanks to the strong cash flow, our net liquidity position increased to CHF 61.7 million compared to the CHF 41.2 million on December 31 and CHF 3.2 million on June 30, 2022.

With this, I now hand back over to him Achim von Leoprechting, again.

[Achim von Leoprechting, Chief Executive Officer]

Thank you very much, Tania. Now I would like to share with you a few details of our key product launches that happened in the first half of 2023. We are excited about the Phase Separator, which represents a significant advance in liquid separation technology for complex samples, including whole blood. With this new offering taken as advancing automation for liquid biopsy, Noninvasive Prenatal Testing or NIPT, as well as for biobanking applications. .

The Phase Separator is a completely new way of separating biological samples, separating of target sample fractions being an essential key step in the processing of blood samples, for example. This innovative technology is unique to Tecan and it addresses the critical challenge of detecting liquid-liquid interfaces and effectively separating neighboring sample phases while avoiding the risk of contamination. By detecting liquid layers from inside the tube, the Phase Separator enables extraction that is faster and more accurate and more efficient even when working with fully labeled tubes.

The Phase Separator is a feature of the new Air Flexible Channel Arm, so it can be seamlessly integrated into our flagship liquid handling workstation, the Fluent, giving customers all the new benefits without taking up any additional bench space. We see this as a game changer for labs that have to prepare complex samples.

With the mentioned key applications in liquid biopsy, NIPT and biobanking, the Phase Separator will impact multiple disease areas, including oncology, transplantation monitoring, neurology and metabolic disorders. Its speed and reliability mean higher throughput, lower cost processing of samples, which ultimately means more affordable operations and broader access to advanced analytics for researchers and clinicians. The Phases Separator is ideal for fast-growing applications like liquid biopsy to scale workflows to meet the high demand.

We see testing volumes here growing rapidly for several of our customers, which fuels the need for more efficient and fully automated solutions. And it has broad applications beyond the next-generation sequencing, for example, for downstream analysis like PCR, digital PCR or mass spectrometry.

So when you look at the liquid biopsy workflow, this really highlights once again Tecan's capabilities and our special position to scale health care from research to the clinic with key innovations. The Phase Separator launch has met great customer interest already, both at existing and competitive accounts. And it broadens the toolbox that we have available to support customers in the Life Science Business and to leverage such new modules also into Partnering Business for projects going forward.

Another product launch in the first half of 2023 is boosting lab productivity for high-throughput workflows is the MCA 96. The MCA 96 is a pipetting arm with 96 channels for the Fluent liquid handler that offers an extremely wide range of volumes ideal for high throughput workflows.

Because of our focus on software and digital competency, the new product comes with software features that make running the applications truly intuitive and user friendly. The MCA 96 can be upgraded in the lab and can also be combined with other arms, including other MCA 96 or even MCA 384 heads to increase lab productivity even further. With this new offering, Tecan had a record product launch demand in our life science lab automation market, with demand across all our target key applications like genomics, proteomics and cell and tissue applications.

I mentioned earlier the dynamic market environment and that in some customer groups, it is taking longer to make purchase decisions. Despite this, we remain cautiously optimistic for the remainder of this year because of Tecan, especially advantageous positioning where in addition to the life science research and diagnostic markets, we also serve the medical devices market through strong OEM partnerships.

Our sales funnel, combined with our new product in the Life Sciences Business and existing and new partnerships in our Partnering Business shows promising potential. Our full year 2023 outlook includes the negative impact from lower COVID-related sales, which mainly affected the first half year and from reduced pass-through of material costs and remains unchanged from the view given in March of this year. We forecast total sales growth in the low to mid-single-digit percentage range in local currencies.

Underlying sales, which excludes the negative effects mentioned are expected to grow in the high single-digit percentage range in local currencies. Tecan also continues to expect an adjusted EBITDA margin excluding acquisition and integration-related costs at, at least around 20% of sales.

This outlook assumes lower integration costs in 2023 compared to 2022. Therefore, Tecan expects the reported EBITDA margin to increase by 20 to 30 basis points in 2023 despite ongoing inflationary pressures. And we also confirm our midterm outlook that we published in March 2023. Tecan delivered a solid financial performance in the first half of this year.

Our newly launched products and new partnerships underscore Tecan's leading role as a trusted partner for life science research, clinical diagnostics and the medical device industry.

Our innovation and development pipeline continues to add meaningful growth opportunities in both business divisions, and we're excited to see the positive customer response to those as we progress further into the second half of 2023. Having well-established business in the 3 attractive market segments is currently proving to be a source of greater resilience as each area offers distinct growth opportunities and dynamics.

Going forward, those segments each represent significant growth opportunities with synergistic channel and product potential. Tecan's product range covers the full spectrum of engineering, product and support solutions from accelerating the discovery and scale up production of novel medications to delivering personalized diagnosis, treatment and prevention of diseases. And we have a strong competitive position that is enhanced more and more by innovative digitization and software solutions.

They increasingly differentiate our products and services in terms of usability, productivity, compliance and cost of ownership. Tecan's business purpose is to scale health care innovation globally. This is what inspires our colleagues around the world to go above and beyond serving our customers and partners.

And with this, I thank you very much for your attention, and we can now open the lines for Q&A.

[Operator]

[Operator Instructions] And the first question comes from Buchta, Daniel from ZKB.

[Daniel Buchta, ZKB]

If I may, I would like to start with 3 questions. Maybe the first one on the guidance for this year. I mean if we exclude all the top line one-offs, COVID and the price parcel, you basically guide for low double-digit organic growth for the second half. I mean, what makes you so confident that you can deliver on the sequential acceleration in the second half? And then also, I mean, a little bit in the Life Sciences Business, I mean, the performance, if you exclude the COVID headwinds, was still pretty good.

And while we see, especially on the biotech side, that development activities is clearly lower and there you have, obviously, development-related activities. I mean, are there any signs that you may also see there a weakening of demand for your products? And then maybe last but not least, if you look at the regional split, I mean, the difference between Asia and Europe compared to North America is pretty significant. Is this all just related to Paramit? Or is there also something else in your old core businesses basically that is explaining this very strong growth in North America?

[Achim von Leoprechting, Chief Executive Officer]

Thank you very much, Daniel, for your questions. Probably I'll start with your question on guidance. And clearly, I mean, we are guiding for a range, low single digit to mid-single digit in local currencies. And this obviously covers a variety of outcomes and dynamics. So at the lower end of the range, we would probably need to deliver mid-single digit to high single-digit local currency growth in H2 and at the upper end in the low teens.

And this is, of course, backed up by our view on the dynamics as we exited H1 and particularly the conversations we're having on our partnering side with our partners, how they see the dynamic, and the funnel and the overall creation of opportunities in our Life Sciences division that give us quite good, I would say, confidence on the overall demand and interest in our products and services. So that's roughly where we are right now. And clearly, as I said, in my introduction, we see order patterns or behaviors that are probably more cautious than we've seen them in the 2021 time frame. And this is, I think, in line what we also saw in second half of 2022. Maybe on the Life Sciences side.

I mean the general, probably, comment that I would make, close, our products are used to generate revenue and save costs for customers in terms of productivity, the more likely is that funding is released. So this is the case for literally all customers in all applications like genetic testing, and especially like, I mentioned, in applications around liquid biopsies where demand is very, very high and volumes are growing significantly and we help them to scale the infrastructure. So it is mostly around our productivity accounts and higher volume accounts.

And to your point, I mean, of course, there are specific sectors in the biotech industry, where we also see kind of a reduction of demand, particularly, I would say, the pharmaceutical biotech clients, which, a, has never been kind of large Tecan customer. On the other side, b, when they were, they're probably more looking at preserving cash as they go to more challenging, I would say, funding time so far.

And I mean, on the regional distribution side, again, just to reiterate what Tania said, carefully with the kind of regional view because we're recording ship to addresses or customer locations. So -- and when there is, for example, 1 or a few specific U.S.-based partnering clients, and we ship products to U.S. locations, that overly kind of emphasizes performance in the U.S. However, the product may end up, of course, in the rest of the world, and we sometimes and mostly don't know the general location of where they're ending up.

Now having said that, of course, U.S. and North America continues to be, for us, the strongest market overall, both for Life Science and Partnering, just because of the overall funding of the health care market. We also see quite a few and probably also most of these production biotechs being located in the U.S. So some of them are expanding globally right now. But typically, they originated and they're scaling up. A lot of their work right now, there.

And so this is where naturally, also historically, U.S. has always been the strongest market, probably also in our space with more resilience and more dynamic than some other parts of the world. So the only other comment I would make region is just to repeat what Tania illustrated. In China, we've seen a quite strong H1. That was mostly fueled by interest-free loans for scientific equipment.

We see that now gone and of course, we participated and benefit from it, but we see China, for example, with more, I would say, challenges into the second half. Now to summarize, like I said, I mean, having taken that all into consideration, we believe that we can definitely deliver on the growth expectations for the second half.

[Operator]

And the next question comes from Pataki, Maja from Kepler Cheuvreux.

[Maja Pataki, Kepler Cheuvreux]

I have 2. Achim, with regards to the product launches that you introduced here, can you help me understand how much of a -- or how difficult the decision processes for lab to integrate those new solutions? Is it like an easy add-on to existing platforms? And how does that work if labs are working with competitor products? Is it kind of can you integrate that with competitive product?

Or would that then be a switch to Tecan Fluent? That's my first question. And then my second question. If we look at the Partnering Business, you've talked very nicely to the Cavro dynamics. You talked about the Paramit dynamics.

But can you talk a bit about what you are seeing on the partnering side where you do the instruments for the diagnostic industry. Are you seeing there a slowdown in demand as well? Or is it just ongoing as usual?

[Achim von Leoprechting, Chief Executive Officer]

Okay. So thank you very much...

[Maja Pataki, Kepler Cheuvreux]

Ex COVID, that would be, sorry, Achim, just to...

[Achim von Leoprechting, Chief Executive Officer]

Yes, yes. Go ahead. Okay. Perfect. No, I will make general comments on Partnering dynamics in the application space and maybe some of the regional differences.

I mean, first on the product launches, I mean, what makes now the, I would say, pickup and the launch for us quite elegant is that both the Phase Separator and the MCA 96 are additions to the Fluent range.

And like I said, they can also be used because we design and develop them as modular additions also in upcoming potential [indiscernible] programs wherever they would add value and differentiation. Now it is very, I would say, straightforward for us to integrate both modules on the Fluent base in the field, but also, of course, for new systems. And naturally, they are not available for competitive instruments.

So we have embedded them very neatly in our software environment, which, again, the big push there is to make these applications extremely user-friendly and then easy in research mode, but also with the utilization in LDT and regulated, maybe more in FDA phasing application spaces.

So this kind of integration of software and hardware makes the value really kind of come to fruition. And we have seen, to answer your question in a slightly different way, quite good interest of accounts that have been, I would say, historically preferring competition platforms where a lot of doors opened now with accounts that have these type of applications that now allowed us to bring in Fluent for the first time for test evaluations, and we've even seen some accounts to already order new Fluent platforms with these modules embedded for the buildup of specific [indiscernible].

So it is both kind of serving kind of new clients, existing clients, but also, I mean, particularly in times like this is for us very important to drive wherever we can to gain access to competition accounts, and it seems to be quite good there. I mean for -- on your second question on Synergence. I mean, actually, we saw some quite good positive momentum, what we call Synergence and what you said and your question was specific on Synergence, where we produce and develop instruments for IVD clients mostly.

We saw actually quite some positive momentum for some of the established partners, for example, in applications like cancer diagnostics, transfusion medicine, which are probably leading the growth, to say. But I mean, on the other side, as you said, the big kind of challenge there was, of course, on the Cavro side. So I would say, Synergence was heterogeneous from a performance standpoint, mostly because to your point, and you said I shouldn't comment on it, but of course, on the PCR platform side, there was probably, particularly when I look at China, a little bit less demand in infectious disease screening and these kind of things.

But what I think, again, gives us some good confidence is the launch of new partnerships that is either on the way or it's just coming up. So I would say it's heterogeneous, but we saw probably more of the normalization of Partnering coming through Cavro where customers clearly were stocking up ahead of the transfer of the production side.

And like I said, in Synergence, coming back to this, we have a very good pipeline of new systems launching and systems scaling up that gives us some good tailwind for the second half.

[Operator]

And the next question comes from Gretler, Chris from Credit Suisse.

[Chris Gretler, Credit Suisse]

I have still a few questions left. Maybe first, starting on Paramit. Could you maybe discuss the margin performance of that business in the first half.

[Achim von Leoprechting, Chief Executive Officer]

Sure. I will probably hand over to Tania for this question.

[Tania Micki, Chief Financial Officer]

So basically, what we have seen for H1 '23 is an improvement of around 200 basis points compared to H1 '22. I mean some of it, of course, or a good portion of it was the result of the lower pass-through revenues. If you recall, I mentioned that we had about CHF 7 million less. And that's about 70 basis points impact on the Paramit margin. Also just mentioning it, but it still was a little bit lower than the group average.

And basically for -- of course, for H2, what we are again expecting, it is an improvement compared to H1 because that's a little bit of the Paramit as well pattern related to volumes and other things. So there, again, their margin is also more geared towards H2. And in H1 '23, as I said, it was an improvement of about 200 basis points compared to last year.

[Chris Gretler, Credit Suisse]

And this is including or excluding the extraordinary costs?

[Tania Micki, Chief Financial Officer]

That's excluding the integration costs.

[Chris Gretler, Credit Suisse]

Okay. Wow. It's pretty strong. Okay. The second question is basically on your customer behavior. Maybe could you also discuss -- I heard about the Life Sciences Business in particular. But could you also maybe discuss what you see on the medical segment, if you see similar kind of cautiousness? Or if there are some other trends at work there?

[Achim von Leoprechting, Chief Executive Officer]

Yes. I mean on the medical side, clearly, I mean, when you cross reference that to the Paramit performance, the demand for select products was very high. But I would say, similar to what we see in Partnering Synergence, it's heterogeneous. So some applications, some medical use cases are in higher demand and some are maybe also seeing the same cautious investment from some hospitals or clinics as we look at the portfolio, while clearly, there are some very strong drivers, particularly for innovative solutions in the medical space and the surgery space that drive a lot of demand.

And I would say more -- I would say, commoditized workflows and applications are probably receiving also a little bit more of what I said earlier, the cautiousness of [indiscernible] clinics and hospitals.

So -- but it's not one size fits all. I wouldn't say the medical market is immune to the trends and the macro comments that I made. But clearly, there are, as we see in other parts of the business, particularly on the innovation side, there continues to be some very good demand. And we expect that is lasting for longer.

[Chris Gretler, Credit Suisse]

Okay. And then maybe another quick question on FX. I noticed it didn't kind of not at all -- wasn't broken out in your margin bridge. So I guess it was immaterial, but there are quite some large swings out in the [indiscernible]? Is there anything to be concerned or you would specifically call out for the second half we should be aware of?

[Tania Micki, Chief Financial Officer]

No, there's nothing specific that we are calling out for the second half. I mean, as you know, the dollar is very dynamic. I mean it does, of course, affect us, which is why you see the big difference between the local currency and the Swiss franc or the reported versus the local currency. But again, we are at the moment embedding this.

[Chris Gretler, Credit Suisse]

Okay. Doesn't sound like a big concern. And then just a last question, and I'll come back on China. What's actually baked in your guidance for that, given these uncertainties we go into H2? That's it.

[Achim von Leoprechting, Chief Executive Officer]

I think you mentioned more uncertainty. So we are seeing kind of slowdown of project allocations. But again, it's not just China is 1 market. It's quite diverse. We see, for example, different dynamics in biopharma and in the clinical side, where the clinical side remains relatively strong, Biopharma is a bit more challenged right now with -- particularly on the CRO side.

So I mean -- like I said, I mean, we expect after, I would say, a quite strong and, of course, tailwind-driven performance in China that was maybe above expectations. We embed in our thinking and guidance for the second half a significant slower performance in China.

[Operator]

And the next question comes from Odysseas Manesiotis from Berenberg.

[Odysseas Manesiotis, Berenberg]

First of all, could you please talk more about market and ordering trends towards late H1 and perhaps July. Have you seen any change in the cautiousness of your customers' investment behavior so far? And secondly, on Phase Separator. You mentioned the launch has opened new competitive accounts with strong interest for Fluent. Could you talk a bit more about what type of customers these are?

Are we thinking clinical labs in countries where insurance coverage pilots for liquid biopsy have been taking place?

[Achim von Leoprechting, Chief Executive Officer]

No. Thank you very much for your questions. And I mean just on the dynamics, I mean, typically, we don't guide month-by-month. But what I can say, and you probably heard me say that in the beginning, we saw a quite steady performance in H1. Of course, it's not 1 month.

It's like the other. Some of our business, particularly Partnering can be quite lumpy where sometimes we ship dozens of instruments in month 1 and then not so many in month 2. So having said that, I think maybe on the Life Science side, specific, I think we had a very, very good month of June, in line with that trajectory. And again, we expect now, of course, like we've always seen in the second half, the dynamics being potentially more skewed again towards Q4 or what we've seen prior to COVID and expecting a quite strong pickup after the holiday season in the remaining 4 months of the year.

So I would say from that dynamic, nothing, I would say, remarkable to be called out in terms of how H1 went and what the dynamics into H2 would entail. Having said that, I think overall, a lot of the basis for our H2 thinking is, of course, around the funnel creation, how many projects we see coming in, what the customer response and interest in our product is? Now then also, of course, discounting on this, the -- sometimes slower decision-making, that's the basis of how we think about the business. It can be, like I said, quite spotty. We also have, even in our Life Sciences Business, seen large deals coming in H1 in 1 block. But it's really also customer-type specific.

I mean we, for example, see some industrial biotechs and that may lead us to the second question, be very well funded and even some smaller accounts being well funded. We see productivity accounts like lab service providers continuing to automate their infrastructure to also on their side, gain productivity and save cost. So like I said, I mean, it's not a one-size-fits-all answer maybe. But we have good confidence based on our feedback from Partnering clients and the funnels we see in Life Sciences for the second half. Now on the Phase Separator and then maybe also the MCA 96, but Phase Separator, specifically around liquid biopsy.

I mean, we see, of course, now specialized labs really coming up in terms of volumes and both in NIPT, in oncology, monitoring, but also transplantation monitoring and volumes seem to be generating quite high demand for this type of applications, particularly in North America, and we see some of it now coming up in Europe and in Asia as well, but I think the strongest is in North America. And the type of accounts are, like I said, production, biotech specialized lab service provider companies. But it is also the more, I would say, general lab service providers are now starting to pick up some of the liquid biopsy work for specific applications in their more, I would say, mainstream kind of workflow.

So I think what we're seeing is a quite good adoption for specific applications by the -- by clinicians and patients. And this is now moving increasingly from the specialist labs or specialist companies into the more kind of generalist...

[Operator]

And the next question comes from Bischofberger, Sibylle from Kantonalbank.

[Sibylle Bischofberger, Kantonalbank]

I had a question about COVID-19. So in COVID-19 sales in the first half were down by around CHF 48 million. I would like to understand how much sales were generated in the first half? And if so, whether only consumables? And then in the second half, to reach the outlook also for COVID-19 sales, is it fair to assume that you don't expect any sales?

And why I asked because the big vaccine producers, Pfizer, Moderna, Biotech, they all have forecast a couple of billion sales in the second half of this year. Would this mean that vaccines, yes, but no test? So just to see what is your scenario for the COVID-19 sales for [indiscernible].

[Achim von Leoprechting, Chief Executive Officer]

Yes. Thank you very much for your question, Sibylle. I'll start off and then Tania can give a bit more, again, color on the specifics on H1, H2, how we split up. But I mean, in our reality, there's probably 2 dynamics that we're -- of course, we are kind of seeing on the bio production side or vaccine production side, which also we're supporting to some extent for some analytical workflows, we see vaccines continuing to be in demand, which is probably also a good thing for preparing for the next seasons. However, on the COVID testing side, I mean, we also try to say -- I mean, we always guesstimated our volumes there because we are kind of supporting general kind of PCR testing infrastructure, which includes COVID test as well.

Now I would say, because we're not calling it out anymore, doesn't mean there are no COVID tests happening, but they are just now a general part of the menu of PCR test machines, and we cannot really carve them out anymore because it's more kind of general testing that is happening. And there may be percentages of COVID test being kind of applied on, for example, the m2000 or some other machine. So I mean that's roughly why we're not spending it out because it's not like a meaningful in addition to what we do for other tests that typically run on these machines as well. So that's why we're not calling it out anymore. Tania, you can probably kind of...

[Tania Micki, Chief Financial Officer]

Yes, I can add a few words. And basically, as you said, H1 '22 last year, we said around CHF 50 million COVID-related sales, which FX adjusted is around CHF 48 million. H2 '22 was around CHF 10 million. We actually did not plan any for 2023. And we are, therefore, considering that we have 0 COVID sales in '23, whether it is H1 or H2.

Mainly, we were able, as Achim said, to identify at the time, COVID-related instruments. Well, those, we obviously do not sell anymore. So mainly, as you mentioned, it could have been some consumables, but there again, they are not material, and we do not identify them anymore. So that's the reason for the 0 -- from a COVID perspective for '23.

[Operator]

And the next question comes from Vogel, Sebastian from UBS.

[Sebastian Vogel, UBS]

I have a few questions. I would ask them one by one. The first one is on destocking.

[Tania Micki, Chief Financial Officer]

I'm assuming you mean that how are we affected by destocking and how do we see that from the customer perspective? I mean, as Achim mentioned, we do have some impact from the Cavro component side, for example. You can hear us, right?

[Operator]

Mr. Vogel, your line is open. Mr. Vogel just disconnected.

[Tania Micki, Chief Financial Officer]

Okay. Well, then maybe let's wait for him to come in. I thought that was 1 last question.

[Operator]

Actually, there currently are no more questions on the phone.

[Martin Brandle]

There's 1 question that came in through the chat on M&A, the M&A environment and our plans to engage in M&A. So maybe, Achim...

[Achim von Leoprechting, Chief Executive Officer]

Yes. Maybe I can take this one, and then we see if the Sebastian comes back or we call him back later. Yes, on the M&A side, I mean, clearly, we are very pleased with the progress of the Paramit integration. Paramit is really working well, both in the California and the Malaysia facilities. And we also are very happy with the successful transfer of our Cavro production into Paramit.

Having said that, we are very actively engaged again, I would say, in the M&A pipeline discussions and funnel discussions. And just I think there was a specific question on size. I mean we, of course -- I mean, we consider size, but it's not like we're going out with a specific frame of acquisitions. It's probably fair to assume that we're looking at more kind of bolt-on acquisitions at the moment in the infrastructure that we created with a strategically kind of focused -- or particularly on the life sciences side. But having said, I mean, bolt-on acquisitions, of course, now can have a kind of different size compared to what we discussed before.

And of course, they should also -- and there will be always be strategically motivated. But we are back in M&A discussions. We see some kind of mobility in that market and the pipeline is actually quite good and we're working our way through like the normal kind of scrutiny of projects and programs and engaging again on various levels and also geographies where these potential targets are sitting at the moment.

[Martin Brandle]

[indiscernible]

[Operator]

Yes. Mr. Vogel has returned.

[Sebastian Vogel, UBS]

Perfect. I hope you can hear me now.

[Achim von Leoprechting, Chief Executive Officer]

Yes.

[Sebastian Vogel, UBS]

Great. Perfect. I've got three questions. I would ask one by one, again. So the first one is on destocking.

What sort of headwinds you're still seeing for the second half for the sub business where it's really applying?

[Tania Micki, Chief Financial Officer]

So, I started actually answering your question before, but then we realized that you disconnected. So while we mentioned that some of the headwinds that we have seen for H1 2023 are related to the Cavro OEM components. And there, I mean, that was a little bit, as you know, a surge in demand last year because of the -- of some pent-up demand as well as stocking from the customers because of the move of the Cavro component to the 2 facilities in Paramit.

What we believe is that in H2, this would or rather that this normalized now and that in H2, we would go back to a more normal demand for the Cavro component. There was probably also some destocking on the consumables.

This also, we believe, there was a little bit of normalization towards the end of H1, and therefore, it should also be more normal in H2. That's how we see it.

[Achim von Leoprechting, Chief Executive Officer]

And then maybe just an add-on comments, Sebastian, if I may. I mean on the kind of inventory situation of clients, as Tania said, on the component side, that was triggered by the transfer mostly, and consumables was maybe an aftermath from supply challenges during COVID. I think that is now back to normal. And we are seeing customers, I would say, kind of turning back to just-in-time deliveries and reducing their inventories where they can because they know that we can deliver very rapidly now and they're kind of less concerned about even safety stocks anymore. So that is, of course, something we are kind of working through this year where, in addition to maybe the extended safety levels and inventories we have seen in COVID, they are now reduced back to just in-time deliveries.

[Sebastian Vogel, UBS]

Got it. The same second question would be, again, coming back to the FX side of things. I somewhere noted myself down that I thought that you have like 50% of your costs in U.S. dollar, like 56% of revenues. Is that still something like a ballpark area which makes sense with regard to the U.S. dollar? Or has things evolved in the meantime?

[Tania Micki, Chief Financial Officer]

[indiscernible] ballpark, I mean, the U.S. is a little bit higher, closer to the 60% for the sales and 53% for the cost. And then the euro is around 15% for sales and 17% for cost. So it's ballpark more or less but there is a little bit more exposure on the U.S. dollar side.

[Sebastian Vogel, UBS]

Got it. And the third last question again on the FX side of things. So if the current spot FX rate would still prevail at that sort of level until the end of the year, how confident would you remain on your margin guidance?

[Tania Micki, Chief Financial Officer]

The FX does not affect us that significantly on the margin because we are relatively well balanced between the sales and the cost. I mean you have heard me saying from the U.S. dollar, that's where the main impact is [60 to 53]. So -- but we are embedding, let's say, in the guidance, the current state of FX.

[Operator]

We have 1 final question from the line of [indiscernible] from AWP.

[Unidentified Analyst]

I have just a clarification question on China. So with the reopening during the first quarter, has that had any effect on your business? Did you see a pickup in demand during the following months?

[Achim von Leoprechting, Chief Executive Officer]

Yes. So maybe I can just close this out here and answer your question. I mean with the kind of reopening, things didn't change too much for us because we already had, I think, very good performance in 2022, which I think I commented on in the last earnings call that we were actually positively surprised about how our team was able to serve customers even through the lockdown and they're kind of lock-in period.

So we didn't see that materially changing coming now into '23, but what did change was what I mentioned before, the stimulus or the interest-free loans for scientific equipment that the Chinese government launched in Q1 that kind of drove up quite some projects and demand in our life sciences space or Life Science division, which was ending in Q2. So it's now, of course, something that had an impact on H1.

I think it won't have an impact on H2. And we see, China, in general now also becoming a bit more cautious due to the current geopolitical situation and their own domestic, I would say, economic development. So that's roughly what we see, but it wasn't due to the lockdown ending in Q1 that we saw the pickup. It was the interest-free loans that drove some stimulus. So thank you very much.

And so I think this is the end of this call, and we're looking forward to, yes, engage with you on one-on-one discussions.