Tecan Group AG

SIX:TECN

Earnings Call Transcript 2022-Q4

[Martin Braendle]

Thank you, and good morning, everyone. Thank you for joining us for our conference call this morning. We are very pleased to discuss with you the results for our fiscal year 2022.

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. The corresponding press release announcing our financial results was issued this morning at 6:30 a.m. Central European time. Both this press release, as well as the full 2022 annual report are available on the company website, tecan.com, under the Investor Relations tab. The call, as you heard, is being webcast over the Internet on our homepage, and we have also posted the presentation slides for this call for download.

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

[Achim von Leoprechting, Chief Executive Officer]

Thank you, Martin. Good morning, and welcome to the Tecan 2022 full year results presentation. Before Tania will discuss the financial results of last year in detail, I will give you an overview of the financial and operational highlights.

2022 was a successful year for Tecan. I'm very pleased with our financial performance and especially with the strong growth of the underlying business. In the past year, we've seen that directly and indirectly, the COVID-19 pandemic reshaped many laboratory processes. This led to strong overall demand for automation solutions in research, pharma and diagnostic laboratories. Also, we saw a robust recovery and demand in the medical end markets through Paramit.

As a result, our sales in 2022 climbed 20.9% to CHF1,144.3 million, well beyond the previous high of CHF946.6 million in 2021, and representing an increase of 21.3% in local currency. Organic sales increased by 1.8% in Swiss francs and by 2.2% in local currencies, with sales in the Life Science business increasing by 3.3% above the prior year period in local currencies and Paramit recording sales growth of 22% in local currencies or 14.4% when the pass-through of higher material costs is excluded. We've made inroads into many new accounts in the Life Science business and gained numerous new partners in the Partnering Business, which positions us well for continued future growth.

Our adjusted EBITDA increased by 7.2% to CHF229.9 million with the adjusted EBITDA margin reaching 20.1%, in line with the outlook provided in August 2022.

Our adjusted net profit for 2022 is CHF154.4 million with adjusted earnings per share of CHF12.14 compared to an EPS of CHF12.35 in 2021 at a lower share base.

As you heard me say before, Tecan does not sell COVID-dedicated products. So any assessment of the impact of COVID-related sales is the best estimate. We share that estimates here, and we believe that the growth of organic non-COVID-related sales in 2022 was in the mid-teens percentage range. By the second half of 2022, COVID-related sales were accounting for only around CHF10 million compared to an estimated CHF30 million to CHF40 million in the second half of 2021. Despite this, sales in the second half of 2022 rose by 13.7% in Swiss francs and by 13.8% in local currencies, of this organic sales increased by 7.8% in Swiss francs and by 8.2% in local currencies.

We've seen solid demand for automation solutions continuing in all geographies with a rebound in customer demand for research products and clinical application related areas such as cancer research, cancer diagnostics, infectious disease diagnostics, transfusion medicine and more. The expanded capabilities we have gained as a company, together with Paramit, positioned us to meet this demand and also to support growth opportunities on a broader scale.

We've made significant progress with the integration of Paramit in 2022. The move of Tecan site for Cavro components from San Jose, California to the Paramit facility in Morgan Hill progressed well and the transfer of serious production of certain liquid handing components from San Jose to Penang, Malaysia was successfully accomplished in the second half of the year. This sets us well to meet the growing demand for these products. Maintaining resilient operations and successfully mitigating supply chain and freight challenges was also a focus last year. Tecan's global manufacturing and business operations teams continue to be effective in securing undisrupted supplies and support for customers and in times of notable uncertainty that we're able to ensure the availability of cargo space and critical materials.

We made steady progress with our broader sustainability activities in 2022. For example, we again achieved the Great Place to Work certification in Switzerland. The surveys and activities that this certification is based on are carried out globally. And with this second survey, we saw both even higher participation and an increased Trust Index score, which is a testament to our progress in increasing our attractiveness as an employer and a great vote of confidence from our employees.

In terms of managing our environmental impact, we committed to the Science Based Targets initiative in February last year. And in the sustainability report, which is part of our annual report, we now show our total carbon footprint emissions, as well as the steps being taken to reduce these. We set a target in line with climate science that now goes through the Science Based Targets initiative validation process, and we'll report on our emissions reduction progress regularly.

In 2022, we also launched new products, significantly expanding the automated genomics portfolio, and I'll say more about these and the outlook for 2023 shortly. First, I'll hand over to Tania for a closer look at the 2022 financial results. But before I do, I would like to thank and congratulate my colleagues around the world. They have put in a great effort to deliver a successful year serving our global customers and partners, taking us past the milestone of CHF1 billion in sales, and their skills and dedication are a key factor in Tecan's ongoing success.

So with this, I hand over to Tania.

[Tania Micki, Chief Financial Officer]

Thank you, Achim, and good morning, ladies and gentlemen, from my side as well. I'm very happy to be with you today to present to you our financial results for the full year 2022 in more detail.

Let's start with order entry and sales. Full year order entry increased by 17.3% to CHF1,132.9 million or by 17.6% in local currencies. On an organic basis, that means excluding acquired Paramit for the first 7 months of the year, order entry was down by 0.2% in local currencies. As you will recall, this compares to the substantial order entry still achieved with COVID-related orders in the prior year period. Order entry for products not related to COVID testing continued to be strong throughout 2022. In the second half of the year, order entry increased by 2.8% in local currencies and was down by 2.4% in local currencies on an organic basis.

Sales for fiscal year 2022 climbed by 20.9% to CHF1,144.3 million corresponding to a growth of 21.3% in local currencies. Overall, sales growth also benefited from the pass-through of higher material costs at Paramit that was recorded as part of revenues. This was CHF28 million which equals to an around 3 percentage points growth contribution to total revenues. Organic sales increased by 1.8% in Swiss francs and by 2.2% in local currencies, thereby more than offsetting the substantial decline in COVID-related revenues recorded in the prior year period.

Estimated COVID-related sales in 2022 were around CHF60 million, a substantial decline compared to the estimated CHF150 million to CHF170 million in 2021. Growth of non-COVID-related revenues in 2022 is estimated in the mid-teens percentage range in local currencies. Sales in the second half rose by 13.7% in Swiss francs and by 13.8% in local currency. Organic sales in the second half of the year increased by 7.8% in Swiss francs and by 8.2% in local currencies with only around CHF10 million contribution from COVID-related revenues compared to an estimated CHF30 million to CHF40 million in the second half of 2021.

Looking now at the sales performance of our 2 business segments. Sales in the Life Sciences Business segment increased by 1.5% to CHF492.3 million and were 3.3% above the prior year period in local currency. This increase was achieved despite the high base from the prior year period, in which revenues increased by 19% in local currencies. Sales growth of products in non-COVID-related applications is estimated in the mid-teens percentage range in local currencies and was driven by strong demand for non-COVID-related liquid handling and detection instruments, as well as service and spare parts revenues.

The pandemic has structurally reshaped many laboratory processes, leading to a higher overall demand for automation in many application areas from next-generation sequencing and other genomics applications to proteomics and cell biology workflows. Sales growth continued in the second half of the year, with sales increasing by 2.1% in local currencies. As expected, full year order entry in the Life Sciences Business was slightly below the prior year period, compared to the substantial order entry achieved with COVID-related orders in the prior year period.

The Partnering Business segment generated sales of CHF652 million, which corresponds to an increase of 41.3% in Swiss francs and 39.7% in local currencies. On an organic basis, sales rose by 2.2% in Swiss francs and 1.1% in local currencies. With total sales of CHF334.7 million, Paramit recorded strong sales growth of 22% in local currencies when including the pass-through of higher material costs, and growth of 14.4% when excluding this effect. This compares to a pro forma sales figure of CHF262.6 million if the acquisition had occurred at the beginning of 2021. Obviously, only CHF113.3 million were recorded in the consolidated accounts for the months of August, December 2021. As expected, in 2022, the negative COVID effect on revenues was more pronounced for Tecan's legacy Partnering Business compared to the Life Sciences Business due to significantly lower COVID-related sales in the reporting period.

Demand for OEM components, on the other hand, was very strong, and sales to customers in other areas of in-vitro diagnostics, which were negatively affected during the pandemic, also showed positive momentum again. Sales growth of these products in non-COVID-related applications is estimated in the high-single-digit percentage range in local currencies. In the second half of the year, sales in local currencies increased by 24.1% and by 13.5% on an organic basis. And order entry for fiscal 2022 grew at a slightly lower rate than sales.

Now, let's look at sales development in the different regions on Slide 10, and starting with Europe. In Europe, full year sales increased by 9.5% in Swiss francs and by 13.5% in local currencies. Organic sales development continued to be significantly impacted by the pandemic-related surge in demand in the prior year period, resulting in organic sales declining by 3.7% in Swiss francs and 0.3% in local currencies. Against this high comparative basis, sales in the Life Sciences Business were 8.9% lower than the previous year in local currencies, and with Paramit's contribution sales in the Partnering Business increased by 9.6% in local currencies. In the second half of the year, sales in Europe increased by 10.7% in Swiss francs and by 14.4% in local currencies. On an organic basis, sales increased by 10.2% in local currencies.

In North America, sales grew by 32% in Swiss francs and by 27.6% in local currencies. Similar to Europe, organic sales development in North America was impacted by the COVID-related high comparison base, resulting in a 0.5% decline in sales in local currencies and a 3% increase in Swiss francs, supported by positive foreign exchange developments. Due to the exceptionally high basis of comparison, organic sales of the Partnering Business segment decreased by 8.2% in local currencies. The Life Sciences Business segment, on the other hand, reported a 7.8% increase in sales in local currencies, driven by strong demand for non-COVID-related instruments, more than replacing the significant COVID-related sales in 2021. North American sales in the second half grew by 19.1% in Swiss francs and by 13.9% in local currencies. Organic revenues increased by 5.9% in local currencies.

In Asia, we recorded an increase in sales of 14.7% in Swiss francs and 19.4% in local currencies. On an organic basis, sales grew by 9.9% in Swiss francs and by 14.4% in local currencies. We are pleased to report that organic sales development in China was also in the mid-teens percentage range despite the lockdown measures in Shanghai at the beginning of the year. The positive sales development was driven by both business segments, with the Life Sciences Business recording growth of 18% in local currencies, while the Partnering Business grew by 20.7% in local currencies. In the second half of the year, total sales in Asia increased by 5.3% in Swiss francs and 12.6% in local currencies and by 11.3% in local currencies on an organic basis.

Our next slide addresses our gross profit. Gross profit increased to CHF438.1 million, which was CHF29.5 million or 7.2% above the prior figure. The increase was driven by the higher sales volumes. Excluding Paramit, the gross profit margin reached 46.9%, pretty much in line with the expected decrease of around 100 basis points due to significant inflation effects that I mentioned at this occasion a year ago. Including Paramit, the reported gross profit margin was at 38.3% of sales. The main effect explaining the difference in the margin were on the margin dilutive side, the Paramit acquisition impact with more than 500 basis points impact. As I explained at previous calls, Paramit comes in with a different gross profit structure. It is significantly lower due to the business model as they charge almost everything to the customer, which means they don't have a lot of OpEx. It also includes the purchase price amortization and pass-through of higher material costs without margin. Other factors with the negative impact are the higher material and personnel costs. On the positive side, we were able to increase prices. For both legacy business combined, it was around 1.5%, and we benefited from efficiency gains.

On the next slide, some comments regarding our cost structure. Overall, our operating expenses grew substantially less than sales and totaled CHF292.1 million or 25.5% of sales in 2022 compared to 28.3% of sales in 2021. Keep in mind though that all costs include the cost of the acquired Paramit Corporation for the full 12 months of 2022 and only for the 5 months from August to December in 2021. Excluding Paramit, Tecan's legacy business returned to a normalized operating cost base of approximately 32% of sales, a level we expected following a period of significant growth in the past years. Also keep in mind that total operating expenses include amortization charges of CHF32.7 million from acquisitions compared to CHF20.6 million in 2021. These charges are disclosed for each line item of the statement of profit or loss in Note 21.1 of the financial report 2022.

Sales and Marketing increased less than total sales to CHF132.8 million. As a percentage of sales, they reached 11.6% of sales compared to 12.7% in 2021. However, sales and marketing increased as a percentage of sales for Tecan's legacy business as we continue to invest in our sales channel and in e-commerce.

At an absolute level, net research and development expenses increased to CHF77.9 million. As the Paramit business is less development-intensive, with activities largely funded by OEM customers, R&D costs as a percentage of total sales reached 6.8% compared to 7.6% in 2021. They increased as a percentage of sales for Tecan's legacy business with continued investments in innovation to position the business for sustained accelerated growth. Overall R&D activities and gross expenses, what we call, gross R&D, were also higher compared to the prior year period, including capitalization of development costs and customer funding of OEM projects. Capitalization of development costs increased to CHF11.6 million, while amortization from capitalized development costs increased to CHF10.4 million. Gross R&D was at CHF94 million or 8.2% of sales.

General and administration expenses increased to CHF81.4 million. As a percentage of sales, G&A cost decreased to 7.1% of sales compared to 8% in 2021. This was mainly related to [less] cost compared to the prior year period for corporate development activities. Keep in mind that during 2021, we engaged in many activities that led to the successful acquisition of Paramit.

Looking at the EBITDA development. [Reported] EBITDA, the earnings before interest, taxes, depreciation and amortization, rose by 5% to CHF214.9 million in 2022 reported EBITDA including all integration-related costs in connection with the Paramit acquisition. These were CHF13.6 million. Adjusted EBITDA increased by 7.2% to CHF229.9 million. The adjusted EBITDA margin was 20.1% of sales, in line with the communicated outlook of an adjusted EBITDA margin of around 20% of sales. Here, the lower gross profit margin and the lower sales volumes in our legacy Partnering Business, were affecting the margin, as well as the normalized operating cost basis that I mentioned on the previous slide. On an underlying basis, that means excluding the negative impact of the exceptionally high material-related costs and the pass-through of increased material costs without margin, the adjusted EBITDA margin would have reached 21.7%. You can see the bridge at the lower left side of the slide, illustrating the magnitude of the individual effects. And while we have already assumed in [2023] some recovery from the lower pass-through, a good portion of the other material cost increase could be recovered once things normalize. We provide a reconciliation on Slide 27.

Now, let's look at the operating profitability on the segment level. Reported EBIT in the Life Sciences Business as earnings before interest and taxes reached CHF87.1 million. The operating profit margin amounted to 17.1% of sales. As mentioned, we made increased investments in research and development, as well as in the sales and service organization and support functions that support a larger installed base of instruments and scale of the business, resulting in a more normalized operating cost base. However, supported by sustained price increases, the gross profit margin remained stable compared to the prior year period despite substantially higher material costs.

Reported EBIT in the Partnering Business increased by 25.5% and amounted to CHF74.4 million, while the operating profit margin reached 11.4% of sales. The integration costs CHF13.6 million and the amortization of acquired intangible assets in connection with the acquisition of Paramit of CHF18.9 million were recognized for the group in the Partnering Business segment and had a notable effect on the reported operating result for the segment. Other factors negatively impacting segment margins were lower volumes for diagnostic instruments with corresponding negative economies of scale, and the pass-through of higher material costs without margin. At the same time, these effects, as expected, could not be offset by price increases, as price adjustments for the instrument business are contractually regulated and only took effect at the beginning of 2023.

Let's now move to net profit on the next slide. Adjusted net profit amounted to CHF154.4 million. Reported net profit for 2022 was CHF121.1 million. This figure includes the integration-related costs that I mentioned before, as well as the accumulated amortization of acquired intangible assets of CHF23.5 million. The main factors contributing to the difference were adjusted EBIT increasing by CHF7 million, the financial result was also a slight positive factor, the tax rate, on the other hand, as expected, increased to 15% versus the 11.8% in 2021. In the multiyear overview, you can see the very positive development in net profit.

Moving on to earnings per share on the next slide. Earnings per share decreased slightly due to the higher share count, which is mainly related to the issuance of new shares a year ago to partly refinance the Paramit acquisition. Also here, you can see the positive development over the last years with an adjusted earnings per share of CHF12.14. On the basis of an ongoing positive business perspective, the Board of Directors will propose at the company's Annual General Meeting on April 18, 2023, an increase in the dividend from CHF2.80 to CHF2.90 per share. Half of the dividend that is CHF1.45 will be paid out from the available capital contribution reserve and is therefore not subject to withholding tax.

We continue with the cash flow on Slide 19. Cash flow from operating activities reached CHF128.3 million in 2022. This corresponds to 11.2% of sales. The current situation with tight material supplies, we wanted to ensure our delivery capability and decided to increase our inventories and safety stock. This higher net working capital is backed up by customer commitments, but obviously had an impact on operating cash flow. We also had higher income tax payments with the profit increases we have recorded last year in most regions. Our DSO, the day sales outstanding increased slightly to 49 days. You can see some of the elements I have mentioned before here as well, for example, the increase in amortization, mainly from acquired intangible assets that explain the majority of the difference. The cash flow from investments was at CHF88.2 million.

Moving on to the cash flow from financing activities. This figure includes the dividend payments we made in April 2022 in the total amount of CHF35.6 million. And I'm happy to report that after a short period of net debt to partially refinance the Paramit acquisition with CHF41.2 million, Tecan has already restored its net liquidity position.

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

[Achim von Leoprechting, Chief Executive Officer]

Thank you very much, Tania. So looking ahead on 2023, I'd like to pick up some of the topics I mentioned earlier and go into these in a bit more detail. 2022 has shown that our execution of the strategy continues to be successful. The focus has shifted away from supporting efforts to fight the COVID-19 pandemic. Tecan has achieved steady growth, supporting customers who are working across a range of fields, such as oncology, metabolic disorders, infectious disease and other areas, as well as adjacent markets such as the food industry. We've maintained strong momentum in the Life Science business, driving further market reach and channel expansion, and we anticipate this continuing steadily in 2023. We continue to invest substantially in research and development, and we've embedded some of our sustainability priorities in this area as well, as sustainability is not an add-on for us. It's integrated into our strategic initiatives. As the integration of Paramit to reach as a successful conclusion, we have a renewed focus on M&A, which remains a key element of accelerating our corporate strategy.

So to look at Paramit in a bit more detail. The common culture and values of the 2 companies have proven to be a strong basis for the successful integration as a complementary skills in operations and development have already shown their appeal to new customers. The 2022 financial performance was strong with double-digit sales growth. Profitability was above original expectations at 19% compared to the 18% previously anticipated. As mentioned already, the transfer of production from the Tecan site in San Jose to Paramit sites in Morgan Hill and in Penang, which we expect to conclude in mid-2023. This integration of Cavro into Paramit expands our capacity for producing the Cavro OEM components that are increasingly in demand, empowering customers to build their own systems on the basis of proven Tecan technology components and modules. The cost synergies from this Cavro product integration into Paramit are expected to be realized from 2024 onwards and are anticipated to be in the region of CHF5 million to CHF6 million a year from 2025 onwards.

In the Paramit business line, we also won several new manufacturing deals in 2022 that will show a first revenue contribution in 2023. And our new partners are engaged in growth fields such as cell therapy, protein analysis and hemodialysis. Another focus has been the execution of a joint commercial strategy, combining the Paramit, Cavro and Synergence offering in our Partnering Business. Through this highly synergistic combination, we can now offer a combined approach to even more OEM customers and projects globally.

With our Partnering Business, we are offering our OEM clients the opportunities to consult and work with us on an entire system development program, which is spanning the whole chain from conceptual design to industrialization and manufacturing of devices and consumables and their support. Tecan Synergence offers tailored and flexible OEM system development, manufacturing and support services, bringing in the know-how from our end user business, as well as our deep understanding of genomic, proteomic, cell and tissue workflows and of the relevant regulatory processes. With Cavro, we are offering the supply of building blocks in fluidics and robotics for those companies that want to leverage their own R&D and manufacturing footprint. And then with Paramit, we are offering now a dedicated service for contract development and manufacturing, specifically geared towards in-vitro diagnostic and medical device end markets.

What is important to note is that, we are now able to leverage synergies across all these 3 business elements by using combined sales structures, joint manufacturing organizations, complementary R&D teams and a strong quality regulatory organization. So there's a high degree now of synergistic leverage of the new capabilities that we gain with Paramit, as well as the strengthening of Paramit through the broader capabilities within the Tecan Group. We are very pleased with the integration process so far and also with the positive customer reactions which position us for solid future growth.

Now, looking at the Life Sciences side of the business. We launched a number of new products in 2022, including innovative solutions for next-generation sequencing genomic workflows. We added the MagicPrep NGS and the DreamPrep NGS Compact. MagicPrep NGS is an automated benchtop library preparation system that transforms time-consuming and error-prone procedures into a simple, robust experience with a setup time of only 10 minutes. The DreamPrep NGS Compact is a benchtop solution that comes with an optimized configuration to run almost any NGS protocol. Compared to the larger DreamPrep NGS, it has a smaller footprint in the lab and is the ideal solution for low to medium throughput. We also saw reagent introductions, including new kits for genomic applications related to the launch of the MagicPrep NGS system.

For all these new products, we have engaged in some very positive partnerships and collaborations. For example, we've built a collaboration with Oxford Nanopore, combining Oxford Nanopore sequencing technology with the DreamPrep NGS system to create automated, seamless and fully compatible nanopore sequencing library preparation for any length fragments of native DNA and RNA. We communicated a collaboration with Element Biosciences to offer a benchtop NGS workflow with Tecan's MagicPrep NGS and Element Biosciences sequencing technologies. This employs proprietary chemistries from both companies to deliver a hands-free NGS solution offering unprecedented performance and flexibility for our benchtop setup.

And also announced earlier this year at a major genomics conference, Tecan has partnered with Singular Genomics to use the turnkey MagicPrep NGS system to create sequencing-ready libraries for the G4 platform, bringing together our expertise in lab automation, genomics and bioinformatics with Singular Genomics technologies. Both partnerships allow even more laboratories to take advantage of hands-free library preparation with the MagicPrep NGS system going forward. One example of Tecan’s capability to scale innovation from research into the clinic were also exemplified with the launch of an advanced genomic system for a leading diagnostics company in 2022 through our Partnering Business. Besides these solutions for genomic applications, we’ve also saw the launch of several new products in other application fields like proteomics and others in both divisions.

That’s the summarize of the financial outlook. We expect the demand for life science research, diagnostics and medical technology solutions to remain solid in all relevant end markets despite ongoing global economic uncertainties. Based on this, we forecast organic sales growth in the high single-digit percentage range, excluding the negative impact of lower COVID-related sales and the reduced pass-through of material costs, which are about minus 4 and minus 1 percentage points, respectively. In recent [Technical difficulty], we expect a sales increase of [Technical difficulty], as well as the steady sales growth, we expect an adjusted EBITDA margin of at least around 20% of sales. Midterm, our expectations are unchanged. And as per earlier guidance, we see sales growth in the mid- to high-single-digit percentage range with our global reach and capabilities, positioning us to continue to outpace theveragee growth rate of the underlying end markets and combining a continuous improvement in profitability.

We look forward to continuing to serve as a trusted and enabling partner for life sciences, drug development, clinical diagnostics and the medical device industry. We have attractive end markets with an expanded commercial reach, capabilities and geographic footprint, which together with Paramit, serve as a significant growing addressable market. The segments we serve can be expected to benefit from several trends like digitalization, precision medicine and overall investments to improve health care economics. Our core capability to bridge innovation from research all the way into clinical deployment is a very strong competitive asset in that environment. And with our strong financials, we are in a good position to continue the reinvestment into the company, both from an organic, R&D and sales and marketing and service perspective, but also from an inorganic M&A perspective.

Now, in this year’s annual report published today, we focus on the fight against cancer. Through a selection of customer stories, we highlight how Tecan is involved in scaling health care innovation globally from the earliest research phase in the lab to advanced robotic surgery to the prevention of the disease altogether. I do hope that you have the chance to take a look at this section of the report.

And with this, I thank you very much for your attention, and I think we have some time for Q&A.

[Operator]

[Operator Instructions] The first question is from Odysseas Manesiotis from Berenberg.

[Odysseas Manesiotis, Berenberg]

Congrats on the great results for the full year. So my first question, firstly, assuming pass-through effects further normalize in full year '24 and the cost synergies from your Cavro OEM components production capacity expansion crystallized from '24 onwards as well. Would it be fair to assume that you could exceed your average 30 to 50 basis point annual margin expansion for a couple of years -- full year '23?

And secondly, could you give us some more color on Paramit's strong sales growth over H2 '22? Is that related to the recovery of elective procedures? And is there still strong room to realize quick wins in terms of sales synergies?

[Achim von Leoprechting, Chief Executive Officer]

Thank you very much for the question. Probably I'll start with your last question on Cavro. I understand correct that was specifically to our Components business. So, I mean, in Cavro, what we're seeing is a very broad base of customers driving growth. So it's not, I would say, singular systems, but really a range of clients from North America to Europe, but also increasingly Chinese customers taking these component modules to convert them into typically diagnostic systems, sometimes research systems as well. So the end market read-through, if this has to do with elective processes is probably too far for us because we're really [spanning] areas from, I would say, environmental monitoring in this business all the way into in-vitro diagnostics and life sciences.

So, I would say, in general, the growth in Cavro is very positive for us to see because it is a quite hands-off model for us. We're serving hundreds of clients with our modules in fluidics and robotics. And now this is, as you know, the business that we transfer into Paramit to accelerate production and profitability. So that's roughly how we look at it. And I think we are very pleased also with the commercial expansion of this team and the pickup of new systems year-by-year that drive growth in this category of partnering programs.

Maybe on the other 2 questions, I will refer to Tania for some more color.

[Tania Micki, Chief Financial Officer]

Sure. And yes, you’re absolutely right, I mean, on the first question, from the pass-through perspective and also looking at the potential synergies that we have, while we do not give, as you know, a specific guidance for 2024 and our 30 to 50 basis points being always an average. And one last disclaimer providing things stay as they are, yes, you could assume an improvement of the margin above the 30 to 50 basis points that we have mentioned. And that is also one of the reasons why we gave the underlying margin just to show the significance of the impact, and that the underlying business is still very, very much at the level where we want it to be. So from that perspective, you’re right.

Now, from the capital synergies, I would just remind that we said they would start in ‘24, so the full effect would not be until ‘25. And there, of course, there is also a little bit of caveat to take from that perspective.

[Operator]

The next question is from Maja Pataki from Kepler Cheuvreux.

[Maja Pataki, Kepler Cheuvreux]

I have 2. I know that taking out or highlighting COVID revenues is very difficult in your business. But I do believe that in 2020 and 2021, when you were talking about CHF150 million to CHF170 million range, you were also talking about a 40% being recurring revenues like on the component side. So now I'm trying to understand, has anything changed because, I mean, essentially, you don't expect to see any COVID revenues anymore? Or have you accounted for those recurring revenues differently in 2022? It will be just very helpful if you could help me understand how to think about that.

And the second question is really, before look at the guidance for 2023 on top line growth, are you assuming similar growth rates across Paramit and Tecan legacy?

[Achim von Leoprechting, Chief Executive Officer]

Excellent. Thank you very much, Maja, for your questions. I'll start off with the COVID question. You're absolutely correct that in 2020, we guesstimated, that's always the disclaimer in this kind of discussion that the COVID-related revenues, both instruments and consumers were around CHF150 million to CHF170 million. Last year, we said that it's around CHF60 million with maybe a distribution of CHF50 million in the first half and the remaining CHF10 million in the second half. And the reason simply why we are saying -- we are not talking about COVID revenues anymore is that, typically in this category now in the 2021 bucket, there were only very few instruments and the majority was what we would call pipette tips or consumables.

And these become -- I mean, they're, again, not COVID-specific, and they become part of the normal, I would say, business and the consumable through of systems in the field. So that's why -- I mean, when we ship now to, for example, consumables to big reference labs, we have no means anymore to even estimate what percentage of COVID testing they're still doing. I would assume it's very little at this moment in time. And the rest will go to other PCR tests or genomic applications. And I think it just becomes part of the normal menu.

But what we have seen, and we also mentioned this before is, of course, a normalization of consumable consumption per machine. So we have seen, I would say, very few examples of COVID-related instruments actually being retired or mothballed, but the majority stayed in operation, but of course, it was moving from a 24/7 operation to, I would say, a normal lab deployment regime. That is, of course, now lowering also nominally the throughput and the consumption of consumables on each and every machine. So that's why for 2023, we said it's not credible anymore for us to even guesstimate the amount. Whatever COVID testing will happen will be part of the normal menu and we will ship our undifferentiating consumables into this installed base and probably stop talk about it, hopefully, any kind of COVID rebounds, which will then bring that back up. But at the moment, I think we look at it as a normalization in the core business of consumables and instrumentation deployment.

[Maja Pataki, Kepler Cheuvreux]

Great. I can just to clarify quickly, sorry, the CHF60 million of estimated COVID revenues in 2022, that's instruments only then, because you've already kind of booked or you see the recurring revenues as more normalized revenues? Is that how I should understand your answer?

[Achim von Leoprechting, Chief Executive Officer]

Yes, around CHF10 million of that was instrumentation related and CHF50 million was around consumables, which, again, will then become in a normalized way and part of the normal menu in 2023.

[Tania Micki, Chief Financial Officer]

And the reason why we’ve estimated those instruments and consumables more specifically is because we still had orders from the Q4 that we could allocate to customers based on this. That’s the reason why it’s not purely instrument, but it’s also some of the service and consumables related to the instruments.

[Operator]

Your next question is from Daniel Buchta from ZKB.

[Daniel Buchta, ZKB]

Yes. Maybe 2 questions on your guidance. I mean, interesting comment from your side saying that the business -- the underlying business has still grown mid-teens, which I think was the same in the first half. But now you assume that it's high-single digits. So if I assume that the market environment stays roughly where it is, I mean, is it at least fair to assume then that your low-single-digit revenue growth guidance is pretty much too cautious? And then also related to that, I mean, if I assume you get to mid-single-digit organic growth, I mean, and your guidance of at least around 20% EBITDA margin with mid-single-digit, I would assume that your margins can benefit a little bit at least in '23. Is it fair to assume roughly this calculation?

[Achim von Leoprechting, Chief Executive Officer]

As always, I mean, we like to be sober in our guidance. And I wouldn't say it's overly conservative. I think it's right on what we see today in the balance of the market dynamics. And it's still, of course, quite some uncertainty in the markets out there in general terms. But what we see in our demand, we are looking at very positive funnels. We see good demand across both businesses, literally in all geographies, maybe with a bit of a kind of flavor between North America, Europe and Asia shaping up. But in other terms, I mean, as we said, the guidance low to mid should be added with the COVID headwinds that we also quantified in the PPV or the pass-through value that Tania mentioned before. So I think in that range, I think we see pretty good starting the year.

And, of course, working to still kind of the environment we're in right now. And -- but you're right, I mean, of course, customer demand is positive. Last year, we had -- of course, also a portion of still catch-up and pent-up demand from the COVID, particularly in the first half, which, of course, is now gone. And we see going back to, I would say, more normal deal cycle. So it's probably fair to assume that the funnels that we're looking at right now sees a bit of a kind of higher level of scrutiny from the institutes and the labs we're working with and the time to place orders has maybe shifted a bit by 1 to 2 months to actually place a [PO] that makes just a dynamic a little bit maybe more and more back-end loaded this year, again, which was normal prior to COVID. So that's roughly how we think about the world.

But as you said, the dynamics are positive. I think our end markets signal also what we said before that many of the labs, particularly in life sciences and pharma have really substantially been reshaped during the pandemic, and we see that as a continuation of demand in these type of labs. And for the rest, we just have to see how it shapes up. But I would call our guidance sober and not conservative.

[Tania Micki, Chief Financial Officer]

And you’re absolutely right. I mean, if we add, of course, more volume, that usually impacts our margin positively. That’s very clear.

Maybe I will go back quickly on, Maja’s question, because there was a second question, which we didn’t answer on the growth rates from Paramit and the legacy. I mean, for Paramit, we are assuming mid-single to high-single-digit growth. So for the legacy business, that would be a little bit [lower teen], of course, the guidance to the low- to single-digit growth that we’ve just announced for.

[Operator]

The next question is from Sebastian Vogel from UBS.

[Sebastian Vogel, UBS]

I have two questions. I would ask them one by one. In the presentation, you mentioned lower volumes at the legacy business in Partnering. Can you pinpoint any particular areas that you had in mind when you put the statement over there?

And the second thing is with regard to Partnering, the price increases that you have -- I assume, that you have put into the market, how much of support do you expect for 2023 on the back of those then?

[Tania Micki, Chief Financial Officer]

Yes. That were mainly COVID-related systems. That's the main impact on the legacy business volumes. And again, I mean, if you recall, we had CHF150 million to CHF170 million in the previous year and only around CHF60 million for 2022. So we had to catch up for most of the COVID-related sales. And again, that was possible in Life Sciences Business. We always knew that in the Partnering Business, that would be more on the lower side. So that was the main impact from that perspective.

[Sebastian Vogel, UBS]

And the impact from pricing for 2023?

[Tania Micki, Chief Financial Officer]

On the pricing level, we have said it's 1.5% overall increase on the legacy business from -- mainly on the Life Sciences Business. As we mentioned before, the Partnering Business kicks in only in the beginning of '23. So now basically.

[Sebastian Vogel, UBS]

Got it. And second question is on the margin guidance. Compared to the last time, I guess, last time you mentioned you were guiding for around 20%. Now you're guiding for at least around 20%. So what has caused this addition of the word at least?

[Tania Micki, Chief Financial Officer]

Well, we believe that we should be able with higher volumes to at least reach this margin. And also, as we mentioned before, we believe there will be a little bit lower PPV or pass-through impact. So that also will help us. The reason why we did not go for much higher is mainly because we still have the impact from significant material cost increases into our numbers also in what is in the inventory side. So that's mainly the reason why we have still a negative impact that we foresee from the material cost increases. On the other side, we have always the positive impact as well from, as I said, the lower pass-through from the higher efficiencies, the volume scalability and also we see maybe things a little bit stabilizing on the material prices. So those are all the elements. And as you recall, we have also guided for an additional 20 to 30 basis points on the reported EBITDA. So that also shows you the improvement there.

[Sebastian Vogel, UBS]

Got it. The third and last question would be, when I look at orders and sales in the past, you -- I mean, in the past where usually like 6 months delay or until they realized. Over the last couple of reporting, you suggested that it's taking a bit longer because customers are ordering earlier given the supply chain constraints they might be or considering that they're facing those that you are facing those. Has that changed in the meantime so that customer behavior on ordering and the expectation of delivery are starting to normalize to come back to the sort of average 6-month period? Or do you think actually it could be even becoming quicker than that is the consolidation of parameters, what's in that regard? That would be great to hear.

[Achim von Leoprechting, Chief Executive Officer]

No. Actually, we see them really normalizing. And maybe one other effect that we’re also seeing is that, customers are reducing their safety stocks and inventories. So some of the effects last year was maybe a combination of accelerated orders also linked to maybe inventory and supply concerns, which, again, last year was a good year from a perspective of supply readiness from our side. So our customers basically saw and assumed that Tecan will be able to supply. So the inventory buildup is probably now going into a different direction, particularly when I look at the consumable side and maybe even to some spare parts or services that we are kind of considering.

But on the other side, I mean, we see, yes, deal cycles maybe even going a little bit longer now because particularly in the Life Sciences side, decisions and signatures require more scrutiny than in the year before, and that’s just normally then expanding back to the envelope that you mentioned in around kind of around 6 months is in terms of from funnel to PO. So, I would say, more and more back to normal and clearly no, I would say, anticipation of acceleration and no more safety stock inventory built by clients.

[Operator]

[Operator Instructions] The next question is from Chris Gretler from Credit Suisse.

[Chris Gretler, Credit Suisse]

Tania, Achim, I have now 3 questions left. First, actually, since we touched on the topic of safety stock at your customer. I mean, your stock inventory is running relatively high. Is this basically peak level? And should we expect this to decline and not be a cash inflow in the current year? Or are we still kind of not in a cautious mode there? So that would be my first question.

[Tania Micki, Chief Financial Officer]

Sure. You're absolutely right. I mean, I do believe it is at the peak level. It was very much driven by Paramit. Again, to the -- what we mentioned to the previous question with the very strong demand and customers looking forward to the next 1.5 years or so. So this -- nevertheless, we have, as you can imagine, a rolling forecast. And my understanding is that, this will be decreasing to probably get to the more normalized levels in -- somewhere in the mid of this year. So that is our intention as well. Like Achim mentioned, some of our customers are looking at this, but we are also looking. And yes, this should materialize in a higher cash inflow.

[Achim von Leoprechting, Chief Executive Officer]

And then probably just one additional comment is, because the inventories, particularly on the Paramit side, but also in many other areas are typically customer committed inventory. So actually, there's a look back to the pass-through volume that we're seeing and quite a few of these materials were actually committed by customers with higher prices to healthy safety stock. So, I mean, as Tania said, we probably -- it's too early to say that we see a substantial improvement of supply chains and materials, but it is -- I think we reckon now maybe not getting worse, but gradually getting better, hopefully. When we see already improvement on the freight and logistics side, significantly improved. So that's good news. But on the materials, particularly electronics, we sometimes and still to this date have to go out and do broker buys and strike when we get the material. So I think it's a mixed bag of situation right now. But I think, as Tania said, we have very good confidence that the inventory levels that we recorded were peak and they're rather going down than increasing.

[Chris Gretler, Credit Suisse]

Okay. And then the second question is just on Paramit, it seems to be running really well since you acquired it. And could you also maybe give an indication about the profitability levels where we stand right now? Is it kind of closing in on group average already, since they had this strong underlying growth this year? Or are we still kind of substantially shy of that? I think it was 18% when you acquired it on EBITDA, if I remember right?

[Tania Micki, Chief Financial Officer]

It has -- indeed, it has improved. I mean, we see the positive effect as we wanted it to be. Now there were some one-offs, which we sell out from the Paramit EBITDA perspective. So -- but they are still above the 18% margin that we guided for.

[Achim von Leoprechting, Chief Executive Officer]

I mean, I said in my commentary that they reached around 19%. So clearly, to your point, that that was kind of higher than we anticipated and [thought]. So as Tania said, some kind of smaller one-off items. But general, as we said, Paramit has many other areas in the partnering side are very kind of volume and top line leverage and Paramit had a very good year last year in terms of productivity that had quite a bit. And actually, in both locations in Morgan Hill and in Penang business was very solid and demand was very good.

[Chris Gretler, Credit Suisse]

Okay. Yes, I missed the 19%, sorry.

[Tania Micki, Chief Financial Officer]

And yes, we believe that we will be able to deepen that 2022 margin also at Paramit as well.

[Chris Gretler, Credit Suisse]

Good. And then maybe my last question, just coming back to the outlook. I mean, kind of it's more a semantic question in the sense that you say that EBITDA margin adjusted will be at least at around 20%, around 20% and at least can be a bit this I don't know a disconnect. Is there also a case where it could be below 20%? Or is that absolutely excluded, not just that?

[Achim von Leoprechting, Chief Executive Officer]

I mean, probably kick us up there. I mean, excluded is typically, I mean, not what you say in guidance. This guidance is the range and scenario. But, I mean, you should read from this level of confidence, exceptional market effects that we cannot foresee at this moment. I think it's a safe assumption that [this would be] a good number to look at as a minimum.

[Tania Micki, Chief Financial Officer]

And Chris, I was hesitating a bit because if you ask to a CFO, can it go down? I can give you a good scenario, everything possible. But as Achim said, that we are having a certain amount of confidence by guiding for at least.

[Operator]

The next question is from Henrietta Rumberger from AWP.

[Henrietta Rumberger, AWP]

I have some 2. One is, in terms of -- I mean, everybody is talking about rising interest rates, does that affect Tecan in any ways?

And secondly, what about your M&A strategy? Which kind of strategy are you pursuing there?

[Tania Micki, Chief Financial Officer]

So, I mean, on the rising interest rates, yes, we see that. But to us, it does not -- well, of course, there's always a certain impact, but there is no negative impact on us. First of all, because we are cash positive. So -- and we do not have any loan or -- from a financing perspective. So the only debt that we have is the bonds that, as you know, has a fixed 0.05% interest rate. So that's the only thing that we are seeing. I mean, rising interest rates is more in terms of how it affects the environment and in general, the supply chain and the material cost, etc., but not directly impacting our numbers in that sense.

[Achim von Leoprechting, Chief Executive Officer]

And maybe just to add on, of course, inflationary concerns are also visible and sensible in the market. And as I said, right now, sales cycles have gone up a bit. So there is a higher degree of scrutiny, particularly for larger purchases in our end markets, but that is to be expected in such an environment. But like I said, we see continued very strong pipeline, very good kind of sales funnels. Of course, as you know, elongation of procurement cycles is maybe kind of one effect that we see in addition to what Tania said on the material price and wage inflation and the other effects. But -- I mean, the way we also look at it from an M&A perspective, I mean, we continue to be very active in the M&A side again. Now that Paramit is largely behind us, our teams are kind of having their head space to look at kind of the cultivation funnel, again, which is quite extensive and broad and spans a variety of application areas and portions in the life sciences field, but also on the partnering side. And we continue to look for cash-generative business as a very good means to continue that journey of acquisitions. Of course, when it now comes to financing of larger acquisitions, we will go back to the drawn board and see what the situation is at the moment in time.

[Henrietta Rumberger, AWP]

May I just add one because I forgot to ask it. In terms of labor costs, did you have substantial pay rises in the round -- in your latest negotiation round? Sorry.

[Tania Micki, Chief Financial Officer]

They were very much in line with last year. So that would be around -- it can vary between 4% to -- up to 10% depending on the region and the country. I mean, as you know, there are some countries in Europe like Austria and Belgium that have mandatory wage inflation on the -- rather on the high level. So there, of course, I mean, that's what we need to consider. Otherwise, I believe that was more or less in line with previous years. So where we said it was around 4% to 5%, and that's what we see again. It's a little bit different from region to region, with Europe a little bit higher maybe than the U.S. now. But that's -- again, it's still the same average.

[Martin Braendle]

Good. With that, we can conclude. No more questions as I can see. Thank you very much for your interest, and yes, have a nice day. Thank you.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Good-bye.