Stratec SE

XETRA:SBS

Earnings Call Transcript 2024-Q1

[Marcus Wolfinger, executive]

Good afternoon in Europe, and good morning in the United States. Before I start, you will have probably heard that I'm a little hoarse today. So however, I'm still hoping that I can get you through the presentation. As always, I think there is no need to walk you through the safe harbor statement, and you can actually download that presentation from the webcast or from our website. We are intending to split this presentation into 3 major segments. First of all, I would like to give you an overview of what happened in Q1, in particular, the drivers of the relevant KPIs and so on, then certainly the financial review, walking you through the details of the figures. And then certainly trying to get your -- an outlook particularly over what we expect to happen in Q2. As certainly, we want to get a gross debt. 2024 is not as back-end loaded as last year. However, it will be back-end loaded, very much driven by the fact that we are expecting a solid return of our molecular business, which is margin heavy and therefore, certainly the success of the full year would only be a derivative of the recovery of our molecular business in the second half of the year. And then certainly, I would like to give you the chance to come up with your questions.

So trying to get you an overview. Certainly, as everyone expected, and we were trying to manage expectations from the beginning of the year, certainly that we had and had a weak start of the year, which was very much driven by 2 main factors. So the entire industry, in particular, our customers, we are trying to avoid that their business goes over the cliff as it happened in 2023, and that's why everyone was starting super cautious into the year.

So we saw nice business recovery in Q4 of 2023, but at the beginning of 2024, what as expected that everyone was trying to hold back and was trying to see how the order income of the relevant businesses downstream actually happens. And we clearly see that order income in the course of Q1 was really good, and that's why we -- actually, in some of our manufacturing sites, we are really already struggling with capacities on the positive end that we have really high utilization decrease in some of our manufacturing sites, particularly in Germany and Austria with, like I said, decrease of utilization. And then certainly, there was one milestone related thing, where actually I expected that we might conclude the milestone already in Q1, which now happened in the meantime in Q2. So we are through that. However, year-over-year sales was minus 15.7% and again, development was mainly and generally consistent with our expectations. Positive things to report is that particularly structural improvements and the efficiency measures we actually established in the course of 2023 are showing effectiveness. We -- and I'll dive into details. We have established what we call efficiency improvement program, too, which is certainly not as big as last year, but allow me to mention that again, a lot of our goals we have established for a 2-year term for 2023 and 2024 on the basis of the budget of 2023 and 2024 established at the very beginning in 2023 has proven to be efficient. There was very little left over for 2023, which then was already covered by the 2024 budget.

And this is where we are. We will reestablish some of those things, but we have to see that particularly in manufacturing, utilization goes up. So this means that it will probably cannot take advantage of those additional measures because we certainly have to make sure that the capacities are actually fitting the degree of utilization and the demand of our customers. So I think the positive signal here is that despite really significant negative scaling effects on those decrease of data, the adjusted EBIT margin with 6.2% is almost on the previous year's level, which is a good thing.

And then we certainly have a well-filled development pipeline, which means most of our development disciplines are in the meantime utilized, which makes it a little bit difficult to establish additional measures in terms of efficiency management program. But I think all in all, it's good that the EBITDA margin improvements are actually operational related, is actually showing that our gross margin is up by 370 basis points. So I think it shows that the improvements are not actually happening by savings, but actually gaining gross margin. That's the positive thing, which allows us to confirm our full year guidance for 2024.

As mentioned last year, it was really, really back-end loaded. I think this year, we are better off that we already see some pickup in the second quarter, and that's why we are expecting significant growth rate top line already in the second quarter of 2024.

Now financial review. What we clearly see is that, as you can see, adjusted EBITDA margin with 13.5% after 2.1%. And then actually, we are losing somewhat down towards EBIT margin, adjusted EBIT margin, which is a little bit weaker than previous year, which is actually almost exclusively attributable to our Natech acquisitions, where the amortizations are slightly higher. However, I think it's not worth discussing that on that low -- those small figures, it's actually more figure related than actually operationally related.

Adjusted consolidated net income with EUR 1.2 million, so I think actually, the big upswing is coming here. However, I want to manage expectations that certainly we will nicely grow top line, but particularly on the development and we have a milestone coming in, which is very top line heavy, but very earnings slide. So please don't expect us to already get to that full year expected margin level. That will only happen in the second half of the year if margins are coming in more from the product side rather than from the development side. Q1 sales decline with 15.7% year-over-year at constant currency to about EUR 51 million is mainly impacted by 3 negative and 1 positive factor. So negative factors still heavily underutilized equipment in the laboratories. We definitely see improvements there, which means some of the equipment in the labs are in the meantime, aged and life cycled and these are replacement, which means about 50% in the molecular space of all instruments we are selling, 50% is actually replacement business and the other 50% is new business coming from our customers. And certainly, you probably know that there are 3 main platforms in the molecular business. One is 1 platform which saw some really nice tailwinds during COVID-19, which obviously led to a high degree of set duration, where we see some wins in the meantime, as mentioned, some replacement business. However, needs at this point are no longer satisfied with underutilized equipment in the space with destocking coming from our customers, and we expect to turn that into a new business from Stratec in the second half of the year.

The second platform is a generation shift from one molecular platform to the next one, which is happening. So our customer is actually about to launch the program, which happens in the territories of the world, which is actually adding some additional pressure on the previous generation. But therefore, we expect a nice catch-up effect and as soon as the platform is launched worldwide and a certain release of holdback of the end customers. And then the third platform, which is a [indiscernible] platform in the molecular space, where this is fairly early in the game and we are not yet through that hockey stick effect. So if we are adding up all the effects, we foresee a healthy recovery of the molecular business pretty soon.

The second thing is still high inventory levels at our customers. We have lead data from some of our customers. We have inventory levels of some of our customers. And we see that the expected inventory levels are now hitting the actual run rate, which means inventory levels are getting to a point where our customers are starting to reorder instruments. Then certainly the timing of some of the revenue recognition from development services here. I'm simply complaining at this point about IFRS 15. And again, volatility caused by timing effects here. So very milestone light quarter 1, but therefore, milestone heavy quarter 2 in 2024. And on the positive end, we can certainly report strong and further accelerating sales with our service parts and consumables business, which actually shows that the equipment, which has been built and the [indiscernible] fleet, which was established during COVID and thereafter is now starting to show utilization, which is the positive thing.

High sales with service parts and consumables is actually an early KPI -- an early indicator for margin acceleration coming from that business. Typically, I'm mentioning that we only make like 30% to 35% of revenues with this part of our business. However, more than 50% of our earnings historically is generated with that part of the business because of -- driven by the fact that this business is margin-heavy.

Now switching to the margin side of things. Here, it is actually getting way more better. So we still have in Q4, in particular, a recognizable negative scaling effects because of small figures. So we can only achieve high scalability north of EUR 60 million or EUR 65 million. So we have given sensitivity analysis of margin profile and earnings profile correlation, which is clearly showing that north of EUR 60 million or EUR 65 million scalability effects are coming in independent of the actual product mix. And this comes on top that we still see material room for improvement on the product mix side.

In COVID, it was more on the other scale of things, on the other side of the state of things with very dominant -- or predominantly coming from molecular very development light now. We see that we have some recognized revenues coming from development coming in. However, still margin light. We see that the product mix at this point is very molecular light, therefore immuno-heavy and immunohematology heavy where the margins are not as high as in molecular. However, I think in 2025 and thereafter, we will get more back to a normalized product portfolio and product mix with a normalized revenue mix for products as well as with high utilization and therefore, better business with our consumables and maintenance parts and at the same time, a solid balance of development revenues coming in as well as instrumentation revenues coming in.

I think the positive side is that our efficiency measures and particularly structural changes we have established over the past 15 months are now showing effectiveness and efficiency over the full year, which is the positive thing we will work on that. In our press release, we reported and we still see some room for additional efficiency measures. I don't want to overpromise at this point as we see utilization coming back in development and in manufacturing, which makes it a little bit more difficult to squeeze out more efficiencies out of the system. We have to see that if we want to continue to grow, which, at the end, means a certain degree of investment and a certain degree of trying to establish activities, which will only pay back dividend in the future. We have a growing share of service parts and consumables, again, which is an early indicator for margin improvement.

Cash flow and net debt related cash flow dynamics is still burdened by a back-end loaded quarter with the corresponding accounts receivable as well as high inventory level. So if you would ask me for, let me say, nonoperational and non-future related activities, so certainly, our focus is bringing in new business and getting through the milestones on the development side and getting back on to the growth track. However, our nonoperational work is focused on getting down the inventory levels. We are still sitting on super high inventories, and we have some obligations to bring in inventory levels from obligations we have towards our supplier base.

And please allow me to remind you that certainly, let me say, inventory development was kind of flattish in Q1. We will work down inventory levels in quarter 2 and 3. However, we will have to buy things and increase our inventory levels in Q4. And then from then on our structural changes will show positive effects on the inventory levels in 2025 and on top certainly structural improvements. We have established will show efficiencies on the gross margin of the product, which means in 2025, we definitely have the chance to first of all, establish a big inventory decline, which will lead to cash release in 2025 and on top, hopefully, can show the effectiveness on those measures established in order to improve the gross margin on the product, which will then add to the margin as well.

Investment ratio at this point of a level of about 8.5% with a further declining level expected for on a full year basis. Net debt to EBITDA on a level of 3%. We will most likely have to increase that slightly in the remainder of the year and then again, work that down. This is very much driven by inventory levels. I hope that statements make all sense for you.

Now getting into the outlook. So financial guidance, and I would -- allow me to summarize that. I think it's actually too early to comment if this is a conservative. We are fairly confident with the data we have given, which means sales is expected to remain stable, show some slight growth, again, very much driven by recovery of some of our franchises, which are still under pressure and certainly a substantial year-over-year growth in the second quarter of 2024 is foreseen. Actually, allow me to say that this is certainly beyond the point where it's still planning. We have this, actually, the orders in manufacturing and at this point actually more a challenge to get the product out of the factory by the end of the quarter rather than utilizing our resources. Adjusted EBIT margin should be around 10% to 12%. And again, obviously, as our business is scaling very well towards the upper end of revenue. So if we all managed to get more towards the upper end of our guidance given certainly, there is a good likelihood of achieving the upper end of the EBIT margin guidance as well. Investments in tangible and intangible assets are forecasted to be in the area of 6% to 8% of sales. Again, on the level where we are at this point, it will most likely show improvements in the remainder of the year.

Focus, actually, I hope you can see more than I can. Focus for the next, let me say, 12 to 18 months is certainly and again, very much driven by -- the degree of utilization is only the implementation of additional earnings improvement. We are certainly looking into the details and will act on a very selected basis. Based on the current figures and depending on the actual capacity utilization rates, we see a potential of low single-digit million earnings improvement. Again, I want to manage expectations. We really take a diligent approach and look into the actual utilization of the capacities.

Certainly, regarding our best business, which is always a discussion at this point. We want to recognize the design to improve actually downstream logistics, though this is not a question of do we get things established on the development side. It's just that we need to ruggedize the design in order to minimize downstream cost, like logistics, which means final testing in our factories and certainly installation. Certainly, the instrument of a value where customers have the expectation that you put such an instrument into your laboratory as you would put a coffeemaker in your kitchen, very minimal installation task and as mentioned, design has been improved to be more robust in terms of installation quality and then downstream service cost.

This has to be implemented into manufacturing. And then certainly the corresponding ramp-up in the remainder of the year. So I think we are through the word, but not yet where we should be time-wise. But I think we discussed that a bit detail already.

Then we certainly want to manage and process on our M&A pipeline. So I think this is actually the time where prices are becoming more reasonable. So with a very ambitious growth target in the future. Certainly, this is one of the core focuses. And then we want to execute on our deal pipeline. We have a couple of nice things ongoing, bringing in new business on the development work as well as in manufacturing. And then certainly one of the core focuses, which has been a little bit pushed out very much due to resource allocation is actually the Natech integration and particularly accelerate the recognition of the synergy potential coming then, so going to common customers and commonly going to legacy customers of most businesses in order to make sure that we are really taking advantage of the synergies and of the chances we have as a combined unit.

And then certainly, we will continue to grow our footprint. So -- and we certainly are coming from the diagnostic phase over the past, let's say, 10 years, mainly over the past 5 years. We certainly have established a nice footprint in very selected segments of the life science, particularly those ones generating multipliers and generating more shorter time to market, and that's certainly one of the changes to accelerate growth in an area where we can really handle the risk very nice. So this gets me to the point where I would like to hand back to, Sasha, our operator and he'll explain us how to get into the Q&A session. Thank you, so far.

[Operator]

[Operator Instructions] The first question is from Oliver Reinberg with Kepler Cheuvreux.

[Oliver Reinberg, analyst]

Hopefully, you feel better soon, Marcus. So first question would be on the kind of short-term business dynamics. So I guess Q1 was probably a bit of a softer start than you indicated in the Q4 call. But I guess you already pointed out back then that there's quite some kind of volatility attached to this kind of milestone payments. So I just want to get a feeling the kind of guidance for EUR 125 million to EUR 130 million in the first half. Is that still in reach or should we be delivering more caution on that side? And then you mentioned that you're not going to reach a full year margin target in the first half, does it mean that we can anticipate that for the second quarter or not? And then thirdly, just any kind of color on this kind of milestones? I mean, normally, there's around EUR 50 million milestone payments in the full year, equally distributed between first and second half last year. Can you just give us a sense how significant the swing factors were now in Q1 versus Q2 just to get a kind of feeling for the kind of sales recovery?

And then the last question, just I think in the last call, you pointed out kind of accelerated focus on probably catching business in the kind of life science space. So just can you talk to that in some more details, how advanced is this? Are you already discussing any kind of projects here and what's changed your thinking here in terms of focusing on these new end markets now?

[Marcus Wolfinger, executive]

Yes, Oliver, thanks very much for those questions. So first of all, first question was about sales dynamics and I mentioned -- in the last call, I mentioned that we'll probably have the chance to get into the area that we might get a level year-over-year after the first 6 months, which is certainly reachable, but I think it's too early to discuss the dynamics.

As mentioned, we are expecting significant growth rates in the second quarter. But I think as I mentioned, it's too early to discuss, will we be level year-over-year after the 6 months or shortly thereafter. I would like to reiterate my statement. We are expecting significant growth in Q2. However, we should expect that like in the year before, we will have better sales dynamics in the second half of the year. Historically, we are generating between 52% and 53% of full year revenues in the second half of the year. As mentioned, Oliver, it's super difficult to make generic statements about margin profile of milestones. Allow me to again make the statement. We certainly have some milestone payments, which are coming in margin heavy and others, which are coming in margin like, which is very much driven by the actual contractual setup with the customer.

And again, I would like to heavily complain about IFRS 15. So -- and definitely, we are taking -- we are trying to establish a contractual setup with our customer, which is good for the company and not good for our balance sheet necessarily. So good for the company means trying to get -- minimize risk in such contracts and to maximize the commercial robustness and commercial positive impact over the entire product life cycle. And that's why we are not over focusing on the balance sheet aspect.

And again, this may mean that we have some recognition of development activities and development revenues coming in margin light and others coming in margin heavy. This particular one was particularly big and particularly margin light. However, we shouldn't compare it to like milestones we had in the past, which were really big. So I would actually considering it being midsize and coming in margin light. However, we have -- are showing some nice gross margin improvement on the product and that will certainly find its balance.

And Oliver, let me say, talking about our life science exposure. So this is actually not new. We have some meaningful products, which are on the market for more than 5 years, which are life science research exclusively. However, these products are typically ending up in highly regulated environments. That's why they are often assumed as being or recognized or perceived as being diagnostic products, although they aren't as they are used, like in early-stage neurological disease treatment and diagnostics, or are actually like more in the translational research space.

Our focus is clearly acting in highly regulated markets, which may or may not be diagnostic on life science, particularly those ones providing a high multiplier profile in terms of developing something which is then actually a little bit ring-fenced from competitors because it ends up in higher regulated environment, and that can well be the life science research space. Certainly, as this order is getting more and more floating like particularly in the neuro space, particularly in the United States with an ongoing discussion about CLIA waived products and LDTs. This doesn't necessarily mean diagnostics in terms of approved products, however, used in highly regulated environment. This is not new in our strategy. But certainly, this will continue to accelerate in the future as well because what definitely helps is that those approval cycle, and we definitely see that approval cycles are getting longer and longer after COVID-19 and focusing more in the life science research space, where, particularly in the United States, approval are more or less gained through validation in the relevant laboratories are helping to recognize revenues a little bit earlier than going into diagnostics exclusively. This is not a change in paradigm, but it's actually a nice track where we have been on like for the past 10 years. I hope that makes sense.

[Oliver Reinberg, analyst]

Perfect. And can I just follow up. So for Q2, we should not expect a double-digit margin. Is that correct?

[Marcus Wolfinger, executive]

Too early to talk about that.

[Oliver Reinberg, analyst]

And can you just give us a sense of the swing effect in milestone revenues Q1 versus Q2? Is the swing effect more than EUR 10 million or is that too much?

[Marcus Wolfinger, executive]

It would be if we wouldn't have a further bigger milestone in the second half of the year. So like -- now I have to answer that from the top of my mind. So like the one which has been now recognized in Q2 is certainly mid to high, but it shouldn't be overloaded in the first half of the year.

[Operator]

The next question is from Oliver Metzger with ODDO.

[Oliver Metzger, analyst]

Yes. Marcus, I really appreciate that you have made it on the call despite your conditions. So 3 questions from my side, and please answer them as short as possible. So the first one is you expect some strong sales growth for Q2. The first month is almost over. So it's still pretty early, but have you seen already in April some pickup in momentum or do you regard this as even in the quarter more back-end loaded? Second question, how would you quantify the positive effect on the EBITDA margin improvement in Q1 due to cost savings? And my last question, what additional potential as a percentage of sales do you see from the base of Q2 EBIT margin from your cost savings from the existing program? I don't want to challenge your new program. And as I said in the beginning, get well soon.

[Marcus Wolfinger, executive]

Yes. No. Thanks, Oliver, and thank you so much. Actually, we saw already some nice development, as mentioned, as we certainly have long lead time items in manufacturing and in procurement. It's actually the fact that already April was, let me say, already fairly successful. It will not be super back-end loaded. There is -- I don't want to say linear distribution across the month because we probably -- you are German as well, so you know that May in Germany is always a difficult month in terms of resource allocation. It was actually a good April, let me put it this way at this point.

So certainly, and I was trying to get that across is that certainly our earnings improvement program, where there are some measures established, which are sustainable. Certainly, it shows effectiveness and certainly on a lower revenue scale the degree of effectiveness is more important than the actual price increases and improvement on the gross margins. However, you already saw that our gross margin was up by 370 basis points, which actually shows that actually both ends are showing effectiveness. And I hope this gives an indication about your second question as well. So earnings improvement program is certainly important for us. But it certainly means to an end of those effects, which are non-sustainable, like hiring freeze. If we are getting towards the upper end of our revenue corridor in terms of guidance, certainly, hiring freeze can no longer be sustainable. And I think I mentioned that already in our full year's call. There are certain departments where we actually already released our hiring freeze, like in software development, some areas in manufacturing. I think all in all, we are remaining a high degree of cost discipline but it's certainly more important to get out of that saving mode and switch back into growth mode where we can take advantage of the improved pricing scheme, which have been established in 2023.

But certainly, in some cases, we have already agreed upon price increases for 2024 and 2025 and actually showing margin improvement on the gross margin side. So input side will help as well. So all in all, I think it's more important to switch out of the saving mode and get back into growth mode and to make sure that the structural or structurally established means are showing their effectiveness rather than savings.

[Operator]

The next question is from Michael Heider with Warburg Research.

[Michael Heider, analyst]

Marcus, I hope you are getting well soon. I have 2.5 questions left, actually. The first one would be on the visibility you have beyond Q2 because I think it's probably pretty visible for you that you will have a very good second quarter? And the question is, however, because you also talk about increased volatility in the business, and we have definitely seen that last year that a good quarter was followed by a pretty weak quarter. And so my question is, is there any indication that visibility has become better again in your industry, so that we can have a high confidence that the second half really will get better beyond Q2? So that would be my first question.

Then second question, just when I look at your P&L, the other operating income was a positive EUR 1 million, which kind of supported your strong margin development in the first quarter. Can you quickly remind me what was behind that other operating income? And then the last 1 was just because when you talked through your presentation, you said that service parts are a good early indicator for margin improvement going forward. And I was wondering that how you meant that because I think the service parts should be built immediately, aren't they? These are my questions.

[Marcus Wolfinger, executive]

Thanks very much. So I will answer -- let me put it that way. The last question first, which is probably the easiest. So certainly, we are trying to describe our business very much driven that there is certainly an underlying margin of business, which pre-pandemically used to be in the area of 15% and certainly, and I'm talking EBIT margin. And I'm certainly -- and certainly, we want to get back to the point where we are getting back to this 15% underlying EBIT margin of the company. On top of that, an extraordinary good years, like when we had high degree of utilization of our equipment in the field, it typically means that we are selling more consumables and more maintenance parts.

In the past, it used to be very maintenance part heavy. Certainly, over the next 5 years, it will become more and more consumables heavy. And that may actually generate another 100, 200, ideally 300 basis points of margin on top. So high utilization means that those parts in the instruments, which are maintenance parts, which are getting in touch with biologic material on higher decrease of utilization, those parts need to be replaced more often. And certainly, assuming a constant or growing installed base of instruments, certainly, this means if instruments are getting more complex, the degree of consumables and maintenance parts sales is actually growing, which then means that those sales we saw during COVID-19 and at the time, we expected that the utilization might continue to be higher, but we didn't see that the actual per unit sales for maintenance parts in the molecular space didn't pick up, which should be a derivative of utilization. And now we actually see that the installed base is kind of robust in terms of the instruments are not getting decommissioned, extraordinary high variance during COVID-19 is now leading to a replacement business, which is leading to a robust installed base and the per unit sales with maintenance partner and consumables is likely picking up, which gives an indication of a higher degree of utilization, which is typically a downstream causing the nice-to-have problem of higher contribution as a percentage of sales to our overall sales, and therefore, a better margin profile. Then Michael, certainly, the question about the nonoperational, let's say, is what actually currently related activity. However, I would like to reiterate that this was actually not the main contributor to margin improvement as the gross margin was up by 370 basis points, which is the actual driver. And then certainly, Q3 and Q4 visibility. So certainly as one of those structural improvements we have established over the past, say, 6 months, that we are certainly -- we're trying to establish a better scenario management.

So we are looking into the detailed bottom-up of the contributors to achieve all our goals. And certainly, we certainly have some way to go and to achieve some and get through certain milestone approvals with our customers. And we know that we like introduction of new products in manufacturing or ramp up for others. This is certainly all things, which have to be established. However, that lineup actually fits and the degree of visibility, predictability and transparency is improving. I think there is one more thing to say at this point, one of the indications we have experienced in the past fairly often that it was always a bad sign if volatility in peaks and dips of the forecast given by our customers and the cadence picking up was always a bad signal. So know if the forecast for 1 quarter was good from 1 customer and the next 1 was weak and then good again and the cadence of forecast given was actually reflecting this lumpiness that was always like a bad sign.

What we definitely see is that the forecasts are getting more robust that the delta between spikes and dips is getting lower and the cadence of forecast is more reduced and the deviation between the relevant forecast affecting a certain period of time is actually declining, which is a good signal, actually. And this is just a historical derivative, but I would actually perceive that the industry is switching back into an operational mode, which is not driven by the effects of fear that somebody is missing something on the one hand side and then actually stepping into the warehouse and seeing high inventory levels and acting accordingly. This is no longer the case, which actually is getting me a higher degree of confidence, let me say that we will get back more into less panic mode over the next 18 months. I hope that makes sense.

[Operator]

The next question is from Jan Koch with Deutsche Bank.

[Jan Koch, analyst]

I also have 3. The first one is, again, on your sales development in Q1. Was the delayed achievement of the milestone payment, the only reason why sales in Q1 came in below your previous indication you gave in March, or were there any other reasons? And it would be great if you could quantify that specific milestone?

And then secondly, on price increases. You mentioned on previous calls that you might implement additional price increases above the level you have announced as part of the earnings improvement. So have you increased prices further? Or are you planning to implement further prices this year? And then thirdly, is there an update on the compensation payment that you expect from a customer that had terminated a contract with you in Germany?

[Marcus Wolfinger, executive]

Yes. No, Jan, thanks very much for bringing up this well. First, quarter 1, certainly the milestone thing was one thing, but actually operational deviations as well. I mentioned that our customers were super cautious. We saw a little bit of upswing then in February, but still a high degree of lumpiness then towards the end of March. And when we talked last, certainly, the main deviation was actually based on that recognition of the milestone we have discussed earlier. I think I mentioned a potential data point in our 2023 full year disclosure, and we deviated from that again. However, this was mainly related to the milestone we discussed earlier. Then certainly price increases. So both your suggested answers are actually true. For some of our main customers, we have established price increases in the discussions we had in, let me say, after Q1, 2023, majority of those price increases established.

Then in the second half of 2023, so for some of our customers, we already have fully negotiated price increase, covering price increases for 2024 and 2025. For others, we don't -- and we continue to negotiate those prices. So both is actually true.

However, there are some which are not yet factored in our guidance, we cannot -- because we cannot determine them, and those certainly play a meaningful role in where will we end up in the bandwidth of the guidance given. And then certainly, compensation payments to the terminated agreement. There was actually no news. So in our today's guidance, no compensation is factored in at any data point, like neither guidance, nor top line or anything the like.

[Jan Koch, analyst]

Okay. Great. Get well.

[Operator]

We have a next question from Alexander Galitsa with HAIB.

[Aliaksandr Halitsa, analyst]

Yes. I'll be quick. Just wanted to ask you if you can provide some more color or context to the gross margin development. I mean, what we see in Q1 that despite EUR 10 million lower revenue, the gross margin actually was at a very solid level of 26% almost. Just wondering to what extent this was a function of lower development revenues? And then in connection to that, now we're heading into Q2 where presumably sales will be much higher quarter-on-quarter. So do you expect sequential improvement in the gross profit margin in Q2 or the contribution margin that you generate on development revenues is so much below the group level of the gross margin that you basically may even see no improvement or even the duration in the Q2?

[Marcus Wolfinger, executive]

Alex, thanks very much for the question. Actually, we are asking ourselves that very question. First of all, is that the right thing, gross margin was on a level of about 26%, which is actually, like I said, showing effectiveness here. So certainly, in that particular case, certainly, the contribution margin coming in from development will certainly play a material role in the margin of Q2. However, driven by the efficiency gains we have on the margin of the product will definitely see that going forward, the gross margin effect will actually supersede and take our dominance over that milestone payment. It's a little bit too early to give you an indication because certainly, the product mix is playing a meaningful role in Q1. Certainly, it's -- as a matter of fact, we -- as our molecular business is not yet recovering with a better gross margin profile. So certainly, in the second half of the year, gross margin improvement because of product mix, but because of measures as well, will play a meaningful role. And in this particular case of that milestone, which is coming in margin weak, certainly I was trying to manage expectations regarding margin development in Q2 already. However, in the second half of the year, this will definitely be the meaning -- or will play a meaningful role, the gross margin on the product level.

[Aliaksandr Halitsa, analyst]

That's all from me. I wish you a speedy recovery.

[Marcus Wolfinger, executive]

Yes. Thank you. Actually, I'm -- it's just my voice, nothing else. So thanks for your all the wishes.

[Operator]

That was the last question. I would now like to turn the conference back over to Marcus Wolfinger for any closing remarks.

[Marcus Wolfinger, executive]

Yes. Thanks, Shasha. And ladies and gentlemen, this gets us to the end of our Q1 financial results presentation. If you have any further questions, please do not hesitate to call us, we are here for you. Thank you so much, and have a good day.