Stratec SE

XETRA:SBS

Yes. Thank you, George, and warm welcome to everyone joining us today for our 9 months 2024 financial results conference call. With me today are our CEO, Marcus Wolfinger; as well as Oliver Albrecht, our CFO at interim. They will firstly guide you through our financial highlights of the first 9 months of the year. And afterwards, we are looking forward to take your questions.

Please note that this presentation will be webcast live, and you can download this presentation either from the website or directly from the link in the webcast. And lastly, I want to draw your attention to our safe harbor statement, which we have on Page 2 of the presentation.

And with that, I'm happy to hand over to Marcus.

Thank you, Jan, and thank you, George, for your opening remarks. As always, we have split this presentation in to those, say, 4 major segments. First of all, giving you an overview of what happened over those past 9 months and Oliver will take over for the financial review, getting them back to me for the outlook and Q&A will be handled by everyone from Stratec in the room. So thanks so far.

Let me say before we start, let me make a generic remark. Actually, I was very enthusiastic when we entered into Q3 this year about the remainder of the year, particularly as I was not only hoping at the time, I was actually convinced that this year is not so back-end loaded as the previous years used to be. Unfortunately, and again, I got the confirmation from some peers in our industry that they actually experience the same thing is that you probably know that there is a very important meeting of the industry at the end of July, beginning of August in the United States. And when we came back from that meeting, everything was in order. We have a lot of good meetings with customers. They confirm forecasts and so on.

And right after that, the thing started over, we saw the year before, but the year before in 2023, it was a little bit earlier that volatilities came in. And actually, we had a situation that forecast which has been pushed out and so on, that doesn't hurt us that much because typically, we have a contractual setup, which allows us to politely deny moving forecast.

However, we are trying to fulfill our customers' needs. And if they want to move things, we certainly can confirm that if it's moved within a reasonable time frame. Unfortunately, we had a situation that a binding order, and I'm not talking a forecast, a binding order of one of our customers, not a top 5 customer 2023, asked us to, again, move a binding order, which was already moved actually from 2023 into 2024 and move that again, and we accepted it. It doesn't make too much sense. We can only sell things once. We don't sell things twice which kind of applied a weird situation in Q3 in terms of inventory levels and so on.

We reflected that in an amendment to our guidance with a slight change. We confirmed a bottom line. We are convinced that we hit the bottom line. We got some new things in actually where we believe that we can materialize those things in the fourth quarter. That's why we don't -- didn't have to shuffle that much. But again, I want to express and kind of elaborate a bit on how things evolved in the third quarter with -- like I said, when we returned from the United States end of July, beginning of August, we were convinced and literally, everybody in sales and in the senior management team of Stratec that this year is not going to get that level of back-end loading like we saw in the previous year, and it looks like the same thing that literally everything happens in the fourth quarter.

We are fully aware that in order to meet the guidance that I don't want to say that this is a stretch because this sounds negative. We are actually fairly convinced that we will meet it. But we know that this means revenue catch-up and certainly a margin catch-up. But things are lined up very well. So we are convinced that we will meet that. However, we have to put that conditional to some events which are not yet effective, but where we are convinced that they will get effective.

I mentioned that I would like to lead you through the first 9 months. We can confirm that we see good sales dynamics. And unfortunately, you know Murphy's Law always strikes that particularly those instruments where we have inventory levels. These are the instruments which are not running very well and those instruments, which are showing high demand, we have to order things. Same thing applies for manufacturing capacities. So it doesn't fit very well. We have high volatilities. We are not yet back into scaling level where we really can take advantage of economies of scale.

At this point, we think that our earnings improvement program is showing very good traction. However, in order to get back to this, say, and don't take it like literal here. But when we are talking about historical margin levels, say, in the area of an EBIT margin of north of 15%, we know that we will get back to that level. We cannot promise that this is going to happen next year. But what we see that is like the things we established over the past, say, 18 months with earning increases and all those structural changes we applied in supply chain.

Getting back to, let me say, regular scalability levels, and a level of operational excellence, we believe that in this right angle of cost discipline, on the one hand side, the relevant capacities and a good level of scalability and operational excellence that we have the means in this company to get back to an EBIT level of, like I mentioned, 15%.

Again, I want to reiterate myself by saying I'm not promising this one next year. I just want to express that this company is set up in a way to get back to that level, which represents then to only an EBITDA level of north of 18%. So sales dynamics is still affected by the lower demand of MDx systems. Still high capacity still during COVID-19, which are underutilized. We see that the utilization comes back.

You'll see it in our full year report for 2023, we really had a nice step up as far as the sales of maintenance kits, consumables and actual [ spare tools ]. This shows that utilization comes back, which is an early indication that when utilization comes back, certainly, the utilization of the equipment out there goes up, which typically means that replacement instruments will have to be ordered and that the market grows. We see it in the data provided by our actual end customers and the end customers of our customers, that volume comes back, and this is a good indication.

Efficiency levels -- measures and structural improvements are actually unfolding momentum and now showing good effectiveness. You probably saw that the gross margin despite the lower economies of scale and still a suboptimal product mix are showing good traction. We provided that margin update guidance on that, and we are actually about to strengthen our market position in Asia Pacific and are starting to show really good sales synergies in the United States, particularly based on the back of the Natech acquisition.

Actually, I just want to mention that in 2 weeks, 2 or 3 weeks from now, we have German Equity Forum. And we are intending to make a deep dive in the presentation of German Equity Forum into our -- in the elements of product portfolio as part of our strategy going forward. So I'll make a deeper dive there. So if you are interested in how we believe the market is going to evolve and how we will act in that evolving market over the next 5 to 10 years, I would recommend to participate in this meeting.

Now I would like to hand over to Oliver, who will get us through financial details.

Good afternoon, everybody, and also a very warm welcome from my side. First, I would like to talk about our key financials on the next page, on Page 5, please.

Our sales in Q3 were EUR 57 million, which is 8.7% lower year-on-year. And despite the positive sales momentum in Q2 -- in Q3, we have been faced by reduced customer forecasts. As Marcus commented, some cancellations and postponements of deliveries into Q4. And therefore, our 9-month sales amounted to EUR 176 million which is about 6.1% lower than previous year.

In line with lower sales in Q3, our adjusted EBIT dropped by 45% to EUR 5 million in Q3 and amounted to EUR 14.8 million in the 9 months period. The adjusted EBIT margin year-to-date was 8.4%, which is only slightly lower than in the previous year. Despite negative economies of scale, we were able to slow down the decline in margins, thanks to our efficiency program, which also Marcus has mentioned here.

Our adjustments include amortization from purchase price allocation and other noncurrent items like advisory expenses for M&A and some one-off expenses, mainly for the former CFO who has left us -- who has left the company in August. Let's talk in more detail about the sales development on the next page, please.

Looking on the left-hand side, you see in the chart, our sales development since 2018 showing a peak sales during the COVID pandemic and since 2022 at decreasing sales volume year-to-year. This ongoing weak market demand affects not only Stratec but the whole peer group. And compared to last year, we had a decrease of 6% year-on-year. And without the acquisition of Natech, it would have been even higher at 9.6%. We are still facing some headwinds with lower pandemic-related demand for molecular diagnostic solutions and a flatter than expected ramp-up phase of the recently launched MDx product.

In addition, some deliveries, which we originally expected for Q3 have been postponed to Q4 and to 2025. Also, we received positive signals about the forecast from customers all year long. Even at the last trade fair in August, as Marcus said, they regret that shipment for September surprisingly dropped, especially the overall sales from analyzer tools are significantly lower than expected.

The positive thing here is that we could partly compensate this trend by a healthy demand for service parts and for consumables and by a moderate increase in development and service revenues. Higher sales from consumables are also a good indicator that molecular tools are starting to have a higher utilization rate, and that gives us a positive trend indication for the future.

Moving on to the next page, Page 7 here, I would like to talk shortly about our profitability. Despite negative economies of scale due to the lower sales volume and the sales decreased in Q3 and in the 9 months period compared to previous year, we were able to stabilize our margin by consequently continuing our efficiency program in '24.

Year-on-year, adjusted EBIT margin slightly declined from 8.6% to 8.4%, and this shows the efficiency of our measures, which comprise strict cost discipline on the one side, continuous price increases, a strict hiring policy, especially in our administration field and also a better product mix. The effect from these efficiency measures will have an even higher impact on our margin when the market is recovering and sales are starting to increase. I expect an even stronger dynamic on our operating cash flow development due to inventory levels coming down to pre-pandemic levels.

Let's move on the next page, where I would like to comment on our cash flow and net debt situation. Our operating cash flow improved significantly due to the lower accounts receivables and lower tax payments. We could improve our DSO from 80 days to 59 days. An open tax method was closed in 2024, but has led to additional tax payments in Germany in 2023 and in turn, to a tax refund in 2024 in a subsidiary from a foreign tax jurisdiction.

In July last year, we acquired Natech, which was firstly incorporated in the financial statements in the third quarter 2023 and this explains the difference in our cash flow from investment and financing activities compared to last year on a year-to-date basis. Our investment ratio is 7% and therefore, in line with the full year target corridor of 6% to 8%. Due to an improved operating investment cash flow, our free cash flow improved significantly to EUR 30 million. Our net working capital improved to EUR 109 million, mainly due to lower trade receivables.

Nevertheless, our inventories have risen slightly due to purchase commitments that we entered into due to supply chain bottlenecks during the pandemic period. We expect the peak at the end of this year and then a trend reversal from 2025 onwards. This trend will have a positive impact on our operating cash flow in the upcoming quarters.

Now I would like to hand back to Marcus, who is going to talk about our outlook and guidance.

Thank you. As mentioned before, we are coming from a guidance where we are expecting going flat top line with probably some slight increase. That was actually the plan very much driven by the fact that, as mentioned before, binding orders have been moved from Q3 into Q4 and into 2025. We adjusted our top line guidance from -- to flat into slight decline. However, we are still hoping that this -- that the slight decline will be slight getting to an almost level situation.

We didn't touch our margin guidance. So we continue guiding for 10% to 12% EBIT margin after a 10.3% EBIT margin in 2023. So sales and earnings dynamics are expected to improve significantly in the fourth quarter 2024 due to the expected signing of further additional orders with customers as well as the shift in delivery from Q3 to Q4. So some things are lined up already. Some things still has to happen. But as mentioned, we are early in the quarter. Things are showing good progression. The communication is good. There is nothing which has to happen operationally, which means we are in a good shape to take advantage of that situation and make those additional orders happen.

Investment, as I already mentioned, which is part of our guidance, intangible and intangible (sic) [ tangible and intangible ] assets combined around 6% to 8%. 2023, we were at 6.7%, as mentioned by Oliver, a minute ago. At this point, it's about 7%, and we believe that this will be actually the KPI for the remainder of the year.

Focus for the remainder of the year and beyond. Obviously, besides the fact that we are pushing this organization hard to make the top line and bottom line guidance happen. We are maintaining a good level of cost discipline. But again, we are not overdoing things, cost discipline is important for an organization of our size and shape and particularly considering the last 24 months.

On the other hand, we certainly don't want to cut into the meat. So cost discipline means a high degree of potential orientation and rather only cost orientation. It will take us some time to reach pre-pandemic efficiency, but we are working hard on that communication, getting back from very synchron communication in the company to a more asynchron communication and setting those levels that is certainly part of those measures which are helping us reach those levels.

Again, I think with all those measures established over the past 18 or say, 24 months, we are in a good shape that as soon as volume and scalability comes back, we did those operational elements and structural changes, we are prepared to ramp up, and we'll see that from an efficiency perspective, we are in such a setup that we can relatively fastly get back to pre-pandemic margin level as soon as the market picks up. We see some good indications.

I mentioned that before looking into our spare parts situation and maintenance part situation. But even talking to customers, there are certain market segments where our customers are developing a certain degree of being braver communicating their expectations, certainly, and as mentioned before, and you'll get the confirmation as well particularly in those areas where a lot of life science exposure has to be applied, particularly in the more commoditized levels.

Still the market is weak in molecular. We are a little bit challenged on the point of care field, actually the market is weak, but in other areas like immune hematology or like immuno, particularly in immuno assays, we are really showing good traction and in certain other areas in the life sciences. We get good signals particularly in those areas where spare technologies are requested and where we are working.

Then we are showing to get a better footprint in selected life science segments. I mentioned that already, particularly driven by our consumables business, which is definitely the door opener there, but certainly instruments and services are following. Then we want to manage and actually not only process but proceed with our M&A strategy. We have a couple of good opportunities. This is actually the moment in time where opportunities are rising at the horizon and it's time to really act anti-cyclical, and that's why we are really looking into areas where we cannot only drive growth, but where we can really drive our diversification strategy on the other hand side, and certainly, managed to show some consolidation in terms of growth here.

This is the time where consolidation in size definitely helps to kind of amortize those structures, which have to be entertained as a company working in highly regulated markets. Volume is definitely important here as well.

Then certainly, we want to execute on our deal pipeline. We didn't talk too much about new businesses. We have a nice lineup of products. We have very well-filled development pipeline with actually smaller programs. You see that in the contribution of our development sales this is the moment in time where those deals are not happening.

Our customers and actually the entire market is a little bit shy in that regard, but we have a really, really nice lineup of smaller things and let me say, a lot of smaller things with good potential going downstream. And certainly, with those really big things we already have in the pipeline and actually the fact that we keep our products very young where we got successive deals with our material customers already lining up and actually, which are already executed and getting to the market and saving the growth of the company for the next 10, 15 years.

Then certainly, it gets easier for the combined organization of Natech, consumables and Stratec to continue leveraging the combined customer base. It is definitely perceived as a huge advantage by our customers, if an organization is not only in charge for supplying instruments and services and the relevant software but getting the consumable, being it complex or less complex. Is it maybe the instrument be like in sales with the chemistry coming from our customers or technologies where actually, let me say, the biochemistry comes more from the end customer like in more in a CLIA setup or LDT setup, where we provide instruments and consumables. This is all help from that perspective. It definitely reduces the perceived risk of our customers and the actual end customers.

This gets me to the end of the presentation, and I would like to hand back over to George who will explain us how to commence with the Q&A session.

[Operator Instructions] Our first question comes from Oliver Metzger with ODDO.

My first question is about the new sales guidance. So first, about the definition is you say slightly declining sales growth. So how do you define slightly declining? Is it somewhere low single digit? Or is it really somewhere 0 to 1? And if you think about the guidance at the upper end, so basically, it would be the strongest sales quarter in your company history. And you commented already about the discrete binding orders. But is the plug to achieve is only this binding orders? Or have you also some visibility about your order book where you can say, yes, was a very high probability that first is binding order will come through. And second, it's also backed by other orders where we are so confident to generate revenues. So these are my two major questions. Thank you.

Yes, Oliver, thanks so much for those questions. And please note that like I -- particularly after my -- let me say, my positive comments in the H1 call about the third quarter, I definitely understand the degree that you kind of want to find out how safe is that all? We, again, went through our order book when we went through our manufacturing schedule, we went through those several IFRS 15 cases about revenue recognition of development.

So certainly, there is a timing aspect to that as well. So I definitely don't want to overpromise and say this is going to get a flat year or it's going to be minus 3%. We actually discussed a lot about should we say low single digit or closer to flat or should we say 2% -- 3% We actually discussed all that. I think it is too early. So we definitely have the chance to get back to a flat level. Worst case is going to get in the area of low single digits.

At this point, we don't think that we might grow further. And I would like to mention again, this is all bottom up. It's not that we are kind of chuckling or shuffling with percentages. We went through the order book. We went through the forecast. We went through our manufacturing schedule, and we reconfirm with customers. There is nothing which could be moved again. Again, we need to bring in some of these additional things, which is more or less an order only thing. Supplies are actually already scheduled, so we shouldn't be worried about that.

Yes, I hope that -- and again, I want to refrain from overpromising. But like I said already, I'm confident that all those things are working out positively.

Oliver, if you have a follow-up question, please go ahead. I think the question was complex. So -- others, right?

Yes. But potentially, if we talk about scenarios and let's say we are a little bit nervous. So this -- so what happens is this binding order is deferred again? Would it be like -- we now have minus of our first 9 months minus 6% in constant currencies. So would it be more, let's say, okay, in this scenario, it's deferred to over time, if we still end at the constant and at a minus 3%? Or would this be an event, let's say, or potentially that's it's -- the effect would be too big?

Yes. Again, I certainly cannot comment on percentages, right? Because like I said, things would have to be shipped. But -- and again, I can only confirm that I definitely understand that if a quarter which has to be so revenue and earnings loaded that brings up questions. On the other side, again, we have to understand that things are manufactured. So this is a matter of shipment, no longer a question of manufacturing. We've got the commitment of our customers scenarios, particularly that very order, which has been moved from 2023 to 2024 and now moved again partly into 2025 that only plays a minor role in the fulfillment of that quarter, the major role is actually handled through our bigger customers, and that's why I'm not super worried about that.

And then certainly, again, I need to put this conditional that we -- that in order to fulfill the guidance we have to bring in those things which have not been in the guidance at the very beginning, when we gave those guidance. I'm not worried about that. But like I said, I need to put this conditional and this is the scenario.

We are, at this point, assuming that and have good indications that this is going to happen, that we will show sales on the previous levels, we are actually more confident if we compare it to our previous guidance that we hit the earnings guidance, that's an easier one, particularly as a derivative of our earnings improvement programs and actually the gross margin profile in terms of shipments for the remainder of the year.

Top line, it is, as we said, scenario. One is actually to go flat. Scenario two is decline -- slight decline, which actually represents like low single digit.

Our next question comes from Jan Koch from Deutsche Bank.

I have three, if I may. I would like to come back to Oliver's question. I understand that you are quite confident on the postponed orders, but more specifically on the orders you expect to receive shortly. And when do you exactly expect to receive those orders? And then secondly, given that we're coming to the end of the year, it would be great if you could speak on a high level about the expected moving parts for 2025, so at which point could be a tailwind next year? And what are the headwinds you are expecting?

And then finally, in your press release, you mentioned that major market launches can be expected in the future. Could you elaborate a bit on the future product launches, especially for 2025?

Yes. Thanks, Jan. I'll just make a note. Like you mentioned that -- like before we start, I think it is important to mention that the thing which actually hit us in Q3 was that you probably remember that when we had this discussion last year about the product portfolio and the sales mix and the behavior of the customers. I think we manage the growth or we managed to get across that.

At the time, we were a little bit hit by our biggest customers and their order behavior, particularly in the molecular field and the way how they are placing instruments in their molecular franchise. At the time, actually, our smallest customer like in complex sample prep or like in immune hematology, the business with them worked out very well. They had a certain catch-up effect at the time. They manage that business very well. What happened now in Q3 which actually kind of brought us to the point that we said we all have to adjust our top line guidance slightly, was actually affected by the smaller customers.

So let me say, from an overall risk perspective, I think in the meantime, the big customers are doing very well in terms of order fulfillment and keeping their guidance and keeping their forecast. Whereas at this point, the smaller ones, some of the smaller ones are affected, which by definition changes the risk profile dramatically. So this is actually the positive signal. Jan, getting back to your question of when do you expect those orders. Actually some of them already came in, obviously, but in order to meet the guidance thereafter. And actually, a big one is actually expected to happen at the end of November. So it gives us some time between actual order income and the end of the year for fulfillment. Like I said, this is not the fact that things will have to be manufactured. So this gives us confidence that we can reach that point.

In our -- and we haven't -- actually, we did not yet fully go through our budget for 2025, now addressing your second topic, Jan. And talking about tailwinds and headwinds, I think it is a little bit too early. Let me kind of make some generic statements. We were actually fairly cautious still with our molecular franchise. We were cautious with products which didn't perform very well in 2024. And you probably if you get back to previous discussions over the past years, we knew that after COVID-19, there will be a dip in the molecular franchise. But we had several products, which had the potential to offset the dip after COVID-19, which didn't perform as well as we expected that to happen, which is actually very much attributable to an overall cautiousness happening these days in the market. This does not only affect molecular.

If you're talking to our peers, you'll certainly learn that there are some markets which are actually outperforming, particularly in the immunoassay space or in like advanced technologies and the things which are more commoditized are really under pressure these days. So for our 2025 budget, we were actually trying to be cautious in those areas where the market would have to return in terms of commodities, in terms of molecular and in terms of point of care. At this point, we think that other markets will go very well and that was reflected by that guidance.

Product launches in 2025 is definitely the next generation of a very important product in immune hematology. And we have some other products in the lineup, particularly in immunoassay, some major product launches will happen towards the end of 2025. And allow me to reiterate myself, and I know I'm talking about that every year or like every quarter. What does product launch actually means? It means the commercial availability of a product in the relationship between us and our customers. Obviously, selling product in certain markets requires approval from the authorities in those certain markets. With IVDR and exchanges through that European legislation -- sorry, short time out.

I'm back. So with -- the applicable rules changing in those markets, there the gap in between commercial availability and regulatory approval for a certain market actually gets longer and longer. We are coming from like 6 to 12 months in the 2010 years, and we are maneuvering in this market to more like 18 months and 2 years, which doesn't make the situation easier. So market launch means that we are selling products to our customers, but they are using those products only for certain markets and typically, with a less than comprehensive menu running on those products. It means that if they get approval for all the relevant markets, and typically the sequence United States with the FDA then Europe under IVDR and then some Asian markets.

It typically means that, first of all, that hockey stick effect sees a certain deferred curve, typically flatter at the beginning. But therefore, the product life cycle extends, which is the positive signal. On the other side, and that's what we are faced these days is actually that obsolescence management becomes more and more a service we can make money with, which is the other positive element of a product life cycle.

Those products which will drive the growth of the company, the expected growth, say, to a certain degree in 2025, but definitely from 2026 on are actually products, which were launched already either right before COVID-19 or during COVID-19. And that particular element of availability of the product for certain markets, but the necessity of regulatory approval in other markets is actually getting up to the point that those products can only take off revenue-wise and therefore, in terms of economy of scale in 2026.

It's a little bit easier with life science products because that approval cycle is not that long, but particularly as our customers are literally going through the same process on the life science side. Certainly, we can take advantage of certain one-offs, but literally the products in order to achieve scalability are going through the same process with similar -- I don't want to say approval but certainly verification and validation tasks associated. I hope that answers your question, Jan.

It does.

Thank you.

We continue with Oliver Reinberg with Kepler Cheuvreux.

A few questions from my side, if I may. Probably take them one by one. Marcus, the first one would be on this kind of additional order that is still to be signed. I mean -- can you just provide any kind of color in terms of the size of that? Is it contributing more than 3% of annual sales and also to the nature of this product? I mean it's a bit unusual for this kind of business that you are busy signing by end of November and booking sales at the same time. So can you just talk about what is behind it? Is this kind of onetime sales event or is that the recurring business that will also support you next year? That's will be the first question.

Yes. Oliver, this is the day, the day of the Oliver.

Yes.

Actually, we are not talking about the relevant products and the contribution and the actual customer exposure. Let me say, if you are looking into the development, into the activities, we are typically recognizing as revenues coming from development, which obviously in the wider sense, includes not just plain vanilla recognition under IFRS 15, but certain other elements as well, you see that like after COVID, the contribution of that source of revenues growth and growth.

And we'll -- I like talking about our strategic exposure to such activities is as a matter of fact. And you know why I talked about obsolescence management in this presentation, which definitely means certain redesigns to keep the products young for our customer, which typically means recognized revenues. And there are other elements to that. So looking into the data, we believe we won't drop that -- we won't drop back to pre-COVID-19 levels of contributions of sales of development activities.

I think that we are coming from 10%, 15%. If you are looking into the historical details, and I believe going forward, we will more be like in the 20%, 25%. And that is actually that part. So often, it means that revenues, and we actually changed our business model slightly in the past, actually material development activities were covered by instrument sales.

In the meantime, we manage that our customers are not only accepting but appreciating the services we are providing, which can be invoiced -- and that -- I don't want to say -- and you actually brought up the right topic. This doesn't mean a material change to our strategy or our business model. It just means that during that phase, we clearly managed to prove to our customers that the services we are providing next to instrument supplies and consumable supplies and software supplies have a value. And actually, we can charge for that value and that happens and they will continue to happen.

All right. Perfect. Second question, I mean, you talked about earlier that the business is now ready to get scaled. I mean can you just provide any kind of color how you think about the sales dynamic next year, I guess, 2 support factors would be that you talk about certain postponements of orders from '24 and '25. I guess the molecular franchise, hopefully should have seen the kind of low point and basically any kind of new orders now should be delivered from Stratec and not from the inventories from your kind of clients. And there's a bit of obviously new pipeline activities.

I mean do you expect rather kind of gradual improvement? Or is there a chance for kind of yes, I would say, like a normal growth here? Or is at least 5% top line growth is a valid assumption for 2025?

Yes, Oliver, it's definitely too early to talk about that. Like I mentioned, we are in the middle of our budget preparation activities. So definitely, we will act very cautious in terms of our financial guidance. I don't want to take a hit again. So please rest assured that we will be cautious.

Personally, I would not at this point. It's definitely difficult to talk or to get like positive signals from customers in the midst of that phase. From those customers where we receive positive signals, these are actually our customers which are already outperforming the market at this point and those customers, which show some slight growth rates. But on the back of infrastructure, which was built during COVID-19. And it's a little bit easier for them if they get a new assay approved and they put it on an installed base in the field of a couple of thousand instruments, they can directly show revenue growth.

But in order for us to show revenue growth with instruments, it definitely means that the capacity requirements of the end customers have to grow, and that's only happening slightly in the molecular space. So like in doubt, err on the safe side, and that's what we are doing. So I would not expect a material rebound, although we are expecting recovery in the molecular market, but I wouldn't consider this as material.

And then we have to see that in the competitive landscape, companies -- we know that companies of the top 5, they had to take back instruments that didn't happen as far as we know. Materially, we are our customers, but we know that their peers had to take back instruments, which were paid by the government at the time. So it's easier for them to place instruments in areas where typical placements wouldn't happen because of the lack of amortization. So it's a little bit easier. And I think the situation is still coming down, but it is not where it used to be on pre-pandemic levels.

The positive thing is that the instruments are getting aged and life cycles. And obviously, they don't have unused, they don't have an endless life span. Utilization comes back, we see certain areas, but I cannot confirm any percentage of at that moment in time. We will definitely put out a cautious -- a very cautious guidance for 2025.

Okay. That makes sense.

Yes. We -- like I said, rebound at this point happens and we have to see the relevant revenue contributors. Looking into our earnings, in particular, revenue profile, certainly, molecular plays a material role. So even like positive development in other areas cannot entirely offset the weaknesses in the molecular space that will have to come through like those new areas we are working in like in life sciences or like in complex sample prep or like in those areas we'll talk about in -- on the German Equity Forum. And all those things will have to be taken into consideration and ramp-up costs will have to happen.

We talked about that already. We talked a lot about our digital PCR program where we had huge expectations. The product is performing well, but it could be better. It could better offset the weaknesses in other areas. If things would happen as planned, it is definitely difficult for us to forecast product run rate at an early product life science stage. It's easier to forecast run rate as soon as the products are getting more mature.

That's very helpful. And third and last question from my side. I think you proactively pushed the message out that you're making progress on M&A. Is there any kind of color that you can provide? I mean are we talking about typical strategies in the kind of bought-out area in terms of size? Or could there also be larger deals and any kind of in nature, what you're looking for in terms of areas, technologies? Any color here would be helpful.

Yes, Oliver, this is a very binary thing that doesn't make too much sense to talk about those things. If there -- if you can only apply a certain likelihood and deals are signed when deals are signed. We are -- and I mentioned that despite looking into like our appetite and our balance sheet. This is the moment in time where things are coming to the market, which didn't come to the market for the past 10 years. This is the moment in time where we see a more decent expectations of the seller regarding the actual price expectations. So I think from a perspective of acting kind of anticyclical, this is the moment in time to look into opportunities.

And we actually -- we keep our eyes open. We are currently working on a variety of things which have a certain spec. We are looking into technological things like we did with Natech, certainly with the expectation of a certain degree of diversification into other segments of the industry. And with access to customers where we haven't had access to in the past, but mainly technological driven, that's one area. And certainly driving diversity on a wider range certain area. Certainly -- and we have to be very, very clear on that. I think the times are and will be over the next 10, 15 years period where is almost exclusively European companies, certainly with size and businesses in the United States and to a certain degree in Asia, where you could serve U.S. customers from Europe.

So definitely, we have to increase our exposure in the United States. That's definitely a core element of our M&A strategy. And I'm not talking about this element of [ repatriorization ]. I think during COVID-19, the majority of the decision makers. And again, in our industry, we have to see that 9 out of 10 decision-makers are sitting in the United States. They had to learn it the hard way that good contracts is actually not that stable means to fulfill orders.

I think U.S. customers, and we see that in contract negotiations and in expectations on where and how do we build second liners in manufacturing. It is the expectation for U.S. customers and U.S. decision makers to show greater exposure on U.S. soil. And that's definitely going to happen independent of the relevant angle of attack in terms of M&A.

And certainly, we are looking into customer base. And all those things are ongoing. We have a team sitting on that, and we are actually making progress on that. But again, it's too early to talk about concrete things at this point.

But is it more bolt-on in nature? Or would you also not exclude larger transactions?

We are not excluding larger transactions but it has to fit. And again, I can only reiterate what I'm saying. Certainly, this is not only a question of our appetite and our balance sheet, other things would have to happen as well. And that's why we actually -- as mentioned before, we are looking into the entire scale of technology, market access, size, consolidation and a variety of other things in the life science industry.

Our next question comes from Alexander Galitsa in Hauck Aufhäuser.

Yes. I have one on the -- and apologies to come back to it. But just to confirm on these additional orders that materialize on a short notice. So we're talking about really development revenues as opposed to orders for systems. Is that even fair?

So not the latter. Absolutely. But I think at this point, you are narrowing down the discussion too far. This is not that one deal, which pushes us over the finish line. Certainly, there are bigger and smaller, but it's actually several. And as mentioned before, some of them already kicked in, which may and actually does involve instrument sales as well, but some recognized revenues in development as well. And certainly, there are some bigger ones, which are more on the IFRS 15 side. Hope that makes sense. But again, I just want to kind of widen your focus. This is not that single event thing.

Okay. So it's a mix basically of various revenue streams. Then maybe related to profitability. So I guess maybe the first one is the sort of outlined target of returning to higher levels of 15% EBIT margin. How -- is there a sense of how much should be? So basically from today's standpoint, we're 3 to 5 percentage points away from this desired level. How much should be sort of carried through by better -- by gross profit margin? What is driven by the OpEx? If you could maybe distill it to provide any color.

Absolutely. Alex, I think diving into the details of our strategy and actual business model is as a matter of fact, we significantly improved the gross margin of the product on paper. So at this point, we have to suffer through those structures, which were the right structures for the time being, particularly prior to COVID-19 and through COVID-19. We have applied a variety of structural improvements, increasing our gross margin downstream. And as soon as we are getting back into scalability, we'll definitely show and take advantage of those structures established during the past 18 months.

So this is actually only a matter of operational excellence and scalability. At the same time, we increased our gross margin profile through applied price increases, which were to a huge degree accepted by our customers. So like I said, I don't want to use that phrase when the market comes back. So actually as soon as we are showing the volumes and again, this is not that we are talking about the risk of that those products are aged or life cycle. At this point, we have -- in certain segments, we have a high degree of saturation, but our product portfolio is fairly young. We are keeping it young. We are doing the next generation of our blockbuster products as well. We are applying measures to get rid of some obsolescence, which will only happen in the next 5 years.

So you see the horizon of our customer using those blockbuster products, not only for the next 5 years, but for the next 10 years, and that is all happening at this moment in time. So that triangle of structural methods already applied, but we have to [ sum up ] through inventories. I just want to make that point again. Then operational excellence to be applied and scalability, this is the actual margin driver. And just because for the late arrivals of you, I would like to mention again, I'm far away from talking a margin profile of an EBIT margin of 15% in 2025. This is something which will take us longer.

I mentioned we have to suffer through inventories but this is all going to happen. We are working in the right market. We have the best customers in order to help us and to -- through those partnerships, we will work through that. So as soon as this recovery of the market happens, we are prepared very well to get back into this pre-pandemic margin profile and particularly through cash release through reducing inventory levels and then showing a better margin profile. I think the free cash flow will show some nice traction then as well.

Understood. That's helpful. And then maybe one question on just generally understanding the gross profit margin as of today. Sort of we know that the sales mix currently is sort of a bit out of balance, where you have systems that lag molecular diagnostics. On the other hand, you have an overweight in consumable spare parts which push margin then again up.

When one looks at maybe 9 months numbers, would you say that this 26% and 27% gross profit margin, is that sort of in normal -- also a margin that would represent sort of a more normalized product mix? Or is that margin that is skewed towards the upside currently due to the overweight of consumables? Yes, if you can provide any color how to think about sort of a normalization process as we go into a more normalized [ sales or sales mix ]...

Actually, I think if we look into the rearview mirror in 3 years, we'll perceive that gross profit margin as on the lower end of the profile then. But we have to look into the details. And you said the right things. At this point, it's actually like high-margin contributor is definitely our consumables business and our maintenance parts business and less instruments.

On the other hand side, certainly, we are showing a way better than the historical margin profiles in our development sales. So I would say at this point, taking the snapshot is definitely kind of showing a non-normalized picture. But going forward, as soon as we are getting back into economies of scale in manufacturing and probably showing some -- getting back on that growth track with instruments as well, I think we'll show a slightly better gross profit and gross margin profile on the products even then if the absolute contribution -- sorry, the relative contribution from spares then declines, again, but not just by absolute decline, but the relative growth of instrument sales.

I think the equation is complex. But from a margin profile, looking in the cost of goods calculations of the product and the structural measures we have applied in order to increase our gross margin on the relevant products. Like I said, if we will draw a historical picture in a couple of years from now. I would say that today's gross margin profile is more on the lower end. I hope that helps.

Yes. And then the last question, I don't know to what extent you can elaborate their comment. Just looking at the sort of revenues that you've been generating with the top customers over the past years and certainly during the pandemic. I mean what we have seen is 2023, you kind of lend it at the pre-pandemic level already.

Sort of what is kind of the ongoing current trading, so to speak, with those customers? Are you undershooting by a lot in 2024 relative to 2023, and that's where we can then potentially see even growth into 2025? Or is it sort of a more leveling off on the low level and kind of staying there for the time being?

Again, complex. Like from a 30,000-foot perspective, I would say the percentage of sales of our top 2 clients is on the level just because of the weaknesses of the others, right?

So -- and again, looking into the history, certainly, like we talked a lot about the relative contribution of new customers. We talked a lot of like BD and Roche which are not yet where we believe they could be. And as soon as this business is picking up, and we are convinced that this business will pick up. Certainly, although the absolute amount of customers, and I'm not telling you any secret, you can read that in our annual report, the relative contribution of companies like a DiaSorin or like a Hologic will most likely decline in percent, although growing in absolute terms, particularly with the fact that we have some other customers which could easily get into the, let's say, 10-plus percent range over time.

And then I think we'll show that the diversification strategy we started already years ago are showing effectiveness. And that's actually the overall goal.

[Operator Instructions] Our next question comes from Michael Heider from Warburg Research.

Yes, most of them have been answered. I mean I was wondering about your growth perspective, but I think there has been enough discussion on this. And also margin development here, maybe just an add-on, if I May, because you also touched upon it in your last discussion on the pricing environment. So I know one of these measures to improve the gross margin was definitely also to increase the output prices. And you just mentioned that your customers received that well. But I mean can you maybe give a little bit more insight here? I mean so have you finished your first round and what are the plans going forward? I mean is this going to be a standard measure again that you will increase your prices on an annual basis?

And the second question that is also left -- yes, we know -- I mean you talked about that earlier that you still have obligations to purchase -- from purchase -- from suppliers to purchase in the fourth quarter. But just here, so your operating cash flow, which was very strong after 9 months, will that be lower in the full year compared to what you've seen now? And these are my two questions.

Yes. Let me answer that pricing and contractual setup, Michael. And let Oliver as (sic) [ answer ] the inventory and cash release and actually cash allocation question, regarding rental because this is a more complex one with a lot of contributors and a lot of it.

So pricing. If you are looking into the contractual setup with our customers, typically, each contract with our customer is actually like a file binder with amendments actually even more. That's why there is a lot of individual obligations and paragraph with the customer. Certainly, there are some generic things like the link between development and supply and the use of IP and certainly forecasting system, which actually differ from customer to customer.

And certainly, one of those elements which differ from customer to customer is actually pricing. We have spent a lot of activities and a lot of, let me say, time negotiating and renegotiating not only pricing but pricing clauses and pricing terms. So you know we already went through that in 2023, if you recall that, and we had a round in 2023. With some customers, we actually already then agreed to a further loop in 2024 and actually 2025 with we only established price increases for 2023 and not for 2024. With others, we actually maneuvered our combined approach more in an index-based price increase. So all those things happening.

So that's why I cannot give you a generic answer, but the generic answer I would like to give you is that this is certainly more a focus of ours than it used to be in the past. That's the first statement I would like to make.

And then certainly there is a deferred catch-up situation. So certainly, inflation came up and in 2024, particularly at the very beginning when inflation was higher than these days. So certainly, we did not manage to get full inflation as a price increase. So that's why we have this deferred situation that we will have some price increases in 2025, which are north of inflation rate, just covering the past. But definitely, then it will flatten, particularly if we are getting back to a more index-based scenario.

But let me say one of the core learnings during COVID-19, in particular, the supply crisis thereafter was that we have to take more cautious in terms of more cautious approaches in terms of inventory levels and more act on the fact that, let me say, if you are looking into the details, it's better to ask for higher volume enterprise positively then with higher volumes, but consider higher volumes beforehand and at the same time, actually looking into pricing mechanisms, which are actually reflecting more the inflation situation rather than economies of scale. And that's definitely one of the learning experiences we took away, although we are all hoping that inflation not only reflecting the German economical situation, you probably know that the majority of our revenue exposure is outside Germany and the majority of our input exposure is outside Germany.

So still euro-based, so looking into euro-based inflation and with the improved situation, that should actually help us pricing-wise as well, particularly for the next couple of years, and particularly with our strategy going forward in terms of applying price increases as well.

Okay. I can comment on the working capital situation, especially on inventory. I think this was the second part of the question. I think I already touched it a little bit when I was talking about cash flow and the debt situation. I mentioned that working capital improved especially or mainly due to the fact that we had a better operating cash flow because we have seen that we could improve our DSO from 80 to 59 days.

On the other side, we have seen a slight increase in our inventories, mainly in raw materials. That's the bad side of the coin. And that's due to the fact that during and after the pandemic, situation where we had been faced with a strong demand from the customer on the one side and on the other side with some supply chain bottlenecks, we have decided to enter into framework contracts with limited -- or with a certain degree amount of pieces we have to take.

And some of these framework contracts have a duration of about 3 years and we are suffering here because on the other side here, we see that our analyzer systems, the sales volume with analyzer systems is not high enough. So the outflow of our inventory is a little bit weak. And therefore, we expect that until the year-end, we will see a further slight increase in our inventories, mainly in raw materials, but then from -- and another effect on this is because we have also started negotiations with some of the suppliers to postpone or to cancel this framework contracts to get here in the inventory.

And therefore, we will see a peak by the end of this year. And then from 2025 onwards, we expect that the inventory level will go down, and this will help us, and this will have a direct impact on our operating cash flow because all these materials already paid. And the good thing here is that it's paid on and for the future, we don't see on these inventories, no inflation rate. So this has a positive impact also on our cost side. So the material costs are fixed here, regarding this point. And therefore, we expect a strong development in operating cash flow in 2025 and onwards. I hope this will answer the question.

Thanks. But for the year-end '24, we should assume a lower operating cash flow I guess?

I think the effect from the trade receivables maybe will be a little bit lower. It depends on the -- no, sorry, what I expect is that trade receivables will go up. So this will be a negative -- will have a negative impact on the operating cash flow because we expect a much higher sales level by year-end. And as I said, DSO is about 60 days. And so this will have a negative impact on the operating cash flow by year-end. So this is the negative impact, if this answers your question.

We have a follow-up question from Mr. Alexander Galitsa.

Just also on the net working capital inventory side of things. You mentioned that you target to return to the pre-pandemic level. I think that will probably mean around EUR 60 million less of inventory on stock. I understand that it's highly contingent on the molecular coming back. But just under a scenario where we still don't see a strong revival in this segment, how would you think that the progress would be on the inventory side?

Yes. Let me answer that first, Alex, and thanks for the follow-up question, actually. I think we have to look into some material changes in the entire industry and the impact we have on our inventory level. So certainly, we have to group inventory levels into different buckets. Like Oliver already mentioned, for the running product line, right? We definitely have the means and measures in place to get back into turnover rates. And like related to revenues, obviously, levels where we use -- where we have been pre-pandemically.

On the other side, and sorry, it will take me a minute for that. We see some changes in the industry, which actually providing or are providing us some nice tailwinds here, but we have to explain the details. There are certainly some kind of typical time frames of regulatory approval, duration of certain tasks until products are really taking off and then certainly product life cycle. And we went through that discussion a couple of times that there were years like I said the 2010 year where product life cycle, we're starting to get longer again, which actually happened in the 2000s as well.

And then a certain like right before COVID-19, we saw that the cadence of innovation came up and which were at the product life cycles were getting a little bit shorter, certainly not short, but shorter, particularly in certain areas, and we discussed that a lot like in certain particularly commoditized franchises like in our hematological business. We saw that whenever products are more commoditized, the product life cycles are getting shorter, not in those areas where spare technologies are provided like in the molecular space or in the immunoassay space, particularly in our immunoassay franchise.

Now during COVID-19, everybody thought that the approval cycles, which could be applied during COVID-19 are becoming the new standards. But to the contrary, the regulators after COVID-19 switched not only back in the pre-COVID-19 -- in the pre-COVID set up, they actually made things worse. So we definitely see that the product life cycles are going up and up and up.

So taking all that into consideration, we see some -- we see some developments, which means the product life cycles on the output side are getting longer and longer, and our customers are trying to apply grandfathering rules and are trying to keep the product young by facelift or software updates, whereas the analytical core of the instruments are literally staying the same for 10, 15, 20 years.

To the contrary on the input side, we see like, you know what I mean, like micro-controllers are getting discontinued earlier than actually expected, which means we need to apply a lot of things in order to be able to supply. For micro-controllers, it often means last time buy, these last time buys are then sitting on inventory levels in Stratec, but these are actually things which are getting paid by our customers. So it's not that per se.

On the other side, at this point, we are actually allocating a decent amount of developer capacity just to do redesign. And you notice has a trickle-down effect, changing a micro-grid controller means new embedded software, new embedded software often means new PC software, new database software, new database software often means re-approval, often means revalidation of the chemistry coming from our customers. And this is a continuous process that actually changes the perspective of new product development of our customers, like it helps us, certainly to, let me say, make high revenues, which products, which -- with products which we did the market 5 and 7 and 8 years ago.

On the other side, it means a decent amount of allocation of development resources to new product designs. Again, what does that mean in terms of inventory? It means that we have to categorize our inventory levels in something which is like regular product. And here, we believe that we can easily get back into those turnover rates of 4 to 6 weeks when the material hit our sites and where they get final product. On the other side, we want to make sure that we understand that there will be a residual inventory level just to handle obsolescence management to make sure that we are able to supply.

But again, this is all covered and financed by our customers. However, the inventory is sitting in the Stratec balance sheet. I hope that explains our perspective in the future. However, we will see -- and I think Oliver mentioned that now a couple of them, we are expecting a material cash release in 2025 when we are starting to work down that inventory levels which are a derivative of fulfilling our applications towards our suppliers in 2024, particularly towards the year's end.

Understood. Just also on the last one, to clarify that. So the inventories for molecular that you have pre-bought and sit on currently, I think there was a comment that they sort of don't see inflation which should be beneficial. But just to clarify that, the pricing on those inventories, is that better or worse versus what you would be normally able to obtain in procurement to date?

Yes, you don't have to be worried about like any kind of depreciation or anything like coming from that side. The beauty of long product life cycle is that you are literally using the same raw material, subassembly, subcomponents for almost the entire life cycle. So certainly, and I mentioned that going forward, we see some advantages through like structural improvements we had applied, particularly like consignment stocks or the way how we are driving manufacturing debt and all those things, this is actually the structural measures we have applied in order to improve the gross margin on our products. And I -- don't be too much worried about the prices of the inventory levels when they are getting into the final products. You shouldn't be worried about that.

Ladies and gentlemen, this was the last question. I hand back to Jan Keppeler for any closing remarks.

Yes. Thank you, George, and thanks again for all of you joining us today. If you have any further questions or comments, please do not hesitate to contact us and the Investor Relations team. Thank you, and goodbye.