Sartorius AG

XETRA:SRT

Earnings Call Transcript 2023-Q1

[Operator]

Good day. And welcome to the Sartorius and Sartorius Stedim Biotech Conference Call on the Q1 2023 Results. Today's conference is being recorded. At this time, it’s my pleasure and I would now like to turn the conference over to Dr. Joachim Kreuzburg, CEO of Sartorius Group. Please go ahead, sir.

[Joachim Kreuzburg]

Thank you very much. And also welcome from our side to our today’s conference call on the Q1 results for 2023 for Sartorius as well as for Sartorius Stedim Biotech. We will run the call slightly differently from the previous times. I’ll make the introduction as always then Rainer will walk you through the main results for the Sartorius Group as well as for the divisions and then René Fáber who is leading Bioprocess Solutions division at Sartorius since four years and now is also the CEO, Sartorius Stedim Biotech will then focus on Sartorius Stedim Biotech’s numbers. Therefore, we will also slightly shift the presentation between BPS and SSB usually we are going into the details when talking about the BPS numbers this time we will be a little bit quicker at that end then Rene will focus on Sartorius Stedim Biotech and as you know overlap is 95 plus percent then in the second part of our presentation. Then of course we will jointly run the Q&A.

So let me. I kick this off by walking you through the highlights and the overview for Q1, 2023. We clearly are recording a continued demand normalization as we have expected. I'm sure a lot of our discussion later will be around in how far that was in line with our expectation. So therefore, a quick recap. 2.5 years ago, when order intake jumped by around 50% from one quarter to the other, we said don't extrapolate this. They are non-sustainable effects playing a role beyond the upcoming demand for corona vaccine manufacturing back then, first players started to prepare themselves for the manufacturing of corona vaccines, and we clearly always flagged that we were seeing stocking effects in the industry.

We discussed pretty much in all calls last year about our expected destocking. It basically then started around mid of last year. We initially would have thought that it started a little bit earlier and would have affected a larger part of 2022. It affected pretty much the second half of ‘22, but that of course means that it's affecting ‘23 quite a bit. Our expectation, and it always has been that this destocking would pretty much influence one year four quarters. So therefore, this first half of 2023, we expect this impact to be significant. And therefore, when we made our guidance for the full year, 2023, I think we made it quite clear that the two halves of this year would look differently. So again, an expected reduced demand, which we consider to be temporary. And therefore we are also confirming the outlook for the year 2023. Sales revenue is below previous year by 13% in constant currencies, excluding the direct COVID effect. I'm not talking about destocking, now I'm talking about the business that is related to vaccine manufacturing, COVID tests, et cetera. Without that effect, it would have been a more moderate single digit percentage decline. More details than also later here. And the underlying EBITDA margin is then also of course, pretty much in line with revenue. As you know, we have quite significant scale effects, effected by this lower sales revenue.

One word again on this normalization. You will see a char later on, two charts actually one for the group and later one for SSB that show both sales revenue development as well as order intake development and it clearly shows as the order intake increase has been much more pronounced and steeper at the beginning of the pandemic for the two reasons that I mentioned again, we now also see a more pronounced reduction of order intake. Therefore the gap between order intake Q1 ‘23 and previous year is also more significant, but again pretty much in line with expectations. And then Raine will later also give a little bit more detail on the announced acquisition of Polyplus. We were running a separate call on that two week ago already, but nevertheless we will provide a bit more information again just in case that there are some further questions.

And with that I hand over to Rainer.

[Rainer Lehmann]

Thanks Joachim. And first of all, welcome from my side to today's call. So as usual, let's jump into the figures, Joachim mentioned a little bit unusual for us, but absolutely in line with our expectations. We see a decline in revenues and constant currencies of 13.2% to EUR 903 million without COVID, the decline would have been in the mid-single digit range. The EUR 903 million only include really a very marginal COVID related business. As I said already and anticipated at the beginning of the year, COVID will not play a role in the actual numbers in 2023. Order intake declined by 32% in constant currencies to EUR 765 million. Also here in line with the expectations. Keep in mind at the beginning of the year we anticipated it, we would not be surprised by seeing book-to-bill ratios below one for the first two quarters. And so clearly indication of the softer H1. And with H1 of course a more pronounced decline in Q1 as we see it already now.

So for us in line, as we expected it. The order intake of course is strongly affected by the customer destocking. Actually, I will show that in the next chart and talk about that a little bit further. And we expect of course then normalization to fade out in the second half of 2023, meaning that there should be an acceleration then of the business in the second half. The underlying EBITDA decreased by 22% to EUR 272 million which translates to 30.1% EBITDA margin, a reduction of almost four percentage points. But then actually fits to the decline in the revenue. Keep in mind here, of course, we are volume driven company and also, we are as we pointed out over the last quarters, we are dealing with the higher cost base of course also related to the expansions throughout the world that come always with a little bit of additional extra fixed cost. And of course, as we always pointed out in the past, we saw these, let's say artificial economies of scale due to this tremendous growth during the COVID area where we said these will also not be sustainable.

And we are now seeing the 30.1% margin. If you actually look back to before the COVID pandemic in 2019, we actually are above that level in the EBITDA margin, on a group level. If we look at the next slide. I want to draw your attention here to the bar all the way to the right. That is actually the sales development in black. That is basically the non-COVID related sales and the yellow part is the COVID related sales and the gray blue line is the order intake. So if you look in Q1, 2023, you see and follow the line horizontally to the left. You see yes, each Q1 is below each quarter of 2022, but above the quarters of 2021 and respectively 2020and 2019.

To put this in figures, we also put that on the top left side versus ‘2019 revenues for the quarter increased 105%. If you look at first quarter 2020, it's around 76%. Actually if you would put the number for the first quarter 2021, it would be around 15%. So therefore, we are seeing here also that the little black portion above of the horizontal line is most likely then also the impact, what we always said is the destocking part of the revenue during the previous years. This will of course, as we always said, an impact that we can only see hindsight one quarter is here not enough. We'll see it for sure after the second quarter but it gives us an indication of what the stocking effect was most likely during 2022.

You also see here, especially since the beginning of 2021, the spread between the gray line and the black bar which is quite significant, which of course increased our orders on hand that we still draw from, therefore, it's absolutely in line and necessary that the order intake decreases in order to come back to our normal growth path. And if you keep in mind that in this presentation of the Q4 results we also showed actually that we are pretty much a year ahead of the curve. That is exactly all in line and I hope that these charts combined with the last chart from our presentation helps to understand and puts this overall or this short term development in a broader perspective in the development of our company.

If we go to the next chart, we see actually that this normalization happened pretty much throughout all the different geographies in the Americas. Let me start on the left hand side. Revenues declined by 14% to EUR 322 million. Here we have lower sales actually in both divisions. LPS is affected specifically by stronger comps. Also here we had, as we pointed out over the last quarter a positive impact in previous quarter of the biologics business that did very well under over the last two years. And also here we of course that have quite high comparable basis. In EMEA, we see a decline of almost 12% to EUR 359 million, in LPS, we actually see quite robust sales growth, whereas on BPS, we are comparing here against high comps. Keep in mind and as you all know, the majority of the COVID business was related to that region and Renee will talk about that later here. Here also we see additional effects from Russia where we pretty much see a significant drop in our activities in that region quarter-over-quarter.

In Asia Pacific, sales declined by 14.5% to EUR 222 million. Here again, LPS actually growing in that region, but we are definitely not happy and it's actually below our expectations development of the revenue of our business in China. On the right hand side, the geographical distribution actually nothing major happened. It's quite in line with what it was at year end, if you look quickly to the Bioprocess Solutions and Joachim said since René is here, CEO of the Sartorius Stedim Biotech Group, and I'll only run very quickly through these numbers. Order intake decreased by 36.1% in constant currencies to EUR 576 million. Here we see, of course, clearly the destocking effect and we expect that to fade in H2, sales revenues decreased by 16.1% in constant currencies to EUR 695 million. Acquisitions contributed here on around one percentage points and excluding COVID, we would actually see here a sales revenue drop in the upper single digit percentage range, the underlying EBITDA margin declining then to 31.2%, translating to EUR 217 million. And of course, here again, here we can see what I called before these artificial economies of scale that work in both ways. They worked in our favor with a significant jump in the margin from 2019 to 2021-22. And of course then with the normalization, we also see then this impacting the profitability when it goes the other way. More than from the me side, since BPS and SSB are pretty much 95% the same if you then switch to the LPS side.

On here we see sales revenue close to previous year level to the first quarter. Let me start on the left hand side with the order intake, we see a decline of almost 16% in constant currencies to EUR 189 million. And here we see or has already reflected the uncertain environment, I would say particularly for the early stage biotech companies also in the US. And we also have to keep in mind that in the comparable of Q1, ‘22, we also still had some corona related business when it comes to membrane and testing kits. On the sales revenue side, we see very pretty much on previous year level 2% decline in constant currencies to EUR 208 million excluding COVID, we would actually see here a slight increase in sales.

Underlying EBITDA margin is 26.3%. So pretty much on previous year level and with the absolute value at EUR 55 million really a result of also stringent cost management. And yes, that's pretty much it on the LPS side. If we look at some key figures, the underlying EBITDA of course weaker level of EUR 272 million and also translates into a weaker operating cash flow. You might wonder why is it actually still stronger than Q1, ‘22? Keep in mind here than in previous year Q1, ’22, we had a strong increase of our working capital. That of course we do not see any more in Q1, ’22, there's only a slight increase. That is pretty much the explanation for that. Investing cash flow reflects the continuation of our substantial CapEx program. Here also, as these expansions are related to capacity increases in our long term basis. Therefore, we are continuing to invest that the investment ratio jumps then up to 15% against a lower sales value. And of course we pay attention also there to see maybe what investments we can defer.

But overall, we are not changing the CapEx program in 2023. If I look then at the next slide, we have here our equity ratio at 36.7%, slight decrease from the end of the year. Net debt pretty much at same levels that's EUR 2.4 billion. That, of course, will change going forward with the acquisition of Polyplus. But we had our extensive call about that already a few weeks ago. And on the net debt, underlying EBITDA, slight increase compared to previous year. Of course, here also reflected a little bit of reduction in EBITDA.

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

[Joachim Kreuzburg]

Yes. Thank you, Rainer. So, outlook 2023. I said that at the beginning, we confirmed the outlook for 2023 as we are seeing or always anticipated the different half of the year and also the different quarters to look quite differently. So therefore clearly, the quarters will differ probably by something like up to 20% for the full year. Therefore, of course, it's important that we keep also the way how we are able to manage our capacities quite flexible. This is something that we have of course much of an eye on at the moment. But again, I guess we will discuss this later in detail. This chart is really completely unchanged. We expect low single digit growth for the Sartorius Group top line, excluding COVID, direct COVID effects, it should be high single digit. We have included here one percentage point of expected growth contribution by acquisitions on a group's level and that does not include Polyplus yet as this acquisition has been closed, so therefore it's not 100% clear now for how many months this business will be fully consolidated.

We will update this, of course, once this is clear and closed and we expect the underlying EBITDA margin for the group to be around previous year's level. And that is how this entire chart reads and therefore I wouldn't read it out completely. Rainer also made a comment on CapEx. You see this there, it's also, as we always said, there is a certain portion of our costs and increasing over time that we are dedicating to activities to reduce our CO2 footprint. And, yes, again, I'm sure we will discuss this later, so and with that, I would now hand over to René Fáber for the Sartorius Stedim Biotech numbers.

[René Fáber, Member of the Executive Board]

Thank you very much Joachim, and hello everybody from my side. Pleasure joining the call today and report on the Q1 results of Sartorius Stedim Biotech. Before I walk you through the Q1 numbers, let me start with a brief look at the acquisition of Polyplus, which we have announced recently. Polyplus is a company which specializes on critical materials used in making advanced therapies, which is a strongly growing and increasingly relevant end market for us. The company, with 270 employees, is based in France, has operations in Belgium, commercial activities or sites in US and China. It's highly profitable business and sales is expected at upper double digit million euro range in this year 2023. The agreed purchase price is around EUR 2.4 billion and we expect to close that acquisition in the Q3 of this year.

Looking at the portfolio, the major part is so called transfection reagents used to make viral vectors, which is one of key modalities in gene therapies and gene modified cell therapies. The company expanded also the offering and added complementary plasmid design and plasmid GMP manufacturing capabilities as well recently. These products and services are highly complementary to our existing offering and we see significant synergies in both upstream and downstream processes of our customers here.

Looking at the next slide, Polyplus for us is an important milestone in increasing our relevance in that as a tool provider for new modalities. As you can see summarized on the chart here. Since 2018, we have been very focused on building a portfolio of media and critical materials, critical raw materials using development and manufacturing of cell and gene therapies. Starting in 2019 with Biological Industries and then 2021 CellGenix, we added media and growth factors, both used to make literally all types of cell therapies, cell then brought specialized media for viral vector manufacturing. Recombinant albumin from Albumedix is used across different types of new modalities and addresses the regulatory trend to move to use chemically defined components in these critical applications. And now Polyplus will complement the portfolio with transfection reagents and plasmid DNA and as you can see, making us quite relevant and attractive supplier to this attractive end market. As said, we see nice synergies across the product which bring us access to literally every customer working on cell and gene therapies in the market. Again, closing expected in Q3 of this year.

Let's move now to the Q1 results, which are very much in sync with the BPS division, which Rainer and Joachim already commented or started to comment, and also in sync with what we have expected to see for the first quarter and the first half of the year. The numbers are very much reflect the post COVID normalization. We see two effects playing particular role here. As explained, COVID vaccines demand is down. We see only marginal effects in the numbers here. And secondly, as Rainer and Joachim said, the ongoing consumption of inventories which customers built up during the pandemic leads to less orders or decreased order intake. We have seen this not only with COVID customers, meaning customers who either developed or made manufactured vaccines, but also other customers who, during the broken supply chains in the pandemic times, build up inventories to secure materials for their manufacturing. And we also believe what we hear from our clients is that we were ready and prepared to supply those products. And that's kind of reflected in a steep increase during the last three years. Since mid of last year, we see the normalization going on the lead times are back to the pre-pandemic level for most of the products in our portfolio.

We expect that it will continue next quarter. The effect of the normalization second half of the year should be, however, significantly reduced or not that [inaudible] event meaning also that we expect to see a stronger H second half of 2023. The sales revenues in Q1 normalized down to EUR 726 million which is 17% reduction compared to previous year's quarter in constant currencies, acquisitions contributed one percentage point COVID related business, if we to take that out the decrease would be in a range of high single digit range for the sales revenues, order intake down by 37.5% to EUR 600 million around due to the effect I just described. And of course the lower sales and a bit higher cost base are reflected then in the underlying EBITDA which was at EUR 220 million corresponding to around 30% EBITDA margin. We think working on that normalization, it's a good result for us. We have reduced the manufacturing, short term manufacturing capacities to the demands quickly. We are running strict cost management across all functions in the organization and, yes, we'll be working on that moving forward as well. And then with respect if the underlying earnings per share was at EUR 1.43 compared to EUR 2.21 previous year.

Looking at the regions geographies, we see similar dynamics across all regions, by the way we see similar dynamics across all relevant portfolio used in drug manufacturing in our portfolio no big difference, is there. Looking at regions, Americas and EMEA, both down by around 16%, Asia Pacific with 21%, EMEA with high comps, we've seen what we see also is that the region is impacted by additional effects from Russia, with sanctions getting more strict for supplying that market. And in Asia Pacific we've seen a bit slower start than expected in China, particularly the rest of the region, as expected.

Moving to cash flow reflects with operating cash flow 3.5% below previous year. Investing in cash flow reflects our continued investment in infrastructure, mostly manufacturing across all regions, to mention few of them or the few most relevant in Germany, we are adding manufacturing lines for filtration membranes. We are expanding our site in Aubagne in France for bag, single use bag manufacturing and we are building new facility in South Korea for manufacturing of main consumables product categories, filters bags and cell culture media. We also continue investing in localization of manufacturing in China for China all debt activities and CapEx spend resulting in a ratio of 16% in Q1 that year.

On balance sheet, very solid equity ratios of around 50 comparable to previous year and slight increase in net debt to underlying EBITDA to 1.1 due to a lower EBITDA result. With that looking at our guidance again as said we expect the normalization to continue in Q2 with stronger second half of the year with no significant effects then from destocking and we confirm the full year moderate sales revenue growth in low single digit range and underlying EBITDA margin at around previous year level.

With that I think we move to Q&A.

[Joachim Kreuzburg]

Yes. So the floor is open for Q&A now.

[Operator]

[Operator Instructions]

And our first question is from Zain Ebrahim from JPMorgan.

[Zain Ebrahim, JPMorgan]

Hello. Thank you for taking my questions and for the quarter and really helpful. Just on slide 5, you've laid out your expectation in terms of how much destocking you saw in Q1 graphically. I'm just wondering if you're able to provide a bit more color on that in terms of how much destocking you've seen so far on your estimates in the order intake and on sales and sort of how much you expect there to be sort of left in the second and potentially third quarter.

And my sort of second question somewhat tied to that is about the total acceleration in the second half. How much of that acceleration, I suppose, is dependent on destocking and normalization being less of a phenomenon in the second half versus potentially the second half benefiting from the high order backlog that you had built up. I think you flagged in the four year result and had underpinned your guide.

And maybe a third question, if I may, just on China, if you're able to expand on what the dynamics are that you're seeing there, and why was it softer than expected? Is that mainly due to sort of reopening or is there anything else that we should be thinking about there? Thank you.

[Rainer Lehmann]

Yes, maybe I'll start and my colleagues will add to it. So on the destocking part and Zain is always, of course, the wild card to really quantify and because, of course, none of our customers actually tell us exactly if this is for additional destocking or if they will use it right away. So therefore, when we refer to chart 5 and you see on the right hand side the Q1 where we have the basically EUR 695 million, or let's say on a group level, our Q1 figure and draw to the left what is a surplus. That is the indication that there's destocking in there. On last call, we actually tried to quantify it a little bit and we said, look, it's in a three digit million range there probably more on the let's say probably on the lower side of the three digit million. But we also expect still, as we said before, that H1 overall is going to be softer. Our basic statement that we also said Q2, I wouldn't be surprised to see book-to-bill below one also indicates that. So that also explains then why we expect an acceleration in H2 that you were referring to, because that is then when the normalization is over, of course, our customers will start, or will have to start at least that is our underlying assumption.

Also embedded in the guidance that Joachim just presented to, yes, accelerate in H2 again, of course, and then to be ready to deliver these goods. So that is basically the implication by us confirming the guidance with this call. Regarding the dynamics. I don't know if Rene, you want to make something. As I said, we thought that we clearly communicated also at the end of last year that H1 is softer and within H1, that Q1 is softer. Yes, it's a 30% decline, but to be honest, that is the behavior. Keep in mind, we don't guide single quarters, we guide full year numbers here and therefore, hey, that we won, is what it is. Maybe I don't know if you want to some color, Rene, but otherwise.

[René Fáber, Member of the Executive Board]

Maybe just one addition. I mean it's basically the same by using a different KPI that we were also introducing during the last year’s to be very transparent and clear about also the magnitude of this extraordinary effect. And that was the book-to-bill ratio. And I think we said clearly, and everybody can follow up and make their own calculation anyway, that our historical pre-pandemic average book-to-bill ratio was 1.08. And during the pandemic we had two years of 1.25 and 1.28, respectively. And then it's very clear how significant this surplus has been and the additional order book build up has been. And we always said, yes, this has to go out of the system one way or the other. And we also have been very clear that this only started and can be easily seen also from that chart that you were referring to again. And that is why we are presenting it, that this effect only kicked in mid of last year we had a slightly above one book-to-bill ratio even for Q2 last year. So this started only in Q3. So therefore I fully understand that this is maybe a bit unusual for everyone because these high volatilities we all are not used to in most industries I would say and also for sure not in the biopharmaceutical life science industry, but it is what it is for very obvious reasons and it's also clear that we have an underlying growth trajectory.

I think it's also very evident and therefore the mechanism, as Rainer already explained, is as long as customers have more on stock that they would like to have and I think we were very, we gave examples in our last call. We said there are some customers that may have a stock level of around 12-months. While they are rather looking forward to run it down again to something between six to nine months, maybe then it's clear that there is a substantial volume that first where people can or customers can like use just from their inventory levels and then only start to reorder again. And that is what we are seeing here and that is why we are also very confident that this is a temporary effect, even though, as Rainer said, it's not that easy to make razor blade, precise, precisions about the timing and the extent that's really not possible in our industry in both directions. Again, it wasn't possible in the direction when it jumped up, and it's also hard to make it to do it now. Zain, there was a question around China. Can you repeat this, please, because I'm not sure whether we got it here.

[Zain Ebrahim, JPMorgan]

Yes, sure. Thank you. Yes, that was very clear. On China, just if you could provide more color on the softness that you saw there. You said it came in below expectations. Was that more to do with China reopening COVID-⁠19 headwinds, or is there anything else that we should be thinking about there?

[Rainer Lehmann]

Yes, I can take that. Rainer speaking. Yes, in China, there definitely has been very significant COVID effects we've seen during the pandemic, both for COVID manufacturers, developers, COVID vaccine manufacturers, but also the over stocking by Chinese customers. We believe that that plays the major role by far in China. I would say probably it's too early to draw any conclusions on the full year, how that will look in China. Our expectation is that it's going to recover and ramp up in the rest of the year starting the Q2. We'll need to see that.

[Operator]

The next question comes from Petrina Carcota from UBS

[Petrina Carcota, UBS]

Good afternoon. Petrina Carcota from UBS. The main question the market has is about visibility in our view. Your guidance implies high single digit sales growth in the next nine months. And your comment in the press release says you assume no impact from normalization in the second half. What level of confidence do you have in that and what level of visibility? What are you basing the assumption? Thank you.

[Rainer Lehmann]

Yes, I think regarding the assumptions, we probably would repeat ourselves here. So therefore, on this, of course, very relevant and interesting aspect of visibility. Also, regarding that aspect, I think we made our comments already a couple of times. But nevertheless, we clearly, when we take a longer term perspective, which I always would recommend to take. We can clearly say that the volatility in our industry has increased. When I look back, let's say 10 years, we very often started into a year and gave a guidance with a bandwidth of two percentage points, maybe three percentage points. We typically landed quite nicely within this bandwidth. Over the last years, we were broadening this bandwidth to at least four percentage points and nevertheless we quite for a couple of times had to adjust the guidance pretty much around the mid of the year typically and that even before the pandemic and that has to do with the fact that this sector is very dynamic. There is a lot of innovation going on. We had biosimilars kicking in as an additional driver. We now have new modalities that are playing a role. The business has become more global over the last decade for sure, so more drivers and the good thing is pretty much all of them are positive additional growth drivers. But nevertheless what I want to say is this is an industry where I would say it’s in the face, we are in, it's anyhow not very easy to make very precise predictions in the first half of the year. We always try to do our best. I think overall our track record isn't that bad. Particularly, we do try to give quantitative guidance. There are also players who don't do this and only start doing this in the further course of the year.

So, however, but as I said already in my answer to the previous question to give a razor blade prediction how exactly this will look like is hard. As I said last year, we thought that this normalization would kick in a little bit earlier than mid of the year. So let's see how it will play out precisely in 2023. Our expectation again will be is that the difference between the weaker quarters and the stronger quarters will be quite significant. And again, our model always is and the way we think about it is that it takes roughly four quarters until we are back on the underlying growth trajectory. But I mean, growth rates of around 20% or so we have been able to manage before and we see ourselves clearly in the position to manage that also now in this phase and as I said, this is what we prepare ourselves for. But of course, it's always a challenge to manage such volatile developments.

[Operator]

The next question comes from Matthew Weston from Credit Suisse.

[Matthew Weston, Credit Suisse]

Thank you very much. Three questions please, if I can. The first is around pricing in bioprocess. You previously said that you were confident in significantly increasing prices in 2023 and that you hope that they would stick. I'd be very interested in this more challenging environment whether or not you're seeing signs of any of you or any of your competitors needing to discount the orders that they're submitting and whether that's a risk to midterm guidance going forward.

The second question is about China. And following on from your previous answer, some of our channel checks have suggested that Chinese CDMOs may be increasingly adding second source suppliers to their supply chain and may also be looking to domestic Chinese bioprocess suppliers as an option. And I wonder whether or not that's something that you're seeing and consider a midterm risk.

And then finally, on the LPS division, you highlight the weakness in US tools. I think people will be very interested to understand what you're really saying about the level of biotech uncertainty. I think the magnitude of the LPS decline in the US was far greater than people anticipated. I'd love some more color as to what you see happening in that environment, whether it's a specific type of tool or a particular part of the market.

[Rainer Lehmann]

Yes, maybe I start with the last question and then Rene will take on the first two. So LPS, I would say to your question around the US here, clearly the market is or the market that we are addressing and the business that we are having there is much more focused on the life science sector than it is in the other regions that we are serving. Yes, so we are more, you could say, also exposed to this sector. And therefore of course also certain trends in this sector are affecting o-US business more than it does in other regions. We have a much broader customer base also outside life science research in Europe and also in Asia. And that is really the key point. We have been extraordinarily successful in the US in growing our business, our BIOA business in particular over the last couple of years outgrowing the market significantly, I would say gaining overall share.

And the relevance of our US business has become therefore also more higher for LPS. But of course that also means in this temporary weakness of the market, as you rightly summarized, then we also see these effects in the US. We wouldn't say that we are directly affected by the SVB situation a couple of weeks ago. But indirectly, clearly one could say that the sector, early stage biotech, et cetera, is a little bit more cautious than during the years ’21, ‘22 where a lot of the research activities were significantly expanded in the sector. And now I think there is a bit a temporary cautiousness, I would say. But clearly what we would say when we look on the market that we are serving, the type of products that we're offering, the applications that we are addressing, we believe we are very competitive and doing well. I wouldn't consider that to be any longer term effect again. Rene?

[René Fáber, Member of the Executive Board]

Yes, I'll take the questions on pricing in China. First pricing for bioprocess division. We are well on track on executing the price increases we have implemented for 2023. Those mostly compensate to offset the prices increases we are getting from our suppliers, so well on track here despite the market difficult, market situation.

Second question was on China, we see local suppliers being expect in a second source, yes, we see that I would say that COVID pandemic situations and supply chain situation during the time of accelerating, accelerated the buildup of local sources for materials used in bioprocessing very much supported by Chinese government as well. We see that happening CDMOS and other customers in China. Today, I would say in, yes, less critical process steps in manufacturing process development but we are expecting that increasing. Today it looks, it's, we see it as a second alternative source to secure the materials. What we also see is a clear requirement by Chinese customers to have and provide local supply and that's our respond to that development. I mentioned that briefly that we are investing and continue to invest in localizing our manufacturing of single use products today. Going further in localizing the parts, at least parts of the components supply in China, again responding to that market requirements market needs, emerging market needs to provide a local supply from China to China.

[Operator]

Next question comes from Paul Knight from KeyBanc.

[Paul Knight, KeyBanc]

Hi, thanks for the time on the questions. Regarding, yes, I think the technologies around or dynamics around your improved second half growth. Are you going to be benefiting from the GLP1market with Novasep business or any other parts? And the other I guess, more general, Joachim would be, do you think the monoclonal antibody market still grows ex COVID 10% to 15%?

[Joachim Kreuzburg]

So, on the second question, because for the first time, I really have to ask you for help us, we are not sure or we are not sure whether we got the first question, right, Paul. So on the second one, we do believe that the monoclonal antibody market will be the most relevant single market that we are addressing, and everyone else in the sector is addressing. And therefore, in absolute terms, it will be very relevant, and also the absolute figure of growth will be very relevant. However, as you know, we think that the market growth, the underlying market growth should be in the high single digits. But that includes maps, as well as other segments, new modalities, Rene was talking about that how attractive and relevant and strongly growing that market is, that will provide substantial double digit growth rates. So in that means that the map market will still grow in a very significant upper single digit range but we wouldn't say 10% to 15%. There might be a single year, but not an average growth rate for maps of 10% to 15%. Maybe that's not, but Paul again, could you help us with the first question, please?

[Paul Knight, KeyBanc]

Yes, the success of the GLP or the obesity drugs, I know they're synthetically created. But does Sartorius have any technology to help in the manufacture of those peptides?

[Joachim Kreuzburg]

Yes, thanks. Thanks for clarifying the question. And, yes, you mentioned Novasep indeed, that's a part of our portfolio which addresses to small molecule or peptides oligonucleotides purification market with the well-established position of Novasep chromatography equipment in this market. So yes, it's relevant portfolio for that market and beyond that, of course, filters are being used as well, in this process definitely.

[Operator]

Next question comes from James Quigley from Morgan Stanley.

[James Quigley, Morgan Stanley]

Hi, thank you for taking my questions. I've got three, please. So first one, going back to order intake, started the year versus order that you received during the year. So looking back pre-COVID, with a two quarter offset order intake was quite a good predictor of revenue for the year. So in terms of your guidance, how much of the revenue that was implied was already present in orders at the start of the year, compared to orders that have come through throughout the year? So just trying to get a sense of basically how long is the order book was at the start of the year and how reliant you are on order intake through the year to hit the guidance. Also, in terms of the destocking, can you confirm that the first quarter is going to be the worst quarter of the year?

The second question on the LPS business, obviously, there was a bit of weakness there was like before, but can you give us an idea of how this bioanalytics which may be impacted bit more by [inaudible] funding, and the other lab tools space?

And then the third question, you may have addressed this on the Polyplus call, and apologies if this is repeating, but for your 2025 targets of EUR 4.2 billion for BPS and EUR 1.3 billion for LPS. Can you give us a little bit more clarity of what you've assumed for M&A within these targets. And you mentioned in the call last week, Polyplus was included in the target suggesting sort of EUR 4 billion of underlying growth. But how much more M&A is in that EUR 4 billion targets? Previously, you mentioned that in BPS M&A would be an under proportionate amount of a gross, but it'd be super useful if you could just give us a bit more clarity of what exactly you're assuming for M&A in both of those targets. Thank you.

[Joachim Kreuzburg]

Yes. Thank you very much. So, the first question indeed, I agree pre-pandemic order intake was a good predictor. And that was, going in line with this book-to- bill ratio being rather stable. But now, as I said, we had this huge volatility around order intake book-to-bill ratio and an extraordinary high order book. And that means order intake is not so much of an indicator for the future, which a predictor is, it's much more a mirror image of the past and this very high buildup of order book. So I guess it will take another few quarters, until order intake will be a good predictor again for our sales revenue. At the moment, we wouldn't consider order intake to be a good proxy for that.

LPS BIOA versus our lab essentials businesses we call it, and then of course, service plays a role for both to some extent, but let's focus on the product side. I would say performance of both has been quite healthy and robust during Q1, different dynamics in lab essentials less exposure to life science research, as just said, but at the same time, the decline of the COVID business as far as it relates to LPS was part of lab essentials largely again, as a recap, we were talking about membranes that are -- that were used by customers in COVID test systems as well as pipette tips are also used in COVID test procedures. So therefore, I would say overall, comparable robustness and contribution. On year 2025 perspective, we exactly, we always included in these projections, a certain portion of acquisitions in organic growth, and therefore, also an acquisition of the size of Polyplus was included in our BPS projections, maybe more. Obviously, one would say that in LPS, that there is another inorganic growth contribution necessary to achieve the 1.3, we would be would feel quite confident that we would achieve EUR 1 billion plus a bit in LPS without any further inorganic contribution. But that means in turn to reach 1.3, something around EUR 200 million of volume would have to be added to the LPS business roughly to achieve that. Maybe for BPS, also we, I mean, there are a couple of interesting opportunities, we might add something here and there. Which therefore is also included in our guidance already. But maybe here, the ratio between existing business and size of a potential acquisition is maybe a bit smaller.

[Operator]

And the next question is from [inaudible] from BNP.

[Unidentified Analyst]

Hello, thanks for taking my question. Few clarifications, please. Joachim, you said it takes four quarter give or take to go through this, Joachim. Is it based on what happened in the past? Or do you have, and sorry to push on that was more data points in terms of orders delivery being pushed back, if you have inventories to share with us? And on inventory, is there a risk or would you say there is a likelihood that inventory actual customers will go below pre-COVID baseline, which was EUR 6 million, EUR 9 million. And that ends restocking could be delayed.

Second on the LPS and the weak biotech funding environment, is there in your view and you read that this could spill over into BPS. Thank you

[Joachim Kreuzburg]

Yes, maybe I start, maybe Rene adds to that, let's see. So our projection that this destocking effect will last roughly four quarters is based on, a, the dynamic that we see at the moment. And as we said, one, the ratio or the there is a context, of course of the actual book-to-bill ratio, and the size of the overall order book surplus, so to say, and therefore, if we take this into consideration, this leads us to this perspective, of course, we also listen carefully to all those customers who give more precise insights.

And the second question that you have is related to that, we don't expect customers to run their stock levels below the pre-COVID level rather slightly higher than that. So and taking these data points, as you said, all together, our conclusion is that they should take roughly four quarters, as I said, to be then, very sharp in the sense of okay, the months the exact format of that curve, then that is really hard to take, hard to project but these four quarters, we feel make a lot of sense to us.

The spill over from LPS, if I get you right, you meant what I said before this a little bit more cautious spending and investment behavior from early stage biotech at the moment, typically, the time gap between any early stage activity be it small biotech, be it large biotech to something that becomes then relevant to BPS business is several years. And therefore, and it's not just several years, there's then also, of course, this typical dilution and mix effect, because it's not just one quarter that moves through time then. So therefore, we wouldn't expect any spillover effects, yes.

[Unidentified Analyst]

Thank you. And just maybe, to follow up on the question that was asked earlier on the impact from pricing on the 2025 target, it seems in the press release this morning, that you have probably less room to maneuver in terms of price. And do you expect that to have an impact on the 2025 targets? Thank you.

[Joachim Kreuzburg]

We wouldn't, I mean pricing maybe again to go back how our communication has around been around that. So during last year, when inflation kicked in significantly, we were running in an extraordinary pricing initiative. And we also set as inflation stayed on a quite significant level, we also had a more than -- or higher than usual price increase for 2023. Our anticipation for the path forward then is therefore ’24, ‘25 price increases should be much more back to normal levels. And that is what we factored into our updated projection for ‘25 which is this EUR 5.5 billion now. So that is our perspective. If boundary conditions change, then we will rethink that but that is how our current perspective.

[Operator]

The next question comes from Odysseas Manesiotis from Berenberg.

[Odysseas Manesiotis, Berenberg]

Hello, thanks for taking my questions. I'm got two and a half, please. So, firstly on bioprocessing margin, other than the sales decline here, is there anything else that affects profitability in this quarter in particular, because we're looking to quite a margin step-up over the next few quarters potentially above your midterm guidance even. So ex margin aggression from the Polyplus acquisition, what pressures that you've faced this quarter, do you expect less of, or what margin tailwinds should come through later in the year?

And, secondly, I mean, given the stability expiry for some of your consumables on the bioprocessing side, have you seen signs of a secondary market becoming active from your customers with a large stock, essentially selling consumables which are near expiry? And don't that, does the fact that a lot of these extra stock that your clients have will expire soon, but you're sort of H2 turn around confidence? Thank you.

[Joachim Kreuzburg]

Odysseas, thanks for the question. I take, try to answer that. So first of all, what impacts the margin in bioprocessing business? Maybe to add one aspect, one factor here is a product mix, where as you can imagine destocking or stock levels applied to this consumable, which are rather higher margin products than equipment. So I would want to mention that one. On expiry shelf life topic, we don't see that being a major factor here. Also a secondary market for consumables, you see a little bit of debt, but there's really nothing which is relevant. And quite difficult in regulated industry. So nothing, which we will consider being relevant.

[Rainer Lehmann]

Odysseas, maybe I can add a little bit also on the margin development, because, of course, I see economies of scale also work in both directions, was that then steeper volume in H2, we're also of course, clearly realizing some economies of scale again. So therefore, that's combination of the product mix, as well, of course, then utilization of the capacities that we sold.

[Odysseas Manesiotis, Berenberg]

Perfect. Thank you, Rainer, for the follow up. I mean, maybe, if I add a quick follow up on that one. So I mean, on your economies of scale point as well, could you help us with some figures, perhaps on the average capacity utilization of your plans now compared to ‘22, or ‘21?

[Joachim Kreuzburg]

Difficult to say, and a huge bandwidth. But maybe let me come back just briefly to a few comments earlier. And when you look into the segment of players that are very significantly exposed to COVID manufacturing, be directly because there are manufacturers, originators, CDMOs, or suppliers of critical materials for that, and there are also a few players that you could think of. And then you can imagine that the capacities, the capacity utilization at such players is significantly lower than during particularly ‘21, the high time of vaccine manufacturing, but also ‘22. And I would say then, of course, there are other parts of the market in the, let's say, more general map space, where I would say capacity utilization is pretty much as it has been before. So there's really a very significant bandwidth. So therefore, I think these average numbers would be, I would always suggest them with a lot of cautiousness, caution, but yes, so that is what I would say and for us, of course, our capacity utilization at this point is also a lot lower than usual. And that is good because that means we are able to react to the anticipated increase of demand.

[Operator]

Next question is from Falko Friedrichs from Deutsche Bank.

[Falko Friedrichs, Deutsche Bank]

Thanks a lot. Good afternoon. I have two questions please. And the first one is a clarification question, please. On this destocking amount that you reflect earlier in your prepared remarks, you said the three digit million amount, can you just clarify again, what is sort of the time horizon is for that? And can you give us a rough ballpark figure for the amount in 2022? And what's left in 2023, just sort of ballpark would be very helpful.

And then my second question out of curiosity, how do you think about your 2023 guidance now versus when you gave it in January? Would you say it is more of a stretch now? Or is it still just as realistic as you thought about it in January? Thank you.

[Joachim Kreuzburg]

So, yes, as I said or as we said, Q1 is pretty much in line with our expectations. And therefore, our perspective on the full year's guidance is pretty much the same. So I fully understand that for everyone else, when you see, okay, there's a decline of 13%. And then there is an expectation of certain increase that you then say, well, that's quite a challenge. But as we said, we have expected a significantly lower first half of the year in comparison to the second half of the year. So within our projections, we always anticipated quite different parts of the year, and therefore two different quarters in the year. So that's pretty much unchanged.

So and on stocking, we have seen a significant built up, Rainer said that very significant three digit million euro number of so to say order book surplus. And we have seen a certain reduction of this in Q3, and then also more significantly in Q4. Now, after Q1, we still would say, there still is, and it was a significant three digit million number, there is still a lower three digit million number of all the orders that have to be like, worked through and reduced and therefore destocking that has to happen. But we already have seen quite a bit of this being digested, let’s put it that way.

[Operator]

The next question comes from Ed Ridley-Day from Redburn.

[Ed Day, Redburn]

Good afternoon, and thank you for the questions you answered. A couple of follow up. First of all, Rene, on top of the lead times you again, you mentioned that most of the times, asset have now back COVID levels? I don't know if you want to quantify what most would be. And we've been discussing there for at least on your side of the business. You would expect normalization in the times to be complete by early in the third quarter.

And the second was just a quick one for Rainer. In terms of your FX, obviously, there has been a little movement in FX year-to-date. Can you give us some help on how that might affect margins for the full year?

[Joachim Kreuzburg]

Yes, thanks for the question. I take the first one on the lead times. When I said for the most of our portfolio that includes virtually all consumables, major consumable products, filters, single use bags, single use assemblies. There are a couple of product categories where we're still working on improving the supply chain situation. On the equipment side, most of the equipment types are also back to pre-COVID lead times. So it's really few exceptions where we're still some components supply ,yes, top officials we are working on.

[Rainer Lehmann]

And regarding FX, so basically, if you compare it to the previous year quarter, there's actually impact on the margin from the FX side really slightly, only a little bit of negative one. And we expect because if you look at how mainly the US dollar developed, become last year from like a 107, around average, now we're slightly up 110. But I expect actually, that we will not see under the circumstances where we are, always a disclaimer, major impact for the remainder of the year on the FX size to be honest.

[Operator]

Next question comes from Naresh Chouhan from Intron Health.

[Naresh Chouhan, Intron Health]

Thanks for taking my questions. One on inventories, please. So when we spoke last quarter, you mentioned you'd be running down your inventories. They seem to have gone back up again this quarter. So firstly, Is that intentional? And secondly, is there any risk that some of your inventory reaches the end of the shelf life and there's potentially a write down? And then on the margin, maybe I could ask the margin question slightly differently, of the 490 basis points contraction in stated, could you kind of help us understand, obviously, there's the economies of scale part and then there are other costs in there. Could you help us understand what percentage or roughly of that 490 basis points how much of it came from things other than economies of scale and lower utilization?

And then related to that, I noticed that you reduce headcount by 3% in the quarter, should we assume that continues for the rest of the year? So kind of a 10%, headcount reduction for ‘23? Or are we largely done here? Thank you.

[Joachim Kreuzburg]

Yes, thank you very much, maybe I tried to answer them first. So at an entry level absolutely right slightly up in Q1, we, that is pretty much quite a normal effect, we typically see a certain buildup at the beginning of the year, and then a reduction towards the end of the year. So that's like the normal curve. The underlying theme, nevertheless, is that we intend to further reduce our inventories. But of course, with very much an eye on being able to react in a very agile and flexible way to the expected then increase of demand and orders again in the further course of the year. So that's a bit of the balance that we are trying to manage here. We definitely as we always said, and you rightly mentioned, our intended stock level in a normal situation, again, will be below the actual one. But we have to see a little bit more or less volatile situation until this really can be pushed for. Shelf life, you rightly said it. Of course, shelf life management is then also a challenge on any supplier side, and therefore also for us, I think we talked about that last time in our call. It's nevertheless a rather minor effect that we are seeing, but of course, in comparison to previous years, we have seen throughout the pandemic a little bit higher depreciation, and sometimes also write offs on inventories. That's clear, but for sure not dominating the equation, I would say. Margin, I mean bear with us that we don't give too much detail here. But roughly, you can say that the bit larger part so let's say roughly or the larger contribution of the three factors. Scale costs makes the larger factories is scale here. And then costs that makes up maybe on the same level, let’s put it that way, so maybe we are talking about something like 50%, 25% of this effect, just to give you an idea. Headcount, so headcount, I would say if the question is very much on the short term horizon, we might see a little bit of further reduction. But if the perspective is rather towards the end of the year, then it may look already maybe similar to what we have today. Even though of course, we will clearly try to use as many flexible workforces here in this anticipated scenario of increased demand again, so, and the headcount number, just to remind you the headcount number, because this is how regulation is asking for this report does not include temporary workers, or contingent workers. So therefore, there might be a certain shift, but by and large, short term, maybe a little bit further reduction. And then if we talk about a couple of quarters, then we will see a moderate increase again.

[Operator]

The next question comes from Sezgi Özener from HSBC.

[Sezgi Özener, HSBC]

Hi, thanks for taking my questions. Most also have been asked, I have just had some follow ups as well. So in China, you mentioned some localization pressures, and also some second sourcing. Are there any parts in BPS where there is more alternative through the more local market to your products, and which are the parts of BPS where you see less alternatives to that?

And my second question, relates to the mix that you've experienced in the first quarter, was a higher proportion of these revenues from older orders compared to previous quarters, which has limited the impact of the price increases.

[Joachim Kreuzburg]

On China, local suppliers in China, which products group from the BPS portfolio we see now being offered or supplied in China from local suppliers, what we see is that happening in area of single use bags, and again, like basic bags to the CD bags used for storage or less critical applications. We see that in area of some areas of equipment. Like, yes, Palletank used to hold the bags. We see some chromatography systems as well, where we don't see at relevant local supply, local suppliers are bioreactors, for example, most of the filtration products, even though, yes, also here, new suppliers are showing up. But not that pronounced as the other categories I mentioned. That would be the, yes, our view on that.

[Rainer Lehmann]

Regarding your other question regarding pricing, you can see that we do not see yet the full price increase that we actually did last year in July, realized in 2023, we still have orders, especially also still in Q1 that were from before or from the first half of 2022. So there's on the price increase side there will be realized more in the coming quarters.

[Operator]

The next question comes from Virendra Chouhan from Alphavalue.

[Virendra Chouhan, Alphavalue]

Yes, thank you for taking my questions. So I think a while ago, you mentioned that the surplus in terms of the order book is now probably a lower three digit million order surplus was normalized levels. And so my sense is that the order book will continue to, book-to-bill will continue to be below one for a while. From that perspective like, if you could help me with like when do you expect order book to be back to growth when you look at it from a quarterly perspective and a sales bottom in terms of over the next couple of quarters? So that would be really helpful if you could share. Thank you.

[Joachim Kreuzburg]

Sure. So I think Rainer mentioned earlier in, during our call, and during his part of presentation that we were anticipating and still do that we would have roughly four quarters of a book-to-bill ratio below one. And we have now three quarters of a book-to-bill ratio below one. So and that means that and that is still our expectation. So that would mean that if this materializes that way, then for Q3, 2023, we would see a book-to-bill ratio above one, and this equals to a growth of the order book for that quarter.

[Operator]

That was our last question. And I hand back to Joachim Kreuzburg for closing comment.

[Joachim Kreuzburg]

Yes, thank you very much for this discussion. First of all, for your interest in Sartorius Group as well as Sartorius Stedim Biotech, very much appreciated. I think it's really important to have this dialogue, particularly when things are not like going as every quarter before and when just ticks the boxes, but where it's really important to explain different effects and to hopefully being able to clarify then all questions around that. So thanks for your interest. Thanks for the discussion. Looking forward to next time. So which means latest in three months. All the best. Bye-bye.

[Rainer Lehmann]

Bye, everybody.

[Operator]

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