Carl Zeiss Meditec AG (AFX) Earnings Call Transcript & Summary

Yes. Good morning, ladies and gentlemen. Thanks for joining our call today, and welcome to our 6 months '21/'22 analyst conference. I am Sebastian. I'm the Head of Investor Relations. And with me, as usual, are our President and CEO, Dr. Markus Weber; and our CFO, Justus Wehmer, and I would like to hand over to our management now to give you an intro to our financial statements of the first 6 months. And afterwards, we look forward to your questions. Markus, over to you.

Yes. Thank you so much, Sebastian. And also a very warm good morning and warm welcome from my side to our 6 months analyst conference of the Carl Zeiss Meditec AG. As usual, I would like to give you a brief overview first of the half year's numbers at a glance. And afterwards, then Justus, my colleague, will take over, giving you a more comprehensive analysis and details of the last 6 months. Afterwards then, I would like to share some exciting highlights in this case, an M&A activity, which we just have executed. And then finally, I will give you an outlook and then ending with a Q&A session and enough time for questions and answers. So having this said, I would like to start with the financial figures. And yes, so overall, we are looking back to a good first half year. So a very solid revenue growth of 11.5% to EUR 855 million. So this is quite nice, but it's also clear that the macroeconomic environment becomes more and more tense and tight also for us. So I think everybody is currently facing this, and we see this also, especially in our supply chain and there -- in our global supply chain. Overall, we see a very strong order intake of more than EUR 1 billion. This shows also the powerful team and also the good product placement of our innovations in the market more than 30% year-on-year. So this is quite impressive, and we see also a growth in all regions, and I come to this in a second again. So both strategic business units, so that means Ophthalmic Devices and Microsurgery has contributed in a positive way to this good half year result. And Ophthalmic Devices went up to EUR 650 million and Microsurgery then to more than EUR 200 million. So this goes along with 10.5% and 14.8%, respectively. And Justus will give you more details on this with a more elaborated analysis. But also important to note that the business here is also affected, highly affected by the supply chain, also shown by the book-to-bill and the high order entry in comparison now to the revenue part. And also important to note for you is that Ophthalmic Devices that the recurring business has been not so much affected by the supply chain instead of the devices. So having this said, we see then in the regions, overall, in APAC, a very good revenue growth, especially also in China and India, now impacted also by the COVID lockdown in China. So that means this will come -- this will be an issue then also for the upcoming half year, but we will also talk about this in a second. Japanese market is back to growth for us, so this is also nice. The European EMEA has a strong demand from our core markets, also in South Europe, very strong, actually demand and also America shows a good development. So overall, this is nice, and we see actually that overall, there's a good progress. So going now to the earnings. And the earnings also, and we are actually happy to report this year has a slight increase to EUR 177 million. And the EBIT margin is more than 20%, 20.7% in direct comparison to 21.2% of last year. So there's a slight decrease in the EBIT margin, actually already as predicted, as you know. The reason for that is also as we forecasted is, first of all,, we are heavily investing still in R&D, and this will continue over the next years, as we discussed, because we believe to stay on a growth path. That also means we would go in digitalization. I come to this later on again. That means that we are investing also in our leading products. We are investing in new markets. We are investing in workflow. We are investing in digitalization. And overall, this is then also reflected in our R&D investments. But we see this also in sales and marketing efforts. And sales and marketing is the new products what we brought to the market like the QUATERA, but also that our team in sales and marketing are now going again to, let's say, pre-COVID status, talking more to our customers, having trade shows, having these hands-on market introduction of the products, and this is also something what is reflected in our OpEx in the sales and marketing expenses. Also, supply chain and here also working capital is a topic where we are investing to ensure that the supply chain is as much as possible stable, and this is also something which is affecting our P&L. So having this said, EBIT is on a good level, and you see this also in the earnings. So earnings is also on a high level with some special actual effects coming in. But overall, also here, a good earning per share of EUR 1.44, which corresponds to 27.9%. So having this said, overall, this is a good status of the first half year. I think we will come then also to the outlook. And with this, I would like to hand over to Justus. Justus?

Yes. Thank you, Markus, and also a warm welcome from my side to all of you. I'm now going to give you a more detailed overview of our financials, starting with the performance of our SBU Ophthalmic Devices. Revenue came in for OPT with EUR 652 million. Compared to prior year, the reported increase was 10.5% and at constant currency at 9.7%, especially due to a high contribution once again of our recurring revenues. Especially in our Refractive business, we continue to see a very strong development with, again, a strong performance in Asia Pacific. I'm very happy to report that last month, we have obtained the clearance of our new phaco system, QUATERA 700 by the FDA. We had a highly successful congress. As Markus just mentioned, the face to face shows are basically back and at ASCRS in Washington, in April, we had very strong interest in this new device and are looking forward to the rollout over the next few months. SBU OPT. EBIT margin decreased slightly compared to last year due to increased expenses, but EBIT increased in absolute terms as a result of our continued business expansion. As guided earlier this year, we clearly see the recovery in sales and marketing activities to the ranges of pre-COVID levels. Trade shows, as we just mentioned, take place physically, and travel is also picking up significantly. But this is in line with what we had been expecting and forecasting since last year. And on top of it, we invest in the sales and application team for our global phaco rollout as we had also guided prior. There's also an increase in R&D expenses to support our strategic initiatives like, for example, our digital ecosystem, the ZEISS health care data platform. Yes. With that, let's move over to MCS. MCS delivered a very strong performance with revenue of EUR 204 million versus EUR 177 million a year ago. This represents a revenue increase of roughly 15%; at constant currency, 14%. This is really good growth given the difficulties in our supply chains. I'd like to point out that the faster growth compared to ophthalmology is at least partially related to the slightly lower base for microsurgical from last year. At that time, this business was still recovering somewhat slower from the pandemic than ophthalmology. EBIT margin is still very strong and has actually further improved despite increased expenses in sales and marketing. We had some positive currency effects that also supported the EBIT margin as most of the cost base in Microsurgery is in Europe. Yes. Let's, on the next slide, look at the regions, and I only highlight a few things here. The strongest momentum again we saw in the Asia Pacific region, but let's start with a few words on Americas, which achieved sales of EUR 212 million, which is an increase of 7.6%. However, at constant currency, this is only roughly 2.6% versus prior year. We are, though, still pleased with the development in the market in the U.S. where we grew 8% and at constant currency, 2%. Latin Americas and here, Brazil and Mexico, in particular, rebounded nicely with increases of -- in both markets, roughly, 9%. In EMEA, we noted revenues of EUR 229 million overall, an increase as reported of 5.8% and at constant currency a bit more accentuated at 7.1%. The development in Europe is somewhat heterogeneous. Some of the core markets are at last year's level or slightly below. Some other markets, Southern Europe, for example, with significant growth versus last year. So it's in total, a somewhat mixed performance by country, but as I said before, growth in Europe overall, very satisfactory. And as I said in the beginning, once again, the strongest growth we saw in the Asia Pacific regions, yielding EUR 414 million of revenues, which is 17.1% up and at constant currency, 17.3%. China, including Hong Kong, again, with an outstanding growth of 25%, but also India, very strongly rebounds seeing 68%, but let's also remember here that India at this point in time a year ago was in the, let's say, darkest hours of the pandemic. Japan, which is a meaningful market for us, also back to growth, 6%. And I think in the other countries for us for Asia Pacific, it's again a mixed picture with growth and also some markets which are rather slower. So with that, let's move then at the P&L. The increase in the gross margin was 58.6% compared to previous year, supported -- was supported by some positive exchange, foreign exchange effects, mainly Asian currencies are here to be mentioned. And then again, the product mix effect, as I mentioned earlier, the recurring revenues again, were growing strongly. The OpEx increase, I think we explained it now in detail, Markus and myself made some comments. The increases in sales and marketing for advertising and trade shows and traveling, of course. On the one hand side, R&D with our, as you know, continuous investments in our strategic priorities. In prior year, that's just to remember here, we had a onetime effect in selling a property that is in relation with us moving in a few years into a currently under construction a new building in [indiscernible] . So in total, the EBIT of EUR 177 million is above prior year's level, which was at EUR 163 million, and the EBIT margin comes in at 20.7%, slightly lower than the 21.2% that we saw a year ago. The adjusted EBIT margin, you see on the next slide, it reached 21.2%. And here, you see the effect of this property sale. And considering that, we have an EBIT margin level, which is almost at previous year's level. And with that, I think we can already move on to the next slide. The cash flow situation, that obviously looks really quite different from a year ago. We -- and the operating cash flow which is up by 75%, which is basically half of what we saw a year ago. That is clearly an expression of the investment in our working capital. We really are investing here in inventories to secure our operations and assemblies in order to maintain, basically, operations up, so that is something that we need to consider. And obviously, we also have quite a number of products which are unfinished yet because we are waiting for the one or the other missing part or component. And that is all putting some pressure here on our operating cash flow. So those safety stocks, so to speak, are, as I said before, actually an investment that we see to secure, and then hopefully, continued supplies to our customers in the second half of the year. Cash flow from investing activities consisted mainly of payments for property, plant and equipment. As you know, especially the expansion of our consumable business both for IOL and Refractive products is here in the focus. And we also have here a recent acquisition that is showing in these investing activities. Cash flow from financing activities is mainly influenced by changes in receivables and payables on our treasury accounts and lease payments. So net liquidity once again is increasing and well above the EUR 900 million threshold. Yes, we have added an additional slide as just discussed in the cash flow statement and with the comments that I made with regards to the working capital. The current global political and pandemic situation causes clearly some concerns in the supply chain. So we want to share a few more details on how we are affected and how we are managing the situation with you. So the unprecedented supply chain pressure we are facing pushes our order backlog to record highs, and we have put in here a graph illustrating it. So the chart on the slide gives you a rough idea of what categories are most affected. What you see here is the breakdown of the categories and the growth of the order backlog and where it comes from. The absolute growth was quite massive, amounting to more than EUR 200 million compared to March '21. And I'm anticipating already questions about it, but I can assure you and I have discussed this with our sales management. We consider this to be an order backlog of good quality, meaning that these are serious orders and not any kind of -- or should I say, reserve bookings or whatever you want to call it. So that just as a side comment here. A significant portion of this backlog comes from surgical microscopes both on the Microsurgery side as well as on the Surgical Ophthalmology side, but also the diagnostics and Refractive Laser equipment is affected here. There is an underlying piece of good news, however, and that is that as you can see, the consumables business is not really impacted in any meaningful way as reflected in the only very negligible increase of the consumables backlog. I also want to share a couple of words on the 2 big geopolitical crises that are playing out in front of us. First, the war in Ukraine. We can confirm again that direct revenue impact has so far been limited to the impact on our Russian business, which contributed between 2% to 3% of our total sales in a year before the war and is now declining very sharply as one might expect in this situation. Carl Zeiss Meditec is not hit by the EU or U.S. sanctions and continues to deliver to our customers in Russia, ensuring that patients receive medical treatment as needed. However, and that is important to be mentioned here, the management has clearly decided to donate any profits from the continuation of our Russian business to charities that are active in the Ukraine, and the first such donation has actually been just a couple of days ago. At this point, our supply chain largely continues to work without major disruptions, though we have to build additional safety stocks, as I mentioned before. And let's now talk about China, which is clearly of high interest for you. So the situation there is much more complex. There are several ongoing lockdowns related to the Zero COVID policy, most prominent one, obviously, in Shanghai. The Shanghai lockdown has enormous ripple effects on transport and logistics as well as warehousing of our products. This means that, again, surgeries are being delayed, although the number of hospitals being locked down, and that's important for all of you, is only minimally affected. It's from the counts that we do regularly only in total China anywhere between 10% and 15%. So let's keep that, please, in mind. And as in previous COVID-19 episodes, yes, surgeries are being delayed. But even outside of the lockdown areas, some products, however, are currently not reaching our customers. And this is because of the logistical problems that we have, of course, once we cannot operate a warehouse, which is in a lockdown area. However, we are looking with some positive optimism in the next couple of weeks and months seeing that just lately over the last 2 weeks, the situation seems somehow to ease up. We have, however, experienced a low double-digit million impact on our revenue so far, meaning, especially during the month of March and April. It is helping us that in our consumables business, particularly in Refractive, we are currently not in the busiest season of the year. Many of you know that the summer season is actually between June and August. And therefore, the current shortfall, we are still considering at something that is manageable. It is hard to predict, though, if all of this is recoverable once the lockdown ends, because nobody knows once it's really going to end. And we cannot obviously predict when this is going to be the case. Although, and I think this is something to also remember because it's not too long ago, I'd like to point out that even in 2020, where we had several months of a total lockdown in China, a very vast majority of that lost business was actually recovered shortly after reopening. So learning from that experience, we also have some positive optimism looking forward. Yes. With that, I thank for your attention and hand it back to Markus.

Yes. Thank you so much, Justus. And let's come to the focused topics and we are, and I am very happy to announce that we have recently successfully finished the acquisition of 2 companies, Katalyst Surgical and Kogent Surgical, and both are U.S.-based manufacturers of surgical instruments and located in Chesterfield, Missouri. And both were founded by Gregg Scheller, and Gregg Scheller is a key innovator in this field in this market, very well known. And actually, we are very happy that he's also after the M&A is very committed to stay on board after the integration becoming a part of ZEISS and actually acting also as an innovator within ZEISS, which brings us additional value also there. So we have already a relationship with Katalyst. Katalyst has been supplying our surgical instruments business, FCI, France Chirurgie Instrumentation, part of our Surgical Ophthalmology division. And as you can see, that Katalyst has a very strong focus on ophthalmology. And the product portfolio is particularly complementary to the current retina in [ refractory ] business. So this is quite nice. It's actually completing also our portfolio here and goes along also with our workflow approach. On the other hand, Kogent's innovative and growing electrosurgical portfolio, especially also in Bipolar Forceps, with a strong development pipeline also enables us to enter new market segments and adding recurring revenue to our SBU Microsurgery business. As you know, this is also one of our strategic goals to increase our recurring revenue in Microsurgery, and this is helping us here where we see a wonderful combination also actually to implement this in our workplace solution strategy. So those products are going to expand our solution offering in all regards. So in surgical instruments and serving our surgeons with a one-stop shopping convenience. And again, this is in addition to our aspiration to provide workflow solutions. As agreed, and this is important for you to know with the target, we are not disclosing exact size and valuation of the deal. However, it's also clear, it does not have a material impact on our P&L. You will, of course, find all mandatory disclosures in the notes to our financial statements and in the full year 2022/'23 report. So we are really very happy to welcome the Kogent and Katalyst team to ZEISS and looking very forward now to the next steps in the next months and to a successful joint activity here. Yes. So this is actually our focused topic of today. And with this, I directly would like to come to the outlook. And now lastly, let me comment on our fiscal year and the upcoming half year of the fiscal year. Also, our industry is still very impacted by the global supply chain difficulties, and Justus has mentioned that in detail and all the regional lockdowns. We believe that it will continue to benefit from a highly favorable long-term growth trends. So this is quite important. So we see this, but currently happening is the VUCA World on this. This is on short and midterm. In the long term, we are very well positioned here. And these trends are actually for -- in the hand. So the first one is the aging of the population. Second one is the growing wealth in large parts of the world and a rising access to health care in the RDE in rapidly developing economies. And finally, and last but not least, increasing information access to digitalization. And these trends lead to a growing number of patients and thus also a higher load to the health care systems so that means there's a high demand then coming from the digital solutions, tailor medicine, also artificial intelligence-driven features and it's becoming more and more relevant for ophthalmology but also Microsurgery. And this is exactly where we are investing, where we are investing our R&D so that we are prepared and that we are actually shaping the market here. So the outlook for '21/'22 is positive, in spite of all the difficulties we are facing in the short term. We aim to grow and to outperform our markets not only ZEISS, but the entire industry is impacted by the tense situation of the global supply chain, and Justus has explained that in detail. The disruptions are likely to continue for the remainder of the fiscal year. So there's a high uncertainty. As we have pointed out, we are having a substantial order backlog, so the market is there. The market is healthy for us. And it is very hard to say how long the situation will last. Nevertheless, we estimate our EBIT margin for '21/'22 to be between 19% and 21%. This remains achievable for us. If there is no further material revenue loss from supply chain disruptions and no further material impact from, for example, an extension of the regional COVID-19 lockdowns in China, this is the high uncertainty we are all facing. So as we have been seeing already in the current quarter, we expect more normal levels of operating expenses. So that means to pre-COVID situation, particularly in sales and marketing, this applies even more so in the context of our upcoming product launches. Mid-term, we continue to have significant investment needs as we want to further broaden our global presence, and we want to continue to drive our innovation strategy with a high level of R&D investment. This goes along also with labors and new colleagues coming on board. However, on the other hand, we consider the high level of recurring business as mostly sustainable. Profitability will clearly benefit from this trend. As a result of higher costs, but more also a higher level of recurring business, we are confident that we can achieve in mid-term EBIT margins sustainable above 20%. So that means really beyond 20%. With that, we have to come to the end of our prepared remarks on the financials. Let me pass it back to the moderator to move into the Q&A session. Happy to answer.

[Operator Instructions] The first question s from Oliver Reinberg of Kepler Cheuvreux.

The first one is actually on China. Can you give us any kind of color what kind of growth have you seen in Chinese sales in the first half? And I guess it's tough to say, but do you have any kind of a view like how the kind of Zero COVID policy in China is going to continue? And specifically, how do you think about the mid-term risk on China in terms of is it at some stage Zero COVID policy would be reversed, what would be the risk on elective volumes? And also, have you done any kind of work on the potential economic sensitivity of the demand in the [ work factory pace of ] business in China? And the second question would just be on the U.S. You had talked about kind of stable development. So can you just talk about what kind of headwinds have you seen there? And does the order backlog suggest that there may be a kind of a [indiscernible] going forward.

Yes, Oliver, just to see, I try to give you a couple of answers, as good as I can. So the growth rate for China actually has been in the first half year, pretty much a continuation of what we have seen throughout the last year. So clearly, in a high double-digit area, so not too much difference actually to what we saw before. The key drivers of the business across the portfolio being at both our MCS business, but as well, of course, our Refractive and Surgical businesses have continued the growth of the installed base for lasers for refractive surgeries, and the consumption of consumables have actually continued on a pace that was very similar to what we have seen throughout the last year. The COVID policy question, I mean there's too much speculation. Of course, we do not have any, how should I say, better contact or information. I can only simply factually share with you that in the last 2 weeks, our company has been part of that second wave of companies in the Shanghai county that could basically restart their operations, which was very helpful to us because that meant that we could actually start shipping again out of our warehouse, as we all know. However, there is still a good number of employees locked away and has to work from home. I think the only good news here is that there's obviously some practice and experience after 2 years of corona, and that means that we can somehow conduct our business. The elective procedures, I mean, let me only share with you here data point. As I mentioned before, it is not that it is like in the first lockdown, the clinics in its vast majority are open, yes. We have currently, I think we are counting that every week, only 15% of the clinics with who are our customers are down. And so it's more an issue of, a, getting product to those clinics, especially consumables; and secondly, that the patients can leave their homes. And so I mean, our experience of the past has been that we saw -- that especially in China, there was a lot of creativity to catch up of -- in terms of the pent-up demand. So we see there still for this year an opportunity that this can happen. And again, let's remember that those months, March, April are, anyways, rather slow months in terms of elective procedures. Yes, U.S, I'm not sure whether I understood your question completely. I wouldn't actually particularly be aware of any meaningful headwinds in the U.S. That's not the case. I mean especially the U.S. is also normalizing more. We just had the trade shows in the U.S. with good participation rates with actually good level of bookings at the show. So overall, I'd say, especially when I look at the sheer order numbers in terms of devices being sold, that actually looks pretty positive. So from that perspective, I may not have fully understood your question, but I cannot confirm that we have any headwinds right now hitting us there. So yes, I'll leave it there. Thanks.

Perfect. And can I just follow up the economic sensitivity of refractive in China? Do you have any insights there?

The economic sensitivity to what extent or in what specific context, Oliver? I'm not clear where you are hinting at.

Sure. I mean, based in China, if the kind of [indiscernible] gets worse and the kind of economy basically built on a lot of debt. So if there's a slowdown, to what extent have you done any kind of work to capture if this kind of slowdown may also impact the demand for refractive laser treatments.

I mean we, that is the effect that we expected almost for 2 years but haven't really seen materializing. And so from that perspective, it appears as if that customer group is one which in terms of its discretionary expenses, is somewhat independent from that. Again, with all caution, but at least, we haven't seen a strong correlation even in the previous lockdown periods. So it is right now, at least from the numbers that we see from the investment policy of our customers, it does not, right now, appear as if somebody would expect a general slowdown or a reversion of the trends.

The next question is from Falko Friedrichs of Deutsche Bank.

My first question is on the QUATERA and whether you have everything in place now to start the full commercial launch of the product. And if that is the case, can you share some input on the expected contribution to the P&L this year from this product? Then secondly, can you share some color on your ability to pass all these inflationary pressures on to your customers in the current market environment? And then my third question is on a potential gas or energy embargo and how this could potentially affect your European operations, especially in Germany, and whether you're starting to prepare for such a potential situation?

Okay, Falko, this is Markus speaking. Maybe to start with the QUATERA. Indeed, with the FDA approval, we started now the launch during the ASCRS show, which has been quite successful. So we created and generated a lot of leads for the QUATERA. Nevertheless, I think also combined with the lead times, we don't expect for this fiscal year significant contribution to this. Even that the KOLs gave us really a very, very positive feedback. Also important for you, and I think this was already reported in the last quarterly calls, and I think this has -- is unchanged in that way, but we are on track in terms of the way how actually to implement the QUATERA to the market. It's important to note also that especially in U.S. that there are always these bundled deals and this is also something what is on our plan. What is also expected. There's more to come. As you know, there is this topic lens [ CT LUCIA ]. And this is something which will come in the next months and years then for the public portfolio of the IOL lenses. And then we have this fully actually integrated, then actually, we can unleash the full potential. So there's more to come. This goes along also with the entire cataract workflow. The workflow what has been presented by Euan, I think during one of our last calls. I think it was October...

December.

December. Yes. So hopefully, to answer this question, Falko. So in terms of inflation, so we don't see currently that the customers are highly affected by this effect. I can also say that, for instance, in Turkey that there is high inflation on that, so this is something, so the demand is still there. Nevertheless, what we are thinking also is it depends also on the supply chain, actually how to arrange this then also in terms of the sales price, so this is something which has to be decided on the local level, on a regional level, and this is an ongoing process. So overall, the inflation itself is not currently affecting directly already our business. We will see if this is now getting accelerated and if the inflation would increase further on then we have to react accordingly to this. So in terms of the gas embargo, so this is something where we are embedded in the entire Carl Zeiss AG activity and strategy there. So actually, this is a kind of bundling effect. Just important for you to know, it's not like that our manufacturing is heavily energy consuming -- let's say, so the processes are not heavily energy-consuming. And that means that the gas embargo is hitting us, I would call it like every industry in that, but not in a special way. We are preparing on that from a Carl Zeiss AG perspective on it, and we are embedded in this.

The next question is from Graham Doyle of UBS.

Just one on, I suppose, sort of the outlook in the second half. If I do some sort of quick math, the Q2 in the first half was so strong that it looks actually that consensus numbers imply an actual decline in EBIT in the second half. So if I sort of work through what China could do and I take a sort of bearish view, it sort of implies to me that if the business ex China can grow mid- to high single digits, then actually you can get to sort of where consensus is. So I suppose the question is, is there anything we should be aware of that would make that sort of level of growth for the ex China business difficult to achieve? Or actually, is that fairly straightforward?

Graham, I can take that. Yes. First, your analysis is correct and logic. The difficulty is, of course, especially what is hitting us on the supply chain. The demand side, as you have seen from the order backlog and from the regional spread, we are growing in all regions quite nicely. So if China was to be hit harder, and to answer your question, if we can compensate that then by sales into the U.S. and the EMEA markets, is ultimately a function of our ability to ship and to get the supplies in that we need. And frankly, that is right now the -- let's say, the biggest question mark. And let's just remind this situation in Shanghai with this huge number of vessels being piled up there, the bullwhip effect out of that I think are hard to anticipate what does it mean for some products that some of our second or third tier suppliers may need to integrate into their shipments to us. So therefore, it is not such a simple straightforward exercise. I would continue to generate some optimism. As I said just lately the last actually 2 weeks have shown a good reaction from our bookings and especially invoicing in China and assuming that even Chinese authority cannot continue to basically lock away people for months. I mean we're talking about 40 days now, and we are in constant exchange with our experts over there. I mean assuming that during the course of this quarter, there must be some relief in that situation, then we would actually believe that China can return rather swiftly to a solid business performance, yes? So that's currently our expectation. If we are wrong with that, okay, then it's a different game, but too early to tell.

Sure. China is, look it's clearly an issue. But at some point, that will get resolved and whether or not it's resolved in time for this fiscal '22 or it takes a little bit longer, it sounds like the business, certainly versus our expectations, it's performing quite well, and that should be broadly fine. But perhaps actually, it's probably even performing stronger than you might have expected 6, 7 months ago. So where do you think you guys are in terms of the sort of broader cycle? We saw Alcon report really strong numbers J&J. Do you think this is just a big, there's a big increase in market growth overall and perhaps this is something we should see for the next 1, 2, 3 years?

I mean, as Markus has said before, we are certainly considering ourselves to be privileged being in a very healthy, robust industry. And I'd say, frankly, if it wasn't for these supply chain issues that we mentioned at depth, I would probably share with you the optimism, if not euphoric perspective, on the second half of the year because, as you know, traditionally, the second half of the year for us has typically even been stronger than the first half. And with that strong start and that order book, I think I agree with you, we certainly would have no reason to worry whatsoever. So yes, but I'm here to give you a kind of a firm guidance. And I think my message is the uncertainty levels have risen so much lately that I don't want to kind of make here commitments that we cannot keep and hold. And that's why we I think you can hear out of Markus and my statements that we, that we are extremely happy with the first half year performance, but we have to be cautious now whether the already today, difficult supply chain situation may even get worse in the second half and then potentially hit us in a way that we cannot recover before the end of the fiscal year. I think that's our difficulty here, yes. So if that moves over into the fourth quarter and then out of this fiscal year, then of course, it can have significant impact, and that's our difficulty here, yes? Yes.

The next question is from Sven [indiscernible].

My first question is on the Microsurgery margin, which was obviously very strong in Q2. What's the expectation here for Q3 and Q4, especially against the background of the difficult supply chain situation? And the second question is on the sales and marketing expenses in H2. So as you said, trade shows are starting again and the salespeople are out at the client. And so there should be significantly higher than the EUR 160 million, which you recalled in H1. Could you please give us a sort of a quantitative guidance for the sales and marketing expenses in H2, please?

Yes. Thanks for your questions. I mean, Microsurgery, I think it was on my backlog slide. The perspective is a very positive one. You can actually see that the MCS equipment, I think, is the biggest stack in the chart in terms of buildup of additional backlog so I think that answers at least the first part of your question. From that perspective, our outlook for the MCS business for the second half of the year is very positive. The portfolio is competitive. As you know, it has been basically completely renewed over the last 2 to 3 years, and both our high-end as well as our, let's say, mid- or entry class products are seeing really good response in the market, yes. However, again, I cannot right now tell you to what extent we may see here lead times being further extended due to yet another wave of shortages in the supply chain. So that's why, in theory, we are certainly continuing to be very happy and positive on that business. But as I said, the transferring order book into revenue is the big challenge. On sales and marketing, yes, you're right. We typically see in the second half an increase without having now already made a full calculation. But I think you can expect on that number for the first half year, typically in the second half a notch -- being it a notch further up, that can be anywhere in the neighborhood of 5, plus 5 or plus, let's say, mid-digit percentage on the number that you have seen in the first half. But again, let's remind that sales and marketing is also correlating to the sales volume, of course, because there are the commissions included there. So that number will breathe, basically, with what we will be able to invoice.

Okay. Just to clarify. If the situation stays as it is, the Microsurgery margin would probably still be very strong also in Q3 and Q4. Is that the correct interpretation of what you said?

I'd say, again, we have discussed all the cost drivers right now. We are seeing inflationary pressures. We are seeing additional cost in the supply chain. I'd say overall, it will stay on a good level. I would not guide you here that we can maintain or even exceed the current levels. I would rather assume that cost pressure is growing. But given that MCS is on a healthy margin level, I'd say they will stay on a margin -- on a healthy margin level. But I, right now, wouldn't have the optimism to see it even growing further. Yes.

[Operator Instructions] The next question is from Daniel Wendorff of ODDO BHF.

Maybe a follow-on question on the Microsurgery margin. Is it possible to quantify what's the potential positive benefit from currency effects here was on the margin? That would be my first question. And the second one is on the trends you see in the U.S. for the different products group you're offering. Maybe you can talk a bit more about what is going particularly well. What is rather a flat business? Any more color you can provide here would be much appreciated. And then lastly, a clarification question, and apologies if I missed it, but what proportion of your sales do you generate in Russia?

So let's start with the last one because that's an easy one. Proportion of sales in Russia is in a -- for a total year somewhere between 2% to 3%. So just to give you a flavor, and of course, in this year, you could argue the first half year was still pretty much unaffected. So that gives you a flavor of what might be the remaining effect for the second half of the year. Then let's move. The currency benefits that we have seen I'd say, I'm not sure you were asking it in particular relation to Microsurgery. Is that correct?

Yes, that's correct because you mentioned that you have here the highest cost base in euro, so in the presentation. So from that, I concluded that that would be...

Yes. It's, let's say, it's a minor single-digit impact here, yes. So that's, if that is good enough for you as a small single digit as I would like to leave it. And the second part was trends in the U.S. Is that correct?

Correct. Yes.

Yes. Trends in the U.S., just really cursory here. I think overall, MCS doing very well in the U.S. We have continued good business in Refractive, as you have heard us explaining in the last year. The volume of SMILE treatments has gone up. And that is obviously also contributing. We also see a good demand for the ophthalmic microscopes. So I think these are highlights. ODX is also traditionally doing good in the U.S., although they are typically the second half of the year is the stronger part. So I'd say across the board, it's fairly well distributed.

The next question is a follow-up from Oliver Reinberg of Kepler Cheuvreux.

The first one on pricing. Of the price increase that you intended to implement, can you just talk to what share of these have been implemented by the end of the second quarter? And any thoughts to what extent the kind of strong order intake has also been benefited from the expectation of increase of pricing? And secondly, on the QUATERA business in the U.S., the CT LUCIA is coming a bit later. Can you just share with us what is normally the kind of share of equipment sales versus bundled deals, and the last quick question. In the cash flow, there was a EUR 26 million outflow related to fair value of contingent purchase price obligations. Can you just share what this is about?

Yes. Okay. Oliver, I'll start with the last one, the last. The position there is a correction of a contingent liability with relation to the earnout of one of our acquisitions that we did a while ago. There, we have a delay in a product introduction. And that in reverse means that for the earnout calculation, we basically have a shorter period of time that runs into that earnout. And this is the one driver. The other driver is that the interest rates with which you basically have to calculate the contingent liability have increased, which in return means, it basically has a positive effect in our balance sheet. So both together are explaining basically, here the effect that you are referring to. So now trying to get through the list of the other questions. On the -- I'll start with the pricing. Pricing, I think you wanted to know how much have we already done in terms of price increases. We have basically an annual price increase on our total portfolio, which is more in the neighborhood of anywhere between 2% and 3% that has been conducted. And as Markus just said before, depending on local market situations. And of course, depending on further input factor cost increases. We obviously reserve the right to do other price increases where we feel that necessary. And as you know, we at least for a good portion of our portfolio, we have market positions in which we are confident that we actually can drive that price increase into the markets. The order entry, you were asking whether we are benefiting here from, so to speak, orders that are anticipated or let's say, that have been earlier place in anticipation of potential further -- later the price increases. I mean that's again a lot of speculation in there. I would not rule that out completely. But I do not think that this is explaining overall the bookings. I mean especially the bigger ticket items have a rather long lead time. If you look at the conversion rate of the individual sales projects. And I mean, this, again, speculation whether somebody who 6 months ago or so started to engage in buying a device, whether he did it already in anticipation of price increase later on. I would be careful. And overall, would not believe that this is really the major reason behind the good order entry that we have seen. And then you were asking about the proportion of the bundled deals in the U.S., and in line with that, of course, what does it mean for the fact that our IOL hydrophobic IOL is only coming in early next fiscal year. Frankly, I mean, since we have, I think, always told you that you should not expect any significant revenue contribution out of the phaco in the U.S. for this fiscal year, I'd say it's nothing that anybody should alarm here that we now basically have to wait until next year for that lens. So we actually have already a double-digit number of letter of intent for the phaco without being bundling it with lenses. So I think that speaks for the apparently a good reception of the product by those surgeons in the U.S. who tested it. And I'd say, of course, we need the bundling then for the long-term success in the U.S. market. But for any means of valuation or estimates on growth in the, let's say, next 6 months or so, I think it's really not relevant. Yes.

As there are no further questions, I hand back to the speakers for the conclusion.

Yes. Thank you very much for joining our call today. Looking forward to discussions with you here over the next few weeks and months. If any questions, please reach out to us. Everybody, have a good day, and a nice oncoming weekend. Thank you very much.