Merck KGaA (MRK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Second Quarter 2023. [Operator Instructions] I will now hand over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thank you very much, Sharon. A very warm welcome to this Merck Q2 2023 Results Call. My name is Constantin Fest, I'm Head of Investor Relations here at Merck. I'm delighted to be joined today by Belén Garijo, CEO of the group; as well as Helene von Roeder, Group CFO. Also for the Q&A part of this call will be joined by Matthias Heinzel, CEO of Life Science; Peter Guenter, CEO of Healthcare; and Kai Beckmann, CEO of Electronics. In the next couple of minutes, we'd like to run you through the key slides of the presentation, and after that, we'll have our Q&A. Also note that we've reserved about roughly 1 hour for this conference call as some of us will have to catch a plane due to road shows. With this, I'd like to now hand over to Belén to kick it off.

Thank you, Constantin, and very pleased to welcome everybody to our second quarter earnings call, and please stay on Slide #5 for the highlights. So first of all, Q2 has once again demonstrated the resilient nature of our multi-industry business model, even as the challenges have increased for some of our business and more specifically for Life Science and to a certain extent for Electronics in relation to semiconductors. Before I start with the highlights of the quarter, please allow me to welcome Helene von Roeder to her first earnings call as the Chief Financial Officer of Merck. Now back to our Q2 earnings and the highlights. One, organically, group revenues were down by 1% and EBITDA pre declined by 7%. Currency has now become a true headwind. This was expected. And this currency impact -- negative impact paired with a minor portfolio effect led to reported sales decreasing by 5%, totaling EUR 5.3 billion. FX have more diluted effect on EBITDA pre on sales. Accordingly, reported EBITDA pre of EUR 1.6 billion was down 13% versus last year. EPS pre of EUR 2.20 was down 17% year-on-year. Healthcare was the best performer with 12% organic sales growth, and that was driven by Mavenclad, Bavencio and our Fertility franchise. Mavenclad is on its way to reach blockbuster status in 2023. Life Science showed a 4% decline in the core business, and this was mainly due to a more pronounced the stocking in Process Solutions, which we have now started to see among our smaller and regional customers. Amid the continuing decline in the COVID-19 business, total sales in Life Science were now down 9%. That's organic in Q2. This decline also had a negative effect on the EBITDA pre margin in Life Science, and consequently, they're one of the group. In Electronics, Semiconductor Solutions decreased 5% organically, again outperforming a declining market, which, as expected, became more challenging also in the second quarter. In combination with the continued decline in Display Solutions, organic sales were down by 6%. While the business environment for Life Science and Electronics came under increasing pressure, Healthcare was the star performer of the quarter and they delivered very strong growth. I am therefore pleased to say that our multi-industry business model continues to demonstrate resilience through the transitional year 2023. In order to reflect the development in the business sectors and to a lesser extent, the adverse currency movements, we are adjusting our 2023 guidance. Now expecting net sales in a range of EUR 20.5 billion to EUR 21.9 billion, EBITDA pre in a range of EUR 5.8 billion to EUR 6.4 billion and EPS pre in a range of EUR 8.25 to EUR 9.35, thereby lowering the ranges provided with our Q1 results in May. I would, nevertheless, like to highlight that the upper half of the guidance ranges still fall within our previous guidance band. And more details on the assumptions will be shared at the end of the presentation. Moving into Slide #6, we will have -- where we show an overview of our performance by business sectors. And as you can see, and we already mentioned, Healthcare was the strongest contributor to the organic sales development in Q2 and largely offset the declines in Life Science and Electronics. Our key growth engines in the quarter were our new product launches as well as the fertility franchise within our Healthcare business sector. In fact, Healthcare showed excellent organic growth of 12% in a challenging operating environment. And this was mainly driven by almost 30% growth from recent launches with Bavencio up 27% and Mavenclad up by 28% in Q2. Our established portfolio means CM&E, Fertility and Erbitux, also contributed with an organic sales performance of plus 8%. From a franchise perspective, Fertility was the highlight, with organic growth of almost 25%, amplified by a competitor stock-out followed by oncology with an organic growth of close to 18%. Life Science was down 4% in the core business in Q2 On this more pronounced destocking in Process Solutions. As expected, COVID sales continued to be dilutive to growth and were significantly down both year-on-year and sequentially. This resulted in sales decreasing by 9% organically in Life Science in the second quarter. As some of you may have noticed already -- and just to put the quarterly performance of Life Science into perspective, regardless of any influence of the COVID period. If we would look at the same period in 2019, the year before the corona pandemic started, our Life Science business has shown an annualized high single-digit organic growth rate despite all the recent market challenges. In Electronics, our Semi business continued to outperform in a declining market. As the market became more challenging in Q2, as we expected, our Semi sales declined by 5% organically in the quarter. This paired with a significant decline in Display Solutions, although not as pronounced as the one we saw in Q1. This led to an overall sales decline for Electronics of 6% organically in Q2. A small portfolio effects in Electronics contributed marginally to sales growth for the group. Currency served as a true headwind across the board on sales with the strongest negative effect on Healthcare. Regarding earnings, EBITDA pre came at EUR 1.55 billion, down organically by 7%, which was mainly driven by Life Science where organic EBITDA pre was down by minus 26% in Q2 on loss volumes in Process Solutions and negative mix effects in the core and, of course, also due to lower COVID sales. EBITDA pre in Healthcare was up strongly by more than 30% organically in Q2, boosted by excellent sales growth, lower gross profit comps and a small upside from portfolio management with no impact of the Bavencio repatriation at all in the EBITDA pre of Healthcare in Q1. EBITDA pre in Electronics was down 5% in Q2, and that was supported by the patent and cooperation agreement with Universal Display Corporation that Kai may detail later on. Importantly, this gives us access to key intellectual property that expands our materials portfolio in OLED, supporting our midterm growth. While this agreement was part of our full year guidance in Electronics, the exact timing and the accounting effect during 2023 is difficult to predict. And as I mentioned already, Kai may give you further color on this later on in the Q&A. Currency was a stronger headwind on EBITDA pre than on sales, and this is due to emerging market currency and Asian currencies, such as the Chinese renminbi and the Japanese yen. Moving into the regional view on Slide #7. What we see is that in Q2, our 3 larger regions were down organically. North America declined by 3.2%, and this was due to the share drop in Life Science sales, while Europe was down 1.5% organically, and this was mainly due to Process Solutions. APAC was down 2.6% organically in Q2, mainly due to Electronics. Overall, second quarter demonstrates, once again, the advantages of our globally diversified business setup combined with the right mix of business or combining, better say, the right mix of business sectors, the regionalized footprint mitigating potential negative impacts. Our 2 smallest regions, LatAm and MEA, Middle East and Africa, increased in the low to mid-teens percentage trend. And with this, I'm going to hand it over to Helene to provide additional insights on our Q2 financials.

So thank you very much, Belén, and a warm welcome also from my side. Let's dive into the numbers. I am now moving to Slide 9 for an overview of our key figures for the first quarter. We achieved almost flat sales organically in Q2 at minus 1.1%, thereby continuing to show resilience in an increasingly challenging business environment supported by a multi-industry setup. Taking into account currency headwinds of minus 3.7% as well as a minor portfolio effect from the acquisition of Mecaro, net sales declined by minus 4.8% to EUR 5.302 billion in Q2. EBITDA pre was down by minus 12.8% to EUR 1.553 billion with the FX headwind of minus 5.7%, stronger here compared with sales. And EPS pre declined by minus 16.7% to EUR 2.20. The operating cash flow came in at EUR 622 million, which represents a decrease of minus 27% over Q2 2022, mainly driven by the decline in EBITDA pre. And looking at net financial debt, which increased by EUR 1.027 billion compared with the end of December. This is mainly due to investments for future growth and short-term financial investments. However, do bear in mind, we also paid the dividend to shareholders in Q2. So let me also briefly comment on our reported results, I'm on Slide 10. EBIT was down by 17.6% in Q2. In absolute terms, the decrease was minus EUR 208 million, thereby, lower than the decline in EBITDA pre of EUR 229 million. The decline in EBITDA and therefore also EBIT was mainly driven by the EBITDA pre decline in Life Science. And this, in turn, was driven in particular by the impact of destocking in Process Solutions. Financial result was minus EUR 76 million in Q2 versus minus EUR 55 million in Q2 last year, mainly due to additional interest costs from pensions as well as related party financial liabilities and tax effects. The effective tax rate came in at 21.0% at the lower end of our guidance range, and below the 22.4% in the second quarter of last year. The higher negative financial result had a stronger effect on net income than the lower effective tax rate. Net income and EPS were down by 18.9% and 18.6%, respectively, slightly higher than the decline in EBIT. So with that, let's move on to the review by business sector, starting now with Life Science on Page 11. Sales in the Life Science core business were down minus 4% organically in Q2, while COVID-related sales continued to decline and had a dampening effect of minus 5%. Accordingly, sales in Life Science declined by minus 8.7% organically in Q2. From a portfolio perspective, Process Solutions and Life Science Services were down organically in Q2 with Science and Lab Solutions having been almost flat organically. So let's look at Process Solutions first. The core businesses decreased by minus 7% organically in Q2, below the plus 3% in Q1. And this was further amplified by the COVID-related decline of minus 5%. The decline in the core business was mainly driven by destocking, which became visible during the course of Q1. Now we expected the destocking effect to fully materialize in Q2, but it turned out to be greater than we had thought at the beginning of Q2, which is now also visible at our smaller and regional accounts. Order intake continued to decline year-on-year on the back of reduced COVID-related sales and book-to-bill was again slightly below 1x as expected. Sales in Science and Lab Solutions were flat in the core and organically slightly down by minus 1% in Q2. The moderation versus a strong plus 7% in the core in Q1 is driven by a temporary demand weakness, mainly at our large pharma customers, especially in North America. So let's turn to Life Science Services. Business sales were down minus 7% organically against tough comps, also reflecting batch phasing in CDMO, amid a sharp drop off in COVID-related sales to marginal levels, as expected, sales were down minus 30% organically. With regards to earnings, please note that in Q2 2022, the EBITDA pre margin was at its peak for Life Science. Against these very tough comps, EBITDA pre decreased by minus 26.1% organically, while the margin came in at 30.2%, down 780 basis points year-on-year. The margin decline reflects lower volumes, mainly driven by customer destocking in Process Solutions and lower COVID sales as well as negative product mix effect due to the loss of COVID sales and in the Process Solutions core business. So if we now take a quick look at 2023, I would like to point to 2 developments. For one, the destocking effect in Process Solutions is only fully materialized in Q2 and was more pronounced than anticipated in early May. Based on intensified conversations with our customer and our own further developed analysis, we now assume the trough will be in Q3 and expect a trend change towards normalization for sales in Q1 to Q2 2024. Secondly, we had particularly strong organic core sales growth in Q3 last year, mainly driven by Process Solutions. So with that, let's move to Healthcare on Slide 12. Healthcare delivered organic sales growth of 11.9% in Q2, above the quantitative guidance range we provided with Q1 in early May. Recent launches grew plus 29% organically, while the established portfolio also grew at plus 8%. Oncology increased plus 18% organically, mainly driven by Bavencio, which was up plus 27% and supported by Erbitux, which grew plus 10% organically. At the end of March, we announced that we would regain exclusive worldwide rights for Bavencio and have now taken full control of the global commercialization effective June 30. Our N&I franchise accelerated growth in Q2 and is now up by plus 12% organically. Mavenclad momentum resulted in a strong performance of plus 28%, while Rebif was only down minus 3%, benefiting from U.S. channel dynamics. By franchise, Fertility was a star performer at plus 25%. Competitor stock-outs continued in Q2, driving stronger performance in various regions. This was paired with a strong rebound of our Fertility franchise in China, where the end of the Zero COVID Policy led to a temporary slowdown in the fertility market in Q1. So regarding our pipeline. For evobrutinib, we are progressing towards the readout of our Phase III RMS program in Q4. Thinking about the potential of this asset, we recognize the excitement in the medical community about the concept of PIRA, which is getting more and more attention when looking at the BTK inhibitor space. Xevinapant, our inhibitor of apoptosis proteins antagonists, we are progressing towards interim analysis try link our event-driven study and locally advanced squamous cell carcinoma of the head and neck in cyst eligible population, depending on the accumulation of events. Regarding earnings, EBITDA pre amounted to EUR 704 million, resulting in a very strong margin of 34.3%. Organic EBITDA pre was up 30.4%, driven by operating leverage, mix and lower comps on gross profit. While Q2 was supported by income from active portfolio management of around EUR 70 million, it should be noted that in the year-on-year comparison, this is offset to a large extent by BD income in the prior year as well as an expected decline in third-party royalty streams. FX unfortunately was a significant headwind of minus 13.9% on EBITDA in Q2, higher than the minus 5.4% on sales. This was particularly due to the decline in value of emerging market currencies, including the Turkish lira. So looking to 2023, we continue to see income from active portfolio management in a mid- to high double-digit million euro amount for the full year. Hence, no significant contribution expected in H2. Regarding the excellent organic sales performance in Q2 and whether this is a good indicator for H2, I would like to say the following. While we generally expect a positive sales momentum to prevail for recent launches, Q2 was indeed also helped by continued competitor stock-out, which started emerging since Q4 last year. From our current perspective, we include in our model some degree of normalization of the supply situation at Fertility towards the later part of H2. Regarding the EBITDA pre margin, the level excluding active portfolio management in Q2 provides a good indicator for the remainder of the year given operating leverage, mix and the repatriation of Bavencio. On Page 13, we will look at Electronics. Sales were down organically by minus 6.3% in Q2, with FX having turned into a headwind in Q2 at minus 3.8%. We did have a very small positive portfolio effect of 0.3% related to the acquisition of Korea-based Mecaro. Semiconductor Solutions outperformed a declining market yet again, but still was down minus 5% organically in a more difficult environment. Display Solutions was down by minus 11% organically with negative pricing and mix effect, but already better than the minus 28% observed in Q1, driven by a continued challenging environment in Liquid Crystals. Surface Solutions was down minus 6% on softness, both in Industrials and Coatings, but Cosmetics are coming back. EBITDA pre amounted to EUR 262 million, implying a margin of 29.1%, down only 30 bps year-on-year. Organically, EBITDA pre declined by minus 5.2% with FX having turned into a headwind of minus 4.9% for Q2, slightly more pronounced than on sales. Both the decline in Display Solutions and Semiconductor Solutions sales contributed to the decline in EBITDA pre. The EBITDA pre margin held up compared to Q2 2022 and was also above the level from Q1. It should, however, be noted that it included a gain from the patent and cooperation agreement with UDC. This agreement will give us early access to their R&D emitter materials, which does strengthen our OLED portfolio significantly. Overall, this agreement added a mid-double-digit euro million amount to EBITDA pre in Q2 and will not recur in this form. That said, let me also briefly comment on the coming quarters. Looking at Semiconductor Solutions, our differentiated market position in Semi materials and our strong order book in DS&S should help to mitigate some of the market headwinds as we already demonstrated in Q1 and Q2 of this year. However, we are not fully shielded. MSI expectations for 2023 dropped during the course of the year and now stand at minus 13%. And we now expect the market downturn to extend into 2024 as our customers lower their outlook and capacity utilization. Our previous guidance was in line with market expectations of a recovery of the Semi market already in Q4 of 2023. So turning to Display Solutions. We believe the inflection point in customer utilization of Liquid Crystals has been reached in Q2. And note that comps in H2 are getting easier. Overall, we expect slower top line momentum in Semiconductor Solutions in H2, with Display Solutions having the chance to return to growth against easier comps. So before handing back to Belén, let me also comment on our balance sheet and cash flow statement. As you can see on Slide 14, our balance sheet overall is slightly above the level as at end of December 2022. The main driver behind this development was business growth. So looking at the asset side, inventories increased mainly related to our Life Science and Electronics businesses. Receivables were slightly up on business performance and high sales volumes at the end of Q1. And intangible assets decreased due to FX and amortization. Other assets increased due to short-term investments with cash and cash equivalents declining accordingly. So then moving on to the liability side. Provision for employee benefits remained stable. Financial debt increased, which was more than offset by decline in other liabilities, in turn, affected by the dividend payment in Q2. And net equity increased slightly, thanks to higher retained earnings with negative FX effect almost canceling this out. Our equity ratio improved slightly to 55% from 54% compared with December 2022. Turning to cash flow on Slide 15. Our operating cash flow came in at EUR 622 million and was down minus 27% compared to Q2 last year. This was mainly due to the decline in profits after tax and changes in other assets and liabilities, in turn, mainly due to tax and pension plans. Changes in working capital in Q2 were reduced compared with high growth comps in Q2 last year. While CapEx increased in line with our midterm growth ambitions, investing cash flow turned positive in Q2 compared with the earlier year period. This was due to changes in short-term investments of our excess liquidity. So last but not least, the difference in financing cash flow can be explained mainly by the repayment of bank liabilities, which took place in Q2 this year. And with that, let me hand back for Belén for an update on ESG as well as the guidance.

Thank you very much, Helene. And as every quarter, I would like to provide a very brief update on our ESG initiatives. In this case, DE&I, diversity, equity and inclusion, and for this, please move to Slide #17. So as discussed with many of you on prior occasions, we have stepped up our sustainability efforts, and we continue to make good progress. Just last week, we released our first progress report on diversity, equity and inclusion The report is covering our plans and the progress in 2022, along with our ambitions through 2030, which has been communicated to you in our first Capital Markets Day in 2021. It demonstrates that we approach diversity, equity and inclusion with the same purpose and transparency as our other global business priorities. We set wealth ambitions, and we hold ourselves accountable. If one believes is the positive correlation between being a diverse organization and a high performance organization, and I believe all of you know that there is a strong body of evidence behind that, then it seems that we are moving in the right direction at Merck. We now have more than 38% women in senior leadership positions, an increase of 11 percentage points since 2015 and 40% female participation in the Executive Board. Our engagement brings us closer to our customers, to our patients and to our communities so that we can be among the first to develop meaningful solutions that address their unmet or emerging needs. I would like to take this opportunity to invite you to discover how we continue to incorporate pride of belonging and our efforts to advance human progress into our first report on DE&I. And with this, let's move on to the guidance. Please move to Slide #19. So as I mentioned at the beginning, we are adjusting our full year 2023 guidance band for the group. In particular, on the increasing challenges in Life Science, but also on the way we see the Semiconductor Solutions market moving in the coming quarters. In this respect, now we expect group net sales in a range of EUR 20.5 billion to EUR 21.9 billion, EBITDA pre in a range of EUR 5.8 billion to EUR 6.4 billion and EPS pre in a range of EUR 8.25 to EUR 9.35. While we continue to expect to grow our net sales, excluding the COVID-19 business organically by a range between 1% positive and 5% positive, we now guide to an overall organic sales development of minus 2 to plus 2 with the midpoint implying a flat organic performance and an organic EBITDA pre decline of minus 9% to minus 3 in the full year 2023. Currency, as several times mentioned, is expected to become a hard headwind of minus 3% to minus 6% for sales and for EBITDA pre, respectively, slightly below our previous forecast of minus 2 to minus 5 for sales and EBITDA pre. This is due to a somewhat weaker U.S. dollar and a weakening Asian currencies such as the Chinese renminbi. While we are lowering our guidance ranges that we provided or versus what we provided to you in May, there is still a meaningful overlap with the previously communicated guidance band. The lower half of the old band now represents the upper half of the new guidance ranges. The new midpoints of the ranges are at the lower ends of the old guidance band and reflect our current most balanced view. We remain confident of achieving our mid-term guidance of EUR 25 billion in sales by 2025, despite the challenging operating environment in the transition -- in the transitional year 2023. Let me offer some additional color by business sector, moving into Slide #20. So for Life Science, what -- we are adjusting our guidance and expect an organic sales development of minus 3% to plus 4% in the core business. We reiterate our expectation for total COVID-related sales of around EUR 250 million in 2023, therefore, expecting this to be strongly dilutive to growth in 2023. For Life Science overall, we therefore expect an organic sales development of minus 8% to minus 2% and an organic EBITDA pre development of minus 21% to minus 12% amid more pronounced destocking in Process Solutions. Please note that we are currently going or planning for a complex SAP migration in Life Science, which potential impact is already reflected in the new guidance that we are communicating today. For Healthcare, we are raising once again our guidance, and we now expect organic sales growth of plus 6% to plus 9% and for organic EBITDA pre growth, we now forecast plus 14% to plus 19%. On sales, a number of drivers continue to play in our favor. First, the stronger performance of our recent launches complemented by an upside from the competitor supply shortages in our fertility franchise and CM&E portfolio. In addition to benefits from regaining exclusive worldwide rights to Bavencio effective June 30, EBITDA pre now is also getting the benefit from operating leverage and positive -- very positive mix effects. In Electronics, we have become more cautious on both organic revenues and EBITDA pre development in 2023. And now we are forecasting sales to decrease organically by or between minus 6% to minus 1% and EBITDA pre to decline organically by minus 18% to minus 10%. And this mainly reflects a more pronounced and extended downturn in the Semiconductor Materials market with industry forecast delaying the time of the recovery into 2024. As you have heard from other companies playing in this space and of course, as you have seen from recent communication from some of our major customers like TSMC. Overall, we continue to expect Semiconductor Solutions to show great resilience and to continue to outperform in this challenging market. For a group as a whole, I'm pleased to say that our organic sales performance is flat in H1, and this is despite the increasing challenges in Life Science and Electronics. And amid the decline COVID business clearly proving the benefits of our multi-industry business model. With this, I'm going to thank you very much for your attention and would be very happy -- we would be very happy to now take your questions.

One remark from my side, it would be very kind if each of you could limit yourselves to 2 questions. This will allow more of all of you to ask questions in the first place. Thank you. And with this, we'd like to have the first question, please.

[Operator Instructions] Your first question comes from the line of Richard Vosser, JPMorgan.

A question on Life Sciences Process Solutions. You talked about a trough, I think, in revenues in Q3, so revenue is getting worse and then improving, I think, in Q1 and Q2 '24. Could you clarify that comment and see whether that's right? And also think about the orders as well. So just thinking out of those orders, the visibility you have over the orders and customer inventory levels and how you see that order intake developing in concert with those or ahead of those revenue comments if those are correct? And then secondly, maybe just thinking about the improvement in those orders. How should we think about the magnitude of the improvement? Should we be thinking about a gradual improvement in orders and revenues in Process Solutions or more of a V-shaped change?

Richard, it's Matthias here. So let me tackle your question. Indeed, just to confirm, we expect now a trough in terms of revenue and destocking in -- during Q3. And I think you're getting at the right question, if you will. We expect then the orders showing an inflection point during Q4 into Q1. So that's where we see an inflection point on the orders. And then given the lead times, right, we expect them to have this translated into an inflection point in terms of sales into Q1 or Q2. And then in terms of how we see the order development. Look, I think it will not be a straight line, right? Obviously, we are monitoring order intake very carefully by region, by customer segment. I think it will be a bit of a fluctuating around -- fluctuating around the line, but it will not be kind of a straight line. I think it will be a little bit bumpy, right? And I think as we also mentioned it before, there will be certain customer segments early on the wave of recovery and others will be a little bit lagging behind. So I think the -- at the end of the mix, but overall, we expect that this will be behind us during Q1.

We will now go to our next question, and your next question comes from the line of Matthew Weston from Credit Suisse.

Two, please. The first, Matthias, is following up on Life Science order trends. One of your competitors was very helpful in that they provided what they estimated to be the gap between current revenue and actual underlying customer demand. For their business, they gave a number of $0.5 billion. Very interested if you were able to share something similar about Merck as to how much you think you are currently missing from your P&L or your sales demand relative to what your customers are actually using of your product? And then the second question is for Belén. It's certainly quite high level. You've talked for some time about M&A firepower. It wasn't really included in today's narrative -- but in the past, it also seems that what was very much a focus on a large deal seems to have moved to a discussion of a string of pearls. I'm very mindful that you've got an extremely cash-generative business, and Helene made that clear in her commentary. So net debt to EBITDA is probably going to fall below 1% in 2024. How long should we expect you to operate with such a conservative balance sheet if you can't find something to buy? And is there a possibility that we could actually see you return capital to shareholders, either through a special dividend or perhaps even a share buyback?

Matthias?

Yes. Let me answer your first question. So we can't quantify with an exact number, but let me frame it this way. Phenomenon, we currently see in the destocking is in a way that there is no issue in terms of the outflow, if you will, of customers using our products, i.e., this is not a sheer issue. It's more really that they work down their inventories. And obviously, we have built a target model, if you will, inventory model, what we believe will be the normalized levels of those customers. And that model, of course, we then use to come up with our guidance and our forecast, which we had just shared with you.

So Matthew, for your M&A question, I think you have followed Merck long enough to understand that our track record is based -- our good track record on portfolio management is based on right time, right target, right price, right? And we are aiming to continue to deliver on that trajectory that characterizes our company. So when we disclose our capacity during the Capital Markets Day, we were very clear what the priorities were in our mind. This hasn't changed. We were also clear that the deal modality is flexible that we can -- that we have the capacity to go for more transformative moves as long as those would create value and the transport approach versus a string of pearls can be combined, right, for the different business units. So first of all, our organic outlook is strong enough not to rush, right? And obviously, as you can imagine, we are closely watching the targets that we believe could be creating value for Merck in the future. Second, we already mentioned, we are not going to do a share buyback. This is not what we believe is going to create value for our owners or create most value for our owners and our shareholders. So last but not least, I would like to remind all of you what is guiding our -- what is our guiding frame when it comes to making decisions on M&A, and this is first and most important, supporting our profitable growth strategy, then having an IRR, which is above what. Third, having an option which is -- would be EPS pre accretive and, of course, doing everything that it takes to maintain our credit rating, right? Something important. As I said, our priorities haven't changed. This is speaking of grooming the big 3 pillars in different ways, right? So priority Life Science, optionality for the Healthcare pipeline and eventually looking at technologies that would enhance the value that we bring to our customers.

We'll now go to our next question, and your next question comes from the line of Sachin Jain from Bank of America.

Two, if I may. So firstly, on Process. Matthias, any color on China dynamics? Hasn't been mentioned as a delta. I just wanted to check your immune from the pressures of overseeing. And if so, why that would be the case? And the second question, I guess, is to Helene, 1Q, there was good color given on the variables between the top end and bottom end of your group guide. You've mentioned a number of times today the top half of guide over late the prior bottom. So should we be thinking the top half of guide is more realistic now and the bottom end is more of a buffer?

Sachin, let me address your first question around China. Maybe just to frame it size-wise -- so China is around 10% of the total Life Science business. And if I look at our Q2 results in China, it's essentially in line with also what we report for Life Science overall. So actually, we see similar dynamics what we see on a global level. Having said that, if you recall, we mentioned in the past that during COVID us and I think several others, if you will, lost some share because -- through local competition because we couldn't supply during the COVID situation. We are now on a good path actually to gain back the share, and we're making good progress. At the same time, we also continue our in-region, full region model, continue to invest. As you recall, we also announced investment in Wuxi, China for our PS business. So overall, yes, while China is kind of in a similar situation like on a global level, I think we are on a decent path towards continued growth going forward.

So on your second question, let me reiterate, this is a highly realistic guidance from our point of view. As you have heard and observed obviously, is like there's a number of sort of moving pieces which we are facing. One I would like to highlight is the fact that the FX is a strong headwind which we are facing, and we have no way of influencing that, obviously. So if I were you, I would take the guidance like any other normal guidance that the company gives and not try to read anything into sort of a tailoring or tapering to the up or to the down.

We will now go to the next question, and your next question comes from the line of James Quigley from Morgan Stanley.

So one on Science and Lab Solutions. I think in the slide you said the pricing benefit you saw in Q2. So could you quantify on what that -- where about that was? And should we expect that to develop throughout the rest of the year? Also what are the key drivers and the regional differences in growth noted, in particular Asia, which was flat, despite, obviously, the tough environment we're seeing in China. And the second question, could you give us an update on evo, in terms of the data on track? Is data still on track for end of the year as you...

James, it's really hard to hear you. We're trying and guess your question if I -- I think your first part was around price on LS -- on SLS because your line was really hard to understand. So if your question was on pricing SLS, we continue to see good pricing momentum actually across Life Science, but especially also SLS. And we continue and expect that to continue for a while. And then what was your question again on China, if you don't mind?

So it's more about regional differences in growth seen in SLS. China -- Asia was flat. And I think U.S. was a decline and Europe was growing. So is there any particular reason for those regional differences particularly given what we're seeing in China?

Yes. Again, I think I got your question. If I look at -- the question was on SLS indeed, North America was weaker, and it was tied more to the pharma spending of the larger customers in North America. If I look at SLS in Asia and China, it was pretty solid actually. It was almost flat. And I mean, the other thing is not the regional split, but if I look at by business, we had certain businesses like biomonitoring, lab water and chemistry, which were between low and mid-single digit, while our diagnostic regulated materials was mostly down. So again, I think, overall, a pretty decent SLS performance, but certainly even better in Asia versus North America for the quarter.

I think there was also a question on evo time lines, James. So the short answer to your question is yes. You know that this is, of course, event driven. But for all what we see currently, we can confirm indeed the Q4 readout. We continue to see the medical community excitement actually increasing. We are tracking a certain number of things like awareness, like unmet medical need, like the understanding of PIRA. And we see actually all these KPIs or prelaunch KPIs, if you will, trending in the right direction. So we're very excited.

We'll now go to our next question, and the question comes from the line of Michael Leuchten from UBS.

Two questions, please. One for Kai. The updated Electronics guidance might suggest that you're better able to control the margin into the second half. Just wondered if that's a fair deputation if sort of give us a point is whether this is just an ability to manage inflation more or whether there's anything else to that? And then second question, going back to the destocking. Any color you could give us on consumables versus equipment destocking? Is there any major difference? And how has that changed from the first quarter into the second quarter?

Yes, Michael, on your first question on the margins in Electronics, of course, we have to still absorb the inflation. As you stated, this will probably last into 2024 since the delayed impact on the P&L. It will first, of course, hit the balance sheet and second, the P&L. Of course, it will taper off midterm, but it still has an effect. The volumes have an impact on the margins to the declining volumes that we had to absorb. And of course, on the other side, we respond to that with our cost flexibilization. It's not the first cycle we are experiencing. So flexible cost structure is very important in Electronics. And this is how we manage a decline in volumes and the situation and inflation that we have right now. So that is maybe the reason for what you called a kind of a softening of that impact in the second half. Still take into account the impact of the ongoing decline of Liquid Crystal. So we are coming back to a better situation as the comps ease based on what I explained in the past quarters. However, it is a continuous impact on -- negative impact on margins since we have that contribution from Liquid Crystal somewhere weighing on our P&L.

Yes, Michael, and on your question on consumers and products -- consumers and equipments. If I look at our product business, which is essentially SLS and PS, the vast majority is actually consumable. So ballpark, 90% consumables, maybe 10% equipment. So when we talk destocking, it's to the vast majority, it's around consumables destocking, not about equipment.

We will now go to the next question, and the question comes from the line of Gary Steventon from BNP Paribas.

So firstly, just on Life Science, you now have quite a wide EBITDA pre growth range. So given all the various moving parts, could you just talk to the key variables here and heading the upper end versus the bottom end, given the Process Solutions sales growth is pretty much off the table for 2023? And then linked to that, could you just give us your updated thoughts on the margin profile of Life Science moving forward? And as we move from that COVID peak of, say, 38% and pre-COVID kind of levels, what do you think a realistic range for that as those near-term pressures ease? And then secondly, on Semis. With the delayed recovery into 2024, but the midterm guidance reconfirmed, could you just talk to your level of visibility here and the level of certainty that you have on the timing of that recovery? I'm just wondering kind of how the strong DS&S business that you've had for a few years now might translate into any kind of uptake in materials demand as those CapEx projects come online?

Yes. Let me take the first part on the margin question. If we look at the margin development this year, there's obviously -- the key drivers are; number 1 obviously, the COVID decline from last year. Obviously, that was a known factor and we are kind of on that path towards the -- roughly the EUR 250 million, but that has a margin impact because the COVID, product portfolio has had a higher margin profile. And that's the first element. And the second element that obviously the PS destocking, which we now talked about at length, has obviously a volume decline, which also has a margin mix impact, given the higher margins we have in PS. And then the other element of that is, obviously, as the volume declines, we're obviously adjusting cost. At the same time, we need to keep in mind that we need to be ready for the uptake, right? And we talked about the inflection point. So while we are adjusting and managing costs very diligently, we also need to be prepared when it comes to staffing in the plans to be ready, if you will, to catch the uptick. And that's obviously then balancing, kind of protecting the margin shorter term, but also then, if you will, be ready for the uptick. That leads then obviously, to the other part of your question, our ambition is clearly to get to the kind of the corridor, which we laid out before for margins where we said between the pre-COVID levels, which we are roughly in the 31% range and the peak levels, which Helene mentioned right last year peaked 38%. We will get to this kind of if you will, corridor post this transition year, which obviously, we are still currently in, but we are having the clear ambition to get there.

Okay, I'll take the second question on Semi. So on the short term, of course, we are very dependent on the capacity utilization that our customers, especially the leading-edge segment announced and as you have seen, kind of change quite on a short notice. So they -- here -- and this is why we have changed now our assumptions for Q4 since the latest news there did not give us any confirmation that there will be a recovery in Q4. It will be more flattish in the second half this year. I think we all believe we have seen the worst in Q2. However, it will be more sideways for the rest of the year. And their statements confirmed the assumption that in 2024, we will see that recovery. On the midterm -- and thanks for referring to DS&S. On the midterm, our confidence is still as high as it always was because capacity that is being installed right now, will be used at some point. Still in the short term, it is a shell first implementation. So we will sell our equipment. However, the rest of the fab is not being outfitted to a point where it can already consume materials. However, the appetite of our customers to build capacity is unchanged. And this is supporting our DS&S business -- on the project side, but as well on the equipment side and our order book here is very strong. Our visibility here is very strong.

We will now go to the next question. And your next question comes from the line of Peter Verdult from Citi.

Just two quick ones for Peter. Just on evo, just quickly as it relates to the partial clinical hold, we've seen FDA widen their review. But just is there anything new to say as it relates to BTK and MS? And then on Xevinapant. Peter, maybe just with the data coming up, could you just set the scene for us? I mean do we see a signal similar to what we saw with that Phase II data or the 3- and 5-year updated data? Would you be involved in to raise expectations or talk about Xevinapant being a blockbuster drug potential? So a question on evo and Xevinapant.

Peter, thanks for the questions on evo and Xevinapant. Let me take first evo. I won't comment on the exchanges, which are ongoing with the FDA. It's a very good and fluent dialogue. And we will provide to you, of course, with an update when we have meaningful feedback from the FDA. And you may understand that at this point in time, I cannot really give you further guidance on the exact time lines for -- currently. On Xevinapant, obviously, we're very excited. You see a very solid data set in the Phase II. You have seen probably the 5 years follow-up of the Phase II, which are quite impressive. We have indeed guided you towards blockbuster potential in the 2 indications hold, and we'll remain committed to that. On the -- I don't know if you asked also on the time lines. So also, this event obviously is -- also this trial is event driven. And it may be that if we look at the accumulation of events that it may slip from end of this year into very early next year. But that's really a question probably of a couple of weeks. What I would remind you, though, is that, of course, this is an interim analysis. And unless the interim analysis is strikingly positive, the study will remain blinded and continue until primary analysis, which is, of course, the main point for the readout of the primary endpoint.

We'll now take the next question. And your next question comes from the line of Oliver Metzger from ODDO BHF.

The first one on Life Science. So regarding the destocking, some competitors described 6 months inventory level of customers as a kind of normal level. So first, do you agree? And what's your view if the inventory potentially goes below that level because everybody is able and wants to deliver even short term. Would this bring some more downside risk to the Bioprocess Solutions market? Second question is on Healthcare. At Fertility, very good momentum. You commented also from the competitor's issue, apart from [indiscernible] comes also from China. So how would you quantify both effects relatively?

Oliver, it's Matthias. I think you bring up indeed a good point, right? The lead times are a key element in terms of the destocking, because now customers can place orders, they get the products much quicker than before. Hence, they don't need to hold so much inventory. So yes, the effect we see and that's factored into our, if you will, modeling, I mentioned the target inventory models and that's really factored in also when we provide now the guidance. The 6 months, I heard that before, right? I think it's something which is, I think, quite common. Obviously, it depends and varies quite widely right by customers. But the key point is 3 times getting shorter, and that's now part of the factor where customers and are readjusting their target inventory levels.

Oliver, on Fertility. Obviously, we don't have the exact crystal ball to know exactly what's going to happen with the competitors stock out. But of course, we have some data points. And I would say that it's fair to assume that the stock out will continue into half 2, although we see that some markets selectively are resupplied by the competitor. I would say that the stock out components of the Q2 results is higher than the China component of the Q2 results. Obviously, the rebound in China post COVID is something that we have seen also in other parts of the world, when we went through the initial COVID waves. So nothing really unexpected there. What I think is important to remind you is that when those, let's say, atypical effects would vane out, we remain confident in the mid-single-digit growth CAGR for the Fertility business.

We will now take our next question. And your next question comes from the line of Simon Baker from Redburn.

Two, please. Firstly, going back to Life Science. I know this has been touched on, but not in this precise form. So -- can I just ask how your visibility on the outlook has changed? The increased range [indiscernible] imply it hasn't improved, but that may just be simple conservatism. So any color on that would be helpful. And then moving on to Display. I wonder if you could give us your thoughts on the impact of Panasonic dissolving its LCD production units, not in terms of whether or not they were a customer, I know you won't answer that -- to the market by removing that capacity in terms of pricing.

Simon, on your first question. So yes, certainly, visibility has improved, especially since we talked in the last call, I think we have a good view around the scope, if you will, of the destocking, meaning now including all the smaller regionalized customers, the depth of the destocking. Do we have full visibility? I don't think so. I think nobody in the current industry has the full visibility but I think we are gradually kind of navigating through that. And also given the even more intense now conversation with customers, et cetera. And obviously, we mentioned before already, the targeted inventory model. So I think we are putting our arms around the issue. And again, based on that, we provided the updated guidance.

Simon, let me take the display question. So you're talking about the Panasonic line that it was focused on industrial and automotive displays. Decision dates back to 2019, and they produced their last panel already in '22. So more than a year ago, March 22 was the last produced panel -- and it's a very small capacity. So this is of the overall healthy capacity globally, we are talking about much less than 1% of the overall capacity. So this doesn't move the needle anywhere in terms of overall global capacity and readjustment of volumes.

Will now take your next question. And your next question comes from the line of Dylan van Haaften from Stifel.

Just on Xevinapant. Given the interim is particularly being flagged, will we get an update or maybe also just purely pass the interim with no news if it doesn't meet the early stoppage or futility criteria -- is there -- obviously, we'll hear something if it is futility. But -- and secondly, is there anything else you can tell us about the statistics required for early stoppage? And could it be stopped on a repeat of the Phase II data?

Thanks for the question, Dylan. So obviously, if futility would be hit, of course, we would communicate that, obviously. That's obviously not the base case scenario. And again, as I said before, the bar to hit the interim analysis and then unblinding the data is a very high bar to meet. So I think the base case scenario should be that we will go until the primary analysis. I remind you again, event driven what we measure is event-free survival. So -- this is a time-to-event end point that is measuring treatment success when therapy is given typically with a curative intent, like it is the case here in locally advanced head and neck Counsel with Xevinapant. This endpoint includes both progression and death, but also, for example, the appearance of a second squamous cell cancer and also salvage surgery in the event definition. And then, of course, in the secondary endpoints, we have overall survival. We have PFS. We have local regional control. We have a duration of response and so on and so forth.

Sharon, I think we have -- Sharon, I think we have time for 1 last question, please.

Thank you. We will now take your last question. And the question comes from the line of Rajesh Kumar from HSBC.

First is on the demand coming from bioprocessing. Obviously, you've got COVID-19 inventory destocking effect. But can you run through what the impact of early stage biotech funding cuts have been? Or is that something you would probably expect to see a bit later in the coming quarters and you build that headroom in your guidance range towards the lower end? And the second one is touching on one of the earlier questions on M&A. Is there -- what is your criteria of success for M&A? How do you define that, okay, this M&A looks like it should go through and this is how we would define success. Is it growth? Is it returns? Is it a product fit or a combination?

Let me start the M&A question very quickly. If you don't mind, Matthias is -- I have already mentioned that to a question of one of your colleagues before. So first of all, we had a very strong track record on right time, right target, right price Second, we have very clearly defined portfolio that raised 3 strong growth drivers, Process Solutions and Life Science Services -- Life Science overall because SLS is gaining in terms of traction and we believe this is an attractive market, but no business sectors being materialized. So that means increasing optionality for Healthcare in the areas that are within our focused leadership approach, and Peter has mentioned this several times, mainly oncology and immunology, and I will not detail this. And of course, looking for emerging technologies and participating in the next frontier of innovation in Electronics. Second or third, better said, what is our financial frame guiding a successful transaction. First of all, the target is supporting our profitable growth strategy; second, that the IRR is above what that the acquisition is EPS accretive and that once closed, we can't maintain our credit ratings. So those are basically the frames that we use.

Rajesh, on the biotech question quickly. So overall, our exposure to biotech for total Life Science is less than 10%, for early biotechs even smaller. And then if I go by business, it's smaller than the 10% for PS and SLS. And it's much bigger, obviously, than for our LSS business, namely the testing business, where we do a lot of testing for the early biotechs and also for the CDMO, where we act as a CDMO for them. But by and large, and again, compared to the destocking topic initially we talked before, for total Life Science and also for PS, the biotech funding issue, if you will, is a rather smaller one. It has a bit of an impact, obviously, on the LSS business. But to your question around the guidance, all of that is fully baked into our guidance.

And then any closing words from your side?

Well, Constantin it will be brief because you mentioned already that there are several of our colleagues including yourself taking a flight. So first of all, many, many thanks to everyone for your continued interest and support to our company to Merck. I think -- you have said it many, many times, not only in calls but also in the shows that we firmly believe that our multi-industry business model is associated with very strong resilience, and this continues to be illustrated quarter after quarter including Q2, in which the company has delivered solidly in a market that is really challenging and full of headwinds. Obviously, I need to say that we remain fully committed to executing our strategy and most importantly, to deliver on our commitments to you for profitable growth, sustainable value maximization and of course, 25 x 25 as you already heard from me at the beginning of the call. We look forward to meeting you in our coming Capital Markets Day. We will definitely keep you informed of any major developments till then, and I wish you all a very good summer break.

Thank you, ladies and gentlemen. Thank you for your attendance. This call has been concluded. You may disconnect.