Sartorius Stedim Biotech S.A. (DIM) Earnings Call Transcript & Summary

Good day, and welcome to the Sartorius and Sartorius Stedim Biotech Conference Call on the Second Quarter 2023 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Joachim Kreuzburg, CEO of the Sartorius Group. Please go ahead, sir.

Thank you very much, and welcome from our side here as well. Thank you for attending our conference call on a Friday afternoon or Friday morning for some of you, hopefully. We would like to start by walking you through the results of the Sartorius Group, and then thereafter through the results of the Sartorius Stedim Biotech Group. We will do this here by myself, Rainer Lehmann, our CFO; and Rene Faber, Head of the Bioprocess Solutions Division as well as CEO of Sartorius Stedim Biotech. Let me start by walking you briefly through the main highlights of the first half year's results. As expected, also the second quarter was very much influenced by the temporary weak demand by quite -- most of our customer groups, one can say. Of course, the most significant impact has come from the continuous reduction of inventory levels by our customers. At the same time -- and this is particularly relevant for the Bioprocess Solutions Division. For both divisions, we've also seen some impact by lower investment activities by customers. Of course, still, there is also some impact from the -- pretty much full omission of the COVID-related business. And Rainer will show you also the impact on both sales revenue for both divisions in a minute. The underlying EBITDA has remained on a quite robust level at around 30% for the group. The cost containment measures that are in place are paying out here. Looking forward, let me flag that here already. Of course, it will play a role to prepare for an increasing order intake activity or increasing demand by our customers. And therefore, we are preparing for keeping our delivery times short and our delivery ability high. So that's a key topic going forward. We are confirming the outlook that we have revised 5 weeks ago, and I also would like to confirm our midterm outlook for 2025 year. And then quite recent news is that we closed our Polyplus acquisition 3 days ago, we announced that. We will take the opportunity here today again, to introduce the main highlights of this business, the strategic logic and why we are doing this. Rene actually will do this in the Sartorius Stedim Biotech part of our today's presentation. And with that, I would like to hand over to Rainer for the details of our H1 results.

Thanks, Joachim. And also, first of all, welcome to today's earnings call. Let's have a look of the soft top line development actually translated into the figures for H1. Sales amounted to EUR 1.73 billion. That's a decline of 15% excluding COVID, and that's important because really, this year, we pretty much do not see any further or related COVID business any longer. This decline would have been in the upper single digit only. It's always important to keep in mind since last year was still fueled at this point in time with some COVID tailwinds. Order intake decreased substantially, but also as expected by 1/3 to EUR 1.45 billion. The decline, as you know, and we have flagged that quite often related to the destocking that seems to take a bit longer than we initially thought, hence, also the update of the guidance that Joachim just referred to in the middle of June and also some lower investments of activities at our customer side. The underlying EBITDA decreased by almost 26% to EUR 517 million. That's a drop in margin of a good 4 percentage points to 29.8%. Nevertheless, still under the circumstances, quite robust margin. Functional expenses are back actually on previous year level at this point in time. And as you know, we are a volume-driven company as we have seen tremendous economies of scale over the last 2 years which led to margins up to 34% in the group. Of course, these economies of scale, unfortunately, also play the other way around. So therefore, seeing this development. Underlying earnings per share for the ordinary EUR 2.95 dropped by 40%. And for the prefs it's EUR 2.96. And again same drop as for the ordinaries. What keeps -- what's important to know, of course, cost -- stringent cost management was key for the first half. That will also continue going forward in order to achieve the guidance that also Joachim will reiterate later on. If we go to the next slide, we continue, of course, and I think it's very important to see our current development in perspective and in a broader context over the time. You see here that Q2 has lower performance or has lower revenue than Q1. We always expected a weaker H1 and H2, and we anticipate that actually Q2 now on the order intake, will also hit the bottom. And from here on, we see a recovery in late Q3 and then Q4 order intake picking up for both divisions. If we have the regional view, we see that really all regions have been influenced by the destocking effect and the low investment activities. The Americas sales declined in both divisions. LPS was specifically affected here by strong comps, keep in mind that in the -- especially in the U.S., also we had very good success with our biology portfolio. And that, of course, also now with a bit more tightened environment regarding biotech funding also plays for sure, a role here in this normalization. In the Americas, we achieved revenues of EUR 646 million. That's a decline of good 12%. In the EMEA region, we dropped a bit further, almost 16% to EUR 669 million in revenues. LPS was here pretty much stable, we have to say. It was driven by the bioprocess, which, of course, has very high comparables. Most of the COVID-related revenue was related to this region, but also Russia has an influence here, basically 4 percentage points of the drop are attributed to the business or basically to the loss of business in Russia. In Asia Pacific, we see actually sales declines also in LPS here. Need to also point out that part of that, and I will come to that when we dive into divisions, but the OEM membrane business. So the basic components for the COVID test played a role. The BPS revenue decreased mainly also due to soft business in China, yes, in this regard. And Rene will add some more color later on during his presentation. When we come to the detail and have a detailed look on the bioprocessing side, we see and I start here on the left-hand side was the order intake, where you see this decrease across all regions, the loss of almost 36% or 35.5% in constant currencies to EUR 1.1 billion is really attributed to that destocking. We can't mention it enough. It took -- or takes a bit longer than we originally anticipated, as I said, but we anticipate that to really bottom out this quarter or last quarter. And sales revenue decreased by 17.5% in constant currencies to EUR 1.35 billion, excluding COVID there would be upper single-digit percentage rate decline. When we look at the regional also split here, we actually see that the loss was pretty much across all regions, again, on the bioprocessing side here, it was around 20% loss in Americas, a little bit less only 10% in Asia Pacific, also 25% revenue decline. Nevertheless, and never -- despite the fact that we lost quite some revenue on the bioprocessing side. We managed to have an underlying EBITDA margin of 30.8%. EBITDA amounted to EUR 414 million. I mentioned it below. We're really here dependent on economies of scale, which worked or works in both ways. If we have now a look at the LPS division, products and services. Here, we see -- really continue to see robust results in a continued challenging market. Also here, starting on the left-hand side with the order intake decreased to EUR 348 million by 22.5%, mainly drive -- or one of the main drivers here is really the reduction in the OEM membranes that we had some nice business 6 -- the first 6 months of 2022. And we also see here clearly the weaker let's say, market environment when it comes to the early-stage biotech funding. Sales revenue amounted to EUR 389 million, a drop of almost 7.5%. And excluding Covert here, we would have a reduction only in the mid-single-digit range. The underlying EBITDA, I mentioned before, we could continue to keep a high profitability for our LPS division here was 26.3% and amounting to EUR 102 million, really stable outlook or stable performance due to also stringent cost management in that division. We have a look at some key performance indicators. Underlying EBITDA, I just mentioned. If you look at the extraordinary items, of course, they are a little bit higher with EUR 61 million. Let me put some color here. Half of them will relate to the adjustment -- to organizational adjustments part of that is, for example, our voluntary employee program as well as ramp-up costs in connection with expansions but also certain onetime payments with suppliers. So really about this whole topic that we still have the aftermath of the COVID business from last year's. And the rest is really integrations and also corporate projects that we normally show in this position. Financial results is influenced as always by the volatility of the valuation of the BIA Separations earn-out liability. So nothing new here. Of course, our interest result or interest expense net has increased due to the funding of the acquisition of Albumedix last year and will, of course, going forward, be a lot more substantially influenced by the new acquisition. Underlying net profit amounted to EUR 202 million, a drop of almost 40%. Operating cash flow, and that is actually very, very happy to report that in these circumstances with that weaker results, we actually were able to increase our operating cash flow by good 25% to EUR 363 million. Main driver is here that in H1 2022, we had a substantial increase in working capital, which we now could optimize. And also going forward, I really do not expect any further negative development out of that position. Investing cash flow amounted to EUR 327 million as Joachim pointed out at the beginning, we also continued with our capacity expansions. As you know, a lot of them are in the manufacturing or manufacturing capacities which, of course, we are adjusting on the time line a little bit. But therefore, we are showing a quite high CapEx ratio of 17.3%. On the next slide, we have our more indicators equity ratio pretty much on last year's level. That's a little bit over 38%. Net debt, slight increase to EUR 2.6 billion which then translate to a net debt divided by underlying EBITDA of 2.1, a slight increase, but of course, with the reduction of the profitability that's a result of that. And with this, I'll give it back to you, Joachim.

Yes. Thanks, Rainer. So from my side now just the outlook for 2023. The headline here says 2023 P&L outlook confirmed as revised in June. So that is because we now, of course, factored in the Polyplus acquisition since it's close since July 18. You can see here from the first bullet point below the table, that this means that there is 1 additional percentage points of nonorganic sales revenue growth contribution, but no impact on the outlook bandwidth here. And there's also no impact on the approximate profitability outlook that we are giving. The other effect is shown in the last bullet point, the net debt to underlying EBITDA ratio, which is now anticipated to be slightly above 4% by end of the year. The other numbers are as adjusted for 5 weeks ago. So it's a very busy chart. Apologies for that. But I hope it helps for providing as much transparency as possible here. So therefore, briefly, for the Sartorius Group, we are expecting a low to mid-teens decline in sales revenue. the effect or the decline, excluding the COVID-related business and the impact from that would be mid- to high single digit. Rainer has explained the numbers after H1. So this is the guidance for full year and the profitability for the group that we are expecting is around 30%. And then it reads the same for the 2 divisions. And I guess I don't have to read it out here. Then as a recap, because Rainer already mentioned CapEx for H1 we expect CapEx to be approximately on the same level for the full year. So -- or I mean, the ratio to be around 15%, but the absolute CapEx roughly on the same level. So we are pretty much continuing without changes in our capacity expansion program. And let me briefly reiterate why this is. One is because we leave our midterm expectation unchanged. We believe what we are seeing here at the moment is what we always have anticipated, and that is quite significant volatility around our unchanged and positive midterm growth trajectory. And as we didn't change our expectation and our respective activities during strong overamplification of order intake and sales growth because of the buildup of inventories by our customers, we do the same now during this temporary rundown of the inventory levels of our customers. And then, of course, there's also a certain impact from the necessity to build up a certain regionalization of our footprint. We actually have been working on that even before the geopolitical turmoil. But nevertheless, of course, this also adds a bit to our CapEx as there is particularly to mention the expansion of our North American plant but as well as the buildup of capacities in Asia. So -- and with that, I would like to hand it over for the Sartorius Stedim Biotech results to Rene.

Thank you, Joachim, and hello, everybody, also from my side. Welcome to our H1 earnings call. I will start this as B part with the Polyplus acquisition we have announced in March and finally closed this week. First of all, a very warm welcome to our new colleagues from Polyplus. We are very excited to join forces with that great team. Polyplus is a leading provider of transfection reagents which are used in manufacturing of gene therapies and gene-modified cell therapy as the company expanded their offering and added both plasmid design and plasmid manufacturing capabilities and also launched recently new reagents which are used to make lipid nanoparticles for in vivo RNA or DNA gene delivery application. So highly relevant portfolio for us and very important milestone in our very focused efforts to build a portfolio of cell culture media and critical materials, which are used particularly in making such new therapeutics modalities like cell and gene therapies. Products are highly complementary to our upstream and downstream and fluid management offering we have today and support -- supported by services like cell line and process development or plasmid design and plasmid manufacturing services. These materials are highly -- high-quality GMP-grade ingredients, which have a strong impact on performance and economics of the manufacturing processes of our customers. They are often used in combination media, for example, with growth factors or transfection reagents are used with cell culture media for -- to make viral vectors. So it brings very nice cross-selling opportunities as well. Typically, they are spec-ed in clinical or early clinical development of drugs. And once the drug gets approved, it becomes quite sticky in recurring business. The market for cell and gene therapies is an early, relatively young market, which is becoming increasingly relevant. These new modalities represent now 1/3 of new biologics pipeline already. The market is growing with 20%, 30%. The approved drugs are today rather small indications, typically with regional or country approvals. According to FDA, the expectation is that around 2025, 10 to 20 new approvals might come to the market per year. We have seen quite a nice pickup of approvals recently in the last couple of years. The pipelines are well filled. 2/3 are early phases, providing for us the opportunity to get those materials spec-ed in early in this process. Is Polyplus here brings quite a nice footprint in these pipelines, both in development, but also in already approved drugs. Regarding the financing, Rainer, do you want to take this?

I'll take this quickly. So as you know, we basically communicated that the initial financing is done. We are a bridge facility on Sartorius AG level. We intend to long-term refinance this with a bond. We are in the middle of the bond preparation and will most likely go into the market at the beginning of September with the intent then to refinance a bit in long term. That would, of course, bring our dynamic indebtedness or net debt underlying EBITDA substantially higher. As I just said before, on an SAG level, it was 2.1, and it will be slightly above 4 for the SSB dynamic indebtedness that would be slightly below 4 -- and it was a clear deleveraging strategy, important to be under 3.0 until 2025. with that, back to you, Rene.

Yes. Thank you, Rainer. And with that, let's move to the H1 results for Sartorius Stedim Biotech, again, very much in sync with what Joachim and Rainer described for the group, following the exceptionally strong previous year sales revenues declined by 18.5% in constant currencies compared to H1 2022 to now EUR 1.4 billion. Taking COVID revenues out, the decrease was slightly above 10%. Order intake has been impacted even stronger, of course, resulting in a 37% decline, which corresponds to an order to book ratio as we have expected, at slightly above 0.8% for the first half of the year. As expected, normalization of demand, which we have seen going on since the mid of 2022 continued. We did expect to end -- that it ends a bit earlier. So it's now a bit prolonged. We also have seen a general reluctance to invest on part of our customers due to over capacities. And looking at the EBITDA margin despite the lower volumes, we achieved a solid EBITDA margin at 29.7%. And here, price effects on both procurement side and customer sides, largely offset each other. We have been working very diligently on managing the costs during that period, decreased the headcount or adjusted the headcount to the current demand situation, and we'll continue doing that moving forward. The low profitability is then reflected in the underlying earnings per share which was at 2.62% H1 2023 versus 4.4% last year. Putting the sales revenues into perspective, again, very similar picture over the years here, like Rainer showed for the group, where sales revenues now doubled when we compare it to 2019 pre-pandemic times which translates to a strong, almost 20% CAGR growth along these 4 years. We expect the higher volatilities also continue, but of course, at better scale, but in 2024, 2025, there will be -- that's our expectation. Then looking at the regions. We see similar normalization effect across all the regions. U.S. is impacted by destocking, mainly euro below strong comps with additional negative impact, I think, that's roughly 5 percentage points coming from Russia business decline in Asia Pacific, strongest decrease mainly due to soft China business. What we see in China is that the effects of inventory buildups overcapacities and also the challenging funding environment also apply in China, but are kind of more pronounced there compared to other regions and also the recovery might take a bit longer in China than in other regions. And we also see a stronger presence now of local competitors in China. Cash flows, again, very much in line with what Rainer explained here for the group to highlight here again our efforts to reduce inventories, adjust to the demand normalization resulting in low working capital in the light of the strong fundamental growth drivers of our market, which we see we are continuing our global investment program in manufacturing capacities across all regions. Joachim mentioned South Korea. So both Asia, U.S., we have expanded and just opened new facility in Yauco, Puerto Rico for cell culture media and continue investing across the portfolio and region moving forward. It resulted in a CapEx ratio at 18.7% for the first half of the year, of course, due to a bit lower sales revenues in that time. The company continues to a very solid -- sound balance sheet. Equity ratio was at 50.2%. Net debt stood at EUR 1.248 billion, which is resulting in a ratio of net debt to underlying EBITDA of 1.2. That brings me now to the outlook for 2023, very much, again, in line with what Joachim already described. Therefore, the Bioprocess Division, same dynamics here. We're expecting now low to mid-teens decline in sales revenues, excluding COVID-related business, high single digit to a low teens decline. Acquisitions including Polyplus are expected to contribute 2 percentage points, excluding Polyplus 1 percentage point. So in underlying EBITDA, we anticipate margin at around 30%. Where the positive margin effects now coming from Polyplus acquisition is not expected to have a significant impact here due to the timing in that in this year. The CapEx ratio for the full year 2023 we project at around 15%, and the net debt to underlying EBITDA at slightly now below 4%, which includes the Polyplus acquisition already. With that, I think we move to Q&A.

[Operator Instructions] And our first question comes from Vineet Agrawal with Citi.

Just on order intake. Are there any particular pockets where you are seeing better visibility for orders than others. I mean if you peek into some of your largest customers' inventory and maybe based on product shelf lives and or discussions with the customers, are you seeing any particular signs which kind of gives you confidence of recovery in the later part of this year?

Thank you very much for the question. Indeed, as you can imagine, in these volatile times, we are in very close contact with our customers with regards to the inventory levels they have and the expectations to reorder or start reordering again. We have been talking to the majority of our largest customers, of course and what we're hearing from them is that most of them, more than 60% of them expecting to reach their inventory levels in the target inventory levels in Q3 and start reordering in Q3 and almost every customer we talk to confirmed their -- starting to reorder in the Q4 of this year. So yes, as Rainer said, that this is now what we expect maybe after the summer period to see uptake in order intakes and then continuing then in Q4.

Our next question comes from Michael Leuchten with UBS.

Two, please. One, just going back to the prior one, what are you doing different now to get a better handle on where we are in this time of visibility compared to what you were doing before. Is there any difference? Or is it the same processes and it's just a little bit easier to get the visibility now than maybe it was in Q1? And then a question on China. You mentioned China a few times in terms of softness. Is that now softness beyond the sort of basic materials and products that always was a competitive here in China. Is the local competition now going into areas where previously that wasn't present? Or is it still only in the lower tech area, not in spec-ed and processes.

Maybe on the difference and maybe Rene will add to that. I think customers are a little bit more transparent at this point now about where they stand in this process. I think during the pandemic and shortly thereafter, it was indeed a little bit more difficult to get an overview here. I think that's exactly as you anticipated, the biggest difference. So that makes it also a little bit easier for us and I guess also for other players to get visibility and share that then also with you. On China, if I get it right, you are asking for in how the market environment has changed. And I think Rene spoke about that already. On one hand, maybe all the effects that we see on the global level are to be seen there as well, maybe on a little bit more pronounced level. That's one thing. But the other aspect is for sure and also that has been mentioned, I believe, that as expected, we see now also some competition in China. And I think we always shared with the market that we were expecting this to first play a particular role in, let's say, more standard fluid management applications. And I think that is also something that we can confirm and see here. And in general, I believe, as in other industries as well, the pandemic has been a kind of accelerator and amplifier for those trends that were ongoing anyway. So that's basically, I think, what we can say. The biggest maybe uncertainty here, and that is why we are always flagging also the quite high uncertainty overall in regards to China is more of a geopolitical dimension as well. So I think the potential within the Chinese market is still very, very significant. But of course, a bit of uncertainty here for sure is also in how far business might be regulated and limited going forward.

Our next question comes from Oliver Reinberg with Kepler Cheuvreux.

Three if I may. Can you first talk about market growth where we currently see it excluding any kind of stocking effects. So to what extent as to funding pressure in early-stage biotech and also the lower investment activity lowered the overall market growth for you? And then second question, just expanding on market share. In the past, you talked about your ability to gain market share. Can you just provide an update, I guess, this kind of market share gains in North America and probably also in cell-culture media are still valid. On the other side, obviously, you were able to get into some kind of accounts when others were not able to deliver which may flip back and also overall, there's more capacities in the industry. So can you just talk about the dynamics around market share, please? And then third question, if I may, just on the midterm guidance. Can you just provide us with kind of which, I mean, to get to the 2025 target that requires a bit more than 20% top line growth for bioprocess in Stedim. So how do you think about this kind of 3 components in terms of M&A, destocking and organic growth?

Maybe I briefly start with the midterm targets and then Rene will answer the 2 on market growth and market share. So I think when you ask for the bridge from 2023 expectation to 2025 projection and target. Then the first important thing to note is that we are talking about roughly EUR 0.5 billion of consumption of products from us and that mostly in bioprocess, i.e., in Sartorius Stedim Biotech that we are not selling in 2023. So consumption in 2023 is approximately EUR 0.5 billion higher than sales revenue. So I think that's the most important aspect to note that based on -- in how far we see and understand and know the market dynamics that these are roughly the numbers. So -- and therefore, what we are projecting from there to the year 2025 is then mostly organic growth on a relatively, let's say, average level, but of course, that then already includes also -- as you are asking for M&A, the acquisition of Polyplus that we have just closed. So it's not that we are factoring in really very high level of additional M&A for bioprocess here. I think you are asking for SSB and bioprocessing here. For the Lab division, there is also, of course, the certain offset effect. And here, we would expect maybe in proportion, in relation to the size of the division, maybe also a little bit more relevant M&A going forward. but, of course, again, some substantial organic growth. And again, for the first 2 questions, I hand over to Rene.

Yes. So on the market growth, of course, the year 2023, particularly is a very difficult 1 to make a robust gap information about the market growth as such, taking out the inventory activities and also the slower investment activities, I would say probably slightly below what we have been looking at historically for equipment tools providers, market low to mid-teens digit growth rates. How we are looking at that rather is a mid-long-term perspective. And the main driver -- growth driver are the -- here the drug pipelines of what our customers are developing. Here, we expect that the majority -- the main -- the largest market segment of protein monoclonal antibodies, pipelines are continuing to grow. So a growth rate in that segment of high single-digit to low double-digit rates is something we would expect mid- to long-term and the new modalities I've mentioned when I talked about Polyplus cell and gene therapies, they are growing over proportionally strong. Gene therapy is maybe around 20%, cell therapy is 30%. We see that as on top to -- in addition to what -- the protein markets. And yes, so that the expectation mid-long term would be that we continue on that low to mid-single-digit growth rates for overall business market shares. We have during the pandemic, been able to gain market shares due to our ability to supply at the speed of capacity expansions. I would say, mostly in the U.S. We also see, of course, it's not surprising that we will not keep it all the market shares we gained. But overall, I think we are getting or got out of the pandemic with net gain of market share -- a sustainable market share, mostly U.S. China, it's different due to the local competitors there. Particularly during the COVID pandemic, you could see a preference of local players, local customers to secure their materials from the local competitors. So there I would not talk about market share gains in China, definitely not.

Our next question comes from Paul Knight with KeyBanc.

Yes. Thank you on the monoclonal answer. The other is, are GLP ones significant yet for your filter business. And then the other question is would it be fair to say bioprocess concluded the June quarter could as expected lab products a little weaker that would be my first 2 quick questions.

So maybe the second question first, for in how far the 2 divisions performed up to our expectations. I would say it's not much of a difference here for the 2 divisions. You can say that typically, the -- when you don't have any influencer overlayer from any other significant trends or larger single projects or whatsoever then the second quarter is a bit below the first quarter, particularly when you have Easter in the second quarter, it sounds maybe a little bit odd, but that is what it is. And this has been the case in 2023. So both divisions basically came in end of June, where they expected them to come in. Really no significant difference that I would highlight here.

And on the GLP, of course, these are different manufacturing processes then cell culture process to make biologic drugs. But you're right, the filters are used in such processes. It can be sterilizing great filters or filtration type of products? So absolutely.

Our next question comes from Jo Walton with Crédit Suisse.

I have two questions. I'd just like to go back to the confidence that you have that things will start improving perhaps in the third quarter and definitely in the fourth quarter. I assume that you were speaking to your customers earlier this year. Were they just not telling you anything. And then when you called them back more recently, they were more open? Or why when you spoke to customers, you didn't have visibility before. But now you speak to customers you do have more visibility. I think people are just trying to really gauge the degree of confidence that you have. And my second question would be relating to China competition. Now I think we all understand that there's been good local supply. But within the pandemic, we did hear of people able to get a hold of Chinese product and integrate it into their processes. And I just wonder if you feel that, that Chinese competition is going to be leaking out into other areas or whether you feel that any short-term use of those products will go away. And once again, people will look for the higher-quality products that come from you. And just to clarify on the element of destocking. On the Lonza call, just before this one, Lonza talked about having 7 months of inventory at the half year, the same as the inventory level that they had at the end of 2022, and they were talking to doing destocking in the second half of the year. So that's 1 customer where we would get a slightly more pessimistic outlook.

Yes. So for the confidence regarding order intake development in Q3 and Q4 and then how far the -- yes, the quality of -- or the details that we have got from customers have changed. I think we tried to express that before. We would say that the level of detail that we get from customers is indeed a little bit higher. And therefore, we feel that the outlook is maybe a little bit more robust now. We also would say that a stock level around the 6 months is rather something that we have seen at many customers before the pandemic, while during the pandemic, stock levels have been very often around the 12-month level. I don't want to comment on any single individual customer here. But our view is that indeed, our stock levels at customers have been going down quite substantially, and 1 can read this very clearly from the order intake that we are reporting. And -- but let me clearly say, we try to be very, very transparent here. And I think, as you know, following us for longer that we have been flagging what we called back then, a changed ordering behaviors of customers, I think, around, yes, almost 3 years ago. And back then, we said it's hard to quantify. At that time, it was actually impossible to quantify, but we nevertheless flagged that. and we'll continue doing so even at times where no one, customers as well as competition was addressing this topic and we are reporting order intake. And this is an information that you cannot see from anyone else. So I would like to claim that we are very, very transparent here and tried to share information in that transparent way as we have it available. But of course, we cannot guarantee for any of this information. I think that's clear. But we think that the numbers that we have now, the insight that we have now is a little bit more detailed and robust than before indeed. And then on China, I think, what we said. And again, this is something I believe we are talking about in these kind of calls for a long time and for sure, also quite a while before the pandemic. we always said that we would expect a number of mechanisms in the market that we are addressing to be the same as in other industries as well. So we always said we would expect Chinese competition to become established and to also then gain share for sure, particularly in the Chinese market. And we always said that we would expect this to happen when we talk about consumers, in particular, first in the -- and mostly in the fluid management domain and in the more simple applications here because we don't have any IP protection and nobody has any IP protection there. And as I said before, what we see now is that for the Chinese market and in the Chinese market, this trend has been a bit amplified and accelerated during the pandemic. I think something that 1 can see also in some other industries probably. Now you are asking if I got you right, what we think how this would develop going forward. And that is quite difficult to project -- we still, of course, have this 1 specific feature of the applications that we are serving in, and that is that for more, let's say, sophisticated applications, for the downstream, for instance, the validation of and the specification of products that are being used in the manufacturing of a drug plays a large role. And therefore, the stability of existing business is quite high. That's 1 factor that for sure plays a role. But in how far the Chinese -- the Chinese competitors will make inroads to the global markets and how that exactly will play out, I think it's really difficult to predict. One thing what we deeply believe in, and we always have been, therefore, pushing forward is that innovation plays a major role in this market. The products that our customers are producing are extremely valuable that is for sure the case for monoclonal antibodies, but even more the case for cell and gene therapies. And therefore, the key question by our customers always is in how far we can help them to accelerate their processes and to how to improve the productivity of their processes. So -- and that is more important than the price point of the respective product. So differentiation, innovation, productivity gains is really the key factor. So -- but clearly, to expect that or we would not expect and build our strategy on whatever that Chinese competitors would be excluded from global markets. So I don't think that this would be a viable strategy.

Our next question comes from Hugo Solvet with BNP Paribas Exane.

I have 3. First one on biotech customers. Can you give some more thoughts around the weak funding environment and the impact it has had on your business and say, if those type of customers were to go to 0, [indiscernible]. Second, you have a lot of new capacity coming online in the coming months time, demand is a bit quicker. Is there a risk that we could see longer-term pressure on the margin from low utilization rates. And third, on Polyplus. Now that the transaction has closed, could you just clarify your earlier comment on the bond issue, does that imply that you won't do a rights issue.

This is Rene speaking. I take the questions 1 and 2. Rainer will comment on the third question. So regarding the biotech customers for us, of course, it's a very important market segment, customer segment. However, today, our exposure -- revenue exposure to these customers is below 10%. Of course, we also see a slowdown there. You can see that in a way that, for example, in the Lab division, they would -- instead of buying 5 instruments at the time do it sequentially. So you see a slowdown there in cash protection. You see that also in a way that they prioritize reshuffle or reprioritize their assets, pipeline, drugs. We rather see a slowdown in early phase drugs in early phase or preclinical development. So it's less a less business simply due to the volumes. So overall, there is an impact. But not that strong for -- definitely not for the bioprocessing business. capacities, yes, we have -- we are building and expanding manufacturing capacities. Joachim mentioned, one driver is regionalization. And yes, here, we want to make sure that we fulfill expectations of customers in Asia and being -- having a local footprint in Asia. Is there a risk that we will see a pressure on margins, we will see that so far not necessarily. We believe that the capacity expansions we are doing, looking at our projections and expectations for the future growth that will get filled then rather quickly again. And we want to be prepared for these volatilities, which we talked about also and having capacities ready for the next phase. Rainer?

So on the bond, basically, we're looking at a [indiscernible] bond, anticipating buckets between 3 to 12 years. We really need to see how it plays out at the end of the day with a fixed coupon. So really a straightforward bond. I hope that answered your question.

Our next question comes from Richard Vosser with JPMorgan.

A couple, please. Just thinking about the customer reordering in late Q3, have the customers indicated any sort of increase or level of reordering that they expect to you? Just some thoughts there and how are they seeing that to develop? Second question, just it looks as though you still have an order backlog at this point. I know around maybe about EUR 500 million ahead of sales over the last sort of 3 or 4 years. Is that the case? And when do you expect that to return to balance? And how much of this is expected to benefit the second half? And then just thinking about that second half and the order backlog and the orders you've taken in the first half. The second half has still got an element of recovery to get to your guidance. So just thinking about the pushes and pulls on that first half versus second half, is that order backlog? Because the low orders that you've taken in the first half seems to mean that that's relatively challenging. So just -- or somewhat challenging. Just some thoughts there.

Yes. Maybe before Rene may comment on in how far we see any level and size of orders of customers that have come to an end with the destocking. So we wouldn't -- we don't call that backlog, I guess, what you are addressing. And therefore, I hope I got your question right and I'm able to answer it in the right way. So ballpark EUR 100 million, maybe EUR 150 million is the number of maybe what we would say destocking left to happen? So -- but backlog for us will always be a kind of whatever carryover of orders, which always happens, but which is not necessarily subject to any destocking activities by customers also. So -- but I guess if we are talking about the same thing here with maybe slightly different words than we would say ballpark, it's that number. And what we indeed factored into our H2, as you call recovery of sales revenue is the pickup of ordering activity, again, by customers. So that's basically the most significant aspect that we are expecting here, Rene?

And Richard, on the size of orders, I would say that's very much overall, it's, of course, driven by consumption and then by each customer's preference and strategy on inventory levels. What we, however, see and would expect this that other than in the past where customers -- some customers would place standing orders for the year consumption that we will not see that or see that less and rather more of smaller orders. So that's something we are seeing coming.

Our next question comes from James Quigley with Morgan Stanley.

Two left. Just picking up on the question on margins and the impact of capacity coming online. So thinking about your capacity utilization today sort of broadly across your network. So how does that compare now versus pre-COVID levels. Also, is there a mix element as well that maybe you might also support higher margins for a similar level of utilization today versus where you were in the sort of 2019 period or so. Just looking on a quarterly basis, second quarter margin looks a little bit lower than the first quarter. Similarly, on that same topic, in terms of the margin, you mentioned sort of cost cutting initiatives. So how much of the sort of margin hit has been offset by cost-cutting initiatives? And secondly, on the lower investment by customers, can you talk through some of the drivers here? Is this project that where customers have ordered equipment in advance and received that equipment before this year? Or is this more referring to customers being cautious about investing in future projects and deliveries there.

Yes. Maybe I'll start. So capacity utilization during the high times of the pandemic in the sense of where we had this very high level of order intake, customers were trying to build up inventories or the effect of building up their inventories -- inventory levels. The capacity utilization was really at 100% in many -- for many product segments. So that included a very significant expansion of our shift models. So there were quite some sites where we were running 24/7 shifts. And now this is back to a more normal level. So if we would now say 24/7 is 100%, then we are now down to 80%, 75%, depending a little bit also on the product segments. In some product segments, a little bit lower and in some a little bit higher. That's also why the significant capacity expansions that we are still investing into are very relevant in our view because of the midterm growth expectations that we are having. And it's also important that we are not running at 80-plus percent capacity utilization too quickly again because there's always quite some lead time that it takes to expand capacity. And I think the during other times -- during different times, we also spoke about this -- in this -- in one of those calls that there is nothing more expensive than not having capacities available. So that is why we believe this makes sense to continue investing here. Then you were asking for several other effects on profitability besides capacity utilization, or the volume effect. Rainer was elaborating on the volume effect earlier today. And you were mentioning mixed costs, et cetera, I would like to add to this price and supply costs, so to say. And that, of course, had quite some impact. We have pretty much been able to offset the higher costs on the supply side by price increases. I think that has been a topic since 15 months roughly. And so far, I think we are on a good track to continue being able to offset that. The cost adjustments that we were undertaking were compensating only for a smaller part of the volume effect. It's pretty much -- I mean, of course, it's always possible to achieve more compensation here. But what we are trying to balance here at the moment is what we addressed earlier in our call here today, and that is being prepared for a pickup of order intake again, because we then think that we have to adjust outputs again quickly. So therefore, it was only a smaller part that we were offsetting. Rainer, you want to add.

I can add some color there, James. Basically, if you look at that we are with our functional expenses. Also this -- the first 6 months of '23 are pretty much in line with the first 6 months of '22. And when you look in '22, actually, the second half was 10% higher than the first half. You see that actually we made quite some progress also in managing really also our functional expenses overall, gives you the communication there. And that is a mid-double-digit million figure we're talking about there.

And then maybe the last question, if I took that down rightly and that is in how far customers have been investing into equipment in advance. I don't know, Rene, whether you want to comment on that. I think what I can say in general that we have seen that before. That there have been times where people were expanding capacities very significantly and 1 was triggering the other, and then there was a little bit more capacity available, I don't know.

Yes, absolutely. And you can see it rather at the smaller clients, smaller customers, smaller CDMOs, mostly in Asia Pacific, including China, that those companies kind of driving the wave of high demand during the COVID, invested in capacities, which are not yet utilized. So that -- it's one of the reasons why where we see less investments going on now in -- particularly in that customer segment.

Great. Just one quick follow-up, if I can. Just in terms of the capacity utilization, at what levels were you sort of pre-COVID. Is it something that might be a bit more of a direct comparison to where you are now, the sort of 80% to 75%, where were you pre-COVID.