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

My name is Petra Muller, and I'm very pleased to meet all of you here at our campus in Goettingen. And of course, also to welcome our participants who joined virtually. One logistical item first, the CEO and CFO presentation will be streamed and recorded by audio and video. And if you disagree, then please contact the IR team immediately. And now I will hand over to Petra Kirchhoff to introduce our speakers of today.

Yes. Welcome also from my side. I hope you had a nice evening yesterday, those who could make it to attend our dinner. And I would like to introduce our speakers, as Petra said, so four of them were already attending our dinner last night, the members of our Board. Most of you have met Joachim Kreuzburg already, who is our CEO of Sartorius Group since more than 20 years. So welcome Joachim, today to our CMD. We have then Florian Funck, who our new CFO, who started in April of this year. Florian worked for the Haniel Group for more than 20 years -- 20 years, was also their CFO. And for those who are not familiar with Haniel, it's a Germany-based and family-owned holding company that is managing around 10-plus independent firms according to certain performance but also to sustainability criteria. We are then having from the board, Rene Faber, who is also the CEO of our Sartorius Stedim Biotech subgroup, who is on the board of Sartorius AG since '19, background in chemistry, made its way through Sartorius in various functions, also spend a couple of years in the U.S. working as a key account manager for the engine group. So very close also to our customers and originally started in R&D. Then Alexandra, Dr. Alexandra Gatzemeyer, who is the head of the sister division, Lab Products and Services. She was appointed to the Executive Board in May '23. Also a long time Sartorian, her background is in chemistry and pharmacology. She started in sales, headed our Russian subsidiaries as Managing Directors and worked her way through various product management and also HR functions. On her team is -- and sitting next to her is Fiona Coats, who joined Sartorius also a couple of years ago, already worked in various life science companies, Thermo Fisher among them knows the life science environment very well and we'll also give a presentation specifically on our bioanalytics portfolio later. Rene as well brought 2 teams of his management team, that's Michaela Pischke background, engineer Michaela. She will introduce our latest innovations in separation technology, specifically in chromatography. So welcome Michaela as well. And next to her sitting Jonas Møller, Jonas, who joined us within the acquisition of Albumedix in 2022, he was their CEO. Albumedix, some of you may remember that was the acquisition when we integrated the recombinant albumin franchise into Sartorius. And last but not least, Oscar Werner Reif, who is our Chief Technology Officer and who will provide some insight into the digital into our digital tools. And Oscar is within Sartorius also for many years already heading the corporate research function as well and very familiar with all our -- yes, I would say also with any M&A projects from a technological side with our cooperations and happy that you can be here with us today, Oscar as well. So that was it regarding our lineup of speakers today, and now I think we jumped right into things. And yes, Joachim, stage is yours.

Thank you, Petra and Petra. Good morning, everyone. Welcome again to Sartorius. I hope all of you who could attend the dinner last night, enjoyed that and enjoyed also the tour this morning. Yesterday, I had a couple of interesting discussions with some of you, at least, I was able to talk to quite a couple of you. And I think one of you put it very -- in a very good way. And he said that everyone would look for early indicators for the long-term trends and developments. And I think it's a very good description about the state of the industry and what everybody is interested in at the moment. At the same time, I can tell you, this is incredibly difficult. However, we will, of course, try to answer those questions as well. Florian will talk about guidance and other aspects from the finance sector following me. And then after Florian's part, we will have a Q&A on numbers, on guidance and also with the entire board. So then we can really discuss this in detail. Other questions yesterday were very much around -- yesterday evening were very much around general market trends and drivers. And in how far anything has changed over the last couple of years. And that is something that we will address a lot, I believe, today. I will, when I now kick it off, also talk about that to some extent, but of course, on a more general level. But then you will have quite some deep dives in particular, three deep dives later on, and Petra already introduced the speakers on those topics. So what I would like to do now is actually focus on three topics in a very general way. And the first one is the main and fundamental market drivers. The second one is then our strategic positioning, addressing the opportunities in that market and the key needs of customers. Again, deep dives later on. and then also the key success factors, how we think we can particularly successfully execute on our strategy. So maybe on a very high level, on a very general level, I think it's also important to note that very often, sustainability is associated to decarbonization. And there is nothing wrong about that. That's key global topic for sure. But I think it's also worth mentioning that there are 17 UN sustainability targets and target number three is the one that you can see here. And that's really at the core of, basically, you could say everything that we are doing. And therefore, I think it's worth mentioning that sustainability is at the core of our business. We are -- when we talk about sustainability, we are not talking about just like repair activities, how can we reduce our footprint or so. We are addressing a key sustainability topic of -- one could say, mankind. And the key aspect that we are addressing as a life science tool companies is we want to enable our customers to develop drugs faster, bring them to the market faster and to produce them more efficiently. So that ultimately more patient benefit from that. But obviously, this is not only a socially important topic, but it's also an economically a very relevant topic. As you would imagine, I think about, for example, it's a very simplistic argument maybe but working hours that are getting lost because of people that are suffering from certain diseases. And that becomes an increasingly pressing topic as -- in particularly in many very large countries and also very large economies, the average population is aging rapidly. And there is a strong correlation between age and the need for health care, particularly also pharmaceutical products. So it's a very strong, very visible, very transparent fundamental driver. And it's also worth mentioning that there is no technology anywhere at the horizon that would substitute pharmaceuticals. Maybe it goes a little bit without saying but we should nevertheless digest that. That is different in other industries where there are upcoming technologies that potentially substitute the existing technologies. It's not the case in the industry that we are addressing. And within the pharmaceutical sector, very clearly, biologics are still gaining importance, are still the above-average growing market segment, of which we and others expect to grow around 10% going forward. So we are executing our strategy since roughly 2 decades. And this strategy is to be an innovative tools and solution provider to pharmaceutical, particularly biopharmaceutical companies. And again, as I already said, focusing on key process steps at these customers and help them to execute those more efficiently. And this, of course, is economically also a very relevant topic because I think all of you know that the development of a new drug is incredibly risky and expensive, and there is tremendous potential to further improve that. And it's also very complex and expensive to manufacture, particularly biologics. So therefore, there's a lot of value creation potential and innovation potential that we, as a tools and solutions provider can bring to the table. And our path on a very high level, you can see that we have increased our business with that segment by a factor of 20 -- over the last 2 decades roughly. So what we have done over the last couple of years is building a portfolio that is addressing mission-critical steps at our customers. I think most of you have seen that before. I definitely don't want to walk you through this chart. You can see on the bottom the general positioning of the Lab Products & Services division addressing the drug development, drug research, drug development phase of customers, whereas the Bioprocess Solutions division is addressing the drug manufacturing phase and partially what is necessary to manufacture the drug is also to develop the respective processes. So therefore, it's also starting a little bit earlier at customers. And you also see that there is quite some overlap and we have followed -- who of you is following us for a longer period know that the overlap is indeed increasing over time. So there is an increasing level of synergies between the 2 divisions. One other aspect is, I think, important to note here that we are particularly focusing on business with consumables and media and other products that provide recurring revenue, very often in validated processes. So it's a very sticky business and yes, a recurring business to a large extent. So I think it's fair to say that we so far have been able to execute this strategy in a way that it translated into a track record of significant profitable growth, sustainable profitable growth, I would also say, very continuous profitable growth. Of course, you will see later also one of the charts that you all are aware of, how it looked like between 2019 and 2023. So there has been a massive action, of course. And that is subject to, I think, still of some trends and developments that we are currently seeing and that we, for sure, will discuss later on. I think -- and again, there will be more discussion that we will have later on. But I think what happened in between, you could potentially compare with as if someone in the '80s had introduced the iPhone to the consumer electronics market and 1.5 years later -- including the ecosystem of it. And 1.5 years later, pulled it back from the market again. So that's roughly the kind of disruption that happened to the biopharmaceutical industry. And therefore, I think it's not a big surprise that we still see some volatility in the aftermath of that. So key success factor without reading them all out, I think what is very important here is, for sure, about products that are addressing key needs of our customers, but it's also very much about people and the respective competence. We are largely in a direct sales business, direct interaction with customers. It's very much about understanding, a deep understanding of the processes and needs of customers and then finding the right solution for those. And of course, given the dynamics in our target industry, at our customers, this also includes the need for innovation And I think it's fair to say that we have been an innovation leader over the last decades. I already mentioned increasing cross-divisional synergies and the recurring revenue aspect. So as said, I would like to elaborate a little bit more on some fundamental trends and other factors and aspects at our business. So first, building on what I said before that there is this fundamental need partially driven by aging societies and the fact that biologics are still the growing segment within the pharma industry. within biologics, you see that there is a -- the segment of advanced therapies, and there also has been quite some discussion, I think, last night amongst some of us. And I guess there will be also some more today. And again, there is a deep dive about that. So I think it's fair to say there is a diversification regarding modalities, we think it's important to address this diversification. And yes, of course, it's very difficult to make precise predictions how this will evolve. But it's also important to say the underlying theme and the underlying fundamental need for drugs and treatments are not influenced by the kind of modality by which they will be later on addressed. But nevertheless, I think it's worth mentioning that there is this diversification in regards to modalities and that advanced therapies are playing already a very significant role. One more thing because there was also some discussion about the growth expectations that one should consider to be realistic regarding cell and gene therapies. You can see we write 20% here. In some of the discussions over the last couple of quarters, we were rather challenged whether that would be too conservative because very often, you find studies saying 30%, 35%. So we indeed are rather applying a little bit more a conservative view, but happy to discuss later. Single-use, I think it's definitely a stronghold of ours. We consider to also grow overproportionately. We still see a trend towards single-use technologies. The advantages are very clear: flexibility, speed, safety, cost and we shouldn't forget also in most applications, the eco-footprint. So then I already mentioned the need for innovation, and that is driven by the innovation on our customer side. I mentioned advanced therapies. And -- they are mentioned here, to some extent, cell and gene therapies, mRNA-based vaccines, for example. So important here is to make the point that this is triggering a strong need for innovation that we, as a tools provider and solutions provider can bring to the table to some extent, have to bring to the table so that those modalities can become a commercial success for our customers. We will see examples later on. So I think I don't elaborate on that, but it's clear that some of these new modalities are far too expensive to manufacture today so that they could address the market that is halfway representing the patients in need. So how are we generating innovation. So our innovation activities are basically standing on three pillars. One, of course, is a strong own R&D activity, product development activity in those areas, those fields that we really master on a world-class level. But then, of course, we are also constantly looking for complementary acquisitions that are providing innovations that are addressing such upcoming critical new needs at customers. And then, of course, as again, obviously, we can't develop everything by ourselves, and we for sure cannot acquire every interesting technology that is out there. We are very much working in various formats with various types of cooperation partners globally, academia, but also industry-leading people, various formats, and you will hear some more about that later on as well. And then M&A, I mentioned M&A. We are following a -- pretty much a long-term, very focused, very clearly defined M&A strategy. We are constantly revising, of course, what's going on in the industry and what that would mean for maybe adjusting those fields, the fields in which we have made our acquisitions over the last couple of years. You can see them here are: one, the bioanalytical field for LPS. You will hear more about that later on by Alexandra and Fiona. And then intensified technologies. Rene and Michaela will talk about that later and then advanced therapy solutions. Jonas and Rene will talk about that later as well. So you will hear more about that. But what I want to say here, clearly, we have clearly defined areas. And then within these defined areas, we are building very strong positions to be a very relevant player in those fields of applications. And then, of course, one topic, and this is really maybe the topic that has changed the most over the last few years is China. I think for about roughly 10 years talking about China meant talking about a tremendous opportunity and tremendous growth rates of the market there and respective opportunities. And now it's very much about balancing opportunities and challenges for sure. Sartorius is present in China since 30 years now. And we have followed up -- followed for the entire period, a China-for-China strategy, maybe more precisely, what I should say, a limited-China-for-China strategy, limited in the sense that we never aim for producing everything that we would sell in China-in-China. So we are producing a limited portion of the products that we are selling into China there locally, but we are not producing or sourcing anything in China for the world market. And that means we believe within the limits that I think we all have in all industries, we have a quite resilient setup in that sense. Sales exposure, of course, after a significant drop that everyone has experienced in China now is 8% for the group, a bit different for the divisions, as you can read there, and I already mentioned the limited scope of local manufacturing. Nevertheless, we shouldn't forget the opportunities that the Chinese market provides. It's everything but a mature market or a saturated market. Think of the size of the population the aging trends there, think about the level of availability of drugs for this population. So there is still a lot of potential. For sure, the uncertainty here that everybody has is the geopolitical -- or are the geopolitical tensions and then how that will be translated potentially into any restrictions, trade restrictions, et cetera. And obviously, we see a lot happening there. Our hypothesis is that the growth rates that can be achieved in China will not be back to what we have seen over the last decade, but we should see some recovery over the next couple of years. My first slide referred to sustainability in a very general sense, target number 3. But of course, we are also addressing since a couple of years already in a very dedicated manner for sure decarbonization but also other aspects now like reducing our, I could say, material footprint, circularity targets, in other words, without reading them all out, we have set ourselves quite ambitious targets regarding CO2 emission intensity. And we also have set targets regarding materiality circularity. Again, you can read them there. It's also important to note that we have social targets. So when we talk about ESG, we are not blind for S. You will see some diversity numbers in a minute or in a second, actually, but maybe it's also worth mentioning that employee satisfaction, I said success factors are products and people is an aspect that we are measuring twice per year in a very systematic winner, and it's part of our short-term incentive system. Talking about people. I think everyone knows this sentence "culture eats strategy for breakfast". And I think there's a lot of truth into that. But what does it mean? It means basically when you turn it around, that when you are able to continuously perform above market than maybe some of the culture at least fits to the strategy that you are having. And the people are also some are working together in a very, very good way and are really able to execute the strategy because strategy doesn't execute itself. So therefore, I think what I can say is that approximately 14,000 people working for Sartorius are really a strong team with a lot of know-how about what customers need. And about the understanding of the customer processes. I was referring to that before, but also in regards to other aspects of really serving customers and helping them with their challenges. And again, we will talk about that later. We have been overproportionately been successful before the pandemic, during the pandemic, which means the exposure to the volatility, to some extent, has been even higher for us. And we are also, I would say, doing not that bad in comparison to the overall market currently. So without reading all those out, quite a diverse team, as you would imagine today. So now my last three slides actually will be about outlook and summary in a way, so clearly some parts, I said that at the beginning. A big question, of course, is what has changed over the last couple of years. And in the end, you can say it's China, and when you look on the left-hand side, you could say, well, that is -- meant when we say geopolitical tensions or conflicts and market weakness in China that is resulting from that. That is the main change. I already said how we expect the development in China going forward. It's, of course, very difficult to make any more precise estimations here, but that is how we see it and how we factor it into our outlook. It's also worth mentioning that this is to quite some extent currently materializing by the fact that Chinese players will have at least, one would say that's today, far lesser chances to address the global market. but this will not be a net loss of the total market. There will be other players substituting that. So it's not a -- yes, like so easy to say, okay, let's deduct China from what's going on. But nevertheless, this is for sure, I believe, the change. On the opportunity side, I think we still are talking about tremendous opportunities, and I would clearly say with all the volatilities and inherent uncertainties that have always been there regarding which kind of drugs will make it to the market at what point in time, et cetera, this is unchanged. And again, there is no -- you don't see on the challenge side, oh, substituting technology XYZ. It's not. The pharmaceutical market is a growing market because there's a fundamental need and to be a solution and tools provider to these customers is, a, I would say, a very attractive positioning because our customers need such tools to improve their processes to develop their businesses. And at the same time, of course, being a provider of tools and solutions has a much lower risk profile than being a developer of a new biotechnological drug, for instance. So therefore, I believe the business model, the strategic logic is still fully intact. So this chart, you know this is our outlook until 2028. We are shooting for mid to -- low to mid-teens growth for BPS and mid- to high single-digit growth for LPS, aiming for 36%, respectively, 28% of underlying EBITDA margin by the year 2028. And for the group, that sums up to low teens growth and a margin of 34% underlying EBITDA. You see a couple of assumptions. One, worth mentioning here that we are factoring in the assumption of roughly 1/5 of sales revenue growth to come from inorganic growth, and we typically model in also a little bit below average profitability from such acquisitions at the beginning, right? So the economies of scale of the existing business typically is higher. And of course, some of our acquisitions that we then de facto have made so far also have been delivering higher profitabilities than the average was. So they have been accretive in regards to profitability as well in some cases. So I would like to finish off by summarizing in a nutshell. I think the life science tools industry is one of the most attractive market segments in biopharma for sure and beyond, I'm tempted to say. We have a strong focus on innovation leadership in dedicated areas. Again, you will hear much more about that later. We support customers also in regards to the sustainability targets around decarbonization, other eco footprint aspects. And I think it's also fair to say that we are following up on a very clear strategy, have a very focused execution and that we are, therefore, well positioned to continue achieving above-market profitable growth. So thank you very much for your attention. And with that, I would like to hand over to Florian.

Welcome, and good morning, everybody. Oh, the mic is really working well. It's great to have you all here at Sartorius campus in Goettingen, but also welcome to the people following us online around the world. I'm happy to have the opportunity to meet that many of the investor community here in one event in Goettingen. And as you know, I joined Sartorius first of April. So it's not even 50 days that I'm in the company. I'm the new kid on the block. And I can tell you, it is an exciting experience that I have been having in the last couple of weeks. And I'm enjoying especially that I'm doing everything for the first time here at Sartorius after I have done in my previous role at Haniel, the things for many, many years, multiple times. Since I joined, the price of our preference shares is down by 20%. And I'm trying to take this as a coincidence and not a causation connected with me being CFO of that company. But I can tell you personally, but also looking at my dear Board members, that we, as a team, have taken your feedback as investors after our Q1 communication very seriously. Let me talk about the financial perspective of our business after Joachim has explained the kind of strategical beauties of Sartorius. Let's start with a longer historic perspective on top line, meaning here, order intake and sales revenue. And you can see three things from that chart. First, Sartorius is a growth company. We have 17% CAGR over the last 5 years, so meaning 2019 to 2023 over the pandemic. Second, the pandemic led to some volatility. Order intake was up 1 year by 89%. And then 2 years later, we had quarters where it dropped over 30% order right. And third, during the pandemic, and this is really important to realize, there was a double decoupling. There was on the customer side, the decoupling from demand of our products to the consumption to our products -- of our products. And this decoupling on the customer side was somehow mirrored on our side by the coupling of order intake and sales. As you can see here, order intake outgrew sales dramatically in 2020 and 2021. And then went below sales in the second half of '22. So things went out of sync. And since then, they are gradually getting back into sync. But we are -- but there are still some effects to take into account when we are analyzing the current business situation. Let me take you along to what we are currently seeing in the market and why pandemic still plays a role these days. And the following statements are true for Sartorius AG as well as for SSB. First of all, we continue to see normalization going on. Destocking effects are getting smaller, but still there is some destocking. And despite that, we are seeing that sales will be growing in Q2. I can understand that everybody is looking skeptically at order intake and book-to-bill rates these days, in order to predict the inflection point of that after pandemic cycle. But as we have told the market many times and Joachim is always banging on that, too much short-term focus might lead into the wrong direction, given the variety of influencing factors that we have to take into account, seasonal factors, regional factors, product mix effects and those effects from changes of customer behavior can influence our quarterly numbers to some extent. So order intake, which is normally in the ideal world, a forward-looking indicator to sales still, to some extent, is backward looking as sales remain also being influenced by the order book that was built by a past order intake and not by a very recent order intake. And even without that order book effect that I was alluding to, order intake can also come under pressure if ordering sizes and timing patterns of ordering normalize back to pre-pandemic level, and this is also what we currently see. So we are in a kind of normalization phase. And we also currently see reduced activity around equipment as a consequence of the subdued investment sentiment, general investment sentiment in the industry, rightsizing projects at customers, so not only we are rightsizing also the customers, of course, are rightsizing and higher capital costs throughout the industry. And the slower equipment business did not come as a complete surprise to us. But referring back to Q1, the normally seen end of quarter really that you have in that equipment business did not occur in Q1 this year. And also, I would say, looking at the numbers, Q1 performance and equipment has to be seen also in connection to that very strong Q4. So there might be here also a seasonal timing effect. What does that mean? For me, sales is currently a more reliable indicator for the business activity than order intake. And based on the sales funnel and the increasing level of customer activity in many areas, we get comfortable with the assumption of increasing sales over the course of the year. I will elaborate on this later on. This brings me to our 2024 guidance that you see here on that chart. It is unchanged and we will give you more transparency on how we are seeing the year to play out. But let me first point to some additional information at the bottom of the chart that some of you have requested in recent calls and communication in order to complete their model, so you see some assumptions for '24 regarding depreciation, financial results and also the tax rate. Let's do a deep dive into our guidance. A lot of numbers, but I'm walking slowly through that chart. Bear with me. In order to avoid surprises going forward, we are here providing the building blocks of our expected H1 and H2 performance. Looking at the sales line, for me, the most important indicator, you can see three important points. First, we have seen the trough performance of our business in H2 '23, minus 18%. So we reached the trough earlier than many other industry players. Second, Q1 '24 sales development was minus 8%. Minus 18, minus 8%, so approximately 10 percentage points better than the second half of '23 growth rate. Our guidance and outlook for H1 '24, of negative low single digits, negative low single digit indicates that we are expecting positive low single-digit growth for Q2, positive low single-digit growth for Q2. Third point to end up at the mid- to high single-digit sales growth for the full year, which is our guidance. We need sales growth in the second half of the year versus prior year between low teens, low teens to reach mid-single digit, so the lower end of our guidance and high teens to reach high single digits, the upper end of our guidance. And given the lower comps for H2, this looks doable and in line with the current view of other players in this industry. However, we all have seen very significant quarterly up and down swings over the last 4 years and volatility is still relatively high. Further, we are aware that consensus currently points to the lower end of our guidance which reflects a more cautious view. So nobody is wrong in attributing a higher robustness and probability to the lower half of our guidance range. Given the high volatility, we think it is too early to narrow down or modify expectations at this point in time. We think we should watch the order trends and customer activity 2 more months before we can give an updated view on the full year outlook, which means alongside with our H1 reporting in late June. Our view on B2B, the second line here, is reflecting what I was just talking about 2 charts ago, which is the limited prognostic quality of order intake and B2B as sales are, to some extent, driven by order book and order intake is impacted by normalizing customer ordering behavior, smaller order sizes and different timing. These effects, we are expecting to bring B2B below 1 in Q2 and also in H1. For the second half of '24, we are projecting a book-to-bill of around 1 as the described effects are still there, but to a lesser extent. Regarding margins, EBITDA, underlying EBITDA margin, third line. We stick to our guidance of 30% plus EBITDA margin. And of course, the margin target will be more challenging to achieve on the lower end of the sales guidance and has upside potential in the upper end of the sales guidance. You should also expect EBITDA margin in Q2 '24 being a bit below Q1 '24, and this has to do with timing effects around our cost and net working capital reduction programs. So we are reducing output in Q2 onwards using more of our inventory to satisfy the customers. Some fixed costs will hit the P&L that we will address with cost-out measures in the second half of the year as discussions with work councils are still going on. The margin -- and the second half of '24 should then be above 31% to bring the blended margin for the full year back to 30% plus. I'm sure we will talk about this in the Q&A. Falko is already nodding. Overall, it will be quite all right in '24 definitely. But looking at how the industry is performing over this special after pandemic cycle, I think we, as Sartorius do not have to hide regarding speed of recovery, stickiness of customers that we have won during the pandemic and the margin resilience that we have achieved at the various levels of output over this time. Let me talk about what this volatile right means in terms of focus and mindset of our organization. We are coming from times, we're coping with growth was supercharged by the pandemic and was a day-to-day task. Which means rapid capacity expansion, significant buildup of the workforce and high inventory levels, of course, to ensure readiness to deliver, number one priority these days. As demand patterns have changed after the pandemic drastically in the last quarters, we are using this shift to prepare ourselves for the upcoming growth phase. We push innovations to improve our competitive standing. Alexandra and Rene will talk more about that. We are rightsizing our organization and trimming processes to drive efficiency and via process improvements, we also get working capital down, which leads to healthy free cash flows, which leads then to improved debt metrics. So I'm personally glad that we are training also this adjustment muscle because despite the clear underlying long-term growth dynamics of our business, I expect the future in general to be more volatile than the pandemic times. Let's have a look into our P&L structures. We are coming from an underlying EBITDA margin of around 20% in 2013. A peak margin of 34% in 2021, and this has then gone to 28% in 2023. Yes, a significant drop, but still an above-average profitability resilience in our industry. In general, One can say that we have shown since 2 decades, a continuous translation of above-market top line growth into margin expansion. And these economies of scale mechanics are inherent to our business, and they are intact. And the ambition to come back to the 34% margin level by '28 but in our plans, of course, without any pandemic. So how do we do that is the question? And there are three factors coming into play when we look at the margin development in '24 and '28. And all of them are taking place in the gross margin. So within cost of goods sales, the first line below sales. And the three effects are, first of all, economies of scale or operating leverage; second, its positive mix effects; and third, it is the rightsizing of the cost base that will help to bring gross profit margin up. But please note, the development from '23 to '24 is mainly driven by rightsizing also a little positive mix because of Polyplus acquisition and also some economies of scale, but it's mainly rightsizing. And then the development from '24 to '28 is predominantly driven by economies of scale and only to a smaller extent also to mix -- I will come to that in a minute. So let's look at the margin driver for '24, which is our cost adjustment initiative. We have started that program in '23 under the title Fit for Future, FFF. And it is a holistic program looking at structures and at processes, and it's looking at operations as well as its SG&A holistically. Overall, we are aiming to take out EUR 100 million costs of the P&L in 2024 compared to the 2023 baseline. And as you know, not all cost effects are starting being effective first of Jan '24, there will be also some overflow of effects so that the EUR 100 million in '24 translates into an annualized run rate of approximately EUR 130 million that should be then visible in '25. Roughly 70% of that cost out are coming from cost of goods sold. So this is what we see in gray and black and round about 1/3 from material and services that we buy, that we procure and 2/3 from efficiency measures, especially regarding personnel cost. And then 30% is the contribution in yellow from the other functions like sales and distribution or overhead. As I said, from '25 onwards, margin performance will mostly be driven by economies of scale or operational leverage as there are -- as we are expecting double-digit annual sales growth and parts of the cost base will grow under proportionately to sales. You can imagine that management structures, overhead, indirect production costs and this is what we've seen at Sartorius since many years this kind of economies of scale. This projected volume growth will come on a platform that is nicely scalable as we have done a lot of investments into IT, digitization and as well into our global infrastructure and capacities in the last years, which we'll talk about in a minute. Besides that, there will be also a positive margin effect from a favorable development of the product mix as the highest margin products in our group are the ones with the highest growth rates, namely bioanalytics and LPS and consumables, media and advanced therapy solutions and BPS. Talking about economies of scales and platform, let me give you some examples of the potential of our platforms and the rationale of our recent capacity expansion strategy. Let me start with our digital platforms where we invested a low triple-digit million amount in the last 5 years. When I started to look into Sartorius, I was very positively surprised by the consequent implementation of powerful standard of top-notch software packages. It is a try as you could say, SAP for ERP, Salesforce for CRM and Workday for People Management, which are our key IT cornerstones. And we have done consequent implementation of these software suites, which means that we have established group-wide standards that allow for template approaches. So there is no scattered landscape of hundreds of SAP systems to make this company work. Now we are working on a consolidated template, which also then allows quick growth rolling out of best process practices. And these platforms are also best positioned to add new features via artificial intelligence, but AI will not only be used via the standard software packages I was talking about. You will see later today, Fiona and Alexandra to what extent we are able to offer industry-leading AI-based solutions for our customers. And of course, AI helps us internally to gain speed and efficiency. So for example, translating a customer portal into Japanese or analyzing the current status of a complex customer service ticket, including proposing measures or helping to find standardization possibilities when looking at the thousands of variants that we are producing for customers. This is now possible with using AI, or let me pick my Sartorius, our online suite for any customer interaction or transaction and also for information exchange, where customers can get a complete overview about their installed base and services and products around this installed base, offering us the opportunity to increase our share of wallet with the customers. So from the digital parts, more to brick-and-mortar, so to say. Sartorius had invested heavily in recent years into the physical infrastructure. On the one hand side, the need for capacity expansion was driving this. But besides the sheer capacity increase, the expansion was also driven by strategic aspects, which are listed on the left-hand side of that chart. In an increasingly insecure world, the rising international tensions. One is well advised to operate with a diversified global footprint. And this brings many positives -- sorry it brings customer and market proximity, which increases speed to market and decreases logistic efforts. It also brings the possibility to test and learn at different locations and share our best practices than across the group. And last but not least, it is important to have redundant capacity, redundant capacities are a must not only because the customers want them, but also in case certain regional conflicts get hot. We view these redundancies not as inefficiencies, but more as the logical consequence of the resilience we are aiming for. These investments into the resilient platform are also visible looking at the CapEx development over the recent years. As you know, our normal or basic CapEx need is approximately 8 percentage points of turnover, 3 percentage points for maintenance, 3 for regular expansion and 2 percentage points for capitalized R&D. As we have kicked off a lot of projects during early pandemic, they have been hitting the balance sheet, especially in '22 and '23, and we are expecting CapEx ratios to get down to pre-pandemic levels midterm again. Besides CapEx, also M&A has a substantial effect on our free cash flow generation and our debt position. Net debt to EBITDA has been below 3% or even below 2% for many years and was brought up by the Polyplus acquisition in Q3 '23 to around 5x by the end of '23. Based on the expected EBITDA and net working capital reductions projected in '24 and the capital inflows from February this year, we are working towards a net debt-to-EBITDA ratio of slightly above 3% by the end of '24. This assumes no more sizable M&A and no additional capital measures in '24. And net debt-to-EBITDA brings me to rating and our debt financing strategy basis is a solid investment-grade rating accompanied with a credit and bond documentation that is free of financial covenants. In 2023, S&P has started to publish a rating for Sartorius, which was then the basis to issue bonds after the summer break '23 in four tranches with a total volume of EUR 3 billion. Furthermore, we have bilateral loans and promissory notes of EUR 1.4 billion and an undrawn credit facility due in May 29, so far out. And this goes then hand-in-hand, as you see in the middle with a well-distributed maturity profile and debt cost of slightly less than 4%. Even if we do not expect any sizable M&A this year, and we are not planning any additional capital measures on Sartorius AG or SSB level this year. I would like to lay out to you briefly the significant potential of flexibility on the debt as well as on the equity side. For debt, our liquidity potential currently is EUR 1.3 million billion short term, which consists of that undrawn credit facility of EUR 800 million and around about EUR 500 million cash. Please note that after the capital measures of February, we had an inflow of around about EUR 1 billion, of which we used approximately 50% to repay debt. EUR 500 million, you will see end of Q2 in our balance sheet as cash, and this cash which is important, has no negative carry versus the debt, a function of the inverted interest rate curve. On equity, we have treasury shares on Sartorius AG level worth EUR 1.7 billion. And they are -- in our strategic thinking, more earmarked for M&A in the LPS direction. Why is that? It's because SSB has own access to equity capital markets and any M&A could be financed with additional shares. Here, the AGM of SSB has granted 30 million potential new shares worth EUR 7 billion at this point in time. I'm not saying that this must happen automatically, but simply there is that additional potential. So we are overall well positioned going forward to remain being an active player in the market also for potentially more sizable M&A at some point in time, but let me also say there is no urgently pressing white spot in our portfolio that we would have to fill. That brings me to my last chart, the summary, four things that you should take away from this session. First, future margin increase is tangible. Short term via cost out and rightsizing and longer term via mix and especially economies of scale. And this, you have also seen at Sartorius for many years. Second, future growth will be well absorbed by our digital and physical platforms and networks. CapEx and relative terms has seen its peak in 2023, and CapEx rate should go down to pre-pandemic levels in the midterm. Third, we are focusing these days on operational efficiency in operations and in SG&A with positive effects on EBITDA and cash generation to increase our fitness level. And fourth, better EBITDA and cash generation will improve our rating KPIs while our investment-grade rating is a cornerstone of our financial policy, of course. This will open up room to strategically maneuver going forward, staying an active player also in the M&A market. Thank you for your attention at this point in time, and we are now looking forward to your questions. Thanks.

We are now ready for the Q&A session with our Board members here. [Operator Instructions]. So we start with the question now and Falko Friedrichs from Deutsche Bank was the first one. Oh sorry, Richard already has the mic, sorry about that.

Apparently I've been giving it. So a couple of questions, please. Unsurprisingly, on the comments you made on the first half book-to-bill and the second half. So first of all, I suppose a simple question. What sort of order backlog do you still have? It suggests there's backlog if you're confident in the revenue guidance, but you're going to have a book-to-bill below 1 in the first half. So that's the first part of the question. Second part, should we anticipate consumables stepping up significantly, order lead times are likely much quicker on consumables. So should we expect those orders stepping up significantly in the second half to hit the sort of teens growth that you're suggesting? And then maybe a little bit of color on equipment order, I think last year, it was down quite substantially in terms of equipment and probably up the 2 years before that. Should we anticipate that being down again for '24? It seems to be what's being implied.

Yes. Thank you very much. I'm going to take the question on the order book and maybe the colleagues are more talking regarding equipment and consumables. Now when we are looking at order book, we are saying it is a healthy order book. And I'm asking for your understanding that we are not in a position to quantify here in this meeting to what extent we are seeing somehow buffer in the order book that's rolling in. but it is good enough to make the statements that I've just made, yes? And if you simply look, for example, on the long-term chart of order intake and sales you see that there is still potential in the order book coming from the pandemic cycle, so to say.

I take your question on the consumables and equipment. Starting with equipment, right? We are and been expecting equipment to be down in 2024 compared to 2023. It's calculated in our guidance. That also means that the growth we are anticipating in H2 is going to come and will need to come from consumables. So it's also right to assume that we anticipate H2 consumables growth in order intake to get to the low teens to the high teens sales growth in H2.

Okay next one is from Falko.

Falko Friedrichs, Deutsche Bank. My first question, also very predictable on your book-to-bill guidance here. Can you speak a little bit about your visibility into this implied very significant reacceleration in the second half? That would be helpful. And also a little bit on the phasing between Q3 and Q4. So is this a super steep hockey stick and Q4 is the biggest driver or should Q3 already be a little bit better? And then my second question is on Slide 30, you kindly sort of noted that the historical B2B average is between 0.9 and 1.1, how should we think about the book-to-bill beyond 2024? And could it be a little bit better than this historical average? And if not, what should give us confidence in your medium-term sales growth guidance?

Yes. Thank you for the question. As I said, the second half would mean on the lower end of the guidance, and let's take that as a reference point, a low teen growth versus prior year. But prior year has been weak. So we have low comps. And now if you're looking at the dynamics sequentially quarter-on-quarter, and you take our expectation for Q2, you are seeing mid-single digits growth. And if you simply continue that mid-single-digit growth, you are there. So the upper end of the guidance would mean an acceleration of that trend over H2 which is also possible because we are seeing upticking dynamics. So this is why we are feeling that this corridor is the right one for this point in time.

Okay. Next question from Matthew.

Can I ask a shorter-term question and then also a long-term question, please. It's Matthew Weston from UBS. It's really about the confidence in recovery in the second half of the year. And it's just trying to -- is there any color that you can give us? Is it the equipment order book? Is it that there is particular things you can see coming that give you confidence? And I'd be very interested in whether or not you think the China stimulus could have a positive impact in the second half and that's baked in. And then secondly, I called it midterm, maybe I'm cheating. 2025, I'm not asking for 2025 guidance. But if we were to think -- I think you said in your opening remarks, Joachim, that you saw this as biopharma growing at 10% about. As we look at '25, do you think '25 is a normal biopharma 10% year? Or you think we still have to be come to terms with the idea that recovery continues into next year, too?

Did you say you are not asking for a guidance? So that's really difficult to answer as you understandably are asking for a kind of quantification here. And we really would like to answer that once we know more about where we land in 2024, I believe. Let me make maybe one general comment regarding order intake, once again, Florian did that during his speech. And we added some discussions yesterday night also. When we look back into -- on pre-pandemic years, I mean, we were always reporting order intake. I would say most other players didn't. And nobody, I would say, pretty much ever calculated book-to-bill. I mean, of course, it was always possible, obviously, because we were reporting sales and order intake. And we always said if at all, order intake is a reasonable indicator on an annual basis, but for sure, not on a quarterly basis. And that was the case pre-pandemic, in a rather stable environment. Fluctuations have increased also pre pandemic in a positive way, by and large. But still, yes, so on a quarterly basis, we would have never -- we actively never recommended to look into that. We explicitly drew your intention on order intake in Q3, 2020, because we said, here is something happening that for sure, is not sustainable. Customers have changed their ordering behavior. They are building up inventory levels. We don't know exactly how long this will take. To what extent that will happen. But one thing is for sure, this will go into the opposite direction at some point. You have seen that chart, Florian shown that. So -- but the situation we are all in and I'm not criticizing that. I only want to describe it is in a more stable situation, I think it was clear that it was not advisable to look on order intake on a quarterly basis. And now we, for sure, are not yet back to a stable situation. And now everyone is looking on order intake on a quarterly basis, and not only making year-on-year comparisons but also quarter-on-quarter comparisons. Again, I understand that, but I have to say it's very, very difficult to make such predictions, we were not able to make the prediction of the roughly 90% increase for example, that we have seen in Q1 '21 versus Q1 2020, obviously, everybody was happy with that. We were just flagging qualitatively that this won't be sustainable. But there was no way to quantify that. So therefore, in a way, I really would like to ask for your understanding that this is really very, very difficult to predict and also to draw any conclusions from that. Even on an annual basis, it's very difficult and that has to do with the first question was asking for that. The order book, right? And Florian answered that, the order book still is in proportion to sales level above longer-term average. So -- and therefore, the order book still provides some, let's say, fuel for the sales revenue that we are expecting for this year. And of course, exactly as Rene said, it's then, of course, a bit different for equipment and consumables, right? For equipment also because of the longer execution cycles. This is even more relevant, whereas for consumables, it is changing to a bit. So therefore, the best what we can do is what we have shown to you, what we expect for Q2 H1 and then also the bandwidth for H2. Of course, we do expect, as has been said, that the customers will have reached their target inventory levels quite soon on average. Some have reached them already. Some are maybe a little bit still or have still a little bit more to go. And one additional thing is very important to note. This was a moving target. Customers were aiming for different target levels a year ago, half a year ago and now they have adjusted that, and that is an influencing factor. But -- and that makes it so difficult, again, a, to make predictions, but b, also to draw midterm or long-term conclusions based on that. Because it's not -- it really shouldn't be mixed up with any long-term demand and therefore, development of the business. Bear with me because of this general statement, but that is really how it functions. And Matthew, thank you for your question regarding 2025. It's a bit too early to answer that, I ask for your understanding.

I wish just on the China stimulus, is that baked in to the recovery in the second half of the year?

In a way that so far, we haven't seen anything. And therefore, we believe there should be something as typically Chinese policymakers walk their talk. So we do expect that some will be visible in the further course of the year, but we haven't seen anything yet.

It's Oliver Metzger from ODDO BHF. 2 questions on M&A. So Florian you said this will be no major M&A this year. If I look on just for the each multiples for all the listed players, they are not at -- historically not at the highest level, most likely same would apply also for targets. So you argue a lot about the long-term view. Is your concern or say, you rule out bigger M&A, I don't want to force you into big, but you rule it more or less out. Is it more the skepticism of the financial markets for a potential bigger deal or whether your internal operation is not far enough after Polyplus integration that you can't digest such a deal? And the second question is, you mentioned we don't have white spots, which I agree to a certain extent, but I think there are still some areas where you could be more active in particular the novel modalities with cell and gene therapy or stronger vectors, but there are also other novel modalities. So why don't you regard this as a wide spot because for a complete offering for integration, why not having a broader, even broader offering?

I think you described the situation absolutely rightly when it comes to the current market. And you are asking somehow for anticyclical M&A given that long-term, in a way the cyclicality might offer in certain times, opportunities. But in general, our train of thought is a strategic train of thought when we're doing M&A. Of course, it's always opportunistically what we see. But it is currently simply and we're coming to the internal state, it's simply not on top of our minds. That does not mean that we are not having discussions in the market currently. But I think especially when we're looking at the year '24 and the curve that we have to fly with the business and the Polyplus acquisition that also has to be somehow digested internally and also by the balance sheet. I think we are well advised not to push now through the window. For me, it is important to state that looking forward after '24, we have all the possibilities and all the ammunition at hand that we need. So we are not in a state where we're saying, stop, no more talks, no more looking into the market, but it's more towards the midterm that we are looking at for larger things.

And next question from Oliver.

I comment on the white spot. But of course, what we are not trying to say is not -- we have everything, we don't need any more innovation, and there are no gaps in the portfolio. That's not what we are saying. But it's like a major get which would hinder us to be competitive in the market. If you look back to 2019, and if we would talk about advanced therapies in 2019, I would say, yes, there is a white spot in that, but we're quite well filled that with a number of acquisitions we'll hear today about that. And of course, we continue to be interested and screen and understand where are the gaps, what are the innovations available or coming in the areas you will hear about today if it's downstream processing, intensification, advanced therapies. And of course, for LPS division, same in the bioanalytics.

Oliver Reinberg from Kepler Cheuvreux. 2 questions for me. Firstly, coming back on this kind of order situation. So book-to-bill offer 0.95 in the first half, obviously, it implies a kind of sequential deterioration. I was trying to get a sense in the Q1 call that you're a bit more optimistic that orders may already show some kind of improvement. So can you just add some kind of more color on this kind of sequential deterioration in the order situation? And then secondly, just on capital returns have been under pressure, Florian, you mentioned you're the new kid on the block now. So can you just talk to what extent are returns on capital of the business a priority for you? Do you have any kind of intention to provide specific targets here? And any kind of operational actions to improve the kind of capital efficiency of the business?

Yes, I can start with the capital returns question. I'm -- here, I simply have to draw the 50 days card, Oliver. So I can talk about this holistically and say, well, what I told about economies of scale is exactly what will drive capital returns because if you have invested capital, and then you are putting on that a growth business to scale that should also bring capital returns, of course, up going forward. . And I feel very comfortable, as I said, with what we have done in the past to bring also then the CapEx rate as a percentage of turnover back to pre-pandemic levels. But to be more precise on that, bear with me for a couple of more days, months.

Next one would be James.

No. You want to something about orders and EPS in particular for Q2?

I think it goes back to what Florian said also about the order intake, how it's being forward-looking or not yet purely forward-looking still backward looking and the orders -- order book, we are slightly elevated order book compared to the normal pre-pandemic time. So that's -- I think that explains what we will see in the Q2, which, yes.

You're saying the sequential decline then from Q1 to Q2?

Yes, it explains it.

It's James from Jefferies.

It's James Vane-Tempest from Jefferies. 2 questions, if I can, please. Firstly, Slide 30 was helpful just on the phasing for this year. I was just wondering between LPS and BPS, whether they're expected to be similar or any kind of color on that would be very helpful. And then my second question is, again, just for the second half weighted year, particularly on profitability, the 2024 cost savings of EUR 100 million annualizing to EUR 130 million, would your reiterated margin target be achievable without those?

Yes. The last one is quite easy. No. The cost-out program is a building block of reaching the margin target. But we've started with a program already '23. So it is well underway and performing so far.

Yes. On LPS results, what we are looking into our prediction for the results for this quarter is rather flat to Q2 previous year. And on the profitability also on the level of what we achieved in the previous quarter. So this is our dynamic.