Stratec SE (SBS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. It's Stuart, your Chorus Call operator. Welcome, and thank you for joining the STRATEC conference call regarding today's announcement for the full year 2019 financial results. [Operator Instructions] I would now like to turn the conference over to Marcus Wolfinger, CEO of STRATEC. Please go ahead.

Yes. Thanks, Stuart, and hello, everybody. A warm welcome. I hope you, your loved ones and your colleagues are all healthy. Welcome to our financial results presentation 2019. Good morning in the United States and good afternoon in Europe. Before I dive into details, allow me to just mention some housekeeping stuff. Actually, you can download that presentation. There should be a download button somewhere. And actually, you can download that presentation from our website later on. I think I don't need to read you through the safe harbor statement. Certainly, we'll talk about the things in the pipeline, and certainly, we cannot guarantee those. As always, I would like to split this presentation into 4 major segments. First of all, I would like to get you an overview what happened in 2019 and about the drivers, then some financial details. I think at this point, it's important to mention that our annual report was released today as well, and you can actually download and find the details there. Then I would like to discuss the outlook, including the strategy, which will certainly cover some aspects of COVID-19 as well. And then I would like to get you the opportunity to ask a question, and hopefully, I can answer these questions. Actually, Jan Keppeler is in the line as well, so if you have detailed questions, probably Jan will address those. In 2019, we had dynamic sales growth, actually, already in Q1, which took the growth ending up with 18% and growth in constant revenues being 15.6%, leading to EUR 221.6 million, which is actually a new record high. That actually was guided for 12%, so we are significantly north. But I think that was clear from the beginning on. Like after Q2, it looked a bit like we would get to the 20%, which didn't really happen, but we were extremely satisfied, particularly with all the facts driving that growth. EBIT margin was up by 19% to EUR 31.2 million. Adjusted EBIT margin at 14.1% after 13.9%, again, guidance checked. I think it's important to understand that about 50 basis points negative impact coming from stock appreciation rights. And so far, we have been satisfied mainly taking into consideration that the majority of the actual top line growth is coming from development activities. And those ones booked under development activities aren't necessarily only development activities. It depends very much to the contract. Often, prototype supplies, pre-serials, evaluation units are covered under development because they are part of the development contract, and that's why we were actually extremely satisfied with that. It's -- let me say the revenue contribution of development was slightly higher than expected. And in so far, our -- the achieved EBIT margin is more than satisfying. We got several new products to the market, which includes the FACSDUET for Becton and Dickinson and LIAISON XS for DiaSorin. Both really successful market launches. And the other thing is, and that actually is fairly more important than it may look from the outside perspective that we have made significant progress within our major development programs. That's particularly important in order to make sure that we can release our developers and development resources into the new development projects lining up. And certainly, in the course of a development program, it is important to hit the relevant milestones in order to hit the relevant market launch dates. Then discussing some aspects of the dividend. I know these days, a lot of companies are setting their dividend conditionally. What we clearly say is that we are planning to pay that dividend. We have to put it slightly conditional, but allow me to say that we would be stupid after 16 consecutive years of growth in dividend, not to keep the dividend growing again. I think we would lose a very important track record, and that's why it's certainly one of the primary goals to keep the dividend up actually. We see some tailwinds coming from COVID. So let me put it that way. If we manage to keep the supply chain up. So I think that the dividend is highly likely or dividend payment. Same thing applies for our annual shareholders' meeting. So we still have the old date up. We are certainly looking into the abilities which have been given by new laws. At this point, we keep the dividend -- the annual shareholders' meeting date up. Although we are looking in several alternatives and may probably move it, so that's why we put this conditional as well. But again, dividend highly likely to be paid. Employees up to -- by 6%, so slightly lower growth and I -- than the years before. I think in the past 3 years, we had a north of 10% growth, which again shows that, first of all, our development pipeline is packed. We have a nice deal pipeline lining up in some products developments, which are already contracted, which requires further headcount, so the majority of this growth is actually coming from the development activities, but we have some other initiatives like controlling and so on and so forth where we keep the headcount going up. And certainly our activities in Hungary in order to improve the gross margin with module manufacturing, certainly, this is requiring additional personnel as well. On the other side, it clearly shows that we do not have to invest in that area as desperately as we had to do that over the past 3 years, which will probably then improve EBIT margin in the coming years as the investments in development activities will not grow in the manner like it did over the past 3 years as mentioned. I think it is important to understand that our actual development activities and revenue recognition from development activities are disconnected. Disconnected to a degree, which is mainly caused by IFRS 15. I think if you had a perspective like 3 to 5 years, still development activities and recognition of revenues for development are in line. However, there may be years and 2019 was certainly one of those years where we recognized very high revenues. Whereas in 2018, although the development activities were extremely high, the revenue recognition were slightly lower. I think it is important to discuss at this point already that the development activities in 2019 were certainly high, but not disproportionately high. So actually, we expected some growth and that's why we see this as a normal high range, certainly not disproportionately high. Now getting to -- sorry, I just want to make sure that I didn't skip a slide. No. So now getting to the financial details. Sales up 18%, coming from EUR 187 million to getting now to EUR 221 million. Adjusted EBITDA up by about a 13% coming from EUR 36 million, now up about EUR 41 million. And EBIT margin -- EBITDA margin, slightly down in '19 to 18.4% coming from 19.3%, 90 basis point down. We can discuss this -- it looks a bit strange as any other earnings figures are up, and we can discuss this later if you wish. Adjusted EBIT coming from EUR 26 million, now north of EUR 31 million, up 19%. Adjusted EBIT margin up by 20 basis points coming from 13.9% to 14.1%, again, check the box regarding the guidance. Adjusted consolidated net income coming from about EUR 20 million, now about EUR 26 million, up 28%. And the adjusted earnings per share coming from EUR 1.70 to now EUR 2.16, up 27%. And EPS, after IFRS, actually up by 44% coming from EUR 0.93 now EUR 1.34, very much driven by a lower tax rate. Dividend planned per share EUR 0.84 coming from EUR 0.82. As you can see, we achieved a nice growth, already that bars are showing that actually the increased sales with development and services. We achieved significant development targets. We have a strong call up from established systems as well as recently launched systems, which makes the overall mix very positive. So 2019 will certainly be way more dominated from growth with instruments rather than development activities. Although we still see some growth in development, we expect north of 10% decline of -- sorry, a north of EUR 10 million revenue decline from development activities, although we are expecting growth. I think that shows the growth coming from instruments and consumables sales. And then certainly, we had higher sales with service parts and consumables. Pleasing utilization of the installed base is actually triggering that nice development in Diatron and in STRATEC instruments. So just getting you -- I think the overall statement here is that one should not see STRATEC as a company growing from year-to-year, like just putting some KPIs in compound annual growth rate between 15% and 19%, north of 10%, and that's actually our long-term goal to grow somehow in the area of high single digit, low double digit. And I think the products in the pipeline are making that possible for looking into the next couple of years, even taking the weaker years of 2018 into consideration. Sales by operational divisions. Systems are up 10%, spare parts -- service parts and consumables up 7% and certainly development up 76%. As mentioned before, for 2020, we are expecting that the absolute contribution of development and services sales will shrink by about EUR 10 million or more. However, we see nice growth. The growth mainly coming from instruments and service parts. Looking into the total percentage of sales, actually, it looks even stranger to look into the development activities, which actually contributed by 24% to 2019 revenues. I would say, like a common year, we should somehow be in the area of lower bandwidth 15% -- 16%, higher bandwidth 20%, and that should actually be the long-term average. Adjusted EBIT and EBIT margin. Again, EBIT up 19.1% year-over-year to EUR 31 million. The adjusted EBIT margin is 20% up, now being on a 14% -- 14.1% EBIT margin level. Positive contributors, definitely economies of scale. And certainly, some positive results coming from our earnings improvement program for those ones who are new to the story. In 2018, we clearly said we needed to look into the details and established an earnings improvement program with the clear goal to look into the aspects where we are doing things which are not absolutely necessary. The goal was clearly to not show this on the headcount level. We clearly said all we do is operationally and strategical and technical moves. Definitely no layoffs, which are often hidden under this earnings improvement. It's definitely not. We hid it actually to the contrary. Even top line growth was really not satisfying in '18, we still hired 10% more employees. Negative contributors to EBIT and EBIT margin, where actually the product, respectively, the sales mix, as mentioned before, more than half of the growth coming from development activities. And again, please bear with me that when we say development activities, that's not necessarily a plain vanilla development, it certainly includes instruments as well depending on the contract, so certainly prototypes, evaluation units, and often pre-serials are addressed under development because it's covered in the development contract. Again, the high mostly earnings-free contribution of development activities certainly didn't contribute positively to the EBIT and EBIT margin. This will certainly improve in 2020 as well, which gives us certainly some room there. And then as mentioned before, the negative margin effects to the stock appreciation rights by about 40 basis points that's certainly a single occurrence, onetime occurrence. So again, giving us some room for margin and EBIT growth in 2020. Now discussing the segment performance, and I'll only dive into those ones which are actually worth to be mentioned. So Instrumentation, up 17.6%; EBIT here, up 4.8%, again, mainly the same thing with development activities. So adverse margin effects coming from higher share of lower-margin development and service sales. Diatron, very nice development after 2018. Top line up 21% and adjusted EBIT up almost 80%, mainly coming from the new product launches and a strong business with veterinary products. Certainly, it's important to mention that this is mainly our hematological business and off-the-shelf products. Actually, it is important to understand that we transferred certain products from Instrumentation to Diatron doing more private label deals, whereas instruments does more OEM in partnering business, which certainly contributed to the Diatron business as well positively. And certainly, it's worth mentioning that particularly in hematology and in some cases, in clinical chemistry, both covered in our Diatron business unit, it is more common that the OEM supplier supplies reagents and more consumables as well, which again contributed positively to that nice EBIT and EBIT margin. Now talking about Smart Consumables, and I think it is important to understand that -- and I can only reiterate myself what I said before. Although the development in 2019 was not really satisfying, it is important to understand that the acquisition of that business back in 2015 was most likely one of the most important strategical moves in the history of the company. I'm almost about to promise that if we look into the rear window mirror in 2021 and 2022, when this business will be margin accretive to the group and showing some nice growth rates, we will all be satisfied with that. I think it is important to understand that although we assumed under the acquisition that the sales channels nicely fitted what we had in mind, we had to slightly change the sales channels. In the meantime, we are focusing a bit more into blue chips, where the acquisition phase of a new project, the development phase and actually, the pre-contractually work is way higher than doing projects for small companies. So it is certainly the overall goal that we continue to work with the well-funded start-up companies and helping them to get smart consumables to the market. However, this business does not scale as nicely as the business with the blue chip. So it's certainly the long-term goal to get the business to a 50% to 70% contribution of revenues coming from blue chips and 30% with smaller companies. We already have some of those products under development or even in clinical phases. That's why we are -- it looks so transparent and so obvious and so predictable that this business will nicely ramp in 2021 and 2022. Others, we saw some nice development as well, mainly the recognition of development and service revenues with above-average revenues in the year. Now getting to the cash flow. Operating activities, EUR 21 million, up 70%. And then certainly, investment activities way higher, very much driven by the building here in Birkenfeld, mainly for development, leading from an overall perspective, very much driven by financing activities to free cash flow of -- a negative free cash flow of EUR 6.4 million. So most likely, we'll already see the turnaround in '18 when the new building is finished. If not 2020, then it will certainly happen in 2021. Now looking into the same thing, that the equity ratio, again, on the same level and net debt slightly up coming from the building activities of cash flow. Year-over-year free -- cash flow from operating activities, forgive me, up 70%, very much driven by the strong development in Q4. And certainly, the adverse effects coming from higher tax payments. Then certainly, higher investment spending due to significant capacity expansion here in Birkenfeld at the headquarter. And again, the capacity is -- expansion is mainly for development activities and prototyping. And we already finalized Stage 1 at the beginning of 2019, and we'll most likely move into the Stage 2 development building towards the end of this year. And again, investment ratio of 12.1% of sales, which has been guided to be between 12% and 14%. Higher net debt position, very much driven by the financing and first-time adoption of IFRS 16. Now looking into the outlook. Financial guidance. Group sales expected to increase at least high single-digit percent range, and this doesn't incorporate the higher order income coming from COVID -- from the coronavirus business where you probably know and I will dive into details later on what our customers are doing here. EBIT margin to be guided around 15%, and I mentioned before that there are some means and measures here and there that we get to that point or even higher after 14.1% in 2019. Margin expansion mainly driven by scaling effects and certainly a share of the earnings improvement program and then certainly an improvement of product mix. Again, the high contribution of development activities in 2019 didn't contribute positively to the earnings as we are expecting higher growth over the instruments and service parts. In 2020, this should certainly contribute positively. And again, I think it's worth mentioning that particularly in the beginning of 2019, even the product mix with instruments was not really satisfying. So I think the overall product mix in 2019 didn't contribute positively, whereas we expect that to happen in 2020. Then certainly, investments in tangible and intangible assets of around 10% to 12%. Ongoing construction measures here for the capacity expansion in Birkenfeld and certainly the investment ratio is likely to decline further in 2021 when the building activities are finalized. Now focus in 2020 and beyond. So certainly, we have to manage the challenges arising from the coronavirus pandemic. Some of our customers are offering nice products. You probably know that we have a couple of molecular customers including DiaSorin and Hologic. DiaSorin offering the LIAISON MDX, which has -- and fast-track approved -- U.S. FDA fast-track approved coronavirus test on the LIAISON MDX for decentralized testing. And Hologic having a fast-track approved molecular COVID-19 test for centralized testing. Hologic, just as an example, with a capacity of delivering 500 results after 3 hours and several thousand during a lab shift. I think it is important to understand that our order income, particularly for Q2 and for the last 2 weeks of Q1 were, for certain products, extraordinarily high, whereas our other products didn't show any weakness so far. The biggest challenge will certainly continue to be to manage the supply chain. As -- and I'm sure you know that everybody is talking about that, that we have supply chain in Asia, we have supply chain in the United States, where the effort literally tripled to make sure that the supplier are supplying based upon their confirmations and in time. And that actually, again, the fact that product volumes and demands went up. This is certainly one of the core challenges in taking like air transportation into consideration with air traffic mainly being down. This is certainly the challenge for us over the period to come. If you don't mind, I would describe the situation for us, and that's probably applicable for a lot of companies as the situation, which consists mainly out of, I would say, 4 waves. Wave #1 being growing demands, very fast-growing demands for the next months coming from pathogen testing on swabs. And this is all molecular business and literally every molecular product of STRATEC sees growing demands -- vastly growing demands and actually on a high ramp up curve. Again, it is a challenge for us to satisfy the additional demands with the on top challenges with the supply chain. The second wave for the coming months, not at this point, but certainly for the coming months is antibody screening. As you are certainly aware, in times of vaccination or in times where it is important to differentiate between people who had corona without any symptoms, but are immune now, antibody screening is the most important element or even for vaccination methods based on antibodies, it is definitely important to find people with corona antibodies. So certainly, this will be the driver in the months to come. And we'll most likely assume some of the additional demands coming from Wave #1 with direct pathogen testing. Then, which is probably a bit atypical for us, but most likely typical for the overall industry is that we, after that, more towards the end of the year, we still see some abilities to grow. We have a certain catch-up effect. We have to keep in mind that at this point, not a lot of things are happening in the diagnostics industry in terms of decision-making processes, placement of instruments, which haven't -- where the leads honored in, we have to consider that our customers' sales activities are literally down because of travel bans and so on and so forth. So we are expecting a certain catch-up effect in terms of supply then. And then certainly something where, again, we are most likely a bit atypical to the overall industry is that in parallel, we have launched and are about to launch several new instruments, which will probably minimize the situation we will see then. I would actually expect that the additional capacities which are built between now and towards the end of the year will lead the entire industry to a slight dip. On top, we have to see something I mentioned before that our customers cannot undertake sales activities, which means the number of placements towards the end of the year, under normal circumstances, would go down for any participant in the industry. We do not expect that. We hope that we can at least have a wash year as far as the expected dip is concerned coming from new instruments, which will then show on top growth. So what I would like to get across is that our guidance is covered in a way and does not yet cover COVID-19 testing and antibody testing expansion. So far, we see some challenges here and there. We think we can overcome the situation with the challenges, but it requires huge additional efforts. I, and that's most likely a personal thing, would say that the industry will see a dip towards the end of the year, beginning next year. We hope that we can overcome that dip with new instrument launches, and that's why we are fairly confident that we will meet the guidance, and we have some upside coming from COVID-19. Then as the next point of our focus, certainly, we want to continue to improve the EBIT. And that means for 2020, but mainly for 2021, the contribution of our Smart Consumables business, then certainly, it is important to achieve the development goals. And I mentioned the reasons for that already, it means market launches in time and making the developers and development resources available to new projects. And I mentioned that before, we have several products lining up nicely. Then certainly, we have new product intros, market launches, among some other -- some proprietary analyzer platforms in various components. Then we are expecting to sign new development agreements. And again, we are distinguishing between deal and development pipeline, development pipeline packed for a couple of years with products already contracted back in 2017, 2018 and some nice activities lining up to sign new development -- development and supply agreements, which for us means executing on the deal pipeline. For some of those, we are performing visibility studies, which gives us a good indication about the likelihood that we execute those deals and actually shows how far we already are. Then we certainly want to realize further efficiency gains of the earnings improvement program, which was introduced in 2018, and it should be finalized 2020, 2021. And again, I just want to make sure that I didn't skip a slide. No. This gets me to the point where I'd like to hand back to Stuart, our operator, who will explain us how Q&A works.

[Operator Instructions] First question is from the line of Oliver Reinberg from Kepler Cheuvreux.

Oliver Reinberg from Kepler Cheuvreux. Marcus, can I ask you a couple of questions on COVID-19? First, when we think -- I think you mentioned it or just talked about direct pathogen testing, so basically PCR testing. Do you have any idea in terms of the overall testing volume we have in the market, how much of this will be dealed with in terms of high throughput of this testing? And what share may fall under point-of-care testing? That will be question #1. Secondly, when you look at the opportunity between PCR and antibody testing, which of the 2 is actually more significant, a, for the industry overall and secondly, for you? And third question, just generally on antibody testing. I mean what is your expectation in terms of how this is now moving and scaling up? I mean is this -- were we just looking at certain cohorts? Or could this be a kind of significant volume testing opportunity?

Yes. Oliver, you probably have to reiterate your third question, but let me answer your first 2 before that. And actually, thanks very much for your questions. I would say, at this point, as the demand of instruments is so high that at this point, I would say the hospitals and the countries and the health care systems are taking whatever is available. So like looking into certain markets, and I would actually say there is certainly a strong preference, which is very much driven by how far countries are centralized as far as testing is concerned. So picking out the example of the United States, where centralized testing with those big reference labs and very few smaller labs, as far as this is concerned, certainly, high throughput instrumentation plays the major role, where certainly things like sample prep is easier and so on and so forth. So I would say a clear statement: countries like the United States, like France, certainly high throughput testing would be the method of choice, if there is a choice. And then certainly, those markets where decentralized testing is quite common, which may mean certain markets in the United States, we call those satellite labs, so those on-site smaller hospitals -- on-site smaller laboratories and hospitals, certainly decentralized testing is more common. And actually, you know that I'm trying to avoid to say point-of-care because point-of-care often is actually confused with self-testing devices. Decentralized testing, in this case, like for DiaSorin, the instrument has the size of a motorcycle helmet, that the beauty is that the swab could be taken, it's just put into a vial and then pipetted manually in disc and the disc is put directly into the analyzer, which means, actually, you can literally do this in the emergency ambulance, which has, particularly in COVID, certain advantages segregating COVID-19 from other patients. But at this point, I think that the strength in sales for companies offering analyzer systems with decentralized testing abilities is actually mainly in those fragmented markets, like in Italy, Spain. To a certain degree, Germany and other markets. Your second question regarding what is more important, is it PCR or direct testing or antibody testing? I think it's a question of the perspective on timing. At this point, with infection rates going through the roof, certainly molecular methods to detect pathogens from swabs is definitely the method of choice. I cannot say if this is going to last for 2, 3 or 6 months. But certainly, at this point, it's way more important than antibody testing. Actually, as far as I know, there are some companies having molecular tests for pathogen detection out there. And as far as I know, only very few companies have the tests already in the market for antibody testing, which certainly, like in the sequence of development activities had priority 2 for the majority of the companies, but now becoming priority 1. From an overall volume perspective, I think antibody testing will become more and more important whereas from a dollar or euro perspective, as the molecular tests are most likely more expensive and we will most likely see a fast competitive situation because literally any immunoassay analyzer could do antibody testing as soon as they are available, I would say that from a euro amount, most likely the PCR-based tests will continue to be more important, whereas the volume for antibody tests will certainly be in excess to PCR-based testing. I hope that answers the question. And can you please repeat your third question, Oliver?

You actually have covered that already. But if I may follow-up. I mean, I think about the PCR opportunity, you say that it only takes 2 to 3 months. I mean, is there a likelihood that certain states, which now realize we are generally understaffed with this kind of equipment and can't get this equipment in the first wave, that there will be a kind of general staffing even beyond for people that couldn't get access in the first wave? And also, can I just say a word in terms of the overall other routine testing market. I mean, Quest was quite coarse in terms of testing volume. Is there anything that you see on your business here?

Yes. No. Thanks, Oliver, again. So just to make that point, I didn't say 2 to 3 months. I said I don't know if it's going to take 2, 3 or 6 months. And actually, you know in an environment where, literally, the situation changes every day, it is impossible to say that. At this point, what we see is that, as you know, that the overall capacity for PCR-based testing doesn't satisfy the overall demand, which means people who are sent or go to testing, it takes them 2, 3, up to 7 days until they get the results. And actually, in some health care systems, not everybody who wants a test gets the test, I think that's obvious. And we have -- you see that in the press, in television at length. Which means, at this point, there is not enough capacity instrument-wise and certainly, then on top laboratory personnel and all consumables and replacement parts and so on, which are needed to perform the testing. A lot of companies are working on that. We will certainly see further tests coming on the market, which means there will be a point of saturation where other data mining factors like lab space, lab personnel, consumable will become more important than capacity on instrument, and that will be the point where I think antibody testing will become more and more important. Regarding your now fourth question, our overall diagnostics lab business, and we were certainly particular in the course of the preparation of that call, we are trying to talk to customers. The clear answer is that 100% focus is on coronavirus testing, particularly, which means antibody testing and PCR-based testing. So certainly, you know that from a first sales lead of one of our customer up until an instrument achieves factory acceptance tests in the laboratory, it often means a cycle of 9 to 12 months. That's the perspective of our customers, which means there is a pipeline where our customers started to follow-up leads in order to place instruments in autumn or towards the end of the year or even early next year. And that's certainly what I mentioned before as a catch-up effect. We don't see this as mainly jeopardized. But the question is what comes after that. And that's what I mentioned as the fourth wave, where I would expect that the overall industry slightly dips, has to be cautious with statements up at this point. But as mentioned before, I think here in our microcyclical environment at STRATEC that we can probably overcome that situation with new product launch, which happened in 2019, and are happening in the course of this year and are happening early next year. So -- but I would actually be cautious as far as the overall development of the industry towards the end of the year and early next year is concerned.

Next question is from the line of Jan Koch from Deutsche Bank.

This is Jan Koch. Regarding COVID-19, you just spoke about it as one of your customers saw a decline of up to 70% in testing volumes in China, and Quest Diagnostics saw a volume decline of up to 40% in the U.S. in March. What is the resulting decline in service parts for your business in Asia, Europe and the U.S.? And secondly, how much of your growth contribution in Q4 came from the recent product launches? And what are your expectations for these systems in 2020? And finally, could you provide some color regarding your adjusted EBIT target? Last year's margin, as you mentioned, was heavily impacted by margin dilutive development sales in the first 9 months. Can you give us a feeling for the phasing of the margin over the next 4 quarters?

Jan, thanks very much, you just made through my note. Okay. So I can only confirm what you just said that some of our customers saw a significant decline like in China or the United States in everything but COVID testing. And you mentioned a certain percentage. I think one of our customers was talking about certainly in a limited geographical area, a decline of 70%. That's right. We have to take the overall percentage of what does it mean to place an instrument in a laboratory and what does it mean in terms of recurring revenue -- revenues from our customers with tests running over that instrument into consideration. So a good example would be that the instrument only contribute to -- by 15% to 20% to the overall value of the business, which means if a customer of us is placing an instrument and literally would sell it, the overall revenue generated by that customer with tests would be significantly higher than just coming from the instrument. Again, 80%, 85% coming from the test and only 15%, 20% coming from the instrument. So now if our customers are talking about 70% revenue decline, that certainly means that they are no longer selling tests for instruments which are already placed, which doesn't affect us that much, which means, for us, this may be that in that certainly limited geographical environment that probably some of our customers replaced 5 or 10 or 15 or 20 instruments less than expected, but it doesn't hit us that hard that our customers are hit in the area because of the split, 80%, 85% versus 10%, 15%. That's actually -- that actually gets me mainly back to what I just said before. We are expecting that deferred wave hitting our customers in the industry. And when I say the industry, I actually mean Instrumentation companies. As mentioned before, probably towards the end of the year and early next year, I think, and I think I mentioned that before, that we don't expect us to be hit to that extent, very much driven by the aspect of new product launches. And when I'm saying new, it doesn't necessarily mean the product launches of 2020. It certainly means, and we've discussed it at length already, the launches which took place in '18 and '19. You asked the question about the contribution of the new product launches. And again, that looks certainly weaker than it actually was. So we had product launches, where serials products had been sold like to DiaSorin, DxS and like to Becton Dickinson, the FACSDUET and some other smaller products, which contributed to the top line growth, but actually, the majority of the development activities were certainly development activities, but some pre-serials instruments, which are then considered as products being launched. So -- and then on the other side, certainly, the majority of the growth in 2019 with products actually were based upon products which have been launched in '17 and '18, just picking out one example because it's obvious, and again we talked about that at length, is the Panther Fusion, which came to the market. The menu at that time was not comprehensive. It took a while until our customers managed to get approval in the relevant geographical areas, which is absolutely common that we achieved that very steep point in the ramp-up curve only in year 2 or year 3 after the market launch and that particular took place with products like the Panther Fusion. And then as mentioned before, one of the margin drivers for 2019 is actually the product mix. And I think I mentioned that before that we are expecting an absolute decline of revenues coming from development activities, which is mainly revenue recognition of about EUR 10 million or EUR 10-plus million, which means taking the growth into consideration, we foresee actually an even higher growth coming from products, including consumables, which will then grow -- drive the margin again. We typically sell the development activities at very low or 0 margin because it is the door opener to sell higher-margin products later on. And that's actually, I think the inherent part of our business model. I hope that answers your question, Jan.

[Operator Instructions] The next question comes from the line of Michael Healy from Berenberg.

And I know you've answered quite a few already on COVID-19, just one or two more, maybe just more general question. Just the increased orders you received in the end of Q1 and into Q2. Just how capable is your manufacturing and your operations to produce these extra instruments? And if this continues again into Q2 and maybe a little bit longer to produce these instruments, do some other products come at risk for launch? And just a general [ theory ] on your ability to meet this demand. And then just another question, I suppose, on gross profit. The margin this year, again, was a little bit weak. And I suppose it relates a little bit to COVID-19. Would you be willing to sort of sacrifice a little bit of margin progression this year in order to kind of get this demand and get the instruments onto the market?

No, Michael, thanks very much for asking those questions. And actually, let me try to walk you through the challenges we have. So yes, definitely, it is a real challenge to bring up volume. There are several contributors to that. First contributor is testing equipment. So I mean, testing equipment we need in our factories in order to perform in line testing and final testing. So typically, there is a natural capacity limit, which means you have testing equipment and you can test 10 instruments per week, and you cannot test the 11th. We are in the nice situation that the testing equipment we have so far is either scalable enough or we had other testing equipment in the pipeline or testing equipment from our customers, which is required for repairs and so on has been moved into our factories. So I think this is something which is covered. Then we have the personnel side. Like in highly regulated markets, you cannot just put somebody there, nailing the things together. We have qualification metrics, training and so on and so forth, which is time-consuming. We were trying to address that by moving people. We were trying to address that working through 2 shifts and so on and so forth. So we have undertaken measures to address it as well. At this point, I would say it puts strains on people in the organization, but as far as today's status is concerned, we are safe as well. Touching wood, that everybody stays healthy and we don't have -- you know how it is, and I'm sure you see that as well in other countries that if somebody got in touch with somebody who could test it later on positive that you have to shut down certain departments for days, if not weeks, and certainly this is the case in STRATEC as well. But at this point, we are managing the situation. And actually, I'm extremely proud of the extra mile everybody is going here. I hope we can keep that up for the next month in order to address the additional demand. Certainly, and I mentioned that before, supply chain is a real challenge. So -- which means, I'm sure you know our -- how we operate. Our manufacturing depth is, despite our module business, is relatively low. So today, we have a manufacturing depth of only about 15% to 20%. And it used to be only 10% before we transferred components supply to Hungary coming from some suppliers. It used to be only 10%, which means we -- although we have 100% development depths, we gave the assembly of modules like a reader or a centrifuge or a washer or an incubator or shaker or whatever it was, to a limited number of suppliers and they supplied us. And we got them, let me say, they were in charge for the procurement of electronical components, of motors, of liquid handling and so on and so forth. Although the developments came from us, which means our first-tier suppliers certainly have a supply chain as well to our second-tier suppliers like the companies producing PCBAs electronics. And they certainly have a supply chain into China for the branded circuit boards, Taiwan into -- to buy electronical components and so on and so forth. But everybody has a supply chain and has a certain buffer, which means, let me just give you an example. The first 30% of growth can actually be achieved by trying to empty the supply chain. Like cutting down the buffers in first-tier, second-tier, third-tier suppliers. Let me say the conflict then only comes after months if our partners do not manage to fill up their supply chain. And that's actually something we help them to manage. We have allocated a number of people into the supply chain to cover the demands coming from second-tier, third-tier, fourth-tier suppliers. I hope that makes sense for you and shows the actual difficulty we are facing these days. Second question, product launches. We were trying to talk to our customers in the presentation or in the preparation of that call. What they see as delays, a typical example would -- that if we supply our partners with prototypes where they have to do assay integration where we help them on site, people from us meeting with people from then, needing hardware, software, instrumentation, that's certainly something which is literally down these days, which will cause delays on the long end with product launches. At this point, talking to our product managers and program managers, and they're talking to their counterparts in our customers, we see that we are expecting that we will see delays or additional delays coming from that situation in certain products of 2 to 3 months. I think this is still manageable, and we can recover that with common efforts from our customers. But at this point, it looks like long term, literally throughout the entire fleet of instruments being under development, a delay of 2 to 3 months. And again, sorry for that, I couldn't finalize my note on that. Can you please get me your third question again?

Yes, no, it's really just on the gross margin. This year is a little bit weak and not much progression. I was wondering when we get to this stage next year, do you think you'd sacrifice gross margin progression in order to meet this extra demand?

I know, I see the point. Well, at this point, we certainly do not look, and I think we mentioned that often enough, at this point, we do not look deep into the margin development. So certainly, with all those products, we are talking in certainly the molecular products have a higher gross margin and a higher margin. And certainly, older products with weaker margin will shrink, whereas newer products with higher margins will accelerate. So I think the overall observation in 2021 for 2020 will definitely be a significant expansion on the gross margin. But this has nothing to do with us looking into trying to accelerate. So certainly, at this point, priority #1 is our employees and families, priority #2 is certainly fulfilling the demands of our customers and priority #3 is looking into the gross margin. However, looking into the details of the products and of the product mix, gross margin will expand, and EBIT margin certainly derived from that.

We have a follow-up question from the line of Oliver Reinberg from Kepler Cheuvreux.

Oliver, you don't give up today.

No, very interesting times, so I want to use your expertise on that. So actually I have 3 more. You said you can sell everything you have. Does it also fully apply for the low throughput testing, what some people call point of care? You have any idea what is actually the price for -- price difference of the COVID-19 test between high and low throughput? Secondly, can you give us any kind of idea of how strongly you can ramp up production for one of your kind of key clients? I mean, is it completely an illusion that you can double capacity? Or can you move it up by 50%? Any color on that would be great. And can you just give us an indication in terms of the antibody testing? Where does it bring an opportunity to STRATEC?

So complex question. Actually, I think it is obvious that tests in a more decentralized environment are higher-priced than in a centralized environment. Therefore, the volume is lower. So I would actually say, looking into the size of the companies and the size of the molecular business, I think the majority of our molecular customers will contribute on a percent level in the same manner. So again, pricing of an instrument which performs like 12 tests in 50 minutes, will certainly be higher than instrument performing thousands of tests a day. And again, these instruments are ending up in totally different environments, in totally different setups. I think at this point, this is a discussion which has to happen between our customers and their customers. Same thing, unfortunately applies for the ramp-up. I cannot get you the figures because I would actually share information which should be shared with you through our customers. The only thing I can say is that it is really significant and gets us to the edge of our abilities. So what we like in a regular contractual setup, which is a guarantee. We guarantee our customers that we would be able to double output within a period of 6 months. Here, it's the actual -- the time frame we have to achieve, that is actually cut it down to 2 weeks, 1 month, 6 weeks. And actually, the additional demand is higher, and that probably shows where we are coming from. Then antibody testing, as mentioned at this point, certainly, the contribution to sales for us and our customers coming from molecular tests is higher. Limitation lab resources, consumables, instruments, everything is actually at the edge of capacity, very much driven by the fact that certainly, our customers have to ramp up their molecular testing, manufacturing abilities. And certainly, that the percentage of molecular tests in this world is way lower than on an immunoassay basis. Antibody screening can be done on immunoassay analyzers. And I think we are positioned extremely well here, very much driven by the fact that more than 50% of our sales is immunoassay, and it's not the boring end of immunoassays, like ELISAs, is the attractive end of random access immunoassays, chemiluminescence assays, higher sensitivities, higher specificities really well positioned on that. Antibody testing will certainly trigger additional demand, but we have to see that particularly for immunoassays, the actual bandwidth of instruments and unutilized capacities is way higher than on the molecular end. So we think we will face some additional on-top demand, but not in a way like we see it in the molecular space. And certainly, the utilization of the existing equipment will bring up our service parts and consumables business, which is another contributor which cannot be assessed at this point. But we have to bear in mind that if the fleet, the number of instruments already placed in the field, certainly supplemented with additional sales from us, are both contributing positively to service parts, spare parts and consumables. That's our overall perspective on that at this point.

And the last point I would push you on. I mean, is there any kind of chance to get a range in terms of how significant the benefit could be for the group?

I'm afraid no at this point. I think I already mentioned the complexity of the situation. So like if I may ask you 10 questions and you get me the commitment that it will churn out. And you know what kind of questions I would ask, I can get you my answer as well, but that doesn't work that way. We have to base things on assumptions. And certainly, as the situation, it really changes every day, it is impossible to nail that down.

There are no further questions at this time. And I would like to hand back to Marcus Wolfinger for closing comments. Please go ahead.

Yes. Thanks, Stuart. Thanks, everybody. Thanks for contributing very interesting questions. Thanks very much for helping us to get this information into the market and to show where we actually are. This actually concludes the presentation of the results. Have a good day, and please stay healthy.

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