Tecan Group AG (TECN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Tecan Group Full Year Results 2019 Conference Call and Live Webcast. I am Myra, the Chorus Call operator. [Operator Instruction] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Achim von Leoprechting, CEO. Please go ahead, sir.

Thank you very much, operator. Good morning, and welcome to the 2019 full year results presentation. Tecan is celebrating its 40th birthday this year, and coincidentally today, March 18, is the actual birthday. We are very proud of what we have accomplished together with our customers in these 4 decades and would certainly have celebrated this anniversary with employees and customers today. However, looking at the global coronavirus outbreak, it clearly does not feel like celebrating. The COVID-19 disease and government's actions to limit and slow down the infection rate is dictating most of the headlines. Around the world, there are thousands of scientists as well as health care professionals working against COVID-19 in a situation that is unprecedented and still fluid. I will come back to how Tecan is contributing to fight this crisis and what impacts we currently see on our own business. Now switching back to the topic of our meeting today, we'll be updating you on the 2019 results and the 2020 outlook. With me speaking at this results presentation is Rudolf Eugster, until end of February this year, our Chief Financial Officer, and therefore, for the last time presenting the set of numbers for 2019. With us is also Martin Brändle, Head of Investor Relations. Before we start, as always, some formalities. The corresponding press release announcing our financial results was issued this morning at 6:30 a.m. Central European time. Both this press release as well as the full 2019 annual report are available on the company website, tecan.com, under the Investor Relations tab. The interim report is also available in our IR app for iPads, which can be downloaded from the App store. The call is being webcast over the Internet on our homepage, and we have also posted the presentation slides for this call for download. Before Rudolf will discuss the financial results of 2019 in more detail, let me first give you an overview of the financial and operational highlights. For the year 2019, we recorded revenue growth of 7.2% in Swiss franc or 8.0% in local currencies, driven particularly by a strong performance in the Life Sciences Business. Regionally, we are pleased with the performance in all major territories. In North America, we saw a double-digit growth in our Life Sciences Business compared to the same period last year. Asia continued its strong performance led again by China, where growth is driven by both business segments. Also in Europe, both divisions showed strong growth during 2019. Organic growth was 6.0% in local currencies, with particularly strong demand in the Life Science instrument and the Partnering Cavro components business. Recurring sales of services, reagents and consumables increased in the fiscal year '19 by 5.9% in local currencies and 6.5% in Swiss francs, and therefore amounted to 41.3% of total sales. The reported EBITDA margin, including all acquisition-related and onetime costs, increased to 19.3%, clearly delivering on the margin commitment for the year. Reported net profit grew by 3.5% to CHF 73.2 million. Because of the positive impact of the lower tax rate in connection with the tax reform in Switzerland, net profit grew at a higher rate than the operating profit or EBIT. Earnings per share reached the highest level to date with CHF 6.18. Now I would like to comment on some of the operational and product highlights of 2019. We successfully launched DreamPrep NGS beginning of last year, combining the proven Fluent automation platform with the NGS library preparation reagents from Tecan Genomics, formerly NuGEN. DreamPrep NGS significantly improves productivity of this essential workflow with highest user convenience. We have now installed DreamPrep NGS at several clients around the world and continue to see strong interest in this highly productive system. As part of our strategic build-out of our reagents and consumables offerings, we have introduced new products in our focused application areas. We have also made good progress to expand our sales channels, particularly for those recurring revenue businesses. The second key launch for our Life Science division was the new Spark Cyto, which had been launched worldwide at a major trade show in June 2019. The Spark Cyto platform expands our plate reader business into the cell analysis market and we have seen strong demand already for this new platform. In the Partnering Business, we have launched together with our partner several new systems, which are now ramping up both in the Synergence business which is the area of Partnering where we develop and supply fully-developed systems to our partners as well as in the Cavro components business where we have made good progress with important development projects. As communicated earlier, we have completed the acquisition of a supplier of key parts and modules with sites in the U.S. and Vietnam and have already made very good progress with the integration. Now let me hand over to Rudolf, who will take you through the financial results of 2019 in more detail.

Thank you, Achim, and good morning, ladies and gentlemen, from my side as well. As always, I will now guide you through our financial results for fiscal year 2019 in more detail. I start with order entry and sales. Order entry increased by 1.9% to CHF 638.6 million. This corresponds to an increase of 2.5% in local currencies. The growth was not the strongest in 2018. You might recall that we saw an increase of 10.7% in local currencies in the prior year. Back then, order entry benefited in the second half of the year from a large order in the Life Science Business for customized solutions. Last year, I mentioned at this event that this order had a value of slightly more than CHF 10 million. Adjusted for this effect, order entry in the Life Science Business grew at a good mid-single-digit growth rate, leading to a solid underlying growth at the group level as well. Order backlog, an important indicator for the current financial year, grew again to reach a record level at the end of 2019. Sales for the fiscal year 2019 grew by 7.2% to CHF 636.8 million. This corresponds to a growth rate of 8.0% in local currency. On an organic basis, adjusted for acquisition effects, sales grew by 5.3% in Swiss francs and by 6% in local currencies. The growth trend we saw in the first half of the year continued in the second half of the year as well, with sales increasing by 6.4% in Swiss francs and 7.7% in local currencies. On an organic basis, sales increased by 5.8% in local currencies in the second half of the year. Segment sales. Looking at the sales performance of our 2 business segments. Sales in the Life Science Business segment grew strongly by 10% to CHF 361.2 million. This corresponds to a growth of 11.2% in local currencies. On an organic basis, that means excluding sales from Tecan Genomics on NuGEN for the first 8 months, sales grew by 9.1% in local currencies. Sales growth in local currencies remained on a high level of 7.8% in the second half of the year as well despite the high comparative basis from the prior year period. On an organic basis, this corresponds to a growth of 6.9% in local currencies in the second half of the year. The instrument business in particular was the growth driver in 2019 due, above all, to sales of the Fluent automation platform and various detection devices, but we also recorded strong growth in the service business and for consumables. As I had mentioned already, adjusted for that large order in the prior year period, underlying order entry in the Life Science Business grew at the good mid-single-digit rate. The Partnering Business segment generated sales of CHF 275.7 million. This corresponds to an increase of 4.1% in local currencies and 3.8% in Swiss francs. On an organic basis, for the Partnering Business, this means, excluding sales of the supplier consolidated in this segment since the 1st of June 2019, sales for the full year rose by 2.2% in local currencies. You will recall that the Partnering Business had a moderate start into the year based on a high comparative basis from the prior year period. In the second half, sales in the Partnering Business accelerated significantly and were 7.7% above the prior year period in local currencies. On an organic basis, this equates to a rise of 4.3% in local currencies. Looking at particular growth drivers in 2019, the components business can be highlighted with a high growth rate. On order for the segment, underlying order entry in the Partnering Business increased approximately at the same rate to sales. Now looking at sales development in the different regions. In Europe, full year sales increased by 8.4% in local currencies and by 6.4% in Swiss francs, with both business segments performing well. After moderate growth in the first half of the year, the sales growth in local currencies accelerated in the second half of the year to 13.5%. The increase in sales was driven primarily by higher double-digit growth rate from the Partnering Business. But the Life Science Business, with plus 5.9% in local currencies, also recorded solid growth again in the second half of the year. In North America, full year sales increased by 8.2% in local currencies and by 9.5% in Swiss francs. The Life Science Business performed particularly well, with sales growth of 15.6% in local currencies in this region. Sales in local currencies increased by a further 3.9% in the second half of the year despite the high comparative basis from the prior year period. In Asia, full year sales increased by 14.6% in local currencies and by 11.9% in Swiss francs, with both business segments performing well. The Life Science Business recorded a growth rate in local currencies of 18.5%, and the Partnering Business grew by 8%. Looking at China specifically. Sales growth in China was even a bit more dynamic as in the entire Asia region. In the second half of the year, growth in Asia in local currencies accelerated even further to 17%. Now you might think that all the main regions grew faster than the plus 8% for the group. How does this add up? Well, there is this pocket orders that we usually do not talk about a lot. Last year and this year are exceptions as orders cover a lot of countries we do not serve directly. And in 2018, we had won a significant tender in the distribution country that makes up for most of the difference. Such big tenders can bring some volatility in the year-over-year comparison in the orders category. Our next slide addresses our gross profit. Gross profit increased to CHF 297.3 million, which was CHF 18.9 million or 6.8% above the prior year figure. The reported gross profit margin was at 46.9% (sic) [ 46.7% ] 20 basis points below the prior year. As always, we had several factors impacting the gross profit margin. Starting with the factors that had a negative impact. Here, the acquisition-related costs were an important negative factor. Second, as already reported at the half year, we had a negative mix effect. On the positive side, we were again able to increase prices. As a second positive factor, in contrast to 2018, this year, we benefited from the exchange rate movement and we continued to benefit from material cost savings. Lastly, as another positive driver for the gross profit margin, we recorded less nonstandard cost of sales. Those are reduced costs related to, for example, cost center variances, material variances and freight. You might recall that we mentioned a year ago that freight cost would be a focus area for 2019. So I'm happy to report here that those activities paid off. Our next slide addresses our cost structure. Overall, operating expenses less cost of sales grew more than sales and totaled CHF 209.4 million or 32.9% of sales. This increase was due to acquisition-related costs. Acquisition-related costs were mostly pre-investments in R&D and the development of sales channel for Tecan Genomics, former NuGEN Technologies. Sales and marketing expenses increased less than sales despite continued investments in the market units. Especially, we increased investment in the sales force disproportionately. On the other hand, we realized savings in freight cost. I had mentioned that on the previous slide. Part of the savings also show up here in S&M. At an absolute level, net research and development expenses increased to CHF 59.9 million. As a percentage of sales, they reached 9.4% of sales, up from 8.6% in the prior year. Overall, R&D activities and gross expenses were also higher compared to the prior year period. This includes customer funding of OEM projects. Gross R&D was at CHF 77.8 million or 12.2% of sales. This compares to 12.2% of sales in 2018. Overall, the higher R&D spending shows our commitment to innovation and investments in future growth. G&A expenses also increased more than sales. This is also mainly due to acquisition-related costs and the nonrecurring additional costs of the CEO change during the year. Looking at the EBIT and EBITDA development. In 2019, our reported EBITDA, the earnings before interest, taxes, depreciation and amortization, rose by 11.3% to CHF 122.8 million. As highlighted already at the half year reporting, there are several positive and negative factors impacting this figure. As a first negative-influencing factor that reduced the overall result, we highlight the net impact of acquisition-related costs. This amounted to around CHF 10 million. These acquisition-related costs were offset by a positive recurring profit contribution in a pretty similar amount resulting from the adoption of the new IFRS 16 accounting standard. On the very positive side, we saw a strong margin trend in the traditional core business. These are the businesses without the newly acquired companies. A much smaller, however, a nonrecurring negative effect came from additional cost of the CEO change that we had during the fiscal year. Again, all in, absolute EBITDA rose nicely by 11.3%, and the reported EBITDA margin rose correspondingly by 70 basis points to 19.3% of sales. Also delivering on the margin commitment for the year of around 19%. The profit before interest and taxes, EBIT, was more or less unchanged at CHF 88.7 million due to the already mentioned acquisition-related costs and the nonrecurring additional cost of the CEO change. Just to mention, IFRS 16 only had a small positive impact on EBIT, around CHF 600,000 as only a small part is booked into interest. Looking at the operating profitability on a segment level. Reported EBIT in the Life Science Business rose to CHF 56.7 million despite the cost impact from the NuGEN acquisition. The operating margin reached 15.1% of sales, up 30 basis points compared to the prior year. This positive performance is primarily a result of sales growth as well as a strong margin in the traditional core business. Reported EBIT in the Partnering Business was CHF 46.2 million. The operating profit margin declined to 16.7% of sales due, in particular, to increased research and development expenses for new innovative projects and a temporary change in the product mix. Our next slide addresses our net profit. Reported net profit for the year 2019 rose by 3.5% to CHF 73.2 million. Thanks to a lower tax rate in connection with the tax reform in Switzerland, net profit increased more than EBIT, the earnings before interest and taxes. The net profit margin amounted to 11.5% of sales. To probably already answer a likely question you have. In 2019, we had an exceptional effect due to the deferred tax assets that were booked. So the tax rate of 11.6% was exceptionally low. For 2020 and the next years, we expect the tax rate somewhere between the 2019 rate and the 15.2% in 2018. We move ahead to the basic earnings per share. Only a brief discussion here. Earnings per share increased to a new high of CHF 6.18. On the basis of the again increased net profit in 2019 and an ongoing positive business perspective, the Board of Directors will propose at the company's Annual General Meeting, an increase in the dividend from CHF 2.10 to CHF 2.20 per share. Half of the dividend, that means CHF 1.10 will be paid out from the available capital contribution reserve, and is, therefore, not subject to withholding tax. It is the fourth increase of the dividend since 2014. We continue with the cash flow. Cash flow from operating activities increased to CHF 98.8 million, which corresponds to 15.5% of sales. The operating cash flow was pulled down due to increased net working capital. That was increased accounts receivable as the year-end finished 2019 was even stronger than a year ago, in a way, the downside of a strong finish to the year. We did not collect the cash from those late sales in the year. However, on the positive side, despite this, we were still able to achieve a better DSO or Day Sales Outstanding, which was down from 47 days to only 45 days. The operating cash flow includes CHF 34.1 million for amortization and depreciation, CHF 10.5 million thereof from IFRS 16, another CHF 4.7 million from the PPA and CHF 8.6 million from development costs we capitalized in the past. On the other hand, we invested a total of CHF 99.1 million. Included in this figure are CHF 12.4 million for newly capitalized development costs. Investing activities, obviously, also include the CHF 20.8 million cash consideration for the acquisition of a supplier that was closed at the end of May. It also includes CHF 4.2 million of an earnout payment in context of the SPEware acquisition from 2016. Clearly, a good sign that the acquisition developed as we had expected. It also includes an investment of CHF 50 million in time deposits. Moving on to the cash flow from financing activities. This includes the dividend payments we made in April 2019 in a total amount of CHF 24.8 million. Cash and cash equivalents were at CHF 266.3 million at the end of 2019. This compares to CHF 296.8 million at the end of 2018. Our net liquidity position, adding the cash and cash equivalents and also the CHF 50 million of short-term time deposits and then deducting all bank liabilities and loans, it reached CHF 312.4 million at the end of 2019 compared to CHF 289.6 million at the end of 2018. The next slide shows the key figures. As always, this is just for your reference, as I have already discussed most of the figures on this slide. This concludes my last financial results discussion here at Tecan, and I now hand over to Achim von Leoprechting again.

Thank you very much, Rudolf. In 2020, we will continue to focus our short- and midterm activities around the business strategy and priorities communicated before. For the selected application areas, genomics, protein analysis as well as cell and tissue analysis, we will continue to expand our offering in differentiated reagents, software and consumables products in combination with more dedicated automation workstations, like you've seen with DreamPrep NGS. In order to further expand our attractiveness as an employer, we have launched several talent and leadership development programs aiming to support our business growth, attracting and retaining the best-in-class employees. With a clear commitment to customer excellence and our promise "Always There For You, " we have installed a continuous measurement of customer satisfaction at key touch points. These measurements directly influence our continuous improvement activities. In order to leverage learnings globally, we have introduced comprehensive improvement projects for all relevant functions in sales, service, operations and R&D. Core processes, methods and tools are defined as The Tecan Way! in order to standardize where possible, driving efficiency and scalability. Last but not least, we are committed to grow our business in line with sustainability goals that we have defined and quantified in accordance with the United Nations SDGs. Sustainability is centered deep in Tecan's culture and strategic road map. As the next important variant of our DreamPrep family, we launched the DreamPrep NAP earlier this year at a major trade show. This new system elegantly complements DreamPrep NGS as DreamPrep NAP adds essential capabilities to extract nucleic acids prior to processing those samples, for example, on the DreamPrep NGS for library preparation. Extracting nucleic acids with high yield and purity is a key step in the workflow that starts with the sample collection and that ends at data analysis and interpretation. Based on Tecan's extensive experience with nucleic acid extraction, DreamPrep NAP offers unmatched simplicity, flexibility and consistency for next-generation sequencing and other important downstream genomic workflows. Through our collaboration with Zymo Research Incorporated, customers are now able to process samples for the fast-growing applications in microbiome research with a maximum convenience and highest yields. Most importantly, DreamPrep NAP offers best-in-class unbiased license for different specimen, addressing a gap in many competitive offerings. As all DreamPrep systems, DreamPrep NAP is customizable to evolve with changing customer needs. We continue to invest in the development of new reagents and consumables in the selected application areas mentioned before. Another new product that we have just launched in our Tecan Genomics business is the new automation-optimized Rapid EZ kit, which complements our offering of DNA sequencing reagents. To expand the offering from the DreamPrep NGS, we have also adapted additional kits for use on this platform. During 2019, we have already launched in our Partnering Business, new instruments together with our partners that will continue to ramp up during 2020. In addition to these launches, we continue to work on more than 5 projects in different stages of the development process. The sales potential of those projects under development range each from single-digit to double-digit million amounts of Swiss francs per year at full launch. The projects funnel, both in the Synergence instrument development as well as in the Cavro components part of the Partnering Business, continues to grow and represents the largest pipeline today. The majority of opportunities is in molecular diagnostics and other fast-growing applications. The funnel continues to include a good number of projects with Chinese companies. During 2020, we expect several new market launches. As always, we collaborate closely with our partners who determine time and region as well as communication of a potential launch. As the coronavirus or Sars-CoV-2 and the associated COVID-19 disease outbreak continues to be a prominent topic, I would like to spend some time illustrating how we are currently impacted by this outbreak. To this date, we are seeing both tail and headwinds related to this disease in our research and clinical diagnostic markets. In the research markets, we are seeing academic and clinical researchers using our automation and reagents, driven by projects aiming to better characterize the new virus variants. Illustrated on the left side of this slide is a recent publication describing the sequencing results of such research from the Wuhan, China outbreak using our reagents for NGS library preparation. On the flip side, we are also facing delays of installations and reduced reagents and consumables demand due to closed universities and not fully resumed business activities in China and now also in Europe. In our clinical markets, I'd like to point out that we are supporting local IVD companies in China and South Korea, supplying additional instruments for COVID-19 patient testing. Those companies are existing Partnering customers that have communicated a short-term additional demand of instruments for upscaling patient testing during the last weeks. Over the last weeks to date, we have received orders for about 100 additional instruments so far. However, also in this clinical segment, we see up until now an adverse effect of some customers in China that are slowing down demand of Cavro components due to their factories not being fully operational again. Now I'd like to give you the financial outlook for 2020. For sales, we again expect growth in the mid-single-digit to high single-digit percentage range in local currencies. Compared to 2019, we expect an even higher share coming from organic growth. Related to the coronavirus outbreak, we cannot predict the impact on the full year 2020 as the developments continue to be fluid with both head and tailwind potential for our business. As usual, potential additional acquisitions are not taken into account in this outlook. After already reported a very positive margin trend in the traditional core business in 2019, we are anticipating a further increase in the reported EBITDA margin in fiscal year 2020 to [Audio Gap] 19.6% of sales at the indicated average FX rates. This projected EBITDA margin continues to include acquisition-related costs but does not take any additional acquisitions during 2020 into account. Upcoming is our Annual Shareholder Meeting which currently is planned to take place on April 7 in Pfäffikon, Switzerland. Before we open up now for Q&A, I would like to take the opportunity to cordially thank Rudolf for his exceptional contribution to Tecan's success as CFO for over 18 years. On the same note, I would like to warmly welcome Tania Micki, who took over from Rudolf on March 1 as our CFO. With this, I would like to open up for Q&A. So thank you very much.

The first question is from Daniel Buchta from Vontobel.

Congrats on the results. Maybe 3 questions from my side. The first one, starting on the Partnering Business. I mean here, the numbers also in the second half compared to the significantly lower comparison base look a little bit soft. And on the margin side, you mentioned the temporarily lower product mix. Can you say a little bit where this is coming from, the softer growth and also the a bit weaker product mix? And what makes you so sure that this is only a temporary issue as you were mentioning it? Then on the guidance, I mean you're guiding for 19.6% EBITDA margin, which is quite precise. Can you provide a bridge a bit how to get there? I mean in my mind, you have lower CEO transition costs, the NuGEN dilution should be a little bit less pronounced, with the growth you are providing you should have a bit of a positive operating leverage as well, so that's why me and if I look at consensus, we would have expected a little bit more than 19.6%. Is the reason as -- which will be a headwind, is that the main reason why you were giving this guidance? Or maybe some understanding here in that regard would be helpful. And then last but not least, on the M&A market. I mean obviously, you are net cash, and it's probably getting more and more over the time. Do you see the current market environment with share prices coming down? And if that is a bit longer-lasting as an opportunity to make potentially a bit cheaper acquisitions, and transformational deals were always on your agenda, do you see the likelihood of such a deal becoming more likely?

Well, thank you very much, Daniel, and great questions as always. So let me kind of answer your questions in sequence. So your point on this Partnering Business, I mean I would just probably also like to kind of remind the fact that we are, of course, always looking at different growth trajectories for different products as we go through the years. And as Rudolf already indicated, we were pretty pleased with the development over the year, particularly with the contribution of new platforms, and the growth of our components business, which are typically pretty midterm ramp-up situations, but we are very happy with the environment overall. However, as we've also communicated, there was one particular client where we had to also -- were affected from the orders book in the H1 communication of 2019. Of course, that also had a, if you want, ripple-on effect on the revenue position of that account during the second half of 2019. And again, kind of masking some of the kind of other growth areas that we've seen. And then lastly, I think, of course, in the mix of clients where some perform better, some perform maybe a little bit weaker, but that is, I think, why we were very prominently also communicating about our intentions to spread out to more clients and were very active and successfully active to bring more clients into the mix, which is now exceeding total of 35 global clients. So in the overall performance of '19, I think there were no big surprises from our side. It went, with the exception of this one account that basically sell out of the mix, according to plans. And again, there are sometimes differences in the ramp-up speeds. However, there is, as part of the mix, of course, also businesses that are coming now closer to the end of their life cycles where you can assume we are having very active discussions around next generations, but some of these have -- due to the duration, they are in the mix already, of course, being optimized on margin and contributed positively to the mix of profitability in Partnering and as some of them start also then now to kind of impact with a bit of a kind of negative effect during the year, that makes also the contribution. But overall, when I look at the mix, this is why I feel pretty good about the outlook and without going into kind of divisional guidance or viewpoints, I think we are very well prepared to continue a solid growth path, both from the Synergence instrument business and the Cavro components business. And then secondly, on the margin, maybe Rudolf you want to start.

Yes, I -- on the EBITDA guidance questions. I would like to start there with reminding you that we had EBITDA guidance for 2019 of around 19%, and we're now going to 2020 with an EBITDA guidance of around 19.6%. Just to see that is quite a significant increase. Then the bridging element, I think you have mentioned all of them. Of course, we expect an improvement from the NuGEN side, from the acquisition-related costs. And then we won't have the CEO exit impact anymore. And on the operating side, we were very well on the way in 2019, and there are always some things that go better and go worse, so we do not just write everything forward. We make that all in. It might be that the next year is different. The NuGEN goes better and the rest is a little bit different. Again, it is all in. And I think usually we are, let's say, quite prudent on the EBITDA guidance, so we feel comfortable, but -- and we think it's quite a significant improvement.

And then maybe on the M&A side, as you absolutely pointed out, we are in a very good cash position to fuel our M&A plans, and we continue obviously to run a very systematic and diligent process on evaluating M&A targets, and we are in constant discussions with quite large set of M&A opportunities that we're looking at, both from private ownership and in processes. And as you say, I mean we basically don't see a dramatic change in that environment. We have a very clear discipline on what we are interested in. We continue to be very disciplined on our view on the strategic fit of the assets in the first instance. And secondly, of course, besides the financials, we are always looking at the operational and regulatory maturity of our targets, and we take that into account in our considerations. And the markets will always change upwards or downwards, we take that into account, but that does not significantly change our view on what we want. And if there would be an opportunity to move ahead now in that situation, we would certainly consider this, but it doesn't change our view or our outlook on what we do with the M&A pipeline.

The next question is from Maja Pataki from Kepler.

I would have 2 questions as well, please. Actually, I have 2 questions. I would like to come back to the EBITDA margin guidance. I understand that it's very difficult to give the individual building blocks. But could you just tell us what you're baking into the EBITDA margin guidance from an FX perspective? And what kind of underlying assumptions you're taking that? Is it on spot FX rates? That was my first question. My second question relates to COVID-19 and the impact on your business. I mean you have been flagging that you've seen some additional instruments being ordered in China and South Korea, but that you're seeing some slowdown in some of the business parts in Life Science, but also in Partnering. I understand that you cannot give us a number attached to it or also not give us an understanding of whether it's going to be neutral, net positive or net negative. But could you provide us a bit of a better understanding, what are the pockets? How much are the different kind of customer groups? And what are you seeing currently happening in Europe and the U.S.? I guess, the Partnering Business impact also depends partly on who are your customers.

Absolutely. Thank you very much, Maja. And again, probably I would refer to Rudolf for the details on EBITDA and your specific questions on the exchange rate kind of assumptions baked into this. So -- and then I will take the COVID-19 question.

Yes. So I take the FX question on our EBITDA guidance. As you read, we have figured in the CHF 0.98 for the US dollar and then the CHF 1.08 for the Euro. I think we can absorb a little bit more. I think it would really start hitting our guidance if the U.S. dollar would fall below the CHF 0.94. You might know that we have an exposure on the U.S. dollar side. However, we are along on the euro, and the euro has fallen significantly, too. That's as already shown. So that's also 2 things which net a little bit. But in a short version, we can absorb the U.S. dollar down to CHF 0.94 if it would fall below, then it would start hurting us. And I think, as in all the years, we do everything to offset as far as we can.

And then maybe on your COVID-19 question. And again, I don't have the crystal ball, and we probably wouldn't have gone out with the guidance as issued if there's -- at this date and today, material insight that would kind of deviate from what we're saying right now. However, let me maybe take you a little bit more into kind of what we have seen so far. And I would, however, like to refrain from speculating what we may see in the future because, I mean as everyone knows, I mean this situation changes daily, and we, of course, adapt our plans and our views also may be on a daily time frame. So on the -- maybe the tailwind that we've seen, you're absolutely right. I mean in the -- I mean first, in the context, in the clinical settings, we're seeing, particularly in the period up until now, some increased demand for patient testing-related systems. One particularly went to actually a few clients in China that through our Partnering divisions incorporate our systems in their total offering, combining them with local detection reagents to screen for the disease. And these systems, as I said, came in on short notice, but based on our, I would say, readiness and also from an operational and production standpoint, we were able to honor these additional requests and demands. And then we are in the process of shipping them and seeing our clients installing them. And the same is true for South Korea. And of course, this also goes in combination with some consumables that are associated to these systems. On the other side, we -- as I said, particularly in the academic side, we've seen universities shutting down in China due to the lockdown situations. I would like to remind you that our -- academics for us is an important but not major client segment. Our big focus areas for the businesses typically are in the pharmaceutical and the clinical markets and at ortho clinical research markets, both on the Life Sciences and the Partnering side. And as you know, I mean there's a lot of activities also that then again drives, to some extent, more demand in these research institutes. But today, it's -- again, it will be very, very premature and unprudent for me to kind of try to net that out and say what we've seen. But clearly, we see headwinds and tailwinds. But obviously, the other element that we are looking at is our readiness as a company to respond to the ongoing, I would say, governmental activities. And to this stage, we feel pretty well prepared for reactions. We are, of course, running a very, I would say, diligent risk management and operational plan that includes pandemic plans. I mean as everyone knows, what we're facing right now is unprecedented. So I'm not proclaiming that we have a kind of a magic ball how to react. But I think we are pretty well prepared in terms of logistic change and inventories and our operational groups are up and running. And I think for the time being in Europe and the U.S., we are adapting to the situations. We are accommodating home office wherever possible, and our production staff is on daily kind of communication routine with the operational leaders and we respond to the situation as it develops. But overall, again, let me just iterate that point, for us, we see both head and tailwinds. And I think the guidance that we issued today accommodates what we know up until this date, and we will, yes, communicate if there's any material deviation from what we are saying today.

The next question is from Scott Bardo from Berenberg.

Congratulations for the results. So first question just really relates to -- there's the coronavirus impact that you see. So just to help us better understand the moving parts here, please, can you give us some sense of how meaningful your academic exposure is within the Life Science Business? A proportion of sales would be helpful. And can you make some comments, at least, so we can get a sense of dynamic as to, are you seeing universities close in Europe and the U.S. at this point? Is there any different trend to what you saw in the first few weeks of February in China? Maybe just some perspective there would be helpful. Also on the -- related to this topic, you mentioned about 100 or so instruments to date in the context of coronavirus. Can you please put that in some degree of context for us? How many instruments would you normally ship at this point? How much of an uplift is this, please? Last point on coronavirus. I see that Hologic, with their Panther Fusion system, has received FDA approval today for its coronavirus test. And clearly, the U.S. government getting behind that for high-volume testing. I understand you manufacture the pipette tips for this system, so would you anticipate some strong consumable demand here? Perhaps you can put that in some perspective. I have a follow-up after those corona question sets.

Thank you very much, Scott, as always very, very diligent question. So let me work through them. And if any other comments from Rudolf, please chime in. So on the COVID-19 situation in your specific question, it was related to the academic exposure or what we're seeing right now. Yes, we're seeing outside of China, some institutions in Europe and the U.S. either slowing down or closing for at least 2 weeks and maybe some additional period that remains to be seen. However, the total, just to put that in perspective, around the Life Sciences segment is around 10% of what we do in that business. And I mean also the dynamic of what we're seeing right now is in 2 directions. One effect, of course, is that installations have slowed down or kind of pushed out a bit. And then maybe the kind of the one area where we're seeing a bit of a kind of slower order intake is the detection business, which is typically more fast-turnaround business, but also of course, offering more quicker opportunities to catch up at the later months of this year. So again, I think just to put that in perspective, so 10% is what we're talking about. But we don't see a kind of overall impact. And the 10% I mentioned is what the academic part is of LSB. On the other...

100 instruments.

100 instruments. So thank you. So it's an additional order. Again, I don't want to kind of -- now and I kind of break that up into what else we'd expect, but it was a very nice uptick. But of course, it was not probably the only communication we received. It is something we can turn around. And then to put it in perspective, this relates at average units around kind of CHF 50,000 to CHF 70,000 per unit. So it was a very kind of nice uptake. But of course, like you also indicated in your third question, there is some consumables that are also now being kind of asked for. I will definitely not kind of speculate on any kind of direct Partnering clients on the OEM side, on the Life Science side that we see our consumables, you mentioned one particular name. And of course, we are in constant discussions now. Always, of course, checking back what are the time lines and the amounts that we discussed about, checking back with our operational groups. As I said, we feel pretty well prepared for ramping up and scaling up. But again, that is as of today. And yes, consumables in that whole mix as patient testing goes up is something, of course, we probably would anticipate would also go up. But again, I don't want to kind of put that into kind of, this is net positive, net negative to the overall business. It's certainly a tailwind that is helpful, but it's -- at the moment, what we're seeing right now, not transforming our assumptions on how the remainder of the year will look like.

And maybe just a follow-up. Obviously, you delivered relatively strong EBITDA margins this year. Congratulations really on a strong track record in that regard over your career. I think, however, on an underlying basis, if one were to ex out the additional NuGEN costs and also the termination of CEO costs, your underlying margins are some 140 basis points higher than this 19.3%. And so the question really arises, are you actually guiding for an underlying contraction in margin for fiscal '20? If so what are the moving parts? And just to understand, please, Rudy, if the top line does not come through as expected this year, which of course is a scenario for all, what degree of cost flexibility do you think you have to protect margins?

Well, first, starting on this underlying margin. When you model it, please also consider that the growth of the NuGEN business, you have to figure in that the results are more sales, and this has an impact there. You really have to make connect with each one, with sales and the EBITDA, and then split out the underlying business. I've said in my first answer, we have not just modeled forward the very strong margin development we had in the traditional core business, we didn't do that. As said, there are always some things that go better and that go worse in a year, and you cannot just model forward to ones which are exceptionally well. It improves with the time, but I think last year, we were a little bit better than what we assumed. That's the basis of our guidance. I do not give numbers on that. We really -- we give one number, that is around 19.6%. But your hypothesis that we didn't just drive forward the underlying improvement, that is correct. On the -- your second question, what can we absorb? I think we have, like every year, plans in place. How do we react if the top line wouldn't be as planned? That's just normal business practice we have. I think we have proven in the past that we know how to do that, but we don't want to give a number there. I think you know our history, that should give you some comfort on that.

I wish you all the best in your new phase of life.

Thank you.

The next question is from Daniel Jelovcan from Mirabaud.

Two questions, please. Just on your supply chain, can you give us an update about your most important materials? How it looks like in terms of the supply chain? I believe to have in mind that you source a lot from Asia. And how it looks there, obviously, with any supply chain disruption? And the second question is the QIAGEN takeover of Thermo Fisher. Can you profit from that because of the typical integration issues they face? Can you maybe hire some good people from them? Or do you also see some threats, that they have a better combined product portfolio? Or are you not at all affected? That's the kind of question.

All right. Thank you very much, Daniel. On the supply chain, so I mean again, I wouldn't sit here with all the communication and the outlook that we've given if there would be material challenges right now. Of course, again, I would not be honest if I say there are no challenges. And you can ensure that our operations and logistics team is working around the clock to ensure either from our prime suppliers or from our second source suppliers to scale up and maybe put some more on inventory and the supply than we would normally do with the order books at hand. So it's just preparing ourselves and stocking up where we can. And then maybe it sounds a little bit cynical but, I mean your comment on we source a lot from China or Asia, I would put in perspective. I mean we have been on a journey actually to relocate suppliers and globalize suppliers out of Switzerland into some other lower cost regions over the last years, which have been successful. But it's also fair to say that our supply chain is very differentiated. And we have -- in the kind of the regional distribution, a very good network of supplier that we're leaning on. And then we bake that, of course, into our planning. And I mean we've seen, particularly from China, some slowdown of some parts, but we've been able to, again, accommodate the situation as of today. So it's, again, something more drastic or fundamentally happens, we have to consider this. But I think when we look at our daily task force plans, they feel pretty well prepared to cope with the situation at hand. And we, of course, daily watch the developments. But I think we had a pretty good view on supply, second source supplying and the -- both inbound and outbound freight masses that we would need to move in order to keep up normal business supply and even with some of the other elements coming in right now that we discussed earlier. On the, obviously, QIAGEN and Thermo situation, that is something that is not even close. I think the closing is projected for mid-2021. So I don't even know if I feel at any point kind of in a position or even motivation to comment on this. I think with both companies, we enjoy very good and pragmatic business relationships. We see business going on. And as we've communicated before, we have a very good collaboration with QIAGEN on their -- particularly on their QuantiFERON tuberculosis screening franchise, which I think I would suspect is one of the very attractive elements of QIAGEN that whatever the ownership structure will be in the mid-2021 going forward, we will remain a very potent and enabling partner to their franchise. But again, if you please respect that I don't want to comment any more on this situation because I think it is well communicated from both QIAGEN and Thermo side. And the, I would say, that process is ongoing, and it's not for me to comment on where they stand and how this is going to play out.

The next question is from Sebastian Vogel from UBS.

I've got 2 questions. The first one would be more on a group level. With regard to your R&D run rate, it seems like you have now reached a run rate of more like CHF 30 million over the last 3 semesters. Is that a sort of an average run rate for half year that can be considered also to be sustainable going forward? The second question is more on the Life Science side of things. You mentioned in your press release, the instruments business was, in particular, the growth driver in 2019. If I recall correctly in the past, your consumables, reagents business and service business was growing way stronger than your instrument business. Was then the second half of 2019 or 2019 overall a period where actually the instruments business was really growing stronger than your service and consumables/reagents business? That would be my 2 questions.

All right. Thank you very much. And maybe I start off with the R&D question, and then if there's any additional detail, please Rudolf, chime in. So I mean on the R&D spend, you have to, again, take into consideration that what we're talking about is basically gross and net R&D that is driven by 2 factors. One is our own development projects that are now also of course, inclusive of the NuGEN acquisition in California as well as the Partnering division where for most of the development work, we get paid as engineering income. So I think when I look at the overall, I would say, development of R&D, and as I said, there is, of course, significant uptick in R&D spend driven by the NuGEN acquisition, but also in other areas. And I mentioned that before. We feel pretty good about our ability to develop innovative, leading products, and we continue to do so as I outlined in all areas of software, reagents, consumables and instrument variants like the, for example, DreamPrep NAP that we've just launched and we continue to do this. But the -- probably one of the bigger flexing items, and again, without going into guidance or different elements between the top and bottom line is, of course, the contribution and the impact of the Partnering engineering income that can vary from 1 year or 0.5 years to 1.5 years of the other reporting season. So I think I feel pretty good about where we are with our spend on innovation and also just kind of reiterating what I think we communicated, I think, a year ago where I think we have a very good track record of commercializing innovation. And we've grown over the last years substantially, I think, starting in 2013 with more than 2/3 of our growth coming from the organic side. So I think, of course, with the differentiation of the business and our focus on genomics, proteomics and cell and tissue analysis, we see ample opportunities. But of course, we stay prudent, and we have a very diligent R&D management process and selection process of where to invest. And that's what we continue to do. So maybe there are some more elements, Rudolf?

No, I would just like to reiterate there that we do not give a guidance on a certain percentage on R&D. I think we're moving steadily. We also -- we do not want to, let's say, suddenly increase the head count very much and then reduce it. That's not -- that's not what we do. What we spend on R&D also depends on the opportunities we have. As we said last year, we had quite a lot from NuGEN. That was more than half of the increase because we had some innovative idea, and we had the rest was in the PP division, where we also had good things. So we really look at what is coming from our business side to decide what we spend in which function.

Thank you, Rudolf. And maybe then on your question, Sebastian, on the Life Sciences trajectory that we've seen in the second half. It's true that we have seen relatively higher demand for instruments in the second half. But also again, keep in mind that, of course, all these instruments, as we continue to focus on elements of the -- particularly of the genomic market and others, they have a pretty high pull-through rate of consumables. We see that as an amplification opportunities to further increase our recurring revenues going forward. So I think, again, for us, absolutely positive development in the Life Science segment. And I think with some down-the-line opportunities to then use this installed base and increasing installed base for future service reagents and consumables revenues.

Sorry, one follow-up, but that does mean that instruments are growing stronger year-over-year compared to reagents and consumables?

I mean in the second half, relatively stronger, yes. We saw an uptick. And of course, there's also -- this is depending on the mix. I mean as we grow, for example, our detection business, which naturally comes with less opportunities to sell consumables, that proportionally skews the equation more to the instrument side. But again, something we feel pretty good about and not concerned about.

The last question is a follow-up question from Maja Pataki from Kepler.

Just a quick question. The additional orders that has come -- that is seen coming in, do you see it as really additional? So on top of the normal contract orders? Or do you believe that this is basically a pull forward of orders?

That is a very good -- I mean it's a combination. Of course, some orders obviously would come in as expected. And for us, it's very difficult to say if a kind of particularly consumable order comes in, how much of this is now incremental or not. So I mean we'll see how that plays out, but we are certainly seeing some -- I mean both, all of the concrete orders, but also questions on product availability coming in right now. And I would probably see how that plays out, but difficult for us to say because these orders are not flagged as additions. The only thing that is, I think what we also are trying to communicate is that the number of hundred instruments up until this date that were truly exceptional, and they came out of the ordinary, in China and Korea. And that is something, I guess, the only thing that I would feel comfortable flagging as a real extra to what we normally would say. But again, just to make that point, we also see some headwinds and particularly now on the Partnering components side where some of the clients, particularly in China, are not taking the normal demand of call-offs from some of the modules and components just due to the fact that they are just beginning to ramp up their productivities again and some of them are sitting on inventory. So like I said, at the moment, it's a pretty mixed bag of situations. And overall, I think both with head and tailwind potential. All right. So with this, maybe we conclude the call at this point. So I thank you all very much for your attention and your questions, and I look forward speaking to you or meeting you in the very near future. So thank you very much, and have a good day.

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