Tecan Group AG (TECN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call and live webcast. I am Paul, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Martin Braendle, Senior Vice President, Corporate Communications and Investor Relations. Please go ahead.

Thank you, Paul. Good morning, ladies and gentlemen, and thank you for joining us for our conference call this morning. We are really pleased to discuss with you this financial results for the first half year of 2021. With me on the call are our Chief Executive Officer, Dr. Achim von Leoprechting; and our Chief Financial Officer, Tania Micki. 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 Summer Time. Both the press release as well as the full 2021 interim report are available on the company website, tecan.com, under the Investor Relations tab. The call is being webcast over the Internet on our homepage, and we have also posted the presentation slides for this call for download. With that short introduction, let me now turn the call over to Achim von Leoprechting.

Thank you very much, Martin, and good morning, and welcome to the Tecan 2021 half year results presentation from my side. Before Tania will discuss the financial results of H1 2021 in more detail, I will give you an overview of the financial and operational highlights. When we presented our financial results for the full year 2020 in March, vaccinations were well underway in many countries, but others are still waiting for supply of vaccines and new virus variants were starting to spread mostly among non-vaccinated people. We were expecting that our business would continue to support the global research and clinical community with COVID-19 test solutions, but we also expected that this part of our business would start to normalize, with infection cases starting to decline as a result of vaccination. It is probably fair to say that testing volumes overall stayed at a higher level than most people including as expected. To point out a specific figure as an example, in the U.S., PCR volumes in the first 6 months this year were reported to have already reached 105% of the entire volume seen in the full year 2020. On the other hand, we expected the COVID headwind continuing to ease off as a result of a rebound of life sciences research, pharma research and non-COVID diagnostic procedures following the lift of lockdowns. All effects were expected to offer continuous growth opportunities for Tecan given the diversification of our business and the breadth of our global market reach. Therefore, I'm pleased to tell you today that Tecan closed this first half year of 2021 with outstanding growth in sales and profits. As before, we are extremely proud of the Tecan employees who continue to support our customers in the global response to manage COVID-19 as well as in our customers' efforts to bring the non-COVID business fields back to track. Looking at some of the financial highlights first. We recorded orders growth of 20.9% in local currencies when non-COVID-19 orders exceeded pandemic-related orders for the first time since maybe the first quarter of last year. From a revenue perspective, we ended the half year with 47.5% growth in local currencies and 46.5% growth in Swiss francs. This performance is in relation to an already strong performance in the comparable period of H1 in 2020. Sales growth continues to be driven by significant COVID-19-related product demand as well as a starting recovery and a more positive market environment in other business areas. Both of our business segments saw similar growth rates. We are also pleased that the reported EBITDA margin increased to 25.3%, with the reported EBITDA increasing by 91.1%. Our reported net profit more than doubled to CHF 82.6 million with a reported net profit margin of 18.2% of sales. Our operating cash flow generated CHF 111 million, which corresponds to 24.5% of sales. Now let me comment on some of the operational and product highlights of the first half year 2021. In continuation of our innovation strategy, we commercially launched new variants of our very successful Fluent Automation Workstation addressing specific needs in important research and diagnostic applications. One of these new capabilities, odd mix and peers, for example, which helps clinical labs to eliminate a common bottleneck in dealing with whole blood samples. Our new feeder reader, as another example, offers a unique detection solution for critical genomic applications, eliminating the loss of precious samples in sample preparation. We also launched new genomic reagent kits including a new solution for the sequencing of degraded and mixed RNA samples as found, for example, in nasal swabs for Sars-CoV-2 infected people. From our digitalization development efforts, we launched several software features including the FluentControl scheduler for the Fluent Automation Workstation, which offers a number of features designed to simplify day-to-day laboratory automation. Building on the strong experience serving regulated markets, we are proud to having received among the first companies the certification for a family of our reagent products according to the new In Vitro Diagnostics Regulation, or IVDR, of the European Union. This is a clear testament to Tecan's continued commitment and leadership as a supplier of safe and compliant solution. Our employees are at the core of Tecan's success and future growth, as I mentioned before. In order to create a basis of measurable employee engagement and trust feedback, Tecan participated in the Great Place to Work survey. We received the certification for 2021. Moreover, we are ranking among Switzerland's Best Large Workplaces. This clearly is a recognition of our activities aiming to improve employee engagement, development and trust as well as encouragement to continue our efforts in this important area. As discussed in June, we expanded our commercial reach, our capabilities and presence in the U.S. and Asia with the acquisition of Paramit Corporation headquartered in California. This acquisition was completed on August 2, and we are now looking forward to begin with the integration process. I'll come back to discuss more highlights of the Paramit acquisition later in this presentation. So with this, I hand over to Tania, our CFO, for a more detailed discussion of the 2021 H1 financial results.

Thank you, Achim, and good morning, ladies and gentlemen, from my side as well. I'm delighted to present to you our financial results for the first half of 2021 in more detail. And I hope you will agree with me, a very strong set of financials. Starting with order entry and sales. Order entry continued on a high level also in H1. It increased by 20.9% in local currencies or 20.2% in Swiss francs to CHF 449.6 million in the first 6 months of the year. We continue to see strong order entry for consumables to support the global fight against the coronavirus pandemic and, as expected, to a lesser extent, for new instruments used for COVID-19 testing. In contrast to the 2 previous 6 months reporting period, orders for products for other research and clinical applications were at a significantly higher level and exceeded pandemic-related orders. Sales climbed by 47.5% in local currencies or 46.5% in Swiss francs to CHF 454 million in the first half of the year. This substantial increase is based on the high order backlog at year-end 2020 that I had pointed out to you in March, but also based on the strong order entry I have just discussed for pandemic-related sales for instruments, components and consumables. As with order entry, sales in H1 also benefited significantly from a recovery and a more positive market environment in areas that were negatively impacted by the pandemic, such as life science research, pharma and non-COVID-19 diagnostic testing. Looking at where the sales growth came from, it was really both areas, COVID and non-COVID. And I would estimate the split to be pretty much 50-50 of the sales growth. Also, again, very positive, both business segments contributed almost equally to the overall sales growth in the first 6 months of the year, which brings me to the next slide. Looking at the sales performance of our 2 business segments. Sales in the Life Science Business segment grew by 47.8% to CHF 250.4 million. In local currencies, they were 49.5% above the prior year period. We continue to see a strong revenue contribution from products supporting the COVID-19 response. As mentioned before, this was based on the high order backlog at year-end 2020, but also based on new orders. These products were mainly liquid handling and automation workstations and associated disposable pipette tips. Sales in the Life Sciences Business in H1 also benefited significantly from a recovery in areas that were negatively impacted by the pandemic, including liquid handling and automation workstations through various life science research applications, detection instruments and research reagents for next-generation sequencing. Order entry in the Life Sciences Business grew with a strong double-digit rate in the first half of the year. The increase in order entry was mainly driven by strong momentum in automation systems for a wide variety of applications and detection instruments. For instruments, clearly more orders, came from non-COVID areas. However, we continue to see substantial demand for consumables used for COVID-19 testing. The Partnering Business segment generated sales of CHF 203.7 million in the first half year, which corresponds to an increase of 44.8% in Swiss francs and 45.1% in local currencies. We observed similar patterns to the Life Sciences Business. In the Partnering Business, automation platforms, OEM components and disposable pipette tips supporting COVID-19 testing contributed strongly to sales as orders were converted on the high backlog into sales. Sales for our customers in other areas of in vitro diagnostics, which were negatively affected during the pandemic, also showed positive momentum again. With the shift in order entry from COVID-driven applications to noninfectious disease customers, order entry in the Partnering Business also grew at a strong double-digit rate. Now looking at sales development in the different regions on Slide 9. In the different regions, we still saw strong demand for COVID-related products. However, the percentage development versus the prior year period was obviously impacted by the COVID contribution we had already seen last year. For example, we saw a tailwind from those product lines already early in the year 2020 in China and Australia, which are grouped into Asia here, whereas orders but not yet sales started to grow substantially in the U.S. only in the second quarter. As mentioned before, on top, we also saw a significant recovery in various other application areas in H1 this year. In Europe, sales in the first 6 months of 2021 increased by 36.1% in local currencies and by 38.3% in Swiss francs. Both business segments grew with a double-digit rate, the Partnering Business with 13.4% in local currencies and the Life Sciences Business with 59%. In North America, sales rose by 69.4% in local currencies and by 62% in Swiss francs. The Life Sciences Business increased sales in the first 6 months of 2021 by 61.1% in local currencies, and the Partnering Business sales rose by 80.8% despite the high comparative basis from the prior year period. In Asia, sales increased by 30.9% in local currencies and 33.7% in Swiss francs. Both segments contributed to the sales growth in the region with double-digit rates in Swiss francs. In local currencies, the Life Sciences Business recorded growth of 8.6% and the Partnering Business grew by 59.7%. On China specifically, in H1 of this year, the Chinese market environment returned pretty much to normal levels. And keep in mind that I have just explained our business in China has already benefited significantly from pandemic-related sales growth in the prior year period. We continued to record solid sales growth in the first half of 2021 in China, although this was lower than in the Asia region as of all due to that high comparison base. Our next slide addresses our gross profit. Gross profit increased to CHF 224.5 million, which was CHF 78.4 million or 53.7% above the prior year figure. The reported gross profit margin increased to 49.4%, 230 basis points higher compared to the prior year. As always, we had several factors impacting the gross profit margin. I want to highlight the main factors that led to the higher gross margin. The largest contribution to the gross margin improvement again came from product mix and the overhead cost absorption. As we mentioned in the press release, the results development was also helped by a onetime positive effect from an adjustment of the Swiss pension plan. In total, the effect was a CHF 7 million tailwind. About half of the positive effect was allocated to the cost of good sold, i.e., part of the gross profit margin improvement. The rest had to be booked in OpEx. I will refer to this effect on other slides as well, so keep in mind that we are a alternative pension schemes that could require a reversal of this gain in the second half of the year. As the third positive factor, we were again able to increase prices. The first negative effect came from higher freight logistics, inventory-related and material costs. You heard me already talk about higher rates from forwarders last year as well as in March of this year. And lastly, FX rates were affecting our margins negatively. I will come back to that point when discussing the development of our operating margin. On the next slide, some comments regarding our cost structure. Overall, our operating expenses grew only at about half the rate compared to sales. Operating expenses totaled CHF 128.2 million or 28.2% of sales, down by 520 basis points compared to H1 last year. Most of this improvement was driven by economies of scale due to the substantially higher volumes. Also, keep in mind what I mentioned on the previous slide regarding the pension plan benefit. The remaining half of the CHF 7 million benefit had to be booked here, pretty much distributed overall cost center and functions. Looking at the different functions in more detail. Sales and marketing increased less than sales to CHF 52.7 million despite continued investments in the market unit, with a focus on further expanding our sales force and growing our e-commerce channel. We also continue to invest in research and development to position the business for sustained accelerated growth. In total, CHF 31.1 million or an additional CHF 5.8 million compared to H1 2020. The ratio shows a relative decrease compared to sales, keeping in mind that our top line grew by 46.5%. As I have already mentioned in March, R&D programs just can't be scaled and started at the same pace. As always, we also had projects that have reached the final stages before launch, where the cost was capitalized. This was below the prior year figure and pretty much at a similar level with amortization from past R&D capitalization. General and administration expenses increased to CHF 44.4 million, in line with sales. This development is mainly due to more costs on the corporate level related to corporate development activities. And you can get that's mostly related to the Paramit acquisition, but also to other targets we looked at. These were legal costs, due diligence costs, but also, for example, the hedging costs for the deal. Looking at the EBIT and EBITDA development in more detail. In the first half of the year, our reported EBITDA, the earnings before interest, taxes, depreciation and amortization rose to CHF 115 million. This is an increase of 91.1% and thereby at a significantly higher rate compared with sales. This increase was mainly driven by benefits of scale due to the significantly increased volumes and favorable product mix of instruments as well as a higher contribution from consumables and spare parts. I mentioned this when discussing the gross profit. The results development was also helped by the onetime positive effect from an adjustment of the Swiss pension plan. I mentioned this before as well. Also, the fact that we are assessing alternative pension schemes that could require a reversal of this gain in the second half of the year. We also had a gain of CHF 1 million from the sale of a building that was recognized in other operating profit. On the other hand, we provided for CHF 6 million as part of the acquisition-related costs. Another negative effect came from the exchange rate movements in major currencies versus the Swiss franc. They had a negative impact on the reported EBITDA. The reported EBITDA margin grew correspondingly by 590 basis points to 25.3% of sales or to 25.9% of sales in constant currency. With an increase of 129.4%, the profit before interest and taxes, EBIT, grew even faster than EBITDA and came in at CHF 97.8 million and is more than what they can record in an entire financial year prior to 2020. The EBIT margin increased to 21.5% of sales, up by 780 basis points compared to the prior year. Now looking at the operating profitability on the segment level. Reported EBIT in the Life Sciences Business rose by 180.9% to CHF 63.1 million. The operating profit margin increased to 22.8% of sales. This positive performance is primarily a result of sales growth as well as a strong margin contribution from the consumables business. On the negative side, I have already mentioned the higher freight, logistics, inventory-related and material costs. Reported EBIT in the Partnering Business increased by 86.9% and to CHF 49.2 million, while the operating profit margin grew to 24% of sales. H1 2020 was 18.6%. Main drivers for the increase in profitability were also benefits of scale and a favorable product mix. Moving on, reported net profit for H1 '21 more than doubled to CHF 82.6 million. Reported net profit increased, in line with operating profit, EBIT. The reported net profit margin amounted to 18.2% of sales. And only a brief discussion on the next slide. Earnings per share rose to CHF 6.88. I guess this number speaks for itself. Finally, on the cash flow on Slide 16. Cash flow from operating activities increased by 34.5% to CHF 111.4 million in the first half year. This corresponds to 24.5% of sales. Our DSO, the Days Sales Outstanding, went up from 39 days to 49 days. Keep in mind here that last year's figure was very low. It is directly related to sales in the month of June. Sales in June 2020 were at an extraordinary level. This was when COVID-related sales really took off in the U.S. and Europe. Because of the lower June sales in 2021, this brings up the DSO number as receivables are put in relation to the sales of the 2 previous months. The operating cash flow includes CHF 17.2 million for amortization and depreciation, CHF 5.4 million there are from IFRS 16, another CHF 2.3 million for the amortization of the purchase price allocation from past acquisitions and CHF 3.8 million from development costs we capitalized in the past. On the other hand, we invested a total of CHF 13.6 million. When you compare this figure to the one from last year, keep in mind that this figure included an investment of CHF 120 million in time deposits. The H1 '21 figure includes CHF 5 million for newly capitalized development costs, which compares to CHF 9.3 million in the prior year period. Our investment in PPE, property, plant and equipment, was at CHF 5.5 million. Let me point out though that this was net of the building sale I mentioned before. On a gross level, it was CHF 9.7 million. Moving on to the cash flow from financing activities. This includes the dividend payments we made in April this year in total amount of CHF 27.6 million. Cash and cash equivalents were at CHF 215.1 million at the end of the period. Our net liquidity position, adding the cash and cash equivalents and also the short term time deposits and then deducting all bank liabilities and loans, reached CHF 534.4 million as of June 30, 2021. This compares with CHF 354 million on June 30, 2020, and CHF 467.7 million at the end of 2020. The next slide, Slide 17, shows the key figures. As always, this is just for your reference as I have already discussed most of the figures on this slide. With this, I now hand back over to Achim von Leoprechting again. Achim?

Thank you very much, Tania. Before turning to the outlook, I would like to recap briefly the key points of the acquisition of Paramit. Headquarters in California U.S., Paramit is a leading OEM developer and manufacturer of medical devices as well as life sciences, modules and instruments. The addition of Paramit's capabilities and customer portfolio will further extend Tecan's reach into the life sciences and in vitro diagnostic markets, but also as with medical mechatronics, an entirely new business and growth vertical to Tecan. The acquisition adds highly complementary expertise and presence in the important life sciences and health care markets, United States and Asia Pacific, with differentiated development, industrialization and manufacturing capabilities. Paramit Corporation has operating locations both in the U.S. and Malaysia and offer significant engineering and differentiated manufacturing capabilities to its global clients. The total consideration for the acquisition of Paramit is USD 1 billion or CHF 920 million. The acquisition of Paramit is a significant step-up in Tecan's strategic growth plans for the existing life sciences and in vitro diagnostic markets. Furthermore, Paramit, as said, expands Tecan's addressable market into the medical devices market segment where we also see significant growth opportunities. With points 1, 2 and 3 of our strategic growth vectors, we continue to strengthen our Life Sciences Business and Partnering Business organically and inorganically by adding competencies in lab automation, one; expanding our portfolio in life sciences instruments, two; as well as adding reagents and consumables to complete the solutions offering with a particular focus on genomics, proteomics and cell analysis workflows. Since 2013, we have completed our organic investments in these areas with 6 bolt-on acquisitions. Paramit now adds capabilities, which will allow us to further strengthen our customer offering for the life sciences and in vitro diagnostic markets through both of our divisions as they exist today. The life science research market with a variety of different instruments was pretty much not addressable to our Partnering Business as these are mostly bench-top instruments. With Paramit, it now is. And as you can see on the chart, instruments make up for the majority of this market segment. In addition, Paramit now offers access and scale in the subsegment of the 100 billion medical devices market called medical mechatronics with a significant total addressable market opportunity of around USD 14 billion. Combining Paramit's differentiated engineering and manufacturing capabilities for highly regulated markets, with Tecan's competencies in systems engineering and software development, which are also geared towards innovative yet regulated markets, we believe that we can offer an even more compelling offering to customers in those growth markets globally. Completing the development and manufacturing sites of -- complementing the development and manufacturing site of Tecan, Paramit operates 2 sites in the U.S., one in Morgan Hill, California and one in Boston, Massachusetts, focused on OEM product development, industrialization and manufacturing with more than 450 employees in the U.S. Paramit also operates a state-of-the-art manufacturing site in Penang, Malaysia with more than 170,000 square feet and 570 employees. On manufacturing sites are ISO 9001 and ISO 13485 certified, and therefore allow Paramit to successfully supply the highly regulated IVD and med tech markets also leveraging Paramit's proprietary and highly differentiated quality manufacturing system called vPoke. The acquisition of Paramit strengthens the financial profile of Tecan in several ways. Paramit will be immediately and significantly accretive to earnings per share, EPS. In full year 2021, Paramit is expected to generate around USD 280 million in sales, which is around CHF 257 million. And regarding operating profit, we expect around USD 50 million or CHF 46 million. That is before acquisition-related costs in full year 2021. This acquisition will provide the Tecan Group with critical mass and scale, further enhancing its already strong operating cash flows. The strength in financial profile will allow us to drive future growth, both organic and through additional acquisitions. As part of the integration efforts, we expect to drive substantial commercial and post synergies, which are being achieved through a range of opportunities, for example, supply chain, internalization of supplies and others. Paramit is included in the consolidated financial statements as a part of the Partnering Business segment from August 1, 2021. Now turning to the financial outlook for the full year 2021. With a very strong performance recorded in the first 6 months and the expectation of a continued strong business momentum in 2021, we raised our organic forecast for sales growth of the full year '21 to be in the low to mid-teens percentage range in local currencies. We expect the effects of COVID-related products continue to normalize in the second half compared with a very high base of the prior year period. However, the developments of demand for products related to COVID-19 still remains subject to uncertainty for the remainder of the year. On the other hand, we expect a continuation of recovery and a more positive market environment in areas that have been negatively affected by the pandemic such as life science research, pharma and non-COVID-19 diagnostic testing. These projections are based on the assumption that supply chains remain undisrupted and all production sites stay fully operational. From a profitability perspective, we now expect the reported EBITDA margin for the full year 2021 of at least 23% of sales. The expectations regarding profitability are based on an average exchange rate forecast for full year 2021 that you see at the bottom of the slide. They also do not include acquisition-related costs. The addition of Paramit is expected to add around CHF 100 million in revenue and CHF 18 million EBITDA before acquisition-related costs. And as always, the outlook does not take account of potential acquisitions during the remainder of the year. And with this, I think we can open up the line for Q&A.

[Operator Instructions] The first question comes from the line of Sibylle Bischofberger from Vontobel.

I have 2 questions about the outlook 2021. First, you expect sales growth organic of low to mid-teens. In the first half, you had a 49% sales growth. This excludes the CHF 100 million permit and the FX effect. So here, my question is, do we expect a negative sales growth in the second half? Then my other -- or second question is about the EBITDA margin of -- in minimum 23%. In the first half, you had one of 25.3%. Just to understand that additionally CHF 18 million EBITDA of Paramit is not included and also not included is the CHF 20 million transactional costs.

Sibylle, thank you very much for your questions. And maybe I actually start with the second one. And yes, your assumption is right that anything from the Paramit acquisition that we will include in our financials starting August 1 is not included in the forecast. And to your first question, clearly, I mean, we believe we will face a very tough comparison in the second half. So I mean, yes, I think you're directionally correct that our guidance, I mean, if you do the math, includes a scenario where we would assume the revenue decline relative in the second half. But keep in mind, second half last year was exceptionally high. So I think as you heard me talk about in the presentation, we're very pleased to see now that rebound of the non-COVID business accelerating in many geographies. I mean, of course, reading the news, as you do, there's still a lot of dynamic in the COVID-related markets as well, both potentially affecting future lockdowns, God forbid, but also the testing of COVID. I think we were expecting to normalize, as you know, more rapidly already in the first half, and that did not materialize so much as vaccinations were slower and the variance of spreading. So we -- again, look at it very carefully, but we believe the guidance is prudent. But as you said, within that range of low to mid-teens, you could assume a comparable decline or negative percentage range. But I think when I look at the overall performance of the business, we are very pleased with both trajectories. COVID-related orders still coming in and the onset of a very robust recovery of the non-COVID markets in, I would say, most geographies.

And just to make sure that I understood it right. The EBIT in the first half, it was included minus CHF 6 million transactional costs, plus CHF 9 million gain of a building and plus CHF 7 million of the pension costs, is this right?

Tania, do you want to take this?

Sure. Yes, Sibylle, this is correct. The CHF 7 million reversal on the pension, the CHF 1 million gain on the sale of the building and the CHF 6 million acquisition-related costs were included in this.

The next question comes from the line of Scott Bardo from Berenberg.

Congratulations on strong set of figures today. So Achim, I think your commentary over the last 6 to 12 months has highlighted confidence in the ongoing dynamism of your business. And I know that there's a lot of focus already onto the baseline for 2022, your guidance then for this year including some sort of normalization in the second half. But I think you've spoken quite positively about the company's growth prospects into 2022. I wonder, do you still have similar optimism today given that you've elevated the baseline now for the group performance this year? Do you still believe that the group can perform and have a positive growth organically next year? Some commentary around that would be helpful. And the second question on Paramit. Again, congratulations on the close. I wonder if you could share some high-level thoughts on the acquisition now that you've consolidated, Achim. I know it's early days. But if you could help us understand some of the assets that you're undertaking for the integration and business development, any ideas that you may have in terms of improving efficiencies for the broad organization, it will be interesting just to hear the first thoughts here, please.

Thank you very much. Yes, of course, your question on 2022, you probably still see me very positive about Tecan's ability to weather any kind of market scenarios, as we've done, I think, in the past 18 months, very successfully to see how we can both continue to grow our contribution to pandemic containment, but also continue to invest in our partnerships, but also in new products that we very actively target to mitigate any normalization curve that will come our way. And I mean this is just a continuation of what you just heard me say in response to Sibylle's question on H2. But clearly, I mean, looking at the percentage growth figures, and I also pointed out I think just earlier that even when I look at the H1 2021 -- 2020 comparison, which was already quite high half, I mean the comps are getting tougher and tougher. And I mean we are, of course, looking at this very carefully. We are investing in all the areas where we can in sales and marketing, in R&D programs. And I think I said earlier in other calls that we are very happy to see that the R&D pipeline is more or less undisturbed. And then, of course, we're accelerating wherever we can to bring new products to market as we've just done in the Life Science segment, but we're also focusing with our OEM partners in the Partnering division to bring them to market as soon as, I mean, we can support them. So all of that said, I think we -- I think have as good as possible basis for 2022 with all these elements. But of course, as I said, I'm looking at growth percentage numbers that will be tough to be, but that makes us probably even more engaged right now in driving additional expansion in our direct commercial efforts and the new partnerships that I just mentioned. So you'll still hear me very positive, but yes, I think we need to stay resilient and very clearly focusing on our strength, which is that kind of mix diversification and addressing also opportunities in geographies, for example, that, pre-COVID, we have not been able to reach and touch. And I think that it was also something I commented on earlier that COVID brought to us both clients in the Life Science division and sometimes even entire, I would say, country infrastructures, and then also on the Partnering side, new partners that, of course, we are now kind of driving for future and sustainable growth beyond the contribution to COVID. So I think 2022 will be another very, very exciting and dynamic here for Tecan. And on the Paramit acquisition, clearly, I mean, very happy that we closed the acquisition for both sides. We are now opening up the integration teams, which are staffed both from the Paramit leadership team and the Tecan leadership team. So we just had our first session. Teams are exchanging information and content, driving the first integration initiative, which clearly, for us, are geared in 2 directions. One is the, I would say, the goals that we have to improve operational efficiencies. We, of course, look at Paramit as an option to source for components and modules. And actually, we've started to do even prior to the acquisition and build that out with a very strong focus on manufacturing and even more capabilities, I would say, offering us to vertically integrate supplies and then leveraging the, I think, supply chain as probably the first. Now then the other element that, of course, is very attractive to us is using now these new capabilities in our commercial efforts and really supporting Paramit from our teams in the Partnering division to get access to new clients and broaden the reach for Paramit, maybe even stronger now with our teams in Europe and Asia. And of course, we still see in the U.S. quite some good runway for Paramit. But also the other way around, we've actually already been approached by a number of Paramit customers trying to assess if the Tecan automation and particularly also the support and service capabilities could be a means to engage further with new clients that actually we've mostly not spoken before. So I think there's a whole set of things happening, but the 2 areas, of course, are kind of operational efficiency gains that we're aiming to drive with the Paramit acquisition in the direction using their capabilities, and secondly, on the commercial side.

Very good. And perhaps just one -- sorry, Achim, go ahead.

It's all right. I just want to say, I mean, for us, of course, very -- I mean, in addition to the kind of more operational, I mean things that we're driving, very pleased to see the reaction of the Paramit teams and the very positive reception we've conducted all hands meetings and interactions with teams, both on the Paramit side and the Tecan side. And on both sides, the reaction was extremely positive and well received and the teams seem to be very engaged and motivated, which is probably a good starting point to really drive a successful integration and future growth of both parts of the company.

Understood. And perhaps just one quick follow-up then, please. I think on the announcement of the acquisition, you highlighted that the deal would be partly funded with some equity issuance. I guess looking at your solid net liquidity position prior to the acquisition, one could argue that this would give the organization quite a lot of additional flexibility to do further M&A. So I wonder if you could talk a little bit about whether that remains part of the strategy and whether there are active targets that you're seeking and have capacity for.

Yes. I mean you absolutely kind of hit the right button there. And our strategy how to finance the transaction has not changed. And the main exception for the reason that you're pointing out, I mean we've talked a lot about our willingness and ability to grow not just organically, but also inorganically. Paramit, of course, is probably the most significant next step in that venture and strategy. But as I also alluded to in the description of Paramit, we still remain very focused on these bullets 1, 2 and 3 in our strategic market considerations, and we continue to look and cultivate targets both on the -- I would say, in our core Life Science and core Partnering Business division. So that gives us that flexibility. But as always, I mean, these things happen when they happen, and we take a very prudent look. And as we've done now with Paramit, what fits strategically and operationally to our future growth profile, and we will, yes, go through these measures and assessments as we've done in the past years. But clearly, I mean, now with the financial profile and the way we structured the purchase price, how we intend to afford it gives us the flexibility that we want to have for future periods. But again, I mean, we are now very, very happy with this acquisition. We are in the full swing of the integration. And I also want to make sure that things happen in the right cadence, and we take now the gained experience of our own integration teams in the Paramit acquisition and then look at future opportunities as both we are ready and, of course, these targets get ready to be discussed in more detail.

Before we take the next question from the phone, there is a question from the chat that fits in well. It's regarding the customer concentration at Paramit. Achim?

Yes. So I mean, Paramit has been growing, obviously, for 3 decades, their customer base. And as we also see in our Partnering division, there are larger customers in there and they are head of a range of up and coming and growth companies in there. So I would say where we look at it, Paramit has a similarly diversified customer base. They serve some market leaders in different segments, which are blue chip names. And this is -- I mean also now reality, not unusual that some customers make up more higher percentage. That's more a testament to success and strategic engagement with a selected group of clients and the innovation profile than anything else. But when I look at Paramit, their 3 largest customers make not more than 50%.

And another question from the chat was already answered regarding the 2020 kind of outlook, and we can commence with more questions from the telephone.

The next question comes from the line of Sebastian Vogel from UBS.

Hello. Can you hear me?

Yes.

Perfect. And the first one would be on your orders and sales. I'm usually trying to compare orders in 1 half year and sales in the following half year. If I do that for Tecan on a group level, I normally see that your first half orders are growing, and you would need to multiply them by 1.1x and then you have your second half year sales. If I do that, I would get to something like CHF 490 million of revenues in the second half. Is there anything in the order book that would object this sort of approach that you say there's plenty of orders that are actually supposed to be delivered in 2022 or later or something?

Thank you very much, Sebastian. And as always, good and elegant question. And I mean clearly, I mean, your calculation and maybe we have similar calculators in normal years would substantiate what you just said. I think the slight issue there that I mean we have and you may have using this approach is that I think we are far from normal yet. And clearly, I mean, our H1 performance has probably also illustrated some of that where I think we have been growing very successfully in both of these markets, but also very strong contribution still from pandemic-related orders where we expect it may be a kind of faster onset of organization in the first half. But I mean, clearly, I mean, when we look at the second half, it's -- like I said, it's a combination of onset of normalization for COVID and the non-COVID-related performance here. When I look at the order book and the backlog, you're right, I mean we are coming in with a good backlog. However, there is a substantial book and ship to be achieved in the second half, and there's a lot of work to be done to come to this. But I mean, clearly, I mean, that's why. I mean, I referred earlier, I mean we are looking very carefully and prudent at the kind of monthly intake of particularly orders that we associate to COVID. And I mean, as you know, that's always not very easy because our instrumentation and consumables are multipurpose. We're trying to do the best effort guesstimate what that could look like. And then yes, the reduction comes from there. But I mean, clearly, I mean, the second half is -- there's a lot of dynamic in there. We feel pretty good about the starting point with the backlog that we're entering in the second half, but we also, I mean, are very, I would say, careful projecting too much of a hockey stick, which we also normally see in calendar years in the fourth quarter because of -- just to factor that we see in the markets and customers that we're talking to. So in aggregate, I think there is, of course, that range that I mentioned, low to mid-teens, so -- and that includes a lot of these elements.

A quick one, also here.

No, maybe just adding to also what Achim is saying. Bear in mind that we book our orders that will be delivered in the next 12 months. And in the Partnering business, especially for the non-COVID-related business, we have frame orders, which will be pulled in the next 12 months. So there, of course, cannot consider that we will deliver all of it in the next 6 months. So there's a little bit of this as well that we need to apply.

Understood. Quickly then on Paramit. You mentioned that you're expecting CHF 100 million of sales for the next -- for the 5 months since August, meaning that you have CHF 120 million most likely then for the whole second half. If I compare that to the CHF 260 million that we initially expected for the full year, that seems to be having a bit of a different seasonality to your existing business. Is that the case? Or is this year also a bit different?

That is directionally correct. I mean we also observed a different kind of shift in their half year performances also. Maybe a bit more lumpy, I mean more comparable to our Partnering division in, I would say, normal years where we've also seen some of, I would say, a bit of a shift in waiting in the first and second half. And the other effect is clearly when we look at it right now, Paramit is subjected to a significantly higher COVID exposure or COVID impact exposure, I would say, because, I mean, their end markets and the use -- their OEM partners are typically not related to COVID testing or any of these type of procedures. So yes, I mean, they have seen a stronger headwind effect and continue to see some of the effects in the second half, and that's probably the second kind of more significant element in what you said. But in aggregate, I think very positive about their ongoing trajectory and then also ability to sign on new clients, which, of course, tend the future basis for growth in 2022 as we also expect the COVID-related headwind effects for Paramit to ease off as soon as -- I mean, we see it also for our normal business.

Understood. And then one very last question. Do you have already some sort of more visibility on how the machines that have been sold over the last years that are used in the sample preparation for COVID-19 tests? Are they still in use for these PCR testing? Or do you see them already getting sort of repurposed for other testings?

Yes, both. I mean, quite, of course, a number of them continue to be performing PCR testing in some regions and geographies. We even see an uptick compared to what we've seen already in this normalization curve rebounding back to more PCR test. For example, Israel is one of these regions where PCR tests actually indicated to go up again. And secondly, we see another second element where some of these instruments are deployed to do and continue to perform PRC test for COVID, but also for other medical indications. And then thirdly, some of these systems are expanded, if you want, from a capability and application standpoint to do not only PCR sequencing tests, but also sequencing tests or workflows in laboratory runs for the analysis of virus variants, which is something we expected to happen. But it's a heterogeneous picture right now. But I would say to this date, most of the instruments that we know have been deployed for PCR testing are effectively still performing PCR test for COVID. And there is a menu expansion happening, particularly in the service labs like the big service providers in the U.S. and Europe that, of course, use that infrastructure now to add on a bigger menu of their lab-developed tests in addition to the COVID tests.

Perfect. Sorry, one follow-up question with regards to the pricing point you mentioned in the slide deck. I know that you don't want to share too much information there. Can -- yes, that's really understandable. The question is like when are they in place? And have they already impacted positively your top line? Or is it rather the thing that would impact your top line on the second half?

You mean product price increases?

Yes, yes. The product pricing increases, yes.

So we are -- as you know, we are looking at kind of price opportunities wherever we believe, particularly our innovation trust kind of significantly elevates the value of our solutions. And as you heard me talk about some additional software features that we launched and others, so we run this as a routine process. And it's not just any kind of one-off events. But I think over the last years, we already very significantly and then successfully increased prices at around 1%. And this is also what we looked at and recorded maybe in the first half. But as we launch new products, as we also, of course, increase value of some of the products, this is something we obviously very dynamically also look at whether that's possible and justifiable to continue to do in the second half then maybe for kind of second half effects as well as 2022 effects. So it's an ongoing process. But this year, again, I think we keep this routine. We measure it very -- as you would probably expect precise on the part number level. So the one -- or slightly more than 1% effective price increase was actually realized price increases and not price increases on price list or anything.

The next question comes from the line of Daniel Jelovcan from Mirabaud Group.

I have 2 questions. The first one, I mean, Tania, you mentioned the nice OpEx leverage of growing half the top line level on Slide 11. I mean I just look back at the year 2019. So before the pandemic there, there was absolutely no OpEx leverage. Okay, I know that there are a lot of moving parts in your OpEx and so on. But going forward, is it -- I think it's not a sustainable level considering the fact that you had probably the perfect world in the first half with high volume growth, excellent leverage and so on. So is it fair to assume that your OpEx leverage is probably in a normalized world, more like 70%? So OpEx growth, 30% less top line. That's the first question. And the second question, I mean, your growth in LSB in Asia was quite moderate with high single digit. And you mentioned that high base China, and it's a normalized world there. But still isn't that a bit disappointing? I mean Asia is still a small base for you. And I mean at the group level, your growth now in the first half in the north of 40%. I mean when I just think about the first half '22, where I make this comparison, what that means for growth in the first half next year, it's a bit -- it's tough to imagine. So if you can comment on that.

So thank you for the question. Maybe I'll start with the first one on the OpEx. And you're absolutely right. I mean what we do is we try to keep our OpEx growth below sales. That's a very clear element. However, with the significant draws that we have seen, we, of course, cannot sustain potential future growth as well with the low OpEx base. And we are in this mandatory process of upgrading and increasing our sales force, the service and the support organization, but also some admin positions because we are now for 18 months functioning with an organization that was not skilled in parallel to this tremendous growth. So it wouldn't be sustainable for us to continue to deliver the growth targets based on the current organization. And this -- of course, there are some effects working against the volume leverage that we will see in the future. But our focus again is to really increase in terms of sales, of field service people to ensure installation of equipment, to ensure the maintenance et cetera. And that is the part that we will see where we will see this OpEx more maybe normalize around those levels as well. So you're absolutely right on this. And on the second question, I think what you have to see, I think your question was related to Asia growth. I mean you have to remember that in H1 2020, we had quite a significant growth of Asia because of the pandemic start there. And therefore, they were very much in advance compared to the others in terms of growth in H1 when we had 2020 where we had 25.3% in local currency. When you compare it to, for example, North America, that was only 2.9% in H1 2020 and Europe only 6%. So of course, with the progression of the pandemic, which hit Europe and then North America later than Asia, we have a comparison basis, which was already higher in Asia compared to -- comparing now to H1 2020. So I hope that answers a little bit your question on the Asia growth as well.

That's good. Maybe just on Asia, so is it fair to say that this high single digit, let's say, in a more normalized regions like Asia is maybe a good reference going forward when the world hopefully normalizes?

I would probably say, I mean we would be satisfied with this, just simply because, I mean, China, as you illustrate itself in the -- in Asia context already, such a dynamic growth environment. And I mean we have, as you know, a very good and well-distributed team in China that is capable of supporting both our Life Sciences and Partnering division. But I mean, look, I mean, as Tania said, I mean the comp was pretty tough, but I mean we have a lot of growth elements that we see as very, I would say, beneficial for us in China, particularly. As you know, the Partnering division has been very successful signing collaborations with domestic in vitro diagnostic companies, and that is a trend that is ongoing. We're very happy actually with the success that we have with our modular platforms in China, particularly in the areas of molecular diagnostics and immunodiagnostics. And -- but as always, I mean, in these kind of OEM partnerships growth, sometimes it depends on time-to-market and development time lines. But when we look at the pipeline, very happy with the continued growth both from our Partnering kind of systems business, but also the building blocks that we supply to companies that then build their analyzers on our Tecan infrastructure. And then on the Life Science side, again, I think we are now in kind of rebound mode still. I mean the normality has begun. But as you also know, just now, some regions are again under lockdown. And I would say, although the normalization was starting earlier than in other parts of the world, I would say, it never reached the real normal to that extent because travel restrictions were still in place, customers were not fully back in operations. And now I think when we look at the normalization, we were very happy, particularly with the pickup of our new platforms and products in China. Fluent has begun -- beginning to be very successful there. And then also our detection range, which includes a lot of applications for biochemical, but also cellular analysis processes has been picked up very successfully in China because of the focus of research in clinical and pharma leveraging sale model. So I think, overall, the outlook that I see for China is very good. Again, I don't want to guide on a specific country or region. But clearly, I just want to probably be a bit more positive than the figures that you called out for, what we look at Tecan's reality in China, given the relatively small, as you said, contribution of China to the overall business.

Good. Before we take another question from the phone, maybe a quick one from the chat. Tania, maybe you want to take that one. It's regarding the process for the purchase price allocation of Paramit. Any update?

Sure. I mean, as you know, Paramit did not use IFRS. So the detailed purchase price allocation is yet to be performed. And -- but at this stage, we expect the amortization from the PPA to a level of CHF 10 million to CHF 15 million per year as we announced in the closing of the Paramit acquisition Q&A.

Good. Thank you. We come back to the Q&A from the telephone. Conscious -- being conscious of time, please limit your questions to one, please.

The next question comes from the line of Maja Pataki from Kepler Cheuvreux.

I will try to limit it to one and then try to follow up with you, Martin, later. With regards to the full year guidance, Achim, as you can see, we're all trying to figure out how to consolidate what is implied in your guidance for the second half of the year and how do you think about that. And so I was wondering if you could remind me quickly on what has happened in 2020. I mean you've spoken about the headwinds from COVID-19 amounting somewhere to CHF 60 million to CHF 80 million, and you've been talking about the tailwind from COVID in 2020 at CHF 150 million to CHF 170 million. My first question -- an it is 1a and 1b question, sorry. So my first question is, can you tell us the headwinds? Was it mainly Q2 -- Q1, Q2? Or how shall we think about the headwinds in 2020? And when we look at the tailwinds, could you also give us an indication on split H1, H2. And then actually, C, as a question, I'm sorry, the CHF 70 million COVID-related revenues that you posted in H1, additional as part of growth. Could you give us an indication what the split was between the consumables and instruments? That will be helpful, so we can actually try to evaluate how we think the pandemic will play out.

Okay. So thank you very much. And maybe I'll start off, and then I'll invite Tania for some detailed support here. And the -- I mean the H1 2020 dynamic as to be expected was very much loaded towards the second quarter dynamic in both headwind and tailwind effect. I mean, clearly, the pandemic was building up and then lockdowns were starting to happen. And then also from the product placements and orders, we received the lead times and turnaround times. Most of these actually accumulated back into the second quarter contribution for the first half. And then in the second half, I mean, clearly, I mean the headwind effects were pretty severe and probably accelerated and the COVID tailwind was probably then to the kind of higher contribution to the normal business. And I mean when -- again, maybe just to kind of sub flavor to your question. I mean when we look now in the H1 results, the distribution of the COVID effect was pretty much 50-50 in terms of the growth contribution from COVID and non-COVID-related recovery from a growth portion of their performance. The dynamic, again, was, again quarterly differently. And again, as expected, normalization started in Q1, but was probably stronger in the second quarter where normalization took the other turns. So I think just directly, that's what you're looking at right now. But just to complicate matters a little bit further, is this pattern that I described is geographically heterogeneous. So it's really -- I mean, we saw different patterns in the U.S. and Europe and Asia. I mean, directionally, it's the same part. But as I just said, I mean, for example now, with the virus variants popping up and then significantly elevating some testing regimes again, this is something where we are not entirely sure how this will then play out in the second half. Then maybe, Tania, you want to take some of the questions.

Maybe on the last question as well, Maja, on the consumables versus instruments. I mean if you look again to Achim's point, on a quarterly basis, Q1 was pretty -- Q1 '21 was pretty much in line with Q4 '20 as we still delivered a lot of the instruments that were ordered in Q4 of '20. And we continue to supply also consumables for the COVID testing. Q2, on the other hand, was less on the COVID-related instruments as we expected, while consumables continued to be on a high level and pretty much actually on the same level as compared to Q1 '21. So if you look at this, the split is probably close to 50-50 between the consumables than the instruments in that half year.

Okay. But still, I know it's a very vague situation and everything, but can you help us understand what the tailwinds amounted to from COVID in H2 2020?

So I think we need to -- you're right. In 2020, we looked at tailwind/headwind because it made sense, right, to understand how much we benefited from the COVID perspective and how much we were hit on the non-COVID-related side. However, you cannot really look at it in H1 '21 from that perspective because really we had growth from both areas, both COVID and non-COVID. And again, there, the split from the sales growth perspective is pretty much 50-50. So of course, there are some small areas where we could still talk about headwind/tailwind, but I think we still have to think more like there was a pickup from the areas that were hit negatively in the pandemic. We are not fully back to the pre-pandemic level overall. And we are -- as I said, we are still behind some others. But you can't really -- again, it doesn't make really much sense to assess the tailwind and the headwind. I really would more focus on the fact that COVID-related growth was around the CHF 70 million, CHF 80 million, and the growth from the other application areas was also somehow between the CHF 70 million and CHF 80 million. Again, it's, of course, very difficult to quantify the exact effect because, for example, we do not know the pipette tips for the COVID testing or another test. So we have to use some assumptions on this from the perspective of which instruments were placed and how they are used, COVID versus non-COVID. So again, as you know, our instruments, our equipment is multipurpose. So I hope that a little bit helps you to answer that question again.

And maybe just to add. So directionally, I mean, we reckon the second half would be kind of dominated by non-COVID businesses. And I mean -- as Tania said, I mean the effect, of course, for kind of COVID-elongated effect is more on the consumable side and spare parts and things in the second half. But we reckon that the new business and business growth will mostly come from non-COVID-related business in the second half.

Understood. I'd like to give you a hard time this afternoon and try to understand what the second half potential implication from COVID. But thank you very much for trying to answer.

There is one last follow-up question. I understand, but please limit it to one follow-up question.

Yes. The last follow-up question comes from the line of Scott Bardo from Berenberg.

Well, great. So just maybe Tania's perspectives for some financial assumptions for Paramit. You mentioned around CHF 20 million acquisition-related costs this year. Can you give us a flavor for what the cost may look like on this basis over the next few years or some sort of cumulative number? And given the size of this acquisition, such PPA that you highlight, is there no cause and reason for Tecan to move to a more adjusted EPS number, which arguably would be more in keeping with some of your med tech peers?

Thank you, Scott. So as we mentioned, we expect initial integration and transaction costs of around CHF 20 million. Some of it will impact EBITDA, some only the net earnings or the earnings per share. We have to -- as I said before, we have to finalize some of the assessments like the PPA, but we expect, at this stage, roughly of half impacting the EBITDA and the remainder only the EPS, the earnings per share. In 2021, we estimate the post-merger integration cost to mid-single-digit millions and the PPA for the first 5 months around CHF 4 million to CHF 6 million. And in 2022, our post-merger integration costs on an annualized basis will be in the high single-digit millions and the PPAs, as I mentioned before, estimated between CHF 10 million to CHF 15 million. Acquisition costs, I mean, there are basically some financing costs, some PPAs and some integration costs. That's the bulk of the breakdown in there. When it comes to the adjusted earnings per share, this is something we are contemplating. However, as you know, we -- so far, we have taken the root of disclosing the numbers as they are and then disclosing all the one-off effects, which, at the end, is very similar to what would have been an adjusted number. But again, it's something we are looking into.

So yes, with this, probably we are at the end of the Q&A session. So thank you very much for your participation and questions. And with this, I believe we can close the call and look forward for meeting and talking to you for future discussions. So thank you very much, and speak to you soon.

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