Good day, ladies and gentlemen. Welcome to the Sartorius and Sartorius Stedim Biotech conference call on the nine months 2022 results. Today's conference is being recorded. It is my pleasure, and I would now like to turn the conference over to Dr. Joachim Kreuzburg, CEO. Please go ahead, sir.
Thank you very much, and hello and good day also from my side. Together with our CFO, Rainer Lehmann, I will now walk you through the results for the first nine months of 2022 for both the Sartorius Group and Sartorius Stedim Biotech as always. I will kick it off by talking a little bit about the highlights of our business development this year so far, then also briefly remind everybody about the key features of the acquisition that we have been able to close by end of last month. I will hand over to Rainer on the numbers for the Sartorius Group. I think overall, we have seen a good Q3, pretty much, with the same set of numbers as we have seen for the first two quarters.
Sales revenue very much on the same absolute level that leads to double-digit growth of sales revenues and earnings for both divisions. We also have seen a healthy profitability level based on the positive side, the scale effects that we have been able to generate. Of course, at the same time, and again, very much in line with what we have seen during the first half of the year, a certain dilution by the higher cost base as expected and planned for mainly because of additional headcount, not so much because of inflation. Then also some FX-related headwinds, mainly through FX hedging instruments. I just said that inflation hasn't played a big role.
I think we talked about that extensively after six months, that we have been able to pass through pretty much the inflationary effect that we have seen on our cost side to our customers by increasing our price levels. We were talking about that a lot last time. I'm sure there will be a couple of questions around that later on as well. The situation is very much characterized by, and again, we talked about that before, by two trends that are at the moment offsetting each other a little bit, depending on the perspective that you take. On the one hand, we still see a very strong market, fundamentally strong market in the sense of healthy pipelines at our customers. A lot of innovation going on after a couple of decades where everything in the biopharma sector was around monoclonal antibodies.
We now see an increasing relevance of new modalities, cell therapies, gene therapies, mRNA-based products, and therapies. At the same time, we see a quite rapid normalization of demand, particularly on the bioprocessing side, not so much on the life science tools or lab product side. I'm sure we will talk about that later on in a bit more detail, but it's important to us to really highlight that the current trend, the expected current trend that we see on the order intake side for bioprocessing shouldn't be mixed up with the fundamentals of the market we are operating in. We specified our outlook for 2022 when we were heading into this year. We were applying a rather wide bandwidth for our sales revenue growth.
We now narrowed that to the lower half of that bandwidth for bioprocessing and the upper end or the upper half of this bandwidth for the lab business. Given the relative size of these two businesses, that leads to the lower half of the bandwidth for the Sartorius Group, w e are fully confirming the profitability target that we have set and communicated for this year. I think it goes without saying at these times that the uncertainties remain to be high. We do have all the supply chain challenges well under control, but I think there are some overarching geopolitical and economic aspects that still cause quite some uncertainty.
I also wanted to repeat a couple of highlights about the acquisition that we closed by September 30th, which is the acquisition of Albumedix based in Nottingham, UK, a business with a good 100 employees. Sales revenue expected this year to be a bit above GBP 30 million. Very healthy profitability, therefore also a price of a good GBP 400 million, representing, I would say, a multiple that you would expect for a business like this. We acquired 100% of this business, all in cash. What is this business about? Albumedix is a leader in recombinant albumin, which is a critical component for a number of innovative biopharmaceuticals or what one calls today new modalities.
As for example, cell therapies, also viral-based therapies, also a couple of vaccines. It strengthens our position further in this field of what we call critical raw materials for such modalities. Y ou have to see this in perspective with acquisitions like the one of CellGenix or Biological Industries before that. With that, I would like now to hand over to Rainer to walk you through the details of our nine months results.
Thanks, Joachim, and also welcome from my side to today's call. Let's start with the usual group overview. Sales revenues amounted for the first nine months to EUR 3.1 billion. That's in constant currencies, an increase of 16.6%. Just to put it into context, you will hear me doing this throughout the presentation, it's important always to refer where we're coming from. At this time last year, we actually had an increase in revenues of 54%. The year prior to that in 2020, of 25%. The 17% are very healthy achievement on top of that substantial base that we have built over the last two years. Order intake also amounted to EUR 3.1 billion.
As expected, it's a decrease in constant currencies of 9.5%. Also, to put it into context, last year at this time, we actually were reporting 72% increase of order intake and prior year in 2020, 37%. Really, I think it's very important that this is something that we also anticipated during our call. Book-to-bill ratio for the first nine months is 3/1. For the quarter, slightly below, it's 0.9. That is also what we pointed out at the half-year call that we wouldn't be surprised if the book-to-bill ratio would go below one. This is now only what really happened and was expected. Underlying EBITDA is at EUR 1 billion. It's an increase of 21.5%, almost.
Despite higher costs, and there again, we pointed out over the last calls that we were increasing our cost base. That last year's profitability was a little bit artificial because revenues increased over proportional to the functional cost development. Therefore, we see that now, catching up. The cost base has increased. In addition, we have still a few FX-related headwinds, but the margin pretty much on previous year level, slightly only half a percentage point below. Also, just to complete the picture, the sales growth, actually 2 percentage points, we attribute to the acquisitions that we made this year. If we then look at the regional distribution of our revenues, we actually see that Americas is growing the fastest. No surprise, it's one of our key markets that we're focusing.
Both divisions actually contribute strongly to this development. It's an increase of 22.5% to EUR 1.1 billion. In the EMEA, of course, here we had higher comparables, really caused by the extraordinary boost through the pandemic. Nevertheless, an increase of 10.5% in constant currencies, also to a little bit over EUR 1.1 billion. In Asia-Pacific, also a very nice growth track here of almost 19% to EUR 825 million. We have to say that despite some partial lockdowns, which at the end really only had a minor impact on our growth in that region. We look on the right-hand side, sales by region. You actually see a little bit of movement also even compared to the six months figures.
We see here 1 percentage point increase in the Americas as well as Asia-Pacific. That reflects, of course, the figures that I just presented. When we have a deeper look at the two divisions, and we start with the Bioprocess Solutions. Let's start in the middle with the sales revenue. Here we have revenues of EUR 2.47 billion. It's an increase of almost 18% in constant currencies. 2 percentage points also are here attributed to the acquisitions that we made. That's basic .
One important point here is, of course, the sales that are attributed to the coronavirus vaccine declined significantly as we expected and as we also said at the half year time, that we expect only half the business compared to last year this year related to the coronavirus vaccine. Again, here, these 18%, keep in mind on the previous year's rates, in the last nine months there in 2021, we actually saw a growth of 58%. It's very important, I think, that we really see the nine months' 2022 development in conjunction in the context of the last two years' development. On the order intake on the left-hand side, you see the expected decrease really reflecting a normalizing demand.
As we all know, we have pointed out several times, prior year figure was boosted by the pandemic and in conjunction with this also the really different behavior of the ordering patterns by some customers. We of course now see also that our customers reduce some stock levels, and therefore the order intake of EUR 2.45 billion really reflects that behavior. The underlying EBITDA margin for the Bioprocess Solutions division was 35.7%, slightly below for the previous year. Nevertheless, an absolute increase of almost 22%. Despite, of course, the positive economies of scale that we're still achieving, we have a dilution because of this increase of the cost base, mainly attributed to headcount and also some FX-related headwinds.
On the LPS side, really see a fantastic development of the division. Really the very dynamic growth fueled by the bioanalytics business. I start here again in the middle with the sales million, and that on top of a very strong previous year. We are really performing well, especially on the BioA side. On the M&A contributes actually only one percentage point here. On the order intake, we see an increase of 14.5% in constant currencies to almost EUR 670 million. Here also, the two regions that really contributed is Americas as well as Asia- Pacific. EBITDA margin slightly up due to economies of scale and also favorable product mix. BioA has a more attractive margin than our Lab Essentials business.
We even could expand our margin by 2 percentage points despite some higher cost base, again, as planned, and also some FX headwinds. If you look at some key performance indicators, we see here the underlying EBITDA I just mentioned before. I'm not going to say something. It's all a good billion. We have extraordinary items pretty much from previous years' levels with EUR 26 million, really reflecting the corporate project and expense related to M&A. Our financial results, pointing out as always, is mainly driven here by the fluctuation of the earn-out liability in conjunction with the acquisition of BIA Separations.
Underlying net profit, we see a healthy increase of 23% to EUR 501 million and reported net profit an over proportional increase to almost by 71% to EUR 526 million. Operating cash flow compared to previous year, a decline of almost 30% is really due to a change in our working capital that is mainly driven by the increase of inventories to in order to really ensure that our supply chain is as secure as possible and buffers certain deficiencies then , in case they should happen. Investing cash flow has substantially increased to EUR 904 million. Of course, composition here is the three acquisitions, which pretty much add up to EUR 541 million.
The biggest one, of course, that Joachim also just mentioned, that we closed at the end of September, Albumedix. We also spent EUR 350 million on CapEx, mainly in order to really continue our production capacities expansions. That translates to a CapEx ratio of 11.3%. You see on the next slide, we then actually look at a very healthy and robust balance sheet equity ratio here increased 35%. Again, here I mentioned it's also at half year is the switch of the first earn-out that was paid out in conjunction with BIA Separations that increased basically equity size, but also, of course, the contribution of our net profitability. The net debt increased to EUR 2.3 billion.
The main driver here, clearly the acquisition of Albumedix, which then translates into a net debt divided by underlying EBITDA, so a dynamic indebtedness of EUR 1.7 billion. Still, even despite that, substantial acquisition, a very healthy and robust, financial situation for the overall group. With that, I'm going to hand back to Joachim.
Thank you very much, Rainer. I have the last slide now here for the Sartorius Group, which is about the guidance for 2022. As said before, we have specified now the expectation for sales revenue growth, whereas we left the profitability expectation unchanged. You can see in the table the change in bold letters in the middle of this table. For the Sartorius Group, we are now expecting to reach the lower half of the range of 15%-19%. That is composed out of the expectation of, again, reaching the lower half of the range of 17%-21% for Bioprocess Solutions and the upper half of the range for Lab Products & Services.
The only other change here is the one on the bottom of this chart, the last bullet point on the underlying EBITDA, net debt to underlying EBITDA ratio, which we now expect to come in at around EUR 1.6 billion after the previous expectation of EUR 1.1 billion, mainly driven by the Albumedix acquisition that we closed, as said before. The main reason here is you might remember that we reduced the expectation on the COVID business for the full year already after six months, when we saw that our customers have reduced their projection for the full year substantially.
We said, "Well, we don't change the bandwidth that we have given at the beginning of the year, even though this is a substantial number, but we said so and did so because of the strong order book." There is no change on that, of course. Now, further in the year and closer to the end of the year, we now also know and see when our customers would prefer to get their deliveries, and that is the main reason why we now expect rather the lower half of the range for Bioprocess Solutions. Then the rest is just adding up the numbers. Whereas for Lab Products and Services, I think a couple of analysts made these comments already today, maybe this looks a little bit conservative.
Well, uncertainties remain high, and it of course depends really on, for example, whether we will see further lockdowns, et c . That is why we really prefer to basically confirm our guidance but to narrow down the bandwidth a bit. Now, I would like to move forward to SSB. As always, walking you through the numbers rather quickly as most of the comments have been made before, particularly on Bioprocess Solutions business. Nevertheless, along the first chart, maybe one more word on order intake, though. You see the order intake number pretty much on the same, identical level, like sales revenue, representing a decrease of almost 9% in constant currencies versus the number the year before.
Rainer was talking about book-to-bill ratio, and typically you would say, well, order intake and the book-to-bill ratio reflects and represents a, an important information for the future business. What is important to me to point out is that at the moment, order intake is more reflecting the development of the business in the past than being a good proxy for the future business. It's a matter of pure logic that after this very significant overamplification of demand because of longer lead times and the policies and initiatives by customers to increase their stock levels and these two trends added to each other. That now when customers start to reduce their stock levels again and the lead times have normalized, you have two strong drivers in the reverse direction. It's clear that we see this trend.
We always talked about that basically since two years ago. However, what we see here is, as you can read, 17% growth in constant currencies for sales revenue and 12.8% decrease for order intake in constant currencies. Underlying EBITDA has been increasing by a good 19% margin, a little bit diluted 0.5% approximately because of the FX-related headwinds and the other, mostly because of the increase of headcount, as we talked about that before. We have an earnings per share at EUR 6.58, an increase by, again, a good 19%. The regional picture we talked about that for the group before, also for SSB.
You see now Americas almost being on the same level as EMEA, pretty much in line with what we would have expected and always talked about. Nothing to add to what has been said before. Pretty much the same is also the case for the view on cash flow, where I would just repeat comments that have been made, and you can see them also on the right-hand side in these three bullet points, regarding inventory buildup as well as the evaluation on the earn-out liability. Then on the financial indicators, obviously a very strong equity ratio for the SSB group, then a reflection of the two acquisitions that we have made for SSB in the course of the year with a certain impact on net debt to underlying EBITDA on a very low level, though.
When we then take a look quickly on the last slide, again, the one on the guidance, the specified guidance, narrowed guidance for 2022. Again, we expect here now the lower half of the range that we have communicated since the beginning of the year, and we confirm the EBITDA margin target. A ll the rest is also quite symmetrical what we have talked about before, including the now higher anticipated net debt to underlying EBITDA ratio for the end of the year, mostly following the Albumedix acquisition. With that, I think we now have time for Q&A. Thank you for listening.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one. If you wish to remove yourself from the question queue, you may press star followed by two. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from Patrick Wood from Bank of America. Please go ahead, sir.
Perfect. Thank you so much. I'll keep it at two because I'm sure there's lots of questions around, and hopefully they're pretty straightforward. Firstly, apologies if I missed it. Do you have a sense for the, let's say, Q3 o rders within BPS, but excluding the COVID vaccine side, just so we can have a sense of ex vaccines, how that looked. Then, the second one, Joachim, you gave a sense, you gave a hint about looking forward and not really the order books being a backward-looking thought process. Should we interpret that...
Appreciate you probably don't want to guide on 2023 at this stage, but should we interpret that as some confidence that we should see some reasonably decent growth on the revenue line in 2023? Is that a fair assumption, given what you've seen of the orders that you still have in the backlog? Thanks.
I'll try to answer the second question first. Honestly, still a little bit too early to talk about 2023 indeed. What we can say is that we don't see any change to our underlying view on the business. I think we talked about that after six months as well. We , of course, will also talk about our midterm guidance, which is for 2025, when we publish our preliminary figures end of January. I would say we don't have any different view from a, let's say, volume side. Volume side now more meant in a physical sense than in a monetary sense. We will take a look on how to translate that into the changed environment regarding currencies and also inflation.
That is something that I can say that we don't have any different view on that. For 2023, to be honest, the variable here is, again, not so much the underlying market. The variable here is the inventory level of our customers. I think we always have talked about that. That's a bit difficult and it's always quite incomplete, the picture that we have. Just to give you a sense, a couple of customers of ours and in the industry have usually stock levels rather around six months of their annual demand, so half of the annual demand. They were rather aiming for, and quite some of them were able to execute on that, to increase that to 12 months.
That gives you a sense for how much reduction of stock levels we partially see. Of course, not everybody is doing that to the same extent because not everybody was able to build that up or wanted to build that up. That is the variable, and that is really why we are hesitating to give any more precise guidance for 2023. As we look on that, at some point, the right perspective will probably be to look on the years 2020 through to 2023 in total. These are four years, we are aware of that. This is probably the right perspective to take later on. Again, give us another three months before we talk about 2023 a little bit more precisely. The first question on COVID or Q3 order intake ex-COVID, we for sure would have seen a much more positive picture, and now it depends on COVID.
What do you mean? How do we define COVID? We always have used a narrow definition here. Rather, really, in bioprocess, orders related mainly to vaccine manufacturing. That already would have made a significant difference and probably has led, for Q3 standalone to a book-to-bill ratio around one. If we would exclude now this additional effect that we are talking about, stock level, lead time driven, etc. , then for sure we would have seen it above one.
Very helpful. Appreciate the color, and thanks for taking the questions.
The next question comes from Paul R. Knight from Key. Please go ahead.
Hi, Joachim. Could you talk about what you think the underlying market growth is in your view? Mid-teens, above 20? Can you talk about what you think the market pace is without COVID?
If we exclude COVID as well as again the normalization now, if this is the question, then we believe the underlying trend in the market is around the 10% mark.
Like 10% from a 2019 basis?
Right. That would be a prospective market. We usually, over the last whatever decade or so, have beaten the market. But you were asking for market. Market, we would say around the 10%.
Right. Plus share gain, et c. Thank you.
Right. Exactly.
The next question comes from Sezgi Ozener from HSBC. Please go ahead.
Hi. Thanks for taking my question. I have two, please. First of all, are lower COVID orders the main change, or do you also see some impact from your customers from the Inflation Reduction Act, which is expected to have an impact on drug prices? Is that cutting the appetite a little bit? My second question relates to bioanalytics. Given the quite striking growth in bioanalytics, especially in America, but I believe that's regionally diverse, do you see a higher ratio of recurring revenues going forward within your LPS segment? Does that change the longer run outlook?
On the first question, I can confirm that the drivers that we were referring to here are really the main drivers, and there are no other relevant drivers at a comparable level. We are really talking about these drivers, like COVID business in a direct sense, in this narrow sense as just defined before, and then these second round drivers we were talking about since basically since the second half of 2020. Longer lead times have led to earlier orders, plus the desire to increase stock levels was a second booster to that, and now we see the reverse. That's really what we are talking about. Then, on BioA, absolutely correct.
We believe that this business is growing on a very significant double-digit level. It's growing at nice profitabilities. It's growing in all regions with quite some penetration of the Americas. That is pretty much also reflecting the relevance and strength of the U.S. when it comes to new drug developments, where these tools are playing a particular role. Again, we are growing in all regions, and yes, this is absolutely our strategy to make this a key pillar of the further development of our LPS division. As you have seen also over the last couple of years, that is why we were making a couple of acquisitions in this field. We believe there is maybe some more room for adding innovative and complementary businesses to it.
If I may follow up on the first question, you're not seeing any negative or positive impact from the Inflation Reduction Act, affecting clients'.
No.
Appetite to invest?
No.
Okay. Thank you.
No.
Thanks a lot.
No. So far we don't see anything.
The next question comes from Zain Ebrahim from JP Morgan. Please go ahead.
Hello, Zain Ebrahim, JP Morgan. Just two questions from me, please. My first question would be on your 2022 BPS guidance. If I take the low end of the guidance, that implies about mid-teens BPS growth in Q4, which seems to be an acceleration in growth that you delivered in Q3. Can you talk through what's driving that acceleration in Q4? M aybe beyond the inventory levels in 2023 that you've already commented on, what other factors should we think about in 2023 as we think about potential for growth there would be my first question. Second question would be on the book-to-bill ratio. I know you've alluded to book-to-bill being below one for a couple of quarters or maybe a few.
Clearly, we saw it now in Q3, and it seems like the order book is normalizing maybe even quicker than people expected. How should we think about the normalization left in terms of how many more quarters you expect book-to-bills to be below one, and how should we think about Q4 order book relative to Q3 in terms of if Q4 last year was already started to normalize, can we start to think about growth there, please? Those are my two questions. Thank you.
Okay. On your first question, that's right, but please keep in mind the strength of Q4 last year. Therefore, I think Rainer alluded to that during his part of the presentation. We are expecting, I would say, a strong Q4 when you take this total perspective, what we always would recommend to take. Bo ok-to-bill, let me answer like this. We have seen four, five quarters from the later part of 2020, well into 2021, including Q3, where book-to-bill ratios have been very significantly higher than usually.
We had in our bioprocessing business, typically, or you can also take the group's numbers, but particularly in bioprocessing, for the years before or not, always when you take the annual level, because quarters can always fluctuate a little bit, we had book-to-bill ratios of 1.08, and we were talking about orders, quarters where we partially had book-to-bill ratios around 1.5, and a few quarters of that. We have to just understand that this cannot be, so that this doesn't work. Purely mathematically, physically, it doesn't work. It has to go down again. We were talking about that, and we always said, "Don't extrapolate that," since the second half of 2020.
Therefore, I think it's well possible, as we said, also after six months, that we will see a book-to-bill ratio below one, again next quarter, for instance. T hat's absolutely well possible. What you also have to keep in mind here, because I'm sure you are all comparing our numbers with the numbers of the competition, and of course, we also take a close look on those numbers. When you do that, then you will see that particularly when you take out COVID, where sometimes the effects have been a little bit different in the different fiscal years, for instance, particularly, and even more so on the different quarters for sure.
You see that we have seen a significantly stronger growth than our competition, particularly when it came to order intake, because our delivery performance was significantly better than the one of quite a number of our competition. That means this effect has been a bit overpronounced on our side, and that means that the reverse effect will be also a little bit stronger. Again, we tried to be very transparent on that, very much ahead of time. Now we see that as expected.
O ur recommendation really would be to take this total perspective rather from the big... Let's say starting from mid of 2020 or take the full year of 2020, whatever your preference would be, so that you understand the full and see the full dynamics and get a true picture on the total performance and the true performance. Then, I think you can see, and hopefully understand why we are talking about a very healthy performance of ourselves.
That's very clear. Thank you.
The next question comes from James Quigley from Morgan Stanley. Please go ahead.
Hello. Thank you for taking my questions. I've got three, if that's okay. You mentioned that we may have a book-to-bill ratio below one in the next quarter as well. how long or what's your best sense or best guess of how long this disruption could last for the normalization could last for? You mentioned some customers are going to 12 months versus six months inventory levels. How are customers balancing inventory levels versus other uncertainties that are out there in terms of geopolitical risks or anything that might affect deliveries in the future? One last point on order book and deliveries. You saw a similar situation in 2017- 2018.
How does the current situation compare to that? When I look at orders versus sales over the past eight quarters, if you do an offset of about two quarters, there's around EUR 200 million or EUR 300 million of excess orders. Orders being EUR 230 million higher than sales. How should we think about realization of these revenues? Have there been any cancellations at all, or should we expect those to flow through in Q4 or next year? Finally, on the LPS business. Bioanalytics, l ast quarter you mentioned it was slightly above 30% of the LPS business and is growing at around 30%. Is that still the same? You mentioned very healthy double-digit growth.
Is bioanalytics still in the same region? For the remainder of the LPS business, the non-bioanalytics part, can you give us a sense of what the exposure is to the economic downturn, particularly in areas such as food and beverage, chemicals, autos, et c.? Thank you.
Yes. Thank you very much. I only can repeat my answer regarding book-to-bill ratio. It's well possible that we will see another quarter or so with a book-to-bill ratio below one. I would rather like to try being more specific when it comes to an outlook on order intake developments, again, end of January next year. On a higher level, what I think is we will see differently from this year, where, as I said before, sales revenue has been the same for three quarters now, and also the fourth will look not that much differently from that. That maybe next year we will see a little bit more a different development during the course of the year.
That may particularly be the case for order intake. We would expect that order intake will gradually improve in the course of the year. To translate that into, at least somehow a guidance for book-to-bill ratios, quarter- on- quarter, it's a bit too early. Please bear with us. We will try to give more transparency when we get a little bit closer to that. I think then you were asking for order cancellations. That is not really a very significant topic. It's rather, and I think we addressed that earlier in our call. It's rather that we are, in close alignment with our customers when it comes to the delivery times.
we have long-standing relationships to our customers, and therefore, within a certain frame, we are adapting also to their preferences here. We see some push outs of deliveries, and I've seen that before into 2023, but cancellations don't really play so much of a role. To your Q2 questions on LPS. First one, we would confirm the very healthy growth rate, and we also confirm that BioA is therefore, of course, increasing the share within the business. It's now a bit above the 30% mark, continuously growing. Yes, confirmation on that. Then, I think the last question was about the exposure of our non-BioA business in LPS to macroeconomic trends.
You mentioned the food and beverage industry, the chemical industry, et c. It's right. A portion of our non-BPS products are sold into such sectors, and it's clear that there is also some level of macroeconomic exposure and cyclicity. We don't expect much or too much effect here. Of course, this depends a bit on whether we really see a longer and very deep recession affecting such markets. I would say it's some exposure, but I would consider that to be rather a limited exposure t o a potential recession.
Great. Thank you very much.
The next question is from Odysseas Manesiotis from Berenberg. Please go ahead.
Hi, Joachim Kreuzburg. Hi, Rainer.
Hi.
First of all, to rephrase the question James asked a bit. just to get a better sense of where we are in the order behavior normalization progress. On the orders you received in Q3, what would be the average lead time for these orders to be delivered? How does this compare to the first half of the year? I know it's not easy to get this data, but if you have, it would be very helpful. A quick second one, could you also please quantify the FX headwind on the EBITDA margin for Q3 in the nine months? How should we think about FX and margin movements going forward given the fluctuations? Thank you.
Sorry. I'll take the first one, and then Rainer will talk about FX headwinds. Lead time, of course, is always quite a bandwidth because of the different nature of the products that we have. Nevertheless, I tried to answer your question, but please give me a bit of background so that my answer can be put also in perspective. We do have some standard products, for example, in the filtration arena, where we are talking about just a few weeks of delivery time between, we receive the order and then we deliver a standard sterilization filter, for instance, and such.
Even here, lead times have been going up a bit last year, so that sometimes instead of say three or four weeks, we're seeing 8-10 weeks in some areas. Then we also have customized products like customized bags. I'm still talking about single-use products here, where typically customers are used to 8-10 weeks maybe. We have seen in some parts lead times that were going up to half a year and partially even a little bit longer. Again, our lead times still have been relatively low in comparison to some others that we have seen in the market. Now, we are pretty much back to normal in this sector. A different standard also is in the area of systems.
As soon as we are talking about a bit more complex customized systems, like for example, bioreactor systems, then lead times can be because of the design phase involved, et c. Anyway, a couple of months. Here we haven't seen so much of a change during the pandemic, and therefore, I would maybe take that out of the equation, but just to give you a complete picture. That's rather what we are talking about. We have seen an extension of lead times by a factor of two or three , sometimes even more in some areas, and we are now much closer back to normal. We are clearly again pretty much across the board there on FX right now.
Yes. Let me answer that from a group perspective. When you come from last year's EBITDA margin to today's, of course, initially just by the conversion of our P&L by strong dollar, we initially have a positive effect by doing that, but they are really offset and counteracted by our hedging instruments that we are realizing. Of course, we hedged, if you look at the FX levels 12 months prior, they're significantly higher than what we are right now, where we are mainly driven by the US dollar below parity.
All in all, and then when you consider what the swing is really from compared to previous year into what is this year, you almost talk, it's a little bit below, let's say half a percentage point that is included just using the FX comparison, if you do the walk from last year margins to this year's margin for the first nine months.
Very clear.
Makes sense?
Thank you.
The next question comes from Oliver Reinberg from Kepler. Please go ahead.
Oh, Yes. Thanks very much for taking my question. I also wanted to come back on the order dynamics. In the past, I think you talked about the large part of the normalization is expected to end by this year. Can you just talk about is there a risk for further sequential decline from these levels? C an you also specify what amount of COVID-related business was still part of the nine months order book? That would be the first question. T he second one, I think mid-November, President Biden announced U.S. biopharma initiatives, talking about significant ramp-up of capacities and investments. Can you just talk about what is the potential from these initiatives for your operations? Thank you.
Yes. Thanks for these questions. I think we pretty much can confirm what we have said earlier this year, exactly as you said, that we think that we will see this for sure until the end of the year. As we said earlier this year, we may have seen most of this normalization by end of the year, but as I tried to say before, it's too early to really confirm that. I don't think that there is a big difference in what we are saying here. I think I would repeat now a lot of what I have said. We see quite a significant normalization. You can read that from the number.
I think, we also are using the respective comments here in saying it's a swift normalization, or it really has gained momentum in the course of this year, as customers now see normalized lead times. It now really has quite some momentum. Customers are clearly talking about their desire now also to get their inventory levels now down. Therefore, we think that we'll have seen a good portion of that probably by end of the year, but whether it will be definitely the last quarter, then, by end of the year that has been impacted by that, that would be too early to say. COVID order book, we don't see that much directly COVID-related business.
In this more narrow definition, in our order book, we would think quite a very low three-digit million euros number. Biopharma initiative in the US, of course, we are looking into that. It will be interesting to see how this will be operationalized. I think it should offer opportunities for ourselves, when there will be additional efforts being taken in the US to make the country more independent from any non-US-based manufacturing steps, because we are partially talking also about intermediates, et c., t hat are being produced elsewhere. Again, operationalization not yet clear, and therefore also not possible for us today to quantify that. I guess, going forward, we will see or get a little bit more clarity about that, and then we can talk about that.
Thanks so much. It would be rather a net positive for you.
Excuse me. Once again, please.
Apologies. I just want to clarify, but net will rather be a positive for you.
Yes. We do think so. We do have a very significant U.S.-based manufacturing. W e don't consider ourselves to be an importer into the U.S., and don't think that the U.S. wants to become independent from working together with a technology provider as we are with a very significant footprint in the U.S.. No, we don't think so. We rather believe that this could include additional opportunities. Exactly .
Perfect. Thanks so much.
The next question comes from Ed Ridley-Day from Redburn. Please go ahead.
Good afternoon, thank you both for the clarity of the explanation that you've given and the detail on the order book. We're glad to know my question is first of all related to pricing. If you could update us on the year-to-date price increase that's actually been realized, that would be helpful. Secondly, related actually to the last question, I was going to ask about China and your comfort with the business strengths there. If you could remind us how much your cost base is in China.
Thanks for these two questions. First on pricing. We have been introducing a second price increase after the inflation kicked in. I think we talked about that in July. As we said then, we were in very intense discussions with customers. We even had implemented the majority of the price increases by then, and I can confirm that we have been successfully closing this additional pricing negotiations with customers, have been able to achieve what we wanted to achieve, that we were able to compensate for what we have seen in price increases on the supply side.
I can confirm that, and I can also confirm that as we said back then, that our customers of course have seen that across the board, and got a good understanding of why that was necessary and so on. Going forward, that is of course an important question. We touched upon that as well back in July. We believe we will also see in 2023 a more significant price increase than what we have seen for many years before. I think that's a very obvious statement for sure. I'm saying that because it's a bit too early again to say what would be the number for our average effective price increase for 2023 b ecause a key driver for defining this number will be of course the inflation that we will see in 2023.
Of course, there are a lot of estimations out there, but I guess a bit too early to take any of those as the right benchmark. We expect to rather execute another pricing round earlier in 2023 once we get a bit more clarity. On cost base in China. Maybe first of all, as a recap, we do have approx 11-12% of our business in China, sales revenue-wise. We are to quite some extent operating on a China for China base in the sense that we are not producing much in China than what we are selling in China. That means we are not very dependent on any Chinese manufacturing for the supply of customers out of China. We are importing products into China.
There are some products that we are not producing in China, particularly certain products where we see also IP topics and other technology-related aspects, or maybe simply also the size where we just run one facility globally, as the key drivers. Of course at the same time, directly or indirectly, there are some supplies out of China, that are used in other facilities, even though there is no true critical or not too many key critical raw materials or components that we supply in China. Long story short, our cost base is in the high single digits, so a bit lower than our sales revenue.
Thank you. That's very helpful.
The next question comes from Hugo Solvet from BNP. Please go ahead.
Hi. Hello. Thanks for taking my questions. I'm left with two. First, to follow up on the previous one on price increase. Can you just clarify the level of price increase that you are running at currently, please? The second, if I remember well, last year you mentioned that you gained some positions as second suppliers among large customers. As they are now de-stocking or normalizing their order pattern, are you losing this position as a supplier, and are they coming back to a single supplier strategy? Thank you.
A very good point. Before I answer that one, on your first question, pricing, as said before, the effective price increase on a full year's basis, which is like a blended number. Will be mid-single-digit %. A gain, that reflects also what we see on the supply side b ecause, on the supply side, what really hits the P&L is not all what we are seeing on the purchasing side, in a month of, say, October, but because we also have, of course, used a lot of what has been on stock before. Therefore, we have blended numbers on both sides, and that is around mid-single-digit %.
I guess you also have in mind, okay, but what is the price increase that we then have implemented in comparison to the price levels in the period before? Here we are talking about higher single-digit numbers on average. The second question Yes. We think that we have been able to be qualified as a second supplier in a number of processes where we haven't had that status before, and we would expect to remain a relevant supplier in such cases. Again, I think you said that when phrasing your question, that's not really visible at the moment because this normalization trend is a much stronger one at the moment. We believe our position is a very decent one.
T hank you very much.
The next question comes from Colin White from UBS. Please go ahead.
Hi, it's Colin White here from UBS on behalf of Michael Leuchten. A couple of questions from me. Go ing back to the duration of order intake, you said normally six months, and you gave a couple of examples of people going up to 12 months. Overall , what is the duration of order intake at the moment? Then secondly, on inventory work downs, is there a particular type of customer where that has been more of the feature that they're working down their inventory? Can you just be a bit more detailed on that? Then finally, on the prices, given that the industry and Sartorius is going to continue to adjust prices for inflation, but is there a scenario at some point where prices would have to come back down? That's all from me. Thanks.
Thank you very much. The example that I was giving before that customers had tried to increase their inventory and successfully in quite some cases increase their inventory levels to 12 months after running on a six-month basis before. I think that's representative. It's not representing our stock level. I'm talking about the stock level that our customers typically have at least in those single-use products that are also qualified as a standard or that are validated into relevant processes on their side. That's it on that one.
I guess if I got your question right, you were also asking for, okay, how much in advance do customers place their order at us, and what's the delivery time that they would be expecting? This time between we receive the order and what's the expected delivery time. That again is quite a bandwidth. As I said before, there are a couple of standard products like, whatever, sterile filters, for example, where you would talk about rather four weeks or something. By the way, in the LPS domain, we are talking partially about even shorter lead times. There are a couple of standard products in the Lab Products & Services domain, where market standard is a week or so for some. Take pipette tips, for instance, and such products.
Syringe filters and microbiological test kits or so. Then, when we are talking about customized single-use products, which is already then a relevant piece of business, we are talking about typically something like two to three months. That's maybe a good yardstick here. When we are talking about complex systems, larger bioreactor installations, etc., then we are partially talking about a couple of months. I find that maybe a bit more relevant statement than these averages. I hope I was able to answer your question by giving that additional insight. On pricing, we don't expect prices to go down in any area at this point.
As what's really important here is, of course, our products are specified into manufacturing processes. That's an important factor here. T hen, the other one, of course, is also the relevance for process performance and in how far we can also differentiate here. I think that's important anyway. What we are talking about here throughout our portfolio are products that, in quite a number of cases, can really differentiate and do differentiate in regards to their contribution to the overall process performance of our customers. Therefore, for the majority of our products, pricing pressure is not so much of a topic. Of course, clearly, there's always a diverse world. Then, there are a couple of products where you have a different competitive dynamic. I mentioned pipette tips, for example.
That is more of a standard product where differentiation is not so much possible, and there are also more simpler bags. We are talking about that for a long time, where also differentiation is not so much possible and significant. That has to be said as well, again, to put as much color to the picture as possible. Again, the average price levels, we don't expect to come down.
The next question comes from Falko Friedrichs from Deutsche Bank. Please go ahead.
Thanks very much. My first question is, can you share your expectations for refinancing of your debt and potential implications for your interest expense going forward? Then secondly, sorry, I have to go back to the BPS segment for a second. I didn't fully understand what is driving this very strong acceleration from about 5% organic growth in Q3 now to the mid-teens growth in Q4, which is implied by your new full year guide. Then, my last question is, I think your bioanalytics devices, they can be quite expensive. D o you see any risk here in terms of the macro environment that might slow down a bit next year? Thank you.
Let me start with the refinancing part on the Albumedix, that's basically EUR 500 million. As you are aware, we're placing a promissory note [inaudible] to refinance it. It's in the market right now. So far, we have a good traction there. We are going to close that at the beginning of November. I am very confident in this, but we will see, of course, [inaudible] it's done. It's definitely a tougher environment than what we've seen in previous years, but to be honest, due to our business model quite well-received so far. Of course, interest rates unfortunately will go up that is in the nature year. We so far had a very good refinancing interest rate. Most of our debt was fixed at very attractive rates. These of course will go up more now probably 2.5%-3% points for just that 12.
Let's be clear enough for the whole net debt that we have, but these are the markets that we have. Of course, next year we will see a little bit increase in our financial results due to the interest expense that is expected. T hen, on the expectation for Q4, I guess we were also reporting on that regularly, that we have been taking a lot of effort to extend our manufacturing capacities over the last quarters, and that such additional capacities are becoming available gradually, one after the other. T herefore, we think that we are in a good position to achieve the sales revenue level that we have to achieve to meet our full-year target now.
Of course, when you compare this with Q3 as you did, Q3 typically is the weakest quarter, simply because of the v acation time, et c., both when it comes to effective working days on our side, but also on our customer side very much. That is based on these effects. I guess your last question was about in how far we would expect an economic downturn next year and in how far that would affect us. I think one has to expect a rather difficult overall economic environment in quite a number of countries, at least for the first half of next year. I think that's clear.
At the same time, I think, we all have made the experience that for quite logical reasons, the biopharma sector is quite resilient in that regard. Typically, the consumption of medicines and vaccines is not shortened and reduced by anybody during an economic downturn. The same holds true for any clinical trials, et c., be cause typically, also the financing abilities of such companies is solid enough so that they can afford doing so during difficult economic environments, but also simply because it would be the most expensive thing you could do to not push that forward. That's for biopharma, which makes up for almost 90% of what we are doing.
Of course, it looks a little bit different for some very early phases. I think that's a question that increasingly is asked by investors and analysts in these days where funding may play a role. Our exposure here is also not that huge because this funding is pretty much relevant for these very early phase companies. Therefore, I would say our exposure is relatively limited, but of course, particularly, it's not like zero. More specifically for the BioA business, I would say here we are mostly in the domain of customers that are not really very early phase. They are typically a little bit more advanced and therefore shouldn't be too much exposed to any downturns or funding issues.
Thanks.
The next question comes from Le Louët, from Société Générale. Please go ahead.
Yes. Hi, good afternoon. It's Delphine Le Louët from Société Générale, effectively. One question from Rainer and Joachim, before you don't have any more voice, again, one for you. Rainer, can you explain to us a bit more regarding the performance of the BPS division in Europe over Q3? Is it just a calendar effect, as you mentioned, regarding the weakness of the growth achieved into that region? Or any other explanation would be useful for my side.
Joachim, when you think back where the performance you achieved regarding the gross margin over the first nine months and into this macro environment, it's probably the first time over the year that we don't feel any more signs of deterioration of the macro environment from your side. What could be the extra cost that we should keep in mind or that could happen over the next six months that will perturb the trend we've seen so far? Thank you very much.
Okay. Let me answer the EMEA bioprocessing business first question. Basically, Q3 year-over-year is pretty much flat in that region. Keep in mind that last year, specifically Q3, we had in that single quarter in 2021 a growth of almost 50% in that region, really driven by the overall situation related to the pandemic, not only corona business, but also, of course, the business, the fact that Joachim just explained quite a few times regarding the really different order pattern. Basically, our customers placing larger orders far more ahead of time. By even just saying, okay, this is flat, it's still quite, if you see it over a two-year period, quite a healthy development of the underlying business, specifically when you see that certain of the corona business has switched into, let's say, regular business. I hope that answers your question.
Yes. Thank you.
The last question is from Naresh Chouhan, Intron Health. Please go ahead.
Hi there. Thanks for taking my questions. On energy costs, can you help us to understand how we should think about the long-term contracts that you've obviously had in place through 2022? When do you think those, or when should we think about those rolling off and those energy contracts being repriced? A lso, can you give some sense as to what percentage of your revenues or cost base is energy? T hen, secondly, on inventories, your own inventories. If I go back to 2019, your inventories were about a third of what they are today. Your inventories almost tripled over that period. Obviously, your sales have gone up, but not to the same degree. Two questions related to those, please.
One, what's the rationale for building up such a large inventory position at the same time as your customers are unwinding their inventory positions? Two, given that your margin improvement, a lot of that margin improvement has come from higher utilization. As this inventory build slows, should we assume downward pressure on the gross margin as that utilization falls as well? Thank you.
On the inventory level side, absolutely correct. We have intentionally started, actually already at the end of Q1 of 2020 to build up inventories because I guess we all remember that pretty much from one day to the other, supply chains got very much stressed and we wanted to be as resilient as possible, and I think it paid off. I referred to that earlier today. We really were performing quite well in comparison regarding our delivery availability, our lead times, et c.. Yes, now as we see the normalization, of course, we are also looking into in which areas we now can reduce our stock levels and in how far we should do that.
We do this in a very targeted and differentiated way because we are taking a close look to, of course, the suppliers, their exposure to certain risk factors, potentially, et c . How you would do that, I think this is what we apply here. Therefore, we will see a certain reduction of our relative inventory level going forward. Our main goal here is still to have a resilient set up and rather reduce our stock levels in those areas where supplies are both secure and with very stable supply situations in any respect, and where potentially the shelf life of such products and materials is limited. That's on that end. On the energy price level.
Yes, maybe I can also say something regarding that, because we're in a good position to actually have hedged at least for the major countries, and here we're really talking about Germany, which is one of the major consumers of the energy due to the production process we're running here. A good three-quarters of our exposure is hedged at good pricing. Overall, the energy in the group, and bear with me, I don't have here an exact figure, but I would say it's probably a little bit less than 0.5% of revenues that we hear and talk about energy. We are also hedging actually always a few years ahead and also for 2023 and beyond.
We also have the majority hedged. Question remains, of course, always in this regard, are these prices, and this is also politically driven, being, or are these hedges being honored going forward, or are maybe certain contracts then invalid? Overall, we have been, I say, in a fortunate situation to have with our more, let's say, multi-year hedging approach, not to be exposed too much, to be honest, to the energy increase, which hopefully we'll see or will hopefully come down also in 2023.
Thanks. There was a question on the inventory. As you reduce your inventories over time, what that implies for pressure on gross margins as your utilization essentially falls?
Maybe I'm missing some aspect here. The utilization would be related to our fixed costs. That means basically the fixed installments, facilities, clean rooms, machinery, et c., b ut not so much to the inventory. What you see indeed is that when we take additional capacities online, that we then get a step up in our depreciation, that has an impact on the gross margin. As our key financial performance indicator is the EBITDA, there it is deducted again. Therefore, this capacity effect, how we would look on them, and again, that is not inventory, that is clean rooms, machinery, and such, has no effect on our EBITDA. It's rather a little bit of temporary shift regarding our gross margin. Other than that, I wouldn't see any effect here.
Maybe I can add something. If you allude to the fact regarding its inventory, the pricing or the price increases are still somewhat sitting in inventory. Those will be offset going forward with additional price increases over the next periods, or beginning of the year as well.
Great. Thank you very much.
That was the last question for the day, and I hand back to Dr. Joachim Kreuzburg for closing comments.
Thank you very much, everybody, for the lively discussion and for all the questions that you have had. I hope we were able to answer them very obviously very much around the very specific situation following the pandemic, I would say. Again, I would say very differently to normal times, order intake needs a lot of explanation as it is more a reflection of a development that we have seen over the last 24 or maybe even 30 months than being a good indicator for the business development going forward. Therefore, I really appreciate your interest so that we can talk about that in more detail.
Looking very much forward to our next touch point, which will be then end of January next year when we will publish our preliminary results, giving out a guidance for 2023, and then also update our midterm outlook for 2025. Thanks a lot again. Take care. Talk to you later. Bye-bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.