Good day, and welcome to the Sartorius and Sartorius Stedim Biotech conference call on the nine-month result, 2023 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Joachim Kreuzburg, CEO of the Sartorius Group. Please go ahead, sir.
Thank you very much, and also hello, and good day from my side. As always, I would like to kick it off by walking you through the highlights of the past three months and the nine months of 2023, and then Rainer will walk you through the detailed financial results for the Sartorius Group. And then after that, René, CEO of Sartorius Stedim Biotech, will talk about the Sartorius Stedim Biotech numbers, and therefore, also highlighting the bioprocessing business in more detail as well. So again, let me start by talking about the most important points over the last couple of months and weeks.
So, obviously, and I think everyone is following the industry quite closely and is seeing also the recent newsflow from peers as well as from our customer segment. There are a couple of industry-wide headwinds that also have influenced the business development and particularly the top line development at Sartorius during Q3. For bioprocess solutions, we have seen signs of recovery. During Q3, we believe that we have seen the bottom of our order intake development, most likely around end of Q2, so that's a positive one. But we see that the momentum is lower than initially expected. For the lab division, we have seen, and again, I think this is an industry-wide topic at the moment, a challenging Q3. It was more challenging than we anticipated.
Particularly China and the U.S. have to be mentioned here, where we saw lower investment activities and more cautious cash management by customers. Therefore, we also have seen some impact in regards to the bottom line. Our profitability has been impacted by those volume effects and also by some product mix effects. That is particularly the case for BPS, and I think more details later during the call. Last week, a week ago, we have therefore adjusted and lowered our 2023 outlook, in regards to the shift in percentages, a bit more in LPS, but also for the profitability. Again, unfortunately, because of the momentum not being at a level that we had expected. For 2024, we are expecting profitable growth and also for the midterm.
Nevertheless, we are reviewing our 2025 ambition, and we'll give quantitative updates and guidance for both 2024, as well as for the midterm, by the end of January next year, when we'll publish our preliminary results for the year 2023. However, let me finish this part by saying, we consider, as we always have underlined during the calls about the previous quarters, we consider the fundamental growth drivers to be intact. But at the same time, we clearly have to say that we still are in times with an above average volatility in regards to demand, partially triggered by, let's say, segment external effects, particularly geopolitical and geo economical uncertainties and tensions. And with that, I hand over to Rainer for the details.
Thank you, Joachim, and also, first of all, welcome to today's earnings call from my side as well. Actually, it's gonna be my last call in my current position, and I wanna actually say a quick thank you for the good exchange over the last six years, and I'm sure we'll see each other on one of the other conference out there. So, but now let's go back to business here and see what actually the first nine months performance was about. Sales revenue declined in constant currencies by 16.4% to EUR 2.5 billion. Order intake decreased by 28% in constant currencies to EUR 2.2 billion. Clearly, the reflection and of course, the result of a lower than expected recovery. This led to an underlying EBITDA of EUR 733 million.
That's a margin of 30.3%, a decrease of 30.3% and a drop in margin by 5 percentage points to 28.8%. The underlying earnings per share for the ordinary is EUR 4, so it's a drop of 45%, respectively, the preference EPS is EUR 4.01, also dropped by 45%. We have to seriously say the sales revenue was impacted by roughly a little bit over 1% for acquisitions. And without the corona-related business last year, keep in mind that this year we're not tracking this anymore because it's really marginal, the sales decline would have been slightly above 10%.
If we look as always and put this whole thing into perspective, we see here that on the sales revenue side, the decline, but more important, as Joachim pointed it out, let's say, the bottom out of the order intake. Q3 was on the bioprocessing side the strongest quarter, and therefore, we believe that this is now the bottom out of this development. René will later on explain more about that when he's talking about SSB respective bioprocess side. When we have a view at the regional distribution, we really can say that all regions have been influenced by the destocking. And on top of that, the regions, USA and China also are, let's say, struggling a bit more with the low investment activity of our customers. What does that mean region by region?
Let's start from the left, on the America side. Here, we really have a decline of 12% to EUR 973 million. Both divisions actually have the lower revenue here. Joachim mentioned on the LPS side, we're really seeing quite a lot softer demand, specifically with our bio and this portfolio, and the investment reluctance on smaller biotech customers. In EMEA, we actually have a decline of a good 15% to EUR 973 million. Here, the significant driver is really on the bioprocessing side due to the higher comps. But also, let's keep in mind that the Russia business weighs here on the top line, with approximately a good three percentage points due to the fact that the business here is decreasing as expected.
In Asia Pacific, we have a more significant drop compared to the previous nine months period of 23.4% to EUR 600 million. Here, we really have the impact of the weak business performance, specifically in China. When we look on the sales by region compared to year-end 2022, we actually see Asia Pacific drop by 2 percentage points to 24%, and each of the other regions, EMEA and America, has gained 1 percentage point to 38%. On the Bioprocess Solutions, you already mentioned it upfront, it's really the slow recovery and the ongoing destocking and the relatively low production levels of our customers that lead to a poorer or weaker performance. Let's start in the middle. Sales revenues decreased in constant currencies by almost 18% to EUR 1.9 billion.
Approximately two percentage points were contributed acquisitions, and the Russia effect is also actually counteracting that by also close to two percentage points. Excluding the COVID business that is included in the comparable of previous year, the decline would have been slightly more than 10%. The order intake overall decreased by almost 29% to EUR 1.7 billion. Nevertheless, the order intake is up quarter-over-quarter. I just mentioned that Q3 was the strongest or quarter on the bioprocessing order intake, but still impacted by the destocking, lower production levels and a muted investment activity. We see really there's a demand recovery, but a little bit slower than expected. What does it mean for the profitability of the division? The underlying EBITDA also decreased by almost 33% to EUR 592 million.
This corresponds to an EBITDA margin of 29.7%, and here created a loss of six percentage points. As we mentioned in earlier calls, the economies of scale, of course, work in both ways, due to the drop in volume and also due to an unfavorable product mix, where we see a bit more instruments and systems. These are the two contributing factors to the lower margin. If you look at the Lab Products and Services division, we see here sales revenue declining by a good 11% to EUR 553 million. Excluding COVID-related business, the decline would have been around 9%. Order intake is really impacted overall by weak end markets and low investments by early-stage biotech companies.
Here, from the regional perspective, we have to point out China and USA, so that led to a decrease in order intake by 24% to EUR 493 million. Nevertheless, the underlying EBITDA could actually be held at a satisfactory level. The margin is almost only one percentage point lower, 25.6%, and amounts to EUR 141 million. If you look at some key financial indicators, we of course see here a high investing cash flow driven by the acquisition of Polyplus. Total investing cash flow amounted to almost EUR 2.7 billion, and of course the substantial CapEx program that we're running and that we highlighted also in the previous quarters.
Nevertheless, let's also have a look that despite a quite significant drop in the underlying EBITDA of around 30% to EUR 733 million, we actually have an increase in the operating cash flow of 20% to EUR 543 million. That is really due to the fact that we really now have a strong focus on internal cash generation. Keep in mind, nine months 2022, we're heavily affected by an increase in working capital of over EUR 300 million. Nine months 2023, we actually see here a positive effect out of working capital. We believe there's also a further room for improvement to generate further cash out of the, not only stringent cost management going forward, but also further optimization of the working capital.
The extraordinary items in are driven by the acquisition, amounts to EUR 96 million, and of course with the integrations, the structural measures and further corporate projects. The financial result, keep in mind here, that of course we have now a substantial higher interest expense since we issued the bonds. But nevertheless, here we also see the fluctuation of the via separations earn-out liability as we did in the previous quarters. If you look at the balance sheet, of course, here we see the drop as expected in the equity ratio from 38% to 27.6%, is clearly due to the increase of the balance in sum, driven by the acquisition of Polyplus.
Net debt, of course, as expected, is a little bit higher than EUR 5 billion, and net debt underlying EBITDA amounts to 4.5. Of course, a high leverage, we anticipated it to be lower, but due to the weaker performance, this one will also still go a bit higher. But we have a clear intention by generating operating cash flow, and you see that on the right-hand side, to deleverage until 2025 to stay in a solid investment grade level, which would mean a net leverage of three. So therefore, we do not plan any equity measures. And with this, I give back to Joachim you for the outlook.
Yeah, thank you very much, Rainer. So, we have updated our outlook for the year 2023, a week ago, on October 12. And here you see it in a graphical presentation again. So for the Sartorius Group, we are now expecting a sales revenue decline by approximately 17%. The effects from COVID, respectively, acquisitions, remain at the same size. So five percentage points, respectively, two percentage points. For Bioprocess Solutions, we are now expecting -18%, and for the Lab Products and Services division, minus 13%.
As I said at the beginning, there is also a certain effect on the profitability that we are expecting, which is now from the bottom to the top for LPS, slightly above 25%, slightly above 29% for the Bioprocess Solutions division, and for the group overall, then slightly above 28%. The comments relating, related to the COVID business, are the same. We expect this to be absolutely marginal for the year 2023. The same is regarding our activities around CO₂ emission intensity reduction. When it comes to the CapEx ratio, we now expect a one slightly above 17%, which is only or exclusively attributed to the lower sales expectation now.
We, of course, are managing our CapEx carefully, also going forward along the lines what Rainer already said regarding internal cash generation. Of course, we are adjusting our CapEx to the later than expected normalization. And therefore, again, this is only related to the sales development. Net debt to underlying EBITDA, Rainer said it already, we expect this number to peak around the end of this year, and we expect the number slightly above five. And we will focus very much on a significant deleveraging of our balance sheet through internal cash generation. So, and then my last chart before I hand over to René is about an extension of our CO₂-related set of targets.
We commit to extending our target set by targets that will be, at least this is what we expect, approved by the Science Based Targets initiative. That includes, of course, activities that we already have started regarding decarbonization, together with suppliers and also customers. And one important factor, of course, is the energy side of our own activities. Here we are shifting towards renewable energy sources regarding electricity. We have already achieved quite a bit in Germany. The large consumers are already using hydropower-generated electricity, and we are going further into that direction. Overall, we aim to be climate neutral by the year 2045. So and with that, I would like to hand over to René for Sartorius Stedim Biotech.
Thank you, Joachim. Hello, everybody. I will walk you through the Q3 results of Sartorius Stedim Biotech with similar dynamics as for the group described by Rainer, particularly Bioprocess Solutions division. After the extraordinarily strong 2022, sales revenues declined by 19% in constant currencies to EUR 2.069 billion. In Q3, the decline, excluding COVID revenues, which were only marginal this year, was slightly below 13%, and at constant currencies. Acquisitions contributed twl percentage points to the revenues. The order intake decreased by 31% to EUR 1.76 billion, with book-to-bill ratio going up now from 0.8 after Q2 to 0.85 now after the nine months. The Bioprocess division, Rainer talked about that.
It translates there to a book-to-bill of 0.94 in the third quarter and slightly above one in the month of September. Yeah, we have seen some recovery in orders in Q3, particularly in September, but a bit softer than we have anticipated. We see clients continue to reduce inventory, however, at a slower pace than initially assumed, partly due to lower production levels. We expect the situation to slightly improve in the final quarter. Moving forward, we continue to see a general reluctance in investing on the part of our customers due to over capacities. That happens. We see that particularly in North America and China with less larger equipment projects compared to previous years. The underlying EBITDA decreased to EUR 594 million, mainly due to volume.
The product mix, however, also contributed, shifting more to the equipment in sales, which contributed to the EBITDA margin decrease, then being at now 28.7% after nine months. Price effects on the procurement and the customer side largely offset each other. The number of employees worldwide stood at slightly below 11,000, which is a reduction by more than 1,000 headcounts we did mostly in operations, where we have adjusted the capacities to the lower demand. Underlying earnings per share were at EUR 3.47 compared to EUR 6.58 previous year. Now, putting the numbers into perspective for the sector study in biotech, we see quite a strong sales increase over four years, almost doubled.
You see on the curve the order intake normalization now flattening with slight increase in Q3 compared to Q2. On the next chart, the normalization on demand, which we have seen going on since the middle of 2022, continued across all regions in the third quarter. In EMEA below prior year, as Rainer pointed out, due to very high comps and also due to largely discontinued business in Russia, weighing on top line with around 4 percentage points. America is impacted by destocking and lower investments. Asia, mostly impacted by China, where we see continued low activities and expect that also the recovery here will take longer than compared to other region.
Moving to the next chart, relevant profit totaled to EUR 320 million compared to EUR 607 million in the previous year period. Investing cash flow mainly reflected, reflects the acquisition of Polyplus, as Rainer mentioned that, and the ongoing substantial CapEx program. The ratio of CapEx to sales revenue was 17.9%, higher due, mainly due to lower sales level. Now shifting to our focus to the internal cash generation, we are shifting also the CapEx timing, in some of, for some of our programs, accordingly, due to delayed demand, operating cash flow slightly above previous year, three percentage points around, pushing now the inventory levels now down after build up during the pandemic to secure the product supply.
Looking at the financial indicators following the financing of Polyplus acquisition, the equity ratio stood in line with expectations at 33%. Net debt stood at EUR 3.695 million, resulting in a ratio of net debt to underlying EBITDA of 4.0. Moving now to the updated outlook, we now forecast a sales revenue decline of around 19%, excluding COVID-related business, a decline of around 14%. Acquisitions are expected to contribute around two percentage points to the sales revenue development. Due to lower expectations and expectations on sales and product mix effects, the underlying EBITDA margin is then expected to be slightly above 28% now for the full year of 2023.
The CapEx ratio is projected then around 18% for, for the full year 2023, and the ratio of net debt to underlying EBITDA at around 4.5 for Sartorius Stedim Biotech. And with that, I think we can move to Q&A.
Yeah, exactly. We can move to Q&A. Let me just add one remark. I mean, today, our call is, I think, three hours earlier than usual. And thank you for everyone who made it, that you were able to adapt to this slight change in timing. I would like, before we start with the questions, to inform you that we have a hard stop a few minutes before 2 P.M. CET, because we then have to jump into another call that has been scheduled. So therefore... But I think we should have sufficient time. That means we have one hour now. Thank you.
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 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please press the handset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please.
The first question comes from Odysseas Manasiotis from Berenberg. Please go ahead.
Hi. Thanks for taking my questions. I have two, and a quick one, please. So first of all, taking into account your previous expectation of consumption exceeding this year's sales by EUR 500 million, as your customers are working on the inventories, do you still expect the return to underlying order trends to support a higher than usual growth year in either 2024 and 2025? How do you expect this to shape up? Secondly, given your recently tempered expectations, against your still high leverage and unchanged three times net debt to the EBITDA target in 2025, would you consider any methods such as raising equity to accelerate delevering? Or do you still believe this is fully achievable using organic cash flow generation?
The last quick one, from the M&A contribution to orders in Q3 implied by Rainer, is it fair to assume that Polyplus orders in Q3 were around EUR 15 million in terms of contribution to the BPS order intake? Thank you.
Yeah. Maybe let me take the first two. So, we indeed would confirm the view that the consumption of our products by our customers is significantly higher during 2023 than our sales revenue shows. And we think overall, the number around EUR 500 million is a reasonable assumption here. The question and then you said, okay, that should translate into an over proportional growth. Yes. The point is here in how far this will materialize within the fiscal year of 2024, and that depends very much on when exactly this effect then fully kicks in. So and I think you're closely following also statements by peers and customers in that regard.
So that's a bit, the question. But, yes, overall, we will, we will see very significant, growth from that. Again, in how far that exactly hits, the two next fiscal years you were asking for, that, that we will see. And of course, as soon as we have more insights here, we will share that with you. I would like to confirm, also what we, expressed, before when we were presenting, and Rainer presented, very much on cash flow related numbers as well as, financial KPIs and, and net debt to EBITDA, first of all. We do not plan any equity measures at this time. And maybe on the Polyplus development, Rainer?
Yeah. So, when we look at the order intake increase in Q3 compared to Q2, roughly for Bioprocess Solutions division, that was roughly 15%. I would say there are, like, three drivers for that increase. One is now returning orders for materials to refill the inventories. The other effect would be new business wins in of new projects, and third, of course, Polyplus contribution as well. And I would say roughly, those three drivers contributed a similar on a similar level to that increase.
Thank you for the clear answers, and Rainer, best wishes with your new role. It was great having you around.
Thank you.
The next question comes from Vineet from Citi. Please go ahead.
Hi, Vineet from Citi. Thanks for taking my question. So, maybe first on the business mix within BPS. I think your equipment share at about 25% is a little higher than most of your peers. Do you think that means recovery is a little bit slower for you in 2024, given consumables probably expected to recover faster? And does that have any sort of implications in terms of margins? And then just staying on margins, can you give us some sense as to how we should think about 2024? Look, I know you're not going to guide on 2024, but if you could give some sort of metric that, you know, X% organic growth, which is mostly volume driven, can drive about Y% improvement in margins, I think that would be really very useful.
So, the audio was not that good, so I understood the... Your first question, it's about kind of over proportional growth of Sartorius during the equipment business. So the dynamics we see, and that also, of course, impacts the profitability profile and the dynamics here. We compared to previous year, this year see a quite lower investment of customers in equipment that is reflected in lower order intake, then, for the equipment this year. On the sales side, is the opposite – the higher orders we have seen in 2022 now being realized in 2023, shifting the ratio of equipment within the portfolio and then impacting the negatively the profitability.
What we would expect then for next year, to give you an idea about the dynamics, how we see that? With the increasing orders then for consumables, and then going from a rather weak year of order intake equipment into then 2024, this ratio should get back to normal, meaning there would be a—we will see a positive profitability impact here.
Yeah, and on the second question, exactly as I said, it's not the point in time at which we can give a solid guidance for 2024, but maybe, yeah, more qualitatively, the mechanism and/or the mechanics within our PNL we consider to be fully intact. So, top line growth translates in a, yeah, quite significant way into additional profitability. And the way how one could look at it is, just as you have seen during 2023, where we had to deal with a, yeah, quite significant decline in sales revenue with an effect on the profitability, I would expect an effect of a similar magnitude and similar ratios, in the case of the expected top line increase again.
So maybe that gives you a little bit of feeling for how the mechanisms are, and please bear with us, but at this point, we really cannot be more precise than that.
Thank you.
The next question comes from Richard Foster from JP Morgan. Please go ahead.
Hi, thanks for taking my questions. Three, please. First question, just on the book-to-bill, obviously in Q3, went up nicely into the 0.9 range. How should we think about that in Q4? Should we expect a book-to-bill improvement so that we can get above 1 in the quarter? Second question, just on the remaining order backlog. I think at the beginning of the year, there was a EUR 500 million backlog, and I think maybe there was EUR 150 million up to EUR 100 million left, going into the second half. So after Q3, is all the backlog gone so that we are sort of fully normalized?
And then just in terms of timing of the stocking, I think we'd be just interested in more color around that, just around whether it's, you know, Q4, the stocking done, Q1, early Q1, or indeed slipping into Q2. That would be very helpful as well. Thank you very much.
Yeah, thank you for the questions. Maybe again, we share a little bit the answering this, maybe in general. First of all, I would like to differentiate a little bit between the two divisions here, because coming back to, I think our comments before, we have seen a challenging third quarter for the life science research segment, which had an effect on our LPS business, where the book-to-bill ratio was relatively low in Q3 indeed. Whereas in BPS, we have seen a positive trend, and that, of course, was then also dominating the group's numbers as BPS is the larger division. And more specifically, we also have seen a book-to-bill ratio slightly above one in the month of September.
Now, you know that we always emphasize, and I would like to underline that here again, that it's not advisable in the business we are in, to focus too much on short-term trends, and that, of course, particularly is the case when talking about single months. So please just take this as an additional insight for why we are saying that we see qualitatively the right trends and the expected trends, but again, yet not to an extent and with the momentum that we initially were expecting. So now, what does it mean for the Book-to-bill ratio in Q4?
We would say, for LPS, probably another rather challenging quarter, whereas for BPS, and I think René expressed that, we do expect rather a further, improvement yet on a, again, lower than, initially, and initially means like, you know, during the first half of this year, expected, level. So that's on book to bill. And then, of course, this all again, fits, and is related to each other backlog. The way how I maybe would slightly phrase this differently is that we indeed had a, excessive or unusually high order book. And that we carried also into 2023.
You are right, this excessive order book, or unusually high order book, has been substantially been reduced, and the number has been going down, a little bit further. Now, the question that you are asking is: Is it all gone? And here we would say, maybe not all, because then logically, we would say, well, back to normal in Q4. So there, there are probably still some pockets of excessive inventories at some customers lefT.
Here the point is, and I think we have discussed this before, it also depends a little bit on whether some customers, and, you know, some of those also have been making respective statements just recently, who have been involved in the manufacturing of corona vaccines, now may have some inventories that were initially been dedicated to the manufacturing of corona vaccines. In some cases, like, let's say, standard sterile filters, for instance, can use them for other purposes. So therefore, the question of what is excessive stock at a customer is not a black and white number. So I hope I'm not overwhelming here anybody by details. We just want to give insights and add color so that you really understand the mechanisms behind.
So, I guess what we want to bring across is we are cautious in saying, "Oh, it's all gone." Yeah, but we definitely would say it's going down further and has been going down further. So, and then the timing of restocking, maybe, René, you already talked about that. Maybe you give some insights where you see the mechanics at there.
Absolutely. So looking at the destocking, there's a few parameters to watch. We try to get a better understanding with talking to our customers. One is, of course, the level of inventories build up during the pandemic. Second is the target inventory levels, and then the consumption rate. And what we see happening and how we see this prolonged or softer recovery is that some customers have built their own inventories of final products, resulting then in less or lower production levels and less consumption rate of the materials. We see from some customers to further decreasing the target inventory levels, so the reach for the materials and inventories then longer.
What we also see as a kind of a changing ordering pattern behavior is that customers are now rather placing more of smaller orders than it used to be in the past.
Thank you very much.
The next question comes from James Quigley from Morgan Stanley. Please go ahead.
Great, thank you for taking my questions. I've got a couple, please. So just picking up on the last question in terms of the backlog, now sort of all starting to or potentially starting to decrease. Should we now be thinking that the historical relationship between orders and sales in terms of the six-month lag or six-month offset between orders, recognized as sales, should start to hold, should start to come back? So third quarter order this year should be informing first quarter sales next year. So is that relationship now coming back into, back into play? And secondly, on the midterm targets, previously, you included about EUR 200 million in the LPS division for M&A. How are you thinking about that going forward? Or generally, including an M&A portion in your guidance.
Third, a quick one on balance sheet health. You mentioned about 5 times net debt to EBITDA by the end of this year, which is, I think, slightly ahead of expectations on the investor side. So can you talk to the speed of deleveraging, and then also any sort of risks around that from an operational perspective that may lead to either you not hitting the 3 times target or even maybe deleveraging potentially far faster than that? Thank you.
Yeah, thank you for your, for your questions. So maybe, maybe I, I start with the last one. We have, we have shown this one graph, or we have shown it for both Sartorius Stedim Biotech as well as for the Sartorius Group, how, how we look on it from, and I, I think we reiterated that when, when talking about the year-end projection, that we think that there will be the peak, and then the target for 2025. And I think that is a good indication for the speed at which, that approximately will happen.
It's maybe not advisable to use this as a yardstick on a quarterly basis, but on an annual basis, I think it's a good guidance to consider that as the speed at which we will reduce the net debt ratio going forward. So I would say it's quite a significant speed at which we will do this, and on lower levels, we have done that before. Also in other cases, a couple of years ago, we were able, after more significant M&A, to reduce our net debt ratio very quickly to lower levels, and we are confident to being able doing this this time as well. So you were asking for the midterm targets and in how far they would include certain portions of M&A.
I would really like to ask for some patience here until end of January, when we will talk about the midterm targets. I would like to add here maybe a few thoughts, nevertheless, again, to be also transparent. First of all, we again would like to underline that we are very that we think very positive about the underlying market dynamics... and the growth potential that they offer. We are also very confident about our competitiveness, our positioning to participate in this market growth. And I think for many years, we have shown that we are able to grow faster than the market, and we believe that we should be able doing so going forward, as well.
My third remark would be that I go back even a little bit more. We have defined our 2020 targets, beginning of 2012. Beginning of 2019 then, when we were setting our guidance for the year of 2019, we then first time communicated our 2025 targets, because we considered 2020 not to be any longer a midterm time horizon. So therefore, I think what we have is besides, that we are looking into the different factors from a quantitative view. At the moment, as we said, we also have to think about what's the right time horizon to give you an idea where we are heading towards when we communicate this at the beginning of 2024.
So please don't misunderstand me. I'm not saying here we will choose a time horizon of 2030. That might not be the right situation at the moment in the industry to choose such a long time horizon. But we think about what's the right framework for doing that. And the reason here is that as we talked about before, maybe it's more likely that not at the first of January, everything is back to normal, but this, that this will be rather a little bit more gradual effect, as also, you know, our customers and our peers are thinking about it, and I think we share that view.
And that means that, how growth will look like in 2024, how the dynamics then will be in 2025 and beyond, that still might be a little bit, not volatile to an extent as, as we have seen it now over the last, three years or so, but still maybe not fully normal, and for sure, not maybe necessarily very linear. So that's why, I think, we, we really would like to ask for some patience. And that then, of course, includes also what might be the order of magnitude for some M&A. And, then finally, that leads me to, my answer for your first question, in how far order intake is a good yardstick for, the next one, two quarters of sales revenue.
I would say, it's not—we are not yet there again, that this is the best measure and best indicator to choose. I believe that within the next couple of quarters, we will increasingly get there, but yet it's not. Because yet, order intake is still very much influenced by historical effects, i.e., overstocking and not already fully reflecting the future business expectation of our customers. Once this has been kicked in, then I believe order intake should become, again, a reasonable indicator for the business of the next couple of quarters. I hope that helps.
It does. Thank you very much.
The next question comes from James Sherborne Tempest from Jefferies. Please go ahead.
Yes, hi. Thanks for taking my questions. Firstly, just on leverage. You say you don't plan to raise equity at this time, but if leverage is expected to be more than 5x, can you help us understand if it's still elevated in 2025, what could possibly be a threshold if you were to revisit this? So, you know, is it north of 3x or whatever it might be in terms of, you know, thinking about equity as a way to potentially strengthen the balance sheet. Secondly, you say in the release that the visibility and predictability is lower, but I guess now we're mid Q4. How much visibility do you have, say, to the end of the year?
I understand that obviously the order intake is higher in September, and if you're thinking one to two quarters, potentially delivering on some of that. I imagine some customers might also be looking at their working capital. So what's the risk that, you know, some of the orders potentially, say, in December, would slip into January in terms of managing balance sheet end dates and how to think about that, please? And can you also give us a finally ... My final question, can you give us a bit more details to what you're seeing in China, and how to think about that business from here? Thank you.
Hi, James, it's me, Rainer. Maybe I take the first question regarding the leverage. So, as I outlined before, we have a clear deleveraging strategy that is based on internal cash generation. So basically, really adjusting cost base where needed, improving working capital, and of course, also, revisiting the CapEx program and see what we can actually optimize on the timeline. With all these components, we believe, and our explanations are there, that by 2025, we should be in, at an investment grade level, meaning around three, or, or 3.0, in this regard. So, what is the fallback plan? I want to be very clear, it's only a fallback plan.
It's not any part of our really operational projections or ambitions here. As last resort, we would use probably then shares, but this is not part that is on the agenda right now. We are confident that we will be able to deleverage through our the increase in our operational efficiency. I want to be very clear here. And the other ones were you, you're going to René, go on.
Yeah, maybe I start before René maybe talks a little bit about how we see China at the moment. So, you were asking for whether some customers might be very cautious in regards to their balance sheet management, working capital management, and how they might and how far that might have an impact on their timing of orders. Difficult to answer. It's definitely the case, and I think we said that before, that we do see cash-oriented behavior at customers on a completely different level in these quarters now. Of course, also following general uncertainties, following also high interest rates.
So, we do not anticipate at this point this to be a major effect towards the end of the year, because as I said, we, we are seeing this now already since a while. At this point, we don't have any indication that this will become a major effect for December then in particular. Yeah, maybe some color on the China business, René?
Yeah, absolutely. I think applies to both divisions, that China, quite with quite low activities and low investments for both both businesses. For Bioprocess Solutions, definitely over capacities installed during the pandemic. We also see customers kind of reevaluating the pipelines of of the drugs. And overall, regarding the recovery in China, we would expect it's gonna take longer than than in other regions, partly also due to lower consumption levels. So the overstocking inventories are, we see them in China, but also the the consumption is is definitely slower than than in Europe or U.S.
Thank you. Just a quick clarification, if I can, just on the leverage question. When you talked about, you know, one of the options, potentially revisiting CapEx to optimize on the timeline, are you essentially saying there that looking at, you know, capacity expansion plans, you'd potentially to push some of those out, a couple of years? Just to help me understand what that means.
Yeah, it basically means, I think we shared with you the main capacity expansion plans. Most of them are at existing sites where we are expanding our capacity, plus then, as a major new site that we are building up at the moment is one in Korea. And of course, for all those projects, we have certain levers in accelerating certain execution or slowing it down at certain periods in time. It's, you know, all those projects have some flexibility here, and of course, we are adjusting the timing of when we believe we need this, the respective capacity to be really available a bit, and that is what we are working on. And what will be one element of, or what we call internal cash generation optimization.
That's great. Thank you.
The next question comes from Oliver Metzger, from ODDO BHF. Please go ahead.
Yeah, good afternoon. Thanks for taking my question. So the first one is: Given the recent development, which inventory level at customers do you see as the new normal? Before the pandemic, we talked about 6-9 months. So do you believe that currently, with, say, 3-4 months, is the new normal? And second, it would be great to know, great to get some insight about the destocking pattern on different client that we saw, in particular, pharma versus CDMOs. And the last question is just about price discipline in your industry. So given the longer than taking destocking, so do you see some tendencies that price discipline, in particular for upstream deteriorates? Thank you.
Hmm. Yeah, maybe I take the one on the destocking dynamics for different customer groups, segments. What we can see today is that maybe the earliest recovery we see comes from large pharma and larger CDMOs, followed by particularly smaller CDMOs, where we see certain impact of lower demand from small biotech companies, which bring projects in early clinical, preclinical development. And there we definitely see an impact, difficult to quantify that, but I think that gives a bit of a different dynamics in those smaller CDMOs with less yet contracted capacity in commercial manufacturing compared to the larger players.
Yeah, maybe inventory levels, if we got the question right, I would say, we would consider that, and I think René elaborated a little bit on that as well before, that the customers have defined their target inventory levels around the level that they had defined before. Maybe some, again, talking about, you know, high interest rates, et cetera, have become a little bit more ambitious here or are still about to become a little bit more ambitious. Hard to say, well, that a certain whatever number of months, three, four, whatever, would be the target inventory level at customers. I think it really differs from customer to customer.
It really differs from product segment to product segment, but in general, we would say that what we have seen is that whereas during the pandemic and at the very early phase of the pandemic, customers increased their target inventory levels very significantly, and some said that, "Well, maybe after the pandemic, we will reduce, but not fully back to the previous levels." I think we now have seen that they are going down to the previous levels, and maybe, and then again, it differs from customer to customer, maybe a little bit further, but again, hard to say, well, this is the number. Pricing, again, not 100% sure, as the acoustics were a little bit bad here.
Pricing, I would again confirm that we have balanced what we have seen on our cost of goods sides and other cost factors by our respective price increases of our products. We are in, of course, very close exchange with our customers and believe that this has been very much characterized by a partnership approach with our customers and has been well accepted. Of course, at the moment, we would say this high time of the inflation is probably behind us, so wouldn't see any major pricing initiatives for the next couple of months, maybe more back to or quarters, more back to normal.
But I think we all know what's going on in the world, and, if there is another shock on energy prices, et cetera, we have to see what happens. But at the moment, I think, it's the pricing level, also the pricing trend is rather back to where we have been before.
Okay, thank you. So therefore, no price pressure, just to clarify. Or no incremental price pressure. Hello?
Yeah.
Do you hear me?
Yes.
Yeah, okay. Sorry, obviously, the line was dead. So just to clarify, you don't see any incremental price pressure rising over the last month?
Oh, okay. Sorry, sorry. I yeah, exactly. That's, that's, that's correct.
Okay. Thank you very much.
The next question comes from Charles Pitman from Barclays. Please go ahead.
Hi, Charles Pitman from Barclays. Thank you very much for taking my question. Maybe just first on China, I was wondering if you could provide any kind of further breakdown on which levels of the business you are facing, kind of most competition from, local, private, players in the area, and whether you can update us on how you're thinking about potential for market share gains post, pandemic. Second, just ahead of the kind of U.S. election year next year, how are you thinking about the outlook of the kind of funding environment? Is there anything you're hoping to see or not see, and what impact would there be, if any, if the IRA is gonna push back on during the election debates?
And then just finally, a quick clarification, in terms of the setting of your midterm guidance, are you going to be consulting with incoming CFO, Florian Funck, or is there a risk that these could be adjusted when he comes in? Thank you.
Yeah. So maybe, maybe China, René?
Yeah, on the local competition, so what happened is, that during the pandemic time and the broken supply chains, the local competitors gained quickly on market shares, where partly preferred to as an alternative to multinational suppliers like Sartorius. We see today that that stabilized very much. Even I would say there is a slight trend backwards now when the supply became much more reliable again, the customers in China are returning to higher quality suppliers as well.
But, of course, there will be a certain level of local competition going on moving forward here, but it's today definitely not impacting, yeah, our business in a certain way in China. That very much what we see is the market slowdown and not a, yeah, losing any market shares to local competition.
Yeah, regarding your second question, I have to say unfortunately, our crystal ball doesn't help us much here, so it's very difficult to, I think, have any or derive any quantitative scenarios from any possible outcomes of the U.S. election next year. What I would say, because I fully understand your point regarding the funding environment, that's clear. And there may be, how we would see it is, it has been at a very, very high level during particularly 2020, there it started, 2021, very high, still to quite some extent, a very well-funded small biotech companies and others in 2022, after the high, you know, highly available money for this space before.
So we have to keep in mind, the levels were very, very high. Now, we see this correction during 2023. But we would expect that the general trend, given the fact that this segment, this industry is still very, very innovative, there are a lot of very promising projects in the pipeline. When you think of dementia, for example, when you think of certain cancer types, you know, name it, there are so many diseases where still better therapies are in need. Again, all this within the context of a very clear and significant demographic trend.
And when you then see how many new modalities are in the pipeline, how many also still mAbs are in the pipeline with promising features, we believe that the underlying momentum is still there, and that is maybe as important as an outcome of the U.S. election might be. So that is how we see it, that there is, you know, we again have to differentiate between this correction at the moment and the general underlying trend. And of course, Florian Funck, he will join in April of next year, but he will be available and involved, of course, to some extent in the weeks and months before.
So I would not expect any effect from him formally joining at the first of April next year.
Thank you very much.
The next question comes from Sezgi, from HSBC. Please go ahead.
Hi, I hope you can hear me. Thanks for taking my questions.
Yeah.
Just, just two questions on my side, please. First of all, the CapEx ratio being higher, versus what was guided in previous years, the 17%. How should we justify, like, the outlook forward? And, has there been... I mean, if my numbers point me correctly, there seems to be a higher capitalization here, because the pre-cash flow yield I'm getting into is quite lower than what would be implied. So just basically to put it shortly, after the 17% capital CapEx ratio, what we should should be the ratio going forward, what we should, should we assume the ratio to be going forward? And do you have an internal threshold of minimum return on investment capital on this? I'm sure you're, you know exactly where these questions coming from.
Looking at over capacities, peers have been just specifying internal minimum return on investment capital ratios. What will be your strategy going forward? The second question also is in a similar area. I'm seeing low single digits pre-cash flow yield for the first nine months, even though inventories have been lower, working capital has been lower. What will be the main driver of your deleveraging, given with regular maintenance CapEx, the pre-cash flow generation remains relatively low?
Yeah, sure. So, thanks for those questions. So CapEx outlook going forward, again, this is a part of our guidance that we will give in three months from now. However, I think it's reasonable to assume a significantly lower CapEx ratio than we are expecting now for the full year of 2023. And give us again a bit time before we are more precise, but yeah, the ratio will be lower and quite a bit. The threshold, of course, as you would imagine, is we make always DCF calculations for all such investments. If you really ask for threshold, then it's that we want to see a return that is higher than our cost of capital. That's clear.
But then, of course, it depends very much on the type of investment we are talking about. As you can imagine, there are a couple of investments that have very significantly higher returns on investment, very short payback times. Others are of a different nature, when it's more an infrastructural investment. So it depends a bit, but the threshold that you are asking for, of course, is always the cost of capital. And on average, of course, the return is significantly higher. And you are asking for the main factors here? It's both. Of course, we are working on the reduction of the net debt, but of course, the EBITDA, so a higher profitability or a higher profit is a main factor here as well.
Which again, then of course, is to quite some extent volume driven. But we are also, and I think it has been pointed out by René when walking you through the bioprocessing, respectively, SSB numbers, that we are also working on cost measures, have been working on cost measures, continue to doing that, increase our productivity. So it's, it's, let's say, all through the P&L to improve profits and the levers for the reduction of our net debt, of course, then is also the profit to quite some extent and significantly higher profit than CapEx or any other investments will be next year. Working capital, we believe also has quite some potential going forward.
I would like to remind you that, during the pandemic, we have been intentionally driving up our inventory levels quite a bit, which paid out in a sense that we had lower delivery times than, I would say, most of our competition. And you could see this in, and/or this was reflected in our business development. And as you can also read from our working capital numbers at the moment, this is not fully out of the P&L, out of the balance sheet yet. So there is also some further potential. So quite a number of levers that we are using for running down our leverage.
And so to wrap it up, you are saying more room to improve further the working capital and more room to cut costs further, on top of what René described, in the BPS, the 10,000 FTE, and lower capacity by postponing.
Right.
A lower CapEx. Yeah. Okay, thanks. Thanks very much.
The next question comes from Falko Friedrichs, from Deutsche Bank. Please go ahead.
Thank you. Two questions, please. So firstly, on LPS, it sounds like Q4 is another challenging quarter on the book-to-bill. When do you expect this to inflect to improve again? Can that improve meaningfully in the first half of next year, or is that rather something that could happen in the second half of next year? And then secondly, on your 2023 guidance, for the group, given that you're now three weeks into the fourth quarter, can you give us a feeling for how bulletproof this guidance is? There is clearly a bit of a concern in the market that you might not get to the guidance, right? It implies a bit of improvement in BPS in Q4. How much visibility do you have there?
How much comfort can you give us at this point, for your 2023 guidance? Thank you.
Yeah. So, LPS, you referred to the book-to-bill ratio, which has been not satisfying during Q3, and we indeed said, well, also Q4, we don't expect to be particularly strong. We don't expect a step change at the beginning of next year. We rather would expect a gradual improvement and a stronger second half than first half. So maybe that is how I would, how I would phrase that. Typically, what we have is that both the first and the last quarter of a year are the strongest quarters. So and maybe that will look a little bit differently next year, at least with regards to the first quarter. Difficult to be a bit more precise at this point because the Lab division has a significantly lower portion of longer standing orders.
So therefore, you know, the cycle at which things develop are a little bit shorter, but that is our current thinking here. And on 2023, well, we are confident that we achieve this guidance. And it's—I mean, we gave it a week ago, so maybe you can understand that there is not much more that we can add at this point.
Okay, thank you.
The next question comes from Paul Knight, from KeyBanc Capital Markets. Please go ahead.
Hi, Joachim. It's great to hear from you. The first question is, we had a record of 20 biologics last year, approved in the U.S., we're almost 17 already. Are you seeing the effect of these record levels of approvals in North America? Then the second question is, when will GLP-1 be significant? Will they need to go oral for it to have enough impact on your filtration business?
Yeah, thank you very much for the question. I take, take both of them. So first, maybe on the GLP-1, we have, it's molecular processes, which is different to a typical biologic cell culture. However, as you pointed, there is a use of filters where we participate in these manufacturing processes as well, and we'll, of course, then participate in the growth of the volumes moving forward.
And on the first question-
Biologic approvals.
The biologic approvals, I would, I would say, back to what Joachim said about the fundamentals of the market being intact. I think it very much shows or demonstrates these fundamentals. And of course, we will see also growth drivers coming from these new approvals.
Okay. I guess your thoughts on bioprocess and market and past has been somewhere around double-digit growth. I, I'm assuming that that's continues to be your view long term?
Yeah, would be double-digit range. Yeah.
Okay, thank you.
The next question comes from Oliver Reinberg from Kepler Cheuvreux. Please go ahead.
Oh, yeah, thanks so much for taking my questions, EMEA. Firstly, just on market shares, you obviously have gained some kind of market shares when there were shortages in the system, and you also just talked about that you had better delivery time. So can you just discuss, do you see any kind of accounts where you're seeing kind of a reverse of market shares back to the original supplier? And if so, how meaningful is the current headwind from that? Secondly, two questions on product groups. Polyplus, can you just talk about the dynamics you're seeing, and to what extent Polyplus is exposed to current market weakness? And also, can you give us any kind of sense in terms of how significant the decline in bioanalytics business in LPS has been?
Third and last question, just on, on leverage. Can you just give us any kind of flavor, how to think about, adjusted interest costs for next year? Is EUR 190 a reasonable assumption, or should it be more? And also, can you give us an indication, what is the share of variable debt now after the refinancing? Thank you.
Okay, maybe let's say, start with market shares and Polyplus.
So, good question on the market shares. Thank you for that. Absolutely, we've seen gaining market share due to available capacities during pandemic. What happens after that, of course, is not everything stays, and some customers go back to the primary supplier. But there's a, yeah, reasonable portion of the market share we keep or kept after the normalization. And, on the Polyplus dynamics, on that business, what we can say is that very much intact and as expected, good progress in the U.S., Europe, where we see impact, indeed, is as for all other businesses, is China.
Polyplus?
I can talk about the interest rate basically. When you talk about interest expense, or let's put it that way, we're slightly on the overall debt you can calculate was slightly below 4% interest rate. 85% is fixed of that. To help you out here, if you would add 10% to your EUR 190, you would pretty much be there where we think we're gonna end up next year on the interest expense rate.
Yeah, and the third question would be then, the last one to answer about the decline of our analytics business. So the overall decline in LPS has been around 11.5% in constant currencies. We have the bioanalytics business and the Lab essentials business, both with quite, you know, dominant, you know, quite a bit of equipment in there, particularly in bioanalytics, a lot of equipment. And then we have service business. Service business has been growing at a healthy rate. That means that the other businesses have been in decline at a little bit higher rate than the division overall. So, and that is also what we would report for bioanalytics.
Decline in 2023, so far, a little bit higher than the number for the division in total. What I think is worthwhile mentioning here is that particularly for the two largest single product segments within bioanalytics, we have seen, let's say, very healthy double-digit growth rates in the periods before. So it also had quite high comps, I would say.
Perfect. Can I just follow up when it comes to market shares? Is this all done, or do you still expect some kind of market share normalizations or reverses going forward?
Yeah, I would say it's done. I would also say that we continue gaining market share in some areas.
Perfect. Thank you.
The next question comes from Lei Lue, from Société Générale. Please go ahead.
Yes, hello. Hi, good afternoon, everyone. Two follow-up question, please. One regarding China, because I just got the feeling that the floor is not yet there, and so I was wondering what sort of visibility, and specifically into the LPS division you have into this APAC division. And second question, Rainer, prior you leave, and thank you for everything. There is a lack of flexibility at the gross margin level in between Q2 and Q3. And so I was wondering if you can guide us through the evolution of the mix that makes the collapse so important at the gross margin level in between Q2 and Q3. So any idea or any thought would be very much of interest in the future.
Yeah, maybe, on China, in addition to what has been said already, the market environment in China had been increasingly challenging during 2023, and I think this is something that I'm sure you have heard a lot from other players in the industry, both our peers or our customers. When you read through the more recent economic reports from China, they at least report higher than initially expected growth for the entire economy. But I would say so far, we haven't seen that in the biopharmaceutical sector or in the life science sector. All this, again, and I think we said that before, based on very high comms. There have been very high investments in China, both into research labs as well as into manufacturing sites.
So, that is for sure one factor. So therefore, when you say, well, maybe we haven't seen the, yeah, the bottom yet, or at least the end of this very low demand phase in China, that might be right. I think this is also something how we would see China at the moment. You said, okay, visibility. Well, visibility is, as you can imagine, limited. It's, you know, difficult to make really any predictions here, particularly as you are asking for LPS. Again, a relatively short business cycle. There is not much lead time, so very difficult to use any early indicators here at this point.
Of course, again, also for China, the fundamentals are strong when you consider the, the size of the population, the fact that this is a rapidly aging population again, so there is a tremendous need. And also, the, the, the Chinese policy to become more independent from, from external, supply of medicines. So all that is, that are positive drivers. At the same time, of course, the question is, in how far potentially, there will be an impact from the overall economic tensions that we see, and certain restrictions may play a role. So that is makes it really very difficult. But as you were using APAC also, when you were phrasing your question, we would strongly like to differentiate between China and the rest of APAC. So that is very important. Yeah, the rest of APAC, overall, is doing well.
It is China that is at the challenge at the moment, and then maybe Rainer for the last question.
Yeah. So basically, running gross profit, fairly easy explanation. There's, of course, a small, impact from, let's say, product mix, but that's neglectable. The biggest part here between Q2 and Q3 is, keep in mind, the purchase price allocation from Polyplus. That is, just for Q3, since we consolidated them since the middle of July, a good EUR 20 million. And on a yearly basis going forward, you will see there basically, roughly EUR 100 million, in additional, costs. That, of course, will be reversed on the underlying EBITDA. But that's really where you see this quarter-over-quarter big drop is related to the purchase price allocation and the, the corresponding amortization of that.
Perfect. Many thanks, and good luck.
Yep, thank you.
There are no further questions at this time, and I hand back to Dr. Joachim Kreuzburg for closing comments.
Yeah, thank you very much. And first of all, thanks to everyone for your interest in Sartorius, making yourself available at this a little bit unusual time for our call. Thank you also for all the questions and the discussions around that. Also thank you for your understanding that it is really unusually difficult to give precise guidance at this time. You can imagine it's we are also not really you know happy about the fact that we had to revise our guidance twice this year. Looking forward to continuing our dialogue, latest beginning of January, when we will be able also then to talk about 2024 and our midterm outlook. Thanks again. All the best. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a blessed day. Goodbye.