Ladies and gentlemen, welcome to our H1 call. Good morning in the United States, and good afternoon in Europe. Before we start, I actually have a few housekeeping things. First of all, I think I don't need to read you through the safe harbor statement. You can actually download that presentation from the webcasting tool or directly from our website. Just one more thing. Actually, we know that other companies are reporting this afternoon as well, so we wanna actually make sure that we conclude that meeting punctually. As always, I would like to get you an overview over the highlights of H1, then followed by the financial review and the outlook, and certainly, at the end, giving us enough time to get through your questions.
H1 was certainly from an overall perspective, particularly from a numbers perspective, not very satisfying, in constant currency, and very much driven by the, the, pandemic-driven high basis and comparison basis. We are showing a revenue decline of about 9%. Actually, already in the second quarter, which is not super transparent, looking at H1, we actually showed improvement on the sales dynamics. If we are looking into the progress of Q3 and forecast and orders, respectively, of Q4, we will continue with growing dynamics here. Certainly we, some of the, the systems which were really suffering in H1, due to the high install base generated during COVID-19, that, that, run rates are already starting to pick up.
We see, like particularly, nice ramp-up, figures coming from newly launched instruments. Our earnings improvement program is actually showing better traction already than initially expected. I'd like to dive into the details later on. Earnings improvement potential depends on actually allocation of resources and actually top-line progression as well, which will certainly get us into the area of savings between EUR 10 million and EUR 15 million on the cost side, as compared to budget on the in the course of 2024. Acquisition of Natech successfully concluded. Again, we have some details in the presentation, showing you the rationale behind this acquisition, which is very, very promising.
We, on the positive side, like market launches, we have the expanded version of the system for flow cytometry for a customer in North America, where the market launch took place in Q2 of 2023. Which is actually one of those systems which is guaranteeing the growth of the company. We, we actually believe that the, the company behind that system, will soon be amongst the top five of the STRATEC clients. Acquisition of Natech. Did I flip a slide? No, that was actually the next slide. The acquisition was certainly that Natech is a provider of polymer-based consumables with a focus on medical applications. Actually, this means a variety of things for us. Certainly, polymer-based means an ideal supplement to our Smart Consumables business.
If you have happened to seen one of our Smart Consumables, you've probably seen that the majority of the Smart Consumables we are offering to the market are actually like a polymer-based carrier with microstructures, often for microfluidics, and then often either covered by a foil or by a structured foil or by a structured layer. Actually, the capabilities of Natech are offering us to go into the third dimension as well, often meaning the macro/micro interface. And certainly, more cartridge-based systems rather than actually flat consumables, which offers a variety of new applications and certainly a variety of new customers to be addressed, particularly in the field of MedTech, where currently our consumables are fairly diagnostics, translational research and certainly life science-based.
medical, like MedTech, is certainly another application which is offered through the access to the products we have now with Natech. That doesn't get only get us into, like, new customer or existing customers with new technology. Certainly, we have already identified a variety of projects and customers where Natech and legacy, STRATEC legacy consumables, are actually providing products to those companies, where certainly with a combined offering, we are overcoming challenges for our customers, like integration of consumables, assembly of consumables, assembly of microfluidic structural consumables in a more macro environment, and certainly interfacing that on an instrument. All those offerings we can provide as that one-stop stopping shopping solution provider. Certainly, it helps us to diversify through complementary target markets, but through customers as well.
Certainly, there are nice synergies with our existing Smart Consumables business. Financially, the transaction was in the area of $30 million with an earn-out component. Closing was July 1st. It adds sales of about like 2022 figures, we have $16.3 million in sales, and a nice margin. Transactional volume was therefore derived from the figures I've already given about weeks. It will show a neutral to slightly positive impact already this year to the company's earnings.
If we break down the revenue streams, you'll see diagnostics, particularly IVD, which is already the majority of the sales of our market consumables and the group in its entirety, but certainly, like tooling, which gets sold to the customer or other medical applications, are already playing an important role here. Financial review, with sales of about EUR 125 million after EUR 137 million, certainly on an H1 basis, a decline of about 9% with already showing positive direction in quarter two. As mentioned before, we are very positive that we can deliver on the adjusted guidance given. Again, I'll dive into details later on. Adjusted EBIT margin half and EBITDA margin half and already looks like a significant decline.
We have to see that, there are a variety of factors to include scaling effects by product mix as well. Again, I'll dive into the details of the guidance later on, but we would like to confirm the trusted guidance given. Sales in H1, headwinds coming from lower pandemic demand. I think we discussed that in deep detail, that during the pandemic and towards the end, the majority of the diagnostics companies had different expectations about the utilization of the equipment and the actual run rates going forward. We see throughout the entire industry, severely declining, or declined placement rates of instruments.
Some of the diagnostics player actually see nice tailwinds, particularly in the sales of their actual product, like the tests, which is a result of the install base of instruments which grew during the pandemic. However, we see that despite the fact that some of our customers are actually still sitting on high inventory levels. Wait, one. Yeah. That some of our customers are actually sitting on high inventory levels, and that we are actually sitting on some inventories here. We see that the decline has already stopped, and the majority of our customers are actually, at this point, satisfying the demands of the end customers from their warehouses. We see that we already went through that dip.
We have lower sales from a transition of a veterinary product, where we are switching from one generation to the other. We in our ad hoc announcement, we mentioned that we have generated some delays based upon technical issues, which means we are selling less of the previous generation and are not yet picking up sales on the new generation, but this is about to improve. Actually, we talked about 2-3 months delay, and I can confirm that. We are actually progressing very well.
Certainly, I mentioned that already, we see some customers increasing efforts to get back to pre-pandemic inventory levels, which, which means at the end, and allow me to walk you through that story again, is that all the forecasts given to us in the course of the pandemic showed too little demand from quarter to quarter to quarter during the pandemic. It was really tough for each player, our customers and us as well, to assess the actual end of those growing demands. Please bear with me, Q1 of 2022, we still had the Omicron wave, and after that, literally demand from the market dropped significantly, our customers going forward with high inventory levels.
That was actually the issue, that we were planning on a slower decline, and our customers were actually planning on, planning on that very same thing that led us to that position, that we are sitting on certain inventory level, our customers as well. Market demand comes back. However, the mar- the demand at this point is still satisfied from the, from the warehouses of our customers. It's actually an important KPI for us to assess when is, has that bottomed out, and we have some customers which actually bottoming out already at the end of quarter three, some are only doing that towards the end of the year. However, we want to get across that, we are getting to the end of that negative cycle.
We have slightly elevated demand from service parts, not yet where it should be, and I think I mentioned that KPI in the course of some communication. If we look into per instrument, and again, please bear with me, we have an elevated install base number of active instruments in the field. If we do the math and look into sales of consumables or sales of service and maintenance parts per instrument, we are still on a lower level as compared to pre-pandemic figures, figures, which actually shows that the utilization of the equipment is still on a low level, but again, picking up, that's the positive message.
Then we certainly have nicely raising call-up figures of those instruments being launched only recently, and actually some niches of our products, like picking out immunohematology or some other hematologic, hematological applications, or even in immunoassay, we see nice traction. The particularly those product lines with extreme tailwinds during COVID-19, particularly molecular products, are still showing material headwinds. Breaking down revenues by operational units. At this point, you see a higher than average decline on the instrument side, service parts and consumables like healthy, but not representing the actual install base, which gives us some nice potential here as well, as soon as our customers are getting back into a mode where the utilization of the equipment in the field goes up.
You know that the majority of our customers are working on new panels, new tests, to take advantage of the growing install base. The thing which is actually showing nice growth here is actually development and services. I think it's worth mentioning that this doesn't only reflect what actually the ongoing side in development, and here at STRATEC with nice new products and nice new additional work. This is actually not just the actual development milestones, which are coming in nicely. It's actually the overall utilization in the development department, as well as the actual workload coming from programs. Breaking down by sales, you see that actually, instrument sales as a percentage of sales declined materially.
I think I walked you through the factors here, which makes services and consumables slightly, particularly, nominally overloaded. As soon as the instrument sales are coming back, we believe that we will get back into a mode where we have about 10%-15% sales coming from development activities, about 35% coming from consumables with growth rates, and then certainly the remainder in the area of 50% instrument sales. As mentioned, currently, instrument sales being underrepresented. Adjusted EBIT margin, after the relative H1s in 2020, 2021 with nice growth rates in the pandemic and still healthy in 2022, we actually see a material dip here, mainly driven by the product mix and actually negative economies of scale.
That's actually not really the issue. I think the actual issue at this point is our gross margin, which means we particularly in H1, and we are talking about H1, we haven't seen a price increases on the sales side so far. Again, I would like to mention that we made nice progress, and we will already see meaningful growth rates here starting in Q3 and Q4 to get back to a margin level, which I would consider as healthy. Again, the gross margin problem comes from 2 high input costs. We have made nice progress here as well. Not really visible in H1, but will be visible in H2.
Sales price increases in H2 are actually helping us to overcome the pressure we have on the gross margin. Cash flow negative with about EUR 5 million, which wouldn't surprise you. High investments on the development side, and operational cash flow, not as it planned to be. Again, we are expecting a nice progress here. I actually already have saw some initial data from Q3, and that's actually looking very promising. The operating cash flow dynamics burdened by the current margin challenges. For the final financing of the Natech acquisition, we have a new revolving credit line of EUR 50 million. Investment ratio at 7.1% versus 5.8% in H1 2022.
Again, bringing us to the full year corridor of 6%-8%, in line with what we predicted. Net debt, EBIT ratio of 2.2, very healthy. Let me walk you through our earnings improvement program, allow me to get you the status on that. On the personal measures, we had a temporary hiring freeze, which has been released in certain areas, particularly where we got project inflow, development activities, and we certainly reallocated resources, which helped us very much. Hiring freeze was implemented in March 2023.
We are on track to achieve positive earnings impact around two, of about EUR 3 million-EUR 4 million already in 2023, which is definitely one of the main contributors to get our margin into the area we have guided on a full year basis in the area of 10%-12%. Certainly a strong focus on price adjustments. We already implemented some in the course of Q2, which is not super transparent if you look into the figures, but beginning to show nice directions already in Q3 and certainly materially then in Q4 and going forward.
And actually, in some cases, we have actually implemented mechanics already to be applied based upon inflation rates then in 2024, which will help us to reduce the gap of inflation and therefore higher wages and higher input costs as compared to the deferred timeline of implementing rising- price increases on the output side. On the non-personal costing side, so mainly CapEx here, so certainly we have an extended program to optimize our procurement structures, nicely implemented already, already starting to show traction. Then we see the first positive effects from some logistical matters on the back on, of the improved market environment. Here we mean particularly availability of parts, and therefore, no need to pay, like, broker costs or higher logistical costs to get the materials in.
Again, we are confident that that will bring us into an earnings improvement of EUR 10 million-EUR 15 million. Again, we know that's a fairly wide corridor, but we want to keep that fairly flexible, very much based upon the effect that certainly we didn't want it to cut into the meat. Particularly, want to take advantage of the higher cadence of projects coming in and don't want to turn down opportunities based upon the non-availability of resources, and that's why we keep that fairly flexible. Guidance for fiscal year 2023 sales is expected to go flat, and you already saw that we have adjusted our sales figures. We had to adjust our EBIT margin expectation down to 10%-12%. We are confident.
I know that means an average EBIT margin of about 15% in H2. Looking into the details, particularly, price increases, but development milestones coming in, not only leading to top line, but bottom line as well, and there's some other factors. This is actually something which is based upon a bottom-up planning model. We are confident that we get to that point, and still the investment in tangible and intangible assets to be in the area of 6%-8% unchanged. Ladies and gentlemen, in the interest of time, this would get us to the Q&A session. [Natalie] will explain us how to bring up your questions. Again, we want to be disciplined that we can conclude this meeting in the area of 2:50 P.M. CET. Thanks very much.
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 touch-tone telephone. If you wish to remove yourself from the question queue, you may press star, followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star, followed by one at this time. We have the first question from Oliver Metzger with Oddo BHF. Your question, please.
Yeah, good afternoon. Thanks a lot for taking my questions. The first one is on the Natech acquisition. I understand that business comes commentary and you can combine your consumables with the smart cartridges. Simultaneously, you talk also about different regional and customer structures. A point which hasn't come through to me quite well was about the synergies and also how the acquisition is expected to create value for STRATEC. The second question is more clarification. The dynamic at the system sales, so clearly, a washing out has happened. Now can you confirm whether trough is already behind you? The last one is on your expectations regarding potential pent-up demand of the veterinary product after the switch from Vios to the new generation. Thank you.
Yeah. Thanks, Oliver. Thanks for the question. The first one was about Natech. Certainly, and, I think we already discussed that in the course of the discussions about the acquisition. Allow me to summarize things. Let me switch to the particular slide before. Here we go. Certainly synergies means in that case, a certain number of layers of synergies. First of all, particularly in the newer contract and after COVID-19, where some of the customers and potential customers had severe difficulties with their supply chain. That's why, in the meantime, particularly U.S. customers are insisting on U.S. manufacturing line, which means pre-pandemically, it was fine for them to deal with a European company, where the majority of the production takes place in Europe or Eastern Europe, right?
Particularly driven by the supply chain issues, they are still fine with development and initial serious manufacturing in Europe. However, the majority, particularly of the new customers or the US customers for plastics, are, in the meantime, insisting to set up a 2nd manufacturing line over time in the United States. That's actually part of that synergy footprint in the United States, with manufacturing in the United States. 1st thing. 2nd thing is that certainly with, and I mentioned that as the 3rd dimension, it sounds simple, but actually fairly complex. If we think about, like, those more flat-ish consumables and more consumables, more towards cartridges going into the 3rd dimension, that means a lot of actually know-how in design, but know-how in manufacturing and know-how in assembly as well. That's another synergy.
Think about that, if we, if we think about comparability of results generated in a point-of-care environment as compared to a centralized lab. Often in the centralized lab, we have smart consumables, which are used in bigger instruments outside the cartridge, and then in a point-of-care environment, more in a cartridge-sized thing. Integrating high density microfluidic components into a cartridge is something which is definitely a synergy and can be offered, particularly the project management around that. The supply of the goods is actually something which is, at this point, to the majority, handled by our customers themselves. That's actually something where we see a lot of growth potential.
Certainly synergies that we can transfer certain technologies towards Natech, but know-how from Natech towards Europe as well, which allows us to be an attractive player, particularly for local customers. We have to see, this is a very early industry with Smart Consumables and cartridges, which means there are a lot of startups in this area. Actually, proximity to the actual startup customer is certainly a factor as well, which helps us in the United States. Another footprint topic is that at this point, we certainly have service centers in the United States for instrumentation, but we don't have something like a real hub, and that's actually offered through Natech.
The value is actually generated, that if we see into the percentage of outsourcing in this, in particularly in this niche, depending on the survey you are looking, you find outsourcing degrees of between, 10 and up to 25%. It very much depends on the application, but certainly way, way, way less than we have in instrumentation. A lot of growth actually comes from the outsourcing trend when certain customers are going into the second generation product, where access to the actual technology is no longer important as compared to our customers' access to end customers running the brand and so on. That's actually our chance to participate more than everybody else. From that, accelerating outsourcing trend in design and manufacturing of Smart Consumables, and actually at the tail end, it brings, certainly brings instrumentation business as well.
It's, it's like a door opener, helping very much. Then, talking about sales dynamics, and Oliver, please bear with me. Certainly, we have to look into the different technologies I mentioned as well. I think, particularly immunoassay, already bottomed out, which means the decline in sales and the full wa- warehouses are actually overcoming. We are already in positive showing positive trends in the demand here. Actually, in immunohematology, that came in e- even earlier, even during the pandemic, but it was hit at the beginning of the pandemic. Like those applications, we are-... still, the utilization of the existing eq-equipment in the market is still very low. It's actually molecular, and allow me to repeat myself.
Certainly, the entire diagnostic world doubled or even tripled the install base, which was out in the field pre-pandemically, during the pandemic. That's certainly a growth rate which is still lacking for utilization of the equipment out there. We see some traction. We see some good data actually from our customers, particularly more on the centralized end of things, less on the point of care side of things, or decentralized side of things. We see nice traction, growing utilization, which means that, that there is a growing demand from the end customer. I mentioned that some of our customers are still sitting on inventory and declining their inventory levels.
The majority of that should be done by the end of the year, and that should actually be the turnaround, or the, the break even then, with molecular instruments then going forward after the end of 2023. You've talked about the pent-up demand on some of our veterinary products. Let me briefly walk you through the situation. At this point, we are generating a little bit south of 10% of our revenues with a meaningful player in the veterinary diagnostic space. The product, which is at this point under sales, is a product which comes to the end of its product life cycle. It will certainly be sold for, like, in minor quantities for the next three-five years in certain markets.
We have executed a contract with that customer to design and manufacture the next generation instrument, with the caveat of too high input costs. We discussed that already. The transition actually caused some issues, particularly the design transfer process towards manufacturing, generating a delay of two-three months. We are about to sort that out, it's still ongoing with nice progress here as well. Pent-up demand is partly covered, and you know that kind of always happening if a company, not even in our industry, but if a company has a predecessor product and announces the soon availability of a successor product, that the sales of the predecessor product is suffering.
We see that sales with the newer product is not yet picking up, very much driven by the lack of availability. Market is satisfied to the extent possible with the predecessor product, but not yet on the run rate, which has been foreseen, but the demand is certainly there. I hope that answers the question, Oliver.
Yes. Yes, it does, absolutely. Thank you very much.
You're very welcome.
The next question is from the line of Jan Koch with Deutsche Bank. Please go ahead.
Hi, Marcus. Thanks for taking my questions. I would also like to start with the destocking of COVID-related instruments. What makes you confident that the destocking will not meaningfully impact your performance next year? How good is your, your current visibility on the inventory levels at your customer? Secondly, I would also like to come back to the system in the veterinary business, and here I would like to better understand the risk of losing this client in the future. Is your client currently impacted by not having enough systems? What is the regulatory environment in veterinary medicine? How complicated would it be for, for your client to change the system by going to another supplier?
Yeah, Jan, thank you very much for your question. I think the first one is easier to be answered. Like, particularly for our two major molecular customers, we certainly know the inventory level of those customers. Certainly, we do not know the actual demand of the end markets. Certainly, you know, there are a lot of tenders out there, and particularly inventory levels held within our customers are actually a means to address tenders as well, you know? It's certainly, like, the question can only be answered if we assume certain tenders which be won by our customers or not. It's certainly, you know, this is not a black and white answer.
Looking into inventory and assuming certain run rates, on the one hand side, partly switching back to historical run rates, but certainly seeing the actual run rates over the past three or four months, we can actually do our math. That actually got us to the conclusion, again, I'm not talking about immuno, I'm not talking about hematology or immunohematology. I'm exclusively talking about molecular, that we will see a healthy inventory rate within our customers, and therefore a healthy run rate in manufacturing of STRATEC towards the end of this year. That makes us very positive that our run rates in 2024 will get to north of pre-pandemic levels. The losing the veterinary contract.
Jan, certainly, you know, it, it would be speculation to talk about elevated risks or that there is no risk at all. Certainly, like, us failing to supply the customers increases the risk of potential damage and damages. I don't see this coming. I think, like, between the relevant sales department and the relevant procurement department and the project teams, which are really talking on a day-to-day basis and showing the progress we made, and actually supplying the customer already with initial products, certainly not on the level of the expected run rate, but at least with certain products, makes us positive that we are not actually thinking about plan B.
However, being realistic, but that applies for all our projects, that there is a risk of unexpected termination, like what we saw with the immunoassay product in at the beginning of this quarter, which is certainly not material, but it's unexpected. We believe that the customer hasn't had the right to do that, and that's why we are currently negotiating compensation with that customer. Again, long story short, I think a realistic approach would be to assume that we will be out of that situation and start with supplying the customer with serious manufacturer products in quantities in over the next six months, with, like I said, ramp-up curve as expected. I hope that answers your question.
It does. Thank you.
Thanks, Jan.
Next question is the line of Alexander Galitsa with HAIB. Please go ahead.
Yes, thank you for taking my question, and good afternoon. I think the first question is, maybe a little bit broader. I mean, this year it's clear that the operating results are kind of in flux, with many moving parts really affecting the business, affecting its sales and gross margins in particular. I guess the question is, looking into 2024, 2025 onwards, number one, could you speak to your overall sort of visibility on showing top line growth in 2024 already?
Or is there a potential for 2024 to still be sort of a year where we digest the pre-pandemic pull forward effects? That would be first question. The second question is more related to the gross margin. Pre-pandemic, you've been comfortably at a level of 25% plus. H1 obviously suffered a lot from multiple angles. What level do you expect to recover to in H2? How do you think of a trajectory going into 2024, 2025 onwards? Thank you.
Yeah, Alex, thank, thanks very much for those, those excellent questions. Talking about 2024 and 2025. Let me, let me set the baseline here, because I think it's important not only discuss about potential not only to discuss the potential results, but discuss actually the prerequisites. At this point, and I mentioned that already, that there are a lot of moving parts in the overall equation, which is particularly utilization or number of new tests or new product launches. Assuming that, we will continue with the nice progress we make in our development programs, particularly those programs like the molecular small solution, which is actually not a point-of-care instrument, but, like decentralized panels.
Certainly for veterinary testing, where a smaller instrument stands for veterinary testing, next to a bigger instrument, particularly integration of instruments into track system, that's actually showing very, very nice progress. That's why we are actually satisfied that we can somehow get back to historical growth rates. Actually assumes that, like, things which were rules of nature are becoming rules of nature again. You know, when we talked about utilization of the equipment and therefore almost guaranteed numbers per instrument in terms of consumable spare parts and maintenance kits, this equation could simply not be applied in 2023, and I'm convinced that this equation can be applied again in 2024.
If we assume kind of a market condition where those where this corona blues can be sorted out, if we assume that, we can certainly get back into growth rates, which we saw prior to COVID-19, and EBIT margins we saw prior to COVID-19. I think we will still show progress-... in the relevant quarters of 2024, so don't expect us to switch into, from corona blues mode into growth mode, in the first quarter digitally. That will certainly continue to be a path lying ahead of us, where we will make quarter-to-quarter progress. However, if we think about the lineup of development activities, think about the lineup of new projects getting in, actually, we got a couple of new things in already over the past. You'll see that actually in our Q3 report.
We got in a couple of new products, or new development projects, where we will not only see a lot of development work, but even a lot of activities falling bottom line. That's actually giving me the indication, and again, I'm far away from promising or I, or get you my personal opinion, but I think in the quarters of 2024, we will show some progress coming out of the year 2024, fairly healthy. You said the exact right thing. At this point, if we are discussing things internally, the most and foremost important topic is actually the gross margin issue we have.
The lack of ability to put forward price increases to our customers one by one, and again, allow me to describe that downstream problem I have described a couple of times. We have contract with our partner, which means price increases are subject to negotiations. Certainly, we have the right to increase prices, but again, as a result of negotiations, downstream, they have the issue there that they have contracts with the laboratories or participating in, in, in tenders, where prices are firm, and they have to guarantee those prices for a certain period of time. The labs and the hospitals have the downstream problem with their payer, so they cannot easily charge more because they have contracts as well.
That like, living with higher input prices, you know, that's a simple question of availability versus pricing. Gets us into the position that each player, us, our customers, the labs, are all buffering that, that downstream problem, and it's just a question of finding the relevant balance between the players. Again, us, our customers and the labs, finding the right balance, so who covers what? And I'm assuming that we get that back into a more balanced mode.
And in so far, I see no reason why not to get back, and I'm not promising that for 2024 already to its full extent, but getting back to historical gross margins in the area of 25%, that's definitely our problem. Still sounds like a low gross margin, but however, bear with me, we don't have the downstream sales cost. That's why we can easily live with a 25% gross margin. That allows us to get into the area of an EBIT margin in the area of 16%. I, I hope that that answers your question, Alex.
Yeah, certainly. That's very helpful. Just maybe one follow-up on this last point.
Go ahead, yeah. Go ahead.
If you could give us a sense of, how long are these, tenders, how long do they last? To get a sense when, by when, roughly, this, sort of new equilibrium between sharing the burden can, can be sort of reinstated. Are we talking about couple of years, or is it really more long than that, longer than that?
Yeah, certainly, we cannot wait, for the duration, of those tenders. We have to balance that earlier. Typically, tenders are running like between two and five years, average three years, I would say. But definitely, this has to be decoupled entirely. You know, we know that certainly, like particularly, the labs are negotiating price increases with the payers, and that's why our customers can renegotiate prices with the labs, and that's why we can renegotiate prices, with our customers.
However, we all have that very same downstream problem with the acceptance of the relevant next partner to accept the price increases. You know, I, I, I wanna make that point, you know, the relationship to our customers and the reputation we have is certainly based upon reliability, not only technically, but as a partner as well. That's why certainly the last thing we wanna do is threaten our partner with whatever we have as a lever. It should be a mutually acceptable compromise, and that's what we are working in. Already achieved in some instances in Q2, already achieved in some instances already in Q3, with some of the negotiations still ongoing.
That's clear. Understood. Then maybe another question on, if we have time, briefly on utilization of installed base. You spoke about that, the levels are becoming or, recovering. What's your sort of expectation in terms of, sustainable, utilization rates relative to pre-pandemic, given that the installed base has increased so much? One would expect that it should naturally be below the former levels, but, how, how do you, think about that?
Alex, that's actually a super, super complicated equation, so just bear with me. You know, during COVID-19, particularly in molecular instruments, we are running on a 24/7 basis. Whereas at this point, the majority of the labs switched back into a 1 shift or 1.5 shift model with, actually more like natural and workflow related utilization. You know, it doesn't make any sense to utilize an instrument to a 100%, because then the turnover cycle of the tests would go significantly down. That's why we always talk about a healthy degree of utilization of the equipment, which is between 30% and 50%. What I would like to get across is, you know, that, that there is no straightforward answer.
I would actually assume that for the next couple of years, we will have to live with underutilized equipment, but certainly not on the level we see at this point, that certain equipment is actually sitting idle and waiting for, like, a new pandemic wave. Or if you think about looking into Australia, actually, the industry already expects a flu wave for this year. You know, in the southern hemisphere, flu is hitting like six months earlier, and we already see that, obviously, with very aggressive variants. So there is actually, again, a lot of moving parts driving utilization. And actually, the labs have the means through shift models to kind of offset demand a little bit.
However, I would say, particularly as the majority of the install base, which was generated during pandemic, pandemic, was governmentally funded, and therefore, if we look into the equation of when does a reagent contract for our customers make sales, we actually see that already at lower utilization degrees, they start making sense. That's why certainly the, for the time being, the industry can live very well with a lower degree of utilization. That's why I wouldn't derive everything from utilization. It's just one of the factors which are, at this point, providing headwinds to us, but certainly can easily switch back into tailwinds as well. Like, in the interest of time, certainly I have plenty time. I just want to take care of your time. Probably one last question.
That would be it for me. Thank you.
Thanks, Alex.
Yeah, so far there are no further questions, and I hand back to Marcus for closing comments.
In time. Thanks very much, [Natalie]. Thanks, everyone, ladies and gentlemen, this actually concludes our H1 call. If you have any further questions, please do not hesitate to address our IR department or the financial analyst. We are certainly very much looking forward into an in-depth discussion with you. Thanks very much. Have a good day.