Ladies and gentlemen, welcome. I am George, the Chorus Call operator. Thank you for joining the STRATEC conference call regarding today's announcement for the Q1 2023 financial results. Throughout today's recorded presentation, all participants will be in listen only mode. I would now like to turn the conference over to Marcus Wolfinger, CEO of STRATEC. Please go ahead.
Yeah, thank you, George. Good morning in the United States and good afternoon in Europe. Ladies and gentlemen, welcome to our Q1 2023 financial results presentation. Before we dive into the details of the Q1 , I would like to remind you that this presentation includes forward-looking statements. I think I don't need to read you through this safe harbor statement and on give statement. Actually, you can download that presentation from the web tool of the meeting or from our website. As always, I would like to get you an overview of what actually happened in the Q1 of 2023, followed by a financial review of the quarter, giving you an outlook. Then certainly, we should discuss some aspects of what actually happened in the form of a Q&A session.
Sales of minus 20% in constant currency, certainly everything else but satisfying. Just to remind you, we compare this quarter to the last quarter with tough comps. Q1 of 2022 was the COVID-19 Omicron variant quarter. The last quarter where COVID-19 revenues played a meaningful role in our PNL. Certainly, we had a very weak start into the year 2023. I think at this point it's already worth mentioning that the sentiment in the industry meaningfully improved in the past weeks. We already discussed that in the call regarding our full year disclosure for 2022. Allow me like to spend only a few seconds on that.
When we returned back from JP Morgan conference early January, the world was still in order. Our customers, and we had a lot of customers meeting at the conference, gave us or still had a good forecast, particularly for the Q1 of 2023. In the weeks to follow JP Morgan, 1 after the other customer disappointed with their forecasts and came back to us with a weaker forecast. When I say disappointed, not only us disappointing, but disappointing the market.
I think it's still worth mentioning that 8 out of the top 10 players in the diagnostics space disappointed the market with their projections for 2023 and partly for 2020, for which was actually the triggering event for us to go through our budget again, which we did, which was probably poor timing, as I already mentioned. Talking to customers, the sentiment in the market is slightly improving, and I'll try to walk you through some of the details in the course of that presentation. Adjusted EBIT margin with 6.3% in the expected range, still weak. We again, in the course of the preparation to this call, we went through our budget and through the forecast again. That's why this is a definite confirmation of the guidance given.
I will reiterate and walk you through the guidance given. The guidance we gave in the course of that previously mentioned call is confirmed. At the time, which is only a couple of weeks ago, we disclosed the initiation of an earnings improvement program. I would like to give you here some details. I think it's already worth mentioning that without going into really painful measures for the company, and I would really like to say that, is that we have been cautious. We actually have a lot of improvements in the forecast. Partly we have a number of projects where we are maneuvering ourselves into a phase where we have to ship prototypes or evaluation units or validation units or pre-series units. Certainly we have a well-filled development pipeline.
With our earnings improvement program, it was definitely the plan to not jeopardize the future. We are working on those products which will then come to the market. We are working on those products which will drive the growth in the future. It was very clear for us that we started this program. In a cautious manner. We have a variety of products in various stages prior to series manufacturing. In particular, we shipped for one of our most important immunomaterial products. It's actually 2 products. We ship pre-series units, and for our molecular systems, we already discussed that. We delivered those pre-series prototype evaluation unit instruments to the relevant customers. One of our customers made material progress in the sepsis program we are working together.
That certainly reduces the risk of the project for the time being. As you can see in the number of employees, still 7% up, mainly in development to a certain degree in marketing and sales, and to a certain degree in logistics and procurement as well. All the areas where we either have new development programs ongoing or where actually the market, and in this case we are talking procurement market, and actually our customers are requiring us to provide the higher services, and that's why we grew over that 12-month period between Q2 of 2022 and until the end of Q1 , 2023 by about 7%.
I think looking into the earnings improvement program, most likely we'll not grow meaningfully headcount-wise in this next 4-quarter period of time. Financial review, EUR 60 million in sales after EUR 75 million is a reduction of about 20%. Adjusted EBITDA from EUR 18.5 million down to EUR 7 million. It's a minus of 60%. EBITDA margin from 24% to 12% halving. I think it is clear that this has been an exceptional quarter. If we are looking into the forecast, the projections, tax planning and so on and so forth, you will see that the next quarters will actually catch up.
Again, I think it's still worth mentioning that we are comparing to a still very strong quarter, 1 of 2022. The comps in the following quarters will be way better, and we already foresee nice growth rates for those quarters to come. Basic EPS down to EUR 0.11 from EUR 0.92. A decline by almost 90%. Again, we will catch up. If you see that development on that chart, you can see that Q1 2020 was actually the 1st strong quarter, where we already had some tailwinds coming from Corona. We are about 10% up from that quarter, still 20% down compared to that super strong Q1 of 2022.
On a negative side, certainly, the high basis coming from the pandemic revenue. Certainly, the sentiment in Q1 of the market was really weak. The majority of our customers knew that they had too high inventory levels to address their customers' needs. After Corona, they still had those inventory levels to address the COVID-19 run rates. The majority of our customers reduced their inventory level now to a normalized level, I think this is a good basis to start from here. We had new product launches. We had higher development and service sales. As you can see that, all that works. I think we are good, at least, for the bigger instruments in terms of materials and module supply on the procurement side.
Still suffering a little bit with some electronic components, which still means higher prices or a slightly elevated supply or lead times. Adjusted EBIT and EBIT margin, like this is meaningful and significant. Still, we have to admit that we have the cost basis for the growth, which is in sight, for the last quarters of 2023, but mainly 2024, and with the new product, certainly beyond 2024. We unfortunately have the cost structure, but operationally, in good order, but unfortunately not the demand. We have material negative scaling effects, those things which provided the tailwinds during COVID-19 with high revenues allocated to margin-heavy products, like particular the molecular programs, good scaling effects, as particularly for those programs, we had high run rates.
This is now hitting us on the negative side and certainly the product mix. Here again, everything which provided a tailwind during COVID-19 is now working against us. Product mix in terms of the product mix of machines, product mix in terms of comparing service and spare parts, maintenance parts, and consumables versus instruments. Product mix in terms of development revenues, like mainly here, earnings week development revenues. This is really a kind of exceptional quarter. I think if we look into the rearview mirror in 1 or 2 quarters from now, I think you'll see that this was really an exceptional quarter. Again, allow me to mention that we already indicated that 6 weeks ago when we discussed the full year results.
Initially, we have a lower efficiency rates coming from the serial production of those newly launched instruments, which for those of you who know us for a longer time, is that nicely leveraged out over time as we have different products in different stages of its product life cycle. Here, again, it works negatively as we have a couple of those products in a younger stage where we are still going through this learning curve. Cash flow, literally the same picture as in the earnings. Coming from EUR 6 million operative cash flow in Q1 of 2022 compared to 2023, is an operational change to 600% investment activities down to and up by EUR 2 million.
Certainly the financing activities is showing the same picture. Free cash flow generation, a difference of EUR 800,000 coming from EUR 3 million here. Certainly the 1st improvement on the cash flow dynamics. Still high working capital position. We worked that down. This is actually one of our priorities for the next quarter that the effects we saw in the past 18 months with material supply, that it was literally impossible to confirm shipments with our customers unless we had all the raw materials in. This is getting slightly better. However, we want to be a little bit cautious because of the conflict in the world. We want to make sure that we are not going belly up if something happens in Asia or if certain governments prefer certain markets.
That's why we will certainly continue to have an elevated inventory level. We wanna work that down. Certainly the investment ratio with 8% of sales is at the lower threshold of what we saw after 2019 and 2020 when we had an elevated level because of our real estate activities. I think between 6% and 8% is a good assumption going forward. Net debt to LTM EBITDA ratio of 1.7, still very good. Cash at the end of the position, literally unchanged in the wider scope, equity ratio unchanged, net debt unchanged.
I think this shows that, let me say operationally, although we are suffering at this point, but we see that those KPIs, which from my perspective are really important, like cash flows, kind of okay. The outlook, and actually we put an extra slide in regarding our earnings improvement program. Please bear with me. This is the impact on the 2024 P&L personal measures. Again, no layoffs, like generic layoffs, planned temporary and partial hiring freeze is something which will be which will stick to us for, let me say, the next 3, 4 quarters, probably taking us even into 2024 with savings of about EUR 4 million-5 million. Certainly reallocation.
Here we are talking reallocations between allocation in projects and then certainly a reduction of personal related consultancy costs like consulting in terms of helping us to actually fill the relevant positions which are harder to fill and so on. All those savings accumulated to EUR 4 million-5 million. Certainly we are bringing forward a price adjustment strategy actually already commenced, already addressed with certain customers. As you can see in the light of north of EUR 300 million in sales in both 2023 and 2024. This is not actually like a big %, however, it's meaningful in the scope of things. Here we believe that we will generate a positive contribution to earnings in our P&L by EUR 5 million-8 million.
Certainly non-personal cost reductions like optimizing in procurement, certainly product portfolio improvements and other CapEx EUR 1 million-EUR 2 million adding up for 2020 for between EUR 10 million and EUR 15 million. Certainly, I think we need to keep this a little bit awake. Mainly, the reason is that we certainly have ongoing activities in marketing and sales. We have a very nice lineup, not only of programs which are already contracted, but which are to be contracted, which requires us to maintain a certain flexibility in terms of hiring, which means we will certainly not turn down an opportunity just because they don't fit our earnings improvement program. We would actually continue to hire if one of those programs which are nicely lining up at this point will come through.
Certainly the counter position to the savings would then certainly be development capitalization. That's actually a neutral position. However, we will not show this in our P&L coming from that angle. That gets me to the next slide. Again, a key topic for this presentation was to get our confidence across. Sales is expected to grow by 8%-12% on a constant currency basis. New product launches, I think it's worth mentioning that we believe that our products which had COVID-19 exposure were coming down at a slower pace, and that our customers and us would manage to ramp up the new products or maintain high sales levels for those newer products, that would happen faster.
Still those new products are coming to the market, or came to the market, or already came to the market in the years, which were those Q1 after COVID-19. That's why we are conservatively expecting a top line growth of 8%-12% on a constant currency basis. Even margin is driven by certainly product mix and input cost inflation, which is something which is part of our earnings improvement program to get to an EBIT margin, adjusted EBIT margin of 12%-14% compared to 16.4% in 2022. Certainly some of the effects coming from the earnings improvement program, particularly those ones which are going against budget, like this hiring freeze I mentioned before, certainly will show 1st and effects already in 2023.
We have that conversion to a new generation in our veterinary and diagnostics business, which is starting with a weaker margin contribution, which will improve. It's the main focus for the group, not only the development activities in Hungary, but even including projects or involving project teams in some of our other sites. Certainly the investments, intangible assets, again, I think there is some room to be more cautious without jeopardizing the future to maneuver this company more to the 6% threshold rather than the 8%. Focus for 2023 and beyond. Certainly, the earnings improvement program is not only the company's main focus, but even my personal focus for the next quarters to bring this company back to a pre-pandemic level of efficiency.
We have to admit that the world changed. We have to admit that some of the players, like if you're even looking into and I'm not talking about our customers now, but if you're looking into those companies like the car makers, you know, with lower output, higher earnings, the airlines, insurance companies, that some of those players are actually contributing negatively to this inflation by their politics. We are trying to catch up here. I think we have a variety of measures which are not hurting the future of the company, however, improving the overall situation on the bottom line. We are negotiating further price adjustments. We had a successful round in 2022. We continue to work on that.
Sales and marketing team, part of their personal goals is certainly that those price adjustments we have to adopt on the input side, that we could actually take that forward to our customers. We have a nice lineup on our M&A pipeline. There are a couple of opportunities which are coming closer with more reasonable price expectations as we saw over the past 3 years. Again, I think this shows our confidence even having that soft and weak Q3 of 2023 behind us. We are actively working on our M&A pipeline. As mentioned, we want to coordinate that parallel ramp up with newly launched instruments, and want to sort out this overall issues with within the common time frame.
We want to execute a strong deal pipeline. We have a nice lineup with a couple of our existing customers, but with new customers as well. shows the overall trend in the industry that outsourcing is still the method of choice for the majority of the top 20 diagnostic players. This is their mean and measure to keep costs, but regulatory time to market and some other elements under control, where they actually lose control if they do it internally and where we will provide the control with good means and measures to control product lifecycle activities for those products. Certainly utilization of that 1 segment reporting and the relevant changes to the corporate structure to continue to improve the cooperation and the strength of the relevant sites.
That's certainly one of the core focuses for the next quarters. We went already through a nice process and showed some nice improvements here already. It's definitely one of the focus areas to show the further improvements, mainly to take advantage of that local strength. Let me just bring up some elements, which is actually development, software development activities like in Romania, or short turnover cycles for smaller instruments in Hungary with hematological applications. There are different strengths across different sites, and we want to harmonize activities in order to take advantage of the relevant strength of the relevant sites within STRATEC Group. This gets me to the end of the presentation. I would like to thank you. For handing back the presentation to George, who will explain us how to commence with the Q&A.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press * followed by 1 on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press * followed by 2. Anyone who has a question may press * followed by 1 at this time. The 1st question comes from the line of Oliver Metzger from ODDO. Please go ahead.
Good afternoon. Thanks a lot for taking my questions. 3 I have. The first one is your expected savings. You said, okay, you want to realize them completely in 2024. Do you expect already an effect in this year? Can you comment in this context about the extraordinary cost to implement this cost-saving program? 2nd question is also related to programs. What's the personnel measures? I understand the objective to reduce costs for years I have heard you talk about topic labor shortage. You mentioned in some cases you would, you won't look that good. You will still allow some hirings, how can you execute these savings without compromising your long-term competitiveness? Last question, just a specific supply one.
Can you comment on the current situation with the microcontrollers, please? Thank you very much.
Oliver, thanks very much. Thanks actually for bringing up those topics, really appreciate it. It really makes perfect sense to make a deep dive on the topics you actually brought up. Certainly, it is a little bit difficult for us to talk about the savings for 2023, because if we would quantify that, we would actually probably have to talk about our guidance as well, that's probably, or not just probably, that's way too early for us. There are some savings and, you know, in the analysis we made, certainly there are certain savings positions which are not just going against the actual costs, but going against the budget. Obviously those elements are kicking in right away.
Let me get you 1 example, like hiring freeze is one of those elements because we had open positions. The reductions in some of the capacities needed for the remainder of the year allowed us to not hire. That goes against the budget, insofar we can realize those savings already now. You are 100% right, that's why I said we are super cautious, we are actually intending to do everything, like with the intention to not jeopardize the company's future. The question was how will we stay competitive? Like the savings coming from the hiring freeze hasn't been taken entirely in the positions of the earnings improvement program, but only by 2/3, which means already the cost saving programs we have established now still allows for certain hirings.
I think it's obvious that, like, if we have the relevant programs ongoing or coming in for the remainder of the year, that we will hire in that position in order to particularly achieve what you just brought up, to not jeopardize the future of the company. We are actually, with all what we did and with all those methods we are discussing now within the actual heads of departments and between the board and the supervisory board, we actually have the premises from our supervisory board to clearly say, we will not overdo it with the savings. That's actually something I want to get across now. Now talking about microcontrollers. I think the situation here improved meaningfully. We still have certain shortages, but not something which is actually causing a material backorder situation.
I think it's worth mentioning that in some areas we still see elevated pricing where we expect that the prices would come back slightly in the future. This is, as already mentioned in our last quarterly calls and in the full year 2022 call, is that at this point, it's no longer a question of supply, it's a question of pricing. Again, this gets me straight back to our earnings improvement program. It's not only part to try to adjust sales prices in order to cover input prices, certainly, renegotiate ongoing terms on the procurement side in order to take advantage of the improved situation there as well. I hope this all made sense for you, Oliver, and thanks again for your question. Any follow-up?
Yeah, yeah. Yes, it did. 1 follow-up, regarding the implementation costs of.
Sorry, I missed that point. Yeah, I think the structure. Actually I have the list in front of me. 1 is earnings freeze, the 2nd is consulting cost savings. No material layoff cost. There will not be material overheads for throughout our entire base of the subsidiaries. OpEx only smaller savings, so there is actually not meaningful implementation costing.
Okay, that's helpful. Thank you very much.
Only minor to 0 restructuring costs.
The next question comes from Oliver Reinberg, from Kepler Cheuvreux. Please go ahead.
Yeah. Thanks so much for taking my question. 3 if I may. Marcus, first one would be on the sales guidance. I mean, I fully appreciate Q1 had a very tough comp, which is fair enough, but I just wonder what kind of visibility do you have on this kind of significantly improved growth outlook that you need in the following quarters? Also, is the top end of your sales guidance equally likely as the lower end? That would be question number 1. Secondly, on the outlook for margins. I mean, I think you talked in the last call also today a couple of points, a couple of times that this outlook was provided at the worst point in time. That suggests that the upper end in terms of margin, 14% is much more likely.
Apparently then this kind of cost savings come on top, which probably add 3-4 percentage points. That moves me already, effectively to 17-18. You talk about that basically mix effect and improvement in the efficiency of ramp- up is also not included. Easily we get towards 18+. I'm just wondering, is that the way we should read it or is that kind of double counting? The 3rd question, please. I mean, the, there's obviously 1 client that had a significant contribution in terms of COVID sales. It's very clear obviously that because this also is the client that triggered this kind of sales decline in Q1. Can you just provide an update?
I mean, in the past you talked about that this system will still benefit from the fact that it has been used 24/7. There's a huge demand for replacement systems of the systems that are what you call worn out. The point I'm trying to get towards is, I mean, is there any kind of risk that in the sales you see from the system that there's still a certain overstatement from this kind of replacement of worn out systems, or are you confident that we have really now hit a kind of a low point for the demand for that specific systems? Thanks very much.
Yeah. Oliver, as always, excellent question. Thanks for that. I think it's obvious that as we confirmed our 2023 guidance and as we had that weak start into the year, that it implies a +20% growth rate for each quarter to come, which is definitely a challenge. Actually this is to confirm that we made a deep dive in our expectations. We made a bottom-up approach again into the systems per quarter. That's why I can only reiterate what I already said. This is actually to confirm our guidance. You brought it up, is the upper and the lower end equally likely. Obviously this is certainly a part of the determination and a derivative of price increases as well.
Looking into the analyzer systems, it's actually like a guidance which is based on where we made an offset to the number given by our customers, where we looked into the details, how likely is that, where we have, at least from certain customers, inventory levels. I would actually say we have given that corridor in order to make a risk offset. At this point, it looks okay, kind of promising that we have the very same likelihoods of the lower and upper edge, as certainly some of our customers still have flexibility in terms of adjustment to the guidance. You talked and you made a nice accumulation of all the matters, the guidance we gave, the already kicking in effects, the improved sentiment.
Certainly, you know, if you are only adding up the upper edge of all those positive momentums, you can easily get to any % you want, but that shouldn't be a realistic and reasonable and conservative approach. If you are adding through the lower edge of all what we brought up, you are still ending up with this, 12%-14% EBITDA margin. I think it is still too early, and I already mentioned that it's still too early to discuss, is it time to adjust the guidance based upon what is in the pipeline, based upon price adjustment, based upon of improvement of sentiment. Certainly, as I've mentioned, if you are just adding up the top-end %, you might easily get to that %, but I think that is not a realistic percentage.
I can almost guarantee when I'm involved, you can never add up all positive sentiments. COVID-19 replacement instruments and run rates. I think I'm not talking about a particular customer. Certainly, we discussed all that during Corona, that we were trying to get across that there is a risk because those ones who had material tailwinds during Corona might dip after Corona, although they were trying to do a lot. In this particular case, we had a customer improving the menu, and we still see the nice effects that in this particular case, the proprietary amplification method instrument of that partner, it still shows solid growth, but the better growth is actually coming from the PCR instrument with that customer.
It shows that the menu expansion took place on the PCR side rather to that proprietary amplification method side of the business of the customer. We saw that the customer was really painfully and painting for us, trying to reduce inventory levels. If we are looking into the forecast for Q1 and partly for Q2, we see that the customer was trying to reduce inventory level, already picking up in Q3 and Q4. I think it's again, worth mentioning that the majority, not to say all our customers with COVID-19 exposure, had inventory levels in order to address customers' needs, which were caused by COVID-19.
Now, with the normalization in the market and reduced demand from the end customer market, we see that our customers are trying to bring down their inventory levels to, probably poor wording, pre-pandemic inventory levels and pre-pandemic run rates, or at least adopt it to the current run rates and the planned future run rates of the instruments. That's certainly something where we dipped out. We had to come out to the financial community with a disappointing guidance. The timing was bad, as you already mentioned, very much driven by those triggering events, which were exceptional at the time. This is a moment in time where we haven't had to review our guidance. We did so. Public markets are forcing us to disclose that information, which we did. I think from here it can only go north.
I'm absolutely convinced that the product offering of that particular market and that particular customer, and the install base that particular customer has and had, will drive our consumables and our maintenance parts and our spare parts business as well. For the time being, we are suffering the effect that our customers are trying to improve their inventory levels at a high cadence and a high, high drag. That's actually what's going on these days. I think, again, it's worth mentioning, talking to those customers, that Sentiment you do not see yet, in instruments or service parts run rate, is improving. We clearly see that.
Super. If I can just push you there a bit. I mean, if I look at the demand from this specific client, like on a quarter-on-quarter comparison, is it down more than 60%, 70%?
Oliver, I can comment that I think that customer is reporting that data, at least partly. It's a public company. Some of our customers, I actually don't know in this particular case, are only reporting active instruments, which means if the number of tests running on the instruments is north of a certain threshold in order to not dilute the test per instrument figure. Certainly some of our customers, we have to admit that some of the players in the market, I'm talking about the labs, are still keeping inventory levels with instruments sitting idle for potential COVID waves, where our customers are literally doing nothing.
We have to see that for that customer you were talking about, we have a number of different instruments, where some are actually showing weak performance, but other are already showing improved performance. I think in order to provide you a transparent, neutral, and comprehensive picture, we would have to make such a deep dive into the data that I would have to disclose data which should only be disclosed by that partner. That's why I cannot get you any further information. This is actually something which should be discussed with the relevant player you have in mind.
Fair enough. Marcus, thanks for the call.
No, thanks for your questions, Oliver.
As a reminder, to ask a question, may press * then 1. The next question comes from Jan Koch from Deutsche Bank. Please go ahead.
Hi, Marcus. Thanks for taking my questions. I also have 3, if I may. I would like to come back to your earnings improvement program and try my luck again. Can you speak a bit about the expected phasing of the targeted price increases? How much of the EUR 5-8 million have you already achieved as of today, and how much do you expect to achieve in Q2, Q3 and Q4? In relation to this, the EUR 5-8 million euros earnings impact from the price increases only applies about 2% price increases on average across your-
Exactly.
Do you see further opportunity to increase prices maybe next year? The 2nd question is can you speak a bit about the phasing of your 2023 guidance? You obviously need a step up in sales and earnings growth to achieve your guidance, but at the same time, the comps are getting much easier. Any color here would be very helpful. Lastly, very encouraging to see that Talis has received an approval for its hepatitis test in the US. Could you help us to quantify the potential for you going forward? When do you expect this test to be approved in Europe?
Yeah. Thanks, Jan. Thanks very much for your questions. I've pulled up that slide again, with the earnings impact for 2024. Let me give you some personal, Marcus Wolfinger flavor. I want to avoid, I have to manage expectations here, that, you know, we are discussing the guidance again at this point. I think this is something I definitely want to avoid. Let me get you some flavor on the relevant topics. Obviously price increases is something which is not super well perceived or price adjustments, which is not super well perceived by customers. You said the right thing. You know, certainly, we gave our teams certain goals and objectives, and we only took in 2% on an average basis. Obviously we will manage some customers for higher increases.
Some we won't manage anything at all. However, I still think there is room for improvement, but I think it's obvious that this will only be partly effective for the remainder of the year 2023. That hiring freeze and reallocation of resources and the savings coming from the not established consulting work is something which goes straight against the budget, which means it mainly kicks in already in 2023. Same thing applies for CapEx and others, so the 3rd element. I would like to encourage you to make your own math here, that it's obvious that some of the elements are kicking in right away and others will only be established if we talk about full year basis, and this is the value of the full year basis in 2024. There is some common ground in between, obviously.
I hope that makes sense for you and gets you some flavor. I made some notes, but I missed your 2nd question, Jan, so sorry about that. Can you please repeat your 2nd?
Sure. Happy to do that. The phasing of your 2023 guidance.
Yeah.
Is there anything we should consider for Q2?
Actually, certainly the comps for the Q2 will be meaningfully better, but we already see some nice improvements, like with some of our immunoassay instruments and some of our molecular instruments. I would say, if you wanna get a hint, I would assume a normal quarter with an average run rate. Certainly, this year will not be super back-end loaded, but certainly we will not entirely catch up what we missed in Q1 already in Q2. I would actually expect a normalized spread of the improvements across the quarters to come. Where, like, or you know that Q4 was relatively weak in 2022, here the comps will be better. Therefore, the overall performance not that good. Definitely Q2 and Q3 heavy for the year 2023. Last was about sepsis.
This is an early stage. We are ramping up, the main revenues will only come in 2024 and 2025. We have a nice lineup of programs where we will already make some meaningful improvements in terms of recognized revenues for development in the course of 2023, which might provide us some additional tailwind. I'm actually... You know, we only talked 6 weeks ago, where I probably made a less optimistic or where I left a less optimistic impression, and I definitely want to manage expectations. However, my gut feeling for the remainder of the year is way better than it has been the case for 2020 for the remainder of 2023 when we talked at the beginning of the year.
Looking into the earnings improvements and discussing with the teams, I think this is something where we are really keeping the balance of not over-saving and in parallel, not jeopardizing the future, but still achieving meaningful improvements here. We are intending to keep that narrow balance. That's definitely the goal. Hope that makes sense.
It does. Very helpful. Thank you.
Thank you very much.
The next question comes from Alexander Galitsa from HAIB. Please go ahead.
Yes, thank you for taking the questions. I'd like to ask 1, sort of to confirm on the full year, maybe rather sales guidance. If I understand that correctly, 1 thing is that the corridor for the sales range was based on what you mentioned, is that gloomy snapshot of customer orders. Since then, that has meaningfully improved. Is that fair to say that currently, as things are, you are trending, sort of at least at the upper end, not at the lower end of the guidance, and for you to really land at the lower end of the guidance, you really need to see customers go back to more restrained forecasts. Is that how 1 should think about it?
Yeah, Alex. Actually, I would like to answer that with a clear no. You know, we talked about some of the contributors to sales for the remaining quarters. Certainly, as meaningfully as the sentiment in the discussion with our customers improved for certain important projects, we certainly have some risks for downsides as well. Now only, like, covering those positive comments and ignoring the risk on the bottom end, is actually, like for me, an approach I don't want to take at this point. Still, we have some nice upsides here and there. We are discussing with our customers where we believe that they dipped out as far as the demand is concerned. On the other side, we still have some flexibility for those customers and for other customers.
Only talking about the positive elements, I think is something which doesn't provide a really, a realistic and conservative approach. That's why we want to stick to that, growth rates we have given in our guidance, and not say that it will become like a home run to achieve the upper end. That's definitely something which is way too early to confirm or deny at this point. Hope that makes sense.
Yes, perfectly clear. Then also on the sepsis diagnostic tool, could you maybe talk a little bit about the revenue potential you're envisioning for this product and also discuss the sort of revenue model behind like what's the value of smart consumables within such system?
Yeah.
How often these consumables need to be replaced?
Yeah. Actually it's a consumable which you need already, like let me say, a 1-to-1 ratio test performed to consumable. It's actually like a linear equation to the test performed. Like I said, meaningful revenue is only 2024. You know, Sepsis is. You know that I'm actually trying to avoid to play this buzzword bingo. Sepsis was in everybody's mind for the last 3, 4, 5 years, and there were a lot of companies with a lot of promises, you know, that Sepsis is not only a question of infectious disease testing, and Sepsis is caused by a high number of pathogens.
It's not only a matter of infectious diseases, certainly treatment, which means antibiotics have to be applied, which means there are different work streams for infectious diseases, which typically gets you to fairly fast results. On the other side, treatment suggestions are taking longer. This is a complex process and a complex workflow. On the other side, it's definitely one of the most severe diseases for the time being, and particularly in emergency care, it plays a meaningful role. What I wanna get across is that there are a number of players out who are intending to go in that market with different solutions. Actually, a high number of good solutions for different price points.
It is not super easy to predict that, but like, already in 2024, we are intending to sell, like, a 7-digit, low 7-digit EUR amount for, excuse me. Sorry, I had to mute. Give me a sec. Already for 2023, we are intending to sell a 7-digit number of runways, probably with a leading 2, with a leading 3 million. Already meaningful for such an early stage. As mentioned, you know, there is a number of players in that market. It's a super early stage. It there is still this ongoing question, how fast the market will adopt this particular technology. Are there other competing technologies which will be adopted faster?
In order to give really a good prediction about the run rates for the years to follow, 2024 is a tough one. I think it's easier if we are in 2024 to discuss the run rates in 2025. It's a very promising project, and it's actually one of the market-leading companies, so we are not worried about the overall success of the product. However, it's still the ramp-up curve is something which is yet unclear for us. We have a forecast from the customer. Certainly we have manufacturing planning already ongoing. We are supplying the customer already. However, if the tail end of 2024 is a hockey stick or, like, more a linear equation, that's still unknown.
Understood. Is there possible for you to give us any kind of sort of anchors to be able to triangulate the potential revenue ourselves in terms of how, like, how much 1 smart consumable costs or as a percentage of sort of value of the device? Anything like that?
This is actually. This is certainly. This would provide a cost of goods calculation. Like I said, our forecast for 2024 foresees a like 7-digit EUR amount leading 2 or 3 with a nice growth rate potential. However, I think it is important to understand that there are certainly minimum expectations. There are capacities in the tools and in the process. There are capacity thresholds when new tools and new automation would have to be ordered. However, there are like, you know, there is a lead time for certain elements contributing to manufacturing ramp up. We have this discussion with one of the market leading players, but still too early to. You know, it may easily get us to a high single-digit EUR amount over time, but it may actually remain somehow in the area of EUR 3 million-EUR 7 million.
It's definitely too early to determine expectation, or to actually assess what is expectation and what is a realistic planning scenario. Too early.
Understood. Just last 1, conceptually, to understand the model, you'll be providing a stock of consumables to Cytovale directly, and they would be already having the relationship with actual users of the equipment. Is that how it works?
Affirmative.
Thank you.
You're very welcome.
Gentlemen, we have a follow-up question from Oliver Reinberg from Kepler Cheuvreux. Please go ahead.
Oh, yeah, thanks very much for taking my follow-up question. Just 2 quick ones on the margin. Marcus, I appreciate that you normally do not share the mix in terms of how much what was the potential sales coming from recurring revenues. Given the kind of significant or quite low margin, any kind of color what the share of consumable sales was in the Q1 when it's normally in the low 30s%? Secondly, on the margin, when we think about mid-single digit personal cost inflation on a like for like basis, have we fully seen that already in the Q1 ? Or is the kind of cost pressure from personal costs further ramping up over the course of the year?
Thirdly, just on M&A, because you mentioned that in your prepared remarks. I mean, is that something that could also be realized more short term? If you would announce a transaction, is it more likely that we're going to see a business that adds capacity and may be loss-making in nature? Is it most likely if you acquire something that this will also be earnings accretive? Thank you.
Yeah. Let me start from the tail end. Actually, Oliver, you got that hint that, certainly M&A is not only focused. We continue to talk to different companies. We have a nice lineup. It's still, you know, a binary thing. M&A doesn't take place by 70%. It either takes place or doesn't take place. Those companies we have in our, in our lineup would actually be margin accretive, and that's the 1st message I wanna get across.
In our salary increase, and I think that was part of the 2nd question, we have reached a level where actually the company, but fortunately, our employees and you know how important human capital is in our business, I think have achieved a balanced situation with salary increases on the 1 hand side, on the other side, giving the company enough room, particularly in those tough times. Margin-wise, actually a level thing. Development revenues were actually slightly elevated. Unfortunately, some of them came along margin light, which is causing that little bit disruptive picture. Service parts were on a normalized level, so almost in the area where they have been on a full year basis in 2023, so almost mimicking the situation we had then.
I must admit that our expectations regarding service parts were higher than what we achieved. They have been on the level where we have been on a full year basis in 2023. I think it will not help you meaningfully to model the rest of the year as we had this disruptive situation with high contribution from margin light development revenues, bad, really tough comps with instruments compared to Q1 2022, but a service and maintenance parts level which compares to the previous year. It doesn't really help. It doesn't get you any direction. I actually followed down the very same route without any meaningful result from my own assessment.
Okay. Sorry, I was almost. Yeah, thanks so much. I missed the answer on personal cost. The personal cost inflation has fully contributed in Q1 already or is that gradually ramping up?
Fully contributed in Q1. Actually, we have made a 24-month solution with our responsible people here, and part of the increases were covered. Certainly with our cost of goods structures, the majority is actually covered on the material input side coming from our suppliers. Our internal increases regarding wages for 2023 are already covered in Q1, and certainly we have other increases which are already agreed upon but only coming up in 2024, but which are already budgeted in the way how we are thinking at this point for 2024.
Perfect. That's very clear. Thank you, Marcus.
Thanks for your question.
There are no further questions at this time.
Yeah. Thanks, George. Ladies and gentlemen, this gets us to the end of the presentation and the discussion regarding our Q1 2023 disclosure. Thanks for your interest and thanks for talking to us, and have a good day. Thanks, everybody. Have a good day.
Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.