Good morning in the U.S. And good afternoon in Europe, ladies and gentlemen. Welcome to our H1 conference call based upon the financial disclosure of the results of the H1 of Stratec's fiscal year 2022. Before we start, I would like to mention some housekeeping stuff. Actually, you can download that presentation either from the webcast, there should be a download button, or you can download it from our website. I think I don't need to walk you through our safe harbor statement. Today's presentation will be, as always, split into three major presentation sections. First of all, I would like to get you an overview. I would like to discuss the financial results, and certainly I would like to touch base on an outlook and forecast and everything.
At the end of the presentation, we'll have the chance for a discussion in the form of a Q&A session. H1, actually, like from when we finalized our budget and when we got our forecast for the first six months, we were actually very excited because we saw uninterruptedly high demand from our customers, which is actually still the case. Certainly, this actually is happening as planned. We see some declining demands, like some of our customers on the molecular end, on the tail end of the COVID-19 pandemic, lower demands here and there. On the other side, very much based upon the nicely grown installed base, the fleet of instruments out there, we see high demands on the spare parts side, nice demands on newly launched instruments.
We are facing a variety of product launches where our customers are performing initial stock keeping measures, and so on. All in all, a very nice progress, but it really hit us hard, particularly, let me say, in the last six weeks of Q2, regarding supply chain issues. Unfortunately, this led to a sales decline leading to six months revenues of about EUR 137 million, which is mainly driven by this super high base of comparison in last year. As already mentioned, severe delivery backlogs and a back order situation, very much based upon this tense supply chain.
To be honest, I described that in several individual communications amongst our investors that I had the impression that the situation, particularly towards the end of the second quarter, got rather worse than actually better. This led to a decline in EBIT margin after 22.1% in H1 of 2021. We are now showing quote-unquote of only 15.4%, which is, at least from my perspective, to a certain degree, satisfying, particularly if we see those two effects. One is the product mix, which was really in our favor last year, not only from a high contribution of molecular instruments, but even from a very low contribution back then of recognized development revenues and other factors which actually caused an extraordinary high EBIT margin last year.
That's why we are actually satisfied, but certainly only partly explainable by the product mix, and then certainly the negative scaling effect. The majority of our costs, except on the input side, are actually fairly firm. You see high investment in development activities. Our development pipeline is still very high and continues to grow. We got several new things in, not only new in terms of development activities, but feasibility studies and other things where we are in a pre-contractual stage, but still spending a lot of money in activities in order to get the contracts over the finish line in order to start with the actual development, which is then capitalized in the majority of the events.
We have this full development pipeline, a variety of promising negotiations and additional growth in the pipelines, and actually got like verbal approval for certain new projects. Certainly what took us a while, and we have often enough referred to that, we are actually about to launch a new MDx system, and the second system is actually good on track that the launch date, which has been towards the end of the year, the second molecular system foreseen towards the end of the year or early next year, is actually still on track. Nothing in sight which might actually jeopardize the launch. Design freeze is a while ago. We are in the last tasks of manufacturing validation, and our partners are actually in the final steps of the documentation.
Nothing in sight which might jeopardize that second launch. Our business unit, Diatron, has launched a new system addressing the needs of this highly decentralized environment. You probably know that in hematology, we have our own brand name, Diatron, no longer offering exclusively hematological systems, but other analyzer systems like in immunoassay. Our KleeYa platform is launched through the Diatron, or it's actually sold through the Diatron brand. In this highly centralized markets in the hematological space, mainly companies like Sysmex or Beckman Coulter are present, and there are only a handful of other companies to include our business unit, Diatron, addressing the decentralized markets of smaller instruments.
Actually the proof that we continue to grow mainly on the development and very much driven by new development activities, new development projects, new feasibility studies, etc., that we continue to grow on that end as well. This gets me to the financial overview. Sales, as already mentioned, in H1, a change of 11%. On a Q-to-Q basis, it looks actually even worse. Here we are down by about 26%, already mentioned. Certainly taking into consideration the super high comparison we have, and please bear with me, I just wanna mention that in H1 in 2021, we generated about EUR 24 million more in sales than in the second half of the year.
This is actually mainly reflected in this comp we see here in Q2 2021 as compared to Q2 2022. Already tough, very much driven by the decline in revenues, and again, very much driven by this backorder situation. The actual margin rates like EBITDA margin or EBIT margin or even the margins on EPS are actually going through in percent, so nothing special. We are very positive that we can catch up. Things are actually normalizing. The end of H1 came actually unexpectedly early. Sorry for kidding around, but I think the situation would have looked way better if the quarter or H1 would have lasted like two to three weeks longer.
We see this here in the financial performance comparing the first six months of an individual year over the past years. Similar situation as in 2018, but again, we are very positive. We can catch up. Certainly, we have that pandemic-related demand for molecular instrument is causing a little bit headwinds. Secondly, the delivery backlog, very much driven by a dense supply chain. Actually, the thing which shouldn't surprise us a lot is that this is actually throughout our entire product portfolio. This is not that instrument one or B has been affected this week, it's that instrument, and the other week, it's the other instrument family.
In the meantime, the situation in our industry is really that the majority of the second and third-tier suppliers, so by means of our suppliers, are kind of trying to avoid to confirm supply dates, which makes it tough or brings us into a place between a rock and a hard place where it is literally impossible to confirm supply dates towards our customers, which doesn't help the situation in terms of actually tackling the real backorder situation. Because currently, we only take the required supply dates of our customers into consideration and not actually the confirmed supply dates. Another very important point is actually that at the end of recognized development sales, we have this postponed milestone, which is actually the finalization of that molecular instrument.
The beauty here is that this is actually not margin dilutive. We are expecting that this milestone, the last milestone, comes along with kind of regular or even slightly extended margin, which will help us in the fulfillment of our guidance given, which requires a certain margin pickup, but we'll discuss that later on. On a constant currency exchange rate, you see that decline in systems as expected. Service Parts and Consumables haven't been affected.
Actually, if we see the actual demand and order situation, consumables would have been way higher after six months than compared to H1 2021, which again would have led to an acceleration on the margin, which again makes us positive that we can deliver not only top line, but bottom line as well, if we are talking about margin. On the development side, we see that development and recognized development revenues are already picking up. Again, I was already trying to bring that across. 2021 was really exceptional from a product mix perspective, which helped us on the margin side. Now it actually shows that the majority of the development revenues recognized in H1 2021 are actually margin light.
That particular milestone, which would have led to a further growth on a development side, is margin heavy. Therefore the picture we are showing after six months is really not representative for the remainder of the year on a basis, how we compare year-to-year. I don't need to reiterate myself when discussing the actual percentages. I think today we can believe that Service Parts and Consumables on a full year basis will continue to show higher traction even percent-wise, which typically means that we will stay somehow in this 50%-55% bandwidth as far as contribution from analyzer sales is concerned. From the D&S perspective, development-recognized development revenues and service activities will stay on that level on a full year basis, or will show some continuous growth.
Please don't expect us to bring this in a 15% revenue, 15% of revenue basis. This would certainly mean a higher dilution rate that we should expect. I think it's a good assumption to act on the basis of 12 to, let's say, 13%-15% level. This gets me to an adjusted EBIT and EBIT margin. Again, we already discussed that. A decline of on an EBIT basis of almost 30% year-over-year, down to EUR 20 million, pickup effect and recovery effect actually expected leading to an EBIT margin of 15.4%. Again, we stick to the guidance. I don't need to read myself continuously.
The headwinds we saw actually very negative economies of scale that will pick up as soon as we normalize the actual backorder situation, which was, and I already mentioned that, way higher than we would see in a common year. Normalization of the product mix, which means lighter contribution from margin-heavy molecular instruments, that happened as expected. Certainly, headwinds from higher input costs. We are in the process and actually, towards the end of H1, we showed some nice progress here in trying to transfer those higher input costs into higher costs of our final products. In some cases, we have been successful. In some cases, the process is actually ongoing. Certainly, we see measures in order to perform currency hedge.
We had some actual headwinds in H1 of about EUR 2 million. Shouldn't be uncommon in this area after the dollar currency rate exchange changes we saw in H1. We don't expect any further effects for the remainder of the year. Segment performance, I would say it's the entire picture throughout the entire base. Diatron, let's discuss this first. Mainly affected by smaller molecular instruments, but still healthy EBIT and EBITDA margin sales on the instrument side. Again, same thing, nice progression in immunohematology and in the immunoassays, lighter revenues coming from the molecular instruments leading to a decline. Very healthy development actually on the smart consumables side, and still we are expecting a lot towards the end of the year.
We see nice progress here, not only in customer wins, but even the business unit working as a door opener for both the segment Diatron and instruments. A nice progression with that slight change to the business model, which has been executed over the past three, four years to focus more on the blue chips. We have a lot of things to come, not only in the development pipeline, but even in the pipeline of new projects. Cash flow, I think compared to the revenue activities, an acceptable situation. Here you can see H1 as compared to H1 2022 situation is under control. Investment ratio of 5.8% of sales versus 6.7% in H1, which is slightly below the full year target.
Actually, it's just an outcome of this equation we already discussed in terms of backorder situation. The same thing applies on the investment side in terms of money spending as well. Net debt down by 1% versus FY 2021, which leads to a net debt ratio to LTM EBITDA of a factor of one. Very healthy development here as well. Here we go. Let me now get us to the outlook and the focus. Definitely we would like to confirm our guidance for fiscal year 2022, which is that we are expecting the sales of this year to match the previous year level on a constant currency basis.
Momentum is expected to improve significantly in the second half of the year, which is actually a result of the lower overall comparison basis and a catch up in delivering on the back order situation. Some postponed revenues on the development side and new product launches. All in all, a variety of factors we can already see coming up. That's why we are not super worried about that. Adjusted EBIT margin of around 16%-18.5%. We have to admit that, when we have laid out that guidance, we put some reserves in. It is unlikely that we will get to this upper edge of the EBIT margin guidance. Still, with all those factors we have already discussed, low to mid should actually be possible.
Investments in tangible and intangible assets combined of around 6%-8%. Here, if we see the activities ongoing, and particularly the investments required, we should again expect this to be more at the lower edge and therefore showing nice cash flow progress as well. Focus for the remainder of the year and getting us into 2023. We have a variety of development activities and launch pipeline, new MDx products, launch of several other instruments to include our KleeYa systems, KleeYa system for new partners and some others. Certainly a super strong deal pipeline regarding new development and manufacturing agreements. Here again, we are very positive. We have several agreements in final stages of negotiations, and we are positive to push this over the finish line within the next weeks or months.
Certainly we need to address the supply chain activities. You know, it's easy to say, just put the material on stock and deliver from there. If we would be in that positive situation that we can put materials on stock, really with our super deep supply chain, like tier six, tier seven suppliers, all letting the subsequent suppliers then down, which makes the situation even harder from a situation that we can assess the situation and tackle the situation and work against it. It's a real challenge. Certainly we are implementing measures to limit the input cost inflation. We have certain measures ongoing, mainly through long-term agreements. The same thing is that we need to conclude additional negotiations.
Some of them already concluded, some of them ongoing to implement price adjustments across our portfolio in terms of sales price increases. M&A definitely remains a super important part of the company's growth and diversification strategy. We have several things ongoing. Again, we are super selective. I think the M&A market is a little bit turning towards our favor, so price expectations are becoming a little bit more reasonable. There are new targets coming up on the horizon, fitting nicely into our strategy to go two directions. One is to find a company, as we found Diatron, like a small Stratec too, or certain technologies, which are helping us to make our product offering towards our OEM customers more comprehensive.
Mainly addressing the needs of things causing headaches to our customers, where through bundling activities for more than one customer, we could actually achieve economies of scale and therefore making a business out of that. These are the two directions besides technology, obviously, where we keep our eyes open as well. Certainly manage the additional personnel requirements in line with the well-filled project pipeline. Again, existing products as well as new products coming on top are certainly requiring new hirings. We all know that this is a real challenge, not only in Germany, but in the meantime even in Eastern Europe and all other areas where Stratec is active, which certainly includes North America as well. This gets me to the end of the presentation.
I would like to hand back over to Francie, who will explain to us how to go through Q&A.
Yes. Ladies and gentlemen, at this time we'll 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. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from Oliver Metzger from ODDO BHF. Please go ahead, sir.
Yeah. Hi. Good afternoon, Mr.
First question is on your guidance, and I will ask a second later. It's a little bit more bigger. Q1 was potentially weak as expected. Q2 results were apparently weaker than expected, as basically, the results triggered even a preliminary announcement. Two questions on the guide. First, can you give us an indication to which extent revenues have been shifted from the second quarter potentially into the third quarter? And, the second sub-question is, your wording on the guidance was in the past that you factored in all risk factors, while you basically left out all potential revenues that appeared uncertain. Over the last years, we have seen a couple of times that, you've increased your guidance over the course of a year or basically overachieved your guidance.
Would you describe the underlying base of your guidance still as unchanged? Did you continue to factor in only the revenues which are 100% certain and leave out all your risk factors? Just what I want to understand is the underlying assumptions regarding your guidance. My next question, I will wait on to your answer, please. No, anyway, you can go ahead actually with the second question.
Yeah. Okay.
I'll try to answer both. Thank you.
Yeah, okay. The second is you commented that basically you said indirectly that the start into Q3 was very good. Simultaneously, you also mentioned that the supply situation has become even worse over the last weeks rather than better. How does this fit together? Should we regard your comment on the strong start despite all this macro headwinds and deteriorating situation? Is this like more a dead cat bouncing? Do you think really that even this strong start overcompensates the supply issues?
Yeah, let me put it that way. I think answering the second question first as well, it makes life a little bit easier for me. I was trying to get across that towards the end of Q2, I said the last six weeks of the second quarter, actually, we had the impression that things got worse. In the meantime, it's really tough to say, because certainly we were trying to get in things. We have increased our activities. We put more people on it. We have certainly as a kind of countermeasure for the weak performance of some of our suppliers in the second half of the second quarter. We have certainly implemented measures which are now leading to that we managed to reduce the backorder situation.
On the other side, certainly we see new things coming up. It is super tough, like I said, because these are weekly events. You know, this is not that one supplier is telling you that he will be three months late, and you can just factor that in. Like I said, this week it's this supplier, that week it's that commodity. We have a supplier performing very well for that project, but not for the other product and so on. It's really tough to tackle. From an overall perspective, I would say that the situation in the first weeks of the third quarter is at least from a subjective impression and from a perspective of the actual performance in manufacturing and like turnover times and so on, it shows improvement.
I wanted to get that across that I think although, like, the car industry was trying to make us believe that from their perspective, Q2 was better than Q1, we, Stratec, had the impression that Q2 was actually the worst over the past, let's say, six or eight quarters. I would actually say that, you know, when the market was really severely hit, like in Q2 or Q1 of 2021, we performed very well. Now at the tail end of the pandemic and at the tail end of supply chain interruptions, we are really hit. I wanted to get that across. It looks better now in Q3. I cannot make any promises, obviously, for materials which are not yet in our inventory.
However, the perception of Stratec is that it starts getting better, although we have those weekly events I just mentioned. Now talking about guidance and risk factors, Oliver, thanks for bringing that up. Actually, as we said, we are confident that we are able to catch up on our delivery backlogs in the second half. It's literally impossible to say whether this is going to happen in Q3 or Q4. We are working on that. Certainly, we have additional orders. We have to set priorities, like think about supplying spare parts for certain products and consumables is more important than shipping new instruments from a customer perspective because they need to keep their fleet working. That's important.
Taking the postponed development revenues into account, which are going to book in the third quarter, we are talking about a combined number of close to EUR 10 million in delivery backlogs and postponed revenue recognition, which the majority hopefully will be recognized in Q3, but I would like to say that certainly there will be a leftover which can only be handled in or dealt with in Q4. On the risk factors, I think I need to get the contributors across, which is certainly that we don't know how diagnostic testing will perform with coronavirus towards the end of the year.
Certainly what we factored in our guidance and what we definitely see our customers factoring those things in, into their forecast is that they are not expecting any additional instrument demand in Q4 or Q1 2023 respectively. This means that from that perspective, our guidance is conservative, as we do not expect any additional tailwinds coming from Corona. All which has been factored in is regular demand, regular new customer wins through our customers, regular replacement business. You know that just as an example, one of our biggest molecular customers is currently turning over his biggest customer with a new instrument. Getting the predecessor instrument, which hasn't been manufactured by Stratec, out of the labs and bringing instruments manufactured by Stratec in. We have a bunch of nice tailwinds here.
I'm still perceiving, assuming unchanged forecasts, unchanged demands, and again, non-COVID-19, COVID-19-related demands into consideration and declining supply chain challenges. If we factor all those things in, I would still say that the risk factors we have factored into our guidance are comparable to the risk factors we have factored in over the past years. I hope that that answers your question. That was a little bit of a comprehensive answer, but I think I needed to get some background.
No, it was an excellent answer, and thank you very much for bringing clarity to this. Thank you.
Welcome.
The next question is from Jan Koch from Deutsche Bank. Please go ahead.
Hi, Marcus. Thanks for taking my questions. I have also three, similar to Oliver's. My first question is on your general visibility on sales and earnings. To be honest, I was a bit surprised by the magnitude of the declines in the recent quarter, especially in view of your comments on the last earnings call back in May. I understand that there were some unforeseen one-time effects that affected your performance in the recent quarter, but it would be great if you could explain the drivers for the negative surprise a bit more in detail, also especially in terms of your visibility, and if you could quantify that would be great. Secondly, on your 2022 guidance again.
Following the Q2 results, the full year targets look obviously a bit more stretched now. How confident are you that you can still achieve the midpoint of your margin guidance? How much does your guidance rely on the digital PCR product to be launched this year? To phrase it differently, are you convinced that what happened in 2018 does not happen again this year? Finally, a more positive question on your smart consumables business. It was quite encouraging to see that you were able to keep a double-digit margin again in the first half of a year.
Do you expect to be able to keep the double-digit margin in the second half of the year, or should we expect it dip again similar to last year? Following on this, a quick housekeeping question. The consumables you expected to deliver for the digital PCR instrument, will they be recognized in the smart consumable segment or in the instrumentation segment? That's all.
Yeah, Jan, thanks very much. Excellent questions. Allow me to answer the easy ones first. Yes, the dPCR consumables will be invoiced through our smart consumables business unit. Yes. The dip in the second half of 2021 for smart consumable was actually mainly related to a pricing mechanism for one very important customer. He actually orders a full year demand in the first half of the year in order to get a better pricing, and then accordingly, didn't order a lot of the consumables in the second half of the year, which actually then led to the dip. We have actually corrected that mechanism, so that shouldn't happen again. Under a regular demand perspective, we should actually show or continue with that nice margin progression in our smart consumable segment.
Getting now to your first question. I think you know, this is complex technical mechanics we have to address here. Assuming that you know, like, let me just get you a real-world example. You know, we are ordering, like, a sub-assembly, let's say a centrifuge from a certain supplier, which includes electronics. Which means that supplier has an order confirmation from an electronic supplier that the electronics might come in in a certain week, so which would allow our supplier with a centrifuge to supply us in a certain other week, right? Now, the PCBA manufacturer is let down by the distributor of the electronic components, and the entire chain then collapses.
What happens is that we are trying to help our suppliers to get those electronic components from like secondary markets, which often don't show the required quality. Which means then we get the materials in, believe it works, and in final testing here in our factory, we find out that the products don't achieve the required quality, and then everything starts from scratch. It is kind of chaos, a theory that you know one brick actually falls after the other, which makes actually planning super complicated. Under regular terms, I would have described our forecasting and planning model as fairly predictable with a high degree of visibility. Here, particularly in this tough supply or rough supply chain situation, making predictions is actually super hard.
I was trying to get this across in my speech and in the replies to Oliver's question that we are fairly confident, mainly driven by the fact that the tailwinds we are expecting in Q3 are not only caused by one factor. As mentioned, a variety of factor like recognized revenues coming from development, picking up on back order, lower comps, and so on and so forth. That makes us very confident. That's why, as mentioned, we are positive that we can get to that midpoint EBITDA margin under a kind of expected product mix scenario. Again, this takes into consideration that over the past years, our install base grew significantly.
Now with lower tailwinds on the contribution of sales from new instruments, certainly in percent, the contribution to revenues coming from consumables and maintenance parts should increase, which should actually cause some nice tailwinds on the margin end as well. Regarding the importance of the contribution to our guidance for dPCR, I hope I managed to get this across over the past years, that the years of the launches are not so super important to us. It's actually the two or three years following the product launches where we are really going through that hockey stick effect that our partners are selling the instruments with a comprehensive menu to all applicable customers in all applicable markets and so on. Certainly dPCR is important for us.
The customer certainly is currently initiating initial warehousing activities for instruments and consumables, so activities are picking up. I just wanna bring that up again. Compared to the initial launch plan, we are certainly a couple of quarters behind, which makes the importance for us and our customers even more important. The likelihood that the launch is now happening within the foreseen timeframe makes it very likely. I think all pre-launch activities like initial stock keeping for consumables and for instruments is ongoing, slightly affected by the rough supply chain still. Again, I would say in a controlled manner, we shouldn't expect any surprises here. I hope that answers your question.
Yes. Great. Thank you.
Very welcome.
The next question is from Aliaksandr Halitsa from H&A. Please go ahead.
Yes, good afternoon. Thanks for taking the question. Markus, could you discuss your Q2 2022 sales and gross profit performance relative to second quarter in 2020? It looks like the sales were pretty much the same as G&A was the same, but the gross margin was 3.4 percentage point higher in 2020. What are the key sort of moving parts in there? Specifically, how much could you attribute to higher input costs this year?
Yeah. Alexander, I think you need to repeat your question. I think you partly confused years, so I don't know the reference point. Can you please repeat?
Yeah. I'm basically looking at Q2 2022 relative to Q2 2020.
2020?
Yeah.
I see. You are trying to develop an ex-corona perspective or what do you?
No, I'm just looking at the headline numbers, right? The revenues were the same this quarter as you had in Q2 in 2020. Gross profit margin has been significantly higher in Q2 in 2020, right? Relative to what we see in Q2 2022, sorry. I'm just trying to get a feel what are the key moving parts within the gross profit margin that explain this difference and specifically wondering how much is the higher input costs you're facing this year play in this mix?
Yeah. Again, sorry for interrupting. Are you comparing this year's figures, so 2022 with last year's figures, so 2021, right?
No. Well, 2021 was sort of an unusual year, right?
Okay, I see. Now I see your point. Yeah.
I was looking at 2020 specific, 2020 and 2022.
I understand. I'm actually not really prepared for that discussion. That's why I have to actually answer the question from the top of my mind. In 2020, we certainly had an initial positive response from the product mix, which is then actually showing a better gross margin on the product and then certainly the input costs, which are affecting us only in 2022, which hadn't been the case at all in 2020. This was at the beginning of the pandemic when all manufacturing markets were down. Literally you got things with discounts or some got things with discounts. I think the path you're going down is explainable by two factors. One is certainly product mix.
You know, at the time, certainly we showed weak performance in our hematological and immunohematology business, kind of flat development with relatively margin-heavy immunoassays and super nice progression with margin-heavy molecular instruments. It's product mix, and then certainly the input cost situation and the backorder situation, which is showing some challenges on economies of scale, which is not just affecting manufacturing costs, but input costs to a certain degree as well.
Mm-hmm. That makes sense. Would you be able to roughly attribute or isolate the input cost inflation within this sort of headwind we see this quarter? Or is it complex?
No, it's actually not because only certain components are affected. You know, you always learn those things in the news that this microcontroller now costs 10 or 100 or 500 x more than it costed last year. I think these are really exceptions. We certainly have those subcomponents as well, where a product which costed like EUR 10 is now costing EUR 1,000, but that's actually not causing the pain. I think the overall thing is literally everything got more expensive, and we have those unfruitful discussions with our customers. At this point, I would say those instruments which.
Typically, unfortunately, older instruments are affected a little bit more than younger instruments or younger in the product portfolio, which is actually an explanation of that the majority of the electronic component manufacturer are actually kind of misusing that situation, that they are clearing their product portfolio, which means discontinuations of older components, which then have to be procured in secondary markets, which actually is driving prices as well. That's why, let me say, instruments which are slightly older in the product portfolio are affected often by, let me say, 8%-15% depending on volumes, whereas newer instruments are affected by, let's say, 3%-10%. I think assuming an average basis of 5%-7% is healthy input cost inflation. I hope that answers the question.
Yeah, that's helpful. I'd like to confirm, and I apologize if I missed that. You mentioned 13%-15% level, when you were talking about the development revenue. Was this referring to the percentage of total sales? How much you expect the development revenue to be at the end of the year?
Exactly.
Okay. Mm-hmm.
Way higher than in the two previous years.
Yeah.
Again, just trying to avoid confusion. Typically, we are saying that a high percentage of sales coming from development or recognized development revenues is typically diluting the margin. As mentioned before, one of the milestones being part of the recognized development revenues is coming along margin-heavy. You shouldn't expect any material or meaningful dilution of the company's margin coming from a way higher recognition of development revenues in sales. I hope this makes sense.
Yeah. Yeah, no, absolutely. I'd like to ask two follow-ups on this topic. When we talk about this milestone kind of adding into 2022, if we put it into the sort of playing field in comparison to last year, how margin-heavy was the development revenue for 2021 compared to what you might have this year?
Yeah. Actually, this.
The comparison for this year is heavier.
Yeah. No, actually this year it should be higher, but this is typically the moment in time where I start whining about IFRS 15, which is actually causing a lot of volatility in the recognized development revenues, and it's actually mainly related to product and development status. We have pushed a lot of projects into, let me say, the final stages of development activities. Market launch is coming up, which means that typically the milestones collected previously are now coming into sales and some of them. It really depends on the actual contractual situation. Let me just get you two examples to show the bandwidth.
In some cases, we have development contracts where parts of the development costs are actually rolled over into the final product, which means we do not make any margin on the development activities, therefore, the margin on the products to be sold later on is higher. Vice versa, that some of our customers are paying more for the development because they don't want this rollover process. It's actually more a political pricing measure, and therefore we have some development milestones coming along margin light and others coming along margin heavy. It really depends on the individual contract with the customer. In this particular case, I would like to say that the milestones recognized and therefore the revenues generated with development activities in 2022 are coming along margin heavier than their comparison in 2020.
Orders are coming along in 2022, margin heavier as the comparison in 2021.
Okay, thank you. That makes sense. Last question I have is, if we strip out your development revenues for the full year, which are presumably between EUR 35 million-EUR 40 million, you'd need around about 10% growth for the second half for the rest of the businesses products and spare parts. Maybe you could talk about the sort of the expected development within this mix. Sort of where do you expect most of the growth to come from? Is that systems or also spare parts, services in the second half of the year?
You know, certainly as a percentage of sales, it's both, but on an absolute level, it's definitely instruments, certainly. Just considering the percentage of sales.
Okay, thank you very much.
You're very welcome.
There are no further questions at this time. I hand back to Marcus Wolfinger for closing comments.
Yeah, Operator, thanks very much. Ladies and gentlemen, this gets us to the end of our H1 call. If you have any follow-up questions, like upcoming in the next days or hours, please do not hesitate to call us on our IR line. We are here to answer your questions. Thanks for your interest in Stratec, and have a good day. Thank you.