Ladies and gentlemen, good morning. Welcome to the Tecan Group Half Year Results 2018 conference call and live webcast. I am Moira, the conference call operator. At this time, it's my pleasure to hand over to Mr. Martin Brändle, Vice President, Communications and Investor Relations. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. Thank you for joining us for our conference call this morning. We are very pleased to discuss the financial results for the first half of 2018. Again, a strong set of results. We are even more delighted to also discuss with you our second exciting announcement published this morning, the acquisition of NuGEN Technologies. With me on the call are our Chief Executive Officer, Dr. David Martyr, and our Chief Financial Officer, Dr. Rudolf Oechslin. Before we start, as always, some formalities. The corresponding press release announcing our H1 financial results was issued this morning at 7:00 A.M., Central European summertime. Both this press release as well as the full 2018 interim report are available on the company website, tecan.com, under the Investor Relations tab.
The interim report is also available in our IR app for iPads, which can be downloaded from the App Store. The call is being webcast over the internet on our homepage. We have also posted the presentation slides as a PDF there for download. With that, let me now turn the call over to David Martyr. David?
Thank you, Martin. Ladies and gentlemen, good morning. Thank you for joining the call today. The agenda for the call will be firstly a few opening comments from myself about our financial performance and some of the operating highlights from the first half of 2018. I will hand over to Rudolf, our CFO, who will lead you through the financial results in more detail. I'll provide some more information about the exciting acquisition that we've announced this morning, which will further strengthen our position in the genomics market, as well as providing comments on our outlook for the full year 2018. At the end, we will, of course, open up the lines for a few minutes to accept questions. Turning to our performance during the first half of 2018, I'm very pleased to report that Tecan Group is continuing on a strong growth path.
Group sales increased by 8.4% in CHF and 6.9% in local currencies compared to the first half of 2017. Our growth in the partnering business was particularly strong at 16.1% in local currencies. It should also be noted that our group sales growth is almost entirely organic this time. In fact, rounded to a single decimal place, I believe there would be no change between the overall reported growth and organic growth. The very strong sales growth in our partnering business of 16.1% was driven by demand for established instruments, as well as the ramp-up of newly launched instruments. Our consumable sales were also strong. You will recall that in our life sciences business, we reported an exceptionally strong first half last year with a growth of 18.2%. It was always going to be a tough comparison.
With sales of just over CHF 140 million for our life sciences business in the first half of 2018, 1.7% higher than last year, our sales were very solid, and the order entry during the period was very strong, leading to a double-digit increase in our instrument backlog at the half year. Total recurring revenues, that is sales from plastic consumables, reagents, spare parts, and services, grew in line with our overall business and was again at a record level of 45% of group sales. Our operating profit expanded even faster than sales, with EBIT increasing by 26% to CHF 37.8 million, and our EBITDA expanding by 16% to just over CHF 48 million. Our operating margin improvements were driven mainly by volume, increased efficiencies in procurement and production, and lower acquisition-related integration costs compared to the prior year period.
Net profit also expanded at a double-digit rate of 12%, with positive effects from a lower tax rate being unfortunately more than offset by a negative financial result due to currency hedging losses. During the first half of the year, a really important event for us has been the market introduction of Fluent Gx, a major new variant of our successful Fluent liquid handling platform. Fluent Gx has been designed specifically for customers who are operating in highly regulated markets such as clinical diagnostics. We were pleased to have also successfully registered Fluent Gx as a Class 1 medical device in the U.S. during the first half. Fluent Gx brings all the advantages of our standard Fluent, including speed, capacity, and ease of use, but now combined with specific features for regulated markets such as sophisticated sample tracking, audit trails, and electronic signatures.
Although shipments of the instruments began only in quarter two, we've already seen strong demand for the new Gx models, with prestigious end-user customers ordering multiple instruments at once. In our partnering business, we've also made significant progress in the development of new instruments for our partners. Our project teams are currently working on more than five new instrument projects, and additional headcount has been hired within R&D. Our instrument project pipeline is also very strong. The sales potential for these instruments under development after ramp-up in the market ranges from single-digit millions of CHF per year in sales to clear double-digit million amounts per year, and we anticipate the first market launches can be expected within the next six months.
After this brief introduction about some of the highlights we've enjoyed during the first half of the year, I'd like to hand over to Rudolf, who will lead you through the financial results in more detail. Rudolf.
Thank you, David. Good morning, ladies and gentlemen. As always, I will now guide you through our financial results for the first half of 2018 in more detail. I start with order entry and sales. Order entry increased by 2.8% in Swiss francs, and by 1.3% in local currencies. This is despite the high comparative basis from the prior year period. You will recall, I mentioned it on the past earnings calls, that it was extraordinarily strong, and that it was influenced by the timing of several large orders in the partnering business. With CHF 298.1 million, order entry substantially exceeded sales by almost CHF 25 million. The book-to-bill ratio, therefore, was at 1.09. Looking at the life sciences specifically, we recorded a nice double-digit increase in order backlog. Sales increased by 6.9% in local currencies or 8.4% in Swiss francs to CHF 273.5 million.
As you will see on the segment level in a minute, this was driven by strong growth in the partnering business. It is almost exclusively from organic growth, excluding acquisition effects. Overall, a pretty pleasing result in line with our expectations. Looking at the sales performance of our two business segments. For the first half of 2018, this looks almost completely the other way around compared to the prior years. Sales in the Life Science business segment increased by 1.7% to CHF 140.5 million, and were 0.6% below those of the prior year period in local currencies. This did not come unexpected after this business generated particularly high growth of 18.2% in local currencies in the first six months of 2017.
We are also not worried at all because the order backlog was growing at a double-digit rate on the back of orders for new instruments, especially for Fluent Gx. This will have a positive impact on sales in the second half of the year. Starting from a lower base, sales in the Partnering business segment increased with a high rate of 16.1% in local currencies and 16.6% in Swiss francs. We generated a total of CHF 133 million with our OEM customers in the first half, driven by a continued strong growth from existing instrument platforms and the consumables business. Also, some newly launched platforms contributed. Looking at the sales development in the different regions. In Europe, sales in the first six months of 2018 increased by 19.9% in local currencies and by 24.4% in Swiss francs.
Keep in mind, with all transparency, that in partnering, we had an unusually low base from the prior year. Nevertheless, we think that the growth of 40% is an excellent result. The life science business benefited from a stronger euro and was therefore able to post solid growth in CHF. In local currencies, sales were stable against the high base of the prior year period. In North America, sales in the first half fell by 2.5% in local currencies and by 4.5% in CHF compared to 2017. This development was mainly due to the unusually high comparative basis of the prior year period in this region. You might recall that we posted a sales increase of 31.7% in local currencies in North America last year, with both business segments contributing clear double-digit growth. In Asia, sales increased by 5.4% in local currencies and 10.6% in CHF.
Both segments contributed to this result with good growth in all of the region's key national markets. Our next slide addresses our gross profit. Gross profit increased to CHF 128.5 million, which was CHF 8.3 million or 6.9% above the prior year figure. The gross profit margin came down by 70 basis points compared to the prior year. We had several factors impacting the gross profit margin. First, we faced a negative exchange rate impact. This might be counterintuitive looking at the tailwind we had on the top line. However, in the meantime, as a result of our material cost initiative, we have moved a significant share of our supply chain to EUR countries. This means that in the meantime, we are short in EUR. We have more costs than sales, and our profitability goes down with a stronger EUR and benefits if the EUR weakens.
Another negative impact for the gross profit, and I want to emphasize the word gross, came from the strong growth of our partnering business. We have discussed this in the past, that this business has a lower gross profit margin. On the positive side, we continue to record substantial material cost savings. Our next slide addresses our cost structure. Overall, our operating expenses, less cost of sales, grew less than sales and with 33.1% of sales were 250 basis points better than in the prior year. Sales and marketing increased less than sales, despite continued investments in our market units. R&D was at 8.1% of sales. Keep in mind, though, that net R&D expenses were reported lower. This is the cost that is booked in the P&L under R&D. Our overall R&D activities, and therefore gross expenses, were higher compared to the prior year period.
That means we are working on more projects for partners, typically customer-funded, which gets booked under engineering income and COGS. We capitalize more R&D based on the progress of projects, and we booked less amortization of capitalized R&D from prior years. In G&A, we realized the volume leverage as costs increased less than sales. Looking at the EBIT and EBITDA development. Also a very positive development here. Our EBIT, earnings before interest and taxes, increased to CHF 37.8 million, up by 26.3% or CHF 7.9 million. Our EBITDA, the operating profit before depreciation and amortization, rose by 15.5% or CHF 6.5 million to CHF 48.1 million. Looking at the margin development. The EBIT margin increased to 13.8% of sales, 190 basis points above the prior year. I mentioned the negative exchange rate impact on the previous slide.
To put some numbers behind the adverse impact, you can see that at constant currencies, our EBIT margin would have been at 14.7% of sales, 90 basis points higher than reported. The EBITDA margin improved by 110 basis points to 17.6% of sales, including integration costs associated with acquisitions from prior years. The margin improvement was mainly driven by positive volume effects, lower acquisition-related integration costs compared to the prior year period. That was mostly from Sias in 2017. Increased operational efficiency in procurement and production. Looking at the operating profitability on a segment level. EBIT in the life science business rose to CHF 18.1 million, and the reported operating profit margin was comparable to the prior year period at 12.2% of sales.
Keep in mind here that the exchange rate impact that I mentioned on the previous slide, 90 basis points on a group level, is with the mass majority booked in this segment. On the positive side, the lower OpEx shown before also benefited the life science business, as well as further efficiency gains. As you can see it in every year, this business is highly geared towards the second half from a margin perspective. EBIT in the partnering business rose by 32.2% to CHF 25.6 million. This positive performance should not be a surprise to you as it is primarily the result of the significant sales growth. Partnering also benefited from further efficiency gains, lower integration costs from Sias. In fact, we did not book any additional costs here.
On the negative side for the margin development, we also list engineering income as this funded R&D work for partners comes with a lower margin in this phase of the partnership. Kind of a cost to benefit from the higher margin supply of instruments later on. Our next slide addresses our net profit. The net profit increased by 12.1%, faster than sales, and reached a record CHF 29.2 million for the first half. The net profit margin increased to 10.7% of sales. Alongside the higher operating result, contributing factors included the lower tax rate, primarily as a result of the tax reform in the U.S. that came into effect in the reporting period. By contrast, the financial result had an inhibiting effect on net profit, falling by CHF 4.6 million year on year due to currency hedging losses. We move ahead to the basic earnings per share. This is a quick discussion.
Earnings per share increased to CHF 2.49, developing about in line with net profit. The average number of shares outstanding increased slightly to 11.7 million. We continue with the cash flow on slide 16. In the first half, cash flow from operating activities climbed by 21% to CHF 38.4 million, therefore corresponding to 14% of sales. Our DSO number, the day sales outstanding, increased from 50 to 55 days, still a good number. We saw some of our largest partners managing their cash flows a bit more this half year. It was not bad debt. The operating cash flow includes CHF 10.3 million for amortization and depreciation, CHF 5.2 million thereof from development costs we capitalized in the past, and the PPA portion allocated to the development costs. On the other hand, we invested a total of CHF 20.8 million.
Included in this figure are CHF 6.7 million for capitalized development costs and an equity investment of CHF 4 million we made earlier this year. We took part in a C round of Andrew Alliance, a Geneva-based company developing and selling affordable benchtop liquid handling robots that use conventional and pipettes. Cash flow from financing activities includes the dividend payments we made in April 2018 in the total amount of CHF 23.5 million. Cash and cash equivalents were at CHF 301.1 million at the end of June, compared to CHF 309.4 million at the end of December 2017. Our net liquidity position, after deducting all bank liabilities, was at CHF 284.1 million. The next slide shows the key figures. As always, this is just for your reference, as I have already discussed most of the figures on this slide. Let me now hand back over to David.
Thank you, Rudolf. Before commenting on our outlook for 2018, I would now like to comment on our agreement to acquire NuGEN Technologies based in California, that we've also announced this morning. Tecan is already today a strong provider of instrumentation for applications in the broad field of genomics, with close to one-third of our life sciences business sales for such applications. With strong instrumentation offerings in this area and the potential to develop further, even more dedicated solutions for applications in this field, it will come as no surprise that the addition of selected reagents for sample preparation in next-generation sequencing has been a focus area for our M&A team. We are delighted, therefore, to be able to announce today the acquisition of NuGEN Technologies based in San Carlos, California.
With an experienced and highly talented team of over 70 people, NuGEN is a leading provider of innovative kits and sample preparation reagents for next-generation sequencing, which is probably the fastest-growing segment within genomic applications. In the agreement we have announced this morning, Tecan will be paying an all-cash consideration of $54.5 million for the complete acquisition of NuGEN, an amount which is just under four times the currently projected sales volume of NuGEN for 2018. With a broad portfolio of kits and reagents, together with access to our global sales footprint, we are confident to expand sales of NuGEN products to around three times their current level by 2023. Further, we see the acquisition of NuGEN to be a catalyst to accelerate our own genomic strategy.
Although not previously communicated, we are already working on new instrument workstations dedicated to genomic applications, and we foresee that the acquisition of NuGEN will accelerate our time to market for complete solutions for our life science business customers. Including the tripling of NuGEN product sales by 2023, we anticipate that this broader push in genomics will add approximately CHF 75 million in group annual sales by 2023. Although the NuGEN business is today modestly loss-making, we will naturally need to invest to integrate the business and further expand sales channels to support the planned growth, we anticipate that the transaction will become accretive for 2022. Even including the additional investments, we see this as a very good deal overall for Tecan. Closing conditions and formalities are not expected to take very long, closing of this transaction is foreseen to occur already within the coming weeks.
At a rather high and simplified level, a typical next-generation sequencing workflow can be represented as shown in this slide. Biological material is collected, but before it is able to be sequenced and the data subsequently analyzed, it must be prepared. Within sample preparation, one can broadly consider three discrete steps. Extraction from the sample, library preparation, and quality control checks. Today, Tecan is already providing many of our EVO and Fluent liquid handling instruments for DNA extraction applications, as well as for the secondary preparation step of library preparation. However, to date, we've only benefited from instrument and plastic consumable sales for these applications. The kits, reagents, and expertise of NuGEN Technologies is particularly focused on library preparation and quality control steps for prepared libraries. It is therefore an ideal fit for Tecan, as the kits and reagents can be directly applied to our existing liquid handling instrumentation.
Their novel library QC reagents can be directly used with our plate reader detection instruments. The kits and reagents will be an important part of a complete solution offering for our planned new dedicated workstations. In a similar way that our addition of consumables for mass spec sample preparation through the acquisition of SPEware in 2016 has enabled us to offer full dedicated automation workflows, we see the addition of NuGEN Technologies as a perfect fit to expand our activities in sample preparation for this fast-growing field of NGS sample preparation. With the first half now behind us, fully in line with our expectations, we are pleased to confirm the organic part of our outlook given originally in March this year for the full year 2018. Our full-year organic outlook is for sales growth in the mid-single-digit range in local currencies.
With our order intake during the first half of the year, we now have quite good visibility into the second half. In profitability, we're again confirming our organic outlook to deliver an EBITDA margin of more than 19% for the full year, even including integration costs in a low single-digit million CHF amount for the acquisitions that were already closed prior to giving our outlook in March. Of course, this outlook is based on certain currency assumptions, with our assumptions for the US dollar and euro unchanged from our March communication, again set out here for clarity. Of course, there will now be an additional effect on our expected 2018 full-year result from the acquisition of NuGEN Technologies.
The financial impact of NuGEN will depend on the exact timing of the closing of the deal, although, as I already commented, we would currently anticipate that the deal may close within the next few weeks. Based on such assumptions, we expect the additional sales contribution of NuGEN to be a low single-digit million CHF for Tecan in 2018, and we expect the impact of the transaction and initial integration costs, together with the moderate loss on operations of the current NuGEN business, to lower our communicated EBITDA margin outlook by between 50 and 75 basis points. Once again, of course, the exact impact will depend on the closing date. Ladies and gentlemen, that brings us to the end of the presentation for today. I'll now hand back to the operator who will open up the lines for your questions. Thank you.
The first question is from Maja Pataki from Kepler Cheuvreux. Please go ahead.
Yes. Good morning, gentlemen. I have two questions. The first one, David, you've been mentioning that the partnering pipeline is full and that you expect the first launch to be seen in 2019, but you've also given us a range of low single digit to clear double digit. Could you give us an indication whether it's a platform that will generate sales on the lower end? How we should think about the launch timing of the continuous platforms to come so we have a bit of an idea of how we should model that. The second question relates to the acquisition of NuGEN. Clearly, from what you've been showing us, it makes strategic sense to integrate that in your portfolio. It strikes me, however, a bit out of your typical acquisition range with regards to the financials that you typically say.
Maybe I'm wrong, haven't you repeatedly said that you're looking for acquisitions that are at least, I would say margin neutral or accretive in year two, and we don't actually see that in NuGEN. Could you please elaborate why that is so? Thank you.
Maja, good morning, thank you for your questions. Firstly, on the partnering business, we have a number of projects under development at the moment, and we're not really at liberty to say too much about some of those. You know that a couple of them we have disclosed who the clients are with the clients' permission, we're not able to say which systems are coming first. I think it would be fair to say, though, that the indication we've given today of the first launches being anticipated within the next six months would be projects of a smaller size. The larger projects that we're working on would take longer, we're not able to go into more detail beyond that today. Regarding NuGEN, I think this is a very exciting acquisition for us.
Genomics is a very important area. NuGEN brings a perfect match of reagents and kits and know-how to our platforms, both from a liquid handling and also from a detection point of view. I think this will be a significant opportunity for us to accelerate our own push in genomics. As we mentioned on the call, we've been developing, although we hadn't announced prior to today, some more dedicated workstations will launch over the next two or three years in several launches. We're not going to announce details about those instrumentation at this stage. The addition of the reagents from NuGEN will be a great asset for those dedicated workstations as well as the business itself, for the reagents themselves, as well as the combination with our existing Fluent and Evo platforms. Now, you commented that we obviously like acquisitions which are immediately accretive.
I think if you look at the overall terms of this deal, I think it's a very good deal, even with the investment that we will make over the next two or three years into this business to scale it up. I think it represents a very attractive deal for Tecan overall. It's absolutely in the center of our field. It's true that we've commented that we would prefer deals which are not dilutive for more than two or three years. This is perhaps at the longer range of this, depending on scenarios. I think overall, the price that we've been able to negotiate on the deal and the investments we anticipate and the fit of the business are very good. We're very satisfied with the deal. It's not a technology bet at all. NuGEN has well established technology.
The library preparation reagents, the quality control reagents that they have are very well respected in the marketplace. They've proven themselves. They have a good team with over 70 scientists in the business, and say overall, I think this is going to be a very nice deal for our business.
Great. Thank you for that. David, can you put us maybe just into perspective to the discussions we had with the full year results, where at least I had the impression that you seem to be a bit more upbeat on the possibility of larger acquisitions. I believe you also mentioned the potential target of CHF 1 billion, that you'd be able to spend up to CHF 1 billion on acquisitions. Now we see an acquisition of $54 million. How shall we think about that? Is there more to come? Is there actually going to be a transformational acquisition at some point in time, or is it just an incredibly difficult market to really find the targets at the right price that would fit your company. Thank you.
I think we've always very consistently said that we anticipate making a series of smaller acquisitions together with potentially one or two much larger and transformative acquisitions. Clearly, the acquisition of NuGEN Technologies today, whilst we're very excited about it, is on the smaller side. It's comparable to some of the previous transactions we've made, which have also been very good deals for us. We will continue to make such bolt-on deals as we've announced today with NuGEN Technologies. We still work on larger, more attractive or more transformative deals. Clearly, we have still a significant firepower from a cash point of view. I'm not in a position to comment on how near or how far we may be from any additional deals, as you well understand. Say, we're very pleased with the deal that we've been able to announce this morning.
Thank you.
The next question is from Scott Bardo from Berenberg. Please go ahead.
Thanks very much for taking my questions. The first question just relates to the operational performance of the business, obviously pleasing to see good top-line growth and good margin development of the company. Really, it's a question relating to this sort of yo-yoing performance at the divisional level, where one of the divisions is performing very well, and then the other is flat or slightly down, and vice versa in the other half of the year. I just wondered, when do you foresee getting out of that and having a more smooth divisional performance on a half yearly basis? I wonder if you could just share some comments there. That's been a more volatile trend we've seen in Tecan over the last few years. That's the first question, please.
Yeah. Scott, do you want me to answer them one by one? Or are you going to-
Please, yeah. One by one.
Okay. Scott, good morning. Yeah, thanks for the questions. Look, I think you understand probably better than most the effect of, if you have an outstanding step forward one year, then just from a pure mathematical basis, if you advanced 30% or 40% one year, it's always going to be a tough comparison going forward. If perhaps we're taking smaller steps, sometimes it would always be more consistent. I think one of the benefits we have, of course, is by having a diversified business with our life science division and our partnering business, and a range of end markets as well as geographies, then these things often balance themselves out very nicely. We've been able to, I think, guide very effectively and deliver on our outlook and our expectations for overall growth.
The partnering business had a more difficult number the first half of last year for the timing of certain deals, and therefore was able to make a much bigger step forward this year. It was a very strong business this year, both with demand for existing platforms, but also the introduction of certain new platforms ramping up, as well as consumable sales. The life sciences business last year with 18.2% growth. Yes, including a bit of acquisition growth too, was always going to be a tough comparison, and I think we've clearly communicated that right back in March with the full year results. Overall, I think we're very pleased with the operational performance, the growth that we've demonstrated, and as you say, the margin expansion, which is faster than the sales growth.
Okay. Just really some strategic comments, if you like, on the NuGEN acquisition. What was it about NuGEN which convinced Tecan so much? There is a lot of startup next-generation sequencing sample prep companies out there. I wonder what really was it about this company that made you prefer to acquire this particular business? Perhaps you can extend those comments as to what gives you the confidence then that you can triple revenues for this business, and perhaps a little bit more color surrounding the underlying inorganic strategy that you look to adopt.
I think the things that attracted us with NuGEN is that, whilst it's still a relatively young business, they have been around now for a few years, therefore they've got a strong team. They're over 70 people within the business. They've proven themselves with a broad range of reagents. They've particularly, in the last few years, focused on next-generation sequencing library preparation reagents, have a very good range of kits and technology there. The technology itself, being in many cases an additive-only chemistry, is very well suited to automation, therefore is a very good fit to our automation focus. The technology also that they have, which I think is a little bit more unique around quality control of library preparation using plate readers and more simple detection devices than are typically used in the industry, again, is a very good fit for us.
I think the combination of the skills, the team, the focus, the expertise, the customer base they have, is just a very good fit for Tecan with our automation capability, our better customer access, and our global reach. In looking at and being confident to grow this business, I think we're starting from something which is a very solid base, a very good reputation, and a very broad customer base and a broad product portfolio. What we can do is we can help them reach more customers globally, particularly in Asia and across Europe, as well as combining it now with our automation platforms for our typical life science business customers. I think we feel very confident that we can grow this business to triple it by 2023.
Of course, as a consequence of that and investing the necessary amounts over the next few years to add further sales specialists and application specialists, I think that we see this as not a high-risk deal at all. I think we see that this is a very good fit for our business.
Okay, very good. Lastly, please, just a little bit of financial clarity on the acquisition. I'm assuming that NuGEN is largely a consumable business, but would you be kind enough at least to share with us what the sort of gross margin profile of these products are? How is the intensity of this business? Roughly what operating margin this business houses today? Give us some feeling, please, that when the integration costs abate, how long will it take with the planned investments into this business to get to the group EBITDA margin of Tecan today?
Okay. I think we'd like to get the deal closed before we dive into a lot of detail, and no doubt we'll be having a capital market day and providing a lot more insight to this business in the coming months ahead. What I can discuss is that, as we've communicated, the business is moderately loss-making at the moment. It's loss-making in terms of a single-digit millions amount. We anticipate in going forward, that with the investments that we will make to integrate the business, to add sales specialists and application specialists, and to grow this out with our own business over the next two or three years. We believe that this will be overall accretive for us during the full year of 2022 at the latest.
That as we go beyond that, we will go to a double-digit % margin by 2023 and grow to well above the Tecan overall EBITDA margins in the years beyond that. It's a typical reagent business, but it'll take three years or so to get to the double-digit margins, because we want to really quite aggressively grow this business and therefore this is for us, is a growth play rather than a cost play. It's not a question of buying the business and squeezing some cost out to immediately make it accretive. We believe that this would be, in the long term, much better to invest, grow this out aggressively, accelerate our own genomics push. We have, say close to a third of our life science division is in genomic-based applications. We see next generation sequencing as one of the faster-growing areas here.
We're working on new workstations already in this area, which we launched in the coming years. The combination of NuGEN together with this, I think, is a very attractive portfolio.
Just one quick follow-up, please, if I may. Just to follow on from your comments to understand, this will still be margin dilutive by 2022 as you foresee. Given that you've outlined 50, 75 basis points margin compression for the back four months of the year, depending on imminent closure. Is it a correct assumption that we see 150 basis points or so, three times that amount dilution into 2019? Just wondering about your ability to progress margins from these rebased levels into next year, if you could at least help us.
Yeah. It's a little premature to give detailed guidance around 2019, but I will attempt to at least give a little bit of color because I think it's a fair question. If you look at the combination of the operating losses, the investments that we'll make, the integration costs, et cetera, we would anticipate a mid to high single-digit CHF millions impact on our overall EBITDA margins for 2019. If you were to consider Tecan before the NuGEN announcement and what is likely to be the impact in 2019. I mean, there is potentially also a small exit tax consideration, maybe it's a low single-digit CHF millions. Some of that will come back over the following years, or most of that would come back in the following years, again, in a cash point of view on the tax.
Let's say a mid-single digit to mid to high single-digit CHF millions impact on EBITDA next year is probably a reasonable guidance at this stage. We will certainly, of course, give more detailed guidance at the appropriate stage in the future.
Okay. Thanks very much, David
The next question is from Sibylle Bischofberger from ZKB. Please go ahead.
Good morning, gentlemen. My questions have been answered. There's only one left. You told us that on EBITDA level, the margin was lower by 19 basis points due to FX effects. Could you tell us how it would be in the second half of 2018 when the currency effects would stay as they are at the moment, please?
Good morning, Sibylle. I think it sounds like a perfect question for Rudolf.
Yes. Thank you. Good morning, Sibylle. I haven't calculated that yet. Just out answering in a few seconds. I would expect that it would get less because we have the effect in the first half that actually the US dollar was higher last year and this year lower in the average, and for the full year it was indifferent. Also the euro last year for the full year, it was 1.11, so higher than it has been in the first half. Overall, I would expect this 90 basis points just here, saying it without having done a detailed math to be more than in a 50 basis point or somewhere there.
Okay, thank you. Just to make sure I understood correctly, the NuGEN acquisition you told us that the EBITDA margin will be influenced in 2018 by 50 to 75 basis points. This would be as example when it would be consolidated per 1st of October. These three months would be then 50 to 75 basis points, it's not calculated by year?
2018 for the full year, right?
Yes. Essentially, that's correct. The impact would be on our full year result. The guidance we've given, of course, the sooner that it closes, there would be more sales, potentially there would also be a little bit more loss. Also we would have done more of the integration work.
Okay.
Say, the closing of the deal, there's minimal formalities. We would expect it to be relatively fast.
Okay. Thank you. The next question is from Daniel Jelovcan from Mirabaud. Please go ahead.
Yeah. Hello, gentlemen. Also question on NuGEN. Can you elaborate a bit on the competitive bidding? Was it kind of a public bidding? Who was involved? Of course, not names, but was it other large diagnostic or instrument companies, or was it more private equity? Was it extremely competitive or were you even maybe, was it a deal between you and them, only or just out of curiosity? Then I'm a bit puzzled on the sales level of this company. You mentioned you pay less than 4 times sales this year. So that would mean, let's say, if it's three and a half times sales, it would be sales of CHF 15 million. That wouldn't add up to your goals to triple sales in the next 5 years to CHF 75 million, because that would imply actually CHF 25 million sales this year.
You also say that it will affect your P&L this year for only a few CHF million. I'm a bit puzzled about the sales number of NuGEN. That's the first question.
Okay. Danny, good morning. I will do my best to try and clarify. Firstly, on the process itself, I don't think we want to particularly disclose too much about the process. We have known NuGEN for quite some time, as you would expect to know. The business was predominantly private equity owned. Therefore, I think we had quite a close process with the management and the ownership structure there and were able to negotiate a deal, I would say, without too much competitive interference. I don't want to go into the details of the process. Just to provide some clarity, though, around the numbers you commented. The ballpark of the sales number you mentioned is about right. If you go from the calculation.
Just to clarify, the CHF 75 million that was spoken about in 2023 is the combination of tripling the NuGEN sales for the products from NuGEN, together with an amount which is already, shall we say, planned in our own midterm plan for these dedicated workstations. You might perhaps broadly think around a third of that CHF 75 million being an amount that we were planning in our own, not announced, dedicated workstations. The balance between the tripling the NuGEN volume and a third of the CHF 75 million would be synergies between being able to sell more of our normal platforms with the NuGEN products. Hopefully, that gives you a little bit more clarity as to how we see those numbers coming together.
A third is actually coming from Tecan with the new workstations?
Yes. We have a significant amount of our life science business today. About close to a third of our life sciences business is actually in broad genomic applications. In addition, we have been planning and are working on dedicated workstations for certain genomic applications which were not yet announced but were part of our forward planning already, which would be around a third of that CHF 75 million. We're announcing that today because it's an appropriate time with the deal to share a little bit more of where we're going with our genomics. The NuGEN will deliver the large part of that in terms of tripling its own volume. Then, of course, as you would expect, there is naturally some synergy sales between the NuGEN products and being able to sell more of our standard liquid handlers and plate readers, et cetera, as well.
Okay. Thanks. That was very helpful. I didn't really understand. Okay. The second question, actually really similar to Scott's question about the volatility in the life science business. I perfectly understand comparative base and so on. That's very clear. Isn't it also a stretch for your own organization that you have this up and down? The volatility to manage people is also quite a challenge. I remember two years ago or so, you said that you will try to smoothen out the volatility by launching new instruments in different indications step by step. Now, obviously, you still have this volatility. I understand, that for instance, the Fluent Gx with the order backlog you flagged will bring another positive volatility. Your goal was to smoothen that a bit. I wonder about the progress of that. Thanks.
I think one of the things that we particularly benefit from is a common operations organization and a common development organization. In our production, we're very easily able to deploy people from one production cell to another. Whether we're building faster certain partnering instruments or needing to put more resources on our own Fluent or EVO production lines, we have quite a lot of operational flexibility. We also, particularly on the partnering side, where the instruments are frozen solutions, where every instrument is the same, we have the ability to actually build a little bit of buffer stock for those.
We keep our production itself much more level loaded, and then we're able to ship out from finished goods stock those instruments to satisfy customer demands, which often in partnering comes as a result of large tenders that have been won, where their own call-off can be sometimes a little bit volatile. We're able to actually de-synchronize or decouple the production surges that you might think of with the sales revenue surges that sometimes you see from shipping large batches of partnering instruments. On the life sciences side, of course, those instruments are configured to customers' orders, so those are built to demand. As I say, we have good flexibility, and we have a lot of productivity on our production lines, and we haven't really had too many difficulties to keep up with the demand.
With the Fluent Gx, we announced it in the first half of the year. We started shipping around the middle of the second quarter. It's possible that we saw a little bit in terms of not as fast sales execution on the life sciences business because we were taking orders, but perhaps not able to ship as many of the Gxes, just simply from a timing of when that became available to ship. We're in a good position going into the second half with a nice backlog, and very good initial demand from the marketplace for those new models.
Okay, thanks.
The next question is from Paolo Mortarotti of Tower House Partners. Please go ahead.
Good morning, David. Good morning, everyone. A quick question on your, actually tying up with your comments on SPEware and the launch of Fluent Gx. I'm picking up quite interesting signals from the scientific community on potentially introducing mass spec in clinical diagnostic at a larger scale. I'd like a comment from you on maybe if you can characterize the state of play here in terms of whether or not this could be a disruptive trend going forward. Maybe to comment on your position with your upgraded portfolio here in terms of instrumentations and consumables. Whether you could characterize the competitive landscape in sample prep at this stage. Thank you.
Paolo, good morning. Thanks for your questions. Look, mass spec, we think, is a very exciting technology. You're right, that having been established for a number of years in research and applied applications, it's moving quite fast into clinical diagnostic applications. This is why, over the past few years, we've been very attracted to that market segment. We've provided a lot of automation products for those applications, often into the reference labs that were early adopters in a lab-developed test environment of applying mass spec for all sorts of diagnostic applications. Now of course, with our move just exactly two years ago when we acquired SPEware, now Tecan SP or Tecan Sample Prep, to participate in the consumables for that application, so that we could offer more complete solutions, as well as participate in the recurring revenue. We think it's a very exciting technology.
I think you used the word disruptive. Potentially mass spec is disruptive on certain diagnostic applications. I think one of the things that mass spec brings is it brings diagnostic performance with a high amount of quantification at a very good price position relative to other diagnostic tests. I think that this is one of the reasons we've been keen to participate. It is one of the focus areas we have on our business going forward. I think overall, with the modular system solutions we have and the partnerships we have, and now with the in-house knowledge we have of developing these techniques, we've been very pleased with this development.
Thank you.
The next question is a follow-up question from Maja Pataki. Please go ahead.
Yes. David, could you please give us a bit of a timing of your new workstation that will go into the next generation, CHF 75 million? When is the timing of it, so we can actually have a bit of an idea how the CHF 75 million will actually constitute over the next couple of years?
Thank you, Maja. I'm probably going to frustrate you by not being able to share a lot of detail, but what I will clarify is it's a number of instruments that are under development, and they will be launched at various dates in the next two to three years. These are instruments of different sizes, different throughputs, and targeted at different parts of the genomic, particularly next-generation sequencing workflow. They are targeted at our classical life science business customers. That's about all I want to say at the moment. There will clearly be more announcements in the future, but we don't want to preview our products from a competitive environment point of view.
Okay, thanks. We should basically really assume that the sales contribution starts to ramp up after 2020, right?
Well, I think, as I say, launches will be in the next two to three years, so I think it's quite reasonable to expect you can see some launches perhaps as early as 2020. Of course, the combination of NuGEN reagents with Tecan products will happen much quicker, because we will combine those with our existing Fluent and EVO products already during 2019. We will be able to offer combined solutions, open platforms during that time. We're looking that more dedicated solutions will come to market after that.
Okay. Just a clarification on that. Apologies. The CHF 75 million that you say give us a kind of an ambition for 2023. Is that purely NuGEN plus new workstations, so dedicated workstations, or is it also existing kind of, is it incremental CHF 75 million? That's, I guess, the easiest way to ask.
Yeah. As I mentioned to Danny, approximately a third of the CHF 75 million will be derived from new workstations, which are not in our portfolio today, which we'll be launching over the coming two or three years. Those instruments, of course, were in our own midterm planning and our expectation of how the company would develop. Our expectation. If you look at what the NuGEN deal brings, this brings the tripling of the NuGEN business, and together with some additional synergies which will drive more instrument sales, both conventional ones and potentially more of those dedicated workstations. Say around two-thirds of that, CHF 75 million is coming as a result of the acquisition announced today. We're announcing today that the additional portion, because I think it's part of our overall genomics push that we're making as for the business.
Brilliant. Thanks a lot.
The next question is a follow-up question from Scott Bardo. Please go ahead.
Yeah, thanks very much. Just really after a little bit more clarity on the status of some of the newer launches. You mentioned you were relatively encouraged by the launch of Fluent Gx, with some reference labs ordering multiple systems. I wonder if you can share some comments. Is this a pattern you expect to be repeated now, significant buy-in from reference laboratories, or was that somewhat of a one-off? Perhaps you can just share some views about the market demand for that system. Also perhaps just some comments on the new Spark launch that you plan in your extended foray into cell analytics, how you're prepared for that and what your expectations are there. Thanks.
Okay, Scott. Thank you. Yeah, it's a trend that we've seen with the standard Fluent that we launched and have sold over the last few years, that actually we saw increasingly that customers were ordering multiple units because they very much bought into the high throughput productivity, ease of use, and benefits of Fluent. What we've seen since we announced the Fluent Gx, is that particularly those companies operating in highly regulated environments, particularly in the clinical diagnostics, looking to be able to, particularly, for genomic workflows, get very high throughput sample preparation. Therefore, I think the multiple orders that we've seen even initially with Fluent Gx is something which is going to continue going forward. Of course, we very much enjoy and continue to appreciate selling the single units to different customers.
Very often customers are putting in large capacity and looking for multiple units at the same time. I think it's a trend that will continue. You ask around our Spark product line. Spark is performing very well in the marketplace. Of course, we've introduced imaging capabilities already on the Spark unit with integrated microscopy and cell incubation capabilities on the unit that we've had in the market over the last two years. As we've hinted, we expect to extend the Spark platform in the future with even more sophisticated imaging and live cell studying capabilities, though the exact date of the launch of that product is not yet communicated to our customers.
Okay, thanks. Still something that, I think you mentioned at the beginning of the year, still something we should expect for the second half of this year, if I understand.
There is still a chance that it comes later this year, I will announce the product when we announce the product.
Okay. Thanks very much indeed.
Next question is a follow-up from Daniel Jelovcan. Please go ahead.
Yeah. Just on China. Some of the life science companies like Mettler-Toledo, they suffered in China. At least the share price suffered because of fears for a difficult 2019 with all the Trump actions. Obviously you're a Swiss company, but do you see anything impacting the business in China? Actually, how is China developing? Asia overall with +5% local currency growth was quite modest, to say like that. It would be nice to have some flavor on those things.
Yeah. Daniel, thanks for the follow-up. China developed pretty much in line with our overall Asia result. Obviously working from a high base there because we took a good step forward again last year with China. We've not yet seen any tangible impact or any impact from the threatened trade tariffs or trade wars, whatever you want to call it. Obviously, it's something that's being looked at very carefully, but at the moment, there is no tangible impact. What we have seen over the last nine months or so, possibly even 12 months, was some disruption in customs clearance processes and some delays in customs clearance processes. You may be aware that in the second half of last year, China changed its processes for approving duty-free certificates for the import of goods by certain customers, and many of those customers had to reapply for their duty-free certificate status.
Some of our customers are eligible for those duty-free certificate clearances, and that certainly slowed things down, and we have seen customs clearance processes increase from a few days to a few weeks on occasion. That's the sort of the disruption that we've seen in China so far, more related to customs clearance processes and administrative items rather than relating to tariffs or anything like that.
All right. Very clear. Thanks.
There are no more questions at this time.
Okay. Well, ladies and gentlemen, I'd just like to thank you all for joining the call this morning, and also thank you for your questions, and that brings us to the end of the call. Thank you very much indeed.