Sartorius Stedim Biotech S.A. (SDMHF) H1 2024 Earnings Call Transcript

Sartorius Stedim Biotech S.A. (OTCPK:SDMHF) H1 2024 Earnings Conference Call July 18, 2024 1:45 AM ET

Company Participants

Dr. Joachim Kreuzburg – IR
Rene Faber – Head of Bioprocess Solutions Division & Member
Dr. Florian Funck – CFO

Conference Call Participants

Richard Vosser – JPMorgan
Odysseas Manesiotis – Berenberg
Charlie Heywood – Bank of America
Charles Pitman – Barclays
Vineet Agrawal – Citi
Thibault Boutherin – Morgan Stanley
Falko Friedrichs – Deutsche Bank
Jo Walton – UBS
Oliver Metzger – Oddo BHF
Sezgi Ozener – HSBC
James Vane-Tempest – Jefferies.

Dr. Joachim Kreuzburg

Welcome everyone, and thank you for dialing in at this little bit unusual time for our call on quarterly results. Obviously, this is because we pulled the publication forward in the context of our decision to de-risk our guidance and therefore Ad hoc these news in the format of an Ad hoc announcement just a little bit earlier today.

I would like to walk you through the highlights and the most important points for H1 of the Sartorius group, that largely also are relevant for Sartorius Stedim Biotech. I will then hand over to Florian, our CFO, who will walk you through the numbers in more detail.

Thereafter, I will talk a little bit more in detail about the revised guidance for full year 2024. Then we will hand over to Rene who will talk about Sartorius Stedim Biotech for H1 as well as outlook. So, as we also said for Q1, one can clearly say that we still see a very mixed picture regarding market conditions and how this reflects then in our numbers.

First of all, we have to say we did achieve the H1 results as we communicated them at the Capital Markets Day roughly eight, nine weeks ago. This is for both top-line as well as margin, but we clearly also have to say that the overall demand situation didn’t really gain substantial momentum yet. Maybe in more detail before we talk about the outlook again for bioprocess solutions, we have sales for H1 now, on previous year’s level.

We still have been in negative territory for Q1, so Q2 has shown quite better picture here. Recurring business was contributing to that. However, it’s still affected in some areas by destocking effects, and we clearly see muted investment appetite by customers regarding equipment.

We do see at the same time very encouraging and significant growth in the area of advanced therapies. For our lab products and services division, sales is still below previous year, which reflects the overall soft-end markets. And clearly China, which plays a more significant role for LPS than for BPS, does play a particular role here, but it also holds true for other geographies as well.

The profitability, I think one can say is on a robust level, given the fact that we are not achieving our initial top-line targets. We see increasing positive effects from our efficiency program. We were talking about that during the capital markets day as well. They’re shooting now for a bit more than €100 million on a full year basis.

However, we do see and expect that also going forward, some dilution by lower volumes and that is why we are mentioning that explicitly as well, even a bit lower capacity utilization than sales were because we are running down our inventory levels by ourselves as well.

However, what we clearly can say is we continue to see intact market fundamentals. One can measure that and quantify that to some degree along the significant number of new drug approvals particularly, but clearly not only in the field of, for example, cell and gene therapies. And one can also say we are talking about a very healthy and encouraging product pipelines across the board, very much so. Therefore, mid and long-term, we remain very positive about the industry we are in.

At the same time, we clearly have to say we still see unprecedented volatilities and also very low visibility. Customers remain changing their outlooks. I think we have been talking about that quite a couple of times and also other players in the industry do the same. That’s really a challenge. Therefore, we would say that the post-pandemic normalization is not yet completed. We still see, particularly in regards to volatility and the rundown of inventory levels, still effects that stem from the high times of the pandemic, you could say.

So, now, regarding our full year outlook, we have taken the decision to de-risk our outlook to reflect what I just said, and that is the low recovery momentum and the very limited predictability. We’ll talk about that later in detail. You have seen just one word here on a quantitative level that we believe that the mid-scenario is a flat top-line development for both divisions and the group.

So, maybe before I hand over to — to Florian, maybe we move forward to the second next chart, just briefly, and I use this for the hand over to Florian. We have shown that, I think, already last year and also after Q1. And this shows, I think, very clearly, this very significant volatility that we are still in. Florian?

Dr. Florian Funck

Yes. Thank you very much, Joachim, and welcome, ladies and gentlemen, and good evening. Also from my side, thank you for dialing in and I would like to walk you through the financial key figures first. So, overall, as Joachim already said, we reached our H1 targets for sales and the underlying EBITDA margin that we communicated at our capital markets day, mid of May, sales for H1 are slightly down by 2.2% in constant currencies to €1.68 billion, with a contribution of around two percentage points from the Polyplus acquisition.

So, this means that after the Q1 decline of -7.6% in constant currencies, we achieved a sales growth of plus 3.6% in Q2, driven as expected by BPS. And we also see that in H1, the sales performance of the recurring business is stronger than the non-recurring or equipment business as we have also expected and communicated.

Order intake was up 8.5% in constant currencies to €1.558 billion. The EBITDA comes in at €471 million in H1, this is below prior year level mainly due to lower sales and negative effects from mix and also from lower production outputs. As we are working with an efficiency program of more than €100 million against these cost pressures and we are envisaging that around about 40% of that efficiency program will come into play in H1 and round about 60% in H2.

On the back of the lower EBITDA and higher interest expenses, the underlying net profits and therefore also the EPS is below prior year as you can see here on the chart. Let’s have a look at our regional performance. In both divisions we see EMEA performing stronger than Americas and Asia compared to prior year sales figure.

With regards to America’s, this is also due to the prior year base with Americas performing better in H1 ’23 than EMEA. The Asian Development is strongly influenced by the still soft Chinese market and if you take China out of the Asia figure, Asia would be growing by around about three percentage points in constant currencies.

Now coming to BPS, where order intake is up 12% in constant currencies to € 1.220 billion. Sales growth is flat in constant currencies, while Polyplus is contributing slightly less than three percentage points to this number. On a quarterly perspective, Q1 sales saw a decline of -5.3% while Q2 was up 5.1%. So, BPS is also growing organically in Q2.

Underlying EBITDA and corresponding margin is slightly down but margin is with 29.2% still on a quite robust level. The slight margin decline is driven by mix effects and lower production volumes alongside with our inventory reduction program and as you know we are working against these effects with the already mentioned efficiency program which will show the strongest contribution in Q4 ’24.

Moving over to LPS, the order intake came only slightly below prior year with -1.5% in constant currency. Sales are down by 8.9% in constant currencies in H1 against quite high comps, especially from the China business. And if you exclude the China sales, the growth would have been of the overall LPS division minus mid-single-digit.

Especially the equipment business turns out still to be weak, especially on [ph]BioA instruments. The broader lab essential business is currently doing better and as you know lab essential business is coming with slightly lower margins than BioA instruments. So, there’s a negative mix effect and also in LPS we have output reduction on the back of the inventory reduction programs. They’re also here.

We have negative margin pressure from under absorption. As a consequence, the underlying EBITDA margin is down to €82 million with a margin of 23.6%. If we move on as usual, we have added one page in the deck with some other financial data that some of you use for your modeling.

Maybe some short comments, first comment looking at the financial result please keep in mind that the financial result in the prior year was heavily influenced by the positive non-cash earn-out valuation effect and adjusted for these non-cash1 offs, the financial results in ’24 is lower only due to the increase in net debt versus prior year.

The second commentary free cash flow is up nicely from €59 million to €108 million, driven here mainly by a trimming of our CapEx plan. And as a result the CapEx as a percentage of sales is also down versus prior year to 13.6%, more to that when we talk about guidance.

Now to the balance sheet, first line non-current assets are slightly up by €70 million to €7.859 billion, because of our CapEx program and the included growth projects, we are adding this amount especially to the property, plant and equipment position. So, we’re still investing into future growth. Equity ratio stands at 38.3% and that increase is driven by the capital increase that happens in Q1 ’24 and for the same reason, meaning the capital increase, also the net debt figure reduced versus end of last year to €4.033 billion.

This then brings me to the last line, which is net debt to EBITDA. That ratio stands at 4.4 times at half year. And as we are working with several measures on further reducing this number towards the year-end.

And with that I would like to hand over to Joachim to talk about guidance.

Dr. Joachim Kreuzburg

Thank you very much, Florian. So, as said at the beginning of our call, we are taking a more cautious view on H2 and expect an increasing demand dynamics only in Q4. Pretty much. We do see no change to the long-term growth drivers, but we believe that 2024 largely will be influenced by the more short term dynamics as mentioned before, and the high volatilities after the pandemic, particularly in regards to still some ongoing reduction of inventory levels at customers, as well as some overcapacities that are reflected in lower demand for instruments and other equipment.

So, you can see here for sales revenue, we are now expecting for both divisions and the group, a mid-scenario which means that sales revenue would come in on previous year level and we believe that a reasonable bandwidth to apply to this mid scenario is a plus and minus low single digit growth rate. For the recent acquisition, which is Polyplus, we expect unchanged in a contribution of one and a half percentage points for the group. For BPS this would be two percentage points.

The reduced top-line expectation also has an impact on what we are expecting for the underlying EBITDA margin, as explained by Florian, we see significant positive effects from our efficiency program, but they cannot completely offset the volume effects, both the sheer sales revenue driven volume effects as well as those from our own inventory reduction program.

Therefore, we are expecting for the group now 27% to 29% as a bandwidth, which of course correlates basically to the a lower and upper-end of our top-line guidance. And then the same is for BPA’s 28% to 30% and for LPS 22% to 24%. I think worth mentioning is, and Florian was talking about that already a bit, that the CapEx ratio nevertheless will be coming in lower than we expected so far because of a revised timing of some of our ongoing capacity expansion projects and for the net debt to underlying EBITDA, we now expect a number around four. It’s a bit too early to narrow that. We before were expecting slightly above three, but the lower EBITDA will have an impact here.

So, and with that I hand over to Rene for Sartorius Stedim Biotech.

Rene Faber

Thank you very much Joachim. Welcome also everybody from my side, let’s take a look at the Sartorius Stedim Biotech now, as many topics relevant to SSB have already been covered by my colleagues, I will be relatively brief as always. So, looking at this volatile environment, H1 showed a mixed picture with few major trends. One, the recovery of consumables is ongoing with different dynamics across product groups and customers, resulting in somewhat slow momentum, as Joachim described that.

Two customers are protecting cash, postponing investments in equipment and decreasing, further decreasing the target inventory levels and the visibility continues to be low. And three, despite the overall mutated market situation, our advanced therapy solutions showed strong growth in H1.

Overall H1 performance was in line with our sales and underlying EBITDA margin projections that we have communicated, at our last capital market day. Sales were slightly down by 1.2% in constant currencies to €1.373 billion, with a contribution of slightly less than three percentage points from the Polyplus acquisition as expected.

So, this means that after the decline of 6.7% it was the first quarter in constant currencies we achieved positive sales growth of 4.7% in Q2.

At H1 order intake was up by a bit more than 11% in constant currencies to €1.261 billion, so it developed a bit less dynamically than in the first quarter. Underlying EBITDA came in at €387 million in H1 6.8% below previous year level. However, margin at 28.2% still on a robust level.

We are working on a cost management efficiency program against the negative operational leverage as laid out by Florian, with a stronger contribution expected from the second half of this year. At the back of low EBITDA, the higher interest expenses underlying net profit and earnings per share stood below the previous year.

Let’s have a look at regional performance. We saw a stronger sales performance in EMEA with plus 4.4% in constant currencies while Americas and Asia were down 6.2% and 2.4% in constant currencies respectively versus previous year. With regards to Americas, this is rather due to the prior year base with Americas performing better in H1 2023 than EMEA. Asia development was influenced by the still soft China market, excluding China, our Asian business grew in low single digits as well.

Our financial results in prior year were influenced by positive non-cash effects Florian was talking about that financial result is up due to the increase in debt and as explained by Florian, free cash flow is significantly up from €50 million to €82 million driven by some adjustments of our CapEx plans. As a result, CapEx as a percentage of sales is down to 13.6%. This brings me to some balance sheet key figures. Non-cairn assets are slightly up €56 million to €6371 billion, largely attributed to our CapEx program which I mentioned.

Equity ratio stands at 48.6%. The increase is driven by the capital increase in Q1. Same is also the reason for the reduction of net debt to €2.465 billion. This brings the net debt and EBITDA ratio to 3.3. As you know we are working on further reducing debt number.

Coming now to the guidance very much in line with Joachim said so for Sartorius Stedim Biotech, the new guidance is previous year level with the bandwidth of plus minus low single digit growth. Polyplus will contribute around two percentage points.

The EBITDA margin now instead of previous more than 30% expectation 27% to 29% corridor CapEx ratio we are expecting at 12% and net debt to underlying EBITDA margin is anticipated in the region 2.5% to 3% at the year end.

With that, thank you very much and I hand over to Joachim again.

Dr. Joachim Kreuzburg

Yes, basically we will have now Q&A of course, but thank you so far. Also, thank you for listening and now we are happy to answer your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions]. And the first question comes from Richard Vosser from JPMorgan. Please go ahead.

Richard Vosser

Hi, thanks for taking my questions. A couple, please. Firstly, could you give us some colour on the development of the BPS order intake during the second quarter, if possible, the mix between consumables and equipment in second quarter. And could you confirm that the consumables order intake still showed growth in the second quarter?

Second question, please. Just on the work down of the order backlog, did some customers pull forward or pull work down some of — did they do that in the second quarter or did they push that out? How do you see the outlook of that backlog for the rest of ’24? Do you expect that to be worked down? Could this reduce the order intake a little bit?

Dr. Joachim Kreuzburg

So, Richard, I don’t know whether you. Oh, sorry, go ahead, please.

Richard Vosser

Sorry. How do you see the picture now with orders in Q4? Thanks. Sorry if it cut out a little bit. Apologies.

Dr. Joachim Kreuzburg

No full understanding. I mean, we have invited to this call only quite recently, so. But nevertheless, I think we pretty much only understood the first two questions.

So, those I think Rene will now answer. And then. Or Florian. And then we. And then we have to ask you for maybe, asking the other questions again.

Rene Faber

Yes, maybe. Let me start on the order intake. And Richard, of course, always taking into account what we’ve also clearly said on the capital market, order intake is not the right or best indicator to judge what’s going on in the current situation. A lot of volatility going on.

Having said that, order intake in Q2 is up high single digits, with recurring business being up even in the, in the teens. Second question. Second question. Was on backlog.

And, Richard, maybe you could rephrase the question?

Richard Vosser

Yes, sorry. Basically, I was just wondering whether customers have been working down the backlog and some of the, and receiving some of the older orders in the quarter and how you see that developing through the rest of ’24 and into ’25.

Rene Faber

So, Richard, we have seen throughout H1, but also H2, that to a certain extent also sales came in from the book, so to say. And, of course also going forwards through the year, we are expecting certain effects from the book.

But of course, if you think that a little bit more-longer into the future, these effects will gradually get smaller, of course.

Operator

And the next question comes from Odysseas Manesiotis from Berenberg, please go ahead.

Odysseas Manesiotis

Hi there. Thanks for taking my questions. So, firstly, I wanted to ask on the H2 read essentially implied guide from the CMD, whether that’s reiterated, essentially expecting around one times booked bill, given that Q2, the implied Q2 number looks a bit weaker than what was guided back in May.

Secondly, on the margin, I wanted to ask whether there’s any components other than operating leverage and utilization here. Has there been any pricing pressure or competition that you did not expect? And can I squeeze in a last one? Sorry. So, on the visibility and the inventory levels, given that we’ve been talking about the direction of your client base here for a while, and that you even have some customers in the below pre pandemic levels right now, I’m just thinking, is there a bottom or given that your peers have been communicating something more stable, is there any idiosyncratic impacts here that we haven’t talked about yet? Thanks.

Rene Faber

Yes. On visibility, it is indeed what it is. I think we all have to deal with that. I definitely am convinced; we are definitely convinced that this is not specific to Satorius. I believe everyone has to live with the fact that our customers are adjusting their targets have obviously increased ambition level in regards to their inventory level reduction and but nevertheless, of course there will be an end to it. And we also believe that we have seen by far most of that.

But it’s also clear that after a very rapid reduction of inventory, and therefore also a recovery of the book-to-bill, if you wish, we now are rather seeing a little bit of side-words trend and that is, I think what is reflected also in the graphic that you have seen, but also in our more cautious guidance now on margin, no pricing pressure effects or anything like that.

Of course, you always have some effects from product mix, but by and large on a half year’s level, it’s nothing that we would highlight here, as said, particularly with a view on the full year, what the main influencing factors are in comparison to our initial guidance and expectation are volume, then capacity utilization, and as a countermeasure a significant one or efficiency program.

I think the first question you said guidance on book-to-bill, you are absolutely right. That came in a little bit below our expectation for Q2 and therefore also for H1, as Florian explained, and I think we discussed that in quite a very transparent way during the capital markets day. We wouldn’t consider that to be the most relevant guiding factor here. Maybe as a brief reminder, it never has been a stable number in the past.

It’s only a number that makes sense to look on rather on annual levels than on quarterly levels. But nevertheless, indeed it has come in a little bit lower than we expected.

Odysseas Manesiotis

Oh, clear. Thanks for clarification. Do you still expect H2 at one time? I understand it’s not the main number, but just to clarify that for a moment.

Rene Faber

We wouldn’t like to add any KPI within the set of our guidance here. Please understand that we are very transparent in all of our communication and we’ll do and will continue being that, but we won’t guide that number.

Operator

And the next question comes from Charlie Heywood from Bank of America. Please go ahead.

Charlie Heywood

Thank you. Charlie Heywood, Bank of America. I’ve got two questions, please. Firstly, on your lowered full year guide, was that mostly down to a lowered consumables outlook or also down to a lowered equipment outlook? And then secondly, at your CMD, you noted your appetite for bigger M&A was likely to pick up in 2025. Given its contribution to your midterm guide, sort of. Given Joachim’s announced departure in late 2025 and during a potential CEO transition, can you confirm that you still expect M&A [indiscernible] will pick up during that period to potentially contribute to that midterm guide? Thank you.

Dr. Joachim Kreuzburg

So, first question was. So, first question, I think was on the driver for our guidance. And the question was, I think, about equipment and consumables here. Actually, as expressed during, when we walk through the different numbers and effects, we see a less dynamic activity than we initially expected on both ends. I think that’s fair to say, and it’s a very mixed picture then, even within the different subsegments, you could say. But both elements of course play a role.

But we do see overall a bit more dynamic as renier in particular also elaborated on a little bit on the consumables end. And that will probably also be a driving factor for where we then actually will lend towards or at the end of the year for 2025 and the M&A element for ’25 and beyond. I guess you were asking for that, maybe.

First of all, I would like to say that within our midterm guidance, we always used some model assumptions in regards to M&A, which are based on, also on historic numbers regarding our M&A activity. So, no specific plans. I mean, it’s very difficult to have specific M&A plans that are whatever, one and a half, two years or even more ahead.

But I am quite convinced that Sartoris will have a number of M&A opportunities going forward. We have a very strong portfolio, so we don’t have any pressure to close any gaps within our portfolio. But as the innovation on our customer side is quite dynamic and also on the tools side, where we are active in, there are a lot of technologies, a lot of tools and solutions that could make our offering even more relevant and even stronger.

I think M&A will continue to play a role going forward. Sartorius was executing M&A not just because I’m the CEO, and therefore it will be independent on who is in this role going forward.

Operator

And the next question comes from Charles Pitman, King from Barclays. Please go ahead.

Charles Pitman

Hi fells from King from Barclays. Thank you very much for taking my questions. I’ll carry on the habit of just taking a few in here. Firstly, just a very quick clarification, I think you already answered this, but can you confirm that the recurring BPS orders grew? Was it mid teens, year on year, you said just getting a little bit. If you could just give us a little bit more clarity on the recurring, non-recurring sequential performance or year on year performance, that would just help us frame how that, like broader industries performing and how you’re within that.

And then secondly, I’d just love to hear whether or not to what degree are cancellations playing any part. You mentioned the book-to-bill, kind of came in a little bit below your expectations. You used the order backlog.

How have cancellations performed? How have orders been trending through June, July since CMD? And then just thirdly, how are you thinking about going forward given this destocking trend remains an overhang to the industry as there’s over capacity around your future pricing discussions? I mean, it looks like the industry is becoming more of a buyer’s market rather than the seller’s market. Do you think that that could lead to further price pressure going forward? Thank you very much’

Rene Faber

Charles. Thanks for your question. And let me reconfirm the development of order intake for the BPS division for Q2, but also in complete H1, we are seeing mid-teen growth. And speaking on the cancellations, what you asked, I would say, and we said that already.

I think in the previous calls that it became less. What we’ve seen definitely in the Q2 this year, not a lot. What we continue to see is push outs for equipment, for example. I mentioned customers are very cautious in spending and investing in equipment. We continue to see that. And on your question regarding price pricing, so far, we’ve been doing fine.

Low single digits. I think we are back to this low single digit range of price increases. That’s very true for this year. However. Yes, of course, we, we can see some increasing pressure on pricing and we’ll see how that develops moving forward.

Operator

And the next question comes from Vineet Agrawal from Citi. Please go ahead.

Vineet Agrawal

Oh, hi there. Vineet from Citi. Two questions please. I completely understand ’24 itself is seeing such unprecedented volatility, but there’s quite a lot of focus on next year.

Can you maybe share some early thoughts on it? Consensus is modeling in low double digit growth for next year. Maybe. Can you share your thoughts as to what sort of improvement rate in orders would you need to hit to see these numbers work for next year? And then just quickly, on the consumable portfolio, you are seeing that certain parts of the portfolio are seeing positive trends.

Maybe you can flag which parts are showing strength and which are not. And I don’t know if you maybe want to quantify what percentage of your consumables portfolio is seeing weakness. Thank you.

Florian Funck

Maybe I take the first question and then the second one, Rene will qualitatively give you a few hints what the driving factors are in that regard. So, for 2025, of course, we all here fully understand your question and your interest in this outlook, but we always have been giving a guidance for the new fiscal year at the beginning of that very year, and in times of unprecedented volatility and low visibility, I think there is really unfortunately, no reason and no basis to change this and to pull this guidance and this forecasting even forward by six months. And therefore, I would like to ask you for your understanding not to, that we don’t give any guidance here.

And of course, I fully understand. I carefully listen to your question that you were asking for some aspects of mechanics in that regard. But I think there’s some elites nevertheless then to interpretation that are very difficult for us to contain and to frame.

And therefore, please understand that we don’t want to talk about ’25 again. I can say that the market fundamentals, I know it’s very difficult and maybe some of you don’t want to hear it any longer in these difficult times, but the market fundamentals are intact and we are very well positioned to participate in this market development to benefit from those trends and even shape some of those trends. Rene?

Rene Faber

Yes. On the consumables recovery. Definitely there and visible. I would say it’s quite a mix of what we see at different customers. We’re still working through the inventories driven by different factors like how much inventors have been built during the pandemic.

That’s very different from customer to customer. What are the, which still been in is moving target the target inventory levels. It also varies from, from customer to customer.

The consumption rate is also different. And overall, if you include also some aspect of shelf life which differ from products to product, we get this mixed picture then on consumables and at the end of the day resulting in the lower dynamic than we actually expected for this year.

Operator

And the next question comes from Thibault Boutherin from Morgan Stanley. Please go ahead.

Thibault Boutherin

Thank you very much. Just my first question is you talked in the past about the fact that you took some extra market share during COVID due to your competitors inability to supply the market. And you also said that you expected to give back some of these market shares going forward. And I think you mentioned two thirds of shares that you expect two thirds of this extra market share you’re expecting to give back.

Do you think you’ve been through this process already? Do you think this process is still ongoing today? Just if you could help us understand the dynamic here. And then the second question on the midterm 2028 guidance, obviously the assumptions behind the guidance for VCR have been challenged. So, presumably the assumptions behind the ’28 guidance are also probably at least a bit compromised.

I mean, 2024, which is the first year of the mid-term guidance, is tougher than expected. So, would you at least point out maybe to the lower half of this ’28 guidance and at what point in time or what event could make you revisit that mid-term guidance?

Rene Faber

Yes, so thanks for that question. So, we are just in the middle of the first year of a five years time horizon and therefore, and this very obviously is influenced by short term factors much more than anything else.

And therefore, it’s not the time for us to revise this guidance. But of course, we always track very much all the fundamental trends, make projections in regards to what we achieve, think that we will achieve. But again, at this point, we don’t see any reason to revise the ’28 guidance again after one 10 in into this five years’ time horizon.

On the market share, you — I think perfectly summarized what we were discussing last time during this call, and we are confident that we were performing above market average over the period from, let’s say, starting from end 2019. Please allow me to say that we were performing above market also before that, but during that very time after 2019, indeed, it was partially influenced and partially boosted, you could say, by the effects that you were mentioning. And yes, customers are rebalancing then their, the weight of the different suppliers.

Therefore, as we expected right from the beginning, the very high share that we were covering in this additional demand during the pandemic was carried and supported by us, and we expected that this would partially go back. But there is no change to our expectation that a healthy portion will remain.

Operator

And the next question comes from Falko Friedrichs from Deutsche Bank. Please go ahead.

Falko Friedrichs

Thank you very much. My first question is going back to order intake in BPS. If I look at what you reported in Q1 and in Q2, I think it’s pretty clear that the equipment orders were down right from Q1 to Q2. That’s very clear.

But when I then consider your indication that the consumable business was up in the mid teens in Q2, your consumable orders must have also been down from Q1 to Q2. Right? Just looking at it mathematically, can you just confirm that I’m looking at this correctly, or if I’m missing anything that would be helpful, then secondly, on the equipment business, can you give us a little bit more flavor? What your customers are exactly telling you, in a sense? What are they exactly waiting for before they want to order again? Is it that they are waiting for interest rates to come down, or what is it exactly? And then thirdly, you mentioned in your release that you expect orders to improve again in Q4. But then you also told us that you still have very low visibility, low predictability.

Your customers keep changing the order patterns. So, what gives you confidence that this actually happens in Q4 and doesn’t happen at some point in 2025? Thank you.

Rene Faber

Thank you very much for your questions. First of all, and excuse me for repeating myself on order intake, the caveat, it doesn’t make too much sense to analyze that from our perspective on a quarterly basis and then also looking sequentially at things or even somehow putting more the views maybe into the wrong direction. But mathematically speaking, you got it right that all those in Q1 and Q2 order intake in BPS recurring in up mid-teens. The absolute number of order intake in Q2 is below Q1.

All right. Yes. And let me comment on the equipment. To your question, what are customers telling us? So, one thing we can say is that there is an activity and interest customers for new equipment. Our sales is busy. There’s a lot in preparation.

What we however see is that once the kind of decision is ready, customers start to postpone, then the order saying CapEx reasons. That’s one thing. And other thing to maybe help to understand the situation is we’ve seen more and more where customers make the decision and place in order are like capability additions, like new equipment, new type of equipment and less in expanding already existing equipment base, like more capacity adding what they have already installed.

So, the other question was regarding the confidence that we have in our guidance. Well, we try to reflect the very limited visibility by the bandwidth that we are attaching to our guidance. Yes, that’s what we can say is the best what we can do.

I think like others as well, we all have to deal with this volatility, with these uncertainties. We believe we cover it quite well with the bandwidth. Thank you.

One quick follow up. Florian, your line briefly broke up at the very end of your answer. I think you said sort of my math was roughly right, and that the absolute orders for consumables declined sequentially.

Correct?

Operator

And the next question comes from Jo Walton from UBS. Please go ahead.

Jo Walton

Thank you. Just a few, please. You’ve talked occasionally about overcapacity. In this conversation, can you tell us where you think that overcapacity is concentrated and just reassure us that that isn’t or those are not areas where you think you’re going to get particularly strong growth? Because presumably overcapacity will mean less growth for individual players.

Secondly, I wonder if you can talk about the frequency of orders. Is it true that you’re seeing perhaps more frequent but smaller orders coming in because people are less certain about the future? And if so, is that helpful to you? Should we be thinking of you being able to deliver sooner on those orders rather than having such a long lead time to the orders?

And my final question would be just to push you on pricing. In every other market, we see that where there is a lack of demand and oversupply, prices weaken, and yet you still seem to be confident that you’re able to put prices through. Why is this when some of your business is essentially commoditized?

Rene Faber

All right. Yes, thank you very much for the questions. I will start with the question around overcapacity.

You ask, where is it concentrated? I would say regionally, mostly in China. But we see that in Europe and us to some degree and then tendency see is that we see the overcapacity rather as smaller or mid size players and city more players. To your question regarding frequency of orders, it’s right.

What we see is smaller orders. But I would not say this is because uncertainty by clients. It’s rather cash inventory working capital management. And we also see that customers are now ordering according to shorter lead times. Lead times are back to pre pandemic levels and even very much aligned with the cash view, even ordering last minutes or shorter delivery times than we are communicating to them.

On pricing, of course, with such situation, pricing pressure will increase or increasing to some degree. We see it. However, I would say what we also see, and it’s fair to say that in such situation where cost plays a role at customers, the tools which help them to reduce the costs are asked.

And I think we have quite a number of differentiated products in our portfolio. But yes, on pricing again, I mentioned that in the last question. So, far, all good at normal levels, price increases, but pressure is increasing.

Operator

And the next question comes from Oliver Metzger from Oddo BHF. Please go ahead.

Oliver Metzger

Yes, good evening. Thanks for taking my questions. The first one is on volation of order intake to sales. So, the last three quarters we have observed a decoupling from order intake to sales. So, the ordering pattern of customers you have described has changed towards more frequent but smaller orders.

If this has changed, can you confirm that order intake shows a worse picture than the actual development of organic growth? Or to see formula differently, that organic growth recovers faster than order intake because it makes a difference whether a client places a twelve months order or two months order. And if this is true, and as I described the dynamic, does it mean that we can rule out a bill of 1.0 in Q3?

Second question is on your guidance range. So, on the top-line, it’s the lowest thing in digit negative to positive. That’s still roughly two percentage points range. Can you describe the scenarios towards the lower and the higher end as you expect some normalization towards Q4? Would you describe that below? And Q4 is basically Q4 doesn’t show any improvement and the upper end is also linked to the Q4 run rate.

And basically, the low end assumes that you show only 4% H2 growth in BPS. And that would mean that you need to deliver high single digit growth in Q4. If I have done the math correctly.

And the last question is also on the guidance on the bottom line, guidance for the second half so the low end of your guidance assumes meaningful step down in margins. So, basically, the 26% in H2 versus the 28% in H1, really, to get to the low end. So, under which scenario would be that bad? So, that would be great to understand. Thank you.

Rene Faber

Yes, sure. So, maybe briefly, because I guess we are touching upon questions that quite to some extent, we already were trying to answer a few times, and therefore, maybe we have to make sure that we don’t repeat ourselves too often.

But maybe to the last question first, as we try to bring across, we indeed factor in for the second half of the year, quite to some extent a lower capacity utilization, which would play particularly a role in the lower end scenario. And the reduced capacity utilization plays, plays quite a significant role on top of the economies of scale effect that, of course, kicks in anyway. So, that’s on the margin side.

Let me please add, I believe what we have shown so far is quite a robust margin performance. And again, as we, I think, also discussed a couple of weeks ago, we really think it makes a lot of sense to take a look on the margin evolution since 2019, because what we have seen in between, and we were extensively communicating and discussing that, we have seen a lot of what we, back then called non sustainable artificial effects. So, therefore, when we take a longer-term perspective, I think what you can see is we have been able to translate top-line development in a healthy way, in a very robust way into bottom line.

But of course, that means when there is less volume in comparison of two scenarios, like we cover here by the lower end, the upper end of our guidance, then of course, this also has an impact on profitability, on order, intake, book-to-bill, et cetera.

I again would like to say that this number makes sense to look on, on an annual level, in a relatively stable business situation where there are no major disruptive impacts, as we still are seeing in the aftermath of the pandemic, what we do see is, as has been said, we see all the recovery that we would expect yet on a lower level. And this is, of course, the main influencing factor for where we exactly will land at the year end, how the momentum will pick up, to what extent when it kicks in, et cetera.

So, that’s the main effect. But again, we wouldn’t make and give any guidance here for book two, bill, on a quarterly basis, it would be not helpful. But looking at the quarterly development for H2 and the ranges that we are given, we are seeing, of course, and we are expecting a stronger Q4 versus Q3, I think this is clear we are expecting Q3, rather mirroring on the top-line the development that we’ve seen in H1, and we are expecting in Q3 still an additional margin pressure from our inventory reduction program based on lower production output.

And on the back of the fact that our efficiency program has the highest contribution in Q4, you can expect the lowest EBITDA margin this year in Q3. Okay, thank you. Very quick follow up to my order intake versus organic growth question.

So, because you answered that quite intensely about this 1.0 on Q3, but this decoupling between the order intake and growth, that organic growth might recover faster than the order intake. Can you give a quick comment on that, please? Two, first of all, I don’t think that we’ve said anything about Q3 book-to-bill.

We explicitly said that we don’t think that it’s reasonable to, to give in a situation like that. Voter bill guidance for Q3, Q4, or H2 as a consequence. Exactly.

Operator

Thank you. So, the next question comes from Sezgi Ozener from HSBC. Please go ahead.

Sezgi Ozener

Hi, thanks for taking my questions. So, I will have two questions, please. First one, thinking in retrospect, do you think at the topic of COVID times your Covid related orders were or sales were around €0.5 billion and I think half of that, €250 million in 2022? Or looking at retrospect, is this too low in estimation? Has, could your Covid related sales actually have been higher? And second, on your comment on expected recovery in the final quarter of the year, is this based on you not seeing any recovery until end of Q3, or are you seeing complete signals of some recovery in orders in Q4? And is that unanimous across your segments, or is that preferable before BPS?

Rene Faber

So, again, on orders, please accept that we think offset what we can say. I think we brought across that we will not give guidance on orders per quarter. Florian just explained the dynamics that we are expecting for Q3 and Q4. That’s really the best that we can say. We expect the sales development for Q3 pretty much in-line with H1. Q4 then should show a more positive recovery momentum, as Florian said, a pronounced reflection of this top-line development on the bottom line.

Regarding Covid related sales. If I got it right, because the line was a little bit weak in between, I guess that’s well possible because when you think about, okay, what are Covid related sales, then you have these direct, directly linked sales, but then also maybe sales revenue that are directly, indirectly linked because then later they represent certain investments that can be reused, for example, et cetera, et cetera. So, for sure, what we have flagged to be Covid related might represent the upper end of the most probable bandwidth with you.

Operator

And the next question comes from James Vane-Tempest from Jeffreys. Please go ahead.

James Vane-Tempest

You’ve given APAC growth and also APAC Ex-China, but to prevent any misunderstanding by the market, can you just let us know what China is down in the quarter? My second question, just on orders. Again, if consumables are up in the mid teens, and I guess that’s around 70% to 75% of mix, then if my math is right, it’s equipment basically needing to be down 15% to 20% year to date. So, is that right? And confirming you’re not assuming a pickup in equipment in 2024.

And I’ve got a follow up. Apologies for the background light on the train.

Florian Funck

So, there was so much background noise, it’s pretty much impossible to answer any of the two questions. We think there were two, but I thought. It’s hard to say. Could you repeat, please, James?

James Vane-Tempest

Yes, certainly. You’ve given APAC growth and also APAC Ex-China, but can you just let us know what China was down in the quarter to prevent any misunderstanding? And then just on orders. Again, if consumables are up mid-teens and they’re 70%, 75% of the business, then is equipment down 15% to 20% year to date? And am I right? You’re not assuming any pickup for the rest of the year.

Florian Funck

Once again, you were hard to understand. I’m trying it. China, we are not giving more information on China than the one that we’ve given on the chart. And I think the second question was about non-recurring, where you said, but I’m not sure if you’re talking sales or order intake.

James Vane-Tempest

I think it orders on consumables versus equipment. So, if consumables are up mid-teens and it’s three quarters of the business, is equipment down 15% to 20% year-to-date?

Florian Funck

I can tell you that on the equipment side, we are down around 10% in H1.

James Vane-Tempest

That’s helpful. And then my final question is just on visibility. I know you’re not being cautious on Q4, but I guess the low end of material slowdown, accessibility. And so I’m just kind of also curious, given in mid-July, what visibility do you have into Q3? Because I guess the CMD was in May, and obviously you’ve come in lower than what we were expecting in QQ so can you help us understand what changed in June for us to get to the first half where we are, and this is where you are at the CMD. Thank you.

Florian Funck

As we explained, and we have seen a no pickup in momentum regarding both equipment as well as consumables. Still, it should be noted that we do see a positive development in regards to consumables, but nothing an acceleration of this development. And then I think, as you also said, we are very intentionally and explicitly are taking a more cautious perspective now and that are the main differences here.

James Vane-Tempest

Thank you. My final question, if I can, is just when considering your customers, were there any differences in behavior in orders or revenue between your pharma, CDMO or biotech clients and can just remind us what roughly proportion of BPF those segments are? Thanks very much.

Florian Funck

Yes, I mean, there are of course individual effects at each and every customer, but we would hesitate to define this.

Existing clusters like CDMOS behaving like this, originators like that. We think that this could easily be lead to an over interpretation of such clustering. We believe what we see is rather determined by the individual situation and policy of those players, for example, in how far they have been involved in COVID vaccine manufacturing, in how far they were running certain expansion programs, what their own pipeline says, whether they have any patent expiries ahead of themselves, et cetera. I think very much such individual factors than that it would make sense to talk about clusters here or groups.

Operator

And the next question comes from Tom de Borci from Newfound Research. Please go ahead.

Unidentified Analyst

Hello. Thanks for taking my question. I was just wondering if on China, just in terms of, I guess, just your outlook on the business, whether you see any green shoots or improving areas of the business, given where that business has been, is there an opportunity for where you’re seeing, I guess, some improvement in funding or equipment or anything else across the segment?

Rene Faber

Yes, I think China is very much characterized by a flat development. We have seen, as everyone else, a very significant decline in comparison to what we have seen in 2022.

Most of that has happened during ’23. Some we see because of partially high comps now in 2024 as well, but the level is pretty much stable. Then, of course, the question is how far will the stimulus program by the Chinese government play a role? We do see first activities by some customers here.

We think it’s obviously too early to call it any stable trend, anything one could really build on, anything one could extrapolate. So, currently it’s flat, but going forward we would expect clearly some recovery. It’s definitely anything but a mature market.

However, timing to be seen, it won’t be too much this year, but maybe some.

Unidentified Analyst

Got it. And just one follow up, I guess. Biosecure. I know it hasn’t passed yet, the US, but we’re seeing, I guess, pharmaceutical manufacturers shifting around. Even CDMOS they work with.

And so, have you seen that impact on your business? Have you had to make changes in how you’re operating based on preferences from sub customers?

Rene Faber

Yes, I think indeed we see in the year some customers preparing for transfer. It’s too early to see any impact on the business. I think that’s more in preparation and yet to be seen how that develops.

Operator

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Doctor Joachim Kreuzberg for any closing remarks.

Dr. Joachim Kreuzburg

Thank you very much again, everyone, for being available at short notice, for your interest, for dialing in at this a little bit unusual point in time. Thank you for the lively discussion. We hope we were able to answer the question, answer all questions sufficiently.

Looking very much forward to discuss, of course, in any follow up format if need be. Otherwise, for sure in after our Q3 release of the numbers. Take care everyone.

Enjoy your holiday season. Take care. Bye.