Tecan Group AG (SIX:TECN), a leading provider of laboratory instruments and solutions in biopharmaceuticals, forensics, and clinical diagnostics, has reported its financial results for the fiscal year 2023.
Despite a tough market environment and a slight decrease in sales, the company showcased resilience with an underlying sales growth of 6.3% in local currencies, excluding impacts from lower COVID-related revenues and reduced material cost pass-through.
Tecan's adjusted net profit saw an increase of 6.5% to CHF 164.4 million. The company also made significant strides in sustainability and workplace excellence, achieving Great Place to Work certification in multiple regions.
Key Takeaways
- Tecan reported a 1.3% decrease in sales, totaling CHF 1,074.4 million, but underlying sales grew by 6.3% in local currencies.
- Adjusted EBITDA reached CHF 220.6 million, with a maintained margin of 20.5%.
- Net profit increased by 6.5% to CHF 164.4 million, and operating cash flow grew by 25.2%.
- Sales in North America increased, while Europe and Asia experienced mixed results.
- The company plans to launch new products, including the Resolvex i300 and Lab Navigator, in 2024.
- Tecan is focusing on M&A opportunities but is open to share buybacks if suitable acquisitions are not found.
Company Outlook
- The company expects sales growth in the low-single-digit range for 2024.
- Adjusted EBITDA margin is anticipated to remain steady at around 20%.
- Strong demand is predicted in the medical OEM business, with new products and partnerships on the horizon.
Bearish Highlights
- Sales in Europe and Asia faced declines due to market conditions, particularly in China.
- Gross profit decreased by 10.9% due to lower sales volume.
Bullish Highlights
- Sales in North America showed growth, with a notable increase in the second half of the year.
- Operating expenses and sales and marketing expenses decreased, reflecting effective cost control.
- The dividend is proposed to increase from CHF 2.90 to CHF 3 per share.
Misses
- The overall sales volume declined slightly, impacting gross profit.
- Specific margin information for Paramit was not disclosed.
Q&A Highlights
- Tecan is leading in digital lab and fleet management solutions.
- The order book decline is attributed mainly to China, with expectations of order normalization excluding China.
- The company is actively engaged in M&A opportunities, focusing on the Life Sciences business.
- Revenue for Paramit in 2023 is estimated at CHF 350 million, with an overall exposure to China of CHF 140-150 million.
Tecan's performance in the fiscal year 2023 demonstrates the company's ability to navigate a challenging market environment effectively. While certain regions faced sales declines, the overall resilience of the company is evident in its operational highlights and strategic initiatives for the coming year.
Tecan's focus on innovation, sustainability, and strategic acquisitions positions it well for continued success in the dynamic healthcare industry.
Full transcript - Tecan Group AG (TECN) Q4 2023:
Martin Brandle: Good morning, everyone. Thank you for joining us for our conference call this morning. We are very pleased to discuss with you the results for the fiscal year 2023. With me on the call are our Chief Executive Officer, Dr. Achim von Leoprechting; and our Chief Financial Officer, Tania Micki. Before we start, as always, very briefly some formalities. The corresponding press release announcing our financial results was issued this morning at 6 AM Central European Time. Both this press release as well as the full 2023 Annual Report, including the 2023 Sustainability Report are available on the company website, tecan.com, as always, under the Investor Relations tab. I just want to remind you that the call is being webcast over the Internet on our homepage. And we have also posted a PDF of the presentation slides that we will discuss on this call for download. With that, let me now turn the call over to Achim von Leoprechting.
Achim Leoprechting: Thank you very much, Martin, and good morning, and welcome to the Tecan 2023 full year results presentation. Before Tania will discuss the financial results of 2023 in detail, I will give you, as always, an overview of the financial and operational highlights. As you know, we published preliminary top-line results for the full year 2023 already in January of this year. I'm glad to be able to say today that Tecan, despite the challenging market environment, delivered a solid performance in 2023. We had already communicated underlying sales growth in January, and I am pleased to report today an increase in profitability and net profit. We generated sales totaling CHF 1,074.4 million, 1.3% below 2022 in local currencies. And as mentioned, we've been able to demonstrate a solid underlying sales growth of 6.3% in local currencies when excluding the effects from lower COVID-related revenues and reduced material cost pass-through. In the second half of 2023, Tecan reported sales growth of 1% in local currencies with underlying growth of 5.5%. The full year adjusted EBITDA was CHF 220.6 million and our adjusted EBITDA margin increased to 20.5%. Our adjusted net profit for 2023 increased by 6.5% to CHF 164.4 million with adjusted earnings per share of CHF 12.88, which represents a 6.1% increase over last year. And our operating cash flow increased in 2023 by 25.2% to CHF 160.6 million. We've made substantial progress in the implementation of Tecan's strategy during 2023 with a number of successful new product launches and partnerships. We've been able to expand our core offering in laboratory automation in key growth markets and applications. As a standout example is the Phase Separator, which is an innovative new pipetting capability available on the Fluent (NASDAQ:FLNT) Automation Workstation, representing a significant advancement for the strongly growing liquid biopsy application. We also launched the Uno Single Cell Dispenser, which is a new instrument featuring a unique functional consumable used for isolating single cells in research and drug discovery applications. Another newly introduced module was the MCA 96, a pipetting arm with 96 channels for the Fluent, which further increases functionality on our flagship platform and that have already seen high demand across all key applications of genomics, proteomics and cellomics. We added additional new unique solutions for proteomics automation with product in the Resolvex product line to further strengthen our position in this important application space. Our Partnering Business, we've established new partnerships and saw product launches in all our OEM business fields, Cavro, Synergence and Paramit. The scaling of our global manufacturing sites has also progressed as planned with serious production of Cavro components successfully established at our facilities in Morgan Hill in California and in Penang, Malaysia. We also opened a new final assembly facility in the Shanghai Free-Trade Zone in China. An additional benefit of our global manufacturing footprint has been that we've already seen the first reduction in greenhouse gas emissions from the transportation of products. The more localized production has supported our carbon emissions target -- reduction targets. We had those targets validated in 2023 by the Science Based Target initiative, which means that our emissions reduction plans have been assessed and found to be credible. This is a significant milestone we have reached as we are moving beyond the stage of having just made the commitment to the initiative and on to implementing the plans and already delivering results. We've progressed in managing our social impact as well with our workplaces in Switzerland again receiving Great Place to Work certification and additional workplaces in Germany, in the United States now is achieving that certification as well. There are more details about this and our full sustainability program in the annual report that came out today. At this point, I'd like to share my sincere appreciation for the Tecan teams around the world who have worked closely with our customers and our valued business partners to take us through 2023 and deliver a strong set of results, setting us up well for steady continuation in 2024 and the years ahead. Before I take us into more business updates and the outlook for 2024, I'll hand over to Tania for more details on the 2023 financial results. Tania?
Tania Micki: Thank you, Achim, and good morning, ladies and gentlemen from my side as well. I'm happy to be with you this morning to present you our financial results for the full year 2023 in more detail. Let's start with order entry and sales. Full year order entry was CHF 1,028.1 million, down 9.3% year-on-year or 4.6% in local currencies compared to the substantial order entry in 2022. As mentioned in August, back in 2022, we still benefited from COVID-related orders as well as orders related to the material costs pass-through still. With solid inflow of new orders close to the level of sales, the book-to-bill ratio reached a value of 0.96. Excluding the effects of lower COVID-related orders and orders related to the pass-through of material costs, underlying order entry grew in the low-single-digit percentage range in local currency. Order entry improved in the second half of the year and was just 1.9% below the previous year's figure in local currencies after a more significant decline in the first half of the year. Sales, very quickly. Nothing has changed here since we published our preliminary top-line results back in January. And going through the chart on the left, with CHF 1,074.4 million, reported sales decreased by 6.1% in Swiss francs and 1.3% in local currencies. As you can see, the bridge, adjusting for the foreign exchange rate, sales in 2022 were at CHF 1,089 million when compared to -- in local currency, sorry. As we spelled out in the past, we still booked COVID-related sales of around CHF 60 million last year, our FX adjusted an amount of CHF 58.5 million. We also benefited from passing through the substantially higher material costs to customers at Paramit. As we expected, this pass-through revenues decreased substantially as supply chains have normalized again. This happened even sooner and to a much greater extent than anticipated back in March last year. As these sales do not generate the margin from passing on higher material costs, this is a desirable development. The net headwind effect for 2023 was CHF 19.7 million. That brought us to the jump-off basis for our underlying sales of CHF 1,010.8 million. So excluding these 2 effects, our underlying sales increased by 6.3% in local currency, which got us to the reported CHF 1,074.2 billion. Looking now at the sales performance of our 2 business segments. Sales in the Life Sciences Business segment reached CHF 451.8 million, a decrease of 8.2% in Swiss francs or 3% in local currencies compared to 2022. On the upper left, you can see a similar chart as discussed on the previous slide now for the Life Sciences Business segment. As it is our end user business, we generate our revenues in the different regions in the respective local currencies. Therefore, the FX impact is higher as a percentage of sales compared to the Partnering Business. Also, the majority of COVID-related revenues in 2022 were in this segment and we estimate the headwind from those revenues at CHF 35.1 million in local currencies. Pass-through revenues were only affecting the Partnering Business and are not related to this segment. Excluding the impact of lower COVID-related sales, underlying sales increased by 4.9% in local currency. This was driven by good growth in the service business due to the higher installed base of instruments. As a result, recurring sales of services, consumables and reagents increased to 52.8% of segment sales compared to 51% in 2022. Partnering Business segment generated sales of CHF 622.6 million, which corresponds to a decrease of 4.5% in Swiss francs or just 0.1% in local currencies. Going through the same bridge, adjusting for the FX impact and taking into consideration the impact of lower COVID-related sales and the lower pass-through of material costs, underlying sales increased by 7.4% in local currencies. The increase in underlying sales is primarily due to the double-digit growth in the Paramit product line, driven by the medical business, which also benefited from pent-up demand for certain medical products after the end of the pandemic. By contrast, sales of Cavro OEM components declined substantially as these products had experienced a significant surge in demand in the prior year period to mitigate disruptions in the supply chain and in the run-up to the transfer of the production to 2 new manufacturing sites. Demand for in-vitro diagnostic systems for the Synergence product line remained solid and sales in local currencies were nearly unchanged year-on-year. New orders in the Partnering Business for the full year were only slightly lower than sales. The book-to-bill ratio came close to 1. Next, let's look at sales development in the different regions on Slide 9. Before discussing the details, I just want to remind you again that this regional sleep and the respective development are based on the location of our customers. That means it does not reflect necessarily the regions where our products might end up. This is important as the Partnering Business, we usually ship products to a central warehouse of a partner, for example, in Europe, and therefore, book revenues in Europe despite this product being distributed globally thereafter by our partner. In the Life Sciences Business, on the other hand, the location of the customer coincides with the place where the products are used. This is why I want to focus here on the Life Sciences Business. You can see the pie chart for the full Group on top. And we obviously disclosed all the numbers for the Partnering Business as well in our press release on Note 4.1 of the consolidated financial statements. So for the Life Sciences Business segment, starting with North America. In North America, sales in the Life Sciences Business segment increased by 5.1% in local currency, a very strong performance considering the high COVID-related sales of comparison and the cautious spending behavior. Sales growth in North America accelerated further in the second half of 2023, rising by 13.1% in local currency. In Europe, sales could not offset the high comparative basis and were 14.1% lower than the previous year in local currencies. In the second half, sales could catch up a bit and decreased by 7.7% in local currency. In Asia, sales development in the Life Sciences Business segment was very different in the 2 half year periods of 2023. As you will recall, the segment recorded a significant increase in sales in local currencies in the first half of the year, but then experienced an almost identical decline in sales of 9.8% in local currencies in the second half of the year. This was mainly due to the market weakness in China. For 2023 as a whole, segment sales in the Asia does remain almost unchanged at minus 0.3% in local currency. Next slide addresses our gross profit. Gross profit reached CHF 390.5 million, which was CHF 47.6 million or 10.9% below the prior year figure. The decline is mainly due to the lower sales volume, which was also the primary factor behind the gross profit margin of 36.3% of sales. Price increases, cost improvements and lower revenue from passing on higher material costs without the margin compensated for the decline in volume, but a less favorable product mix, higher depreciation on production equipment for consumables and acquisition-related integration costs led to the overall lower gross profit margin. On the next slide, some comments regarding our cost structure. Thanks to effective cost control, operating expenses fell by 10.5% and amounted to CHF 261.3 million or 24.3% of sales in 2023. Sales and marketing expenses decreased by 10% to CHF 119.6 million. As a percentage of sales, they reached 11.1% of sales. At an absolute level, net research and development expenses increased to CHF 69.7 million. As the share of Partnering Business sales has increased in relation to total sales and is less development intensive, as the activities are largely financed by OEM customers, research and development costs decreased slightly to 6.5% of total sales. Overall, R&D activities and gross expenses, including capitalization of development costs and customer funding of OEM projects were at CHF 89.6 million. They increased slightly as a percentage of sales to 8.3% of sales with higher customer funding of OEM projects and continued investments in innovation to position the business for sustained accelerated growth. Utilization of development costs increased to CHF 12.3 million, while amortization from previously capitalized development costs was almost unchanged at CHF 16.7 million. General and administration expenses decreased by 11.5% to CHF 72 million and as a percentage of sales to 6.7%. Looking at the EBITDA development in more detail. Our adjusted EBITDA, the earnings before interest, taxes, depreciation and amortization, was slightly below the previous year level, mainly due to lower sales volume and the negative impact from exchange rate movements in major currencies versus the Swiss franc. The adjusted EBITDA margin nevertheless increased to 20.5% of sales due to the effective cost control and further efficiency gains. Now looking at the operating profitability on a segment level. Reported EBIT in the Life Sciences Business, that's earnings before interest and taxes, reached CHF 84.4 million. The operating profit margin rose to 18.3% of sales, supported by higher gross margin, price increases and cost control and despite the lower sales volumes and an adverse exchange rate effects. Reported EBIT in the Partnering Business amounted to CHF 64.4 million and the operating profit margin reached 10.3% of sales. Keep in mind that the integration costs and amortization of acquired intangible assets in connection with the acquisition of Paramit, were recognized for the Group in the Partnering Business segment. Other factors negatively impacting the segment margins were the lower sales volumes with corresponding negative economies of scale and a more negative product mix. On the positive side, we implemented tighter cost control and we also saw price increases in the Partnering Business as they contractually kicked in at the beginning of the year for our Synergence Instruments business. Net profit on the next slide. Adjusted net profit increased to CHF 164.4 million, CHF 10 million or 6.5% above 2022. Looking at the main factors, adjusted EBIT has decreased. Positive effects came from the financial results and a lower tax rate, which decreased to 1.3% compared to 15% in the prior year period. Yes, the tax rate was at 1.3% due to an acceleration of measures related to the Swiss tax reform. While we originally planned to spread the tax benefits of the Swiss tax reform over 2 years and hence keep the 15% to 17% projected tax rate up to and including 2024, we have decided for an earlier switch to the Swiss tax reform-related measures and bring the full impact forward to 2023. This is mainly due to the minimum taxation coming in force in 2024, which we are anticipating to impact us with projected tax rate going forward now in the range of other 17%, 19% as of 2024 onwards from the previous 15% to 17% before. But please keep in mind these higher rates are an IFRS view and they do not fully impact our cash flow. Very quickly, if we get on the next slide, earnings per share increased to CHF 12.88 which is the highest level ever achieved. The number of shares outstanding was at 12.8 million at the end of 2023 compared to 12.7 million the year before. Based on the solid underlying sales growth and an increase in profitability, net profit and cash flows for the full year 2023 and on the basis of an ongoing positive business outlook, the Board of Directors will propose at the company's Annual General Meeting on April 18, 2024, an increase in the dividend from CHF 2.90 to CHF 3 per share. Half of the dividend, that means CHF 1.50 will be paid out from the available capital contribution reserve and is therefore not subject to withholding tax. We'll continue with the cash flow on Slide 16 and a very positive development after a period that was affected by supply chain disruptions and higher inventories to ensure our delivery capability. Cash flow from operating activities increased by 25.2% to CHF 164.4 million. Keep in mind that in the prior year period, there is an increase of inventories and safety stocks. These inventories have now been increasingly reduced again. Also, our DSO, the days sales outstanding improved to 45 days from 49 days. The cash flow from investment was at CHF 84.2 million. You see some of the elements on the slide. Moving on to the cash flow from financing activities. This figure includes the dividend payments we made in April 2023 in the total amount of EUR 37 million, an increase over the prior year period as the dividend was increased steadily over many years now. Thanks to the strong cash flow, our net liquidity position increased to CHF 112.6 million compared to the CHF 41.2 million on December 31, 2022 and CHF 61.7 million on June 30, 2023. With this, I now hand back over to Achim von Leoprechting again.
Achim Leoprechting: Thank you very much, Tania. So I've provided earlier some of our 2023 operational highlights, and these and our financial results provide a solid foundation for 2024. I would like to emphasize again just how differentiated Tecan's position is; spanning across several key growth segments and being at the center of a variety of dynamic healthcare ecosystems. What we're illustrating here is how we support our customers on the research side to better understand diseases, develop more effective medicines from those insights and help to scale the drug production process. We then support customers to take many of the applications to the clinical side to advance personalized diagnostics, the treatment with more precise therapies and ultimately improve the management of disease risks. The applications we focus on are all genomic applications, protein analytics as well as cell and tissue analytics. And more recently, also medical applications in the medical mechatronics space. We thereby serve diverse end markets and customers working with clients from academia and clinical research from biotech, pharma, genetic testing and reference labs as well as direct clinical clients. This progression of innovation from research to the clinic is covered end-to-end by our connected business units, which benefit from synergistic global operations and R&D capabilities, leveraging a continuously expanding range of common platforms, modules, consumables, reagents and digital solutions. This breadth really differentiates Tecan for many other companies in this space. So with that context in mind, let's look at some of our current areas of innovation. I briefly mentioned earlier the successful launch in 2023 of the Phase Separator, a new pipetting capability available on the Fluent. The Phase Separator represents a significant advance in liquid separation technology. It's a unique module that has digitally advanced sensor handling to detect the interface between plasma, lymphocytes and erythrocytes, which is a demand of workflows like cell free DNA sequencing and single cell analytics and liquid biopsy. And it's also applicable in fields such as separating the organic solvent phase in sample prep for mass spectrometry workflows. So it can be used as a new way to separate biological samples, including whole blood, and it will impact multiple disease areas, including oncology, tissue transplantation, prenatal testing, neurology and metabolic disorders. It has broad applications beyond next-generation sequencing and can also be used for downstream multi-omics analysis workflow. The Phase Separator adds value in all of our end markets and 3 of the 4 core application areas. This is a great example of how Tecan has further expanded the toolbox to support customers in both the Life Sciences Business and the Partnering Business from research to the clinic. So 2024, we'll be launching an addition to our Resolvex line of products with the Resolvex i300 and the accompanying antibody purification columns. It follows a very similar approach as the Phase Separator in the sense that it represents a key module to debottleneck a strongly growing workflow. The i300 is a fully integrated model that enables the automation of every step of the sample purification process from sample purification to clean-up, evaporation and resuspension, using positive pressure. Integrating onto the Fluent or our OEM platforms, the Resolvex i300 enables laboratories to deliver new levels of efficiency to proteomics and genomics workflows. This can be used to advance biomarker discovery and drug development as well as certain applications linked to personalized medicine, which is as I said before, a growing field and one where we expect significant developments in the future. And as always, such new modules broaden our available toolbox utilized in both of our businesses. In this case, the first Partnering Business program, incorporating the Resolvex i300 is already in advanced development and we are expecting high levels of interest as we go further into 2024 and beyond. Now taking a closer look at our Partnering Business. We saw several new partnerships as well as product launches in 2023. And again, it's key to keep in mind that through our Partnering Business, Tecan have 3 synergistic offerings for OEM customers, including life science, diagnostic and medical companies. We continue to expand our reach serving both type of OEM partners, those who utilize their own R&D capabilities through in-house development programs and those who prefer to outsource development and production. For our Synergence full system development and manufacturing offering, development activities for customized OEM systems picked up in 2023, resulting in a rich project pipeline going into 2024. New systems are increasingly based on our modular hardware and software platforms. And overall, we'll have in 2024, a further production ramp of past launches as well as new introductions. For our Cavro OEM components, we also see a healthy project pipeline of new and existing partners using our robotic platforms and fluidic components. Cavro is our business where Tecan offers the building blocks in fluidics and robotics for those companies that want to leverage their own R&D footprint. New innovative products for fluidic pathway leads to opportunities for Tecan several market segments. We now also commercialized our precision machining capabilities that we have vertically integrated some years ago for our own products. In the Paramit product line, our contract development and manufacturing offering, we have expanded our commercial channels, specifically for medical OEM opportunities and we are now able to leverage broad synergies between all 3 OEM offerings and have an increased focus on development for manufacturing, making use of existing engineering capabilities in key medical applications. For Tecan, we believe the medical device area offers an addressable market as big as life science and diagnostic combined, and we are expecting several product launches in 2024. Very notable competitive differentiator of Tecan is its leading open digital ecosystem. And what we've done is we've created a suite of digital solutions in the various areas, starting with a highly modular software architecture called MAPlinx to run our instruments and cater to all core application areas that I mentioned before. Within digitally connect whole fleets of instruments, orchestrate, full labs, make instruments really easy to use all the way to enabling better service and support. Today, I will focus on 3 key launches in 2024 to boost lab personnel and equipment effectiveness. The first launch that created already quite some excitement at the recent SLAS industry trade show in Boston is Lab Navigator. Through the Lab Navigator software solutions, Tecan boosts personnel and equipment effectiveness by enabling the orchestration of the entire lab workflow, increasing personal productivity and reducing errors. This includes also hardware and configurations in labs, which are not necessarily coming from Tecan. We are creating an open ecosystem that will allow us to be at the front and center of application method development. For example, for research and pharma labs who wish to deploy methods into labs that can be used by people who are not necessarily experts in these solutions. Another 2024 launch is Next-Generation Introspect. It brings the latest innovations to the successful and established Introspect Lab Insights platform. It offers improved usability and uses advanced data analytics to provide actionable insights for maximizing the utilization, quality and performance of instrument fleets. Existing features focused on run success rates, consumable consumption and real-time monitoring have also been improved, helping lab managers to make the most of their resources in local labs or even global fleets. Generation Introspect also unlocks service excellence by enabling remote diagnostics and service support, leading to higher instrument uptime and cost of ownership improvements, all insights being built into a full digital twin of our customers' instruments. These are very exciting additions to our digital suite and something you can expect to continue to build out further over time. We are convinced that the lab of the future is already here. To summarize, what Tecan is known for is scaling healthcare innovation globally. And we are serving our very attractive end markets from a place of strength with a proven record of being a trusted partner for life sciences, drug discovery and development, clinical diagnostics and the medical device industry. We're offering a full spectrum of solutions from accelerating the discovery of novel medications all the way to personalize diagnosis methods and treatment and ultimately also offering entirely new options for prevention and early detection of diseases. Ultimately, Tecan is improving patient outcomes and healthcare economics. Being a global player in multiple growth market segments and applications has been a good source of resilience for Tecan and positions us to benefit from overall growth trends. We have a strong competitive position to benefit particularly from trends like increasing digitalization and personalized medicine with technologies bridging from research to clinical settings for better management of cancer, metabolic disorders, infectious diseases and other critical illnesses. And through 2024, both our Life Sciences Business and Partnering Business are going to be very busy with the launch of new products and partnerships. Turning now to the financial outlook for 2024. For the reasons just set out, we do expect sales growth in local currencies in 2024 and we anticipate this to be in the low-single-digit range. Overall demand in our diverse end markets is expected to remain solid, but we do expect customer spending to remain conservative throughout 2024 and especially in the first half of the year. Our adjusted EBITDA margin, excluding acquisition and integration-related costs, is expected to remain steady at least around 20% of sales as we anticipate the positive developments of underlying improvements in profitability and efficiency gains, foreign exchange rates of around 40 basis points and the fact that we anticipate less acquisitions [Technical Difficulty] which accounted for about CHF 8 million in 2023. Normalization is here a positive development as these revenues did not generate any margin, but it does need to be factored in as an element when we come to compare 2024 to the previous year. We've seen continued market softness in China, which has a high comparison base in H1. We expect the current market conditions to impact our direct sales with local Chinese customers and we assume a further decline in the mid-single-digit percentage range. But also to about the same degree, we expect this to impact our indirect China business as our global OEM partners in the Partnering Business are affected by the same downturn. After 2 years of double-digit growth, we are expecting demand in the medical OEM business to normalize and come into line with the growth of the Group overall in the low-single-digits. So it is a challenging market environment right now, but the reason we are giving an outlook of growth in the low-single-digits rather than flat or even negative growth are the strong building blocks we have in place that have already enabled us to deliver comparably solid results in the past. Innovative products such as the Phase Separator and growing new OEM partnerships as well as additional new products that we plan to launch in the course of 2024 are expected to drive growth with existing and new customers in both the Life Sciences and Partnering divisions next year and beyond. In turn, we expect to continue to outpace the average growth rate of the underlying end markets with a return to average organic growth rates in the mid-to-high single-digit percentage range in local currencies. We do have strong financial supporting organic and inorganic strategic expansion in the Americas, Europe and Asia and we also reiterate the mid-term outlook for the adjusted EBITDA margin. We expect to grow the top-line, while continuously improving profitability and anticipate an average annual increase in the adjusted EBITDA margin of 30 to 50 basis points. Before we go to the Q&A, I would like to draw your attention to our Capital Markets Day, which we are planning for October 24. Please make a note of this date in your calendar. And with this, I thank you very much for your attention, and we can open the lines for Q&A.
Operator: [Operator Instructions] The first question comes from Maja Pataki from Kepler Chevreux.
Maja Pataki: I have 2 to start with, please. First question, Tania, could you please elaborate a bit on the COVID headwinds that we've seen on the OEM side? When you're referring to Synergence being flat in local currency, is that assuming excluding any COVID impact or are you not allocating -- or can you not allocate COVID to the different lines of Synergence and cover? That will be my first question. And my second question is like, it's impressive what you're doing on the digital side, but can you help us understand the monetization of your digital innovations, particularly when it is open systems?
Tania Micki: Thank you, Maja, for your questions. And I'll start with the first question. Actually, there were no COVID headwinds in 2022 or rather no sales in 2022 related to Synergence in our OEM business, there were mainly consumables. So that would probably not apply from that perspective.
Achim Leoprechting: Maja, Achim. I'll take your digital question. I mean, the monetization comes in kind of various, if you want, categories. So to some degree, what we do in digitization in terms of ease-of-use, fleet management, software to the state is driving gross margin expansion by adding to the value of the system and allowing us to increase prices as we go through this offering iterations. But there is now a moment with both what I said about Introspect, but particularly with Lab Navigator, which is an entirely new software suite that we're launching to move to a Software-as-a-Service licensing model, which we're doing starting of 2024. So it's work in progress, but we are very consciously building out the infrastructure, if you want, the ecosystem and then aiming to add and monetize and also invoice separately some of the software solutions in lab orchestration, in fleet management, but also in other areas like serviceability to come. So it's a mixed model. But in '24 for the first time, particularly with the Lab Navigator. We're starting a lab-based licensing model and implementation model of this digital suite that we did not have at our disposal before. But it's, like I said, a combination of things driving margin and now branching out into several revenue streams.
Maja Pataki: Got it. And just quickly a follow-up on that, just probably another quick follow-up. But could you help us understand what the competitive environment on the digital side is? Since it is clearly becoming quite an important feature of your Tecan offering, how do you compare to your competitors on that side?
Achim Leoprechting: I would say on many areas, I would think that we are clearly leading right now in the industries that we're serving. So at least that's what we're seeing from the availability of products. We are -- clearly, when I look back at products like Introspect, this is the only system out there at that scale that can do global fleet management with the features that I mentioned. And then we expect of course competitors to kind of raise and gear up to what we have created. But it's something that when we look at trade shows and the response of customers today, we are offering a unique position in the lab and fleet management space. In areas like lab orchestration, there are multiple vendors, but we are concentrating on specific workflows that really incorporate the ability to deploy methods on our, but also third-party machines in a way that is, I would say, not unique, but more elegantly featured and combined with our existing solutions in the space. So I think we are very consciously bidding on top of our existing lab presence with hardware, software and infrastructure that deploys and leverage that kind of presence, but it's not limiting us to access labs that only have taken equipment and that's probably very important to note. So that open ecosystem idea resonates very well with the market and particularly with those companies that try to close ecosystems in lab management software where we got the very clear feedback from clients that this is not the preferred way to go. But Again, I think I expect this to remain and be a competitive field and more competitive field in the future. But I think with our kind of infrastructure and our ability to both license partner, but also leverage a very strong in-house digital development team, we are in a very good position.
Operator: The next question comes from Aisyah Noor from Morgan Stanley.
Aisyah Noor: My first one is on the order book. You mentioned in the press release that it's 0.96 or just below 1. I know you don't break it out by region, but China, the real region there that drove the below 1 book-to-bill. And I guess, if you were to exclude China, was the book-to-bill higher than 1? My second one is on the gross margin. If you could explain what drove the close to 300 basis point step down between first half and second half? And whether this mid-30s level could represent a new normal for you going forward? I know you mentioned mix and lower volume, but if you could quantify the major drivers for that in the second half, that would be helpful.
Achim Leoprechting: Probably, I'll start. I'll start it off with the order book. And clearly, I mean, we have to differentiate the views on the Life Sciences and Partnering side, which is typically -- then also Tania started to describe the different kind of pie charts that we explained from the revenue attribution. It's a very similar picture from the order side. And then clearly, on the Partnering side, we get typically more lumpy orders, which makes the comparisons, I would say, more difficult, order falls into December or January kind of bigger back-up order that can make a kind of bigger difference. In Life Sciences, you're right. I think China was a kind of major element of the deceleration, particularly in the second half. And we've seen also, I would say, some differences between Europe and the U.S., which I think were also probably a little bit more seasonal and also customer specific. So we see -- I mean, we're not guiding for the order book, but we see maybe more normalization on the geographies, excluding China, but this is where we -- I would say, normally, I wouldn't exclude, we're going back to a kind of ratio of more than 1, but it's clearly, right now, we are in an area to kind of drive accelerated book to ship.
Tania Micki: And Aisyah, if you could please repeat maybe your second question.
Aisyah Noor: The question was on the gross margin and the close to 300 basis point step down between the first half and the second half of 2023 and whether the gross margin of around 35% or so could represent a new normal for you going forward? I know you mentioned the mix and the lower volumes as the kind of headwinds to gross margin for 2024 -- '23, sorry, but the major drivers for the step down in the second half was what I was going after.
Tania Micki: Okay. Now -- and you can imagine, there are many impacts on the gross margin. In fact, when I do my bridge, there are quite a few elements. But the most important one, as you mentioned, is the volume. I mean, there, clearly, that was the largest impact. What partly offset it was the pricing increase, which we had quite similar -- well, very similar to what we mentioned in the first half of the year and also when we discussed our pricing in general from the history. So that means that we had the contractual increases in the OEM business, in the Partnering business, as we discussed on the instrument sales mainly. And we also had the pricing -- the price increases on our prices that we usually do on our Life Sciences business. The other, I would say, negative impact mainly was on the -- from the Paramit dilution, as you mentioned as well. I mean, there was quite -- that's normal. That's what we expected as well. And on the other hand, we had a positive effect from the pass-throughs because they were lower, as I mentioned before. And then we had some other elements, which usually are the case for us where we have better efficiencies from our productivity. We had also a slightly better material cost. And on the other hand, we had quite a significant FX impact. So that's overall. Between the 2 halves of the year, I mean, there is very often a difference of 200 to 300 basis points or maybe less of that during the COVID time, but that was the case already in pre-COVID. And now we are back to pre-COVID situation and it's all very much dependent on the volume. So there, this is the biggest impact that we can have from that perspective.
Operator: Next question comes from Odysseas Manesiotis from Berenberg.
Odysseas Manesiotis: Firstly, your biggest customer would be launching a new version of their flagship robots later this year or early next year. Could you confirm whether you're involved? And does the sale of parts here usually happen well in advance of instrument placements? And secondly, a follow-up on the order side. Could you please talk about order trends towards the close of 2023 and early 2024? Have you seen material recovery sequentially in Q4 and Q1? And where has that recovery come from? And can you possibly see H1 book-to-bill above 1 or is it where you can say for now?
Achim Leoprechting: Odysseas, probably I'll take the first kind of shot at your questions. I mean, #1, as always, I'm not able to comment on specific customer names, but what I can say, I mean, we in many partnering programs, including those on the medical field, we have typically a very long-ranging partnership. And this includes multi-generational involvement in many products, particularly with customers and relationships ranging back to several decades, back to I think 2004 in this case. So again, I think we of course kind of work our way in these partnerships typically to be included as much as we can in any multi-generational product. But again, please allow me not to be too specific on this one and your question. But this is probably where I would leave it at this moment. But we're very happy with, I would say, all our partnerships on the medical side. And then on the second side, on your order trajectory, I would probably say that, I mean, the dynamics from the second half hadn't really changed material. I think what I said in various other kind of conferences and calls, we see, I would say, quite heterogeneous customer behavior and in some groups like in pharma or clinical labs, we see very solid investment and strong investments. We see other clients in the same market segment markets to be very cautious and holding back orders and delaying decisions. So I think that hasn't materially changed. I think what we also said, I mean, China is not improving on us at the moment. And this is probably, as I said, too early to say how the dynamic works out. I think we are very, I would say, positive, particularly when I look -- I mean -- and this is where we typically make the reference points on the Life Sciences Business on the funnel and the number of programs and projects that come to us from existing and particularly also new partners and customers on the Life Sciences side. But funnel mobility is still, I would say, a difficult piece to project out. And we're working very diligently as we've done in the second half to find these -- that materialize where we get the PO in time, that we can ship and install in a meaningful timeframe. So I think that dynamic has changed materially. But like I said, the other element that we are very closely following and watching is the response to the newly launched products like Phase Separator, like the Uno Single-Cell separating system and consumable as well as software solutions. And that's why I made this cross reference to the -- I think for us in the Life Sciences Business, quite important conference called SLAS, which happened in February in Boston. And I would say the attendance levels were very high and the reception and particularly on our trade show presence was extremely positive. So I think that gives me some good confidence going into '24 that we are launching the right programs and the right product that resonate with customers. And like I said, we are also seeing some new doors opening and also some competitive accounts opening for conversations, which is always what we're aiming for with some of these innovations that we bring to market. So I would say, market dynamic hasn't changed materially, but I think we feel pretty strong about our ability to drive good demand with our existing Life Sciences products, new products. And also the same on the Partnering side, you see a good pick-up, as I said in the call on programs that are in development that are starting off to become commercialized on more meaningful levels, but also new partnerships in development. So I would say, overall, I would say, yes, the dynamic hasn't changed. So it's probably too early to judge how H1 will shape up.
Tania Micki: And as you know, Odysseas, we don't want to guide on order entry. We don't know. And we are looking more at it from a full year perspective, not so much at H1, H2 apart from the fact that it will most likely be very similar to prior to COVID for sales, but not for other entry, again, we are not really guiding on that, as you know.
Odysseas Manesiotis: Really appreciate the color, Achim and Tania. May I add a small rephrasing of the first question. So on the medical mechatronics business given that we're talking about chunkier instruments here, is it sensible to think that ahead of a new launch from one of your clients, is the parts ordered from that part of your business are ordered well in advance of the launch?
Achim Leoprechting: It depends. I mean, there's not a one-size-fits-all answer, but it's not like there's a kind of multi-quarter pre-order shipment cycle. Typically, I mean, we are very good in on-time delivery and production. So it's, I would say, more of the kind of mid-to-near-term implications in typical programs. But we have some customers that like to keep more kind of start of inventory, some have left that kind of intention. But yes, so in general, I think we came out -- I mean, generalized again on the medical side with a kind of 2-year history now on double-digit growth. And that's why we're assuming right now that to normalize back to the Group kind of guided average in the low-single-digit range. So that's all factored in what you're trying to assess here into our full year guidance.
Operator: The next question comes from Jan Koch from Deutsche Bank.
Jan Koch: I also have 3, if I may. I would like to start on the adjusted EBITDA margin you have achieved in H2 2023. What are the drivers for the sequential margin improvement despite having generated less sales in H2 versus H1? I understand that the lower part was helpful, but any color here, especially on pricing would be appreciated? And then secondly, I would like to get a better sense of the sales growth phasing in 2024 and China should be an important factor here. Could you remind us of the growth you had in China in H1 and H2 last year? And then lastly, on capital allocation. You have a very strong balance sheet. Would you consider share buybacks or if you don't find any attractive M&A targets this year?
Achim Leoprechting: And I'd probably start off with the last question, if you allow me, on the capital allocation side. I mean, clearly, we are looking at M&A, continue to look at M&A. And particularly after the successful and positive integration of Paramit looking at M&A as the preferred vehicle in that category, and of course, a constant dialogue with our Board of Directors, but this is the avenue where we are going and we see still a very fragmented market ahead of us. We, like I said, have now accomplished the integration of Paramit and we are very happy now to build on that footprint, which is representative of 1/3 of our operation capabilities being located in North America, 1/3 in Europe and 1/3 in Asia, which of course, gives us also for M&A an entirely different and far more structured, if you want, framework to integrate possible M&A acquisitions into. And I can probably also say on the activity level, we are fully engaged again after closing out the Paramit integration and the move of the Cavro components into Paramit. And we're looking back at the continuation of our journey, particularly adding where we can strategic elements into the Life Sciences Business with digital reagents, consumables, but also new technologies on the Life Sciences space and selectively looking at capabilities on the Partnering side. But the focus clearly is more back now on the Life Sciences side to continue the journey that we started prior to the Paramit acquisition become more complete in the application areas, genomics, proteomics and cell and tissue analytics to name the kind of 3 strategic elements. But of course, I mean, it's kind of the time would kind of go into excessive kind of periods where we continue to generate cash as we do, and we are very proud of that as well to consider other means of returning the profits to our shareholders. But at the moment, the agreement is that we continue to work on a very rich M&A pipeline.
Tania Micki: Maybe on your second question on China, it was around minus 5% in H1, minus 15% in H2. So that's a little bit the rebalance that I mentioned before. And then on the full year, that's added up to about minus 10%. And then maybe on your first question on the EBITDA, at the end of the day, there are again different elements that come into consideration, but there was mainly the impact from the OpEx perspective and also the integration costs, which were higher in the second half than in the first half and then impact of course the adjusted EBITDA.
Operator: Next question comes from Leonildo Delgado from Baader-Helvea.
Leonildo Delgado: So the first question is, can you help us understand what has been driving the double-digit growth of Paramit? And what level of growth is considered normal in the mid-term? And last question would be, I mean, Achim just touched on the M&A topic. And I would like to understand, so if you have any insight you could share with us in terms of the timeline and the type of prices you're looking at?
Achim Leoprechting: Yes. And thank you very much for the questions. I'll probably start off with the kind of the medical side, double-digit growth. I mean, when we look back at the past period, '22 and '23, the medical side was growing very strong, particularly coming out of COVID with kind of, I would say, deferrals and some backlog, but also some, I would say, slowness of these -- some of these key end applications in the medical field, which were subdued in COVID. So we saw, I would say, a combination of organic growth, pent-up demand, regional expansion of our partners on the medical field during '22, but particularly also in '23, which were very strong years. And we expect this now to just on that kind of slow of growth to normalize down to the kind of the low-single-digit growth in '24. But mid-term, we expect -- I mean, the medical side to be in line with the growth of the Group mid-term outlook in the mid-single-digit to high-single-digit range. So we are, that's what I tried to illustrate in my presentation, adding quite substantially commercial capabilities on the medical side, which are driving funnels and attracting new clients on that front as we speak. And this team is now in full operation. It's fully kind of staffed. And they are concentrating at the moment as the kind of biggest area of growth potential in North America. So I would say, very happy with what we said we're going to do after Paramit. The milestones we achieved in '23 in the kind of ramp-up of funds and the commercial efforts. But like I said, the business that we have under management at the moment on the medical side, we expect to normalize back to Group average levels. Of course, there's always kind of bigger and smaller dynamics in these accounts, as we know from all our partnering programs also in the in-vitro diagnostic rates, sometimes programs, the launch slope is steeper, some of the launches are kind of more over multiple years. The same happens on the medical field. So I think very happy to now add to, I would say, kind of a very good group of customers on the medical side, also additional partners that will help us to kind of, if you want, kind of even out some of the individual contributions of single and sometimes large customers in that field over time. So that's probably where we are. And then on the M&A side, again, I would say, we are continuing to run a very disciplined process around M&A. It's all strategically motivated to accelerate growth in these strategic elements and areas that are outlined during the webcast. And we are typically not looking at kind of commitments on timeframes because we are very, I would say, discriminative on M&A targets and we do it very deep due diligence. And sometimes, we also walk away from M&A targets if we can't retire risk on operations or regulatory or other fields that are important. So please allow me not to kind of say '24 is the year where another M&A will happen. It's possible, but we don't want to lock ourselves in and then being forced to make an acquisition even if it's not a good one. So that's continued the strategy that we drive. But like I said, we are very active and we see a variety of M&A opportunities, both on what we cultivated on a private or one-on-one basis, but also what we see now from banker-led processes coming in. And it's probably also my last comment on this slide is we continue to of course get kind of companies offer that are in strategic fitting areas, but are seeing now some of the effects of the economic downturn and being kind of on the, I would say, cost -- cash burning side and being not profitable. These are not targets that we typically consider in that framework of the M&A pipeline. So just to make that point. But prices, I mean, for very profitable, attractive targets are reassuringly high. That's what I can say there. The price expectations are not deteriorating for these assets that are quality and profitable and accretive.
Operator: The last question for today's call comes from Sebastian Vogel from UBS.
Sebastian Vogel: I have 3 questions. I would ask them one by one. The first one is a bit of a clarification. It was with regard to the book-to-bill. I thought I understood that you were saying that book-to-bill should not be above 1. Please correct me if I'm wrong there. But if I'm right, then I understand it correctly, was it more linked to 2024? Was it meant for longer or can you give a little bit of context around that statement?
Tania Micki: No, I think on the book-to-bill, we are saying that we are looking forward to more than 1 in the full year. But again, it's a little bit early to have any assumption on this, but that's definitely -- we are not looking forward to below 1.
Sebastian Vogel: Okay, perfect. Then I misunderstood. And the second question is a bit of a clarification on the guidance. When you were talking about low-single-digit, is it fair to assume that would mean like a range like something between 1 and 3.5 as a sort of a starting point or what is the sort of thinking about this low-single-digit asset trade?
Achim Leoprechting: I would say, our thinking is low-single-digits in the range that you are at. I mean, please allow me now to kind of narrow it down more. But I mean, clearly, what we said, we look at growth in what kind of framework remains to be kind of seen in the dynamic, particularly looking in H1, but we feel pretty good about, like I said, new products, new partners, new kind of doors that we're opening, existing clients, again, kind of behaving the way they behave and even in that kind of configuration of China being expected down year-over-year in '24 in the framework that is kind of in the low-single-digit growth. So please allow me not to kind of narrow it down compared to what we said in that area.
Sebastian Vogel: Sounds fair. And the last question is quickly on Paramit. I guess, of course, it's getting harder to really understand this business from the remaining business. But nonetheless, I still was trying my luck there for 2023 in terms of revenue number. Is that something CHF 350 million, CHF 360 million sort of a decent starting point for the revenue numbers? And any sort of margins for this business that you can share that would be appreciated?
Achim Leoprechting: I would say, it's a good ballpark. It's around CHF 350 million. And as I said, we are probably a little bit even more kind of, I would say, hesitant to kind of call out specific margin aspect of it. I mean, we are very happy with the dynamic. As we said, after the integration you've seen in '22, the results in '23, we continue that journey. And of course, volume is helpful. On the other side, I mean, you're also aware that we now moved one of our old -- our existing legacy Tecan factories from San Jose into Paramit, which makes now the, I would say, profitability allocation nearly impossible on the Paramit versus Tecan level. So going forward, with that move in particular in mind, we prefer to keep the kind of profitability discussion on the Group level. And as I said on the Paramit side, we're also kind of thinking it more around as a kind of product category now rather than kind of company entities that we will continue to report on in the future. But I would say, the progress of margin in line with the kind of growth profile of that part of the business in '23 was very satisfactory.
Tania Micki: And we are within the business case we plan, so it's all good.
Sebastian Vogel: And if I may squeeze in just a quick follow-up with regard to China, if I may. Is it fair to say that your sort of overall China exposure given indirect and direct exposure is maybe somewhere around like CHF 140 million, CHF 150 million?
Achim Leoprechting: Yes, I think that's a reasonable number. I mean, we -- probably half of it is direct. And of course, the indirect portion that goes through OEM part as far as is harder to assess, but we reckon it's in that ballpark that you mentioned, yes.
Martin Brandle: Good. We have to conclude this call. And if there are remaining questions that came in on the -- through the webcast, we would then answer those in the aftermath of this call.
Achim Leoprechting: Yes. And also from my side, thank you very much, and have a very good day and look forward to the ongoing discussions.
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