Stratec SE

Good morning in the United States. Good afternoon in Europe, ladies and gentlemen, welcome to our 9 months financial press conference.

Before we start, please allow me to mention some housekeeping things. You can download that presentation from either the webcast or our website, and I think I don't need to read you through the safe harbor statement.

As always, I'm intending to fit this presentation into 3 major segments. So first of all, I would like to take an overview then talking about financial details.

and then trying to give you an outlook, then we will get back to Morris who will explain us how to commence with Q&A, and that should do it. In the presentation, we have some supplementary data.

So 9 months at a glance. We are actually back about 9% compared to 2022 top line comparing to a 9-month revenue volume of EUR 188 million.

The decline in performance was mainly generated by weak molecular diagnostics sales which is actually still an outcome of the overcapacity built during the pandemic, particularly in the molecular space. We are facing actually a trickle-down effect of that, which means, in the meantime, the testing volumes are showing nice progress, and I'm really talking about the testing volumes in the laboratories.

However, there are still those overcapacities built during COVID-19. So some of the less are actually trying to return it.

We know that some other players in the field, not our customers, but some other players in the field are taking back equipment which is then reconditioned and goes into secondary markets. On top, and this actually mainly affects the molecular space, but some other spaces as well that towards the end of the pandemic.

It was not only a matter of fact that there were overcapacities, but as an outcome of those always 2 conservative forecasts during the pandemic, which means from quarter-to-quarter. In the middle of a quarter, our customers identified that the volume and the demand of the quarter to follow should be higher, the demand was always increased.

And that didn't even stop after the first quarter of 2022, which was the Omicron quarter, which means a lot of inventory was actually built within our customers during the phase where the actual market demand was already starting to go back, which means at this point, we are seeing already some nice progress in the market. Actually, demand within the laboratories is growing.

However, in the market, we clearly see that some of the players still have to destock. And this actually affects one of our customers still sitting on a certain inventory level.

We have precise market data. We are talking to that customer.

We know the inventory levels. We know the leads.

We know the demand from the market. So I think we have a good understanding of when this destocking effect should be over and when we are seeing a normalized level of inventories and that we really see that the demand coming from the market trickles down into sales from STRATEC.

I think what we saw, and I'm sure you saw that as well over the last couple of weeks when companies like Roche or Danaher or Thermo [indiscernible], when they reported, all taking some hits not only those ones in the diagnostics space. I think at the beginning of the year, the diagnostics space was more affected than the life science research space.

In the meantime, we clearly see this swapping over to the life science research space in us is an early indicator. You probably remember that we were fairly early saying that there is an issue in the space.

And we were earlier than others. And now we see actually the contrary that some of those players I've just mentioned, are actually not brave enough to mention when they believe this is over.

We actually see the silver lining that we see growing demand, talking to our customers. And we clearly see that particularly in the molecular space, we believe that in H1, probably already at the beginning of the second quarter that we should be out of that phase.

We clearly see that in the meantime, and I think I've mentioned that already, that the market demand -- and I'm really talking about the end market demand like in the laboratories that they do not yet breakthrough due to those destocking effects, which is mainly visible in the molecular space. And I think there it's obvious because of those super high capacities built during COVID-19.

However, we see some other areas as well, which is less related to COVID-19, but to the fact that at the end of the pandemic and at the beginning of the post-pandemic phase. We had those supply chain issues in the entire space, not only in our industry, obviously, -- and at the time, a lot of the players in the market panicked and went materially into inventory.

And now as the majority of the commodities are available we actually see the exact opposite of the effect is that those inventory levels built during that supply crisis is now getting reduced, and that's why we clearly made that statement that the market demand does not yet breakthrough. However, for the majority of our customers in the diagnostic space and in the life science arena, I think it's very transparent.

Generating about 80% of our revenue with our top 7 clients, I think it's obvious that for us, it's a little bit easier to try to get the transparency through our customers, through their inventory levels and into those customers, which are actually using the equipment. I think there are recent inherent proof of that statement, which is a derivative of the expectations regarding consumables, particularly maintenance part at this point.

And the actual spare parts is that at this point, we are far behind expectations regarding spare part sales, which means that the equipment in the space is underutilized. But we clearly see that our customers now sitting on inventory are trying to pull in delivery times and lead times which means, obviously, the demand goes up.

And I hope, particularly after the price increases, we have performed not only for instruments, but for consumables and for spare parts as well that as soon as the typical contribution as a percentage of sales coming from those parts will have a positive impact on our margin as well. At this point, margin is still lacking a couple of positive contributors like economies of scale coming from the top line.

And certainly, at this point, the percentage of sales coming from spares and maintenance parts is still underrepresented in the overall revenue. So -- that's why our Q3 margin in that light is actually even more impressive.

I mentioned that the stockholding at customers is expected to return to a more normalized level in the course of 2024. At this point, it looks like actually more the first half than the second half.

But it's a little bit back and forth. So we have shown significantly that we are fairly proud of that.

This is mainly coming from our nice growth rate with gross profit and gross margin that we showed a significant intra-year improvement on the profitability in Q3, coming from the first 2 quarters in the area of 6% now in Q3 and adjusted EBIT margin of north of 14%. As mentioned before, this is not really related to economies of scale, which it's not related to an improvement in the product mix.

It's simply related to that we nicely managed that we increased the delta between input and output in terms of gross margin. Certainly our progress in the earnings improvement program showed some contributors here as well.

But at the end, the growth in margin is almost exclusively now related to improvements on the gross margin. Our sales guidance and financial guidance, we confirmed the margin targets.

We had to adjust the sales guidance coming from going level to 2022 or a slight growth rate to a slight decline. Overall, what we did is that for the remainder of the year and for 2024, we went through a variety of scenarios, really line item by line item, customer by customer, product by product.

It didn't only apply values to the relevant line items, and we made an offset -- risk-adjusted offset and went through a metrics of likelihood of those relevant line items, and that's why we built a variety of scenario for the remainder of the year, which allowed us to put that adjustment to the sales guidance out with a high level of confidence and the same thing for 2024, which is certainly budget related, which is not actually approved yet. Well-stocked development pipeline, I think the main thing here is that at this point, we certainly see that there is a certain degree of hesitance in the market.

However, the majority of our partners, particularly those ones with a vision of where the market goes and what the future applications are that they are not really worried about a decision to be made today which will only impact their business in 5 to 7 years from now. This includes our vet business.

This includes our Life Science Research business and our Diagnostics business as well. That's why 2 of our today's partner where we have ongoing development programs put more work into our basket for particular programs where we are assuming more workload in order to manage time lines, manage budget and get those products to the markets within the expected time frame.

So that's why besides those products where our partners or some new partners are a little bit shy of taking decisions at this point. We clearly see that the pipeline is very strong, and new costs are added to that pipeline.

Financial review doesn't surprise you that much. As mentioned before, compared to the 9-month figures of 2022, which were very much driven by the last -- demands coming from COVID-19 early that year, backed by about 11% top line and that trickle-down effect with the gross margin issue we had as we couldn't put forward the price increases we were facing on the input side directly to our customers.

This was a basis of long-lasting negotiations where we for some of our customers, not all at this point, but for some of our customers, we managed to bring in those price increases and not only for 2023, we have already agreed with the majority of those customers where we were allowed to apply price increases for instruments, consumables and spares for 2024 and 2025 as well, which makes things way easier than they have been this year. But however, we took the hit in the first and second quarter, margin situation significantly increased.

That's why certainly, the 9-month data is certainly diluted by quarters 1 and 2. However, the step forward was made in the third quarter.

We believe that the market demand will come back in 2024 automatically. We have the right development programs.

We have the right programs in our product portfolio. That's why we believe that as soon as we get back to a more normalized demand from the markets trickling down into sales of STRATEC that the margin will certainly positively influenced by the contribution of service parts and maintenance parts to overall sales as well as coming from the actual scalability.

At this point, really, we are lacking scalability that it almost hurts. Same effect, and I think I don't need to read you through that with adjusted EBIT and EBIT margin, it's literally the same story.

Almost everywhere, if we had to describe the issues we saw at the beginning of the year, it was really nothing but the gross margin issue. We are in good shape literally everywhere else, and we believe that the momentum coming from the market will return next year.

So from a sales perspective, 9 months, 2023, on a constant currency basis, down by 9%. And tailwinds coming from the pandemic-related overcapacities mainly in the molecular space.

Here, the overcapacity is built at the end customer side, so the laboratories outside molecular to a lower degree, coming from inventory management within our customers. We have some customers which are affected by that, particularly those ones which erred on the very safe side during the supply crisis, those ones undertaking a more aggressive approach during that time are doing fairly well.

Load utilization levels within the installed base, showing limited growth with service parts. So at this point, and I'm already talking 9 months data, we are behind expectations and behind forecast.

And actually, behind historical data, you may probably remember that we -- particularly the years before the pandemic, we were in the area of 33%, 34% -- percentage of sales coming from this area. We are behind here.

But like I mentioned before, silver lining is that our customers are starting challenging us with supply time. On the tailwind side, we have that slight growth with development sales.

And again, I would describe it as more normalized. We had -- obviously, we had some development milestones, which could be recognized in revenue, some of them coming along with higher than usual margins, some of them coming along with lower than expected or average margin.

That's why I would actually consider this as more neutral to the margin, but certainly, of those, for us, disappointing as well demand from the end customers that here, we see it more like a tailwind. And then certainly, we see nice contribution from those newly launched instruments, which makes me believe that as soon as like I mentioned that our sales data gets more in line with the actual end customer sales data and the additional demands are not covered from the stocks within our customers that the instruments which were launched right before COVID-19 or during the crisis or thereafter will contribute to growth, whereas the legacy instruments, those ones launched before COVID-19 will get more to a normalized level, particularly in the molecular and in the immunoassay space.

At this point, we see particularly those ones which had headwinds during the crisis, like in particular, our immuno-hematological franchise is now showing some nice growth rates which is one of those elements, which is contributing to the level of sales we are showing at this point. From an adjusted EBIT and EBIT margin level, literally the same thing.

Negative economies of scale. I mentioned that it hurts me that we are, in the meantime, at a manufacturing level where we can no longer talk about economies of scale at all, and we are expecting to return that as soon as the volume is going up.

Then some negative product mix effects. Like those things which helped us to show extraordinary high margins during COVID-19 like molecular sales and lower percentage of sales of earnings-light development.

Revenues are now coming in higher, particularly as a higher percentage of sales and, therefore, negative economies of scale on the margin side, particularly coming from those product groups. Then certainly negative product mix effect, like you probably know that we have some product groups with higher margin contribution and some product groups with lower margin contribution.

At this point, the demand is mainly driven by those product mix with lower margin contribution, again, expecting a higher degree of normalization in the course of next year. Then certainly on the positive elements, our earnings improvement program where a lot of these effects, which were only expected to come in 2024 could put forward -- actually were put forward already into 2023.

However, we have to see that the absolute saving volumes were defined at a moment in time where we are expecting to get to a revenue level of about EUR 300 million. And now on a level of lower volumes, it was certainly a little bit easier and don't take me wrong here.

It was a little bit easier to maintain discipline on the OpEx side on new hirings as the revenues didn't achieve that level. We will certainly adjust our earnings targets -- sorry, our saving targets coming from the earnings improvement program going forward into 2024 as soon as we have released the budget for 2024, then it will certainly be adjusted.

However, nice progress on the savings side, particularly OpEx, some improvements on the material input side, nice savings on the HR side and certainly price adjustments as mentioned before, trickling down into gross margin and therefore, contributing nicely to our margin improvement, which led to that improvement of the margin in Q3 on a stand-alone basis, ending up with, as mentioned before, north of 14% after 2 quarters of about only 6%. Cash flow, not good, which is mainly driven by inventory level.

So -- you know that I mentioned that a couple of times at the end of the crisis, in order to be able to supply, we certainly -- we're forced by some of our suppliers to some orders which were from a timely horizon north of what we typically do so which means more obligations to buy things based upon forecasts given and weak top line development didn't really contribute positively to our inventory levels. However, we believe that things are getting more and more under control.

We'll probably see some additional inventory levels for the next 3 months. We hope that it will not be on that level we showed in Q3 and from then on, we believe that we can work down inventory levels.

And therefore, as a matter of fact, show better levels, particularly in the areas of net debt-to-EBIT ratio and certainly on the cash level, which is disappointing still healthy, as you can see in the cash flow from operational and financing activities that mainly the cash went into inventories, which is certainly, as mentioned before, disappointing, but things are getting more and more under control. And we hope that certainly not in 2024, but that we can reduce the inventory levels in 2024 to a more normalized level and then getting back into more historical inventory levels in 2025, where we hope that we have a turnover ratio in inventories in the areas of 4, 5, 6x turnover of inventory per year.

This gets me to the end of the financial review. Earnings improvement program -- as mentioned before, we have established a temporary hiring freeze in some areas.

Actually, the hiring freeze was already released. We see certainly the necessity to maintain discipline here, but in certain areas, we will continue to hire again.

We got a couple of new projects and which are particularly forcing us to actually increase staffing level in software projects and some other development groups as well as in some other groups, particularly working in supply chain. So we will -- as mentioned, I can promise that we will continue to maintain discipline here.

However, I think some of the material savings we showed in 2023 will be put forward in some areas, we have to release the level. Reallocation of resources went fairly well.

And we are on track with our earnings improvement which means we saved already in the area of EUR 4 million, which is exactly what we expected to happen. Please bear with me certainly, the earnings improvement program was established during a time when the expectation, particularly as far as top line was concerned, we're higher than we are showing at this point, and that's why we'll adjust things in the course of 2024, but like more putting forward the savings rather than releasing things.

Then as mentioned before, price increases were put effective July 1. In some cases, we are still working on it.

In some cases, there were only established in the course of the third quarter, which means it gives us some room here that we are positive to maintain gross margin levels we showed in Q3. However, we'll have to work through product mix and some other effects in 2024.

But I think it shows the capabilities and the actual like substance we have here. Price increases for the major products and major customers were established in July 1, but we have some others where we are -- where there is still room for improvement.

Then non-personnel cost reductions like in CapEx and other area of EUR 1.2 million, which is not material, but it's important to actually confirm that we were very disciplined and will continue to be very disciplined. Update to the guidance.

As mentioned before, we had to adjust our top line. We are coming from expectations to that sales will remain stable with some slight growth rates adjusted to -- on a constant currency basis, that we will slightly fall short to previous year.

As mentioned, we have established a variety of scenarios, including upsides and risks. We put likelihood to that metrics.

And that's why we have a bandwidth, but literally all those scenario, except the worst -- with worst-case scenario hitting that guidance very well. Then we confirmed our EBIT margin guidance -- adjusted EBIT margin, same thing as an outcome of the scenario I mentioned before.

This is actually was an easy one for us to confirm that particularly as we obviously knew already in Q3 about the progress we made in terms of our earnings improvement program as well as in our -- the progress we made for price increases. Intangible assets, certainly on a lower revenue level, but very much again driven by strict disciplines and then certainly we were more like potential and prospect oriented rather than cost oriented.

That's why we can confirm here that our investments in tangible and intangible assets combined will be in the area of 6% to 8%. We hope that we can get it closer to 7% as it is transparent after Q3 with about 7.5%.

This gets me to the end of this presentation, and I would like to hand back to Morris who will explain us how to commence with the Q&A.

Can you hear me now? sorry.

I don't know what happened. Apologies.

Three questions from my side. Firstly, just on pricing, Marcus, can you give us a bit of color what you have achieved meanwhile in terms of realized price increases this year?

And how you're tracking for next year? It sounds like there's some more confidence.

So should we expect the kind of upper bandwidth of the guidance range that you gave for next year? And also, can you give us any kind of flavor what percentage of your product portfolio actually allows for price increase to be pushed through.

And what share of the portfolio do you really have to push your clients for some kind of concessions.

I thought, Oliver, I thought you had 3 questions, I only got 2. No?

Yes. I'll probably take them one after the other if that's okay.

We'll go ahead with the questions. Probably I can put things together.

Sure. Secondly, just on China.

I guess I'm not sure how much visibility you have, but do you have any kind of guesstimate what share of your instrument placements are actually moving to China, where obviously, the environment is more tricky these days? And the last question would just be general how to think about the kind of funding issues in the market.

I mean, I guess the largest part of the portfolio is probably placed by reagent rental deals. The question would be what is the share of that?

And to what extent is really the pushback still in terms of the tougher funding at lab chains, which are partly significant leverage, but also hospitals overall.

Yes. Thanks, Oliver.

I fear I cannot put things together. Your pricing question, let me put it that way, was certainly a very intense phase over, let me say, the past -- let me say, 4 months, I literally almost exclusively lift on board of planes.

During that phase, I was allowed in activities with our customers. And certainly, we got to points where things had to be sorted out on C-suite level.

But I think we got to compromise it which could still be considered win-win. I think that our partners were super worried about that what we typically call downstream effect.

That if they would accept price increases on the input side, a.k.a., us, and that they couldn't put price increases forward as like in tenders where they were bound to confirm prices or in a setup where particularly governmental payers already fixed the prices for this and next year. And the labs were not willing to pay more.

I think that they managed to at least to a certain degree, saw that the demand in testing volume came back, which means part of the price increases on their side could be covered by economies of scale and high gross margin products and that the payers were more willing to renegotiate prices in running contracts as well, which made it a bit easier for them. However, it was certainly a phase of where a lot of strain was in the system.

In the meantime, I think we sorted that out, and we are talking to our customers more about new projects and about the market and about expectations rather than price increases. At this point, and I think I mentioned that in most of the cases, where we already found new pricing.

We got to a level that price increases are stagger, which means price increases were already agreed for 2024 and 2025 as well. In other cases, we put automatic price increases into the agreement based upon inflation or future inflation rates.

So I think we are doing good. And I think that this extraordinary situation of high inflation rates, which is obviously more transparent in the supermarket than on less energy-intensive areas in the industry.

I think we got things fairly well under control and our customers are still satisfied and are still making their margins. So I would consider this as a win-win.

At this point, and you know how that is if you -- like it's a little bit easier to ask for price increases if the demand is high as compared to asking for price increases where highly saturated markets are faced. So I hope this gives you an answer where it was easy and where it was not so easy.

However, at this point, and this is actually really only a rough guess, I would say that at this point, we achieved between 50% and 75% of the price increases, which have been expected to be established before 2024. So there is still a way to go, but there is some -- I would say, some capacity level and some room for improvement level.

Getting to your China question. So I think -- and I mentioned the earnings call of Thermo, Roche and some -- in particular Danaher as well.

So I think the big issue is actually and the big concern is actually what's going on in China. And this is not only affecting the diagnostics side.

This is affecting the life science research side as well with price pressures or actually not just price pressures, clear statements from China government that the time of high pricing or the time nature of high pricing is over with material expectations to what extent prices have to come back, driven by lower growth rates in China in those markets. We know that some of our customers already took the hit in 2023 with a material lower sales rate as compared to historical sales rates in China.

Data point is that like in the last normal year was actually 2019 that the exposure of our customers in China led to a percentage of sales of Stratec instruments of about 6% to 7% of instruments ending up in China from our entire fleet that this certainly is declining materially. And you know that some of our customers are actually trying to actively limit their exposure in China.

Some see this as a chance. We are undertaking cautious actions to establish final assembly site in China in order to allow those products to be made in China in order to allow our customers to continue to participate in Chinese tenders.

Again, very cautious in terms of resource allocation and in terms of cost. However, I think this is a decision which is made on an individual basis.

As mentioned before, we see that some customers are trying to actively reduce their China exposure, whereas other see this as a real chance. So I think either you have an established market in China in the next 3 years or you are entirely out.

So still, the growth rates there are super attractive. I think pricing continues to be attractive particularly for our customers with high gross margins on their assays.

So from our perspective, actually, we believe that particularly 2024 and 2025 growth rates of our customers will certainly be influenced by their exposure in China. Getting to your third question, funding, like I think that the payers are getting more and more stringent as far as funding is concerned.

I think at this point, particularly in our immunoassay franchise and in our molecular franchise and for complex sample prep we, let's say, except hematology, the majority of our instruments about 70% is going into a reagent rental setup, which makes things a little bit easier. We definitely hear and learn.

Although our life science research exposure is fairly small, we definitely see that funding in the life science research arena is getting a little bit worse than it used to be the case in Diagnostics at the beginning of the year. I think the turnaround or funding limitations in the IVD space already lies behind us, whereas we see the big hit to be taken in the life science arena only happening in 2024 which doesn't affect us that much.

I just want to reiterate that. I hope that answers your question, Oliver, and open for next question.

Yes. Do you hear me well?

Absolutely.

I had some connection issues and [ power ] was also kicked out once. Basically also 3 questions from my side.

So first, on this year's guidance. So basically, you've changed on the top line a little bit.

The question is after you're basically still down 9% in constant currency for the first 9 months. So how much visibility do you have that you really see this acceleration of growth, which would mean in the last quarter, somewhere more mid- to high teens.

So that's question #1. The second is about also your view into 2024.

So you mentioned some destocking effects are expected to come to an end. So my understanding is that normally destocking does not trigger pent-up demand?

And is it correctly said that you should experience a slower start into '24, but from the -- and then we should [indiscernible] into mid- to high single-digit territory for the second half. And the last one, very quick.

We discussed just in the previous questions, some points on pricing. So can you give us a rough idea about your development, which was the contribution of a positive price effect in the quarter?

Oliver, thanks very much. for those excellent questions.

Actually, and I hope I managed to get that across. We like adjusting our top line expectations for the remainder of the year.

We went through a variety of scenario, line item by line item, product by product. So we obviously have that transparency that we know the order income.

We know the call of -- that we have that forecasting system where those forecast presented at the beginning of a given quarter are already making the second to the next quarter actually binding. So I would say that we have a fairly good established transparency for that, and as mentioned before, we went through risk analysis and a likelihood of effectiveness.

We went through that and have given the effectiveness. We certainly have some positions where particularly like in spare parts, where certainly, there is an expectation like if everybody would stop ordering spare parts at this point, certainly, we would take a hit or recognizing development revenues.

So if like the acceptance of a milestone, which is due next month, would be pushed out. But as mentioned before, we went through the likelihood.

We made sophisticated risk analysis and I would actually give it a fairly high likelihood, particularly as we are already 1/3 into the fourth quarter, the likelihood actually increase. You are right with your second statement.

And I just want to make some math with you that certainly, our molecular franchise being the biggest of all our technological -- like if we break down our areas of expertise and where we really generate revenues. Number 1 of those 5 areas is actually molecular diagnostics.

That's why soft revenues there actually means that the overall revenues of the companies are soft. So I would definitely say that as the recovery effect and the fact that the demand from the end customer markets are only starting to trickle down into instrument demand and therefore, revenues for STRATEC, it will definitely be back-end loaded in 2024 as well.

However, we have to see that particularly the new product showed some nice progress and are certainly starting in 2024 on an elevated level. So still higher contribution of revenues to the overall percentage of sales in the second half of the year, definitely.

But I wouldn't say it's extremely dis-balanced or lumpy as what we saw in 2023. Pricing as mentioned before, we managed to establish price increases already for quarter 3.

And certainly, these price increases will continue to be effective. We have some other customers where price increases will -- are not yet established, but where we made it very clear that whatever we agree to will be invoiced retrospectively to include the third quarter.

So we'll probably have in the fourth quarter, like a minimal onetime effect. But going forward, we have already established price increases for 2024 and for 2025.

That's why, again, we think we went through the worst. I think going forward, we manage to reduce that deferred time spend between elevated input prices and our inability to put the price increases right away forward into sales prices.

I think we overcame that, which makes me confident that the gross margin will continue to stay on an elevated level. So certainly, we had a nice gross margin growth in the third quarter, and we are showing a nice gross margin.

And I'm hoping that we can maintain on that level. However, I think there will be certain volatilities.

But again, we will go -- we will go forward with an elevated gross margin level and therefore, with a higher margin level into 2024. I hope that answers your question, Oliver.

I would also like to start with your margin in the recent quarter, which was quite encouraging. Are there any kind of one-offs that supported your margin in the recent quarter, like a lower share of margin dilutive development sales?

Or is this a sustainable level that we should expect for next year? Or could it be even higher given that you had a lower share of margin accretive service parts in Q3?

My second question is on your recent acquisition, where contributions were lower than I had expected. Are there any headwinds which we should consider here?

Or how can you explain this? And then finally, could you provide an update on the issues with the production of the new veterinary diagnostic instrument.

How far are you here in providing a reliable supply for your customers? And also how far are you in terms of lowering the cost base for you?

Yes. Thanks, Jan.

Excellent question. So obviously, in such a scenario where we are coming from unexpected high pressure on the gross margin in quarters 1 and 2 and then actually showing a nice gross margin progression.

I think it is a fair question to ask how sustainable is that? At this point, and I was trying to get that across, is that there was a certain level at the end of 2023 and at the beginning of 2024, where we prepared the company for the next level of growth in new and it's a little bit painful for me to describe that there was -- at the beginning, we were assuming a revenue level of EUR 300 million, we prepared the company for that level of growth.

And with our earnings improvement program, certainly, we established discipline in terms of hiring but not cutting into established workforces or anything like that. So it was really like a hiring freeze.

Positive contributors, and I mentioned that a couple of times. Now, I don't want to bore you too much with price increases.

If we are looking into the relevant contributors, and we are trying to get that across here on that slide is that positive contributors is pricing negative contributor is actually a total lack of economies of scale and certainly underrepresented levels as a percentage of sales coming from spares. So like gut feeling would tell me that there is further room for improvement on the gross margin and therefore, on the company margin.

However, we are expecting a bigger development milestone to be invoiced and actually recognized in revenues with an average margin. So average in terms of Q3 margin, which will then be neutral to the margin.

So going forward, I'm fairly optimistic, but I think is way, way, way too early to say that this 15% EBIT margin we achieved in Q3 is the sustainable margin. So putting forward a model for 2024, I would actually assume margin level, which is like half the way between our today's guidance and the EBIT margin we showed in Q3.

On a full year basis, we believe that we can get back to historical EBIT margin in 2025. Certainly, 2024, we will show probably some weaker margins like in Q1 and some stronger margin levels in quarters 3 and 4, again.

So definitely a little bit too early to get you a solid indication. However, as mentioned before, we -- like if you are looking into historical data, you will see that particularly economies of scale, particularly the product mix, particularly sales of consumables and spare parts, which contributed negatively all mainly in Q1 and 2, but still in Q3.

And then that huge gross margin jump makes me very positive going forward. Talking Natech.

Topline Natech contributed about 130 basis points, which was lower than expected. The reason for that is mainly an unexpected bandwidth issue that we are going full speed into post-merger integration processes, which is limiting the bandwidth in terms of sales and our ability to really put the rubber on the road.

We went through review of that, and we are actually fairly positive about the development in Q4. So we'll certainly catch up slightly.

However, we have to see that there is a weakness in that market as well. So the overall decision of acquiring are for the consumable heavy business, the overall decision to establish a strong footprint in the United States is 100% the right decision.

We are super optimistic. We have the right people on the ground.

At the end, it's just a matter of fact that we have to make sure that we are covering both things in parallel, like looking into demand, customers, marketing and all those aspects but establishing a diligent post-merger integration process in parallel at this point, it's really a bandwidth limitation and we are fairly positive that we can sort that out over the next quarter. Update on our vet business, there is actually nothing materially new.

I think I mentioned already in our H1 call that we are in a stage where technologically, we are through the worst that prototypes were shipped, second generation of prototypes is in testing, showing positive results. gross margin improvement on that vary product is in progress.

Again, gross margin issue caused by fact that this is actually a platform-based product, which is for that very application slightly over specced and we are now actually maneuvering the design to -- a little bit away from that platform that the specific product is more requirement and specification space, which improves the pricing situation for us. This is an ongoing step-by-step task.

I actually saw a project review, which is actually showing progress as expected. Just to get you up to speed, we are expecting that the gross margin on that product that we sought out the technical issues we had in the next month, which will make the serious manufactured product more robust and that we sought out the pricing issue towards the end of 2024, probably taking us still into 2025 coming from the effect that we had to allocate the development resources into reliability and robust improvements rather than trying to get the cost of goods under control.

Therefore, these activities have been deprioritized whereas quality, reliability and robust improvement -- robustness improvements have been prioritized, which pushes the gross margin improvement of that product a little bit out of the scope of 2024. However, good progress to be made still a program which will take us into 2024 in terms of development activities, however, progress made as planned.

So nothing new here. I hope that answers your questions, Jan.

I just have 2 quick ones. First one is to confirm that with the expectation of demand coming back in H1 or H2 2024.

One should expect you to grow top line in 2024 at least slightly. Would that be fair?

Alex, do you want to add your second question or so?

The second one is regarding capital intensity of the business. You already provided a sort of some color on inventory situation, which has been bloating up quite significantly.

I think you mentioned, if I understood correctly, 5x inventory turnover by 2025. I think at least on the first glance, that looks like an incredibly ambitious target from where we are today.

Just to get some more color how this should be evolving over the coming year. So in Q4, presumably, you would be having a very strong sales quarter that should reduce inventory somewhat?

And then how much would you be able, you think, to reduce inventories in 2024, sort of what would be the middle step and whether 2025 target, whether I understood it correctly that we are, I think, 5x with 20% of sales, which I think it's rarely ever you had such a low -- net inventory levels, [indiscernible] comment that as well.

Alex, thanks very much. Allow me to answer your second question first.

Actually, sorry, if I put that wrong, we are expecting further inventory growth in the fourth quarter, very much driven by those factors I mentioned before. And only from then working down inventory levels.

Actually, we have some historical data. And again, our portfolio is a bit misleading that we have to distinguish between inventory levels for the high runners and inventory levels for the low runners.

I was actually talking about the high runners where we have historical data that we have turnover rates of inventory like more in the area of 6% to 8% to 10% in some cases even -- and we hope that we can actually get back to that data as mentioned before. But before that, we actually have to work down inventory levels, again, as a result of the necessity to commit to a certain degree of input, whereas the demand at the same time was declining, which actually brought us in this unfruitful situation.

But from then going forward, we actually believe that we can establish inventory levels, particularly for our high runners, we actually in the past, easily managed to have manufacturing times of products in the area of 2 to 3 weeks and inventory only coming in just in time. So there is room for improvement.

This is certainly one of the focus areas we have for the next 24 months to really materially look into inventory levels and bring that down to a more normalized level. Again, assuming that we will not see situations as we saw at the end of COVID-19, at the beginning of the post-COVID area where supply times went to the roof and triple and quadruple I think particularly inflation and weakening economies in China will probably give us some tailwinds that our supply chain can improve there.

And actually, we have some material programs already ongoing to deepen our manufacturing level which, at this point, may look that we will have to put other things in inventory, but it will certainly help us to treat that commodity by commodity and by the extensive commodities just in time whereas those commodities where it doesn't make too much sense to buy them just in time can be handled separately and that allows us to be fairly optimistic on that. Regarding your top line development question, I think it's way too easy to just put a percentage on that.

As mentioned before, our business in immuno-hematology in the chemiluminescent immunoassay space like particularly immunoassays is showing nice progress where molecular business is still suffering. Recovery is expected to happen in the first half of the year, but certainly not front end.

But recovery is not binary, right? So there is actually assuming that we see a healthy development of those technological area businesses, STRATEC has in that area, like that we see steady levels and slightly growing levels there on to some of our newer products.

It's actually a fair statement to assume that this generates additional demand, which may lead to growth rates. However, at this point, into really err on the cautious side, I think I wouldn't push you in a situation where you are over optimistic.

And that's why at this point, I would really err on the cautious side, rather than expecting material growth rates in 2024.

Yes. Thanks very much, Morris.

Ladies and gentlemen, this gets us to the end of our 9-month presentation. Thanks very much for your interest.

If you have any follow-up questions, do not hesitate to call us or drop us a line. Thanks very much, and have a good day.