Stratec SE

Good afternoon in Europe, and good morning in the United States. Welcome to our H1 2024 financial results presentation.

Before we dive into the details, I would like to get you a couple of housekeeping things. So first of all, I think I don't need to read you through the Safe Harbor statement.

You can download that presentation either from the presentation or actually from our website. And there is one more thing.

This is the last time where we will have this call in this setup. Next time, Oliver Albrecht, who is our CFO, at interim, will join me in walking you through the data.

He'll obviously take over financial details, and I'll focus on marketing strategy and everything else. Now I would like to walk you through the agenda.

First of all, I would like to get you an overview over the event and most recent things. We [ haven ] during H1, particularly focusing on Q2 2024.

Then a financial review, then I would like to get you an outlook what we expect to happen, particularly until the end of the year, but certainly looking -- trying to get to further details about those things, which are actually planned for the next 2, 2.5 years. Then certainly, we have the chance to discuss your questions and we certainly have supplementary information in the appendix of this presentation, which is not part of the agenda.

So now getting to the overview of what happened. I think the first thing which we would like to discuss is that we really saw some improvement in the business dynamics, particularly in the second quarter, where we managed to grow sales by 5.3% at constant currency, which is actually slightly a little bit less than what we expected after Q1.

I'll dive into details later on that. We actually, at the very beginning of this quarter, we saw the chance to actually get close to breakeven on a year-over-year basis to H1 of 2023.

If we are looking in the remainder of the year, the majority of those things which have been pushed out are actually expected to happen in the second half of the year. Then certainly, our efficiency improvement program, which was commenced in actually right after Q1 2023 already show effectiveness.

But certainly, as we are maintaining cost discipline, and we are looking more into a potential oriented approach rather than a cost-oriented approach in trying to keep our particularly OpEx, but to a certain degree, CapEx under control is certainly one of the means in order to maintain in the margin improvement and certainly, particularly in the operations. But in development as well.

And actually, when we later on look into the breakdown of the revenue split, I'll talk about structural improvements there as well. But mainly those structural improvements are happening on the supply chain side.

So like procurement, certainly manufacturing debt, make-or-buy decisions. the way we are handling things on the procurement side and on the manufacturing side.

I'll continue to make a dive into inventories because this is important to understand aspects of cash flow and inventory between now and the end of the year and as we are expecting a material and substantial cash release from inventories in 2025, I think this is worth considering already at this point. In H1, we managed to increase our adjusted EBIT margin by more than 260 basis points year-over-year to an adjusted EBIT margin of 8.2% Q2 on a stand-alone basis, even 9.6%.

I think this is all showing in the right direction. And I would like to mention already at this point that if we are looking into like the communication with our customers, but even with the end customers, those people observing the market, I think, particularly on the NCS customer side, we definitely see improvement in the condition of the market and the appetite to invest into not only new technologies but even continue to invest in the capacities.

I think it's worth mentioning that we had a concluding milestone in one of our most important development programs, which is in transfusion diagnostics. And that actually led to an IFRS 15 step, which is well shown in our revenue stream, particularly on the development income side.

We continue to work on our well field development pipeline. We have a variety, a number of promising negotiations ongoing.

We -- it was already our goal to push certain things over the finish line, which in Q2, which didn't exactly work out. But certainly, those things are certainly on track in terms of execution.

So we do not expect that one of those aspects will decline or that decisions are being made differently than expected. It's actually just a timing effect.

And certainly, we are working on additional development cooperation. So I think just as a result of the discussions we have of the negotiations we have on ongoing, but even looking into a very important indicator, which is a number of feasibility activities and feasibility projects, even here the number grew.

So this is all looking very promising, which was one of the main reasons why we managed to confirm our full year 2024 guidance, but I think it is still worth mentioning that in order to fulfill the guidance, we definitely need to work diligently need to track things, need to make sure that we are all disciplined not only on the Stratec side, but even on the procurement and manufacturing side and certainly managing to keep our customers disciplined that they keep what they promise. Now getting into the financial review.

As already mentioned, -- in H1, we actually are still a little bit behind H1 2023. We actually had the orders, some things were happening right at the end of the quarter or have been pushed into the second half of the year.

None of those things we expected to happen in H1 was deleted or the like all pushed into the second half of the year, which may actually make H2 from a delivery perspective, even more challenging. We have some things still in the element where we need to manage risk.

But on the other side, we have sufficient upside potential for H2, which makes us believe that it should be in the range of normal operations that we managed to get to our guidance. stand-alone basis, very successful with a growth of about 6% in revenues.

Adjusted EBITDA, I mean, here, it's not only that we are showing that we have good scalability. On the other side, it clearly shows the company did its homework like price adjustments, working on structural and procurement, earnings improvement, still maintaining cost discipline.

All those aspects led to an adjusted EBITDA of plus 60% with -- in the second half -- sorry, in the second quarter, about EUR 6.6 million EBITDA. Adjusted EBIT margin in the second quarter, 10.2% in -- as compared to H1 growth.

Same thing on the EBIT and EBIT margin side. And certainly on the adjusted consolidated net income, I think all those earnings KPIs are going in the same direction.

So nice growth, literally growth of north of 100%, EPS even 220%. So I would say we could convince bottom line, top line, there is still room for improvement.

And here, I would mainly point out actually instrumentation with particularly still pandemic-related suffering on the -- our molecular franchise. So let me walk you through sales details.

Here, you see the 6 months top line results even during COVID, like with peak in H1 2021. And since then a steady decline, we believe that if we would have like 2 quarters like we are showing here in Q2 of 2024, then we definitely can say that we have bottomed out.

And I already mentioned the pandemic-related lower demand for molecular instruments. Here, we actually have 2 programs.

One is a program which really showed nice tailwinds during COVID-19, a high degree of saturation. So a lot of underutilized equipment out there.

What we definitely see is that this equipment is aging and is, therefore, leaving the installed base. On the other side, we see growing demand from the end customer side, we see an increased utilization of the underutilized equipment.

This is clearly shown in our spare parts, maintenance parts and consumables business. So all on track, we see utilization going up, and this is actually for us an early indication that the demand goes up.

And if the demand goes up, we expect that actually, this low run rate in our replacement business of molecular units is actually showing traction and that we will soon start to sell more instruments. And then we have that flatter-than-expected ramp-up in one of our other molecular programs.

I think from an overall perspective, if you talk to players in the market, I would say those ones in hematology, immune hematology, clean chem immunoassay are already reporting good growth, particularly with the menu expansion, but even from a volume perspective. I think from a -- in the molecular market, we see that the market switches back into growth mode.

So we see that our customers are actually growing again mainly with a higher degree of utilization. So bringing tests on the instruments which are already in the field, which doesn't necessarily lead to more instrument placements right away.

But certainly, that comes at the tail end of utilization of the equipment comes up and if we are thinking about optimized leverage flows and so on in aging and actually, like instruments, which are underutilized. If we think about that, then we are really positive about a healthy recovery of our molecular business coming soon.

Then -- and I already mentioned that we see healthy demand for our service parts a consumables business. Certainly, we shouldn't forget about our acquisition, which exclusively goes into the consumables business that certainly contributes to a higher percentage of sales in our consumables segment in our consumables franchise.

Then certainly, we showed some significant progress in development programs and even the corresponding revenue recognition was actually fairly well established in Q2 of that year. So probably like from a 30,000-foot perspective, the biggest change is actually showed in our business dynamics, if we look into the breakdown of percentage of total sales that in H1 of 2024 as compared to the already weak H1 2023.

-- analyzer systems sales was fairly weak. Again, certainly to a certain amount attributable to the overall dynamics in the shift of the relevant contributor to the overall revenues, name it growth in consumables, growth in maintenance part, growth in spare parts.

So a higher percentage there automatically leads to a lower percentage in systems. And certainly, the Natech acquisition at this moment in time coming in on the consumable side, fairly margin light, but that will certainly improve over time.

We manage that after the acquisition of Sony the ADC Bioscience back in 2016 as well. So I think top line growth and a higher proportion of growth within the consumables segment with parts which are coming on a high run rate, that certainly helps to improve the margin here as well.

But I would like to make a deep dive that we certainly manage that structural change fairly well to make sure that our operational business in terms of instrumentation doesn't have to subsidize development activities anymore. I think we nicely managed to make sure that everyone working with Stratec understands the value of our development activities and that to a certain proportion, the development paid as soon as they exist and it only downstream with instrument sales is clearly shown if we break down revenues in H1 of 2024.

If we are looking into the way how it has evolved, like on the left-hand side of the chart, if we are comparing absolute sales, clearly is the same picture, nice growth in consumables, nice growth in development and sales and the instrumentation business is still suffering. I think we are doing very well with immunoassay, doing good with immune hematology and hematology.

The delta here is mainly attributable, particularly, if we are comparing not to previous year, but to our budget, certainly on the molecular side. But again, we are expecting nice recovery here, and we have some data from our customers.

So looking into their inventory levels or looking into the utilization. You probably know that we have IoT schools, which are actually showing the utilization of the equipment.

This is actually pointing in the right direction as well. Adjusted EBIT margin, clearly, the adjusted EBIT and EBIT margin, we clearly showed the dip if we are comparing the half year figures.

Clearly, after the super strong covet years 2021 and then still 2022. -- dipping out H1 2023 and nice progression shown in 2024.

As mentioned, it's certainly a balance of slightly but not really effective scaling effects, certainly our earnings improvement program, but certainly structural changes in the way how we're doing operationally and how we are working with our customers in terms of pricing efficiency, that's certainly something which clearly is showing in the right direction, as already mentioned, which got us to that 8.2% adjusted EBIT margin. As mentioned on the tailwind side, certainly efficiency measures, revenue mix certainly played a role.

Then certainly currency. Same thing here.

We are actually showing about EUR 1 million positive FX effect. On the other side, certainly still not yet where we believe we belong on the economy of scale and utilization of our utilization of the capacity we do have.

Actually, even here, we have a strange picture. In some of our site, we had to hire operations people in order to manage the workload in procurement and manufacturing and in some other sites, we are actually still heavily underutilized.

So typically, we are trying to spread our products from a market segment perspective in order to make sure that if one market segment is affected negatively that we are not underutilized in a certain site so that we can balance activities, unfortunately, really, the -- from a neutral perspective, fairly balanced product mix in some sites held us to a certain degree, which makes those manufacturing sites underutilized and translate in other manufacturing sites, we actually had to hire in order to provide the relevant capacities in order to manage the bargain manufacturing. Then still, we have room for improvement regarding product mix within systems mainly talking about molecular.

Cash flow showed nice progress as well. So cash flow on -- and that's actually the most important one.

Operating effect operating activities, a growth of 340% after EUR 4 million, now north of EUR 17 million in H1 as compared to H1 2023. -- and certainly a nice cash flow generation after negative EUR 5 million in H1 2023 now plus EUR 6 million.

I think -- and again, this is about managing expectations. Let me walk you through what we expect to happen regarding the remainder of the year.

Certainly, in the second half of the year, we are expecting slightly negative free cash flow, which is mainly related to our inventory position. So all in all, we expect it to run flat in inventory by midyear 2024.

We didn't manage it, which is certainly related to the revenue thing we already discussed that we actually didn't fully manage well. We believe that it should go in H1 revenue-wise that certainly, on the other side, brings in still slightly higher-than-expected inventory levels for H1.

As many -- as already mentioned, the activities which happened over the past 2 years like tail-end of COVID-19 and then supply crisis, is leading to the fact that we are sitting on an elevated level of inventory. We actually managed that fairly well, but we will continue to see a ramp-up will, but most likely go further down in inventory levels in Q3, but towards the end of the year, we will have most likely see a slight increase in inventory levels again, which is on the other side causing negative free cash flows, all very mildly, but I think it's worth mentioning that we will most likely end up with higher inventory levels at the end of the year.

And from then on full year 2025 quarter-to-quarter, we are expecting a decline in inventory levels, which is leading to a significant cash release on the positive side. Equity ratio very much related to the Natech acquisition a slight growth to 51% of 90 basis points, net debt in line with expectations.

As mentioned, a significant improvement on the cash flow dynamics. Investment ratio 7.3% versus 1% showing that we continue to have heavy investments in development activities.

And I think, again, it's worth mentioning that we were almost always one of those companies that, to the degree possible that we were looking into the future that we were looking into that we fulfill our obligations towards our customers, where we have ongoing development programs and didn't push the break here, even in times where it does not operationally work out in the expected level. Net debt EBITDA ratio of 2.7%, again, developing in the right direction.

Now let me get you the outlook. First of all, touching base on the financial guidance, which has been confirmed today.

We are expecting to remain stable top line actually expect a slight growth compared to previous year. on -- both on a constant currency basis.

Obviously, adjusted EBIT margin and even if the H1 adjusted EBIT margin is south of 10%. If you are looking at the dynamics of the previous year, even in the pre Covid phase the majority of EBIT is generated in the second half of the year, and we are expecting a comparable dynamics in the second half of 2024 as we are showing historically.

And then certainly, the investments in intangible assets combined of around 6% to 8% last year, -- sorry, 6.7%. This year, we are expecting to actually show a little bit higher results than in 2023.

-- focus for 2024 and beyond. So we are talking towards the end of the year, but certainly looking into 2025 already.

Certainly, we will maintain cost discipline throughout the company, given that the earnings improvement program was really very efficient. We definitely switched from a cost focus more into a potential focus or potential orientated focus.

So meaning if something is paying dividend on a short term, so like short, short return yes, then certainly, we are continuing -- willing to invest, but we want to reach pre-pandemic efficiency levels. So just if we're looking into turnover rates in our warehouse and so on, this still shows a lot of room for improvement, and we are working on that throughout the entire company.

So certainly, in those new areas, we are working, we want to grow our footprint, particularly in selected Life Science are particularly those ones showing a high degree of multiplier, so not one-off, not super specific things, but those areas of the life science where good multipliers are happening, where platforms could be sold, where we can actually leverage our existing technologies. We are -- probably you know that we are working for years in this area.

We are showing actually first placements of instruments there. And certainly, we are looking into the areas of diagnostics where other market mechanics could be applied like not necessarily those reagent render model, the majority of our customers are applying but like areas where direct instruments is not directed to the end customer, but instrument sales, not on a reagent rental basis is actually showing direct effects and therefore, directly kicking through into our P&L.

Then certainly, we want to manage and process our M&A opportunities. We are actually actively looking into M&A, which is definitely a part of our diversification strategy.

So it's saying allocating less revenues to isolated customers. Certainly, we don't want to lose those customers and want to continue to grow with those customers, but certainly diversification of revenue streams is an important program.

I already talked about, platforms, our clear, our CRS platform are already means within diagnostics left to get there, but certainly other things where we have in our development pipeline are going in the same direction, diversification and achieving a higher degree of independency of relevant dynamics in certain markets is definitely on our agenda. Then I already mentioned the nice lineup we have in terms of deal pipeline, and I'm here, I'm talking about development and manufacturing deals, not M&A deals, a nice lineup, and we continue to push things over the finish line in order to make sure that those programs we are already working on and where we -- in some of the cases, we have retainer agreements in place that we are getting more into the structure of a development and supply agreement, which is then covering such product typically for a period of north of 20 years.

And then certainly, we are looking to accelerate the recognition of the synergy potential we have with Natech in the United States. So not only helping Natech to open the door to where we have existing instrument business and vice versa, certainly, there are means to actually cooperate and show the product offering of struggle consumables of Natech and of Stratec instruments in parallel in order to become an even more attractive partner for our customers, and we want to take advantage of this possibility.

I'll switch to the. I think it gets me to the end of the presentation.

And I would like to hand back to frenzy and she'll get the instructions on how to commence with Q&A.

Yes. Marcus, 3 questions I have.

First one is on your guidance. So your guidance implies some acceleration for H2.

King -- just make a comment between phasing between Q3, Q4. So is it fair to assume a back-end loading?

Second question is about your M&A opportunities which you named for '24 and beyond. Could you give us some test about just the ideas and also how we should think about leverage in this context?

And my last question is a more general question of the overall market environment for analyzer systems. So the phase of Covid was characterized by some ramp-up of capacities.

We saw some over utilization of customers, equipment afterwards here, the ongoing consolidation and some destocking, which clearly wait on the development over the past 3 years. So could you describe where you see the overall environment and also currently the moving parts are some of the overcapacity already digested or for how long should we still expect some headwinds coming from this over capacities.

Thanks, Oliver, for those questions. Let me try to get you a little bit more information.

So you talked about like the dynamics regarding to fulfill our guidance in terms of how -- what do we expect for Q3 and Q4 in the relevant comparison. So actually, we are already expecting a super strong Q3.

If we are looking into the lineups and forecast and things which are already put in manufacturing and actually orders and colors and so on, this is all looking into a very promising Q3. So we are expecting high dynamics in Q3 and certainly not so much as we saw in the previous year in Q4 in terms of relevant split.

So already a nice proportion. So it should not get that back end loaded as it used to be the case last year.

That was the positive side. The negative side is that certainly, in order to fulfill all those orders, we are hitting certain capacity thresholds mainly in those manufacturing sites, which are already at capacity levels.

And you know those products and sites are approved like products are approved to site. So you cannot easily move products between sites and that makes it difficult for us.

And like I mentioned before, in some of our sites, we are underutilized in others we are overutilized. We are managing and balancing it, but that's actually like a certain timing effect.

So I hope it makes sense to a certain degree. And on the other side, we saw like things what we believe to be firm in have been pushed into the second half of the year.

So I think we should try to manage expectation and be realistic on that, that we have to expect that certain things we and our customers are expecting to happen in Q3, will hopefully not push too far into Q4. Again, we are expecting high dynamics in Q3 and good dynamics still in Q4.

However, not that unhealthy balance we showed last year with the dynamics we had in Q4, particularly in terms of December in Q4, that's not healthy for the company. M&A, and I cannot be super specific, but you know that we are following like 3 main streams in M&A.

One is acquiring technology whenever necessary. So I think we are doing fairly well here.

But like in the Natech case, these are typically not big acquisitions. And certainly, acquisitions which were not paying dividends right away.

So they may be dilutive for certain periods of time. Like I said, nothing concrete ongoing here.

Then certainly, looking into customer base market access to, at this moment in time, unpenetrated market segments. That's certainly a second aspect we are looking into, which is, at this moment in time, for us, more important, particularly under the umbrella of diversifying our revenue streams.

And I think it's too early to discuss leverage, which is resulting from that. But I think it's worth mentioning that we are looking into those opportunities and are certainly looking into the opportunities of -- and the necessities and abilities how to finance that.

Now talking markets.

One quick follow-up on this one. So which leverage level would you regard still as prudence?

Yes, Oliver, as mentioned, it's certainly, let me say, too early to discuss those elements. I think from an outside perspective, leverage level of 3% to 3.5% in our industry.

And here, I think it's less important what bankers think, I think it's more important what our customers think from an outside perspective. Like I said, 3.5% is still perceive healthy.

We are good piece away from that. As mentioned, we are generating free cash flow.

So we believe we are working that down, particularly with the material cash release, we are expecting from releasing inventory levels in 2025. I think this is all going in the right direction.

And certainly, for the time being, we can discuss bridges and other things. But I think this is something we are only initially discussing that's why it's too early to make the deep dive here.

Getting back to your third question regarding market situation and allow me to give you some background and answer this question from 2 sides. I would say, market dynamics, utilization and so on within our customer base, differs slightly to the overall market situation.

And then we still have to see that if you would talk to our customers, they would probably describe the situation slightly different to us because like we discussed that in the past a couple of times if our customers are getting a new test to the market. And they have an installed base of, say, 3,000 instruments out there with this installed base and that new test, they can grow from day 1 on because for that test, they have 3,000 new customers for that instrument right away.

On our end, if instrument is not achieving the right level of utilization say, being underutilized, and they bring a new test on that instrument, utilization level gets from 40% to 42%, which doesn't necessarily mean that our customers have to buy a new instrument. So that's why I think if we manage to keep up the threshold of investment level placing new instruments in order to have recovery instruments or in order to do secondary testing and so on.

This is all driving installed base, and that's what we are actually looking into. So what I want to get across is when you talk to our customers and they are talking about a 3% or 5% or 7% growth rate ex COVID, then certainly, it goes in the right direction, but it doesn't necessarily mean that we are placing new instruments right away.

We certainly do that as like in our hematological business, we do that in our wet business. We do that in our new hematological business, and we do that particularly in our immune franchise.

We don't do that in our molecular franchise as the deviation between the capacities built during COVID-19 and the actual utilization at this moment in time is not at a level where end customers or our customers are starting to reinvest. I mentioned before that the situation improves, that the -- that we see inventory levels within our molecular customers coming nicely back.

So we believe and we already mentioned that. And this proved to be true that our customers in the molecular franchise are going through inventory levels, which are bringing them back into inventory levels of 2 to 3 months run rate on stock, and that's what they actually want.

And that's the moment in time where they are starting to buy new instruments in order to satisfy the needs of the market. I hope that makes sense.

Like I said, I think although this is not a breakthrough. So certainly, we have to admit that the market had a nice and steady growth rate before COVID-19.

Then it went through the roof. Then we went through supply crisis with all those reactions like overcapacities and so on.

Then we'll let then certainly, we saw some customers, particularly those ones providing specialty testing with good results. So those ones in the bread and butter business, not so successful, but what we see is a decline of volatilities, which is typically a good signal, and we see that the statements being made by our customers are actually pointing in the right direction.

As being always an early indicator, you probably remember when -- we started discussing a weakness of the market early 2023, that we were one of the first ones mentioning that, and a lot of others followed us with a lineup of profit warnings. I hope we are now the indicator and the early indicator for, let me say, a recovery of the market and a more healthy and a less volatile overall condition of our market.

And again, I'm not only talking diagnostics, to a certain degree, I'm talking lab instrumentation in analytics and life sciences well, particularly in these areas where we are playing so those ones with a high degree of regulation and a high degree of similar installations like recurring revenue. I hope that makes sense.

And getting back to Frenz, I think there should be a lineup of question.

Marcus... I also have 3, if I may.

Given the importance of the topic, I would like to come back to your molecular business and starting with my first question on the underlying demand for molecular instruments. So your largest customer, have seen a modest pickup in the placement number of new instruments following several quarters with no growth.

Do you view this as a first inflection point? Or is it too early to call for this?

And my second question is on the destocking of molecular instruments. And I know you already touched on this topic, but it would be great if you could share your thoughts again here specifically for H2.

And could 2025 still be impacted by the destocking. And then finally, Marcus, you mentioned in the past that it will take some time until inflationary cost pressure and implemented price increases better each other out.

Do you think that this could already happen next year? Or is it too early for this?

Any color on your planned price increases for the next year would be appreciated.

Yes. Thanks, Dan, for bringing those topics up.

It gives me actually the chance to dive a little bit more into those pain points we have at this point, but certainly shows the potential we have. So you talked about inflection points in the molecule.

And certainly, I cannot comment on comment being made by our customers. But it is right that we see throughout our customers by molecular instruments that after, let me say, quarters where the demand was mainly satisfied with instruments they had warehouse at this point and very little sales from us that the demand seems to pick up.

which is mainly related to the replacement business. So the instruments which were heavily used under COVID-19 are showing signs of aging and wear and tear.

So you know, like in the aircraft industry, like with good service, you can keep an instrument young only for [ Sonangol ] for -- so an solar, and we definitely see that. That's one element.

But certainly, increased number of tests is actually going in the same way. I'm not the person to talk about inflection points.

This is something which should be handled by our customers. On the other side, like if we are looking into forecast manufacturing rates and particular utilization and our replacement parts and maintenance parts business, I would actually say, yes, we are through that.

But talking about the inflection point is not on me. Then talking about destocking Index, and you particularly raised the question of will this take us into 2025.

We actually received some comments of our customers that even in 2025, we will not return to instrument placement rate. And I'm not talking our sales rate, I'm talking instrument placement rates where we used it to be precovid, which means that we will most likely have to live with an ongoing weakness of the molecular market.

So certainly, this is not a real weakness, but not the growth rate we had prepandemically. But as mentioned, and I think this is worth considering that particularly those instruments which have been launched right before COVID, during Covid and after Covid.

We were actually fairly active in markets other than molecular -- so the growth we actually see coming in from areas and franchises outside Covid will drive the company's growth in the next 2 to 3 years. So we are a little bit less dependent on our strongest franchise molecular, which used to be the case like between 2017 and 2019 and then certainly even more accelerated and exposed during COVID-19.

And I think this is going to decline over the next couple of years. But still, like this is an important market for us looking into our business model.

So we certainly live from spare he technologies and complexity -- so it means that we have to focus and orient into those markets, which are actually driving complexity. This used to be the case in molecular, but certainly particularly complex sample prep or camera-based systems or advanced imaging, all those new technologies, particularly driven by smart consumables, not only smart consumers as our franchise and it's the driving force, but by the overall percentage of growth of smart consumers in the diagnostics lab, that's actually all driving complexity and that helps us next to our molecular franchise, which from a complexity perspective was certainly the driving force over the past 5 years.

And then certainly talking about like cost pressure and earnings improvement program and price increase. things have to continue to come in parallel.

In times of growth and where the ability to supply was the first and foremost thing switching into a mode where our customers got more like cost sensitive and where we had to increase prices and where we continue to increase prices, we certainly -- the logistical side, the procurement side, like, like operational excellence are playing at this moment in time. Certainly, the most important role is a driving first-of-fearnings growth.

Certainly, we continue to be very sensitive about pricing towards our customers. And I can only say the same thing again.

there are certain customers where we have already agreed on price increases for the remainder of 2024, but some of them even further price increases then in 2025. And there are others.

We continue negotiations. And actually, for a very important one, we are expecting a material step by the end of the year, which will again help us to show efficiency and therefore, a better margin profile in 2025.

That's actually our expectation at this point. So this is a work, which is really happening step-by-step requires a lot of diligence.

This is not just flipping the switch. Next question.

First question is on pricing. I'm just wondering because we have seen, obviously, to our 2024 quite erratic implementation of price increases, obviously, depending on the customer and the products.

Just if you could give us a sense how much price tailwind do you expect to realize in 2025 from the price measures you have already implemented or agreed upon with your customers? That's the first one.

Yes, Alex, thanks for bringing it up. I think actually the most important understanding and that's definitely our position we have towards our customers is that we are at this moment in time actually performing price increases to get the company back to where we believe it belongs in terms of investment, in terms of innovation, in terms in our ability to swallow dips and so on and so forth.

So actually, we already had the impact at the beginning of the supply crisis, where we were in order to continue to supply accept higher cost -- higher input costs, mainly driven by certain commodities. You all remember those stupid price increases the industry's thought during like with microcontroller supply and last time buys, and that's actually part of our inventory level is actually something, and we won't get rid of that pretty soon.

just because we had to buy inventory level in order to be able to supply and continue to be able to be able to supply in the next several years because we had to do last time by when we were hit by like the chip prices and other supply crisis. So what we are saying at this point is we had the hit already like 18 months ago.

And what we are performing today is just to balance out the hit we took it is not to increase prices or to cover inflation ongoing, we are actually expecting our customers to help us to recover from the hit we took 18 months ago. And that's our perspective on that.

And that's why we continue to have pricing negotiations with some of our customers. Some of our customers, we actually already achieved satisfy results that they said we have a staggered approach of like 5% price increase in 2023 and another 5% in 2024.

And then switching back into an automatic price increase on the basis of inflation. And we have others where we have ongoing negotiations on how to allow us to recover from the hit we took 18 months ago.

And that's actually our perspective on that. And that's why, Alex, sorry to give you that vague answer.

In some cases, we have established price increases going forward. In other cases, we continue to have ongoing negotiation.

Understood. And maybe just more broadly then, until when how much longer you think you would need to come to the sort of square one where you basically neutralize the hit that you had to take?

Absolutely. Like I said, I think it will continue to take us into 2025.

But I think getting back to historical margin levels that this is more an operational excellence thing than price increases. And I think that has to be understood.

The market accepts for a certain market segment and for certain products, only a price like that. As long as the diagnostics market doesn't switch back into the dynamics, we had like between 2012 and 2019, with a steady 3% to 5% growth rate.

As long as the market doesn't switch back into that mode, certainly, it will be difficult to discuss price increases in order to satisfy our needs the market only accept a certain price. There is -- there are market conditions.

And we shouldn't forget that particularly in commodity segments, and that was particularly transparent in -- at the ADL end of previous ACC show, which was at the beginning of August or end of July in Chicago this year in the United States that we see, particularly in the commodity market segment, we see huge pressure from Asia. And that's why we are doing very good to look into more into innovation and to look into more about the actual value of certain technologies in the market.

And that certainly leads to that the market except lead to the acceptance of the fact that the market accepts only this and that price. And that from then on, it gets difficult, and that's why operational excellence is definitely the key we need to work on over the next 24 months.

Understood. I just have two quick ones left.

Number one is, is there a particular inventory level or release of funds you're targeting for 2025? Or you have already some visibility on?

And the next one is on the development sales. I think H1 saw around about $30 million in revenue.

Could you provide any kind of guidance on the second half? Or what do you expect in terms of full year development sales?

And how should one view it in the sort of broader -- the peak output you expect for this vertical or there is still scope to grow.

Yes, Alex, I think I was trying to get that growth in the course of the presentation. So certainly, H1 on the development side was particularly strong.

We shouldn't expect that to reoccur in the second half of the year. Certainly, development sales will continue to be strong, particularly regarding the structural amendments we made to that part of the business.

So we think we provide a certain value. In the past, we managed to leverage the value provided through instrument output.

And this is at this moment in time no longer the case, we need to focus more on the realization of the value and the acceptance of that we provide value through development work and want to make sure that we are charging what we have reserved and that actually worked out fairly well. If you're looking at the development of the past quarters, we have established that already last year, and we will continue to be very disciplined on that.

That's what I was trying to say. Historically, we had instrument sales in the group of 55%.

I think that won't happen in the future. So the relevant contribution of instrument sales, relevant contribution of consumables and relevant contribution of development and services.

Certainly, we want to make sure that you understand that like those nonserious units like backward prototype, evaluation unit, validation units, pre-serious unit, early series unit. -- all those instruments are counting into the development work.

And that -- like I said, we -- at this point, we have a nice lineup of development programs, and that is particularly reflected in development revenue recognition and development sales recognition of those nonserious units. But structurally, please do not expect us to get back soon or overall in the near future to get back to that 55% instrumentation level, I think we are showing good scalability in our consumer business and a certain high level contribution by the value we are providing to our customers and the markets throughout development activity.

I hope that makes sense. There is certainly a structural change ongoing.

Thanks for taking my two follow-up questions. The first one is on the system deliveries that were originally planned for June.

Could you quantify the impact and share some color on which businesses have been impacted? And secondly, on your 2024 guidance, you made good progress in Q2.

But standing where you are today, where do you see more risks for your guidance on the top or rather on the bottom line?

Jan, thanks for your follow-up questions. So second question first.

So we are fairly confident bottom line. And we -- you asked me for which one is more risk.

I'm not talking about overall risk. I'm talking relative to risk.

That's important. So I see our the measures in order to fulfill our guidance as well in place, and we see ourselves good on track.

But if you ask me for where do I think more risk result is actually top line rather than bottom line. And then talking about system sales, certainly, we -- it's good practice in our industry and particularly for Stratec that we do not talk about individual customers.

And certainly, if I'm talking segments I would directly lead to into certain customers. So certainly, we are talking just doing your own math at the very beginning of at the very beginning of Q2, we were actually confident that we could achieve the year-over-year breakthrough already in H1, which didn't work out.

So the delta is partly attributable to our molecular franchise and partly to our immuno franchise and certainly public to revenue recognition on the development side. So I think overall, we had a couple of contributors, which unfortunately came in, in parallel and very close to quarter end.

So that's why, at this point, I would actually book it more into the bucket of not uncommon volatilities rather than anything structural. I hope that helped.

Yes, Frank, thanks very much for guiding us through the presentation. So ladies and gentlemen, thanks very much for your interest.

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