SRTOY - Sartorius Stedim Biotech S.A. (SDMHF) Q3 2023 Earnings Call Transcript
2023-10-20 17:03:02 ET
Sartorius Stedim Biotech S.A. (SDMHF)
Q3 2023 Earnings Conference Call
October 20, 2023, 6:30 AM ET
Company Participants
Joachim Kreuzburg - Chief Executive Officer
Rainer Lehmann - Chief Financial Officer
Rene Faber - Chief Executive Officer, Sartorius Stedim Biotech
Conference Call Participants
Odysseas Manesiotis - Berenberg
Vineet Agrawal - Citi
Richard Vosser - JPMorgan
James Quigley - Morgan Stanley
James Vane-Tempest - Jefferies
Oliver Metzger - ODDO BHF
Charles Pitman - Barclays
Sezgi Ozener - HSBC
Falko Friedrichs - Deutsche Bank
Paul Knight - KeyBanc Capital Markets
Oliver Reinberg - Kepler Cheuvreux
Delphine Le Louet - Societe Generale
Presentation
Operator
Good day and welcome to the Sartorius and Sartorius Stedim Biotech Conference Call on the Nine Months 2023 Results. Today's conference is being recorded.
At this time, I would like to turn the conference over to Dr. Joachim Kreuzburg, CEO of Sartorius Group. Please go ahead, sir.
Joachim Kreuzburg
Thank you very much and also hello and good day from my side. As always, I would like to kick it off by walking you through the highlights of the past three months and the nine months of 2023, and then Rainer will walk you through the detailed financial results for the Sartorius Group. And then after that, Rene, CEO of Sartorius Stedim Biotech, will talk about the Sartorius Stedim Biotech numbers and therefore, also highlighting the bioprocessing business in more detail as well.
So again let me start by talking about the most important point over the last couple of months and weeks. So obviously and I think everyone is following the industry quite closely and seeing also the recent news flow from peers as well as from our customer segment. There are a couple of industry-wide headwinds that also have influenced the business development and particularly the top line development at Satorius during Q3.
For Bioprocess Solutions, we have seen signs of recovery. During Q3, we believe that we have seen the bottom of our order intake development most likely around end of Q2. So that's a positive one, but we see that the momentum is lower than initially expected.
For the lab division, we have seen, and again, I think this is an industry-wide topic at the moment. A challenging Q3. It was more challenging than we anticipated particularly China and the US have to be mentioned here, where we saw lower investment activities and more cautious cash management by customers.
Therefore, we also have seen some impact in regards to the bottom line. Our profitability has been impacted by those volume effects and also by some product mix effects. That is particularly the case for BPS and I think more details later during the call.
Last week, a week ago, we have, therefore, adjusted and lowered our 2023 outlook in regards to the shift in percentages, a bit more in LPS, but also for the profitability. Again, unfortunately because of the momentum not being at a level that we had expected.
For 2024, we are expecting profitable growth. And also for the midterm, nevertheless, we are reviewing our 2025 ambition and we'll give quantitative updates and guidance for both 2024 as well as for the midterm by the end of January next year when we'll publish our preliminary results for the year 2023.
So, however, let me finish this part by saying we consider, as we always have underlined during the calls about the previous quarters. We consider the fundamental growth drivers to be intact. But at the same time, we clearly have to say that we still are in times with above average volatility in regards to demand, partially triggered by, let's say, segment external effects, particularly geopolitical and geoeconomical uncertainties and tensions.
So and with that, I hand over to Rainer for the details.
Rainer Lehmann
Thanks, Joachim. And also, first of all, welcome to today's earnings call from my side as well. Actually, it's going to be my last call in my current position, and I want to actually say a quick thank you for the good exchange over the last six years, and I'm sure we'll see each other on one of the other conference out there. So but now let's go back to business here and see what actually the first nine months performance was about.
Sales revenue declined in constant currencies by 16.4% to EUR2.5 billion. Order intake decreased by 28% in constant currencies to EUR2.2 billion, clearly the reflection and of course, the result of lower-than-expected recovery. This led to an underlying EBITDA of EUR733 million, that's a margin of 30.3%, a decrease of 30.3% and a drop in margin by five percentage points to 28.8%.
The underlying earnings per share for the ordinary is EUR4, so it's a drop of 45%, respectively, the preference EPS is a cent more EUR4.01 also dropped by 45%. [indiscernible] sales revenue was impacted by roughly a little bit over 1% for acquisitions. And without the Corona-related business last year, keep in mind that this year, we are not tracking this anymore because it's really marginal, the sales decline would have been slightly above 10%.
If we look as always and put this whole thing into perspective, we see here that on the sales revenue side the decline, but more important, as Joachim pointed it out, the -- let's say, the bottom out of the order intake Q3 was on the bioprocessing side is the strongest quarter. And therefore, we believe that this is now the bottom out of this development. Rene will later on explain more about that when he's talking about SSB respective bioprocess side.
When we have a view at the regional distribution, we really can say that all regions have been influenced by the destocking. And on top of that, the regions USA and China also are, let's say, struggling a bit more with the low investment activity of our customers.
What does that mean region by region? Let's start from the left on the Americas side. Here, we really have a decline of 12% to EUR973 million. Both divisions actually have the lower revenue here. Joachim mentioned on the LPS side, we're really seeing quite a lot softer demand, specifically it was on Biologics portfolio and the investment reluctancy on the smaller biotech customers.
In EMEA, we actually have a decline of a good 15% to EUR973 million. Here, the significant driver is really on the bioprocessing side due to the higher comps. But also, let's keep in mind that the Russia business we see on the top line was approximately good three percentage points due to the fact that the business here is decreasing as expected.
In Asia-Pacific, we have a more significant drop compared to the previous nine months period of 23.4% to EUR600 million. Here, we really have the impact of the weak business performance, specifically in China. When we look on the sales by region compared to year-end '22, we actually see Asia-Pacific drop by two percentage points to 24%. In each of the other regions, EMEA and Americas gained one percentage point to 38%.
On the Bioprocess Solutions, Joachim mentioned the upfront. It's really the slow recovery in the ongoing destocking and the relatively low production levels of our customers that lead to a poorer or weaker performance.
Let's start in the middle. Sales revenues decreased in constant currencies by almost 18% to EUR1.9 billion, approximately two percentage points were contributed acquisitions. And the Russia effect is also actually counteracting that by also close to two percentage points. Excluding the COVID business that is included in the comparable of previous year, the decline would have been slightly more than 10%.
The order intake overall decreased by almost 29% to EUR1.7 billion. Nevertheless, the order intake is up quarter-over-quarter. I just mentioned it, Q3 was the strongest quarter on the bioprocessing order intake, but still impacted by the destocking, lower production levels and a muted investment activity.
And we see really there's a demand recovery, but a little bit slower than expected. What does that mean? For the profitability of the division, the underlying EBITDA also decreased by almost 33% to EUR592 million. This corresponds to an EBITDA margin of 29.7% and here clearly a loss of six percentage points.
As we mentioned in earlier calls, the economies of scale, of course, work in both ways due to the drop in volume and also due to an unfavorable product mix where we see a bit more instruments and systems. These are the two contributing factors to the lower margin.
If you look at the Lab Products & Service division, we see here sales revenue declining by a good 11% to EUR553 million. Excluding COVID related business, the decline would have been around 9%.
Order intake is really impacted overall by weak end markets and low investments by early-stage biotech companies. And here from the regional perspective, we have to point out China and USA. So that led to a decrease in order intake by 24% to EUR493 million. Nevertheless, the underlying EBITDA could actually be held on a satisfaction level. The margin is almost only one percentage point lower at 25.6% and amounts to EUR141 million.
If you look at some key financial indicators, we, of course, see here a high investing cash flow driven by the acquisition of Polyplus. Total investing cash flow amounted to almost EUR2.7 billion, and of course, the substantial CapEx program that we are running and that we highlighted also in the previous quarters.
Nevertheless, let's also have a look. Despite a quite significant drop in the underlying EBITDA of around 30% to EUR733 million, we actually have an increase in the operating cash flow of 20% to EUR543 million. That is really due to the fact that we really now have a strong focus on internal cash generation.
Keep in mind, nine months '22 were heavily affected by an increase in working capital of over EUR300 million. Nine months 2023, we actually see here a positive effect out of working capital. And we believe there's also further room for improvement to generate further cash out of the -- not only stringent cost management going forward, but also further optimization of the working capital.
The extraordinary items are driven by the acquisition amounted to EUR96 million. And of course, with the integrations, the structure measures and further corporate projects. The financial results, keep in mind here that, of course, we have now a substantial higher interest expense since we issued the bond. But nevertheless, here, we also see the fluctuation of the beer separations earn out liability as we did in the previous quarter.
If we look at the balance sheet, of course, here, we see the drop as expected in the equity ratio from 38% to 27.6% is clearly due to the increase of the balancing some driven by the acquisition of Polyplus. Net debt, of course, as expected, is a little bit higher than EUR5 billion.
And net debt underlying EBITDA amounts to 4.5%, of course, a high leverage. We anticipate it to be lower, but due to the weaker performance this one will also still go a bit higher, but we have a clear intention by generating operating cash flow. And you see that on the right-hand side, to deleverage until 2025 to stay in a solid investment grade level, which would mean a net leverage of three. And so, therefore, we do not plan any equity measures.
And with this I give back to Joachim for the outlook.
Joachim Kreuzburg
Yes. Thank you very much, Rainer. So we have updated our outlook for the year 2023 a week ago on October 12th. And here, you see it in a graphical presentation again. So for the Sartorius Group, we are now expecting a sales revenue decline by approximately 17%. The effects from COVID, respectively, acquisitions remain at the same size. So five percentage points, respectively, two percentage points. For Bioprocess Solutions, we are now expecting minus 18% and for the Lab Products & Services division, minus 13%.
And as I said at the beginning, there is also a certain effect on the profitability that we are expecting, which is now from the bottom to the top for LPS, slightly above 25%, slightly above 29% for the Bioprocess Solutions division and for the group overall then slightly above 28%. The comments related to the COVID business are the same. We expect this to be absolutely marginal for the year 2023. The same is regarding our activities around CO2 emission intensity reduction.
And when it comes to the CapEx ratio, we now expect a one slightly above 17%, which is only or exclusively attributed to the lower sales expectation now. We, of course, are managing our CapEx carefully also going forward along the lines what Reiner already said regarding internal cash generation. Of course, we are adjusting our CapEx to the later-than-expected normalization. And therefore, again, this is only related to the sales development.
Net debt to underlying EBITDA, Rainer said it already. We expect this number to peak around the end of this year, and we expect the number slightly above 5%, and we will focus very much on a significant deleveraging of our balance sheet through internal cash generation.
So -- and then my last chart before I hand over to Rene, is about an extension of our CO2-related set of targets. We commit to extending our target set by -- targets that will be -- at least this is what we expect, approved by the science-based targets initiative.
That includes, of course, activities that we already have started regarding decarbonization together with suppliers and also customers. And one important factor, of course, is the energy side of our own activities. Here, we are shifting towards renewable energy sources regarding electricity.
We have already achieved quite a bit. In Germany, the large consumers are already using hydropower generated electricity, and we are going further into that direction. Overall, we aim to be climate neutral by the year 2045.
And with that, I would like to hand over to Rene for Sartorius Stedim Biotech.
Rene Faber
Thank you, Joachim. Hello, everybody. I will walk you through the Q3 results of Sartorius Stedim Biotech with similar dynamics as for the group described by Rainer particularly, Bioprocess Solutions division.
After the extraordinary strong 2022, sales revenues declined by 19% in constant currencies to EUR2.069 billion in Q3. The decline excluding COVID revenues, which were only marginal this year was slightly below 13% then at constant currencies.
Acquisitions contributed two percentage points to the revenues. The order intake decreased by 31% to EUR1.76 billion with book-to-bill ratio going up now from 0.8% after Q2 to 0.85% now after the first -- after the months. The Bioprocess division, Rainer talked about that. It translates there to a book-to-bill of 0.94% in the third quarter and slightly above one in the month of September.
Yes, we have seen some recovery in orders in Q3, particularly in September, but softer than we have anticipated. We see clients continue to reduce inventories. However, at slow pace than initially assumed, partly due to lower production levels. We expect the situation to slightly improve in the final quarter.
Moving forward, we continue to see a general reluctance in investing on part of our customers due to overcapacities that happens. We see that particularly in North America and China with less larger equipment projects compared to previous years.
The underlying EBITDA decreased to EUR594 million, mainly due to volume. The product mix, however, also contributed shifting more to the equipment in sales which contributed to the EBITDA margin decrease than being at now 28.7% after the nine months. Price effects on the procurement and the customer side largely offset each other.
The number of employees worldwide stood at slightly below 11,000, which is a reduction by more than 1,000 headcounts. We did mostly in operations where we have adjusted the capacities to the lower demand. Underlying earnings per share were at EUR3.47 compared to EUR6.58 previous year.
Now putting the numbers into perspective for the Sartorius Stedim Biotech, we see quite a strong sales increase over four years, almost doubled. And you see on the curve, the order intake normalization now flattening with slight increase in Q3 compared to Q2.
On the next chart, the normalization on demand, which we have seen going on since the mid of '22, continued across all regions in the third quarter. In the middle, EMEA, below prior year, as Rainer pointed out due to very high comps and also due to largely discontinued business in Russia weighing on top line with around four percentage points.
Americas impacted by destocking and lower investments, Asia, mostly impacted by China, where we see continued low activities and expect that also the recovery here will take longer than compared to other region.
Moving to the next chart, relevant profit totaled to EUR320 million compared to EUR607 million in the previous year period. Investing cash flow mainly reflects the acquisition of Polyplus as Rainer mentioned that. And ongoing substantial CapEx program, the ratio of CapEx to sales revenue was 17.9% higher due -- mainly due to lower sales level.
Now shifting to our focus to the internal cash generation, we are shifting also the CapEx timing in some of -- for some of our programs accordingly due to delayed demand operating cash flow slightly above previous year, three percentage points around pushing now the inventory levels now down after buildup during the pandemic to secure the product supply.
Looking at the financial indicators following the financing of Polyplus acquisition, the equity ratio stood in line with expectations and 33%. Net debt stood at EUR3.695 million, resulting in a ratio of net debt to underlying EBITDA of 4.0.
Moving now to the updated outlook. We now forecast a sales revenue decline of around 19%, excluding COVID-related business, a decline of around 14%. Acquisitions are expected to contribute around two percentage points to the sales revenue development due to lower expectations and expectations on sales and product mix effects, underlying EBITDA margin is then expected to be slightly above 28% now for the full year 2023. The CapEx ratio is projected then around 18% for the full year '23 and the ratio of net debt to underlying EBITDA at around 4.5% for Sartorius Stedim Biotech.
And with that I think we can move to Q&A.
Joachim Kreuzburg
Yes, exactly. We can move to Q&A. Let me just add one remark. I mean, today, our call is, I think, three hours earlier than usually and thank you for everyone who made it that you were able to adapt to this slight change in timing. I would like, before we start with the questions, inform you that we have a hard stop a few minutes before 2:00 P.M. CET because we then have to jump into another call that has been scheduled. So therefore but I think we should have sufficient time that means we have one hour now. Thank you.
Question-and-Answer Session
Operator
Ladies and Gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Odysseas Manesiotis from Berenberg. Please go ahead.
Odysseas Manesiotis
Hi. Thanks for taking my questions. I have two and a quick one, please. So first of all, taking into account your previous expectation of consumption exceeding this year's sales by EUR500 million as your customers are working on the inventories, do you still expect the return to underlying order trends to support the higher-than-usual growth here in either '24 and '25? How do you expect this to shape up? Secondly, given your recently tempered expectations against your still high leverage and unchanged three times net debt-to-EBITDA target in 2025, would you consider any methods such as raising equity to accelerate de-levering or do you still believe this is fully achievable using organic cash flow generation? And the last quick one. From the M&A contribution to orders in Q3 implied by Rainer, is it fair to assume that Polyplus orders in Q3 were around EUR15 million in terms of contribution to the BPS order intake? Thank you.
Joachim Kreuzburg
Yes. Maybe let me take the first two. So we indeed would confirm the view that the consumption of our products by our customers is significantly higher during 2023 and our sales revenue shows. And we think, overall, the number around EUR500 million is a reasonable assumption here. The question -- and then you said, okay, that should translate into an over-proportional growth, yes. The point is here in how far this will materialize within the fiscal year of 2024, and that depends very much on when exactly this effect then fully kicks in. So -- and I think you're closely following also statements by peers and customers in that regard. So that's a bit the question. But, yes, overall, we will see very significant growth from that. Again, in how far that exactly hits the two next fiscal years you were asking for that we will see. And of course as soon as we have more insights here, we will share that with you. I would like to confirm also what we expressed before when we were presenting and Rainer presented very much on cash flow related numbers as well as financial KPIs and net debt to EBITDA. First of all, we do not plan any equity measures at this time. And maybe on the Polyplus development, Rene.
Rene Faber
Yes. So when we look at the order intake increase in Q3 compared to Q2 roughly -- for Bioprocess Solutions division that was roughly 15%. I would say there are like three drivers for that increase. One is now returning orders for materials to refill the inventories. The other effect would be new business wins of new projects; and third, of course, Polyplus contribution as well. And I would say roughly those three drivers contributed on a similar level to that increase.
Odysseas Manesiotis
Thank you for the clear answers and Rainer best wishes in your new role. It was great having you around.
Rainer Lehmann
Thank you.
Operator
And the next question comes from Vineet from Agrawal. Please go ahead.
Vineet Agrawal
Hi. Vineet from Citi. Thanks for taking my questions. So maybe first on the business mix within BPS. I think your equipment share at about 25% is a little higher than most of your peers. Do you think that means recovery is a little bit slower for you in '24, given consumables probably expected to recover faster? And does that have any sort of implications in terms of margins? And then just staying on margins, can you give us some sense as to how we should think about 2024? Look, I know you're not going to guide on '24, but if you could give some sort of metric that X percent organic growth, which is mostly volume-driven can drive about Y percent improvement in margins, I think that would be really very useful.
Rainer Lehmann
Yes. So the audio was not that good. So I understood your first question. It's about kind of over-proportional growth of Sartorius during the -- in the equipment business. So the dynamics we see and that also, of course, impacts the profitability profile and the dynamics here. We compared to previous year, this year, see a quite lower investments of customers in equipment that is reflected in lower order intake than for the equipment this year. On the sales side, it's the opposite for the higher orders. We have seen in 2022 now being realized in '23, shifting the ratio of equipment within the portfolio and then impacting negatively the profitability. What we would expect then for next year to give you an idea about the dynamics, how we see that with increasing orders then for consumables and then going from a rather weak year of order intake equipment into then '24. This ratio should get back to normal, meaning that we will see a positive profitability impact here.
Joachim Kreuzburg
Yes. And on the second question, exactly as I said, it's not the point in time at which we can give a solid guidance for 2024. But maybe more qualitatively, the mechanism or the mechanics within our P&L, we consider to be fully intact. So top line growth translates in a quite significant way into additional profitability and the way how one could look at it is, just as you have seen during 2023 where we had to deal with a quite significant decline in sales revenue with an effect on the profitability, I would expect an effect of a similar magnitude and similar ratios in the case of the expected top line increase again. So maybe that gives you a little bit of feeling for how the mechanisms are. And please bear with us that at this point, we really cannot be more precise than that.
Vineet Agrawal
Thank you.
Operator
And the next question comes from Richard Vosser from JPMorgan. Please go ahead.
Richard Vosser
Hi. Thanks for taking my questions. Three, please. First question, just on the book-to-bill, obviously, in Q3 it went up nicely into the 0.9 range. How should we think about that in Q4? Should we expect a book-to-bill improvement so that you can get above one in the quarter? Second question, just on the remaining order backlog. I think at the beginning of the year, there was a 500 million backlog. And I think maybe there was 150 million to 100 million left going into the second half. So after Q3, is all the backlog gone so that we are sort of fully normalized? And then just in terms of timing of destocking, I think we'd be just interested in more color around that, just around whether it's Q4 destocking done, Q1, early Q1 or indeed slipping into Q2, that would be very helpful as well. Thank you very much.
Joachim Kreuzburg
Thank you for the questions. Maybe, again, we share a little bit the answering this. Maybe in general, first of all, I would like to differentiate a little bit between the two divisions here because coming back to, I think, our comments before, we have seen a challenging third quarter for the Life Science Research segment, which had an effect on our LPS business, where the book-to-bill ratio was relatively low in Q3 indeed. Whereas in BPS, we have seen a positive trend. And that, of course, was then also dominating the group's numbers as BPS is the larger division. And more specifically, we also have seen a book-to-bill ratio slightly above one in the month of September. Now you know that we always emphasize and I would like to underline that here again that it's not advisable in the business we are in to focus too much on short-term trends. And that, of course, particularly is the case when I'm talking about single months. Please just take this as an additional insight for why we are saying that we see quality the right trends and the expected trends. But again, yet not to an extent and with the momentum that we initially were expecting. So now, what does it mean for the book-to-bill ratio in Q4? We would say for LPS, probably another rather challenging quarter, whereas for BPS, and I think Rene expressed that, we do expect rather a further improvement yet on a, again, lower than initially. And initially means like during the first half of this year expected level. So that's on book-to-bill. And then, of course, this all again fits and is related to each other backlog. The way how I maybe would slightly phrase this differently is that we indeed had an excessive or unusually high order book that we carried also into 2023. And you are right, this excessive order book and while the order book has been substantially been reduced and the number has been going down a little bit further, now the question that you're asking is, is it all gone? And here, we would say maybe not all because then logically, we would say, well, back to normal in Q4. So there are probably still some pockets of excessive inventories at some customers left. And here the point is, and I think we have discussed this before, it also depends a little bit on whether some customers and some of those also have been making respective statements just recently, who have been involved in the manufacturing of Corona vaccines, now may have some inventories that were initially being dedicated to the manufacturing of Corona vaccines in some cases, like, let's say, standard sterile filters, for instance, can use them for other purposes. So therefore, the question of what is excessive stock at a customer is not a black and white number. So I hope I'm not overwhelming here anybody by details. We just want to give insights and add color so that you really understand the mechanisms behind. So I guess what we want to bring across is we are cautious in saying, it's all gone, yes? But we definitely would say it's going down further and has been going down further. And then the timing of restocking, maybe, Rene, you already talked about that. Maybe you give some insights where you see the mechanics there.
Rene Faber
Absolutely. So looking at the destocking, there's a few parameters to watch, and we try to get a better understanding with talking to our customers. One is, of course, is the level of inventories built up during the pandemic. Second is the target inventory levels and then the consumption rate. And what we see happening and how we see this, we have prolonged or softer recovery is that some customers have built their own inventories of final products, resulting then in less or lower production levels and less consumption rate of the materials. We see from some customers to further decreasing the target inventory levels. So the reach for the materials and inventory is then longer. And what we also see is a kind of a changing ordering pattern behavior is that customers are now rather placing more of smaller orders than it used to be in the past.
Richard Vosser
Thank you very much.
Operator
The next question comes from James Quigley from Morgan Stanley. Please go ahead.
James Quigley
Great. Thanks for taking my questions. I've got a couple, please. So just picking up on the last question in terms of the backlog now sort of starting to or potentially starting to decrease. Should we now be thinking that the historical relationship between orders and sales in terms of the sort of six-month lag or 6 months offset between orders recognize the sales should start to hold just start to come back? So third quarter orders this year should be informing first quarter sales next year. So is that relationship now coming back into play? And secondly, on the midterm targets, previously, you included about EUR200 million in the LPS division for M&A. How are you thinking about that going forward or generally, including an M&A portion in your guidance? And third, a quick one on balance sheet health. You mentioned you've got five times net debt to EBITDA by the end of this year, which is I think slightly ahead of expectations on the investor side. So can you talk to the speed of deleveraging and then also any sort of risks around that from an operational perspective, that may lead to either you not hitting the three target or even deleveraging faster than that? Thank you.
Joachim Kreuzburg
Thank you for your questions. So maybe I start with the last one. We have shown this one graph or I've shown it for both Sartorius Stedim Biotech as well as for the Sartorius Group, how we look on it from -- and I think we reiterated that when talking about the year-end projection that we think that there will be the peak and then the target for 2025. And I think that is a good indication for the speed at which that approximately will happen. It's maybe not advisable to use this as a yardstick on a quarterly basis. But on an annual basis, I think it's a good guidance to consider that as the speed at which we will reduce the net debt ratio going forward. So I would say it's quite a significant speed at which we will do this. And on lower levels, we have done that before. Also, in other cases, a couple of years ago, we were able, after more significant M&A to reduce our debt ratio very quickly to lower levels, and we are confident to being able doing this, this time as well. So you were asking for the midterm targets and then how far they would include certain portions of M&A. I would really like to ask for some patience here until end of January where we will talk about the midterm targets. I would like to add here, maybe a few thoughts, nevertheless, again, to be also transparent. First of all, we again would like to underline that we are very -- that we think very positive about the underlying market dynamics and the growth potential that they offer. We are also very confident about our competitiveness or positioning to participate in the -- this market growth. And I think for many years, we have shown that we are able to grow faster than the market, and we believe that we should be able doing so going forward as well. My third remark would be that back in -- or I go back even a little bit more. We have defined our 2020 targets beginning of 2012. Beginning of 2019 then when we were setting our guidance for the year of 2019, we then first time communicated our 2025 targets because we consider 2020 not to be any longer a midterm time horizon. So therefore, I think what we have is these sites that we are looking into the different factors from a quantitative view at the moment. As we said, we also have to think about what's the right time horizon to give you an idea where we are heading towards when we communicate at the beginning of 2024. So please don't misunderstand. Yes, I'm not saying here we will give -- we will choose the time horizon of 2030. That might not be the right situation at the moment in the industry to choose such a long time horizon, but we think about what's the right framework for doing that. And the reason here is that as we talked about before, maybe it's more likely that not at the 1st of January, everything is back to normal, that this will be rather a little bit more granular effect as also our customers and our peers are thinking about it, and I think we share that view.And that means that the -- how growth will look like in 2024, how the dynamics then will be in 2025 and beyond, that still might be a little bit are not volatile to an extent as we have seen it now over the last three years or so, but still maybe not fully normal and for sure, not maybe necessarily very linear. So that's why I think we really would like to ask for some patience. And then, of course, includes also what might be the order of magnitude for some M&A. And then finally, that leads me to my answer for your first question. How far order intake is a good yardstick for the next one, two quarters of sales revenue? And I would say it's not -- we are not yet there again that this is the best measure and best indicated to choose. I believe that within the next couple of quarters, we will increasingly get there, but yet it's not because yet order intake is still very much influenced by historical effects, i.e., overstocking and not already fully reflecting the future business expectation by our customers. Once this has been kicked in, then I believe order intake should become, again, a reasonable indicator for the business over the next couple of quarters. I hope that helps.
James Quigley
It has. Thank you very much
Operator
And the next question comes from James Vane-Tempest from Jefferies. Please go ahead.
James Vane-Tempest
Firstly, just on leverage. You say you don't plan to raise equity at this time, but if leverage is expected to be more than five times.Can you help us understand if it's still elevated in 2025, what could possibly be a threshold if you were to revisit this? So is it north of three times or whatever it might be in terms of thinking about equity as a way to potentially strengthen the balance sheet? Secondly, you say in the release that the visibility and predictability is lower. I guess now we're mid-Q4. How much visibility do you have, say, to the end of the year? And I understand obviously, the order intake is higher in September. And if you're thinking one to two quarters, potentially delivering on some of that. And I imagine that some customers might also be looking at their working capital. So what's the risk that some of the orders potentially say, in December, would slip into January in terms of managing balance sheet end dates and how to think about that, please? And can you also give -- finally, my final question, can you give us a bit more details to what you're seeing in China and how to think about that business from here? Thanks.
Rainer Lehmann
Hi, James, Rainer. Maybe I'll take the first question regarding the leverage. So as I outlined before, we have a clear deleveraging strategy that is based on internal cash generation. So basically, really adjusting cost base where needed, improving working capital and of course, also revisiting the CapEx program and see what we can actually optimize on the timeline. Both all these components, we believe and our explanations are there that by 2025, we should be at an investment-grade level, meaning around 3 or 3.0 in this regard. So what is the fallback plan? I want to be very clear, it's only a fallback plan. It's not any part of our really operational projections or ambitions here is as last resort, we would use probably the shares, but this is not part that is on the agenda right now. We are confident that we will be able to deleverage through our increase in our operational efficiency. I want to be very clear here. And the other ones were -- we'll go to Rene, Joachim.
Joachim Kreuzburg
Yes. Maybe I'll start before Rene. Maybe talk a little bit about how we see China at the moment. So you were asking for whether some customers might be very cautious in regards to their balance sheet management, working capital management and how they might -- and how far that might have an impact on the timing of orders. Difficult to answer. It's definitely the case. And I think we said that before that we do see cash-oriented behavior at customers at a completely different level in these quarters now, of course, also following general uncertainties, following also high interest rates. So we do not anticipate at this point this to be a major effect towards the end of the year because, as I said, we are seeing this now already since a while. At this point, we don't have any indication that this will become a major effect for December then in particular. Yes, maybe some color on the China business, Rene?
Rene Faber
Yes. Absolutely, I think it applies to both divisions that China with quite low activities and low investments for both businesses. For Bioprocess Solutions, definitely overcapacities installed during the pandemic. We also see customers kind of reevaluating the pipelines of the trucks. And yes, overall, regarding the recovery in China, we would expect that it's going to take longer than in other regions, partly also due to lower consumption levels. So the overstocking inventories are -- we see them in China, but also the consumption is definitely slower than in Europe or US
James Vane-Tempest
Just a quick clarification, if I can, just on the leverage question. When you talked about one of the options potentially revisiting CapEx to optimize on the timeline, are you essentially saying that looking at capacity expansion plans, you'd potentially to push some of those out a couple of years just to help me understand what that means?
Rene Faber
Yes, it basically means, I think we shared with you the main capacity expansion plans. Most of them are at existing sites where we are expanding our capacity plus then as a major new site that we are building up at the moment is one in Korea. And of course, for all those projects, we have certain levers in accelerating certain execution or slowing it down at certain periods in time. It's -- all those projects have some flexibility here. And of course, we are adjusting the timing of when we believe we need the respective capacity to be really available a bit, and that is what we are working on and what will be one element of what we call internal cash generation optimization.
James Vane-Tempest
That's great. Thank you.
Operator
And the next question comes from Oliver Metzger from ODDO BHF. Please go ahead.
Oliver Metzger
Good afternoon. Thanks for taking my questions. So the first one is, given the recent development, which inventory level at customers do you see it being normal before the pandemic, you talked about six to nine months. So do you believe that currently with, let's say, three to four months is the new normal? And second, it would be the great to know -- great to get some insight about the destocking pattern on different client categories? So in particular pharma there is CDMOs and the last question is to ask about price discipline in your industry. So given the lower than taking destocking, so do you see some penalties that price discipline in particular for upstream deteriorate? Thank you.
Rene Faber
Yes. Maybe I take the one on the destocking dynamics for different customer groups, segments. What we can see today is that maybe the earliest recovery we see comes from large pharma and larger CDMOs followed by particularly smaller CDMOs where we see certain impact of lower demand from small biotech companies, which bring projects in preclinical development. And there we definitely see an impact, difficult to quantify that. But I think that gives a bit of a different dynamics in, yes, those smaller CDMOs is less yet contracted capacity in commercial manufacturing compared to the larger players.
Joachim Kreuzburg
Yes, maybe inventory levels, if we got the question right, I would say we would consider that -- and I think Rene elaborated a little bit on that as well before that the customers have defined their target inventory levels around the level that they had defined before, maybe some, again, talking about high interest rates, et cetera, have become a little bit more ambitious here or still about to become a little bit more ambitious. Hard to say, well, that a certain whatever number of months three, four, whatever would be the target inventory level at customers, I think it really differs from customer to customer. It really differs from product segment to product segment. But in general, we would say that what we have seen is that, whereas during the pandemic and at the very early phase of the pandemic, customers increased their target inventory levels very significantly and some said that, well, maybe after the pandemic, we will reduce, but not fully back to the previous levels. I think we now have seen that they are going down to the previous levels and maybe -- and then again, it differs from customer to customer, maybe a little bit further. But again, hard to say, well, this is the number. Pricing, again, not 100% sure as the acoustics were a little bit bad here. Pricing, I would again confirm that we have balanced what we have seen on the cost of goods side and other cost factors by our respective price increases of our products. We are in, of course, very close exchange with our customers and believe that this has been very much characterized by a partnership approach with our customers and has been well accepted. And of course, at the moment, we would say this high time of the inflation is probably behind us. So we wouldn't see any major pricing initiatives for the next couple of months, maybe more back to our quarters, more back to normal, but I think we all know what's going on in the world. And if there is another shock on energy prices, et cetera, we have to see what happens. But at the moment, I think it's the pricing level also the pricing trend is rather back to where we have been before.
Oliver Metzger
Okay. Thank you. So therefore no price pressure, just to clarify, or no incremental price pressure? Hello? Can you hear me?
Joachim Kreuzburg
Yes.
Oliver Metzger
Okay. Sorry about that. Obviously the line got bad. So just to clarify, you don't see any incremental price pressure arising over last month?
Joachim Kreuzburg
Okay. Sorry. Sorry, yes, exactly. That's correct.
Operator
Okay. Thank you very much. And the next question comes from Charles Pitman from Barclays. Please go ahead.
Charles Pitman
Hi. Charles Pitman from Barclays. Thank you very much for taking my question. Maybe just first on China. I was wondering if you could provide any kind of further breakdown on which levels of the business you are facing kind of most competition from local private players in the area and how you -- whether you can update us on how you're thinking about potential for market share gains post pandemic? Second, just ahead of the kind of US election year next year, how are you thinking about the outlook of the kind of funding environment? Is there anything you're hoping to see or not see? And what impact would that be, if any, if the IRA is going to push back on during the election debate? And then just finally, a quick clarification. In terms of the setting of your midterm guidance, are you going to be consulting with incoming CFO, Florian Funck or is there a risk that these could be adjusted when he comes in? Thank you.
Joachim Kreuzburg
Yes. So maybe China, Rene?
Rene Faber
Yes. On the local competition. So what happened is that during the pandemic time and broken supply chains, the local competitions, competitors gained quickly on market shares, where we partly preferred to as an alternative to multinational suppliers like Sartorius. We see today that stabilized very much. Even I would say there is a slight trend backwards now when the supply became much reliable, much more reliable again. The customers in China are returning to higher-quality suppliers as well. But of course, there was a certain level of local competition going on moving forward here, but it's today definitely not impacting our business in a certain way in China. That's very much what we see is the market slowdown and not are losing any market shares to local competition.
Rainer Lehmann
Yes. Regarding your second question, I have to say, unfortunately, our crystal ball doesn't help us much here. So it's very difficult to, I think, have any -- or derive any quantitative scenarios from any possible outcomes of the US election next year. What I would say, because I fully understand your point regarding funding environment. That's clear. And there, maybe how you would see it is, it has been at a very, very high level during particularly in 2020, where it started 2021, very high, still to quite some extent, a very well-funded small biotech companies and others in 2022 after the highly available money for this space before. So we have to keep in mind the levels were very high. Now we see this correction during 2023, but we would expect that the general trend, given the fact that this segment, this industry is still very, very innovative, there are a lot of very promising projects in the pipeline. When you think of dementia, for example, when you think of certain cancer types, name it, there are so many diseases where still better therapies are in need. Again, all this within the context of a very clear and significant demographic trend. And when you then see how many new modalities are in the pipeline, how many also still maps are in the pipeline with promising features. We believe that this underlying momentum is still there, and that is maybe as important as an outcome of the US election might be. So that is how we see it that there is -- we again have to differentiate between this correction at the moment and the general underlying trend. And of course, Florian Funck, he will join in April of next year, but he will be available and involved, of course, to some extent, in the weeks and months before. So I would not expect any effect from his -- from him formally joining at the 1st of April next year.
Charles Pitman
Thank you very much.
Operator
And the next question comes from Sezgi from HSBC. Please go ahead.
Sezgi Ozener
Hi. I hope you can hear me. Thanks for taking my questions. Just two questions from my side, please. First of all, the CapEx ratio being higher versus what was guided in previous year, the 17%. How should we justify like the outlook forward and has there been -- I mean, if my numbers point me correctly, there seems to be a higher capitalization here because the free cash flow yield I'm getting into is quite lower than what would be implied. So just basically to put it shortly, after the 17% CapEx ratio, what should be the ratio going forward? What should we assume the ratio to be going forward? And do you have an internal threshold of minimum return on investment capital on this? I'm sure you know exactly where this question is coming from looking at overcapacities, you also have been just specifying internal minimum return on investment capital ratios. And what will be your strategy going forward? And the second question also is in a similar area. I'm seeing low single-digit free cash flow yield for the first nine months, even though inventories have been lower working capital has been lower. What will be the main driver of your deleveraging given with regular maintenance CapEx, the free cash flow generation remains relatively low?
Rainer Lehmann
Yes, sure. So thanks for those questions. So CapEx outlook going forward. Again, this is a part of our guidance that we will give in three months from now. However, I think it's reasonable to assume a significantly lower CapEx ratio than we are expecting now for the full year of 2023. And give us again a bit time before we are more precise. But yes, the ratio will be lower and quite a bit. The threshold, of course, as you would imagine, as we make always DCF calculations for all such investments, if you really ask for threshold, then it's -- that we want to see a return that is higher than our cost of capital, that's clear. But then, of course, it depends very much on the type of investment we are talking about. As you can imagine, there are a couple of investments that have very significantly higher returns on investments, very short payback times. Others are of a different nature and it's more an infrastructural investment. So it depends a bit, but the threshold that you are asking for, of course, is always the cost of capital. And on average, of course, the return is significantly higher. Deleveraging and you're asking for the main factors here. It's both. Of course, we are working on the reduction of the net debt. But of course, the EBITDA, so a higher profitability or higher profit is the main factor here as well which, again, then of course, is, to quite some extent, volume driven. But we are also and I think it has been pointed out by Rene when walking you through the bioprocessing, respectively SSB numbers that we are also working on our cost measures -- have been working on customers continue doing that, increase our productivity. So it's, let's say, all through the P&L to improve profits and the levers for the reduction of our net debt. Of course, then it's also the profit to quite some extent and a significantly higher profit than CapEx or any other investments will be next year. Working capital, we believe, also has quite some potential going forward. I would like to remind you that during the pandemic, we have been intentionally driving up our inventory levels quite a bit, which paid out in a sense that we had lower delivery times than I would say, most of our competition. And you could see this in -- or this was reflected in our business development. And as you can also read from our working capital numbers at the moment, this is not fully out of the balance sheet yet. So there is also some further potential. So quite a number of levers that we are using for running down our leverage.
Sezgi Oezener
Thanks. So to wrap it up, you are seeing more room to improve further to working capital and more room to cut costs further on top of what Rene described in the BPS to 10,000 FDE and lower capacity by postponing?
Rainer Lehmann
Right.
Sezgi Oezener
Lower CapEx. Yes, okay. Thanks. Thanks very much.
Operator
And the next question comes from Falko Friedrichs from Deutsche Bank. Please go ahead.
Falko Friedrichs
Thank you. Two questions, please. So firstly on LPS. It sounds like Q4 is another challenging quarter on the book-to-bill. When do you expect this to inflect to improve again? Can that improve meaningfully in the first half of next year or is that rather something that could happen in the second half of next year? And then secondly, on your 2023 guidance for the group, given that you're now three weeks into the fourth quarter, can you give us a feeling for how bullet proved this guidance? Is there is clearly a bit of a concern in the market that you might not get to the guidance, right? It implies a bit of improvement in BPS in Q4. How much visibility do you have there? And how much comfort can you give us at this point for your '23 guidance? Thank you.
Joachim Kreuzburg
Yes. So LPS you referred to the book-to-bill ratio, which has been not satisfying during Q3. And we indeed said, well, also Q4, we don't expect to be particularly strong. We don't expect a step change at the beginning of next year. We rather would expect a gradual improvement and a stronger second half than first half. So maybe that is how I would phrase that. Typically, what we have is that both the first and the last quarter of the year are the strongest quarters. So and maybe that will look a little bit differently next year, at least with regards to the first quarter. Difficult to be a bit more precise at this point because the lab division has a significantly lower portion of longer-standing orders. So therefore, the cycle at which things develop are a little bit shorter, but that is our current thinking here. And on 2023, well, we are confident that we achieve this guidance. And it's, I mean, we gave it a week ago. So maybe you can understand that there is not much more that we can add at this point.
Falko Friedrichs
Okay. Thank you.
Operator
And the next question comes from Paul Knight from KeyBanc Capital Markets. Please go ahead.
Paul Knight
Hi, Joachim. It's great to hear from you. And the first question is, we had a record 20 biologics last year approved in the US were almost 17 already. Are you seeing the effect of these record levels of approvals in North America? And then the second question is, when will GLP-1s be significant? Will they need to go oral for it to have enough impact on your filtration business?
Rene Faber
Yes. Thank you very much for the question. I take both of them. So first maybe on the GLP-1. We have -- it's a molecule processes, which is different to a typical biologic sale culture. However, as you pointed, there is use of filters where we participate in these manufacturing processes as well. And we'll, of course, then participate in the growth of the volumes moving forward. And on the first question, the biologic approvals, I would say, back to what Joachim said about the fundamentals of the market being intact. I think it very much shows or demonstrate these fundamentals. And of course, we will see also growth drivers coming from these new approvals.
Paul Knight
Okay. And I guess, your thoughts on bioprocess market in past has been somewhere around double-digit growth. I'm assuming that that continues to be your view long-term?
Rene Faber
Yes, would be double-digit range, yes.
Paul Knight
Okay. Thank you.
Operator
And the next question comes from Oliver Reinberg from Kepler Cheuvreux. Please go ahead.
Oliver Reinberg
Thanks very much for taking my questions. Firstly, just on market shares. You obviously have gained some kind of market shares when there was shortage in the system. And you also just talked about that you have better delivery times. So can you just discuss do you see any kind of accounts where you're seeing kind of a reverse of market shares back to the original supplier? And if so, how meaningful is the current headwind from that? Secondly, two questions on product groups and Polyplus, can you just talk about the dynamics you're seeing and to what extent Polyplus is exposed to current market weakness? And also, can you give us any kind of sense in terms of how significant the decline in bioanalytics business in LPS has been?And third and last question, just on leverage. Can you just give us any kind of flavor on how to think about adjusted interest cost for next year? Is EUR 190 a reasonable assumption or should it be more? And also, can you give us an indication what is the share of variable debt now after the refinancing? Thank you.
Rene Faber
Okay. Maybe let's start with market shares and Polyplus. So good question on the market share. Thank you for that. Absolutely, we've seen gaining market share due to available capacities during pandemic. What happens after that, of course, is not everything stays and some customers go back to the primary supplier, but there's a reasonable portion of the market share we keep or kept after the normalization. And on the Polyplus dynamics on that business, what we can say is that very much intact and as expected, good progress in the US, Europe, where we see impact indeed is as for all other businesses is China.
Rainer Lehmann
So I can talk about the interest rate basically. So when you talk about interest expense or let's put it that way, we're slightly on the overall debt. You can calculate with slightly below 4% interest rate. 85% is a fix of that. So to help you out here, if you would add 10% to your EUR 190, you'll pretty much be there where we think we're going to end up next year on the interest expense rate.
Joachim Kreuzburg
Yes. And the third question would be then the last one to answer about the design of our analytics business. So the overall decline in LPS has been around 11.5% in constant currencies. We have the bioanalytics business and the lab essential business, both with quite a bit of equipment in there, particularly in bioanalytics, a lot of equipment. And then we have service business. Service business has been growing at a healthy rate. That means that the other businesses have been in decline at a little bit higher rate than the division overall. So -- and that is also what we would report for bioanalytics, so decline in 2023 so far, a little bit higher than the number for the division in total. What I think is worthwhile to mention here is that, particularly for the two largest single product segments within bioanalytics we have seen let's say, very healthy double-digit growth rates in the period before. So it also had quite high comps, I would say.
Oliver Reinberg
Perfect. And can I just follow up when it comes to market shares, is it all done? Or do you still expect some kind of market share normalization over versus going forward?
Rainer Lehmann
Yes, I would say this is done. I would also say that we continue gaining market share in some areas.
Oliver Reinberg
Perfect. Thank you.
Operator
And the next question comes from Le Louet from Societe Generale. Please go ahead.
Delphine Le Louet
Yes. Hello. Hi. Good afternoon, everyone Two follow-up questions, please. One, regarding China because I just got the feeling that the floor is not yet there. And so I was wondering what sort of visibility and specifically into the LPS division you have into this APAC division? And second question, Rainer, prior you leave and thank you for everything. There is a lack of flexibility at the gross margin level in between Q2 and Q3. And so I was wondering if you can guide us through the evolution of the mix that makes the collapse so important at the gross margin level in between Q2 and Q3. So any idea or any thoughts would be very much of interest in the future.
Joachim Kreuzburg
Yes. Maybe on China, in addition to what has been said already, the market environment in China has been increasingly challenging during 2023. And I think this is something that I'm sure you have heard a lot from other players in the industry, both our peers or our customers. When you read through the more recent economic reports from China, they at least report higher than initially expected growth for the entire economy. But I would say, so far, we haven't seen that in the biopharmaceutical sector or in the life science sector. All this, again, and I think we said that before, based on very high comps, there have been very high investments in China, both into research labs as well as into manufacturing sites. So that is for sure one factor. So therefore, when you say, well, maybe we haven't seen the bottom yet or at least the end of this very low demand trade in China that might be right, I think this is also something how we would see China at the moment. You said, okay, visibility. Well, visibility is as you can imagine, limited. It's difficult to make really any predictions here, particularly as you're asking for LPS, again, a relatively short business cycle. There is not much lead time. So very difficult to use any early indicators here at this point. Of course, again, also for China, the fundamentals are strong when you consider the size of the population, the fact that this is a rapidly aging population again. So there is a tremendous need and also the Chinese policy to become more independent from external supply of medicines. So all that is -- that are positive drivers. At the same time, of course, the question is in how far potentially there will be an impact from the overall economic tensions that we see and certain restrictions may play a role. So that makes it really very difficult. But as you were using APAC also when you were phrasing your question, we would strongly like to differentiate between China and the rest of APAC. So that is very important. The rest of APAC overall is doing well. It is China that is a challenge at the moment. And then maybe Rainer for the last question.
Rainer Lehmann
Yes. So basically, we're in gross profit, fairly easy explanation as oppose to small impact from, let's say, product mix, but that's neglectable. The biggest part here between Q2 and Q3 is, keep in mind, the purchase price allocation from Polyplus that is just for Q3 since we consolidate them since the middle of July, a good EUR20 million. And on a yearly basis going forward, you will see there are basically roughly EUR 100 million in additional costs that, of course, will be reversed on the underlying EBITDA. But that's really where you see this quarter-over-quarter big drop is related to the purchase price allocation and the corresponding amortization of that.
Delphine Le Louet
Perfect. Many thanks and good luck.
Rainer Lehmann
Thank you.
Operator
So there are no further questions at this time and I hand back to Dr. Joachim Kreuzburg for closing comments.
Joachim Kreuzburg
Yes. Thank you very much. And first of all thanks to everyone for your interest in Sartorius making yourself available at this a little bit unusual time for our call. Thank you also for all the questions and the discussions around that. Also thank you for your understanding that it is really unusually difficult to give precise guidance at this time. You can imagine it's -- we are also not really happy about the fact that we had to revise our guidance twice this year. So looking forward to continuing our dialogue latest beginning of January when we will be able to also then to talk about 2024 and our midterm outlook. Thanks again all the best.
Operator
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.
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Sartorius Stedim Biotech S.A. (SDMHF) Q3 2023 Earnings Call Transcript