Edited Transcript of SATG.DE earnings conference call or presentation 21-Jul-20 1:30pm GMT

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Goettingen Jul 25, 2020 (Thomson StreetEvents) — Edited Transcript of Sartorius AG earnings conference call or presentation Tuesday, July 21, 2020 at 1:30:00pm GMT Sartorius Aktiengesellschaft – CFO, Member of Executive Board and Head of Finance, Information Technology & Business Process UBS Investment Bank, Research Division – Co-Head of Pharmaceuticals […]

Goettingen Jul 25, 2020 (Thomson StreetEvents) — Edited Transcript of Sartorius AG earnings conference call or presentation Tuesday, July 21, 2020 at 1:30:00pm GMT

Sartorius Aktiengesellschaft – CFO, Member of Executive Board and Head of Finance, Information Technology & Business Process

UBS Investment Bank, Research Division – Co-Head of Pharmaceuticals Research of Equity Research

BofA Merrill Lynch, Research Division – Director in Equity Research and Head of the EMEA MedTech & Services Team

Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst

Good day, and welcome to the Sartorius and Sartorius Stedim Biotech conference call on the half year 2020 results. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Dr. Joachim Kreuzburg, CEO. Please go ahead.

Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [2]

Thank you very much. Welcome to our conference call here today. Good morning, good afternoon, maybe even good evening in some cases. As always, we would like to walk you through the H1 results for the Sartorius Group and also present to you the full year’s guidance for the Sartorius Group and after that, talk about the same, so the H1 results as well as the full year guidance for Sartorius Stedim Biotech. I’ll do this together with our CFO, Rainer Lehmann. And before I hand over to him to walk you through the results for H1 in detail, I just would like to talk about maybe the key highlights for the first 6 months of this year.

We have achieved double-digit growth for sales revenue, order intake and earnings. We also see good progress in the integration of the businesses that we acquired from Danaher. We closed that transaction on April 30. And the integration, as I said, is progressing very well, despite all this has to be managed in a remote mode actually because of the restrictions as you can well imagine, I guess.

The Bioprocess Solutions division, after already a strong start into the year, again, has seen a very strong second quarter across all product segments and geographies. After a strong order intake in Q1, we now have seen, again, a very high level of order intake partially related to COVID-19 vaccines and therapeutics so that we, therefore, on back of that, also have changed our guidance as we will talk about in a minute.

For Lab Products & Services, we also have seen a positive trend within Q2, also for the organic development of our business. And then, of course, on top of that, we have seen a very significant positive contribution by the acquisitions, particularly, of course, by the Octet business that we have acquired from Danaher for that division.

I mentioned already that on back of the strong development at — in the BPS division, we have increased our guidance for both sales and earnings also for the group then. We have communicated that mid of last week because of the significance of that change of our guidance already, but still walk through that in detail later on. I, however, and nevertheless, would like to underline that, of course, we still see significant uncertainties also in relation to all the restrictions and challenges that are coming along with the COVID-19 crisis at the moment.

So with that, we would now like to dive into the 2020 H1 results, and I hand over to Rainer.

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Rainer Lehmann, Sartorius Aktiengesellschaft – CFO, Member of Executive Board and Head of Finance, Information Technology & Business Process [3]

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Yes. Thank you, Joachim, and also welcome, everybody, from my side to today’s call. As Joachim pointed out, it’s very dynamic top line growth with a further margin increase. The sales revenue amounted to EUR 1.056 billion in H1, which is an increase in constant currencies of 17.9%. Keep in mind that as expected, close to 4 percentage point sales growth are from the inclusion of the biological industries business, which is included in these figures for 6 months, and also the acquisition of the Danaher Life Science assets, which we closed at the end of April. So therefore, it is included in these figures for 2 months.

The order intake rose or surged, you can almost say, by 27.8% to EUR 1.24 billion. If you look at the spread between order intake and sales revenue, it’s approximately EUR 200 million, which was, of course, also one of the driver to then increase the guidance, which Joachim just mentioned and he’s going to explain later on.

The strong sales performance increased overproportional our underlying EBITDA to EUR 293.5 million, an increase of 23.5%. Of course, main drivers here, economies of scale despite a slight negative foreign exchange impact. And let’s also keep in mind that the spending patterns in the last months have been, I would say, far from normal. So overall, margin at the end translated to 27.8%, which is an increase of 1.2 percentage points compared to H1 2019.

The underlying EPS for the ordinary shares are at EUR 1.81, an increase of 22.5% and respectively, for the preferred shares, EUR 1.82, which also increase of 22.3%.

If we go to the next slide, actually, let’s have a look at the regional performance, quite a great picture to see double-digit growth in all 3 geographies. Let’s start on the left-hand side with the Americas, where, of course, the lockdown had different impact to different regions. And I’m going to mention that as I go through the different regions.

In the Americas, the Bioprocess Solutions division did very well, significant growth in that area, whereas LPS business was impacted by lockdowns, especially in Q2. All of you who follow the news know that in the U.S., the pandemic has quite some significant impacts. And of course, here, research and development laboratories are quite not at the level as they were before the pandemic unfolded. So nevertheless, increase also in the Americas on the revenue side, supported by the acquisitions.

In EMEA, and I’m very happy to see this, increase of 16% to EUR 419.5 million. Again, really strong driven by Bioprocess and LPS demand is also driven by our diagnostic test kits and lab consumables, where, of course, this is also offsetting part of the product portfolio that has a little bit weaker demand, for example, our lab weighing business.

In Asia Pacific, we’re able to raise revenue by 18.4% to EUR 264.2 million. BPS here, clearly was the highest momentum, also driven with some project business. I’m going to mention that later on when we dive into the details of BPS. LPS demand stabilized. China was really gaining momentum, but not as strong as a recovery as we had hoped. You remember, at the end of Q1, it was really impacted majorly by the China lockdown. And we saw good progression in Q2, but, of course, far away from the levels before the pandemic. The regional split overall is pretty much stable. It’s the same as in Q1 2020 and also pretty much remains the same as in H1 2019.

As we come now to the performance of the Bioprocess Solutions divisions, as I said, very strong performance on all regions, but also across the whole product portfolio. Order intake rose by 33.5% to almost EUR 985 million, positively impacted by demand for COVID-19 medicines, which attribute roughly 7 percentage points to that growth. And of course, also, our — let’s say, the very good performance in Asia Pacific, and I hear also some strong project business attributed to that growth rate.

Sales revenue increased by 21.3% in constant currencies to EUR 809.3 million. Here, also 2 percentage points were contributed from the 2 acquisitions, Biological Industries as well as the Danaher Life Science asset, as we expected when we included that business. The underlying EBITDA margin increased by 29.1% to EUR 247.2 million, which is an increase of 1.7 percentage points to a margin now of 30.5%. Here, clearly, also the rise attributed to economies of scales, again, despite a slight dilution of the acquisitions. Keep in mind that especially the Danaher Life Science assets on the Bioprocess side has a lower margin than the Bioprocess Solutions division. And we also have a little bit of headwind from foreign exchange.

If we look at the details on the Laboratory Products & Services division on the next slide, we see still a robust sales development, one has to say, but in a very tough economic environment due to the pandemic with a dampening effect on the demand. Order intake overall increased by almost 9% in constant currencies to EUR 260 million. The acquisitions contributed close to 9 percentage points in order intake as well as on sales revenue, which rose by 8.1% in constant currencies to EUR 247.5 million. So organically, if you do the math, we are a little bit below previous year. But nevertheless, under the circumstances, a quite robust performance.

The underlying EBITDA pretty much on previous year level, EUR 46.4 million and in percent of sales decreased to 18.7%. Clearly, the — impacted by the lower capacity utilization, and of course, we have, as in the Bioprocess side, a little bit of headwind from FX effect. But on the circumstances, the overall underlying EBITDA, not too bad, I would say.

On the next slide, we will look at some financial key performance indicators. So the high earnings really paid into a very strong operating cash flow, despite a substantial increase in working capital of — if you look at the details, roughly EUR 180 million, which could partially be offset by the increase of our factoring program, which offset it by EUR 90 million. So operating cash flow at EUR 215.4 million, an increase of 30.4%.

Underlying EBITDA, Joachim pointed out at the beginning, I’m not going to say more to that right now. Extraordinary items increased substantially. But clearly, as expected, main drivers here are the M&A for BI as well as for the Danaher Life Science asset as well as some rebranding and smaller restructuring expenses.

Financial results was EUR 20.3 million as well. It’s substantially higher than the previous period in H1 2019, mainly driven also by, of course, increased interest expenses due to the — or deriving from the acquisitions, but also valuation expenses on the FX side from the loans that are held in foreign currency.

The underlying net profit could increase by 22.4% to EUR 124.3 million. And the reported net profit, you would see, is pretty much on previous year level, which was EUR 81.1 million. Here, actually, since we are expecting for year-end tax rate of 30% due to the accounting of some tax risks, we already applied this tax rate in H1 by applying the simplification rule under IFRS. Therefore, you see here the deviation between our reported net profit, which includes a 30% tax rate, whereas our underlying net profit has a tax rate of 27%. Of course, I can only point out at this point that for H2, we’re really going to evaluate if we might need to adjust our underlying tax rate for 2021. For 2020, we’ll leave it the way it is. And as I pointed out, we’re expecting it to be at year-end at 30%.

The investing cash flow, clearly influenced by the acquisition of the Danaher portfolio, EUR 850 million negative. The CapEx ratio, 8.5%, substantially lower than previous year, as expected to a certain extent, but of course, also driven a little bit by the pandemic. The investments have been a bit more cautious, whereas we expect them also to increase in H2. And Joachim is going to comment on that later on as part of the guidance.

On the next slide, we’ll look at some financial indicators. Equity ratio, 30.1%. Of course, the increase — or substantial increase in balance sheet, some puts the equity ratio a bit lower, but nevertheless, very healthy. Of course, nominally, it’s still the equity increase. Net debt is increased to EUR 1.67 billion. Again, here, the driver, the 2 acquisitions, but of course, mainly, the DHR — the Danaher portfolio, so that it results in our indebtedness, which is net debt to underlying EBITDA by — at 2.8, which we expected to be below 3.0, so clearly they’re where we wanted it to be.

And with that, I’ll hand back to you, Joachim.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [4]

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Thank you very much, Rainer. I would now like to walk you through the outlook for 2020 as we have changed it now based on our H1 figures. What you can see here is that we left completely unchanged, to start off with that, the impact of the acquired businesses. These are exactly the numbers that we also have provided you with after Q1.

For Lab Products & Services, we also confirm the guidance that we have given back then. So we expect 10% to 14% top line growth and the full year’s profitability of 20%, but we changed our expectations substantially for the Bioprocess Solutions division. We now expect a top line growth of 26% to 30%, which is 9 percentage points above the guidance as of end of Q1. And the majority of this shift is because of the high demand for products for the manufacturing for corona vaccines as well as therapeutics against COVID-19, like anti-viral products and such.

Following this higher top line, the higher sales revenues, we expect also the underlying EBITDA margin to be a bit higher at 31%. Of course, you will have noticed that our profitability after H1 already was above 30%, but we do see a certain change in the product mix for the second half of the year in comparison to the first half of the year. As we already said, based on the Q1 numbers, there is a substantial portion of project business and respective orders that we have received. And typically, these projects have a little bit higher — a lower profitability and profit contribution than the consumables business.

And then this sums up for the Sartorius Group at a shift of the top line expectation by 7 percentage points to now 22% to 26% growth in sales revenue, and then also by 1 percentage point higher expectation for our underlying EBITDA margin, which we now see at 28.5% for the full year.

The CapEx ratio, Rainer already referred to that based on the H1 numbers where it was at 8.5%. We still expect it to be at 10%, pretty much in line with our expectations, so no significant shift here. What needs to be said is that, as you can imagine, this additional demand is quite a bit a challenge for our manufacturing output and the respective capacity, so we might have to expand our capacities at some of our sites. We do not expect this to have a such a significant effect on our 2020 CapEx, but nevertheless, should be mentioned here probably. A slight change on our expected indebtedness rate. We now expect it to come in a bit below 2.75 instead of around 2.75.

Tax rate, Rainer talked about already. I don’t want to take that up again. I already mentioned at the beginning that, for sure, in these times, any guidance comes with a higher level of uncertainties than usually. So our guidance here, therefore, is based, of course, on the assumptions that both supply chains as well as all other parts of the value chain, so in particular, the production lines are stable and remain in operation.

Of course, a number of you already have asked for overview on the midterm guidance that we have given a while ago for 2025. And obviously, some have expected us to change this guidance now. We do not see any reason at this point in time. And the main aspect to be mentioned here are: a, that we cannot see any clear evidence that the current additional demand for — particularly for manufacturing devices and technologies for vaccines, lead to a sustainable shift of demand in that regard; and the second one is that, on the contrary, we clearly see that, maybe only visible and quantifiable in 2021 and 2022, there will be most likely some delay of new product approvals following the postponed Phase III clinical trials. So — and it’s absolutely impossible, I would say, to really quantify these different potential impacts at this point in time. And for sure, as soon as this will be possible, we might also talk about our midterm guidance and have a fresh look on that. But at this point, we do confirm it, but we don’t change it.

Having said that, I would like to move now to the perspective on Sartorius Stedim Biotech and walk you briefly through our results here. And as always, they are, to a quite large extent, at least in sync and in parallel to the development of the Bioprocess Solutions division that we have presented on already.

So sales revenue up by 22% in constant currencies. Order intake is 34% above previous year’s number. An overproportionate increase of our underlying EBITDA by 27.8% has led to an increase of the EBITDA margin by 1.3 percentage points. And also, overproportionate is the increase of our underlying earnings per share, which came in at EUR 1.82, which is an increase by a good 27.5%. Don’t want to repeat what Rainer already has said on the development of the business and the different factors here as well as on the — FX effect has been mentioned before.

Geographies, of course, are pretty much as the picture that you have seen for the group, but yet a few differences between the Americas and Asia Pacific regarding the different growth rates here. So the Americas have been growing by 22% — our business there by 22%; EMEA, 18%; Asia Pacific, 28.5%. We believe all very healthy growth rates within the respective market environment. Again, Asia Pacific project business is playing a particular role here. And as you can see from the pie chart on the right-hand side, we are getting increasingly balanced in regards to our geographical distribution of sales revenues.

Operating cash flow has been rising significantly also for our business in Sartorius Stedim Biotech by almost 28% to EUR 262 million. Extraordinary items very much because of the M&A activities, also quite a bit above last year’s figure of financial result has been commented on before, also above previous year’s number significantly.

Underlying net profit, again, up by a good 27.5%. The same comment has to be kept in mind here that Rainer made for the group. When you compare the development of the underlying net profit as well as — and the reported net profit yet, the difference of the actual tax rates for the group and SSB compared to previous year is a little bit different and, therefore, the relative development is also a little bit different here.

Operating cash flow, almost up by 40%. And also, here, you can see that we have, of course, a significant investing cash flow following the acquisition. At the same time, CapEx is quite a bit below previous year figure, but pretty much in line with our expectation, as you can see in a minute when I show the full year’s guidance to you.

Our financial position remains extremely strong, I would say, 58% equity ratio. Even after the acquisition, net debt, of course, is a bit up, but indebtedness rate still very low at 0.5%, so very robust numbers here.

And finally, I come to the outlook for the full year. And here, you see the same change as the one that I have presented to you for the Bioprocess Solutions division. So no change regarding the inorganic growth contribution, but yet a shift of our top line expectation by 9 percentage points predominantly because of the additional business following the corona — COVID — or COVID-19 crisis and additional demand coming from that. And because of this additional sales revenue that we expect, we expect the underlying EBITDA margin to come in at 1 percentage point higher than initially projected at 31%. Again, the comment regarding economies of scale to be a little bit lower than in the first half of the year because of the product mix aspect.

CapEx, we confirm to be around 8 percentage point — 8% for the full year, so below 2019, even though we might have to kick off some additional capacity expansions or pull them forward a little bit. And the net debt to underlying EBITDA, again, on the very detailed level, we now expect it rather to be a little bit below 0.5, instead around 0.5. And of course, also for this business, which has also some opportunities, obviously, additional opportunities within this situation has to accept a quite more unstable environment than in normal years. And of course, we pretty much base our assumption — our guidance on the assumption that there will be no severe lockdown anywhere. And therefore, supply chains remain stable as well as production lines in operation, both at our customers and for us — or themselves.

So — and then the midterm guidance for 2025, I elaborated on that a minute ago already for the group and can only underline that also for Sartorius Stedim Biotech, I think, hopefully, in 1 year from now or so, we will be able to sort out the different potential more — potentially more sustainable impacts or longer-term impacts from the current situation. But at the moment, this is a very current situation, and the current additional demand doesn’t necessarily lead to a sustainably higher demand, and that’s why we confirm our midterm guidance.

So — and with that, I think I finished my presentation and I’m looking forward to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from the line of Michael Leuchten of UBS.

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Michael Leuchten, UBS Investment Bank, Research Division – Co-Head of Pharmaceuticals Research of Equity Research [2]

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I have 2.5 questions, please. One, you were very clear in — around the Q1 results that we shouldn’t get too excited about the potential tailwinds for this year from the coronavirus pandemic. And then obviously, the ad hoc announcement the other week turns out the year is a lot more dynamic than you expected. So I was wondering about why you were so cautious in Q1. And how quickly that has changed and why? Any color on that would be very helpful.

And then the second question is around the composition of the order book. You did comment already that the mix is maybe towards projects more, so I presume that means fermenters and maybe bags and not too much consumables like filters. But could you maybe comment on vaccine versus therapeutic splits in that order book? Is there a skew in either way?

And then I do understand you don’t want to talk about 2025 at this point in time. But as we think about the pull-through into 2021, which part of these orders could indeed feed into 2021 as the projects placed turn into consumable orders in the nearer term?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [3]

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Yes, thank you for those questions. So to the first one, yes, absolutely. Of course, in a normal year, it probably would be quite a bit a — maybe a strange thing to change a guidance so substantially as we do it now from Q1 to Q2. Fully understand that, but — yet 2020 is not a normal year.

So — and I think, yes, normally, you would say, well, 13 weeks, that’s not a long time. But I think in this situation, 13 weeks is a long time. And we now know that vaccines are progressing through different clinical trials at a speed that hasn’t been seen any time before. And when we compare the respective situation today with the one, again, 13 weeks ago, it’s very, very different.

At that time, we haven’t seen this massive investment by big pharma into such manufacturers. We haven’t seen agreements between, for example, Lonza and Moderna regarding the manufacturing of that vaccine, et cetera. And therefore, this really — this situation has changed during that time. And therefore, also, we have changed our full year’s guidance in that regard.

Then on the — and maybe, if I may, I would like to — if I have understood your third question correctly in how far maybe parts of the order book will be like carried over into 2021, which is also the case at the moment is, that our customers, particularly for this additional demand, have very ambitious thoughts about delivery times. No wonder for sure, because in normal years, somebody would run a development campaign for a vaccine and then plan for process development, et cetera. And the visibility or the time horizon of such undertakings would be completely different from what we see today.

So — and therefore, today, and again, sorry, it’s not a normal year, it’s not a normal situation. But today, we wouldn’t, therefore, necessarily expect the carryover of orders into 2021 being extremely or extraordinarily high. But again, we will continue to learn during the next weeks to come until the end of this year, and let’s see what we will see happening within the next couple of months.

I definitely would also underline and repeat what we always have said in more general context. Not all of these products will be successful, not all of the vaccines that are under development will get market approval, not all of — maybe even some of the manufacturing lines that will be built up by then will not be fully utilized. So it’s — there are so many moving parts, unfortunately, really a little bit difficult to tell. However, tendency is very short, very ambitious delivery times that are expected by our customers at the moment.

And then on the composition of the order book, when we differentiate between projects and consumables, then I would say, the projects are really hardware heavy, but that doesn’t mean vax. Vax are also consumables, so it’s more larger systems. Very often, when we differentiate along the lines of upstream and downstream processing, quite a good portion of our projects are upstream-related when it is about larger fermentation trains, single-use products being used and run on these fermenters, but yet, first, these respective systems have to be set up. Some are also downstream like crossflow systems, where, again, then crossflow cassettes are used later on.

But this is a bit the differentiation. So projects are very much when larger production lines are being set up. And then later on, the consumable business follows. And indeed, we see quite a significant portion of hardware systems here that will come to delivery and will be invoiced in the second half of the year to a bit higher portion than is reflected in H1.

Vaccines maps, clearly, there is a certain shift towards vaccines at the moment. But still, maps are dominating the overall picture. Maybe that is also important to note here. I mean the entire world is, of course, and for good reasons, probably discussing the corona crisis and vaccine development and all, such we shouldn’t forget that more people — by far, more people are suffering from and dying from other diseases like cancer, diabetes, et cetera. And that’s why such medicines that are for the treatment of such diseases, very often monoclonal antibody-based, are playing a very significant role, but yet not too many people are talking about that at the moment. But still within our business, they still play quite a significant role.

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Operator [4]

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The next question is from Patrick Wood of Bank of America.

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Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division – Director in Equity Research and Head of the EMEA MedTech & Services Team [5]

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Perfect. I’ll keep it to 2, please. The first would be, I’d love, if you can, a little bit more color on some of the project work you’re seeing coming out of China and APAC, why you think that’s seen such a big inflection, how sustainable. And within that, did I hear correctly that you said about 7% of the order intake was a function of COVID? If that’s right, that would suggest, obviously, that the Asia Pacific project work there is a very substantial part of the step up. So any color on that would be great, as a first question.

And as a second question, just within LPS. I mean Q2 was actually a little bit better than I would have expected. A little bit of color helpful on some of that. And if I’m right, I think your current guidance implies organically, so ex the acquisitions and FX, a sort of flattish picture for the full year. Are you expecting things to get a little bit more challenging in Q3 or Q4? Just some context in terms of LPS for the balance of the year would be very helpful.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [6]

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Sure. Yes, thanks. So first question, China and Asia overall and project business here, yes, it’s indeed the case that, particularly China, but also some other parts of Asia, are still a bit in an early phase, I would say, to become fully developed pharma markets and particularly also for biopharmaceuticals.

China has started a good 5 years ago to really develop that part of their industrial landscape. I would say, if one imagines and pictures such developments as a kind of S curve, we are now in the steep phase of this S, very significant investments by also a lot of Chinese companies in manufacturing capacities, very often also now backed by own product development activities. So we will see an increasing number of new products that have been developed in China.

Going forward, most likely, we’ll see some of the corona vaccines now that will be approved probably coming and have been — that have been developed then in China, I could imagine. But the same is the case for monoclonal antibodies and probably other products going forward.

And again, when you see the size of the Chinese market in comparison to the size of the U.S. market and then compare the size of — the potential size of the home market, which should be very much determined by the size of the population, at least to quite some extent, then you clearly can see how much additional potential there is in China. And there is, of course, yes, I say, of course, because that has been the case in all other industrial segments as well that the Chinese government is following a clear policy to become independent, to a large extent, at least independent from imports. So therefore, there is a strong driver, and I believe a driver that will play a significant role for a number of years to come within the global context of the industry we are serving that China will expand its footprint in any respect in this industry.

And maybe then, one more aspect, we talked about that maybe already a couple of times within our — within these kind of calls. The customers in China typically don’t have such a long history and strong own backbone of engineers and scientists to build up such manufacturing sites. So they appreciate very much a solution offering as we have it. So really, helping our customers to design their manufacturing process and to set up entire manufacturing trains. And that is why we do quite benefit from this demand.

Then indeed, as we said, and Rainer said earlier today, we have seen around 7 percentage points of impact from additional demand from COVID-related business. And you’re right. I think you asked for that, that translates into quite substantial project business. And particularly, when you recall the number that we have communicated, almost 40% order intake growth for the Bioprocess division in the first quarter, yes, that’s absolutely the case. So again, that’s why we made our comment regarding product mix also.

LPS, yes, Q2 was better than Q1, and we also have seen a positive trend within Q2. We indeed expect a pretty much flat organic development for the full year. But yet — or but in — following a certain decline during Q1, still by H1, we are slightly behind organically. Expect a certain growth for the full year, so that means a certain, not very high, but still positive development during H2, and that’s pretty much as we see it.

We do see a nice development of our bioanalytics business. We see a nice contribution so far and expect that also going forward from the acquired Octet portfolio, so for the Bio — the former ForteBio business from Danaher, but clearly, a more difficult environment for all that business that is not related to the biopharmaceutical industry, and we expect that to stay a bit — a more difficult territory for the remainder of the year.

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Operator [7]

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The next question is from Richard Vosser of JPMorgan.

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Richard Vosser, JPMorgan Chase & Co, Research Division – Senior Analyst [8]

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First question, just on the integration of Danaher. Just — I think there were some comments in — during Q2 that, that was challenging because of the COVID situation. So just maybe you could update us on the integration there, please? And then just thinking about potential for higher CapEx needs next year and to meet the high demand, how should we think about that impacting the margin? Will we see some sort of pressure on the margin as you have to build up your sites potentially and have made the lower utilization?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [9]

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Sure. Yes. Thank you. So integration, Danaher — of the Danaher businesses is progressing really nicely. You’re right, we were saying 3 months ago that this would be, for sure, a bit of challenge because of the fact that this all had to be managed remotely. Now we can say that the first — now it’s almost 11 weeks or so or 12 weeks, I guess, almost of this integration have run very smoothly, pretty much based on the solid preparation for this integration together with the Danaher teams that had to carve out those businesses. So works very, very nicely. No major, yes, hiccups or so. IT systems have been transferred. Data has been transferred. Products are being produced, sent out, invoiced. Yes, so far, absolutely 100% according to plan, really happy about that.

Capacity, yes, a bit too early to quantify that in a solid way, but I wanted to flag that. And we would not expect, as of now, an impact on the margin. Following that, it would be — rather impact our CapEx ratio, but not our margin.

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Operator [10]

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The next question is from Markus Gola of MainFirst.

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Markus Gola, MainFirst Bank AG, Research Division – VP [11]

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So my first question is on the market environment and BPS in general. It seems that due to the strong industry demand, some of your competitors have already reached the capacity limit already for — at least for some products. So do you believe that this might be an opportunity for you to grab some market share as there’s currently a higher urgency to deliver products on time in the COVID-19 environment? I mean also, could you shed some additional light on your current capacity situation and what scenario you would reach a limit as well?

My second question is a follow-up on the sales split in BPS in 2020. Based on your current visibility, would you agree with the statement that the split between consumables and equipments could be rather 50-50 than the usual 75-25?

And then finally, on the COVID-19 vaccine opportunity, there are numerous potential modalities for the COVID-19 vaccine from mRNA to viral vector to DNM-based — DNA-based. So could you elaborate a bit how the wallet size for the single-use bioprocessing industry might vary depending on which technology the vaccine will be based on?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [12]

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Yes. Thank you very much. Quite interesting questions, indeed. So I would agree that there have been some, but I would say, rather isolated cases, where our competitors have seen certain constraints in their ability to deliver products. I rephrase this — or I phrase it this way because to our understanding, this partially had to do with local lockdowns and maybe also, in some cases, with problems on their supplier side.

I don’t see any competitor that really has systematically reached capacity limits. And — but of course, such situations can offer opportunities to gain some market share. But I’m sure you are fully aware of that there are very strong limits to that given the fact that customers run validated processes. So but yes, for sure, to some extent, in some specific cases, this can be possible.

Our own capacity situation is robust, I mean, you have seen in our guidance for this year. So we see ourselves in a position to add substantial to the output that we have seen during H1. I’ve built up additional shifts, for instance, in a number of our sites and are in a healthy position to manage this. But clearly, we have a policy and a way to handle that in a way that when certain capacity utilizations are reached, then this triggers the buildup of additional capacities. And that is why I said, okay, there are some areas where we now start to build up additional capacities to cope with that. But so far, we see ourselves in the position to manage this.

Yes, you are right in the general assumption that there is a certain shift in product mix this year, but for sure, not to 50-50. I would agree that it has been going into that direction regarding order intake in Q1. But for H1 already, order intake, and for sure, full year sales split will be, for sure, not that extreme. We will not see a doubling of our project business and like a stable consumables business or something like that. So it will not be 50-50. It will be much closer to 75-25, but probably a little bit less than 75% consumables.

And the different modalities, that is also, indeed, a very interesting aspect. So the — you can basically say that there is no fundamental difference regarding the need for products pretty much across our portfolio and for the fact that most companies are realizing their manufacturing by using single use technologies. There are certain differences, whether certain purification technologies are more important for one or the other modality, that’s for sure, but it’s not the case that mRNA-based vaccines, for example, would need more or less, single-use products than others. So that’s not a major impact yet.

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Operator [13]

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The next question is from Scott Bardo of Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [14]

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So first question, please. I think you’ve caveated this year’s guidance with some greater-than-usual uncertainty given the current COVID situation. But in your communicated release this morning, you highlighted that you entered into the second half with great confidence. So I guess the nature of the question is, is this a signal that actually, you could indeed see performance even higher than this maybe 30% growth in BPS? Is there a potential for that in your discussions and what you’re seeing this year? That would be helpful to understand and square those 2 comments.

The second question, please. Obviously, we’re seeing some spectacular growth in BPS yet again. And I guess it’s tempting for us as analysts and the capital markets to speculate that. When we look into 2021, we could even indeed see a similar pace of growth given you’re witnessing this growth now without really any meaningful production, high volume coming in. So I’d like you to share some comments about how we think about the normalized trajectory of this business? Is it that you’re a more preclinical or precommercial manufacturer? Or is there a significant opportunity to see higher volumes as we move into the commercial launch phase?

And last related question just really forms for the 2025 guidance. And I appreciate, again, this is somewhat of a long way away. But nevertheless, I think implied within that guidance was around EUR 2.8 billion BPS revenues by 2025. And if I’m right, I think your guidance at the high end implies about EUR 1.7 billion, EUR 1.8 billion this year.

So I guess in order to get there, you would need to see a deceleration of growth down to around 9 percentage points from 2021 and beyond, which is below what you’ve called out historically as an industry growth rate. So is it the fact that you’ve actually been understandably conservative? Or are you already seeing concrete discussions about delays in products that you would otherwise expect to manufacture that has caused this apprehension?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [15]

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Sure. Yes. Thank you for those questions. So first question, do we see potential to exceed the upper end of our top line guidance for the BPS division? I was referring to what we have learned from end of Q1 until end of Q2. So I would again say, times of high uncertainty, then, for sure, not times where one should exclude anything. But I would clearly also say that this would — as you, for sure, have done the math by yourself, would translate into a very significant growth rate in Q2. So we believe that is already quite an ambitious upper end, but I definitely won’t exclude anything year-to-date.

So then on the question regarding 2021, and if I got you right, you said, “Well, are we now increasingly involved into — in precommercial manufacturing also?” I think the — really, the difference here is, and the very special situation now is that we receive significant orders for the buildup of manufacturing capacities of a product that is not yet fully developed and still in some high-speed clinical trials.

So — and you are right. Normally, at that time, one would maybe receive some orders for some precommercial manufacturing for such clinical trials. But now the company has placed orders already for the commercial phase. So that’s really the very specific situation. And I believe that makes it really very difficult to solidly project the impact on the different quarters. And as life doesn’t end at the end of Q4 2020, it makes it also very difficult to make any predictions for 2021. So we will do our best as soon as we have more visibility, but it’s really a bit difficult.

And that indeed leads then to your third question. I think you did the math that — the fact that we confirm our 2025 guidance would translate into, as you said, a deceleration of growth for Bioprocess. That’s right. But again, it has to do with what I explained along our presentation earlier today that it’s hard to tell whether any of this additional business at the moment will translate into sustainable business, that is one thing.

And the other thing is, indeed, the impact from delayed product approvals. We haven’t seen any impact from that yet, but it’s difficult to imagine that there will not be any impact as pretty much all other clinical trials are postponed at the moment, apart from those for corona vaccines. And please keep in mind that our guidance also includes M&A, and that is another factor that makes it a little bit, yes, difficult to exactly project that.

Don’t get me wrong, we definitely don’t see any reason to change our strategy to add M&A and to add businesses due to our portfolio following our strategy, but just to keep in mind that there are a number of moving pieces. Again, I think changing guidance should be based on a bit more solid ground than we have at the moment, I believe.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [16]

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Yes. Very, very understandable answer. And maybe just one quick follow-up. I mean, I think historically, one of the attractions of the Sartorius case has been a relatively good customer dispersion. I think you’ve said you’ve only had, say, 3% of your revenues coming from one given customer or product. So the question would be that, obviously, there is some developmental risks around in potential vaccine, but do you see a potential if that product is successful for perhaps a customer to be significantly more than 3% of sales going forward? Or perhaps indeed being that trigger to reassess midterm guidance?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [17]

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So yes, also a very interesting question. I guess what we so far always have said is that there is no customer that accounts for more than 5% of our business, and there is no single product that is produced by any customer that accounts for more than 2% of our sales revenues. And what I would see here is that — and it depends, of course, very much on who will win that race or will be one of the leaders in that race for a new vaccine. But I would expect this 5% mark not to be surpassed by anyone. Maybe one company gets a little bit closer to that, but not beyond that 5% market at the moment, I don’t see that.

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Operator [18]

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The next question is from Virendra Chauhan of AlphaValue.

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Virendra Singh Chauhan, AlphaValue – Analyst [19]

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So I have one on the acquisition impact between both the division, BPS as well as the Lab Products business. So based on the release, it looks like the acquisition impact seems to be higher on the Lab Products business and lower on the bioprocessing side compared to what has been guided for. So is there anything specific that kind of was in this quarter? Because I see that the FY ’20 acquisition impacts were largely unchanged. So what caused the diversion in Q2? That would be the first question.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [20]

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Yes. Maybe you ask the other question also right away.

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Virendra Singh Chauhan, AlphaValue – Analyst [21]

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Okay. The second question and my last question will be that — so the incremental momentum that’s being projected for the bioprocessing business is, as you have reiterated on the call as well, that it’s from vaccine developers. So my question would be that most of these vaccine and drug developers in context of COVID-19 are probably at a preclinical or very early stage.

So in case some of them do come out as a candidate, is there a lot of scope in terms of having an impact on sales in the coming year? That would be the — and would that trigger a kind of upgrade to the growth rates that we have seen historically or even the current expectation? That would be the question on the bioprocessing side.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [22]

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Yes. Thank you very much for these 2 questions. So the first one, the different impacts on the growth rates of the 2 divisions are fully in line with our initial expectations. So back in October last year, when we announced the acquisitions we already communicated, the order of — the size of the top line impact of those acquisitions, and that pretty much didn’t change. We communicated that for the 8 months that this business would be part of the Sartorius Group that we would expect an impact from the Danaher business on the LPS division to be roughly 10 percentage points top line, whereas the biological industries business would add 2.5 percentage points nonorganic. And for Bioprocess, it would be 3.5 approx for the businesses acquired from Danaher and 1 percentage point roughly for the biological industries business. So no change to that. Simply, yes, a matter of fact, from the businesses that are added to the respective divisions, no change at all, in line with our initial expectations.

And then the second question, I hope I got it right. So you were asking on — in how far we could see maybe even more business from vaccine manufacturers, so manufacturers for corona vaccines. Actually, next year, based on the understanding that this year, we just see a preclinical development on that end and therefore, limited business. Well, that’s indeed — I would agree, this would be a perspective in a normal situation, but this is not normal. So as I tried to explain before already, we see orders by either those companies themselves or their manufacturing partners that would cover a number of significant manufacturing runs to produce a significant number of doses of these vaccines even though those vaccines are still in clinical development, not preclinical development, clinical development and partially already very advanced clinical development.

But nevertheless, indeed, for the stage these vaccines are in, are a very high level of orders. And that makes — that, again, makes it really difficult to project what that would mean for next year. And again, it’s not — I think it would be a heroic assumption that all of these vaccines will make it to the market and will be sold in billions of doses. This won’t happen. This might happen for one or the other, but it won’t happen for all of them. And that makes it really so difficult to quantify these effects, particularly on the longer time horizon, until the dust somehow has settled. So therefore, difficult to make any projections beyond 2020.

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Operator [23]

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The next question is from James Thomson of Rathbones.

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James Garrick Thomson, Rathbone Unit Trust Management Limited – Fund Manager and Executive Director [24]

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And good questions from Scott earlier. Yes, I just wanted to probe that a little bit more. I think I’m right in saying that you are involved with 80% of the COVID-19 vaccines currently in development, is that right?

And look, I hear you. I know it doesn’t mean that all vaccines need to get approved for you to benefit from all of them. But you only need a couple of the vaccines to get approved that you’re involved with. And billions of doses do have to be made in the commercial phase, especially if we have to get booster doses or the duration is poor. So maybe asking it another way, based on the orders you’ve already had, how many millions of doses do you think could be produced based on just the orders that you’ve seen?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [25]

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So to be honest, I can’t answer that question. Based on the information that we have and to be honest, based on the fact also that yet often, it’s not yet clear what will be the volume of the dose. That’s partially still under investigation. I am not in a position to make any quantitative — give you any quantitative answer, yes.

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James Garrick Thomson, Rathbone Unit Trust Management Limited – Fund Manager and Executive Director [26]

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But it couldn’t meet the need of billions of doses?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [27]

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Again, I now have to try to rephrase my answer that I can’t quantify it.

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James Garrick Thomson, Rathbone Unit Trust Management Limited – Fund Manager and Executive Director [28]

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Okay. And what about the 80% of COVID-19 vaccines that are in development at the moment? Is that the right sort of ballpark in the people you’re working with?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [29]

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Yes. We believe that we are indeed involved in a very significant portion here. As you know, this is now a significant 3-digit number at very different stages. But at least for those who are at some, let’s say, relevant stage, that doesn’t mean that all of them are in clinical development yet. We are involved to some extent, yes.

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James Garrick Thomson, Rathbone Unit Trust Management Limited – Fund Manager and Executive Director [30]

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Yes, brilliant. And just a question about the monoclonal antibody pipeline. Is there any way of sort of framing the size of that opportunity? Because we’re all getting a little bit dazzled by COVID. But could you give me any sort of statistics to talk around that, please?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [31]

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Yes. I mean, the — by far, the majority of the growth and also the business that we have built and enjoyed over the last couple of years is based on the development and the relevance of maps in the biopharmaceutical market. Going forward, that relevance is changing or there is at least a certain or there are a few more facets. One is that we see a number of monoclonals moving into the biosimilar space as well. So the sheer number of doses that are produced for — of monoclonals is still increasing substantially on both ends because there are still also new drugs under development, and there are biosimilars.

But at the same time, we also now see viral vector based products and others and also advanced therapies that we will call it, so cell therapeutics and such that will play an increasing role going forward. But still, it’s the dominating piece of the market.

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James Garrick Thomson, Rathbone Unit Trust Management Limited – Fund Manager and Executive Director [32]

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Okay. Great. Congratulations to you and the team doing a great job.

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Operator [33]

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The next question is from Falko Friedrichs of Deutsche Bank.

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Falko Friedrichs, Deutsche Bank AG, Research Division – Research Analyst [34]

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I have 2 questions left. Firstly, could you provide an update on the growth in diagnostic test kits and how meaningful this business is for you in terms of size now?

And then secondly, on the potential capacity expansion for the COVID-19 related demand, could you share in which locations you would most likely expand?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [35]

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Yes, sure. So diagnostic test kits is just a double digit — medium-sized double-digit million euros number, so it’s not dominating the equation. We are not in the business of whatever — Qiagen, also with specific tests for a corona infection, for instance, also, so our test kits are rather used in quality assurance. There are also some other applications, but so there is no strong link as we see it in other businesses that are really in — yes, as I said, in the diagnosis of infections, for example.

And locations, so we actually see as, I mean, we were focusing on a number of specific aspects in our discussion here today, also along your questions, for good reasons. But bottom line, we shouldn’t forget, as we say it also in our presentation, that we see strong demand across our product portfolio and that we see basically double-digit growth in all product segments. And yes, we see a certain shift towards projects. And I’ve seen that in Q1 already, as mentioned, but yet we do see basically this increased demand, and therefore, the additional capacity utilization across the board.

So long story short, we do see the need, not maybe to start off with that, not to build a new facility anywhere, but to install additional capacities in pretty much all of our main facilities as there are the one at our headquarters in Germany, in Goettingen, then the one in France, the one in Yauco, for sure, as planned pretty much. Maybe you recall that we have built up the infrastructure for substantial additional capacity expansion, and we will make use of that. And then also to some extent, the facility that we have in Germany, where we engineer and assemble a very significant portion of our project, so it’s a bit across the board. No new facility, no big bang investment anywhere, but a bit additional investment probably in different cycles.

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Operator [36]

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And we have a follow-up question from Scott Bardo of Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division – Analyst [37]

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Yes. Thanks for the follow-up. And hopefully, a pretty easy housekeeping financial one for Rainer. I see that euro is strengthening versus the dollar and your margin guidance is, I understand, in constant currency. So I just wonder if there’s anything you want to pull out or any messages with respect to the currency environment and implications to guidance.

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Rainer Lehmann, Sartorius Aktiengesellschaft – CFO, Member of Executive Board and Head of Finance, Information Technology & Business Process [38]

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Basically, what we have seen, Scott, over segment all of H1, specifically at the end of Q1, but also sort of Q2 is a high volatility, specifically between U.S. dollar and euro. So it’s hard to predict if you look where we’re going to end up. We, of course, hedged our net exposure. But as you pointed out, we are guiding without FX because it’s, to be honest, far too unpredictable, specifically what has happened so far the first 6 months in H1.

If I look being up March up to $1.15, jumping down to $1.07, and that’s where you also see that actually our FX effect, some of them, of course, are driven by valuations at month end. Some of them, of course, are realized due to the fact that we also do business in foreign currency. So unfortunately, can’t give a clear answer, just the way that we’re trying to do our best and we’re still confronted with high volatility.

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Operator [39]

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And there are no more questions at this time. I hand back to Dr. Joachim Kreuzburg for closing comments.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft – Chairman of Executive Board & CEO [40]

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Yes. Basically, my closing comment would be that I would like to thank all of you for your interest in Sartorius and Sartorius Stedim Biotech and also, all the questions that you were asking. Be assured we will do our best to give you as much visibility as possible at any point in time. So I hope to be even more precise than we can be today after 9 months. And with that, I would like to wish you a great summer, stay safe, hope you find some time to recharge your batteries and relax, take care. Talk to you soon. Bye-bye.

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Operator [41]

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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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