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Edited Transcript of DIM.PA earnings conference call or presentation 23-Oct-18 1:00pm GMT

Q3 2018 Sartorius Stedim Biotech SA Earnings Call

Aubagne Nov 2, 2018 (Thomson StreetEvents) -- Edited Transcript of Sartorius Stedim Biotech SA earnings conference call or presentation Tuesday, October 23, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joachim Kreuzburg

Sartorius Stedim Biotech S.A. - Chairman & CEO

* Rainer Lehmann

Sartorius Aktiengesellschaft - CFO & Member of Executive Board

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Conference Call Participants

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* Gunnar Romer

Deutsche Bank AG, Research Division - Research Analyst

* Markus Gola

MainFirst Bank AG, Research Division - VP

* Oliver Reinberg

Kepler Cheuvreux, Research Division - Head of Med Tech Equipment & Services Research

* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

* Scott Bardo

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

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Presentation

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Operator [1]

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Good day, and welcome to the Sartorius and Sartorius Stedim Biotech conference call on the 9 months 2018 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, sir.

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [2]

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Thank you very much, and welcome also from our side to our conference call on the 9 months results for Sartorius as well as for Sartorius Stedim Biotech. As always, we will start off by walking you through the figures for the Sartorius Group and thereafter, directly -- or directly thereafter, talk about the figures for Sartorius Stedim Biotech, and then we will have a Q&A.

Let me kick off our call here today by mentioning the key 4 highlights that we believe are worth mentioning for the 9 months and to quite some respect, also in regards to the recent 3 months of this year. So we have achieved double-digit growth in sales and order intake and also posted double-digit growth in earnings. This has particularly been driven by strong growth in Bioprocess Solutions for both sales and order intake.

In contrast to that, we have seen a softer demand in Europe in our Lab Products & Services division. We believe that this, to some extent, has to do with the weakening economic climate in that region. And -- however, we do confirm our group guidance that we have given and substantially upgraded 3 months ago. However, we have adjusted it for the contribution of our 2 divisions.

I would now like to hand over to Rainer Lehmann, our CFO, who will talk about the figures in more detail.

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Rainer Lehmann, Sartorius Aktiengesellschaft - CFO & Member of Executive Board [3]

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Yes. Thanks, Joachim. Also, welcome from my point. And basically, I will start off quickly with some housekeeping. Remember that 2017 figures have been restated due to the final purchase price allocation of our acquisitions, same as we did in half year figures. So it means for BPS, [15.2] percentage points lower; LPS, 4.4 percentage points lower; and the total group EBITDA is actually 0.2 percentage points lower. All figures you see in the presentation is -- or they already are adjusted.

So we come to the following slide with some key figures. We see the sales revenue, nice performance in constant currencies. We grew 13.4%. Also, there was a strong order intake as well in constant currencies, 13.3% to EUR 1.2 billion, which translated to an underlying EBITDA of EUR 294 million, which is an overproportionate increase to the growth of 15%. This translates into an underlying EBITDA margin of 25.5%, so almost 1 percentage point higher than last year in the same time frame.

Below that, you see underlying earnings per share of EUR 1.84 for the ordinary and respectively, EUR 1.85 for the preferred, roughly an increase of 22%. Acquisitions contributed in the first 9 months approximately 1.5 percentage points to the nonorganic sales growth.

If you come to the next slide, we'll have the regional split. There, we clearly see that the Americas records the strongest increase. Please keep in mind that, of course, and specifically in the Americas, last year, for the 9-month figures, we have 3 temporary effects. Remember, those were -- one is the downturn of our so-called [Chemia] business as well as the impact of the Hurricane Maria that happened in September. And also, we saw the effects of the reduction of the stock level.

So comparables are low in the Americas, but nevertheless, a very strong growth, 20.1%. Of course, it's also been fueled by the LPS size. Since [third], we have the bioanalytics business at its core market. And this year, it's the full time -- we have the full year consolidation of those figures.

In Asia Pacific, our growth of 13.4% that we see there is right in line with the expectations. And in EMEA, we unfortunately only see 8.6% increase. This is really -- yes, mainly due to a fairly weak LPS contribution there. This is below our expectations, and we're going to come to that in the following chart.

If we go to the next slide, on the Bioprocess Solutions, we see here the dynamic development, specific also on the order intake, 15% growth in constant currencies. EMEA and Americas continue really with a very strong performance and also Asia Pacific after 2017 having really extraordinary growth figures back to normal rates. So very happy with that development across the board.

When we come to the sales revenue, we see 14.8% increase in constant currencies to EUR 843 million for the 9-month period. Really, all regions contributed here with a double-digit growth, as we said before, Americas overproportionately due to also the lower comparison -- comparables.

All of this nice growth really translate into an increase in profitability, and we see how our business model there works to the economies of scale. And compounded with positive product mix, we were able to increase the EBITDA margin from 27.3% to 28.4%. So it's an increase of 16.5% to roughly EUR 240 million.

If we come to the LPS side, there, we basically -- and actually, on the order intake, order intake of nearly 8.7% in constant currencies. It is really a bit disappointing, mainly driven by the performance or the softening of demand that we see in the EMEA regions. The Asia and Americas regions actually continue to perform on a very satisfactory level. The order intakes translate also to only a single-digit increase in sales revenue of 9.7% in constant currencies to EUR 311 million.

Essen, in this regard, contributes 3.5 percentage points of nonorganic sales growth. And it's really developed as planned in that respect. While not being -- or let's say, what we paced was just slightly lower sales growth than expected, the EBITDA margin shows a small uptake of 0.2 percentage points to 17.7% to EUR 55 million.

Although it's really early in the reporting period, we do believe that, I think, the softening of the demand in Europe could really be also one of the early warning signs that the economy might be slowing down in the European. We see that slowly creeping up with -- in South Europe, and we'll see what other companies will be reporting. I wouldn't be surprised if, to be honest, we would hear similar comments from them.

If we come to the next slide to the key performance indicators, mainly on the cash flow, we have here, based on the strong underlying EBITDA, which, of course, translated into a nice net operating cash flow of EUR 161.7 million, so an increase by 31%. And the net investing cash flow, due to the fact that we didn't have really any acquisitions, is only EUR 151 million.

I have to say, although cash flow has a strong increase of over 30%, there's still room for improvement because, if you look at the details of the cash flow statement, you see there's quite a significant increase in working capital. This is due to the fact that currently, we are focusing more on growth, especially on the bioprocessing side, and want to ensure that we have the right product at the -- in time at the customers. But definitely, going forward, we'll have a sharp eye on the development and see there room for improvement. Underlying net profit, growing by 22% to EUR 126 million, is also a very nice development.

On the following slide, we see the equity ratio, nice increase compared to previous year-end from 35.1% to 35.6%. Net debt in absolute terms of EUR 940 million, but the indebtedness ratio, net debt divided by underlying EBITDA, it's 2.4, in line with, to be honest, our expectations. And we believe that it continues to decrease over the next quarters under -- in case, obviously, there's no acquisitions.

And with that, I'll hand over back to Joachim, who's going to talk about the outlook for the group.

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [4]

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Thank you, Rainer. So on the next slide, you see the outlook for the Sartorius Group and also for the 2 divisions. On the right side of this table, you find the new outlook for the Sartorius Group. We confirm the 12% to 15%, which we have defined 3 months ago after last year's result when we were upgrading this by 3 percentage points. We also confirm the increase of our underlying EBITDA by approximately 0.5 percentage point.

For Bioprocess Solutions, we specify the significantly upgraded range from 12% to 15%. This is 4 percentage points higher than we started off with the year 2018 and believe that we should reach the upper range of this bandwidth. And we do confirm also the increase of our underlying EBITDA margin by 0.5 percentage point for this division.

For Lab Products & Services, we have become more cautious now after the not satisfying development in our largest single geography, which is Europe. And we, therefore, project now an increase of our top line by 8% to 10% only. And because of the lower top line increase, we also believe that the increase of our underlying EBITDA margin will reach only approximately 0.5 percentage point.

As you, again, can see that because of the significantly higher weight of our Bioprocess Solutions division within our group, there is no impact on the expected performance of the Sartorius Group overall. We also see no change in the contribution by the acquisitions that we made last year, which is 0.5 percentage point from Umetrics for the Bioprocess division and 2.5 percentage points on a full year's basis for Essen for LPS, which then sums up to approximately 1 percentage point of nonorganic growth for the group.

We also confirm our expectation for the CapEx ratio to come in around 15 percentage points for the full year. And just as a reminder, we will see approximately a positive effect on our net results because of the significantly more favorable tax environment in the U.S., which should have an impact by 2 percentage points lower group tax rate for 2018 compared to the years before.

I would now like to immediately shift the perspective to Sartorius Stedim Biotech and walk you through these figures. They are, as always, pretty much similar to those of the Bioprocess Solutions division. The only difference is the intergroup's business that Sartorius Stedim Biotech has with the lab division for some of their products.

So top line increase, sales revenue up by 13.8%. Order intake, up by 14.5%. Also here, this translates into an overproportionate increase of our underlying EBITDA by a good 17%, and therefore, an increase of our EBITDA margin by 1.4% and an increase of the underlying earnings per share by almost 23%. All the comments that have been before made by Rainer, of course, apply also here for the Sartorius Stedim Biotech business in regards to nonorganic growth and other factors.

The geographical composition of this growth, I think, has been explained also earlier. Just briefly, therefore, Americas, up by a good 20% in constant currencies; Europe, up by close to 10%; and Asia Pacific, around 12%. This very much mirrors also our expectations within the framework of the different factors that were mentioned before.

We also see Europe for Sartorius Stedim Biotech an in -- significant increase of the operating cash flow, particularly driven, of course, by the higher earnings. The net investing cash flow reflects the execution of a quite ambitious CapEx program, which we have explained, I think, also at the beginning of this year, why it would be at this relatively higher level for Sartorius Stedim Biotech this year. It is particularly because of significant investment into IT, but also into additional capacities in Yauco and also at our headquarters in Goettingen.

And then maybe if we shift directly to the financial key figures, then I think one can indeed summarize this picture to be showing very strong key figures, an equity ratio at 61.6% and a net debt to underlying EBITDA ratio, about 0.4, pretty much unchanged, even though we are executing this very ambitious investment program, as I said before.

And then finally, we do confirm and specify the outlook for Sartorius Stedim Biotech, pretty much in line with what has been said for Bioprocess a minute ago. We believe that we should come in at the upper range of the bandwidth of 11% to 14% top line growth in constant currencies.

We believe that the underlying EBITDA margin should reach approximately 28%, and we also believe that the CapEx ratio should be around 15% for the full year of 2018. Contribution by the Umetrics acquisition should be 0.5 percentage point. Nonorganic growth and again, also here, U.S. tax reform leads to a lower group tax rate by approx 2 percentage points.

Ladies and gentlemen, thank you very much for listening so far. And now we are opening the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Oliver Reinberg of Kepler.

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Oliver Reinberg, Kepler Cheuvreux, Research Division - Head of Med Tech Equipment & Services Research [2]

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Yes, Oliver Reinberg from Kepler Cheuvreux. 3 questions for me. Firstly, starting with LPS, I think the midpoint of your old and new guidance is basically kind of 4.5% cuts. And given that this is based on the second half performance, it basically means that your second half performance has been down-weighted by 9%. That's probably quite more than I would expect it in terms of the general cyclicality of this business.

So can you share some more details in which end clients have been affected here? Is there sort of a similar exposure to automotive and chemicals industry? And can you just share with us what is actually the current percentage of sales coming from this region? And what decline have you seen in these client groups?

Secondly, can you also comment on bioanalytics specifically? I think that the first half was a bit softer, and it's normally geared towards the second half. Is that entirely on track? I think you had talked about EUR 100 million sales potential for the full year. And finally, can you give us an update on BPS in terms of how quickly you're winning back market share in the media business?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [3]

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Yes. Thank you very much for your questions. So basically, I confirm your math for LPS even though I would like to add that after 6 months, maybe the midpoint of our initial range would have been also at the upper end of our -- what's realistic. I think we talked about that, after 6 months, we indeed were convinced that we should reach that range, but probably not at the midpoint.

But however, it remains to be a fact that the third quarter indeed was a significant and strong disappointment for Europe, which basically was just flat, you can say. In the third quarter, as such, after very significant growth in the years before, particularly in 2017, has been strong towards the end of the year. So maybe one could say, "Well, yes, comps have been high in -- for the third quarter and -- but will be also quite high for the fourth quarter."

So in other words, as I phrased it before, we have become a bit cautious in regards to our expectations there. We are not so much -- or we do not have so much business with the automotive sector, but we indeed have some business with the chemical sector.

And whereas the life science, both industry as well as academic sector, is the strongest one for the lab division, thereafter comes the chemical industry and also food and beverage. And that -- and particularly, the chemical industry indeed typically is an early indicator for economic trends. And therefore, as I think Rainer has said it before, we believe that this could be an early indicator that we see a certain downturn in Europe and maybe one that is relatively sharp.

But again, just 3 months may be a little bit too early to confirm it, but it really has made us more cautious for the full year for LPS no doubt and to quite some extent indeed.

Bioanalytics, we are basically well on track. Of course, still, the Americas play the most significant role here. It's still, by far, the most relevant market.

By the way, sorry, Mr. Reinberg, I think you were also asking for the relevance of the EMEA region within LPS. It accounts for roughly 45% of our business. So it really has, by far, the highest relevance in LPS and particularly for the, let's call it, the non-bioanalytical business, yes, because bioanalytical business is overproportionately strong in North America, as I just started to talk about.

And here, we basically believe we are well on track. We indeed do expect a strong second half of the year and also a strong fourth quarter. We have seen year-on-year growth throughout the last quarters. And therefore, as we commented before, this is in line with our expectations.

However, also here, we would say, within -- in Europe, again, with lesser weight and therefore, not maybe a key factor to mention here, but also, bioanalytics hasn't performed tremendously great within the third quarter in Europe.

On Bioprocess Solutions, here, the growth rates are basically backed by all regions. We have talked about that, but also by all product segments. And it's indeed the case that the recovery of our media business is a bit above our initial expectations. I think we said that also after 6 months, and we would also confirm that now after 9 months.

Still, we are not back on the level that we have reached in 2016. So it depends on the perspective. After the difficult year 2017, we are recovering quite nicely, but yet not to the full extent if we compare that to where we could have been without the challenges of last year.

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Oliver Reinberg, Kepler Cheuvreux, Research Division - Head of Med Tech Equipment & Services Research [4]

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Great. May I just follow up? The sales exposure in LPS towards life science, chemicals, food and beverage and others, can you give us any indication there? And also, does the EUR 100 million sales guidance for bioanalytics still apply?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [5]

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So the exposure to the life science segment in LPS is around 40%. We do not have a very significant exposure to the automotive sector. I clearly would say it's in the single-digit domain, and we are shooting to achieve $100 million of sales revenues in the bioanalytical segment this year indeed.

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Oliver Reinberg, Kepler Cheuvreux, Research Division - Head of Med Tech Equipment & Services Research [6]

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And chemicals, that's more than 10% of sales of LPS?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [7]

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Yes, chemicals is accounting for more than 10%. It should be in the range of approximately 20%.

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Operator [8]

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The next question is from the line of Michael Gokay of Janney.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [9]

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It's Paul Knight in New York. Thanks for taking the question and congratulations on the quarter. Your North American growth is leading other geographies, Joachim. Is it because -- are you taking share? Could you talk to the U.S. marketplace and your position and strength?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [10]

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Yes. I mean, as I think Rainer has talked about before, we do have to take into account, of course, some aspects that make the comps relatively easy ones for North America this year. As has been mentioned, the media business was close to 0, at least very low in North America for the reasons we all know last year. And we had the impact of the -- from the hurricane, and we saw the reduction of stock levels by some customers, particularly in North America also in the second half of last year.

So -- but even if we discount for that, we indeed believe that we are on a very good track in North America. We should rather gain market share there. It's an explicit part of our tactics and our investment into our organization to do so. And because of the nature of our business, validated processes and so on, this is an exercise that takes a couple of years. We are on this track already for a number of years, and we should remain taking share also going forward. So yes, again, after discounting for those specific kind of extraordinary effects, we believe that we are performing above the market.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [11]

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And can you talk, just to Essen instruments, what share -- or what portion of the addressable market does Essen have today? How much application do you see Essen having for the industry?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [12]

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I'm hesitating to answer this question in too much depth, I have to say, because this then also would maybe touch some key elements of our strategy here going forward. But in the application that -- or let's put it the other way around, the features that the Essen system offers to customers and users is unique.

So it depends anyhow very much on the definition of the addressable market when it comes to the share here. Maybe it's fair to say that the share is, if you would define it a little bit wider, is maybe around 30% or so in this segment.

But -- however, again, it's more that the performance of the system is, yes, absolutely superior to any other system that you would find in the market. So then it is more about convincing customers that they can increase the overall efficiency of their processes in comparison to other instruments and to basically change the way how they work in the laboratories.

The second part is that we think that the overall addressable market, depending on entering probably into some adjacent fields in bioanalytics and around cell biology, could extend the addressable market quite significantly by significant factors, let's put it that way. But that is something that really depends not only on some own product development, but also maybe on some complementary acquisitions going forward. And that is why I would like to ask you for acceptance that we wouldn't go much deeper than that.

But as we said, when we entered this field, through the acquisitions of IntelliCyt and Essen, we said, "Well, these are very attractive products per se, offering very strong benefits to customers." And they are also opening a field into which we would consider further complementary acquisitions to take place over time.

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Operator [13]

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The next question is from the line of Gunnar Romer of Deutsche Bank.

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Gunnar Romer, Deutsche Bank AG, Research Division - Research Analyst [14]

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Gunnar Romer, Deutsche Bank. So firstly, if you can come back on the sales exposure in LPS, I understand 40%, bioscience; chemicals, around 20%. Would that mean food and beverage is accounting for the rest, assuming orders is single digit? Or is there any other significant exposure to other industries? If you can remind us of that, that would be great.

Then also, I understand that you're seeing that mostly related to the economic environment, the weakness that you're currently seeing. Can you share with us some sort of sensitivity of that business to the overall economic cycle? Obviously, I can look back in the model and have a look at the mechatronics division and the financial crisis. But clearly, the setup is completely different today. Back at the time, there was around a 20% top line swing through the cycle. Just trying to get a sense of the sensitivity here to economic fluctuations. Any comments in that regard would be very helpful.

And then last question would be on BPS. Pretty strong order intake indeed against a very tough comparison base. Just curious if you can help us understand what's been driving the order intake. You talked about equipment orders in the second quarter. Just help us understand what's been driving the strength in the order book in the third quarter, please?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [15]

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Yes. On LPS first, so food and beverage accounts for maybe a little bit north of 10% of our sales here in that division. And then, of course, we also have the segment of quality control as well as diagnostic lab.

Please keep in mind anyhow, when we give a bit rough figures here that a portion of our business with our lab essential product, so balances, lab water systems, pipe pads, lab filtration, microbiological test kits and the like, are sold via distributors. So we don't have that deep insight of our end customers as we have it in the Bioprocess division, for instance. So therefore, take it with a grain of salt.

But again, there's also quality control, some environmental labs, even diagnostic labs and such where we also see our product going into. I mean, the comparison with the economic crisis a good 10 years ago maybe indeed is an extreme comparison. But at least, it indicates one thing, and that is that the sensitivity, as you are asking for, is not as high and extreme as indeed in some machinery business and such where we really have seen declines of businesses at the time by 50% and more.

So that's not exactly what we see, but it's a business. And I think we are describing that everywhere, also in our annual reports, always that we say this business, other than the Bioprocess business, which is in this very almost unique position of being not sensitive to any economic cycle. The lab business is sensitive, to some extent.

So therefore, let's say, normal economic cycles should show a bandwidth between the upper end and the lower end of the market growth, maybe around 4, 5 percentage points if you compare rather single quarters. The longer the time period becomes that you compare, maybe then the swing is just wrong, maybe 2, 3 percentage points. Maybe that is how I would look on it typically.

For the Bioprocess division, maybe I would like to add that particularly, for the third quarter, but therefore, also for the 9 months, the comps haven't been that tough. So for order intake, they will be not that soft for the full year because we have seen strong momentum of order intake towards the end of last year that has led us commenting at that point in time also that we saw ourselves well positioned to start off into 2018 because of a healthy order book.

But at this point in time of last year, we have seen not that strong development of our businesses for the reasons that we were talking about. So therefore, comps have been not that tough for our 9-month figures of 2018. Nevertheless, we indeed believe that we are very well on track. I think we also touched upon the aspect that we rather believe to gain market share in the market -- in the environment.

And exactly as you were mentioning in your question, we have seen a nice contribution from some larger orders in Q2 in particular, which has been one element that has led us upgrading our guidance at that point in time. And we will particularly see a larger contribution of the execution and delivery of such systems in the fourth quarter then indeed.

And just to complete this aspect, of course, such instruments or larger systems, in particular a project, typically contribute little bit lower margins than our consumables business. And that was the background for us also not to upgrade our profitability guidance 3 months ago and also to leave it untouched now because of the slight differences in product mix from quarter-to-quarter.

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Gunnar Romer, Deutsche Bank AG, Research Division - Research Analyst [16]

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Okay, maybe 2 follow-ups if I can. Firstly, on LPS again, I think your guidance did imply a pickup in growth in the fourth quarter over what you've seen in the first 9 months and the third quarter. Is that entirely driven then by bioanalytics? Or do you assume better performance already in the legacy business?

What's your assumption here regarding the legacy business, continued flat development in Europe or further deterioration? Just curious about how you look at the rest of the year at least.

And then on BPS, my question was rather related to the third quarter in particular. Because here, I believe the comp was actually quite tough in BPS. Order intake last year in the third quarter was up 13%, and now it's up 20%. And I'm just curious whether you've seen additional equipment orders now in the third quarter or any other areas that are performing stronger.

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [17]

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So first, on LPS, again, you're right. We do expect not such a difficult development in Europe for the fourth quarter. But from a product segment perspective, indeed, of course, the weight of our bioanalytics business will be higher in the fourth quarter and therefore, also offsetting a bit the more challenging environment and therefore, not that strong development of the, as you call it, legacy business or lab essentials business. But indeed, we don't expect too strong growth in Europe but a little bit better than in the third quarter indeed.

And for Bioprocess, the development -- I mean, now it really depends on where we look. The -- so I understand you are looking on order intake. And order intake last year in Bioprocess has been up just around 13% in the single quarter, that's right. But the overall figure has been just 7%, and that is what I was referring to.

So the overall comps also for order intake, let's just say, hasn't been that strong. The single quarter already was a better one, but my initial comment was really about the performance in sales revenues. And here, both is the case. The cumulative figures were just around 3.7%. And for the single quarter, it was even slightly negative by around 3%. So therefore, I think I wouldn't consider the 9-month comps, and that is what I was referring to here in particular, to be very strong ones at this point in time.

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Operator [18]

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The next question is from the line of Scott Bardo of Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [19]

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So first question relates to the LPS business. I think at the time of the IntelliCyt and Essen BioScience acquisition, you outlined intentions to close the gaps of growth between the BPS and LPS divisions. And clearly, that's not going to happen this year for reasons you've discussed.

But I wonder, given this sign of slowing demand in Europe, which might not be temporary, is there a reason for caution that the LPS business might not have this similar sort of growth profile to BPS next year or going forwards? Perhaps you can share some thoughts actually as to when you see a sustainable growth for the LPS segment. I have a follow-up after that.

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [20]

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Yes. I mean, we see very significant double-digit growth for the bioanalytics business, which accounts for still a bit less than 20% of our overall revenues in the lab division. So it's clear that in a downturn scenario, as we see it at the moment in Europe, this very significant contribution is diluted quite a lot, no doubt about that.

But overall, we believe that the growth profile and also the profitability profile of the division will continue to change and improve. And of course, to some extent, it will also be dependent on potential further acquisitions.

I think you know from -- also from our Capital Markets Day and all other presentations that further acquisitions remain being a key element of our strategy going forward and -- whereas in Bioprocess, such acquisitions will be rather continuing to be in -- to add to our positioning within the space we are already in.

They will contribute in the lab division to continuing our path towards strengthening our positioning and shifting our positioning more into the field of life science research and particularly around the field of bioanalytics. So maybe it's fair to say that, yes, we are not yet fully there. No doubt about that. But I believe that really key elements are already in place and should not be disregarded, I would say.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [21]

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Okay. And I have a follow-up question on the Bioprocess division. Obviously, very encouraging to see continued strong demand for your businesses' products, but also at the industry level, we're seeing healthy growth.

And I really wanted to follow up on the -- or continue the question I asked you in Munich more recently. Given that there are multiple biosimilar or biogeneric companies coming on board, I wonder whether this is supporting some of the growth we see in the industry today, including [modern world innovation], meaning players entering this market will succeed and be sustainable businesses.

So I guess, the question I have is, are you concerned at all about the [underwriting] capacity in the industry and that -- and maybe in some capacity oversupply realm if some of these biosimilar companies fall by the wayside?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [22]

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Yes. If I get this right, I would say, clearly, I think nobody expects that all companies that have invested into manufacturing capacities for the biosimilar or in the biosimilar space will be successful. But we definitely believe that the biosimilar market segment is still just at the beginning and will play a larger role going forward.

And once the sales of consumables into this space, which is even more at the beginning than the sales of maybe some equipment into this to -- those manufacturers will pick up, then this will be even more the case, and it will be also then less volatile than sales of systems and projects is by nature.

So we remain to be very positive about the fact that there will be biosimilar manufacturing going forward and that this will play a bigger role because it adds to the overall volumes of drugs that are being produced. And that is pretty much a key driver for our sales.

Having said that, and I'm sure and I know you are very well aware of that, of course, this space is already quite diverse and will become probably even more diverse. We see very different business models. Some originators produce their own biosimilar product. Some originators or -- let's say, originators by strategic positioning in general, start to produce biosimilars that have been original drugs by competitors. And then, of course, we see pure-play biosimilar producers also going forward.

So it's a very interesting and changing and moving market environment. But overall, clearly, we don't see this as an area of concern, even though, once again, we don't believe and never have believed that all capacities that are being installed will be in full utilization going forward. But that is something that we also have seen happening with installments and investments of originators in the past.

We always have seen phases where everybody thought that it would be short of capacities, and then there was heavy investment into additional capacities. And then maybe a year later, there was a weaker demand for such systems. But given the fact that 75% of our sales revenues in Bioprocess are with consumables, we wouldn't consider ourselves to be particularly vulnerable here.

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Operator [23]

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The next question is from the line of Markus Gola of MainFirst Bank.

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Markus Gola, MainFirst Bank AG, Research Division - VP [24]

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My first one would be on the CapEx. It seems that you're running a bit behind your full year guidance here. So will we see a massive step-up in Q4? Or should we rather expect some phasing in 2019? And if so, could you give first some additional color, which projects will be still on the agenda next year and maybe even an indication about the required expansion CapEx for these projects in 2019?

And my second question is a follow-up on the softer demand situation in LPS in Europe. So here, actually, which product groups have been mostly affected from the slowdown? Are these mainly equipment-like products like your lab balance business? Or did you also see a slowdown in your lab consumables in Q3?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [25]

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Yes. To the CapEx first, yes, we confirmed our outlook for the full year because -- I mean, you're right, we are a bit behind our full year's guidance after 9 months, but not to an extent that this would imply a tremendous peak in the fourth quarter. So we pretty much expect to come in at the guidance figure.

And for '19, what I would confirm at this point in time is indeed that we expect a lower CapEx ratio because we are really about to finalize major projects as they're up, in particular, the consolidation and expansion of our Goettingen facility as well as the expansion of our Yauco facility. However, both won't be fully completed by end of this year as planned. So we always said there will be a certain level of CapEx into those projects in 2019.

You mentioned spillover. Well, again, I wouldn't expect any significant spillover at this point in time, but let's see when we close the year. And that's also why we will give, as with all other figures that we guide on, we will give our 2019 guidance figures just when we publish our preliminary results for 2018. And please bear with us to give us these additional 3 months.

So for LPS in Europe, pretty much -- we have seen this weakness across the board, you could say. It would give probably the wrong impression to highlight or lowlight here, a particular product segment, of course, simply because of the size of the different product segments.

Of course, lab balances and also other instruments play a larger role here, but that is not too specific for Europe also. So it really -- the third quarter in Europe in the lab division has been pretty much a disappointment across the board, I would say.

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Operator [26]

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We have a follow-up question from the line of Oliver Reinberg of Kepler.

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Oliver Reinberg, Kepler Cheuvreux, Research Division - Head of Med Tech Equipment & Services Research [27]

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First question, on bioanalytics, can you give us a rough idea? I mean, it's pretty much geared towards Q4 and because it's -- a lot of it has stemmed from the academia, but maybe give us a rough indication, what percentage of full year sales are represented by Q4 for bioanalytics itself? Is it probably more than 35% or less? And also, can you remind us of the split for bioanalytics between U.S. and Europe? That would be the first question.

Secondly, coming back to CapEx and when you have finalized these kind of projects in Goettingen, and Puerto Rico, is that a certain cutoff point from which onwards, you're going to depreciate these assets? So in other words, is there any kind of chance for a higher-than-normal increase in depreciation charges going forward?

And then last question, I guess, this does not play well for your business, but we heard here and there that some European companies benefit in China from the fact that some kind of U.S. companies are disadvantaged on the back of this kind of trade conflict. I just wondered if there's any kind of [weight] for you in the industry. I assume not.

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [28]

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Yes, thank you for that -- for these questions. So maybe I start from the end of the list of your 3 questions. I wouldn't think that we can already make the statement that the trade conflict between the U.S. and China had any impact on our business. Maybe that will be visible at some point. I wouldn't see that at this point in time yet.

The point on depreciation, it's right that the depreciation starts with the beginning of the utilization of respective, yes, whatever, buildings, machinery and so on. So we will see this depreciation kicking in particularly in the course of 2019, that is right.

There won't be this -- a single point in time in 2019 because the different parts of the manufacturing site in Yauco, for instance, and also the buildings in Goettingen, will be taking into operation at slightly different points in time. But however, in 2019, we'll see a certain step-up of depreciation.

Your first question, I think you said whether the portion of bioanalytics sales revenues that we expect for the fourth quarter would be above or below 35%. So the theory is between 30% and 35% actually that we expect. And the wage or the portion of sales of bioanalytics that we are making in the U.S. is north of 50%, whereas in Europe, it's around the 30% mark and Asia accounts for a good 10%. So that's roughly the composition there.

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Oliver Reinberg, Kepler Cheuvreux, Research Division - Head of Med Tech Equipment & Services Research [29]

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Fantastic. And may I just ask a question if there's an inflation in depreciation, excluding amortization? Is there a chance that we see growth in depreciation of more than 10% next year?

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [30]

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Bear with me. I don't have this figure here in front of me, but I'm sure we will be able to answer that in detail once we have, a, finalized our budget for next year; and b, then also communicated our guidance for 2019.

I fully understand and appreciate the background of that figure, and we will be transparent as always in answering it. But let us complete our budgeting phase, and then we will talk about that.

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Operator [31]

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There are no further questions at this time. I hand back to Dr. Joachim Kreuzburg for closing comments.

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Joachim Kreuzburg, Sartorius Stedim Biotech S.A. - Chairman & CEO [32]

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Yes. Thank you very much, everybody, for participating in our call today again, and thank you also for your questions. I'm very much looking forward to the continuous interactions with you, and particularly in approximately 3 months' time, when we'll publish our preliminary figures for the full year 2018. Thanks a lot. Have a good day. Bye-bye.

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Operator [33]

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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.