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Edited Transcript of TECN.S earnings conference call or presentation 15-Aug-19 8:00am GMT

Half Year 2019 Tecan Group AG Earnings Call

Maennedorf Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Tecan Group AG earnings conference call or presentation Thursday, August 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Achim von Leoprechting

Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board

* Martin Brändle

Tecan Group Ltd. - VP of Communications & IR

* Rudolf Eugster

Tecan Group Ltd. - Group CFO & Member of Management Board

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Conference Call Participants

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* Daniel Buchta

Bank Vontobel AG, Research Division - Research Analyst

* Laura Pfeifer-Rossi

Octavian AG, Research Division - Analyst

* Maja Pataki

Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector

* Sibylle Bischofberger Frick

Zürcher Kantonalbank, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Tecan Group Half Year Results 2019 Conference Call and Live Webcast. I'm Miruna, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Martin Brandle, VP, Communications and IR. Please go ahead, sir.

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Martin Brändle, Tecan Group Ltd. - VP of Communications & IR [2]

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Thank you, and good morning, ladies and gentlemen. Thank you for joining us for our conference call this morning. We are very pleased to discuss the financial results for the first half of 2019 with you.

With me on the call are our Chief Executive Officer, Dr. Achim von Leoprechting; and our Chief Financial Officer, Dr. Rudolf Eugster.

Before we start, as always, some formalities. The corresponding press release announcing our H1 financial results was issued this morning at 7 a.m. Central European Summer Time. Both this press release as well as the full 2019 interim report are available on the company website, tecan.com, under the Investor Relations tab. The interim report is also available in our IR app for iPads, which can be downloaded from the App Store.

The call is being webcast over the Internet on our homepage and we have also posted the presentation slides for this call for download.

With that, let me now turn the call over to Achim von Leoprechting. Achim?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [3]

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Thank you very much, Martin, and good morning, and welcome to the 2019 half year results presentation. Before Rudolf will discuss the financial results of the first half year of 2019 in detail, I will give you an overview on the financial and operational highlights.

In the first half of this year, we recorded revenue growth of 8.3% or 8.4% in local currencies driven in particular by a strong performance in the Life Sciences Business. Regionally, we are especially pleased with the performance in North America where we saw substantial growth compared to the same period of last year. Also China continued its strong performance posting double-digit growth in the first 6 months almost equally driven by both business segments.

Organic growth was 6.3% in local currencies with positive demand in the instrument business. Recurring revenues reached 44% of total revenues, unchanged versus the prior year period as the new reagent sales from NuGEN balanced out the strong increase in instrument sales.

From an orders perspective, we again exceeded revenue and grew backlog double-digit, positioning us well for the second half.

As expected, the reported EBITDA margin, including all acquisition-related and onetime costs, was below prior year, whereas the adjusted EBITDA margin was on a similar level when calculated on a comparable basis.

Now let me comment on some of the operational highlights of the first half. Earlier this year, we launched DreamPrep, which combines the proven Fluent automation platform with the NGS library preparation reagents from Tecan Genomics, formerly NuGEN. As we have started to demonstrate DreamPrep to several potential clients over the past (inaudible), we have received highly positive feedback related to the unprecedented speed and accuracy demonstrated by the system. The fact it allows labs to perform 2 library preparation runs in a day with integrated quality control is a convincing argument. We are therefore glad to report that the active funnel for DreamPrep has built quite significantly globally, and that the first purchase orders are imminent.

The second key launch for our Life Sciences division is the new Spark Cyto. Spark Cyto has been launched worldwide at a major trade show in June. Spark Cyto allows researchers in academia, pharma and clinical to perform time cytometry along many other detection modalities in 1 instrument. The instrument comes with a range of unique features that allow researchers to analyze sales and higher throughput using advanced environmental controls, real-time results analysis as well as automatic execution of kinetic experiments. That means that further processes can be automated on the basis of the evaluated image data analysis such as the addition of chemical substances which may influence sales behavior and/or survival. First customer demonstrations in leading research institutes have been very successful and commercialization is now in full swing.

In both the Life Sciences and Partnering divisions, we have made good progress with exciting partnerships providing solutions to infectious disease and cancer diagnostic processes, respectively. Together with QIAGEN, a leading life sciences and diagnostic company, we announced the collaboration to co-market modified fluid automation systems equipped with custom modules which allow for rapid and robust sample preparation upstream of QIAGEN's QuantifERON diagnostic test. This combined solution will facilitate higher throughput sample preparation for screening of latent tuberculosis delivering robust sample aliquots from primary heparin blood tubes.

In our Partnering Business, we announced the development of a customized Fluent platform for The Binding Site, a leading IVD company in the field of multiple myeloma diagnostics aiming to significantly improve the diagnostics of certain blood cancers through MALDI mass spectrometry analysis.

Not on this slide, but as I've just gotten back from the AACC trade show in the U.S., I'm also very pleased to report that our partner, Sysmex, has issued a press release announcing the launch of the jointly developed PS-10 sample preparation system for flow cytometry.

In May, we closed the acquisition of a long-term supplier of critical precision machine parts with operation sites in California, U.S.A. and Vietnam. With Tecan being the largest customer, we expect to enhance operating profitability through this integration. We also plan to extend the supplies of additional parts through these operating sites, Tecan in future years.

Now with this, let me hand over to Rudolf, who will discuss the H1 2019 financial results in more detail. Rudolf?

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Rudolf Eugster, Tecan Group Ltd. - Group CFO & Member of Management Board [4]

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Thank you, Achim, and good morning, ladies and gentlemen, from my side as well. As always, I will now guide you through our financial results for the first half of 2019 in more detail. I start with order entry and sales.

In the first 6 months of the year, order entry increased by 4.2% to CHF 310.6 million, again exceeding the sales realized during the reporting period. This increase equates to a rise of 4.5% in local currencies.

On an organic basis, excluding the 2 most recent acquisitions, order entry rose by 2.4% in Swiss francs and by 2.7% in local currencies.

I want to share some additional comments with you why we are not concerned seeing a slower growth rate in H1. One swing factor in order entry always are orders in the Partnering Business segment that tends to come in bulks and are therefore much more volatile. In the first 6 months, this was the factor, as we did not receive some larger orders in H1 but shortly thereafter.

Additionally, the underlying trend is more positive as we had to reverse 2 bookings and deduct them from our backlog thereby obviously reducing the order entry growth rate.

Let me point out a very unusual instance for us. One of the cases was based on a communication we received from one of our smaller partnering customers that put at risk any business continuity from their side. Therefore, we took the prudent step and canceled all orders in our books that we had already received.

The second case is in context of the large order for several customized systems that we mentioned in the call in March. Here, our partner faces some delays in their program and canceled several systems we ordered before. The positive side to this is that we are able to accelerate some more activities in the project, allowing us to book some revenues already this year.

Despite the somewhat slower pace of the new order entry, our order backlog once again increased significantly as of June 30, 2019. In fact, it grew with a double-digit growth rate driven by both business segments.

Sales increased by 8.4% in local currencies or 8.3% in Swiss francs to 296.1 million. On an organic basis, sales grew by 6.3% in local currencies and 6.2% in Swiss francs. In contrast to the previous year, growth in this reporting period was driven by a double-digit sales increase in the Life Science Business. As expected, the Partnering Business recorded only a small increase in sales following growth of more than 16% in local currencies in the prior year period.

Recurring sales of services and consumables increased in the first half of 2019 by 7% in local currencies and 7.3% in Swiss francs and therefore amounted to 44.4% of total sales, as Achim already mentioned.

Segment sales. Looking at the sales performance of our 2 business segments, again this looks more or less the other way around compared to the prior year. Sales in the Life Science Business segment increased by 15.5% to CHF 162.4 million and were 15.7% above those of the prior year period in local currencies.

On an organic basis, that means excluding sales from NuGEN, now Tecan Genomics, half year sales also increased significantly by 12% in local currencies.

Looking at the drivers of this growth, we can clearly highlight the instrument business, in particular, sales of our Fluent automation workstation which recorded strong growth. Order entry in the Life Science Business also continued to increase. As a result, the order backlog again increased at a double-digit rate.

The Partnering Business segment generated sales of CHF 133.7 million. This corresponds to just a slight increase of 0.6% with no currency impact. This is both in local currencies and Swiss francs.

On an organic basis, excluding sales of the acquired supplier for the month of June, sales grew by 0.2% in local currencies.

As I mentioned before, the slower development was not the surprise at all after the segment had recorded particularly high growth of 16.1% in local currencies in the first 6 months of 2018.

Looking at orders in Partnering. Thanks to solid growth in order entry, like in the Life Science Business, the order backlog in the Partnering Business also increased at a double-digit rate.

Now looking at the sales development in the different regions. In Europe, sales in the first 6 months of 2019 increased by 3.4% in local currencies and by 1.8% in Swiss francs. This increase was despite the high baseline in the prior year and therefore expected at that level. Keep in mind that in the same period last year, we recorded an exceptional growth of 19.9% in local currencies. This growth last year was mainly driven by the Partnering Business, which is why, to no surprise, the Partnering segment sales this year did not quite reach the prior year level in Europe.

By contrast, the Life Science Business recorded considerable growth of 9.6% in local currencies. Let me point out though that this increase was more on the basis of the high order backlog from the prior year and not driven by new orders received in the reporting period, one of the reasons for the smaller increase of the overall order entry.

In North America, sales grew by 14% in local currencies and by 16.9% in Swiss francs. The Life Science Business performed particularly well, with sales growth in this region of 23.5% in local currencies. Obviously, the sales contribution from acquired NuGEN was mostly North America. Therefore, let me point out that also our organic growth in Life Science was particularly strong with an increase of 18.6% in local currencies. The sales development of our Partnering Business in North America was in line with the overall segment growth.

In Asia, sales increased by 11.8% in local currencies and 9.2% in Swiss francs. Both segments contributed to the sales growth in the region with good performances. Of special interest for given reasons is obviously the sales development in China. In this respect, we are happy to share that our sales growth in China outpaced the overall growth in the Asia region, and we did not see any impact from tariffs nor from an often described slowdown of the economy.

Our next slide addresses our gross profit. Gross profit increased to CHF 141 million which was CHF 12.5 million or 9.7% above the prior year figure. The gross profit margin increased by 60 basis points compared to the prior year to 47.6%. As always, we had several factors impacting the gross profit margin.

On the positive side, we were able again to increase prices. As a second positive factor in contrast to 2018, this year we benefited from the exchange rate movement. And lastly, we continue to benefit from material cost savings.

Factors that had a negative impact. First, this was the product mix, here especially the higher contribution from engineering income in our Partnering Business that comes with lower gross profit margins. However, these activities to develop new instrument platforms for partners are obviously fueling future growth. And as expected, the acquisition-related costs were a second important negative factor to the gross profit margin.

Our next slide addresses our cost structure. Overall, our operating expenses less cost of sales grew more than sales and with 36.5% of sales were 340 basis points higher than in the prior year. What you obviously need to keep in mind is that all operating expenses in the first 6 months of this year now include the costs from our latest 2 acquisitions, especially from NuGEN or Tecan Genomics. This is the most significant reason for the increase, and I will comment a little more on that when discussing the specific operating expenses.

Sales and marketing increased slightly more than sales as we continued investments in our market units. In addition to that, we expanded the dedicated sales force and application support from Tecan Genomics. For example, we hired the first ever colleagues on the ground for our NGS reagents in China.

With an increase of 34% or almost CHF 7.6 million, R&D was the biggest driver for the increased operating expenses. Innovation will remain a key sales driver for the future, and we continued our investment in new products. This specifically includes R&D activities at Tecan Genomics. Although our overall R&D activities and therefore gross expenses were higher compared to the prior year period, that means that all the project work for the Partnering Business customers grew. These activities are typically customer funded which gets booked under engineering income and COGS. I had already mentioned the increased engineering income earlier. Overall, we capitalized less R&D in the reporting period. Amortization was at the similar level compared to H1 2018.

G&A also increased more than sales, mainly due to the costs related to acquisitions, including for the due diligence work we do and also related to the additional cost in context with the CEO change. I will come back to that on the next slide.

Looking at the EBIT and EBITDA development. The reported EBIT, earnings before interest and taxes, decreased by CHF 4.8 million to CHF 33 million. As flagged, this includes acquisition-related costs totaling a mid-single-digit million Swiss francs amount and the nonrecurring additional costs I mentioned for the CEO change.

Regarding those additional costs, let me point out that the impact in the first 6 months was bigger than what we expect for the full year. In other words, the effect will be diluted in the second half and the total amount in Swiss francs will be smaller than what we had to already book in H1. On the other hand, keep in mind that the adoption of the new IFRS 16 accounting standard regarding leases only had a minimal effect on EBIT as only a very small part is booked into interest.

Looking at EBITDA, the operating profit before depreciation and amortization. Reported EBITDA grew to CHF 49.3 million. In contrast to EBIT, our EBITDA benefited from the recurring positive effect of IFRS 16. As I mentioned on the call in March, for the full year 2019, we estimate that the gain on EBITDA will be around CHF 10 million.

Looking at the margins, with all factors just explained, the respective reported EBIT margin was at 11.1% of sales and the reported EBITDA margin reached 16.6% of sales. However, when calculated on a comparable basis with the prior year period, the EBITDA margin for the first half of 2019 was at the same level as in the first half of 2018.

Now looking at the operating profitability on a segment level. The statement on profitability I made before regarding selling, marketing and R&D obviously translate into the different segments. However, some elements might only affect one specific segment or at least they might have a more pronounced impact on a certain segment. I will, therefore, mostly concentrate on those effects. The comments regarding G&A mostly affect the corporate/consolidation column in the segment reporting.

Starting with the Life Science Business. Reported EBIT in the Life Science Business rose to CHF 90 million. The corresponding operating profit margin therefore reached 11.2% of sales down 90 basis points compared to the prior year period. The main factors here were, on the negative side, the higher R&D expenses that I mentioned earlier and obviously the acquisition-related costs. I mentioned before that these acquisition-related costs were adding up to a mid-single-digit million Swiss franc amount. This was on the group level, and the full amount was booked into the Life Science Business segment.

On the positive side, I mentioned the higher gross profit margin. This was mainly attributable to this segment including price increases and the positive impact from the exchange rates. And lastly, Life Science Business with an organic growth rate of 12%, of course, benefited from a positive volume effect.

EBIT in the Partnering Business reached CHF 25 million and therefore was slightly below the prior year level, not too surprising without any significant volume increase. Higher net R&D expenses were also playing a role in this segment. And as I mentioned before, the engineering income for funded R&D work for partners come with a lower margin in this phase of the partnership.

Our next slide addresses our net profit. The reported net profit pretty much reflects all elements discussed before mainly the acquisition-related costs. There is not much to highlight in addition to that as all the lines below the EBIT, like the financial result, is not developed in any extraordinary way. Also, the tax rate stayed pretty stable at 16%. Therefore just strictly reporting net profit for the first half of 2019 was at CHF 25.3 million and the net profit margin amounted to 8.6% of sales.

We move ahead to basic earnings per share. An even shorter discussion here, earnings per share were CHF 2.14. The share count increased slightly not even visible when rounded to the first decimal.

We continue with the cash flow. In the first half, cash flow from operating activities reached CHF 36 million thereby corresponding to 12.1% of sales. Our DSO number, the days sales outstanding, came down from 55 days to 50 days again, the level we have also achieved in H1 2017. This development goes into the right direction and was despite some of our largest partners continuing to manage their cash flows.

The operating cash flow includes CHF 16.3 million for amortization and depreciation, CHF 5.2 million thereof from IFRS 16, another CHF 2.3 million for the PPA and also CHF 4.1 million from development costs we capitalized in the past. On the other hand, we invested a total of CHF 36.7 million. Included in this figure are CHF 5.2 million for newly capitalized development costs. Investing activities obviously also include the CHF 21.2 million cash consideration for the acquisition of a supplier that was closed at the end of May. It also includes CHF 4.2 million of an earnout payment in context of the SPEware acquisition from 2016. You might remember that we had booked a similar first payment a year ago. This is now the second and final installment of the total consideration of CHF 10 million we had agreed upon as the maximum. The entire amount was payable as the sales-defined milestones were all achieved. Clearly, a good sign that the acquisition developed as we had hoped for.

If some of you wonder why it is CHF 4.2 million here and not CHF 5 million as disclosed in Note 3.2.2 of our interim report, well, from an accounting perspective, the remaining CHF 800,000 had to be booked as cash outflow in the operating cash flow. It is for the unwinding of the difference between the CHF 5 million and the discounted amount of CHF 4.2 million that we had booked as a contingent consideration at that time.

Moving on to the cash flow from financing activities. This includes the dividend payments we made in April this year in the total amount of CHF 24.8 million. Cash and cash equivalents were at CHF 269.7 million at the end of June. This compares to CHF 296.8 million at the end of December 2018.

Our net liquidity position after deducting all bank liabilities was at CHF 264.5 million compared to CHF 284.1 million on June 30, 2018. These 2 acquisitions closed since then is a combined cash consideration for the 2 deals of CHF 65 million.

The next slide shows the key figures. As always, this is just for your reference as I have already discussed most of the figures on this slide.

Let me now hand back over to Achim.

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [5]

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Thank you very much, Rudolf.

Now coming to the financial outlook for 2019, we confirm the guidance given earlier this year. For sales, we expect growth in the mid-single-digit to high single-digit percentage range in local currencies. The acquisition we closed at the end of May is expected to add sales in the low to mid-single-digit million Swiss franc amount. And as usual, potential additional acquisitions are not taken into account in this outlook.

For the reported EBITDA and margin we include, as discussed earlier, integration costs and short-term lower margins associated with the NuGEN, now Tecan Genomics, acquisition that will impact reported EBITDA margins with an expected high single-million-digits Swiss franc amount. However, the positive and recurring impact of IFRS 16 is expected to largely offset costs associated with the NuGEN acquisition and the CEO transition costs mentioned earlier by Rudolf. Therefore, the reported EBITDA margin is expected to expand to around 19% of sales in the indicated average FX rates.

With this, I thank you very much for your attention. And I think we are ready to open up 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 from the phone comes from Daniel Buchta with Vontobel.

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Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [2]

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Three questions, if I may. The first one, on your order book. I mean, you were mentioning some points in that regard already and that it has slowed down. But just to clarify again I mean, some orders have been canceled, but also do you see some customers becoming more cautious with new orders given the softer macro environment and also the investment cycle in general slowing down? I mean, you had a lower comparison base this half year while the second half last year was extremely strong. So how does that all fit together? And what can we expect here for the second half? Do you expect your order book entry to accelerate sequentially again?

Then the second question on the FX side, I mean, you mentioned that the gross profit margin was benefiting here in that regard. As far as I know, I mean, you are short euro, which is good for you because it has weakened; and you are long U.S. dollar, which is also positive. But here, I think you're using hedging. Can you quantify a little bit how much you have benefit in that regard? And what it also means for the second half for you? And then lastly on your guidance for the EBITDA margin. I mean my understanding is you guide on a reported basis. So on a reported basis, the margin was down in the first half. So if you want to reach 19% that would mean that the second half should be up significantly year-over-year. Is that really -- understanding -- is my understanding here in that regard right?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [3]

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Excellent. Thank you very much, Daniel, and maybe I will address them and take the first question, while Rudolf will be taking on the second and the third question. So on the orders, as explained, there were a couple of factors that we mentioned which included the kind of very unusual circumstance that we had to cancel orders that -- for the reasons that Rudolf outlined. But to your specific questions on what we see in the markets. I mean, overall, I think we still see very solid and sound demand for our products in all geographies. There is, particularly for the European environment, I would say a bit of a increased scrutiny on large capital investments, particularly in the pharmaceutical segments, where we're not seeing any slowdown of demand or the funnel, but more kind of the durations of sign-off on specific projects take a little bit longer than what we initially have seen probably in the back end of last year where also, to your point, we may have seen a bit of an acceleration into H2 of 2018 that we're now living on the backlog. But overall, the demand overall for Europe remains to be quite solid. But we see that slightly in the longer sign-off periods, especially for large instruments installation, not so much affecting areas like the detection business and others. But that's on that level. Overall in the other geographies, and particularly in North America and China, we see continued very strong development of our funnels and pipeline. So as we indicated, from that perspective, we are pretty happy with the performance and have a very solid backlog and view into the second half of this year.

The other factor that was mentioned is also reflecting to what we observed several times is a bit of volatility in the Partnering Business, where sometimes we receive large frame orders and top-up orders for call offs in June, sometimes we receive them in July and sometimes a little bit impossible to predict when these clients will place these frame orders. This year, it was more skewed to the second half placement of these frame orders. So again, that volatility plays into that background. But overall, we are pretty happy with the performance. And as indicated, we even have backlog left from some of the orders we booked in the back end of 2018. So with a pretty solid backlog into H2, we're I think in a very good performance basis.

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Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [4]

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Maybe just quickly a follow-up in that regard, I mean, given the high comparison base you have in the second half with orders coming in, do you expect incremental growth in that regard, that the order book is growing even more?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [5]

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I mean, of course, we're driving as many orders as possible. But I'm probably not in a position to give a guidance on the orders performance for the second half. We prefer to kind of stay on the revenue side. But as we said, we are -- looking at very, very solid funnels in both business divisions and a very good trajectory. So really one exception that we also called out in 2018 where we booked an unusually high single order for a client for customized systems, I think the underlying performance expectation on the orders book remains to be quite strong.

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Rudolf Eugster, Tecan Group Ltd. - Group CFO & Member of Management Board [6]

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Okay. Then I move to the FX question. First, yes, we are short in euro and we are long in U.S. dollars.

Then second I have to distinguish between 2 effects. The hedging effect, hedging goes fully into the financial result. And second hedging depends on the balance sheet date exchange rate whereas the operational impact on the gross profit margin, for example, depends on the average exchange rate. So when you look at the hedging, actually -- and we only had U.S. dollars, obviously, the U.S. dollar balance sheet date exchange rate was pretty similar end of 2018 and this year, so I had a loss on the hedging because the hedging cost is around 3.5% on 18 months. So that explains our financial result.

Your question regarding the second half, obviously, the hedging result in the financial result will depend on the December 31 FX rate, which I don't know. And the P&L impact we will have again the same questions to answer. If in the average, the euro goes down, it helps me on the margins. And if the U.S. dollar goes down, it threatens me and if it both goes down, then it depends on the mix what happens.

Regarding EBITDA, yes, it was down reported in the first half and yes, I expect it to be significantly higher in the second half. I would like to list 3 reasons there. First, generally, we have more sales in the second half and have a volume effect. That's actually every year, some years a little bit more, some years a little bit less. But then please also have in mind, in the second half, we will not have additional costs, but even a little bit come back on the CEO change. And second, also on our acquisition, of course, I had in the first half of the year, NuGEN, Tecan Genomics for the first time. In the second half, there will only be 2 months. And after this comparable though there are 3 reasons why the second half should be significantly better. This is not unusual. You could go back for example to the year 2017. There, we had first half EBITDA margin, 16.3% and second half 21.7%. So this is nothing that should surprise you.

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Operator [7]

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(Operator Instructions) The next question from the phone comes from Maja Pataki with Kepler Cheuvreux.

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Maja Pataki, Kepler Cheuvreux, Research Division - Head of Med Tech Devices Sector [8]

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My question actually has just been answered with 3 points on EBITDA margin expansion for the second half of the year. So thanks a lot.

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Operator [9]

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(Operator Instructions) We have a follow-up question from Mr. Daniel Buchta from Vontobel.

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Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [10]

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Yes, so if no one else wants to ask a question, I have still a few left. I mean, the second one -- or the first one on your guidance again, and this time on -- regarding the top line. I mean, you're guiding for mid-single-digit to high single-digit local currency revenue growth. I mean, obviously, we have NuGEN in there. My assumption is it's roughly 2% of M&A contribution for the year. So that means 3% to 8% organic growth around about this year. I mean, with 6% now, especially the lower end seems to be quite cautious. I mean, what would need to happen that the lower end of 3%, 4% organic growth for the whole year is realistic? And then the second one on the corporate line, I mean you mentioned the acquisition costs for NuGEN are in Life Science obviously included. And then probably you had a bit of acquisition costs also related to the supplier acquisition. But the corporate line went up quite significantly or the consolidation line on EBIT level. What particularly drove that?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [11]

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Thank you very much, Daniel, again. And again, we'll split it. Rudolf will take the second part and I will probably start with the first.

On the outlook, listen, I mean of course it is a range. It is mid-single digit to high single digit and then the acquisition that you mentioned will play into this, of course. But on the other side, the year is still ongoing. I mean, we keep to that range and didn't kind of modify it. I didn't want to kind of skew it to one or the other position.

You're right, yes, and there is still a lot of work to be done. Of course, there's a lot of orders still to be converted into revenues. And that's why I think overall I feel pretty good. With the guidance, of course, we kind of moved a bit upwards in our own thinking in terms of the kind of profile within that range, but overall, yes, I think it's a very solid guidance and I don't want to become more specific here. But you also have to say about the kind of the backlog performance and some of the other underlying factors. So I think we're in a good position to kind of deliver on that outlook.

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Rudolf Eugster, Tecan Group Ltd. - Group CFO & Member of Management Board [12]

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Okay. Then I take the question on the corporate costs you raised. I would like to give you 3 elements in the answer.

First is in the year 2018, we were, I would say, low with CHF 5.9 million. There are also always some normal volatile part. We had CHF 7.2 million in the year 2017, for example.

Then what has driven this increase, there are 2 specific big impacts. One is the M&A-related costs for the due diligence and the closing of the acquisition of the supplier we mentioned. As we had to make contracts in 2 countries, one was in the U.S. and another one was in the -- in Vietnam. And then linking the 2 contracts and everything, and obviously in Vietnam normally the people don't speak English and things are in Vietnamese so all of that has driven the costs higher than just for a simple acquisition in the U.S. And the second impact was the nonrecurring cost for the CEO change they had also booked in this corporate/consolidation.

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Operator [13]

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The next question from the phone comes from Sibylle Bischofberger with ZKB.

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Sibylle Bischofberger Frick, Zürcher Kantonalbank, Research Division - Research Analyst [14]

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I have also a couple of questions. I would like to start with the acquisitions. First, could you give us a flavor how happy you are with the NuGEN development? I expected a little more sales there. And secondly about a small supplier. Did you book these sales starting 1st of June only in Partnering Business or also in Life Science Business?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [15]

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Excellent. Thank you very much, Sybille. I will just first comment on the NuGEN acquisition and your comment if we're happy with it. And I can absolutely confirm we are. I mean, the trajectory -- and as I said, it's twofold. One is, we have invested significantly in the commercialization ramp-up of NuGEN products worldwide. And we hired the last salesperson in that mix and we are in full swing to kind of talk to NGS laboratories to continue finding very good interest in the product. And of course, a lot of labs are now in the validation of these assays and these kits and we expect the acceleration of the kind of franchise accelerating significantly in the second half.

And the second part, of course, is linked to the launch of the DreamPrep. I mentioned that in my part of the presentation. Of course, DreamPrep is also coming with a predefined set of NuGEN, or now Tecan Genomics, we should say, reagents. So as NuGEN also receives a very high interest associated both to the NuGEN instrument performance, but also to the specific nuances and advantages of the NuGEN chemistry that allows far higher productivity of the overall system, we of course expect with installation going forward of DreamPrep's far accelerated adoption and then pull-through of NuGEN reagents on that instrument platform. But keep in mind that we continue to commercialize the kits also to competitors. So we are not kind of aiming at closing the system. And in our direct reagent business in genomics, we are talking to any large-scale NGS facility that maybe are in a position to adopt these kits. And like I said, we make very good progress. But the adoption and then the scale-up always follows a period of valuation which naturally is a bit of a time delay in terms of when you first speak to a customer and then when you see significant volumes of these kits coming from exploratory volumes, I would say, to more industrialized volumes of reagent consumption.

And then on the second, on the acquisition on DCPMI, Rudolf probably will give a comment on the financial allocation.

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Rudolf Eugster, Tecan Group Ltd. - Group CFO & Member of Management Board [16]

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Yes, your hypothesis is right. We have booked 1 month in the month of June into the P&L, and it is all in PB. And this explains when you look -- when you listen the difference in the organic growth rate of 0.2% in local currencies to the 0.6% in the reported number.

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Sibylle Bischofberger Frick, Zürcher Kantonalbank, Research Division - Research Analyst [17]

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And I have other questions concerning IFRS 16. The only figure you mentioned was amortization and depreciation, which increased by 5.2% -- by CHF 5.2 million. Does it mean that the EBITDA was by this amount higher and that EBIT was still only influenced by a couple of hundred thousand Swiss francs? So I just want to get a feeling how much IFRS 16 was influencing EBITDA and EBIT.

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Rudolf Eugster, Tecan Group Ltd. - Group CFO & Member of Management Board [18]

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Yes, the amount is CHF 5.2 million. You'll find that in our half year report. And this means the EBITDA was CHF 5.2 million higher. On the EBIT, it was a very, very small number, only a few thousand Swiss francs. You get this when you also look at the details in the published half year report. So again, EBITDA impact plus CHF 5.2 million. EBITDA, it's -- EBIT, it's negligible.

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Sibylle Bischofberger Frick, Zürcher Kantonalbank, Research Division - Research Analyst [19]

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And does it mean also that the financial result is not influenced by IFRS 16, right?

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Rudolf Eugster, Tecan Group Ltd. - Group CFO & Member of Management Board [20]

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The financial result is impacted by CHF 299,000. There's a difference when the lease payments one would do -- we did add cash is not the same than when you add up the amortization and the interest because there is -- in the balance sheet, you have to do some discounting so the 2 numbers do not give exactly the third number. The third number that was impacting the financial result was in interest paid, CHF 299,000.

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Operator [21]

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(Operator Instructions) The next question from the phone comes from Laura Pfeifer with Octavian.

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Laura Pfeifer-Rossi, Octavian AG, Research Division - Analyst [22]

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I have two questions on the top line. Maybe just to follow-up on the Life Sciences where you have 12% organic growth in H1, what kind of dynamics could we expect into H2 given just the recent launch of DreamPrep and Spark? I mean how big of an impact could that have on growth? And then maybe on the Partnering Business, what is here the outlook for the second half? And what kind of dynamics are driving the growth? I mean, is it mostly coming from new launches or what do you expect from the OCD contract?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [23]

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Okay. Thank you very much, Laura. And typically, as we don't really guide on the segment level, I would still like to give you a little bit of flavor on the dynamics on the divisions. And I think it's a great question.

So on Life Sciences, as I said, we continue to be quite strong on a very broad basis. And as to be expected, with particularly the DreamPrep, which is a significant CapEx investment, we made very good progress and we have a substantial funnel now built. But of course, the contribution of the overall top line growth in Life Sciences, just by DreamPrep, is not going to transform the business. So it's going to be a very meaningful number going forward but it's not kind of in itself a kind of too high level to the overall performance. I think we look at it more broadly. And then as we go forward DreamPrep will, of course, have a kind of more important impact. But I suspect in the second half, we will see a couple of installations, but then continue to accelerate the funnel into the next year.

In Spark, of course, naturally it has a bit of a shorter, I would say, adoption cycle. But it's still there. We just launched it in June. We are talking to a lot of institutes and leveraging the previous experiments that we conducted. At key opinion leaders, the reception is extremely positive. The turnaround from lead to quote and then sales is, of course, somewhat shorter than with the DreamPrep. But still, we're in very early phases of demonstrations. And of course, we're now adding capabilities of sales and application specialists in an imaging segment of cell analysis that we've not fully captured before or not even entered with a meaningful product range. So there is a bit of adoption time still expected from our side. So both will meaningfully contribute probably in the mid-term but they will not transform the top line expectations of Life Sciences.

And maybe to the Partnering side. I mean, it's in -- like in similar discussions we have on the Partnering side, the growth, of course, is carried by an increased number of clients with different contributions to the top line. Still the biggest that are well known, including Ortho Clinical, make the biggest kind of contribution to the overall revenue performance of the business. However, we see now a significant contribution also of smaller-scale projects. I mentioned that Sysmex launched their front-end flow cytometry system. However, this again is not going to transform the top line. But of course, the addition of multiple of these type of projects start to pay dividends and they now contribute to the top line also in the second half. And overall, I'm not going to discuss in detail customer performances because that's due to our partners to comment on their business performance. But on a broader scale, we are very happy with the trajectory both of existing clients and newer clients both in North America, Europe and particularly now in China that start to significantly contribute to the growth. And as outlined before, we are looking at a solid backlog for this. So again, all in all, I remain very, very positive around what I said earlier on the guidance on the top line that we also discussed with Daniel.

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Operator [24]

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(Operator Instructions) We have a follow-up question from Mr. Buchta. Please go ahead, sir.

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Daniel Buchta, Bank Vontobel AG, Research Division - Research Analyst [25]

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Just one question maybe quickly on the R&D. You mentioned that R&D, obviously, went up quite significantly. It was roughly 34%. I mean, R&D per se is nothing negative and it is obviously an investment in the longer future. But I mean why is that now necessary that you increase it that much? And is this significantly higher level a new run rate? So that would be very interesting to know.

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Rudolf Eugster, Tecan Group Ltd. - Group CFO & Member of Management Board [26]

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Maybe I say something and can be that Achim wants to add. First, you're right, up 34%. But please keep in mind that approximately half of it was from Tecan Genomics, NuGEN, where we have some plans, and we have said that they have plans and the predicted -- or given you that this will have a negative impact in the first year. We do a lot to commercialize and get the synergies and grow the top line. So there, we did a lot of R&D.

Second, is it the new run rate? We do not guide on the different lines on the P&L. Obviously, there is always some volatility. If you look at last year, I would say, the R&D level in the first half was a little bit lower than what we had expected. We had, at that time, some trouble to find people. We have solved that in the meantime, and this year, we are now a little bit higher in the first half. But I would not conclude from that, that we have changed somehow the level of R&D we want to do. In the long term, we do what is necessary to grow the business.

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [27]

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Yes, in addition to what Rudolf said about the kind of expectation and the level of R&D, I would just like to confirm that you should probably see there's a sign of confidence in our strategic outlook and both with our confidence in investing. I would say meaningful into the strategic part of the programs like Tecan Genomics, but also others that are just complementing the strategic direction that we also share and discussed with you on the Capital Markets Day.

And secondly, as also was discussed earlier, particularly in the Partnering Business, higher R&D contribution on the engineering income should be seen as a very good kind of sign of progress in the development of new partners and existing partners expanding some of the world's (inaudible) partners in life cycle management.

So overall, as Rudy said, we're not looking at this as a transformation step. And we're certainly not kind of guiding on the numbers, but I think it's in line with the expectations. And this was certainly a very, very -- I would say for us positive development overall. Also looking forward with the outcome of the development programs that are under works right now.

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Operator [28]

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We have another follow-up question from Ms. Bischofberger with ZKB.

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Sibylle Bischofberger Frick, Zürcher Kantonalbank, Research Division - Research Analyst [29]

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I have a first -- a question concerning CapEx. So you had around CHF 12 million for intangibles and tangibles. Is it fair to assume that I take this number times 2 for the full year?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [30]

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The answer is yes, that's a good approximate.

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Sibylle Bischofberger Frick, Zürcher Kantonalbank, Research Division - Research Analyst [31]

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And the other question is concerning M&A. Any news flow there?

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Achim von Leoprechting, Tecan Group Ltd. - Head of the Partnering Business Division, CEO & Member of Management Board [32]

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Okay. As always, we will communicate whenever there is news. No -- but yes, again, it's a very, very, very good I would say overall funnel in front of us. And with the just closed acquisition of DCPMI, of course, we are very happy with the opportunities that we now gain, a new company being part of the Tecan Group with all their capabilities in high-precision machining both in North America and Vietnam. And yes, we will continue to be very active on the M&A side, very consciously of our very healthy balance sheet.

Okay. So if there's no follow-on questions, then I believe we could probably close this call at this moment.

And I would really thank you all for your time and your active participation, and I look forward to speak to you in the very near future. So thank you very much.