Sartorius Aktiengesellschaft (OTCPK:SARTF) Q3 2022 Earnings Conference Call October 19, 2022 9:30 AM ET
Corporate Participants
Joachim Kreuzburg – Chief Executive Officer
Rainer Lehmann – Chief Financial Officer
Conference Call Participants
Patrick Wood – Bank of America
Paul Knight – KeyBanc
Sezgi Özener – HSBC
Zain Ebrahim – JPMorgan
James Quigley – Morgan Stanley
Odysseas Manesiotis – Berenberg
Oliver Reinberg – Kepler
Ed Ridley-Day – Redburn
Hugo Solvet – BNP
Colin White – UBS
Falko Friedrichs – Deutsche Bank
Delphine Le Louët – Société Générale
Naresh Chouhan – Intron Health
Operator
Good day and welcome to the Sartorius and Sartorius Stedim Biotech Conference Call on the Nine Months 2022 Results. Today’s conference is being recorded.
It is my pleasure, and I would now like to turn the conference over to Dr. Joachim Kreuzburg, CEO. Please go-ahead sir.
Joachim Kreuzburg
Thank you very much, and hello and good day also from my side. Together with our CFO Rainer Lehmann, I will now walk you through the results for the first nine months of 2022 for both the Sartorius Group and Sartorius Stedim Biotech as always.
I will kick it off by talking a little bit about the highlights of our business development this year so far. Then also briefly remind everybody about the key features of the acquisitions that we have been able to close by end of last month, and then I will hand over to the Rainer on the numbers for the Sartorius Group.
So I think overall, we have seen a good third quarter, pretty much with the same set of numbers as we have seen for the first two quarters, sales revenue very much on the same absolute level that leads to double-digit growth of sales revenues and earnings for both divisions. We also have seen a healthy profitability level based on the positive side, the scale effects that we have been able to generate. But of course, at the same time, and again, very much in line with what we have seen during the first half of the year, a certain dilution by the higher cost base, as expected and planned for mainly because of additional headcount, not so much because of inflation. And then also some FX related headwinds, mainly through FX hedging instruments.
I just said that inflation hasn’t played a big role. I think we talked about that extensively. After six months, that we have been able to pass through pretty much the inflationary effect that we have seen on our cost side to our customers by increasing our price levels. We were talking about that a lot last time. I’m sure there will be a couple of questions around that later on as well.
The situation is very much characterized by and again, we talked about that before, by two trends that are at the moment, offsetting each other a little bit depending on the perspective that you take. And on the one hand, we still see a very strong market, fundamentally strong market in the sense of healthy pipelines at our customers a lot of innovation going on, after a couple of decades where everything in the biopharma sector was around monoclonal antibodies, we now see an increasing relevance of new modalities, cell therapies, gene therapies, mRNA-based products and therapies. But at the same time, we see a quite rapid normalization of demand, particularly on the bio processing side, not so much on the life science tools or lab product side.
Again, I’m sure we will talk about that later on, in a bit more detail. But it’s important to us to really highlight that that the current trend, the expected current trends that we see on the order intakes side for bioprocessing shouldn’t be mixed up with the fundamentals of the market we are operating in.
We specified our outlook for 2022, when we were heading into this year. We were applying a rather wide bandwidth for our sales revenue growth. We know narrowed that to the lower half of that bandwidth for bioprocessing and the upper end or the upper half of this bandwidth for the lab business. And given the relative size of these two businesses that leads to the lower half of the bandwidth for the Sartorius Group. We are fully confirming the profitability target that we have set and communicated for this year.
And I think it goes without saying at these times, that the uncertainties remain to being to be high. We do have our all the supply chain challenges well under control, but I think there are some overarching geopolitical and economic aspects that still cause quite some uncertainty.
So as I said before, I also wanted to repeat a couple of highlights about the acquisition that we closed by September the 30th, which is the acquisition of Albumedix based in Nottingham, U.K., a business with a good 100 employees, sales revenue expected this year to be a bit above 30 million British Pound, very healthy profitability, therefore also a price of a good 400 million British Pound, representing I would say, a multiple that you would expect for a business like this.
We acquired 100% of this business, all in cash. What is this business about? Albumedix is a leader in recombinant albumin, which is a critical component for a number of innovative biopharmaceuticals or what one calls today new modalities, as, for example, cell therapies, also viral based therapies, also a couple of vaccines, it strengthens our position further in this field of what we call critical raw materials [Audio Gap] biological industries before that.
And, yeah, with that, I would like now to hand over to Rainer to walk you through the details of our nine-month results.
Rainer Lehmann
Thanks, Joachim, and also welcome from my side to today’s call. Let’s start with the usual group overview.
Sales revenues amounted for the first nine months to €3.1 billion that’s in constant currencies, an increase of 16.6%. Just to put it into context, and you will hear me doing this throughout the presentation, it’s important always to refer where we’re coming from. Last year, at this time, we actually had an increase in revenues of 54%, the year prior to that in 2020 of 25%. So the 17% are very healthy achievement on top of that substantial base that we have built over the last two years.
Order intake also amounted to 3.1 billion, as expected, it’s a decrease in constant currencies of 9.5%. Also here to put it into context last year, at this time, we actually were reporting 72% increase of order intake, and prior year in 2020, 37. So really, I think it’s very important that this is something that we also anticipated during our call book-to-bill ratio for the first nine month [Audio Gap] for the quarter, slightly below 2.9. And that is also that we pointed out at the half year call that we wouldn’t be surprised [Audio Gap] is at 1 billion it’s an increase of 21.5% almost so despite higher costs, and there again.
We pointed out over the last calls that we were increasing our cost base that last year’s profitability was a little bit artificial because revenues increased over proportional to the functional cost development. And therefore, we see that now catching up and the cost base has increased. In addition, we have still a few FX related headwinds, but the margin pretty much on previous year level, slightly only a half percentage points below. Also, just to complete the picture on the sales growth actually two percentage points we attribute to the acquisitions that we made this year.
If we then look at the regional [Audio Gap] distribution of our revenues, we actually see that America is growing the fastest, no surprise, it’s one of our key markets that we’re focusing both divisions actually contribute strongly to this development, an increase of 22.5% to 1.1 billion. In the EMEA, of course, here we have high comparables really caused by the extraordinary boost through the pandemic, nevertheless, an increase of 10.5% in constant currencies, also to a little bit over 1.1 billion in Asia Pacific, also a very nice, close track here of almost 19% to €825 million. And we have to say that despite some partial lockdowns, which at the end, really only had a minor impact on our growth in that region.
If you look at the right-hand side sales by region, you actually see a little bit of movement also even compared to the six months figures we see here one percentage point increase in the Americas as well as Asia Pacific. So that reflects, of course, the figures that I just presented.
When we have a deeper look at the two divisions, and we start with the Bioprocess Solutions, and let’s start in the middle with the sales revenue. Here we have revenues of 2.47 billion, that’s an increase of almost 18% in constant currencies, 2 percentage points also are here attributed to the acquisitions that we made that’s basic. And one important point here is, of course, the sales that are attributed to the Coronavirus vaccine declined significantly, as we expected, and as you also said at the half year time that we expect only half the business compared to last year this year related to the Coronavirus vaccine.
Again, here, this 18% keep in mind on the previous year’s rates in the last nine months there in 2021, we actually saw a growth of 58%. So it’s very important, I think that we really see the nine months ’22 development in the context of the last two years development.
On the order intake on the left-hand side, you see the expected decrease really reflecting a normalizing demand. As we all know and we have pointed out several times prior year figure was boosted by the pandemic, and in conjunction with those also the really different behavior of the ordering patents by some customers, which will of course, now see also that our customers reduce some stock levels. And therefore, the order intake of 2.45 billion really reflects that behavior.
The underlying EBITDA margin for the Bioprocess Solutions division was 35.7, slightly below previous year, nevertheless, an absolute increase of almost 22%. And despite, of course, the positive economies of scales that we’re still achieving, we have a dilution because of this increase of the cost base mainly attributed to headcount and also, some FX related headwinds.
On the LPS side, really see a fantastic development of the division. Really the very dynamic growth fueled by the bioanalytics business, I start here again, in the middle was the sales revenue, we see here, an increase of 12.5% in constant currencies to 642 million, and that on top of a very strong previous year. So we are really, really performing well, especially on the bio-a side.
M&A contributes actually only one percentage point here. On the order intake, we see an increase of 14.5% in constant currencies to almost 670 million. Here also the two regions that are really contributed is Americas as well as also Asia Pacific. EBITDA margin slightly up due to economies of scale, and also favorite product mix bio-a has a more attractive margin than our Lab Essential business. And we even could expand our margin by 2 percentage points despite some higher cost base again as planned, and also despite some headwinds.
If we look at some key performance indicators we see here. Again the underlying EBITDA I just mentioned before, I’m not going to say [indiscernible], good billion, we have extraordinary items pretty much from previous year’s levels was 26 million, really reflecting the corporate projects and expense related to M&A. Our financial results pointing out as always, is mainly driven here by the fluctuation of the earn out liability in conjunction with the acquisition of the separations and underlying net profit, we see a healthy increase of 23% to 501 million and report net profit and over quarter increased to almost by 71% to 526 million.
Operating cash flow compared to previous year, a decline of almost 30% is really due to change in our networking capital. That is mainly driven by the increase of inventories in order to really ensure that our supply chain is as secure as possible, and buffers, certain deficiencies in case they should happen. Investing cash flow and substantially increased to 904 million. Of course, composition here is the three acquisitions, which pretty much add up to 541 million. The biggest one, of course, Joachim just mentioned that we closed at the end of September, Albumedix. And then we also spent 350 million on CapEx mainly in order to really continue our production capacities expansions. And that translates to a CapEx ratio of 11.3%.
You see on the next slide, we then actually look at a very healthy and robust balance sheet equity ratio here, increased 35%. Again, here I mentioned that also its half year is the switch of the first earn out that was paid out in connection with BIA Separations, that increased [indiscernible] equity side, but also, of course, the contribution of our net profitability. And the net debt increased to 2.3 billion main driver here clearly the acquisition of Albumedix, which then translates into a net depth divided by underlying every day. So dynamic indebtedness of 1.7. So still, even despite that substantial acquisition, very healthy and robust financial situation for the overall group.
And with that, I’m going to hand back to Joachim.
Joachim Kreuzburg
Thank you very much, Rainer.
I have the last slide. Now here for the Sartorius Group, which is about the guidance for 2022. As said before, we have specified now the expectation for sales revenue growth, whereas we left the profitability, expectation unchanged. You can see in the table the change in bold letters in the middle of this table. So for the Sartorius Group, we are now expecting to reach the lower half of the range of 15% to 19%. And that is composed out of the expectation of again, reaching the lower half of the range of 17% to 21% for Bioprocess Solutions and the upper half of the range for Lab Products and Services.
The only other change here is the one on the bottom of this chart. The last bullet point on the underlying EBITDA — net debt to underlying EBITDA ratio, which we now expect to come in at around 1.6 after the previous expectation of 1.1, mainly driven by the Albumedix acquisition that we closed, as I said before. So and the main reason here is and you might remember that we reduced the expectation on the COVID business for the full year already after six months, when we saw that our customers have reduced their projection for the full year substantially. And we said well, we don’t change the bandwidth that we have given at the beginning of the year even though this is a substantial number, because of but we said so and did so because of the strong order book there is no change on that, of course. But now further in the year and closer to the end of the year. We now also know and see when our customers would prefer to get their deliveries and that is the main reason why we now expect rather the lower half of the range for Bioprocess Solutions. And then, the rest is just adding up the numbers. Whereas for Lab Products and Services, and I think a couple of analysts made these comments already today, maybe this looks a little bit conservative, but well, uncertainties remain high. And it of course, depends really on, for example, whether we will see further lockdowns, et cetera, et cetera. And that is why we really prefer to basically confirm our guidance, but to narrow down the bandwidth a bit.
So now I would like to move forward to SSB. And as always walking you through the numbers rather quickly as most of the comments have been made before, particularly on Bioprocess Solutions business. Nevertheless, along the first chart, maybe one more word on order intake, though, you see the number order intake, pretty much on the same, I mean, identical level, like sales revenue, representing a decrease of almost 9% in constant currencies versus the number, the year before. Rainer was talking about book-to-bill ratio. And typically, you would say well order intake the book-to-bill ratio reflects and represents an important information for the future business. And what is important to me to point out is that at the moment, order intake is more reflecting the development of the business in the past, then, being a good proxy for the future business.
And it’s a matter of pure logic, then after this very significant over amplification of demand, because of longer lead times, and the policies and initiatives by customers to increase their stock levels. And these two trends added to each other, that now when customers start to reduce their stock levels again, and the lead times have normalized, you have two strong drivers in the reverse direction, it’s clear that we see this trend we always talked about that basically since two years ago.
So however, what we see here is as you can read 17% growth and constant currencies for sales revenue and 12.8% decreased order intake. In constant currencies, underlying EBITDA has been increasing by a good 19% margin a little bit diluted, 0.5%, approximately because of the FX-related headwinds, and the other, mostly because of the increase of headcount as we talked about that before.
We then have an earnings per share at €6.58 and increased by again, a good 19%. The regional picture, we talked about that for the group before also for SSB you see now Americas almost being on the same level as EMEA, pretty much in line with what we would have expected or and always talked about, nothing to add to what has been said before. And pretty much the same is also the case for the view on cash flow, where I would just repeat comments that have been made. And you can see them also on the right-hand side in these three bullet points regarding inventory buildup, as well as the valuation on the earn out liability.
And then on the financial indicators, obviously a very strong equity ratio for the SSB Group, then the reflection of the two acquisitions that we’ve made for SSB in the course of the year with a certain impact on net debt to underlying EBITDA on a very low level, though.
And we then take a look quickly on the last slide, again, the one on the guidance, the specified guidance, narrow guidance for 2022. Again, we expect here now the lower half of the range that we have communicated since the beginning of the year and we’ll confirm the EBITDA margin target and all the rest is also quite symmetrical what we have talked about before including the now higher anticipated net debt to underlying EBITDA ratio for the end of the year, mostly following the Albumedix acquisition.
And with that, I think we now have time for Q&A. Thank you for listening.
Question-and-Answer Session
Operator
Ladies and gentlemen, at this time we will begin the question-and answer-session. [Operator Instructions]. The first question is from Patrick Wood from Bank of America. Please go ahead sir.
Patrick Wood
Perfect. Thank you so much. I’ll keep it to two, because I’m sure there’s lots of questions around and hopefully, they’re pretty straightforward. Firstly, apologies if I missed it, do you have a sense for the let’s say the Q3 orders within BPS, but excluding because of vaccines? So just so we can have a sense of X vaccines how that looks?
And then, the second one, Joachim, you kind of gave a sense, you gave a hint about looking forward? And not really the order books being a backward-looking sort of thought process? Should we interpret that and appreciate, you probably don’t want to guide on ’23 at this stage, but should we interpret that as some kind of confidence that you wish you’d see some reasonably decent growth on the revenue line in ’23? Is that a fair assumption, given what you’ve seen, if the audits that you still have in the backlog? Thanks.
Joachim Kreuzburg
I will try to answer the second question first. So, honestly, still a little bit too early to talk about 2023, indeed. What we can say is that we don’t see any change to our underlying view on the business. And I think we talked about that, after six months, as well. We, of course, will also talk about our midterm guidance, which is for 2025, when we published our preliminary figures, end of January.
And I would say, we don’t have any different view from let’s say, volume side. Volume side, no moment in the physical sense than in a monetary sense. So we will take a look on how to translate that into the changed environment regarding currencies and also inflation. So, that is something that I can say that we don’t have any different view on that.
For 2023 to be honest, the variable here is, again, not so much the underlying market, the variable here is the inventory level of our customers. And I think we always have talked about that, that’s a bit difficult and it’s always quite incomplete the picture that we have. But just to give you a sense, a couple of customers of ours and in the industry, have usually stock levels, rather are around six months of their annual demand or so half of the annual demand. And they were rather aiming for and quite some of them were able to execute on that to increase that to 12 months.
So that gives you a sense for how much reduction of stock levels we partially see, of course, not everybody is doing that to the same extent, because everybody was able to build that up or wanted to build that up. So and that is the variable and that is really why we are hesitating to give any more precise guidance for 2023. But we look on that, we will at some point, the right perspective will probably be to look on the years 2020 through 2023 in total. And these are four years we are aware of that, but this is probably the right perspective to take later on. But again, give us another three months before we talk about 2023 a little bit more precisely.
And then, the first question on COVID or Q3 order intake ex-COVID, we for sure would have seen a much, much more positive picture and now it depends on COVID. What do you mean — how do we define COVID? We always have used the narrow definition here. So rather really, in bioprocess orders related mainly to vaccine manufacturing. That already would have made a significant difference and probably has led for q3 standalone to a book-to-bill ratio around one. If we would exclude now, this additional effect that we are talking about stock level lead time revenue et cetera, et cetera, then for sure we would have seen it above one.
Patrick Wood
Appreciate the color and thanks for taking the questions.
Operator
The next question comes from Paul R. Knight from Key. Please go ahead.
Paul Knight
Hi, Joachim. Could you talk to what you think the underlying market growth is in your view mid-teens above 20? Can you talk about what you think the market pace is without COVID?
Joachim Kreuzburg
So if we exclude COVID, as well as again, the normalization or if this is the question, then we believe the underlying trend in the market is around the 10% mark.
Paul Knight
Like 10% from a like a 2019 basis.
Joachim Kreuzburg
Right. So that would be a perspective market. So we usually over the last whatever decade or so have beaten the market. But you were asking for market-to-market we would say around the 10%.
Paul Knight
Right, plus share gain, et cetera. Thank you.
Joachim Kreuzburg
Right, exactly.
Operator
The next question comes from Sezgi Isnack [sic] [Sezgi Özener] from HSBC. Please go ahead.
Sezgi Özener
Hi. Thanks for taking my question. I have two please. First of all, are lower COVID order is the main change or do you also see some impact from your customers from the Drug Inflation Control Act, which is expected to have an impact on drug prices? Is that cutting the appetite a little bit? And my second question relates to bioanalytics, given the quite striking growth in bioanalytics, especially in America, but I believe that’s regionally diverse. Do you see a higher ratio of recurring revenues going forward within your LPS segment? And does that change the longer run outlook?
Joachim Kreuzburg
So on the first question, yes, I can confirm that the drivers that we were referring to here are really the main drivers, and there are no other relevant drivers at a comparable level. So we are really talking about these drivers, now like COVID business in a direct sense, in this narrow sense as justified before. And then, these second-round drivers we were talking about basically since the second half of 2020, longer lead times have led to earlier orders, plus the desire to increase stock levels was a second booster to that. And now we see the reverse. So that’s really what we’re talking about. And then on Bio-A absolutely correct. We believe that this business is growing on a very significant double-digit level is growing at nice profitability. It’s growing in all regions with quite some pronunciation of the Americas. That is pretty much also reflecting the relevance and strength of the U.S. when it comes to new drug developments where these tools are playing a particular role. But again, we are growing in all regions.
And yes, I mean, this is absolutely our strategy to make this a key pillar of the further development of our LPS division. And as you have seen over the last couple of years, that is why we were making a couple of acquisitions in this field. And we believe that there’s maybe some more room for adding innovative and complementary businesses to it.
Sezgi Özener
If I may follow up in the first question, you’re not seeing any negative or positive impact from the Inflation Control Act, affecting clients appetite to invest.
Joachim Kreuzburg
No.
Sezgi Özener
Okay. Thanks a lot.
Joachim Kreuzburg
No. So far we don’t see anything.
Operator
The next question come from Zain Ebrahim from JPMorgan. Please go ahead.
Zain Ebrahim
Hello, Zain Ebrahim from JPMorgan. Just two questions for me, please. My first question would be on your 22 EPS guidance. So if I take the low end of the guidance that implies that mid-teens EPS growth in Q4, it seems to be an acceleration growth you said in Q3. So can you talk through what’s driving that acceleration in Q4? And maybe beyond the inventory levels in 2023, that you’ve already got for sure? So I know you’ve alluded to book-to-bill being below one, for quarters or maybe a few and then came so now in Q3, and it seems like the order book is normalizing maybe even quicker than people expected.
So how should we think about the normalization left in terms of how many more quarters you expect to book-to-bill be below one. How should we think about Q4 relative to Q3 in terms of Q4 last year was already started to normalize and start to think [indiscernible]? Thanks for taking the questions. Thank you.
Joachim Kreuzburg
Okay. So your first question. That’s right, but please keep in mind the strength of the fourth quarter last year. So, therefore, and I think Rainer alluded to that, during his part of the presentation. So, we are expecting a — I would say, a strong fourth quarter, when you take like this total perspective, what we always would recommend to take.
And book-to-bill, let me answer like this, we have seen four, five quarters from the later part of 2020, well into 2021, including the third quarter were book-to-bill ratios have been very significantly higher than usually. We had in our bioprocessing business, typically, or you can also take the groups numbers, but particularly about processing for the years before, always when you take the annual level, because quarters can always fluctuate a little bit. When book-to-bill ratios of 1.08. And we were talking about orders, quarters, where we partially had book-to-bill ratios around 1.5 and few quarters of that. And we have to just understand that this cannot be that this doesn’t work purely mathematically, physically, it doesn’t work, it has to go down again. We were talking about that. And we’ve always said don’t extrapolate that since the second half of 2020. And therefore, I think it’s all possible, as we said, also, after six months, that we will see a book-to-bill ratio below one, again, next quarter, for instance.
So that’s absolutely well possible. And what you also have to keep in mind here, because I’m sure you are all comparing our numbers with the numbers of the competition, and of course, we also take a close look on those numbers. And when you do that, then you will see that, particularly when you take out COVID, where sometimes the effects have been a little bit different in the different fiscal years, for instance, particular but an even more so on the different quarters, for sure. But then you see that we have seen a significantly stronger growth than our competition, particularly when it came to order intake, because our delivery performance was significantly better than the one of quite a number of our competition. So that means this effect has been a bit over pronounced on our side. And that means that the reverse effect will be also a little bit stronger. And, again, we tried to be very transparent on that very, very much ahead of time. And now we see that as expected. And our recommendation really would be to take this total perspective, rather, from the big — let’s say starting from mid of 2020, or take the full year of 2020, whatever your preference would be, so that you understand the full and see the full dynamics and get a picture, a true picture on the total performance and the true performance. And then, I think you can see, and hopefully understand why we are talking about a very healthy performance of ourselves.
Zain Ebrahim
That’s very clear. Thank you.
Operator
The next question comes from James Quigley for Morgan Stanley. Please go ahead.
James Quigley
Thanks for taking my questions. I’ve got three, if that’s okay. So you mentioned that we may have a ratio below one in the next quarter as well, but sort of how long or what’s your best sense or best guess of how long this sort of disruption could last for — the normalization could last for you mentioned some customers are going to 12 months versus six months inventory levels, but how are customers sort of balancing inventory levels versus other uncertainties that are out there in terms of the geopolitical risk or anything that might affect deliveries in the future?
And then one last point on order book and deliveries, we saw a similar sort of situation in 2017, 2018. How does the current situation compare to that? Then, when I look at orders after sales over the past eight quarters, if you do an offset of about two quarters, there’s around 200 million or 300 million of excess orders. So orders being 200 million and 300 million higher than sales? How should we think about realization of these revenues? Have there been any cancellations at all? Or should we expect those to flow through in Q4 or next year?
Finally, on the LPS business? Bioanalytics, last quarter you mentioned it was slightly above 30% of the LPS business and it’s growing at around 30%. Is that still the same? You mentioned a very healthy double-digit growth, so this bioanalytics fit in the same region? And then, for the remainder of the LPS business, the non-bioanalytics part? Can you give us a sense of what the exposure is to the economic downturn, particularly in areas such as food and beverage, chemicals, autos, et cetera? Thank you.
Joachim Kreuzburg
Yes. Thank you very much. So I only can repeat my answer regarding book-to-bill ratio, it’s well possible that we will see another quarter or so with book-to-bill ratio below one. I would rather like to try being more specific when it comes to outlook on order intake developments. Again, end of January next year. But on a higher level, what I think is, we will see differently from this year, where as I said, before, sales revenue has been the same for three quarters now. And also the fourth will look not that much differently from that, that maybe next year, we will see a little bit more a different development during the course of the year. And that may particularly be the case for order intake.
So we would expect that order intake will gradually improve in the course of the year. And to translate that into — at least somehow a guidance for book-to-bill ratios, quarter-on-quarter. It’s a bit too early. And please bear with us, we will try to give more transparency, when we get a little bit closer to that.
I think then you are asking for order cancellations, that is not really a very significant topic. It’s rather and I think we addressed that earlier in our call, it’s rather that we are in close alignment with our customers when it comes to the delivery times. And I mean, we have long standing relationships to our customers. And therefore, within a certain frame, we are adopting also to their preferences here. So we see some push outs of deliveries. And I’ve seen that before into 2023. But cancellation don’t really play so much of a role.
To your two questions on LPS. First one, we would confirm the very healthy growth rate. And we also confirm that by way is therefore of course increasing the share within the business. It’s now a bit — above the 30% mark continuously growing. So yes, confirmation on that.
And then, I think the last question was about the exposure of our non-bio-a business and LPS to macroeconomic trends. And you mentioned then the food and beverage industry, the chemical industry et cetera it’s right, a portion of our non-bio-a products are sold into such sectors. And it’s clear that there is also some level of macroeconomic exposure and cyclicity. We don’t expect much or too much effect here. But of course, this depends a bit on whether we really see a longer and very deep recession affecting such markets. So I would say it’s some exposure, but I would consider that to be rather a limited exposure to recession to a potential recession.
James Quigley
Great. Thank you very much.
Operator
The next question is from Odysseas Manesiotis from Berenberg. Please go ahead.
Odysseas Manesiotis
Hi, Joachim and Rainer. So first of all, maybe try to rephrase the question James, asked a bit. I mean, just to get a better sense of where we are in the order of behavior normalization progress. So on the orders you received in Q3, what would be the average lead time for these orders to be delivered? And how does this compare to the first half of the year? I know it’s not easy to get this data, but if you had, it would be very helpful.
And a quick, second one, could you also please quantify the FX headwind on the EBITDA margin for Q3 and the nine months? And how should we think about FX and margin movements going forward given the fluctuations? Thanks.
Joachim Kreuzburg
I will take the first one and then, Rainer will talk about FX headwinds. So, lead time, of course, is always quite a bandwidth, because of the different nature of the products that we have. So and nevertheless, I tried to answer your question, but please give me a bit background so that my answer can be put also in perspective. So we do have some standard products, for example, in the filtration arena, where we are talking about just a few weeks of delivery time between — we received the order and then we deliver a standard sterilization filter, for instance. And such, even here, lead times have been going up a bit last year. So that in sometimes instead of say, three, four weeks, we’ve seen a 10 weeks in some areas.
And then, we also have customized products like customized bags, I’m still talking about single use products here, were typically customers are used to 8, 10 weeks maybe and we have seen in some parts a lead times that were going up to half a year and partially even a little bit longer. Again, all the lead time still have been relatively low in comparison to some others, that we have seen in the market. And now we are pretty much back to normal in the sector a different situation or not situation different standard also is in the area or systems. So, as soon as we are talking about bit more complex, customized systems, like for example, bioreactor systems, then lead times can be because of the design phase involves et cetera. Anyway, a couple of months. Here, we haven’t seen so much of a change during the pandemic. And therefore, I would maybe take that out of the equation, but just to be to give you a complete picture. So that’s rather what we are talking about. So we have seen an extension of lead times by a factor of two, three, sometimes even more in some areas, and we are now much closer back to normal, clearly. And again, pretty much across the board. On FX, Rainer?
Rainer Lehmann
So let me answer that from a group perspective. And when you come from last year’s EBITDA margin to today’s of course, initially, just by the conversion of our P&L by a strong dollar, we initially have a positive effect by doing that, but they’re really offset and contracted by our hedging instruments that we’re realizing. And of course, we had to, if you look at the FX levels 12 months prior, they’re significantly higher than what we are right now, where they are mainly driven by the U.S. dollar below parity. So all-in-all, and then when you consider what the swing is really compared to previous year into what is this year, you almost talk it’s all — it’s a little bit below, let’s say half a percentage point that is included just using the FX comparison if you do the walk from last year margins to this year’s margin for the first nine months.
Operator
The next question comes from Oliver Reinberg from Kepler. Please go ahead.
Oliver Reinberg
Oh, yes. Thanks so much for taking my question. I also wanted to come back on the order dynamics. In the past, I think you’ve talked about the large part of the normalization is expected to end by this year. So can you just talk about, is there a risk for further sequential decline from these levels? And can you also specify what amount of COVID related business was still part of the nine months order book? That will be the first question.
And the second one, I think mid-November, President Biden announced kind of U.S. biopharma initiatives, talking about a significant ramp up of capacities and investments. Can you just talk about what the potential from this initiative for your operations? Thank you.
Joachim Kreuzburg
Thanks for these questions. So I think we pretty much can confirm what we have set earlier this year, exactly, as you said that we think that we will see this, for sure until the end of the year. And as we said, earlier this year, we may have seen most of this normalization by end of the year. But as I tried to say before, it’s too early to really confirm that. So I don’t think that there is a big difference in what we are saying here. I think I would repeat now, a lot of what I’ve said, we see a quite a significant normalization, you can read that from the number. I think we also are using the respective comments here in saying it’s a swift normalization, and really has gained momentum in the course of this year, as customers know, see normalized lead time. So it now really has quite some momentum, customers are clearly talking about their desire now also to get their inventory levels now down. And therefore, we think that we will see — we’ll have seen a good portion of that probably by the end of the year, but whether it will be definitely the last quarter, then by end of the year, that has been impacted by that there will be too early to say.
COVID order book, we don’t see that much COVID directly COVID related business. So in this more narrow definition. In our order book, we would think quite a very low, three digit, million euros number. And then biopharma initiative in the U.S. Of course, we are looking into that, it will be interesting to see how this will be operationalized. I think it should offer opportunities for ourselves, when there will be additional efforts being taken in the U.S. to make the country more independent from any non-U.S. based manufacturing steps, because we are partially talking also about intermediate cetera that are being produced elsewhere. But again, operationalization not yet clear, and therefore also not possible for us today to quantify that. But I guess going forward, we will see or get a little bit more clarity about that. And then we can talk about that.
Oliver Reinberg
Thanks so much, but it would be what a net positive for you.
Joachim Kreuzburg
Excuse me, once second, please.
Oliver Reinberg
Apologies. I just want to clarify, but net-net, we rather be positive for you.
Joachim Kreuzburg
Oh, yes. We do think so. I mean, we do have a very significant U.S. based manufacturing. So we don’t consider ourselves to be an importer into the U.S. And don’t think that the U.S. wants to become independent from working together with a technology provider as we are with a very significant footprint in the U.S. now. We don’t think so. We rather believe that this could be that this could include additional opportunities. Exactly, yes.
Oliver Reinberg
Perfect. Thanks so much.
Operator
The next question comes from Ed Ridley-Day from Redburn. Please go ahead.
Ed Ridley-Day
Good afternoon. And thank you both for the clarity of explanation that you’ve given in the detail on the order book. With regard to know, my question, first of all, pricing. And if you could, yes, update us on the year-to-date price increases that actually would been realized that will be helpful. And secondly, related, actually to the last question.
I was going to ask about China, and your comfort with the business strengths there. And if you could remind us how much your cost base is in China.
Joachim Kreuzburg
Yes, thanks. Thanks for these two questions. So first, on pricings. We have been introducing a second price increase after the inflation kicked-in, I think we talked about that. In July. And we as we, as we said, then, we were in very intense discussions with customers we even had implemented, the majority of the price increases by then. And I can confirm that we have been successfully closing this additional pricing negotiations with customers have been able to achieve or what we wanted to achieve that we are able to compensate for what we have seen in price increases on the supply side. So I can confirm that.
And I can also confirm that, as we said back then that our customers of course, I’ve seen that across the board, and got a good understanding of why that was necessary and so on, Going forward and that is, of course, an important question. We touched upon that as well, back in July. We believe we will also see in 2023, a more significant price increase than what we’ve seen for many years before, I think that’s a very obvious statement, for sure. But I’m saying that because it’s a bit too early again, to say, what would be the number for our average effective price increase for 2023. Because a key driver for defining this number will be of course, the inflation that we will see in 2023. And of course, there are a lot of estimations out there. But I guess, a bit too early to really take any of those as the right benchmark, but we expect to rather execute another pricing round earlier, in 2023, once we get a bit more clarity.
And then, on cost base in China, so maybe first of all, as a recap, we do have approx 11%, 12% of all business in China sales revenue wise. We are to quite some extent operating on a China-for-China base in the sense of that we are not producing much in China what we are not selling in China. So that means we are not very dependent on any Chinese manufacturing for the supply of customers out of China. But we are importing products into China, so there are some products that we are not producing in China, particularly certain products where we see also IP topics and other technology related aspects or maybe simply also the size where we just run one facility globally, et cetera as the key drivers.
But of course at the same time directly or indirectly there are some supplies out of China that are used in other facilities even though there is no too critical or not too many key critical raw materials or components that we supply in China. So long story short, our cost base is in the high single digit, so a bit lower than our sales revenue.
Ed Ridley-Day
Thank you. That’s very helpful.
Operator
The next question come from Hugo Solvet from BNP. Please go ahead.
Hugo Solvet
Hi. Hello, thanks for taking my questions, I’m left with two, first a follow-up on the previous one on price increase, can you just clarify the level of pricing fee that you are raising up currently, please? And the second, if I remember well, last year you mentioned that you gained some positions as second suppliers among the large customers, as there are no restocking or normalizing their order pattern, are you losing this position as a supplier, and are they coming back to a single supplier strategy? Thank you.
Joachim Kreuzburg
Very good point, before I answer that one, on your first question pricing, I said before the effective price increase on the full year’s basis, which is like kind of blended number will be mid-single digit. And again that reflects also what we see on the supply side because on the supply side what really hits the P&L is not all what we are seeing on the purchasing side in a month of say October, but because we also have of course used a lot of what has been on stock before. So therefore we have blended numbers on both sides and that is around mid-single digit. So but I guess you also have in mind okay, but what is the price increase that we then have implemented in comparison to the price levels in the period before and here we are talking about higher single digit numbers on average.
The second question, yes, we think that we have been able to being qualified as a second supplier in a number of processes where we haven’t had that status before. And we would expect to remain being a relevant supplier in such cases. Again, and I think you said that when phrasing your question, that’s not really visible at the moment, because this normalization trend is a much stronger one at the moment, but we believe our position is a very decent one.
Hugo Solvet
Thank you very much.
Operator
The next question comes from Colin White from UBS. Please go ahead.
Colin White
Hi, it’s Colin White here from UBS on behalf of Michael Leuchten, a couple of questions from me. Going back to the duration of order intake, you said normally six months and give a couple examples of people going up to 12 months but overall like what is the judicial order intake at the moment?
Then secondly, on inventory work downs, is there a particular type of customer where that it’s been more of the future that they’re walking down their inventory? Just a bit more detail on that. And then, finally, on the prices, given that this industry and Sartorius is going to continue to adjust prices for inflation, but is there a scenario at some point where prices would have to come back down? And that’s all from me. Thanks.
Joachim Kreuzburg
Thank you very much. So yes, the example that I was giving before that customers had tried to increase their — and then successfully — in quite some cases increased their inventory levels to 12 months after running on a six month basis before. I think that it’s kind of representative. It’s not representing our stock level. Yes, I’m talking about the stock level that our customers typically have, at least in those single use products that are also qualified as a kind of standard or that are validated into relevant processes on their side. So that’s on that one.
I guess if I got your question right, you were also asking for, okay, how much in advance do customers placed their order at us? And what’s the delivery time that they would be expecting, this time between we receive the order, and what’s the expected delivery time? Well and that again, is a quite a bandwidth. As I said before, there are a couple of standard products like whatever sterile filters for example, where you would talk about rather four weeks or something. And by the way, in the LPS domain, we are talking partially about even shorter lead times, yes, we, there are a couple of standard products in the lab products and services domain, where market standard is a week or so, for some take pipette tips for instance and such product. So our syringe filters and microbiological test kits or so.
And then, when we are talking about customized single use products which has already been a relevant piece of business. We are talking about typically something like two to three months that maybe a good yardstick here and then when we are talking about complex systems, larger bioreactor installments et cetera, than we are partially talking about a couple of months. So I find that maybe a bit more a relevant statement than these averages but yes I hope I was able to answer your question by giving that additional insight.
And then, on pricing, we don’t expect prices to go down in any area at this point. As you know, what’s really important here is of course, A, products are specified into manufacturing processes that’s an important factor here. And then, the other one of course is also the relevance for process performance and then how far we can also differentiate here and I think that’s important anyway. What we are talking about here throughout our portfolio are products that are quite in a number of cases can really differentiate and do differentiate in regards to their contribution to the overall process performance of our customers. And therefore for the majority of our product, pricing pressure is not so much of a topic of course clearly, there’s always a diverse world.
And then there are a couple of products, where you have a different competitive dynamic, I mentioned pipette tips for example, that is more of a standard product where differentiation is not so much possible. And there are also more simpler facts, we are talking about that for a long time, were also differentiation is not so much possible and significant. So that has to be said as well, again, to put as much color to the picture as possible. But again the average price levels, we don’t expect to come down.
Operator
The next question comes from Falko Friedrichs from Deutsche Bank. Please go ahead.
Falko Friedrichs
Thanks very much. And my first question is, can you share your expectations for refinancing of your debt and potential implications for your interest expense going forward? Then secondly, sorry, I have to go back to the BPS segment for a second, I didn’t fully understand what is driving this very strong acceleration from about 5% organic growth in Q3 now to the mid-teens growth in Q4 which is implied by your new full year guidance. So would be helpful if you can share a bit more color on what’s really driving the strong acceleration, and why Q3 was then so low? And then, my last question is, I think your bioanalytics devices, they can be quite expensive. And so do you see any risk here in terms of the macro environment that that might slow down a bit next year? Thank you.
Rainer Lehmann
Let me start with the refinancing part on the Albumedix basically $500 million. As you are aware we’re replacing a promissory note for [indiscernible] to refinance that, it’s in the market right now. So far, we have a good traction there. We’re going to close that in the beginning of November, so I’m very much confident in this, but we’ll see of course never done until it’s done. It’s definitely a tougher environment than what we’ve seen in previous years. But to be honest due to our business model quite are received so far.
And of course, interest rates unfortunately will go up that is in the nature here. We so far had a very good refinancing interest rates. Most of our debt was fixed at very attractive rates, these of course will go up more now probably 2.5% to 3% points for just that [12] [ph]. So let’s be clear not for the whole net debt that we have. But these are the markets that we are in, so of course next year we will see a little bit increase of our financial results due to the interest expense that is expected. Yes.
Joachim Kreuzburg
And then, on the expectation for Q4, I guess we were also reporting on that regularly, that we have been taking a lot of effort to extend our manufacturing capacities over the last quarters, and that such additional capacities are becoming available gradually, one after the other. And therefore, we think that we are in a good position to achieve the sales revenue level that we have to achieve to meet our full year’s target now.
And then, of course, when you compare this with the third quarter as you did, third quarter typically is the weakest quarter, simply because of the vacation time et cetera, both when it comes to effective working days on our side but also on our customer side very much. So that is based on these effects.
And then I guess your last question was about in how far we would expect an economic downturn next year and how far that would affect us. So I think one has to expect a rather difficult overall economic environment in quite a number of countries, at least for the first half of next year. I think that’s clear. At the same time, I think we all have made the experience that for quite logical reasons the biopharma sector is quite resilient in that regard. Typically, the consumption of medicines and vaccines is not shortened and reduced by anybody during an economic downturn. And the same holds true for any clinical trials, et cetera. Because typically, also the financing abilities of such companies is solid enough so that they can afford doing so during difficult economic environments, but also simply because it would be the most expensive thing you could do to not push that forward. So that’s for biopharma, which makes up for almost 90% of what we are doing.
Of course it looks a little bit different for some very early phases, where and I think that’s a question that increasingly is asked by investors and analysts in these days where funding may play a role. Our exposure here is also not that huge, because this funding is pretty much relevant for these very, very early phase companies. So therefore, I would say our exposure is relatively limited, but of course, it’s not particularly — it’s not like zero. More specifically for the bio-a business.
I would say here we are in the pocket of mostly in the domain of customers that are not really very early phase. They are typically a little bit more advanced, and therefore shouldn’t be too much exposed to any downturns or funding issues.
Operator
The next question comes from Le Louët from Société Générale. Please go ahead.
Delphine Le Louët
Yes. Hi, good afternoon. It’s Delphine Le Louët from Société Générale effectively. One question from Rainer and Joachim before you don’t have any more advice again one for you. Rainer, can you explain us a bit more regarding the performance of the BPS division in Europe over Q3. So, is it just a calendar effect as you mentioned regarding the weakness of the gross achieving into that region, or any other explanation would be useful for my side?
Joachim, when you think back of, in a way the performance you achieved regarding the gross margin over the first nine months and into this microenvironment. It’s probably the first time over the year that we don’t feel any more strengthen of deterioration of the microenvironment from your side. So what could be the extra costs that we should keep in mind, or that could happen over the next six months that will perturbate in fact, the trend we’ve seen so far. Thank you very much.
Rainer Lehmann
Okay. Let me answer the EMEA bioprocessing business first question. So a bit basically the Q3 year-over-year is pretty much flat in that region. But keep in mind that last year, specifically Q3 we had in that single quarter in 2021, a growth of almost 50% in that region, really driven by the overall situation related to the pandemic, not only Corona business, but also of course the business effect that Joachim just explained quite a few times regarding the really different order pattern basically our customers placing larger orders far more ahead of time. So by even just saying, okay this is flat, it’s still quiet you see it over a two-year period quite in a healthy development of the underlying business, specifically when you see that certain of the Corona business is switched into, let’s say regular business. I hope that answers you on your question.
Delphine Le Louët
Yes. Thank you.
Operator
The last question is from Naresh Chouhan, Intron Health. Please go ahead.
Naresh Chouhan
Hi, there. Thanks for taking my questions. On energy cost, can you help us to understand how we should think about the long-term contracts that you obviously had in place through ‘22? When do you think those or when should we think about those rolling off and those energy contracts being re-priced? And also can you give us some sense as to what percentage of your revenues or cost basis is energy?
And then, secondly, on inventories, your own inventories, so if I go back to 2019, your inventories were about a third of what they are today. Your inventories almost tripled over that period. Obviously, sales are going up but not to the same degree. So two questions related to those please. One, what’s the rationale for burning up such a large inventory position at the same time as your customers are unwinding their inventory positions? And two, given that your margin improvement a lot of that margin improvement is coming from higher utilization, as this inventory build slows, should we assume downward pressure on the gross margin as that utilization falls as well? Thank you.
Rainer Lehmann
So on the inventory level side, absolutely correct. We have intentionally started actually already at the end of the first quarter of 2020 to build up inventories because I guess we all remember that pretty much from one day to the other supply chains, could very much stressed and we wanted to be as resilient as possible, and I think it paid off. I referred to that earlier today. We really were performing quite well in comparison regarding our delivery ability, our lead times et cetera.
And, yes, now as we see the normalization of course, we are also looking into in which areas we now can reduce our stock levels and how far we should do that. But we do this in a very targeted, differentiated way because we are taking a close look to, of course the suppliers, their exposure to certain risk factors, potentially et cetera, et cetera, how you would do that, I think this is what we apply here. Therefore, we will see a certain reduction of our relative inventory level going forward. But our main goal here is still to have a resilient setup. And rather reduce our stock levels in those areas where supplies both a secure with very stable supply situations in any respect. And where potentially, the shelf life of such products and materials is limited. So that’s on that end.
On the energy price level maybe I can also say something regarding that because we’re in a good position to actually have hedged, at least for the major countries in here, we’re really talking about Germany, which is one of the major consumptions of the energy, use a Russian process we’re running here. About three quarter of our exposure is hedged as good pricing, over all the energy in the group and bear with me, I don’t have an exact figure. But I would say it’s probably a little bit less than half a percent of revenues that we are talking about energy.
And we are also hedged, actually, always a few years ahead. And also for 2023 and beyond, we also have the majority hedged question remains, of course, always in this regard. Are these prices and this is also politically driven, being or are these hedges being honored going forward? Or maybe certain contracts, then invalid. But overall, we have been saying the fortunate situation to have with our more, let’s say, multi-year, hedging approach, not to be exposed too much, to be honest to the energy increase, which hopefully we’ll see or will hopefully come down also in 2023.
Naresh Chouhan
Thanks. And then, the question on the inventory as you reduced your inventories, over time, what that implies for pressure on gross margins, as your utilization potentially falls?
Joachim Kreuzburg
Maybe I’m missing some aspect here. So the utilization would be related to our like fixed costs. And that means basically the fixed installments facilities, clean rooms, machinery et cetera, but not so much to the inventory. What you see indeed, is that when we take additional capacities online, that we then get a step up in our depreciation that has an impact on the gross margin, but as our key financial performance indicator is the EBITDA there it is deducted again. So therefore, this capacity effect, we would look on them. And again, that is not inventory, that is cleanrooms machinery and such has no effect on our EBITDA, it’s rather a little bit of shift, temporary shift regarding our gross margin. But other than that, I wouldn’t see any effect here.
Rainer Lehmann
Maybe I can add something, as you allude to the fact we’re running an inventory, the price increases are still something sitting in inventory. That also we offset going forward with additional price increases over the next period or beginning of the year as well.
Naresh Chouhan
Great. Thanks very much.
Operator
That was the last question for the day. And I hand back to Dr. Joachim Kreuzburg for closing comments.
Joachim Kreuzburg
Yes. Thank you very much, everybody for the lively discussion and for all the questions that you have had. I hope you were able to answer them, very, obviously very much around the very specific situation, following the pandemic. I would say, again, I would say very differently to normal times order intake needs a lot of explanation, as it is more a reflection of a development that we have seen over the last 24 maybe even 30 months than being a good indicator for the business development going forward. So therefore, I really appreciate your interest so that we can talk about that in more detail. looking very much forward to our next touch point, which will be then end of January next year when we will publish our preliminary results, given an update — a guidance for 2023 and then also update our midterm outlook for 2025. Thanks a lot again. Take care. Talk to you later. Bye-bye.
Rainer Lehmann
Bye-bye.
Operator
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.
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