Tecan Group AG (OTCPK:TCHBF) H1 2022 Earnings Conference Call August 17, 2022 3:00 AM ET
Company Participants
Martin Braendle – Senior Vice President of Corporate Communications & Investor Relations
Achim von Leoprechting – Chief Executive Officer
Tania Micki – Chief Financial Officer
Conference Call Participants
Maja Pataki – Kepler
Daniel Buchta – ZKB
Sebastian Vogel – UBS
Henrietta Rumberger – AWP
Operator
Ladies and gentlemen, welcome to the Half Year Analysts and Media Conference Call and Live Webcast. I’m Mara, 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 Martin Braendle, Senior Vice President, Corporate Communications and Investor Relations. Please go ahead.
Martin Braendle
Good morning, ladies and gentlemen. Thank you for joining us for our conference call this morning. We are very pleased to discuss with you the results for the first half year of 2022. With me on the call today are our Chief Executive Officer, Dr. Achim von Leoprechting; and our Chief Financial Officer, Tania Micki.
Before we start, as always, very briefly some formalities. The corresponding press release announcing our financial results was issued this morning at 6:30 A.M. Central European Summer Time. Both this press release as well as the full 2021 interim report are available on the company website, tecan.com, under the Investor Relations tab. The call is being webcast over the Internet and our homepage and we have also posted the presentation slides for this call for download. If you are dialed in through the webcast, you might have to refresh the page to see the download.
With that, let me now turn the call over to Achim von Leoprechting. Achim?
Achim von Leoprechting
Thank you very much, Martin. Good morning and welcome to the Tecan 2022 half year results presentation. Before Tania will discuss the financial results of the first half year in detail, I will give you an overview of the financial and operational highlights.
As you know, the COVID pandemic brought about a greatly increased demand for Tecan’s products in the year 2020 and 2021. Today, I’m very pleased to be able to tell you that our financial performance continues to be very strong, even as the pandemic apparently has abated. In the first 6 months of 2022, order entry has increased by 34.2% in local currencies at a higher rate than sales and I’m very pleased with the fact that organic order entry was up by 2.4% compared to the last year’s H1 orders.
Sales in the same period have increased by 29% in local currencies. And despite the very high comparison base that was still a result of COVID-related sales in H1 2021, our organic sales in local currencies are only 4.3% lower than this time last year. Adjusted EBITDA increased by 3.8% to CHF119.1 million with the adjusted EBITDA margin reaching 20.4% or 22.1% if we exclude Paramit. I’m very pleased to report an adjusted net profit of CHF80.6 million which brings us an adjusted earnings per share of CHF6.34.
So overall, the first half of 2022 has provided a solid basis for us to raise our sales outlook for the rest of the year. And I would like to thank all of my colleagues at Tecan for the role they’ve played in achieving this great result.
And now before discussing COVID-related revenue comparisons, I’d like to emphasize that when we say COVID or non-COVID-related sales, we are using estimated figures because we’ve never had a separate COVID-related line of products. We know that during the pandemic our products were used extensively in COVID PCR testing programs, mRNA vaccine developments and virus sequencing. And we’re very proud of the enormous extra length our employees went through to support our Life Sciences’ customers and OEM partners in fighting the pandemic globally.
What we’ve seen in the first half of 2022 now is a rebound in customer demand for research products and clinical applications not related to COVID such as cancer diagnostics, transfusion medicines and others and an overall strong demand for automation solutions in all geographies. We estimate that COVID-related sales in the first half of 2022 amounted to around CHF50 million, mostly from consumables and spare parts. We therefore saw strong growth of organic non-COVID-related business in H1 ’22 which we estimated to be in the mid-teens percentage range.
The scale up of testing solutions during the pandemic really highlighted the benefits of laboratory automation to achieve accurate, reproducible and cost efficient results on a large scale. When comparing the financial progress of the first 6 month periods of prior years, we’ve achieved a substantial increase in organic sales and in profit growth compared to pre-pandemic levels and an overall steady increase in EBITDA and the EBITDA margin, excluding the acquisition of Paramit for 2022.
The trend is very much one of steady growth with the expected normalization of the pandemic period from ’21 to ’22. We anticipate that the learnings gained during the pandemic, however, will have a lasting positive effect on the adoption of laboratory automations for infectious disease testing but also for many other research and diagnostic processes, including cancer, metabolic disorders and others.
The integration of Paramit has progressed very well and we’ve already transferred manufacturing of certain Tecan Cavro components to Paramit sites. I’m also pleased that the common culture and values of the 2 companies have proven to be a strong basis for the ongoing integration of the teams and the complementary skills in operations and development have already shown their appeal to new customers.
In the continued challenging supply chain and logistics environment, we have been able to maintain resilience in our global operation sites to supply our customers with our products. We’ve continued with our strengths in sustainability program which we describe in detail in the annual report. One of the key highlights I’d like to mention today is that we achieved again the Great Place to Work certification in Switzerland which we are very proud of. We have created a strong positive corporate culture and I think this role is — the role this plays in the long-term success of our business has already been demonstrated over the past years.
In terms of managing our environmental impact, we committed to the Science Based Targets initiative which means we are measuring our complete global carbon footprint and we’ll be setting a greenhouse gas emissions reduction target in line with climate science and the need to reach net zero emissions over time. This is something that’s very important to us and we’re increasingly seeing that it’s also important to our customers and investors. So I’m happy that we are all on our way in this journey already.
Our operational highlight also includes the launch of several new products in both divisions. In addition to the progress we are making in expanding our innovative digital solutions portfolio, we expanded our solutions offering in Life Sciences with the launch of new reagent kits for mass spectrometry and genomics applications. We again combined Tecan’s reagents, consumables, software and automation systems to offer complete solutions with demonstrated value in quality, reproducibility and efficiency compared to manual sample preparation methods.
The Partnering division saw the start of serial production and commercial launch of an important advanced genomics platform in the first quarter which had been developed for a global top tier diagnostic company. This innovative platform leverages several proven platform components and our modular software architecture.
We also further extended our range of complete genomics workflow solutions now from personal workstations to high throughput. Adding to the DreamPrep NGS system, we have launched the MagicPrep NGS system earlier this year. As mentioned already in March, MagicPrep NGS is a highly innovative benchtop solution for the growing NGS library preparation market. For MagicPrep NGS, reagents and consumables are provided in a single cartridge which includes all consumables necessary for a run to set DNA or mRNA library preparations in just 10 minutes.
Complementing MagicPrep and DreamPrep NGS, we’ve just launched the new DreamPrep NGS Compact. DreamPrep NGS Compact is now offering the flexibility and usability of the very successful DreamPrep NGS in a highly compact size. All 3 systems feature the innovative range of Tecan NGS library preparation reagents. DreamPrep NGS Compact is also a benchtop solution that comes with an optimized configuration to run almost any NGS protocol. Compared to the larger DreamPrep, it has a smaller footprint to fit in every lab and is the ideal solution for low to mid throughput. With this range of systems, Tecan offers solutions to every lab in the growing NGS application area spanning from personal entry levels to high throughput laboratory needs.
So now let me hand over to Tania for a closer look at the half year financial results. And then I will give afterwards an overview of outlook for the rest of 2022. Tania?
Tania Micki
Thank you, Achim and a very good morning, ladies and gentlemen, from my side as well. I’m happy to be with you today to present you our financial results for the first half of 2022 in more detail.
Let’s start with order entry and sales. Order entry increased by 34.2% in local currencies or 33.6% in Swiss francs to CHF600.5 million in the first 6 months of the year. On an organic basis, that means excluding Paramit, order entry grew by 2.4% in local currencies. This is despite the substantial order entry we achieved with COVID-related orders in the prior year period.
Our book-to-ship ratio was 1.03 as order entry in absolute terms exceeded sales. As a result, our order backlog increased further. Sales increased by 29% in local currencies or 28.6% in Swiss francs to CHF584 million in H1. Included in that figure are revenues of CHF151 million from Paramit.
Looking at organic sales. We booked revenues of CHF433 million, only 4.6% below the prior year period or minus 4.3% in local currencies. We believe this is a very good development as sales increased by 47.5% in local currencies in H1 2021, providing us with a very high base. The main driver for this positive development was the strong organic growth of non-COVID-related sale. As Achim mentioned, we estimate that these were in the mid-teens percentage range. These sales largely offset the substantial decline in COVID-related revenues we recorded in H1 last year.
The organic sales development was driven by strong demand for automation solutions for non-COVID applications. It was also supported by the fulfillment and subsequent revenue recognition of the high order backlog from 2021 that we reported on in March. Overall, revenue growth also benefited from price increases for products and services, about a 2% impact. The contractual pass-through of higher material costs at Paramit was in the low teens of millions or about 2.5% based on the CHF454 million revenue in H1 ’21.
Let’s now look at the sales performance of our 2 business segments. Sales in the Life Sciences Business segment increased by 3.5%, CHF259.1 million. In local currencies, that is an increase of 4.3%. This growth exceeded our earlier expectations. We did not expect to deliver organic sales growth in our Life Sciences Business segment already in the first half of the year. Keep in mind that this comes on top of the revenue increase of 49.5% seen in H1 2021. Drivers of this sales growth were products in non-COVID-related applications.
On Life Sciences Business, we estimate growth in the high-teen percentage range in local currencies which was driven by strong demand for non-COVID-related liquid handling and detection instruments as well as service and spare parts revenues. Order entry in the Life Sciences Business was also up on the prior year period and exceeded reported segment sales in the first half of the year, thus resulting in a further increase in the order backlog.
The Partnering Business segment generated sales of CHF324.9 million which corresponds to an increase of 59.5% in Swiss francs and 59% in local currency. As expected, the COVID effect was more pronounced for the Partnering Business due to significantly lower COVID-related sales in the reporting period. As a result, organic sales decreased as expected to minus 14.6% in Swiss francs and minus 14.9% in local currencies.
Demand for OEM components, on the other hand, was very strong. We believe that this included some demand pull forward in our Cavro components business in anticipation of the site move. Also, sales to customers in other areas of in vitro diagnostics which were negatively affected during the pandemic, showed positive momentum again. For Partnering, we estimate non-COVID sales growth in the high single-digit percentage range in local currencies for H1 ’21.
Looking at Paramit. Paramit also recorded strong sales results in the first half of the year, although it could have been even higher had we not faced some supply chain issues which led to higher inventory of almost finished goods, sometimes just waiting for the last part to complete the assembly and ship the products. Sales growth at Paramit was in the mid-teens percentage range when including the contractual pass-through of higher material costs and in the mid-single-digit percentage range when excluding this effect.
Let’s now look at sales development in the different regions on Slide 12. Starting with Europe. In Europe, sales in the first 6 months increased by 8.4% in Swiss francs and by 11.8% in local currency. Organic sales development was significantly impacted by a pandemic-related surge in demand in the prior year period, as you will likely recall. This resulted in organic sales declining by 13.6% in Swiss francs and 10.9% in local currencies in the first half of this year. Against this high comparative basis, sales in the Life Sciences Business were 10.5% lower than the previous year in local currencies and in the Partnering Business, they declined organically by 11.4% in local currencies.
In North America, sales grew by 47.2% in Swiss francs and by 43.4% in local currency. Similar to Europe, organic sales development in North America was affected by the COVID-related high comparison base, leading to a decline of revenues of 5.7% in Swiss francs and 8.2% in local currency. Due to the exceptionally high basis of comparison, organic sales of the Partnering Business segment decreased by 29.8% in local currency. The Life Sciences business segment, on the other hand, reported a 9.3% increase in sales in local currencies, a testament to the strong demand for non-COVID-related instruments which more than replaced the significant COVID-related sales in the first half of 2021.
In Asia, we recorded an increase in sales of 24.4% in Swiss francs and 26.4% in local currency. On an organic basis, sales grew by 15.9% in Swiss francs and by 17.8% in local currencies. Organic sales development was again particularly strong in Japan. Sales also returned to a mid-single-digit growth in China. As you might recall, in the second half last year, we and everyone else were impacted to some extent by the delayed issuance of duty-free certificates. They were gradually released towards the end of 2021 which led to some spillover effect into H1 ’22 and this helped us to offset effects from the shutdown, mainly in Shanghai.
Overall, organic sales development in Asia was driven by both business segments with the Life Sciences Business recording growth of 25.5% in local currencies, while the Partnering Business grew by 11.4% in local currencies.
Our next slide addresses our gross profit. Gross profit increased to CHF232.9 million which was CHF8.4 million or 3.7% above the prior year figure. The overall gross profit margin was significantly impacted by the Paramit acquisition. As I explained at previous calls, Paramit comes in with a different gross profit structure. It is significantly lower due to the business model as they charge almost everything to the customer which means they don’t have a lot of OpEx. Therefore, the gross profit margin reached 39.9% which is largely a mix effect of the consolidation. Excluding Paramit, the gross profit margin reached 49%, only 40 basis points below the prior year level despite significant inflationary impacts we have seen.
The main effects that explain the difference of 950 basis points in the margin where the Paramit acquisition impact that contributes about 1,000 basis points. This includes purchase price amortization and the contractual pass-through of higher material costs without margin. As expected, we recorded a negative effect from higher material costs.
Freight and logistics continued to be at elevated levels. Higher personnel costs was another factor. Wage increases are up between 5% to 10% depending on the region. As in prior years, being a positive factor, we were again able to increase prices with around 2% which is more significant than in the past.
On the next slide, some comments regarding our cost structure. Overall, our operating expenses grew substantially less than sales and totaled CHF153 million or just 26.2% of sales. The figure includes the cost of Paramit. And as I mentioned, their business model means they don’t have a lot of OpEx. Therefore, to explain the development of cost, I will focus my remarks on the operating expenses, excluding Paramit which is the last bar for 2022 that you see in the chart and a like-for-like comparison with the 2021 figures.
Excluding Paramit, we returned to a post-COVID more normalized operating cost base with costs totaling CHF135.3 million or 31.2% of sales. In all cost categories, we also saw the effect from higher prices and salaries.
Looking at sales and marketing. Here, costs increased more than organic sales as we continued our investments in the market unit, that means in our sales channel on the ground, as well as for our e-commerce platform. With several product launches happening, Achim mentioned some of them in the operating highlights, we also saw increased marketing activities, also with physical events like trade shows as part of these activities.
Research and development expenses also increased more than organic sales as we continued our investments in innovation. As a percentage of sales, R&D increased to 8.3% of organic sales. Amortization of previously capitalized development cost was about CHF400,000 higher than what we newly capitalized in the first half of the year.
Overall, R&D activities and gross expenses, what we call gross R&Ds, were also higher compared to the prior year period. This includes capitalization of development costs and customer funding of OEM projects. Gross R&D was at CHF38.5 million or 8.9% of organic sales.
General and administration expenses were down in absolute terms and also by 100 basis points as a percentage of organic sales. This was mainly related to less cost compared to the prior year period for corporate development activities. Keep in mind that during H1 ’21, we engaged in many activities that led to the successful acquisition of Paramit.
Looking now at the EBITDA development in more detail. Our adjusted EBITDA, the earnings before interest, taxes, depreciation and amortization, increased by 3.8% to CHF119.1 million. The adjusted EBITDA margin amounted to 20.4% of sales. Excluding Paramit, it reached 22.1% of sales. Here, the lower organic sales volume, a post-COVID normalized operating cost base, as just discussed on the previous slide and a higher material and freight costs were the main factors for the expected decrease. Adjusted EBITDA excludes acquisition and integration costs and a negative effect from an adjustment of the Swiss pension plan. We provide the reconciliation for this on Slide 25.
Now looking at the operating profitability on a segment level. Reported EBIT in the Life Sciences Business, that’s earnings before interest and taxes, reached CHF53.2 million. The operating profit margin amounted to 19.5% of sales. Following a period of significant growth, potential investment in the sales and service organization was required to support a larger installed base of instruments.
As seen for the group on a previous slide, this resulted in a more normalized operating cost base again. On the other hand, we were able to meaningfully increase prices which led to a notable increase of the gross profit margin compared to the same period last year.
Reported EBIT in the Partnering Business amounted to CHF35.5 million, while the operating profit margin reached 10.9% of sales. Integration costs and amortization of acquired intangible assets in connection with the acquisition of Paramit were recognized for the group in the Partnering Business segment and had a notable effect on the reported operating result for the segment. Other factors negatively impacting segment margin were the mix effect with lower EBIT margin at Paramit, lower organic volumes with corresponding negative economies of scale and the contractual pass-through of higher material costs without margin.
At the same time, the negative effects, as expected, could not be offset by price increases as price adjustments for the instrument business are contractually regulated and only take effect at the end of the calendar year.
Now net profit on the next slide. Reported net profit for the first half of 2022 was CHF65.7 million. This figure includes integration-related costs in connection with the Paramit acquisition of CHF3.3 million as well as the accumulated amortization of acquired intangible assets of CHF30 million. In the multiyear overview, you can see the very positive development in reported net profit. Adjusted net profit amounted to CHF80.6 million, CHF3.7 million below H1 ’21. The main factors contributing to the difference were adjusted EBIT which was CHF1.8 million lower and our tax rate increased to 16.4% versus the 13.1% in H1 ’21. The financial result was a slight positive factor.
Now, moving to earnings per share on the next slide. Earnings per share decreased more than reported net profit due to the higher share count which is mainly related to the issuance of new shares a year ago to partly refinance the Paramit acquisition. Also here, you can see the positive development over the last years with a reported EPS of CHF5.17 and an adjusted EPS of CHF6.34.
Let’s now move on to the cash flow on Slide 19. Cash flow from operating activities reached CHF70.3 million in the first half of 2022. This corresponds to 12% of sales. In the current situation with tight material supplies, we wanted to ensure our delivery capability and decided to increase our inventories and safety stock. This higher net working capital is backed up by customer commitment but obviously had an impact on operating cash flow. We also had higher income tax payments with the profit increases we have recorded last year in most regions. Our DSO, the day sales outstanding, is stable at 49 days. You can see some of the elements I have mentioned before here as well, for example, the increase in amortization mainly from acquired intangible assets which explains the majority of the difference. Cash flow from investments was at CHF15.1 million, nothing unusual to highlight here.
Moving on to the cash flow from financing activities. The figure includes the dividend payments we made in April 2022 in the total amount of CHF35.6 million, an increase over the prior year period as the dividend was increased by 21.7% from CHF2.30 to CHF2.80 per share. And I’m happy to report that after a short period of net debt to partially refinance the Paramit acquisition with CHF3.2 million, Tecan already restored its net liquidity position.
With this, I now hand back over to Achim von Leoprechting again.
Achim von Leoprechting
Thank you very much, Tania. I mentioned the good progress we’ve made in integrating Paramit Corporation which we acquired in August of last year. The shared culture and values of the 2 companies have provided a strong foundation for a successful joint future and we’ve already seen that the complementary skills in operations and development are appreciated by new customers in research, diagnostics and the medical devices field.
Earlier this year, we started to move production of Cavro components in California from San Jose to the Paramit facility in Morgan Hill and we’ve also been transferring production from San Jose to the Paramit facility in Penang, Malaysia. This has progressed well and we plan to start serial production before the end of the year. There is a high and growing demand for our Cavro OEM components, as Tania just mentioned and expanding production capacity will ensure this demand is met.
Our focus on having strong and positive corporate culture and developing talent in all geographies is reflected in several in-house programs that have been rolled out. Those programs now have been complemented by external online learning opportunities which we have made available to all employees in the first half of 2022. We are driving several coordinated activities in our sustainability framework, ranging from the before mentioned reduction of greenhouse gas emissions to EHS and supplier management, to diversity and inclusion programs.
As we expect, the global supply chain and freight challenges to continue for some time, we continue to drive focus activities on securing supply of critical parts and other possible supply, freight and energy constraints. I’m extremely pleased with how our colleagues have maintained resilient operations and successfully mitigated supply chain and freight challenges so far. Continuation of R&D programs, both for our Life Sciences and Partnering divisions and launch of new products continue to be in focus also for the rest of 2022 and, of course, going forward.
What I’d like to return to now is the financial outlook for this year. We are very pleased that we are able to increase the revenue guidance from the mid-teens percentage range to a mid- to high teens percentage range for 2022. As I said earlier, we are basing this on a strong momentum we’ve had in the first half of this year and a solid outlook.
The guidance for adjusted EBITDA margin remains at around 20% of sales. This now includes, however, offsetting the additional dilution from contractual pass-through of increased material costs without margin, abbreviated PPV which we expect to be 30 basis points higher compared to our expectations back in March.
Coming out of the COVID pandemic, Tecan is in a very strong position since the recognition of the value of automation has received even wider acceptance. The acquisition of Paramit has expanded our commercial reach and operation capabilities, especially in the U.S.A. and Asia and significantly expands our total addressable markets.
As a company, we are now in a quite unique position to bridge technologies from research to diagnostics and clinical settings, therefore, leveraging significant synergies between the Life Sciences and Partnering Business divisions. Being able to work with customers through all stages of development, confidently adapting to ever more complex regulatory requirements from design through to manufacturing and service, enables Tecan to build deep, long-lasting customer relationships, both through our Life Sciences Business as well as our Partnering Business.
And we are now covering an even wider spectrum of solutions, bridging technologies from research to pharma and from in vitro diagnostics to the medical device settings for better management of cancer, diabetes, infectious diseases and other critical illnesses. Tecan is well positioned to benefit in a number of markets from megatrends like digitalization and investments to improve health care economics. And our strong financial base well supports strategic organic and inorganic expansion in the Americas, Europe and Asia.
So with this, thank you very much for your attention and let’s open up the lines now for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from Maja Pataki from Kepler.
Maja Pataki
I have a couple. First of all, looking at your guidance and also what you — how you talked about the price increase and the cost pass-through from Paramit, I’m trying to understand how much the higher price through from Paramit is actually reflected in your guidance. Is there also an organic part that you expect to be better than previously? The second question is, I know, Tania, that the Tecan stand-alone operating costs have a standard rate of 31%. And I remember that you’ve talked about returning to 31% to 32%. So can you just talk to what kind of higher investments you will have in the second half of the year?
And then lastly, can you just talk a bit to what are the reasons – in a bit more detail what are the reasons for the strong underlying non-COVID performance in Life Sciences?
Tania Micki
So maybe I’ll start. And maybe for the last question, I give it back to Achim. But I think on your first question on how much of the guidance has included the Paramit effect. So maybe in a little bit more detail, the pass-through of material costs at Paramit was in the low teens of millions in H1 2022. And we expect actually a similar amount in the second half of the year. So that would be about 2% of growth based on the CHF946.6 million sales for the full year of ’21. We have assumed some of it in our previous guidance but much less, so about 1/3 of it. So not the full effect of now what we believe will be the — the PPV comes on top of the March guidance for the full year of ’22. Our main reason for the upgraded sales outlook was the positive business performance and momentum in the first 6 months of ’22 as well as the continued high order backlog and the anticipated demand for the second half of the year. So that, I think, answers maybe your question around the sales side.
On the margin side, maybe we more or less assumed also about — so for the full year, we are assuming 40 to 50 basis points. And we had embedded in the beginning of the year, probably more around 10 to 15. So really the additional impact that we are now forming is around 30 basis points. So I hope this answers for the first question.
On the second question, as you rightly pointed — so we said we would be coming back based on organic sales around 32% to 33%. We are actually now slightly below, on the 31% range. Of course, the intention is not to grow it to the upper level but to stay as much as possible around more the 31%, 32% you mentioned. The few elements that you have to take into consideration for the increase — and I think we’ve mentioned some of it before — very much around adding additional people to the sales — the commercial organization to cater for the — and the service as well to cater for the growth. I think that we very consistently said this in the past as well. Of course, as you know, the higher wage inflation that affects all the elements of cost and the OpEx. And also, we have more activities from a marketing perspective, the trade shows we’ve mentioned. And also some more travel also related to this.
So in general, I would say maybe more of a normalized life compared to pre-COVID, not at the same levels but still a little bit higher, as we always expected. So hopefully, that also answers your second question. And then maybe I pass onto to Achim for the…
Achim von Leoprechting
Yes. And maybe just a comment on the dynamics and probably underlying strength that you rightly point through, particularly in the Life Sciences, I would say, rebound after the COVID situation. I think when we look at the geographies, we were very pleased to see that it’s really across the board that clients come to us to ask for our solutions, both for the automation systems but also detection systems have regained quite some strength after — that has been a market segment that has probably been more subdued under COVID per se. But overall — I think the notion that I think we communicated already in March that the pandemic has been also a bit of a wake-up call to a lot of labs to look at automation more favorably plays into our hands with the increased focus on growth applications that, of course, are kind of primed for these type of solutions like genomics, like proteomics, including mass spectrometry and cell and tissue analytics that we see as growth and investments both in kind of research accounts and clinical academic research but also in pharma and clinical lab providers. And I think what we’ve done both from a solution and application and focus but also with the software progress that we’re making in making the systems extremely easy to use and controllable seems to give us some competitive advantage in addition to the, I would say, solid investment that we’re seeing in the end markets that we’re serving.
And maybe lastly; I think also as a maybe a reflection to the challenges of the labor market per se, there seems to be again a positive momentum in demand for automation systems, where labs have to decide to either wait for people and trained personnel to come in or be available or preferably adopt automation systems which, of course, gives a very high degree of flexibility and productivity in a market where trained lab personnel is quite scarce. So, I think there’s a variety of effects. And like I said, I think very happy with the investments that we made in sales and marketing that Tania mentioned before to take future advantage of the momentum that we’re seeing in the end applications and markets that we’re serving.
Operator
The next question is from Daniel Buchta from ZKB.
Daniel Buchta
Maybe two questions from my side. I mean, thank you for the very helpful chart on how the COVID business has developed first half now compared to first half last year. If I remember back what you stated with the full year results, especially the consumables business you mentioned in 2022 to be below the 21% level but above 2020. I mean, what do you expect now for the second half? How the COVID-related business could still impact your top line momentum at least on a reported basis? And also — I know it’s still relatively early in the year but what could it mean — still early until 2023 but how could trends be there? I mean, you had still probably a pretty good testing business early this year due to the Omicron wave. How could that still be a little bit of a drag into next year?
And then, I think you call it the pull forward theory. I mean initial signs which you reported today, is that this theory does not come into practice. But still, what makes you so confident that significantly higher installed base is not partly at least unused now and the investments don’t take place for, say, another one, two, maybe even three years. So, what do you hear in that regard from your customers?
Achim von Leoprechting
Yes, super. I’ll probably kick us off. And if there’s additional flavor, Tania, please join in. I think you’re right in saying that the normalization of the, what we call, COVID-related revenues is quite massive in the first half as we try to illustrate. And for the second half, we reckon this trend will continue. So we have in our planning baked in a very, I would say, small amount, maybe around CHF15 million remaining consumables and elevated level of spare parts in the second half. But we are not seeing any indications that there’s another kind of testing wave coming. Of course, if that would happen, that would change the view. But I think CHF50 million-ish is — again, with all the caveats that we typically make on — it’s very hard now to earmark consumables when we ship them to labs what they’re used for is maybe the kind of best guestimate that I can offer.
And then — I mean, maybe also to the other question. And then I would — from my perspective, definitely agree with your sentiment that these series that have been kind of spun around — kind of this demand maybe kind of slowing for some time for some specific labs is not what we’re seeing. I think effectively, most of the labs that we work with, with very few exceptions which were the ones that have been really literally only set up for COVID testing, they have returned to a normal life. And quite a few of them have actually reordered equipment which is also a good indication that they’re not only looking at kind of maybe reduced but continuation of utilization of the existing installed base.
But maybe what I said earlier; what we’re seeing is the willingness to adopt even higher level of lab automation in a broader sense seems to be at least validated by some of the accounts that are coming back and ordering additional equipment. So I think overall, we feel pretty good about the dynamic and the mix. But clearly — I mean, what I said several times already, back in March and before, that we reckon the utilization of these instruments will return to more normal from what was under kind of COVID peak levels, from maybe 24/7 utilization to something that is more the normal kind of leveraging processes. That also will naturally then kind of normalize some of the pull-through of these machines for the consumables which, again, as a reminder, are not COVID specific but typically cater to general PCR processes or sequencing processes.
And to your last question — I mean, yes, this is maybe again kind of thinking a little bit ahead of where things could be going next year. Again, we are not looking at scenarios that would indicate another kind of pickup of testing in the next year. I mean, it’s too early maybe even kind of speculate around this. However — I mean, what we are seeing is at least in some geographies the willingness to continue, I would say, surveillance programs by either PCR or sequencing technologies is adding to the menu of some of the labs. How meaningful that is in addition, I wouldn’t dare to say. I believe it will be compensated within the normal workflow on testing laboratories unless there would be really a new variant breakout that needs to be specifically analyzed and assessed.
Operator
The next question is from Sebastian Vogel from UBS.
Sebastian Vogel
Hello? Can you hear me?
Achim von Leoprechting
Yes, very well.
Sebastian Vogel
Perfect. I got three questions. I would ask them one by one. If I recall correctly from your full year results, you were suggesting that you would see some 1 percentage point gross profit margin headwind for the old Tecan business on a full year 2022 basis. Now with the H1 being much in line with the H1 of last year, does that mean we will see this effect later in this year? Or we will not see it all together? Could you shed some light on that one? That would be great.
Tania Micki
Sure. I can take this one. And absolutely right, Sebastian. We did say 1% gross margin headwind. We have reported so far around 40 basis points on the organic part. But that’s mainly because — if you recall what we were saying in the first half year — we did not see the full effect of the material price increases in Q1 because we were still using material that were coming from prior year orders. We started seeing really the large impact in Q2. And this will continue in Q3, we believe, as well as in Q4 and potentially in ’23, not just for us, of course but in general overall I believe. So there would be more headwind coming in the second half which we believe will still bring that 1 percentage point headwind. And that’s still in our expectations which is why we left the margin where it is.
Sebastian Vogel
Got it. Then a bit of math on the gross profit margin. As you said, right, you had this 49% for the — for your business, excluding Paramit. And if I apply this 49% to the CHF433 million, so the revenues excluding Paramit, I would get to a sort of a gross profit of around like CHF212 million. And in the numbers, you mentioned that you had an overall gross profit margin of CHF233 million. That means there’s just something like CHF20 million of gross profit left for Paramit. But if I apply the CHF21 million to the CHF151 million of revenues, I would get to a gross profit margin of 14%. Do I have a mistake there in my calculation?
Tania Micki
No, you’re absolutely correct. So that’s around CHF20 million, indeed, for gross profit for Paramit which is around the 14% you have mentioned and a lower number, of course, than the EBITDA. So we do have to consider, though, a few elements from that perspective. The pass-through of material costs with no margin and that’s around 160 basis points for Paramit alone. The last month of amortization of the acquired backlog, if you recall, we had around CHF30 million last year for the first 5 months and then we had the last 6 months in January of CHF2.7 million that you would need to add back, right, into the gross margin to have a like-for-like comparison. And finally, about half of the integration costs were booked into the cost of goods sold, so about CHF1.7 million.
So if you adjust for all those factors, you actually come up with higher gross margin and above the EBITDA margin which is still somehow below our expectation because we had the lower revenue contribution from higher-margin engineering services. But again, if you add back all of those elements, you are higher than the 14%.
Sebastian Vogel
Got it. And the last question is, in your guidance when you were referring to the integration cost, it seems like compared to your previous guidance, you got a notch now lower. Is it an indication that things actually worked out better? Or does it mean the sort of change in guidance means that we have then a little bit more of these costs than in 2023? Or how should we think about that?
Tania Micki
No, it’s really very much more of a timing issue, because at the end what happens is that we spend more time in Q1 planning for everything. And then we started having costs more in Q2. And then we are expecting the second half to have more elevated levels of cost. So that’s the reason why we are still guiding for the low to mid-teens and integrate — million in integration costs. And if anything, there could be some spillover effect to next year. But we are still believing that we will have those costs. The main reason was really the move from the – products to the Malaysia side. That took a little bit longer than what we expected.
Operator
The next question is from Henrietta Rumberger from AWP.
Henrietta Rumberger
I have one or two questions as well, please. So can you possibly tell me a bit more in which sense did things like inflation, like input costs and raw material costs effect you during the first half? And what are your expectations going forward? And also with the supply chain, did you encounter any supply chain problems during the first half? And how do you expect the second half to develop? And have you already made any price adjustments to counter possible higher input costs?
Tania Micki
Sure. Maybe I can start and then we can have some add-on. I mean, from an inflation cost perspective, what we said in March and it is still very much valid, maybe even with some more elevated costs on the material side, we said material costs would increase by 5% to 8%; inflation — wage inflation we see it between 5% and 10%, depending on the region. I believe this is still valid. Maybe on material cost even a little bit higher, more — upwards to the 10%. Plus, quite some significant effects from brokers buys related to electronic components; that’s the biggest hit that we are seeing.
Now as I mentioned in my answer to Sebastian just before, we mainly saw the impact of those in Q2 because Q1 was still based on prior year orders. And we believe that the biggest or the largest effect will come into H2 but still within what we have planned for which is the 1% net decrease in the margin. And that’s actually very much because of the price adjustments that we are able to do in the Life Sciences business which were a little bit higher, as I mentioned during my presentation, were more around 2% on the organic sales. And that’s a little bit higher than the usual 1% that we called out in the prior years.
And again, as I said, this is on the LSB side. On the PB side, we have contractual clauses that will kick in more towards the end of the year, so with the effect of more to the next year. And again, Paramit is a different model because there — that’s the pass-through that I have mentioned. And therefore, those elements are coming in offsetting those price increases but with no margin and therefore, diluting the margin from our perspective.
And finally, on the supply chain, we definitely see some impact. And that’s the reason why we have those much higher inventory levels, especially in Paramit. Because we really want to be ready there: as soon as we receive the missing components, that we are able to deliver it to the customers. So that’s the main reason why we are trying to offset those supply chain issues with the higher levels of inventory.
Achim von Leoprechting
Yes. And maybe just an addition like kind of qualitative content to your question — answer to your question. I think in the second half, we see both kind of higher effects of the inflationary pressures on materials, as Tania said, because, of course, before we had, in the first 6 months, still contracts and supplies from previous periods, where price increases have not hit us at this moment. And secondly, also from the price increases a similar – I mean, in the second half, the price increases that we have started earlier this year, particularly in our Life Sciences division, will kick in more prominently in the second half because just of timing of – and the time between quoting and shipping and invoicing. So there’s a parallel movement into the second half. And as Tania said, we don’t foresee any of that kind of easing off anytime soon. I think, of course, we’re staying very close, particularly to the electronics market which again, we are maybe kind of just a smaller customer. Nevertheless, I think we have created some very good relationships both to brokers and factories that we’re trying to leverage now going forward. So there’s a lot of activities happening to secure supply.
And as Tania said, particularly on the Paramit side, as they have a more extensive range of suppliers, we are already joining forces in supply chain and global procurement to ensure that we are getting the right materials in time and thereby, as Tania said, accepting maybe a little bit of a higher inventory level to be able to ship demand because demand also for Paramit products is very strong coming out of the pandemic.
Operator
The next question is a follow-up question from Maja Pataki from Kepler.
Maja Pataki
I have a quick question with regards to your price increases and the dynamics as we go into 2023. And it’s really just about the dynamics to understand. So you have increased the prices in Life Sciences and the effects are expected to come through in the second half of the year. Just to our understanding, should material prices start to come off in 2023? Are you going to adjust the prices downwards? Or are price levels just basically increasing going forward?
And the second question. To my recollection, you talked about the fact that in Partnering — Tecan old Partnering, you have the opportunity to increase prices contractually in the October, November time frame. What kind of inflation are you — can you actually pass on? Is it really the actual? Or can you take into account also some assumptions on the development?
Achim von Leoprechting
Super. I will probably answer the first and then Tania will give you a bit more detail on the dynamics around Partnering. So in Life Science, maybe — as you recall, we have 2 main levers to increase prices or to mitigate the cost pressures that we are seeing. One is list prices and the second one is reduction of discount levels in the sales entities for — basically, from a sales rep up upwards and controlling and limiting these volume or kind of price discounts. So typically, what we are doing is we are arguing and we are placing and justifying price increases with innovative improvements. And then I mentioned some of our progress we’re making, particularly in the expansion of our digital solutions on our systems. This has typically been a very good basis to justify price increases rather than just kind of arguing for kind of material price and the pressures that are hitting our way.
And this is why – I mean, from where we sit right now, we are planning to keep the prices as they are and continue even to increase prices as we equip these systems with more capabilities, more software and more features as we go kind of along the life cycle of these instruments. What will happen to the kind of volume discount is always, of course, a bit more market driven and sees different dynamics from competitive reactions but also to maybe ordering some level of longer-term contracts with larger accounts, particularly in the clinical services business.
So I would say, overall, we have a pretty good framework of strategic price increases and price decreases are not part of this consideration. And then tactically, we would use, again, kind of a more updated view on discount authorities depending on the competitive situation of deals and geographies.
Operator
[Operator Instructions]
Martin Braendle
In the meantime, we can take questions that came in through the chat. Maybe one for Tania. If you could elaborate on the bookings at Paramit. If you do them — or that person did kind of some math. And the question is, was Paramit’s book-to-bill below 1.
Tania Micki
So yes, that’s a correct mathematical approach. Nothing alarming from our perspective. That’s very much because we actually — if you recall, in the Partnering Business, we only show order entry for what we deliver in the next 12 months. And actually, in Paramit, we take a little bit more cautious approach. So yes, we did — and we could have shipped more actually even — as I mentioned before, if we had all the components. We have a lot of semi-finished products on stock that we could sell straightaway. But again, as I said, nothing alarming from the book bill ratio because we actually have quite a solid book going into next year as well. But as I said, we only show the next 12 months.
Martin Braendle
The next question is – well, maybe reiterating what was said before. The question is around the organic sales, excluding COVID and excluding price increases. Maybe again, Tania, you want to…
Tania Micki
I mean, as we mentioned, the non-COVID-related sales grew at the mid-teens. And then if you consider the 2% price increase on organic sales that I have mentioned, that would be what you would need to exclude. And then from an outlook perspective what we have said and we are staying there, it’s around — it’s being flattish. So compensating as much as possible for the COVID-related sales of last year. And maybe I – just one follow-up on Maja’s question, because I think, Maja, you had the question on PB which we didn’t fully answer. But there on the contractual clauses for inflation increases, those are very much based on certain baskets. So it wouldn’t match necessarily the real increases that we see because of that. And we estimate that to be somewhat below the 1 – the 100 basis points.
Achim von Leoprechting
Okay. So thank you very much, Tania. And thank you very much for all of you on the call for your attention and your questions. I think we are just hitting the hour, so we will close the call now. And we’re looking forward to continue the dialogue and discussions through the online channel. So please contact Martin Brandle, if you would like to discuss with us further.
So with this, thank you very much and yes, I’ll speak to you next time.
Operator
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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