Interim Management Report

Economic and Sector Report

The sectors in which the Sartorius Group is active differ in their dependence on the economy. The Bioprocess Solutions Division, for instance, operates in an environment that is largely independent of economic fluctuations. The Lab Products & Services Division, in contrast, conducts its business activities in sectors that are more strongly affected by economic factors.

Global Economy Continues Robust Development

According to the most recent data of the OECD, the global economy continued to grow at a high level in the first quarter of 2018.

In the European Union, the gross domestic product rose from 2.3% in the prior-year quarter to 2.4%. In particular, the French economy grew considerably faster at 2.2% (previous year: 1.4%), and growth in Germany was also slightly above the previous year’s rate of 2.1%, at 2.3%. The British economy’s pace of expansion eased to 1.2% (previous year: 2.1%).

Driven by positive momentum from the tax reform enacted at the beginning of the year, the world’s largest economy, the USA, gained significantly in the first quarter, rising from 2.0% a year ago to 2.8%. Higher corporate investments and strong domestic demand promoted this growth.

The Asian-Pacific economic area proved to be a key growth driver yet again. China's gross domestic product thus rose by 6.7%, relative to 6.9% in the year before. Sartorius additionally earned significant sales shares in South Korea, India and Japan. While South Korea’s economic performance grew by 2.8% (previous year: 2.9%), the expansion rate of India's economy rose year over year from 6.0% to around 7.4%. Japan reported an increase of 1.1% (previous year: 1.3%).

Sources: OECD: Quarterly National Accounts, May 2018; Reuters, April 2018

Continued Positive Sector Development

Sartorius’ key customer groups include the biopharmaceutical and pharmaceutical industries as well as public research institutions. In addition, the company counts quality assurance laboratories in the chemical and food industries among its customers. Accordingly, the trends in these specific sectors considerably influence the business development of Sartorius.

The international market research institute IQVIA, formerly IMS Health, estimates that the global pharmaceutical market has grown annually by around 6% on average over the past five years. This positive development was mainly fueled by better access to health services in emerging countries and rising median ages in industrialized countries, which led to an increasing demand for medications. By contrast, growth of the pharmaceutical market was dampened by government initiatives directed at reducing health spending, as well as by expiring patents for high-revenue pharmaceuticals.

The market for medications manufactured using biotech methods has already been growing faster than the global pharmaceutical market for years and is therefore especially important for Sartorius’ business growth. Its rapid expansion is primarily due to many new approvals of medicines and additional market penetration by existing biologics. Overall, the proportion of sales revenue of the world's pharmaceutical market from medical drugs manufactured using biotech methods rose from around 21% in 2013 to approximately 25% in 2017.

Biosimilars, or biotherapeutic products similar to originally patented reference biologics, used to play only a minor role in the growth of the biotechnology market in 2017 due to their small revenue base. Yet the biosimilars market is expected to see substantial growth throughout the coming years due to expiration of patents for a number of high revenue pharmaceuticals. In addition, the regulatory, patent law-related and marketing hurdles that have hindered faster penetration of biosimilars to date are likely to further decrease.

Demand for laboratory instruments and consumables is generated also by public research and the chemical and food sectors other than by just the biopharmaceutical and pharmaceutical industries alone.

According to data provided by Frost & Sullivan, the global laboratory market grew by about 3.4%. In view of higher-than-expected economic growth, Europe reported an increase of 3.5%. Sales revenue in the USA, the largest market for laboratory products, likewise rose solidly by 3.1%. Significant growth was once again reported in Asian countries, such as China and India, in which the laboratory market saw above average expansion of 7.8% (China) and 8.0% (India).

Sources: IQVIA Institute: 2018 and Beyond: Outlook and Turning Points, March 2018; EvaluatePharma: World Preview 2018, Outlook to 2024, June 2018; Frost & Sullivan: 2018 Mid-year Report, May 2018

Group Business Development

  • Significant growth in sales and profit
  • Both divisions report dynamic business performance
  • Sales forecast for the full year of 2018 raised

Sartorius with Double-Digit Gains in Sales and Order Intake

Sartorius grew dynamically, recording significant increases in sales revenue and earnings in the first half of 2018. Thus, sales in constant currencies rose by 11.9% from €702.5 million to €758.4 million; the reported increase was 8.0%. Essentially, this revenue growth was due to the strong organic business development of both Group divisions, while sales contributed by acquisitions were around 2 percentage points.

Order intake in the reporting period also rose slightly more strongly than sales, by 12.7% in constant currencies to €807.6 million. The reported gain was 8.9%.

Sales revenue and order intake
in millions of € 6-mo.
2018
6-mo.
20171)
Δ in %
reported
Δ in %
cc2)
Sales revenue 758.4 702.5 8.0 11.9
Order Intake 807.6 741.9 8.9 12.7

1) The previous year's figures have been restated due to the finalization of the purchase price allocations for the acquisitions of 2017

2) In constant currencies

All regions contributed to growth of the Sartorius Group in the first half of 2018. Sales revenue in the Americas region, which accounted for around 33% of total Group sales, gained the highest momentum relative to a moderate revenue base in the previous year, and was up 16.6% to €249.6 million (reported: +9.3% compared with €228.5 million a year ago).

1 ) In constant currencies

2 ) Acc. to customers' location

The EMEA region, which generates the company's highest share of revenue representing around 43% of total Group sales, recorded a gain of 8.4% to €324.4 million (reported: +7.5%, compared with €301.8 million).

Sales revenue in the Asia | Pacific region, which accounted for around 24% of total consolidated sales, also showed positive development against exceptionally strong prior-year growth, with sales up 12.2% to €184.4 million (reported: +7.1% compared with €172.2 million).

All changes given for the regional development are in constant currencies, unless otherwise specified.

Underlying EBITDA Increases Robustly

Sartorius uses underlying EBITDA (earnings before interest, taxes, depreciation and amortization and adjusted for extraordinary items) as the key profitability indicator.

In the first half of 2018, the Sartorius Group substantially increased its earnings. Operating EBITDA rose by 9.6% from €172.9 million to €189.5 million despite negative currency effects. The Group's respective EBITDA margin climbed from 24.6% in the year-earlier period to 25.0%. Growth in earnings was particularly dampened in the first quarter of the current fiscal year as a result of the depreciation of the U.S. dollar against the euro.

Underlying EBITDA and EBITDA margin Group
in millions of € 6-mo.
2018
6-mo.
20171)
Δ
in %
Underlying EBITDA 189.5 172.9 9.6
Underlying EBITDA margin 25.0 24.6

1) The previous year's figures have been restated due to the finalization of the purchase price allocations for the acquisitions of 2017

Consolidated EBIT, including extraordinary items of -€13.9 million (H1 2017: - €14.7 million), depreciation and amortization, amounted to €123.3 million compared with €111.5 million in the previous year. Extraordinary items were primarily related to various cross-divisional projects and expenses in connection with the Group's prior-year acquisitions. Despite an acquisition-driven increase in amortization, the consolidated EBIT margin improved in the reporting period from 15.9% a year ago to 16.3%.

The financial result was -€11.0 million in the first half of 2018, relative to -€14.9 million for the prior-year period. This change is essentially attributable to positive valuation effects related to foreign currency liabilities and hedging instruments.

Tax expenses in the reporting period stood at -€30.3 million relative to -€28.0 million in the first half of 2017. The tax rate for the Sartorius Group decreased from 29.0% in the previous year to 27.0%, as expected.

Net profit for the first six months of 2018 was €82.0 million, substantially higher than the year-earlier figure of €68.6 million. Net profit after non-controlling interest totaled €57.3 million relative to €46.1 million in the comparable prior-year period, with non-controlling interest accounting for €24.7 million (H1 2017: €22.6 million).

Relevant Net Profit Rises Significantly

The relevant net profit attributable to the shareholders of Sartorius AG rose by 14.1% from €69.9 million to €79.8 million. This profit figure is calculated by adjusting for extraordinary items and eliminating non-cash amortization, and is based on the normalized financial result as well as the corresponding tax effects for each of these items. Underlying earnings per ordinary share totaled €1.16 (H1 2017: €1.02) and €1.17 per preference share (H1 2017: €1.03).

€ in millions 6-mo. 2018 6-mo. 20171)
EBIT 123.3 111.5
Extraordinary items 13.9 14.7
Amortization 18.4 15.7
Normalized financial result2) –8.3 –8.3
Normalized income tax
(2018: 27% | 2017: 29%)3)
–39.8 –38.8
Underlying net result after tax 107.5 94.9
Non-controlling interest –27.8 –25.0
Underlying earnings after taxes and non-controlling interest 79.8 69.9
Underlying earnings per share    
per ordinary share in €
1.16 1.02
per preference share in €
1.17 1.03

1) The previous year's figures have been restated due to the finalization of the purchase price allocations for the acquisitions of 2017

2) Financial result excluding fair value adjustments of hedging instruments and currency effects relating to financing activities

3) Income tax considering the average group tax rate, based on the underlying profit before tax

Operating Cash Flow Considerably Enhanced

In the first six months of the current fiscal year, the Sartorius Group reported a net cash flow from operating activities of €92.0 million relative to €54.3 million a year ago. This development primarily reflects the increase in underlying EBITDA.

Net cash flow from investing activities was -€97.4 million, above the year-earlier figure of -€79.5 million. Capital expenditures in the reporting period were related to, inter alia, the expansion of production capacity at our site in Puerto Rico as well as the consolidation and expansion of Group headquarters and extension of production capacities in Göttingen, Germany. The ratio of capital expenditures relative to sales in the first half of 2018 was 13.2% compared with 12.9% in the previous year.

The net cash flow from investing activities and acquisitions was also - €97.4 million relative to -€436.1 million in the same period of the previous year. The considerably higher cash outflows in the year earlier were due to the acquisitions of Essen BioScience and Umetrics, whereas there were no acquisitions in the first half of 2018.

Key Balance Sheet and Financial Indicators Remain at Robust Levels

The balance sheet total for the Sartorius Group stood at €2,418.6 million in the period ended June 30, 2018, compared to €2,297.7 million as of December 31, 2017. This increase is mainly attributable to higher figures for property, plant and equipment, inventories and for trade payables.

The Sartorius Group's equity rose from €806.6 million to €845.2 million between December 31, 2017, and the reporting date. The equity ratio continued to remain at a comfortable level at 34.9% (December 31, 2017: 35.1%).

While gross debt increased from €955.0 million as of December 31, 2017, to €1,006.5 million as of June 30, 2018, net debt was €955.3 million at the end of the reporting period relative to €895.5 million as of December 31, 2017.

The ratio of net debt to underlying EBITDA based on the past 12 months was 2.6 for the period ended June 30, 2018, relative to 2.5 at year-end 2017.

Number of Employees Increases

As of June 30, 2018, the Sartorius Group employed a total of 7,738 people worldwide. Compared with December 31, 2017, head count thus rose by 237 or around 3.2%. From a geographical perspective, personnel increased at the highest rate in the EMEA region, by 4.6%. The number of employees in the Americas region rose in the reporting period by around 3.6% to 1,225. Following consolidation of local production activities, Sartorius employed 1,096 people in Asia | Pacific as of the end of the reporting period (December 31, 2017: 1,140).

Business Development of the Divisions

The Bioprocess Solutions Division Continues to Grow Dynamically

The Bioprocess Solutions Division recorded double-digit growth in sales revenue and earnings in the first half of 2018. Following relatively moderate development in the prior-year, which was impacted by a few temporary effects, momentum considerably picked up again for the Bioprocess Solutions Division in the reporting period. The division's sales revenue rose year over year by 11.9% to €550.3 million in constant currencies (reported: +7.9%), fueled by a high demand for single-use products and equipment; in addition, the division's cell culture media business also contributed to sales expansion. Consolidation of Umetrics acquired in April 2017 contributed close to one percentage point of non-organic growth.

The Americas region, in particular, saw significant sales growth, which was up 15.4% against a low prior-year base, while the EMEA region also achieved a highly solid increase in sales revenue of 10.7%. In the Asia | Pacific region, sales were up 8.9%, after strong growth in the previous year. (All rates of change for regional development in constant currencies.)

Bioprocess Solutions
in millions of € 6-mo.
2018
6-mo.
20171)
Δ in %
reported
Δ in % cc2)
Sales revenue 550.3 510.1 7.9 11.9
– EMEA3) 229.5 208.5 10.0 10.7
– Americas3) 195.8 181.3 8.0 15.4
– Asia | Pacific3) 125.1 120.3 4.0 8.9
Order Intake 594.6 546.9 8.7 12.6

1) The previous year's figures have been restated due to the finalization of the purchase price allocations for the acquisitions of 2017

2) In constant currencies

3) Acc. to customers' location

The division's first-half order intake in 2018 rose substantially as well, also due to larger equipment projects and slightly more strongly than expected, by 12.6% to €594.6 million in constant currencies.

Underlying EBITDA of the Bioprocess Solutions Division increased by 10.0% to €153.9 million due to economies of scale and despite negative currency effects. Its respective margin was 28.0%, up from 27.4% in the year-earlier period.

Underlying EBITDA and EBITDA margin Bioprocess Solutions
in millions of € 6-mo.
2018
6-mo.
20171)
Δ
in %
Underlying EBITDA 153.9 140.0 10.0
Underlying EBITDA margin in % 28.0 27.4

1) The previous year's figures have been restated due to the finalization of the purchase price allocations for the acquisitions of 2017

Lab Products & Services Continues Positive Business Development

In the first half of 2018, the Lab Products & Services Division increased its sales revenue within the range expected, by 12.0% in constant currencies to €208.1 million (reported: +8.1%). While the division's organic growth was around 7%, the prior-year acquisition of Essen BioScience, a specialist in cell analysis, contributed non-organic growth of around 5 percentage points.

Lab Products & Services
in millions of € 6-mo.
2018
6-mo.
20171)
Δ in %
reported
Δ in % cc2)
Sales revenue 208.1 192.4 8.1 12.0
– EMEA3) 94.9 93.3 1.8 3.3
– Americas3) 53.9 47.2 14.1 20.9
– Asia | Pacific3) 59.3 51.9 14.2 19.9
Order Intake 213.0 195.0 9.2 13.1

1) The previous year's figures have been restated due to the finalization of the purchase price allocations for the acquisitions of 2017

2) In constant currencies

3) Acc. to customers' location

The Americas and Asia | Pacific regions reported the highest growth dynamics due to the prior year's acquisition and to significant organic growth, recording a strong double-digit uptick of 20.9% and 19.9%, respectively. In the EMEA region, sales rose relatively moderately by 3.3%. (All rates of change for regional development in constant currencies.)

Order intake for the division increased in the first half by 12.6% in constant currencies (reported: 8.7%), also within the range expected.

Underlying EBITDA of the Lab Products & Services Division rose in the six months of 2018 by 7.8% from €33.0 million to €35.5 million. Despite positive economies of scale, the division's earnings margin was at the previous year's level of 17.1% in relation to the unfavorable currency environment.

Underlying EBITDA and EBITDA margin
Lab Products & Services
in millions of € 6-mo.
2018
6-mo.
20171)
Δ
in %
Underlying EBITDA 35.5 33.0 7.8
Underlying EBITDA margin in % 17.1 17.1

1) The previous year's figures have been restated due to the finalization of the purchase price allocations for the acquisitions of 2017

Opportunity and Risk Report

The opportunities and risk situation of the Sartorius Group has not materially changed since the publication of its 2017 Annual Report. For this reason, please refer to a detailed description of the opportunities and risks as well as the risk management system for the Sartorius Group on pp. 54 et seq. and on pp. 68 et seq. of the 2017 Annual Report.

Forecast Report

Global Economy Set to Further Expand

According to the most recent forecast of the International Monetary Fund (IMF) of April 2018, the global economy is expected to continue expanding at a high level this year. Economic growth is projected to reach 3.9%, slightly up from 3.8% a year earlier.

The growth rate for the European Union is forecasted to level off slightly this year and is estimated at 2.5%, compared with 2.7% in 2017. While economic growth for the United Kingdom is projected to decline to 1.6% (previous year: 1.8%) due to lower corporate investments, a solid increase of 2.1% is expected for France (previous year: 1.8%) because of rising domestic demand. Germany, Europe’s largest economy, is likely to see a continued upturn, with growth at 2.5%, the same rate as in the previous year.

For the U.S. market, the IMF continues to predict that economic activity will grow significantly at a rate of 2.9% compared with 2.3% a year ago. The primary reasons this market is picking up momentum are the tax reform that entered into force at the beginning of the year, rising corporate investments and strong domestic demand.

The Asia | Pacific economic area is likely to grow by around 5.6% this year and thus at approximately the prior-year level. This expected growth will be driven especially by the expansion of the economy in India. Here, the forecasted increase of 7.4% is projected to substantially exceed the year-earlier rate of 6.7%. Despite experiencing a slight downturn by 0.3 percentage points to 6.6%, China will continue to be the growth engine of the Asia | Pacific region as well. By contrast, the Japanese economy is forecasted to see a decline from 1.7% in the previous year to 1.2%.

Sources: International Monetary Fund, World Economic Outlook, April 2018

Continued Positive Sector Environment

The trends described on pages 63–65 of our 2017 Annual Report have remained unchanged with respect to their impacts on the development of the Sartorius Group.

Most recent estimates project that the global pharmaceutical market will expand at a compound annual growth rate of 4% to 7% during the period of 2018 to 2022. For the biopharma subsegment, market observers continue to expect overproportionate annual growth of around 9% on average. This growth will be fueled essentially by the ongoing penetration of the market by biopharmaceuticals already approved, the expansion of their areas of indication and the industry’s strong research and development pipelines.

Based on Frost & Sullivan estimates, global demand for laboratory products is predicted to show exceptionally positive development in the next few years. Therefore, growth of around 3.6% is projected for 2018. While the markets in the USA and Europe are likely to expand robustly at rates of 3.3% and 3.1%, respectively, market analysts continue to expect the highest growth rates in Asian countries, for instance, 7.5% for China and 8.5% for India.

Sources: IQVIA Institute: 2018 and Beyond: Outlook and Turning Points, March 2018; EvaluatePharma: World Preview 2018, Outlook to 2024, June 2018; Frost & Sullivan: 2018 Spring Mid-year Report; May 2018.

Guidance for Fiscal 2018 Raised

In view of good business performance in the first half of 2018 and strong order intake, management has raised its full-year sales forecast for the Bioprocess Solutions Division and thus for the entire Group as follows:

Group

Based on constant currencies, management projects that Group sales revenue will grow by about 12% to 15%, up from its earlier growth forecast of about 9% to 12%. As projected so far, the Group's underlying EBITDA margin is still expected to increase by approximately half a percentage point compared with the year-earlier figure of 25.1%.

For 2018, Sartorius continues to plan on investing about 15% of sales revenue.

Regarding its financial position, Sartorius further expects that its ratio of net debt to underlying EBITDA will be slightly below the prior-year figure of 2.5 by the end of the current fiscal year. Any further potential acquisitions are not reflected in this guidance

Divisions

Given the higher-than-expected growth dynamics for the Bioprocess Solutions Division, management has raised its sales forecast for this division from 8% to 11% to about 12% to 15%. The division's underlying EBITDA margin remains projected to rise by about half a percentage point over the prior-year figure of 28.0%

For the Lab Products & Services Division, guidance remains unchanged. Under the assumption of an overall stable economic environment, sales are forecasted to increase by about 12% to 15%. The division's underlying EBITDA margin is expected to rise by about one percentage point compared with the prior-year figure of 18.0%.

All forecasts are based on constant currencies. Due to the latest developments in the foreign exchange rates, especially between the U.S. dollar and the euro, these figures may need to be reviewed during the remaining part of the year.

Report on Material Events

No material events occurred after June 30, 2018.