Earnings Transcript for MRK.DE - Q2 Fiscal Year 2023

Constantin Fest: Thank you very much Sharon, a very warm welcome to this Merck Q2 2023 Results Call. My name is Constantin Fest. I'm Head of Investor Relations here at Merck. I'm delighted to be joined today by Belén Garijo, CEO of the Group, as well as Helene von Roeder, Group CFO. Also, for the Q&A part of this call will be joined by Matthias Heinzel, CEO of Life Science; Peter Guenter, CEO of Healthcare; and Kai Beckmann, CEO of Electronics. In the next couple of minutes, we'd like to run you through the key slides of the presentation, and after that, we'll have our Q&A. Also note that we've reserved about roughly one hour for this conference call, and some of us will have to catch a plane due to road shows. With this, I'd like to now hand over to Belén to kick it off.

Belén Garijo: Thanks, Tin, and very pleased to welcome everybody to our second quarter earnings call. And please stay on slide number five for the highlights. So, first of all, Q2 has once again demonstrated the resilient nature of our multi-industry business model even as the challenges have increased for some of our business sector, and more specifically for Life Science, and to a certain extent for Electronics in relation [indiscernible]. Before I start with the highlights of the quarter, please allow me to welcome Helene von Roeder to her first earnings call as the Chief Financial Officer of Merck. Now, back to our Q2 earnings and the highlights; one, organically group revenues were down by 1% and EBITDA pre declined by 7%. Currency has now become a true headwind, this was it. And this currency impact negative impact paired with a minor portfolio effect lead to the quarter sales decreasing by 5%, totaling €5.3 billion. FX had more diluted effect on EBITDA present on sales. Accordingly, reported EBITDA pre of €1.6 billion was down 13% versus [indiscernible]. EPS pre of €2.20 was down 17% year-on-year. Healthcare was the best performer with 12% organic sales growth, and that was driven by Mavenclad, Bavencio, and our fertility franchise. Mavenclad is on its way to reach blockbuster status in 2023. Life Science showed a 4% decline in the core business and this was due to a more pronounced stocking in process solutions, which we have now started to see among our smaller and regional customers. Amid the continuing decline in the COVID-19 business, total sales in Life Science were now down 9%, that's organic in Q2. This decline also had a negative effect on the EBITDA pre margin in Life Science and consequently the one of the group. In Electronics, semiconductor solutions decreased 5% organically, again outperforming a declining market. With that expected, became more challenging also in the second quarter. In combination with a continued decline in display solutions, organic sales were down by 6%. While the business environment for Life Science and Electronics under increased impression, healthcare was the star performer of the quarter and they deliver very strong growth. I am therefore pleased to say that our multi-industry business model continues to demonstrate resilience through this transitional year, 2023. In order to reflect the developments in the business sectors and to a lesser extent the adverse currency movements, there has been our 2023 guidance. Now, expecting net sales in a range of 20.5 billion to 21.9 billion, EBITDA pre in a range of 5.8 billion to 6.4 billion, an EPS pre in a range of 8.25 to 9.35, thereby lowering the ranges provided with our Q1 results in May. I would never like to highlight that the upper half of the guide and ranges still fall within our previous guide and balance. And more details on the assumptions will be shared at the end of the presentation. Moving into slide number six, where we show an overview of our performance by business sector. And as you can see, and we already mentioned, healthcare was the strongest contributor to the organic sales development in two, and largely observed the declines in Life Science and Electronics. Our key growth engines in the quarter were our new product launches, as well as a fertility franchise within our healthcare business sector. In fact, healthcare showed excellent organic growth of 12% in a challenging operating environment. And this was mainly driven by almost 30% growth from recent launches to up 27% and Mavenclad up by 28% in Q2. Our established portfolio means CM&E, fertility, and Erbitux, also contributed with an organic sales performance of plus 8%. From a franchise perspective, fertility was the highlight with organic growth of almost 25% amplified by a competitor stock out, followed by oncology with an organic growth of close to 18%. Life Science was down 4% in the core business in Q2, on this more pronounced stocking in process solutions. As a sector, COVID sales continued to be diluted to growth and were significantly down both year-on-year and sequentially. This resulted in sales decreasing by 9% in Life Science in the second quarter. As some of you may have noticed already, and just to put the quarterly performance of Life Science into perspective, regardless of any influence of the COVID period, if we would look at the same period in 2019, the year before the Corona pandemic started, our Life Science business has shown an annualized high single organic growth rate, despite all the recent market challenges. In Electronics, our semi-business continued to outperform in a declining market. As the market became more challenging in Q2, as we expected, our semi-sales declined by 5% organically in the quarter. This, paired with a significant decline in display solutions, although not as the one we saw in Q1, this led to an overall sales decline for electronics of 6% organically in Q2. A small portfolio effect in electronics contributed marginally to sales growth for the group. Currency served as a true headwind across the board on sales, with the strongest negative effect on healthcare. [Reganinx] (Ph) EBITDA pre came at €1.55 billion down organically by 7%, which was mainly driven by Life Science, where organic EBITDA pre was down by minus 26% in Q2, on loss volumes in process solutions and negative mixed effects in the core, and of course also due to lower COVID sales. EBITDA pre in healthcare was strongly by more than 30% organically in Q2, boosted by excellent sales growth, lower gross profit comes, and a small upside from portfolio management with no impact of the Bavencio reputation at all in the EBITDA pre of healthcare in Q2. EBITDA pre in electronics was down 5% in Q2, and that was supported by patent and cooperation agreement with Universal Display Corporation, that Kai made it later on. Importantly, this gives us access to key intellectual property that spans our materials portfolio in OLED, supporting our mid-term growth. While this agreement was part of our full year guidance in electronics, the exact timing and the accounting effect during 2023 equal to predict, and as I mentioned already, Kai may give you further color on this later on in the Q&A. Currency was a stronger set win on EBITDA pre than on sales, and this is due to emerging market currency and ASEAN currencies such as the Chinese renminb and the Japanese gen. Moving into the regional view on slide number seven, what we see is that two of our three larger regions were down organically. North America declined by 3.2%, and this was due to the short drop in Life Science sales, while Europe was down 1.5% organically, and this was mainly due to process solution. APAC was down 2.6% organically in Q2, mainly due to Electronics. Overall, second quarter demonstrates one of the advantages of our globally diversified business setup, combined with the right mix of business or combining, better said, the right mix of business sectors, the regionalized footprint mitigating potential negative impact. Our two smallest regions, LATAM and EMEA, Middle East and Africa, increased in the low to mid-teens percentage. And with this, I'm going to hand it over to Helene to provide additional insights on our Q2 financials.

Helene von Roeder: So, thank you very much, Belén, and a warm welcome also, from my side. Let's dive into the numbers. I am now moving to slide nine for an overview of our key figures for the first quarter. We achieved almost flat sales organically in Q2 at minus 1.1%, there continuing to show resilience in an increasingly challenging business environment, supported by a multi-industry setup. Taking into account, currency headwinds of minus 3.7%, as well as a minor portfolio effect from the acquisition of Mecaro, net sales declined by minus 4.8% to 5.302 billion in Q2. EBITDA pre was down by minus 12.8%, 1.5 billion, with the FX headwind of minus 5.7%, stronger here compared with sales. And EPS pre declined by minus 16.7% to €2.20. The operating cash flow came in at €622 million, which represents a decrease of minus 27% over Q2 2022, mainly driven by the decline in EBITDA pre. And looking at net financial debt, which increased by 1.027 billion compared with the end of December. This is mainly due to investments for future growth and short-term financial investments. However, do bear in mind, we also paid the dividend to shareholders due to. So, let me also briefly comment on our boarded results on slide 10; EBIT down by 17.6% per Q2, in absolute terms, the decrease was minus 208 thereby lower than the decline in EBITDA pre of €229 million. The decline in EBITDA, and therefore also EBIT, was mainly driven by the EBITDA pre declined in Life Science. And this in turn was driven in particular by the impact of key stocking and process solutions. Financial result was minus €6 million in Q2 versus minus €55 million in Q2 last year, mainly due to additional interest costs from pensions, as well as related party financial liabilities and tax effects. The effective tax rate came in at 21.0% at the lower end of our guidance range, and below the 22.4% in the second quarter of last year. The higher negative financial is a stronger effect on net income than the lower effective tax rate. Net income and EPS were down by 18.9% and 18.6% respectively, slightly higher than the decline in EBIT. So, with that, let's move on to the review by business sector, starting now with Life Science on page 11. Sales in the Life Science core business were down more percent organically in Q2, while COVID related sales continued to decline and had a dampening effect of minus 5%; accordingly, sales in Life Science declined by minus 8.7% organically in Q2. From a portfolio perspective, process solutions and Life Science services were down organically in Q2 with signs and lab solutions having been almost flat organically. So, let's look at process solutions first. The core business is decreased by minus 7% organically in Q2, below the percent in Q1. And this was further amplified by the COVID related decline of minus 5%. The decline in the core business was mainly driven by these, which became visible during the course of Q1. Now, we expected that the stocking fully materialized in Q2, but it turned out to be greater than we had thought at the beginning of Q2, which is now also visible at our smaller and regional accounts. Order intake continued to decline year-on-year on the back of reduced COVID related sales, and book to bill was again slightly below one as expected. Sales in science and lab solutions were flat in the core, organically slightly down by minus 1% in Q2. The moderation versus the strong plus 7% in the core in Q1 is driven by a temporary demand weakness, mainly at our large pharma customers, especially in North America. So, let's turn to Life Science services. Business sales were down minus 7% organically against tough comps, all selecting batch spacing in CDMO. Amid a sharp drop-off in COVID related sales to marginal levels, as expected, sales were down minus 30% organically. With regards to earnings, please note that in Q2 2022, the EBITDA pre emergent was at its peak for Life Science. Against these very tough comps, EBITDA pre decreased by minus 26.1% organically, while the margin came in 3.2%, down 780 basis points year-on-year. The margin decline reflects lower volumes, mainly driven by customer destructing and process solutions and lower COVID sales, as well as negative product mix effect due to the loss of COVID sales and in the process solution core business. So, if we now take a quick look at 2023, I would like to point to developments. For one, the destocking effect in process solutions is only fully materialized in Q2 and was more pronounced than anticipated in early May. Based on intensified conversations with our customer and other developed analysis, we now assume the drop will be in Q3 and expect a trend change towards normalization for sales in Q1 to Q2 2024. Secondly, we had particularly strong organic core sales growth in Q3 last year, mainly driven by process solutions. So, with that, let's move to healthcare on slide 12. Healthcare delivered organic sales growth of 11.9% in Q2 above the quantitative guidance range we provided with Q1 in early May. Recent launches grew plus 29% organically, while the established portfolio also grew at a plus 8%. Oncology increased plus 18% organically, mainly driven by Bavencio, which was up plus 27%, and supported by Erbitux, which grew plus 10% organically. At the end of March, we announced that we would regain exclusive worldwide rights for Bavencio and have now taken full control of the global commercialization effective June 30th. Our NNI franchise accelerated growth in Q2 and is now up by plus 12% organically. Mavenclad momentum resulted in a strong performance of plus 28%, while Rebif was only down minus 3% benefiting from US channel dynamics. By franchise, fertility was a star performer at plus 25%. Competitive stockouts continued in Q2, driving stronger performance in various regions. This was paired with a strong rebound of our fertility franchise in China, where the end of the zero COVID policy led to a temporary slowdown in the fertility market in Q1. So, regarding our pipeline, for evobrutinib, we approved words of readout of our Phase 3 RMS program in Q4. Thinking about the potential of this asset, we recognized the excitement in the medical community about the concept of [PIRRA] (ph), which is getting more and more attention when looking at the BTK inhibitor space. Xevinapant, our inhibitor of proposals proteins antagonists, we are progressing towards interim analysis. In tri-links, our event-driven and locally advanced squamous cell carcinoma of the head and neck in CIS eligible population, depending on the accumulation of events. Regarding earnings, EBITDA pre amounted to €704 million, resulting in a very strong margin of 34.3%. Organic EBITDA pre was up 30.4%, driven by operating leverage and lower comps on gross profit. While Q2 was supported by income from active portfolio management of around €70 million, it should be noted that in the year and year comparison, this is offset to a large extent by BD income in the prior years, as well as an expected decline in third-party royalty streams. FX, unfortunately, was a significant headwind of minus 13.9 EBITDA in Q2, higher than the minus 5.4% on sales. This was particularly due to the decline in value of emerging market currencies, including the Turkish lira. So, looking to 2023, we continue to see income from active portfolio management in a mid to high double-digit million euro amount for the full year, hence no significant contribution expected in H2. Regarding the excellent organic sales performance in Q2, and whether this is a good indicator for H2, I would like to say the following. While we generally expect a positive sales momentum to prevail for recent launches, Q2 was indeed also helped by continued competitor stockouts, which started emerging since Q4 last year. From our current perspective, we include in our model some degree of normalization supply situation and fertility towards the later part of H2. Regarding the EBITDA pre margin, the level excluding active portfolio management in Q2 provides a good indicator for the remainder of the year given operating leverage, mix and the repatriation of Bavencio. On page 13, we will look at Electronics. Sales were down organically by minus 6.3% in Q2, with FX having turned into a head-winning Q2 at minus 3.8%. We did have a very small positive portfolio effect of 0.3% related to the acquisition of Korea-based Mecaro. Semiconductor Solutions outperformed a declining market yet again, but still was down minus 5% organically in a more difficult environment. Display Solutions was down by minus 11% organically with negative pricing and mix effects, but already better than the minus 28% observed in Q1, driven by a continued challenging environment in liquid crystals. Surface Solutions was down minus 6% on softness, both in industrials and coatings, but cosmetics are coming back. EBITDA pre amounted to €262 million, implying a margin of 29.1%, down only 30 bps year-on-year. Organically, EBITDA pre declined by minus 5.2%, with FX having turned into a headwind of minus 4.9% for Q2, slightly more pronounced than on sale. Both, the decline in display solutions and semiconductor solution sales contributed to the decline in EBITDA pre. The EBITDA pre margin held up to Q2 2022 and was also above the level from Q1. It should, however, be noted that it included again from the patent and cooperation agreement with UDC. This agreement will give us early access to their R&D image materials, which does strengthen our OLED portfolio significantly. Overall, this agreement is a mid-double digit euro million or amount to EBITDA pre in Q2 and will not recur in this form. That said, let me also briefly comment on the coming quarters. Looking at Semiconductor Solutions or differentiated market position in semi-materials and/or strong order book in DSNS should help to mitigate some of the market headwinds, as we already demonstrated in Q1 and Q2 of this year. However, we are not fully shielded. MSI expectations for 2023 dropped during the course of the year and now stand at minus 13%. And we now expect the market downturn to extend into 2024 as our customers lower their outlook and capacity utilization. Our previous guidance was in line with market expectations of a recovery of the semi-market already in Q4 2023. So, turning to Display Solutions, we believe the inflection point in customer utilization and liquid crystals has been reached in Q2 and note that comps in H2 are getting easier. Overall, we expect slower top line momentum in Semiconductor Solutions in H2 with Display Solutions having the chance to return to growth against easier comps. So, before handing back to Belén, let me also comment on our balance sheet and cash flow statement. As you can see on slide 14, our balance sheet overall is slightly above the level as at end of December 2022. The main driver behind this development was business growth. So, looking at the asset side, inventories increased mainly related to our life science and electronics businesses. This was slightly up on business performance and high sales volumes at the end of Q1. And intangible assets decreased due to effects and amortization. Other assets increased due to short-term investments with cash and cash equivalents declining accordingly. So, then, moving on to the liability side; provision for employee benefits remained stable, financial debt increased, which was more than offset than other liabilities, in turn affected by the dividend payment in Q2. And net equity increased slightly, thanks to higher retrained earnings with negative effects almost canceling this out. Our equity ratio improved slightly to 55% from 54% compared with December 2022. Turning to cash flow at slide 15, our operating cash flow came in at €622 million and was down minus 27% compared with Q2 last year. This was mainly due to the decline in profits after tax and changes in other assets and liabilities, in turn mainly due to tax and pension plans. Changes in working capital in Q2 were reduced compared with high growth comps due last year. While CapEx increased in line with our midterm growth ambitions, investing cash flow turned positive in Q2 compared with the earlier year period. This was due to changes in short-term investments of our excess liquidity. So, last but not least, the difference in financing cash flow can be explained mainly by the repayment of bank liabilities, which took place in Q2 this year. And with that, let me hand back in for an update on ESG, as well as the guidance.

Belén Garijo: Thank you very much, Helene. And as every quarter, I would like to provide a very brief update on our ESG initiatives. In this case, D, E, and I, Diversity, Equity and Inclusion, and for this, please move to slide number 17. So, as discussed with many of you on prior occasions, we have our sustainability efforts and we continue to make good progress. Just last week, we released our first progress report on diversity, equity, and inclusion. The report is covering our plans and the progress in 2022, along with our ambitions through 2030, which has been communicated to you in our first Capital Market Day in 2021. It demonstrates that we approached diversity, equity, and inclusion with the same purpose and transparency as our other global business priorities. We set both ambitions and we hold ourselves accountable. If one believes in the positive correlation between being a diverse organization and a high performance organization, and I believe all of you know that there is a body of evidence behind that, then it seems that we are moving in the right direction at Merck. We now have more than 38% women in senior leadership positions and increased of 11 percentage points since 2015 and 40% female participation in the executive board. Our engagement brings us closer to our patients and to our communities so that we can be among the first to develop meaningful solutions that address their unmet or emerging needs. I would like to take this opportunity to invite you to discover how we continue to incorporate pride of belonging and our efforts to advance progress into our first report on D, E, and I. And with this, let's move on to the guidance. Please move to slide number 19. So, as I mentioned at the beginning, we are adjusting our full year 2023 guidance band for the group, in particular on the increasing challenges in life science, but also on the way we see the semiconductor solutions market moving in the coming quarters. In this respect, now we expect group net sales in a range of 20.5 to 21.9 billion, EBITDA pre in a range of 5.8 to 6.4 billion and EPS pre in a range of 8.25 to €9.35. While we continue to expect to grow our net sales, excluding the COVID-19 business organically, by a range between one positive and 5% positive, we now guide to an overall organic sales development of minus 2 to plus 2, with the midpoint in applying a flat organic performance and an organic EBITDA pre decline of minus 9 to minus 3 in the full year 2023. Currency, as several times mentioned, it's expected to become a hard headwind of minus 36 for sales and for EBITDA pre respectively, slightly below our previous forecast of minus 2 to minus 5 for sales and EBITDA pre. This is due to a somewhat weaker US dollar and weakening Asian currencies, such as the Chinese renminb. While we are lowering our guidance that we provided or virtualized with EU in May, there is still a meaningful overlap with the previously communicated guidance bands. The lower-half of the old bands now represent the upper half of the new guidance ranges. The new midpoints of the ranges are at the lower ends of the old guidance bands and reflect our current most balanced view. We remain confident of achieving our midterm guidance of 25 billets by 2025, despite the challenging operating environment in the transitional year, 2023. Let me offer some additional color by business sector, moving into slide number 20. So, for Life Science, we are adjusting our guidance and expect an organic sales development of minus 3 to plus 4 in the core business. We reiterate our expectation for COVID related sales of around €250 million in 2020, therefore expecting this to be strongly diluted to growth in 2022. For Life Science overall, we therefore expect an organic sales development of minus 8 to minus 2, and an organic EBITDA pre development of minus 21, minus 12. Amid more pronounced the stocking in process solutions. Please note that we are currently going or planning for a complex SAT migration in Life Science, which potential impact is already reflected in the new guidance that we are communicating today. For healthcare, we are raising once again our guidance, and we now expect organic sales growth of plus 6 to plus 9, and organic EBITDA pre growth, we now forecast plus 14 to plus 19. On sales, a number of drivers continue to play in our favor. First, the strong performance of our recent launches complemented by an upside from the comparator supply shortages in our fertility franchise and CM&E portfolio. In addition to benefits gaining exclusive worldwide rights to Bavencio, effective June 30TH, EBITDA pre now is also getting the benefit from operating leverage and very positive mixed effects. In electronics, we have become more cautious on both organic revenues and EBITDA pre development in 2023. And now, we are forecasting sales to decrease organically between minus 6 to minus 1, and EBITDA pre to decline organically by minus 13 to minus 10. And this mainly reflects a more pronounced and extended downturn in the semiconductor materials market, with industry forecast delaying the time of the recovery into 2024, as you have heard from other companies playing in this space, and of course have seen from recent communication from some of our major customers like TSMC. Overall, we continue to expect semiconductor solutions to show great resilience and to continue to outperform in this challenging market. For a group as a whole, I'm pleased to say that our organic sales performance is flat in H1, and this is despite the increasing challenges in Life Science electronics and amid the decline COVID business clearly proving the benefits of our multi-industry business model. With this, I'm going to thank you very much for your attention, and we would be very happy to now take your questions.

Constantin Fest: One remark from my side, it would be very kind if each of you could limit yourselves to two questions. This will allow more of all of you to ask questions in the first place. Thank you. And with this, we'd like to have questions, please.

Operator: Thank you. We will now begin our question-and-answer session. [Operator Instructions] Your first question comes from the line of Richard Foster, J.P. Morgan. Please go ahead.

Richard Foster: Hi, thanks for taking my question. A question on Life Science's process solutions, you talked about a trough I think in revenues in Q3, so revenues getting worse and then improving I think in Q1 and Q2 '24. Could you clarify that comment and see whether that's right? Also, think about the orders, and so, just thinking about those orders, the visibility you have over the orders and customer inventory levels, and how you see order intake developing in concert with those or ahead of those revenue comments, if those are correct? And then, secondly, maybe just thinking about the improvement in those orders, how should we think about the magnitude of the improvements, should we be thinking about a gradual improvement in orders and revenues in process solutions or more of a V-shaped change? Thanks very much.

Matthias Heinzel: Hey, Richard, it's Matthias here. So, let me tackle your question. Indeed, just to confirm, we expect now a trough in terms of revenue and destocking during Q3. And I think you're getting at the right question, if you will. We expect then, the orders showing an inflection point during Q4 into Q1. So, here an inflection point on the orders and then given the lead times, right, we expect then to have this translated into an inflection point in terms of sales into Q1 or the Q2. And then, in terms of how we see the order development - look, I think it will not be a straight line. Obviously, we are monitoring order intake very carefully by region, by customer segment. I think it will be a bit of a fluctuating around the line, but it will not be a straight line. I think it will be a little bit bumpy. And I think as we also mentioned before, there will be certain customer segments early on the wave of recovery and others will be a little lagging behind. So, I think at the end of the mix, but overall, we expect that this will be behind us during Q1.

Richard Foster: Thanks very much.

Matthias Heinzel: Thank you.

Operator: We will now go to our next question. And your next question comes from the line of Matthew Weston from Credit Suisse. Please go ahead.

Matthew Weston: Thank you, too, please. The first, Matthias, is following up on Life Science order trends. One of your competitors was very helpful in that they provided what they estimated to be the gap between current revenue and actual allying customer demand for their business. They gave a number of half a billion dollars. I'm very interested if you were able to share something similar about Merck as to how much you think you are currently missing from your P&L or your sales demand relative to what your customers are actually using of your product. And then, the second question is for Belén. It's certainly quite high level. You've talked for some time about the firepower. It wasn't really included in today's narrative, but in the past, it also seems that what was very much a focus on a large deal seems to have moved to a discussion of a string of pearls. I'm very mindful that you've got an extremely cash generative business and Helene made that clear in her commentary. So, net debt to EBITDA is probably going to fall below one in 2024. How long should we expect you to operate with such a conservative [battle] (ph) if you can't find something to buy? And is there a possibility that we could actually see you return capital to shareholders either through a special dividend or perhaps even a share buyback?

Belén Garijo: Matthew?

Matthias Heinzel: Yes. Let me answer your first question. We can't quantify with an exact number, but let me frame it this way. Phenomenon, we currently see in the destocking is in a way that there is no issue in terms of outflow if you will of customers using our product, I.e. there's not a share issue. It's more really that they work down their inventories. And obviously, we've built a target model. If you will, inventory model what we believe will be the normalized levels of those customers. And that model, of course, we then use to come up with our guidance in our forecast, which we just shared.

Belén Garijo: So, Matthew, for your M&A questions, you have followed Merck learning up to understand that our track record is based. Our good track record on portfolio management is based right time, right target, right price. And we are aiming to continue to deliver on that trajectory that characterizes our company. So, when we disclose our capacity during the capital market phase, we were very clear what the priority in our mind. This hasn't changed. We were also clear that the deal modality is flexible, that we have the capacity to go for more transformative moves as long as those would create value. And the transformative approach versus a string of bills can be combined for the different business units. So, first of all, our organic outlook is strong enough not to rush. And obviously as you can imagine, we are closely watching the targets that we believe could be creating value for working the future. Second, we already mentioned, we are not going to do a sale buyback. This is not what we believe is going to create value for our owners or create most value for our owners and our shareholders. So, last but not least, I would like to remind all of you what is our guiding frame when it comes to making decisions on M&A. And this is, first and most important, supporting our profitable growth strategy. Then, having an [indiscernible], which is above what. Third, having an option which would be EPS pre accretive and of course doing everything that it takes to maintain our credit rating. Something important, as I said, our priorities hasn't changed. This is speaking of grooming the big three pillars, so priority Life Science, optionality for the healthcare pipeline, and eventually looking at new technologies that would enhance the value that we bring to our customers in it.

Matthew Weston: Thanks. Sharon

Sachin Jain: Hi there, thanks for taking my questions too, if I may. So, firstly on process, any color on China dynamics, has it been mentioned as the delta, I just wanted to check that you're immune from the pressures that others are seeing and if so, why that would be the case? And the second question, I guess, is for Helene. At one queue, there was good color given on the variables between the top end and bottom end of your group guide. You've mentioned a number of times today the top half of the last of the prior bottom. So, should we be thinking the top half of guide is more realistic now and the bottom end is more of a buffer? Thank you.

Matthias Heinzel: Hey, so, Jain, let me address your first question around China, maybe just to frame it size-wise. So, China is around 10% of the total lifetime of business. And if I look at our Q2 results in China, it's essentially in line with also what we report for Life Science overall. So, actually, with these similar dynamics, what we see on the go, having said that, if you recall, we mentioned in the past that during COVID, us and I think several others, if you will, lost some share for local competition because we couldn't supply during the COVID situation. We are now on a good path actually to gain back the share and we are making good progress. At the same time, we also continue our in region, full region model, continue to invest. We also announced the investment in [Wuxi] (ph), China for our PS business. So, overall, yes, while China is in a similar situation like on a global level, I think we're on a decent path towards continued growth going forward.

Belén Garijo: So, on your second question, let me reiterate, this is a highly realistic guidance from our point of view. As you have heard and observed, obviously, it's like there's a number of moving pieces, which we are facing. One, I would like to highlight is the fact that the FX is a strong headwind, which we are facing, and we have no way of influencing that, obviously. So, if I were you, I would take the guidance like any other normal guidance that a company gives and not try to read anything into a tailoring or tapering to the up or to the down.

Sachin Jain: Thank you.

Operator: Thank you. We'll now go to the next question. And your next question comes from the line of James Quigley from Morgan Stanley. Please go ahead, your line is open.

James Quigley: Hello. Thanks for taking my questions. So, one on science and lab solutions, I think in the slide, it says the pricing benefit you saw in Q2. So, could you quantify what about that was? And should we expect that to develop throughout the rest of the year? Also, one of the driving and the regional differences in growth noted, particular Asia, which was flat despite obviously the tough environment that we're seeing in China. And then, the second question, could you give us an update on [indiscernible], please in terms of the data on tracks? Is the data still on tracks for end of the year as you already spoke?

Belén Garijo: We have bad line.

Matthias Heinzel: James, it's really hard to hear you. We would try and guess your question. I think your first part was around price on SLS, because your line was really hard to understand. So, if your question was on pricing SLS, we continue to see good pricing momentum actually across Life Science, but especially also SLS. And we continue and expect that to continue for a while.

Helene von Roeder: Second, China.

Matthias Heinzel: Then, what was your question again on China, if you don't mind?

James Quigley: So, it's more about regional differences in growth seen in SLS. China or Asia was flat. And I think U.S. was decline and Europe was growing. So, is there any particular reason for those regional differences, particularly given what we're seeing in China?

Matthias Heinzel: Yes, again, I think I got your questions. If I look at -- the question was in SLS in North America was weaker and it was tied more to the pharma spending of the larger customers in North America. If I look at SLS in Asia and China, it was pretty solid, actually. It was almost flat. And I mean, the other thing, it's not the regional split, but if I look at by business, we had certain businesses like biomonitoring, lab water, which were between low and mid-single digit, while our diagnostic regulated materials was mostly down. So again, I think overall a pretty decent SLS performance, but certainly even better in Asia versus North America for the quarter.

Peter Guenter: I think there was also a question on evo timelines, James. So, the short answer to your question is yes, you know that this is of course event-driven, but for all what we see currently confirmed indeed a Q4 readout, we continue to see the medical community excitement actually increasing. We are tracking a certain number of things like awareness, like a medical need, like the understanding of PIRA. And we see actually all these KPIs or pre-launch KPIs, if you will, trending in the right direction. So, we're very excited.

James Quigley: Thank you.

Operator: Thank you. We will now go to our next question. And the question comes from the line of Michael Leuchten from UBS. Please go ahead.

Michael Leuchten: Thank you very much. Two questions, please, one for Kai. The updated electronics guidance might suggest that you're better able to control the margin into the second half. Just wondered if that's a fair interpretation, if so, if you could just give us the pointers, whether this is just an ability to manage inflation more or whether there's anything else? And then, the second question, going back to the destocking. Any color you could give us on consumable versus equipment destocking, is there any major difference in how has that changed from the first quarter to the second quarter? Thank you.

Kai Beckmann: Yes, Michael, on your first question on the margins in Electronics, of course, we have to still absorb the inflation as you stated. This will probably last into 2024 since the delayed impact on the P&L, which will first hit the balance sheet and second the P&L. Of course, it will taper off midterm, but it still has an effect. The volumes have an impact on the margins to the declining volumes that we had to absorb. Now, of course, on the other side, we respond to that with our cost flexibilizations. It's in the second half. We have still taken into account the impact of the ongoing decline of liquid crystal. So, we are coming back to a better situation as the comps is based on what I explained in the past quarters. However, it is a continuous negative impact on margins since we have that conformed liquid crystal somewhere weighing on our P&L.

Matthias Heinzel: Yes, Michael, I know you have a question on consumers and products, consumers and equipment. If I look at our product business, which is essentially SLS and PS, the vast majority is actually consumables for ballpark, 90% consumables, maybe 10% equipment. So, when we talk destocking, it's to the vast, vast, vast majority. It's a little bit destocking, not about equipment.

Michael Leuchten: Thank you.

Operator: Thank you. We will now go to the next question. And the question comes from the line of Gary Stevenson from BNP Paribas. Please go ahead.

Gary Stevenson: Hi, there. Thanks for taking the questions. So, firstly, just on Life Science, you've now got quite a wide EBITDA pre gray frame. So, given all the various moving parts, could you just talk to the key bearing hitting the upper end versus the bottom end, given the process solution sales growth is pretty much off the table for 2023? And then, link to that, could you just give us your updated thoughts on the margin profile of Life Science moving forward and as we move from that COVID peak of, say, 38% and pre-COVID levels, what do you think is a realistic range for that as they need to end pressures ease? And then, secondly, on semi, with the delayed recovery into 2024, but the midterm guidance reconfirmed, could you just talk to your level of visibility here and the level of certainty that you have on the timing of that recovery? I'm just wondering how the strong DSNS business that you've had for a few years now might translate into any uptake in materials demand as those CapEx projects come online. Thank you.

Matthias Heinzel: Yes, let me take the first part on the question. If we look at the margin development this year, there's obviously -- the key drivers are number one, obviously the COVID decline from last year. Obviously, that was a known factor and we are on that path towards roughly the €250 million, but that has a margin impact because the COVID product portfolio has had a higher margin profile. That's the first element. And the second element that obviously - the PS destock now talked about at length, has obviously a volume decline, which also has a margin mix impact given the higher margins we have in PS. And then, the other element of that is obviously as the volume declines, we obviously adjusting cost. At the same time, we need to keep in mind that we need to be ready for the uptake. And we talked about the inflection point. So, while we are adjusting and managing costs where we did, we also need to be prepared when it comes to staffing and the plans to be ready if you will to catch the uptake. And that's obviously then, balancing, protecting the margin shorter term, but also then, if you will, be ready for the uptake. That leads then obviously to the other part of your question. Our ambition is clearly to get to the corridor, which we laid out before for margins where we said between the pre-COVID levels, which we are roughly in the 31% and the peak levels, which Helene mentioned right last year, peak 38%. We will get to this if you will corridor, post this transition year, which obviously we are still currently in, but we are having the clear ambition to get there.

Kai Beckmann: Okay. I'll take the second question on semi. So, on the short-term, of course, you're very dependent on the capacity of this station that our customers, especially the leading edge segment announced and they changed quite on a short notice. So, here, and this is why we have changed now our assumptions for Q4 since the latest news there, did not give us any confirmation that there will be a recovery in Q4. It will be more flat-ish in the second half this year. We all believe we have seen the worst in Q2. However, it will be more sideways for the rest of the year. And their statements confirmed the assumption that in 2020 that recovery, on the midterm, and thanks for referring to DSNS, on the midterm. Our confidence is still as high as it always was because capacity that is being installed right now will be used at some point. Still on the short-term, it is a shelf first implementation. So, we will sell our equipment. However, the rest of the fab is not being outfitted to a point where it can already consume materials. However, the appetite of our customers to build capacity is unchanged. And this is supporting our DSNS business on the project side, but as well on the equipment side. And our order book here is very strong. Our visibility here is very strong.

Operator: Thank you. We will now go to the next question. And your next question comes from the line of Peter Verdult from Citi. Please go ahead.

Peter Verdult: Yes, thank you, Peter Verdult, Citi, just two quick ones for Peter. Just on the evo, just quickly, as it relates to the partial clinical hold, we've seen FDA widen their review, but is there anything new you to say as it relates to BTK and MS? And then, on to the Xevinapant, Peter, maybe just with the data coming up, could you just set the scene for us? I mean, if we see a signal similar to what we saw with that [bid dates] (ph) or the three-and five-year updated data, would you be involved in to raise peak sales expectations or talk about the xevinapant being a blockbuster drug potential? So, a question on evo and setting the scene on Xevinapant, thank you.

Peter Guenter: Peter, thanks for the questions on evo and Xevi. Let me take first evo. I want to comment on the exchanges, which are ongoing with the FDA. It's a very good and fluent dialogue, and we will provide you with an update when we have meaningful feedback from the FDA. And you may understand that at this point in time, I cannot really give you further guidance on the exact timelines currently. On xevinapant, obviously, we're very excited. You see a very solid dataset in the phase 2. You have seen probably the five years follow-up of the phase 2, which are quite impressive. We have indeed guided blockbuster potential in the two indications hold, and we remain committed to that. I don't know if you asked us on the timelines. Also, this trial is event-driven, and it may be that, if we look at the accumulation of events, that it may slip from end of this year into early next year. But that's really a question probably of a couple of weeks. What I would remind you, though, is that, of course, this is an interim analysis, and unless the interim analysis is strikingly positive, the study will remain blinded and continue until primary analysis, which is called the main point for the readout of the primary end point.

Peter Guenter: Thank you, Peter.

Operator: Thank you. We will now take the next question. And your next question comes from the line of Oliver Metzger from Oddo BHF. Please go ahead.

Oliver Metzger: Yes, good afternoon. Thanks for taking my questions. The first one on Life Science, so regarding the destocking, some competitors described six months' inventory level of customers as normal levels. So, first, do you agree, and what's your view if the inventory potentially goes below that because everybody is able and will deliver even short-term? Would this bring some more downside risk to the bioprocess solutions market? Second question, some health care, at fertility, very good momentum, you commented also from the competitor's issue, apart from that, to my understanding, comes also from China. So, how would you quantify both effects relatively? Thank you.

Matthias Heinzel: Hey, Oliver, it's Matthias. You bring up indeed a good point. The lead times are a key element in terms of the destocking, because now customers can place orders. They get the products much quicker than before, hence they don't need to hold so much inventory. So yes, the effect we see, and that's factored into our - if you were modeling, modeling, I mentioned the target inventory models, and that's really factored in also when we provide now the guidance. Six months, I heard that before, right? I think it's something which quite common. Obviously, it depends, and varies quite widely by customers. But the key point is, the lead times getting shorter, and that's now part of the factor where customers are now readjusting their target inventory levels.

Peter Guenter: Yes, Oliver, on fertility, obviously we don't have the exact crystal ball to know exactly what's going to happen with the competitor stock out, but of course, we have some data point. And I would say that it's fair to assume that the stockout will continue into house two. Although, we see that some mark is selectively our resupplied by the competitor. I would say that the stock out component of the Q2 results is higher than the China component of the Q2 results. Obviously, the rebound in China post-COVID is something that we have seen also in other parts of the world when we went through the initial COVID waves, so nothing really unexpected there. What I think is important to remind you is that when those, let's say, atypical effects would wane out, we remain confident in a mid-single digit growth care for the fertility business.

Oliver Metzger: Okay, great. Thank you very much.

Operator: Thank you. We will now take our next question. And your next question comes from the line of Simon Baker from Redburn. Please go ahead.

Simon Baker: Thank you for taking my questions; two, please. Firstly, going back to Life Science, I know this has been touched on, but not in this precise form. So, can I just ask how your visibility on the outlook has changed? The increased range [technical difficulty] -- imply, it hasn't improved, but that may just be simple conservatism. So, any color on that would be helpful. And then, moving on to display, I wonder if you could give us your thoughts on the impact of Panasonic dissolving its LCD production unit, not in terms of whether or not they were customer, I know you won't answer that, to the market by removing that capacity in terms of pricing.

Matthias Heinzel: Yes, hey, Simon, on your first question. So, yes, certainly visibility has improved, especially since we talked in the last call. I think we have a good view around the scope, if you will, of the destocking, meaning now including all the smaller, regionalized customers, the depth of the destocking, do we have full visibility? I don't think so. I think nobody in the current industry has the full visibility, but I think we are gradually navigating through that. And also, given the more intentional conversation with customers, et cetera, and obviously, we mentioned before already the targeted inventory model. So, I think we are putting our arms around the issue, and again, based on that, we provided the updated guidance.

Kai Beckmann: And Simon, let me take the display question. So, talking about the Panasonic line that was focused on industrial and automotive displays, decision dates back to 2019, and they passed the panel already in 2022. So, more than a year ago, March 22 was the last produced panel, and it's a very small capacity of the overall, LC capacity globally. We are talking about much less than 1% of the overall capacity. So, this doesn't move the needle anywhere in terms of overall global capacity and the adjustment of volumes.

Simon Baker: Thank you.

Operator: Thank you. Thank you. We'll now take your next question. And your next question comes from the line of Dylan van Haaften from Stifel. Please go ahead.

Dylan van Haaften: Excellent. Hi guys, thanks for taking my questions. Just on Xevinapant, given the interim is particularly being flagged. We'll begin an update or maybe also just purely past the interim with no news if it doesn't meet the early stoppage or futility criteria. And obviously we'll hear something in the equity, and secondly, is there anything else you can tell us about the statistics required for early stoppage and could it be stopped on a repeat of the phase two data?

Peter Guenter: Thanks for the question, Dylan. So obviously, if futility would be hit, of course, we would communicate that, obviously. That's obviously not the base case scenario. As I said before, the bar to hit the interim analysis and then unblinding the data is a very high bar to meet. So, I think the base case scenario should be that we will go until the primary analysis. I remind you again, event-driven. What we measure is event free survival. So, this is a time to event end points that is measuring treatment success when therapy is given typically with a curative, like it is the case here in locally advanced head and neck cancer with Xevinapant, this end point includes both progression and death, but also, for example, the appearance of a second squamous cell cancer and also salvage the surgery in the event definition. And then, of course, in the secondary end points we have overall survival. We have PFS. We have local regional control. We have duration of response and so on and so forth.

Constantin Fest: Sharon, I think we have time for one last question, please.

Operator: Thank you. We will now take your last question. And the question comes from the line of Rajesh Kumar from HSBC. Please go ahead.

Rajesh Kumar: Hi, good afternoon. Thanks for taking my questions. First is on the demand coming from bioprocessing. Obviously, you've got COVID-19 inventory, destocking effect. But can you run through what the impact of early biostage, early biotech funding cuts have been? Or is that something you would probably expect to see a bit later in the coming quarter? And you've built that [indiscernible] in your guidance range towards the lower end? Second one is, we're discussing one of the earlier questions on M&A. What is your criteria of success for M&E? How do you define that, "Okay, this M&A looks like it should go through and this is how we would define success?" Is it growth? Is it returns? Is it product fit or a combination?

Belén Garijo: Let me start by giving on it quickly, if you don't mind, Matthias, I kept already mentioned that to a question of one of the questions before. So, first of all, we have a very strong track record on right time, right target, right price. Second, we have very clearly defined portfolio gap rates. Three, strong growth drivers, processing, and Life Science services, Life Science overall, because SLS is gaining tons of traction and we believe this is an attractive market. But no business sector is being marginalized. So, that means increasing optionality for healthcare in the areas that are within our focus leadership approach. And Peter has mentioned this several times, mainly oncology and immunology. And I will not detail this. I'm looking for emerging technologies and participating of the next frontier of innovation in electronics. Second or third, better said, what is our financial frame, guiding a successful transaction? First of all, that the target is supporting our profitable growth strategy; second, that the IRR is above [WAC] (ph), that our precision is EPS accredited and that once closed we can maintain our credit ratings. So, those are basically the frames that we use.

Matthias Heinzel: Rajesh, on the biotech question quickly. So, overall our exposure to biotech for Life Science is less than 10%, for early biotechs, even smaller. And then, if I go by business, it's smaller than the 10% for PS and SLS. And it's much bigger obviously than for our LSS business, namely the testing business. We do a lot of testing for the early biotechs and also for the CDMO, where we act as a CDMO for them. But by and large, and again, compared to the destocking topic, and it should be talked before for the Life Science and also for PS, the biotech funding issue, if you will, is a rather smaller one. It has a bit of an impact obviously on the LSS business. But to your question around the guidance, all of that is fully baked into our guidance.

Rajesh Kumar: Thank you very much.

Constantin Fest: Belén, any closing words from your side?

Belén Garijo: Well, Constantin, I will be brief because you mentioned already that there are several of our colleagues, including yourself, taking a flight. So, first of all, many, many, many thanks to everyone for your continued interest and support to our company, to, Merck. I think you have heard it many, many times, not only in calls, but also in the book shows that we firmly believe that our multi-industry business model is associated with very strong resilience, and this continues to be illustrated quarter after quarter, in Q2, in which the company has delivered solidly in a market that is really challenging and full of headwinds. Obviously, I need to say that we remain fully committed to executing our study, and most importantly, to deliver on our commitments to you for a profitable growth, sustainable value maximization, and of course, 25 by 25, as you already heard from me at the beginning of the call. We look forward to meeting you in our coming Capital Market Day. We will definitely keep you informed of any major developments until then, and I wish you all a very good summer break.