Sartorius Stedim Biotech S.A. (SDMHF) Q4 2023 Earnings Call Transcript
Sartorius Stedim Biotech S.A. (OTCPK:SDMHF) Q4 2023 Earnings Call Transcript January 26, 2024 7:00 AM ET
Company Participants
Dr. Joachim Kreuzburg – IR
Rene Faber – Head of Bioprocess Solutions Division & Member
Conference Call Participants
Vineet Agrawal – Citi
Matthew Weston – UBS
Oliver Reinberg – Kepler Cheuvreux
Charles Pitman – Barclays
Richard Vosser – JPMorgan
Thibault Boutherin – Morgan Stanley
Odysseas Manesiotis – Berenberg
James Vane-Tempest – Jefferies.
Naresh Chouhan – Intron Health Research
Falko Friedrichs – Deutsche Bank
Oliver Metzger – ODDO
Sezgi Ozener – HSBC
Virendra Chauhan – AlphaValue
Markus Schmitt – ODDO
Operator
Ladies and gentlemen, welcome to the Sartorius and Sartorius Stedim Biotech conference call and live webcast on the preliminary full year 2023 results. I’m Sascha, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.
At this time, it is my pleasure to hand over to Dr. Joachim Kreuzburg. Please go ahead.
Dr. Joachim Kreuzburg
Thank you very much, and also welcome from our side here and thank you for being available a little bit earlier than usually. So therefore, good day, but also good morning, I guess, to some of you.
So let me start the presentation by walking you through the most important highlights of the year 2023, which really has been a year of transition in a very volatile life science industry where everybody has been impacted by several partially expected, partially unexpected developments.
So first of all, the preliminary results for the group and both divisions are well in line with the adjusted guidance that we shared with you in October. You will see the numbers in a minute. We have seen that the demand continued to gradually pick up. So for both divisions and therefore, of course, also for the group, the book-to-bill ratio for the entire fourth quarter has been slightly above 1x. We think that’s quite encouraging. Nevertheless, of course, still maybe not a completed normalization. We’ll talk about that later.
We definitely would like to highlight the Polyplus acquisition as being an important milestone for the Sartorius Group, and particularly in the context of building up a strong and differentiating technology platform in the area of cell and gene therapies.
We have continued to make significant investments into organic growth. So that means into capacities on a global scale, which has to do with our view that we should invest into customer proximity and resilience. And I think it’s clear that now maybe differently to 5 or maybe even 10 years ago, that needs also a bit of different idea about the global footprint that one has to develop. And sustainability, of course, is part of our investment program as well.
For 2024, our guidance is that we expect group sales revenue growth at a level of mid to high-single-digits. This reflects a positive outlook on the — regarding the general market trends. And at the same time, a certain caution regarding how quickly these trends will fully kick in and the actual trends of normalization will have been really completed. And we expect the EBITDA margin to increase to slightly above 30% for the group.
We are fully committed to reduce our debt leverage rapidly through a strong organic cash generation. However, at the same time, we want to underline that potential additional equity measures remain an option, as you know, from all of our previous communication.
For the midterm, we have defined a new outlook. And I think we gave you a little bit of a heads up that this would be framed in a little bit of a different way than we did this over the last more than 10 years. And we have chosen to use a time horizon until 2028. And we are expecting a sales revenue CAGR to be below teens and a further increase of our EBITDA margin to about 34% by the year 2028.
So let’s jump into the details of what we have achieved. And before sharing the numbers for the group and the divisions with you, I would again like to use a chart that we have shown to you, I think, throughout the year in these quarterly calls. And that is taking a little bit of a broader perspective on how sales revenue and order intake have developed since the beginning of the pandemic. So therefore, I think it’s helpful to compare where we are at the moment with the year 2019. So the last year before the pandemic.
So sales revenue at the end of 2023 or for the year 2023 is almost 90% above the 2019 level. Order intake is still about 60% higher. And we believe that those numbers also reflect a growth above the average market. You will also see in a minute that the profitability of the Sartorius Group for 2023 is above the one of 2019. As we communicated as early as in October 2020, we have seen a non-sustainable over amplification of economies of scale and top line growth because of the volatility that you all are aware of. So but nevertheless, I think the level where we are at the moment is a healthy one.
So now let’s take a look on the key P&L figures for the Sartorius Group. Sales revenue came in at €3.4 billion. Order intake at €3.1 billion approximately. The decline in sales revenue has been 16.6% in constant currencies. So within the bandwidth that we have or that — within the guidance that we have given to you about 3 months ago.
Order intake decline as expected even a little bit higher because of the strong decline in the first part, the first half in particular of this year. The underlying EBITDA as set at €963 million, representing a 28.3% EBITDA margin. Earnings per share stand at €4.94 respectively €4.95.
Maybe without reading out all the additional information that this chart provides, I would like to just say that the — the sales decline excluding COVID related directly COVID related effects is around 12% in constant currencies. And then, of course, now we could discuss about the effect coming from Russia, which would be around one percentage point, et cetera, et cetera. But we will provide some more detail later.
So from a regional perspective, it’s fair to say that all regions have been affected by this normalization. And all those trends we talk about for both divisions, however, as China was particularly weak, very weak, indeed, the total Asia Pacific number. Therefore, shows also a stronger decline, even if we would deduct for that, then Asia Pacific would have performed better than the other regions, as you can see.
And then for the European region alone, the effect from Russia accounts for roughly 3 percentage points.
So I think but this is, again, very much in line with the trends in the life science sector during 2023. So for the bioprocess solutions division, obviously, the full year has been strongly impacted by the headwinds, particularly by the — the reduction of the inventory levels by our customers. However, we have seen a sequential recovery of the order intake and book-to-bill came in above 1 for the fourth quarter. Then it will expound on this a little bit more when presenting to you the SSB numbers later. So sales revenue decline was 17.6%, again, in line with our most recent guidance as the profitability, which stands at 29.2% for 2023.
The LPS division had to deal with very cautious, low investments by many customers, particularly to be mentioned here are customers in China, where the market has been very weak across the board and the U.S. because of the more significant role that small biotech firms play here within our customer base. And I think that is the same for many peers as well.
So sales revenue came in at roughly €720 million order intake as a good — at a good €660 million. Sales revenue declined by 12.7% in line with our most recent guidance as the profitability, which stands at 25.1% for the full year.
Book-to-bill for the fourth quarter, as we have seen a positive trend for LPS as well after, as we talked about 3 months ago, a disappointing third quarter, quite encouraging above 1, slightly above 1 as for BPS as well.
So taking a look on the cash flow numbers and some other information here, what I would like to highlight again, without reading out all the information that this chart provides to you. The third bullet point on the right hand side, we have seen an overrating cash flow quite a bit above previous year’s number, which shows that the improvement of our working capital position as planned, and particularly here, the reduction of our inventory levels already have shown some results in 2023, more to come in 2024.
I mentioned at the beginning that we are executing on a quite broad and also ambitious investment program, very conscious, long-term oriented, built out of our capacities with an eye on the robust regional setup, as I said before. And just 2 examples on the right hand side, just in the center of the U.S. in Ann Arbor, we are about to complete the build or the construction of a site, particularly for our bioanalytics products, but also other activities that we have in the lab division in the U.S.
And in Songdo, South Korea, we have started to build a site with quite a broad scope of products to be produced there for Asia, where we took the conscious decision to position it in Korea, as we have strong and very relevant customers there. And we consider that to be a rather, very stable market to run such operations. And we have a strong activity in Korea already today.
The balance sheet, of course, reflects the recent M&A and the acquisition of Polyplus in particular. So I would say no surprise here. Again, I would like to mention also along this chart that we are fully focusing on a rapid deleveraging as a key priority for such areas for 2024 and beyond.
So — and let me now expand a little bit on this topic. And I mentioned it already when walking you through the most important topics for 2023 and at the beginning of 2024. We have a strong focus on organic cash generation, but at the same time, we can imagine to take also equity measures to accelerate deleveraging. You see some conceptual charts or a conceptual chart here on the left-hand side, where you can see that our organic path forward would lead to approximately debt leverage around 3x in 2025. And maybe this would be 1x turn lower depending on a potential equity or equity-like measure, if taken.
And the key point here is not so much backwards looking, but very much forward looking. The idea would be to accelerate the debt reduction and to strengthen our strategic flexibility.
So, and as you can see on the right-hand side in the bullet points, and again, let me reiterate on what we communicated for a long time now in our Capital Market Days, et cetera, or also during our AGMs, where we got those authorizations for such potential measures. Those measures in principle are available on both the SAG and the SSB level.
And what I also would like to say is, because that could be some concern if such measures would be taken, our rough estimation would be that the reduction of interest payments would compensate for any effects from higher numbers of shares.
So now let’s shift our perspective on the guidance for 2024. We are shooting for profitable growth, while expecting a moderate start into the year, a moderate first half of the year, particularly maybe a moderate first quarter of the year. And that has partially to do with the rather strong comps that Q1 represents. But on the other hand, also on what I said before, we believe that we will still see some weaker market environment when it comes to the appetite for investments amongst the young biotech firms, which will affect probably the LPS division mostly, as well as the rather weak market in China that we also would anticipate not to recover very quickly soon.
Again, maybe this would have a bit of stronger impact on the lab division. And at the same time, while we see quite now for 4 months, roughly a healthy trend in order intake in our process, we nevertheless would consider this normalization and the rundown of inventory levels at customers not to be fully completed. . And again, Rene will expand on that maybe in a minute as well. And therefore, we believe that there will be a gradual trend during 2024 with a second half of the year to be stronger than the first half of the year.
So, and overall, what we are expecting is for the Sartorius Group, a top line growth of mid to high single-digit percentages, including 1.5 percentage points from acquisitions, which is basically the first, yes, 7 months roughly of Polyplus, because we were consolidating them since late July of last year. So there is this remainder to come.
Bioprocess Solutions, also mid to high single-digit percentages. Here, this effect would be approximately 2 percentage points. LPS, low single-digit percentage growth. And then the EBITDA margins are slightly above 30% for the Group, above 31% for BPS, and approximately on the 2023 level, which was 25.1% for LPS. And again, you see that excluding any possible capital measures or theoretically also any acquisitions, we would anticipate the net debt to underlying EBITDA to come in at around for 2024.
So, and then just briefly, as this chart will be part of the presentation on SSB in a minute, and maybe Rene will talk a little bit more on that as also an opener and the background information for our activity in cell and gene therapies and advanced therapies. Just briefly, we consider the fundamental growth drivers in our industry to be intact. And that is where we base our mid-term guidance on, which you can now find on the next chart.
And as said before, we are now taking a perspective onto the year 2028. We are expecting to continue outgrowing the market. For the Group, the target is to grow in the low teens and to achieve a 34% EBITDA margin. I said that before when walking through the first chart, the distribution or the contribution, I should probably say, by the division that we are expecting is for BPS, low to mid-teens percentage growth and an EBITDA margin of approximately 36%. And for LPS, mid to high single-digit percentage growth and 28% of EBITDA margin. For both divisions and the Group, our estimation is that 1/5 of that sales revenue growth could come from acquisitions.
So, and then my last chart now would be on our quite broad set of ambitious sustainability targets. I think we presented quite a few times already on our target, or set of targets regarding the reduction of CO2 emissions, which is an important part, of course, of this agenda.
At the same time, now we have, or additionally, we have set ourselves targets regarding reducing the consumption of material. So, quite some ambitious targets regarding circularity. And of course, we also do have some social targets. One that we mentioned here, which is also as the others are relevant for compensation schemes is the annual employee net promoter score, an important measurement for employee satisfaction.
So far for the Sartorius Group, and now I would like to hand over to Rene for SSB.
Rene Faber
Thank you, Joachim. Hello, and welcome everybody to the Sartorius Stedim Biotech part of our call today. Starting with the 5-year view. The chart looks very similar to what Joachim showed for the Sartorius AG Group showing the post-pandemic transition. We went through the last couple of years. The growth you see from ’19 to ’23 corresponds to a strong above-market 18% CAGR.
We have achieved, I want to again highlight the positive trends in order intake we have seen since the end of Q3, started in September, and now also in the Q4, despite the slower than we anticipated destocking dynamics, we see order picking up, and the book-to-bill in the last quarter climbed slightly above 1, a very positive signal. So, the positive trend is visible, yet the destocking at some of our customers is not yet over, and we expect it will take the H1 to get through it.
In a full year view, sales revenue for Sartorius Stedim Biotech decreased compared to previous year’s high base to (€2.775) million in 2023, which corresponds to a decline of 18.7% in constant currencies. We guided around minus 19%. This includes a growth contribution from acquisitions of around 2 percentage points. If we would exclude here the pandemic-related directly pandemic COVID related business, the decline in constant currency was slightly then above, below 14%.
The temporarily weaker market environment was even more reflected in the order intake, which decreased by 23.6% in constant currencies, and yet achieved €2.476 million. The Group’s underlying EBITDA margin decreased to €785 million by 35.7%, mainly due to the volume development and product mix effect, means a bit higher than usual portion of equipment revenues here. The resulting margin was 28.3%. We guided here slightly above 28%, so well within the guidance. Price effects on procurement and customer side largely upset each other, and the underlying earnings per share dropped from 8.64 to 4.19 in 2023.
Looking at the regions at all, we see that the general market weakness affected all the business regions. EMEA region, which accounted here for around 39% of total revenue, sales revenue declined by 16.7% compared to previous year. The growth in EMEA was negatively influenced by the discontinuation of business with Russian customers. The Americas region were down 15.5% against the backdrop of inventory reductions and low investment activities by customers in the U.S. This corresponds to a share of around 38% of total group revenue. The investment slowdown was particularly pronounced in China. Joachim mentioned that, leading also for the SSB Group, more significant decline of 26.4% in sales revenue in Asia-Pacific region, which accounted for around 23% of the total group sales revenue.
Underlying net profit, total €386 million compared with €797 million in the prior year period, while net profit amounted now to €310 million compared to €876 million in 2022. Net operating cash flows stood at €746 million compared to €612 million. And previous year, the increase was primarily achieved through the optimization of working capital. As we’ve planned that, you will remember that we have systematically increased inventories in ’22 and previous years as well to secure our supply ability in view of a temporary constraint supply chain that allowed us to gain market shares during the pandemic. We are now reducing back the inventories as planned.
CapEx ratio was up to 17.1% by 4.8 percentage points. As we want to keep our best-in-class delivery ability, we continue investment program in both R&D and operations infrastructure to get it ready for future above-market growth and make it more resilient and closer to our customers. Yet we do it at adjusted speed, reflecting the temporally market slowdown. Major strategic investment in capacities is the Songdo site in South Korea. It’s close to the largest installed cell culture capacity in the world, where we will produce all major consumables like cell culture media, bags, filters, and also run product process development and customer training laboratory serving not only Korean, but also Asian market outside, mostly outside China.
Moving to the key financial indicators, very much in line with what Joachim explained for the Sartorius Group. The equity was €2,673 million as of December 31, ’23. Following the Polyplus acquisition, the equity ratio stood at, in line with the expectation, 34.5%. Net debt stood at €3,565 million and resulting in a ratio of net debt to underlying EBITDA for SSB Group 4.5.
Beyond focusing on customer satisfaction, innovation, organic goals, we will fully concentrate on further efficiency gains and strong cash generation in 2024 to rapidly run down the debt leverage, which is at an elevated level following the Polyplus acquisition. You see here how the potential equity measures, Joachim described would accelerate the deleveraging by approximately one turn for the SSB Group then to 1.5 in 2025.
That brings me now to 2024 outlook. This year, we anticipate the return to profitable growth for SSB. As said, the inventory optimization measures of some customers have not yet been fully completed and the visibility is still somewhat limited. We expect business momentum to increase then only gradually over the course of the year, leading to a moderate first half of 2024 with continued gradual pickup in orders followed by H2 rebound in sales.
With that, we forecast an increase in sales revenue in the mid to high single-digit percentage range, including a contribution of Polyplus of around 2 percentage points. In terms of profitability, we expect to the underlying EBITDA margins to rise to more than 30% compared to the previous year figure of 28.3%. The above average profitability of Polyplus business will be also slightly have a positive effect on the margin development.
The CapEx ratio is projected to around 13% compared to 17.1% as I described it previously, including the potential capital measures and our acquisitions, the ratio of net debt to underlying EBITDA is expected in 2024 at 3.5.
So Joachim already talk about the market fundamentals briefly. So I would maybe focus more here on particular cell and gene therapies. You see it’s a market segment, which is becoming more and more relevant for our business. We expect also that market segment growing above average with around 20%.
On the left side, you see that then a portion of such new therapeutics in the customer’s pipeline is already relevant at 30% and growing. If we look at our activities in that space, we have been putting together a technology platform of media and critical materials used in this young yet increasingly relevant market segment. Polyplus acquisition was a key milestone for us, bringing already quite a nice footprint in the pipelines of gene and gene-modified cell therapies. Our SSB exposure to this attractive market segment is now at above 10%, and we expect above-average growth here, as I mentioned.
Having said that, there is a need for continuous innovation, not only to help customers to bring such innovative novel modalities therapies to life, but also further drive process and resource efficiencies in more traditional monoclonal antibody like biologics manufacturing.
With our broad portfolio, we see ourselves extremely well positioned to continue outgrowing the market. And we are forecasting now low to mid-teens percentage range growth over the next 5-year period to 2028. Acquisition are anticipated to contribute here around a fifth and the underlying EBITDA margin is also expected to increase and reach slightly above 35% for SSB Group in 2028.
And with that, I think we move to the Q&A.
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Vineet Agrawal with Citi.
Vineet Agrawal
Just had a couple on BPS mid-term outlook, excluding the M&A contribution of roughly 2 to 3 percentage points, the guidance is sort of implying low double-digit to low teens growth. Now, if you try to unpack the guidance a bit with market growth expected at around 10%, as you showed in one of your slides, does it mean you are not factoring any sort of significant market share gains? Any thoughts there would be useful.
And on your LPS 2024 outlook, I’m just wondering what sort of recovery have you assumed for China and the funding environment to meet that guidance? Just trying to understand how far is that guidance derived? And just a quick one on LPS. Did you gain any market share in the fourth quarter because of the disruption seen by one of your competitors?
Rene Faber
Maybe — this is Rene. I start with the BPS guidance outlook, how we see ourselves growing in the next 5 years. You’ve seen on the chart, which I showed when talking about the fundamentals of the market, how we see the market growth of biologics of around 10%. And then the subsegments of this market, like biosimilars growing faster, like 15%-ish, and the new cell and gene therapies, which is rather small in size market today.
There is a limited commercial manufacturing volumes, but there will be increasing number of approvals coming in the coming year. So all over, overall, we see then a potential for us to grow above 10%. And for Bioprocess Solutions division, as I said, we’re guiding low to mid-teens. We believe with the portfolio we have in place, we will continue to outgrow this market. And yes, it’s a, I think, very, very positive outlook overall, I think, for bioprocessing industry, and we will definitely participate in that.
Dr. Joachim Kreuzburg
Yes, and maybe on LPS, I try to answer the 2 questions that you asked. The first one, our assumptions regarding China are, I would say, are moderate in the sense that we expect some moderate recovery rather in the second half of the year, but not any strong recovery.
And the question regarding Q4 and potential market share gains, I have to say, it’s almost impossible for us to answer. First of all, we are the first to report, so hard to say what others will report on Q4. And besides that, it’s anyhow quite difficult to extract market share gains from quarterly numbers. So I would always rather, yes, say let’s focus on annual results to make any statements in that regard.
Operator
The next question comes from Matthew Weston with UBS.
Matthew Weston
A couple of questions, please. The first, in terms of some drivers within your mid-term guidance, particularly for BPS, price has been an important lever for the whole of the Bioprocess industry for a number of years, but in particular for Sartorius during COVID. So I’d be very interested in your expectations for price dynamics in the mid-term, but also including the domestic Chinese market. I think 15% of your sales and a strong growth engine, we’ve seen increasing signs of domestic competition. So again, what have you assumed for China over the mid-term in bioprocess?
And then just another question about your financial targets. I’d be very interested to understand if Dr. Funck has been able to be involved in any of the new targets and discussions, or whether we should expect targets to be reviewed when he joins the Group in April?
Rene Faber
Yes, I start with the first 2 questions. First was on price and expectations looking ahead. So we have, as I mentioned during my presentation, we were able to more or less compensate the purchase price increases we have experienced not only in ’23, but also ’22 with, let’s say, over average price increases due to the inflation aspects.
And looking ahead, I think, we will get back to more typical price increases as far as we can say today that was something we would expect, let’s say, to low single-digit price increase, which we were able to realize before pandemic. So that kind of will normalize again.
Looking at China, mid-term outlook, yet difficult to say, how we are looking at China overall. Mid-long term, let’s say, it’s a very large market, large population, aging population with a need for therapeutics. There is, and we believe will be continued innovation on our customer side in developing new drugs, new modalities. We have seen that dynamic picking up during the pandemic, of course, now slowed down. But I believe — we believe it’s a market which offers a significant growth potential. And we will see how that, and when that will come back, yes, time-wise.
Dr. Joachim Kreuzburg
Yes. And then regarding Florian Funck, who will join us on the Board from the 1 of April onwards. He has been able to involve himself since the beginning of November on a regular, yet, of course, limited basis. But I wouldn’t expect any revision also of numbers, plans here that we have presented to you after he joins us on the board, as he has been fully involved.
Operator
The next question comes from the line of Oliver Reinberg with Kepler Cheuvreux.
Oliver Reinberg
The first one would be, again, on the BPS mid-term outlook. So I guess, excluding M&A, we’re talking about roughly 11% organic growth. I think over the quarters in 2023, you talked about that the sales that you realized were about €500 million is below the actual end market demand. If I consider this kind of €500 million, basically it’s the kind of future opportunity, it probably counts for 3% of sales going forward. So 11% minus 3% implies underlying growth of 8%. So just trying to get a kind of feeling how to think about it, or probably just ignoring this kind of €500 million opportunity?
And then secondly, also midterm on LPS, you’re guiding for mid to high single-digit growth. So the first question, is it including M&A? And in both cases, I guess that implies a somewhat softer underlying demand outlook. So can you just talk to what is driving that? And any kind of color, what kind of growth you’re expecting for bioanalytics specifically?
And the third question I made just on CapEx, I mean, it obviously comes down to 30% of sales in 2024. But can you just give us any kind of guide what kind of a CapEx ratio is required to support the organic growth outlook out to 2028? So what is kind of average CapEx ratio beyond ’24 out to ’28?
Dr. Joachim Kreuzburg
Yes, so for sure. Thank you for your questions. So yes, we consider the consumption of BPS consumables for — or during 2023 to have been roughly €500 million higher than our sales revenue represents. Of course, this is a number based on some assumptions and nothing that we can measure precisely, but we believe that this ballpark number is the right one.
And maybe on the impact on growth going forward and how this exactly materializes, I think, as we said, this basically depends on how exactly now the final phase of this normalization will look like. But in the end, the result, the level of consumption is a set roughly this €500 million higher and how it exactly translates into growth contribution over time is, yes, as I said, dependent on this final phase of this normalization.
And then on LPS and BPS and the Group, the numbers that we have shown to you for 2028 indeed include what we said, roughly a fifth of M&A. So it’s including this effect. And to put this into perspective, as the way we have framed it is a 5-year time horizon. So from 2023 until — including 2028. And that means that this period includes the year 2024, which obviously we are guiding a lower growth rate for both divisions and particularly for LPS probably.
So therefore, I would say, it’s not a statement that we necessarily expect the market dynamics going forward to be much different from what we have said before. But it’s again more an effect that we expect and our 2024 guidance stands for that. A year of ’24 that still will show some of those effects. And therefore, some dilution, if you want of the underlying growth that we consider to be a very, very healthy one.
And on CapEx, and I think there is a chart that we have showed quite regularly in our more extensive set of Investor Relations communication and also during Capital Market Days. And we believe conceptually, you could say that maintenance CapEx, and then, of course, maintenance CapEx always is a difficult word, because, of course, you never buy the same machine that maybe you have to replace. It’s always a kind of upgrade. But conceptually, that this maintenance CapEx would be roughly 3%. And then this more normal ongoing capacity expansions in a more steady state kind of development should be maybe another 3% approximately. And then we have capitalized R&D, which represents around 2%.
So this, what you would typically would consider to be CapEx. So including this IFRS specific capitalization of R&D would be 6%, and then including R&D, we are around 8%.
Operator
The next question comes from the line of Charles Pitman with Barclays.
Charles Pitman
Hi, Charles Pitman from Barclays. Two if I may, just first one on ordering dynamics. I was wondering if you could give us any insight on the kind of speed of recovery and customer ordering dynamics in Europe versus U.S. and then also just by customer. So how is the ordering behavior changing between large pharmas versus CDMOs versus biotechs?
And then just secondly, as far as your diversification of customers goes, I was wondering if you could provide a little bit more detail on your single-use production customers, how much of demand do your top 3 customers account for, for example? And what is the potential risks to your future guidance of outperforming the market, should one of these customers face headwinds?
Rene Faber
So let’s talk a bit about destocking dynamics, as you ask by regions and customer groups. Looking at the regions, the only, I would say, region, which shows a different dynamic series, China compared to rest — the other Asian countries and Europe and U.S. We see that consumption is definitely slower in China compared to the other countries.
Europe, U.S., I would say on the comparable dynamics, that is really much more dependent on the customers. I mentioned that there are still some customers who are not yet through their inventories. Some are still maybe reevaluating the target levels.
Is there a difference between large pharmas, CDMOs? Yes, eventually I would say more shifted to the CDMOs who are, or were probably a bit over, higher in building the inventories and where at some of them, it takes now a bit longer to work through them. So — but other than that, it’s more single customers impact than a market segment view.
Operator
The next session comes from the line of Richard Vosser with JPMorgan.
Richard Vosser
A few questions, one also on orders and BPS orders. Perhaps you could talk about how you expect the orders to develop here. And I’m really thinking sort of should we anticipate some sort of sequential improvement that we’ve seen over the last 2 quarters to continue. Just some thoughts there would be great.
Second question, just looking at revenues in the fourth quarter, the Americas, they seemed a little bit weaker, pretty weak. Maybe you could talk about any dynamics impacting those orders in the fourth quarter? And how you think they will develop through ’24?
And then finally, one question, please, on your comments around deleveraging and the potential for using equity here to enhance that deleveraging. How are you thinking about this in relation to external strategic options and maybe the timing of those options? And maybe I could also ask, what sorts of deals are favored in terms of LPS versus BPS at this point? So I think previously we were thinking, next deal in LPS, but just any thoughts you can give us there would be very helpful.
Rene Faber
Yes. Let’s then I take the first and second question, first on the order intake development. So, yes, looking back Q3, as we discussed, that was the first quarter where we’ve seen the uptake and change in dynamics in ordering pattern of our customers was end of Q3. We recorded 15% quarter-by-quarter growth in Q3 then Q4, another 15%. And looking ahead, knowing and seeing that the visibility still is a bit limited and the customers are not all of them over yet through destocking. And we have experienced that the feedback and the data we are getting from customers might change moving ahead.
So I would not expect another 15% growth trajectory or order intake growth quarter-by-quarter. But as we said, a gradual increase in the first half of the year, 2024. And then we will see that reflected later in second half in sales revenues pickup.
You also asked regarding the U.S. I think U.S. was — or is a region where we clearly also seen the order intake pickup dynamics. And I think it’s a region which, yes, maybe it was a bit more impacted than Europe in terms of how the capital expenditure of customers. But I think that we will see here also ongoing gradual improvement with maybe slightly above Europe, but not a significant different dynamics.
Dr. Joachim Kreuzburg
Yes, and then on the question regarding deleveraging. And I think you asked for any potential timing if equity measures would be considered. What I can say is there have been absolutely no decisions being taken. So, therefore, also no perspective on timing at this point and deals regarding potential acquisitions rather than BPS or LPS. Also there are absolutely nothing that I think one should expect to come soon for any division. So it’s clear that we are focusing very strongly on a strong operating cash flow and also strong deleveraging by operating cash flow.
Operator
The next question comes from the line of Thibault Boutherin with Morgan Stanley.
Thibault Boutherin
So my first question is on equity funding. You’re talking on your slides about measures in principle at Stedim, but also AG. And so my understanding was that there was some sort of restriction in terms of issuing equity at the Group level due to implications in terms of shareholder dilution. So just wondering if you could give more details here on what can be done at the Group level and your preference and the factor that are at play in your choice of potentially issuing equity between Group and Stedim?
Second question, just if you could come back on the evolution of the mix in order book in terms of equipment versus consumable. If you could confirm that you are seeing a shift of order towards more consumable going forward?
And maybe a last one quick on the biotech funding. If you could just share your kind of general impression on how the funding is evolving in the U.S. in particular? And if you see any sort of direct implication on the business at this stage?
Dr. Joachim Kreuzburg
Yes, maybe I answered the first and the third question, if I may. And then I would hand over to Rene for the second one. So I think the first point that you were making, if I got it right, in the right way was on shareholder dilution. Again, conceptually based on some more rough estimations, we believe that any such potential equity measure would lead to a reduction of interest payments that would compensate for potential effects from a higher number of shares.
So, therefore, we wouldn’t really expect a dilution from this perspective. And I hope that answers that point or addresses that point.
Thibault Boutherin
Sorry, excuse me. The question was more on the Stedim versus Group. Because my understanding of the slide is you’re considering options on both. And I was just wondering what are the kind of factors that you’re taking considerations here?
Dr. Joachim Kreuzburg
Yes, yes, sure. Okay, so, okay, that I just wanted to answer next. So on the instruments, it’s indeed that both shareholders or shareholder meetings for Sartorius Stedim Biotech as well as Sartorius AG have given authorizations to potentially use such measures. And at this point, we would not exclude any of these measures. So that’s basically what I can say.
And the aspect of any dilution also of the shareholding of Sartorius AG in Sartorius Stedim Biotech, for instance, would be in such theoretical case also limited. So therefore, I would say all those effects, given the fact that we are not talking about any whatever huge measure, I think here anyway, would be rather limited.
So, and then on the third question, biotech funding and how that evolves. So, clearly, it hasn’t recovered very significantly yet. However, I would describe the situation as follows. We have seen a boom of biotech funding in 2021 and partially also in 2022. And then from this very, very high levels that have been much higher than in the years before, we have then seen indeed a significant drop in 2023. And again, the recovery isn’t very visible yet.
As I said before, when explaining the LPS guidance for 2024, however, we would say that there are quite some positive signs again. When you see that the number of deals is increasing again, where larger biotech firms acquire smaller or larger biopharmaceutical companies acquire small biotech firms announcement for capacity increases are made by such customers, then this clearly shows that there is no fundamental change of perspective as how attractive this market is being seen. The pipelines are very, very promising. Approval rates are very high. So there’s also no fundamental shift of risk profile in this segment at this point.
And therefore, I would rather advise to interpret the current situation and what we’re seeing in 2023 by including the perspective on ’20, ’21, ’22. And see this overall picture. So recovery, not yet significant, but we expect this to come.
Rene Faber
Yes, and take the question regarding the product mix in how the orders are developing consumables versus equipment. I would say, it’s too early to talk about any trends on a quarterly basis, it’s difficult. 1 or 2 larger equipment projects can change these numbers, but definitely what we see is a pickup in orders for consumables. There was also some new projects coming in equipment area.
So again, it’s I think too early to say where it’s trending. We expect, of course, that with the progressing destocking, the portion of consumables will increase moving forward in this year 2024.
Operator
The next question comes from the line of Odysseas Manesiotis with Berenberg.
Odysseas Manesiotis
I just have one actually. So on the news from one of your major Chinese customers and the potential sanctions targeting Chinese drug researchers and developers. Is there any positive way to view these news such as reshoring of production in markets where you might have a higher market share perhaps?
Dr. Joachim Kreuzburg
So thank you very much for addressing this. Obviously, I think this has been quite recent news and everybody tries to get their heads around it. I think it’s important to also better understand how this exactly will be now executed and implemented. But the direction of your question already, I think indicates an important aspect.
For us, the key driver of the business is not so much a single customer. It’s much more the fundamental demand for medicine. And therefore, if there is a shift in where and by whom certain medicines are manufactured, that typically doesn’t have a significant impact on our business.
And the other aspect I think that, or the notion I think that you are addressing here is in how far maybe in the longer run, the share of business with Western companies could be higher than the share of business that we have at Chinese customers. And I would say that could probably be that way in the longer run.
So again, too early to really have a full assessment available on this news, but we also wouldn’t expect a significant negative impact on us.
Odysseas Manesiotis
Oh, very clear. And may I add a follow-up actually on the previous question on the product mix? I mean, not asking about trends, but could you at least give us the split of consumables to equipment in both sales and orders, or at least the difference in the consumables trade between sales and orders in Q3 and Q4, just to get more conviction on how product mix is going to drive some different margin improvement into next year?
Rene Faber
Yes, so regardless now timing and how fast it will get back to what we expect a typical mix is and will be in the future, is like 75% consumables, 25% equipment instruments systems in our portfolio. And yes, we’re getting kind of from 60%-40% towards that. And you can expect that we will be there at some point.
Operator
The next question comes from the line of James Vane-Tempest with Jefferies.
James Vane-Tempest
Three, if I may, please. Firstly, just on destocking, you mentioned it’s sort of ongoing and it’s more of a second half recovery. It’s been our understanding from the industry, we should perhaps see a much better Q1, either due to known expiry dates of older inventory or the pickup of consumables, shorter delivery given the orders in Q4. So I was just kind of curious if your portfolio is seeing different trends or is this more conservatism given the changes last year?
My second question is about delevering, not a question about timing, which has been covered, but more case of, if you’re at 5x, is the comments about potentially using an equity or equity-linked option to delever more time to M&A? Or is it a case of if you’re still more than 3x in 2025, that would be an option, which is I think one thing you’ve mentioned before?
And then my final question is, the absolute margin targets you’ve given in 2028, I think are the same as what was in the prior 2025 guidance, even including 1% extra investment for your CO2 emissions. I appreciate it’s a later period, but are you assuming any M&A, which is 20% of the growth, which is margin accretive, like Polyplus to help get there?
Rene Faber
All right. Joachim, I can take the first one, which is more or less around the timing of the order intake development, Q4 strong versus Q1 strong. I would say that can be even different from a, yes, for different competitors in that space, depending on the customer mix and this dynamics, I will not over interpret these quarterly numbers. I just want to maybe stress again, the trend is there. 15% quarter-over-quarter growth is not what I would expect moving forward, but a gradual improvement. And overall, that will result in a — should result in a positive — or above 1 book-to-bill ratio for the ’24 year.
Dr. Joachim Kreuzburg
Yes, and maybe just a short addition. And of course, the comps play a role here as well. So the comps for Q1 are quite not as bad or as low. So that is part of our — what we tried to describe here as well.
So deleveraging, I hope I got the question. So as said, we believe that we will be able to quite rapidly and significantly reduce our debt ratio by organic cash flow generation. However, we believe that getting a bit more strategic flexibility through accelerating this deleveraging could be an option, as said before. And that’s basically just the status of what we can say here. As said before, there are no plans at this point for any specific acquisitions. So it’s really a conceptual strategic consideration.
And then margins, absolutely correct. The margins that we are projecting for 2028 are the same that we were projecting for 2025. And maybe 2 comments that play a role here. One is that economies of scale that always have played and continue to play a certain role in our P&L mechanics, of course, always flatten out. This is a very normal mathematical aspect. And we indeed continue to assume that potential M&A could be rather dilutive at the beginning.
Of course, exactly as you said, this can be, could be different, like Polyplus, which is accretive. But the model that we are using is to rather say, okay, it is rather a little bit dilutive. And we also, in our ’28 numbers, assume that there will be approximately 1 percentage point of P&L effect coming from expenses for sustainability activities, particularly in regards to reducing our carbon footprint.
James Vane-Tempest
And just a quick follow-up, if I may. The 20% of the — in terms of from M&A to the mid-term target. If we were to kind of look at how you’d sort of go to the mid-term before, would you say that you’re expecting more of the growth to come from M&A than you have previously? And I guess if so, is that just the reflection of the opportunity you see or reflection of the underlying growth that you’re seeing?
Dr. Joachim Kreuzburg
Yes, no, actually M&A portion for the previous 10 plus years has been rather a little bit higher than 20% on average, I believe. So this 20% is ballpark what we’ve seen before, rather a little bit at the low end, probably.
Operator
The next question comes from the line of Naresh Chouhan with Intron Health Research.
Naresh Chouhan
It’s Naresh Chauhan from Intron Health. Can you just help us understand the Q4 revenues, please? And some of the dynamics going on next. If you look at the order book for Q2 and Q3, Q4 sales seem very strong and obviously the order book grew very strongly, but we’re not expecting that to continue at least in H1. So just trying to understand what’s going on there. Was this, it implies some very significant reordering within the quarter? Or there’s some potential one-offs in there? So 2 questions, please. 1, were there any one-offs in Q4 ’23 in terms of revenues? And 2, was there an accelerated sell-down of your own inventories in Q4 ’23? Just if you can help us understand what’s happened to inventories Q4 over Q3, that would be helpful.
Dr. Joachim Kreuzburg
So, we wouldn’t say that for both divisions that there have been no one-off effects in Q4 regarding revenues or also order intake. That’s definitely not the case. And yes, as explained along our statement about the development of our working capital, we have reduced our inventory. And that includes also to some degree a reduction of our inventory of finished goods. But of course we also have reduced our inventory regarding raw materials and work in progress. So it’s not all finished goods, but partially also finished goods, yes.
Naresh Chouhan
Okay. And perhaps if you could help us understand what’s driven the significant quarter-on-quarter increase in order intake and why we shouldn’t expect that for H1 of ’24, please?
Rene Faber
Yes, again, we — the growth of orders quarter-by-quarter, there is of course the destocking plays a role in that increase. We have a portion on the BPS side, about process solution side of contribution from the acquisition. We mentioned that to percentage points from Polyplus mostly. Then we continue and we are acquiring new business and new business opportunities. So, these are the drivers behind the quarterly growth. And it’s a comps topic where the Q3, Q2, the 15% growth quarter-by-quarter, I think at some point now we are reaching a level where that’s just going to flatten moving forward.
Dr. Joachim Kreuzburg
Yes, maybe just in addition to that, we touched upon that a couple of minutes ago when somebody asked for the higher consumption of our products in comparison to what our sales revenue shows in 2023. And just to reiterate on that, our customers continue to manufacture the drugs as before. Basically, there is no big change to it. And of course, fundamentally, the patients are still in need for those drugs. So all those fundamentals are like a given, including that the consumption of those drugs on average is continuing to increase.
So, and therefore it’s clear and has always been clear that at some point the order intake would pick up again because it was clear that at some point, at least the majority of the customers would have reached their target inventory levels after they started to reduce the inventory levels a bit more than a year ago. So, pretty much mid of 2022. So the dynamics I think are exactly as we have expected them what always has been a little bit difficult, obviously was to predict very precisely the timing and the extent on the quarterly level. But qualitatively, what we are seeing here was absolutely to be expected.
Operator
The next question comes from Falko Friedrichs with Deutsche Bank.
Falko Friedrichs
My first question is, can you provide your outlook for growth of Polyplus in 2024? Should that grow sort of in line with your medium term aspirations or still a little bit lower than that? Then secondly, did I just understand you correctly that out of the 15% sequential growth in orders in BPS and Q4, about 2% were from Polyplus? And then my third question is a bit bigger picture. Where do you see the biggest risks to your mid to high single digit growth guidance this year?
Rene Faber
So, let me take the first question. So on the outlook of Polyplus, we expect the market, cell and gene therapy market growing average 20% plus. Remember that the market being young, meaning the base line of commercial manufacturing volumes is not there yet. So a single approval might shift the market growth rates quite significantly from year-to-year. However, our expectation for Polyplus growth 2024 is well above the 20% market growth. And I think we are well on track with that. And to the second question, yes, the Polyplus contribution to the Q4 sales was around 2 percentage points.
Dr. Joachim Kreuzburg
To the growth rate — of the growth rate — in the growth rate of the full year, right. So, on a quantity basis, it would look slightly different, but we can dig deeper also in our future presentations of that to give you a little bit more feeling. So on the risks. So as we explained in the — or at least we mentioned it in our communication here today, we consider, of course, the overall economic environment still to be a relatively uncertain and volatile one. And I think, I guess at least everyone can agree to that, that this is what one can observe.
The geopolitical conflicts play a role to some extent. One was mentioned here today about a significant CDMO player, who maybe get some restrictions now in doing business in the U.S. So these are in general, and again, I don’t want to change my answer to that question, but what I want to say is there are a lot of factors that can have an impact on the short-term business development. And that is what I really want to underline because the industry we are in is very much driven by very stable, very visible long-term trends. And yet what always is a bit of challenge is making precise guidances for 1 or 2 quarters. So that is how I would differentiate.
When you are asking for 2024, then I would say it might have such volatility effects. On the other hand, in the longer run, this typically flattens out. And again, I would refer to the perspective on 2019 to 2023, which I think shows this in what I think is quite an impressive way. However, let me say at the same time, like I would say most players currently, we also do see some upside potential. It depends really on how exactly these different elements of volatility will play out going forward. So again, there are risk factors, but there are also opportunity factors. That is how we see it.
Falko Friedrichs
And just a quick follow-up to Rene. So if I understood you correctly, you said that, Q1 and Q2 order intake in BPS should grow sequentially, but probably not at the 15%. Did I understand that correctly?
Rene Faber
Yes.
Operator
The next question is from Oliver Metzger with ODDO.
Oliver Metzger
The first one is about your EBIT margin target ’28. So how we should think about the phasing. So you said also it depends on M&A, but also top-line growth. If I do the math and look just from the low-teens versus the mid-teens, in absolute terms, the difference is at around €1.4 billion, and also given gross margins in the industry, there seems to be, even before EBITDA margin of 35% plus, some huge room. So potentially, you have us being on the outlook for ’24, but how we should think, do you have a more linear view about this improvement, or how about that?
My second question is on the weakness in China. So to your — or if you describe the dynamics, did you see it more as an overall market weakness, or do you see it, in the meantime, more as a weakness of Western players just to this increasing shift to some domestic ones? That would be helpful.
Dr. Joachim Kreuzburg
Yes. So on EBITDA for 2028, yes, that’s a fair point. We decided to basically refer our EBITDA margin target to a kind of midpoint development on the top line. As you said, and repeated, there are a number of factors that will play a role where exactly we will land as there is M&A that can be product mixed effect and such. But in principle, we believe that these are absolutely realistic targets. Want to refer to the profitability level that we have seen in both BPS, as well as the group, and also in LPS to some extent. The comment back then was not that the level is, all of reach in principle, and just by some artificial effects that we have reached, we just said that during the pandemic, that it was like an over amplification of the speed of to getting there.
So I guess what I want to bring across is, I think you have evidence from our track record that those profitabilities are achievable. And therefore, we believe that there is a good match between what we are projecting for the top line and for the bottom line. But of course, as you say, the upper trend and the lower trend curve, of course, differ to some degree. That’s clear.
So in China, so we would say both aspects, of course, play a role in China going forward. Currently, we clearly would say that it’s predominantly a market weakness. Also, local players are suffering at the moment very, very significantly. And therefore, I would definitely not expect each and every Chinese competitor to, yes, maybe to be strong enough to really survive this phase, other maybe than the multinational players. So that’s what I would say currently.
However, going forward, we definitely also would expect, as always, a certain level of increasing local competition. How we reflect upon the most recent trends, and that means the last 2, 3 years, is that the pandemic has accelerated the development of those local players. But it was not a systematic surprise that this would happen. So, but what is more of a bit of change to how we would have seen the Chinese market is indeed how quickly the Chinese market overall would continue to develop. And we have seen very, very strong growth rates. And I think, as in other sectors as well, the Chinese policymakers are making different choices now when weighing what I would call maybe the level of control versus the speed of growth. And that is some change. And maybe that’s the most important one regarding China.
Oliver Metzger
Just 1 follow-up regarding my first questions. So can you make a comment on at least your expected phasing? So if you talk about, let’s say, ’25 or ’26, if you just do the math, let’s say, from 30% margin, we go to 31.25% in ’25, or what are your expectations from the current understanding?
Dr. Joachim Kreuzburg
Did you say savings or?
Oliver Metzger
No, no, phasing.
Dr. Joachim Kreuzburg
Phasing, phasing. Ah, sorry, okay, phasing, okay, yes. Well, so, I mean, for the group, we are shooting for a bit above 30% for 2024 and approach 34% for 2028. And the trend towards that will not differ too significantly from a linear development. Of course, if it was just about economies of scale, typically, as this flattens out, you would expect maybe a little bit larger portions to come on the shorter end. But as this can be overlaid by other effects, it’s really difficult to make any further statement here as we are not guiding 2025 now, for example.
Operator
The next question is from Sezgi Ozener with HSBC.
Sezgi Ozener
Sezgi Ozener here. Thanks for the presentation and taking my questions. 2 on my side, please. First, the significant reduction in FTE numbers, both on Sartorius and Stedim side. You mentioned it’s coming from the reduction of fixed-term contracts, but can you be more specific on which areas this is coming from and how do you expect that to continue? Is there further room to do so?
And the second question is on capital allocation. You mentioned about 1/5 of the growth coming from future M&A, and that’s actually, Polyplus was also around low single percentage points growth. It came at a higher multiple, so do you then project these kinds of multiples going forward or do you expect future M&A to come at significantly lower multiples to Polyplus?
Dr. Joachim Kreuzburg
Yes. So the FTE reduction for the Sartorius Group has been €1,300 million, indeed, mostly because of the expiry of fixed-term contracts and partially, of course, also natural or normal fluctuation. That was the most important factor here. And we intentionally closed quite numerous fixed-term contracts during the pandemic because we anticipated the output levels to be somehow overemphasized for a certain period. And for SSB, I think the number is pretty much around €1,000 million. I would have to look it up, can provide it later, but I think it’s around €1,000 million for 2023.
And going forward, as you asked for further potential there, we are continuing to work on efficiency improvements across the board constantly. And as you can imagine, currently even a little bit more than this was possible during the pandemic as there was, of course, a lot of stress on ramping up output levels very rapidly. So there is a little bit more possibly to come, but as we are expecting top-line growth, the net effect will probably be very, very low.
So therefore, a net reduction of FTE at a significant level, I wouldn’t expect for 2024, depending on how exactly our growth will kick in, it might be even the case that by the end of the year, the number of FTEs will be a little bit higher. However, please keep in mind what we are reporting on are the number of FTE at the end of the year or the end of the quarter. It’s not an average number. So therefore, that has to be understood when interpreted.
Capital allocation and multiples. So the multiple that we paid for Polyplus, of course, when you relate it to sales, was quite a high one, but that is because the profitability and the growth of Polyplus are both extraordinarily high. So therefore, I would say most potential targets, but that, of course, is now a very hypothetical question or answer from my side. Most targets, even attractive targets, would have maybe lower profitabilities, as I said before. That is also part of how we are projecting this. And maybe also attractive, but yet not that high growth rates. And then the sales multiple that one would pay would typically be quite a bit lower than the one for Polyplus.
Sezgi Ozener
Can we say that for the EV EBITDA multiple as well?
Dr. Joachim Kreuzburg
Can you repeat this, please?
Sezgi Ozener
Can we say the same thing for the EV EBITDA multiple as well? I mean, I understand the reasons you say why it’s a lower sales multiple.
Dr. Joachim Kreuzburg
Yes, of course, the EBITDA multiple is dependent on the growth as well, sure. And for the sales multiple, then you have both effects. You have the EBITDA margin effect and the growth effect. And on the EBITDA multiple, you just have the growth effect. But yes.
Operator
Next question is from Virendra Chauhan with AlphaValue.
Virendra Chauhan
Yes. So many have already been answered, but 1 on your — some of the production activities that you had brought forward following the pandemic boom, if I can call it. So how much has that translated into a drag as we went through this normalization? And where were you versus your optimum utilization level? And how does that impact your EBITDA margin probably in ’24? How do we think of that impact unwinding, if I can call it?
Dr. Joachim Kreuzburg
Did you ask for capacity utilization ratios or because the line was a little bit broken?
Virendra Chauhan
Yes, so that’s right. So from a capacity utilization perspective, I would believe that you are probably below your optimum or target levels.
Dr. Joachim Kreuzburg
Okay, yes, yes. So that’s indeed a good question. And thank you for asking that. Maybe again, going back to where we have been during the pandemic. During the pandemic, we were partially operating at 100% capacity utilization. That sounds great, but is really a big challenge and not where you want to be. And it’s also not the most efficient operating point that you want to be, because you pay rather high additional wages often for additional shifts, et cetera, et cetera. It’s a problem to run maintenance shifts, et cetera, et cetera.
So therefore, that was really extraordinarily high. And we were running really 24/7 shifts in a lot of facilities. So that is back to quite normal now. And our capacity utilization, therefore, is more in the range of, depending on the site, 60%, 70% or so. And what we typically are targeting for is to run not at higher capacity levels at then 80%, right? Because when you operate at 80%, you really should have good visibility to get additional capacities online relatively soon, because in a situation where you, let’s say, grow by 10%, you otherwise get quite quickly, very close again, to a capacity utilization level at which you don’t want to operate, as said before.
So therefore, given the outlook regarding our future growth, we believe and are quite convinced that we have to complete the capacity expansion program that we are working on. I think Rene was also expounding on that a little bit before. And this is also very much around completing our geographical global footprint. That is an element of that. So that then thereafter, we are more in a kind of steady state situation to a certain degree. But long story short, we believe that the level where we are working on, even though below 80% at the moment, is nevertheless a level at which we should continue adding some capacities.
Virendra Chauhan
Perfect. So just another question is on your midterm outlook. And though I understand from your earlier comments where you explained the difference between FY ’28 target margin being at the level closer to the FY ’25 target previously. But could you just, when I look at FY ’25 numbers, compared to the guidance that you issued back in 2023 January, so we have kind of stepped down by €1 billion or so. So just help me bridge the gap about what has changed or what has driven that divergence?
Dr. Joachim Kreuzburg
Yes, yes. So mostly, basically I would say here, 2 factors. One, we talked about quite a bit. And that is that we think the view on at which rate the Chinese market will develop going forward has changed. I think that everyone in the industry had different expectations regarding China about a year ago. I think we all didn’t expect at all the, let’s say the intensity of the decline that we have observed in the life science industry during 2023.
And as I said before, nobody really expects that to fundamentally change and substantially change very quickly now. And that indeed, as you can imagine, has quite an effect going forward. And then also to some extent, of course, the fact that the current recovery is taking a little bit longer then has some effects as well and has some effects also based on the experiences that everyone has made during 2023. I mean, we had to revise our guidance. Every other player in the industry had to do the same as well. And I think that made all of us a bit more looking at the more conservative end of potential projections than this possibly has been the case before.
So what I want to say is, again, we have very much unchanged fundamentals, a bit a different outlook or a significantly different outlook on China and a bit readjusted calibration of how cautious or more optimistic we weigh risks and opportunities going forward.
Virendra Chauhan
Perfect. Just 1 final question, and that’s fairly straightforward. So can you clarify that by investment grade, you mean sub 3x leverage ratio, the way you define it?
Dr. Joachim Kreuzburg
Our current rating is a BBB rating.
Virendra Chauhan
No, but you said that you want to deleverage with the view that you want to have a strong investment grade rating. So my question is when you reference to investment, the outlook on the deleveraging, do you want to be below 3x? Is that the right way to understand that?
Dr. Joachim Kreuzburg
No, we don’t want to make any statements in that regard where we want to be after 2025. I think we have shared with you a conceptual representation under 2025 and that we are considering an acceleration on our path towards that, but we don’t want to make any statements where we want to be in 2026, for instance, also.
Virendra Chauhan
Sure. That’s very helpful.
Operator
We have a follow-up question from Matthew Weston with UBS.
Matthew Weston
It follows up from Thibault’s question. I’m sorry to go back to the potential equity raise. I think Joachim, we all previously, or certainly many of us previously thought that Sartorius AG could not issue new shares. And I think you made a statement at 3Q that equity issuance could be the treasury shares being released back into the market. But now there seems to be a suggestion that AG can issue new shares. So can you just clarify that the commentary around potential equity issuance, I realize hypothetical, could involve new AG shares?
Dr. Joachim Kreuzburg
Yes, thank you for helping me to clarify this. Wasn’t aware that there could be any misunderstanding because indeed, and I think there are a number of presentations that we have shared with the market during capital market days. And that is indeed that the instrument that we have available on the Sartorius AG side since pretty much like 20 years or so are the treasury shares on both the preference as well as the ordinary level. And that are the instruments that are available and no other instruments would be considered at this point.
Matthew Weston
Perfect. That clarifies everything.
Operator
Next question is from Markus Schmitt with ODDO.
Markus Schmitt
Just 1 for me, please, on the deleveraging plan. So when you would raise about €1 billion, just hypothetically, what debt would you take out then? Because in September, I think you had short-term borrowings of around €300 million. Maybe that is part of the answer, but what else? It would be helpful to understand what instruments or debt items you’re looking at, for example, a tender on the 2026 bond, maybe which is most intuitive to me. Any comments there would be helpful.
Dr. Joachim Kreuzburg
Yes. I do have to say that we indeed have not made any such decisions at all. So therefore, I’m not able to answer the question because what we shared here with you and the market overall are some conceptual clarifications, but no specific plan. And therefore, for sure, no specific plan, how any hypothetical equity measure would be then transferred into debt reduction measures.
Markus Schmitt
Okay. Then 1 follow-up on the rating, please. Is a BBB flat rating for you enough? Do you aim for a higher rating or is that actually the sweet spot where you want to be?
Dr. Joachim Kreuzburg
We consider the BBB flat rating a very robust and healthy and good level for us. No other plans at this point. So the thoughts that we were sharing were really about an acceleration of the deleveraging beyond the strong impact that our organic cash flow generation will have on the deleveraging. And again, we would consider this to be a path for gaining more strategic flexibility, but not a path for shooting for a different rating.
Markus Schmitt
So basically removing the negative outlook would be fine for you from today’s perspective?
Dr. Joachim Kreuzburg
That would be then possibly a result from that, yes.
Markus Schmitt
Okay, good.
Operator
Ladies and gentlemen, that was the last question. I would now I like to turn the conference back over to Dr. Joachim Kreuzburg for any closing remarks.
Dr. Joachim Kreuzburg
Yes, thank you very much for your interest in Sartorius. Very much appreciate it. Looking forward to our next conversation, I mean, there might be some in between. Investor Relations is always available for sure. Otherwise, I guess we will talk in late April again. Take care, all the best to everyone. Enjoy your weekends, bye.
Rene Faber
Take care, bye-bye.
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.
