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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome. I am George, the Chorus Call operator. Thank you for joining this Stratec conference call regarding today's announcement for the Q1 2023 financial results. Throughout today's recorded presentation, all participants will be listen-only mode. I would now like to turn the conference over to Marcus Wolfinger, CEO of Stratec. Please go ahead.
Yes. Thank you, George, and good morning in the United States, and good afternoon in Europe, ladies and gentlemen. Welcome to our Q1 2023 financial results presentation. Before we dive into the details of the first quarter, I would like to remind you that this presentation includes forward-looking statements. I think I don't need to read you through the safe harbor statement. And that statement, actually, you can download that presentation from the web tool of the meeting or from our website.
As always, I would like to get you an overview of what actually happened in the first quarter of 2023, followed by a financial review of the quarter, giving you an outlook. And then certainly, we should discuss some aspects of what actually happened in the form of a Q&A session. Sales of minus 20% in constant currency, certainly everything else, but satisfying. Just to remind you, we compare this quarter to the last quarter with tough comps quarter 1 of 2022 was the COVID-19 Omicron variant quarter, so the last quarter where COVID-19 revenues played a meaningful role in our P&L. And certainly, we had a very weak start into the year 2023.
I think at this point, it's already worth mentioning that the sentiment in the industry meaningfully improved in the past weeks. So we already discussed that in the call regarding our full year disclosure for 2022. Allow me I like to spend only a few seconds on that. when we returned back from JPMorgan conference early January, the world was still in order. Our customers, and we had a lot of customers meeting at the conference gave us or still had a good forecast, particularly for the first quarter of 2023. In the weeks to follow JPMorgan, one after the other customer disappointed with their forecast and came back to us with a weaker forecast. When I say disappointed, not only us disappointing, but disappointing the market. So I think it's still worth mentioning that 8 out of the top 10 players in the diagnostic space disappointed the market with their projections for 2023 and partly 2024 for which was actually the triggering event for us to go through our budget again, which we did which was probably poor timing, as I already mentioned.
Now talking to customers, the sentiment in the market is slightly improving, and I'll try to walk you through some of the details in the course of the presentation. Adjusted EBIT margin is 6.3% in the expected range, still weak. We, again, in the course of the preparation to this call, we went through our budget and through the forecast again. That's why this is a definite confirmation of the guidance given. And I will reiterate and walk you through the guidance, given the guidance we gave in the course of that previously mentioned call is confirmed at the time. which is only a couple of weeks ago. We disclosed the initiation of an earnings improvement program, and I would like to give you here some details. I think it's already worth mentioning that without going into really painful measures for the company. And I would really like to say that is that we have been cautious. We actually have a lot of improvements in the forecast.
Partly, we have a number of projects where we are maneuvering ourselves into a phase where we have to ship prototypes or evaluation units or validation units or preseries units, and certainly, we have a well field development pipeline. And with our earnings improvement program, it was definitely the plan to not jeopardize the future. We are working on those products, which will then come to the market. We are working on those products, which will drive the growth in the future. So we were -- it was very clear for us that we started this program, however, in a cautious manner.
We have a variety of products in various stages prior to serious manufacturing. So -- in particular, we shipped for one of our most important immunohematological products. It's actually 2 products. We shipped 3 series units for our molecular system. We already discussed that. We delivered those pre-serious prototype evaluation unit instruments to the relevant customers. One of our customers made material progress in the sepsis program we are working together, and that certainly reduces the risk of the project in for the time being.
As you can see, in the number of employees, still 7% up, mainly in development to a certain degree in marketing entails and to a certain degree in logistics and procurement as well, all the areas where we either have new development programs ongoing or where actually the market, in this case, we are talking procurement market and actually, our customers are requiring us to provide the higher services. And that's why we grew over that 12-month period between quarter 2 of 2022 and until the end of quarter 1, 2023 by about 7%.
I think looking into the earnings improvement program, most likely will not grow, meaning fully headcount wise in this next 4 quarter period of time. Financial revenue, EUR 60 million in sales after EUR 75 million is a reduction of about 20% adjusted EBITDA from EUR 18.5 million, down to EUR 7 million, it's a minus of -- sorry, of 60%. EBITDA margin from 24% to 12%, havening. I think it is clear that this has been an exceptional quarter. If we are looking into the forecast, the projections, tax planning and so on and so forth, will see that the next quarters will actually catch up. And again, I think it's still worth mentioning that we are comparing to a still very strong quarter 1 of 2020 to the comps in the following quarters will be way better and we already foresee nice growth rates for those quarters to come.
Basic EPS down to EUR 0.11 from EUR 0.92, a decline by almost 90%. Again, we will catch up. If you see that development on that chart, you can see that Q1 2020 was actually the first strong quarter where we already had some tailwinds coming from Corona. We are about 10% up from that quarter, still 20% down compared to that super strong quarter 1 of 2022. On the negative side, certainly, the high base is coming from the pandemic revenue. Certainly, the sentiment in Q1 of the market was really weak. The majority of our customers knew that they had too high inventory levels to address their customers' needs after corona, they still have those inventory levels to address the COVID-19 run rate. The majority of our customers reduced their inventory level now to a normalized level. And I think this is a good basis to start from here.
We had new product launches. We had higher development in service sales. As you can see that all that works, I think we are good at least for the bigger instruments in terms of materials and supply on the procurement side, still suffering a little bit with some electronic components, which still means higher prices or slightly elevated supply or lead times.
Adjusted EBIT and EBIT margin. This is meaningful and significant. Still, we have to admit that we have the cost basis for the growth, which is inside the last quarter of 2023, but mainly 2024 and with the new products certainly beyond 2024. So we unfortunately have the cost structure but operationally in good order, but unfortunately, not the demand. Therefore, we have material negative scaling effects. Those things which provided the tailwinds during COVID-19 with high revenues allocated to margin-heavy products, like in particular, the molecular program, good scaling effects, particularly for those programs, we had high run rate. This is now hitting us on the negative side, and certainly, the product mix.
And here, again, everything which provided tailwinds during COVID-19 is now working against that product mix in terms of the product mix of machines, product mix in terms of comparing the service and spare parts, maintenance parts in consumables versus instruments, product mix in terms of development revenues like mainly here, development earnings week, development revenues, and this is really a kind of exceptional quarter. I think if we look into the rearview mirror in 1 or 2 quarters from now, I think you'll see that this was really an exceptional quarter. And again, allow me to mention that we already indicated that 6 weeks ago when we discussed the full year results.
Initially, we have lower efficiency rates coming from the serial production of those newly launched instruments, which for those of you who know us for a longer time is that, that nicely leveraged out over time as we have different products in different stages of its product life cycle. Here, again, it worked negatively as we have a couple of those products in a younger stage where we are still going through this learning curve.
Cash flow, literally the same picture as in the earnings coming from EUR 6 million operating cash flow in Q1 of 2022 compared to 2023. It's an operational change from -- to 600% investment activities down to -- and up by EUR 2 million, and certainly, the financing activities and is showing the same picture. So free cash flow generation, a difference of EUR 800,000 coming from EUR 3 million here. Certainly, the first improvement on the cash flow dynamics still high working capital position. We worked that down. This is actually 1 of our priorities for the next quarter that the effects we saw in the past 18 months with material supply that it was literally impossible to confirm shipments with our customers unless we had all the raw materials, and this is getting slightly better.
However, we want to be a little bit cautious because of the conflict in the world, we want to make sure that we are not going barely up. If something happens in Asia or if certain governments prefer certain markets, that's why we will certainly continue to have an elevated inventory level. However, we want to work that down. Then certainly, the investment ratio with 8% of sales is at the lower threshold of what we saw after 2019 and '20 when we had an elevated level because of our real estate activities, I think between 6% and 8% is a good assumption going forward. Net debt to LTM EBITDA ratio of 1.7, still very good. Cash at the end of the position, literally unchanged in the wider scope equity ratio unchanged in net debt unchanged. I think this shows that, let me say, operationally, although we are suffering at this point, but we see that those KPIs, which, from my perspective, are really important like cash flows kind of okay.
The outlook, and actually, we put the next trust line in regarding our earnings improvement program. Please bear with me, this is the impact on the 2024 P&L, personnel measures, again, no layoffs like a generic layoff plan temporary and partial hiring freeze is something which will be -- which would stick to us for, let me say, the next 3, 4 quarters, probably taking us even into 2024 with savings of about EUR 4 million to EUR 5 million, certainly reallocation. Here, we are talking reallocations between allocation in projects and then certainly a reduction of personal-related consultancy costs like consulting in terms of helping us to actually fill the relevant positions which are harder to fill in.
So on all those savings accumulated to EUR 4 million to EUR 5 million, then certainly, we are bringing forward a price adjustment strategy actually already commenced, already addressed with certain customers. As you can see in the light of north of EUR 300 million in sales in both 2023 and 2024, this is not actually like a big percentage, however, it's meaningful in the scope of things. Here, we believe that we will generate a positive contribution to earnings in our P&L by EUR 5 million to EUR 8 million. And then certainly nonpersonnel cost reductions like optimizing in procurement, certainly, product portfolio improvements and other CapEx, EUR 1 million to EUR 2 million, adding up for [ 2024 ] between EUR 10 million and EUR 15 million. Certainly, I think -- we need to keep this a little bit weak, mainly the reason is that we certainly have ongoing activities in marketing and sales. We have a very nice lineup not only of programs, which are already contracted, but which are to be contracted, which requires us to maintain a certain flexibility in terms of hiring, which means we will certainly not turn down an opportunity just because they don't fit our earnings improvement program.
So we would actually continue to hire if one of those programs, which are nicely lining up at this point, will come through. And then certainly, the counter position to the savings would then certainly be development capitalization. So that's actually a neutral position. However, we will not show this in our P&L coming from that angle. That gets me to the next slide. Again, a key topic for this presentation was to get our confidence across sales is expected to grow by 8% to 12% on a constant currency basis, new product launches. And I think it's worth mentioning that we believe that our products, which had COVID-19 exposure were coming down at a slower pace and that our customers and us would manage to ramp up the new product or maintain high sales levels for those newer products that, that would happen faster.
Still, those new products are coming to the market or came to the market or already came to the market in the years which were those first quarters after COVID-19, and that's why we are conservatively expecting a top line growth of 8% to 12% on a constant currency basis. EBIT margin is driven by certainly product mix and input cost inflation, which is something which is part of our earnings improvement program, to get to an EBIT margin -- adjusted EBIT margin of 12% to 14% compared to 16.4% in 2022.
Certainly, some of the effects coming from the earnings improvement program, particularly those ones which are going against budget like this hiring freeze I mentioned before, certainly will show first effect already in 2023. And then we have that conversion to a new generation in our veterinary diagnostics business, which is starting with a weaker margin contribution, which will improvement is the main focus for the group, not only the development activities in Hungary, but even including projects or involving project teams in some of our other sites. Then certainly, the investments intangible and intangible assets. Again, I think there is some room to be more cautious without jeopardizing the future to maneuver this company more to the 6% threshold rather than the 8%.
Focus for 2023 and beyond. Certainly, the earnings improvement program is not only the company's main focus, but even my personal focus for the next quarter to bring this company back to a pre-pandemic level of efficiency. We have to admit that the world changed. We have to admit that some of the players like if you're even looking into -- and I'm not talking about our customers now, but if you're looking into the -- those companies like the carmakers, with lower output, higher earnings, the airlines, insurance companies that some of those players are actually contributing negatively to these inflation by their politics. We are trying to catch up here. I think we have a variety of measures which are not hurting the future of the company, however, improving the overall situation on the bottom line.
Then we are negotiating further price adjustments. We had a successful round in 2022. We continue to work on that sales and marketing team part of the personal goal is certainly that those price adjustments we have to adopt on the input side that we could actually take that forward to our customers. Then we have a nice lineup on our M&A pipeline. There are a couple of opportunities which are coming closer with more reasonable price expectations as we saw over the past 3 years.
So again, I think this shows our confidence even having that soft and weak first quarter of 2023 behind us. We are actively working on our M&A pipeline. Then as mentioned, we want to coordinate that parallel ramp-up with newly launched instruments and want to sort out this overall issues with -- within the common time frame. Then we want to execute a strong deal pipeline. We have a nice lineup with a couple of our existing customers, but with new customers as well, shows the overall trend in the industry that outsourcing is still the method of choice for the majority of the top 20 diagnostic players.
This is their mean and measure to keep cost but regulatory time to market and some other elements under control. Where they actually lose control if they do it internally and where we will provide the control with good means and measures to control product life cycle activities for those products.
Then certainly, utilization of that 1 segment reporting and the relevant changes to the corporate structure to continue to improve the cooperation and the strength of the relevant side. That's certainly one of the core focuses for the next quarter. We went already through a nice process and showed some nice improvements here already, but it's definitely one of the focus areas to show the further improvement mainly to take advantage of that local strength.
Let me just bring up some elements, which is actually development -- software development activities like in Romania, or short turnover cycles for smaller instruments in Hungary with hematological applications. So there are different strengths across different sites, and we want to harmonize activities in order to take advantage of the relevant strength of the relevant sites within Stratec Group. This gets me to the end of the presentation. I would like to thank you so for handing back the presentation to George, who will explain us how to commence with the Q&A.
[Operator Instructions] The first question comes from the line of Oliver Mather from ODDO.
Three I have. The first one is on your expected savings. So you said, okay, you want to realize them completely in '24. So do you expect already an effect in this year? And Also, can you comment in this context about the extraordinary cost to implement this cost-saving program? Second question is also related to programs for the personnel measures. I understand the objective to record but for years, I have heard you talked about topic labor shortage. So you mentioned in some cases, you won't look at you will still allow some hirings, but how can you execute the savings of us out compromising your long-term competitiveness? And last question, just a specific line. So can you comment on the current situation with the microcontrollers, please?
Yes, Oliver, thanks very much. And thanks actually for bringing up those topics. Really appreciate it. It really makes perfect sense to make a deep dive on the topics you actually brought up. So certainly, it is a little bit difficult for us to talk about the savings for 2023 because if we would quantify that we would actually probably have to talk about our guidance as well, and that's probably not just broadly, that's way too early for us.
So there are some savings. And you know in the analysis we made, certainly, there are certain savings positions which are not just going against the actual cost but going against the budget. And obviously, those elements are kicking in right away. Let me get you one example like hiring freeze is one of those elements because we had open positions the reductions in some of the capacities needed for the remainder of the year allows us to not hire, that goes against the budget. And in so far, we can realize those savings already now. And you are 100% right. And that's why I said we are super cautious, and we are actually intending to do everything like with the intention to not jeopardize the company's future. So how we will stay -- the question was how will we stay competitive, like the savings coming from the hiring freeze hasn't been taken entirely in the positions of the earnings improvement program, but only by 2/3, which means already the cost saving programs we have established now still allows for certain hirings. And I think it's obvious that like if we have the relevant programs ongoing or coming in for the remainder of the year that we will hire in that position in order to particularly achieve the future product to not jeopardize the future of the company.
So we are -- actually, we with all what we did and with all those methods we are discussing now within the actual heads of department and between the Board and the Supervisory Board. We actually, we have the premises from our Supervisory Board to clearly say we will not overdo it with the savings. And that's actually something I want to get across now. Now talking about microcontrollers, I think the situation here improved meaningfully, we still have certain shortages, but not something which is actually causing a material back order situation I think it's worth mentioning that in some areas, we still see elevated pricing where we expect that the prices would come back slightly in the future. So this is, as already mentioned in our last quarterly call and in the full year 2022 call is that at this point, it's no longer a question of supply, it's a question of pricing. And again, this gets me straight back to our earnings improvement program. It's not only part to try to adjust sales prices in order to cover input prices, but certainly renegotiate ongoing terms on the procurement side in order to take advantage of the improved situation there as well. I hope this all made sense for you, Oliver, and thanks again for your question. Any follow-up?
Yes, yes. Yes. It is one follow-up regarding the implementation costs of...
No, sorry, I missed that point. Yes, I think the structure -- so actually, I have the list in front of me. One is earning freeze, the second is resulting cost savings, no material layoff cost, there will not be material overhead throughout our entire base of the subsidiaries, OpEx only smaller savings. So there is actually not meaningful implementation costing. So only minor to 0 restructuring costs.
The next question comes from Oliver Reinberg from Kepler Cheuvreux.
If I may. Marcus, First one would be on the sales guidance. So I mean, I fully appreciate Q1 had a very tough comp, which is fair enough. But I just wonder -- what kind of visibility do you have on this kind of significantly improved growth outlook that you need in the following quarters? -- also is the top end of your sales guidance equally likely at the low end? That would be question number one. Secondly, on the outlook for margins. I mean I think you talked in the last call also today a couple of points -- a couple of times that this outlook was provided at the worst point in time. So that suggests that the upper end in terms of margin, 14% is much more likely currently, then this kind of cost savings come on top, which probably adds 3 to 4 percentage points that moves me already effectively to 17 to 18. And then you talk about that basically mix effect and improvement in the efficiency of ramp-up is also not included. So easily, we get towards 18-plus. So I'm just wondering, is that the way we should read it? Or is that kind of double counting?
And then the third question, please. I mean, the there's obviously 1 client that had a significant contribution in terms of COVID sales. And it's very clear, obviously, that this also is the client that triggered this kind of stay decline in Q1. But can you just provide an update? I mean, in the past, you talked about that the system will still benefit from the fact that it has been used 24/7. So there's a huge demand for replacement systems or the systems that are what you call worn-out. So the point I'm trying to get towards is I mean, is there any kind of risk that in the sales you see from the system that there's still a certain overstatement from this kind of replacement of worn-out systems? Or are you confident that we have really now at a kind of a low point for the demand for that specific systems?
Yes, Oliver. It's always excellent question. Thanks for that. So I think it's obvious that when we -- as we confirmed our 2023 guidance and as we had that weak start into the year that it implies a plus 20% growth rate for each quarter to come, which is definitely a challenge. So actually, -- this is to confirm that we made a deep dive in our expectations. We made a bottom-up approach again into the systems per quarter. That's why I can only reiterate what I already said.
This is actually to confirm our guidance. You brought it up is the upper and the lower end equally likely. So obviously, this is certainly a part of the determination and the derivative of price increases as well. But looking into the analyzer systems, it's actually like a guidance which is based on what we -- where we made an offset to the number given by our customers where we looked into the details how likely is that, where we have at least from certain customers, inventory levels. So I would actually say we have given that corridor in order to make a risk offset. But at this point, it looks okay, kind of promising that we have the very same likelihood of the lower and upper A, certainly some of our customers still have flexibility in terms of adjustments to the guidance. Then you talk and you made a nice accumulation of all the matters, the guidance we gave, the already kicking in effect improved sentiment. So certainly, if you are only adding up the upper edge of all those positive momentum, you can easily get to any percentage you want but that shouldn't be a realistic and reasonable and conservative approach because if you're adding through the lower edge of all what we brought up, you are still ending up with this 12% to 14% EBITDA margin. So I think it is still too early, and I already mentioned that it's still too early to discuss. Is it time to adjust the guidance based upon what is in the pipeline based upon price adjustment based upon of improvement of sentiment. So certainly, as I've mentioned, if you are just adding up the top 10 percentages, you might easily get to that percentage, but I think that is not a realistic age I can almost guarantee when I'm involved, you can never add up all positive sentiments.
Then COVID-19 replacement instruments and run rate. So I think that -- and I'm not talking about a particular customer. Certainly, we discussed all that during corona that we were trying to get across that there is a risk because those ones who had material tailwinds during corona might dip after corona, although they were trying to do a lot. So in this particular case, we had a customer improving the menu. And we still see the nice effect that in this particular case, the proprietary amplification method instrument of that partner is still shows solid growth, but the better growth is actually coming from the PCR instrument with that customer. So it shows that the menu pension took place on the PCR side rather to that proprietary amplification method side of the business of the customer -- we saw that the customer was really painfully and painting for us trying to reduce inventory levels. If we are looking into the forecast for Q1 and partly for Q2. We see that the customer was trying to reduce inventory level already picking up in Q3 and Q4. So I think it's again, worth mentioning that the majority, not to say all our customers with COVID-19 exposure had inventory levels in order to address customers' needs, which were caused by COVID-19.
Now with a normalization in the market and reduced demand from the end customer market, we see that our customers are trying to bring down their inventory levels to probably poor wording prepandemic inventory levels and prepandemic run rate or at least adopted to the current run rate and the planned future run rate of the instrument. And that's certainly something where we dipped out, we had to come out to the financial community with a disappointing guidance. The timing was that, as you already mentioned, very much driven by those triggering events, which were exceptional at the time. This is a moment in time where we haven't had to review our guidance. We did so. Public markets are forcing us to disclose that information, which we did. And I think from here, it can only go north. I'm absolutely convinced that the product offering of that particular market and that particular customer and the installed base, that particular customer has and had will drive our consumables and our maintenance parts and our spare parts business as well. But for the time being, we are suffering the effect that our customers are trying to improve their inventory levels at a high cadence and high drag. And so that's actually what's going on these days I think, again, it's worth mentioning talking to those customers that this sentiment you do not see yet in instruments or service part run rate is improving. We clearly see that.
Super. And if I can just push it there. But I mean, if I look at the demand from this specific client, like on a quarter-on-quarter comparison, is it down more than 60%, 70%?
Oliver, I can comment that I think that customer is reporting that data, at least partly it's a public company. Some of our customers, I actually don't know in this particular case, are only reporting active instruments, which means if the number of tests running on the instruments is north of a certain threshold in order to not dilute the test per instrument figure -- and then certainly, some of our customers, we have to admit that some of the players in the market, I'm talking about the labs are still keeping inventory levels with instruments sitting idle for potential COVID wave, where our customers are not literally -- are literally doing nothing. So -- and then we have to see that for that customer, you were talking about, we have a number of different instruments where some are actually showing weak performance, but others are already showing improved performance. So I think in order to provide you a transparent neutral and comprehensive picture we would have to make such a deep dive into the data that I would have to disclose data, which should only be disclosed by that partner. That's why I cannot get you any further information. This is actually something which should be discussed with the relevant player you have in mind.
[Operator Instructions] The next question comes from Jan Koch from Deutsche Bank. .
I also have 3, if I may. I would like to come back to your earnings improvement program and try luck again -- can you speak a bit about the expected phasing of the targeted price increases? So how much of the EUR 5 million to EUR 8 million have you already achieved as of today? And how much do you expect to achieve in Q2, Q3 and Q4? And in relation to this, are the EUR 5 million to EUR 8 million earnings impact from the price increases only implies about 2% price increases on average across the -- so do you see further opportunity to increase prices maybe next year?
The second question is can you speak a bit about the phasing of your 2023 guidance? -- you obviously need a step up in sales and earnings growth to achieve your guidance. But at the same time, the comps are getting much easier. So any color here would be very helpful. And then lastly, very encouraging to see that Citadel has received an approval for sepsis test in the U.S. Could you help us to quantify the potential for you going forward? And when do you expect this test to be approved in Europe?
Yes. Thanks, Jan. Thanks very much for your questions. I have pulled up that slide again with the earnings impact for 2024. And so let me give you some personal so markets warping of flavor. I want to avoid and I have to manage expectations here that we are discussing the guidance again at this point. I think this is something I definitely want to avoid, but let me get you some flavor on the relevant topics. So obviously, price increases is something which is not super well perceived or price adjustments, which is not super well perceived by customers, but you said the right thing. Certainly, we gave our teams certain goals and objectives, and we only took in 2% on an average basis.
So obviously, we will manage some customers for higher increases, some we won't manage anything at all. However, I think -- I still think there is room for improvement, but I think it's obvious that this will only be partly effective for the remainder of the year 2023 whereas that hiring freeze and reallocation of resources and the savings coming from the not established consulting work is something which goes straight against the budget which means it mainly kicks in already in 2023. Same thing applies for CapEx and others. So the third element. So I would like to encourage you to make your own math here that it's obvious that some of the elements are kicking in right away and others will only be established if we talk about full year basis, and this is the value of the full year basis in 2024. But there is some common ground in between, obviously. I hope that makes sense for you and get you some flavor. I made some notes, but I missed your second question. Sorry, Jan, can you please repeat your second?
So happy to do that on the phasing of your 2023 guidance. Is there anything we should consider for Q2? .
Actually, certainly, the comps for the second quarter will be meaningfully better, but we already see some nice improvements like with some of our immunoassay instruments in some of our molecular instruments. So I would say if you want to get a hint, I would assume a normal quarter with an average run rate. So certainly, this year will not be super, super back-end loaded. But certainly, we will not entirely catch up what we missed in Q1 already in Q2. So I would actually expect a normalized spread of the improvements across the quarters to come, where like -- you know that Q4 was relatively weak in 2022. So here, the comps will be better. Therefore, the overall performance is not that good. So definitely, Q2 and Q3 have for the year 2023.
Last was about Texas. So this is an early stage. We are ramping up -- so the main revenues will only come in 2024 and 2025. We have a nice lineup of programs where we will already make some meaningful improvements in terms of recognized revenues for development in the course of 2023, which might provide us some additional tailwind. So I'm actually we only talked 6 weeks ago where I probably made a less optimistic -- or where I left a less optimistic impression, and I definitely want to manage expectations. However, my gut feeling for the remainder of the year is way better than it has been the case for 2020 -- for the remainder of 2023 when we talked at the beginning of the year.
Looking into the earnings improvement and discussing with the teams, I think this is something where we are really keeping the balance of not over saving. And in parallel, not jeopardizing the future but still achieving meaningful improvements here. So we are intending to keep that narrow balance. That's definitely the goal. Hope that makes sense.
The next question comes from Alexander Galitsa from HAIB. .
I'd like to ask one sort of to confirm on the full year, maybe rather sales guidance if I understand that correctly. So one thing is that the corridor for the sales range was based on what you mentioned is gloomy snapshot of customer orders. since then, that has meaningfully improved. So is that fair to say that currently, as things are, you are trending sort of at least at the upper end, not at the low end of the guidance. And for you to really land at the lower end of the guidance, you really need to see customers go back to more restrained forecasts. Is that how one should think about it?
Yes, actually, I would like to answer that with a clear no. So we talked about some of the contributors to sales for the remaining quarters. So certainly, meaningfully the sentiment in the discussion with our customers improved for certain important projects. We certainly have some risk for downside as well. So now only like covering those positive comments and ignoring the risk on the bottom end is actually like for me, an approach I don't want to take at this point. Still, we have some nice upsides here and there. We are discussing with our customers where we believe that they dipped out as far as the demand is concerned. But on the other side, we still have some flexibility for those customers and for other customers. So only talking about the positive element, I think, is something which doesn't provide really a realistic and conservative approach. That's why we want to think to that growth rate we have given in our guidance and not say that it will become like a home run to achieve the upper end. That's definitely something which is way too early to confirm or deny at this point. Hope that makes sense.
Yes. Perfectly clear. And then also on the sepsis diagnostic tool, could you maybe talk a little bit about the revenue potential you're envisioning for this product and also discuss the sort of revenue model behind like what's the value of smart consumables within such system? And how often these consumables need to be replaced?
Yes. So actually, it's a consumable, which where you need already like, let me say, a 1:1 ratio test performed to consumables. So it's actually like a linear equation to the tester for -- like I said, meaningful revenues only 2024. Sepsis is -- you know that I'm actually trying to avoid to play this buzzword bingo sepsis words in everybody's mind for the last 3, 4, 5 years. And there were a lot of companies with a lot of promises. You know that sepsis is not only a question of infectious disease testing and set this is caused by a high number of pathogens -- so it's not only a matter of infectious diseases, but then certainly treatment, which means antibiotics have to be applied, which means there are different work streams for infectious diseases, which typically gets you to fairly fast results on the other side, treatment suggestions are taking longer.
This is a complex process and a complex workflow. On the other side, it's definitely one of the most severe diseases for the time being and particularly in emergency care, it plays a meaningful role. So what I want to get across is that there are a number of players out who are intending to go in that market with different solutions, actually a high number of good solutions for different price points. It is not super easy to predict that. But like already in 2024, we are intending to sell like 7-digit, low 7-digit euro amount for Sorry, mute. -- so all right, for 2023, we are intending to sell a 7-digit number of runway probably with a leading tool with a leading 3 million. So already meaningful for such an early stage. As mentioned, there is a number of players in that market. It's a super early stage. It's there is still this ongoing question how fast the market will adopt this particular technology -- are there other competing technologies, which will be adopted faster. So in order to give really a good prediction about the run rate for the years to follow 2024 is a tough one. I think it's easier if we are in 2024 to discuss the run rate in 2025, but it's a very promising project and actually 1 of the market-leading companies -- so we are not worried about the overall success of the product. However, it's still -- the ramp-up curve is something which is yet unclear. For us, we have a forecast from the customer. Certainly, we have manufacturing planning already ongoing. We are supplying the customer already. However, if the tail end of 2024 is a hockey stick or like more linear equation that's still unknown.
Understood. Is there possible for you to give us any kind of sort of anchors to be able to triangulate the potential revenue ourselves in terms of like how much 1 smart consumable costs or as a percentage of sort of value of the device, anything like that?
No, this is actually -- so this is certainly -- this would provide a cost of goods calculation. Like I said, our forecast for 2024 foresees a like 7-digit euro amount leading 2 or 3 with a nice growth rate potential However, I think it is important to understand that there are certainly minimum expectations. There are capacities in the tools and in the process. There are capacity thresholds where new tools and new automation would have to be ordered. However, there are -- like you know, there is a lead time for certain elements contributing to manufacturing ramp-up. We have this discussion with 1 of the market leading players but still too early to -- it may easily get us to high single-digit euro amount over time, but it may actually remain somehow in the area of EUR 3 million to EUR 7 million. It's definitely too early to determine expectation or to actually assess what is expectation and what is a realistic planning scenario. Too early.
Understood. And just last one, conceptually to understand the model, you will be providing stock of consumables to Cicobail directly, and they would be already having the relationship with actual users of the equipment. Is that how it works?
Affirmative.
Gentlemen, we have a follow-up question from Oliver Reinberg from Kepler Cheuvreux.
Just 2 quick ones on the margin, Marcus. I appreciate that you normally do not share the mix in terms of how much -- what was as the percentage of sales coming from recurring revenues. But given the kind of significant or quite low margin, -- and any kind of color what the share of consumable sales was in the first quarter when it's normally in the low 30s? Secondly, on the margin when we think about mid-single-digit cost inflation on a like-for-like basis, have we fully seen that already in the first quarter? Or is the kind of cost pressure from personal costs further ramping up over the course of the year? And then thirdly, just on M&A because you mentioned that in your prepared remarks. I mean, is that something that could also be realized more short term -- and if you would announce the transaction, is it more likely that we're going to see a business that adds capacity and maybe loss make in nature? Or is it most likely if you acquire something that this will also be earnings accretive?
Yes, let me start from the tail end. Actually, olive, you got that hint that certainly, M&A is not only focus. We continue to talk to different companies. We have a nice lineup. It's still a binary thing. M&A doesn't take place by 70%. It either takes place or doesn't take place. Those companies we have in our lineup would actually be margin accretive. And that's the first message I want to get across in our salary increase, and I think that was part of the second question. We have reached a level where actually the company, but fortunately, our employees, and you know how important human capital is in our business. I think, have achieved a balanced situation with salary increases on the one hand side on the other side, giving the company NAV, particularly in those tough times.
Margin-wise, actually, leveling. So development revenues were actually slightly elevated. Unfortunately, some of them came a lot margin light, which is causing that little bit disruptive picture. Service parts were on a normalized level. So almost in the area where they have been on a full year basis in 2023, so almost mimicking the situation we had then. However, I must admit that our expectations regarding service parts were higher than what we achieved. However, they have been on the level where we have been on a full year basis in 2023. I think it will not help you meaningfully to model the rest of the year as we have this disruptive situation with high contribution from margin light development revenues, bad really tough comps with instruments compared to Q1 2022, but a service and maintenance part level, which compares to the previous year. So it doesn't really help. It doesn't get you any direction. I actually followed down the very same route without any meaningful results from my own assessment.
Okay. I missed the answer on personal cost. So the personnel cost inflation has fully contributed in Q1 already? Or is that gradually ramping up?
Fully contributed in Q1. Actually, we have made 24 months solution with our responsible people here. And part of the increases we are covered. Certainly, with our cost of goods structures, the majority is actually covered on the cost -- on the material input side coming from our suppliers. But our internal increases regarding wages for 2023 are already covered in Q1. And certainly, we have other increases which are already agreed upon, but only coming up in 2024, but which are already budgeted in the way how we are thinking at this point for 2024.
There are no further questions at this time.
Yes. Thanks, George. Ladies and gentlemen, this gets us to the end of the presentation and the discussion regarding our Q1 2023 disclosure. Thanks for your interest, and thanks for talking to us and have a good day. Thanks, everybody. Have a good day.
Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.