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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the STRATEC conference call regarding today's announcement for the 9 months 2020 financial results conference call. [Operator Instructions]And I would now like to turn the conference over to Marcus Wolfinger, CEO of STRATEC. Please go ahead, sir.
Yes. Thanks, Emma. Good morning, everybody in the United States, and good afternoon in Europe, and actually good -- very good evening in Asia. Thanks for joining our 9 months conference call. Before I start, I would like to mention some housekeeping statements. First of all, and I think it's necessary to read you through our safe harbor statements. What I would like to mention is that you can download this presentation either from our website or from the tool -- the Chorus Call tool you're currently following the presentation with. As always, we are splitting this presentation into 5 major segments. First of all, I would like to give you an overview over the highlights after the 9 months this year, then a financial review. I would like to get you an outlook for the remainder of this year and for the year 2021 as far as it is transparent to us now. Then we would like to follow with a Q&A session, and then we have an appendix showing some details. I would like to keep this presentation fairly brief as it is really a straightforward quarter for us, and I would like -- without skipping any details also, and I would like to give you as much time as possible for questions to be answered. Highlights. 9 months, we are up organically with 13.1% year-on-year to about EUR 179 million revenues coming from EUR 158 million, which represents an organic growth of 22.4% in quarter 3 2020. Adjusted EBIT after 9 months is up by 40.7% to EUR 28.1 million after EUR 20 million in 2019 after 9 months. The adjusted EBIT in Q4 and Q3 is actually up by 35%. As always, it is not just looking into the rear window mirror. Actually reporting detail for us means that we have to look into our future programs, and there are -- it's certainly important to mention that we have achieved several important milestones, instrumentation-wise in our smart consumables business unit. We just picked out one example. We launched series manufacturing of a polymer-based smart consumable, which is, for flow cytometry, a very interesting application for one of the market leading companies. And this actually is following our plan to work more and more with the blue chip companies in our smart consumables business unit with a fair ratio of start-up companies typically well funded, but certainly no guarantee to go into mass production about -- should be over time about 25% to 33% of the overall volume generated by our smart consumables business unit. And about 2/3 to 75% of the business should be in mass production for the blue chip companies, and that's actually following exactly what we were planning after the acquisition and what we intend to see more often in the next quarters. Certainly, it is important to achieve development milestones, not just to finalize the development milestones and get things done, it's actually very important in our development planning as we need to make sure that we are allocating the relevant people, the relevant resources of the relevant department at the right moment in time into new development projects lining up. And therefore, we keep that closely monitored. We have actually a few new cooperations. We signed a few agreements, and, actually, we made significant progress in other new agreements. Actually, like I said, we signed some. Others are actually in circulation of the signature, and we have started some new feasibility agreements. So even here, things are lining up nicely. And we managed to keep the number of employee growth under control. After high-growth rate at the beginning of this year, we came back, and actually, we have built the resources now to cover the additional demands coming from our customers related to the pandemic situation and the additional demand coming from that. And like I said, we managed to keep the employee growth "under control" and only grew by 2.6% to 1,315 employees. Let me get you a COVID-19 update. I think it's obvious and well-known that a lot of our customers are at the forefront to containing the COVID-19 pandemic. A couple of them are actually public companies as well. That's why they are certainly talking about that to include companies like 2 of our biggest customers, Hologic and DiaSorin, but we have several other customers, who are actually working in the same space, and we see nice growth rates as far as instrumentation and consumables business is concerned. I think it is important to understand. And here, we certainly have to clearly differentiate between the lower volumes of rapid testing and the higher volumes of centralized testing. So if we are following the figures mentioned by our customers and the figures of the overall testing, we could clearly say that like in the United States and in Europe, in both cases, about 30% to 40% of all COVID-19 genetic tests performed in centralized setups are actually performance driving instruments, which is actually showing our role, not only in the situation, but in the industry as well. We certainly have an unbroken and unprecedented demand for certain products. So actually, some product lines have more than doubled year-over-year in 9 months. And actually, if we are -- we -- in order to manage capacities and in order to manage priorities, we actually asked our customers, particularly those customers with the high run rates, to switch from the approved forecasting system into more an ordering system. And that's why we got most of the orders for the first 6 months of 2020, one already in talking to those customers and with decision-makers. It's quite obvious and quite transparent for us that we will see and most likely an unbroken demand with those high run rates covering the entire year 2021. Allow me to mention at this point, and I think it is important to understand, that we are not worried at all that we might dip after this demand comes back into a more regular demand. Particularly, we have a couple of market launches lining up or we have a couple of market launches already had. However, it is important to understand as well that we cannot assume or consider that we just take those 10% growth from new instruments planned in 2021 and just add like 15% COVID-19 additional demand leading to a 25% growth rate in 2021, that will not work. It is important to understand that some of our customers certainly changed priorities and focus, which means things which have been intended to ramp up faster are now ramping up slower and so on and so forth. So we have to see that, although it's really hard to tackle and to see. This is trading off with this, but it is important to understand that we cannot just add to growth prospects or to growth estimates, the COVID-19 growth and new market launch growth and just add that up, that will not work. We continue to have supply chain challenges here and there. However, again, it is important to understand that we were very, very worried at the beginning of the year, like in February and March, about interrupted supply chains. In the meantime, we have learned how to control supply chains. On the one hand side, we clearly went into higher inventories. You see it [ unfold ] -- you see that in our working capital as well. On the other side, we see that if things are delayed by a week, we can catch up the next week. We are in, literally, on a daily basis, in communication with our customers to address additional demands or to cover the actual supply capabilities. And actually, we often get the compliments from our customers that we really managed to keep the run rates we are intending in to ramp up to the required run rate. I think it's obvious that, particularly in that situation, some of our customers would take more instruments. But as we are in the manufacturing business and, in some cases, we have lead times of 6 months. We have like kept capacities coming from tools and so on. So it's really like a daily challenge to manage additional demands and to keep inventory levels under control, keep supply chain under control and so on and so forth. This all against the background that certainly, the health of our employees remains top priorities. And we have, again, always been at the forefront of our measures. I talked about that at length, is that like we already had a travel ban end of January this year, we went into an extremely high home-office ratio. We have isolated our buildings. We have closed [ cantina ]. We went into 2 and 3 shift mode in our different sites just to make sure that we are avoiding contacts between employees. It worked out fairly well. So that's why we switched back into a more normal mode, in a more economical mode than in May, June, July time frame. But however, we have been one of the first companies, and, again, people didn't understand that very well and have taken that very well that we switched back into lockdown 2 mode already at mid-September. In the meantime, it showed its effectiveness, and so far -- and let me touch my wood here. So far, so good. It worked out fairly well for Stratec. And again, the health of our employees is certainly the top priority overall. In the meantime, it's just as exciting. I'll keep that brief. On the left picture, you can see actually the -- one of the very first buildings. It's actually just a 2-story building, that one with the red roof. It looked like a black forest hut. It was one of the first buildings. We've torn that down in 2018. At the back end of the left-hand picture, you see phase 1 building of one of our new complex. And on the right-hand side, you can see -- actually, the front of our new building was a EUR 20 million investment, adding about 15,000 square meters, which is about 150,000 square foot mainly for development and prototyping to a very little degree and at the back end for actually storage. I think with this big jump, we have set the foundation of the growth of the next 3, 4 years here at the headquarter with mainly design in development, to a certain degree, certainly prototyping. It becomes more important as -- particularly driven by regulatory aspects, the number of prototypes to be manufactured, the number of evaluation units, the number of preseries units, which are manufactured, is becoming bigger and bigger, and the measures are actually getting more and more complex. That's why this was needed. In Switzerland, where our biggest manufacturing site is sitting. I think we are good with capacities for the next 2, 3 years. All other sites are good as well. So we believe that even taking high-growth rates for the next years into consideration that we are good with real estate activities for the next 2 to 3 years. Now getting to the financial review. Sales on a 9-month basis, up by 13%, in Q3 up by 20%. Adjusted EBITDA, up by 33% coming from EUR 26 million, now EUR 35 million after 9 months. The quarter on a stand-alone basis, up 30% coming from EUR 9.5 million, now EUR 12 million. Adjusted EBITDA margin, very interesting, coming from about 17%, now 20%, up 310 basis points as the growth rate in Q4 top line was higher. EBIT -- EBITDA margin in Q3 coming from 19% in Q3 '19, now 20.6%. Same growth rate actually apply for the adjusted EBIT margin coming from 12.6%, now 15.7%, even taking the high stock appreciation or the high growth and stock appreciation rights into consideration. So -- which represents a growth of about 310 basis points on a quarter basis, growth of 190 basis points. Figures after taxes, consolidated net income grows by about 50%, both after 9 months in Q3, leading to an EPS growth of 48% after 9 months, and 45% after -- in Q3, respectively, which means an EPS coming from 72% to EUR 1.55 in -- which represents actually a growth of 115% just on a -- in Q3 on an isolated basis. EPS growth represents a growth of 125%. Now talking about sales growth. 9 -- after comparing the figures, very interesting dynamics: after 9 months in '18; after 9 months in '19; and after 9 months in '20, 2018 being a fairly difficult year and a certain catch-up effect. Certainly, still the decoupling of operational growth versus company growth and like getting back into more a normal mode with high scalabilities, where the actual capacities built in '18 and '19 are now utilized or starting to be utilized. That's why after 9 months, we have this organic sales growth of 13.1%, now to about EUR 180 million, which represents double-digit growth rates with systems. And we clearly see that service parts and consumables are now catching up. Actually, we expect this to significantly accelerate towards the end of the year and particularly in 2021. We have to see that there is certainly a deferred effect here that new instruments are placed. Typically, our customers have certain inventories as far as those service parts and consumables are concerned. And as soon as the number of placements and the utilization of the equipment goes up, they are refilling their stocks and warehouses. Then we have to see that certainly the high degree of utilization, which took place all 2020 and continues to take place is certainly making or aging the -- makes the instrument aging earlier and faster, which then leads to a higher degree of service and maintenance parts and consumables. But actually even the replacement business, which typically only kicks in, like if an instrument is placed by our customer in year 1, it gets replaced with an instrument of the same kind probably in year 4 with high utilization rates. It might actually get replaced in year 2 or year 3 already, which then leads to a nice replacement business. And that's actually what we expect to happen. In 2021, that a certain proportion of the high growth is actually not additional high demand. It's actually coming from replacing an instrument of the same kind. Then certainly, the degree of testing, particularly on a molecular diagnostics basis, it generates a very strong demand. And like what I mentioned before, now as we got the forecast or orders, respectively, for 2021, we see unbroken high demands, actually even higher demands. And that's why we are trying to further increase our manufacturing capacities. Then certainly, which is important to understand, we have a significantly lower amount of recognized development revenues. And again, allow me to reiterate myself, and I'm doing that fairly often is that, let me say, the overall performance of the company in terms of development hours or development services provided to our customers, and the recognized revenues for development services is entirely decoupled, mainly coming from paragraph 15 International Financial Reporting Standards, which leads to volatility. We had a high revenue recognition in quarter 2 2019, leading to this declining development revenues compared to -- on a year-over-year basis, Q2 '20 to Q2 '19. We are picking up here, but I think it's obvious, and we made it very clear, that we will not get to the previous year level as far as our development revenues are concerned. In 2020, 2021 then looks different again as things are lining up nicely here as well. Talking about EBIT and EBIT margin. 9 months, adjusted EBITDA, up by 40% to EUR 28 million. And 9 months 2020, adjusted EBIT margin on the level of 15.7%. Margin expansion of about 310 basis points, mainly coming -- and I think that's the biggest factor here is actually a positive product mix and sales. Then certainly, economies of scale, mainly utilization of equipments, then certainly the earnings improvement initiative. We already started in the year 2018, paid about 2/3 of the dividend. By means of that, it -- we assumed about -- savings of about EUR 3 million in total. And in the meantime, we think that we have achieved about EUR 2 million. And again, this was all operational development. You probably remember that we had a weak year in 2018. A lot of things have been delayed, which then showed some nice effects in 2019 and in 2020. However, we started the earnings improvement program. As a part of that, we actually sold our molecular diagnostics business for reagents, mainly for stabilization and purification, where we had a small business in Berlin. Part of that was actually the sales at the time. Negative effects applying a certain pressure on our adjusted EBIT margin is the stock appreciation rights with a negative margin effect of about 280 basis points. Talking about cash flow. Cash flow from operating activities is up by 70% year-over-year to EUR 18.5 million, very much driven by increased profitability and lower tax payments still. We are on a working capital level, which is not satisfying for us. However, I think it is important to understand that we are acting on the safe side, which means if we have, in regular terms, just-in-time manufacturing, and the subassemblies are supplied by the relevant supplier or by our internal groups, literally in time for manufacturing or in line for manufacturing when early in inventory to make sure that we can satisfy the additional demands coming from our customers. We did that already in February and March, and we continue to do that then at the beginning of Q3. And that's actually clearly reflected in the working capital. Investment ratio is slightly below our target of 10% to 12%. I think it is important to understand that we are expecting or the main thing here is coming from our real estate activities, which are now getting close to being finalized. And that's why we are expecting to get back to a normal level, which is actually like high single digit to low double digit, but certainly lower than 12%. Now getting you an outlook. Actually, reiterating the guidance we have amended the second time, this year already, along with our 6-month reporting. Group sales is expected to increase 14% to 18% top line. Again, high additional demands, and, actually, higher than the demands in quarters 2 and 3 led us to actually narrow down the corridor, top line and bottom line. We are expecting the upper end of the targeted corridor same thing, like I said before, for the adjusted EBIT margin is expected to be in the area of 15.5% to 16.5% after 13.7% in 2019. And again, a very strong utilization, economies of scale and strong product mix expected for Q4. That's why here as well, we are expecting to get at least to the upper end of the targeted corridor. As mentioned before, investments in tangible and intangible assets of around 10% to 12%, after the completion of our construction project, here to expand capacities in Birkenfeld at the headquarter, mainly for development and prototyping. The investment ratio will most likely decline considerable from 2021 on -- which then will certainly help to improve our cash flow situation as well. This gets me to the end of the presentation. I would like to hand back over to Emma. She'll explain us how to commence with the Q&A session. Thank you so far.
[Operator Instructions] First question comes from the line of Oliver Reinberg, Kepler Cheuvreux.
Marcus, if I may, 3 questions. One, you talked about that you're still in the process of ramping up capacities, in particular for the system that earned strong demand for COVID testing. Can you just give us any kind of idea in terms of where your -- what is the level of capacity by year-end? And how does it compare to the average capacity you had throughout the year just to get a kind of certain feeling how much spillover may happen there? And secondly, can you just talk about the demand for equipment that is not used for COVID testing? Have we seen a recovery there? And third question, you talked about certain new deals and progress on new development projects. Is this rather a normal course of business? Or is -- in this kind of new activity is also something major in there?
Yes. Thanks, Oliver. Good to talk to you, and excellent question. Thanks for those. Let me put it that way. Certainly, it is extremely complex to tackle a situation, which is literally changing on a daily basis. And I'm not talking about demands. I'm talking about delivery times. I'm talking about the focus of our customers, the resource allocation of our customers here and there. So we can only -- I think it only makes sense to talk about those instruments, which are seeing huge additional demands. And I think it is worth mentioning that particularly for those instruments, which are showing those additional demands, we actually ramped up all the time, like starting from, let me say, March, April time frame. On a monthly basis, we ramped up. And if you see this growth curve, certainly, if you pick out, particularly quarter 3, the beginning of quarter 3, the capacities were lower than at the end of quarter 3. Now we are actually at a level of capacity where we and our customers feel fairly comfortable, which means we keep slightly growing as far as capacities are concerned, but we will have those capacities available in each and every month of the month of October, November, December, January, February, continuing to grow. And I think like particularly for the bigger lines, we are growing capacities by about 20% to 25% in quarter 4. Demand of non-COVID instruments, and here, again, this is actually an observation. At the beginning of quarter 2, we clearly saw some generic developments within the different technologies, which means extra, ultra-ordinary high demands in like molecular testing, nice growth in immunoassays, chemiluminescence immunoassays, in particular, a nice growth in hematology like going level in our clin chem business, which is fairly small, and a dip in our immune hematological business. Then like over the past 3 months, we saw that certain product lines had exceptional developments and unexpected developments, even if they were within some lines. Like we saw a nice growth, like a pickup effect in immune hematology. In some cases, we saw that our customers shifted priorities away from -- or slightly away from newer instruments into more of those ones which are established, where like the service technicians know what they do. No ramp-up, which means higher business in established business, weaker business in our newer instruments. This will change in 2021. So what we can clearly see is that we have some product lines with weaker-than-expected demands. Some product lines with way higher-than-expected demand. So at this point, I would say if we have the net-net perspective that like about if -- we still see this significant growth coming from the additional demands, whereas those instrument lines with weaker-than-expected demands are actually fairly minor. But it's no longer the case that this only applies for things like immune hematology. In the meantime, we see some declining growth rates in hematology, which were actually fairly high at the beginning of the year. I think it's actually more or less the thing of the priorities of our customers rather than -- which means customers with the COVID business are certainly focusing all their resources into their COVID business. And those ones who don't have a COVID business are focusing their activities in their regular course of business, which makes the overall thing like a little bit more in transparent. However, on a net-net basis, I think it makes absolute sense to talk about high-growth rates in uninterrupted high demands. Talking about new projects. And again, this is a question of priorities of our customers. Literally, all those customers we are talking about have an existing COVID-19 business, which means their activities into a new product development like testing prototypes also is not as expected. That's why I would expect on a long term, literally in each of our projects, about 3 to 6 months delay, which doesn't worry me at all. But I think it is important to understand that our customers are prioritizing things. And certainly, the current COVID business has priority versus things which will only hit the market in 2 or 3 years from now. We still have means and measures to catch up, but I think it's obvious that there are certain project phases like requirements' definition or deriving specification from requirements or architectural work. Or at the end of the development cycle, mainly software work is being -- or is representing work, which can be done nicely remotely. And there are other phases where products have to be tested or assay integration phase, where certainly hands-on work is required, and which is a common approach between us and our customers. And these are particular dose products, which are seeing some delays. I hope that answers your question, Oliver.
It's perfect. If I can just squeeze one in. I mean do you have any visibility or idea what your clients are telling you, when is this kind of peak demand coming to an end? I mean is it the second quarter? Or are your clients also seeing like they have prioritized their allocations to certain regions? So certain regions are still underserved, and this may still carry into the second half of next year. And if you have one word on the sustainable tax rate beyond 2020, that would be great.
Yes, absolutely. So talking to our customers, certainly, at the beginning of the pandemic, they were worried that this might be a spike and might come back to normal very soon. Now talking to our customers, they see a lot of elements, which is actually driving this business even beyond 2022. It's not just the perception of diagnostics. It's certainly the availability of testing capacities will lead to an overall change of when and where screening is taking place for certain applications, then certainly, replacement business. So let me say, talking to my customers, and I'm actually talking to our customers literally on a weekly basis, they all expect that the -- these high demands will not end mid-2021. It will take us into 2022, and I think the overall demand will continue to be fairly high. Just bear with me. This is the starting of flu season, which means a lot of our customers have developed respiratory panels to distinguish COVID from flu patients, which means we have, let me say, tests coming along with COVID testing, which means -- like in Central Europe, the number of flu tests is going through the roof as well, which requires additional capacities. Same thing applies for certain organ diseases coming along with COVID infections, which means this number of tests is going up as well. And we don't expect that these additional demands will be interrupted soon. Tax rate was low, mainly because of the relevant geographical territories, where the additional revenues coming from COVID are made. And actually, we would certainly not expect to keep the tax rate on the level, we have been after 9 months. But certainly, not getting back to the historical level soon. So a fairly low level. Again, not getting back to the historical level soon, but certainly not staying on the level we have seen after 9 months in 2020.
[Operator Instructions] Your next question comes from the line of Michael Heider with Warburg Research.
And I think -- I mean, you have already elaborated a bit on this, but we have seen -- not recently, we have seen that antigen rapid tests have been entering into the market. And I think you've already mentioned that you don't feel that these tests really have a big impact on the PCR test. However, now our question here is, I believe that these tests, firstly, will be pushed into the market in a very, very high quantity going forward. And secondly, maybe the sensitivity of these tests will get better going forward. So the question is now, do you think this will then -- or under certain circumstances will then have an impact on the PCR tests? Or do you think it will definitely always remain a second layer, so to say? That's the first question. The other question is that, hopefully, for all of us, and we hear some good news here that we should be expecting a vaccine to enter the market maybe in Q4, but probably in Q1 next year. Don't you think that this could also have some impacts on overall testing on COVID? Or do you think that this, again, would not have any impact on the overall demand?
Yes. No. Thanks, Michael, and good talking to you. Thanks for your questions. Actually, both questions are actually going in a direction where a lot of speculation has to be applied. And if you're talking to 3 experts, you will get 4 different opinions. So certainly, antigen testing plays an important role because it is actually tackling one of the most infectious period of a corona case and corona infection. However, those tests are typically confirmed in a centralized environment. Then certainly, it is scientifically impossible to get to a sensitivity with an antigen test than to a molecular test, and not all molecular tests are actually PCR-based. There are several other methods for amplification. And certainly, if you see how you can tackle infections or actually past infections on that curve starting from day 0 of the infection, so certainly, all those curves has different peaks, which means at the very forefront from a sensitivity perspective, certainly, it's molecular testing. Then slightly deferred antigen testing, and then certainly antibody testing at the very end. And all 3 methods are proving effectiveness. So I wouldn't say that necessarily one or the other is a replacement for the one or the other. It's actually just a question of how can I test? What kind of environment do I need to test? And you know how difficult it is to do like a molecular point-of-care test being available, but how difficult it is. It's certainly easier to -- with less expertise to run an antigen test like in a hospital also. And I think it is important to understand that not necessarily the different formats are cannibalizing each other. I think, actually, some are leading to additional demands. Like I said, false negative antigen test needs to be confirmed, particularly with ones in the market, currently needs to be confirmed by a molecular test, which means an antigen test typically then is leading to a molecular test later on. Actually, I think this is actually -- our isolated perspective is that vaccination through an entire population will take long, will take a while. So if we are talking to our customer, even if vaccination will get to the market in Q4 or Q1, it would not lead to an immediate shift of required resources and required capacities. What we believe certainly is that as soon as vaccination is growing, and the degree of the vaccination of the population will certainly lead to additional resources required on the antibody side, effectiveness of vaccination, a herd immunity and so on. So -- and what we believe in this is actually just mirroring what our customers are saying, vaccination will, particularly in 2021, not have a main or lead to declining additional demands coming from that side. To the contrary, I think a lot of markets and a lot of capacities currently cannot be tackled because of the fact that our resources are overutilized anyways, which means that if we manage to relieve certain resources at a certain moment in time, this will immediately lead to additional demands in other areas, geographically, testing-wise and so on. So talking to our customers, they are actually very positive about the full year 2021 as well, even taking vaccination into consideration.
Okay. Very clear. Maybe, if I may, then an additional question. So that -- if that's all true, and meaning that you place much more instruments into the market, and they have a much higher utilization, meaning that you have -- will be selling much more spare parts and have much more service and consumables and so on. So what do you think then would be a sustainable margin for -- EBIT margin -- adjusted EBIT margin for your company?
Yes. Like I said before, this is just following the natural equation of instrument placements, utilization of the equipment, and with a certain time gap in between those effects to our spare parts, service parts and maintenance parts business. So definitely, one could expect growth here, but I think it is too early to talk about the 2021 margin. I think we like particularly taking those 3 factors into consideration, which is economies of scale and manufacturing, which actually is higher utilization, and which is earlier aging of the instruments, which are utilized on a higher degree. All those effects contributing positively to our margin. I think there is still some room to improve -- for improvement. However, I think it is too early to try to quantify this.
Your next question comes from the line of Jan Koch with Deutsche Bank.
I've got 3 as well. Firstly, back to the antigen test. One of your customers has launched a lab-based antigen test last week. Could this help to ramp up the recent launch LIAISON XS system? And do you expect that the additional testing volume could increase the service parts for their respective systems? And secondly, in your prepared remarks, you mentioned that you have launched a serial production for smart consumables for one of your clients. Could you please explain this in more detail, especially with regard to the potential of these products? And lastly, a growing number of studies show that COVID not only affects the lungs, but also other organs. And with almost 50 million confirmed cases worldwide and no end in sight, do you expect these people to drive future growth in diagnostics? And if so, how could you benefit from this additional demand?
Yes. Jan, thanks very much, and good talking to you. Thanks for your questions. 100% right that one of our customers, last week, launched an antigen test for smaller laboratories like in one case of the instrument families we are offering, like for bigger general practices, smaller hospitals, same tests running on a bigger machine for more centralized laboratories or bigger laboratories. And this means a clear yes and yes. We are expecting additional demands coming from that in our chemiluminescence immunoassay business, which actually showed already some nice growth rates in 2020. Coming from those effects, the customer was actually one of the first ones offering an antibody test. And actually, already the run rates in Q2 and in Q3 were satisfying, and we are moving forward with these uninterrupted high run rates. Then you're 100% right. COVID is causing an effect in other organs, I already mentioned that, which is leading to an overall higher diagnostics volume, not just the case I mentioned. Like a respiratory panel, where COVID and flu is tested in parallel. Like even here, heart diseases, liver, kidney and so on, other organs are affected as well, which is leading to higher demands for more classical tests here as well. And that's actually leading to higher demand here as well. And to be honest and I forgot your second question. Can you please reiterate it for me?
Yes, sure. Regarding the smart consumables, could you explain…
Yes. Actually, we are not allowed by our customer to actually go into significant details. It's actually one of the market-leading customers for flow cytometry. And this is -- it's certainly a volume, which is in the area long term on an annual basis of like a single-digit million euro amount per year, but I think it is important to clearly show on which kind of track we are with our Smart Consumables business. When we acquired Smart Consumables, they had certainly a few bigger customers, but the majority of the revenues were generated with smaller customers. And here, it was mainly not mass production or series production. It was a lot of development work, very small lots or very -- a low run rate. And like within that period of time, we got new customers in. We managed to grow certain customers. We clearly shifted priorities and said we want to focus a little bit more on to blue chips, where certainly the investment phase, development phase, is way longer and way higher investments are required. But therefore, the economies of scale coming from mass production later on is showing like a nice effect, not only into the growth rate of the company, but even in the margin of the company. And like I said before, and like I'm saying continuously for years now is that, we are 100% convinced that our Smart Consumables business will not only contribute positively to the EBIT, but will play an accretive role to the EBIT margin to the group in the future. And that's particularly coming from this nicely scalable business. This was one of the first steps. This is not the first actual step in mass production of -- for a bigger client, but certainly, it's one of the most recent product launches where we showed that those measures are now starting to show effectiveness. And then I think I mentioned that a couple of times before that we have a big molecular program in the pipeline where Stratec Group is not only selling family of instruments, but where the actual smart consumable for the application is coming from us as well, which will then mean another significant step in that direction to go more into bigger serious volume. That it actually proves that the first generation of more complex smart consumables, which is done by the molecular companies themselves, will certainly more switch into an outsourcing solution. If you think about the overall setup in instrumentation, still about only 40% of all instruments hitting the market are actually instruments, which are developed by an outsourcing solution provider like Stratec is one. It's way, way, way worse as far as smart consumables is concerned. We are guessing that more than 95% of all smart consumables hitting market these days are actually smart consumables which are manufactured and have been designed under the control of the actual diagnostics company. And we are expecting, actually, long term, the same thing to happen, that the next generation of the products will be products which will be outsourced coming from aspects like quality management, coming from aspects like regulatory, coming from aspects like pricing, coming from aspects like know-how and so on and so forth. And that makes us believe that this will not only be a positive effect to EBIT, but will have a positive effect to growth of the company as well as being accretive to the earnings of the group. And I'm not talking about next year or the year thereafter. I'm talking like on the horizon of 5 to 10 years.
We have a follow-up question from Oliver Reinberg, Kepler Cheuvreux.
Yes. 3 follow-ups, if I may. I mean firstly, Marcus, can you say a word on automation? Obviously, the trend towards automation is significantly increasing. I think the reimbursement for PCR tests in the U.S. is probably double for the automatic one compared to a kind of a more manual process one. So I just wonder, is this a kind of pure positive for you because Hologic is in the higher throughput space? Or is there also certain headwinds because you are obviously more in the kind of mid-throughput space? And I'm not sure if cobas or other systems are taking some share of -- part of your other product portfolio? That's question number one. The second question. Just in terms of cost base, that has been depressed by the pandemic due to less travel. I guess it's not significant, but could you share with us any kind of number in terms of what kind of cost savings are not sustainable? Because these are unprecedented times. And the third question, just in the -- in the second -- in the first half of the year, you had total R&D cost of EUR 20 million, of which EUR 15 million are obviously capitalized. I actually don't see that in the investment cash flow. So I just want to weigh the bucket, but we can follow up if that's difficult to answer on this call.
Actually, I cannot answer the last question. So if you are interested, I would ask Jan to actually add a slide to the presentation, which is already available on our website. And probably, we can put that in tomorrow or the day after to answer that question if this is of interest for all of you. I certainly want -- don't want to give exclusive information to anybody, that's why we will put that. Good question, actually. So that's why we'll put it into the presentation, which will then be updated. Costs, and yes, you're 100% right, Oliver. Cost base is actually related to -- certainly, we have some additional costs here and there like -- driven by a higher ratio of people working from home. On the other side, certainly, the majority of savings is actually traveling and accommodation costs. Again, I perceive this as slightly negative because we are not traveling unnecessary, which means that we are not doing things we did previously, which means like hand-on work together with our customers on instrumentation. And that's why, like I said that before, I'm a bit worried about delays, which are, at this point, not at the surface because it affects instruments, which will only come to the market or consumables, which will only come to the market in like 2 to 3 years. But in 2 to 3 years, we will have to discuss it -- the delays were generated during this time. I think in the meantime, we -- all of us, us and our customers, switched into a mode where we can better accommodate things and that like testing can be done on 2 sites in parallel, and that information is shared. I think this is not a sustainable delay, which will add up in the course of the lockdown of the relevant. But I think, like I said before, at the beginning of the year, mainly in Q2, we certainly have caused the delays here and there. Actually, at this point, reimbursement rates for our customers is something we do not monitor at all. Thing is that, if we talk to our customers, it's certainly obvious that at this point, the deal is made by those players who is able to supply goods and products, which means if a customer of us is selling products and they are making good margin in products which -- with products which are only of "only performing 10 to 12 tests per year." And in cases where, like in the Hologic case, you mentioned that about 1,000 tests are performed or 500 tests are performed after 3 hours and a couple of thousand tests per lab shift, I think -- and I would like to mention that, again, in this case, we have to see that at this point, the additional demand is coming from the end customers. Like the laboratories are so high that our customers are all making good margin and that they are not trading fully automated equipment against nonfully automated equipment. I think everything which is available, which is approved and where the customers are actually then showing nice traction, and the end customers are taking those products is actually perceived fairly well.
The next question comes from the line of Michael Healy with Berenberg.
Marcus, I have a couple here just at the end then. So I guess with the recent spikes, it looks like you've seen this demand come through in your orders from -- governments and health care systems appear to be quite reactive to the recent spike. So is it fair to assume there's still a big market need for molecular diagnostics instruments? If we look at Hologic, how they have got a lot of government funding recently, do you expect that to trickle down to you and to help build out your capacity as well? And then if we just look at the gross margin level, where you are at the moment, is this the sort of base level we should expect going into next year given you expect this high volume to be maintained? And then maybe just one quick question, just outside of COVID and looking at animal health and Diatron, a lot of commentary around how big this market can be and how it's grown recently. Are you experiencing any significant demand in your animal health business? And how has that developed over the last couple of years? And how do you expect that to move forward? And how does that contribute to revenue and margin?
Yes. Yes, thanks, Michael. And again, good talking to you. We haven't talked for a while. Definitely, we -- the capacities being built in molecular diagnostics through this pandemic will lead to an overall or will be an overall game changer that we will see more and more and more molecular tests in the future, that we will see methods to develop molecular tests faster and faster. And you probably saw how fast it went in this case to develop PCR or TMA-based tests, multiplexing tests. So I think we will see a nice business here coming from that. There is an overall game-changing mechanism ongoing here in molecular testing, no doubt about that. At this point, we don't think that this will cannibalize immunoassay testing in parallel, but certainly, long term, it's obvious that a lot of testing will, as prices are coming down over time, no doubt, will -- like particularly infectious diseases or sexually transmitted diseases, will move from immunoassay testing over and over into molecular testing. But all assuming like -- either elements like higher specificity or higher sensitivity in the molecular side or actually acceptable pricing. These are things which are coming in parallel. So I'm actually expecting not only for Hologic, even for our other molecular customers and for the overall molecular diagnostic market, like certain tailwinds over the next years, no doubt about that. On the veterinary side, again, this was part of our diversification plan when we acquired Diatron back in 2015, '16 to diversify our business. This is not only a diversification in the direction of hematology, where we have gained a nice share, where we are playing an important role in certain areas of that market, but even here, as veterinary and clinical testing is actually very close, these are similar instruments with different kinds of software libraries. We saw a nice upswing. And in the meantime, about 30% of our Diatron business is actually veterinary business accelerating faster than our other hematological business, which, again, proves our thesis that it is important to invest in those markets as well, particularly if they have similarities with the clinical markets.
Okay. And just on the question on Hologic and the funding, do you expect to receive any investment and just gross margin for next year, similar level to this year?
Actually, I think a real partnership is actually how it has some attributes, which means that not just because, a, is getting more money that we are asking, a, to give us more money. I think if we do things properly, we will have the long-time benefits. If we are ramping up properly, if we keep costs under control, if we are trying to keep our supplier base under control, if we are actually manufacturing on a scalable level, we are -- even if we have, in some areas, higher costs through economies of scale, we can achieve better margin. And that's actually our path forward. It's not to try. Certainly, if applicable, we are trying to get governmental funding, but this is actually the degree how Hologic or other partners have started good governmental funding has nothing to do with us and will not be transferred. That's for assay development and particularly for the ramp-up of the manufacturing of the assay develop -- manufacturing capacities, has nothing to do with us.
And there are no further questions on the line. I hand back to Marcus Wolfinger for closing comments.
Yes. Thanks, Emma. This gets us to the end of the presentation for our Q3 and 9 months figures of the year 2020. If you have any follow-up questions, please do not hesitate to call us or get with us in touch through e-mail or social media. If there is anything else, please do not hesitate to call us. I would like to thank you for your interest in Stratec, and I would like to wish you a good day. And please stay healthy and stay safe. Thanks very much. Have a good day.
Ladies and gentlemen, the conference has concluded, and you may disconnect your telephone. Thanks for joining, and have a pleasant day. Goodbye.