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Edited Transcript of RECI B.ST earnings conference call or presentation 25-Jul-19 8:00am GMT

Q2 2019 Recipharm AB (publ) Earnings Call

Jordbro Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Recipharm AB (publ) earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Thomas Eldered

Recipharm AB (publ) - CEO, President & Director

* Tobias Hägglöv

Recipharm AB (publ) - CFO

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Conference Call Participants

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* Arsene Guekam

Kepler Cheuvreux, Research Division - Senior Equity Research Analyst

* Daniel Albin

Danske Bank Markets Equity Research - Research Analyst

* Johan Unnerus

Pareto Securities, Research Division - Analyst

* Kristofer Liljeberg-Svensson

Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst

* Patrik Ling

DNB Markets, Research Division - Senior Analyst Healthcare

* Peter Sehested

Handelsbanken Capital Markets AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the interim report January to June, 2019. Today I'm pleased to present Thomas Eldered, CEO; and Tobias Hägglöv, CFO. (Operator Instructions)

I will now hand you over to Thomas Eldered, please begin your meeting.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [2]

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Thank you, Annika, and good morning, everyone. Thank you for joining us today for this presentation of our second quarter interim results.

We're today reporting steady progress towards our overall targets, as we have done for the last 6 quarters. Considering that we had a somewhat challenging comparison in the second quarter 2018, which was actually one of our strongest quarters ever. I'm pleased with our performance improvements during this quarter.

We are reporting sales of almost SEK 1.9 billion, the increase of 10%, basically driven by acquisitions. We show a stronger improvement in EBITDA, 15% improvement over the very strong second quarter last year, SEK 354 million.

Margins -- EBITDA margin of 19%. And here we should keep in mind perhaps that 1.2 percentage points are coming from changed accounting standards. But still, we are almost at par with that EBITDA margin of the strong quarter last year.

Profit after tax, significant improvement of 38%. We show strong improvements in cash flow, and here we are reporting SEK 259 million after working capital changes compared to the SEK 119 million last year. And we also show good improvements in return on measures, return on capital and return on equity. We're reporting here 4.1% compared to 2.2% last year. Earnings per share increased as well, 22% from SEK 1.13 to SEK 1.38 per share.

If we look at business, such, we are seeing an increased business momentum in basically all the segments of the business, and are clearly benefiting from our global reach and our attractive value propositioned customers. We see good and increasing demand in particular for inhalation and lyophilization technologies. We see very good performance in the newly acquired operations in Holmes Chapel, that continues. We have done and we are continuing to do a ramp-up of the recently expanded capacities, and that continues according to our plans.

Serialization project, which we have worked with -- for many years, it's now nearly fully implemented, and we see very good effects of that as well during the second quarter. We will continue to see that as well going forward.

We had underperformance in our non-lyophilized injectables and oral solids segments or products, technologies, and this is in spite of a good or stable demand of these products, and in fact, very good demand in some cases. This is basically due to internal reasons. And I think we know exactly how to deal with this. This is something that we will do in the near future.

Global development services performed very well. And we continue to improve our development services and they contribute both to the D&T segment but also to the overall performance of the group.

End of operations in 2 facilities in U.K. and Sweden, that we have announced earlier on. That's progressing as planned, and they will both be closed during next year.

We have seen very good inflow of opportunities to offer new business to both to current and to new customers. And I clearly think this is a result of the -- of our value proposition that we have and the position we have in the market. And we are working with several promising new products in tech-transfer, mainly in the solids area but also in other areas in particular for lyophilization.

If we look a little bit closer to our segments and step back and look at a longer time period here, this is showing the performance on a 12-month basis for all 3 reporting segments. As you can see here, it's pretty stable performance-wise, margin-wise, it's reasonably stable as well. We see good growth in the Steriles & Inhalation over this 12-month period. In this segment, it's partly or to a large extent driven by acquisition so far. Solids & Others has had a great organic growth over this time period. We think that will be somewhat slower going forward. Development & Technology is very stable from a growth perspective, and also have had a slight increase in the margins here over this time period.

What I think is giving us comfort for -- going forward is that when we look at the margins for the second quarter and also for the year-to-date, second quarter this year, they are all at par or in most cases, quite a bit higher than these 12-months margin. So what I'm saying with this picture is that we have had a fairly stable development so far, but we are seeing very significant improvements margin, and also we will continue to see improvements in growth -- organic growth going forward.

Looking at sales in different geographies. We see a very strong increase in some of the smaller geographies, where we are operating, in particular, that goes for Israel and U.S.A, of course, starting from a very low base. We also see continued good growth in India, in particular, in the development part there that we have in Bangalore. And also we see very good growth in Spain, continuing Portugal as well, a very good market for us. Whereas we have the somewhat weaker market geographies in Italy and France. And this is to a large extent caused by the underperformance in the non-lyophilized injectables.

In Sweden, we are affected by then -- of course, the closure, end of operations in Stockholm, but also of the underperformance in some of the oral solids.

U.K., excluding acquisitions, is of course also gradually fading out, as we are closing that site.

So with that, I'd like to hand over the call to Tobias, our CFO.

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Tobias Hägglöv, Recipharm AB (publ) - CFO [3]

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Thank you, Thomas. In the second quarter, we reported sales growth of 10% in total. Our acquisitions or the operations in Holmes Chapel, which Thomas has mentioned, contributed with 11 percentage points.

Currency FX exchange rate had a favorable impact of 2 percentage points, and finally, we had an organic decline of 4%. EBITDA, then, increased to SEK 354 million, corresponding to a margin of 19%.

Comparing to the second quarter of 2018, the new accounting standard, IFRS 16, had a favorable impact on EBITDA of SEK 23 million corresponding to a positive EBITDA margin contribution of 1.2 percentage points.

Our improved free cash flow was driven by better development on working capital combined with the continued low level of investment, which has strengthened our balance sheet and improved our key ratios. Finally, adjusting for nonrecurring items in the second quarter of 2018, earnings per share increased driven by higher earnings.

Let's turn page and look into the quarter in more detail. Moving over to the EBITDA bridge. Our SEK 47 million earnings improvement was the result of higher earnings in Steriles & Inhalation as well as in the Development & Technology segment, partially offset by lower earnings in Solids & Others.

Let's look into the financial development of these segments. Let's begin with Steriles & Inhalation. Sales and EBITDA increased by 32% and 28%, respectively, driven by the acquisitions of the operations in Holmes Chapel. The slight organic EBITDA decline was caused by higher production cost in 1 facility in Italy, technically issues in 1 facility in France, partially compensated by good sales contribution across several other facilities.

Let's turn page. Sales declined organically by 6% in Solids & Others, caused by sales phasing relating to change of product ownership and machine breakdown in 1 facility. EBITDA declined by SEK 13 million in the quarter, lower sales and we mentioned the machine breakdown in this facility combined with higher tech-transfer and scale-up expenses were partially offset by higher earnings in Spain. Let's turn page.

Organically our sales in Development & Technology remained flat in the quarter. We had growth in API deliveries and Development Services, and these were offset by lower sales of our own products. Our EBITDA increased to SEK 90 million in the quarter, mainly driven by higher API deliveries and a better product mix.

Now let's turn page and look into the cash flow in the second quarter. Our free cash flow improved substantially in the second quarter, mainly driven by better development of the net operating working capital.

Business combinations in the quarter related to payment of inventories, related to the acquisitions, the operations in Holmes Chapel. Last year's net cash flow was positively impacted by the divestment of Thyrosafe. Following the solid cash flow and higher earnings, our net debt to EBITDA declined.

Over to you, Thomas.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [4]

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Thank you, Tobias. And let's have a look at our targets. We are well on track to reach our targets. And start to look at target of reaching at least SEK 8 billion in sales by 2020. We are showing good increase here in the second quarter and the year so far. And we are above the line -- the growth line to reach this SEK 8 billion. We actually expect the second half of the year to take us even further above this growth line, SEK 8 billion.

The EBITDA margin of at least 16%. And here we are considering -- not considering the IFRS 16 effects of the changed accounting standard. So these are numbers excluding that. I think we get some comfort here to reach that target by seeing the 17.8% that we had in the second quarter, the 16.3% that we have so far in the year. And also looking at the continuing operations on a 12-months basis, where we are almost at the target, we are here saying 15.8%.

Net-debt-to-equity ratio, less than 0.8%, we are well in line and comfortably achieving that better than actually. We will reach an even better level as we go. Dividend is of course in line with our targets. So in summary, we are reporting steady progress towards our targets. We are seeing clear benefit from our global reach and competitive value proposition. We have well invested in attractive and high-demand areas. We see a growing demand from current and new customers, which is very promising for the future. We are reporting sales growth and EBITDA growth that is higher than the sales growth, and we expect that to continue.

We have the organic growth, which is set to improve during the -- already during the second half of the year. And then we see strong cash flow and reduced CapEx, and we also expect that to continue in the near to midterm. And we see improved performance metrics in line to return on capital, return on equity, earnings per share and several other KPIs. And we have a very promising project pipeline both in discussions with customers, and also ongoing tech-transfers in various areas.

So with that, I would like to hand over to Annika, again, for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [2]

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I have 3 questions. First on your comments about accelerating organic sales growth. If you could explain the drivers for that, and also the timing? Is this something we should see now already in the second half of the year, considering that year-over-year comparison gets a little bit easier also? Then I wonder if you could spend a few more or give a little bit more color on the segments where you have underperformed? And why you're confident that will improve, and also the timing? Is that something that will help already in the third quarter? And I'm just curious to hear your comment on this payment you did for inventories in Holmes Chapel, why that is coming now in the second quarter? I think I'll stop there.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [3]

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Okay. Thank you, Kristofer. When it comes to accelerating organic growth, we see many reasons why that will happen. First of all, that -- the underperformance, basically the reason will be that the underperformance that we have in -- have had in non-lyophilized injectables and oral solids will improve. And that's due to several different reasons, and some of them are that we have improved our performance regarding some technical issues that we have had earlier on. And also, as Tobias was mentioning, for example, machine breakdown in one facility with certain impact. So there are many reasons why this will actually improve. And as I said as well, the comparisons -- the rest of the year, comparison quarters are not quite as challenging as they were in the second quarter.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [4]

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Could I ask that should we -- so this will help pull out in the third quarter?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [5]

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Yes.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [6]

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Okay. And to reach the SEK 8 billion space next year, would you agree that you need to have, like, let's say, 7%, 8%, may be 9% organic sales growth for this year and next year?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [7]

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As I showed you in the second to last slide, we could see the -- let's say, the trajectory from 2018 to 2020 on a 12-month basis. How -- what sort of sales we need to achieve to reach that. And we are above that line -- slightly above that line. We think we will be more above the line during the second half of the year.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [8]

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Okay. But I guess, for this year, of course, you're helped by the Holmes Chapel acquisition. And you have said the target is without any new core routes or new acquisitions. So to continue to be on that line, we need to see a pretty steep improvement of organic growth at least next year?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [9]

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Correct.

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Operator [10]

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The next question comes from the line of...

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Tobias Hägglöv, Recipharm AB (publ) - CFO [11]

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Sorry, I think he had a third question as well that I want to answer regarding the payments related to the Holmes Chapel acquisition here. And what actually happened here in the second quarter was that we paid for the inventories and this was a core mutual agreement, when we acquired the company. So it's 50% now and 50% will be paid in the fourth quarter of the 2019.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [12]

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Okay. But this was included in the initial...

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [13]

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Yes. Yes.

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Operator [14]

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The next question comes from the line of Arsene Guekam from Kepler Cheuvreux.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [15]

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Three questions, if I may. First of all, how do you explain on the underperformance of non-lyophilized injectables this quarter? Would like to know if is it punctual or more chronic or recurrent? The second question, could you make an update of the planning for the end of preparation in the 2 facilities and what did you discontinue in Q2? And the last question is on the machine breakdown. Did you fix this issue?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [16]

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Thank you, Arsene. When it comes to the underperformance in the non-lyophilized injectables. I think this is showing in -- showing up in both in France and in Italy, our facilities there. And in particular, in -- I would say in Italy we had an unfavorable cost development, I would say. And when it comes to France, we have had, as we had reported earlier as well, we have had technical issues in one of the French facilities, which is clearly affecting our performance. These are the main factors there. And these -- we know what to do to fix it, and we will fix it. But it's not necessarily a quick fix, as we have talked about in earlier quarters. But we're getting there. And we will see improvements the rest of the year.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [17]

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Okay. We'll see an improvement curve the rest of this year or next year?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [18]

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No, this year.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [19]

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Okay.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [20]

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Excuse me, I didn't take note of the second question.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [21]

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At the end of the operation, are you planning for the end of operation as well?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [22]

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Yes. That is progressing according to plan. We are -- as you have seen, we are gradually phasing out sales and customers in these 2 sites. They will be closed during next year according to plan. And they are reported, as you may have seen, in a separate segment as discontinuing operations. We expect the U.K. facility to close sometime during -- actually both facilities to close sometime during the first half next year.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [23]

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Okay. And what did you include in your press release when you talk about discontinue operation, with an impact of SEK 81 million. This is these 2 sites? That must have been -- the line, discontinue operation include the discontinuation of these 2 sites, correct?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [24]

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Correct. Yes. So it's our facility in Stockholm and this -- in Ashton, U.K.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [25]

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Okay. Just to be sure. Okay, great.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [26]

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Yes, nothing new.

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Operator [27]

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The next question comes from the line of Johan Unnerus from Pareto Securities.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [28]

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Johan Unnerus, Pareto Securities

(technical difficulty)

Q3 could be a soft question.

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Operator [29]

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Johan could you kindly repeat your question, please?

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Johan Unnerus, Pareto Securities, Research Division - Analyst [30]

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Yes, of course. The machine breakdown in Q2 in Sweden, can you confirm that it's fully addressed, and that the facility will be fully operational already in Q3?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [31]

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Yes, we can confirm. It's a breakdown. It's effected the second quarter. But it's now repaired and up and running.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [32]

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And regarding the outlook and margins in sales, it seems to be -- well, Q2 was a good margin contribution. And you have support from, obviously, IFRS, even though that's not included. And also I understand that you will have some support also from serialization. Is that going according to plan, that contribution?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [33]

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Yes, serialization is very much going according to plan. And that is actually one of the reasons why we're still reporting very good margins in some of the segments, particular in the Solids & Others segment in spite of basic underperformance in the segment.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [34]

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Yes. And also regarding the top line, which seems, like, more challenging to achieve then. You don't report new contracts as acquisition. That's part of organic growth. Is it possible to say, anything regarding the split between organic growth, apart from new contracts and the contribution from new contracts and perhaps tech-transfer, because the overall effects will have to improve quite significantly to achieve the SEK 8 billion?

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Tobias Hägglöv, Recipharm AB (publ) - CFO [35]

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Yes. But we -- I mean new contract is -- that's really an ongoing business for us. And we're talking about new contracts in our current facilities. So that is really part of our organic growth. What we are saying here is that we have a very good inflow of new contracts, which we expect to have effects next year. We are doing currently tech-transfers in a number of places. So that is perhaps negatively affecting this year's performance, but we will expect to see the benefits of it next year.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [36]

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That's useful. Is it possible also to say something about the transfer out from part of the business that is going to be closed in 2020. Are you -- can we expect half of the volumes to be transferred, or is it possible to say anything?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [37]

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Yes. We don't have any new statements regarding that. I think what you can see here is -- for instance, you see very clearly our sales in U.K, our facility there, or from our facility there, a decrease in the first half 45%, I think it was, compared to the first half last year. So we are gradually decreasing sales here. Much of it will not be transferred to other sites. It'll be discontinued business for us.

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Operator [38]

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(Operator Instructions) The next question comes from the line of Daniel Albin from Danske Bank.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [39]

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So I have a couple of questions. I wonder if you could just elaborate a bit more on where you are in terms of utilization rate at the newly built capacity in Wasserburg and also Kaysersberg. And when can we see this come through, and where are you today? That's my first question.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [40]

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Basically, when it comes to Wasserburg, we are progressing very much according to plan, when it comes to utilizing our new facilities or new capacities there. We still have some way to go before we are at the fully utilized basis, but we are getting there. I think you -- in the third quarter we will basically be at the desired level. We are seeing some other bit of underperformance, I would say, or slower development in the non-lyophilized product also in Wasserburg. But we believe that is temporary and that will change in the near to midterm. When it comes to the blow-fill-seal capacity, we are, again, following what we could call the revised plan here. We are utilizing the new capacity more and more, and we will expect that to take a little bit longer. Here we are, as we also mentioned in the first and previous quarters, we are negatively affected by customer with growings from the Turkish market. So it will take a little bit longer until we see the full effect of this expansion. But it is in the pipeline.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [41]

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Okay. And -- on working cap, if I may, can you give us some further clarity and what's behind the improvement in looking at the operating liabilities? What measures are you taking in order to improve that?

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Tobias Hägglöv, Recipharm AB (publ) - CFO [42]

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I will say, we are continuously working to manage the working capital in most efficient way and improving that. And this is following the fact that we are consolidating the acquisitions, and we are consolidating the business overall. So we are actually taking opportunities. We have to improve our processes and improve particular inventory management and also payment terms, both for customers and to suppliers. And this is an ongoing obvious work, part of the consolidation.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [43]

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Okay. And to my last question, this might be a bit more strategic, but lately, we have seen that you have participated in some -- or invested in some early stage drug development companies such as [Usafal] Xbrane and [Lately] now (inaudible) if you are right . And my question here is threefold then. So firstly, looking at these investments as a basket, what's your expected rate of -- rates of return on an annual basis? That's my first question.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [44]

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Yes. We are looking at this from a slightly different view. We are engaged in this company as part of a business relation, primarily. So we don't view them as a purely financial investment. It's part of a relation building with a potentially very interesting customer. And so we don't expect this to be really material contribution to the group's investment as such. The relation we expect, lot of benefit going forward, but the investments will not be, or we don't expect it to be a material contribution, and we don't communicate any expectations about this.

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Daniel Albin, Danske Bank Markets Equity Research - Research Analyst [45]

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Okay. And a follow-up on that one, and this might be more directed to you, Thomas. You are privately also doing some investments in early stage drug development companies such as [Damper's] pharma, for example. Isn't there a risk of a conflict of interest in between what investment you are making versus what Recipharm is doing?

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Tobias Hägglöv, Recipharm AB (publ) - CFO [46]

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No, I don't think so at all. It's completely unrelated.

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Operator [47]

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The next question comes from the line of Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [48]

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Two follow up questions. The first on the issues we have had with steriles, just to make sure I truly understand what you're saying. So it -- so that -- Italy, there you are back on track. The tech-transfers are done. And that's really helped the second half of the year. While in France there's still some way to go until this facility is fully up and running again. But we should see some sequential improvement. Is that correct?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [49]

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That is correct.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [50]

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Right. And then on the new contracts you talked about will help or be supportive for next year. Is this for existing -- or products that already -- or established products so that you will have a pretty direct positive impact, or is it more for product in launch phase or about to be launched. So this will only be small and then gradual positive impact?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [51]

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It's actually both. And we see new contracts in both areas. Both product on a neutral market and product that are undergoing tech-transfer from somebody else. The combination I think will be material contribution to our performance next year from both types.

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Operator [52]

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(Operator Instructions) The next question comes from the line of Patrik Ling from DNB Markets.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [53]

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We talked a little bit about organic development and what you're doing to improve that going forward. Could you also address a little bit when it comes to the EBITDA impact because organically it's 10% down for the first half compared to the first half last year. What measures you are taking to actually get that turned around?

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Tobias Hägglöv, Recipharm AB (publ) - CFO [54]

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Yes. I can answer that question. I think there is -- I think as Thomas mentioned, we see better progress here, and that goes for sales as well as profitability. And obviously, as we answered in most previous questions, we see an overall better progress of efficiencies here. And you can mention this particular item, but you can also see that we are overall addressing both in terms of cost structure versus sales as well as that the -- also that we see a sequential improvement of sales that will also contribute not only to high profit but also to high profitability.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [55]

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Okay. But when you, for example, mentioned that you have had cost issues in Italy and so on. Is that something that has been temporarily or is that something that you will suffer from going forward as well?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [56]

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I think -- Yes, I think we have actually continued good progress, and that we -- as Thomas mentioned, the Italy -- that goes specific to Italy, specific, has substantially improved here. While France will take a little bit longer. Then there will always be items coming up. We're a production company, and I think in general, we actually performed very well. But there will be items. But the overall trend and the overall direction is good. And that -- we see a clear confidence in what we are doing here.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [57]

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So when we stand at the end of this year, would you say that it's likely that organic EBITDA will be positive or will it be neutral or negative for the full year?

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Tobias Hägglöv, Recipharm AB (publ) - CFO [58]

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It's our ambition to improve it for sure.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [59]

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Okay. Good. Then last question, and what's -- may be a little bit just of a housekeeping question. But -- you mentioned that serialization is almost fully implemented now. May be you could mention what type of impact you will have on sort of an annual run-rate on sales? How much will actually serialization add to your top line. And may be also you can say something about the margins?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [60]

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What we have communicated regarding serialization is that we have the total investments, and that total CapEx spend was about EUR 35 million. And we expect this one to be very much sort of profitable investment for us, and well in line with any improvements in return measures and so on.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [61]

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And what type of return measures do you use when you evaluate an investment like this?

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Tobias Hägglöv, Recipharm AB (publ) - CFO [62]

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I think the general one. I mean there is no rocket science, but obviously, that we should have return way exceeding the profits that's all. And then we are also looking for other metrics, I mean, when the cash flows streams are coming in terms of perfect timing (inaudible). No rocket science, the -- I think the general metrics which are more or less every company use. And -- but there should be a good value out of it for sure.

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Operator [63]

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(Operator Instructions) The next question comes from the line of Peter Sehested from Handelsbanken.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [64]

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It's Peter from Handelsbanken. I have 2, the first one relates to the SEK 8 billion sales target. Just some stuff here, I simply cannot add up here. You're saying that the bulk of the organic growth impact will come from 2020 due to this pipeline of encouraging opportunities you talked about. On the other hand, you're also saying that you'll be above the trend by the end of the year despite we're heading into a sort of weak-ish Q3. So the only way I can interpret this is that you're going to make an acquisition here by the -- before the end of the year that will make you -- take you above that trend that we're seeing right now. And my second question relates to some of a more strategic stuff, but could you -- or do you -- can you say anything about how large of the portion of your total sales, for which the margin is -- EBITDA margin is below 16%, and for which organic growth is below what you consider to be, let's say, satisfactory, and which has the potential from the numbers efficiency perspective to be sort of divested or sold off or shut down over the next couple of years?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [65]

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Yes. I must confirm here that we are expecting to reach our SEK 8 billion sales target by next year without any further acquisitions. And that is -- I mean we have considered a sale. We have a weak third quarter, if you look at it like that. But that's a seasonally weak third quarter, and that's always the case. We still believe that we will perform -- improve performance compared to the second half of last year, of course, for both third and fourth quarter then of course. So as you say, we are expecting organic growth to pick up during even further next year, but we also expect it to pick up during the rest of this year. So that will take us quite a bit along the way. And then we will see the rest happening next year. When it comes to the organic growth, I think it's well worth to keep in mind that we have a very large share of barely mature products in our portfolio. So if we don't add new projects to our portfolio, we will have a very low organic growth. It will be fairly stable and -- fairly stable sales going forward. So the growth is typically coming from the new products that we have, products that are new to the markets which is still a smaller share of the total sales. And adding new projects, new customers, or new projects for current customers. It will particularly impact next year.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [66]

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But could you say anything about -- my question was leading to that part of total sales for which there was both, let's say, unsatisfactory organic growth as well as EBITDA margins below 16%. If you sort of put matrix of organic growth one way and EBITDA margin the other way. I mean there must be some kind of pockets, which from, let's say, strategic point of view, are simply not worth having. And could you just get a sense for how large a fraction of total share that's part of the business is?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [67]

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What I can say is that even though that many of the products we produce don't have a growth as such, that doesn't necessarily mean that they are unsatisfactory for us. It's still a very good predictable, very high visibility type of products that we have our manufacturing. So we don't think they are necessarily low performing or anything like that. When it comes to share of sales that have a lower margin, I can only say that this remind you of the picture showed about the segment as such where you could see that we have for the last 12, latest 12 months in Solids and others, we had an EBITDA margin of 15% for the whole segment. So this is clearly the lower segment, it's better now this year, better now in year-to-date, and it's better in the Q2 but again, that could serve us an indication of somewhat lower segment business that we have. We are, it's a combination, when we're talking about the 16% target, it's of course a combination of average for the whole group. We are having several products with lower margins and we have a number of products with higher margins of course. Mix is what we are measuring. We are addressing the poorest performing products and the poor performing products that we don't think have a place. And we are addressing that by closing the 2 sites in U.K. and Sweden.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [68]

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This is just -- if I could just throw in a final question. It's relating to the individual cost items excluding depreciation, amortization i.e. raw materials and all the external costs and employee expense. Could you add -- give some flavor for the potential for efficiency improvements across these 3 line items over the next couple of years? Could we -- is there any of these where there is hope for let's say efficiency improvements?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [69]

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Yes, there is certainly hope for efficiency improvements. And part of it will come, if you look at the total picture, part of it will come from the discontinuing operations that we are closing out. But also -- I mean the margin improvement and us reaching the -- our targets here. Part of it is, of course, also from -- it's not only improved sales and new projects, it also partly due to efficiency improvements.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [70]

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But could you say to which of these line items we should expect to see any kind of bettering. Is it mainly the employee expense line, which as you know a relatively heavy in your overall cost picture or is it the raw materials or the external costs?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [71]

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No. We are not commenting on that.

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Operator [72]

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The next question comes from the line of Arsene Guekam from Kepler Cheuvreux.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [73]

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Just a quick question. From my understanding, I would like to clarify something. As you plan to discontinue some operation in 2020, I would like to know if you're 2020 objectives in term of sales on the EBITDA include these discontinuation of operation or not?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [74]

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Our 2020 targets are set for the total group. They are included.

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Tobias Hägglöv, Recipharm AB (publ) - CFO [75]

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They are included, yes.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [76]

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They are included to the extent they are still part of the group.

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Arsene Guekam, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [77]

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Yes. Okay, okay. So in your forecast you include -- just to be sure, you include this operation. Okay, great.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [78]

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And that goes for both sales and margin.

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Operator [79]

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(Operator Instructions) There are no further questions at this point. I'll hand the conference back to the speakers.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [80]

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Okay, thank you very much for spending this time together with us. And I wish you a continuing good day. Thank you.