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Edited Transcript of RECI B.ST earnings conference call or presentation 7-Nov-19 9:00am GMT

Q3 2019 Recipharm AB (publ) Earnings Call

Jordbro Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Recipharm AB (publ) earnings conference call or presentation Thursday, November 7, 2019 at 9:00:00am 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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* Harry Thomas d'Alton Sephton

Jefferies LLC, Research Division - Equity 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 September 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, everybody, and thank you for joining us today for this presentation of our third quarter interim report. Actually, in spite of this being as normal, the weakest quarter of the year, the third quarter due to maintenance shutdowns and holiday shutdowns we're actually reporting what is one of our best quarters ever, and it's definitely the best third quarter ever. We have a strong increase in sales, 26%, EBITDA even stronger, 87% increase. And we also have an unusually strong margin in the quarter. And we are making a positive profit after tax as well, which we usually don't do in the third quarter. It's here, SEK 81 million. And I'm particularly pleased with the cash flow that continues to be very strong in this quarter. We maintain a very stable, almost flat working capital. So also after working capital changes, we have a strong increase in the cash flow as well. As well as the profitability measures like return on equity, return on operating capital and so on. Here we see a return on equity is almost twice as high as it was a year ago. And we (inaudible) show good earnings per share, good solid profit there. And we look for a moment, why that is? And we see a clear business momentum here increasing very much according to our expectations in advance and we can see strong growth in all 3 reporting segments and in all geographies where we operate. We have implemented several new projects, in particular in the Solids & Others segment. There are new projects here that are bringing us good benefits and good growth. And our Global development services, they continue to perform very well. And they provide now a material contribution to the development and Technology segment. In particular, we have continued here to see as well, good performance in the newly acquired operations. Inhalation operations in Holmes Chapel that we acquired 1st of October last year. And of the SEK 58 million in EBITDA that we generated here, about SEK 15 million of this is a benefit from customers building stock in anticipation of Brexit. So it's perhaps a temporary thing here. But also, excluding that stock building effect, we see a good performance this year.

We are continuing to ramp up the expanded capacities that we have expanded over the last 3 years. Serialization is now fully implemented, is also contributing to the profit. We still have some underperformance in the non-lyophilized injectables section as a part of the Steriles & Inhalation segment. It's partly due to technical issues and partly due to weaker demand, temporary weaker demand. We believe this is progressing and improvement in our ongoing unless very much following our improvement plan as is the end of operations in the 2 facilities. It's going on very much according to plan, and we see a step-wise downsizing of the operational activities in those 2 sites. They will be closed according to plan by mid-year next year.

Our offer log offers out in the market to new customers or current customers for new projects continues to increase, and we now have it at record levels, which is very promising for the future. And we also have several promising new products already in tech transfer, which will have a material impact for next year.

If you look at the growth in the third quarter, the sales growth in the third quarter, excluding acquisitions here. We can see that we have very good growth almost everywhere. But some of the smaller units like in Israel, I mean, have a very strong growth. It's a little bit slower in the U.S. now, but still bit of catching the breath there after a very strong growth earlier in the year. But also the big market, big countries where we operate like Portugal, Spain, Italy, are performing very well, a bit weaker in Sweden and U.K. U.K. is affected, of course, also in Sweden by this end of operations in the 2 facilities.

We also continue to see very good growth in India, 14% here in the quarter. And that is actually bringing us to a situation where we're starting to saturate the capacity particularly in the injectable manufacturing. And that is one reason why we announced after the period-end here. We recently announced a new partnership in India, which will provide a very high-quality injectable dose for manufacturing facility or capacity in India. That we expect to be compliant with all the international regulatory requirements, would be necessary. This is an investment for us of SEK 110 million, and it will take a few years before -- for -- till it's fully operational. This will happen in 2022 per the plan. But then, it will provide us access to high-quality injectables manufacturing capacity with a very attractive cost level. And this is again extending a collaboration with the Indian Sobti family that we have already long term, very successful collaboration with. So with that, I would like to turn over to our CFO, Tobias. Please?

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

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Thank you, Thomas. And just as Thomas said, in the third quarter, we reported a sales growth of 26% in total. And if you look at the split up here, our acquisitions of the operations in Holmes Chapel contributed with 13 percentage points. We had a continued help by currency exchange rates, which had a favorable impact of 3 percentage points. And finally, we had an organic growth of 11%.

EBITDA increased to SEK 282 million, corresponding to an EBITDA margin of 15.7%. And by this, we have reached a year-to-date EBITDA margin of close to 17%. Comparing to the third quarter of 2018, the new accounting standard, IFRS 16 had a favorable impact on EBITDA of SEK 24 million corresponding to a positive EBITDA margin of 1.3 percentage points. Free cash flow declined somewhat compared to Q3 last year, but we are considerably above looking at the year-to-date numbers with the continued unchanged working capital despite the strong sales growth.

Finally, adjusting for nonrecurring items in Q3 2019, earnings per share increased substantially, driven by higher earnings.

Let's turn page and look into the third quarter more in detail. Moving over then to the EBITDA bridge. Our SEK 131 million earning improvement is a result of higher earnings in all our operating segments. In the third quarter, Steriles & Inhalation contributed with SEK 57 million earnings improvement, Solids & Others were SEK 47 million and Development & Technology with SEK 37 million.

Now if we turn page and look into the financial development a little bit closer by segment.

Let's begin then with Steriles & Inhalation, sales and EBITDA increased by 42% and 54% respectively. The sales growth was driven by a combination of higher sales of injectables and a continued strong contribution from our acquired plant in Holmes Chapel. And just as well as for sales, our operations in Holmes Chapel contributed strongly to a favorable earnings development as well. Organically, EBITDA was impacted by technical issues in one facility in France partially then compensated by improved product mix and higher cost efficiency in the segment. Let's turn page.

Looking then into Solid & Others. And we had a sales growth of 18%, while EBITDA nearly doubled. And this was a result of higher sales volumes in combination with price increases. Turn page.

Looking into Development & Technology then. Higher Sales of APIs and development services led to an organic sales growth of 16% for the segment. Compared to previous year, EBITDA more than doubled in effect from strong API performance and improved product mix as well as price increases.

Now let's turn page and look into the cash flow in the third quarter. Our free cash flow declined somewhat in the third quarter year-over-year, mainly due to a strong reduction in working capital and exceptional low investment level in Q3 2018. For the first 9 months, however, Recipharm has substantially improved free cash flow compared to previous year. Net operating working capital continued to be around flat despite the strong sales growth we see. In line with previous communication, expansion CapEx continued to be on a low level, and our cash flow after investing activities was further helped by divestment of the financial assets.

The strong cash flow continues to strengthen our balance sheet and the net debt-to-EBITDA ratio has declined to 3.2%. This is below last year despite the payments we've had for our newly acquired operations in Holmes Chapel. Over to you, Thomas.

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

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Thank you very much, Tobias. If we look to our overall targets. We are well on track to reach our targets. If you look at the sales target of SEK 8 billion by next year, we are above the trajectory from 2018 to 2020. And with this strong increase we had in the third quarter and also 20% base increase that we've had so far for the last 12 months. The EBITDA margin of at least 16%, which is now for the -- adjusted for the IFRS 16 effect. It's for the year-to-date now, 15.7%, and the last 12 months was 15.8%. We still aim to reach a target by this year and we will, of course, have it next year. Net debt-to-equity ratio of less than 0.8%, this is 0.7%. The dividend policy remains the same. We remain -- our overall targets remain unchanged.

And in summary, look at the third quarter here, we are clearly benefiting from our global reach and our competitive value proposition. We are well-invested in attractive high-demand areas. We see a growing demand from current and new customers. We have seen in this quarter a very strong sales growth and even stronger EBITDA growth. And we will -- we believe we have seen also in this quarter, double-digit organic growth, and that is something we like to see continue as well as strong growth. Strong cash flow and reduced CapEx are certainly helping to improve our balance sheet. We have improved, just about every KPI or measure we have and our performance is improving, and we have a very promising project pipeline, (inaudible) good opportunities going forward. And we also can see a number of highly accretive acquisition opportunities that we are now able to review more closely. So with that, I would just like to say that we are happy to take your questions. And thank you very much.

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Operator [5]

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(Operator Instructions). The first question comes from the line of Harry Sephton from Jefferies.

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Harry Thomas d'Alton Sephton, Jefferies LLC, Research Division - Equity Analyst [6]

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I just have a few, please. So starting with Holmes Chapel inhalation facility. Even when you take into account some of the stocking that you disclosed from Brexit, the contribution margin there seems to look very strong in the third quarter. Does this site have the same holiday shutdowns and maintenance shutdowns that are typical with the rest of the business? I just want to really understand why the profitability was so much higher for the Holmes Chapel facility individually in the third quarter of this year? Then secondly, a few questions on the India partnership, if I may. So how will that partnership work for you individually? Will you be able to prioritize your customer contracts for that new facility? And will you be able to add some new injectable manufacturing capabilities that you don't already have? Or is it purely based on increasing your capacity?

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

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Yes. First of all, Holmes Chapel, I think you may be right there. They have definitely much less holiday shutdown, much shorter in Holmes Chapel than we have in the other European sites. So this is basically an exception from this scenario. So you're right. It's more or less a normal quarter for Holmes Chapel, I would say, without -- or adjusting for the Brexit effect, of course. When it comes to India, we will get a broad range of injectable technologies here, and it's actually -- it will add some technologies that we don't or some forms that we don't have necessarily today or have very little capacity for today. So it will add -- it will both broaden the range that we can offer to customers as well as offer more capacity, of course. And we will have a good -- good influence on the projects that are to be implemented in this facility. But we don't have to carry the management responsibility for operations. I think it's a very good combination here.

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Harry Thomas d'Alton Sephton, Jefferies LLC, Research Division - Equity Analyst [8]

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And just to follow-up on that. Will the influence that you have on what can be prioritized capacity-wise for that facility be determined by whether you take up the extra I think it was -- I think you disclosed about 12% that you can increase your ownership in 2021.

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

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I think this is an option to increase by 16%. And we will have about 1.5 years to evaluate to what extent we want to do that. But if everything goes according to plan, we will take up that.

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Operator [10]

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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 [11]

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The first question is about organic growth. Of course, last year and currently benefit from the ramp-up of all capacity having been built, but could you talk a little bit more about this possibility of bringing new products to existing facilities and with the capacity you have to do that? And also, that leads us into the CapEx needs if we look what you would need to continue to grow organically after 2020?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [12]

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Yes. We have -- thank you, Kristofer. When it comes to capacity, we are certainly gradually increasing the utilization, I would say, in the -- both in the Steriles & Inhalation segment, we still have good availability of capacity. We are not fully using the expanded capacity that we have. And we also see in the non-lyophilized inhalation or injectable products that we -- due to the issues there -- we have quite a bit of capacity. So I don't foresee any major capacity or CapEx in this segment. When it comes to the Solids & Others segment, we have definitely a lot of available capacity. We are using it, and we can grow with, as you have seen in this quarter, we can grow quite significantly without any significant CapEx. And we actually estimate that to be possible also during next year and perhaps at least in the midterm.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [13]

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And if we look at this a bit further ahead. How much growth do you think it's realistic to assume that you could bring in from new products because this is something new. It's not something you have really had, to a large extent, at least in the past?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [14]

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Well, we've always had it actually. And -- but it varies all the time, of course, and the amount of new projects that we bring in. This is very much a result of us showing the track record we have in the industry and gaining confidence from customers. And also perhaps from some of our competitors that are not always doing so well. So that is giving us a further benefit. I think we, when it comes to growth and what we can accommodate. We still maintain our target of SEK 8 billion next year without any further acquisitions (inaudible).

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [15]

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Okay. 2 more questions. The first one is, how you manage to keep working capital flat despite the strong sales growth. And the last one related to the margin targets for this year, what do you think are the main risk now in Q4 to not reach that target?

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

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When it comes to working capital, I think this is very much a result of us having -- I mean, we did the last major acquisition we did on 1st of October last year. And it's -- the integration is going very well. And before that, it's been quite a while, in the major things. So this is a result of us getting the structures, the procedures, the working together and really sort of doing this day-to-day improvement that we will need to do, but it has been very successful, I definitely believe. So when it comes to the margin targets, I think, the main risk is probably that we grow too successfully in the Solids & Other segment because it has a lower margin, and it's going to bring the average margin down, if we're too successful there.

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Operator [17]

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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 [18]

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Yes, it's Peter from Handelsbanken. A bit desperate here because I was always trying to find something negative in the report, but it was actually quite good, and you hit the jackpot across all regions and business areas going forward. And so just an overall view of the report, and the key takeaways as I see it, could you give a broad level indication of how you view the sustainability of organic growth and margins. Can you tell us a little bit about the actually underlying negative impact that you had in the quarter due to the usual maintenance stuff that (inaudible) in Q3 in terms of what the comment you just added about the working capital resulting of integration, getting structures in place, et cetera, et cetera. You talk about, let's say, new acquisitions, but also that they were looking for earnings or highly accretive acquisitions. I mean, should -- historically, when you've made acquisitions, they all had a volatile, negative impact on your operations for 1, 2, 3, 4 quarters ahead. Are you saying that now you are more prepared to make, let's say, large acquisitions where we should not expect dilution volatility in earnings, organic growth, et cetera, is that how we should think about your M&A going forward.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [19]

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Okay. Thank you, Peter. When it comes to the sustainability of the organic growth, I would say that we are -- I mean, we're clearly benefiting from a somewhat soft third quarter last year. So that is helping us a bit here. But in spite of that, we also believe that we are set to have quite a higher organic growth going forward than we've seen in the recent past. So maybe not quite as high as 11%, that's an exceptionally high number, I would say. And it's partly due to the soft Q3 last year, but still a very good growth going forward, we expect. When it comes to maintenance cap. Was that a question? Sorry, sorry, Peter,

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [20]

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No, typically -- I said, Q3 is typically weak due to shutdowns and maintenance, et cetera. So the underlying negative impact on this quarter? That's -- yes.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [21]

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I think it's basically so that almost all our European, with the exception maybe of Holmes Chapel. We have a maintenance shutdown for maintenance and vacations, and it's between 2 and 4 weeks in the factory, mostly 4 weeks, actually. And that 4 weeks out of the quarter is, of course, quite an impact. So it's always so that the third quarter will be the weakest or softest in the year due to this factor. So it has an impact, right. It has no impact in India and very minimally impacted at Holmes Chapel as well. So -- but in the other facilities, you will see the impact. And this has less impact in Development & Technology as well. When it comes to new acquisitions, we prefer to comment on that when appropriate. We can only say that the balance sheet, as we see it today, really moving in the right direction here. We get a stronger financial situation. We can reduce our leverage. And that will allow us to look forward to new opportunities here when it comes to acquisitions.

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Peter Sehested, Handelsbanken Capital Markets AB, Research Division - Research Analyst [22]

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Okay. Just coming on the acquisitions. I mean, any -- can you give us any sense of direction as to where those acquisitions will be, what -- are you looking for taking new strategic directions? Are you, let's say, expecting to build up in competencies that you already have? I think that...

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [23]

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Yes, we like to build on what we already have. And that's really our main objective. We're not doing any tremendous shift in strategy here or direction. We would like to expand the successful operations that we have and build on the successes we have. So that could be in various technical areas or even in some geographies. But yes, we'll see how we could develop that.

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Operator [24]

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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 [25]

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Congratulations to a strong quarter. It's almost difficult to understand that it's your weaker quarter, but there we go. Yes, more of a character of follow-up on Holmes Chapel. As was stated before, it seems to be a very successful acquisition, surprisingly high margins, and you had some extra contribution in stocking. Is it -- should we understand it that extra volume also carries an extra high-margin contribution on that side. And but we can take that first.

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

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Thank you, Johan. And you're right, extra volume, it doesn't necessarily carry an extra price, but, of course, higher volume is beneficial for margins. So there is a partial effect of that as well in the quarter.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [27]

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Yes. And you don't perceive any need for any major CapEx generally as a group as a whole, but you also stated that part of the operation in India, it seems to approach some restrain -- constraint -- restraints and the news -- the added capacity you announced yesterday that's in place sort of '22. Can you take measures to increase capacity for part of the business in the meantime and/or acquisitions inside for any other opportunities?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [28]

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I think this new capacity and this new opportunity for manufacturing in India will come in play in a very timely fashion, a very, very suitable timing here for us. So we will be up and running basically an extremely good timing here. So I think we can manage the situation pretty well after then, and it means also that we expect to be able to continue to grow in India. But maybe at a somewhat slower pace due to the increasing the utilization so much we have now.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [29]

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And any other sort of significant contracts or the contribution that is sort of less of a sustainable nature that hasn't been directed in the quarter?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [30]

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I think that's the -- the Brexit building by customers is probably the most important one that we think is a non -- almost a nonrecurring. Or who knows about Brexit, but probably nonrecurring event.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [31]

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Yes. And finally, on D&T. Clearly, the contribution is very solid and higher than expected, especially considering that you have presumably less support from your own product sales. There's no sign of setback in this quarter for certain, how should we look at the coming years on the Development Services side?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [32]

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Development Services is clearly an area where we put a lot of effort in getting new projects, and it's very important for us because it will build the pipeline for manufacturing projects later on. And we are constantly investing at least time and to some extent, some money as well into this business. And we are very pleased with the performance that has followed. We reorganized this whole function at the beginning of last year, and it's really showing good improvement since then.

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Questions and Answers

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Operator [1]

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The next question comes from the line of Frederick Ling from DNB Markets.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [2]

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Patrik Ling here. Just a few follow-up questions, please. First, when it comes to this Brexit impact that you had in Holmes Chapel. I mean, you gave the breakout on the EBITDA line, how much you expected the stocking effect that was in the quarter. Could you also give that for the sales line, please?

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

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I think what you can say there, I mean, we have a good margin on that, so back track that to sales level -- good...

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Tobias Hägglöv, Recipharm AB (publ) - CFO [4]

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It's almost 25% of EBITDA. And it's, of course, clearly less of the sale.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [5]

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Okay, okay. Yes, okay. I'll try to work it out. Also I had a question regarding the expansion in India that you announced yesterday. When it comes to this option to acquire another 16% of the operation potentially, is the price for that option set? Or do you know already now what the price will be? Or will it be sort of negotiated at the time.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [6]

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We have not disclosed the details of the option. More than that, we will have the option to acquire 16% 2021.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [7]

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Okay. But will -- have you already negotiated some sort of formula for how to calculate what you will have to pay for it?

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Tobias Hägglöv, Recipharm AB (publ) - CFO [8]

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There are -- there are already agreed terms for this option.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [9]

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Okay, great. Good. And last question, you talked a little bit about a few tech transfers that are coming. Could you give us a little bit more color on what type of products we're talking about? Are we talking about tech transfer for products that are launched and well-established in the market already? Or are we talking about tech transfer for newer products that are up and coming and maybe more high growth, but today, lower volumes?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [10]

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The good news is that we see both. And we see both a high number of already commercial products that are in the market today, which will have a shorter time to have an impact for us, there will be definitely impact next year. And -- but we also have a number of very promising new products for us that are new to the market. And this is really the result of successful development work. That will have, of course -- the material impact will be a bit later, but still very, very interesting.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [11]

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And I know that you previously talked about tech transfers taking somewhere between 18 to 20 months to complete. Has that been the case for these projects as well or are they faster?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [12]

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No, it's a similar question, and so of course many of these were started some -- quite some time ago.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [13]

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And can -- I suppose that when you do the tech transfer and when you work with a process like that for 1.5 years or something like that I mean that you do have some costs before you actually start to get revenues for it. Could you elaborate a little bit on how you do the reporting, if you charge the client in any way? Or if you -- if this is shown really in your operating expenses before. So that you -- we have already seen the cost for the tech transfers?

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [14]

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The short answer, it varies a bit, but we certainly had a number of these costs or some impact from the tech transfers earlier this year. And so I don't foresee any major impact from this cost or processes for rest of the year or in the near future.

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Patrik Ling, DNB Markets, Research Division - Senior Analyst Healthcare [15]

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And when you have these costs -- are these costs that you absorb yourself? Or can you charge it to your clients?

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

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It's a combination usually. What we saw earlier in the year, not in this quarter, but early in the year is sometimes we need to do changes to our facilities to accommodate new projects. And that is usually on our cost. But when it comes to other necessary work specifically for a new project, it's usually charged to the customer.

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Operator [17]

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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 [18]

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2 follow-up questions. First, is it possible just to provide the figure for the M&A amortization in the quarter. I see you just disclosed total depreciation. The second question, coming back to the earnings development in Steriles, of course, very much supported by the acquisition. But what's the reason you don't see a better contribution from the ramp-up of the new capacity? Is it that, that is outweighed by the negative effects you talked about? And when do you think if that's the case, those negative effects will go away so that we could expect some more organic earnings growth in Steriles.

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Tobias Hägglöv, Recipharm AB (publ) - CFO [19]

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Your first question, if I understand it correctly here for amortization, it's around SEK 60 million in the quarter.

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

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And when it comes to the earnings in the Steriles section. It is -- you're correct, it's -- have quite a material negative impact here from the low-performing non-lyophilized injectables and this is, again, it's an ongoing improvement here that we are working with -- we improve step-by-step, but it is -- we're not there yet. We haven't succeeded yet and that will continue into next year.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [21]

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And these problems. Is it still the manufacturing site in France, where you have other issues before? And if so, why does it take -- at least it seems to take longer than what you thought during the spring?

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

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Yes, it's -- most of it is in this facility, not all of it. We have also an issue in another place to the same type of product. It's yes. It's a long story. It's not necessarily the same -- exactly the same problem. It is -- even though it may be the same size that is affected. We have some new issues, and we have some old issues in combination with that. And just it takes time in this industry to change things unfortunately. Taking a little bit longer than we would like, I'm not particularly happy for that. But on the other hand, I see the improvements being made, and I think we have a very solid improvement plan. So I definitely think we will get there.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [23]

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And the margin impact from this, is that possible to quantify?

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

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No, not really. But it has a material impact on the margin business.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [25]

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Okay. But I guess, previously, I said, we shouldn't see this as a one-off as it's part of the business, but it sounds -- it's pretty costly. So when this is sold, and hopefully, at some point during 2020, should it mean it could have a positive impact on the group margin?

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

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I think that's a fair assumption.

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Tobias Hägglöv, Recipharm AB (publ) - CFO [27]

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Absolutely.

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Operator [28]

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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 [29]

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Yes it's Peter again with 2 follow ups. The first relates to -- I came a bit early into the call, but in your introductory remarks, Thomas, you mentioned something that will have a material effect next year. Were you referring to the issue we just have discussed? Secondly, I just noticed that you mentioned that this added capacity in India has an attractive cost level. Is it such attractive that you would expect to sort of being able to comment on a positive margin impact from this going forward.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [30]

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I think, Peter, when I talked about this impact next year, I was probably more thinking of the product transfers, the tech transfers that are ongoing more than that. And also, perhaps, to some extent, to the ongoing ramp-up of capacity. But we could also add to that the effect of the currently underperforming non-lyophilized injectables. So combination here will have certainly an impact next year. When it comes to India, this is still -- I mean, we have a few years to go before we will see an impact. The factory -- the newly built factory will be operational, fully operational in 2022. We will see some business before that, but it will be fully operational in less than 3 years, which is still by pharmaceutical standards very, very quick.

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Operator [31]

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(Operator Instructions) There are currently no further questions registered. I hand the conference back to you, speakers.

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Thomas Eldered, Recipharm AB (publ) - CEO, President & Director [32]

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Thank you very much. And I just -- finally, would like to remind everybody that we have our Capital Markets Day on November 18 in Stockholm. And also like to thank you all for listening in today, and I wish you a nice day. Thank you.