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Edited Transcript of SRT.F earnings conference call or presentation 21-Oct-19 1:30pm GMT

Nine Months 2019 Sartorius AG Earnings Call

Goettingen Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Sartorius AG earnings conference call or presentation Monday, October 21, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joachim Kreuzburg

Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO

* Rainer Lehmann

Sartorius Aktiengesellschaft - CFO & Member of Executive Board and Head of Finance, Information Technology & Business Process

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Conference Call Participants

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* Christophe-Raphael Ganet

ODDO BHF Corporate & Markets, Research Division - Head of Equity Research

* Daniel Wendorff

Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals

* Markus Gola

MainFirst Bank AG, Research Division - VP

* Michael Gokay

Janney Montgomery Scott LLC, Research Division - Associate

* Michael Leuchten

UBS Investment Bank, Research Division - Co-Head of Pharmaceuticals Research of Equity Research

* Patrick Andrew Robert Wood

BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team

* Scott Bardo

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Virendra Singh Chauhan

AlphaValue - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Sartorius and Sartorius Stedim Biotech conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Dr. Joachim Kreuzburg, CEO. Please go ahead, sir.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [2]

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Thank you very much. Welcome, everybody, to our today's conference call on both the proposed acquisition of select assets from Danaher life science as well as on our 9-month results for 2019. We would like to start off by walking you through some details regarding the proposed acquisition, and then we would like to focus on the 9-month results, first for the Sartorius Group; and then for Sartorius Stedim Biotech; and after that, we will have time for questions and answers.

So let's start by focusing on the proposed acquisition of select assets from Danaher Life Science. As you can see on this chart, this acquisition includes the portfolio of 3 businesses, with all having a strong complementary fit to the businesses of Sartorius today, of both divisions, actually. The sales for the fiscal 2018 of these 3 businesses together amounted to approximately USD 140 million, and of this USD 140 million, approximately 50% would become part of the LPS, respectively, then also the BPS division. The overall growth of these businesses has been in the double digits over the last couple of years, and the profit performance was in the strong double-digit range. The total purchase price that we have agreed upon is approximately USD 750 million in cash, that we will finance through debt. And as of today, we project that approximately 25% of the purchase price, we expect to be allocated to our Bioprocess division and therefore, also, to Sartorius Stedim Biotech. The precise figure will depend on the purchase price allocation process during the closing.

A very important point is that the closing of this transaction depends on the successful closing of the acquisition of GE Biopharma by Danaher, and within this overall context, both transactions are subject to further approval of various regulatory authorities.

Let me now focus a little bit more in detail on these 3 businesses. What you can see on this table is that on the left-hand side, the ForteBio business with the well-positioned and well-known Octet product family is offering a label-free biomolecular characterization technology, with a strong patent protection. It includes instruments as well as consumables. This business would become part of the LPS division of Sartorius. Today, this business employs approximately 200 people. The main sites are in Fremont, California as well as in Shanghai, and we consider this business to be highly complementary to our bioanalytics portfolio within the Labs division today.

The other 2 businesses, Pall-Chromatography and SoloHill, would become both part of our Bioprocess division. The chromatography business includes hardware and resins, both multiuse and single-use equipment actually, as well as columns and also consumables then. This business includes approximately 100 employees today. The main sites here are Portsmouth in the U.K. and Saint-Germain, close to Paris in France. This business is highly complementary to our overall solution provider offering. It clearly would particularly strengthen Sartorius' positioning in downstream processing.

The SoloHill business offers micro carriers for adherent cell culturing as well as particle validation standards. These are all consumables. Clearly, this business would become part of our Process Solutions. It's relatively small, employs approximately 10 employees today, and it would be obviously complementary particularly to our portfolio within cell culture technology today.

As we expect closing of this transaction within the first quarter of 2020, and the date is still not fixed, of course, we thought that it would make most sense to make a little bit a theoretical projection of the full year's effect of this business on our P&L. And then obviously, we relate that to our expected 2019 results to have a tangible grip on these figures.

And as you can see from the table on Page #6, for the group, the nonorganic revenue growth contribution would be approximately 8 percentage points. 5 percentage points would be the contribution for the Bioprocess Solutions division, and around 15 percentage points for the Lab division. Regarding the underlying EBITDA margin, it would be pretty much neutral for the group, slightly dilutive with around 0.5 percentage point for the Bioprocess Solutions division and are quite accretive with an effect of around plus 2% for the Lab division.

Let me now focus on the 9-month results of the group. As always, I would like to just walk you very briefly through the main highlights, and then I will hand over to Rainer, our CFO.

So we are quite satisfied to being able announcing that we have again achieved double-digit growth in sales revenue, order intake and profits. Particularly, the Bioprocess Solutions division has shown a continuous high-growth momentum. Also, the LPS division has delivered a robust third quarter, I would say. You will remember that we haven't been satisfied with the second quarter, third quarter has been clearly stronger, and we are, I think, back on track in regards to our guidance that we have updated 3 months ago. And we now also have specified the group guidance and the guidance for our Process division, both at the upper end, regarding top line growth.

Now Rainer will walk you through the details.

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Rainer Lehmann, Sartorius Aktiengesellschaft - CFO & Member of Executive Board and Head of Finance, Information Technology & Business Process [3]

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Thank you, Joachim. First of all, welcome, also from my side. As you can see on Slide #9, we continue to have the very dynamic top line growth. Revenues rose by 15.5% in constant currencies to EUR 1.35 billion for the first 9 months, also with a strong order intake increasing by 16.1% to EUR 1.43 billion. This, we're also able to translate it into a strong underlying EBITDA, grew over proportional by 22.7% to EUR 361 million, which basically translates to a 26.6% EBITDA margin compared to previous year, it is a plus of 1.1%. Please keep in mind that this is also impacted by the change in accounting rules according to IFRS.

Earnings per share, you can see EUR 2.23 for the ordinary and EUR 2.24 for the preferred shares, again, increase of over 21%.

If we look on the next slide, sales by geography, we'll focus on the Americas. Despite having quite some strong comps on the Bioprocess side, we're able to increase revenue from EUR 387.9 million to EUR 461.7 million. Also, LPS were able to contribute with a robust performance in that region. The EMEA, we grew 12.7%. All of those increases are actually in constant currencies, from EUR 484 million to EUR 546 million. Also here, considerable growth of the Bioprocess Solutions division despite having, also on the LPS side, a softer economy, we are aware of the uncertainty currently, and the slowdown of the economic development within Europe. In Asia Pacific, very good results and very good growth achievements on both divisions, we have to say. We grew from EUR 281 million, by 21.5%, to EUR 348 million, really strong momentum on the Bioprocess side fueled also by system or equipment business. And also, the LPS division really recovered in Q3, also something that Joachim just mentioned, where we had a little bit below expectations in Q2.

Sales by regions, not a dramatic change. Americas, 34%; Europe, still, strongest region with 40%; and Asia are now adding up to 26% of revenue share.

If you look a little bit more in detail on the Bioprocess side, on Slide 11, we see order intake growing almost by 20% in constant currencies from EUR 902 million to EUR 1.1 billion despite high comps. High order intake is really driven by [project] business, especially also in Asia Pacific. The sales revenue for Bioprocess grew 19.4% in constant currencies from EUR 843 million to EUR 1.025 billion. Here, though, we have to say that we see clearly the full impact now of the slowdown of the media business in Q3. Remember, we anticipated that we are going to lose some portion of that due to the modified agreement with our partner, Lonza. The underlying EBITDA margin, we're able to expand that as well, from 28.4% in 2018 to 29.3%, now reaching over EUR 300 million. That's an increase of 25.7%. Also, keep in mind here that, of course, there are change in IFRS accounting rules that contributed to that increase, but we are also seeing clear economies of scale.

If we move to the Laboratory Products & Service division, we see an overall robust performance in really a partly challenging environment, specifically in Europe. We start on the left side with the order intake. We're able to grow by 5.3% in constant currency to EUR 335 million. Of course, the -- specifically, there are tough circumstances in Europe, not also mentioning the uncertainty in regards to Brexit, but the overall volatility and the slowdown on the LPS, still, a result we're happy with. Sales revenue grew by 4.9% in constant currencies to $330 million. We can really say that the growth really recovered in Q3 compared to a lower comps of the previous year. EBITDA margin expanded slightly from 17.7% to 18.3%, an increase of 9.9% to EUR 60 million, again, the positive -- was positively impacted by the change of IFRS 16.

We now look at some key financial figures. The strong underlying EBITDA really translated very well into operating cash flow, which increased by 57% to EUR 254 million. Financial results, in line with our expectations and slightly below year, and the underlying net profit also grew 21.2% -- or 21.2%, and the reported net profit grew by 32.7% to EUR 121 million. So very happy with that performance. The investing cash flow that we now changed to a cash-based definition amounts to EUR 175.6 million, translate in percent of sales to 12.5%, really in line with our expectations. If you look back at half year, was 12.8%, and we're expecting to be around 12% at year-end, so right in line with our expectations.

On the next slide, we'll see some key financial indicators. Of course, the strong net profit translates into an increase of the equity ratio, where here, as of September 30, it's 38.7% despite really the headwind of the change in accounting rules, which added roughly EUR 50 million to our balance sheet. And the net debt amounted to roughly EUR 1 billion, but more important, our net debt and ratio of the underlying EBITDA is at 2.1, which is in line with our expectations and under growing concern -- we'll see that decreasing further towards year-end.

And with that, I'll give back to Joachim, who's going to talk a little bit about the outlook for 2019.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [4]

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Yes. Thank you, Rainer. And as said already, as the last point of our highlights at the beginning of this presentation, we have specified the guidance for full year 2019. In regards to the top line growth on Page 15, here, you see that in comparison to the guidance as we have defined it after half year, we now expect for the Bioprocess Solutions division to reach -- that we reach the upper end of the 13 to 17 percentage point of top line growth bandwidth, and that then also translates into the -- our expectation for the Sartorius Group to reach the upper end of the 10% to 14% band. There's no change in regards to the top line expectation for the LPS division, where we still believe that we will reach rather the low end of the 5% to 9% range, and in regards to the underlying EBITDA margin, we stick to slightly above 29.5% for BPS, slightly below 20% for LPS and slightly above of 27% for the group overall. Also, no change in regards to the additional remarks regarding the effect from the IFRS 16 changes that have to be adopted by 2019, first time, as well as in regard to our CapEx ratio that we expect to be around 12% for the full year after around 15% for the year before.

Let me now -- also, I'll walk you briefly through the Sartorius Stedim Biotech figures. As always, they are very much in sync with those of the Bioprocess Solutions division that Rainer has walked you through earlier. So we have reached a top line growth of 18% for sales revenue and came in at EUR 1.077 billion approximately after 9 months. Order intake was around EUR 70 million higher, and again, 18% top line growth, underlying EBITDA has increased over proportionately by a good 24% to EUR 312 million. The margin has increased by just a little bit less than 1 percentage point and has reached 29% now, and the underlying earnings per share is up by 23% and has reached EUR 2.15. I think all the remarks in regards to the fact that we have grown across geographies and product categories have been made before.

Regarding geographies, you see that also on the next page with the respective growth rates. I think in comparison to the picture after 6 months, we see that, particularly Asia Pacific, as it has been expected, it's standing out now. You remember that we said that, particularly the order intake regarding larger projects from Asia has been strong after 6 months, and that, of course, now materializes to some extent here. Still, we see a very nice momentum. In the Americas, order intake is strong here. So the fact that the figure for sales revenue growth is a little bit lower now after 9 months is a bit, I wouldn't say artificial, but due to high comps and some timing effects. EMEA, I think, a very strong growth given our market share in that region. So overall, a healthy picture, we believe.

Operating cash flow or cash flow overall has been healthy as well, reflecting the strong increase or the significant increase in EBITDA. Also, the operating cash flow has increased by around 39%, as you can see here on the bottom of the first pack of figures here, and has reached EUR 224 million. Investing cash flow, as expected, significantly lower than last year after the completion of a number of larger investment activities like the massive expansion of our facility in Puerto Rico, for example.

And then finally, also, a view on the key balance sheet and the figures. And regarding our net debt to underlying EBITDA ratio, I think, nothing spectacular to talk about here, very strong equity ratio, very low net debt to underlying EBITDA as we have seen it for a longer time already.

And then of course, also for Sartorius Stedim Biotech, we have specified the guidance of full year 2019 now fully in line with everything that has been said before. So we expect now sales revenue growth to be at the upper end of a 12 to 16 percentage points range, and we still expect the underlying EBITDA margin to be slightly more than 1 percentage point higher than for our full year 2018 CapEx ratio, still, we expect to be around 11% for the full year.

So this has been the presentation that we wanted to walk you through and to make some comments on. And now we would be looking forward to your questions. Thank you very much so far.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Paul Knight from Janney.

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Michael Gokay, Janney Montgomery Scott LLC, Research Division - Associate [2]

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This is Mike on for Paul. A quick question on the acquisition of the Danaher Life Science assets. Can you talk to the specific assets you acquired in the chromatography business? You just mentioned Pall in the presentation, but just kind of get a sense of what assets you're actually acquiring here?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [3]

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Yes, sure. The Pall portfolio in chromatography includes skids as well as columns and resins. Regarding the equipment, it includes both multiuse and single-use equipment. I think I can say that a good portion of that business has been also larger system, larger projects. And therefore, we believe it fits really nicely to our -- as you said, solutions offering, where we today have particularly a strong positioning in upstream, and this, of course, then complements this very nicely on the downstream side. And I think this offering -- and bear with me when I say this even though I'm sure you know that the chromatography, of course, is an essential step in all those manufacturing, particularly for monoclonal antibodies for example, and therefore, it's a relevant technology for our customers for sure.

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Michael Gokay, Janney Montgomery Scott LLC, Research Division - Associate [4]

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And just one more. Kind of looking at the order intake numbers for the Bioprocess, specifically, pretty strong growth in the first half of the year. And then I think if I do the math, right, you're looking at 11% or 12% in the third quarter. Can you kind of talk to what was driving that little bit softer order intake growth in the third quarter?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [5]

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Yes, sure. Basically, we would say, pretty much comes in timing. I guess we were talking about 3 months ago that order intake growth was quite a bit above our expectations for the first 6 months. And such orders, I mean, don't really fall from the sky. I mean this basically means we have worked on certain projects with customers often for a longer time. But what we have seen, and particularly in regards to a couple of larger projects in Asia, has been that our customers were rather working on accelerated time lines, and we were able to pull in those orders also earlier than expected. And then of course, then it's reflected maybe in a not completely straight line of order growth, but rather, certain emphasis in Q2 and a little bit a lower growth rate in Q3. But within this overall picture, again, comps and this timing, we consider ourselves to be really on a very solid track in regards to all the development.

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Operator [6]

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Next question is from the line of Patrick Wood of Bank of America.

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Patrick Andrew Robert Wood, BofA Merrill Lynch, Research Division - Director in Equity Research and Head of the EMEA MedTech & Services Team [7]

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I may be greedy and take three, if I can. Just follow-up on the downstream chromatography facts. You, obviously, for a long time, has been something of the bottleneck in downstream production and across the whole thing. So I'm just wondering if you guys can think of, with this asset, any additional technology over time that you think can help alleviate the bottleneck there. That's first question one.

Question two, a little bit more color, if you could, on China. Obviously, you mentioned, it was a little bit softer in LPS last quarter, but it looks like it's a quite a bit better this time. I'd love to get a little bit more color given some of the comments [your colleagues] are making, obviously, different business model, but about that market? So just curious on China. So that's question 2.

And then the last one is just to the group level. Even taking the top end of your guidance range, the implied Q4 looks relatively light. So I guess -- not that you guys would have meant to just being conservative, but I'm just trying to understand, is there something that you're expecting to happen in a large degree in the fourth quarter or that we should be thinking about that would mean the growth could materially slow down relative to the third quarter?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [8]

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Yes. Thank you for these questions. I'm not sure whether I got the first question right, but maybe, nevertheless, a couple of comments on how we see the downstream part of Bioprocessing overall. As I've said before, it's of course an essential part of such bioprocessing. We indeed of course see, for the entire process chain of our customers, a significant potential for increasing the efficiencies going forward. And then, of course, we'll include also innovation.

I think indeed in the industry, many people would say that over the last, let's say, 1, 2 decades, there has been very significant improvement regarding the efficiency, the productivity of the upstream end, be it because of more productive cell lines, better designs, cell culture media. The cell culture process as such, meaning the bioreactors as well as the control units, are controlling the process, and this have been improved so that titers have been really -- the titers that can be achieved today are very much higher than -- and this has been the case, 10 and 20 years ago maybe. And again, many people would say that in downstream processing, the improvements have been a little bit lower, and therefore, some more progress is needed, but we believe also possible. And therefore, definitely, we do expect that in the entire downstream arena that innovation is possible and will play a role.

In one segment of such downstream processing, we do have membrane absorbers already in our portfolio that addresses some of these topics in certain applications. And again, we believe that the resin-based chromatography that we would add through this acquisition complements this very nicely. And that of course, again, going forward, there will be also further innovation, we believe, that can play a role, it should play role for achieving further productivity gains.

In regards to China, I think, clearly, the growth rates in China -- in some of the markets that we are serving, of course, are lower than for most of the recent years, clearly. Just as a reminder, with -- a part of our product portfolio like, for example, lab sciences -- but perhaps, lab water systems -- we do also address markets outside the life science biopharma market, for example, also the -- our chemical markets, et cetera, food and beverage. And there, of course, we do see lower growth rates in 2019 than in the years before.

When we talk about Q3, in particular, we would say that Q3 was, for sure, much better than Q2. We were talking about that Q2 really was a disappointment, and we have seen Q3 coming in much better. However, we would always recommend to emphasize not too much on single quarters. I think that this will often lead to overinterpretation of data. We do believe that we should see a reasonable fourth quarter. However, again, underlying growth rates in those markets outside life science, we expect to stay rather a little bit lower on average in China.

And then I think you were asking for the growth rates that we are expecting for Q4. As you said -- also in light of the specified guidance that we are giving here. And it is right that we do expect a growth rate -- the top line growth rate for Bioprocess, in particular, that is lower than the growth rate that we have achieved on average for the last 3 quarters, in particular, the first 2 quarters. This is not very much because of any slowdown of the business development overall. I would rather again say, this is how we anticipate the timing to be in regards to the delivery of certain projects and then the respective completion. In such effect, we are very optimistic and positive about the further development of our business and our process. Yet, indeed, we do believe that the growth rate for Q4 for -- but again, not -- no, like, fundamental reasons would be maybe the lowest within the quarters of 2019.

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Operator [9]

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Next question is from Michael Leuchten from UBS.

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Michael Leuchten, UBS Investment Bank, Research Division - Co-Head of Pharmaceuticals Research of Equity Research [10]

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Three questions for me as well, please. Two on the transaction and one on the margin. In terms of -- so just my understanding, in terms of the allocation of the 25% of the purchase price to Stedim, is that money coming out of Stedim? Is that how I should read it? Or is this just an accounting treatment on the balance sheet?

And then secondly, on the employees that you're taking on with these assets of 200 employees with ForteBio, 100 for Chromatography and 10-or-so with SoloHill, are those mostly R&D-based employees? Is that R&D capacity? Is it sales and marketing? I was wondering if you could shed some color on that and light on that, that would be helpful.

And then on the margin. We started the year -- or you started the year guiding for 7% top line growth at the lower end. We're now ending the year with 14% or towards 14% at the upper end of the increased range, yet the 27% EBITDA margin has not changed as the years progressed. I was wondering if you could explain why, with such better top line momentum, you didn't see more margin gear or you're not seeing more margin gearing this year.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [11]

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Yes. Thank you for these questions. So on the first one, the financing structure of the Sartorius Group is such that all the external financing is set up through the -- through Sartorius AG, and Sartorius Stedim Biotech then has receiving intercompany loans from Sartorius AG. And that is how we will handle also the financing of that part of the acquisition that is made by Sartorius Stedim Biotech.

Then on the second question, the profile of the 300 employees approximately that would join Sartorius. So we do have actually all profiles in here, maybe not so much regarding support functions, as those support functions have been pretty much been delivered through the overall Danaher structure and that space with Danaher, but there are R&D people, marketing, sales, operations, of course. A little bit of different mix in the different businesses, but that would maybe lead already in a lower year-over-year. But basically, you can say we have all those functions, being part of that set of people that would join Sartorius.

On the margin, you are absolutely right. We didn't change our margin guidance for the full year despite the fact that the -- as you said, the growth expectation now is quite a bit higher than the, let's say, the midpoint also of our initial guidance at the beginning of the year. And there are basically 2 reasons and that is -- I mean, all those increase of top line growth expectation is coming from the Bioprocess division, obviously, and here, we have 2 main factors. And one is that the reduction of our cell culture media business kicked in a little bit later than we initially anticipated. And you might recall that the profit margin of that business, as we are not manufacturing this media ourselves, but buying that in, is quite a bit below average. So that is a little bit dilutive in regards to the margin.

And the same is the case for those larger projects. The larger projects that we have won, as I've said, particularly in Asia, are quite equipment heavy at the beginning. They lead to significant consumables business later when those systems are in operation. But yet, at the beginning, those businesses are equipment heavy, and these equipment businesses or these equipment orders also come in at lower profit margins than the average profit margin of our Bioprocess division is.

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Operator [12]

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Next question comes from the line of Markus Gola from MainFirst.

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Markus Gola, MainFirst Bank AG, Research Division - VP [13]

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My first question is possibly related with your acquisition in chromatography. These discussed segments -- [your discussed segments have been dominated] by [GE], I guess being rather small there last year. So do you now have a full offering with this acquisition now? And do you expect that you will now bear significant market share here going forward? Or is this offering that is more to compete towards the market leader on the same level?

My second question is related to the margin trajectory. After 9 months, we stand at 26.6%, but you guide for slightly above 27% for the full year. So is it a fairly strong acceleration in Q4? Could you explain the building blocks in both divisions and what would drive this improvement?

And then finally, just for modeling purposes, could you share with us the financing costs for acquisition? [Let's say] depreciation stayed [in the range of 40%], that's roughly in line with your group level.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [14]

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Yes. Thank you for these questions. It was a little bit hard actually to understand them acoustically because the line has been really bad. I'll do my best to answer them though. I guess you were asking for the positioning and the competitiveness of the chromatography business that we would acquire here vis-à-vis the market position of the GE chromatography business. And yes, of course, we definitely believe that we are able to be a competitive player in this market. We believe that, within the context of our overall positioning and the market access that we have, the customer access that we have and also our strong product portfolio across the value chain of our customers, that we are very, very much able and well positioned to develop this business further.

On Q4 margin. This is very much a question of the mix indeed that we expect for the product mix that we expect for Q4. I think I said a minute before, that we anticipate certain timing of delivery of larger projects, et cetera, and that is why we don't expect such a high top line growth rate. But that also leads to a rather positive mix for Q4 regarding consumables, and at the same time, in the Lab business, the strongest margin contributor here is our bioanalytics business, which typically has Q4 as the strongest quarter. And these 2 factors basically should lead to the expected EBITDA margin for Q4.

And then the third question was actually acoustically the hardest to understand. I think you were asking for financing costs. And that depends -- the total financing costs actually will, to some extent, depend also on the exact closing date that has to do with -- simply with the point that for a couple of -- or a couple of months, we don't have to pay any fees, and then we will have to pay fees depending on when we drop the money, et cetera. But what I can say is that the interest rate that we have secured here is really a very competitive low one, and we will provide more details when we have all our figures to make a tangible calculation, let's put it that way. Is that fair?

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Operator [15]

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Next question is coming from the line of Scott Bardo from Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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A few remaining, please. So firstly, I'd like to understand regarding the acquisition, what was the trigger for Danaher to sell these assets, given that it appears that the sale was broadly at its own 2019 valuation? So maybe we can talk about what the trigger is, perhaps with particular reference to the Lab side, which doesn't appear to be in any real conflict with the GE acquisition?

The second question, please, just a clarification. Why is it that only 25% of PPA allocated to Bioprocess strokes Stedim 150% of the business is being consolidated? If you could perhaps clarify that for me, please.

And third question, and again, just to understand the relevant mixes of these businesses, just given the disclosure you've provided for both the LPS-based assets and the BPS-based assets, there seems material differences in the profitability between these 2 businesses. If I calculate correctly, some 35%, 36% margin for the LPS assets and broadly half of that for the BPS assets. So can you help explain why? Perhaps give us some differences about the markets you serve or the consumable mix or something, that would be helpful. So they're the first ones. I have a quick one after.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [17]

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Sure. So I guess, the full picture of the trigger that you are asking for could be given by Danaher, for sure. But I think, as you can read from our statement as well as the ones that Danaher has published earlier today, there is a -- that the -- the antitrust authorities have defined certain prerequisite for a closing of the GE Biopharma acquisition by Danaher. And because you were particularly asking for the context for the ForteBio business on the GE portfolio, there is a product family called Biacore, which is addressing a similar application with a different underlying technology. But as I've said, similar application, and that's very much the context here.

I think the -- your question #2 and 3 are directly linked. As you rightly pointed out, the profitability level of these 2 businesses is a bit different. And that, of course, then leads also to different valuations, and therefore, to different allocations of the total purchase price. The background of the different margins are indeed that when you see the chromatography business, and I think I briefly touched upon that, that there is a good portion of also larger projects, so therefore, a significant portion of respective equipment in that business. And then, of course, such equipment typically comes in at a little bit lower margins on average than a business that is a bit more heavy on the consumables side.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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Very good. And perhaps a follow-up. Would then -- Can you give us some feeling actually for the consumable mix per the LPS consolidated assets and the BPS consolidated assets? And maybe share with us some flavor for the geographic dispersion of this business, whether it should impact your tax rate or so? Just a little bit of additional color there would be helpful.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [19]

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Yes, sure. We will share quite a bit of more detail at a later point in time. At this point in time, there are not more details available. We will definitely give more information in those different dimensions once we have achieved the closing of this transaction.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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No, that's very fair. And maybe then, just so I understand, this is a -- the acquisition is a carve out. Is there any necessity to do any sort of restructuring or one-off costs that we should expect for the Sartorius Group on consolidation? Or is this a relatively easy plug-and-play?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [21]

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I would say, there is no restructuring necessary. But of course, there are always some one-off costs associated to such an integration. Again, here, we will give more transparency and quantitative information once we got there. But we definitely believe that the integration and continuation and development of those businesses will be a pretty much straightforward process.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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Congratulations on the deal.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [23]

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Thank you.

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Operator [24]

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(Operator Instructions) The next question is from Daniel Wendorff from Commerzbank.

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [25]

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Three, if I may. And the first one is actually on the acquired ForteBio business. I was wondering whether you could provide a bit more color on how the market is structured, how big that really is. I understand that it's like half of the sales volume you acquired. I'm just not that very familiar with the target market there.

And my second question would be on -- can you quantify the impact of the modified setup of the cell culture media product on your Q3 EPS number and growth number in particular? And would that be roughly the same in Q4?

And my last question, I guess, it's a follow-up question to Scott's before. When you think of the Slide #6, the pro forma numbers you've given us, can we expect any kind of potential synergies coming out of that? Or is the pro forma number on a full year basis, really what, at the end, could then also model in if you succeed in acquiring that business from Danaher?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [26]

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Yes. Maybe on the questions #1 and 3 first because I guess they are a bit linked. So I guess my answer to the first one, more details on the market that the Octet product family of ForteBio is addressing, et cetera, I would basically give the same answer that I've given just a minute before. I think all those details about markets and positioning, et cetera, we would like to give a little bit later in this process when we have achieved the closing and not at this point in time. I hope that finds your understanding.

However, I would like to comment on this pro forma calculation. This is, if you wish, you could say a kind of a stand-alone perspective. But I think it's the realistic one to use also as a model for 2020 because the synergies that we definitely believe we will be able to realize in the midterm and long term is nothing -- or are not synergies that you can achieve within the first 12 months. That is true particularly, of course, for the top line, whereas in some cases, really, sales cycles are much longer than 12 months-or-so, but also in regards to tangible measurable bottom line synergies, it will take a little bit longer. And we, for sure, we'll give more color on that also once this makes sense.

On the effect from the cell culture media, I first have to go to make sure that I answer you correctly. Are you -- you were asking for the margin effect? Or...

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [27]

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No, no, no. Sorry. The sales growth effect or the negative effect you saw in Q3 on a year-on-year basis, and will that be the same in Q4? Or how should we think about that?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [28]

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So roughly, you could say that per quarter, the reduction is EUR 10 million, sales revenue.

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Operator [29]

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Next question is from the line of Virendra Chauhan from Alpha Value.

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Virendra Singh Chauhan, AlphaValue - Analyst [30]

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Virendra Chauhan, Alpha Value. I have, firstly, a one question on the Lab products business before -- and following which, I will get on to some questions about the acquisition. So LPS have picked up momentum in this quarter vis-à-vis the H1 performance because I see something more a thought of -- significant pickup in the momentum there, also when the environment hasn't really changed. So what exactly came in this quarter, in this segment, vis-à-vis the H1 that kind of lifted this segment? Firstly that's on the Lab product side?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [31]

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Yes. I mean to some extent, I would always say that it's really difficult to interpret single quarters. You always end up a little bit in -- with the risk of over interpreting data here. As we said, we have been really a bit disappointed by Q2, particularly in China, also in some markets in Europe. When we then see now the performance in Q3, I's guess, one could argue that also there have been maybe some shift of some orders from Q2 into Q3. And then the average of these 2 quarters maybe reflect a little bit better the market situation. That still is not -- particularly be strong in those industrial segments outside life science and biopharma, as we pointed out before. But it's indeed always a little bit difficult to compare those quarters and to find very deep explanations for those. Again, I think underlying markets are a bit softer and underlying market growth, particularly, as I said, like in the chemical industry, food and beverage, for instance, is lower than in the years before. I think that definitely holds true that you can see in many other industrial segment at the moment in the different geographies. But again, quarter-on-quarter, hard to interpret that.

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Virendra Singh Chauhan, AlphaValue - Analyst [32]

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Okay. And my next question would be on the business that's been acquired from Danaher. So with respect to the Bioprocessing business, so for longer, I believe that Sartorius, the product completeness or the profile of your entire product range across the various stages of the biotech, is that something which has been a standout for Sartorius? So does the Danaher business materially add to that? Or something -- some color on that front.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [33]

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Yes, sure. I mean we have indeed a broad portfolio across the process chain of our customers. We always have said that we would consider ourselves to be really particularly strongly positioned in upstream processing, with our bioreactor business, with our cell culture media, with our cell lines, also with our bag business and also filtration our -- plays a certain role in upstream. When we then look on to the downstream arena, again, of course, our bag business also plays a role in downstream, filtration plays a role in the downstream. But in this key step of purification, et cetera, we -- so far, we're particularly targeting those applications only that we could access through our membrane-based chromatography technology, membrane absorbers. And we have this gap in regards to resin-based chromatography. And this gap, we can close now, and therefore, I think it adds nicely and very complementarily to our existing portfolio and increases the relevance of our offering even further.

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Virendra Singh Chauhan, AlphaValue - Analyst [34]

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Yes. Perfect, perfect. And just one final one on the -- you have given in the pro forma sheet, and in the pro forma slide, you have also given us the impact in terms of nonorganic revenue contribution to 2019. But then, like -- could you give me a rough idea in terms of the -- because in the -- in your release, it also states a strong growth profile. So the business that you are acquiring, does it currently have growth rate which are better than your current product profile or not, both in LPS as well as BPS?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [35]

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Again, we'd like to give more details in regard to facts and figures when this transaction is closed, when we do know the exact date of closing and we then can give a really a fully comprehensive set of figures on that. Please keep in mind what we have given here on Page 6 is a projection of full year effects related to expected 2019 results. So a couple of moving pieces in here, and we really would like to give more precise figures once this transaction materializes.

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Operator [36]

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Next question is from the line of [Naresh Chauhan] from [IntraHealth].

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Unidentified Analyst, [37]

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Largely related to Stedim. Firstly, there's obviously a significant amount of new capacity coming onstream in the CDMO space, which has and should continue to help your business materially. Can you help us understand how much of that bonus of demand has already happened and whether we should continue to expect that bonus of demand to continue for another year or 2?

And then secondly, how should we think about consumable growth going forward in the context of this large increase in capacity, which we would envisage having kind of pretty high utilization rates pretty quickly? So just some color on kind of how the market's evolving with this increased capacity would be helpful.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [38]

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Yes, sure. So I think you're absolutely right. There's a lot of investment at the moment into additional capacities, you're particularly focusing on the CDMO part of the market. I would also add the market for biosimilars, a year where a lot of investments are going into, I think, at the moment. And I think it's also fair, as you, I think, implied by your question that a good portion of the additional business recently has been a bit equipment-heavy as it was about, yes, setting up those facilities, et cetera. And that is also, as we talked about before, has been having some impact on the composition of all our results so far and expected for the full year in 2019.

We do see -- have seen and are seeing at the moment, nevertheless, also a significant growth in regards to our consumables business, and that should not be forgotten, yet a little bit like over -- or dominated by even stronger growth in equipment. Having said that, going forward, we do expect, indeed, a nice growth pretty much across the board, maybe with a little bit a higher portion coming from the consumable side or we should rather see a less overemphasis on the equipment side, and therefore a little bit a slightly different mix of growth.

Maybe -- nevertheless, one word on capacities because that is a discussion at the moment also to quite some extent. I think it would be a bit over optimistic to believe that all the capacities that are being installed at the moment will be fully utilized. I think that there is quite some rush into the biosimilar market, in particular, and I believe that maybe the first 2, 3 players in a given -- in a certain market might be successful. For #4 and 5, it might be a little bit more difficult. So I guess what I want to say is, please, nobody should expect all those developments being just this straight line quarter-on-quarter, but that doesn't change anything in regards to the average growth rates and our respective expectations, and that is, again, very nice development in regards to consumables' growth going forward, but of course, still also with equipment business contributing to growth as well.

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Operator [39]

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Next question is from Christophe-Raphael Ganet from ODDO.

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Christophe-Raphael Ganet, ODDO BHF Corporate & Markets, Research Division - Head of Equity Research [40]

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Actually, three little questions. One, regarding the sales about the United States -- or the Americas performance on Q3. If I'm not wrong, there is a little slowdown, so I would just like to have your view, is this just a comps effect or a specific evolution in your client portfolio? That's the first question.

The second one relates to the deal. So when will be -- how should we see and how we -- should we look at the ramp-up of this Danaher activity? And if you can provide us a view on the overlap of the client mapping, for example, is there a specific rate of overlaps? So how can you use their bases of clients?

And there's -- third point is I am not sure having -- if I have understood correctly, the competitive advantages or the competitive edge of those assets, notably in chromatography. So can you help us a little bit more on that, on the landscape and competition?

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [41]

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Yes, sure. So regarding sales growth in the Americas in Q3 in Bioprocess, you're right. The figure has been a bit lower in Q3. But after an extremely strong third quarter 2018, maybe as a reminder, growth rate in Q3 18, quarter-on-quarter now, was a little bit above 30%. So that indicates that comps really have been very high. And if we now do a very simple exercise and at quarterly growth, '18 and '19 for the first, second and third quarter each, then we end up with pretty much the same growth rates for all those quarters. So it's really a little bit the little shifts and changes that you see quarter-on-quarter.

And then you had a few questions -- or 2 questions actually about the chromatography business, we would add to our portfolio in SSB. And actually, again, I think -- I assume at least it's fine to your understanding that we cannot give more detail at this point in time. You were asking for overlap of clients. I mean you can imagine that Pall, Danaher as well as Sartorius and also other players, basically all have the big biopharmaceutical companies as their clients, and also maybe the midsized and some of the smaller clients as well. So therefore, of course, there is a certain overlap but in the sense of -- you can also say complementary fit and in a sense of relevance, et cetera.

And I guess when I was talking in a bit more detail about the positioning and how we intend to integrate that, I think I was saying that resin-based chromatography, it's nicely -- in a very complementary way to our existing portfolio. And that we, therefore, believe that as we are doing that today in offering a very complete upstream offering that we can -- in the same direction with regards to downstream processing. I don't think that I, I mean, in a position today to make any statements in regards to the technological differentiation of these portfolios. I think that would be a very detailed discussions between experts maybe.

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Operator [42]

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Okay. There are no further questions at this time. And I would like to hand back to Dr. Joachim Kreuzburg for closing comments. Please go ahead.

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Joachim Kreuzburg, Sartorius Aktiengesellschaft - Chairman of Executive Board & CEO [43]

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Yes. Thank you, everybody, for participating in our call here today. Thank you for your interest in Sartorius. Thank you for being available and making ourselves available at short notice. I can assure you, we'll update you as soon as possible on any new developments in regards to the proposed acquisition that we were talking about here today. Very much looking forward also to reporting on our full year's figures, end of January, most likely. Once again, thank you very much. Have a good day. Take care, bye-bye.

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Operator [44]

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Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.