Gerresheimer AG (GRRMF) Q3 2023 Earnings Call Transcript

Gerresheimer AG (OTCPK:GRRMF) Q3 2023 Earnings Conference Call October 5, 2023 4:00 AM ET

Company Participants

Bernhard Wolf - Corporate Senior Director, Investor Relations

Dietmar Siemssen - Chief Executive Officer

Bernd Metzner - Chief Financial Officer

Conference Call Participants

Victoria Lambert - Berenberg

Falko Friedrichs - Deutsche

Oliver Metzger - ODDO BHF

David Adlington - JPMorgan

Oliver Reinberg - Kepler Cheuvreux

Sven Kuerten - DZ Bank

Operator

The conference is now being recorded. Ladies and gentlemen, welcome to the conference call regarding the publication of Gerresheimer Q3 Results 2023. At the moment, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation.

Now I will hand you over to Mr. Bernhard Wolf, Corporate Senior Director, Investor Relations. Please go ahead.

Bernhard Wolf

Hello, everybody. A warm welcome to all of you from the whole Gerresheimer.

This morning, we published our Q3 figures and we are now happy to guide you through the data set, add some insights and answer your questions.

With me today here in Dusseldorf are our CEO, Dietmar Siemssen; as well as our CFO, Dr. Bernd Metzner. As usual, we are presenting a set of slides together with the management's notes, following by a Q&A session. Please note, this call is being webcast live and will be filed on our website as always.

Before we start, I have to remind you that the presentations and discussions are conducted subject to the disclaimer. We will not read this disclaimer but proposed taken it as read into the records for the purpose of this conference call.

And now, it's my pleasure to turn the call over to Dietmar Siemssen. Dietmar, please go ahead.

Dietmar Siemssen

Yeah, thank you so much, and welcome everybody. Thank you for joining us this morning.

Bernd Metzner, our CFO and I will now run you through the highlights of our third quarter in 2023. As always, we will then be happy to take your questions.

Our strong business development, its result, is what you see on this slide. We have successfully transformed Gerresheimer into a system solution provider and the market now recognizes our strength. We offer one of the broadest, if not the broadest, portfolio of containment solutions and drug delivery systems on the market. We develop digital solutions for therapy support and traceability. We scale industrial production for customized solutions globally while meeting the highest international pharmaceutical quality standards.

We have the competencies and innovative solutions to tackle any challenge to support our customers, to bring any drug to and into the patient. This includes highly demanding large molecule formulations as well. We provide the right solutions to our customers at any stage of the drug lifecycle in all major global markets. That makes us the strategic partner of choice for the global pharma and biotech industry.

Organic revenue growth was 5.5% in Q3. The underlying growth course is unchanged and we will deliver double-digit revenue growth for the full fiscal year as put forth in our guidance. The adjusted EBITDA showed an organic growth of 16.4%, resulting in a notable major margin expansion year-on-year.

This is the Q3 snapshot of healthy growth in line with our strategy. Our bottom-line grew stronger than the top-line. The transformation and repositioning of the company towards higher-value products pays off, resulting consequently in better margins. The adjusted earnings per share too grew by 4.4%. We hereby confirm our guidance for the full fiscal year 2023, as well as our mid-term guidance.

Our profitable growth momentum will continue. All growth projects are on track and being implemented according to plan. Our order book, as mentioned several times, which is at record high, also impressively shows the transformation of our company. We currently have the highest order intake in our corporate history, even outperforming the very strong years 2021 and 2022.

On our last call, we told you that we are working on new orders for GLP-1 obesity drug in the upcoming months and that the capital increase will finance necessary capacity expansions. We have now secured new additional orders at attractive terms and conditions. Our customers trust us to be the right partner going forward and to deliver the capacities they need, and we will.

We worked hard during the last few years to build the foundation for our success today and in the future, optimizing and strengthening the existing business while expanding into new growth markets.

We completed our broad product portfolio with new innovative solutions. Today, we are continuously innovating for a better life. We are now able to harness global mega trends in the pharma and biotech market. Our GLP-1 business is a very good example of this.

Second, customer centricity. We definitely broke down the silos. Today, we leverage synergies in our divisions and force the innovations to find the best-tailored solutions for our customers.

Third, operational excellence. Good was not enough. We examined each single process and optimized it, we industrialize, we scaled production globally. Today, we are setting standards in the industry in terms of quality as well as processes and cost efficiency.

And finally, of course, leadership. We now have a team in place with an outstanding growth mindset, fully committed to grow the business and increasing our margin.

This foundation opened highly attractive growth opportunities with existing and this is even more important, with new customers. Just a few years back, these new customers may have turned to one of our competitors because they did not know that we could provide the right product or because they did not trust us that we could come up with an innovative solution.

This perception has completely changed. We have proved our innovative strengths and the ability to deliver the key pharma players in the market. They know they can entrust us with their new developments as well as with their new and existing drugs already in the market. They know that we will solve all the complex challenges of industrial production for the primary packaging solutions or also drug delivery systems, shortening their time to market and reducing the total cost of ownership for their product. The transformation to a system solution provider and the change of perception now results in the strongest order intake in our corporate history. And this will fuel our profitable growth in the years to come.

We are addressing the needs of our customers with dedicated products for key therapeutic areas, anything from chronic and autoimmune disease, cell and gene therapy, vaccines and infectious diseases, ophthalmology, oncology, respiratory and cardiovascular diseases to diabetes or -- and metabolism disorder. In all of these therapeutic areas, we have the capabilities and solutions to be the full-service provider for pharma and biotech companies, any size and at any stage of the drug lifecycle.

As this slide visualizes, the GLP-1 business for treating obesity is certainly relevant and important, but it's just one therapeutic area for which we provide customized solutions. Our broad systems and solutions provide services as a much wider range for therapeutic areas. The number for the market potential for the treatment of chronic obesity with GLP-1 drugs vary, but all have one message in common, the market is big and it's permanently growing. One of the largest, or latest market estimates was $80 billion. Considering that the primary packaging and drug delivery system market would represent 2% to 4% of the overall market, we would be looking at a potential market of roughly 1.6 billion to 3.2 billion euro or dollars. Maybe even more, and we are a key player in this market.

We already have contracts for syringe systems, pens, autoinjectors and containers for solids with the leading GLP-1 players in place. We have now signed new additional contracts for syringes, pens and autoinjectors. Based on these and other long-term contracts, we are expanding our production facilities and our global footprint. For example, Peachtree in the U.S. for pens and autoinjectors; Queretaro in Mexico; Skopje, North Macedonia, Horsovsky Tyn in the Czech Republic; and Bunde and Pfreimd in Germany for syringes, pens and autoinjectors. And we have won another order for GLP-1 solid containers just recently.

Our broad systems and solution portfolio opens unique growth opportunities presented by global megatrends, whatever solution is needed to contain or administer the drug.

This slide gives you an impression how well-positioned we are with our products systems and solutions in key therapeutic areas, including highly sophisticated solutions for biologics. For example, we offer shatterproof vials and syringes made of Cyclo Olefin Polymers, COP, vials and syringes. COP vials and syringes are the right solutions for a challenging therapy or, for example, mRNA vaccines which need cold storage.

We offer ready-to-fill syringes with countless closure and needle options, silicon-free syringes, for example, for ophthalmic and other therapies. Other special syringe solutions for large molecule applications. Elite Glass Vials for an entire range of therapeutic areas, meeting the highest quality and safety requirements, while reducing the total cost of ownership. Custom-made inhalers for respiratory therapies. Our SenseAir pump platform for antibody-based cancer therapy or any other large molecule applications. Wearable and patch pumps for high volume applications for these treatments of, for example, Parkinson's, cardiovascular disorders, or other rare diseases. Pens and autoinjectors for chronic diseases like diabetes. This includes our own solutions like the Inbeneo autoinjector, which helps our customers to significantly shorten their time to market.

We are one of the key players in the market with syringes, autoinjectors, cartridges and pens, and we are a key player in the obesity care market. The contracts already won are clearly a proof of this. We have high-value solutions in all product categories in place. We have ready-to-fill options for synergies -- sorry -- for syringes, cartridges and vials. Whatever challenge our customers have, safe containment or sensitive drugs, precise, safe and convenient way of administration. Highly efficient and cost-effective production for the primary packaging solution or drug deliveries devices, we solve it and we deliver.

The rollout of our Formula G strategy transformed Gerresheimer. As a system solution provider and partner of choice for the global pharma and biotech industry, we support our customers to improve the quality of life and health of millions of patients worldwide. We have clearly expanded our portfolio with high-quality and highly innovative products and solutions. We have fostered operational excellence. We have put our customers first. These measures were the prerequisite for strengthening of the market position, for being able to size market opportunities and not to forget to accelerate our profitable growth. And this profitable growth is sustainable, because it does not depend on one single application or trend, there's significantly more to come.

Thank you very much. And with this, I will hand over to our CFO, Bernd Metzner, for a deep dive into our figures in Q3. Bernd, you have the floor.

Bernd Metzner

Thank you, Dietmar, and welcome everybody also from my side.

Let's dive into the analysis of the key financials for the third quarter 2023. Once again, we showed a strong quarter with continued double-digit organic growth in earnings and solid revenue performance.

Reported revenues increased from €473 million in Q3 2022 to €488 million in Q3 2023. Adjusted for FX effects, organic revenue growth amounted to 5.5%. Our profitability once again developed very good with an over-proportionate increase of adjusted EBITDA versus revenues. FX adjusted EBITDA increased from €88 million to €103 million in Q3 2023, representing an organic growth rate of 16.4%. Our EBITDA margin, FX adjusted, expanded substantially by 200 bps from 19.1% to 21.1%. Adjusted EPS increased organically from €1.13 by 4.4% to €1.18. This increase considers already the dilutive effect of the pro rata recognition of additional shares after the capital increase in April this year.

Let's continue with the deep dive into the divisions.

Plastic and Devices: For Plastics and Devices, reported revenues in Q3 2023 grew from €244 million to €261 million. Adjusted for FX effects, the organic revenue growth amounted to 8.7%. In Q3 2023, all business areas in Plastic and Devices contributed to the strong growth. Plastic containment solution benefited from higher customer demand across wide areas of the business, and we saw a particularly strong revenue acceleration in the medical system business, reflecting strong demand, especially for pens.

As a side note and already flagged in our Q2 call three months ago, we have seen a decline of the resin price in the last couple of quarters, which as you know, we basically pass on to our customers over time, so reducing our top-line whilst improving our EBITDA margin.

The adjusted EBITDA increased from €59 million in Q3 -- sorry, Q3 2022 to €63 million in Q3 2023. Excluding FX effects, we've delivered a strong organic growth of 11.4%. The margin has improved by 60 basis points from 24.1% to 24.7%. The bottom-line benefited from both, product mix effects and economics of scale.

Primary Packaging Glass: The Primary Packaging Glass division showed another strong quarter with solid revenue performance and very strong margin expansion. Reported revenues went from €229 million to €228 million. Adjusted for FX effects, the organic revenue growth amounted to 2.6%. So, we have seen continued organic revenue growth despite, as flagged already at our Q2 call three months ago, the temporary, I repeat, temporary decline in demand for injection vials after the COVID-19 pandemic. Demand for the high-value ready-to-fill vials, however, remains high and expanded compared to Q3 2022. We have increased our capacity for high-value glass vials in particular and are confident of benefiting from the global trend towards higher quality vials going forward.

On an as-reported basis, the adjusted EBITDA increased significantly from €44 million to €49 million in Q3 2023. Excluding the FX headwind, we achieved an organic growth rate of 19.8% and our EBITDA margin improved, FX adjusted, substantially from 19.2% to 22.5%. Our sustainable here-to-stay price increases are taking hold.

Advanced Technologies: Advanced Technologies performed according to plan. Reported revenues stand at €2 million in Q3 2023 and adjusted EBITDA was minus €4 million, unchanged to previous year. We maintain our sharp focus on R&D in this division. At Advanced Technologies, we continue to strive to establish Gerresheimer as an innovative original equipment manufacturer for smart and connected devices in the healthcare industry. The project for the development of a micro pump for the treatment of chronic heart failure disease is running according to schedule and we are working closely with new customers on further innovative projects.

The next slide shows the reconciliation from EBITDA to adjusted EPS. Worth highlighting, the organic adjusted EPS growth of 4.4% for Q3 2023 despite the 3.14 million new shares in conjunction with the capital raise in April 2023. Based on this positive performance and our outlook, we expect to grow at least, I repeat, at least low single-digit for the full year 2023.

Let's turn now to cash flow and net financial debt. The free cash flow of plus €80 million was €64 million better than in the prior-year quarter. If we compare the free cash flow versus second quarter 2023, one appreciates and sees how positive this performance was. We realized a swing of plus €120 million from minus €40 million in Q2 2023 to plus €80 million in Q3 2023. There are three main drivers for this positive development compared to Q3 2022.

First, good bottom-line performance with high earnings quality. Second, we received pre-payments of almost €70 million in connection with the new GLP-1 contract wins. This is a result of our long-term oriented win-win partnership philosophy and reflects obviously also a strong commitment of our partners. Third, and additionally, we see a release in our net working capital overall, and that despite having material less cash-in contributions from factoring realized compared to Q3 2022. As a consequence of these three positive drivers, we could overcompensate negative elements in our free cash flow statement like higher interest and taxes.

Deep dive into CapEx. In Q3, our net CapEx increased by around €19 million to €79 million compared with the previous year, as we continue to invest in global injectable capacity and further ramp up contract manufacturing projects, including several projects related to GLP-1. Also, going forward, we will rigorously execute on our ongoing projects and expect to win further new attractive businesses in highly attractive niches, such as GLP-1 and biologics.

Net financial debt decreased as we temporarily used the funds from the capital increase to reduce drawings on our revolving credit facilities. So, adjusted EBITDA leverage came down to 2.3 times in Q3 2023.

Looking at the full year, we expect a strong cash performance in the last quarter of the year, as usual. Generally, our free cash flow performance is strongly influenced by the execution of our investment program in profitable growth. Having this said, we should arrive at a range from the guided moderately negative to an even breakeven free cash flow in 2023.

With this, I hand back to Dietmar. Dietmar?

Dietmar Siemssen

Well, thank you, Bernd. Thank you for nice figures.

Yeah, based on the strong performance in the first nine months, it's not so difficult for us to reaffirm our full-year guidance with double-digit growth in revenue and adjusted EBITDA of at least 10%. You can also expect our adjusted EBITDA margin to improve in comparison to the previous year as scheduled in our long-term guidance. We are on track and we will deliver on our guidance. This includes also our EPS, earnings per share, guidance despite a higher number of shares from our capital increase this spring.

Our mid-term outlook, backed up by a very strong order book, remains strong and positive as well, with organic revenue growth of at least 10% and adjusted EBITDA margins of 23% and later above to 25%, resulting in organic growth and adjusted earnings per share of at least 10% per year. We are continuing our profitable growth path and would be delighted if you would accompany us going forward.

Let's have a brief look into the financial calendar. The next opportunities to check in on our progress are the following: we will publish our results for the full fiscal year 2023 on February 22, 2024; first quarter results of the new fiscal year 2024 will be published on April 11; second quarter and half-year results on July 11, 2024. We hope you will join us again for the respective calls.

Thank you. We are now happy to take your questions.

Question-and-Answer Session

A - Bernhard Wolf

Thank you very much to you all. Let us switch now to the Q&A session. The lines are now open for questions. [Operator Instructions] The first question comes from Victoria, Victoria Lambert from Berenberg. Please go ahead.

Victoria Lambert

Hi, thanks for taking my question. My first one is just given the new GLP-1 contract extensions, why haven't you raised your medium-term guidance?

The second question is just how we should think about finance costs in Q4 and next year?

And then the third one is just, do you expect any impact from vaccines or FX in Q4, similar to the effect of Q3? Thank you.

Dietmar Siemssen

Yeah, I think I can take the first one. You take the second one, because I didn't fully get it. [indiscernible] Yeah, thank you for your question. Yeah, the new GLP-1 orders are strong and very helpful. Why don't we increase the mid-term guidance? I think the mid-term guidance with double-digit growth over the next year is strong enough. From my point of view, the market priced in the strong development first before I give them further [food] (ph) and things. But there's no doubt, there is a certain robustness, of course, in the years out, especially if you go in the launch phases '25, '26, where we definitely will show pretty strong performance.

Bernd, you take the second, or should I do the first one -- I'll do the third for first, because it's an easy one. The Q4 is usually always a good year -- strong year for -- quarter for the syringes. We produce the syringes over the loop of the year. And then before the vaccines actually go to market, they are ordered and we will see how this develops. I'm actually pretty optimistic, especially for the syringes in Q4.

Bernd Metzner

Taking your question regarding the finance cost for Q4, I think the -- and expect that the finance result should be around -- basically better than what you have seen now in Q3, maybe minus 9, minus 10. And this would bring us to a finance result of maybe €43 million, €44 million, something like this in the magnitude, I just have to tell you.

Regarding the guidance for the full year -- for the next year regarding finance, because I think it's too premature, and I come back to what Dietmar said, when we release our Q4 numbers on the February 22, we will also talk you through the year 2024. But conceptually, I think I don't want to speculate, but conceptually, the interest should go down. And I think the -- as far as the variable interest is concerned, I would personally assume that somehow we see a certain release for the upcoming years as far as our finance costs are concerned on a [indiscernible] obviously.

Regarding the FX effects for Q4, also here it's difficult to predict. Last year, looked at it, we had an EPS in strong support by FX -- positive FX effects. Also this we excluded, now the FX effects are against us. And I would not assume, and we cannot speculate now what could be the FX effect for Q4. But what is important is that our operational performance was measured without any FX adjust -- without any FX effects, Victoria.

Victoria Lambert

Thanks. And will there be any impact from COVID vaccines in Q4 like there was in Q3 with the take and pay?

Dietmar Siemssen

No, I don't think we see -- we will see a lot of COVID impact at the moment. The next wave that will most likely come is a combination of classic flu formulations with COVID. And I don't think that this is something we will see in '23.

Victoria Lambert

Thank you.

Bernhard Wolf

Thank you. Thank you, Victoria. So, the next is Falko, Falko Friedrichs from Deutsche. Please go ahead.

Falko Friedrichs

Thank you very much. Good morning, everyone. My first question, going back to your GLP-1 contract. Nice to hear about those extensions. You've spoken about a peak sales potential of €200 million to €300 million before. Are you able to give us a flavor for how much of an uplift we can now expect from these new contracts?

Then my second question is, you flagged the temporary lower demand in your injection vials business in the third quarter. Can you speak a little bit more about this? What exactly you're seeing there? And also for how much longer that lower demand can potentially last?

And then my last question is on the mid-term targets. Thanks for the answer on growth. How should we think about your CapEx spend now going forward, and also your free cash flow in light of these contract extensions? Thank you.

Dietmar Siemssen

Thank you. Yeah, the GLP-1, interesting, well, I never mentioned €200 million to €300 million. I just said it several million, but it's right, it's not so wrong. And there's no doubt, the additional orders that are coming in at the moment are adding to this amount, so we are probably already beyond the figure you mentioned here.

In the vials, yeah, there is, what we see at the moment, Q3, and you might also see this in Q4, a certain destocking effect. It's not necessarily the COVID, it's really in the COVID time, some of our customers -- many of our customers were cautious. They added to the safety stock in their warehouses. And we see at the moment a certain destocking effect.

How long this takes? We have to see until they are on their new target safety levels. We see -- that's what Bernd spoke about this as a more or less temporary effect. Whether this goes into the first quarter '24 or not, we have to see. Important for us is that it's not necessarily something we didn't plan with. The important point is that we are steadily replacing these volumes with high-volume, high-value vials and this is what actually takes place.

So mid-term target of CapEx spend, I think we discussed it several times, there's no doubt, with all the orders flying in now at the moment, there is definitely a peak in CapEx in this year, and we expect a similar amount probably next year also with the new orders that are bringing in. And I don't see the CapEx growing significantly above this figure that we are doing at the moment. Whereas on the other side, the EBITDA every year is adding a chunk of dollars and euros, and that is definitely very helpful for the free cash flow.

Bernd Metzner

Maybe just, Falko, to add on, and what we're always saying, and this takes also hold and is valid also for our plan – mid-term plan, €1 expansion CapEx translates in €1 additional revenue. That's a concept we have, and this we have also in mind for our company going forward.

Falko Friedrichs

Okay, thank you.

Bernhard Wolf

Thank you, Falko. Oliver Metzger from ODDO BHF, it's now your turn.

Oliver Metzger

Yes, good morning from my side. First question is also on destocking. Can you elaborate about the importance of year-end orders and whether a different pattern might enlarge the destocking effect we saw recently?

Second is about organic growth in the last quarter. So, I assume the headwind from the resin prices will continue. In PPG, it should become a little bit better due to more attractive comps. So, do you think that you might be able to report double-digit organic growth from last quarter?

And my last question is also conceptually how to think about '24. So, if you use '23 as base assumption, so can you share some of the major drivers which might have incremental possible negative effects? So, I mentioned resin price before, because to my understanding that should also have some negative impact for H1 next year. Thank you.

Dietmar Siemssen

Yeah. Maybe -- I think we spoke about the destocking is something we can't say. And the year-end orders is something I don't even know whether it exists in this industry. Sometimes the orders are -- customers order a little bit, sometimes not. I wouldn't say that this is a relevant impact at all for our industry.

Coming to the resin prices, the resin prices are something -- they are as they are. We are pretty cool. We have in many areas of the business clauses in the contracts. That's why they have maybe an impact on the top-line, but they have no impact on the bottom-line. With all the increase of the resin prices last year, we had -- or the last two years, we had quite some tailwind in this, but it actually weakened our bottom-line margin. If this is now coming back, I'm pretty relaxed because this will further help in the -- on the bottom-line and the margin. And this is what we'll expect. Actually, for the first quarter, I wouldn't see too much pressure on the resin prices at all.

Bernhard Wolf

Oliver, did we miss one question? And if so...

Dietmar Siemssen

Maybe we did.

Oliver Metzger

It was also about '24. So, now we deal with resin, but are there any major drivers compared to '23, which basically push your organic growth in one or the other direction?

Dietmar Siemssen

Yeah, there's no doubt. Some of the platforms that we invested into in '21, '22, they are now launched. We are expecting key SOPs in '24, and that will definitely help us. Even the first GLP-1 applications are starting to show reasonable volumes, and maybe not in a total different maker as a volume, but we are also expecting to launch the pump here, SQ Innovation, and that will also drive the growth. So, '23 or '24 will also be an interesting year.

Bernd Metzner

Maybe just on -- you might understand, we are just in the phase of finalizing our budget for the next year and we give the guidance for the next year on February 22 when we release our full year numbers, then we will shed also light on this topic.

Oliver Metzger

Yeah. Okay.

Dietmar Siemssen

Resin prices, one more time, they might influence the top-line, but they will definitely not negatively influence the bottom-line. And here we will be very strong.

Oliver Metzger

Yeah, okay. I've got this. But do you expect double-digit growth in Q4?

Dietmar Siemssen

We are not guiding quarter-by-quarter. We are expecting that there is no problem to reach our guidance for the total year.

Oliver Metzger

Okay. But that would leave us a lot of room. Okay. Then I leave it by that. Thank you.

Bernhard Wolf

Thank you, Oliver. So, next is David Adlington from JPMorgan. Please, David, go ahead.

David Adlington

Thanks for the questions. So first one, just following up on Oliver's question today, your EBITDA growth is about 20%. You only reiterated the more than 10% this morning. So to get down by 10%, that we got contracts for the quarter. I just wanted to square the circle here in terms of -- is there any expectation that you could contract EBITDA or you're just retaining [indiscernible] guidance. And I suppose the key question is why not upgrade your full-year guidance?

Dietmar Siemssen

There's quite some interruption in the line. I didn't actually fully get the question.

Bernd Metzner

So basically the question, just to translate a bit, you mentioned you are so strong so far in our EBITDA growth, why -- you just say that we at least have a 10% EBITDA growth for the full year, why we are not more precise? Let's put it that way. That's basically the question that David asked.

Dietmar Siemssen

But it's -- you can do your math. I'm not expecting that the bottom-line will perform in Q4 worse than over the loop of the year. So, we will have a strong development.

David Adlington

Good. And then maybe on...

Dietmar Siemssen

It will be better than 10%, yeah, through some buffer.

Bernd Metzner

Yeah. And basically just to be very concrete, David, we never guide for a specific quarter. Dietmar just mentioned this before, and I know that we have so far very strong EBITDA growth and we are very good in shape and we are saying at least 10% and we will release also here the details, obviously, when we release our Q4 numbers.

David Adlington

And then maybe just on the GLP-1s, Ypsomed recently talked about out-licensing their IP on the GLP-1 side. Have you been on the other side of that? Have you in-licensed any IP from Ypsomed? And if not yet, do you expect to?

Dietmar Siemssen

I can't disclose these details as you can understand.

David Adlington

Thank you. And maybe I'll just...

Dietmar Siemssen

I can't disclose details on this -- on customer projects that are in discussion, or might be in discussion, and before they are signed.

David Adlington

Maybe just one follow-up question on the GLP-1s. You obviously raised a best part of €300 million of new capital, of which, I think, about two-thirds of resets is towards the GLP-1 CapEx. In terms of that €70 million contribution of pre-payments, is that on top of the €200 million of CapEx you sort of set aside for additional GLP-1 capacity?

Bernd Metzner

David, no the €207 million it's -- this is €270 million including also the pre-payments. But in the end of the day, I mean, if we need funds for additional projects it would be available. And -- but for the calculation purposes, we actually -- we would assume them, but it's quite artificial. If we get a very attractive project which fits to our business, we would find the funds to invest in them. But to be crystal clear, and still valid and as mentioned before, the €270 million are basically earmarked for really attractive projects where we are investing in two-thirds for GLP-1, one-third for biologic.

Dietmar Siemssen

Which is a rough direction because we have to win the orders all first. But whether it's GLP-1 or not, it would be attractive orders, because there is other very attractive business out there, especially in the area of large molecules that we are going to do.

Bernhard Wolf

David, is there anything from your side?

David Adlington

Thank you very much.

Bernhard Wolf

Okay, thank you very much. Next one is Oliver Reinberg from Kepler Cheuvreux. Please, Oliver, go ahead.

Oliver Reinberg

Good morning. Thanks very much for taking my questions. There's three if I may. And firstly, also on GLP-1. Also from earlier discussions, part of your GLP-1 portfolio also includes dual chamber syringes. So I was wondering, can you first just provide some kind of color on what drove the kind of decision to move into this kind of area, where you have probably the kind of attractive kind of monopoly position? And also, can you just comment on whether the kind of new contracts that you announced are also including expanded capacities for dual chamber syringes? That will be question number one.

Secondly, on the topic of syringes, in general, I mean, obviously, the kind of supply of syringes was held back in Q3, I guess, on the back of the switching of your kind of production towards GLP-1. Can you just give us any kind of flavor what kind of a top-line -- drag effect on top-line growth for the group you've seen on that? And also is this kind of conversion now fully done, or is there any kind of further effects to be expected?

And then the third question, just on vials and just on standard vials. I mean, currently, obviously, the demand is softer on the back of the COVID phase-out, but I guess at the same time, there is also a number of more capacity ramping up. So can you just talk generally about the kind of supply-demand situation in vial, please? Thank you.

Dietmar Siemssen

Yeah. I'll pick the point with the syringes first. It was a very comprehensive question actually. There are not so many players that are capable of producing a solid glass syringe in the world. There's only a handful. Gerresheimer is very leading in, for example, special syringes like dual chamber. That's why we actually work with one of these customers for GLP-1 with the dual chamber Gerresheimer syringe. And yes, we had to switch some details of the production of our Bunde plant towards dual chamber. And we're actually adding significantly capacities in North America, here in Queretaro, Mexico for this, and of course, a couple of other syringes as well.

The long-term guidance, I think I gave out at the Capital Markets Day where I indicated, you have to understand that we are investing significantly in syringes, which is not only dual chamber but also other applications. We will more or less double our capacity of the group over the next years, but we will more than three-double our sales, and that indicates that the transformation that goes on in syringes is primarily also a shift into high-value products and high-value solutions. I hope this answers your question.

To the vials, we see also here that the general thing is unchanged to what we said. There is a clear trend towards more high-value products. We are benefiting from large molecules, from biologic drugs that are very demanding in the packaging -- primary packaging, and that is a clear switch of the market towards more and more high-value products, might it be Elite, and might it be ready-to-use. And I think this is what we benefit from.

The effect at the moment of a certain destocking is something we see and we feel you might not see this one-on-one because it's compensated by the other effects, and on the long run we have to see this. We are pretty convinced that the long-term trends towards more injectable drugs, which means more large molecule, they're all injected, they're all liquid, leads to a permanent increase of the demands of vials, cartridges, syringes, but also the secondary packaging, whether it's autoinjectors, pens and pumps. And that is what we see, not only mid-term, but also long-term.

Oliver Reinberg

Okay. And just to follow up, I mean on these dual chamber syringes, can you just clarify if there was any kind of additional contract for dual chamber syringes?

Dietmar Siemssen

It's not -- yeah, you can call it additional, you can call it an expansion of the contract, because these specific syringes we are talking about is only for one customer, but of course, they are significantly expanding their demands. And that leads to capacity increases that we have to add.

Oliver Reinberg

Okay, super. And can you just quantify the headwind on your general syringe capacity in Q3 from this kind of switching where capacity was not around?

Dietmar Siemssen

I didn't get this. Can you...

Bernd Metzner

Can you repeat the question, please?

Oliver Reinberg

I mean, effectively, you talked also in earlier quarters about the fact that the growth in syringes was held back in the first nine months as you switched basically kind of production over to GLP-1. So, I was just trying to get a kind of feeling for what was the kind of drag from this missing capacity that has not contributed to top-line growth in Q3?

Dietmar Siemssen

You mean the changeover of the glass forming lines? That of course, took out a certain capacity for a certain time. That's true. And you -- that's why you might expect increasing volumes in Q4 and of course to '24.

Oliver Reinberg

All right. Okay. Thanks very much.

Bernhard Wolf

Thank you. Thank you, Oliver. I see Sven, Sven Kuerten from DZ Bank. Please go ahead.

Sven Kuerten

Yes, thank you. Firstly, you talked about the very strong order intake. The question is, could you give us a quantification of the order intake and volume in terms of year-on-year growth rate?

And secondly, as a clarification question, did you see a relevant market for [obesity] (ph) drugs of €1.6 billion to €2.2 billion for Gerresheimer? And what would be a realistic market share for Gerresheimer on this market?

And then, thirdly, which percentage of the total order is a typical pre-payment in GLP-1? Thank you.

Dietmar Siemssen

Tricky question, because we can't -- some of this we don't even look at. The order intake is very strong and some -- one should not forget, these orders are not unexpected. They're definitely helping and they are giving the right foundation for the strong mid-term guidance and long-term guidance. And it gives more and more confidence into the guidance that we will deliver, and I think this is important. Don't think that this order intake is only on the area of GLP-1, because I think Gerresheimer is providing a wide area of different solutions. That's what we do.

Bernd Metzner

Regarding the -- maybe just regarding pre-payments, GLP-1 has been -- there is no precedent for that. So it's really something I would never say this representative somehow, because it's a very individual discussion. And what you have...

Dietmar Siemssen

What you see in general, though, and that is very clear, the way we are working with our customers has changed significantly over the loop of the last years. It's not only the perception that we are a better partner for products and solutions, it's the terms and conditions that have significantly improved for us, because the customers see us as a partner on eye-to-eye level, and that of course leads to better terms and conditions, not only by pre-payments, but also things like protections, like take or pay clauses, but also should not forget this in the classic margins.

Sven Kuerten

Yeah. And the market potential for obesity drugs? You mentioned earlier in the call, I think you said something €1.6 billion to €2.2 billion relevant market for Gerresheimer. Did I understand that correctly?

Dietmar Siemssen

That's the market potential for a packaging area. And there's no doubt, we are at the moment already underway and we are prepared to take a -- yeah, a reasonable good chunk of this market.

Sven Kuerten

Okay. From a target market share, you can put no number on that probably.

Dietmar Siemssen

It's not the market share I'm looking at. I'm looking at sustainable profitable growth of the company.

Sven Kuerten

Okay. Thank you.

Dietmar Siemssen

More important is that you generate a company, I don't want to have a market share and be -- we don't need to be the number one everywhere. More important is that the company is growing double-digit at a very reasonable margin that is directionally above the 25% margin. That is what we are aiming for long-term. In this, we will definitely also take a very attractive market share, not only in GLP-1, but also in other areas.

Sven Kuerten

Okay, thank you.

Dietmar Siemssen

For us, it's also important, we should not forget this, to balance, to balance our product portfolio in the right way. Yeah. It's nice to benefit from the GLP-1 and it's a great party at the moment, but I also do not want to be completely depending on one story alone. That's why it is essential for the company to focus on the full broad portfolio, various customers and various therapy areas.

Bernhard Wolf

Thank you, Sven. I move to James, James from Jefferies. Please go ahead.

Unidentified Analyst

Hi, thanks for taking my questions, please. Just a few on the new GLP-1 contracts. Can you quantify at least the kind of magnitude this would have from the overall contracts you have so far? I appreciate you don't want to be specific numerically, but give an idea of quantum of increase, that would be helpful.

And, secondly, what this means to the cadence of growth? You mentioned an acceleration in '25 and '26. So, if there's an acceleration of delivery, are you also able to allude as to whether these contracts are more in syringes or plastics?

And then the final question is, with these new contracts, what does this mean for the directional trajectory of your margins, potentially if there's more upfront investments as you move towards your mid-term targets? Thank you.

Dietmar Siemssen

Yeah. The entered contracts are key contracts also to deliver the mid-term guidance, the double-digit growth and -- which is the CAGR, CAGR of double-digit growth and also margins towards the 25%-plus. And the business we are talking about, whether it's GLP-1 or the other large molecule contracts that we've closed at the moment are all very accretive in regard of only the top-line, but also in the bottom line, it's very clear.

The guidance that you are looking for how much does it mean, I principally heard this already in this call, principally, whether -- I never spoke about the €200 million to €300 million that we had in the pockets, I always spoke about several hundred, but in principle I confirm that. So the new contracts that are now, like, they are actually adding to the story and that should give you a good understanding of what we are aiming for.

Unidentified Analyst

Perhaps if I can just ask a follow-up. I understand that they're incremental to the numbers you've already given, but I'm just sort of wondering overall whether we're talking an increase of, I mean, 5%, 10%, 20%, just to give us a feel in terms of -- from how you kind of laid out the previously kind of announced contracts, what this does in terms of being additive to that?

Dietmar Siemssen

James, we might appreciate this also -- it's a quite sensitive information, but the magnitude of the pre-payment of €70 million at least indicates that it's really a substantial relevant contract. And we are not talking here about peanuts.

Unidentified Analyst

Okay. And then just another kind of quick follow-up then, so to make sure I am understanding correctly, these should be accretive to profitability. So, at least in terms of the trajectory, whatever margin cadence was before, to make sure I've understood you correctly, is it fair to say that there's an acceleration of that, just given the mix of these new contracts coming in?

Dietmar Siemssen

And it's in line with our guidance and in line with our planning. You have to see where we are now with the margin and we are principally adding 1% margin every year. And what we do now is bringing the businesses into our -- ensuring that we also deliver.

Bernd Metzner

Our plan is, and -- is, was and will be that we each year increase our profitability by 1 percentage point going forward. And that's our concept. And all the details and we'll discuss the mid-term guidance again in our Q4 release when we have really a consistent data set. But it's clear that this is actually the way forward for our company, including the contracts.

Unidentified Analyst

Understood. Thank you.

Bernhard Wolf

Thank you, James. Alexander, please, it's your turn.

Unidentified Analyst

Yes, good morning. Thank you for taking the question. I would have a couple. The first one, maybe on the margin development. So, adjusted EBITDA margin increased but one does not necessarily see such an increase in gross profit margin. In fact, I think it was down year-on-year and quarter-over-quarter, despite the fact that you have the positive effect from the pass-through clauses. So, I was just wondering -- I was wondering how to explain that and whether you expect a much better margin than in the last quarter of this year. That will be the first one.

Bernd Metzner

Regarding the margin development, I don't know how you calculate the gross profit margin. But what you -- what do you actually see is that our EBITDA margin is increasing -- was increasing by 200 bps in the third quarter. So very strong and that we are really underway for the EBITDA margin to outperform it -- our EBITDA margin increased by 1 percentage point. Other than that, regarding the gross profit margin, why there should be a decline? Maybe it was to reconcile this, perhaps it's not in detail on the radar screen, I have to say, what could be the real root cause for this...

Unidentified Analyst

Okay. I was just thinking...

Bernd Metzner

...gross margins. Maybe you give me your number set and then I can probably just call.

Unidentified Analyst

Okay.

Bernd Metzner

Maybe, we can do one-on-one, but it's...

Unidentified Analyst

Sure. Understood. And then just to get an update on the Advanced Technologies division. You mentioned that SQ innovation is on track. I think you also have been mentioning a contract -- development contract with the U.S. biotech client. Could you provide an update whether there has been any change in terms of the timeline of that contract or structure with any kind of color?

Dietmar Siemssen

I think the projects are in plan. And the second project you are talking about is in development. So it's normally ongoing.

Unidentified Analyst

Okay. Then lastly on the tax rate. After nine months, you're roughly at 29%. I think previously you've been guiding for -- maybe it wasn't obviously precise guidance, but you have been envisioning around 27%. Is that something you still see for 2023, or are we going to be higher than that?

Bernd Metzner

We have, obviously, prospective to go for a tax rate of 25% in each year, and the certain volatility -- because it depends how you assess in the end of the day net operating losses -- for the net operating losses in certain sites and how you assess for that. And so, you always evaluate it for the year-end. So, in the end, our statement is as a company, we are driving for 25% -- for 25% tax rate. And there will be no surprise in Q4. That's basically in line what we have so far year-to-date.

Unidentified Analyst

Understood. Thank you.

Bernhard Wolf

Thank you, Alexander. Victoria, Victoria Lambert from Berenberg. It's you.

Victoria Lambert

Thank you. I just wanted to follow up on the destocking risk involved. Just so I understand, yeah, is this because of COVID or -- I'm just trying to understand what's going on here and when it should possibly normalize?

Dietmar Siemssen

Yeah. I think in that COVID time, the market was nervous. It's not only a question of the COVID vaccination. It's a question of no trucks available, no labor available sometimes. So in this time, it seems that some of our customers increased their safety stocks for vials, and what we see at the moment as things seems to normalize, they are -- destocking effect. As I indicated before, we do not know. We see this at the moment, we see this also in the fourth quarter. And I can't tell you how long this will proceed, because I do not know exactly the safety stock new goal that they have in their warehouses.

Honestly spoken, it's not an effect I see with a lot of -- I'm not so concerned about this effect. The long-term trend is completely unbroken. And as I indicated before, the important point is for us to replace the classic vials with steadily replace it with high--value products and this trend is unbroken, ongoing.

Victoria Lambert

Great. Thank you.

Bernhard Wolf

Thank you, Victoria. Colleagues, I see no more questions on the screen. Anybody, any burning topics to discuss? Okay, that's not the case. As there are no further questions, we would like to thank you for joining us today. All the best for you. With this, we close the call. Thank you.

Dietmar Siemssen

Thank you.

Bernd Metzner

Thank you.

Operator

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