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Gerresheimer extends business model and increases growth forecast

Nachrichtenagentur: news aktuell
11.07.2018, 23:41  |  299   |   |   
Düsseldorf (ots) -

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- With the acquisition of Sensile Medical, Gerresheimer is
extending its business model in the direction of an Original
Equipment Manufacturer (OEM) for drug delivery platforms with digital
and electronic capabilities for pharmaceutical and biopharmaceutical
customers. The purchase price is a maximum of EUR 350m with an
initial payment of EUR 175m.

- Gerresheimer has secured two major orders for the manufacture of
inhalers and prefillable syringes but lost a significantly smaller
order for inhalers resulting in restructuring affecting the plant in
Küssnacht, Switzerland.

- This will require higher capital expenditure - without
consideration of Sensile Medical - by a minimum of two and a maximum
of four percentage points of revenues at constant exchange rates in
the years 2019 and 2020. Among other things the higher expenditures
will be used for capacity expansion at Horsovsky Tyn (Czech
Republic), further investments in automation and a new plant in
Eastern Europe.

- For the financial years 2019 and 2020 - without consideration of
Sensile Medical - the adjusted EBITDA margin will therefore be
temporarily reduced by approximately one percentage point, compared
with the financial year 2017. This is a consequence of
proportionately higher revenues in the low margin engineering and
tooling business for the new major orders as well as increased
expenditures for relocation, employee training and production
start-up/ramp-up.

- In the years 2021 and 2022, revenues - without consideration of
Sensile Medical - are expected to increase by two percentage points
beyond the usual rate of growth, as is the adjusted EBITDA margin.
Capital expenditure will then return to approximately 8%.

- For the current year, Gerresheimer anticipates a strong second
half without consideration of Sensile Medical and has narrowed its
revenue forecast to the upper end of the guidance range.

Gerresheimer is acquiring Swiss technology company Sensile Medical
AG and thus fundamentally extents its business model. The acquisition
enables Gerresheimer to offer drug delivery platforms with digital
and electronic capabilities for pharmaceutical and biopharmaceutical
customers. "We are accelerating our growth and laying vital
groundwork for the years ahead. For Gerresheimer, Sensile Medical is
a perfect fit, as it develops innovative products and platforms for
drug delivery, including digital connectivity. Sensile Medical is
already working with customers on highly successful projects dealing
with devices for diabetics and patients with heart complaints and
therapy areas such as Parkinson's disease. Sensile Medical lays the
foundation for a major extension of our business model in innovative
application areas. We have also secured two major orders in our
normal business, meaning that we can expect higher revenue growth and
increased profitability in the medium term. The first half of the
current financial year is going as expected, with earnings per share,
in particular, performing well. We anticipate a strong second half
year and have accordingly narrowed our revenue forecast to the upper
end of the range," said Rainer Beaujean, Speaker of the Management
Board and Chief Financial Officer.

Acquisition of Sensile Medical

By adhering to its four growth drivers-stronger growth with
existing and new customers, ongoing product development and
innovation, regional expansion, and additions to the service and
value portfolio-Gerresheimer has now succeeded in taking a further
major step forward: After the balance sheet date, the Company signed
an agreement for the acquisition of Sensile Medical AG
(Olten/Switzerland). The purchase price will be a maximum of EUR 350m
depending on the attainment of contractually specific milestones. The
initial payment is EUR 175m. By making this strategic acquisition,
Gerresheimer gains a highly innovative technology, thus enhancing its
capability and product portfolio. This is a building block in the
Company's long-term development toward an original equipment
manufacturer (OEM). Sensile Medical's leading position in micro pump
technology combined with drug delivery devices featuring electronic
and connected capabilities for medical applications progresses to
market readiness in specific customer projects with pharma companies.
By contrast to the contractual manufacturing model in the
Gerresheimer Business Unit Medical Plastic Systems, Sensile Medical
is involved at pharma producers in an earlier phase of drug and
therapy development. In an already well-advanced collaboration, for
example, pharma group Sanofi contributes its many years of experience
with insulin and solutions for the treatment of diabetes. A further
party to the same joint project is Verily, a company in the Alphabet
group, with its expertise in integrating microtechnology and digital
health technology. Sensile Medical holds a large number of patents
and is remunerated by the pharma companies it partners with on
attainment of specified milestones in the development phase and by
way of royalties after product launch. It generates additional
revenue from the sale of devices, where the products can be
manufactured either by external producers or by Gerresheimer's
Medical Plastic Systems Business Unit. As a result, the new division
has little capital expenditure, a small asset base and low net
working capital. An initial, preliminary purchase price allocation
has shown that the transaction will result in virtually no goodwill
and that the acquired technology will consequently result in
amortization of fair value adjustments of approximately EUR 25m per
year over the next 15 years. As has been the case with previous
acquisitions, the amortization of fair value adjustments will be
adjusted out in the determination of adjusted net income.

On the basis of the current contractually secured project
pipeline, the initial, preliminary expectation for Sensile Medical's
revenues and adjusted EBITA is presented in the table below.

in EUR m FY FY FY FY
2018 2020 2022 2027
Revenues ~ 15 ~ 100 ~ 200 ~ 400
thereof
Development ~ 13 ~ 40 ~ 10 -
Parts ~ 2 ~ 55 ~ 160 ~ 340
Royalties - ~ 5 ~ 30 ~ 60
Adjusted EBITA ~ -2 ~ 10 ~ 25 ~ 90

The Company naturally expects to obtain new customer projects in
the future, which will further add to this pipeline. This may make it
possible among other things to further raise development revenues,
beyond 2020, although this is not yet secured by contracts. Sensile
Medical is to become the Development Division covering the field of
value added devices for the entire Gerresheimer Group.

New major orders and initial, preliminary guidance for the
financial years 2019 to 2022 - without consideration of Sensile
Medical

Gerresheimer has secured a large inhaler order for Europe from a
major international pharma producer. This was based on good
performance in supplying the same inhaler to this customer for the
North American market from the plant in Peachtree City (Georgia/USA).
Following tooling revenues in 2019 and 2020, the Company expects to
begin supplying the inhaler under this contract from the fourth
quarter of 2020. At full production, revenues from the contract are
anticipated of up to EUR 30m a year. To fulfill this order, the
Company is going to invest in the Horsovsky Tyn plant in the Czech
Republic during the financial years 2019 and 2020.

Furthermore, Gerresheimer has succeeded for the first time in
becoming the main supplier to one of the largest heparin producers
and is to supply this customer with prefillable syringes under a
multi-year contract. This is an outcome of Gerresheimer
systematically pursuing its syringes strategy and of ongoing good
operational performance in the syringe business. The Company expects
revenues from this contract to come on stream in the financial year
2019 and reach up to EUR 20m a year at full production. To generate
growth in medical devices and syringes generally, Gerresheimer plans
to build a new plant in Eastern Europe for manufacturing medical
devices and, possibly, syringes. Automation will also continue to be
accelerated across all plants.

In terms of organic base growth, for the financial years 2019 and
2020, Gerresheimer initially expects to grow with the market for
products relevant to the Company. This growth is to be increased by
one percentage point by means of further improvements in the product
mix, to be achieved through a shift toward more high-quality products
such as biotech syringes, new innovative developments like Elite
Glass, and also cosmetics finishing. In the financial years 2021 and
2022, the above-mentioned major orders-among other things-are then
expected to lead to a further two percentage point rise in organic
revenue growth.

For the financial years 2019 and 2020, as a consequence of the
major contract awards described above, Gerresheimer anticipates
higher revenues in the low-margin engineering and tooling business as
well as increased expenditure for relocation, employee training and
production start-up/ramp-up, resulting in a temporary reduction in
the adjusted EBITDA margin by approximately one percentage point
compared with the figure for the financial year 20171. As a result of
the measures described above and of the major orders, the adjusted
EBITDA margin at constant exchange rates is then expected to increase
in the financial years 2021 and 2022 by about two percentage points
relative to the financial years 2019 and 2020.

This growth will be made possible by additional capital
expenditure on immediate capacity expansion which, on initial
projections, will lead in the financial years 2019 and 2020 to a two
percentage point increase in capital expenditure measured as a
percentage of revenues at constant exchange rates. In addition, the
Company will also incur capital expenditure for the plant to be built
in Eastern Europe and for automation. Gerresheimer is still in the
planning phase in this regard, but likewise expects a two percentage
point increase in capital expenditure measured as a percentage of
revenues at constant exchange rates. From the financial year 2021,
the Company anticipates that capital expenditure measured as a
percentage of revenues at constant exchange rates will return to its
normal level of approximately 8%.

Business performance in Q2 2018

The Gerresheimer Group increased revenues at constant exchange
rates from EUR 335.8m in the prior-year quarter to EUR 343.0m in the
second quarter of 2018. On an organic basis-meaning adjusted for
exchange rate effects, acquisitions and divestments-revenues
consequently went up by 2.1% on the prior-year quarter. Demand for
plastic vials for prescription drugs in the USA was very robust.
Plastic primary pharma packaging also developed positively, mainly
due to growth in India. Revenues from tooling were down in the
quarter as budgeted. The inhaler project in North America performed
well. Overall, however, medical plastic systems revenues were down on
the prior year. Revenues from glass primary packaging in North
America were higher than in the prior-year quarter. Corresponding
revenues in China and from cosmetic glass also developed well. Due
mainly to the change in the USD exchange rate, reported revenues fell
in the same period from EUR 339.5m to EUR 332.6m.

An inhaler customer will not place any further orders for the
Gerresheimer plant in Küssnacht as the customer's inhaler business
fell short of its expectations. This will lose Gerresheimer revenues
of about EUR 12m in the financial year 2018 and of up to EUR 15m in
subsequent years. The Company is in advanced contract termination
negotiations with the customer concerned and has already recognized
an initial partial compensation of EUR 4.8m as income in the
reporting period. Moreover, Gerresheimer expects further
compensations during the course of the year, so that the total
compensation will roughly correspond to the affected plant's
contribution in the financial year 2018. Without this inhaler order,
the Küssnacht plant no longer meets profitability expectations. In
consultation with the remaining customers, Gerresheimer will
therefore relocate production to other locations in Europe, ideally
by the end of 2019, and close the plant in Küssnacht.

Adjusted EBITDA at constant exchange rates decreased as budgeted
from EUR 74.9m in the prior-year quarter to EUR 73.9m in the second
quarter of 2018. This includes a EUR 1.1m expense from the final
measurement of the Triveni put option. Adjusted EBITDA after exchange
rate effects came to EUR 71.1m, compared with EUR 75.8m in the second
quarter of 2017. The adjusted EBITDA margin was 21.4% which, as
expected, was below the 22.3% recorded in the prior-year quarter.

Adjusted net income after non-controlling interests came to EUR
26.0m in the second quarter, compared with EUR 30.4m in the
prior-year quarter. Accordingly, adjusted earnings per share after
non-controlling interests came to EUR 0.83 in the second quarter of
2018, compared with a prior-year figure of EUR 0.97. As a result, the
company achieved adjusted earnings per share after non-controlling
interests of EUR 2.68 in the first six months of the financial year
2018, a significant increase over the prior-year figure of EUR 1.56.

Net financial debt increased by EUR 61.0m to EUR 773.7m as of May
31, 2018, primarily as a result of the dividend payout and the last
coupon payment on the redeemed bond. Calculated as the ratio of net
financial debt to adjusted EBITDA over the last twelve months,
adjusted EBITDA leverage stood at 2.6 times. Capital expenditure
totaled EUR 14.8m in the second quarter of 2018, as against EUR 20.3m
in the prior-year quarter.

2018 Outlook without consideration of Sensile Medical

The Company's expectations for the financial year 2018, in each
case at constant exchange rates and without acquisitions or
divestments, are set out in the following. In addition the potential
effects of the acquisition of Sensile Medical, which are presented
separately above have to be added. In total, for the US dollar-which
is expected to have the largest currency impact on the Group
currency, accounting for about a third of Group revenues in 2018 or
about 40% of adjusted EBITDA-Gerresheimer has assumed an exchange
rate of approximately USD 1.12 to EUR 1.00. As before, about a rise
or fall in the US dollar against the euro by about one cent has an
impact of around EUR 4m on revenues and EUR 1m on adjusted EBITDA.

Based on current visibility and demand-side indications from
customers, the Company expects-as already communicated-a strong
second half year in 2018. The forecast for revenues at constant
exchange rates in the financial year 2018 is between EUR 1.38bn and
EUR 1.4bn, which is at the upper end of the previous expectation. For
adjusted EBITDA at constant exchange rates, the Company continues to
project a range of EUR 305m to 315m for the financial year 2018,
compared with adjusted EBITDA of EUR 307.2m[footnoteRef:1] in the
financial year 2017. As a company that largely serves the US market
with US products, Gerresheimer also gains an one-off positive effect
from the US tax reform in the amount of USD 52.9m as a result of
remeasurement of deferred taxes accounted for in the first quarter of
2018. Had the impact of the US tax reform already applied in the
financial year 2017, there would have been a positive effect in the
low single-digit millions of euros on current income taxes and net
income for 2017. [1: Excluding the effect from fair value
measurement of the Triveni put option.]

Largely due to the favorable growth prospects, and driven by
initiatives to boost productivity and quality, capital expenditure in
the financial year 2018 is expected to amount to around 8% of
revenues at constant exchange rates.

Long-term targets

Gerresheimer's long-term target for the entire Group, including
Sensile Medical, is as follows:

- The Gx ROCE forecast remains unaltered, despite the acquisition
of Sensile Medical, at approximately 15%.

- Due to the acquisition of Sensile Medical and the associated
purchase price payment, the Company expects a temporary increase in
adjusted EBITDA leverage to above 3.0x. Gerresheimer nonetheless
continues to consider a figure of 2.5x to be about right for the
ratio of net financial debt to adjusted EBITDA, with temporary
variation above or below this tolerated because M&A activity cannot
be planned in exact detail.

Estimates for the years 2019 to 2022 and the assumptions for the
new division, including Sensile Medical, will be given in further
detail in the guidance provided by the Company on publication of its
Annual Report 2018 in February 2019.

The full quarterly report is available here:
www.gerresheimer.com/en/investor-relations/reports

Originaltext: Gerresheimer AG
digital press kits: http://www.presseportal.de/nr/9072
press kits via RSS: http://www.presseportal.de/rss/pm_9072.rss2
ISIN: DE000A0LD6E6

Contact:

Gerresheimer AG
Klaus-Bungert-Strasse 4
40468 Duesseldorf
Germany

Jens Kürten
Group Senior Director Communication & Marketing
Phone +49 211 6181-250
Telefax +49 211 6181-241
E-Mail j.kuerten@gerresheimer.com
Website www.gerresheimer.com

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