Gerresheimer AG (GXI) Earnings Call Transcript & Summary

The conference is now being recorded. Welcome to the conference call regarding the publication of Gerresheimer's Full Year Results 2020. [Operator Instructions] Now I hand over to Mr. Jens-Philipp Briemle, Head of Investor Relations at Gerresheimer AG.

Hello, everyone, and welcome for the first time from my end, and thank you for joining us to review our annual results 2019. With me today are Dietmar Siemssen, our CEO; and Dr. Bernd Metzner, our CFO. As we did in the past, we are presenting a set of slides to accompany our remarks on this conference call. The annual report, slide presentation and the press release are posted on the Investor Relations page of our website. Please note that this call is being webcast live and will be archived on our website. Before we start, I would like to remind you that the presentations and discussions are conducted subject to the disclaimer. We will not read the disclaimer but propose we take it as read into the records for the purpose of this conference call. Our agenda for today starts with the presentation by Dietmar Siemssen and Dr. Bernd Metzner. After that, we will enter into a Q&A session. Now it is my pleasure to turn the call over to Dietmar.

Yes. Good afternoon, and also of course, good morning to those joining us from the U.S., and welcome from my side also to our fiscal year 2019 results conference call. Yes, what happened in 2019, which was a pretty exciting year, in 2019, we laid the foundation to make our Gerresheimer fit for the future, and we started a clear growth path. We worked on the topics of innovation, excellence, customer and employee focus, and we'll continue doing so. We invested a record amount into growth, capacities, optimization of processes and also digitalization. Our clear target, profitable and sustainable growth. For our future growth, we focus on new segments like full solutions for biotech drugs, innovation, as mentioned a couple of times, and sales growth in fast-growing markets. A quick look at the main KPIs for 2019. We have reached our guidance. Underlying sales was around EUR 1.4 billion. Underlying EBITDA, EUR 293 million. In 2019, we have invested 12% of sales into innovation, optimal processes, the digitalization, quality, capacity and growth. We will propose another year of dividend increase from EUR 1.15 to EUR 1.20. One remark, the change in the strategy of our customer Sanofi affected us, as they canceled the development project for the diabetes micro pump. The result is a one-off effect with some implication on our numbers, and Bernd will later elaborate that in more detail. Independent from the pure financial figures, overall, you clearly see that the company is changing and started to change. In 2019, there has been a tremendous level of positive dynamic in the whole company. The shift towards, what I call, a growth mindset is more and more obvious. A lot of initiatives have been launched, and we will see more of that. This makes us very optimistic about the future development. Going forward, and you'll hear this again and again from my side, we go for a stable, profitable growth. I will show you how we reach it in the following charts. We see, in principle, 3 key enablers for our growth story: the cultural mindset for growth and excellence; the investments; and of course, innovation. As well as 3 big growth levers: the first one being the market dynamics or market growth; but also the growth in so-called growth segments; and of course, new products. On the following slides, I will elaborate on these enablers and levers. Picking the first one, the implementation of a mindset for growth. The mindset for growth on excellence is very important. Only with the right mindset, we change our company into what we call innovative, excellent and customer-focused with profitable growth. Within the implementation of this mindset, we focus on 6 key areas: Customer orientation. Customer excellence is the target. In order to get there, we will continuously optimize all customer touch points, enhance our services, regulatory and quality support, strengthen our customer field engineer teams and launch more and more initiatives in that direction. We are strengthening our global key account management and leveraging our broad product portfolio and increase sales with our existing customers. The key culture change is really the act as one customer. We are tearing the silo walls down. All business units are joining forces to offer a broader and better service and an enhanced portfolio of products and solutions. Cross divisional and cross-view thinking is opening new opportunities. Management board and senior managers from all areas met on a regular base, defining joint activities. You can already see a lot of energy, cross-divisional thinking and projects, which will drive future growth and change in our company. Excellence in all what we do here. The better is, in the end, the enemy of the good. Excellence in all aspects of our business is the goal. Lukas Burkhardt has launched great projects for operational excellence in the Glass division, which shown good progress already today and are one of the reasons why we show better and better figures in the glass sector, and it's very promising going forward. The same applies for plastic and devices. From small batch production to high-volume lines, process innovations are driving our excellence. Digitalization is actually another key enabler for our excellence improvements. Driving digitalization will be a focus in the future across all divisions and all business units. Quite relevant, the optimal resource allocations. You all saw investment is crucial to foster our growth. Every euro spent show result in maximized impact and contribution. We see that the CapEx spend currently is very high. The strategic program was started in 2019 with a clear target to drive the company towards higher efficiency in CapEx spend and a stronger translation of this CapEx into real growth. Next topic, quality. Quality is a key enabler for our customer satisfaction. We have a very broad production footprint globally and are able to offer our broad product portfolio to our customers in all regions. With our worldwide identical quality standards and processes, we are able to serve our global customers with the same high level of quality, independent from the region or the delivering plant. Last point of the 6 is the performance culture in our company. We are changing the mindset towards, what I call, commitment and delivery. Performance is key in all we do. Changing this mindset or changing the mindset and culture of a company is still not easy. It does not come overnight. The successful implementation is key for our very ambitious plans for the future. Looking at the second enabler is the investments for future growth. You saw it in 2019 and also in 2020, we are executing large investment programs. We are spending around 12% of our sales on CapEx in 2019, and you will see the same in 2020. We have invested in growth and innovation projects, into improving our processes, digitalization and very important, more capacity. By doing so, we are becoming stronger, more agile and absolutely more competitive. With this, we are setting the pace for our future growth. A few examples. The new furnace with extended capacity in Essen and Lohr, additional lines for ready-to-fill syringes in Buende or the extension of the Horsovsky Tyn plant in Czech Republic. The aim for the future is to come back to the proven historic formula, which actually Gerresheimer lost in the last 5 years, for our capital expenditure. The simple formula is around 4% of CapEx is needed for maintenance and other basic business. But any additional percentage point of CapEx should translate [ one on one ] into sales growth. We will see this again from '21 on. Innovation will be another essential driver to materialize our growth. New and innovative products and solutions are key to attract new customers, get a higher share of wallet and accelerate growth. We are pushing a culture of innovation throughout the whole company. One of the activities to drive innovation is to leverage the innovation power of all our newly acquired Sensile. In cross-divisional teams, we stimulate innovation, drive projects in all areas of our business. Another great step forward is -- in this regard is the bundling of all our glass expertise in the new glass and innovation technology center in Vineland, U.S. But innovation is not only future. Two examples of innovation, which are ready for commercial launch are the following: We are moving up the value chain by introducing our ready-to-fill vials, which are great solutions for immediate filling at customer filling lines. We enhance our value chain by washing, stabilizing and packing the vials ready for filling. We offer our ready-to-fill vials in various packaging solution in both Europe and also North America. The other example is our new product, Elite Glass. Elite Glass is ready for commercial delivery. First orders are successfully in our books. The new Elite Glass is superior glass quality in several aspects and significantly reduces the customer total cost of ownership. These are just 2 examples. The innovation pipeline, of course, is filled much better than this. Next topic. We are leveraging the technology of Sensile Medical. With Sensile Medical, we have bought an excellent technology, and we have a clear road map. The SQ Innovation project on heart failure is progressing as planned. The design has been finalized end of 2019. SQ Innovation is progressing well towards their launch target. This project in the therapy field of heart failure has definitely the potential for a real game changer, not only for SQ Innovation, but especially also for Gerresheimer. The micro pump solution for Parkinson treatment has been launched commercially and is running well. In addition to these 2 projects, we have a promising pipeline. We are working with several customers on feasibility studies for future application in several and different therapy areas. We merge our innovation and product expertise of Sensile with the industrialization expertise of medical systems. A strong combination in the end where we simultaneously engineer, develop new product and process solution, create IP and transform the company into a full solution provider. In 2019 and '20, we further optimized our global footprint. A few examples. South America is an attractive and large market we want to grow with our pharmaceutical plastic packaging portfolio and therefore, enhance production facilities in Anapolis, Brazil. The plant that we set up in 2019 is filled as we talk with machines, and I'm optimistic that we will start production in summer this year. India is another large market and a large country. Following the success of our plastic packaging business out of Kundli, near New Delhi, we increased our footprint by building the second facility to better provide the large country with our products. In China, we fill another white spot of plastic packaging. We have signed first commercial customer contracts for this business and have recently opened our new production plant in Changzhou, China. A breakthrough for expanding our plastic packaging footprint in the U.S. is in the U.S. The first local business wins are in the books, and we are now leveraging on our strong presence of center in Berlin, Ohio, where we start commercial production of plastic packaging in a close-by new facility in 2020. A major add-on for capacity, you will also see in our new facility in Skopje, North Macedonia where we plan to produce medical plastic systems in the second half of 2020 and also later prefilled syringes. And by the way, last night, I received the first picture of the first part produced on the machines in the facility. So we are fully on plan, on track with our project plan. Biotech is a very promising and fast-growing market. The majority of the new formulations are actually biologic. These are typically parenteral drugs and need very specialized primary packaging and drug delivery solutions. The launch of our new unit, Gx Biological Solutions, aims to serve the customers' needs in these important segments. We bundle our cross-divisional experts, expertise, service and product portfolio into an organization with a sole focus on this customer group. We have actually the broadest portfolio of primary packaging and drug delivery devices in the whole industry, which can be adapted and customized to the special needs of the new biotech market. Our ability to offer a broad range of services, especially for smaller and midsized biotech companies, enables them to focus on their core competence, the development of drugs. We offer services for product requirements for each clinical stage, product specifications, regulatory and qualification support, lab service all bundled in this new team, which has access to the whole Gerresheimer expertise worldwide. On the next chart, we talk about new products as growth drivers. Our innovation pipeline. We expect a significant share of growth by new and innovative products, innovative services and value-adding solutions. Some of these new products are evolutions of existing products, but others are real game changers and are completely new. As explained earlier, we will expand our innovative approach. And by doing so, we expect to see more and more of these new products being launched in the future. Now we come to the guidance, yes. Our sales outlook of mid-single digit is fueled by our growth drivers. The overview demonstrates the individual impact of these levers. The foundation of our growth story for the coming years driven by the interaction of the mentioned enablers and growth levers. How do we see the impact of these levers in 2020? We expect around 1.5% growth by the underlying market -- supported by the underlying market growth as estimated by IQVIA. Another 2.5% by utilizing our growth segments and another percentage point by new products. This, in the end, results in our guidance of mid-single-digit growth. With this, I hand over to Bernd, who will give us more insight in the numbers in detail. Thank you. Bernd, it's on you, you have to almost in text manner.

Many thanks, Dietmar, and welcome from my end as well. Dietmar gave already the big picture for the financials. As our underlying performance in Q4, we achieved our full year 2019 guidance. Not part of the underlying performance are 3 extraordinary effects around Sensile in 2019. These effects have to be put into a broader context. First, they do not affect our underlying business. Second, they do not affect our free cash flow. Third, the net income impact is negligible; better even, slightly positive. To explain these 3 extraordinary effects in detail. First extraordinary effect. The effect from the cancellation of the project by Sanofi. The cancellation led to a contract modification and so to a cumulative adjustment of revenues in the amount of EUR '17 million. The EUR '17 million of revenues linked to the exclusivity commitment, which were recognized prior Q4 2019. Without this exclusivity commitments, we are now free to sell our developed pump in the therapeutic field of diabetes to other customers. In addition, the adjusted EBITDA was also reduced by EUR 9 million due to the contract cancellation by Sanofi. On the back of our development activities, we see in this regard, basically an existing claim against Sanofi, verily. However, we also noticed an increased uncertainty in respect to the enforceability of this claim. Second extraordinary effect, the effects from the derecognition of contingent purchase price components. We had a positive extraordinary impact from Sensile. We recorded other operating income of EUR 130 million in the financial year 2019 due to the recognition of contingent purchase price components from the acquisition of Sensile Medical; thereof EUR 11 million that derecognized in Q4 2019 due to the cancellation of the diabetes project by Sanofi. So for Q4, the net impact on adjusted EBITDA was EUR 15 million due to the cancellation of the diabetes project. If you sum it up, we paid finally EUR 218 million for Sensile Medical and hence, EUR 130 million less than what we expected at the time of the acquisition. With this in mind, it shouldn't come as a surprise that Sensile's carrying amount exceeds the recoverable amount, and hence, as the third extraordinary effect, we recognized impairment losses of EUR 117 million in Q4 2019. Quite interesting and worth noting, combining all 3 extraordinary effects after tax, the net income impact is overall this EUR 5 million, still slightly positive in 2019. This slide compares the underlying performance of our business on a quarterly basis. Having presented the extraordinary effects of Sanofi before, I will now focus on the underlying performance in Q4 2019 in comparison to Q4 2018. On the left-hand side, you'll find the Q4 2019 performance, both at constant exchange rates and on a reported basis. Adjusted for extraordinary effects occurred during the reporting period, you end up with the underlying performance in Q4 2019. The same method applies for the prior year quarter, respectively. You will find a detailed presentation on the composition of the adjustments for both periods in the appendix of this presentation. This gives you a very transparent way to look at our business. Let me highlight the following points for you. As already discussed, revenues in Q4 2019 were negatively impacted by EUR 17 million due to the project cancellation by Sanofi. To get to the underlying revenues for Q4 2019, we had to add them back to the actual numbers. The same method applies to the adjusted EBITDA. What are the key takeaways for our underlying performance? Our underlying FX-neutral revenues declined by 2.3%. This decrease is mainly caused from lower revenues from Sensile by EUR 6 million versus Q4 2018. Our core business, that means plastic and devices and primary packaging glass combined, remained, as already guided and expected, almost flat in Q4 2019. Our underlying FX-neutral adjusted EBITDA declined by EUR 5 million, which is driven by the advanced technology division, with minus EUR 6 million versus Q4 2018. Our core business with plus EUR 2 million could not compensate for this fully. Let me now dig into the details by division, plastic and devices. In Plastics & Devices, the underlying revenue -- revenues at constant exchange rates declined from EUR 225 million in Q4 2018 by 4.5% to EUR 215 million in Q4 2019. This decrease of EUR 10 million is linked to lower tooling revenues. For full year 2019, revenues within our tooling business amounted to EUR 61 million, almost at par with the prior year. However, as you already know, it is normal that there are intra-year fluctuations within the tooling business. In Q4 2019, we recognized tooling revenues of EUR 21 million, which were EUR 10 million less than in Q4 2018. For the financial year, the division plastic and devices achieved a 1% organic growth for the full year. Good news. Given the lower tooling revenues, we had a favorable product mix effect which increased our adjusted EBITDA margin from 31.2 % to 32.2%, or to say it differently, the lower revenues had practically no meaningful implications on the adjusted EBITDA, which was with EUR 69 million, almost flattish compared to EUR 70 million in Q4 2018. Now let's go to Primary Packaging Glass. Primary Packaging Glass showed a strong growth and increased from EUR 158 million in Q4 2018 by 4.7% to EUR 166 million in Q4 2019. The reason for this stellar growth are twofold. The Cosmetics business continued its strong demand seen in the prior quarters. Additionally, tubular glass in the U.S. and Europe increased significantly. The adjusted EBITDA grew from EUR 31 million by 10.9% to EUR 35 million. The adjusted EBITDA margin increased from 19.8% by 120 basis points to 21%. This improvement has to be seen in light of a favorable product mix and our efficiency initiatives like the reduction of cost of non-quality. Let's go to Advanced Technology division. The Advanced Technologies division is our innovation driver and longer-term investment case. We invest in this division, and we'll see the return in later years. In this respect, Q4 2019 shows EUR 4 million underlying FX-neutral revenues and corresponding minus EUR 1 million underlying FX-neutral adjusted EBITDA. We are planning to break even in 2021, with meaningful revenues latest in the financial year '22, '23. Therefore, you can expect a similar financial pattern within this division in the following quarters of 2020. Let's go to the strong cash flow in Q4. We had a remarkable strong cash flow appearance in Q4 2019, probably the strongest ever in the history of our company. We were able to almost double the quarterly cash flow from EUR 36 million in Q4 EUR 2018 to EUR 62 million in Q4 2019. The key reason for this achievement was our net working capital management. Our leverage decreased from 3.1% in 2018 to 2.4% at the end of 2019. This development is surely influenced by the derecognition of contingent purchase price components, which were mentioned before. Looking at 2020, we will refinance the promissory loan in the amount of EUR 100 million -- EUR 190 million due in November 2020. I am confident that we will be able to participate from the actual beneficial market conditions and lower our financing costs slightly further. Let's look at the full year 2019 underlying performance. The analysis of the underlying performance allows -- follows the same concept discussed on the earlier slides. We look through the extraordinary effects in 2019 and 2018 to get a comparable picture. This rounded EUR 1.40 billion underlying revenues, we achieved the lower end of our revenue guidance of FX-neutral revenues between EUR 1.40 billion to EUR 1.45 billion. The underlying FX-neutral adjusted EBITDA amounts to EUR 293 million and is also in line with our guidance of EUR 295 million, plus/minus EUR 5 million. We do not guide for our net income. However, supported also by lower net finance expenses, we realized a very good underlying net income growth by 8% from EUR 119 million to EUR 128 million in 2019. Let's go to the accounting standard implementation of IFRS 16. The new leasing standard, IFRS 16 is applicable for Gerresheimer for the financial year 2020 going forward. Gerresheimer has opted for the modified retrospective first time application. That means that the financial year 2020 will be presented according to the new set of rules according to IFRS 16 and the comparative prior year period will be presented with the old set of rules according to IAS 17, like the other companies do this as well. The overall impact is somehow negligible on our operations overall. Adjusted EBITDA will be positively affected in a range of EUR 9 million to EUR 11 million from the transition to IFRS 16. Additionally, the balance sheet total as well as the net financial debt will increase in a range of EUR 27 million to EUR 30 million. Allow me a final remark. We know that this was a -- given the Sensile adjustment, a quite challenging quarter to grasp the underlying performance. For the future, we will reduce our adjustments significantly going forward. First, we will not adjust our underlying performance in 2019 for the 2020 guidance jumpoff point. Second, we will apply a new comprehensive exceptional guideline and eliminate the old ones, which led to various adjustments in the end. I'm convinced this will support our transparency and allow us to focus more on the underlying performance going forward. And now I'm handing back to Dietmar.

Yes. Thank you, Bernd. With this I come finally to the guidance. What do we expect for 2020? We expect 2020 will be the first year where our positive activities translate into financial results and Gerresheimer's back on a growth path. For 2020 and also midterm, we expect sales growth in mid-single-digit percentage. We expect the EBITDA margin to be at the level of 21% in 2020, steadily improving towards 23% over the planning period. 2020, CapEx is planned to be around 12% another time and should be between 8% and 10% on the midterm. Don't forget the formula I mentioned in my earlier presentation. Today, being already mid-February, we expect our new growth strategy showing impact and being visible in our Q2 '20 numbers with further progress in Q3 and also in Q4 2020. So to sum it up, 2019 and a very intense and dynamic year. We laid the foundation for profitable growth and switched gears. We significantly improved culture and dynamic in the company. We invest and work on our innovative and innovation pipeline. We expect 2020 to be the turning point for our growth. We will grow mid-single digit, leveraging growth segments and pushing new products. Our activities will make a difference and successfully bring our Gerresheimer onto a sustainable growth path. In order to also improve the work with you, our investors, the communication dialogue, we are planning a Capital Markets Day end of 2020. By then, we will also have a better picture of the developments of 2020, and we can give you further insights in our growth strategy. With this I'm at the end of my presentation, and I'm handing back to the operator for your questions. Thank you.

[Operator Instructions] And we've received a first question from Veronika Dubajova, Goldman Sachs.

I will keep it to 2 big picture place and one financial, if that's all right. I want to start big picture. If I look at Gerresheimer, your predecessors have often promised growth acceleration. And it sort of never materialized for a variety of reasons. So Dietmar, can you maybe give us a little bit of insight into what gives you the confidence that this time around, as we move through the year, you will indeed see the growth accelerate? Is it contracts you've already signed? Kind of how much visibility do you have on that growth acceleration pathway? And how confident are you in that? That would be my first question. My second question is on the medium-term margin guidance. It would be great to get a little bit of insight from you on the cadence of the improvement, and especially as it relates to the core business, so excluding Advanced Technologies, it -- sort of what is the margin potential? How should we be thinking about that? And maybe if you give an update related to that, on the ongoing restructuring, I noticed you took some personnel reduction costs in the quarter. Maybe you can talk about the savings opportunity that you see in PPG. And then my final quick financial question is just the net working capital movements. Good to see some progress. Maybe tell us, can we see more as we move into 2020? And I also noticed there was some discussion of factoring when it comes to receivables in the annual report. So maybe if you can help us understand how helpful or meaningful that was in the context of the networking capital move?

Yes. I actually liked the first question because this is a question of what I called commitment and delivery. And that's something the company -- that Gerresheimer definitely has to learn. Because if I go to the market and I tell you, you guys, I want to grow 5%, nobody believes me, which is a miss. How do I see the year 2020? Or let me start differently. I am completely convinced about the midterm growth that will come. Let's talk about 2020, yes. 2020, the first quarter will start, compared to 2019, where we were relatively strong, relatively flat. That's what we see already, yes. But in the second quarter, we clearly see the growth to come. And in the end, why is it coming? And why are we more confident in this growth? Because we see this. I come back to the -- one of the charts we showed in the presentation. There is called a tailwind out of the market that is growing, and we will grow with the market. The next aspect, which is around 2.5% of the growth, with which we see 2.5% growth this year is really coming out of -- yes, the materializing of the growth in key markets where we are today with products. And that's -- I can give you an example. That is the inhaler for -- in Horsovsky Tyn, that's additional syringes, that's glass that is coming actually out of the additional capacity that we, on the one side, generated in Essen, while the other side, you also see, for example, from the cosmetic business. The next point where we spoke about roughly 1% of growth that we expect out of new products, it's also not hope and pray. It's really things we have on the books. I bring back the examples of the Elite Glass. We have the first contracts here. We clearly have new plastic packaging products that we are selling in South America, for example. And not to forget the ready-to-fill vials, where we had not only contracts in the books, but we will really start to deliver with the second quarter, and that gives us a certain evidence in this regard. Yes. For the medium-term margin guidance and Bernd might also later elaborate on this or answer this. The most difficult thing is actually to turn the company into growth at all coming off a period of almost 5 years of very little growth. And once this is done, you will also see the growth coming. What is important, if you remember the guidance that we gave in beginning of 2019, we spoke about this 4% to 7% of organic growth. We have slightly changed the term -- terming but not the terms, yes, mid-single digit. What we do, and that's in principle better than what we have before, take all the Sensile business aside, we will be able to show you solid growth and fulfill this guidance with our core business. You will see the growth coming out of the glass, you will see the growth coming out of the plastic, and you will come -- see the growth out of the devices. Then in the later years, really, we see this digging in of the Sensile business. This will come on top. And that is something which is very good. There was a slight question regarding the restructuring in the Glass business. I wouldn't call it restructuring. There's no doubt we're investing a lot into the improvement of our processes. And yes, it was necessary to improve the processes in our plans. But with the investments in both taking 2019 and '20, we will bring our facilities here back on track, what I call, being able to supply and to offer very competitive. And you -- honestly spoken, if you look into the results of the Glass business that we deliver now in the last quarter already in 2019, and you see this in first and second quarter, you can already see these improvements, yes. The next thing is the network capital improvement. Bernd, that's definitely a question for you.

Before jumping into working capital. And before jumping into the net working capital improvement, just to step regarding to the margin guidance to step into this because it's really good -- gives us your occasion also to differentiate in our guidance statement. Because in the end, we have also in the next year without the support of IFRS 16. We have basically, in our core business, a margin of 21%. And this without any IFRS support, we expect in the core business to grow into this and increase our margin to 23%. That's something what is really important. So finally, what you will see now in 2000 -- just in this context, what you will see in 2020 is that we use as a part of IFRS 16 was a EUR 10 million to fund in the end, at least, let's say, technically, our operations in Sensile. But our core business is very strong, also in 2020, and will improve the margin going forward. Where is this profitability increase is coming from? In the end, what Dietmar said, it's finally it's a growth because you'll see economies of scale at its best in this respect. And the second piece is so we have a higher drop-through rate for the additional volumes. So economies of scale. And on the other side, you have also definitely efficiency gains mentioned also by Dietmar before. So optimization, digitalization, the reduction of cost of non-quality and so on. And these are the drivers, actually, the key drivers where we will get our improvements of the margin going forward. Now coming to your last question regarding net working capital. The net working capital was influenced in Q4 by EUR 10 million actually. But even if you take this EUR 10 million out, it was a very strong cash flow performance in the -- in Q4. Why we are doing this kind of factoring? The reason is that, in the end, here and there, our customers want to have different payment terms. So basically that they want to pay us later, but often in the same time, also some factoring in the end that is very cheap, cheaper than our own financing. So finally, we really have also some gains out of this kind of concept because the financing there is cheaper than our financing with our own banking funding. That's how you have to see Q4 2019, so EUR 10 million factoring. On the other side, going forward, for 2020, we expect over the year, very balanced 16% net working capital performance, what we have always guided also in the past. This is something what we are striving for also for 2021.

The next question is from Scott Bardo of Berenberg.

So the first one is a relatively small picture one just on why you're anticipating relatively flattish development in the first quarter. I don't think it was a tremendously demanding growth quarter for Gerresheimer albeit arguably not too bad in the context of the full year. So is there any impact from external macroeconomic impacts? Or is this more relates to the phasing of your orders and your launch flow? The second question, please. And I wonder if you could explain in a little bit more detail how the business model and consolidation of Sensile or your advanced technologies is now taking place within the company. Obviously, we've gone from a period of having some revenues and a little bit of positive EBITDA to now being quite a negative both this year and presumably a negative or so the year after. So what is it that is different here? Is it bloated operational costs? Or have you decided to change the model slightly? And then I would like you to further extend upon your initial comments, please, as to how this technology is being developed for other customers? And are you optimistic that you could strike something more significant over the near term? So I'll leave it there for a second, and then I have a follow-up.

Yes. It's good to be the CEO, then you always are the first to take the questions. Yes, I go for the first one. I think the answer is even more simple than you anticipate. The core -- again, the core business is actually developing reasonable -- also in the first quarter, we have some delay in one of the development contracts we expected for Sensile, and this will lead to the relatively flattish picture. And also 2019, don't forget we were not bad in the first quarter, and that gives a challenging starting point. Note the base business, you will see developing nicely in first quarter as well. Second, how is the -- Sensile, how is the business model developing. I think this is key. What we did, and this is one of the reasons why you see some cost that we in the former times showed as sales in Sensile are now in cost. It's because we are kind of changing the business model in a certain way because in the past, we did -- we had development contracts with the customers and we developed and they paid for the development. But this is something we are clearly changing because we want to develop into our IP. So we kind of have the cost of the development, cast as R&D costs that are, of course, a cost burn. But in the end, we should not forget we are transforming the company into a company where you are selling not only the product that we produce, but also very clearly, IP and so on that gives you more business models. I don't know whether you want to add something to this, Bernd?

No. Scott, it's quite -- regarding the question for Sensile, in the end, as a company, we're investing, if you look at it, EUR 5 million around in R&D in 2019. And we -- I think we have some bigger room, and we should also use the opportunity which we have now with Sensile to expense it somehow. And to see this negative EBITDA of EUR 10 million is really expenses into innovation, if you want to. And this gives us the opportunity to get a higher share of the cake. From the product as we have -- if you have released this on the market. And that means that you have a higher transaction value. And you have a -- for yourself. And that's a little bit the principle how we are approaching Sensile differently, like we have done it in the past. You asked also for the other customers, it was quite interesting that after we have successfully launched EVER Pharma, it was a project for Parkinson where we get a regulatory approval last year. You know it. We get a lot of interest from other blue chip companies, pharma companies, which are really interested now in our pump. And this makes me very confident and somehow out of these kind of leads, you will really get some tangible result out of this leads. So -- and we are very concrete. We have also very concrete project at hand. I don't know, Dietmar, that you want to talk about it. Yes?

Yes, definitely. It's a risky question because the risk is that I talk for an hour around this point. Yes, the technology is -- yes, let me say it different here. We took the hit with Sanofi this year. And you know in the very early 2019, we took the hit with scPharma, which, in the end, turned out to be a big win because with the loss of the exclusivity, we were successfully able to win the business with SQ Innovation, which is the significantly better and state-of-the-art pump. The Sanofi wasn't hitted. You can't talk it beautiful. But in the end, it doesn't change the attractiveness of the technology that we actually acquired. The only negative thing with the technology is actually that it takes so long that we see the sales and the profits because it all takes quite some time. But we are working, as Bernd said, with various customers in various therapy fields, clearly confirming how broad the ability of this pump actually is. And I am relatively optimistic that we will show first, yes, at least development contract wins within 2020. I'm still -- yes, fascinated about the technology because it opens the door for our Gerresheimer towards what I call intelligent and smart devices. And we will utilize this technology, the communication tools and so on, clearly even beyond the pump in the next years. So it is, in a certain way, a clear changer for Gerresheimer, even though we all have to be pretty. Yes. And we have to wait some time and we have to be patient before we really see the results. That's why it is so important that what we are doing at the moment, focusing on the core business as well, showing the results of the next years and delivering the results and growth of the next years with the core business alone.

Okay, very good. And it's certainly appreciated that you give a guidance which more reflects your base business progression and leaving, if you like, this Sensile has medium-term optionality. I think that makes a lot of sense. A question just from me then, please, just sort of related to this topic. You highlight around EUR 10 million or so IFRS 16 benefit to EBITDA in 2020, as you highlight, that's basically being offset by EUR 10 million negatives for Sensile. That implies, if I'm correct, that the EBITDA margins of your plastics and primary packaging glass business will be broadly flat, which seems to be somewhat of a surprise, given your comments about operational leverage growth and ongoing efficiencies that you've been working through and demonstrating in '19. So why -- what are the counter forces that would lead to flat margins in plastics and devices and primary packaging throughout the course of 2020?

Just to step into this in practice? In practice, we see a very slight -- I agree with you but because -- but we see even a slight -- a very slight increase there in reality. But very slight. And the key thing is that PPG will be actually -- you will have a -- see a margin improvement. You will not see this for the area of PPG for plastic and devices. And the key reason is, in the end, it somehow in this business, it's a product mix effect, what we see in 2020. But going forward, also there, so in '21. And also, given that we're investing now also operational expenses we will have in the area of Scopia and so on, which is dragging slightly relative on the potential to have economics of scale here. That's a little bit the reason. But you will see in '21, also a nice profitability increase in the area of P&D. Somehow PPG here.

Next question is from David Adlington, JPMorgan.

Firstly, some technical questions just around some of the numbers. So just wondering if you're able to quantify the FX impact on both top line and margin as things currently stand? And then just with respect to IFRS 16, obviously, EUR 10 million benefit at the EBITDA level, but I suspect there's some offsets in terms of higher depreciation and interest further down the P&L. So maybe you could give us some help with depreciation and full year financial expenses as well. And obviously, the tax rate has been banging around a bit over the last few quarters. Just wondered if you could give a clarification on tax rate for 2020. And then away from the numbers, just you've been nearly one of the only companies so far this reporting season that hasn't mentioned coronavirus. I just wondered if you could give us your thoughts on the impacts or potential impact there?

Just to start with the IFRS effect of depreciation and so on. So basically, these are, as you mentioned, EUR 10 million. And really roughly now, probably this will translate in EUR 9 million depreciation and EUR 1 million interest. But something like this, it's really of the change here, just ballpark. So in the end, I don't see any negative impact and implication on the net income. I looked at it before. This is so far the IFRS question is concerned. your first question -- your first question was referring to.

Foreign exchange.

And the FX effect -- I think basically, we should have EUR 10 million -- we have EUR 10 million on sales and EUR 4 million on adjusted EBITDA as a result of FX effect for 2019.

Okay. And just as helpful to the absolute financial income line, absolute depreciation for the year?

Just give me a second, it should be EUR 112 million included EFS -- EUR 112 million period, yes, including IFRS 16, for 2020.

So that's the depreciation and then financial expenses?

And then you can basically use your EUR 25 million plus the EUR 1 million. So it basically goes at the same level, probably the same level as in 2019.

Understood.

Yes, I would take over the coronavirus. Why didn't we talk about the coronavirus a lot because there's 2 aspects with this. One, it's not clear what really -- how much it really impacts the economy of China in total. And the key reason is the impact on us is actually not so big, especially not so far. We have, as you know, 5 plants in China, 2 of them -- 1 of this is device. One is plastic, which are relatively small facilities. The 3 key plants are all Glass business, where we, by extra permission, were allowed not only to start production after Chinese New Year, Monday, where the plastic plants facilities actually started, but already 1 year ahead. And we are in full production; there is no influence, no impact so far. That's why it's relatively neutral so far to us. I see this with 2 things. You could also see quite a potential opportunity for us. If you see the Chinese government for the next years to decide that there will be a next sign for flu law, then, of course, it would be a fantastic opportunity for us to grow our sales with syringes.

As the tax adviser, I'm very happy for your question, and then I forgot to answer this. About the tax rate for 2020. I would calculate for around 30%, 31% for 2020 for your model. And -- but we will look at it that the deficit around for the 30%, but we're working on this item as well.

The next question is from Falko Friedrichs, Deutsche Bank.

I would have 3, please. Firstly, on your midterm guidance, which now called for mid-single-digit sales growth. Can you further specify what you mean by mid-single digits? Before today, your guidance called for the 4% to 7% growth in 2020 to 2022. So do you still assume that this range is possible? Or is it slightly different now? Then secondly, also on the midterm guidance, in which year do you roughly intend to reach the 23% adjusted EBITDA margin now? Is that still possible in 2022? And then thirdly, it looks like you slightly increased your CapEx guidance for the midterm, from 8%, to 8% to 10%. Where do you plan to invest this additional 1% to 2% going forward?

Yes, I take over the question is because, in the end, what we actually changed was a little bit how we named the guidance. We actually didn't change the guidance. Mid-single digit is in the frame, which is identical with the old term, it's from 3% to 7%, 4% to 7%. We actually didn't change the guidance, and I don't expect that we do not deliver to the guidance. However, you take the old one or the new one, which is really different is what I mentioned before, we believe that we can deliver the guidance based on the core business without Sensile. The Sensile digs in, this will come on top. And then, of course, most likely, you will also be able to see the upper end of the former given range. The second part is the 23% margin, which is something we see at the end of the planning period. As we now plan from 20% to 24%, it's more at the end of the planning period. But we see a -- we will see a steady increase of the margins towards the end of the planning period. The CapEx guidance has actually not changed much. There's -- what has significantly changed is how we see the guidance. I would like to one more time remind you on the formula I gave you, and that is the difference. We will, and that is something I want to see from 2021 and on, not '20 but '21 on, you will see the 4% base CapEx plus growth. So it's very clear, if you -- if we then spend 8% CapEx, you will only see 4% growth. That's why the guidance is 8% to 10%, because probably 4% of growth is not enough. And where do you spend it? It's unchanged. Yes, our capacity increase mainly, especially after '21, it's very strongly into capacity increase. And until then, '19 and '20, I think we mentioned it a couple of times, it's a lot of digitalization. It's process improvements, these things. It was necessary in '19 and '20 to do this to bring our plans back on attack mode. But from '21 on, we will mainly see this for growth.

Okay. So if you end up spending 10% beyond 2020, we can assume that you are able to deliver 6% of top line growth.

The mathematics would show this. Yes. If I decide to spend 12% CapEx, you should be happy.

The next question is from Oliver Reinberg from Kepler Cheuvreux.

Oliver Reinberg from Kepler Cheuvreux. First question on operating cash flow. In your segment accounts are final to see the operating cash flow by division. And here, the operating cash flow actually declined by 20% in the full year for both divisions, Plastics & Devices and PPG. And if you compare that over the last 2 years, that was actually even down 30% despite no meaningful change in the EBITDA. So as in other words, the cash conversion has deteriorated. So can you just discuss this what was affecting that? Secondly, on capitalized R&D, I noted that the capitalized R&D was coming in at EUR 6 million, and there was a rather small amount in the past. So 2 questions to this. One, is this EUR 6 million actually gross or net, because I realized that you also vote down EUR 4 million of capitalized R&D? And secondly, as part of your new business plan for Sensile, do you expect this kind of capitalized R&D charges to go up in your budget for 2020? And last question, can you just provide an update on the U.S. client which was showing some kind of weakness in the past? Is this recovering? Any outlook here would be great.