Welcome to the conference call regarding the publication of Gerresheimer AG's Q3 results 2018. 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 hand over to Mrs. Severine Camp, Corporate Senior Director, Investor Relations at Gerresheimer AG.
Good morning or good afternoon, everyone. Thank you very much for joining us to review our third quarter results of 2018. With me today is Rainer Beaujean, Speaker of the Management Board and CFO. As we did in the past, we are presenting a set of slides to accompany our remarks on this conference call. The interim report, the slide presentation, and the press release are posted on the investor relations page of our website at gerresheimer.com/investorrelations. Please note that this call is being webcast live and will also be archived on our website. Before we start, I would like to remind you that the presentations and the 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 a presentation by Rainer, and after that, we will enter into Q&A.
Thank you, Severine. Good morning and afternoon to all of you joining us on the Q3 2018 earnings call. I'm sure that you have noted that we have now added the third division in our reporting, so a few words on that before we discuss the highlights of the quarter. As communicated in July, Sensile Medical is now part of a new division within the group, namely the Gerresheimer Advanced Technologies division or GAT, which we have also included in our segment reporting alongside Plastics and Devices and Primary Packaging Glass. For the moment, the only business within this division is Sensile Medical, but our goal, as we progress to identify further innovative solutions to produce intelligent drug delivery systems and to bring added value to the entire Gerresheimer Group, is to add further technologies or solutions. As said several times, this does not necessarily mean significant investment.
It can be cooperation agreements with research teams or universities or a participation in a small start-up company. With that in mind, let's move to slide number five, where we provide you with an overview of the financial and operational highlights of the quarter. We delivered a very strong growth in the third quarter of this year, and this confirms what we have said earlier this year, that is, that we are expecting a strong second half. Excluding Sensile Medical, or better, our new division, Gerresheimer Advanced Technologies, which we consolidated from June 30th, 2018 onwards, and which we refer to as GAT through the entire presentation and on a currency-neutral basis, the group delivered a 7.8% revenue growth in Q3 2018. Including Sensile and on a currency-neutral basis, growth was 8.8%.
If you subtract about two percentage points of currency translation impact, you have the reported revenues growth for the quarter at 6.7%. Profitability was impacted by a number of factors that we will address in the presentation. Let me address one item up front so that it is clear for the rest of the presentation when we make reference to it, which are the expenses for setting up a liability for network charges. In our Q2 2018 earnings report, in the Note 15 on contingent liabilities, we reported that on May 28th, 2018, the European Commission declared that the network cost exemptions for large electricity-consuming enterprises granted in the years 2012 and 2013 by the Federal Republic of Germany should not have been approved as state aid.
At the closing of our Q2 earnings, we did not know what the Federal Republic of Germany would do with such injunction and could only report it as a contingent liability. Since then, the Federal Republic of Germany has acknowledged the decision by the European Commission, and this means that the conditions for the recognition of a liability are met, and we have booked this liability accordingly in Q3 2018. It amounts to EUR 1.4 million. This liability is not considered as a one-off item and is hence included in our adjusted EBITDA. As you know, we have a strict list of what we treat as one-offs from an accounting perspective, and this is not a one-off item according to this definition. I hope this explained what we will refer to in the rest of the presentation as network charges or expenses for network charges to be more precise.
At constant currency, excluding the network charges and Sensile Medical, adjusted EBITDA was slightly up year-over-year. We will review the details later on. One item to bear in mind when reviewing Q3 are the translation effects stemming from adverse currency movements, both impacting the revenues as well as adjusted EBITDA. Finally, when we will review the other profit and loss or balance sheet items for Q3 2018, you will see that they reflect not only the operational performance, but also the impact from the consolidation of Sensile Medical. On the market and macro side, a couple of remarks as well. First, currencies.
While the weakness of the U.S. dollar towards the Euro has mostly played a role in the first half of this year, in the third quarter, the accentuated weakness of currencies such as the Brazilian real or the Indian rupee have also added to the currency headwinds, and it looks as if this trend is here to stay, at least when looking at currency developments for the fourth quarter. Second, recent hike in commodity prices. For us, it is essentially European gas prices which have noticeably increased in the third quarter. We are partially hedged against this increase, but nonetheless, it has impacted gross margin, in particular of our European Molded Glass business. Third, resin prices. Some of the oil-based derivatives we use for our plastic packaging raw materials saw their prices further increase in the quarter.
For some of our business, such as, for example, Sensile Medical, we have pass-through clauses in place, but the impact is always recorded with a certain time lag of a couple of months, which also partially explains the drag on Plastics & Devices profitability. Regarding the U.S. market, we are still monitoring changes over there. The new United States–Mexico–Canada Agreement has been discussed by all parties, and ratification is underway by each of the national bodies. From what we can see at this point in time, our initial assessment is that there is no direct impact with regard to our business. On the operational side, the themes which we will develop in the presentation are the integration of Sensile Medical and the fact that the micro pump for Parkinson's treatment from Sensile Medical received CE Declaration of Conformity.
Our growth projects, and more precisely, on where we stand with regard to our newly awarded ones as announced in Q2 of this year. The fact that we have recorded a strong growth in the glass business, amongst others, on the back of the recovery and comparable comps in the U.S. injectables. Finally, that we have decided to go for further upgrades regarding our planned Chicago repair, which we postponed from Q3 into Q4 and extended in time, but which will also extend the useful life of one year, namely 2021 instead of 2020. A quick word on Sensile Medical on the next slide. Moving on to slide number six. Overall, Sensile Medical's performance is developing alongside expectations.
For sure, the approval received by one of the projects, namely the belt-on-pump for Parkinson's, is a great proof of concept for Sensile Medical and for their business development and marketing activities towards all existing prospects. It is not necessarily one of the largest projects, and whilst timing is in line with our expectations, we also know that further variation can occur regarding the remaining projects. This is something we've also had encapsulated, if you remember, in the assumptions we shared with you in July. Obviously, this year and next year, the focus is on development, and development. Given the cost structure of the company, this means that development revenues will mainly cover the costs in full year 2019. The profitability coming from royalty fees and product sales is more expected from 2020 onwards, and here I would like to refer to the indication table provided in July.
A word now more on the organic growth focus and more precisely on the operational priorities. Obviously, the buildup of additional capacity in the Czech Republic to hold the new inhalation project will remain a key operational focus in Q4 2018 and full year 2019. The idea here is to build a new building on the existing parking lot. Demolition works have started. We are expecting the formal build authorization in very due course. This means that for Q3 and Q4, we have or will be further incurring a number of costs linked to the management of the project. As said in our press release this morning, our goal is to already secure construction of the necessary production building and the conversion of existing capacity as quickly and efficiently as possible in 2018.
As we progress into full year 2019 and the buildup of the capacity, obviously we will be looking at EG hires, training of personnel as additional OpEx alongside CapEx investments. We expect the first parts to be delivered in Q4 2020, which is almost six months earlier than what we normally have on average in other contract manufacturing contracts. This is doable. We have been awarded this contract amongst others because of our execution capacity. This means that we need to be very agile. If we need, for example, to hire people to secure staff allocation before the production has effectively started, we will do so. We've also now dedicated engineering, tooling, and automation capacity allocated for in our Wackersdorf Technical Competence Center. More generally, we are continuing to ramp up capacity both in developed as well as in emerging markets.
For example, in Bünde, where we are building up our RTF5 line, or in Brazil, China, and India, where we are looking at expansion in primary packaging. Overall, the general assumptions for our new investment that we have communicated previously for 2018 and the outer years have not changed, both in terms of profitability and CapEx. What we need, amongst others, to refine is the CapEx OpEx allocation for these projects. We're fine-tuning our assumptions in the context of the preparation of our full year 2019 budget, as well as our long-term strategic planning. As we said previously, the current intention is to communicate these alongside our full year 2019 guidance in February next year. Turning now to review the Q3 financials. Starting with revenues on slide number nine.
The first part of the bridge shows the evolution of revenues on an organic manner, that is excluding GAT and currency neutral. Organic revenues grew by 7.8% in Q3 2018, or 3.5% for the first nine months of 2018. This represents a strong performance considering our organic revenue growth of 0.4% in the first quarter and 2.1% in the second quarter of 2018. In Plastics and Devices, revenues increased by EUR 11.2 million or 6.1% year-on-year. Performance in Plastic Packaging was good overall. In syringes, we continued to observe a sustained demand, but the business was impacted by timing effects in Q3, stemming amongst others from temporary personnel shortages. Revenues contribution stemming from syringes was not as strong as expected. In contract manufacturing, the performance is a bit more mixed given the various bits and pieces, namely Peachtree continued to perform well revenue-wise.
We still observe lower demand from some European customers, in particular in inhalation. The contract termination that we reported in Q2 2018 is also negatively impacting the year-on-year comparison in Q3 2018. As expected, our tooling revenues were higher year-on-year. This is timing and in line with what we previously communicated. In Primary Packaging Glass, revenues increased by EUR 14.5 million or 9.7% year-on-year. Here we had a stellar quarter on the basis of favorable comps, in particular in the U.S., where we continued to see a good recovery within the U.S. injectable business. There was equally strong growth in Europe, both on the pharma as well as in cosmetics. China business was pretty stable.
Looking further at the bridge, we can see that there was a revenue contribution from GAT in the amount of EUR 3.5 million, which corresponds to basically two months in Q3, as Sensile Medical was consolidated from June 30th onwards. Here, as I mentioned earlier, we are 100% talking about development revenues. All in all, on a currency-neutral basis, revenues increased by 8.8%, including GAT in Q3 2018. Please move with me to slide number 10 to review the main profitability drivers. On this chart, we have applied more or less the same logic as on the precedent slide, providing first an overview currency neutral without GAT, as you can see, also excluding the expenses for the network charges.
This is reflected in the first part of the bridge. Here we can see a slight increase year-on-year at EUR 1.3 million to EUR 79.5 million in Q3 2018. With regards to Plastics and Devices, adjusted EBITDA was down by short of a million. There were a number of factors leading to that. First, the increase of resin prices and the fact that there's always a time lag between the increase in raw material prices and the effective increase in prices for given customers in plastic packaging. Second, margin of our syringes business, which was affected by the timing of demand in Q3. Then here again, if we look at our contract manufacturing performance, we have to single out the following items. Peachtree, which despite a good revenues run rate, is still sub-efficient from a profitability standpoint. This is very normal.
The lower demand from a few European device customers, which also has a certain impact on profitability. The adjusted EBITDA also include a further partial compensation of EUR 4.2 million from an inhaler customer who ceased to place orders for the Gerresheimer plants in Küssnacht because the inhaler business fell short of the expectations. Termination negotiation with the customer have now been concluded. In total, we have recorded a compensation, which is broadly equal to the profit contribution from the plant concerned for the financial year 2018. Here in total, we have recorded EUR 9 million of compensation in essence for the periods Q2 to Q3 2018. As a reminder, in Q1 2018, we were still producing for this customer. In this quarter, we only had minor costs related to the expansion of our site in the Czech Republic. Turning now to the adjusted EBITDA and Primary Packaging Glass.
Here we had a total contribution in the amount of EUR 2.1 million in the quarter. On the positive side, the higher capacity utilization in the U.S. definitely improved the margin in both the molded and tubular glass business. However, in particular for Molded Glass, higher gas prices weighted on gross margin and hence adjusted EBITDA. Just a few words on this year. We are seeing the highest gas prices recorded in Europe since 2014. The average price since 2014 is EUR 19 per megawatt hour, and the prices are currently above EUR 27. For 2018, 50% of our energy costs have been hedged. This is, by the way, always our approach to start the year. We will also do so for 2019. At certain stages of the year, we compare the spot market with the future market prices and decide whether we hedge or not for the other 50%.
For the last five years, always in summer, the future market prices went down, therefore we normally hedge the rest. In 2018, gas market prices have been quite high compared to historic levels. Future gas prices were lower, business decided not to hedge. Unfortunately, gas prices kept rising, hindsight, it would have been better to hedge, but afterwards you're always smarter. Stick to our internal rules, even as the prices are high. We have started to hedge up to the year-end to get the 50% energy cost in for next year. In parallel, we are actively managing other commercial levers such as, for example, pricing and procurement. This is something that we need to continue to watch for, even if we are using hedging mechanism to try and protect ourselves.
Overall, those impacting Plastics & Devices and Primary Packaging Glass are the additional investments we are continuing to make in Gx Solutions as this commercial outlet, although the bulk of the investment lines within Primary Packaging Glass, Plastics & Devices currently. The rest of the chart shows the impact of the network charges. If you add up the negative contribution from GAT, which is in the amount of EUR 2 million, then you land at the EUR 76.1 million. Regarding Sensile Medical, given the nature of the revenues and the costs that the company has, essentially people, marketing, IT, and building, then it is a normal development for this quarter. Briefly on currencies on slide number 11. I said in my introduction, this is the same mechanism as flagged in the precedent quarters. Here other currency are also weighing on the translation effects.
In terms of revenues between reported Q3 2017 and reported Q3 2018, we have alone a total of EUR 14.2 million of currency effects. By the way of background, out of the EUR 10.7 million of effects in Q3 2018, approximately 40% are related to the U.S. dollar, 36% to the Brazilian real, and 9% to the Indian rupee. In other words, this means that whilst we only generate approximately 5% of our revenues in Brazil, this accounted for more or less EUR 3.9 million of translational effects alone in Q3. On the adjusted EBITDA basis, the impact was EUR 3 million. Moving on to the review of our P&L. On this slide, we are looking at the year-over-year variations first between the net income of Q3 2017 and the net income of Q3 2018.
The main elements to have in mind when looking at the bridge are the EUR 5 million delta of one-off items mostly related to the acquisition of Sensile Medical AG and initial restructuring costs in connection with the closure of our Küssnacht plant, which we are undertaking in the third quarter of this year. One word to the Küssnacht closure here. This is progressing according to plan so that we stick to the indication we have in Q2, which were that we are expecting approximately EUR 8 million of one-off plant closure costs for 2018 and EUR 7 million for 2019, with a view to have closed the plant by 2019 and sell the land and buildings thereafter. The next relevant topic is amortization of fair value adjustments, which is higher by EUR 3.4 million this year compared to Q3 2017.
Here the difference comes from the acquisition of Sensile Medical in the reporting period, which adds more amortization of fair value amortization. As you can see in the notes, the purchase price allocation for Sensile acquisition leads to approximately EUR 395 million being classified as technology. On the other side, we have the net finance expenses and the income taxes. The net finance expenses are seen here as positive on the bridge as a result of a lower interest burden stemming from the redemption of the bond notes in May 2018. The taxes are essentially a function of a lower absolute performance. This led us essentially to a net income for Q3 2018 in the amount of EUR 90 million.
If you look at the adjusted net income after minorities, which is for us the metrics we track also when it comes to our dividend distribution policy, then it is stable year-on-year. By the way, this is up by almost EUR 36 million year-on-year in the first nine months of 2018, which also results, if you remember, from the positive impact out of the U.S. tax reform. The equivalent adjusted earnings per share after non-controlling interest is therefore up EUR 1.13 in the first nine months of this year. As you can see on the bridge, there is the equivalent of EUR 13.5 million of adjustments that we add back, basically the net portion of the one-offs and of the fair value amortization, and on the non-controlling interest, they remain negligible. Let's move to the other elements regarding the balance sheet and cash flow items on slide 13.
I won't comment on all items in detail on this slide, in particular because a number of them are directly resulting from the first-time consolidation of Sensile Medical. For this, I would refer to the relevant section in our quarterly report. Let me address first a few words on net working capital. The rise in net working capital compared with November 30th, 2017, mainly reflected an increase in inventories, a decrease in trade payables, and slightly increased trade receivables. Relative to revenues in the last 12 months, average net working capital increased slightly from 16.7% in the prior year period to 17% in the first nine months of 2018. This is accounted for by a slightly higher average level of finished goods inventories, which is intended to ensure very high delivery capacity and is also necessary in order to realize the revenues expected in the fourth quarter of 2018.
The cash outflow resulting from the increase in net working capital, coupled with the reduced adjusted EBITDA contribution, are the main drivers for the operating cash flow variation. Net financial debt increased by EUR 193.1 million to EUR 905.8 million as of August 31st, 2018. The rise in net financial debt as of August 31st, 2018, is mainly due to payment of the first purchase price installment for the acquisition of Sensile Medical in mid-July 2018. The EUR 34.5 million dividend payout following the annual general shareholder meeting on April 25th, 2018, and the EUR 50 million final coupon payment on the bond issue redeemed in May 2018. Calculated as a ratio of net financial debt to adjusted EBITDA over the last 12 months, adjusted EBITDA leverage pursuant to the credit line agreement in force stood at 3.2 times.
A quick note here regarding Q4 to say that from a cash outflow perspective, we paid yesterday the remaining portion of Triveni of EUR 60 million. This concludes the financial review section, and let's move to slide 15 for the outlook section. A couple of comments here, starting with full year 2018 at currency neutral, excluding GAT. Our forecast for revenues at constant exchange rates in the financial year 2018 remains at between approximately EUR 1.38 billion to EUR 1.4 billion. As announced in the second quarter of 2018, which is at the upper end of our guidance communicated at the beginning of the year. On the adjusted EBITDA side, we are, to some extent, facing tough comparisons. As you remember that Q4 2017 was, if I'm not mistaken, the strongest quarter ever in terms of adjusted EBITDA contribution.
There are a number of factors that we have to watch, in particular the macro ones such as resin and gas prices, as well as operationally, the scheduled furnace repair in Chicago. Having said that, we continue to project a range of approximately EUR 305 million- EUR 315 million for the financial year 2018. Here we are adding a precision which relates to our inhalation project in the Czech Republic. Let me refer to my own words in Q2 conference call, where I said, "The sooner we start, the better, as it maximizes our chance to deliver sooner." This is, by the way, true for several projects I mentioned in my presentation at the beginning.
In clear terms, this means that as far as the exact landing within the range is concerned, it will depend on how successful we will be already in 2018 in securing progress regarding the construction of the necessary production building and the conversion of existing capacity. In absolute numbers, it means that adjusted EBITDA may also tend towards approximately EUR 305 million at year-end. For our core business, excluding GAT, that would allow us to expect the fourth quarter 2018 to be on a par with the prior year figure in terms of adjusted EBITDA. All of these figures are excluding GAT and currency neutral. Just for the sake of being clear, these are also excluding items such as the effects resulting from the evaluation of Triveni put option or the expenses for network charges, which I mentioned at the beginning of this presentation.
In that sense, we are still comparing apples with apples. For example, if you look at Triveni, it was overall a positive item last year, which we are excluding from our comparison basis because the comparative number for full year 2017 is EUR 307.2 million. I don't have a crystal ball on currency, but if you basically apply the same spot rate as observed in September for the remainder of the year, it would basically lead to an overall negative translation effect of approximately EUR 40+ million for the revenues and EUR 11+ million for the adjusted EBITDA. Again, this is very approximate, but still to be in mind for modeling purposes as it can be the biggest swing factor at year-end. Regarding Sensile, our overall targets for the year are maintained.
As said earlier, this number can vary and there is a level of uncertainty in timing, but this is our best estimate for now and has not changed compared to the last time we communicated to the market. Please be aware that we are giving you here an adjusted EBITDA number, so without a D for depreciation. Regarding depreciation, we said it was between EUR 2 million to EUR 3 million per year, but keep in mind, depreciation is linear at Sensile, and we are looking only at 5 months in full year 2018. Finally, our long-term target for the entire group, including new Gerresheimer Advanced Technologies division, have not changed and are outlined on the chart. Before we go into the Q&A session, a few words of conclusion on slide number 16.
Looking back to some extent, we can say that we have, in course of 2018, systematically executed on the 4 growth drivers we outlined at the beginning of the year. This is true for regional and customer expansion, products and innovation, but certainly also with value proposition with the integration of Sensile Medical under the GAT umbrella. We are also crystal clear about the operational challenges ahead of us in the short and midterm. The build-up of Horšovský Týn or the customers transfers out of Küssnacht, to name a few. I've covered currency and commodities, a few words on management changes. You know, Dietmar Siemssen is joining us from November 1st onwards as new CEO of Gerresheimer. Dietmar will also assume from March 1st onwards the operational responsibilities for Plastics & Devices as well as GAT.
As you could see in this morning's separate press release, Andreas Schütte will step down from the management board of Gerresheimer at the end of February next year at his own request. As communicated already a month ago, I will not extend my contract with Gerresheimer beyond its term, which is end of April of next year. Operationally as management team, for the moment we are set in full gear for preparing the management transition, which amongst others includes a comprehensive onboarding schedule for Dietmar. You can imagine, there are a lot of plans and grounds to cover, and this is done in sync with my other board members, member colleagues, Andreas Schütte and Lukas Burkhardt. To finish on this and the greater outlook, the overall assumptions are, as we have communicated them on the occasion of our Q2 earnings report, remain unchanged.
Obviously, we are in the process of fine-tuning our budget and strategic planning for 2019 and the following years, which would serve, by the way, as basis for our guidance to the capital markets in February 2019, and this, amongst others, with regards to the investment planning and within that, the OpEx and CapEx allocation. With that in mind, let me hand back to Severine for Q&A. Thanks.
Thank you, Rainer. We are going to now enter into a Q&A session, the lines should be now open for any questions you might have. To register for questions, you need to press nine star on your telephone keypad. In case you want to cancel the questions, you need to press nine star again. We're going to pause for a minute to pause for questions. Thank you. We're going to take Falco Fritsch from Deutsche Bank first.
Yes. Hello, can you hear me?
Yes, if you could just get that louder, that would be great.
Okay, great. Thanks for taking my questions. Three, please, from my end. Firstly, on your adjusted EBITDA guidance for this year, could you share how good your visibility is currently on the needed investments in relation to the contract wins and capacity expansion that you might incur in Q4? It also seems that the guidance cannot really stomach any more increases in raw material prices. Would that be a fair assumption? Can you maybe even quantify the negative impact from the higher raw material prices in Q3? Secondly, I know it's early, but it seems that the market assumes pretty much no EBITDA growth in 2019, and hence another margin decline. Just qualitatively speaking, is that an assumption that makes sense in your eyes? Could you remind us again of the factors that should be an additional drag to margins next year, or could be.
My last question is on Sensile. Did I understand correctly that it is fair to assume that EBITDA should be zero in 2019? Quickly on the recently approved product, could you give us an idea of the peak sales potential when that product is fully ramped up?
Thanks for your questions. By the way, they were four, not three. Let's start with the adjusted EBITDA guidance. Visibility is as good as last year same time. Perhaps you remember we have presented to you last year risk scenario, and we were pretty close to get to these numbers. For sure, we have a forecast process in place, and we look on each division, and I announced in the presentation all the uncertainties. Have in mind for the raw material, which is then also a little bit the third question which you have. Raw material is a factor, but on the other side, mostly of the raw material for plastic packaging can be passed through to the customers. That means to Sensile as well as Medical Plastic Systems.
There is perhaps a delay. Correct, if the raw material prices can increase dramatically, that will have also a negative impact, but if it stays only on the level, then not. For Primary Packaging Glass, for plastic packaging means the European plastic packaging business is a little bit different, but here we clearly can say with price increases and other stuff, normally we also have a good chance to absorb some of the raw material effects. Again, it's still an issue which we have to monitor very constantly. Energy prices. For sure, that's also an issue which we haven't expected. I've clearly said, when we would have known where the energy prices would be at the year-end, we would have hedged for the year earlier.
The general rule in Gerresheimer is that we take in the energy prices up to 50% up to the year-end of 2019, and that means that even if we start to hedge every day, only a small portion, that we hedge in a very high price for 50% of the energy cost for the Molded Glass division next year, which is also an issue. We also will work out, and that's what we are doing currently, how we can work with price increases and because that's a known issue, and our sales people have to work on that and to make sure that we have countermeasures in place to get an advantage out of that, too. A question about EBITDA growth. Yeah.
As you can imagine, I can't give you, and I won't give you a precise guidance for 2019, because that's what we have communicated we will do after our year-end closing. What we already have said in our Q2 call was, being together with the investment projects which we have, that we will have an effect of approximately first indication, one percentage point on the EBITDA margin. We also said at that time that this normally should include everything. Again, this was a preliminary assumption, and the one percentage point is perhaps not a one percentage point. It can even be a little bit more or a little bit less. I also said in my speech at that time, and that's what we also have to do, we have to do an OpEx and CapEx allocation of our investments, which we will invest in next year.
There also can be an effect out of that, which I can't clearly guide currently. The one percentage point is not totally out of reach, and that's clearly what we have said in the speech, what we have written in our report and what we still have in mind when I look at my numbers currently. Sensile. I explained to you we have given you an indication for the year-end on EBITDA in our Q2 numbers, and I explained to you that you have EUR 2 million-EUR 3 million depreciation on a yearly basis. This is the yearly effect, and you only have to take five months of that, and then you can come to your own conclusion where it is. That means, will be a little bit lower than a zero, I would say, yeah, for 2018. That was the question.
Correct. Just a quick. I was asking about 2019, actually. I understood that that should be around zero. Is that-
Yeah. The point for us is clearly, as I said, what is that what we have in mind for 2019. You could see, I also said that the project which we won is not a big one, it's a small one. It's more a proof of concept. We will assume for the year 2019, mostly development sales, and that means that we can offset our costs, mostly. If it's then exactly a zero, a little bit above or a little bit below, that's what I can't say right now. The assumption that development sales are not comparable to royalty sales or part sales is totally correct.
Okay, great. In terms of the peak sales potential of that device, can you give any sort of indication?
No, we can't because the customer hasn't disclosed who he is, and that's the reason why I also don't want to give peak sales on that level.
Okay. That's fine.
It's a small project. It's not a big project.
Okay, perfect. Thank you very much.
Veronika. Sorry. We are going to take the next question from Veronika from Goldman Sachs.
Thank you, Severine and Rainer, for taking my questions, please. I have also three. The first one I had was trying to get some indication, Rainer, from you on the 2019 revenue visibility that you have. It seems like some of the headwinds that you had in the business this year are starting to stabilize. As you look into 2019, is there anything else that we should be thinking about? How much confidence do you have in your ability to achieve the organic growth that you had outlined in July, and has anything changed? That would be my first question. My second question is very Sensile specific, and that is, do you have an update on the scPharma project? My last question, please, if I can, just looking at the rate of CapEx investment this year.
It seems to be tracking below the 8% guidance that you set for the year. Just curious if this is a function of timing or if there is something else as far as CapEx for the year is concerned that we should be bearing in mind. Thank you.
I start with the last one. This is more or less a timing issue. It should come a lot in the last quarter. Sensile Medical update on scPharmaceuticals, I can't. As you can imagine, please check the website of scPharmaceuticals and their announcements, because that's the best thing to do. Yeah, we are also involved in it for sure. We are working with the FDA and we are helping them, but we cannot provide details on that. For 2019, as you know, normally our visibility is pretty okay. As you can imagine, I also don't want to give currently an outlook for 2019 on sales. The only thing which I can say, and that's what you have to have in mind, is that we have lost the inhalation customer.
That's the reason why we are closing our Peachtree plant, Küssnacht plant, sorry. Normally the growth for the market is relevant, and therefore we have to wait for the official statistic from IQVIA. When you have this official statistic, normally then we are in a normal pattern again. We are pretty optimistic that we can perform the normal business on that level. On top of that, for sure, Sensile Medical with their development sales comes on top because that's for sure also something which you should have in mind.
Rainer, can I quickly ask a follow-up on scPharmaceuticals, because I understand they met with the FDA about one month ago. Any reason to believe that the project has delayed further beyond what you had originally anticipated?
No.
Okay. Wonderful. Thank you very much.
The next question comes from Scott Bardo from Bernstein.
Yeah, thanks very much for taking my questions. First question, please, just relates to the top line this quarter. Nice to see a bounce back and some good growth coming back into the organization. Rainer, I just wondered if you could highlight a little bit how much of this growth that you see this quarter relates to simple restocking effects or lower comps, and how much, in your opinion, relates to a more sustainable growth dynamic within your core business areas in plastics and in glass. Perhaps if you can just uncouple a little bit some of the growth that we saw this quarter. Also, second question just relates to natural gas. Can you remind us, please, what percentage of your cost of goods relates to energy or gas consumption?
What has been your historic experience with respect to timing and success of pushing through those rises to your customers? I'll pause there and have a follow-up. Thanks.
Let me start with the energy cost. Energy costs represent approximately 9% of sales of PPG. This is approximately 1 percentage point higher than in Q3 last year, to give you an indication of that. Top line, we had a Primary Packaging Glass growth in the quarter of 9.7%, which is exceptional high. We also flagged that several times, also during this year that our expectation is that Q3 will be a bounce back from that what we lost last year, because this was clearly our depressing quarter. I would say that approximately 50% of that is perhaps the right number to look at. Plastics & Devices to 6.1% is more or less a normal growth for this quarter. Also have in mind here that especially primary plastic packaging was very high due to a timing issue.
The overall assumption, and that's perhaps the more important question also to go on further for the next year, are not changing. We are not telling you that we are with the market position which we have, can in our normal business outperform further as we have outlined in the past. The market, we stay with that what we have said in the past. First of all, we want to grow with the market and on top of that, normally we should have due to mix whatever, a possibility to outperform that. That's it for the normal business. On top comes Sensile Medical. That fundamentally hasn't changed.
Understood. Thank you very much. Just to follow up, it seems then that the fourth quarter has quite a lot of moving parts. You mentioned about increasing investment to meet your contract wins. At the same time, ramping up in Peachtree City, and delivering upon, if you like, some of your pooling revenues and pooling projects. I just wonder if you could outline or be a little bit more specific as to why the fourth quarter will be of a similar profit magnitude or EBITDA magnitude to the prior year, when you highlighted already that was one of the peak quarters in the company's history. Why should this quarter be of a similar sort of magnitude?
When you look at our numbers from last year, for sure we had perhaps a million or two deviation to that what we announced in Q4 last year, mostly it comes out of the Centor business. The tooling business is pretty secure due to the fact that this is tooling, it's in project that's very easy. We had also last year a better injectable business in the U.S., it wasn't on the level which we had it in Q3, there's also a possibility which gives us a good visibility also going on further also with lead time, which is there. I overall feel pretty comfortable. What I think is really more important, I'm always talking, by the way, currency neutral. I think what is more important and really more relevant is that what is happening to currencies.
When you could see what happened to the foreign exchanges, especially with the Brazilian real, also the Argentinian currency and so on, even South America, these are all things which are influencing our reported figures. That's the reason why I've said that this is perhaps more relevant than this or that deviation here or less. For sure, energy prices play a role. When we talk about the effects and also the effects in what does it mean, even if I'm not hedging and I had to increase, I have a deviation on a monthly basis compared to last year where the energy prices were lots lower of perhaps half a million or something like that. There is a certain part is hedged. It's not really unclear what we're doing up to the end of the year.
I also would like to say for sure, we are doing everything currently to make sure that we deliver this inhalation product in Q4 2020. Therefore we have to do everything for our plant in Horšovský Týn, to make it happen. Also whatever is necessary, we are investing in that area. It's not only investing, it's also OpEx, because I give you one interesting example when you look on demolition costs. I know that some people put them in CapEx. You also can put them in OpEx depending, if it's a building which is already built up in the past, therefore accounting-wise, it's also not easy. You have to look what is happening between OpEx and CapEx and similar to when you are investing in an existing plant, what is OpEx, what is CapEx, and so on.
That's the reason why we have to have our exercise finished, which is the planning. Then we know precisely how we will develop also next year on the profitability side. Overall, I believe we are okay for the rest of the year based on the assumptions which I've explained to you currency neutral.
Very good. Just a quick housekeeping, please. Just by your own guidance on Sensile, are we right to assume that this is not dilutive, if you like, or won't be a negative EBITDA contribution in the fourth quarter? I think you've had all of your relevant negative in the third quarter, if I understand your guidance correctly.
Yeah.
Also, could you give us some guidance actually as to where you expect net financial income to land this year and next given your refinancing activities? Thanks.
For Sensile, you are right, but have in mind, this is a project business. It can deviate, but here again, it's not a big deviation. If it's exactly zero or wherever, I don't know. We will see. Or minus two, we will see. We will see at the year-end. This is not a big effect. We are talking about people where we get money for. At the end of the day, it's more or less, do we get this milestone payment of EUR 1 million or not, or will it be transferred to December? That's a little bit the things which I can't clearly say currently. I believe, the influence won't be very big, whatever can happen there. Net financial income, I look on Severine. Perhaps you can help me there.
Yes. Basically, if you think about that, if I'm talking about the financial results, we were around EUR 35 million in 2017, if I'm correct. We should be landing, I would say south of EUR 30 million in 2018. You have on the one hand, and I explained that to a few of you have on the one hand, obviously the positive effect coming out of the refinance, well, the redemption on the bonds coming from May. It's your EUR 5.5 million. You have obviously the interest cost that we need to carry from end of June 30 with Sensile. You have actually a portion of currency effect that will be this year. Simply because with the financing of Sensile, we have actually restructured the intercompany loan between the U.S. and Europe, from that perspective, we don't have currency exposure anymore.
I'm looking back at Rainer to see if it's all correct.
Yeah, it's fine. Approximately EUR 30 million would be my year-end number. Okay. Yeah. If it's really lower, I don't know. We will see. You have to have in mind, we have Sensile in, and so on, and therefore we have to see it's approximately EUR 30 million. That's fine. Yeah.
Very good. All right. Thanks so much for taking the questions. Appreciate it.
We have to be mindful of time. I would say we're going to take one last question, which is from Alexander from Hauck & Aufhäuser.
Yes, good afternoon. I'd like to ask again on the, sorry for a little bit nitty-gritty question, but on the EBITDA guidance. In Q3, isolated sales were up by 8% organically at the adjusted EBITDA margin declined by more than one percentage point, and we're talking about all the cost pressures that you're facing on numerous fronts. Clearly, Q4 is a very tough comparable base, with also Centor, I think, benefiting from the flu season. I'm just wondering, how do you expect to maintain the margin in Q4 stable, which is basically what is needed from you to reach the lower end of the full year EBITDA margin guidance?
Sorry, could you reply to the second question, or maybe even the first one, because-
That was basically the first one. Just the one question that I had. I'm just wondering, how do you expect to maintain the margin in Q4, largely stable on the prior year's level in Q4, what you had in Q4 2017, which is required for you to attain the full year EBITDA margin, sorry, not the margin, but EBITDA guidance for the full year, given the fact that you speak of all the cost pressures that you face on numerous fronts and also that Q4 is really demanding comparable base for you.
When we talk about we are expecting a strong Q4 similar to last year, I'm talking about the adjusted EBITDA number, the approximately €95 million which we had last year. If then the margin for Q4 is a little bit lower or higher, it's based on the sales that you have. And I'm only talking before Sensile. Sensile comes on top. Hopefully, that answers your question. We are talking about the absolute number.
Yeah.
If you get to the same amount of absolute numbers, and you add it to the current numbers, you would end up at approximately EUR 305, which is the lower end of the guide. It means that all the things which we have in mind are happening. Yeah?
That means, for instance, also that our building in Czech Republic, that the parking lot is already away, that I have the approval to build up the building, and that we already have started to do it. Yeah. That's really what we want to do. Therefore, this is the challenging part of that guidance in that situation because the other ramp-ups and on top, for sure, raw material, as I said, energy prices, I repeat myself a little bit. For sure, that's what I don't have under control, and you are right. There is always a certain risk in that. On the other side, I also don't have every sales in, I don't have everything else. So there's always a risk in all scenarios which you present.
When you compare our precision from last year at the same time up to the year-end, you have seen that the EBITDA deviation to that what we have announced wasn't very high for the normal business. For Sensile, again, my problem here is for Sensile, I seriously have to look at my comment before I hopefully said Sensile and not Sensile. Yeah. For Sensile, this is a new part in our company. We have to figure out, and we also have to screen further on what they are doing, and we better have to understand how they book things and so on. That's something which is a little bit more uncertain. That's the reason why we split it in two pieces, the normal business and Sensile.
Okay. No, fair enough. Thank you. Then another one. If you could broadly quantify the expenses that you expect to incur in connection with the ramp-up of the two new contracts, because so far we have this indication that the EBITDA margin should drop by one percentage point in 2019 and 2020. Can you attach a rather an absolute figure to that? Because this adjusted EBITDA margin decline by 1% is pretty much close to. I am open to interpretation if you can do that.
Yeah, sorry. That's exactly what we perhaps can do when we sit together in February next year. We have to finish our work currently. We have to divide an OpEx and CapEx. We have given a guidance in Q2, where we explained what we assume is the right number, as well as based on how much more CapEx we need for the next two years to make both things happen. Because we also gained not only the inhaler in Horšovský Týn, we also gained this huge contract in Bünde. Therefore both together need more capacity. Therefore we also said that we have to figure out if we need a new plant and how we can shift capacity. Therefore, all the things have to be puzzled together and then we can give you a better view.
Currently, we refer to the numbers which we have provided you in Q2. They are still available, and they are still intact, and that is the basis for our guidance.
A very short one. The customers that you transfer now from your Swiss plant, how many customers do you serve from this plant currently? And if you could mention sales exposure that you have.
No, we are not providing more information about that because our customers wouldn't like it.
Okay.
I can tell you, we are on track in taking them over to the other plants we have defined for that. These customers which we transfer are already in this plan, so they know what they're expecting. Currently everything is on track to make it happen, at the end of 2019, which is our target. That's the reason why we have restructuring in two steps. One step in 2018 and the second step in 2019, when you look on the restructuring expenses, how we have split them in the two pieces of EUR eight million in 2018 and EUR seven million in 2019.
Yeah. Thank you very much.
Sorry, apologies. I was on mute. This would now conclude our conference call for Q3 results, and if you have any further questions, please do not hesitate to reach out to investor relations. Thank you.
The conference is no longer being recorded.