Ladies and gentlemen, welcome to the conference call regarding the publication of Gerresheimer AG's Q3 results 2017. At the moment, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. I hand over to Séverine de Comtes , Corporate Senior Director, Investor Relations at Gerresheimer AG.
Good afternoon, everyone. Thank you very much for joining our Q3 results call. With me today are Christian Fischer, our CEO since September 1st, and Rainer Beaujean, our CFO. As usual, 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 under gerresheimer.com/investorrelations. Please note that this call is being webcast live and will be archived on our website. Before we start, I would also like to remind you that the presentation and the discussions are, as always, 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 today starts with a presentation by Christian and Rainer, and after that we will enter into a Q&A session. With that being said, I am now handing over to Christian.
Thank you, Séverine. Good afternoon and good morning to everyone, and thanks for joining us on this conference call today. Before I hand over to Rainer for the review of our Q3 earnings, I would, of course, like to take the opportunity to give a bit of background about myself and share with you my first impressions. My first weeks, and I think that is not a surprise, have gone by really fast. I want to start with a special thanks to my predecessor, Uwe Röhrhoff, for his remarkable and excellent handover. He has shared his in-depth knowledge of the company and its market, and that was very helpful. Together, we visited several sites, suppliers, as well as partners. Just a few words about myself. 53 years old, married, and we have a grown-up daughter. I have a master's degree and a PhD in chemistry, and studied business administration.
From a business point of view, I spent almost 25 years at BASF in different functions: research and technology, controlling, marketing, as well as sales and BU management. I lived in different regions, worked one year in the U.S., of course, several years in Europe, and overall 8 years in Asia. There, first responsible for the plastics business in China, and later as business unit head for entire Asia for fine chemicals, and here worked very closely with customers from the pharmaceutical, cosmetics, and food industry. That experience will help me now also at Gerresheimer, because we want to grow in these industries, especially in emerging markets. After that, I was, for several years, responsible for research, to be precise for materials and systems research, and recently as President Performance Chemicals for a division with overall 5,000 employees, 4 billion turnover, and sites across the globe.
Key takeaways from these excellent years are a solid strategy. The stringent implementation of a roadmap and clear, solid business models are key for continued sustainable success of a company. Operation excellence on the one side and customer centricity on the other side are the foundation for profitable growth. A strong presence in emerging market is today crucial for above-average growth. Innovation, how shall I say? Innovation is the icing of the cake to be a real solution provider for your customers. Above all, the passion of our employees is the key driver of success. What are my first impressions after a few weeks? Very exciting and very encouraging. I've visited the majority of our production sites, to be precise, 28 out of 35. Talked with colleagues from our business units in North as well as South America, Europe, including all our German sites.
I visited our sites in Asia, in India as well as China. Goal is to have visited almost all our sites by early next year. Wherever I've been, I came across very motivated employees with a passion about our production, passion about product quality, and customers. I'm impressed about the passion, the driver for our current as well as future success. I've seen quite some strength in operations, and people are proud about standardization of technologies rather advanced, and the focus on quality is clearly visible, a key aspect, not only but especially for the pharmaceutical industry. We will continue to strengthen operations, and I think we have a good solid basis to build upon. I see personally good opportunities in the digitization of our operations. Main pillars. First, introduction of our manufacturing execution system software, especially in primary packaging plants.
Second, selective further upgrade of quality inspection systems. Third, further automation. All three are crucial to boost productivity further and meet increasing quality demands. Let me also share first my first impressions from a market point of view. Pharma, healthcare, and cosmetics are attractive markets with overall promising growth rates. Long-term mega trends drive growth, such as rising life expectancy, growing work population, and increasing prosperity. Interesting for us, especially development of new drugs, especially in biopharma and the increasing trend toward more and more self-medication. The overall cost pressure in healthcare markets create opportunities for a reliable and cost-competitive supplier. My priority remains to meet more and more customers, learn about their needs, and understand even better how markets are going to develop.
Just recently, I had several customer meetings during Luxe Pack, a cosmetic fair in Southern Europe. In just two weeks I will meet customers at the leading pharmaceutical trade show and the CPHI in Frankfurt. Customer centricity will be an important pillar of my work and for the senior management as a whole in the months and years to come, in particular, of course, for our sales, marketing, and business development teams. Professional sales and marketing teams and dedicated, even more global key account management is essential. We will implement focused and industry-specific business models. With some of my first weeks and months up, we have a strong team, very committed team. The company has sharpened its portfolio. Yes, currently we do face some temporary headwinds.
In the first three quarters of the financial year, we saw softer demand. Rainer will now elaborate on that in more detail. Rainer.
Many thanks, Christian, and good afternoon or morning also to all of you on this call from my side as well. Before I start to go more into the detailed review of our Q3 earnings call, I would like to echo some of Christian comments. First, needless to say that this past quarter has been challenging from a revenue perspective. However, we have been able to maintain and even slightly increase our adjusted EBITDA margin year-on-year. This is thanks to a continuous stringent cost control and focus on operational efficiencies from all teams in place, which is something that we have become better at over the past years. Second, the revenues decrease encountered in the third quarter.
This is not due to a new series of problems arising suddenly in the third quarter, but still linked to some of the customer-related issues we started to flag at the beginning of the year. Against this backdrop, what we have seen is less orders and in parallel, some postponement. Third, we are heading towards a good fourth quarter. Everyone will remain committed here until the very last day of our financial year to execute as seamlessly as possible. After this opening remark, let me give you an overview of Q3 in terms of top line and profitability and how we gauge Q4 at this current stage. Reported revenues decreased by 5.4% to EUR 331.5 million in Q3 2017. In absolute terms, on a reported basis for the first nine months of the year, it represents a total of EUR 44 million less than the same period last year.
Organically, the decrease was 4.3%. From a currency perspective, there were a bit more than EUR 3 million of adverse currency effects in the quarter versus Q3 last year, essentially stemming from the US dollar and Chinese renminbi. As just mentioned, the main factor for the decrease in the third quarter is linked to the fact that the somewhat softer customer demand that started to affect us earlier this year continued to linger in the third quarter. As in the precedent quarter, it was linked to the device business as well as our primary packaging glass operations in the U.S. As we also mentioned in precedent calls, there was not just one single reason prevailing, and we will elaborate on these on the next slide. Despite the trend in revenues, we have been able to slightly improve margins year-on-year.
Adjusted EBITDA margin was 23.4% in Q3 2017 against 23.2% in the third quarter last year. Here, we saw the same mechanism at work than those which helped support our margin in the first half of the year. Plastics and devices, thanks essentially to product mix and our price-volume clauses, the Adjusted EBITDA margin even improved by 80 basis points. In primary packaging glass, our margins decreased only slightly to 20.1%, and this despite the revenues decrease and the fact that we did not completely reduce our production capacity in anticipation of the solid volumes expected in Q4. In both divisions, we have continued to manage our cost base tightly. I will spend a bit more time later to discuss cash and earnings financials, but most of the trends on the rest of the P&L and cash development side are essentially derived from the top-line development.
I will also update you on the successful issuance of our EUR 250 million of promissory loan and its implication for the financial results of 2018 and 2019 later on. Over the next slides, I would like to walk you through the main drivers that have affected Q3, and provide you with the current risks and opportunity we see for the fourth quarter. In essence, the message that we provided during our last earnings call has not changed. We are still expecting strong volumes in both divisions for the fourth quarter of 2017. However, based on the revenue development over the first nine months of the year and what is expected from us for Q4, it would be wrong to say that this does not pose any operational challenges. It indeed requires a seamless coordination of all parties.
When I say all parties, I mean our suppliers, our partners, our clients, and of course, ourselves, to be able to execute as much as we can. It means obviously that the production needs to run as efficiently as possible. I think it is important here that I describe the reality of our business and the swing factors involved. We have always said that the fourth quarter is our ideal one, as there are, apart from Thanksgiving, no holidays or breaks whatsoever, and as such, the entire organization is completely focused on delivering as much as we can in Q4. In my function as CFO, it is my role to look also at a scenario analysis. As a whole, the magnitude of the increase at Q4 is first and foremost to be determined by how much we are going to be able to compensate the revenues lost to date.
As I will detail later on, this is partly under control and lies with our execution capabilities, but is still, as always and more pronounced this year, in the hands of our customers. From a scenario analysis viewpoint, we currently estimate a total of approximately EUR 30 million revenues at risk on a currency-neutral basis, whereas the EUR 1.4 billion, which we have announced in our Q2 earnings call. Some of you might question why we are not just giving you a final number for the year-end. The truth of the matter is that still a lot can happen over the next seven weeks, and given how critical these weeks are going to be, there are a number of factors that could possibly amplify the revenue risks described. Let's now delve into the details of Q3 drivers. Move on with me to slide number seven.
As Christian mentioned earlier, we have not seen any significant changes in our operating model. Overall, the underlying trends are healthy. On a reported and year-on-year basis, we have posted a total revenues decrease of a bit less than EUR 19 million in Q3, of which approximately EUR 11 million is attributable to plastics and devices, and the remaining EUR 8 million to primary packaging glass. The trends can be seen on the chart in the top right corner of this slide. What we have then tried to present on this slide are, for each division, the factors we outlined during our Q2 calls and whether these still impacted Q3. In essence, you can see that all the trends, both on the negative as well as on the positive side, are more or less valid.
If we start with the trends with plastics and devices, please move with me towards the box at the bottom left corner. The totality of the sales decrease in Q3 is attributable to the devices business. As in precedent quarters, and as previously flagged, it has to do first with lower tooling revenues, where we still anticipate almost half of the expected full-year revenues to come in Q4. There are essentially two sets of revenues in tooling. On the one hand, revenues with engineering hours, on the other hand, revenues with assembly machines and tools, both of which are generated from own activities as well as from external suppliers.
Especially the timing of the invoicing of our external suppliers is critical. As a consequence of the various structures we are currently working on right now, there will be a lot of invoicing and payment booked into the Q4 of this year. The other factor that is impacting the devices revenues in Q3 is the result of unfavorable customer dynamics, in particular within our inhaler business. This has nothing to do with the inhaler market per se, which is still poised to develop further, but has more to do with the various life cycles of the products that we are currently being managed within our customer base. As mentioned last time, you have to remember that we have quite a good market share in inhalers, both with pharma as well as with generic customers.
Within our customer base, we are seeing heightened competitive dynamics and specific management of the life cycle for certain products and medications that have led to lower volumes for certain customers or postponement. This is something that can happen, nothing out of the extraordinary here, especially when one considers that given our high market share, we are not immune to market trends. Having said that, despite these high market shares, which we are constantly working on, a new project pipeline, as demonstrated by the ramp-up in Peachtree. Here, as already mentioned in Q2, we saw postponements of orders from the first half into Q4, and this is still the assumption we are working under. The rest of the business has evolved according to our expectations in Q3.
This is the case for plastic packaging overall and for our syringe business, where we saw here some pickup in QC as announced previously. Profitability-wise, we are seeing the same trends as in the precedent quarters. Lower volumes in the device business triggered contractually agreed price escalation clause. Such higher prices, in combination with the decrease in the lower margin tooling revenues, translating in a favorable sales mix have enabled us to even increase the adjusted EBITDA margin by 80 basis points at 28.7%, despite lower revenues in plastics and devices. If you now move on to the right-hand bottom side of the chart to review the drivers for our primary packaging glass. The main factors for the revenues decrease remains in the U.S. glass business. We have seen less orders from our U.S. customers, both traditional pharma and generic ones.
It is difficult for us to pin it down to a single component. As mentioned in previous calls, there's an array of reasons that have led to this trend. Here again, it has in part to do with the competitive positioning of our customers, and we have been also impacted by destocking. We even saw some mentions of drug shortages for some specific medication. Overall volumes are not disappearing, but as always, as a supplier, we are not informed first up about delays from our customers and can't influence their order pattern. As a whole, outside the U.S., the revenues remain broadly stable. From a profitability standpoint, we were able to maintain the margin in a 20% region as a result of operational agility and efficiency.
As mentioned before, we have also taken the conscious decision not to reduce significantly our production capacity in anticipation of the volumes expected for Q4 2017. As such, the slightly softer margin is due to a lower utilization. I hope this provides you some color on the factors that have affected Q3. I will comment more in detail on what we judge to be the drivers of outperformance in Q4 versus Q4 last year. Before that, I would like to spend some time on the financials for Q3. As a matter of fact, there are a number of positives we can also report on from a financing and leverage perspective, which are also supportive for our value creation approach going forward. Please, first, move with me to slide number nine.
As in the preceding quarter, you can find the slide on revenues and profitability for the quarter in the appendix. On this slide, we are comparing the reported Q3 2017 results with those of Q3 2016 for continued operations only, as both exclude the results from Life Science Research, which have been treated as discontinued operations for full year 2016, and subsequently for each quarter of 2016. During the quarter, we can see that the reduction in adjusted EBITDA, coupled with some depreciation and taxes increase overall leads to a EUR 5 million decrease in the net income from continued operations. Let me describe the main positions here. The increase in depreciation is less than EUR 1 million and in line with the trends that we have outlined in the preceding quarters.
The one-off effects of EUR 8 million do include mainly non-recurring costs secured in conjunction with an acquisition opportunity we evaluated, but for which another buyer was ultimately selected. The amortization of the fair value adjustment is, as in the preceding quarters, for a large part driven by the Centor acquisition. As a whole, we thus achieved an EBIT of EUR 46.3 million in Q3 compared to EUR 50.7 million in Q3 2016. Below the EBIT line, the net finance expenses is essentially in line with last year. Regarding taxes, the quarterly comparison is not necessarily the most relevant given the complexity of the topic by country. As such, we like to look at it more on a year-to-date basis. In the first nine months of the year, the tax rate at group level was 30.2%. This compares to 28.3% for the same period last year.
The difference is essentially linked to the timing of the occurrence of certain tax-free income or non-deductible expenses. In Q3 2017, we recorded a net income of EUR 26.3 million compared with a net income from continuing operations of EUR 31.3 million last year. After adding back the one-offs and subtracting the non-controlling interest and on the basis of a stable share count year on year, the adjusted earning per share after non-controlling interest amounted to EUR 1, compared to EUR 1.17 in Q3 2016. Please move with me to slide number 10 to review selected balance sheet and cash items. Looking first at the equity portion of our balance sheet, we note the decrease of 1.7% from total equity from EUR 763.3 million at the end of full year 2016, compared to EUR 750.7 million as of August 31st, 2017.
This increase results, on the one hand, from the payment of the dividends recorded for the period under review and negative currency effect. As a whole, the equity ratio increased slightly from 32.1% at the end of full year 2016 to 33.3% at the end of Q3 2017. The EUR 24 million increase in net working capital is essentially linked to a decrease in trade payables as well as an increase of the inventory. The average net working capital in percentage of the last 12 months revenues was 16.7% compared to 15.8% at the end of last year. The figure as of August 31st, 2017, has to be seen in conjunction with our expectations towards a stronger sales performance expected for the fourth quarter of this year.
Operating cash flow decreased from EUR 131.5 million, excluding Life Science Research, to EUR 121.2 million year-on-year, a trend that is explained by the lower adjusted EBITDA contribution on the one hand, and by the increase in net working capital I just mentioned. In relative terms, and excluding Life Science Research for the first nine months of 2016, CapEx to sales remained practically unchanged year-on-year at 6.6% of sales. Looking at the transfer division. A large part of the CapEx spend in Q3 was in plastics and devices, and it's mostly linked to the acquisition of an exclusive license enabling us to launch an innovative, integrated passive syringe safety solution, as well as additional investments for our Peachtree facility. The investments in primary packaging glass were significantly lower than last year, which was impacted in Q3 2016 by the complete overhaul of our furnace in Tettau.
In Q3 2017, CapEx spend for the division essentially deals with the investment of molds and tools as well as modernization initiatives. As a whole, since the beginning of the year, we have invested up to EUR 50 million in intangible assets, the majority of which comprised of our licensing agreement. Net debt amounted to EUR 765.8 million, which corresponds to a decrease of EUR 22.4 million and is essentially driven by a lower draw down on our revolving credit facility and positive currency effects resulting from the currency US dollar to euro exchange rate. Based on the last 12 months adjusted EBITDA calculation as of August 31st, 2017, leverage therefore remained unchanged at 2.6 times, whereas at the end of last year.
I think this is an important element to flag at this point towards the very good development of our leverage and demonstrates further that we remain very disciplined also when top line becomes challenging and never cease to focus on cash. This is one of the strengths of Gerresheimer as a corporate issuer, which has been constantly recognized as well by the debt capital markets and has allowed us to successfully issue a EUR 250 million Schuldschein or promissory loan at very good conditions. Let me describe these on the next slide. Here on this slide, I want to focus on the new emission and also provide you as an indication with the pro forma financing structure should the new promissory loan have already been recorded during the third quarter. First, the new issue. On September 27th, 2017, we successfully issued a promissory loan amounting to EUR 250 million.
The strength of our credit and company profile, as well as favorable market conditions, enabled us to upsize the initially announced volume of EUR 150 million to a final size of EUR 250 million. We even had an over-subscription by EUR 100.5 million. 96% of the promissory loan is linked to fixed interest rates, varying between 0.82% and 1.72%. Even better conditions than the precedent issues following the Centor acquisition. The remaining 4% are a standard variable rate that is six months EURIBOR plus 60 or 75 basis points. We have also overall extended the debt maturities of our financing as the promissory loan has three tranches, each maturing as of September 2022, 2024, and 2027. A strong signal of the trust and the confidence of the debt capital markets in our business and cash generation profile. Now let's look at the pro forma financing profile.
In essence, with the new promissory loan, it means that until May 2018, we will not need to draw on the revolving credit facility. This is reflected in the last column of this table of slide 11. This would conclude my review of Q3 financials, and I would like to go back to current trading and our expectations for Q4. Moving on to slide number 13. On this slide, we have outlined the trends as we see them currently and which should support the growth that we are expecting for the last quarter of the year. To be clear, we are talking about drivers which are going to support the outperformance in Q4 2017 whereas Q4 2016.
Plastics and devices should contribute for approximately 80% of the outperformance in Q4 on the basis of a solid performance year-on-year in devices and systems, both in Europe as well as in the U.S. We are definitely expecting a much higher production run in our Peachtree facility by the end of Q4. Syringes should also continue to add to the top line in Q4. We anticipate the bulk of tooling revenues, close to half of the total revenues for the year to be precise, to be recorded in Q4. This will also contribute to the increase in Q4 year-on-year, as we realized more revenues in the nine months of 2016 than this year. There will be growth in tooling in Q4 whereas last year. In plastic packaging, we expect further growth in line with our expectations in all regions.
In primary packaging glass, the expected solid performance versus the last year is a result of, first, moderate growth expectations in the U.S. and European pharma sales. Second, we expect an improved performance in emerging Asian markets. Third, the cosmetics business is to benefit from stronger seasonal uptake ahead of the Christmas season. I talked about scenario analysis before, and I also would want to provide you with the supporting factors as well as those that we continue to monitor carefully. On the plus side, we have a good level of committed orders on hand for the end of the year. We maintained capacities in order to be able to deliver targeted volumes in Q4. We have taken operationally the necessary measures and are ready for higher production levels.
Our improvement of sales doesn't come from one product or out of one plant or segment, but the shipping of the various products is expected to occur from different plants. However, it does not necessarily diminish the complexity of what we need to accomplish. On the flip side, the aspects that we will continue to monitor until the very end of the year are the overall customer dynamics. As I have always said, the seasonal softer demand of many pharma companies will also have a corresponding impact on us as a packaging specialist. As a supplier, our information knowledge is more back-end loaded as we usually notice possible trends after pharmaceutical companies publish their financial statements. Another aspect to bear in mind has to do with supply chain swings. There has been mention of drug shortages in the U.S. and in Europe, implying some disruptions in the supply chain.
This is something which we cannot necessarily control and which can also be linked to external factors as the hurricanes, which have hampered logistics of some distribution centers in the U.S. This brings me essentially to my last remark, which is that we are not the only one in the driving seat here, but are also dependent on external factors. All in all, the level of preparedness of all parties involved to support processing these expected large amount of volumes will play a critical role in Q4. I hope I have provided you here with a direct and transparent assessment on where we stand today. Let me now address the details on how we compute our estimates for Q4 and link it to our outlook. Turning to slide 14. As just mentioned, we are expecting a good fourth quarter.
Based on the computation we have made for Q4, the overall objective to post revenues in the amount of EUR 1.4 billion on a currency-neutral basis seems more than ambitious at the current stage. Our current scenario analysis points towards a downside risk in the amount of approximately EUR 30 million on a currency-neutral basis. Should this come to realization, which appears to be more likely than not at present, this may also lead to variations to our adjusted EBITDA and, as a consequence, to our adjusted earnings per share after non-controlling interest. You can see these variations on the right-hand side of the table.
They are all on a currency-neutral basis. They indicate an estimated delta of approximately EUR 10 million, whereas our adjusted EBITDA objective of EUR 320 million and an estimated delta of approximately EUR 0.17 for the adjusted earnings per share after non-controlling interest, whereas our stated objective of EUR 4.25. From that perspective, as I mentioned earlier, we feel it is more transparent to provide you with our current risk estimate at this stage. For our metrics, such as investments, our ratio of approximately 8% of sales remains unchanged. A few modeling elements here. First, currency impacts. Should the U.S. dollar further weaken compared to the euro, let's assume that the rate for Q4 2017 is 120, then it would be probably right to assume roughly a EUR 10 million translation impact on sales for Q4 alone.
As you remember, we have always said that on a full year basis, a cent variation for the dollar would have roughly a EUR 4 million impact on revenues. If you make this calculation on a yearly basis, 120 versus 140 would mean a decrease of sales of roughly EUR 40 million. If you then just divide the 40 by four for the sake of the calculation, then you arrive at the EUR 10 million currency effect I just mentioned. On adjusted EBITDA basis, the impact will be less as we said that EUR 0.01 variation would lead roughly to EUR 1 million impact. Second, CapEx. The approximately 8% excludes our investment into long-term licensee agreements.
As we have described in the past with regards to our external growth strategy, we have always said that acquiring IPs or patents or for that matter, investing in licensee agreements should be more or less treated as M&A and are necessary to fund our external growth strategy. Turning to 2018. In principle, we continue to adhere to our guidance for 2018. Based on revenues as of the year-end 2017, we currently see the targets for 2018 as follows. We are aiming for organic revenue growth of 4%-5%. For the adjusted EBITDA margin, our target is some 23% for the financial year 2018. In order to meet these targets, we require annual CapEx expenditures of around 8% of revenues at constant exchange rates. We anticipate that average net working capital as a percentage of revenues will be approximately 16%.
To continue to expect that our operating cash flow margin will be around 30%. Let's discuss again the great progress and initiatives we have been able to seal in the past few months, and I would like to spend a few minutes on this before I hand over to Christian for the concluding remarks. Please move with me to the next slide. We have presented the slide already on the occasion of our Q2 current earnings call. But since then, we have further worked on enhancing our specialty pharma offering, in particular with the launch of an innovative, passive, and integrated syringe safety solution. As you might know, the high amount of needlestick-related injuries among healthcare workers has led to increasing demand for safety solutions, and this is backed by international regulation.
Currently, there are only non-integrated safety devices on the market, which means that the device is assembled after the filling, an additional progress step for the customers. Our cooperation with West Pharma through the licensing agreement that we sealed in July, foresees that the integrated passive safety solutions or so-called safety syringes, are delivered preassembled by us to our customers, ready to be filled using standard nests and tops. So for our customer, it means less process steps and no need to invest in an extra assembly step. This greatly enhanced our offer proposition, especially for the specialty pharma, as the primary target is to win new customers that want to launch new products and solutions in the market, especially in biotech.
First customers' discussions and reactions are positive, but as always, with these initiatives in pharma, it will take another few years before it starts to significantly impact our top line. This together with the agreement on the ready-to-fill vials that we sealed with the Stevanato Group earlier this year, demonstrates that our alliances with partners, in this case through licensing agreements, can be a way for us to support profitable growth. Another type of alliances come from the collaboration with Corning with the aim to deliver a new type of glass, the so-called Valor Glass, to the pharmaceutical packaging market. All in all, this means that we are progressing well towards complete system solution offerings to offer our customers an innovative and complete solutions portfolio. And with that, I'm now handing back to Christian for his concluding remarks before we open the Q&A session.
Thanks, Rainer. One more comment on innovations. I was impressed by our process development expertise at our technical competence Centor in Wackersdorf in Germany. We do have a solid pipeline. Our development teams and our newly established Gx Solutions business development teams are now working hard and preparing the launch. A professional go-to-market approach is important. Right now, as Rainer mentioned already, all teams in the business units, regions, and sites have their hands on the steering wheel and working hard to bring home a solid quarter four. Cost discipline throughout the entire organization is essential. I think it is important for me to spend now time learning more about Gerresheimer, our markets, and customers. During the last couple of weeks, I focused more on operational items, but starting in the next weeks, I will also spend, together with the entire leadership team, time to discuss strategy.
Then on February 22nd next year, we will share with you our 2017 full-year results. Talk, of course, about 2018 and talk about strategic topics. Séverine is already working out a detailed plan for my first meetings with you during road shows and conferences after our full-year results. But I think now having talked long enough, and now we open the floor for questions. Séverine.
Thank you very much. So, let's enter into our Q&A session. The lines are now open for any questions you may have. To register for a question, you need to press nine star on your telephone keypad. In case you want to cancel your questions, you need to press nine star again. So we're going to pause for a few minutes or for a few seconds, just to have the opportunity to see the Q&A line. The first question comes from Scott Bardo from Berenberg. Go ahead, Scott.
Thanks, Séverine, and welcome, Dr. Fischer. So thank you very much for taking questions two, please. Firstly, I want to understand a little bit better, the fundamental performance of the company, not just in this quarter, but over the last few years. I wonder, Dr. Fischer, can you share some thoughts, actually, as to why Gerresheimer has had slowing growth and culminating in negative growth this year. I appreciate there are some near-term industry-related or end-market topics, but some of your competitors also face those and are growing at a faster pace. So could you perhaps share some thoughts as to why Gerresheimer has been losing share and what the strategy and plan is to then address that. So that's question number one, please. Question number two just relates to the financial guidance that has been given by
Provisionally into next year. Very simple question actually, given the financial performance to date, the guidance still calls for a very significant acceleration in the fourth quarter and still very healthy profitability with some resuming accelerating growth next year. I wonder why Gerresheimer still set the hurdle quite high this year, given that, if you like, these issues have now been flagged. Investor expectation is low. Would it not have been preferable to, if you like, rebase guidance to an even lower and seemingly more achievable level? Thank you.
Thank you very much. Let me start with the first question. I think overall, Gerresheimer really operating in healthy markets. Healthcare, pharma, as well as cosmetics are attractive market with more promising overall growth rates. Our target at Gerresheimer has to be, we grow above average. For that, you need to have a very solid presence also in emerging markets. I think we are an international company. I'm well-organized there, but have to go more in emerging markets. I think that's one topic. The other thing, I'm now six weeks in the company and I'm analyzing, talking a lot with people. I think overall, we work in attractive markets. Regarding financial guidance, I think here the same applies.
Our target has to be that we grow above the market, also here, I'm six weeks now here in the company, and after six weeks, I have no reasons to adjust that.
Scott, from my side, when I look on the expectation for the year end, for sure, it's ambitious. That's what we've set. That's the reason why I have outlined the risk scenario of the EUR 30 million. We also said that there is the possibility that we have a further downside potential. When you calculate it correctly based on the last year, it means currency neutral that we have to do EUR 32 million more in fourth quarter, which is already normally the best quarter. On the other side, we have fundamentally discussed it internally with our people several times, and especially the revenues are key for that. We have evidence, and we also have six weeks to go or seven weeks to go, to get to this point. Again, it means, that we have to deliver and everything.
Do we have a chance to outperform that's what we hopefully also stated clearly in my speech, that we don't see that the EUR 30 million is currently the scenario where we live with. We will further discuss it, and we will further figure out how it will come out. That's the basis for our discussion, and that's the reason why we have given out the numbers. This is always our philosophy. We talk openly to our investors, and that's the basis of our guidance.
Okay. Very good. Just one quick follow-up, if I may. Just to understand then with this EUR 1.37 billion revenue expectation for this year, that it should be seen as a peak guidance or an optimistic scenario, or that is a scenario which you can still have potential to beat or there's some error margin around that. Or is that very much the ceiling guidance for this year, if you could clarify? Also, just want to get some specifics, please, on what you see the contribution coming from tooling. I think you referred to something like a EUR 30 million contribution in Q4, if I'm correct. Also what then the run rate of the revenues from Peachtree is likely to be in the fourth quarter so that we can get some additional comfort actually as to the contribution for full year 2018. Thank you.
First of all, we have set, this is our risk scenario where we working with, there is also downside potential. We can't say if it's this number or that number. That's the reason why we have to say it's a risk scenario of the EUR 30 million. For sure, when you look on our expectation for the fourth quarter, the tool revenues have to grow, compared to last year. Because also last year we had the effect that in Q4 we generated most of our tool revenues. They have to grow with approximately EUR 10 million. Peachtree, is also a small amount of EUR 5 million. Syringe is approximately EUR 5 million. Plastic packaging, approximately EUR 5 million, and so on. That's what I've said in my speech, it's all over. I also said it's 80%.
That means that would end up with approximately EUR 27 million, which we expect more in the fourth.
Okay. Thanks very much. We'll jump back in the queue. Appreciate it.
Just a moment. We will continue immediately.
Yeah. Yeah.
Yeah. I think we can hear you now. Yes.
Okay. All right. Sorry for that. She seems to be a little bit of a problem with the system here. Yeah. I have to say that approximately EUR 27 million is our expectation. Can't say it precisely. It comes out of plastics and devices. A solid growth in Q4, in primary packaging glass, which is at the end of the also not one effect, one plant. It's all over, and that's the reason where our challenge comes from. At the end of the day, that we have to deliver on all plants, all over, and that's also a risk for our numbers here.
Okay. Thanks very much. I'll jump in the queue. Appreciate it.
The next question comes from Falko Friedrichs from Deutsche Bank.
Hello. Thanks for taking my questions. I would have three. Firstly, now that we're six weeks into your Q4, do you see market trends intact to reach the double-digit sales growth that you could require even to reach the lower-end specification, meaning the EUR 1.37 billion? Secondly, do you feel that you still did not lose any market shares now in Q3, meaning that this continues to be declines that should impact your competitors as well? Thirdly, you said one of the important drivers to get to the 4%-5% sales growth is emerging markets. Could you maybe share your strategy on how you plan to improve your presence there, and where specifically?
Sorry, we cannot hear you now.
Hello. Frau Bruno?
Yeah.
Can you hear Beaujean now?
No. We cannot hear Mr. Beaujean.
Can you hear me now?
Now we can hear you. Thank you.
Okay. Sorry. We're changing systems here several times. Now I have a new one on my hat, so great. I start with the first one. The inhaler trends overall. Overall, the trends in our opinion are intact. For us it means in Q4, that it's all about execution. That's clearly what we have to deliver. Yeah. To lose shares here or there, it's difficult to say when you have a situation that all your customers are going down, you could see that we are serving the top 10 pharma companies. That means, when you get less share here and less share there, all of us is also getting less share there and there, you also can listen to that.
In our business model, it means, being the market leader here or there, that basically, we feel comfortable that the markets are intact and that we perform as we have expected originally. The last one, perhaps you can repeat the question because I don't have them in mind. Emerging markets? What was the question?
Yes, correct. Just in terms of your strategy and how you plan to improve your presence there, and where specifically.
Markets. I think Gerresheimer is already more internationally well-placed. Very clearly growth rates are in the Asian markets and here in the emerging markets, China and India, where we are active already, but where we very clearly need to work on broadening our customer base. That's one topic. Also, in some segments in South America, there are opportunities.
Okay, great. Thank you.
The next question comes from David Adlington from J.P. Morgan. Go ahead, David.
Hey, guys. Thanks for the questions. Firstly, just with respect to the fourth quarter, again, obviously we're six weeks in and you've identified that EUR 30 million potential shortfall. I'm just wondering what would cause that to be amplified. I suppose, really the follow-up from that is, I think you answered on the last question, just wanted to be sure. Is your delivery in the fourth quarter, is that a demand or your ability to supply restriction, i.e. do you have the sufficient demand? It's a question of whether you can actually supply to customers or not. Secondly, just with respect to, obviously given the disappointments of this year, I suppose what gives you the confidence that you've not had to alter your outlook for next year? Thank you. Including the top line. Thanks.
Let's start with the first one. Fourth quarter, we've set already, we're not discussing the shortfall compared to the EUR 1.4 billion, because at the end of the day, that's what we lost from the beginning of the year up to now. Currency neutral, we lost EUR 48 million, reported EUR 44 million. For me, more or less, it's more the challenge which comes in the last quarter, that we have to reach the risk scenario, which we, as I said, it's a risk scenario. To reach this number, we have to do EUR 30 million more, that's more or less a challenge for me. For sure, it depends how we can deliver all that, what we have in our hand.
Again, I also said in my speech that we have to look on all market trends, that we have to see how customers work on further, that there are no surprises going on further. That's clearly the scenario which we have to address and which we should look at. The outlook for 2018, as you could see, we cut it back on that case that we have set
That based on the numbers which we reached at the end of 2017, we want to grow. Again, our performance here in Q4 is essential to go on further, first we have to deliver on that. We haven't changed it dramatically, we changed it. Due to the fact that the basis for our next year numbers is 2017, that's something which we will discuss then about the 2018 numbers again on the 22nd of February next year. Fundamentally, the market haven't changed and that's the reason why the basis for our business model is a 3% growth, which you normally should see in a year. We haven't seen that in volume growth this year. Normally, it should come and that's the basis for our overall business model.
Just let me add a few more sentences to that. In my first couple of weeks, the focus really was on operational topic and to talk with the team, and the entire team is now focused to bring home a solid quarter four. In addition, we will start now in the next couple of weeks to discuss strategy and reflect on the growth development of the last couple of years. As Rainer said, in February, we come back to talk about 2018 and to talk about strategic topics.
Understood. Thank you.
Does it answer your question, David?
That's fine. Yeah. Thank you.
Okay. Thank you. We will take the next questions from Veronika from Goldman Sachs.
Good afternoon. Thank you for taking my questions. Really appreciate it. I'll keep it to two, please. My first one is actually, Dr. Fischer, on one of the comments you made to the previous questions, which is your end markets are growing 4%-5%, and for you to grow at that rate, you need to have a broad portfolio. Do you feel that Gerresheimer has that breadth of the portfolio from a customer mix and geographic presence that you'd like to see? I guess if I look at the business the last number of years, not just this year, you have fallen short of that 4%-5% organic revenue growth target. Do you think that the fix there is about the breadth and the depth, or is it more about getting more innovation and maybe broadening your presence in a particular vertical of the business?
That would be my first question, and I'll let you answer that, and then I'll have one more follow-up, if that's okay.
Okay. Let's start with our end markets. There are several market reports that are describing the situation in cosmetics as well in pharma. From a volume point of view, our pharma markets globally weighted average grow roughly by 3%. In order to grow at least 3%, I think you have to be globally well-established. I think we are a seasoned player, especially in the European and in the German markets, and there are, for us, opportunities in emerging markets, especially in Asia. In order to at least grow with the market, you need to have a broad customer portfolio. I mentioned our topics in emerging markets. In established markets, in order to increase the share of wallet, we really need to come up with innovations. We need to have a solid portfolio.
In the pharma markets, you know the life cycles in the pharma market, it takes for validations. It's not overnight, but the markets as such are attractive.
Okay. How do you think about, I guess, in emerging markets, as you want to get broader, is that a function of winning more customers, or is that a function of acquiring a competitor who has these customers and you can convert them to your business? I'm just trying to understand how quickly you can execute on this desire to accelerate the top line to that 4%-5% that you are guiding us to in the medium term.
I think most important topic regarding emerging markets is that you are present in the emerging markets, and there, the topic is on sales and marketing organizations, where we will work on.
Okay. Fantastic. That's very helpful. My second question is just very briefly, as you look at the glass environment in the U.S. in the fourth quarter, can you comment in the six weeks that you've been operational in the fourth quarter as to whether you've seen any improvement there? Thank you.
I think you gave an answer already partly. After six weeks, it's a bit difficult, but I've been there already two times. I talk with colleagues and meet our first customers. The situation in the U.S. right now, I think it's fair to describe it's challenging.
Okay. Excellent. Thank you both very much. Really appreciate it.
We have the next questions coming from Daniel Riggott from HSBC. Go ahead, Daniel.
Good afternoon. Thank you for taking my questions. I have only two. The first one is that you mentioned difficulties in fulfilling all devices orders in 2017, particularly due to disruptions in the supply chain due to drug shortages. Could you please elaborate on those difficulties and maybe give an indication of how this would be resolved going into 2018? How this conversion from orders to sales is going. Secondly, thinking ahead to 2018, as far as I understand, one reason you are able to maintain your margin is due to your price escalation clauses. For how long can you maintain your margin if the slowdown continues and contracts are up for renewed negotiation? Thank you very much.
I start with the second one. The price escalation clause is always secure as a combination between price and volume. We have then the difficulty when the price is increasing, that my contribution margin is lower due to the fact that utilization of my manufacturing is the basis for a higher margin. Overall, we would be happy to have a higher percentage in the part areas. The main reason for the margin increase also in Q3 is for sure the more tooling revenues, which we had in Q3 this year compared to last year, because the margin of tools are a lot lower than the margin of parts, and that's for sure one of the main reasons why the margin is pretty strong in Q3. Going on further, for sure, that's something which we shall then discuss next year.
We have given you a general idea where we think, where we will be or where we can be based on the numbers at the end of 2017. That's the best which we can give you right now, because normally in February we discuss how 2018 works and not today, because that's too early. You also asked me for the suppliers and how the situation looks like drug shortages and so on. That's all something which you can read in the different newspapers all over. I can't comment on customers here because that's what we're not allowed to do. Again, my general statement to that only can be, when the big pharma companies all over, you name pharma as generics, do have problems in the market, that normally hurts us. That was the reason which happened up to the first three quarters.
For sure we have, when you look on our outlook for the rest of the year, a better feeling for it. Again, in primary packaging glass, this is a solid growth. This is a small growth which we expecting. The majority of our growth comes out of plastics and devices. As I said before, first step, tool revenues. Second, Peachtree. Third, syringes. Fourth, a little bit the plastic packaging business means Centor as well as the European part. That's the majority of our growth in fourth quarter, that's 80% of the overall growth, that's the situation which we address here.
We're going to take the last.
All right. Thank you very much.
Sorry, Daniel. Last questions. We have Scott again in the queue, so that's going to be our last question.
Thanks for taking the follow-up, Scott. Yeah, thank you. I think you mentioned that you've done relatively well conserving margins at a high level despite the weak top line. I think that's absolutely the case. How confident are you that you've not cut too close to the bone to jeopardize growth? If we go into a situation next year where top line doesn't materialize as you expected, should we then expect some pressures to start to unfold on your margin, given some of the near-term relief starts to abate on the profitability side? If you can talk us through that dynamic, I would appreciate. Second follow-up, please. You've talked about Peachtree being a significant driver of growth.
I think Dr. Fischer, your predecessor, highlighted that new growth projects will likely drive 2%-3% top-line growth for the group for not just next year, but for a few years to come, mainly Peachtree, which would imply, to me at least, that into next year, Peachtree should generate some EUR 30 million or so in revenues. That would help us at least get the bridge, actually, as to how you return to more reasonable growth rates next year. Perhaps if you could give us some additional details as to how significant the contribution from Peachtree would be, that would be very helpful. Thank you.
I start with the last one. For sure, Peachtree is an important driver, and that's what we have said before, is still the case, and that's also part of the situation, and that's the reason why the ramp-up is also important. As I already said in my speech, we had postponements from the first half of the year in the fourth quarter here. Overall, Peachtree is doing very well, and we also have a good situation going on further. Profitability. If we can maintain the margin going on further here, I clearly have to say profitability is for us based on the flexibility which we have. If we have more revenues, it's much easier for us to have a better profitability. On the other side, we haven't cut back investments this year.
If we take up next year, for sure we are able to deliver all that things which will come. Our belief also this year was that we will have a good year, and we also believe, again, that we will have a good year next year. We don't think that our profitability is hurt by this or that, because we are still ramping up facilities. Don't forget, we are ramping up our facility in Oelsnitz/Zwickau. We are ramping up our facility in India. We are ramping up in Peachtree. There is a lot of work beside all that, difficulties which we have right now. That what we have told you in the past is that, what we believe is also true. By the way, approximately 23% means, not exactly 23%, it could mean a little bit less.
At the end of the day, we have to deliver that, and we have to see what we will discuss, at the 22nd of February, when we then talk about 2018.
Very good. Just squeeze one very quick one in, please. This EUR 5 million incremental contribution from Peachtree you're calling out in the fourth quarter, am I to understand that this facility is not at full manufacturing output this quarter, and so that the runway would be potentially higher into next year, if you wouldn't mind clarifying?
Correct. We are still ramping up.
Check it.
As Rainer commented, the situation in plastic and devices, let me add a few more words on the primary packaging, glass side. As I said in my introduction speech, our goal very clearly is to be a reliable quality supplier for the pharmaceutical market. For us, operation excellence is a key topic where we will continue to work. Our productivity is on the agenda because it's good to be prepared, also for the years to come. Competition is always intense.
Very good. Okay, thanks very much for taking my questions.
Thank you very much, Scott. Thank you very much, everybody, for attending the call. That would actually conclude the call. Just a few housekeeping elements here. The results for the full year will be published, as mentioned several times here, on the 22nd of February 2018. We are going to be on road show in the next few weeks, and the investor relations team is there for any questions you might have. Thank you very much. Cheers.