The conference is now being recorded. Welcome to the conference call regarding the publication of Gerresheimer AG's Q3 results 2015. 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. Anke Linnartz, Corporate Senior Director in the Investor Relations and Creditor Relations at Gerresheimer AG.
Hello, everyone. Thank you for joining us to review our third quarter results 2015. As we did in the past, we are presenting a set of slides to accompany our remarks on this conference call. The quarterly 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 be archived on our website. With me today are Uwe Röhrhoff, our CEO, and Rainer Buesgen, our CFO. Before we start, I would like to remind you that the presentations and discussions are conducted subject to the disclaimer. We will not read the disclaimer, but propose we take it as read into the records for the purpose of this conference call. Our agenda for today starts with the presentations by Uwe Röhrhoff and Rainer Buesgen.
After that, we will enter into a Q&A session. Now it's my pleasure to turn the call over to Uwe.
Thank you, Anke. Ladies and gentlemen, good afternoon also from my side. Welcome to our call. I'm pleased to report that we delivered good results for our third quarter this year. We achieved markedly higher revenues and profits, with reported revenues of EUR 344 million, up 6.2% when compared with last year's Q3. Excluding currency, organic third quarter revenues improved by 3.1%, which makes it our best quarter this year, in line with our expectation and guidance. Organic growth for the nine months of 2015 stands at plus 0.9%. That's almost within our guidance of 1%-3% organic growth for the full year 2015. We are on track. Adjusted EBITDA increased on uptake of volume and better mix and got to EUR 68 million. Representing an improvement of 9.5% versus the 2014 period. Adjusted EPS recorded strong growth, 26.9% to EUR 0.85.
Operating cash flow almost tripled to EUR 48.5 million, based on improved networking capital and strong operating results. In Plastics & Devices, we recorded flattish growth versus last year's strong comparison. Tooling revenues came down to a normal level as expected. The adjusted EBITDA margin improved, driven by a positive revenue mix effect from lower tooling. We saw good growth in our device business with inhalers and diabetes care products up quarter-over-quarter and recorded increased revenues with our Primary Packaging business. South American revenues were down in light of the recession of the Brazilian economy, but were overcompensated by good revenue growth in Europe. In Primary Packaging Glass, revenues were up significantly by 12.2%. Apart from favorable currency development, organic growth was strong and came in at 7.4% versus last year's admittedly soft comp.
Growth was driven by our U.S. converting business as well as by European cosmetic molded business. We are pleased to see demand picking up in the U.S. after a weak first half that we have been through, and this is fully in line with our expectations. However, growth also reflects some inventory build-up with our U.S. converting customers, which is why growth might not stay that strong in Q4. Adjusted EBITDA increased by 17% and adjusted EBITDA margin was up from 21.6% to 22.5%. Main reasons were the contribution of the higher revenue base and the timing of the furnace repair, which led more towards the end of Q3 2015 and early Q4 2015. The refurbishment of the Chicago Heights plant was successfully completed in September, and production is now being ramped up. In Life Science, we saw a strong revenue increase, primarily because of strong tailwinds from currency.
Organic revenues came in somewhat softer due to temporarily lower demand. Adjusted EBITDA margin improved slightly on the strict cost management. With that, I would like to hand it over to Rainer.
Thanks, Uwe. Ladies and gentlemen, welcome also from my side. Let's have a look on the revenue development for the third quarter 2015 on slide number seven. On group level, revenues were up by 6.2% and amounted to EUR 344 million. Excluding the effect of foreign currency movements, as well as portfolio optimization, acquisitions, and divestments, organic revenue growth quarter-over-quarter was 3.1%. Like in Q1 and Q2, we had a strong and positive currency translational effect, which can mainly be attributed to the U.S. dollar. The key takeaway here is that our organic growth picked up sequentially compared to Q1 and Q2 of this year, and that is a trend that we expect to continue, and that means we feel confident with our guidance for the full year 2015.
In the Plastics & Devices division, revenue growth in devices was somehow covered by the markedly lower tooling and engineering revenues in the quarter. Therefore, organic growth was pretty flat at minus 0.2%, and currency translation was slightly negative, so the reported growth was minus 0.4%. This is absolutely nothing to worry about, because the tooling and engineering revenues had been high in the prior year's third quarter as well, and now came back down to a more normal level. In the Primary Packaging Glass division, the positive trends that we saw in the first half of 2015 did continue. After negative organic growth in Q1 and Q2, organic growth in the third quarter moved now clearly into positive territory and amounted to 7.4%. The reasons are clearly as expected. The U.S. demand situation improved in tubular glass converting, and last year's Q3 comp was weak.
Do not expect us to grow in this segment in Q4 with the same rate again. Other than that, we closed our Millville plant now in Q3 and focused all our U.S. molded glass efforts in our Chicago plant, which was fully refurbished and modernized in Q3 2015. Also, our molded glass business in Europe grew well, especially in cosmetics. Finally, the stronger U.S. dollar versus the euro gave us a very nice boost from translation effects, so reported revenues were actually 12.3% stronger quarter-over-quarter. Finally, in Life Science Research, demand was temporarily weak, and so organic growth was minus 3.3% quarter-over-quarter. However, fortunately, the strengthening of the U.S. dollar caused a 13.8% rise in reported revenues in the quarter, so from that, we benefited a lot.
To sum it up, organic growth improved markedly in Q3 when compared to the first half of 2015. In addition, the strengthening of key currencies, most of all, the U.S. dollar, pushed the reported growth rate markedly up. Overall, the developments in the first nine months were fully as expected, and we expect a strong Q4 2015 with a higher organic growth rate than we saw in Q3. Let's move on then to the adjusted EBITDA slide, and that's slide number eight. Here, the development in the third quarter 2015 was also positive, driven by good margin developed in all three divisions. The adjusted EBITDA margin in Q3 2015 was 19.8%, compared to 19.2% in Q3 of the prior year. The group's adjusted EBITDA came in at EUR 68 million in the quarter, above the number in the prior year's quarter, where we had amounted to EUR 62.1 million.
In the second line on the slide, you can see that the margin in Plastics & Devices went up from 20.3% in Q3 2014 to now 20.6% in Q3 2015. This is coming from a positive mix effect from the increased device sales in the quarter, coupled with a markedly lower amount of tooling and engineering revenues when compared to last year. In Primary Packaging Glass, the margin also rose to 22.5% and was higher than the margin level in Q3 2014, which had been 21.6%. Here, we had a great quarter, and the margin benefited from the strong pickup in revenues in molded glass in Europe and in tubular glass converting in the U.S. Finally, in Life Science, our very strict cost controls led to a slightly higher margin quarter-over-quarter.
Effectively, we achieved a margin of 14.3% for the quarter, which compares to a margin of 13.8% in Q3 2014. There is a good margin development, especially in a quarter with lower sales. To sum it up, we managed to increase profitability in Q3 compared to the previous years, and that was achieved by good margin performance in all three divisions. Now, please move on with me to slide number nine, starting with the adjusted EBITDA, which was up 9.5%. We first of all deduct ordinary depreciation amortization, as well as the amortization of our value adjustments. Ordinary depreciation amortization was lower in the quarter because with the decision to sell the glass tubing business on June 29, 2015, according to IFRS, no further depreciation attributable to that business was recorded.
Also the figure for the amortization of fair value adjustments was lower and reflects the fact that some fair value adjustments have been fully amortized in line with their economic life. We have EUR 8 million of restructuring and one-off costs, which are mostly costs related to our Centor acquisition and the disposal of the glass tubing business. The purchase price of the stake was $725 million, that is approximately EUR 655.5 million. In order to hedge the purchase price of EUR 655.5 million, we contracted a forward exchange transaction at the time of the signature. As of August 31, 2015, EUR 5.8 million on remeasurement of the purchase price hedge have been recognized in other operating expenses in the third quarter 2015. Another EUR 0.8 million relate to consultancy costs in connection with the Centor acquisition.
The cost for portfolio optimization relate to the Millville plant shutdown, which was effectively implemented, finalized in Q3, and which we also reported in Q2. Our EBIT amounted to EUR 36.2 million, which is 0.9% above the figure that we recorded in the prior year. Net finance expense for the quarter was practically flat quarter-over-quarter. The tax rate stood at 30.1%, compared with 30.2% in Q3 2014. The combined figure for finance expenses and taxes was exactly the same as in Q3 2015, as EBIT was slightly higher quarter-over-quarter, net income also rose slightly. Actually was up by 1.5% and amounted to EUR 20.2 million after EUR 19.8 million in Q3 of the last year.
Overall, the reported earnings per share was flat because of the restructuring and one-off costs that I mentioned, and remained at EUR 0.58 for the quarter, exactly the same amount as in Q3 of the last year. However, the adjusted earnings per share was markedly up by 26.9% quarter-over-quarter and amounted to EUR 0.85. To sum it up, it was a successful quarter with good numbers across the board. Let's then have a closer look at the key balance sheet and cash flow figures. Overall, we recorded a good set of results, meaning our balance sheet remains healthy and cash flow development very favorably. Total assets were up by 2.4% on the comparative quarter's end.
Other than that, it is also important to know that single balance sheet items are no longer fully comparable because we needed to break out the assets and liabilities belonging to the glass tubing business as held for sale. Group equity was up by 4.8% to EUR 612.8 million. Most of the increase is attributable to the continued positive development of group net income. Accordingly, the equity ratio rose to 36.7%. Net working capital was about EUR 10 million lower compared to the previous year's quarter. It amounted to EUR 254.3 million at the reporting date, which is 19% of the last 12 months revenues. CapEx spending was 15.5% higher than the Q3 2014, this is only a temporary effect, mainly driven by the Chicago furnace repair. CapEx for the whole year will be spent as previously guided.
Finally, looking at the key cash flow figures for the second quarter, what I can say is that all of them are up. This is due to the good business performance coupled with the optimization of the net working capital. Overall, the good Q3 performance is for sure also reflected favorably in the balance sheet and cash flow figures for the quarter. Speaking of cash, let's move on with me to slide number 11, where you can see our financing structure. At the end of August, it remained very solid, and it provides us with funding security. The bank debt and the bonds have residual terms of about five and three years, respectively. Overall, the adjusted EBITDA leverage figure was lower and improved from a very solid level of 1.8 times last 12 months adjusted EBITDA 12 months ago to now 1.6 times.
Let's have now a look on the financing of the Centor transaction. In order to pay the purchase price, we have drawn approximately EUR 100 million from the new revolving credit facility and signed a contract for a bridge loan in the amount of EUR 550 million. I told you already at the end of July that we were able to achieve highly attractive terms for the bridge loan, and that it will be replaced by a long-term debt instrument after the closing of the transaction. In a first step, we intend to refinance the bridge loan with the Schuldschein. Of course, we still intend to use the proceeds from the sale of the tubing division to reduce the initial debt financing volume.
There I can tell you that we expect to receive these funds until the end of our financial year 2015, meaning latest at the end of November 2015. Considering what I just said, we still expect that pro forma for the acquisition, net leverage will increase temporarily at approximately three times EBITDA. The outstanding financial performance and cash generation of Centor should enable a quick deleveraging and in general leads to a more stable business due to even more regional and product diversification. With that, I hand the call back to Uwe.
Thank you, Rainer. Please move on with me to slide 15. I am happy to report that we closed the Centor acquisition in a very timely manner on September 1st, 2015. Thus, Centor will fully contribute to our Q4 2015 numbers. Our integration plan is fully on track with IT separation from Nemera being the most important task to complete, while many other tasks were already successfully accomplished. We have retained the entire management team from Centor, and the business is running as well as expected. It is our intention to deleverage quickly by reducing the debt associated with the acquisition. We reiterate that Centor will be adjusted EPS accretive by a low double-digit % already next year. The disposal of our tubing business to Corning is moving well towards closing. We have obtained regulatory approvals and continue to finalize separation work for the U.S. plant.
We do expect that closing will take place during the month of November. We reiterate our expectations for 2015 and fully confirm our guidance for the full year 2015. We expect organic revenue growth of between 1% and 3%. This corresponds to a revenue corridor of approximately EUR 1.3 billion-EUR 1.33 billion. Regarding adjusted EBITDA, we expect an increase in a target corridor of EUR 255 million-EUR 265 million at constant exchange rates. Capital expenditures in the financial year 2015 is forecasted to represent around 9%-10% of revenues at constant currencies. Given that the Centor deal was closed September 1st, the contribution from Centor in Q4 2015 will increase the reported figures. We reiterate our first indication for the coming years.
Just to remind you, these numbers now include Centor and exclude the tubing business as we assume the completion of the sale of the glass tubing business during November. For 2016 to 2018, we expect annual organic revenue growth to average 4%-5%. The adjusted EBITDA margin will be approximately 22% in 2018, so two percentage points higher than before in our old mid-term outlook. Capital expenditures will be in the range of 8%-9% of revenues at constant exchange rate. About one percentage point less than previously because Centor's asset intensity is below our group's average. Overall, that means that Centor will directly further improve our strong financial profile. Let me just wrap up the key points from this presentation. In Q3 2015, organic revenue growth accelerated as expected to 3.1%. Operating profitability moved up to 19.8%.
Adjusted EPS was up by 26.9% and our operating cash flow was up to a very, very healthy level. We closed the Centor acquisition, as I said, on September 1st, which provides a strong enhancement of our financial profile. In Q4, Centor contribution is to be added to our guidance for the fiscal year 2015. With that, I hand it over to Anke.
Thank you for your presentation. We will now open the call to questions. The lines are open for any questions you may have. Please dial nine star on your phone to register. Thank you. The first question comes from Jan Keppler, HSBC.
Yeah. Hi, everyone. Jan Keppler, HSBC. Two questions, if I may. First question would be on your comments regarding the Chicago furnace overhaul. I think at the end of last year, you gave us an indication that this is a EUR 15 million top-line headwind overall. I was wondering if you could quantify how much of this has materialized already in Q3 and how much is left for Q4. Secondly, on the plastics business and the year-to-date lower tooling revenues. Now, as we have again reached a more normalized level, I was wondering if you could give us any indication how we should think about tooling revenues going into 2016. Should we expect, again, an uptake in tooling revenues, or would you expect that this normalized level will hold for a few quarters? Thank you.
Yeah. Thanks for the question. I'll start with the last one. Yeah. My recommendation is that looking at 2015 tooling revenues, you should assume this to be the normal level going forward, also for 2016. On the Chicago Heights furnace, I think that I have pointed out in the last call that you should expect a revenue impact in Q4. As of today, I would still advise you to take that into consideration, because normally toward the end of a furnace repair, you might have a little higher impact on the revenue side than at the beginning of the furnace repair, because you can still draw from some inventory. Q4 will be impacted by that.
Okay. The vast majority of this EUR 15 million then in Q4, or two-third or something like that?
I think that you have to live with that. I would say, expect probably at least the same impact in Q4 that we have seen in Q3. Maybe a little more.
Okay, thanks. That's also then valid for the EBITDA impact? Is it also 50/50 or?
No, I didn't say that it is 50/50, on the EBITDA impact, basically, I would advise you to basically spread that over the time of the furnace repair, which I said before falls into both quarters.
All right. Thank you very much.
Okay. Now, Gunnar Romer, please. Deutsche Bank.
Yeah. Gunnar Romer, Deutsche Bank. Thanks for taking my questions. The first one would be, again, with regard to the glass business and the inventory buildup you've referred to. Can you quantify that possibly? Also, your statements regarding Q4, I think that shouldn't really surprise that Q4 growth should be below Q3 simply because of the comp effects. A very soft comp now in the third quarter. Still not a very tough comp in the fourth quarter, but certainly not as soft as in the third quarter. I was just wondering whether you can add some more color around the growth you would be expecting for the fourth quarter in your glass business. Secondly, on financing, I think you've mentioned that you plan to issue a Schuldschein.
I was wondering whether you can already give us any kind of idea where you would expect the cost of the Schuldschein in terms of interest rates and how it compares potentially to the bridge financing. Lastly, I noticed there was a slight step-up in the overhead cost. I was wondering whether you had any comment on that and how we should think about that line going forward. Thank you.
Overhead cost is pretty easy to answer. Due to the share price increase, we had to step up the phantom stock, which we have to a higher level because last year the share price was lower. Now it's roughly 62, therefore we had to uptake the phantom stock value due to the stocks change to a higher level. If you believe that the stock stays on that level going on further, we should now have the right number to go with. That was the effect. Schuldschein. Yeah, we have started to market the Schuldschein at the 1st of October. The size which we have given out is EUR 250 million. Like always, demand-related increases are possible, so we have to see how the questioning will be. We will have, in our opinion, or ideally we would have five year, seven year, and 10 year.
Longer maturities could be possible, we believe that five, seven, 10 years is that what we have in mind. Margin spread for the five-year is roughly 75-95. For the seven years, 95-115. For the 10 years, 120-140 basis points. Like always, the coupon is based on variable six months EURIBOR. For the fixed, it's the mid-swap. Yeah, that's how it's drafted right now, and we will see how it works.
That's very helpful. Yeah.
On the growth for the glass, yeah, you are absolutely right. Third quarter was, if you look at absolute figures, a high quarter for us to a low comp last year's quarter, which with two effects that you have to adjust for in Q4. If you assume that the underlying business is solid, one is the carryover of the Chicago Heights furnace repair to the revenue side. That still has an effect in Q4. A much, much smaller effect comes from some inventory build at one of our larger customers that has basically emerged back from FDA-related production curtailments. That had an early favorable development in Q3, and that I do not expect to repeat again in Q4.
Okay, perfect. That's very helpful. Just one follow-up question, if I may. On the tooling business, I think you indicated that the level we're seeing in 2015 should be basically a good guide going forward. Would that mean that at some point, your growth in terms of the medical plastics device business should slow down? Or what's the kind of time lag we should be thinking about? Because I think, generally, your pipeline still is nicely filled. We have seen the delay of that inhaler. Maybe an update here would be helpful in this regard as well. I was just wondering what kind of time lag we should be thinking about, that this pipeline is then hitting your sales and earnings.
Well, that is a good question because it reminds me that I have to explain this again. The volume of the tooling revenues do not have a direct correlation to the revenue growth. Why is that? Number one is you have tooling revenues that could be expensive for tools that run on small quantities and on high quantities. You can have assembly machine revenues in for assembly portions, and you can have engineering revenues in for the development work. Our pipeline with respect to projects and with respect to revenue expectations out of those projects is unchanged, very healthy. What is different is obviously the mix that we have in the pipeline.
In the pipeline in this year, we have less, what I'd say, hardware that is related to the implementation of some of those projects that we manufacture and design on behalf of our customers and that our customers then own. I would not be concerned, and I would advise you to look at it not from a standpoint that always high tooling revenues correlate to a significant growth in the parts business in the next year or the year after. There is no correlation. We always said, last year, you might remember, that we had extraordinarily high revenues, and those were actually related particularly to hardware work that we did for customers that we actually, in some cases, outsourced with very low margin. I think, please keep that in mind.
Okay, perfect. Thank you very much.
Okay. Scott Bardo, please, from Berenberg.
Yeah. Thanks very much for taking my questions. I have a few, please. Just firstly, on the integration of Centor. Good news that you've managed to close the deal quite quickly. Could you please give us what you expect to record in revenues and EBITDA for the fourth quarter and also mirror that with what your expectations would be for net financials, please? That's question number one. Second question. Appreciate at the time of the announcement of the Centor acquisition, you provided 2018 financial targets. It was also my understanding that the management board were aligned to return on capital employed base metrics. I just wondered if you could remind us what they are and whether there's any change in that internal return on capital employed metric post the Centor acquisition. That's question number two.
If it's okay with you, I'll let you answer those two and I'll come back with a follow-up. Thank you.
Well, the Centor contribution for Q4, we just have it. We don't know the seasonality, but I would advise you to take, on the revenue side, approximately EUR 30 million at an exchange rate that we use for our projections, which is 130, and probably use a 40% margin for the EBITDA line. That should guide you safely to where we believe this business comes in the fourth quarter.
The financial impact of Centor, as you know, Uwe already said that before, that the depreciation and CapEx is not very high compared to the rest of the business. That what you get in the EBITDA, yeah, you take a little bit of CapEx down and you have a very strong contribution then also on the EBITDA side. If this is the question which you had for Centor or perhaps you have to repeat it if I missed it.
Sorry. Yeah, no. It was just the return on capital employed question.
Which I understand is forms part of the financial internal metrics for the company. Do you expect to revise those, or do you still expect to surpass your return on capital employed metric? That was part of the question. The second one, thank you, Uwe, was just also on what we should expect for net interest, actually, to mirror those revenues and profit contribution in the fourth quarter. Thank you.
For the return on capital employed, we haven't changed the numbers for the board also going on further. You know we have provided you that the minimum target, which we want to have, is 12%. You can read it in the annual report. That hasn't changed. The last question?
Net interest.
Net interest. I don't forecast that for the quarter because it's difficult to say right now. What you should assume, what I've said the last time when we have spoken, that is 3% also for the next years is a realistic figure. Have in mind that we have a bond out up to the year 2018 with 5%. Therefore, all the-- You know that the revolving credit facility was refinanced, and the average number was roughly around 1.1%, 1.2% in the actual situation. The average at 3 is pretty okay. Then we have to see how the Schuldschein runs going on further. There are a lot of balls in the air right now. It's the same like how much money gets into our business from the tubing area. When does it come in?
That also influence our interest going on in the last quarter, so a day makes a difference here. Then you will have one-time costs also have to be booked in the interest rates in some cases. All this together makes it difficult to forecast that. When you think long term, the 3% is a good orientation line. Perhaps it's conservative right now, looks conservative right now, but we have to see how the refinancing works because the bridge right now is pretty good. 12 months in place. We can accelerate that another six months or overall 18 months. We are in a pretty comfortable situation, and we won't do things which doesn't help us going on further. I can't be more precise for the last quarter. I hope you understand that there are right now a lot of balls in the air.
We'll have a stab in the dark then. Thank you. Just last question then please, just on some fundamental progress. Could you just remind us where we are with the launch of the asthma inhalation product? Was it somewhat delayed, or the trajectory of launch lowered at the capital markets day last year, how that's looking into 2016 and also, if possible, an update on the progress at the Peachtree facility, the expansion efforts there. Are you still on track to start manufacturing into next year? Thank you.
On the Peachtree, everything is on track. That is fine. We work very closely with our customer. As we do on the other inhalation device, but there are no news. We will keep you updated on the expectations once we provide the detailed outlook for 2016.
Okay. Thanks very much indeed.
Okay. David Adlington JPMorgan, please.
Guys, thanks for taking the question. Most of them are answered. Just a housekeeping question, please. You saw quite a big drop in depreciation in the third quarter. Obviously, you have depreciation, albeit quite small, coming in from Centor in Q4. Just wondering if we could use that Q3 rate as an appropriate sort of rate for Q4 and also going into full year 2016 as well.
First of all, you have to have in mind that we haven't depreciated any more tubing business due to the fact that, under IFRS 5, when you put something available for sale, that you then directly stop to depreciate that. We announced at the 30th of June that we signed the contract, therefore, during the last two months, we didn't do it, and that's roughly EUR 1.9 million depreciation, which we didn't have, and that fits pretty well with the number which we have given you last year. If you remember that we have set that the depreciation for the tubing business is around 12%, 12%-13% on a normal year. That's something for sure which you have to take out for next year. Normally the variance between that what we have in CapEx to the depreciation is roughly 2% less, as an assumption.
That means if you have a CapEx of 9%, then we normally should have a depreciation of 7%. That's normally our going on forward, and hopefully, that gives you an indication. The EUR 2 million or the EUR 1.9 million, which you perhaps could assume that this will be the number, which is more than in Q3, totally works together with the accounting principle under IFRS 5, if you put something available for sale.
Okay. Just follow up on that. If we're talking about around EUR 20 million of depreciation in Q3.
Yeah.
Is that the run rate we should be using for depreciation for FY 2016?
No, because Centor is not in right now, as you know. Centor revenues have to be put on top. CapEx of Centor has to be on top. As I said, a good indication is around 7% depreciation for next year. That's not totally wrong, I would say.
Okay, great. Thank you.
Okay, Patrick Wood, please. Morgan Stanley.
Perfect. Thank you very much for my questions. I just have two quickly, if I may. The first would be- For the quarter, did you see the usual pricing volume split? I'm thinking maybe, obviously, you had a fair amount of mix, but maybe 1% pricing, and then the split of the rest in the volume side. Is that a fair estimation? Again, I appreciate this is a smaller part of your business, but the life sciences market as a whole, do you expect any of the increased funding that people are seeing in the NIH and that area to drive a bit more growth next year in the volume side? What's your feeling about business for next year? Thanks.
Yeah, on the mix, I think that is what we refer you to mix is entirely product mix. That means products with a higher margins than compared to products with a lower margin. There is no price effect. Actually, particularly on the plastics, with resin prices coming down, we would and we have to, if such contracts exist, we have to lower pricing while we actually enjoy the benefit of lower resin costs. That generally is helpful for the margin, but not for the top line. On the plastic side, with the resin prices being low, you rather have a negative price effect. What we really refer to mix effect on the plastics is products with more complexities that sell at a higher margin than, I'd say, more standardized commodity type of products.
Life Science. Yeah, we always expect a low single-digit growth. This year it didn't work out or it didn't work out up to now. We are mostly reliant on the U.S. market, very important is how the budget looked like in November, December, and then we have a good indication going on forward. We are the biggest player in that market. Our market share is pretty high. We have to see how this works out. Overall, don't forget, that Life Science is generating a great cash flow. Operating cash flow is above 12%, and this is pretty strong. Therefore, that's one of the reasons why we keep them in our portfolio and they generate cash.
Makes a lot of sense. Thanks, guys.
Oliver Reinberg, Kepler Cheuvreux.
Oh, yeah, good afternoon. Three questions of me. The first one would be on Brazil. I appreciate the fact that this is obviously a relatively small proportion of your business, can you just give us a feeling how much is currently the business under pressure? Can you also update us in terms of what does the 10% real weakening imply for sales and EBITDA? Secondly, I think in the other operating income, there was a larger contribution from the release of provisions of EUR 5 million after nine months. What was this actually, and can you just confirm that this was not adjusted for? The third question, just coming back on plant depreciations. When we look at just Centor, would it be a fair assumption that we should think about roughly EUR 5 million plant depreciation just for that kind of asset?
Should we also expect a significant increase just from the machine strategy that you're rolling out? Thank you.
I think I didn't quite get the Brazil question, but I'll try to answer it anyway, and you might follow up if I do not answer completely. Clearly, the economy is under pressure. Actually, our products package generally a high share of prescription drugs. From that perspective, we are not as volatile as other businesses are. We have seen clearly, after years of strong growth, that the markets in Brazil are extremely under pressure and that government funding for programs is not as we have seen it. Therefore, we have, I think the first time I can remember actually experience a drop in revenues in that. This is why we have mentioned it. This is not a catastrophic type of a development.
It is rather notable because it was the first time negative, but it is far from being anything close in the double digits, by the way. I hope that answers that question. I did not get it completely.
No, the other part was just on currency. If the real is down 10%, how much sales, how much EBITDA do you lose?
EBITDA and sales, we don't lose. It's only translational, as you know. That's always when we put that on our organic growth, you can see how it works in the different division. Brazil is in the Plastics & Devices division. Therefore, when we then talk about currency in that division, that's the Indian rupee as well as the Brazilian real, which plays an influence in that area. The US dollar, up to now, before Centor acquisition was there, wasn't playing a role in that. The deviation only comes mostly out of the real.
We export very, very little into Brazil. All the plastic products we produce there. The only products we import into Brazil are some glass products that we manufacture in Mexico. That is, I would say, an immaterial proportion of the business. That obviously is under pressure as well, or not happening due to the currency. That is absolutely neglectable.
You have the question about Centor depreciation. You suggested a EUR 5 million number, we have never given out a number here. If the group is between 8%-9% and we say it's clearly below the group CapEx, it will be around 3% or whatever, based on Centor revenue is somewhere around the 3%-4%. It's perhaps a good assumption. You also asked for the machine strategy, if the machine strategy doesn't take us to higher depreciation, going on further. No, because we are not doing huge effects left and right. It will increase for sure if the CapEx is increasing, further on also the depreciation will increase, it's not a one-time effect, which you should assume. We guided you in the past in that direction, giving you numbers there, how we think that will increase.
Don't expect that to be something, there is no one-time effect coming in a year, which takes you to a higher level. It will be a smoothly increase and with Centor, there's a counter effect on top, that the depreciation. You shouldn't be surprised about depreciation next year.
Right. The last question on the release of provisions.
Yeah, that's normal operational business. As you always can see, we also have to build up numbers. We have explained in the provision area was quality, I think it was quality issues, where we have forecasted for, and you can find that in our reports. That was based on quality things where the insurance get in, and that's the reason why we could release this one. That's the major number out of that.
Okay. Thank you.
You can find that in our report on page 23, by the way. It's explained there.
Are there any further questions? Again, to ask question, please dial 9 stars. Jan Keppler, HSBC.
Yeah. Thanks for taking my follow-up. Just a quick one on the syringes business. I was wondering if you could give us an update in regard to the ramp-up of the fourth production line and maybe more general comment on the business, how we should think about the business going forward. Would you advise to model it as a growing business, a stable business, or a declining business going into 2016? Any comments on that would be appreciated.
Yeah. Well, I think that it is, as I said before, we'll give you the guidance for 2016 altogether, when we generally provide that as our annual call for the 2015 numbers, and we stay with that. Long term and mid-term, we look at that business as a growing business. The line is, as I said, fully operational and performs to expectations, the RTF four. I think I can leave it at that.
Okay. Thank you.
Okay. We have a follow-up from Scott Bardo, please.
Yeah. Thanks very much. Just coming back a little bit to depreciation, sorry for this, but I just wanted to understand Rainer's comments. I think you mentioned something like a 7% ratio, if I'm correct, on 2016 revenue. Just to confirm we're on the same page, you're expecting straight depreciation amortization at around something like EUR 105 million or something like this. A significant step up to the EUR 80-EUR 85 or so this year. If you could just clarify that, please, just so I'm on the same page. Also appreciate it's quite early, but you've now closed Centor. I dare say you've had the opportunity to at least do some initial assessment for amortization of fair value adjustment. Any feeling, sense that you can help us with for the magnitude of that value adjustment that you run through the P&L? Thank you.
Let me talk about the depreciation again. As you remember, in 2014, we had a depreciation for the group of 6.8%. We have told you for 2015, that you should assume that this is going up. I have to check back in my office again, but I think we said something like 2016, approximately 7%. And so on and so on. We have to finish, first of all, our numbers. We are in the middle of our planning period right now. Going on further, we don't give absolute numbers right now because when I give you an absolute number, that wouldn't help you because then you have to also assume how the revenues look like and so on. The 7% as an orientation line is not so wrong.
Okay, thank you. Purchase amortization?
Oh, yeah. We closed at the 1st of September. Give us some time to have a look on that. As we already said in our call when we acquired Centor, we don't have synergies and so on, going on further. For sure, we bought a lot of customer value. To explain to you exactly right now how customer value in correlation to goodwill and all the other works out, it's not what I would have in mind right now.
Oh, I understand. Thank you. Just to say that regardless of the magnitude of PPA that you run through, that shouldn't have a material bearing on your tax rate.
No, for the tax rate, you mean? That was your question?
Yeah. Yes.
No, because the tax rate normally should stay on that level, which we have guided in the past for sure. The U.S. has higher tax rates than the European environment, as you all know. The tax rate for the U.S. is roughly around 37%, 38% right now. For that, where we have to work with, and for sure in the European environment, you also have tax rates around 30%. There is also always an opportunity to reduce tax results in the U.S. Therefore, the guidance which we have given in the past between 30% and 33% is something which stays in place for the group.
Okay. Thanks very much.
Okay. Christoph Glettler from Baader-Helvea.
Yes. Hi, good afternoon. I actually have two questions. The first is, I guess now you may prepare for now is on China. Could you talk about the opportunities now and the risk you see in the current economic environment for your business specifically? My second question relates actually to remuneration. While not preparing for a recent research report, I basically now actually noticed that back in 2014, it was changed. You changed basically the fact that capital expenditure is no longer a target in your management compensation. Could you actually now elaborate on that? Why is that? I was surprised given the capital-intensive nature of your business that this was just scrapped. Thank you.
Well, I answer the last portion of the question first. Number 1, it is obviously not the management board that decides about its own incentives. It is the supervisory board, which actually presented all the rationales at the annual meeting where shareholders voted with an extremely high percentage for it. Therefore, you have to look at the complete structure of the remuneration for the management board. The target for staying within the budget capital expenditure had been always achieved at Gerresheimer, and the weight had been shifted to honor on the short-term incentives, more performance on growth and EBITDA performance and net working capital. Then the shift, and there has been a shift to a higher compensation of midterm targets. On the midterm target, obviously, the return on capital employed has become to a higher weight.
Indirectly, actually, that has been rolled in into the midterm target through the return on capital employed that is measured against strategic targets. I think overall, from the standpoint of making sure that the management makes the right decisions, it made a lot of sense. I hope that explains that.
Thanks.
On China, well, I think what we see right now is that the emerging countries go to a phase where the unlimited growth, at least for a certain period of time, is interrupted, and we see more generally, we see definitely more volatility in those countries. What does that mean for us? I'd say 2 things. Volatility in the industrial environment certainly means that has an impact to capital that could affect some of our local customers with respect to hampering their growth strategies or if healthcare funding in emerging countries, through the government, is seeing some curtailment or not the same level of growth as, for example, we have seen many years ago in Mexico. I do not see that, especially for China. Most of the products we sell are packages for injectable packaging that are generally drugs you have to take.
Therefore, I would say that there might be a limited effect, maybe a timely effect, where we see smaller growth or maybe shorter periods of time, where the growth might drop. In the long term, I'm completely convinced that we continue to see solid growth in the healthcare sector on the emerging countries, because the underlying growth drivers, aging population, trends like diabetes or COPD, are the main drivers for higher consumption of our products stay in place. It comes down to the point, how much funding governments provide to help that sector, healthcare sector to grow. I'd say, we are in it for the long term. We're not getting nervous. If there is a quarter or half a year of a little bit of a downturn, I don't think that matters.
Okay. No, very clear. Thank you. Maybe now just I have a follow-up question. If I may, on the cosmetic business, I noticed that this was really strong apparently. Do you think now this is a reflection of end market demand, or do you think now there are certain stocking effect now have taken place and been driving? I know it's now difficult from your perspective, but just maybe if you could give an evaluation, given what you see.
Generally, on the cosmetic part, we supply a lot of products, what we call the masstige market, to a handful of very large clients. That is not that difficult to watch. Basically what I'd say, we see the trends that the big cosmetic companies like L'Oréal report that they basically have seen an upswing in the business. We see that in our number. I don't think there's any correlation, in this case, to increased stocking. I think that is clearly consumer-related. Even though that I might remind everybody that the number of new product developments, particularly for glass cosmetics, has slowed down over the last two years. We always keep that in mind, and we do not get too excited, looking at the growth rate for one quarter.
Okay. Thank you, Mr. Röhrhoff.
Okay. There are no further questions, we would like to thank you for joining us today, and please note that we are going to publish our full year results for 2015 on February 11th, 2016. Thank you so much.
The conference is no longer being recorded.