Ladies and gentlemen, good day, and welcome to Strides Pharma Science Limited Q4 and FY 2022 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal the operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Singhal. Thank you, and over to you, sir.
A very good morning, and thank you for joining us today for Strides earnings call for the fourth quarter and full year ended financial year 2022. Today, we have with us Arun, Founder, Executive Chairperson, and Managing Director, and Badree, Executive Director, Finance and Group CFO, to share the highlights of business and financials for this quarter. I hope you've gone through the results released and the quarterly notes for presentation, which have been uploaded on our website as well as the stock exchange.
The transcript of this call will be available in a week's time on the company's website. Please note that today's discussion will be forward-looking in nature and must be viewed in relation to risk pertaining to our business. After the end of this call, in case you have any further questions, please feel free to reach out to the Investor Relations team. I now hand over the call to Arun to make his opening comments.
Thank you, Abhishek. Good morning, everybody, and thank you for joining in early. This is a very unusual time for typical Strides earnings call, as we have to announce our results quite late yesterday, given some of our directors were overseas. Thank you for that, for the accommodation and look forward to this engagement. Before I start, let me start off saying that while it has been an extremely challenging year for Strides, and we see green shoots, as a promoter and as a founder of the company, I take full responsibility for the events of the last year as regards the organization's performance. It is easy to rationalize on COVID, the business environment and other elements, but it is critical to accept responsibility, fix it and move forward.
I'm actually very delighted to say that I'm happy to come back to work full time at Strides. As a family, we are fully committed to ensure that Strides gets back to its previous glory or past glory, if I may. We are determined to institutionalize the organization to face challenges of the environments that we face or any future environments that may come our way. I also give credit to the fact that while we've had difficult year, we had a set of extraordinary people staying fully invested with the company and its opportunities. We have with my coming back on April ninth, although I started getting involved into the business a little earlier.
First of all, I wanna thank all the leaders who served the company in the last two to three years and have moved on for other interests or for the reason that the company has revisited and recalibrated its strategy. Having said that, I'm very happy with the team that we now have in the organization. Apart from my coming back, I'm also delighted to welcome Venkatesh, who will now head our U.S. business. Venkatesh until very recently was the CEO of Alkem's U.S. business and Mylan's U.S. business before he joined us. Being a seasoned professional with deep experience in the market, he will lead our sales and marketing activities in the U.S.
U.S. continues to be an important market irrespective of the business environment it currently operates in. The transaction with Endo, in my view, is extremely accretive to the organization. The integration of the Endo business, which actually technically integrates to us only from June 2022, is an important milestone to our reset and recalibration strategy. To have Venkatesh leading that business is an extremely important step that we have taken. I also wish to thank Terry, who not only got us the transaction closed, but also integrated and is in the process of handing over the business in a seamless manner to Venkatesh and his team. Q4, nonetheless, has been a much better performance, especially coming back after two difficult quarters. We are seeing green shoots across all our businesses.
In spite of the doom and gloom, we have had some outstanding outcomes. For example, our U.S. business has started to pick up. We are now confident of hitting $250 million guided. This is not going to be telescoped towards H2 or it's going to be linear, which effectively means, we will see growth pick up fairly quick, and as early as in H1, we should get into a linear situation with our numbers in the U.S.. That will give us a lot of headway to build the business from there on, considering that we have over 150 products that comes with the acquisition. We have a strong plan for a launch of 20-odd products for years starting now. All of these products are approved.
We are not dependent on any regulatory inspections or facility inspections as these are approved ANDAs. More importantly, in the U.S. especially, we are sitting on significant inventory as the volumes dropped in the last year. With the volume pickup being quite significant, and we are already seeing growth in volumes as early as this quarter, we believe this will improve our cash flows quite dramatically.
This is an important step for us to bring our balance sheet size in order, apart from the fact that we have guided that we will reduce our debt by INR 1,000 crore through a combination of the fact that we have requested and our partners in Australia have been very kind to bring forward our payments, so we expect to receive these payments in H1 against December 31 as previously contracted. This is going to help with our debt quite a bit, and also the fact that we have reset the businesses to focus on large businesses where we have complete control on cash flows. We won't accept minuscule and tiny businesses which do not move the needle for us for revenue or EBITDA.
That and free cash generation will significantly help us achieve our stretch target of reducing debt by INR 1,000 crore and bring the company back to a very solid exit run rate of EBITDA to be under 3x EBITDA. This is a task that we have set for ourselves. We're very confident of achieving it. This will also be aided by strong performance in other markets outside of the U.S. We reported in Q4 our highest quarter in the other regulated markets with strong pickup coming in post-COVID in the last two quarters, and we believe that we'll see a similar pickup in the U.S. operations in the coming quarters. The emerging markets continue to grow.
Of course, it's off scale, but it helps us in our manufacturing and the recoveries, and we will continue to focus on that business and build from where we are in terms of top line growth. The margin flow through is not very significant, but the absorption is very important for us. We have a series of cost improvement programs that includes a very significant relook at our cost structures, reducing the complex natures of our international businesses, reducing the number of subsidiaries, operating companies in a more matrix and sometimes in a functional leadership manner, reducing costs consequently. We expect our cost improvement programs will enable us to get market leadership in several products and also reduce our cost structure quite significantly.
Given our significant investments that we have and approvals that we have, we are reducing our R&D investments into the U.S. as we don't see the need for significant R&D investments over the next three years. Although we will keep our eyes open and continue to file critical products that we believe are important for our domain and niche strategy. That will continue, but we will not be a 25, 30 product filer anymore in the U.S. and shift the focus to develop to launch our products that are already approved. The transaction with Endo has clearly solved what used to be an acute-only strategy which worked very well for us pre-COVID, but COVID clearly exposed the portfolio strategy gaps.
With the combined portfolio that we have from Endo and Strides, we don't have any more excuses on our narrowness of our portfolio, and we strongly believe that the new domains in controlled substances, hormones, and nasal sprays will give Strides enough ammunition for future growth and also product launches. We have created significant work streams, clearly laid out scorecards for our leadership to execute across globally. We're all working in sync to create what we call the One Strides and build a company of scale and size, which I'm sure that you will see the results flowing through in the near term. I won't dwell too much on FY 2022.
You know, some of the key issues obviously was that a significant drop in the gross margins. For the first time, we had a drop in revenues, although Q4 has started to look differently. We had a 16% increase in operating costs, employee and other expenses. We obviously are sitting on significant inventory, which we are now already seeing a normalization. We expect this inventory to be normalized to the extent that we need to have by the end of the year, releasing cash, but also then starting on the under recovery process in our plants. Considering that we are sitting on large inventories, we obviously are not filling in new stocks until the stocks are getting over.
This year is going to be a very important year with razor-sharp focus on execution, margin expansion, and also bringing the balance sheet to size. I see the detail deck has got individual slides on the U.S. For example, the U.S. sales have moved from $38 million to $44 million. And if you're guiding the street for $250 million, then obviously this needs to be closer to a $60 million run rate.
We are very confident that we will get there very soon, and that's mainly to do with the integration of the generic operations in the U.S. We are expanding significantly our other reg markets, and in any markets that we're not present, we have significantly secured new partners, and we are working with Kia on increasing our B2B IP-led B2B profit share model across Europe and markets that we do not want to operate ourselves in the front end. We have exited many markets like Canada and some parts of Europe where we can't scale. In the markets that we can scale, we're putting all our energies to become a leading player with OpEx leverage and significant margin expansion. Our emerging markets, especially our Francophone Africa markets, were not impacted by COVID.
We all know that COVID was not as severe in Africa, especially in North Africa where we operate. We continue to benefit from those and our margin expansions. Productivity of our sales reps are now numbering about 160 sales reps in Francophone Africa and continuing to introduce new products will ensure that we will have an improved sales in those markets. There are a few markets in Africa that we operate that we are now revisiting. If it fits into our overall strategy of scale, that if you're not a top five player in a domain or a frontier market, then does that make sense for us to be in?
We are reviewing those, but none of that is going to impact what would be an important year for sustained substantial growth in top- line and EBITDA. We have a very detailed deck this time on how we propose to reduce our debt. When we open the house for questions, we'd be more than happy to answer any specifics. We also have detailed explanations on Stelis . We believe that Stelis has done extremely well as a pure play CDMO in its first year of operations. We have a revenue model, which we have articulated in our deck. We have two parts.
We have two businesses, namely the CDMO business where the bulk of our investments have been made. With the completion of our new site, we now have among the top 20 global capacities in microbial and mammalian manufacturing capabilities. But we are one of the few global players which are fully integrated from cell line development to fill finish. We are delighted to have onboarded six customers in our first year. In the first three months of our operations in this quarter, we have already added another six new customers. Master services agreements that we sign up with these customers are always linked to a contract of supplies, and our supply book is now in the vicinity of INR 100 million for the first years of master service activities that we have done.
Now, just that this, you understand it's understood well, a master service agreement typically leads to a commercial, like, supply agreement in about three years. We are approximately a year and a half away from breaking even that business. Outside the challenges on Sputnik and the sanctions on RDIF, which we are finding all kinds of solutions to resolve, including taking the help of the Government of India to work with their good offices with the Russian government to find solutions as we are sitting on inventory of a sale value of close to about $40 million, which is extremely critical for us to find a home. We are working through it.
Luckily for us, our dating on that is, our stocks are good. We still have 12 months of inventory, so we don't see any risk for the next three to four months. The next two quarters for Stelis is extremely important as we find a solution for Sputnik. But more importantly, our own COVID vaccine, which is called AmbiVax, which is in-licensed from Akston Biosciences, has completed the full dosing of its Phase III patients in India. As some of you may know, we have an EUA status on this product issued by the government of India. We have now applied for a booster study for across all variants.
This being the only or the first or one of the few thermostable vaccines which doesn't require cold chain, I mean, it requires cold chain at what normal under 25 degrees, makes AmbiVax a very unique vaccine. Therefore, we still believe that there are a lot of legs left in this program. Outside of that, the CDMO business will do well. We expect the MSA contracts for this year will help us operationally break even. We have existing investors have got an additional $70 million, $65 odd million of commitment of capital, which everybody's committed to invest. Consequently, we don't see any challenges for the funding of Stelis. Of course, this does not include the fact that there continues to be ambiguity around Sputnik.
We want the next three months to resolve this and to also see how AmbiVax itself progresses because we're expecting to submit our phase III final clinical data to the government of India by the middle of June. There's a lot of important milestones. Most interestingly, the facility had three plants. Two blocks were inspected by the EU authorities, and we are expecting formal approvals, but we have had great outcomes. Consequently, we are seeing a strong inbound of customers. Stelis CDMO's business is unique, considering that we do not do small contracts. We do service contracts only with suppliers, which makes us a very unique different biotech biological CDMO compared to other players in the country.
With the size and scale of what we have achieved, I am extremely confident that this will be an important pivot for Strides. We've also announced that Stelis, two significant announcements with regards to the business development. We have a stellar team in-house who's worked in the last two years building out this business. But as we build, as we go global, I'm delighted to welcome Frank and Dr. Axel, both veterans in the biotech CDMO business development activities, having more than 25 years of experience respectively in both Europe and in the U.S and with deep connects to big pharma. I'm quite excited about the opportunities around Stelis.
I know that there will be questions on what are our plans for Stelis. We have put all our plans for Stelis on hold till we find a solution for Sputnik till we hear about AmbiVax. We continue to see value in Stelis to convert some of the major customers that we are expecting to convert in this year. We have been advised of a US FDA inspection. That's a very critical milestone. In the next update, I think we'll have lot more news about the, I mean, the two or three elements which are still ambiguous at Stelis.
We are right on top of matters, and we're very excited about our investments in Stelis, and we look forward to addressing specific questions. I must also apologize that most of you may not have had time to read through our very detailed explanations, including our slide on extraordinary items. We believe, and we know that it's a busy day for many of you, so we'll be more than happy to take calls from any individual investors or analysts who may want to ask these questions. Please write to us or Abhishek, and we'll be happy to address. We now are happy to take any questions that you may have.
Neel, can you open up for Q&A, please?
Thank you very much. We now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. Anyone who wishes to ask a question may press star and one. The first question is from the line of Tushar Manudhane from Motilal Oswal. Please go ahead.
Yeah. Thanks a lot for the opportunity and the elaborate explanation on improving the performance going forward. I would like to understand on the U.S. front, like the Endo portfolio would have a similar gross margin as the Strides portfolio in the first place.
Yeah, that's a fair estimate.
secondly, even on the Strides side, we had good number of products which are already approved, but if you could just explain, sir, any reasons for, you know, not able to launch in the past, and then what gives you the confidence that they would be, you know, still very profitable, going forward as we launch in the coming years?
Tushar, out of the 200 or 150-odd ANDAs that are not launched, more than 100 of them came through the several inorganic transactions, small ones we did earlier, and now with Endo. Many of them needed significant improvements in terms of costs, which means vendor changes. Some significant changes mean that the past approvals from the FDA can go up to about six to eight months of work from our side and six months of approval time. We have now received several approvals, and we continue to receive several approvals for key products on a regular basis. That is why we are now committing to launch at least 20 products, from the current 55, or 55 to 60-odd products that are launched. We should be able to take that, more than 20 per year or 20 in the minimum.
Given that there has been a good amount of price disruption, I mean, that is what we hear from the peers. On our existing portfolio and even on the Endo portfolio, what kind of price erosion would we have experienced?
We, you know, I mean, in FY 2022, the price drop was very significant. I mean, you can already know that the fact that our gross margins have dropped by 10%. The drops have been, in some cases, as high as 30%-35%, in some cases, as low as 10%. What we have seen is not across the platform, across some products, especially in our portfolio, especially in our Q2. To be fair, we are seeing prices either by people who disrupted the market now no longer operating after having gotten rid of their inventory because it doesn't make sense to play at those prices. We are seeing rebids. We are bidding at higher prices. We are winning businesses, and we are growing our base business. We are not seeing.
I think our value deflated, you know, our revenue deflated from almost $200 million to $230 million, if I'm not mistaken. Sorry, $160. We had a $50 million revenue deflation. We are now very confident of getting back the base revenue this year itself, and then adding it to the end of the portfolio, and that's what makes our $250 million quite feasible. We are not seeing more deflation in our portfolio because if we are seeing it, we are obviously not winning or bidding for them because it doesn't make sense.
Overall, given that we have the luxury of so many unlaunched products and the fact that we started the cost improvement programs probably two years ago, we are very close, and we are getting some very nice approvals as we speak. They're small, but they're very nice and niche, and we'll see some more in the next couple of months. We believe that, you know, the margin uptick will come on the $250 million. I don't see a drop in margins from where we are. It won't be across the board that we'll be able to improve the margins, but it's gonna take us some time before we get back to our historical 60% gross margin. I mean, to be fair, our U.S. gross margin was 70%, and now it's about 60%.
Getting back to 70% is a long haul. I think somewhere between 60%-65% we should settle in the U.S. and then kind of recoup at least 3%-4% of the global gross margins that we've lost in FY 2022. I'm quite confident about getting there.
Understood, sir. Going a little below the gross margin, you have elaborated on a 300 basis points improvement in the logistics cost. If you could elaborate, and this could happen over what period of time?
Last year, because of the supply chain disruptions, especially with input material, either we were sitting on too much of inventory, which means you were paying for very expensive warehousing costs, and in the front end, these are not cheap because you pay by the week by pallet. Normalizing that when you're not shipping new goods and getting pallets out of 3PL and warehouses, that obviously will reduce our costs. More importantly, with very stringent focus on our AOP or our annual operating plan, which gets constant updates, we are now producing only to demand and not to estimates. Because we have a lot of inventory, we don't really have to rush anything by air.
From end of September, except for extraordinary opportunities that adds to our $250 million uptick, we don't see the need to spend any more for air. Although sea freight has gone up from an average of $6,000 to now $25,000 per container, and containers are not available for the U.S. You would have probably heard from many other peer groups. The fact that we are able to take off even more expensive freight costs from air into sea will reduce the cost. Most of the cost reduction will come from front-end warehouse reduction costs.
Got you, sir. Considering the improvement in the sales and the reduction in the cost, like we are currently at about 5% EBITDA margin, as we ended FY 2022 in fourth quarter. What kind of EBITDA margin can we think of, for, let's say, in FY 2023?
Well, I can't guide you for a percentage margin. Our focus is to get to focus on revenue growth. Revenue growth will get back our volumes, and not necessarily from the U.S., from all markets. That will ensure that our capacity utilization in our plants will improve, leading to less under recovery, which is important. We expect that if you go to our debt book, you'll see that we expect to exit at least at INR 150 crores of EBITDA for us to be under 3x debt to EBITDA after reducing INR 1,000 crores of debt. I think our focus this year is about solving for inventory, improving our cash flows, reducing our balance sheet, and improving growth. Then all of these inefficiencies that have been built into the company will get addressed.
In the business, because of COVID or whatever we want to say, will normalize to what we predict. The idea is that by the end of the year, we should be in the 16%-20% range, if that addresses your question. Yeah, you would see growth Q-on-Q from here. I think we're done with the bottoming out of the business. We're seeing growth coming back, and we are excited about the opportunity Chestnut Ridge brings. In some of that, we are confident to get there. I can't give you an exact finite number.
I think the focus this year is on growth, improve capacity utilization, reduce inventory, improve free cash, get out of a few businesses that don't make any strategic or value sense in the near term, and yet grow the business from where we are. All of this will lead to significant improvements to the overall business. I think you should be asking us percentages more closer to H2 and closer to the end of the year.
Sure. Actually, the perspective was more of yours,
Can I request to come back in the question queue?
Just one last, if I may.
Sure. Go ahead, Tushar.
Just on this, INR 450 crore debt reduction, that would be largely from the internal accruals or
Yeah.
Because the kind of margin trajectory that we are kind of building from the point where we are today. Just to understand that trajectory.
Yeah. Absolutely. Free cash generation from, you know, we are sitting on inventory which is being exhausted this year. I think that when I look at exits of minor P&Ls, we are not talking of anything more than about INR 100-INR 150 crores in that range. It's nothing significant. You know, it's just that we want to focus on the bigger outcomes. Otherwise, even if we don't do any of that, we are confident of free cash generation to that extent.
All right, sir. Thanks.
Thank you, Tushar.
Thank you. Participants, you may press star and one to ask a question. The next question is from the line of Vinay Bafna from ICICI Securities. Please go ahead.
Thank you for the opportunity, and good morning, everyone. I have a couple of questions. My line was a bit patchy at the start, so I just want to clarify. We are assuming a $250 million annual sales for the U.S. business next year, which is. You highlighted in your statements that it will be linear. We are assuming a $60-odd million quarter run rate, which is approximately 35% sequential growth. I understand it might not be entirely in Q1. However, I just want to understand how much of it will be contributed by the Endo. Considering our plant at Puducherry is still under regulatory concern, what is the dependency on that plant as of now?
Well, our Puducherry dependency is zero because we have supply chains for those. I mean, we have developed those for almost all products from our other sites, so they are not material at all. We don't need anything new. To launch any approved product, the OAI in Puducherry has no impact. You can launch a product from a site if the product is already approved, right? We don't have a problem with that.
Puducherry is really not a challenge. It'll be hard for me to give you specifics of how much is from Chestnut Ridge and how much is coming from India. But I can give you an indication that Chestnut Ridge will add an annualized. Remember, we take charge only in June, although we are starting to consolidate some of the businesses. We expect Chestnut Ridge to have an exit run rate of about $25 million a quarter for our top line. I can't give you the quarterly outcomes on Chestnut Ridge.
No, that's very helpful, sir. If I understand correctly, then at least the initial part of the first half is gonna be driven by our internal growth. Considering the bump up and the
No. Yeah. We do have, Vinay, some Chestnut Ridge products that we took charge of as soon as the deal was announced. There is a certain amount of value, but the bigger product launches are happening as we speak. You should watch Q1 and Q2 for launches out of Chestnut Ridge.
Okay. Got it. That is very helpful. Secondly, sir, we have said that we've gotten an upfront payment from our partners in Australia. Since it was a payout that you're expecting several years later, does it impact our agreement for the study phase that you do over there? How much of the payment is left to receive from there?
Well, first of all, it's not several years, it's only a few months. The payment was due on December 31, 2022. We should have the funds in our bank in H1. It's a few months in advance. At best, six to seven months. That's what is important. It's maybe five to six months, if I may. Our contract to supply Arrotex for 10 years. We don't have any challenges on that. In fact, our business will grow from where we are.
Do we have any more payments left from their side for this agreement, or is this the last tranche?
This is the last payment.
Okay, got it. Last part, last bit is, you did highlight a bit on the logistics cost for the previous participant. What we understand is that it was a significant jump during the quarter, and you also highlighted how the air freight has gone high. I'm sure that you've taken up several measures, and you were highlighting how you want to reduce it. Considering how the situation is and what the peers are saying, no one's really talking about these costs going down. You want to highlight anything very specific wherein we're trying to save on costs?
Yeah. As I said, a large part of our logistics costs includes our front-end warehousing costs. If you're sitting on inventory that you sell out over six months, then you are sitting on too many pallet stations that you pay too much for rentals on a monthly basis, on a weekly basis, correct? If you're not loading new pallet stations because you're not producing new until the stock is resolved, your logistics cost automatically comes down, in our case. It's not a peer-to-peer comparison. The fact that our volumes dropped last year by more than half, but our AOP was for the production. The production was for almost all of your annual operating plan. That's how this business works, because if you do not have inventory in the front end, then you will not win business.
You can't win business unless you have stock in hand. Considering that we have enough inventory for at least three to four months compared to the average two months, that itself. That normalization itself will reduce our logistics costs. I'm not taking away anything from the fact that, in effect, to sell the same dollars or more, we'll be shipping maybe 40%, 50% containers than what we shipped in a bad year. That will be. It's just a normalization. It's nothing to do with us getting any better prices than anybody else is getting with container rates.
Understood. I actually have two sub-questions to it, also. This will be the last of them. First part is that since we are sitting on such high inventory and we want them as well, considering obviously there'll be a shelf life issue as well with them, we are still assuming a growth on our base portfolio largely because of the volume delay. Isn't it a bit contradictory at least, maybe you can help me understand that we are trying to push more volumes, but we're not expecting a high value-
No, I'm not pushing any more volumes. During COVID times.
Even if the demand is coming in, it'll be at a higher price unless that situation is completely resolved.
No, it's not coming at a cost of price. In the acute therapy, the number of players continues to be few, in which Wockhardt thrived, its strategy. In the acute, when whoever dumped the product is no more in the market, in fact, that market has become more attractive for us as the number of players has probably even reduced further. The volume drops. The volumes have started coming back with prescriptions coming back, which effectively means that we haven't lost market share at all. It's just that our market share, let's say on Ibuprofen, was 28% or 30% for many years. It hasn't changed with COVID, but now the volumes, if the volumes move up by 500 million units, so your 28% share also moves up by 500 million units. It's nothing to do with us selling at a lower price. That's not what we do.
Got it. It's just that our product baskets are benefiting from the situation, which is improving at the macro level. Which is fair enough. Got it. That's all from my side. Thank you, sir.
Thank you.
Thank you. Bharath Sesha, Sameer, please press star one to ask a question. The next question is from the line of Gautam Bhan from Moorings Capital. Please go ahead.
Hi, Arun. Thanks for taking my questions and for the detailed presentation as well. A couple of them. I'm just trying to make sense of slide 16 that you guys posted last night. Would I be right in interpreting this as in Q4, you had INR 77 crore of exceptionals to your EBITDA? You would add INR 46 crore to INR 77 crore to get to INR 122 crore. Would that be right?
Sorry, Gautam. Could you just? You kind of faded in between. You may wanna just.
Sorry.
Repeat your question.
Slide number 16 in the PPT.
Yeah.
It's non-operational items slide.
Okay.
Trying to interpret that, would that be right that in Q4, you had INR 77 crore of exceptionals which will not be repeated going forward?
Yeah, that is correct.
To interpret the Q4 number, you just add the INR 77 crores to the INR 46 crores you reported for EBITDA, adjusted reported EBITDA.
No, no. See, what happens is, see the company has got an accounting policy, you know, that traditionally in the last many years we have been reporting all these line items and exceptions. These are all exceptions. Whenever there's a product recall, and it's returned by the FDA, we take all of this here, and it is consistent with the past practice. This is of a one-time nature predominantly.
No. Just trying to understand. The INR 46 crores that you have printed, as well as your consolidated EBITDA, if we were to adjust it to INR 77 crores.
It doesn't have any adjustments.
Yeah.
It should be taken as. I'm just trying to get the sense that if we add 46 to 77, that already implies a 14% margin. Is that the right way to think about it or not?
No.
Okay, fair enough. Okay, maybe I'll reach out offline on that one. The next question, Arun, is the INR 1,000 crore debt repayment that you've outlined. Does that include anything to do with Stelis secondary sales at all?
No.
Okay, good to know.
We will have no debt.
One more, I mean, I guess you have implied this already, but when you said 3x debt to EBITDA, that implies a INR 650 crore EBITDA, would that be right in FY 2023?
Run rate.
Run rate in Q4, in the exit quarter or something like that?
Yeah. We are pushing to be better, but that's the target.
Okay. That also implies around 16%-17% EBITDA margin run rate at exit.
Which is what I was alluding to an earlier question from Tushar.
Okay, Arun, given that we are almost two-thirds through Q1 already, are we sort of trending towards these better numbers? Are we trending towards $60 million quarterly run rate in the U.S. already or not yet?
Well, our headline says guidance for an encouraging FY 2023 outlook, which effectively means. You're right, if we are very close to June, we probably know what we're telling you. If we are headlining our U.S. sales to be near linear, then the answer to both your questions is yes.
Okay. Last one from my side. Where does, I mean, there's a lot of moving parts now on the top line and on the cost line, right? Where does the business settle out in a couple of years or three years from now, Arun? Like, is it?
Aren't these lines moving for everybody in the industry? I mean, all these lines keep moving. What exactly is your question?
No, my question is, where does it settle out in two or three years in a normalized basis? Do we ever see a 20% margin again on this business? What's your thought?
Absolutely. We don't see any reason why we won't be there, and that's because of the diversity of the business. I think all the emphasis of the people who look at us is for the U.S., as is the case. Please look at our other regulated markets business, how quickly it's growing, how rapidly it grows. It doesn't have the SG&A and costs associated to U.S. While you may run a lower gross margin, the flow through margins to it are stronger. You'll see lumpiness from here on because we are adding several new markets, but the base is a very solid base and I won't hesitate to say that we are now amongst the top ten players in Europe, in other regulated markets out of the country.
We want to focus on that market. We've got lots of opportunities and product approvals coming our way, but it doesn't get too much attention, but that's where our focus is because it's a massive market. There's been massive consolidation of massive players in Europe. The big players are hurting for portfolio supply chain, and we are partnering with them on profit shares and no contract manufacturing activities. You're seeing an uptick in our business, and you'll see more and more of that in the next two to three years. Mirroring US, the other reg markets in three to four years is a goal for the company, and that's what is gonna make the OpEx leverage very, very different, and the EBITDA flow to be very different. We're very determined to get there with that strategy.
Okay. I appreciate the color, Arun. Just a final data point. What is the sort of maintenance CapEx we should build in for this year, approximately?
You know, the good thing now is that when you have capacity utilization as low as you're building up, you have inventory and you don't have to use all your plants. We have the ability to, you know, move one product from one factory to another considering we have several FDA approved sites. We are going to be very low on CapEx. Our typical CapEx will be about INR 100-odd crores per year for the next two to three years. There is nothing major that will go into investments in terms of CapEx, because all our plants are well-equipped and have got large capacities and enough capacity for the next two to three years in terms of build up.
Understood. Thank you, Arun, and I look forward to a better year. Thank you.
Thank you. Likewise.
Thank you very much. We'll take the last question from the line of Nitin Agarwal from DAM Capital Advisors. Please go ahead.
Hi. Thanks for taking my question. Arun, in the U.S., you've talked about increased RFQs and all being coming into the market. For an oral- focused player like us, I mean, what is this really implying? Is it implying more volumes, or are you seeing some improvement in the pricing also?
There are two things, Nitin. One is if I am sitting on too much of the inventory, I can go and, you know, switch an existing improvement by giving a price. Then, how it works is that I get an ROFO to accept that price. In many cases, we didn't accept the price, so we accepted the market price less. Once the inventory is exhausted, you can serve a notice saying that you don't want to supply after 90 days or 180 days.
Then, typically, the customer comes back to the market for a new vendor. That's what I mean. For about three to four months, post- COVID, and when the U.S. was slowly kicking back, there really was nobody getting any requests for quotes. Now it's back to normal. Of course, there is price intensity in some products, but especially in our acute products, we are winning back the contracts. We have many contracts that we have lost; we are winning back. They don't move the needle much in terms of revenues, but they move the needle a lot in our gross margin uptick.
You know, on the Chestnut portfolio, we've talked about how complex the presentations, like hormones, patches, such as Bayer. When do you see some of these things begin to get commercialized for us, those complex, sort of non-OD formulations?
You can look at our hormone launches in Q2. You can see our controlled substances coming back, which are now being currently sold, coming back in Q4. There are several specialty products, especially products like Megestrol, where we may be one of the only few players in the U.S. market. You will see us coming back in that product as early as this quarter. We are now that we have complete control of the business starting in a couple of days rather or a couple of weeks, you will see more launches coming out of Chestnut Ridge and from here. By H2, I think you will see the momentum of launches.
One of the reasons I'm giving you more linear guidance on U.S. is because we are also giving Chestnut Ridge the attention it requires in terms of market share. We are gaining market share in the products simply because when Endo was exiting the market, they obviously for the right reasons, didn't pick up new contracts as they were not willing to take the liabilities or supply. Now that we have started bidding and winning new businesses, that also adds.
Okay. Lastly on your debt, I think the question has been asked a few times, but on the guidance, what the guidance really implies, ex of the investments in Stelis and here is a net EBITDA number of about INR 1,500 crores or thereabout, net debt number of INR 1,500 crores or thereabout for end of the year?
Net of investments, our debt to EBITDA on the pharma will be under two by this year.
Okay. Thank you.
Etc. data. Don't take.
Yeah.
Don't mistake me for that.
Yeah. Got it. Sure. Yeah.
Thank you. I now hand the conference over to the management for closing comments.
Thank you, everybody, for coming in this early, and appreciate your time and questions. I'm sure that many of you may have follow-up questions. Please feel free to write to our investor desk or with Sandeep, Abhishek, or even to me, or Badree, and we'd be more than delighted to answer your questions. Have a great day ahead. Thank you.
Thank you very much. On behalf of Strides Pharma Science Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.