Edited Transcript of RECI B.ST earnings conference call or presentation 7-May-20 8:00am GMT

If we look at our geographic footprint, and — the acquisition here of Consort has really contributed to deepen our geographic footprint. And I’m actually very pleased to report the growth that we see in all the geographies where we operate. From an organic point of view, we are reporting organic growth in all geographies where we operate, except Spain and U.K. And I think in Spain, it’s mainly due to COVID-19. And in U.K., it’s other things that I will come back to. But in particular, I’m very pleased to report that we have actually growth both in Italy, organic growth in Italy and in India, where operating conditions have been particularly challenging.

Looking into the COVID-19 response. And this ongoing pandemic provides a lot of uncertainty and short-term headwinds. In order to keep our now 9,000 employees safe and continue to serve patients’ needs, which include several products used in treating COVID-19, Recipharm implemented responsive measures to the pandemic that allowed our more than 30 operating facilities around the world to continue to supply and service our customers during this crisis.

We have seen, though, a number of conditions here or effects or issues that have affected our performance during the quarter. We are operating almost all our factories in suboptimal conditions. We see elevated levels of absenteeism, many times compensated by a lot of overtime. We have had to reorganize workflows to maximize social distancing.

We have a number of plant disruptions and work processes curtailing efficient execution. And we also are suffering from poor availability of consultants and technical support due to travel restrictions. And we have during the quarter as well, have had — we have had some temporary suspensions or shutdowns of manufacturing activities. It’s usually short term, about a week or between 1 and 2 weeks. But we have seen that in Portugal and in India during the quarter. And there are also natural transport issues here and logistic issues, both in supply of materials and supply to our customers. And we are seeing delays, but no shortages really from material suppliers.

The Consort integration due to this COVID-19 will be somewhat delayed, and we will see a little bit of delay in the synergy gains here. We still estimate that we will be on track to achieve those synergies by the latest in the second quarter 2021, but they will be somewhat fractured.

There — also, the recovery of the Cramlington site following the incident that they faced there in the mid-2019 will take a bit longer than expected. It was previously expected to be up and running full speed again in April, and this will take longer due to the availability of external support..

Development projects, we have seen several of them being postponed or canceled from our customers, and there has been actually a sharp drop in demand for development products. This is mainly due to the difficulties in performing clinical trials in the current environment for our customers. However, and this is very important to remember, we have managed through various measures here to successfully mitigate most of these negative consequences. And I’m very pleased with that.

And also when thinking about demand for our products and services, it should not surprise you, given our business model, that we see both potential challenges and potential opportunities as we respond to the COVID-19 pandemic. We have identified several COVID-related trends with respect to the demand for our services across all 4 business units.

We are now helping our customers to develop, manufacture and supply potential COVID-19 treatments across all 4 of our business segments, including projects for drug substance, drug product, oral product, respiratory, analytical, in chemistry and clinical supply services. Some of the products are shown here on the slide to the right.

First, we are ramping up volumes of chloroquine phosphate, a product where Recipharm owns the marketing authorization in Sweden. Also, we are supporting a clinical trial with our product erdosteine, where the hypothesis is that the multiple mechanism of action of erdosteine antioxidant, mucoactive, anti-inflammatory and antibiotic enhancer may improve respiratory function and could thus potentially benefit patients affected by COVID-19.

We also see COVID-19 related increase for certain antibiotics. For example, piperacillin, tazobactam, which we supply to several customers. The final example is dexmedetomidine, a sedative used in intensive care of COVID-19 patients with our main market here being the U.S.

Looking at the Consort integration and the synergies, specifically here, we have an integration program specified and it’s ongoing. And the prime objectives of this program has been to ensure business continuity post acquisition and also to define and implement the new operating model and identify and implement cost synergy savings and latest by the second quarter 2021 and also to explore commercial synergies. We expect these synergies, those cost synergies to amount to SEK 125 million on an annual basis.

And progress so far. Consort Medical has been delisted. We have communicated with key stakeholders on particular customers. We have the former Aesica business, one of the divisions of Consort has been rebranded and is now operating according to the Recipharm model. The headquarter and the Aesica divisional overhead personnel cost will be realized — cost savings will be realized in the third quarter, and it’s all identified. And all the identified savings are on track. We have a minor effect of these savings already in the first quarter. But the total effect here will be somewhat backloaded due to the COVID-19 delays, but still being in place no later than second quarter 2021.

The next focus for our — the next phase focus areas for our integration activities will be in procurement, IT and HR activities. And with this acquisition of Consort, we are creating definitely a leader in integrated advanced delivery systems. We did complete the acquisition in February. We are progressing the first phase of integration, delivering against a 60-day plan to ensure continuity of business. We have defined a new operating model. We are doing extensive group-wide customer engagement, demonstrating new and more innovative product proposition. We have refined management and reporting structure to better align business for growth and drive synergy capture. We are well positioned to take advantage of the many valuable growth opportunities seen by the enlarged group.

And with that, I could say also that we are very well positioned now for continued growth. We have a strong foundation for growth as a leading CDMO with expertise and the foundations allowing us to navigate the dynamic and challenging Q1 and deliver organic growth. We rapidly responded to the short-term challenges presented by the coronavirus. We adopted operations. We controlled costs, and we have invested in our supply chain to meet the customers’ demand.

And notwithstanding short-term situation, CDMO industry remains robust and is underpinned by strong fundamentals. Organization is scaled and structured to execute against our long-term growth strategy. And we still see many new opportunities to drive growth, profitability and materially deleverage post acquisition. And we are preparing for the previously announced equity issues and that is ongoing.

And with that, I would like to hand over to Tobias for a financial update.

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [3]

——————————————————————————–

Thank you, Thomas. And I would like to start with here that our acquired operations of the Consort Group are consolidated from February. Meaning that we have 2 months of reporting from the Consort operations in the Q1 results.

Let’s turn slide. In the first quarter then, as Thomas mentioned, we reported sales growth of 43% in total. Out of this, the acquired growth of Consort Medical stands for 37 percentage points and FX rate 42 percentage points. Despite the ongoing COVID-19 environment, we continue with a solid organic growth of 4% in the quarter. EBITDA increased to SEK 267 million, corresponding to an EBITDA margin of 10.3% driven by higher sales volumes, better product mix and improved cost efficiency, partly offset by the COVID-19 effects.

Free cash flow for the quarter was slightly negative with the impact from nonrecurring payments and finally, core EPS improved year-over-year, driven by higher earnings.

Let’s turn page and look into our new segments. In order to better reflect our new larger group, we are — we have from 1st of January this year, reporting our business unit in new segments. The Advanced Delivery Systems segment includes the previous inhalation operations in Recipharm and the acquired operations of devices under the Bespak brand.

The new segment Steriles include all current operations in the Steriles & Inhalation segment with the exception of inhalation operations.

Solids and Others includes our current operations within Solids and Others, plus the corresponding part of the Aesica operations.

And finally, Development and Licensing includes with the exception of the inhalation operations, the current operations in development and technology and the API business in the Aesica operations.

So let’s turn page into the quarterly development of these segments. Starting then with an overview of the segment development. As mentioned in the interim report, our earnings have been impacted by the ongoing COVID-19 situation with cost increases related to suboptimal solutions from managing supply and production. In this environment, our earnings rose in all segments in total with SEK 96 million, coming from a combination of the acquisition as well as organic. Organically, notable improvements were seen within the segments, Advanced Delivery Systems and Steriles.

So let’s turn page and look into the segments in more detail. Starting with our segment Advanced Delivery System. Sales more than doubled as a consequence of the acquisition. Organically, sales declined, mainly temporarily related to rephasing and a temporary supply issue. Despite lower sales, EBITDA increased organically compared to previous year, positively affected by temporarily lower material costs.

Let’s turn page. Then looking into Steriles. Q1 means another strong quarter for Steriles. While sales grew 10% organically, EBITDA grew 24% despite the COVID-19 situation. Higher sales of lyophilized injectables and blow-fill-seal products contributed to higher sales and earnings. Earnings were further enhanced by improved mix and cost efficiency.

So let’s turn page and talk about Solids & Others. Net sales increased by close to 50% in Solids & Others with acquired operations in U.K., Germany and Italy. Organically, sales increased slightly by 1%, driven by higher sales of oral solid. EBITDA fell SEK 7 million organically, mainly driven by higher costs related to the COVID-19 situation.

Lets turn page. Then looking into Development and Licensing. Net sales increased by 23%. Higher sales of own products more than compensated from the headwinds from the COVID-19 situation, which led to an organic growth of 8% in the segment. EBITDA was in line with previous year, impacted by higher costs from the COVID-19.

Let’s turn page. Then I would like to comment on our finance net in the quarter. As you may have noticed, we report a material increase compared to previous year. I would like to say, though, that half of the finance net is related to nonrecurring items and currency effects relating to revaluation of loans. The remaining part is related to higher loan volumes.

Let’s turn page. When it comes to cash flow, the major item in the quarter is, of course, the acquisition of Consort Medical Group, where the purchases of the shares amounted to close to SEK 6 billion. Our free cash flow declined somewhat year-over-year in the first quarter. Out of the SEK 250 million deterioration compared to previous year, approximately SEK 150 million related to nonrecurring payments related to the acquisition. We had a slight buildup of working capital in the quarter, but working capital in relation to sales continued to decrease and had a solid development. The net debt to EBITDA rose considerably to 8.7% by the end of Q1. Here, I would like to say, though, it’s important to note that these calculations only include 2 months of EBITDA from former Consort Group.

Let’s turn page and look into the net debt development in Q1. Some words on — about our net debt. In the first quarter as planned, our net debt increased following the acquisition of Consort Medical Group. In addition to the previously mentioned acquired shares, we have also refinanced Consort’s existing debt. The quarterly cash flow as well as the net debt by the end of Q1 is also affected by nonrecurring payment, as I mentioned, to the value of SEK 150 million. As planned, our gearing is high, but will be reduced going forward. We will strengthen our balance sheet, partly due to rights issue, but also by solid owned cash flows.

Let’s turn page. [Then we’ll go] to some wording here what Thomas just said and regarding the financial progress and some comments about the integration from a finance function perspective. I’m happy to see that we have completed a reorganization of financial reporting to the 4 business units. We have integrated the finance team and aligned reporting and accounting principles across the enlarged groups. We have a solid plan for capital allocation, focused deleveraging, and we have a strong support from our banks. A number of good initiatives have been implemented to support cash generation. And finally, even though we have some short-term challenges from the COVID-19, we stand strong, and our long-term outlook is unchanged.

Over to you, Thomas.

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [4]

——————————————————————————–

Thank you, Tobias. We continue to make good progress towards the long-term strategic objectives, which have propelled Recipharm into a top 5 global CDMO. We are committed to work towards our new financial targets, even though COVID-19 may provide a short-term headwind for us. Sales target of at least 11% per year growth. We obviously will achieve this year and have achieved this period as well.

The margin target of EBITDA margin of at least 12%. We are making good progress here towards that target and increasing in this quarter from 9.4% previous year to 10.3% EBITDA margin this quarter.

Also with capital efficiency, we are making progress towards the target. Even though Consort here is included only 2 months after the — in the quarter, so we are increasing here the return on operating capital from 6.2% to 6.4%.

If we try to summarize the first quarter 2020, we have in the quarter created an excellent platform for further accretive growth. We did complete the transformational acquisition of Consort Medical. Integration and synergy capture plans are progressing according to plan. We delivered organic EBITDA growth significantly ahead of sales growth. We are having high levels of liquidity to support our business. We are on track to significantly deleverage our business. And demand from customers remains strong. We are well positioned to benefit in a growing industry, and we are confident in the medium- and long-term outlook.

Thank you very much. And now, operator, we would now like to open the floor for questions.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) The first question comes from the line of Harry Sephton from Jefferies.

——————————————————————————–

Harry Thomas d’Alton Sephton, Jefferies LLC, Research Division – Equity Analyst [2]

——————————————————————————–

So I have 3. Firstly, I just want to get to your sense around potential sales synergies from the Consort deal. Firstly, I wanted to ask, do you see any demand for add-on services from your current Bespak customers? And how long do you expect that you could potentially realize any sales synergies?

My second question would be, can you help us understand the bridge between the strong underlying EBITA improvement in the business and also the weaker first quarter operating cash flow? So I guess another way of asking that is, what were the one-off cash flow impacts in the first quarter? And then related to that question, I’ve seen in your EBITDA to EBIT bridge that you reported nonrecurring costs related to achieving synergies, could you help us understand what those items are and how long they may be cyclical?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [3]

——————————————————————————–

Yes. Thank you, Harry. We’ll try to answer your questions. First of all, the sales synergies. There are obvious sales synergies and commercial synergies in the combination with Consort. They will, however, not materialize in the short term. It’s more of a long-term project. And most of these synergies, we will see in the combination with the devices being developed and manufactured in Bespak division of Consort and combining those with the pharmaceutical expertise and capabilities that we have regarding the content of these devices, whether it’s inhalation, port injectors or any similar device. And that’s where we expect the commercial synergies actually going forward. We also see some synergies — commercial synergies in the form of Aesica division, which is very similar to our Recipharm current business, where we could do — in particular in the API side, we could achieve some synergies going forward. But again, this will be a little bit longer term or midterm, I would say, for this unit — material results of this.

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [4]

——————————————————————————–

Yes. And then Harry, to your comment here about the EBITDA and the cash flow. I think this is a consequence. As you know, we completed the acquisition as such and related to that, we do have nonrecurring payments, transaction payments for completing the acquisition. So that is, I would say, the bridge.

Then, I mean, if you look at further below the P&L, we also have some items in the finance net as well. But that is the explanation. So it’s — I mean looking at the cash flow generation and such and the structural development here, I think it’s important to notice that sales is growing more than working capital, if you look at the organic development. Also, CapEx is actually held on a low level in the quarter. So structurally, I won’t worry about the cash flow. It’s more related to — that we are in a quarter where we have to finalize a big acquisition. That is how I would frame it.

And your last point was actually about the nonrecurring items in the quarter. Did I read that correctly, Harry?

——————————————————————————–

Harry Thomas d’Alton Sephton, Jefferies LLC, Research Division – Equity Analyst [5]

——————————————————————————–

Yes. So it was just the nonrecurring costs related to achieving synergies. I just wanted to understand what those were. And if we could maybe expect those nonrecurring costs to actually recur for some time as you try to achieve those synergies?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [6]

——————————————————————————–

Yes. Sorry, Harry, yes, we understand. It’s — these are costs to achieve the synergies of SEK 125 million. And these are nonrecurring. It’s canceling various contracts and changing things to combined — or consolidated into the new group. So it’s nonrecurring. We don’t expect them to appear going forward.

——————————————————————————–

Harry Thomas d’Alton Sephton, Jefferies LLC, Research Division – Equity Analyst [7]

——————————————————————————–

That’s very helpful. I just had 1 final question on the Cramlington API facility that you acquired from Consort. I know that the Consort had previously flagged some disruption to operations there. I just wanted to understand the sort of time frame around those operations getting back up and running and if you’re expecting any significant investments related to that?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [8]

——————————————————————————–

Yes. We do expect to come up and running, but we are not there yet. As I explained, due to — primarily due to the COVID-19, the late-stage adjustments or adaptions that we needed — or modifications, I should say, that we need to do to the facility and the process, the start-up recovery will be delayed. It was previously announced, I think, by Consort to happen in April, it will be later. So it’s not yet up and running at full speed. We do foresee some CapEx here, but I don’t think in the overall context that it will be material. It’s more a matter of work that needs to be done, and we need to have consultants and experts involved in modifying processes in the facility to make it work in a safe mode going forward. And this has been a challenge during these times.

——————————————————————————–

Operator [9]

——————————————————————————–

The next question comes from the line of Arsene Guekam from Kepler Cheuvreux.

——————————————————————————–

Arsene Guekam, Kepler Cheuvreux, Research Division – Senior Equity Research Analyst [10]

——————————————————————————–

Three, if I may. First of all, could you give us an estimation of the impact of the pandemic on your top line and profitability in Q1? And how do you see the evolution for the next quarter? Second one, how do you see the evolution of Solid division? Plus 1% in Q1 seems a little low. And the last one, when are you expecting to launch your capital increase to pay back your loan? And if you can make a short update on your divestment project in Sweden and in U.K., it could be grateful.

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [11]

——————————————————————————–

Yes. Thank you, Arsene. I will start with the impact from COVID-19. Quantify that in numbers, there is around SEK 20 million impact on sales and EBIT, respectively, so about the same number on both.

——————————————————————————–

Arsene Guekam, Kepler Cheuvreux, Research Division – Senior Equity Research Analyst [12]

——————————————————————————–

Okay. And are you expecting a more important impact for the coming — for the mix for the Q2?

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [13]

——————————————————————————–

I mean it’s — around COVID-19, the world is uncertainty. I mean what will happen next year, right? But I mean,one thing to consider here is that the COVID-19 actually impacted us towards the end of the quarter. While we’re actually now in the second quarter, we’ll actually have 3 months exposed to the COVID-19 situation. So by that math, I think it’s a hyper likelihood that the impact will be lower during the second quarter than in the first.

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [14]

——————————————————————————–

On the other hand, we are seeing stabilized conditions compared to March, April right now. So I mean it’s like to be, as you’re saying, it’s a time of uncertainty and things and conditions could change rapidly. We have seen that happen in the past. But right now, we see fairly stable conditions in our operations.

Sorry, and I missed your second question, Arsene.

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [15]

——————————————————————————–

What was your second?

——————————————————————————–

Arsene Guekam, Kepler Cheuvreux, Research Division – Senior Equity Research Analyst [16]

——————————————————————————–

It was about the evolution of the Solid division. How do you see this evolution? Plus 1% seems a little low for the Q1? Just would like to have some more on the revenue?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [17]

——————————————————————————–

Yes, you’re right about that. And I think the major — here, we have seen a big impact of the COVID-19 situation. And in particular, increasing operational costs. And here, we see effects of the suboptimal operating conditions. I would say the main profit or one of the main profit impact is actually happening in the Solid segment. So depending on what we believe about the future for COVID-19 effects, it could — we could consider that when we’re looking at the Solid segment here. The other impact on the Solid segment is, of course, the addition of the corresponding Consort units, which are performing at a lower margin than our Recipharm business. So they have a dilutive effect on the operating margins here.

——————————————————————————–

Arsene Guekam, Kepler Cheuvreux, Research Division – Senior Equity Research Analyst [18]

——————————————————————————–

Okay. But I thought that this division will suffer due to the fact that it’s — you signed long-term contract with your partner?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [19]

——————————————————————————–

No, we don’t suffer from that. I think that’s actually many times a benefit in the whole — in the Solids segment as a whole. I think we have — we are enjoying very long relations. And I think we have the foundations and the possibilities to operate this segment in a much more successful way. We will use our expertise and capabilities to improve the performance and the margins in the former Aesica business. And I think also, we will hopefully be able to mitigate some of the consequences of the COVID-19 going forward.

——————————————————————————–

Arsene Guekam, Kepler Cheuvreux, Research Division – Senior Equity Research Analyst [20]

——————————————————————————–

Okay.

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [21]

——————————————————————————–

And regarding your last question here regarding the equity issue, we are now asking or the Board is asking for the authority to decide or make a resolution about the final terms and the timing, and they’re asking for this authorization at the upcoming AGM on Tuesday. So pending that or following that, we will see what the Board decides upon this. But there will be a total of equity issues of SEK 2.5 billion and exact terms and timings will be communicated later.

——————————————————————————–

Arsene Guekam, Kepler Cheuvreux, Research Division – Senior Equity Research Analyst [22]

——————————————————————————–

Okay. On the last point about your divestment project?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [23]

——————————————————————————–

Yes, they are progressing according to plan. We have 2 facilities now bound for closure, and that’s in Stockholm and in Ashton, in the U.K. and there, everything is going according to plan. We expect both of them to close pretty soon. We’re actually talking about the second and third quarter now, next quarter here. So they will be closed during this year, all according to plan.

——————————————————————————–

Operator [24]

——————————————————————————–

The next question comes from the line of Johan Unnerus from Pareto Securities.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [25]

——————————————————————————–

Thank you. Johan here. Yes. The first one, 4% organic growth is pretty good during this period of some severe COVID impact. Is there any positive stocking effect, including that you can see? Or is that less — insignificant?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [26]

——————————————————————————–

Johan, yes, I don’t think there is any material stocking effect here. I think it has rather been a very challenging task for us to actually continue to supply according to this demand — this organic increase in demand as well under somewhat challenging conditions. So I don’t think we can see any material stocking effects. There are, of course, certain products that have been more in demand than others, particularly the COVID-19 related products. But overall, I don’t think we should say anything — we should see anything of that. On the whole, it’s pretty much sort of solid organic growth.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [27]

——————————————————————————–

That’s useful, helpful. And clearly, the take we get is that the COVID effect has sort of sharpened during the quarter, and we should expect some more impact then on Q2. What about your typical seasonal Q3 effect — I mean we don’t — if we should speculate too much about COVID or not, how that plays out. But clearly, there will be some level, probably rather substantial COVID disturbances also during Q3, even in a positive scenario. What about that impact during your traditional typical low activity Q3? Is it — should we expect more of a dip during this year? Or how should we look at that effect?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [28]

——————————————————————————–

I don’t think with the condition of — the uncertainty of the COVID-19 situation, but apart from that, I don’t think there is any reason to believe that we should have an additional dip or additional holiday shutdowns or anything like that during the third quarter. It will be as usual, I would say, due to holiday shutdowns. So it will definitely be our weakest quarter, as it usually is. And I don’t think there’s any change in that.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [29]

——————————————————————————–

Yes. I would think more towards that it could be even more tricky to cover the fixed cost and maybe also to source service and maintenance externally during these conditions, but no major…

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [30]

——————————————————————————–

It could, of course, be the case, but I don’t think it will materially affect our operations actually.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [31]

——————————————————————————–

Yes. And what about…

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [32]

——————————————————————————–

But again, there is uncertainty, so we don’t really know.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [33]

——————————————————————————–

That’s the only thing we know is uncertainty, I guess.

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [34]

——————————————————————————–

Yes.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [35]

——————————————————————————–

And what about the inventory effect because you — sort of mitigating actions you’ve taken. One is to build up larger inventories, and that’s, of course, very sensible. Is it possible to specify that?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [36]

——————————————————————————–

I think that will continue. It’s one way of securing supply and securing also our capacity and the ability to service customers. So that’s an important way to mitigate transport irregularities and — as well as supply delays or restrictions from time to time. So we will not — we will probably not increase very much more, but we will not decrease these inventories either in the short term.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [37]

——————————————————————————–

That’s also helpful. And finally, D&T, 8% organic growth during these conditions and COVID impact is rather impressive. Is that — is it realistic to expect a big pressure on that short term?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [38]

——————————————————————————–

Here we have 2 trends that go in the opposite direction. First of all, we have development services where we are experiencing a very sharp drop in demand and hence, a sharp drop in sales as well. And that we will see a full effect of — probably in the second quarter. On the other hand, we also see good increases in some of our own technologies and product rights and also in drug substance. And that is, to some extent, compensating or actually in the first quarter, it more than compensated a shortfall in development services. We do expect some of this to continue with positive effects and whether we will be able to fully compensate for the drop in development sales remains largely to the uncertainty in the COVID-19, actually and how that unfolds going forward.

——————————————————————————–

Johan Unnerus, Pareto Securities, Research Division – Analyst [39]

——————————————————————————–

So we could cautiously expect some pressure, but no major falloff?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [40]

——————————————————————————–

I mean 8% — considering these circumstances, I think 8% is quite a good growth and I’m not convinced that we can be able to show — we will be able to show such large growth going forward.

——————————————————————————–

Operator [41]

——————————————————————————–

(Operator Instructions) The next question comes from the line of Kristofer Liljeberg from Carnegie.

——————————————————————————–

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division – Head of Health Care & Financial Analyst [42]

——————————————————————————–

Three questions from me. You talked a little bit about it before when it comes to the nonrecurring cost. Is it possible to quantify here how much was transaction-related versus integration and restructuring costs? And related to that, I also wonder how much more nonrecurring costs should we assume now for the year and for reaching the synergies? That’s my first question.

Second, if you could just say a few words about the status of the Indian factories. As you said, the whole COVID-19 situation seem to have improved quite a lot in the last few weeks, but you still have some issues there, if I understand it correctly.

And the final question, could you say anything about the timing of the share issue?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [43]

——————————————————————————–

Yes. Let me start with the second question regarding the Indian factories. And we are — as you say, I mean, conditions are improving. But we still have some ways to go in India. We are operating — all our factories are up and running again after a short suspension of operations in the — at the end of March and beginning of April. But we are not operating at full capacity due to availability of staff issues. And I mean that’s a pretty long story. I could state that some other time perhaps. But there are issues which are not perhaps always intended by the Indian government, but they are having effect on the availability of our employees or possibility of our employees to actually go to work, and that is having a certain impact on our capacity. So again — but in spite of this, we actually managed to deliver organic growth in India in the first quarter, which I think is remarkable. We do see that the underlying business in India is still very strong, and we see good growth in the market. But there is an uncertainty. Now the lockdown has been extended for a while for a couple of weeks in India, but it is also softening up a little bit, and we see some domestic transports starting to work again and — or public transports in several places. So we think this is progressing in the right direction, and we’re hopeful that we during the quarter may return to full capacity.

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [44]

——————————————————————————–

Yes. Some…

——————————————————————————–

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division – Head of Health Care & Financial Analyst [45]

——————————————————————————–

Sorry. Talking about these type of impacts, what about the plants or facilities you have in Southern Europe, what’s the staff absence nowadays?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [46]

——————————————————————————–

It’s much lower than what it was during March in particular and the beginning of April. So it’s significantly lower now, but it’s still higher than normal for the season.

——————————————————————————–

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division – Head of Health Care & Financial Analyst [47]

——————————————————————————–

Okay. Sounds good.

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [48]

——————————————————————————–

And then, Kristofer, coming back to your question on the nonrecurring items, I would make it easy for you. Half transaction-related and half synergy-related.

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [49]

——————————————————————————–

And it’s also important to note that we don’t expect any further nonrecurring items of that nature.

——————————————————————————–

Tobias Hägglöv, Recipharm AB (publ) – CFO [50]

——————————————————————————–

Yes. We have — yes, we have covered for future items here as well.

——————————————————————————–

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division – Head of Health Care & Financial Analyst [51]

——————————————————————————–

That sounds good. And then the final one was timing share issue?

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [52]

——————————————————————————–

Yes, we are still — we haven’t announced this, and the Board will make a decision later on following the AGM next week on the timing [and terms of it.]

——————————————————————————–

Operator [53]

——————————————————————————–

The next question comes from the line of Peter Sehested from Handelsbanken.

——————————————————————————–

Peter Sehested, Handelsbanken Capital Markets AB, Research Division – Research Analyst [54]

——————————————————————————–

It’s Peter from Handelsbanken. I know it’s still a bit early in the stage, but anything that you have seen so far with respect to Consort that in any way makes you, let’s say, more or less optimistic with respect to your EBITA margin target, not just about the level, but also potentially about the timing in which to achieve your current target? That was my only question.

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [55]

——————————————————————————–

Yes. Thank you, Peter. Regarding the Consort acquisition, we are actually, if anything, more excited about the opportunities that this will bring. And this goes, in particular, for the Bespak division and the opportunities that we have here in combining our resources with strong pharmaceutical expertise that we have in Recipharm. This will take a little bit of time. But again, I think these are highly attracting opportunities and value-enhancing opportunities that we see. I don’t think we have seen any particular material bad surprises or negative surprises so far. And it’s the integration and synergy work, synergy achievement is actually very much progressing according to plan. But as I mentioned, due to the COVID-19, we are struggling a little bit with some part of this synergy achievement or synergy implementation, I should say, and there was integration. So it will be a little bit delayed. We don’t see any change in the sort of final target here, but it will be a little bit later or backloaded in the period compared to what we initially thought. This is mainly due to the, well, inability to meet and plan work, but also, in particular, for instance, in IT area, it is a bit of a struggle in many of the territories where we operate to actually get consultants and outside people and experts to help us in the process.

——————————————————————————–

Peter Sehested, Handelsbanken Capital Markets AB, Research Division – Research Analyst [56]

——————————————————————————–

Okay. And I’m sorry if you’d actually answered this question before. I came a little bit into the call. Sorry.

——————————————————————————–

Operator [57]

——————————————————————————–

There are no further questions registered at this point. I’ll hand the conference back to you, speakers.

——————————————————————————–

Thomas Eldered, Recipharm AB (publ) – CEO, President & Director [58]

——————————————————————————–

Thanks, operator, and thanks, everyone, for your questions and for taking the time to join our call. I’d like to close by reminding you a few important points. First, the key strength of Recipharm, that is even more evident today after the Consort acquisition, is the wide diversity of our business across products, geographies and customers. Due to our comprehensive capabilities, diverse revenue base, well-funded customers and the increasing need for complex solutions, Recipharm is not only very well positioned to support customers and patients with important products in general, but also to weather the pandemic crisis and play an important role in the battle against COVID-19.

Second, we are committed to delivering results towards our new financial targets, and we’re focused on continuing to drive organic revenue and profit growth across all of our segments over the long term.

And third, it’s a top priority to effectively integrate the assets we’ve acquired and to deploy our new capacity and capability to help improve the lives of patients and meet our customers’ demand. We’re focused on exploring the highly value-creating opportunities that the combination with Consort has brought.

And finally, we support every customer project with deep scientific expertise and a commitment to putting the patient first in all we do.

Our employees’ commitment have enabled us to keep supplying and servicing our customers even during the worst pandemic of our lifetime.

I would like to take this opportunity to sincerely thank every one of them for their efforts and commitment. Thank you very much, everybody.