Fagron (Euronext:FAGR) Q3 2022 Earnings Call

0:00 Hello and welcome to the Fragrance third quarter 2022 trading update call. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you will be connected to an operator. I will now hand you over to your host, Karen Burke, to begin today's conference.

0:40 Thank you. Thank you and good morning, everyone. My name is Karen Burke, Head of Investor Relations at Fagron. Thank you for joining this call where we will discuss the Q3 trading update for Fagron. We will start with an explanation of the results by Rafael Padilla, and then we will hand the floor over for questions, which will be answered by Rafael and Karen, our CFO. Thank you all, and I would like to hand over to Rafael.

1:06 Thank you, Karen. Good morning, all. Welcome to our Q3 and nine-month training update. Before Karen and I take your questions, we'll go through the presentation, where we will explain our Q3 and nine-month revenues. We will then elaborate on our current macroeconomic developments and how displayed in the different regions where we operate. We'll discuss on the increasing regulatory environment and how we vote to ensure the highest quality standards, and we'll then finalize our full year guidance. Moving to the next slide, when we look at our nine-month revenue, we see an increase from the 419 million euro of last year to the half billion mark supported by all regions, strong M&A Execution, and Forex Tailwind.

1:54 When we deep dive in the quarter, EMEA shows a 10% growth supported by the three business segments where we operate. Essentials, the raw materials, brands, our added value products, and compounding services, both sterile and non-sterile. Latin shows the same picture with 60% total growth supported by all three segments. And North America with 39% total growth with compounding services and essentials strong and brands showing a decrease being a reflection of current operating environment. Moving to the next slide, regarding our Q3 operations, at global level, we continue to see a disrupted supply chain and inflationary pressure. A good example is sterile syringe shortage in Wichita. We counteract as explained several times, globalizing our procurement and supply teams in order to limit this impact.

2:46 Following our sustainability strategy, we committed to set science-based emission reduction targets. On an organizational note, we have appointed Geraldino Nether as LATAM Area Leader. Geraldino has more than 30 years' experience in the Brazilian compounding market, being 12 years already at FAG. He brings strong commercial and innovation expertise. Jumping to the regions, EMEA's growing trajectory continues as a result of the strategic actions taken as centralized production, streamlined back office, and brand rationalization in the Benelux. In a very relevant note, our compounding services activities in the Netherlands continue showing further stabilization.

3:33 For this region, continuous progress on price pass-through exercise is very important, and we're making good progress here. Finally, Our GMP repackaging facility in Poland is fully operational, and we start seeing the benefits of it. Going into Latin, we see a continuation of softened end user demand this quarter, resulting in increased competitive intensity. In order to maintain market leadership and drive operational efficiencies, we're executing on back and front office projects, centralizing all our warehouses activities, being these finalized at the second semester of next year and optimizing our brands by merging three of them into one to gain efficiency and improve innovation capabilities.

4:21 To finalize, we continuously assess opportunities to strengthen our market-leading position in the second biggest compounded market in the world. Moving into North America, we clearly see a strong underlying demand on the three segments where we operate. Going to each one of them during this third quarter at our B&E division and due to the Minneapolis warning letter, we have started the transfer of sales to our LEPCO facility. This part of our original integration plan has been now accelerated. Within the frame of the remediation plan of the Minneapolis warning letter, we have voluntarily put some budget on hold, causing a displacement of sales into the next two quarters as we satisfactorily release debt. Moving into FSS, with a current run rate of 88%, And as we flagged at the semester update, we continue experiencing strong syringe shortage worsened during this quarter. We do not expect to get it better during this fourth quarter.

5:27 To remedy this and secure constant supply, we are, as we speak, validating to new syringe suppliers. This process takes approximately six months. We are very pleased with the evolution of our new FSS Boston facility as our commercial team is onboarding several new customers and taking advantage of the sterile to sterile IV bags capabilities we have there. Integration with Boston is going according to plan. Finally, on our health and wellness division, Anazeo, we see good developments in the third quarter, especially at our Vegas facility. As during the last week of the last month, our Tampa facility could not ship because of the Hurricane Ian. Also, the rest of our business, North America, could not ship into the southeast, especially in Florida due to the hurricane.

6:19 One final note, and clearly post-COVID, we see increased regulatory scrutiny of the FDA. And moving to the next slide, we'll take the chance to explain how the FDA audit process works. A facility is being normally inspected on the two years. After that, in most of the cases, an observational report is being prepared. The company, in a regular basis, updates the agency, and depending how this evolves, it can be closed or a warning letter is issued where the same process of regular updates continues. When we look at our facilities in the U.S., currently at Minneapolis, we are updating regularly the agency on our remediation plan. As said, a displacement of sales to the next two quarters and transfer to the LEDCO facility is now ongoing.

7:10 In Wichita, we received an audit in March this year with six observations. We delivered our final response in April, and now we wait for the closeout report. At Anaseo Vegas, we were audited in July and received five observations. We are now in the response process. For the other facilities, at Tampa, we received the last inspection in 2019. At Letco in March this year, and at Boston, remote assessment in 2021 all of them with no pending observations and as quality leadership moving to the next slide please is in our industry a differentiation factor we as the global market leader in the niche market pharmaceutical compounding we benefit from a resilient business with diversified geographical presence and the broadest product portfolio in the industry with favorable underlying trends as demographics and personalization. As we have seen, we have strong M&A execution capabilities and we have as well strong financial profile with high cash generating operations and a net debt with a ratio of 2.2.

8:23 And finalizing, going to the next slide, we reiterate our full year guidance. We will exclude in the Boston acquisition book revenues between 670 and 600 million euro with better margins in the second semester compared to the first one. Thank you very much. Now time for questions. Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. We'll now take our first question from Frank of D-Groove. Your line is open. Please go ahead.

9:04 Yes, good morning, Frank Klaas from the Grove Peter Cam. Three questions, please. First of all, you mentioned the Hurricane Ian as impacting your revenues. Could you quantify this in Q3 and will it also have an impact in Q4? Then on the Boston facility, the acquisition, what did you do so far on the integration and what level? You indicate now run rate roughly $15 million dollars. What kind of run rates do you envisage to get to the break-even target for the end of next year? And then finally, on pricing, could you elaborate? What did you do so far? How easy is it to pass on the higher raw material prices?

9:49 And does it also have an impact on your gross margin already? Thank you. So thank you, Frank. Maybe to start with your first question on the hurricane. So indeed, We have a facility in Tampa, so that's the NSAO facility, that was impacted by the hurricane in the last couple of days of September. So the last couple of days of the month were impacted. Those sails will be shipped out in the first week of the next quarter. So there we see some impact, but it's limited to a couple of days. And next to that, we also see that shipping into the state's to customers we have in specific states was difficult during that period. So that impacted also the other companies we have shipping into that specific state.

10:37 But again, as mentioned, that sales that will be shipped the early of quarter four. So we don't quantify it. It's a couple of days which moved from one quarter to another quarter.

10:50 Thank you, Frank. Let's take the Boston question. When we acquired the Boston facility, as we speak during the semester call, we had the revenues of low double digit at that time. Now what we're doing, we are, first of all, integrating on the sales side all the activities. So this means that our existing commercial team that was, of course, selling the Wichita plant is now offering as well the solutions that we we produce in Boston. That's mainly the sterile to sterile IV bags. So this is now taken in their portfolio. And next to this, as we also explained, we're applying for new licenses. We are now licensed in 11 states and we're applying for nice states like California, Texas, and Florida.

11:40 And maybe on your third question on the pricing element. So indeed, as we explained during our semester results, we see inflationary impact throughout our businesses, but we are able to pass on price increases towards our customers, despite the fact that it's different within the different regions. So in the US, it's easier to pass on price increases. Brazil is a very dynamic market, so there's always price competitiveness on top line. For EMEA, we can pass on our price increases over time. So we start doing that already early this year, and we see that continuing very well. So we'll keep on doing that for the next couple of quarters. So we can pass on the price increases and compensate for the inflationary impact we see through the regions.

12:29 And do you already see, as a result, the gross margin improvement because of these price increases? Yes. Yeah, as I said, this is, of course, a trading update, but we reiterate the guidance we have given. So we expect that we see an improvement in our profitability for the second half of this year.

12:48 Okay, that's clear. And coming back on Boston, what kind of run rate revenues do you need to get to break even? Could you elaborate on that?

12:57 Yes, so in the original plan, as we communicated, it will take approximately between 12 to 18 months to bring it to break-even. We are on track with the plan, and again, we're very pleased because we're onboarding new customers with the existing sales force that we have now.

13:16 But no number at 2,000.

13:20 Well, during the, yes, Sir Frank, as we explained during the last call, during the full year results, we will elaborate on the figures of the Boston facility.

13:32 Okay, that's fair enough. Thank you very much. Thank you. Thank you, Frank. Thank you. We'll now take our next question from Stan of ING. Your line is open. Please go ahead. Yes, good morning. Three questions, if I may, and all are related to Richter. The first one is basically on 23, as you are cutting your year-end sales guidance by some $30 million in sales, should we factor in a similar cut to our 23 assumptions? So what confidence do you have that you can recuperate these sales over the course of the year? Is it simply a function of pent-up demand, which you can cater to as the syringes come in? or are there additional risks related to the ramp up?

14:21 Secondly, I think a couple of quarters ago you mentioned the double shift and hiring of 70 new people. Is this plan somewhat affected by the recent events or is it still continuing as progress? And should there then be an impact on the margin that you can sort of earn on Wichita? And then the last question is on the new syringe suppliers. You mentioned that it takes six months. When exactly did you start with that process of finding new suppliers, and when should we sort of think about the problem to be resolved? These are the questions I have. Okay, thank you, Stijn. Maybe to start, and Rafa will also jump in on the more specifics regarding the syringes.

15:10 So on the run rate, indeed, what we see is that there's supply chain shortages on the syringes. Most of our products that is coming from Wichita are the syringes. So we see impact on our run rate at sales going forward. However, we do see this as a temporary impact. The underlying demand in that market is very strong. So from that point... any issues going forward. It's more on the supply side. And there we took action on getting two new suppliers for the syringes on board. So we expect this to be temporary. And that doesn't mean that we go back on the fact that we expect the run rate to keep on growing. It grew slightly in the third quarter.

16:02 We expect to continue to grow in the fourth quarter, despite the fact that we see an impact on the syringe supplies for that sector. Sorry, if I may. When you say that the run rate proves slightly in Q3 versus Q2, is that including Boston or organically? No, that's organically. Organically.

16:26 That standard 88 million that we said during the presentation, right? And on the On your question specifically on the operations, the third shift is in place. So we are prepared because, as Karin said, the demand is strong. The demand is very strong in that market. And on the onboarding of those two new suppliers, so we received already the syringes, and now we are in the validation process. So this means that in the SKUs that we prepare on the pre-filled syringes, we need to do validation studies, and this takes approximately six months. So we'll have these new suppliers ready to go into the production during the first semester of next year.

17:16 Okay. Thanks. And then on the sort of margin that you could expect given the new hires and sort of lower run rate sales, which would suggest that sort of break-even point is a bit I mean, not very given point, but that operationally or profitability-wise, it could be somewhat lower, also for 23. Yeah, so on the longer term, I think there's enough volume to create leverage and increase profitability levels for Wichita, for that site. It, of course, will have a slight impact, but again, we reiterate our guidance and we will see for the overall improvement in profitability. On the longer term, we believe that a third shift is needed to cover the volume, and we'll create some leverage.

18:08 Thank you. Thank you, Stijn. Thank you. We'll now move on to our next question from Matthijs of Capella. Your line is open. Please go ahead. Yeah, good morning. Thank you for taking my questions. Yeah, maybe three left. Maybe first on Latin America there. Clearly organic growth is slowing further. Could you maybe elaborate on the price-volume mix and also on the measures you have taken? You mentioned streamlining operations.

18:53 Could you maybe elaborate on what that just implies and how you are going to revive the organic growth there? That's my first question. I will ask them one by one. Maybe to start with the price-volume mix. So we see that we are slightly increasing our volumes, but we do have negative pricing impacts in that market.

19:14 Yeah, and good morning, Mathias. On the streamlining projects that we are launching in Latin, especially in Brazil, so when you look at the back office side, we have already centralized all the back office admin activities. in Sao Paulo and now we are centralizing all our warehouse activities. So each brand has its own warehouse and now we're bringing them together into a centralized warehouse that will, of course, improve our logistics and our service capabilities to the market. Next to this, on the front side, we are now starting an exercise of optimizing our brand. So we took three of our six brands in the Brands and Essentials Division and we're going to bring it into one.

19:59 And by this, we're going to have more innovation power because I'm going to your last question on how are we going to grow again organically. There, you need to have two things. First of all, availability of products and, of course, good starting practice. We are quite solid there. We're a market leader. We maintain market leadership position. So we are good there. And then on the second side, innovation. So it's the market that innovation and branded products really help, and we are fueling our innovation pipeline. And of course, with this branch optimization, this one will improve. Okay. Would you say you're losing market share at this point in time in Brazil?

20:39 Not at all. Not at all. We are maintaining market share. It's a market where data is very clear. And at this moment, we are maintaining our current market share. Okay, so it's more market related issue than a company specific.

20:55 Yeah, it's often of consumer. You see it on the four years and it's not new for us. But I've seen also in the past on the four years of election, you have World Cup, consumer demand decreases a bit and then you feel it back. Nevertheless, with the actions that we already have taken and as well, we forgot to mention on the new general packaging site that we have in Annapolis, it's giving us muscle power in order to maintain and improve our market leadership. Okay. Then the second question is actually on Wichita and the syringes. Could you maybe just elaborate on the process it takes to add additional suppliers? Because this is an issue that was effectively flagged at H1 results already. I now hear from Karin that you have onboarded additional suppliers.

21:45 I was just wondering, is there a reason why you can't move faster because clearly it's impacting your Q3 but will also impact your Q4 sales? So if you would maybe elaborate a little bit on that onboarding process and why it's effectively taking quite a while before you have additional suppliers.

22:03 Sure, Matthias. And we have seen during Q3 that the situation did get worse, right, on the supply of these cell syringes. So we have onboarded two new suppliers and how it works. You get the syringe, you make the media fields, and then you go into validation process. And when all the tests are satisfactory, then this new supplier is being validated, and now you can go into production. And this takes approximately six months. Okay, yeah. And then the last question is effectively on this third shift, because I'm... I'm a bit puzzled. Can you maybe elaborate on what the margin headwind is from that third shift? Because previously, when you added from one to two shifts, the impact was quite substantial.

22:49 I still see that you died for H2 margin ahead of H1. So I'm a bit puzzled, given that your organic growth performance is clearly below your own expectations, effectively, if I look at your guidance. So could you maybe give us a little bit more color on what kind of margin headwinds you would expect maybe on North American and group level from this third shift? And what is going to be the drivers that your H2 margin will be above H1, please? What gives you this confidence? Yeah, so maybe on the third shift, so... That's not easy to quantify. Of course, we monitor the number of people with the volumes that go into the facility. So it's a balancing act on how many people you add to your third shift and what the impact on profitability is.

23:38 So we do expect some growth in the fourth quarter and we balance the number of people in the facility based on the expected production batches and volumes we have. So it will have some impact. However, we are positive that the market continues to develop in the right direction, so demand is growing. Overall, I think for the entire group, if you look at the profitability margin, I think we start increasing prices towards our customers in EMEA. We started that a couple of quarters ago. We continue in doing that, having positive benefits from that point of view. Also, the operational excellence we achieved by the facility in Poland, which has positive benefits.

24:25 We expect Brazil in H2 to be better than H1. Traditionally so. H4 is always good. So we are positive. We don't see that the third shift will have a huge impact on the profitability margins for the group in total. Okay. And just as a background, if you say we can balance a little bit shift in function of the volumes that we can do. Those people that you then not employ, I would say, how certain are you that you can, yeah, I would say rehire those people quite quickly at the day that your supply chain issues are resolved and you have to cater for all the spent of the month?

25:09 Right. Here, Matis, you can make a comparison with the supply of the syringes, the new suppliers that we are seeing on the validation, right? So you get the new colleagues on board and you need to go through training and also to validate in your room, right? You have to control environmental monitoring. So this is a process that takes time. It's not like you put a new colleague up and running, right? So you get the training. But also, again, because we're working in a sterile environment, you need to do the control, again, a set environmental monitoring. And this takes some time, right? So we want to be prepared when we have the volumes in, because, again, as Karin said, The demand, the underlying demand is there. It's strong. I've seen as well with Boston that our current commercial teams are onboarding several new customers to the Boston facility with the sterile-to-sterile IV bags capabilities that we have there, right? So when the volumes come, we'll be prepared to deliver those volumes to the market from our Wichita facility.

26:12 Okay. Thank you. Those were my questions.

26:15 Thank you, Matthias. Thank you. Ladies and gentlemen, if you find that your question has been answered, you may remove yourself from the queue by pressing star 2. Thank you. We'll now move on to our next question from Christos of Kempen. Your line is open. Please go ahead. Hello. Good morning, everyone. I have two questions. First one is if you can give a qualitative statement on how cash generation 1 into 3 and how working capital did evolve. And the second question is, let's take question by question, sorry. Yeah, so on that, Christophe, as you know, it's a trading update, so we don't specifically quantify anything on working capital or our cash flow.

27:08 I think the fundamentals of the business are and remain the same. We saw during S1 a small increase in working capital above 12%. We don't expect that to decrease in the second semester. And secondly, on cash generation, of course, those fundamentals are also not changed. So it will be, I think, on cash generation a very solid year. Okay, that's what I wanted to hear. Then the second question is with regard to FDA audits. It seems that FDA is catching up with auditing 503 facilities in the US in general. Do you have an idea how the audits are at competitors? Because I can see that Cuba has been audited recently and many other direct competitors.

28:02 I don't want to hear some names, but do you have an idea how the conclusions of these audits were.

28:10 Yeah, so, good morning, Stof. It varies on each company, on each site even, right? And we see that some are, most of them get the observations, then it's being translated into the 403, some are being resolved, some continue, and you get this evolution with the agency. Some of them have recalls even in this industry because you're talking about sterile products, so you have recalls. And what you see is that maintaining the highest quality standards, it's a competitive advantage in the industry, right? So we as Fargron are ensuring that one. And then that the market will consolidate because of regulation and quality. That's very clear for us. Okay, thank you. Thank you, Christophe.

28:55 Thank you. We'll now take our next question from Jeroen of KBC Securities. Your line is open, please go ahead. Yeah, thank you for the question. I'll start with one, going back to the North America region. First, following up on the FDA's audits, can you provide some more color as to the EZNEO let's say, issues, where they tend to land, what your expectation is, but regarding to not having that warning letter, how serious are the noted, let's say, issues?

29:44 Yeah. Good morning, Jeroen. Regarding ANASEO, as I said, we recently had the audit. We had the five observational... points and we are responding them. And after responding, we think we're quite confident that we'll be very successful there. We will get the close-up letter from the FDA. So this is how the process normally goes. It's a 503 facility and we have always had satisfactory results there. And we're quite confident that together with the team, we will close the letter as well. Fair enough. And maybe following up and maybe a bizarre question here. Since, you know, Fagrom is the only global compounder with, let's say, more supply lines, I imagine, than other competitors.

30:32 Of course, most of these in the North American region are in private hands. But does that ultimately provide opportunity for Fagrom on the longer term? are you able now with the new, let's say, supply lines for the syringes, do you expect that longer term you'll be able to take a bigger market share in the U.S. due to your, let's say, additional supply lines? Yeah, so... Sorry.

31:03 Coutinho, sorry, I thought you were finished. No, no, as compared to your competitors specifically where they might not have that access.

31:13 Yes, so as we said in the last calls, we are in the process of globalizing our procurement and supply team. So this gives benefits, right? As you said, the network is... it's bigger, right? And you can take some benefits there. Again, going to the highest quality standards, that's a very important point for that industry. And of course, with supplies, you can help one company to each other, right? But again, the crucial factor is maintaining highest quality standards in the industry. Okay, maybe one last final question. With regards to EMEA, everything seems to be on track there, but specifically with Belgium, you have a mandatory indexation, obviously.

32:03 What can we expect there with regards to the Netherlands? While it's not mandatory, should we also calculate a massive salary increase there going into the future? Yeah, so that's a good question. In Belgium, it's indeed compulsory to increase. It's one of the only countries where we are active in Europe where that's the case. So in the Netherlands it's not the case and in a lot of countries it's not the case. So we have to see next year. I think a lot of companies have the same. Of course you need to balance our OPEX and our increases in turn elements in energy and wages with balancing price increases. So overall we will try to have operational efficiencies to monitor that and strict OPEX control. But it's not the case that it's obliged in all countries we're in to increase wages. It's more an exception like in Belgium that it's inflation related and it's obliged to do that.

33:11 Okay, no further questions. Thank you. Thank you. Thank you. We'll move on to our next question from Eric of ABN AMRO. Your line is open. Please go ahead. Good morning, everyone. I've got a few left. I think Fagron has made welcome steps to become more transparent, evidenced by your cautious wording on the Latin markets, as well as the mentioning of the Anaseo FDA observations. But that being said, on the guidance front, I'm a bit surprised why you did not already lower the Wichita guidance at Q2, as the syringe shortages are such an important part of Wichita's growth story. So basically what, and that's my first question, what in your view has changed so drastically during Q3 for you to lower the Wichita guide now and not yet do it at Q2. Thanks.

34:00 Yeah. Yeah, sure. Thanks a lot Wilber and thank you for the comments that you made. On that respect, during the call, we said that we would be able to get to the 125 run rate when the syringe supply would stabilize, right? So how does it work? The producers that we have validated, the two of them, they have committed supply to their customers. We are one of them, right? And what you have normally seen during this month is that this supply supply to the customers in this respect to us has not been most of the times respected in the on time in full, right? So sometimes maybe on time, but not in full. So not the full batch as they had to split into several customers.

34:46 So we were quite confident on the fact that, of course, as the demand is there, as the orders are there, as the customers want to order with us, right, that we could deliver those when the syringes, those supplies, would come to our facility. But the fact is that in Q3, the situation worsened. We hear many times that, okay, we will deliver the full batch to you, but that's not the case. So we want to be here, as you said, right, transparent, saying, okay, when the syringes come, we might have a better result. Nevertheless, with the experience that we had in Q3, we are now comfortable with the guidance that we gave today. And we're going to see how this evolves. Again, you didn't ask, but I want to add the Boston facility offers us nice opportunities.

35:36 And the sales team now are also offering the product range that we can produce at Boston. Okay, thank you. The next question is on brands in North America. I think light black sales were down by about 10%. To what degree is this driven by the pandemic? Or is this related by the FDA warnings from your Minnesota facility? Could you break down that 10% a little bit from what has been driving that? Yeah, I think it's a quarterly thing. So a big part of that is related to the FDA as Minneapolis also delivers brands next to other suppliers. So we expect some recovery in the fourth quarter of that. Okay, thank you. And then... Two more remaining small questions.

36:23 One is on Brazil. You just mentioned Q4 usually strong. Maybe it's on my end, but could you remind me why is Q4 usually strong for Brazil, margin-wise, again?

36:35 Yeah, here you have seasonality, right? So you enter into the summer months, and the compounding market in Brazil, it's mainly focused on the health and wellness, and these kind of products have traction during this period, Eric. Okay, that's very helpful. Thank you. And then lastly, M&A pipeline. You've kicked off this year actually rather actively. So I was wondering how are you looking at this? I think the last quarter was, let's say, more muted. How do you look at the next couple of quarters if we should look at your M&A pipeline? Thanks.

37:09 Yes, sure. So as we said, we reiterate, we have now a dedicated team. We're working, as we know, with the funnel, right? We have many candidates in the funnel. They may move or not, and we're assessing different opportunities in all the markets that we're activating. Okay. Thank you. Thank you, Eric. Thank you, we will now take our last question from Martin Werbeck of BDEA. Your line is open, please go ahead.

37:41 Good morning, it's Martin Werbeck of BDEA. Firstly, does your Boston facility have a syringes supplier as well?

37:54 yeah this one good morning martin we boston facility is more uh dedicated to sterile to sterile iv box production that's how the facility is set up okay so you have so they don't have a syringe supplier no okay um you uh stated you not not going to make your goal for fs which star and you more or less uh

38:21 blame it on the syringes, which is a large part of your business. However, you also have your IV bags and your durals and cassettes. Do they live up to the expectation which was incorporated in the 125?

38:37 Yes, that's a very good question because they do, right? You see quarter on quarter that we're increasing. So we're picking up with the revenues. And this is mainly this year originated by the IV bags and then with the two new pharmaceutical forms, the epidural and cat cassette. That's correct.

38:55 So they are on track? They are on track, for sure. Okay, thank you very much. Thank you. We have no further questions in the queue. As a final reminder, if you would like to ask a question, press star 1 on your keypad now. Thank you. I don't see any questions in queue. I will now hand you back over to your host, Karen, to conclude today's conference. Thank you.

39:31 Thank you, Laura, and thank you for all the questions and everyone dialing in and listening in. I wish you all a great day and looking forward to see you again in February to discuss our full year reports. Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.