Good afternoon, and thank you for joining our conference call on our Q1 financial results. I have with me today Gert-Hartwig Lescow, CFO, Thomas Fischler, Investor Relations, and Peter Mueller, Financial Communication. We would like to guide you through the presentation covering our results for the first two months, which we made available on our web page this morning. Following the presentation, we will open the floor to your questions. We already published the preliminary figures two weeks ago. In the final figures we published this morning, there are no meaningful deviations to the pre-release. Nevertheless, in view of the substantially changed conditions for the global economy, that's of course also for Dräger, due to the geopolitical risks from the Ukraine crisis, but also from China, two fundamental topics are particularly important for me for this conference call.
Firstly, to once again highlight the comparatively high crisis resistance of our company. Secondly, to emphasize the significant future potential of the portfolio in medical and safety, which we continue to see in the medium to long term. Now, let's get started on page 3 with the business highlights of Q1. Behind us lie events for months that we would certainly all have wished for differently. The war in Ukraine is rightly the all-dominant topic, and has easily displaced Corona from the pole position. In addition to the tragic human suffering, the war is also leading to serious economic consequences for many companies, and potentially serious consequences for hospitals and their patients. Entire markets are collapsing. Supply chains are massively disrupted. Clear inflationary tendencies are affecting global business models. How is Dräger doing in this challenging situation? We are proving our resilience against crisis.
We have confirmed our guidance. Our business model is not much dependent on energy and raw materials supplied from Russia and Ukraine. Our business is geographically well-balanced, with sales in Russia amounting for only 2% of our total revenue. The greater part of our turnover in Russia is generated in the medical segment. At present, we cannot yet assess how strong the impact on turnover will be. However, the direct effects should remain manageable. The only effect that we currently see on a wide scale is the shortage in supply for electronic components that will have an effect for the remainder of this year. In Q1, which is traditionally weakest quarter of the year, we could already feel first, but very minor effects. More significant, this was the first quarter for Dräger that was hardly affected by Corona impacts.
The last deliveries for FFP masks from the large orders we received during the pandemic times had been delivered on time and finished. Pandemic-driven new business in both divisions, safety and medical, is no longer taking place. The normalization of business that we had expected and communicated some time has taken place. This makes the really good development of our order entry all the more gratifying. Our orders are clearly above the comparable levels we recorded before the pandemic. Our order intake is at 12% above the previous year, and almost 30% above the 2019 level. It is a broad-based growth across the businesses. Both divisions contributed similarly well to the increase. Additionally, we posted an increase across nearly the full range of our portfolio of product level within the divisions.
This demonstrates that Dräger is well positioned to also handle the new crisis. Due to our broad range of products, we can also benefit from the increase in demand across the board and return to growth even after the pandemic-related boom, from which we have, after all, benefited greatly in the last two years. The very good order intake is not yet fully reflected in higher sales. There is a clear and expected time lag here, which currently leads to an increase in the book-to-bill ratio. On the one hand, incoming orders accelerated during the quarter, so that we have received significantly higher orders in March than in January and February. Even though this development is not unusual within a quarter, this increase was much more pronounced at the end of the quarter than usual.
The more important factor, however, is the increasingly restricted availability of parts, which has been keeping the global economy in suspense for some time now, is now also having an impact on our supply situation at Dräger. Until now, we have been able to manage the negative effects of the tense situation on the procurement market in close cooperation with our suppliers. In the meantime, it is becoming increasingly difficult to procure the required electronic components in sufficient quantities. The availability of important components is very tight and procurement costs has risen significantly. In some cases, prices for these parts have increased tenfold when buying via broker, if parts can be procured at all. I had already started to take measures to compensate part of the higher cost by adjusting prices last year.
It is safe to assume that this situation will not improve quickly, but will continue to burden business development in the coming quarters. Inflation is taking place all around us, and this provides an opportunity for an unprecedented price increase. We are currently implementing these measures consistently in all markets and will thus be able to compensate for at least part of the pressure on margins. Whether the opportunity is greater than the threat or the other way around and to what extent is still unclear at the moment. The gap between higher procurement costs and the delayed realization of net sales from the high order backlog due to the poor availability of parts also makes us more cautious about the expected future business development in 2022.
Therefore, although we have confirmed our forecast for the year, we have already indicated that the lower end of the guidance has become more likely, both for the net sales realization and for earnings. It is still early in the current financial year, so we will not provide any further details on our annual forecast at this stage. Of course, if we see a normalization of the delivery situation, we will adjust or reverse the qualification on the forecast. Our optimistic perception for my profitable mid- and long-term goals are not affected by these hopefully time-limited impacts. Our confidence is partially driven by our strong innovation focus. During the quarter, we launched several new attractive products and have also upgraded several products to improve the performance for our clients. For example, in the safety division, we introduced the OPC UA connectivity of the REGARD 7000.
OPC UA, that is Open Platform Communications Unified Architecture, integrating all the functionality of the individual OPC classic specification into one extensible framework, a game changer to industry in process control and asset management. For our medical portfolio, we have launched a new generation of filters for anesthesia and ventilation equipment made in Germany. Breathing system filters must support and protect patients and staff just as reliably as the rest of Dräger's medical devices. Our new generation of filters, we are underlining this claim. 13 different breathing system filters and heat and moisture exchangers are produced on a highly automated line. The new filter generation is manufactured in a clean room at the main site in Lübeck. At the same time, each filter is fully tested for tightness, filtration efficiency, and resistance. The new filters are perfect addition to our wide range of hospital consumables and accessories.
To finalize my introduction, let me give you an update on the status of the FDA topic. The implementation of measures to remedy the deficiencies identified remain a particular focus of me and my colleagues in the board. It is still work in progress. Recently, we are on a good track. An indication of this is the approval of the IACS VG 4.2 we received a few months ago. The FDA has just now completed a re-inspection at our Andover site, close to Boston. Andover is our main site where we develop and produce our patient monitoring solutions. The inspection has been completed in April with a total of two findings, so-called 483s, after a total of 10 inspection days after conducting an in-depth analysis of our quality system.
None of the two findings represent a repeat observations to the prior citations by the FDA, and we were able to demonstrate that the previous findings of the Warning Letters have efficiently been addressed through actions implemented to date. As a next step, we will develop a formal response to FDA outlining how we will address the identified points in our effort to continuously improve our processes and quality system overall. The successful completion of this re-inspection is a major milestone on the way to being cleared from the Warning Letter. It confirms our expectation that the Warning Letter could be withdrawn in the course of 2022. The further process and the timing on the closing of the Warning Letter is at the sole discretion of the FDA.
The FDA has also announced a quality system inspection of our site here in Lübeck in Q3. We will keep you up to date on progress in our quarterly earnings calls. With that, I'd like to turn over to Gert-Hartwig Lescow for a review of the financials before I will come back with a summary and outlook later. Gert-Hartwig, please.
Thank you, Stefan. I'd also like to welcome everybody to our conference call for our 2022 first quarter results. Please, turn to page 7 for a view on the Dräger Group. As usual, I will be stating currency adjusted figures whenever referring to growth rates. Our order intake increased by around 10% in the first quarter of 2022. This is a strong development, particularly against the background of seasonal aspects. At around EUR 826 million, the intake was also significantly higher than in the first quarter of 2019, the year before the corona pandemic. While our AAA region saw the strongest push in the recent quarter, our European business grew as well. The demand in America was on the decline.
Nevertheless, both divisions contributed to positive order development on group level, and I will elaborate on this on the next slides. As expected, sales in the first quarter of 2022 did not reach the all-time high of the prior year period and declined by around 20%. The end of the pandemic boom is particularly noticeable in the medical division. Nevertheless, sales were still significantly higher than in the first quarter of 2019 i.e., well above the pre-pandemic level. At around EUR 650 million, it topped the corresponding pre-pandemic figure by almost EUR 50 million or 8%. Our gross profit decreased by around one-third to EUR 274 million in the first quarter of 2022 compared to the prior year.
This was due to the decline in net sales, as well as the lower gross profit margin, which dropped by around 10 percentage points to 42.2%, mainly as a result of the change of product mix and higher purchasing costs. The normalization of the business comes with lower net sales shares of ventilators and lower mask sales. Both categories provided well above average profit margins during the corona pandemic. Stefan Dräger had already elaborated on the reasons for the higher purchasing costs. Higher functional expenses also weighed on our earnings development. An increase in investments in R&D and the expansion of our sales organization, as well as higher freight costs, resulted in year-on-year increase of around 8%.
As a result of a decline in net sales volume and gross profit margin, as well as higher functional costs, our EBIT at EUR -35.1 million was significantly below the level of the first quarter of 2021. Exchange rate changes had a slight positive impact on earnings. This is mainly due to the closing of existing rupee hedges in light of the lower expected sales volume. If currencies remain on today's level, this would result in negligible full year impact on net sales and EBIT. Due to the decline in earnings, the Dräger Value Added, the DVA, amounted to around EUR 8 million at the end of the first quarter of 2022, compared to around EUR 426 million in the prior year period. Please recall that those are always 12 months rolling figures.
Let's now take a look at the development of the medical division on page 8. As already mentioned, both divisions contributed to the increase in order intake. With a growth rate of roughly 11%, the medical division was just slightly half. Demand increased in almost all product categories of this division. The strongest growth was seen in our business with anesthesia machines, workplace infrastructure, consumables and services, but also the thermoregulation business, as well as patient monitoring and data management, registered higher order volumes. On the other hand, orders for ventilators declined as expected after a very strong corona-related development in the past two years. Almost half of the orders in the medical division came from customers in EU. The increase of 4% in this region was mainly driven by the German market, where orders rose strongly by almost 17%.
Also outside of Europe, our business picked up with gains of roughly 57%. The AAA region grew even stronger than Germany. Only in the Americas did we see fewer orders than in the prior year period. Against the background of the corona-driven extraordinary high net sales in the first quarter of 2021, net sales in the medical division were roughly 26% below the prior year figure in the first quarter of 2022. All regions contributed to this development. The decline is primarily a base effect due to the high volumes from a year ago. Compared to Q1 2019, the year before corona, net sales are roughly 5% higher. As a result of the decline in net sales and the lower gross profit margin, which fell by around 12 percentage points due to the changed product mix and higher purchasing costs, gross profit decreased.
Functional expenses were around 7% above the prior year figure, mainly caused by higher expenses in R&D and logistics or EBIT. In the medical division amounted to around -EUR 30 million. It was therefore significantly below the prior year figure of around EUR 98 million. Consequently, our EBIT margin decreased from 19.9% to -7.8%. Our Dräger Value Added for the past twelve months amounted to EUR 5 million at the end of March, after a DVA of around EUR 303 million in the prior year period. Coming to our safety division, page nine. Safety incoming orders increased by roughly 10% after adjusting for currency effect in the first quarter. This development was mainly driven by the clear jump in orders for breathing and personal protection products like SCBAs, but also our service business saw higher demand.
On the other hand, our Engineered Solutions business, alcohol testing devices and light breathing protection, such as N95 or FFP breathing masks, were on a decline. Demand in the first quarter increased in all regions, especially in Europe, which contributed roughly EUR 200 million or 63% of the total order intake. With a share of around EUR 87 million and an increase of around 11%, Germany was the main growth driver in this region. While America gained only 2% more orders than the prior year quarter, the AAA region delivered a clear outperformance with a boost of roughly 17%. Net sales in our safety division decreased by around 8% after the strong development of the prior year quarter. At the same time, deliveries declined in all regions.
The prior year's quarter still reported significant deliveries for FFP masks, which only played a minor role in Q1, 2022. Meanwhile, all of the large public orders for FFP masks we received during 2020 have been delivered. Like in the medical division, the gross profit margin was burdened by the changed product mix and higher purchasing costs. Therefore, it was 5.8% below the prior year quarter. Together with the drop in net sales, it led to a significant gross profit decrease of around 18%. Financial expenses increased by around 9% in the first quarter. This was due to higher sales and trade costs. Our safety EBIT amounted to -EUR 5 million and was therefore significantly below the corresponding figure of the prior year period. Consequently, the EBIT margin dropped by 12.9 percentage points to -1.9%.
The Dräger Value Added for the past twelve months decreased by around EUR 50 million to around EUR 3 million as of March. Let's move on to some key ratios on page 10. In the prior year's quarter, cash flow was very strong due to the Corona-related high earnings. In line with the substantially lower earnings this year, cash flow from operating activities amounted to around -EUR 25 million in the first quarter of 2022. The lower EBIT could not be compensated for by a lower increase in inventories. While in the last year's quarter, free cash flow was supported by the sales of money market funds held for liquidity management purposes, this year's quarter did not have a similar effect.
Investments in Q1 had a cash effect of roughly EUR 30 million, resulting in a negative free cash flow of some EUR 55 million for the first quarter 2022. Cash and cash equivalents amounted to around EUR 385 million, an increase of around 8% compared to the prior year's figure. The current investments into money market funds, which we consider to be near liquidity-like, is roughly at EUR 130 million. In light of the good liquidity development in the last twelve months, net financial debt dropped significantly by around 76% to around EUR 36 million at the end of March this year. Capital employed amounted to around EUR 1.42 billion and was slightly below the corresponding prior year figure.
Net working capital decreased as well by around 13% to roughly EUR 555 million at the end of March. With 40.5%, our equity ratio has slightly improved compared to the level at the end of 2021. In addition to the increase in revenue reserves from retained earnings in 2021, an increase in revenue reserves from actual adjustments to pension provisions also contributed to the increase in equity in spite of the profitability loss. That's it from my side. Back to you, Stefan.
Thank you, Gert-Hartwig Lescow. Let's move on to our outlook. As you are all aware of, one of the effects of the coronavirus pandemic have subsided, and we return to a normalized business standard before the pandemic. As a result, in comparison to the record levels of 2021, Dräger still anticipates net sales on a currency adjusted basis of between -5% and -9% below the previous year in the current fiscal year. With that, Dräger continues to forecast an EBIT margin of between 1% and 4%. While our financial performance in the first quarter was certainly in line with our expectations, that supports our guidance. We now consider the lower end of the net sales development as well as the to be more likely due to the increasing difficulties in the supply of electronic components.
After the transition year of 2022, we will return to positive net sales growth and higher profitability again. With this, I would like to end the presentation and hand over to the operator to open the floor for your questions, please.
We take our first question from Oliver Reinberg with Kepler Cheuvreux. Your line is open. Please go ahead.
Yeah, thanks for taking my question. Clear for me. Firstly on the order situation, I mean the orders are truly encouraging, just growing despite the kind of base effects. Can you just talk to what is actually driving that? Is there any kind of top effect you can isolate? Can you share any kind of views how the CapEx environment may develop going forward? I mean, there are some kind of headwinds in North America. Hospitals are suffering from significant pressure on cost inflation, interest and other items. Obviously also in the European market, the governments have now other buckets of spending on defense, energy crisis, et cetera, et cetera. What has been driving this kind of strong order intake, and what are your thoughts on the CapEx environment going forward? Second question, just on the supply chain.
Can you just talk about how broad-based is this kind of challenge? The kind of components, is this isolated for specific products or is it really affecting the kind of whole product range? How much has it gotten worse in the first weeks of Q2 and any ability to navigate around that? Then the third and last question please. I mean, obviously the world is changing. The challenges have become significantly worse. China inflation, supply chain, and probably personnel cost inflation is going only to begin next year. I guess weapon number one is trying to push through price increases. Can you just talk about, are you also working on any kind of incremental new efficiencies that gives you the confidence that the situation will significantly turn around next year? Thank you.
Well, thank you, Oliver , for your question. What is driving the order intake? That's generally to say across the board, but it's more, let's say, we can see that our investment in innovation and also in capabilities in the sales organization do pay off. There's some, for instance, our new anesthesia device is still, let's say, relatively new. The Atlan, it's selling well. And in the safety division, successes from newer versions of our SCBAs. There is not one single, say, cause that pushes it. It's across the board, say, paying off for our effort in innovation and specific capabilities in the organization, of course.
Your second, what specific aspect you mentioned, if we can see benefit from the added attention to defense spending. We don't at this point in time see such effect. It is only a minor part of our business's defense business, and there is no significant effect on this at this moment. We do at all times have, let's say, committed that we have this part of the business, but it's relatively small. So at this point in time, there's no significant impact on the order intake. Second, your second point, supply chain issues.
Has it become, let's say, worse in, I think you said, the first weeks of this year? Or now, basically after the war, if I may interpret, your question. Actually, no. It was a continuous deterioration, starting by the mid of last year. The good part, we are not, let's say, overly dependent on specific raw materials or energy that has become very short, in these days, or specific materials, that are very hard, to get. It's a continuous deterioration, that I don't see will go away for the remainder of this year, and with some time delay propagate this to our supply chain, and we can now feel it.
There is so much that cannot be easily circumvented. If you know that, I'm sure if a certain semiconductor is not available, it cannot just be simply replaced by another one because we operate in highly regulated markets. It needs quite some redesign and reapproval effort to do so. Now, to mitigate this effect, we come to the last question. Of course, we are continuously working on efficiency measure. By the beginning of this year, we have beefed up our efforts to some extent to save more. The lion's share of the improvements or downside will come from the market and the volume.
Both is affected by, as you rightfully mentioned, price increase, where I said in my introduction and comment and speech, that we do have an unprecedented opportunity for a price increase of a not before seen magnitude by our customers. We expect in the environment that inflation is all around us, and that it's more than we would be say cutting into our expenses because our long and midterm futures it depends on our innovation.
We are convinced it does not make sense to completely stop this effort because it would be very inefficient and a waste of time and resources, and to go in a stop-and-go mode with the innovation effort. Yes, there is some efficiency gained in addition. However, the largest part of the improvement comes from implementing innovation and from price increases.
If I may add to the efficiencies. Yes, they are included also in the more precise outlook to balance some of the effects. I believe Mr. Reinberg, regarding your second question on supply chain, you also asked, have we specific products? Well, they're not individual products, but of course it's products that have a high electronic component content in there. That is particular on the safety side of the portfolio. While, as Mr. Dräger pointed out, the situation has deteriorated or has tightened over time, so it's a gradual process.
Our outlook has in particular in the beginning of the second quarter led to the conclusion that contrary to prior estimates we will not be able to fully compensate that. We already see that to a degree in the net sales realization in March in particular. That we could probably have had sold some more in the first quarter had delivery been more timely in the period. We expect the same over the course of the year and that's in particular realization of the last few weeks of March and the beginning of April.
That's helpful. Thanks so much. If we can squeeze in the last question. Any color where we should expect the gross margin to come in in the full year? Any kind of range?
Yeah, sure. We expect actually that has actually not changed significantly. We will see a slightly lower end of the gross margin, and that is, as we have said, between 44%-46%. Again, I think part of our lower profitability is due to mix effects from high value add products with high electronic components, that will lead to a mix effect that will lead to the lower end of 44%-46% gross profit margin. Implied is a better gross profit margin for the remainder of the year.
Thank you so much.
Yeah, that's in quarter.
Thank you. Once again, ladies and gentlemen, press star one to ask a question. It appears there are no further questions at this time. I'd like to turn the call over back to you, Mr. Dräger, for any additional closing remarks.
Yeah. I would actually say give the opportunity to ask one more question if there is anyone. Say it's your last opportunity because we have the sufficient timelines, so if you have a question, you can still ask it now.
We do have one question in the queue. Mr. Frank Siebrecht with Cyan Invest . Your line is open. Please go ahead.
Good afternoon, gentlemen. I had one question regarding your FDA Warning Letter and the impact you have imposed so far on your P&L due to this specific audit and also to improve the quality. Can you quantify how much additional cost you have to bear on an annual basis since you received this letter in early 2020? On other hand, can you elaborate on once you got fully cleared what this will mean for your business, especially in the U.S., going forward, and that we can a bit of get a sense on what is the impact on your P&L just from this warning letter. Thank you.
Unfortunately not as easy. I do understand the question. It's a good question. However, please bear in mind that the resources that we have used are, to a large degree, internal resources. So if I were to include that, perhaps the intent of the question is to what degree can actually we expect a lightening of the P&L right away after the Warning Letter. This is not likely that this is going to happen. What in fact has happened is we have used resources that would otherwise have worked on our roadmap. So the consequences, in fact, a delay in the roadmap and the ending of the Warning Letter will first and foremost lead to a reprioritization. There are some external costs that will go away, and then there are in the seven digits, certainly.
This underestimates the total cost or the total burden that it has on the organization.
Yeah. Thank you. With regards to the potential that you see thereafter in the U.S., what will it mean for your business once the letter is cleared?
There are several consequences. In fact, we have seen some licensing. Stefan Dräger, I believe, has pointed out that we have received the approval for the 4.2 ICS software version. With that, we can already work on the market. A key element not directly related to the Warning Letter is the approval process for our therapy devices. This will, we expect, end of this year or early 2023. This will broaden our offering for the U.S. market, effective for 2023, not being effective for 2022. Of course it will help us to accelerate the roadmap. I believe Stefan Dräger can add to that.
Yeah. Most clearly speaking, it is currently not yet approved for sale in the US by the FDA, and we are working on that. As I said earlier, that is selling very well in the CE countries, and so we have to work hard to catch up to that with our sales in the US as Gert-Hartwig said, probably not before the end of this year.
Thank you very much, gentlemen.
Thank you. We take our next question, follow-up question from Oliver Reinberg with Kepler Cheuvreux. Your line is open. Please go ahead.
Yes, thanks for taking my follow-up. I think you just answered the first one. Basically on IACS, that was the one where you expect approval early 2023. Is that correct? I think you so far work on the software. Once it is done, then you engage in filing. Is that the correct way of understanding? If so, when do you expect the software to be completed? Secondly, on pricing, can you provide any kind of color? I guess it's a kind of gradual process in terms of how the price increases are ramping through the organization. I mean, I don't expect any kind of quantified details, but can you just give us any kind of feeling of the price increases that you expect to be done by year-end?
How much of these have already been implemented in Q-one? Just to get a kind of feeling for how much of these kind of related benefits we still get going forward. I'll probably leave it there. Thank you.
Okay. First, on the [inaudible], that is correct. The delay is due to the revised cybersecurity guidelines of the FDA that has an effect on this part of the world that is not so easy and quick to implement. That is what we feel to be finished by the end of the year at the latest. Then it can also launch in the US, and we were very much looking forward to that. Pricing, Gert-Hartwig?
Yeah. As you've pointed out, the pricing approach is a gradual one and will show stronger results over the course of the year. Bear in mind that of the net sales that we have realized in the first quarter, a significant portion has actually been in the sales funnel since the third, certainly the fourth quarter of 2021. The impact is limited. Overall, without going into too much detail, the impact in the first quarter is relatively small compared to what we expect for the full year, and has been overcompensated by other factors leading to the decline in the gross profit margin. We expect that to change over the course of the year, at least on a quarterly basis.
The other one, is it the 510(k) or full PMA approval?
510(k).
510(k). Okay. The last question on the FDA warning letter. Can this be lifted, despite the new 483 or do we need another re-inspection before that?
Like, it is eventually, let's say, it's all at the discretion of the FDA. It is possible that the FDA might review our reply to the 483 since we satisfied with that and lift it. That is the very optimistic case. The pessimistic case is they keep it open until they inspect the Lübeck site, which has nothing to do with the Warning Letter and the other inspection. We did not have an inspection at Lübeck site for seven years, and they come typically every two to seven years. It is overdue anyway, and it was delayed also due to corona. It is kind of a running procedure, and it is being done, who knows?
The FDA may keep the Warning Letter open until everything is completed. If that and feeling better that they still have something open in their hand. It's up to them. We make sure that we have a good working relationship and do whatever is required and whatever it takes. It has got much management attention to do it right and to keep it closed.
Sorry, what was the plant which is overdue of inspection? Was it Lübeck or what did you say?
It didn't have an inspection for the last seven years, which is about the longest period I can remember since I'm in the business.
Sorry, in Lübeck you said or?
Yeah, in Lübeck.
Yeah. Okay. Sorry. Okay, perfect. Thank you. Once again, ladies and gentlemen, press star one to ask a question. It appears there are no further question at this time.
Okay. With this, I would like to thank you all for joining us this afternoon, for being with us, and look forward to sometime, hopefully soon, meet you again, hopefully in person. Have a pleasant afternoon, and evening, and the call is adjourned.