Good day, ladies and gentlemen, and welcome to the Getinge Q4 report for 2017. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mattias Perjos. Please go ahead, sir.
Thank you very much, and warm welcome to all of you. Thanks for joining the earnings call today. As usual, the presentation that we'll go through today is accessible via a link in the quarterly report, and it's also available on our webpage under the investors section, under presentations. For the first time on these calls, I have with me as well our new CFO, Lars Sandström, who will support me during the call, and of course, a very warm welcome to him as well. On page number two, you have the agenda for today, which is the same format that you're probably used to by now. We start off with an overview of our business performance in the Q4.
We can skip straight away to slide number four and the key takeaways for the quarter. If you look at the, excluding non-recurring items, our gross profit performance was in line with the year-earlier period, while EBITDA 1 is obviously below. EBITDA was negatively affected mainly by stranded group by cost of about SEK 250 million, following the distribution of Arjo. That is something that we have mentioned also on earlier calls.
We are tackling this now by gradually reducing our OpEx in relation to sales, and this is both by making sure that we grow into this suit, and it's also addressed through eliminating some of these costs gradually during 2018. I think it's very positive that you can see that our increased focus on customers and our offering is starting to show positive effect on the top line. So, organic order intake is up 6.6% in the quarter, and net sales by 2.5%, organically.
It's also good to see that we have positive momentum in both our business areas, both Acute Care Therapies and Surgical Workflows, and good momentum in all our regions as well from an order intake perspective. When it comes to sales, our net sales increased organically in both business areas and also in Americas and in Asia Pacific in the Q4. In EMEA, we had a little bit of a slower quarter, and this was burdened mainly because of lower sales in Surgical Workflows compared to last year, and this is linked to the weaker order intake in the previous quarter, the H1 of 2017. It's mainly related to Surgical Workplaces and Life Science, the sales performance.
Also want to highlight that the board of directors propose a dividend of 150 SEK per share, and we've looked at Arjo's report also this morning, and if we take their dividend into account, we end up in money terms with a larger combined dividend from what used to be Getinge Group, and the dividend per share is unchanged if you look at the two companies combined. With that, we can move over to the organic top-line development in the Q4. As I mentioned, this rose with 6.6% in the quarter.
Both our business areas, Acute Care and Surgical Workflows, show good, good growth, and also our new business areas, which you will see in a moment, see from now from 2018. Life Science had a very good momentum in the last quarter. If you look at the order intake, though, for Acute Care Therapies, it increased organically by 3.8% year-on-year. I'd like to mention Critical Care, which stood out with a particularly high order intake, especially ventilators in EMEA, we had really good, good momentum.
From a Surgical Workflows perspective, our order intake rose organically by 9.9% during the quarter, and this was mainly attributable to a really good trend in Infection Control and also in Life Science. All of our three sales regions reported organic growth in the Q4. So, EMEA had the biggest increase, both acute care and Surgical Workflows performed very nicely in EMEA. In Americas, the growth was mainly driven by a good trend in Infection Control inside Surgical Workflows and of critical care in inside Acute Care Therapies. If you look east towards Asia Pacific, growth was primarily driven by really good performance in Surgical Workflows.
And again, it's Infection Control that had a really strong quarter, and also Life Science, where we had good momentum and one particular good order when it came to the sterilizer business as well. If we move then to the next slide, I'd like to touch a little bit on some of the key activities in the Q4. When it comes to our consent decree with FDA and remediation progress, we continue to make good strides and good steps forward on our different sites during the Q4. If you look at it from a financial perspective, in 2017, SEK 296 million of the provision have been utilized for remediation measures.
84 of this was in the Q4, and we left 2017 with an unutilized provision of SEK 556 million at the end of the Q4. I'd also like to mention a little bit about some of the news when it comes to our products, services, and solutions. We've announced earlier the strategic partnership with Verb Surgical Inc. This is really a key strategic building block for us for the longer term. It's an important element really in our updated strategy. We also launched an upgraded version of our heater unit that's called HU 35 on the CE market, which is the European Economic Area, essentially, and this is within Cardiopulmonary.
So this was one upgrade launched in the Q4. I also want to mention that we released a new version of our Getinge Online digital service, and this is a key building block in driving service revenue for the company. This ensures highest performance and really strong operational reliability for our products at the customer's sites, and it also enhances the mobility when servicing our equipment. We also launched an upgraded version of the cart washer disinfector, Getinge 9100E in the Q4, and this is, among other things, it's a product now that now uses less water and less energy and therefore provides additional benefits to our customers.
We also had a big milestone. We've now installed over 1,000 hybrid operating rooms, and this milestone was achieved in November. It's really a good evidence of our strong position in this part of the business. We can move from the key activities. I'd like to mention maybe before we move as well that the updated strategy and the financial targets that we communicated as well, it is a strategy that now revolves even stronger around the operating room in the hospital, and the connecting rooms, like the Central Sterile Supply Department and the Intensive Care Unit as well.
We've made a really detailed exercise when it comes to mapping our product offering and across different geographies as well, to really assess the attractiveness of the segment as such, our own competitive position in this, and really make sure that we have a solid future strategy. So a lot of work went into this during the whole year, I would say, and the communication of this, both internally and externally, has started in the Q4. And of course, we cannot forget to mention the distribution of Arjo as well, which we completed ahead of scheduled time.
I really feel that we have two standalone companies now that are clearly focused on their own strategies, and the atmosphere inside the Getinge is really positive here. Very good energy in the company now for 2018 and onwards, so it's another key activity during the Q4. With that, we can move to. I'll say a few words before I hand over to Lars Sandström, the underlying performance of the group financially. If you look at the earnings perspective, it goes in two directions. One is that we have strengthened the gross margin, but we have a lower EBITDA.
When it comes to the gross margin as such and the good performance there, it's mainly attributable to volume and product mix inside Acute Care Therapies, where we see a 7.4% organic increase of sales in the US, which is one of our better margin areas. If you look at the decline in underlying EBITDA one, this is mainly attributable to the higher OpEx, and it's driven partly by quality management that we talked about for the whole of 2017. We have continued to invest both in the remediation work, but also to make sure that we have an organization that is long-term sustainable from a quality management systems perspective.
And the standard cost that we have in the group now to around SEK 250 million is something that we're addressing partly through growing into the slightly oversized suit and partly by addressing some of the costs that will not be necessary for us to carry in the long term. That's an overview of the gross margin EBITDA performance, and with that, we can move over to page number eight and look a little bit more in detail on Acute Care Therapies. The order intake for Acute Care Therapies increased organically by 3.8% year-on-year.
Looking at the different sub-segments inside Acute Care Therapies, the performance of critical care was particularly robust, and again, especially the ventilators. We set a new record in 2017 in ventilator volumes. EMEA performed strongly due to high sales in critical care, and in Americas as well, we had a slightly positive trend as well, so. Asia Pacific was a little bit more difficult from ACT perspective, and mainly hampered by weak performance in Japan. And in Japan, I have mentioned on a couple of these quarter calls that we're still suffering from the turmoil on the people side because of the rollout of One Getinge.
So we had a lot of people turnover that we're trying to correct, and we are optimistic about the future, but it's been a difficult year altogether, a difficult quarter for Japan. A few words on net sales as well from ACT. It increased organically by 4.8% in the Q4, and mainly driven by the healthy performance in critical care. All of our regions had growth in organic net sales as well in the Q4. When it comes to the gross margin, a good underlying gross margin development, thanks to positive product and regional mix within critical care.
It's been partly offset by by weaker performance in Vascular Systems, mainly because of the increased competition in the US, I would say. From a EBITDA level, you can see as well that we have a decreasing result, which is illustrated in the graph. It's mainly driven by increased quality costs linked to both the remediation programs as such, but also the longer-term building of the quality organization. And there's also an increase in selling expense to drive some of the future growth. With that, we can move to Surgical Workflows on the following slide. We start with order intake.
The order intake for Surgical Workflows rose organically by 9.9% during the quarter, and this is mainly the result of good trend in Infection Control and also our future business area, Life Science, where we had a growth of 21.2%, so we're really robust in the quarter. And within Life Science, it was mainly a result of we had a number of good orders when it comes to isolation and sterile transfer and also sterilizations from pharma companies, mainly in EMEA. From a net sales perspective, there was a very small organic growth of 0.4%, mainly due to positive trend in Infection Control.
Life Science, though, it's a much more lumpy business. It was partly offset by lower sales in Life Science, where in Q4 the previous year, we had one significant deal that we did not have in 2017. In Asia Pacific, we had the strongest performance of the regions, solid growth in Infection Control and also in Life Science compared with the year before. If you look at the gross margin in Surgical Workflows, it was 1% lower compared to last year, and this is mainly due to regional mix.
We had a slightly higher sales in Americas, where we have a weaker market position in Surgical Workflows compared to Europe, so the margins here are a little bit thinner as well. So that's explains the slight drop in gross margin for Surgical Workflows. From an EBITDA perspective, there's obviously the impact from the gross profit itself. That's the main thing we, a nd then we can move, I think, to the following page and look at Life Science, which is now from first of January a new business area in Getinge. And I mentioned before also when we had the strategy update, that we're excited about the prospect in our Life Science business.
It's if you look at the addressable market for us, it's we have a strong position on what is a SEK 23 billion global market, growing 3%-5% per year. Life Science shares the same base technology as Infection Control, but there's also additional product in the portfolio for Life Science that we don't sell to other customers. What makes Life Science different, though, different from the rest of the group, is that it's a different customer group. These are pharmaceutical companies, not hospitals, and it's a much higher degree of specialization and customization needed to serve this market.
In general, it's larger deals, as well, when it comes to the capital side. We have a good business model in place. I also think that now with the organization change that we made during 2017, we have a well-functioning organization. It was one of the parts of Getinge that was hurt the most by the initial One Getinge rollout. This is an area of business that really requires a seamless way of working from the initial inquiry to the end installation and the service of the customers. And with the functions organization that was rolled out in 2016, we were not able to achieve this for our customers. We're at that point now.
It's a much better way of working and a very good relationship with our good and improving relationship with our customers again. It's, as I said, it's about supporting biopharma companies with specialized systems for contamination prevention, really, both in the research phase, but also in production. So we're basically helping them reduce risk and also shorten time to market for new products. So the Life Science will be reported as a business area in the Q1 report that is due for release on April 26th. But before this, it's important as well to let you know that we will disclose restated financials for Life Science and Surgical Workflows because Surgical Workflows is obviously impacted also by this change.
That's something that we will, we'll come back to. With that, I leave over to Lars Sandström, and to take you a little bit more through the details of our results from the Q4.
Thank you, Mattias. All right, starting with net sales then. As already mentioned, we reported a 2.5% growth in organic net sales for the quarter, but, 2.8% headwind from FX took us to, zero, - 0.8% decline in the reported net sales. And here, US dollar is the main driver behind this negative FX impact. For the full year, we had some support from FX, taking us from, + 1.3% in organic net sales to 1.5% in the reported net sales. Looking at gross margin, here, it was impacted by write-down of capitalized R&D and inventory amounting to SEK 197 million, which led to a decrease over, or impact then, of - 2.4 percentage point. When adjusted for these items, gross margin was in line with last year.
For the full year, the gross margin was somewhat higher versus last year, if you reflect this write-offs. Despite declining net sales, gross margin improved slightly than due to FX, product mix and efficiency enhancement. OpEx, the increase in OpEx is attributable to periodization impact from group common costs increase, as well as increased quality costs and currency. The EBITDA margin decreased due to the increase in reported OpEx, just mentioned, and when adjusting for the periodization impact and one-offs, the EBITDA margin is close to 100 million or 1.3% lower than last year, where the key driver is the quality-related costs. Then over to page 14 and FX impacts. Our currency transaction exposure relates to when the group's factories are selling to the group's foreign subsidiaries, and for which we hedge.
This contributed with some 68 million for the Q4 and with 219 million year to date. The translation exposure relates to when the group company results are translated into SEK, and this is not hedged. And as you can see in gross profit, that the transaction impact was SEK 68 million, and the translation effect was SEK 120 million, resulting in a total effect of SEK -52 million for the Q4. It's also worth mentioning that currency transaction effects are expected to have a positive impact of approximately SEK -100 million on Getinge's EBIT for the full year 2018. Then let's move to page 16 and net debt.
Net debt amounted to SEK 12.8 billion at, at the end of the period, and the change in net debt in 2017 amounted up to SEK 10.8 billion. This is mainly related to the rights issue and, your dividend, as well as cash flow and some currency revaluation effects. Our gearing net debt equity ratio decreased from 1.12 to 0.65 during the year, and our leverage then, net debt to EBITDA before restructuring, decreased from 3.9 down to 3.1 for the period. Let's go to page 24 and, cash flow. Here, cash flow from operations decreased by SEK 703 million to SEK 1.08 billion for the quarter, mainly due to weaker or lower earnings this year.
Working capital impacted with SEK -257 million for the quarter, and this was mainly attributable to high receivables, partly offset by lower inventories and positive impacts from accounts payable in the quarter. In Q4, we had net investment of SEK 467 million, which resulted then in a cash flow after net investments of SEK 613 million, compared to SEK 1,337 million last year. Then let's move to slide 20, and over to you, Mattias.
Okay, very good. Thanks, Lars. Before we go to the summary, just a very brief comment on the outlook for 2018. We said already earlier that we're moving towards the window of growing into 2%-4%. 2018 is expected to be a ramp-up year. I'm really happy with the order intake development in the Q4 of 2017. So we enter 2018 with a good tailwind for this. And it's also really good to see now the energy of the organization firmly focused outward towards our market and the customers again.
It's good to have completed the distribution of Arjo, and really be back to more daily business with focus on our customers. So we still expect to have slight positive growth in the year 2018, and we expect a good momentum to continue. We have really good relationships with our customers, I have to say, having visited and met many of them during 2017. We also have a very, very good passionate and professional organization supporting these customers, and good atmosphere and energy in the company now, having completed the distribution of Arjo, and really focusing, being more focused company with its own strategy.
So it's full focus on execution and continued organic growth for 2018. As Lars mentioned as well, in terms of currency, we do expect a negative impact of about SEK 100 million on EBIT. And then we can move over to page 22 and the summary for this call. To repeat the takeaways from the quarter, our EBITDA, we're obviously not happy with, but it is impacted by a number of one-offs to start with, that impact also gross margin. And we are stuck with a bit of stranded cost that we need to methodically work down from here, and we have good plans in place for this as well.
If you look at the gross margin from an underlying perspective, though, it's a pretty good development, and we believe that we have activities in place, also for continuing to perform strongly when it comes to gross margin. As mentioned, I think the best part of the Q4 is the growth in organic order intake. Really good evidence that the renewed focus back on the market and our customers is starting to show positive effect. And also good deliveries during the Q4, so making our organic sales grow by 2.5%, so that's also positive.
We're also entering 2018 with a good order book now, which really supports the momentum in a good way. And the board of directors propose a dividend of 1.5 SEK per share. And again, if we look at Arjo's proposed dividend, the dividend per share for what used to be Getinge Group is unchanged compared to the year before, so. Finally, I'd just like to underline again that it, we've had a year of extensive change for Getinge, but we are following our plan, really.
As I've said from the start, that our main priority in 2017 was to restart and get a new grip on the remediation program, to work our way out of the consent decree with FDA. We had to reinforce the sales organization that was hurt partly by the initial rollout of the One Getinge initiative, and it's really crucial to be able to get back to a position of organic growth. We've had a strategy review inside the group as well, which has led to an adjustment of the organization, which we did in the Q4 as well, so we're now much better structured to actually deliver on the updated strategy.
We've gone through our portfolio and mapped this really with future customer needs, and also the competitive position in different areas, and really taken actions accordingly. Some of it's visible now in the non-recurring items in the Q4, but the real positive effect is obviously for the future, where we will have a portfolio that is in better shape to serve our customers in a good way. We did the rights issue during 2017 as well, so we've strengthened the balance sheet, giving us a little bit more room to maneuver and act on both long- and short-term opportunities.
I think Verb is one of those kind of opportunities, and there's also potential bolt-on M&A that we have the, the, the possibility to act on when, when those kind of opportunities, occur. And last but not least, we've completed the distribution and listing of, of Arjo, as well. So it's, it's very much been about creating the right preconditions for, for 2018, now. I've said both internally and externally that 2018 now need to be much more about, daily work, really the, the day-to-day, interaction with our, our customers, focusing on developing our portfolio, to, to really remain competitive in the segment that we've decided to, to compete in.
We will have continued strong focus on the remediation program, and in parallel, making sure that we have a long-term, sustainable quality organization and a quality system in place, as well. And also, really continuous improvement when it comes to operations and supply chain. I've mentioned a couple of times before that we are working actively with every line in the profit and loss statement, so to really make sure that we continually improve our gross margin and that we become efficient also from an OpEx standpoint. And there's still plenty of opportunity in this part of the business.
So with that, I have closed the presentation part of this conference, and I'd like to open up for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one to ask a question, and we will take an opening question from Hans Mähler of Nordea. Please go ahead, your line is open.
Yes, this is Hans Mähler with Nordea. Two questions, if I may. Firstly, to understand this issue about prioritization fully, you, you booked four quarters of cost that you previously had invoiced to, to Arjo . So you didn't adjust for that extra cost in the quarter. So if you want to adjust for this in Q4, which would add back three quarters of these costs to get the like-for-like number, is that correct?
This is related to 2016, yes, we agree on that. Yes, but we didn't do that Q1 2017, so it was Q2, Q3, and Q4. And exactly how it will impact, I might have to come back to you on that, but rather evenly spread out between Q2, Q3, and Q4, but nothing as it looks in Q1.
Okay, so going forward, this cost will be significantly lower than you had in Q4, correct?
No, I think you should see it on it. If you look at Q4 2017, the runway is there on the cost. That is your good starting point if you take out the significant items that we have reported on.
Okay.
The invoice in IO is related to 2016, not 2017.
Okay, I understand. And then, also, could you give some more color on the R&D write-downs in respect to the area? What kind of projects are we talking about?
We don't disclose details on what type of products there are for competitive reasons, but it is a result of the strategic review that we did. So we've gone through the portfolio in both business areas, and there's been a number of products that we've decided to stop because they were not going to be viable business cases. It's more related to Acute Care than Surgical Workflows, those.
Okay, thank you much.
We will take our next question from Annette Lykke of Handelsbanken. Please go ahead, your line is open.
Thank you so much. I have two question and one request. I maybe start with the request. Could you please, when you are now restating your numbers again, with the Infection Control, provide a restated numbers for 2017, both quarterly and full year? I think I followed you now for two and a half year, and you have, I think, more than five times, changed your way of reporting. So this time it would be really nice to have restated numbers ahead of the Q1 numbers for Infection Control and how it impacts it to other divisions. So that's a request from here to increase visibility and transparency. Then, my another question is on the full year guidance.
When you say a slight positive growth, should I interpret that to be close to the 2%, which is within your mid-term targets? And then I would also like to know how much a needle can be moved with your new products that you are highlighting in your pre-presentations. Are they of a significant magnitude? And in this respect, how many products do you still have after the Arjo spin out, and are you still willing to slim the tail, and how would that work? Thank you so much.
All right. Thanks, thanks, Annette. Lars, you want to start with the restatement?
Yes. Thank you for your proposal there. Of course, yes, we will restate so you get both full year and quarters. And I think it will be helpful for you because they are a little bit different animals, Life Science and Surgical Workflows. So I think it will even help you going forward, despite a lot of work you have to do to redo the recalculations.
Good. No, so that's coming. And when it comes to the growth guidance, we're not changing anything we said before Christmas here. We confirm that 2018 is a ramp-up year. I think the performance order intake-wise in the Q4 maybe gives us a little bit more confidence that we'll reach it, but we're not materially changing anything in our guidance. We expect to be pacing in the window of 2%-4% towards the end of 2018. That's what we've said, and we don't do any other kind of guidance on this. And when it comes to new products, we're continuing to invest in this.
I know I've mentioned earlier that it's two things to really keep in mind when it comes to R&D and product development. Because I get a lot of questions whether it will be a significant step-up in this, and I've said no. And the reason is because I believe first, we need to make sure that we spend the money that we already spend on R&D and product development in an effective way. So it's, that kind of thinking, the result of that, that you see in some of the one-offs in the Q4.
So we need to be a little bit better when it comes to both selecting the areas that we invest in, make sure that we have a proper risk analysis and business case upfront, and also have a slightly more stringent milestone process than the company's had before. So we continuously evaluate projects as they go along, because these are typically projects that run for many years. And it becomes rather costly if you don't stop early enough, when either the market has changed or you've made the wrong assessment earlier when the investment was done. So that's important to say.
We still have a good pipeline of development that we will continue to launch during 2018 and the coming years. But we don't provide any more detailed guidance on how much is from products launched in different years and so on. So I, I'm not prepared to give you a split on this.
Okay. But can you at least maybe indicate if these products you highlight on page six are of significant matter?
Well, what we highlight on the.
Are they vital to your 2% guidance?
Yeah, I mean, vital. I mean, they're for sure an important piece in the puzzle for, for the guidance, yes.
Okay. Thank you so much.
Thank you.
We'll take, we'll take our next question from Kristofer Liljeberg of Carnegie. Please go ahead, your line is open.
Thank you very much. Two questions from me. First, on the very good order intake. Could you maybe explain a little bit what that would have been without those what appear to be big Life Science orders? I guess that's more lumpy business.
No. Yeah, I don't, I can't give you a split off the top of my head. As I say, it is a lumpy business, but it's worth pointing out that we had good growth in all parts of the business. It's not just a fluctuation in life sciences. That's important to be clear on.
But if you take the life science business up 20%, is that a business that's, you know, one quarter up 20%, the other one down 20%? Is that normal for this type of business, or?
Well, it's all the way. If it's that magnitude, I don't want to comment on, but it is a business that is much more fluctuating than the other parts of our business, and that's also why one of the reasons that we've made it its own business area.
Okay.
I think as last year as well, as Mattias mentioned, yes, we have a good impact on the Life Science, but also Infection Control is really the big contributor for the whole, surgical workflow order intake this quarter.
Yeah, and it's also important with the previous question here, where it's Life Science that is a business area. It's not. We're not making adjustments for Infection Control as such. Infection Control remains inside Surgical Workflows. Life Science shares base technology with Infection Control, but Infection Control remains the business inside Surgical Workflows as well, just to clarify.
Okay. Then my second question is on slide seven in the presentation here. The historical adjustments you're doing to Q4 2016, you're adding, like, SEK 200 million. Those SEK 200 million in cost, that must include some type of one-off costs for Q4, because I guess the overhead cost you have is, like, SEK 50 million, 50, 60 million per quarter. So I'm not sure I follow you here.
No, I can fully understand it strictly here, because we are, it is not, this is a full year cost that was invoiced to IO, so it's a full year reduction cost that is impacting one quarter, going from the legal group of IO. And previously, we've been talking about segments with feedback, et cetera, but this is really different then. So therefore, we have this very big one-off that from, for last year that is impacting. You cannot fully, you cannot say it's the same as the common costs. That's why it was trying to call it.
Why adjusting Q4 2016?
Because it is.
If you have the same time, at the same.
Mm-hmm. Yes, sorry.
Yeah, because at the same time, you're saying that the Q4 2017 is the normal run rate now. So, maybe we should take this offline. I don't follow.
I'm happy to do this because we are really getting into how to account for discontinued operations, in.
Yeah
In the big book, of course.
Okay. But if we take now the 2017 figures you have reported, does that fully reflect now the new structure of the company? Previously, you said Q4 was a good run rate, but also, I guess the 2017 figures, that doesn't include IO at the operating level, right?
No, exactly. So what you see, the full year, 2017, is the cost. That is, what you should use also as a going forward rate, let's say. There is no IO in that.
Okay. And what do you expect for operating costs now in 2018? Sounds that you are not lowering it, but is that more of a gradual decrease you're looking forward to do?
Yes, it is. We don't guide on OpEx, as you know, but we are, as I mentioned in my part of the presentation, there are two things. One is that we have the possibility to partly grow into the suits in some areas. But we have also taken some restructuring costs because of changes that we know that we need to do to bring down the operating costs. There are some costs in it that we would not need for the long term. So, that's the other dimension of working with the office. You will see some results of this going forward as well, but we don't give any detailed guidance on it.
Okay, thank you.
Thank you.
We will take our next question from Scott Bardo of Berenberg. Please go ahead. Your line is open.
Yeah, thank you for taking my questions. So first question, please. In the adjusted EBITDA of SEK 1,377, where you've added back these one-off items and periodization effects, can you please tell us whether you're making any adjustment for the 197 in capitalized R&D write-downs? So does that number include or exclude the write-down that you see in gross margin, please?
Yes. In the adjusted EBIT for 2017, it's including the SEK 197 and the SEK 69 connected to the Brazil additional costs. The other invoicing to IO is impacting 2016, so that is not impacting the costs in 2017. That's impact the deviation to the, do you see my point? 69 + 197.
So, okay, so you're adjusting for the SEK 69 and SEK 197, but not the prior year Arjo-related costs?
No, that is, that we are adjusting the numbers of 2016.
Okay. So with respect to the base margin as we see it now, throughout the course of 2018, and in order to meet your earnings guidance, we expect some margin improvement. So are we to expect some margin improvement over the course of 2018?
We, we only guide on top line costs. We, we don't do any, any detailed guidance on, on earnings, as such.
Just to understand, again, on the operating cost side, and it's a bit confusing also the way it's been laid out. But with respect to the quality costs and the stranded costs, can you talk a little bit more as to whether the Q4 was particularly high here? And can you give a little bit more details as to whether any of that gets worked down and some magnitude of which, please?
Mm-hmm. Yeah, well, I mean, quality cost is one of the main contributors of the increase in OpEx. And as I said, it is both supporting remediation work, to make sure that we work our way out of the consent decree with the FDA. But it's also making sure that we have a sustainable setup as a whole when it comes to the QRC quality and regulatory control organization in Getinge for the longer term. So there will be some additional buildup, actually, in 2018 of quality-related costs, both because of remediation but also because of the long term.
At the end of 2018, we expect to be in a position where we can start to work more with productivity also from this perspective and gradually bring it down. Because as you may remember from some of these earlier quarterly discussions, when you work through a remediation program, you tend to end up with a slightly oversized system for managing quality, to really be on the safe side. And well, once you're through remediation, so then you can start working this down. So we are still in a phase during 2018, where you will see some additions when it comes to quality cost.
When it comes to the stranded costs, though, as I said earlier, we will partly grow into this and partly work it down.
Have you quantified how much stranded costs are?
Yeah, SEK 250 million .
Yeah. We have said around SEK 250 million. What you should also remember when talking about the cost is that we did also in the Q4 here, some provisioning regarding restructuring, that we expect them to give impacts in 2018 and forward, and from this restructuring activities that we have already sort of decided.
Okay, two more very quick financial questions for me, please. Can you give us some guidance on restructuring costs, please, for the course of 2018? Historically, this is a line you usually guide on, so that would be appreciated. And also, can you give us some indications of taxation rate going forwards now? You mentioned some positive effects from the US tax reform. Can you give us a sense of what your underlying effective tax rate is going forwards now, please?
I can answer the first part here, then. I just want to reiterate what we said last year when it comes to restructuring. I think one change that you see in our way of reporting as well, that some of the costs that have been previously reported as restructuring, they're actually more normal course of business. For example, write-downs when it comes to the capitalized R&D projects, for example. So they will not be reported as restructuring in 2018.
What we said earlier, as well, is that in a business of our size, it's probably reasonable to expect up to SEK 200 million in restructuring costs because of continuous improvement work, with the relocating facilities and those kind of activities. When it comes to taxation, I leave that to Lars.
Yeah, we have the impact, of course, now in the Q4, as you see, which is then mainly related to revaluation and connected to the US tax reform. Going forward, we don't see a big impact on the taxable income. So the US impact in our tax going forward, so we are back to historical levels with a slight improvement, is that that is what we expect.
Very, very quick clarification, please. Sorry. Given that you had SEK 759 million in restructuring costs in fiscal 2017, the fact you now guide for more SEK 200 million suggests you, you meet your over 10% earnings target this year, just through restructuring falling away alone without any underlying progress in the business. Do you, do you follow that logic?
Yeah, I follow that logic, but we also said, and it's important to keep in mind, that we've said that we still see opportunity in working with all the lines in the P&L. We still have a lot of work to do when it comes to direct and indirect purchasing, logistics, and so on. And of course, our OpEx structure when it comes to working with pricing, with commercial excellence and so on. So, we still expect underlying improvement as well, not just meeting targets because of less restructuring.
Okay. Thank you very much, guys.
We will take our next question from David Adlington of JP Morgan. Please go ahead. Your line is open.
Morning, guys. Most of my questions have been answered, but just, just a couple, please. So, firstly, on foreign exchange, I just wondered what the transactional impact would have been without hedging. Just trying to get some feel for how we should think about the impact of FX rates as we stand once the hedges start to roll off into 2019. And then on the order growth, obviously, significantly ahead of sales growth, I just wondered, those orders that you've taken, obviously, bigger orders, what sort of time frame should we be thinking about those completing over? Should we expect to see an impact of those orders in the H1 of this year, or is it a longer timeframe than that? Thanks.
Did I start with hedge? We don't guide on hedging because it depends on what we decide during the year here, et cetera. But so what we have said is that we expect an impact of SEK 100 million, that is what we normally give guidance on. But we are fairly well hedged, I can say.
When it comes to the conversion of orders to sales, it's also, I can't provide many more granular, even if I wanted to, here, actually. But some of them are bigger orders. Most of it's for delivery in 2018, but it's smeared out over the year. Some part of the contract will even be 2019, possibly, but the bulk is 2018. But in terms of quarterly timing, I can't give you any more guidance.
Okay, thanks.
And it's important to keep in mind that it's not only large capital orders. There are some fairly quick book and turn business in here as well.
Thanks. Actually, maybe just one follow-up. You saw a downturn in consumables orders in the quarter. Maybe you could just put, give us some color around that.
Yes. Yes, it's mostly. I think the only thing that stands out there is vascular systems in the US, because of the continued increased competition. Other than that, it's nothing extraordinary.
No, we had one also a little bit, bit stronger in APAC last year. That impacts the comparison.
Yeah.
But that's really more technical.
Thanks, guys.
We will take our next question from Peter Östling of Pareto. Please go ahead. Your line is open.
Yes, thank you. Just a short one. You have been continuously giving us update on the savings from the Big 5 program. I couldn't find anything about that in this report. Could you give us a number, what the savings was in the Q4, please?
No, we can't, I can't give you a detailed number on this for the Q4. And as like we hinted earlier as well, that we're not going to report details on this. It is now as part of the updated strategy, and the, we started the implementation of this. It is weaved into the daily work in a much more integrated way than before. So, things are progressing according to the initial plan. There's no change from this. We still see the same opportunities, but it's much more continuous improvement work now, because we believe this is the only way to make it stick for the long term.
Otherwise, it tends to be a campaign, and once you stop it, it starts growing again. So it's extremely important for us to take a bit more of a lean approach to this and make sure that it's weaved into continuous improvement work in the company.
So just to follow up on that. Previously, it's been around SEK 100 million in savings per quarter, and the original program was very back-end loaded. How should we see these savings pouring through? Is it still back-end loaded, or will it be considerably less than SEK 100 million savings the quarter going forward? Or how should we factor this program into our estimates?
I realize it's hard to factor this into your estimate, but I can only say what I said earlier, that we don't see any material change to the scope and content of the program, but it needs to be executed a bit differently, and it needs to be much more part of the part of daily work in the company. The only main change is really that Arjo is not part of the group anymore, so there is some loss of synergy in regards to this. But that's the only impact. When it comes to direct sourcing, to indirect sourcing, commercial excellence and everything, we still see the same potential benefits here.
It's just that it's. We're not going to give any forward-looking guidance on this.
But will it, s orry for dwelling into this, but will it still be that the most of these efforts will bear fruit in 2019?
I don't know if you can give. Sorry, saying.
This was, I think it was originally.
Can you repeat? I didn't hear it directly.
Yeah. Okay. So is it still so that most of the fruits from this Big Five program will materialize in 2019, as it was originally presented? Even though you won't give us continuous updates on numbers as such.
No, no, I can't give you any more detailed guidance on this timing-wise, Peter. There's a lot of work going on already, but also 2018 now with the new structure that we have, there is dedicated people still working with it. It just needs to be more integrated into the mainstream of what we're doing. So I really can't give you any more timing guidance on this. Sorry.
Okay. Okay. Thank you.
We will take our next question from Inês Silva of Bank of America. Please go ahead, your line is open.
Hi, good morning. Thank you for taking my questions. Sorry to go back to the same subject, but I just have a follow-up question on essentially all the questions that were asked around EBIT for next year, 'cause it, your message is just coming off as a bit confusing given the amount of non-recurring costs that you've talked about. So when we think about EBIT 2017 towards 2018, could you highlight the most important moving parts, both on the positive side and on the negative side, so that we can bridge? And I understand you don't want to give guidance, so if you could just speak in the direction to which you expect the costs to go.
Yes, hello, Lars here. On the positive side, I think we have given all indications on what we going to work on driving organic growth, continue to drive that. So I think you will see that is what we say. And then when it comes to improvements in cost, I think we are working heavily and hardly on the continue to drive the synergies. That's why we did the reorganization in keeping this, what we call group functions, and focusing on logistics, procurement, both indirect and direct, ISIT, et cetera, et cetera, to really continue to drive synergies. And that is, of course, it will prove work as a positive impact on margins and costs.
And then, of course, we are growing, and we have invested in, as Mattias mentioned there, and continue to invest in quality, and to some extent also in the selling side of the company. I think these are the main drivers if you look, try to look into 2018.
If you look at the 2017, if you ask about the 2017, it is the SEK 196 that Lars talked about earlier, plus the SEK 69 for Brazil, those are the main items.
Yeah, that is the adjustment to have the starting point of 2017.
So, what you just said there is that we shouldn't consider the SEK 69 million for next year, right? Which I understand.
I would certainly hope that that was a true one-off. It is related to the Brazilian investigation, where there's been good progress and good cooperation with the authorities, so that's why we made this reservation in 2017.
Yeah, that makes sense. What about the R&D write-downs?
Well, similar there, we, it's really a result of the updated strategy, where we went through in detail the portfolio across the different geographic segments, and we found a number of capitalized R&D projects that were not going to meet their targets, and they just weren't viable initiatives going forward, so we decided to write those down. We don't know anything more like that at the moment, but of course, there's always a risk in our type of business that you get something wrong when you decide on investment. So that risk is always going to be with us, but we don't see anything in addition right now in the pipeline.
Okay. Thank you. That's really clear. And then just a quick question. When are you expecting to give us the restated numbers for the Infection Control?
I can't give you an exact date, but well in advance before we present the Q1 numbers then.
I repeat, repeat again, it's for Life Science, it's not for Infection Control. The Infection Control will continue to be a business line inside Surgical Workflows.
Yeah, sorry, sorry. I'm sorry, that's, I meant Surgical Workflows, but thank you very much.
Thank you.
That will conclude the Q&A session for today. I would now like to turn the call back to Mr. Perjos for any additional or closing remarks.
Thank you very much. Again, thanks for attending today, and I just want to repeat that, we feel good about having finished all the extracurricular activities of 2017 now, not least the distribution and listing of Arjo. And generally very good spirit and energy in the organization, now clearly focused back on our customers, our own product portfolio, and the work we have ahead of us when it comes to quality remediation and creating a sustainable setup also for the longer term future. And of course, the continuous improvement initiatives as well, that is an integrated part of our strategy going forward.
With that, really, I'd like to just thank you for attending the call today, and wish everyone a good rest of the day. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.