Hey, ladies and gentlemen, and welcome to the Getinge Group Fourth Quarter Report Conference Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Alex Myers. Please go ahead, sir.
So thank you very much, and warm welcome to all of you out there. Apologies for starting a couple minutes late. We had a few people dialing in, and we wanted to make sure they were on board. We'll attempt to close this conference at 4:00 P.M. sharp, and we've sent out also a press release that you have been able to access, and also a slide presentation, which we use as a format for this session. So the presentation is also available on our webpage, and together with me, as always, I have Ulf Grunander, our CFO, who will join me in bringing you the highlights for the fourth quarter.
So I want to start on slide 2, with the overall Getinge Group perspective, and I wanted to start with my personal overall message for the quarter, because I sincerely believe that we are on track on our plan, and we're moving in the right direction. The quarter, if you take away the one-off effects, actually reflects an improvement on our side. We delivered a revenue growth of 4.3%, and an EBITA, if we adjust for the one-offs that we'll describe later, of SEK 213.8 million , which is an overall performance improvement of 7.2% versus last year. Security operation, we had an improvement versus last year.
For me, this is a satisfactory achievement, considering we're under a consent decree, and we're also in the midst of reorganization, where we're reorganizing the Getinge Group from being three companies into one. A few comments on the order growth in the quarter. As you know, that quarter three was a very strong quarter for us, and quarter four was all about revenue growth. In quarter four, we grew orders by 1.2%, but more importantly, we grew net sales by 4.3% organically.
For the full year, the orders grew by 1.9%, and net sales grew by 1.8%, and this is in line with the outlook that we had for the year, and it was also more than double the rate of 2014, which was 0.6% growth. So on the growth side, we fulfilled our own outlooks and actually followed our own plan for the year. Regarding orders, Infection Control grew substantially with more than 14%, while Medical Systems and Extended Care experienced decline with 2.1% and 1.5%, respectively. A little bit on geography. From a geographical standpoint, we had strong growth in Western Europe, 3.7%.
We also had a slight growth in North America, 1.5%, and rest of the world experienced a slight decline in orders for the quarter, with China and India having a very strong double-digit growth, and a very strong quarter, while Brazil and Russia declined significantly. Capital equipment declined slightly, and recurring revenues had a strong single-digit growth. Regarding revenues, I mentioned the 4.3%, and we had strong growth from Infection Control that grew more than 16%. Medical Systems grew more than 3%, while Extended Care declined 3.6%. Gross margins, I would like to define a little bit in operational and maybe non-operational gross margin. Our gross profit margin decreased 200 basis points in the quarter, from 49.4% to 47.2%.
But of this decline, the negative currency effects were about 80 basis points, and the Consent Decree impact, around 40 basis points. So in other words, more than half of the decline is caused by non-directly operational issues. On the operational side, we experienced a strong margin improvement in Infection Control and a negative margin development in medical systems due to negative product and geographic mix. We'll talk a little about a bit about that a bit later, and also Extended Care, due to increased price pressure within our DVT portfolio, and especially focused in the US, and I'll also talk about that a little bit later in the presentation. Sales expenses followed the revenue growth in the quarter. Our admin expenses were flat, so overall, our expense ratio was improved slightly in the quarter versus last year, and that's also a good sign.
So then moving to the EBITA of the quarter. Including the one-offs, we decreased 3.7%, but actually we had two very significant one-off items that we took in the quarter. We sold a company called Medikomp, Metallkomponenten, on behalf, which is a non-core business of ours, making a SEK 60 million loss in 2015. And we also had a legal settlement within medical systems in the US, and Ulf will talk, describe those a bit later. So adjusted for these two items, we increased our EBITA to SEK 2.138 billion in the quarter, and this was an improvement of 7.2%. And this improvement also includes the negative impact of the consent decree of about SEK 40 million.
So in light of the one-off nature of the negative effects, we did have an improvement versus last year, and I believe, under the circumstances, this can be seen as satisfactory, even though we still have more to improve on, going forward. So in summary, the quarter for me has been encouraging and the first sign of operational improvement. We see continued growth, and even though our GP margins are under pressure, we've seen a chance to stabilize and the EBITA improve. In parallel, a comment on the new management structure. In September, we announced a one-company structure, and I wanted to say that right now we have one company structure regarding global management, regional management, and as of January the 1st, we also have one management team in every country around the world.
So that, of course, enables us now to start our transformation journey in the coming years. Moving over to the next slide on medical systems. Medical systems had a 2.1% decline in organic order intake, and this should be compared to a very strong quarter four last year. We had a growth of 4% last year, and also a very strong quarter three this year with 6% growth. So the comparisons were actually quite tough for the quarter. And this was also in line with our expectations. Order intake grew in Western Europe and North America, while rest of the world declined by 8%. And the focus a lot within medical systems, as well as on the group level, was to focus on revenues, and revenues grew by 3.1%. Some comments on GP margins.
They declined by 260 basis points in the quarter. This was primarily driven by a negative currency effect of about 90 basis points. We had a negative financial impact of the consent decree of about 80 basis points. So this also means that about 65% of the decline was attributed to non-operational issues, while the remaining 35% is mainly due to an unfavorable product mix. And Ulf will comment about that during his financial analysis. Sales expenses grew in line with revenue, and the admin expenses are primarily caused through increase in the legal costs for this legal settlement that we had in the U.S. The work within the consent decree framework continues in line with plan.
We have satisfactory progress in the U.S., but we also have gaps in Europe, and I'll talk a bit about them later in the presentation during our FDA Consent Decree update. As part of our portfolio overview, we took a strategic decision to divest Medikomp. Medikomp is a non-core and actually loss-making component manufacturing business for us, and this resulted in a one-off negative effect of SEK 110 million in quarter four, but actually will contribute to an improved profitability in 2016, and the payback for this will be less than two years. The EBITA, before restructuring, was affected then negatively by the two one-off items, that together accounted for SEK 218 million effects. If we adjust for these, also Medical Systems improved its EBITA by 4.7%.
Additionally, the Consent Decree impact for the quarter on the EBITA level is SEK 48 million , approximately. Overall, here, my comments on medical systems would be that we had a satisfactory quarter in terms of revenues. We had higher focus on cost containment, but we still have challenges on our GP margins, and that we have to work for and with and towards it also in 2016. I'm also very glad that the U.S. and Western Europe had very strong quarters in terms of their performance in the quarter. So over to Extended Care on slide 4. Here, I want to summarize the quarter as being disappointing. Our organic order intake declined about a percentage and a half.
The development on the negative side is very much primarily due to the U.S., also a little bit in the quarter in the U.K., while actually most other markets showed a positive development, especially emerging markets, had a very good growth throughout the year, I should say. Main drivers are still a weak development in Therapeutic Services rental business, combined with a weak quarter, specifically for [UET] and the consumable business in the U.S. While actually, patient handling business continues to have positive development on growth terms and also margin terms. Revenues for Extended Care declined by 3.6%, and as a result, the GP margins follows and declined by 380 basis points.
However, of which of these, [140] basis points are due to currency effects, and the rest is due to a combination of lower revenues and also an unfavorable product mix and geographic mix for the business area. Expense control has been very satisfactory. We've tried to adapt to the situation, and the EBITA decreased from SEK 403 million to SEK 330 million in the quarter. Regarding Extended Care, we do have business challenges. I want to say they're very much focused towards one market. The rest of the world is actually doing quite well, and many regions are doing quite well. Our challenges are very much in the U.S. And, what we're doing now is looking at the categories, because it's also focused on two categories, Therapeutic Services and DVT.
Patient handling and hygiene is doing very well at very good margins. So as a consequence, we've adjusted the organizational structure in the U.S. As of 1st of January , we also have the [audio distortion] place in the one-company structure, and we're working now with a task force to look at what can we do in the short term. We're also looking at innovation, where we're going to be launching new innovation within the bed business and the therapeutic surface business that is more adapted to the U.S. market. And we're also looking at accelerating sales synergies in the one company structure, where we're even looking at, and even though we haven't concluded, but we might be possibly combining some of the sales forces, where traditionally, Maquet, as a company, has had a much more stronger position in the U.S. market.
So overall, a disappointing quarter and also a disappointing year for Critical Care, and a signal that a lot needs to be done, and a lot will be done during 2016 within that area. So moving to what I call the star of the year in my conclusion, but Infection Control has been a business area which had a bit of a tough start this year, but has shown consistent progress and improvement throughout the year. We had a strong quarter with more than 14% growth and even more revenue growth, more than 16%, and almost all geographies and all product segments showed very healthy growth in the quarter. Infection Control also continues to have a healthy order pipeline, which is very encouraging going forward.
[audio distortion] margins showed improvement in the quarter, and they grew 180 basis points, and this also includes 10 basis points of negative currency effects. So I'm happy to see the supply chain restructuring is going in the right direction, and together with the volume effect, it's very positive we're utilizing our factories in a better way. The EBITA margin grew substantially from slightly above 16% to almost 20%, and that's a very strong performance. So we continue to strengthen Infection Control by expanding into the low temp segment within sterilization. We've entered segment in two strategic steps, and we have a global exclusivity partnership with a Canadian-based TSO3, but we've also acquired a small Turkish-based company called Stericool, and the combination will create growth for us in the low temp segment, both in emerging markets but also in the developed markets.
So once again, I would like to express my appreciation and also happiness around the start of the year in Infection Control, and I'm also optimistic towards seeing the trends continue into 2016. So now, hand over to Ulf.
Yeah, as Alex mentioned in the beginning of his presentation, we here in the group booked two non-recurring cost items in the last quarter of 2015 as other operating expenses. The first one has to do with the ongoing litigation case in the U.S., and as we and the other party met in Washington in mediation, and were also able to agree to a preliminary settlement of the remaining claims. Based on this preliminary settlement, as I said, we booked an amount of SEK 110 million as other expenses in the last quarter. The terms of the settlement will remain confidential until a definitive agreement is executed. The settlement is expected to be finalized by the end of the first quarter 2016.
The second non-recurring cost booked in the second quarter has to do with the divestment of Medikomp during that quarter, which is a manufacturing company specialized in metal processing. This divestment is a step in the group's strategy of streamlining its supply chain and focus on the core competence of our product activities. The purchase consideration amounted to about SEK 5 million , resulted in a capital loss of approximately SEK 100 million . The transaction was completed during the last quarter, and in 2015, Medikomp reported an operating loss of about SEK 60 million , entailing that the investment will lead to an earnings improvement in 2015. Then if we take a look on the restructuring.
In the last quarter, the Getinge Group booked a restructuring charge of SEK 172 million, which led to the total restructuring charge of SEK 657 million, which was very close to our estimate of SEK 630 million. The major part of the quarter's restructuring charge relates to activity within the transformation program to One Getinge, and that amounted to approximately SEK 80 million. In addition to that charge, we also took a restructuring charge for our shared service center activity, which amounted approximately to SEK 40 million. And finally, a charge for the integration of function amounting to approximately SEK 20 million.
Alex will later on give you the outlook, but I could only say now that we have estimated that the restructuring charge for the full year 2016 will be approximately SEK 800 million.
Okay, over to me then on the FDA and Consent Decree update. Overall, we're progressing according to the overall plan we set out, we set out in 2013 and 2014. And as required by the consent decree, we've had third party audits, and they've been carried out at Hudson, in Merrimack and in Wayne, which are located in the US. And also, during the latter part of the fourth quarter, we had audits in Hechingen and Rastatt, which are located in Germany. All reports have been issued to the FDA, and the last one mentioned was issued actually on the eleventh of January. So we fairly recently was, the report was issued to the FDA. Also, the FDA has conducted its first inspection within the CD, and they chose to visit Merrimack.
They were in Merrimack for 11 days, and we had an inspection with them. We're pleased to say that we had no observations during that 11-day visit, and this is a positive sign of progress in the U.S. On the negative side, we had our last and final audit from the third party Quintiles in the cardiopulmonary sites, which are located in Germany. There we have had a number of observations. We received the report a few days ago, as I mentioned, and it shows that we have more work to do. We have to look at the report and analyze what kind of remediation activities are necessary before we're satisfied ourselves with the results. We've been very transparent with the FDA.
We're in continuous dialogue with them throughout the process, and now we're analyzing, as I said, the observations and assessing the need for further remediation. We have a 30-day period now where we're looking at that. In the meantime, we've taken some actions also ourselves. We've changed the leadership on the site. We've also strengthened the local team, and in light of the good progress we've done in the U.S. and on the other side, we're also allocating resources to Hechingen and Rastatt, and bringing best practice that we use in the U.S. and in Merrimack specifically to improve also on our German side. So regarding the commercial consequences of the CD, we had in the quarter sales of Atrium that declined.
Partly they declined due to supply and partly due to demand. Overall, the negative effect for the quarter was estimated to SEK 40 million.
If we add those SEK 40 million, which was the charge in the last quarter, the total financial impact on operating profit for 2015 amounts to SEK 350 million. If we then take a look on those, 100 of those, 350 was booked as a restructuring cost, and those were relating to the payments to the U.S. government. And the other 250 relate mostly to loss of revenues and a smaller portion of higher costs. The financial consequence related to the consent decree are expected to decrease in 2016 versus 2015, and are estimated to amount to approximately SEK 130 million, excluding the cost for the remediation program.
If you take a look on the update of the remediation program provision, I think Alex gave an update regarding how we are progressing. If you take a look on, on the financial, that was that we utilized a part of our provision, actually SEK 79 million was utilized for the ongoing remediation activities. Those at the end of 2015, the provision for the remaining remediation activities are amounting to SEK 193 million. If we now take a look on the consolidated result, the group organically, the group's net sales increased by 4.3% in the quarter. And if we split that between currency, you could see that the currency impact was 7.6%, and the divestment impact was 1.6%.
As Alex also has said, that, the gross margin declined by 220 basis points in the quarter, mainly related to negative currency of 80 basis points and the impact relating to the CD of 40 basis points. Then in addition to that, we have an unfavorable product mix within medical systems, division surgical workplaces. I also would like to say that that is very well identified, that, the division surgical workplaces, it is related mostly to the capital equipment, and if you take a look on the geographic, it is mostly related to the Middle East. Another part, which also Alex have described, was the DVT product in, U.S., which also dropped in margin during the last quarter.
But I also would like to say, in some parts of the group, the gross margin improved in the quarter, especially in the business area, infection control, and also within the cardiovascular division. If you take a look on the expenses and adjust that for exchange rate effects, the administrative expenses were in line with the prior year, while selling expenses rose by 4.4%. The change was mainly due to higher investment in the sales organization, and although previously implemented acquisition at infection control, and also accounted for some cost increase. [audio distortion] result before restructuring, it was adversely affected by the non-recurring cost, which I have now explained, which was SEK 108 million regarding medical, and also SEK 110 million related to the ongoing litigation.
If we adjust for both these items, EBITDA amounted to SEK 2,138 million, which represents a 7.2% compared with last year's EBITDA result. EBITDA was also charged with the SEK 40 million attributable to the loss of revenue and the cost attributable to the Consent Decree with the FDA. If we then take a look on the FX effect, and I'm not going to go through all the details, but you could see that on profit before tax, in this quarter, the transaction impact was 73 , and the translation effect was 135 . Maybe I have to repeat that the group has two currency exposure.
The first is the currency transaction exposure, and it relates when the group's factories are selling to the group's foreign subsidiary, and that will be hedged for. The other is the translation exposure, when the group company results are translated into the Swedish krona, and that is not hedged. If you take a look on the full year effect, which profit before tax, if you take the transaction impact of minus 273, the translation of 205, net 68. If you take a look on 2016, which also will be mentioned in the outlook, we are expecting that our currency transaction effects will have a positive impact of approximately SEK 150 million next year, and that will impact the gross margin in our P&L.
If you take a look on the cash flow, the group's cash flow amounted to SEK 1.483 billion. The quarterly cash flow represented 68.8% of the EBITDA, and operating cash flow for the full year amounted to SEK 3.458 billion, corresponding to a cash conversion of 66.7%. We were well in line with our range target of 60%-70%. The strong cash flow in the quarter relates to the good collection of our accounts receivable, and that shows very well in our DSO, which was down by two days to 70 days compared to last year. However, we need to focus on our inventory, even though inventory came down in the quarter, but the DIO was still up two days to 137 days compared with last year.
We have already been focused on that, but in the new consolidated supply chain function, in the new setup, there is going to be a very strong focus to reduce the inventory, and the target has been set to three days, and that has a potential reduction of approximately SEK 200 million. Finally, the balance sheet, net debt amounted to SEK 22.8 billion, and the closing equity amounted to SEK 19.8 billion, which resulted in a net debt to equity ratio of 1.70x and an equity asset ratio of 36.8%. That means that we had, with the strong cash flow in the last quarter, if we adjust for currency fluctuation, the net debt decreased in the quarter by approximately SEK 450 million. I think I stop there, Alex.
Okay, just a few final comments on the outlook and then wrapping up. The outlook, we've expressed in the new geographic regional segmentation that we have. So overall, we see the group having a positive revenue outlook for the year. One of our regions, it will be EMEA as of 1st of January, and within EMEA, we see a positive outlook for Western Europe, which is a slightly positive growth. The Americas, which will be the second region, we see also similar outlook, slightly positive, with positive growth in North America. However, we do see challenges remaining in Latin America. The third region is Asia Pacific, and there we expect growth with a positive outlook for Southeast Asia and India.
While we're looking at China, even though we're happy with the fourth quarter development, we still see China as a country that's difficult to predict in the coming year. The total financial consequences for the consent decree are estimated to be lower than 2015, and it's estimated to amount to approximately SEK 130 million effects in 2016. The currency effect Ulf mentioned will amount to a positive SEK 150 million effect, and also the restructuring costs we're keeping the restructuring costs to SEK 800 million, which was also communicated in December. So finally, if I would sum up the quarter, I generally actually am very encouraged with the quarter.
When I look at it purely operationally, and I take out the two one-offs, we had a quarter of revenue growth, and we also had a quarter of relative performance improvement versus 2015. Another encouragement, that I'm seeing is also that the second half of 2015 was significantly better than the first half, when we relate it to the year before, and that is also encouraging for me. I'm still not satisfied with our margins, and I'm still not satisfied with the bottom line results, if we take the year as a whole. But I do remain confident that we have a plan to materially improve our performance in the coming years.
We presented that plan, which is a four-year journey, and I do believe that 2016 will be the first year to contribute in a positive way towards a successful transformation. So I genuinely believe we're on track. Finally, before going into Q&A, I'd like to give a special thank you to somebody that has meant a lot to me and a lot to the company. Ulf Grunander, who is leaving Getinge after 22 years of building a fantastic group, a fantastic global group, has decided to retire. This is a planned retirement. We talked about it several times, almost from the time I started. So it has been carefully planned and with all good intentions, and I'd like to thank Ulf for everything he's done.
I also am happy that Ulf's successor, Pernille Fabricius, is a very capable successor to Ulf. Ulf will take care of her in the early days now, with a good transition. Pernille will take over on the 22nd of February, officially, as CFO, but Ulf will be with us, up until the annual shareholders' meeting, so more or less until the end of March. Once again, Ulf, this is your last quarter, but, you will be following us, and I, and, I thank you for all the contributions you've given me and, and, to Getinge Group. With that, I'd like to, hand over to any questions.
Moderator, please, allow for the questions to come in, and we'll also extend the meeting a little bit to make sure we, we get all the questions on board. Over to you. Thank you very much.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, please press star one to ask a question. Our first question today comes from Hans Mähler, [Foreign language] .
Yes, Hans Mähler with Nordea Markets. I just want to come back to the guidance. You didn't give much details for 2016 when it comes to both the growth outlook and how you can relate it to the performance for 2015, if you believe it could exceed that growth rate? And also, coming back to profitability at the capital markets day, you talked about this EBITA target growing above 10%. Is that something we should pencil in also for 2016, or how should we look on that? Thank you.
Okay, I can take some, and maybe also Ulf can take some, because this year has been a combination of one-offs and also operational performance. We gave you the outlook at the Capital Markets Day, and we're not changing our view on that within the four-year perspective and kind of the average growth rate for that. I should say for 2016, we see the top line as being within that spectrum that we gave. Regarding the bottom line, our ambition for the period is to have an average of the 10% EBITA growth rate.
But I see kind of 2016 as the early phase of that, so there will be an improvement versus the year before, but not fully in that, in that percentage, the way I see it. I see that as the first year out of a three, four, or a four-year period, where I see the improvement accelerating over time. So there I can say improvement operationally versus the year before, but not fully in the, in the context of the, of the four-year plan, let's say, contributing. That's on the operational side. Then I think also, Ulf, would be good to comment a bit how we see it on the one-offs, because we clearly have had one-offs in 2015.
Yeah, absolutely. I think we -- when we talk about one-off, there is the currency impact, which I've already said, which will be improved at 150. You had the Medikomp, you had the [Salavan], and we also have said that the CD impact will be so to reduce next year, and we will then come up with a positive impact of SEK 85 million. I also would like you to remember that we took a gain in the beginning of the year on the Pulsion , which was SEK 76 million. But those have to be included in how you get back to the figures for 2016 EBITA.
Okay. So, just to clarify, when you're talking about the growth rate a little bit below this 10% target, the starting point would be to include all one-offs. Is that correct?
Yeah.
Yeah, that's, that's correct. And I think you should see... Again, I don't want to overpromise on the operational. We see improvement versus earlier in the year, and we will be within, let's say, the, the framework. But... Again, I remember this is the first year of the transformation. And, I, I think, you know, if you look at an average over the, over the period, it will be a, a lower contributor, let's say, of the four years. And also if, well, we've been in the con- in the capital markets thing, we also, we gave you some information on how to compare years. So we had a 2016, 2017 pair and an 2018, 2019 pair, and that might be helpful.
But again, I don't want to overstate 2016, but I said, I do see 2016 as contributing as a positive development and traditionally before.
Understood. And then if you're talking about this growth point, you know, I think I recall it being 54%. Which areas do you think then will improve versus 2016, given that that is a high growth number than what you reported for 2016?
As I said, I mean, geographically, we see the three geographies. So we see slight positives. I would translate that into lower single digit growth in the Americas and in EMEA. And then we see a higher growth rate in the West or the Asia Pacific region.
Okay. Very good. Thank you so much.
Thank you.
Thank you.
Next question comes from Johan Unnérus of Swedbank. Please go ahead.
Yes, good afternoon. It's Johan Unnérus from Swedbank. Thanks for taking my questions. Some have been answered, but I got others. I can start with the FDA inspection in Germany. It will be very helpful if you can provide us with some added feedback on what could be the implications and how long it will take until we get clarity on the status, the start and the delivery of the product. And second point, it's clearly a drag, a continuous drag with the rentals in U.S., possibly other bits in the Extended Care. Will that be something we will see for the full 2016, or would you manage to fade that effect off during 2016?
Thank you. Thank you for the questions. If I start with the FDA, I think what I want to say is we got the report on the 11th of January, and we have now 30 days to look through the report and make a judgment on what are the issues, how quickly can we get to the resolution of the issues. It's nothing that's solved from one day to the next, but I think it'll give us a good picture of how far we need to get to get to where we want to be to a satisfactory level. So we need a month more, I think, to make an assessment. And that, of course, we'll be discussing with the FDA. So it also depends on how, you know, how the discussions go, how they react.
On the positive side, we do have a, let's say, a good track record to help us in the U.S., hopefully, because we really want to apply the same methodology. So to answer your question, we need, we probably need a month or a little bit more, including the FDA discussion, to make an assessment on how far we are and how far we need to get. In the meantime, we have no new information on that. The other question was... I should also say with Hechingen in Germany, it's also the plant that when we did the original inspections, it was the one that was farthest in a way, that had the most difficult starting point. So in some respects, it's understandable, but still not satisfactory.
So they had the longest, let's say, improvement stretch from where they were to begin with, while the U.S. plants have come a little bit further. So that's just to put it in relation to the starting point. Extended Care, I would like to put it in kind of a first half of the year, second half of the year perspective, and also to remind you that in February last year, a conscious decision was made by Extended Care to leave part of the market, and that was about 10% of the market, where we call the walkaway. And we decreased a significant amount of depots. So that has been a comparable that we've been facing and we'll be facing it during the first quarter.
So I think the comparables will be better in a way in the second quarter, but I think the actual action plan will take the first half of the year and then go into the second half of the year, where I hope we get performance. And again, this is my personal aspect, and as I mentioned, I have a new management, and we have a task force looking at that. I should also want to say, I also want to say with Extended Care that in the quarter, the rental part of the business actually delivered on its top line target. So we see we're better at forecasting now, and we're closer to our own planning.
So, my expectation is first half may be better than the quarter, but more like today's situation, and then second half, we start seeing an improvement, and that's also my personal ambition. And then by then, also, we would have been able to do more on the one company structure, where we have our sales organization now looking at that.
Great. That's useful. Could we expect some clarity on the German situation by April? Is that a fair assumption? And secondly, to follow up on the U.S. business, should we assume that the top line facing is aligned with the bottom line facing of improving the situation, or if the earnings reflect a bit later?
First quarter should be a good time point for us to give more information, and then as soon as we have it, we'll share it with you. So I think April is fair on the FDA and Hechingen clarification. And your other comment is yes, I would expect both top and bottom to follow each other, but it is very much a top-line issue at the moment. And I also need, again, the task force to help me do a deep dive in what is happening and to come with some solutions.
Thank you.
Thank you.
Thank you. We will now move to Morgan Stanley, Michael Jüngling, please go ahead.
Thank you very much. I have three questions. Firstly, the medical device tax benefit, could you quantify that for 2016, and whether you will give that to shareholders, whether you intend to reinvest that amount? Secondly, when it comes to emerging market pricing, what is happening to your own prices as EM currencies fall? Are you able to raise prices very, very quickly to reflect the inflationary component, and therefore restore margins, or do margins keep on going down in the emerging markets? And then the third question I have is in relation to the guidance for 2016 on the EBITA growth rate. What EBITA number would you like us to use for 2015 to assess growth for 2016?
Because right now, it seems to be really a hodgepodge of so many different variables, it'd be nice to calibrate to a consistent meaning of what the EBITA reference point should be. Thank you.
Okay, thank you very much. I'll take, maybe you can help me on the last one. And also, I'm aware of the medical device tax. To begin with, the medical device tax, I think you mean the one in the U.S., correct?
That's right. That's right.
Yeah. Yeah. I don't have the latest information on where they are politically on that decision, so it's still in discussion and debate. So here we haven't factored in anything, up or down on that one, and when it happens, it will, we will do that. I believe around SEK 100 million was the number that affected us negatively when we got it. And since it hasn't happened, I would say we haven't decided what to do with it, but my instinct would be that that will improve our situation. So as in a way, we lost it when we lost it, we'll get it back now.
We haven't decided, again, you know, all the way to the shareholders or not, but I would say, it will affect us in a positive way by about SEK 100 million if it happens. Emerging market pricing and margins. I think it's important to know that for us, emerging markets, if we include BRIC in them, has actually been a fairly satisfactory story. We've had slight growth, and we do have a stable margin situation in emerging markets as a total. But then we have a BRIC situation, where we have Russia and Brazil drawing us, pulling us down.
I don't have a full analysis on the non-BRIC or BRIC, so I just see it as emerging markets, but there, of course, the Brazil and Russia are pulling us down quite substantially on the average margins for emerging markets. And what we're doing there is trying to adapt the pricing situation as much as we can. But the top-line decline is significant, so we can't fully compensate that. And we also have decided we want to stay in those markets for the long term, so we don't have any exit strategies from there. So unfortunately, I have no more information. I don't know, Ulf, if you have more information on markets, specifically for emerging markets beyond what I said?
No. No, I don't.
Okay. No. So then finally, the EBITA baseline. Again, I'd like Ulf to comment. As you say, it's a hodgepodge, but there are some one-offs that we can highlight, which we would take off the baseline.
I think I mentioned that a little bit when Hans asked about the guidance. But, if you take that, we have the CD impact of SEK 211. I'm talking on EBITDA level now, and then you have the color one case, as we call it, SEK 110, and the loss on when we sold assets of SEK 108, and then we have the profit on on sold asset function. If we add them back and deduct the profit, it should be around SEK 4.5 billion on an adjusted EBITDA level.
Okay, that's helpful. Now, when it comes to medical device [set up], I thought it had been decided that it is coming back to medical device companies. As a matter of fact, [audio distortion] tied it to the benefit already. So is that not the case?
Yeah, at least what we got as the latest information from our folks in United States, that this was still a political decision which has to be taken in the House of Parliament in December. But we could recheck that, [audio distortion] I have not got any new information during the last days, at least.
Okay. Great, thank you very much.
Thank you.
Thank you. We will now move to Chris Cooper of Jefferies. Please go ahead.
Hi there. Thanks for taking my question. I have three, please. Firstly, on the medical systems business and the 8% fall in the rest of the world orders. Now I appreciate there's been some disruption from Atrium there, but perhaps you could elaborate a bit more on the other sources of the disappointment there. Are you guiding teams to suggest this is more of a an anomaly in the fourth quarter than a trend that will continue into 2016? Is that a fair comment, first of all?...I'll start with you on the U.S. litigation, please. Can you confirm that a SEK 110 million charge is your expectation to the total liability? And I'll come back with a third question, if you don't mind.
Okay, I can take the first one, and maybe [audio distortion] . We had, regarding the rest of the world in medical systems, very much Latin America drawing us down, and to a certain extent, Russia. So those are the ones I mentioned. They had a particularly weak quarter. The rest of the world, the other emerging markets didn't pull their weight enough in the other direction. So I would still say, yes, it is an anomaly, but it's something we have to look into deeper and see whether this is a trend. But we do see the trend of Latin America not picking up in the short term and also Russia not doing well.
With them, your question regarding the provision we had made on the ongoing litigation, we had a mediation meeting with the other party at the 22nd of December in last year. And we, based on that preliminary settlement, which we have so far not in a firm document, we have based this provision. So it is the best estimate that we have for the time, and if nothing is changed during the time when we execute the agreement, it should be an adequate provision. And that is my belief at this point in time.
Got it. Thanks. So, so just to be clear, I mean, it, the SEK 110 million is the charge for the settlement itself. I was trying to get at whether there'd be sort of any other associated costs that maybe we could expect to kind of feed into, into the second quarter 2016, with that?
No, it is what we got. It is including, so to say, whatever we have to pay for their legal costs. But I don't like to disclose the separate parts of the agreement, the relevant agreement for the time being, as long as we have not reached and executed the final document, and that has been agreed with all the parties. So the SEK 110 million should cover all costs, so to say, for the time being, regarding the ongoing litigation.
Thank you. And then just another follow-up on the rest of the world. The challenges in LatAm and Russia, are there particular product groups that are experiencing a broader share of the decline, or is this kind of across the board?
It's very much capital equipment oriented, and that's a combination of, say, both Infection Control products and also surgical work-based products, but very much capital equipment.
Okay, thank you. And, and just lastly then, now, apologies, I'm going to push you slightly on the Hechingen inspection. I know it's very early days, but potentially, could you just give us a sort of quantitative sense of the nature of the observations, just so that we have an idea of what we're dealing with?
I would say there were just a number of observations. So it's not a single observation. It's multiple observations, and most of them have to do with processes and not product safety, so to speak. So, but again, we're looking at the report, and we have to do a deep dive analysis. What's not satisfactory from our side is the number of observations were earlier inspections, or the U.S. inspections, we've had significantly fewer number of observations.
Fine. Thank you very much.
Thank you. We will now take a question from David Adlington of JPMorgan. Please go ahead.
Thanks, guys. Just a couple of housekeeping, please. Firstly, on minority interests in the fourth quarter, I just wondered what that was related to and how we might let that line, might develop in 2016. And then secondly, we know obviously there's quite a lot of cash costs going through. Just wondered, and I'll ask if it's going to impact on your interest, what your interest expectations were for 2016 as well, please?
Well, if I take the first one, it has to do with our [audio distortion] acquisition, where we have a majority, sorry, a minority owner. And as that company did a very good result, that is caused an increase. And hopefully, maybe that could increase even more next year if [audio distortion] do a good result. So it has to do with the good performance on that company. And the second question was... Sorry, could you repeat that?
Yeah, just wondering what your interest expectations were for 2016?
Yeah, so we believe that we could reduce our our financial net next year, and we will have a lower average interest of approximately 1.7%-1.8% , where last year we were above 2.0%. So there is an improvement in our average interest rate, and also you will see a positive cash flow coming through next year, which also will have an impact on our financial net.
Okay. Thank you.
Thank you, Kristofer Liljeberg of Carnegie has our next question. Please go ahead.
Yeah, thank you. It's Kristofer from Carnegie. First, on Hechingen, have you included that potential big negative impact in the SEK 140 million report for the Consent Decree?
Yeah, as I said, that are excluding all remediation work and whatever comes out of Hechingen. That is only for to say the CDE impact when you talk about what revenue and so on. But it has, it's not including any sort of impact from whatever comes out of Hechingen.
Okay, so you don't expect lost revenue from Hechingen in your base case or?
At this point of time, it's too early to say, as we have to look into what sort of outcome it will be from this sort of review, and yeah, it's too early to say, Kristofer.
Okay. You had previously said that you expect to achieve 10% of the savings, SEK 2.5 billion-SEK 3 billion already in 2016. Is that still what you expect?
Yeah, we're on plan on that, so I would say that that is what we expect. Yeah, absolutely.
So that should give you some SEK 250 million positive impact. We have the FX hedge effect of SEK 150. What about translation effect based on current spot rates on that? Positive as it stands now or negative?
It's no major impact. I've done a very rough calculation, but so far, compared to the average rate we had last year, it's not a big change what we find is.
Okay. [audio distortion] the device tax effect, which I also think has been decided as some other analysts were, that would, you know, those three factors would add some 12% to the EBITDA. So does this mean that you expect the underlying business to be down, but you said you don't expect the EBITDA to grow 10% in 2016?
Yeah, your calculation is as good as anyone. But I think, Alex, you-
Yeah, I mean, to be honest, we haven't factored in the medical device tax.
No.
That, we will look at, of course. I think what I'd like to put in more, just being prudent, is to say we're going through a major transformation. I think also, we mentioned also in the capital markets day that we factored in the price erosion of 1%. There are also negative factors. What you're describing is accurate. It's more, you know, we shouldn't add everything one on top of the other and not calculate on any challenges in the market situation. The device tax is, we'll look into that and make sure we have the correct updated information in that case.
Yes, also, I'd like to add that we will also have an increased quality cost. I mean, we have hired tenants and quite a more people working with our quality system compared to, I mean, 2015, which we will have in 2016. So we have probably something around EUR 60 million-EUR 67 million increase in, in for that sort of organization, if you sort to add and deduct certain things, Kristofer.
Okay, fair point. Thank you.
Thank you. We will now move to Lars Hevreng of Danske Bank. Please go ahead, sir.
Thank you. Thank you. Could you just remind us, perhaps, on the Hechingen expectation, are there any other sites that are due for inspections in the near term or within this the target program?
No, at the moment, there's nothing signaled, but of course, what we expect, which is a logical expectation, is the FDA will continue to inspect us. So they will go to Hudson, would be the other site, which is where we produce Merrimack. So I think we should expect now the FDA to begin inspecting us, us themselves, now that the first round of third-party audits have been done. But we haven't gotten any information or indication from the FDA, and we're in very, very open dialogue with them regarding both Hechingen and, and also Merrimack. So no new information, but, but of course, they will, they will be inspecting us. We just don't know when and where.
Okay. The comment about the conclusion of the audit program as of mid 2016, was that then taking these inspections into account, or is that something that doesn't include?
Yeah, one is a remediation program. I think the other is a Consent Decree, and the way it works is, you know, we're working on improving our processes, and that's kind of the remediation program. We have, there's a series of observations and projects, and some are closed already, some will be closed in the first half of the year. I would judge now the Hechingen one, that we can make progress by the summer, but there's going to be some open issues also after the summer. So that's the remediation program. Then there's the Consent Decree, which is something that the FDA has full legal rights to inspect us whenever they want, and as often as they want.
Consent decrees, when we look at other companies, can take up to 3, 4, 5 years.... So the consent decree, I would say, is something that you're under, and then you get inspections, and then the remediation program in itself is, is something in a way separate, even though they're part of the same issue. I would expect most of the remediation work to be done during 2016. The objective was closer to the midyear rather than the end of the year. But I would, I would probably get now with the, with the Hechingen report, but that's gonna take as long as it gets where we need to, it to be.
Okay. Just a time-allowed question on if this can be divisional, any of the backing up the divisional split as it looks now. The margin development, I think, has been from the peak of around 20%, now we lost 10 percentage points or so. Can you just in retrospect say how much would you say that's referred to this to the TSS acquisition a few years back?
I wouldn't know an exact percentage, but I would say a majority of that would be the effect. I think if we look at the different product categories, again, when I look at the original Arjo patient handling hygiene part of the portfolio, that has improved. So that's still up in those kind of margin levels and also growing lowish in the digits. So the legacy Arjo is where we've missed the margin has been on the TSS, probably the majority, and a little bit also on the DVT side of the business, which came with the Huntleigh acquisition.
Where we have very good margins, but they're eroding because the category is getting more competitive.
Mm-hmm. Okay, thank you.
And I should also say, again, I want to comment on it. It is very much a U.S. The integration in Europe and the rest of the world went very well with the CSS business. Mm-hmm.
Thank you.
Okay. I think we maybe have time for one more question, and then we'll round off.
Certainly. We will now take a question from Scott Bardo of Berenberg. Please go ahead.
Yeah, thank you very much for taking the questions. So, first question is related to the group restructuring and the new organizational plan. Can you just talk a little bit about that? There's obviously been quite a lot of heavy lifting in January as you put your new organizational structure in place. How many headcount have now been reduced, please, going into the full year, and how seamless has that process been? Second question, please, just again, back to this FDA discussion and the observations in Germany. Can you please clarify whether you have any additional observations in Hudson and also in Wayne? These have been inspected a couple of quarters at these facilities, so should we not be getting some visibility about getting the green light at those facilities? A bit of commentary there, please.
And also whether you think, given the current, you've nearly run out of your FDA provision that you set early part of the year and the year before, would you say it's likely then you need to step up this provision somewhat to deal with the German issues? And last question, please, one to sort of probably to go back to this, because I think there's been quite a lot of numbers thrown around on this call, and I think there's probably more confusion now than there was going into this call. So I just want to just clarify a few things as to the one-off items.
If it's helpful, the second question is probably just to get answered, and I can come back on specifics, or I can actually answer these financial questions now.
Okay. I can take the reorganization and the other sites, and then we can try and clarify a little bit of, on the confusion, regarding the numbers, or we can do that. So regarding the big five and the administration part, where we are now is, we have now one management team in each country. So on a country level, we have one. And what we're doing now is going to each country and doing a four-year roadmap, together with them on how we see the organization develop, during these four years.
However, what we've done already is what we call the management consolidation exercise, where what we'll see is during the first half of the year, around 10% of the management levels will be reduced, and that's around 200 people on management level. So that has been initiated. And we're moving on that in the first half of the year. Some of it has already started. I don't know the exact numbers, but I would say you should expect during the year 10% reduction of management roles, which would be around 200.
We've also said around 1,000 as a total, so I would say management consolidation is an integral part of the long-term strategy. And then from there, we will look at, you know, what can be done in the next few years together with the organization. Regarding other sites, we've had the inspections, and we have some observations at each site, and the reports have been given to the FDA. So we're now waiting for the FDA's response to that, and also they will be visiting us.
Here, it's more what we believe has, how we judge, let's say, the results, and we feel that the observations, they're valid, but they're observations that we can overcome, and we can remediate around. When it comes to extra remediation costs, I think we have to look at what we have still to use. Of course, the new report, we have to judge again what the need is. There, I don't have any new information. That's what we need the next month and a half or so to make a judgment on that.
Okay, thank you. Great, just to get a little bit of clarity then as to the starting point into 2016. Very much appreciate you all just talking through some of these one-off items. You mentioned the Consent Decree impact, some SEK 211 million, this one-off disposal by [audio distortion] , and also the legal settlement charge, the port and write-up. You mentioned around SEK 76 million. I think you forgot maybe the other SEK 100 million or so impairment that you took this year impacting EBITA. I just wanted to clarify that, stripping out all the one-offs, the starting point, if you like, would be more like SEK 4.6 billion EBITA.
And then, just to consider that you had, if I'm right, some SEK 400 million or so swing in currencies, SEK 270 million negative impacted 2015, and now turns into a SEK 150 million positive this year. So I just, I just want to understand is, if we were to include the currencies, because that was a negative view last year, but otherwise a, a positive or a normalization this year, should we expect then a starting point after all of the improvements you've already outlined for EBITA margin to be something like 16%? That, that seems, in my understanding, to be what, what the communication is. So I just wanted to understand that.
No, it sounds that you are right, but you should always know that the currency impact is always in comparative, in comparison to what we, what sort of rate we had last. So it is the improvement, which I gave you, is SEK 150. It's not SEK 150 or some more. It is SEK 150, because this is the way as we described it to you. And then I think you are fully correct in your other items you mentioned here. So I have nothing more to add to what you described here, Scott. You are always very perfect.
That's very kind. So just to understand then, that if, if the starting margin, let's say, is 15.5% or 16%, stripping out one-off and given the current currency environment, now, obviously, you had some benefit from your restructuring plan, offset by a little bit of pricing pressure, offset by some other moving parts that you mentioned. I guess what I'm trying to understand is, consensus forecast at the moment are calling for, what, some 16% EBITA margin, and perhaps a little bit more. Is there any reason for concern around that, that level, or is that a level that you expect to achieve and improve upon? So just, just to avoid any volatility or further volatility in our forecast, I was wondering if you could help, at least with that, that statement.
We have decided not to give any more guidance, and the only thing I could say, Scott, that you have to make up your own mind, so to say, what you—I think we have tried to give you the non-recurring items. I've given you the currency impact, and we have also given you what we believe the restructuring will be and so on. So I think you have got all the parameters, and as Alex have tried to say, what will be the impact on the one year transformation program in 2016? I think we have tried to give you guidance on that also, but we will not comment on the EBITA margins or give you any sort of a EBITA improvement in the percentage.
Super. Thanks very much, guys.
Okay, great. Thank you very much to everyone for joining. Apologies, we've gone a bit over time. Thanks once again, and we'll keep you updated as we move on. Feel free to call either Ulf or me if you need any more clarification. Thank you very much. Bye-bye.
Thank you for calling.