Good day, and welcome to the Getinge Group Q4 Report conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Johan Malmquist. Please go ahead, sir
Thank you very much, and a warm welcome to all of you, and thanks for taking time to be with us over the next hour here. We will follow the format we normally do, which means that I, for myself, will provide a brief overview of the quarter, and we will follow up immediately after that with questions and answers. We'll stick to the time schedule that has been announced in advance, which means that we will attempt to close this conference at 4:00 P.M. sharp. You should have been able to access a slide presentation if you follow the instruction in today's press release that we will use to give this sort of overview a bit of a format. So with that, I turn immediately over to the slide marked 20 in Organic Order Intake.
As you can see, the organic volume growth, both as regards revenue and orders, has been below expectation throughout 2014, although the last quarter showed an improvement with an organic order growth of about 3%. And I think it's worth mentioning that this is over a prior year period that was relatively strong in itself, with an organic order growth of just under 6%. Both Medical Systems and Infection Control reported good growth of orders in the quarter, and for both business areas, the prior year period was also strong, with close to 10% organic growth for Medical Systems and just a little bit over 6% for Infection Control.
Extended Care reported, one have to say, another weak quarter on orders, which is attributable to the challenging conditions that we continue to face in the rental market for therapeutic services, predominantly around the U.S. market. However, if we exclude the rental business from the Extended Care numbers, we are showing low single-digit organic growth across the remaining franchise. From a geographical standpoint, the Western European market and the North American market, Japan and Australia, perform together largely in line with our expectations with growth in all of those geographies. The challenge has been the developing market throughout the year, and particularly the BRIC markets, that have performed significantly below our expectations. It is a situation we believe will gradually change and improve going forward.
Since the developing economies are the most important market when it comes to investment into new hospital infrastructure, it is also the most important region when it comes to sales of capital equipment. It, it's, in fact, the largest proportionately of all the different geographies. Now, this situation has resulted in quite an uneven development during the year between capital equipment and recurring sources of revenues, where capital equipment as a whole has been in decline during the year, while the latter having performed to expectations across essentially all geographies. If we continue and look at the consolidated results for the group, now, we reported growth for the quarter of 9%.
However, if we adjust for FX and acquisitions, the organic growth was just over 1%, which is clearly below the guidance, and is the result of lower order generation and also push out of shipments in the fourth quarter. I would say despite the weak organic growth, EBITA in the quarter was comparable with the prior year quarter if we factor in the gain we made of about SEK 92 million from the sale of two smaller product lines that occurred in the fourth quarter of last year. Lower gross margin in the quarter is largely the result of under absorption in our manufacturing units for capital equipment, which is the result, as I said, that we've had a very uneven load throughout the year. There is also some negative FX effect, but they're actually quite weak in this fourth quarter.
Operating expenses, I would say, are under good control and, declined on a like-for-like basis. Actually, I think we were down organically by about 1%. I will come back and comment on the restructuring charges you see here in the quarter when we review the medical systems, which we actually come to immediately now. So medical systems organic revenue growth in the quarter, was up by 1%, and the operating results increased somewhat if we again adjust for the SEK 92 million that we recorded from the two product line sales in the prior year period. Operating costs were also here slightly declining in the quarter on a currency-adjusted basis and like for like, while the gross margin was down somewhat.
And again, the lower gross margin in this business area is to a large extent the result of an uneven utilization of plant capacity, where we experienced low loads in the surgical workplaces entities. And we also had some output disturbances in the cardiovascular division as a result of the ongoing remediation work that we're undertaking as we speak. If I move on to the highlights of medical system, as we have reported previously, we have been in a now a relatively long dialogue with the U.S. FDA, actually since the end of 2013, following a series of inspections that the agency conducted within medical system. Although no definitive agreement has been reached, we have attempted, as part of this fourth quarter report, to provide guidance when it comes to the likely financial impact of a final agreement.
Without specifying again where in our P&L the likely impact would end up, we estimate that our operating earnings would be impacted by approximately SEK 500 million from the outcome of these discussions. The impact would, on the assumption that agreement is reached now in the first quarter of 2015, mean that the impact would actually come in this current fiscal year. You'll also see that in addition to the SEK 500 million impact, we've made a very detailed assessment of the remediation program we are currently undertaking, and this is also based on the further knowledge we have gained in the discussions with FDA.
For that reason, we have provided an additional SEK 175 million that we believe now is quite an accurate number to complete the program here by the middle of 2016. On a slightly smaller note, one could say we also launched in the quarter a new surgical light, the Lucea, and the transfer, the manufacturing transfer program that is currently taking place within cardiovascular is set, as in the previous communication, to be completed in the second quarter of this fiscal year. Moving on to Extended Care, the organic revenue growth was comparable with the prior-year quarter, although lower than the corresponding quarter last year. The gross margin for the quarter was on a good level.
I underline that the gross margin in the fourth quarter of 2013 was actually on a very good level. Expenses grew organically by just over 10%, but the cost level in the prior year quarter was unusually low. Again, if you look at it, typically the fourth quarter activity base is heavier than the other quarters, and it was unusually low in 2013. As we have reported earlier, the most significant impact on performance comes from the U.S. rental business that has suffered from an industry-wide decline, as customers are moving more of their spend to buying support services rather than renting them. But we've also had, as we have communicated, integration challenges following the TSS acquisition.
This is what has caused the expenses or the operating cost to look like they're growing significantly in this year versus last year. As you know, we made a prior period adjustment of about SEK 60 million between 2013 and 2014. So when you even that out, and you also factor in that we spent earlier in the year some SEK 30 million in one-off costs to improve the situation, the underlying cost escalation is not that dramatic and hopefully will improve going forward. I would say that we have a good grip now on the situation within the rental business, but we still have improvements in terms of performance to bring to the business. If I move over to the Extended Care highlights, we have launched a product called the SafeSet.
This is a product that gives nursing staff visual alerts to identify the whereabouts of patients in and around the bed, and this is to prevent unnecessary injuries to patients, which is actually quite a common phenomenon on wards. We've also said that we have a number of activities planned and initiated to improve performance. One of those programs is around mostly the Western European commercial operations, and this is to simplify and delayer the commercial setup. We're also launching a relatively broad program to improve the global rental business that has suffered profitability-wise, which we believe will have a good outcome, and I think we'll be in a position to communicate a bit more in detail around that program in the upcoming Capital Markets Day.
If I move over to infection control, as you can see, revenues grew organically by about 3% in the quarter. The EBITA result increased by just over 11%, mostly through structurally lower operating costs. The lower gross margin is again the result of lower utilization of capital equipment plans in the period, and to a somewhat lesser extent, the result of adverse currency hedging effects. Moving on to the highlights of infection control, you will see, and as you saw in the press statement, we have appointed Joacim Lindoff as the new head of the business area from the first of the year. Joacim has a long track record within the business and has risen through the ranks on the merits of his continuous performance.
The fact that Joacim is a seasoned and well-respected person from within the organization, I think will provide the continuity we need to complete the improvement, improvement program that is already in place. And speaking to that point, you can say an essential part of the improvement program relates to the optimization of the manufacturing footprint. In the quarter, we completed the transfer of the sterilizer production in Mansfield, in U.K., to a Swedish facility, and will now proceed to close that facility. We also opened up negotiations with unions in our disinfection equipment plant in Växjö, in Sweden, with the aim of transferring the production of simpler disinfectors to our newly opened facility in Poland. Some 40-50 people will be concerned by, by this transfer, but pending the outcome of the negotiations, obviously.
With that, I hand over to Ulf for some additional highlights around our financial performance.
Thank you very much, Johan. The group's cash flow was good in the fourth quarter and amounted to SEK 1.4 billion. The quarterly cash flow represented 65.6% of the EBITDA. Year-to-date, the cash conversion was 72.9%, which is better than the targeted range of 60%-70%. The main part of the increase in the restructuring cost paid is due to the medical system remediation work and amounted to approximately SEK 150 million in the quarter. During 2014, SEK 470 million has been paid for the remediation work. The quarterly change in working capital was as expected, and in general, good performance of the group's working capital.
The balance sheet, the closing net debt amounted to SEK 22.5 billion, and the closing equity amounted to SEK 18.7 billion, which resulted in a net debt to equity ratio of 1.2 and an equity, equity asset ratio to 35.4%. Adjusted for currency fluctuation, the net debt decreased in the quarter by approximately SEK 750 million. Okay, Johan?
Thank you. Then just a few final comments around the outlook for 2015. So when it comes to the volume outlook for 2015, we expect to see an improvement over what I would have to call a weak 2014 performance. No doubt, the comparatives will be easier, not least when it comes to developing markets where we expect demand for capital equipment to pick up somewhat. We will, if we get a timely resolution to our discussions with the FDA, most likely incur a negative financial impact of SEK 500 million that was mentioned previously.
Because of our relatively long hedging profile, as you can see, we continue to incur negative transaction effects during 2015, but we will benefit from a more favorable translation effect, and the net of these two effects is going to be a plus of some SEK 40 million. From a transactional standpoint, I would say that we will start to become positive from 2016 forward, so there, there is some hope on the hedging side, in the business. All this said, I would say that we remain confident that we can materially improve our profitability from a growth perspective, but more importantly, from a profitability perspective.
In light of the pending change of guards and the arrival of Alex soon, I believe that it's likely that the capital markets day that we have planned to host now for, for quite some time will happen sometime in the second quarter, most likely, I would say, the second half of the second quarter. So with that, I, I suggest that we hand over to, to questions from the audience.
Thank you. If you would like to ask a telephone question at this time, please press star one on your telephone keypad. 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 Michael Jüngling of Morgan Stanley. Please go ahead.
Good afternoon, everyone, and thank you for taking my questions. I have three. Firstly, on the FDA remediation, cost of SEK 500 million, does that represent a fine only, or does it also include your estimated cost of supply restrictions? If it is a fine, is it a civil fine, or do you expect it to be a criminal fine? Question number two then is on the FY for the 2015 margin guidance. Do you expect that the EBITDA margins to have bottomed, or is there scope for a further margin deterioration in 2015? And then thirdly, on the sales growth guidance of an improvement, does it include a further deterioration in the emerging markets from where they are today? Thank you.
Well, thank you, Michael. I'll try not to answer your first two questions. I think considering we have a pretty good grip of what we believe the outcome to be after lengthy discussions with the agency. But at this point in time, we will not and cannot disclose the decomposition of the SEK 500 million, which we will do once we have sort of a firm resolution. But I think the number we're communicating is sort of the right number, if I put it that way.
When it comes to the operating margin, and again, this is not sort of ducking the question too much, but I think this is a question also that needs. I obviously have plans for the business and so forth, but I also think this is a question that is better answered by Alex once he has got his sort of feet under the table here. But I think when we look at the volume growth, then yes, we are expecting the volume growth from what we term the rest of the world region, which, of course, is quite broad.
We are expecting to see volume improvement from the regions outside of Western Europe and North America in this coming year, and a better situation than the one we have experienced over the last 12 months.
... Mm-hmm. And I, I appreciate that you can't, can't sort of give the, the details I'm after for, for the FDA development, but maybe in, in a slightly different way. You specifically mentioned 2015 impact, but doesn't refer to, let's say, a 2016 or 2017 impact. Was it intentional or, or was it perhaps?
Indeed, Michael, it, I mean, that's intentional in the sense that if the impact has sort of a timing component to it, and I would say if we get resolution, the amount we believe will be the same whenever it comes, but it would need to come sufficiently early in the year for the impact to remain with 2015 only. So the only thing I see could happen is that if we don't get sort of a final resolution until, let's assume that it happens in the middle of the year, there is a likelihood that some of the effects would spill over to 2016, but the amount would still be the same.
Okay, so it sounds like there could be some supply restrictions because of a fine. If it was a fine only, it wouldn't matter when it would come in 2015, it would always be in 2015.
You're free to speculate, Michael.
Great. And then also on the guidance that I asked before in 2015, what I can't really understand is your comment about the emerging markets. If I look at your comp adjusted order book growth for the fourth quarter, it is the best momentum number or the best comp adjusted number that we've had for five quarters, and it's majorly better than we had in the previous three quarters. Why are your numbers so much better compared to your comments about the emerging markets getting worse?
It's in that. I think you have to recognize that within that number, we also have Australia and Japan that has performed well. So if I was to break out the BRIC countries, specifically, that makes up a significant part of our emerging markets volumes, the picture would look very different.
Okay, lovely. Thank you.
Thank you.
Thank you. Our next question now comes from Richard Koch of Kepler Cheuvreux. Please go ahead.
Hi, Richard Koch at Kepler Cheuvreux. Why do you feel the need to cut the dividend?
Well, we, we have a dividend policy, and, and I think that we feel somewhat bound by that policy. It typically says that we should hand out about a third of our net profit. This represents an acceptable level, closer to 50%. So I think we want to show, on the one hand side, that we're, we're trying somewhat to adhere to the policy, and second, to send a signal that, you know, we're, we're determined to maintain sort of going forward, a healthy growth in, in dividends year-over-year. But this, as you know, with the one-off charges, has been a somewhat unusual year for us.
Okay. And what gives you reasons to believe that these SEK 500 million for the FDA-related costs, so that is going to be enough? How certain are you when you communicate that number?
If what we know today, and as you can imagine, this is not something we have discussed over the last week. This has been sort of a very lengthy discussion, and it is a complex matter, but I think it's been bounced back and forth between teams on our side and experts on the other side. And therefore, I think that I'm pretty confident this is going to be the number, but I wouldn't like to sort of go into more details than that until the final agreement has been reached.
Okay, and just to follow up on that and the previous question, just to make it crystal clear, this is the total impact that you expect for 2015, 2016, 2017, whatever time frame?
Yes.
This is the total.
Yes.
This is not per year, but this is the total.
No, no, this is the impact, so to speak. And with, I think one should possibly include the SEK 175 as the remediation impact. And I think you need to view that in the light that with the ongoing dialogue, we have also gained a further understanding what the endpoint in terms of the standing of the quality management system in question needs to be. And therefore, looking at the gap between current status and sort of expected status, we have identified this gap, and I think we're pretty. I would say we're pretty accurate on that number as well. So, yes, I feel confident that with this fourth quarter report and what we communicate, we have captured, as far as we possibly can, the impact.
Okay, and final question: In the report, you state that the margin in Infection Control will increase from 11% today to 17% in-
Yeah
... 2-4 years. How do you intend to reach that quite remarkable hockey stick margin increase in the current conditions?
... Yeah, I think the, if you look at, where the business area Infection Control still differs quite materially, I would say, from the other business areas, if you look at the fragmentation of the footprint in manufacturing. So I think one of the significant components to that is, A, a smaller footprint, B, a footprint that has a somewhat different geographical location. We're also doing quite a lot to streamline the product portfolio so that we can derive greater customer variability from a smaller base, which will allow us to drive economies in manufacturing, but still have the capacity to offer products of different configurations to customers in different geographies. So and then there's also efforts and simplification around the commercial setup, et cetera.
I think one needs to keep in mind that this is a business that was the first business built, and therefore, the integration was less aggressive. And I would say the prerequisite to integrate that business completely at the time when those acquisitions were made was not really there, the different national standards and so forth. I would say what has prevented us from making stronger progress or stronger visual progress, I would say, is if I go back over the years, a far too frequent change in the leadership. And secondly, also, this business has had a particularly strong currency headwind here for the last three years. So it's been roughly lost 200 basis points a year in terms of currency headwind.
So I don't think that one should underestimate the underlying improvements to the business that has already been put in place. And I think with currencies now moving, I think we'll actually get some tailwind for this. We can all debate what is sort of a normalized level or exchange rates, but I think they're gonna be somewhat different to what we have experienced in the last few years.
Okay, thanks. We'll see what happens.
Thank you, Richard.
Thank you. Our next question now comes from Kristopher Lijeberg of Carnegie. Please go ahead.
Thank you. First, on, you mentioned that capital equipment orders were particularly weak. Could you give a figure on how much it's down organically, and also compare that with the growth rate you had for capital equipment's in 2013?
Oh, I don't have that in front of me, but I would say that we, we have a decline in the low, low single digits, I would say. And, and I would say that it was, probably low single digits of, of an opposite nature, in the prior year.
Okay, and your definition of emerging markets, how big was the decline there?
Well, if we take BRIC, for example, which I think is the one, I think it was closer to 10%, in that region, and we had a corresponding growth of recurring revenue streams of closer to 10% growth. So I think that your, your, you-- It's not like our emerging markets have a fundamental problem, right? So when it comes to recurring revenues, we're showing healthy growth, but the capital equipment has taken a bit of a breather here in the, I would say, the last year. And so,
But do you have any signs of improvements? I remember that after the second quarter, you talked about emerging market growth will pick up considerably in the second half of the year, and you had the same message as late as in October, when you reported third quarter, and still,
It did. I'd like to underline that, the orders did improve, but not to the extent that we had anticipated. So I think we're talking degrees, but we're talking quite big degrees. So the order pipeline and project pipeline we had suggested that we were going to see a stronger trend, which just didn't materialize this side of the end of the year, or in 2014.
But are you seeing that happening now, beginning of 2015, or is it still very uncertain?