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 so much, and welcome to all of you, and thank you for taking time to be with us here today. I'm joined by Ulf Grunander, our CFO, and our intention is to start off with a review and a presentation of the quarter that will be followed by a Q&A session. We have planned for this call to conclude at 4:00 P.M., that is to say, in just under one hour. For those of you who have not managed to access the presentation, if you follow the instruction on the press release that was sent out earlier today, you should be able to get hold of it. If not, I think it's posted on our website as well.
So with that, I suggest that we move to the first slide that shows the organic order intake, the currency and acquisition-adjusted organic order intake. The organic order generation developed according to our expectation during this last quarter and grew by 5.5%. The improved growth rate partly reflects the relatively weak prior year period. If we start by looking at the numbers from a business area angle, we can see that Medical Systems performed well with a 9.4% growth in the quarter. Both the Cardiovascular and the Surgical Workplaces division showed very good progress, while the volumes in the Critical Care divisions were declining organically. Infection Control also showed good growth with organic orders going up by 6.2%.
Our growth challenges as a group remains with our Extended Care business that recorded falling order volumes organically. The TSS business that is included in the organic numbers from this quarter, or for at least two of the last month of the final quarter here, had a negative impact on the reported order figures. But I, I can say that with the peers that have reported, we have performed significantly better in this space than, than other companies. If we move over to a geographical standpoint, then we can see that all the regions have contributed to the growth in the quarter. And Western Europe posted another good quarter compared to the weak prior year quarter, though, and we believe that the Western European market has bottomed out.
The North American market grew also in this quarter, but at a slower rate compared to the three preceding quarters. The prime reason for this is that we, well, the return to growth in North America, specifically in the U.S., really started in the fourth quarter in the prior year, so the comps have become a little bit more challenging. In the regions outside Western Europe and North America, we had a decent quarter, not least from the BRIC countries, where orders grew organically by 24%. However, if we look to the region over the full 12-month period, the growth from Extended Care and Infection Control is below expectations, and we believe those are numbers that will correct themselves in this coming fiscal year.
However, all in all, we're satisfied with the order development over the year and in the quarter, and if we consider the outlook that we provided at the beginning of 2013, then we have surpassed those expectations. I also think it's fair to say that we have done better than the majority of the larger medical device companies. Moving on to the results for the group as a whole. The earnings for the fourth quarter, I think, is a little bit of a non-event. The pre-tax profit recorded for the full 12-month period takes us pretty much to the midpoint of the earnings interval that we provided in conjunction with the Q3 report, meaning that we had forecasted that the pre-tax result would end up in the interval between SEK 3.1 billion and SEK 3.2 billion Swedish.
Organic revenue growth in the fourth quarter was relatively modest at 1.3%, but was in line with the projection for the full- year, with growth of a little bit over 4% organically. Gross margin advanced somewhat through good performance from Extended Care and Infection Control, and decent performance also by Medical Systems. Expenses were basically flat on an organic basis in this last quarter and reflects the structural measures that we've taken in earlier quarters. The group's EBITDA result for the quarter grew by 6.1% nominally, and the EBITDA margin reached 26.6%.
If we adjust the earnings numbers for negative or adverse currency effects and also for the medical device tax that was introduced in the United States in the beginning of 2013, then the operating result or the EBITDA result grew by 40% in the quarter, and the equivalent number for the full 12-month period is 8.3%. It's, it's not where we have wanted to be, if I, I sort of take a look from the beginning of the year, but at least it represents on a like-for-like basis, earnings growth. Move on to Medical Systems. The Medical Systems EBITDA result grew by 7% nominally in the quarter and by 13.7% on an adjusted like-for-like basis.
Gross margins were flat year- over- year, despite continued adverse mix effects in the critical care division and stronger growth from the surgical workplaces business that operates on lower gross margins than the two other divisions. Expenses declined also when you adjust for the net gain that occurred as a consequence when we sold the two product lines, Safeguard, during the quarter. And we've also, which you can't see here, which was a little bit unplanned for, but we had assumed the transaction costs relating to the Pulsion acquisition this side of the year end, which equates to approximately SEK 9 million . I move on to the highlights of the Medical Systems. It's been a relatively busy quarter. I just mentioned the Pulsion acquisition, where we have launched the public tender offer.
We're right now at just under 75%, 74.9%, and as you well know, the offer is conditional on obtaining a 75% shareholding, in addition to antitrust clearance in Germany. So I think we're making good progress towards concluding this transaction in February, latest March of this year. We've also announced an efficiency program in the critical care division. The program is primarily aimed at right-sizing our R&D organization, after a relatively long period of time when we've been operating above what I would call the long-term R&D intensity. And this is caused by, sort of, over a relatively short time period, launching an entirely new product platform on the anesthesia side, and then right after that, on a relatively short time frame, replacing our best-selling product, the Servo-i, with a Servo-u and a Servo-n.
This program will take down costs by approximately SEK 60 million, and the SEK 45 million we've spent in this restructuring activity is actually netted off the lower restructuring costs that we are incurring in Extended Care. So it's sort of an incremental program that we've introduced, but it's contained within the framework of previously communicated restructuring costs. You will also see that we have, and you've seen a separate release around the initiatives that we're doing to strengthening our quality management system. This is in response to observations we've made ourselves, but also in response to observations made by the Food and Drug Administration in the United States. We've completed the integration of Atrium. Just to say that this will not be something that we now follow specifically in the quarterly results.
Atrium has continued to do extremely well from a growth perspective during 2013. The restructuring activities within the cardiovascular division, which specifically relates to the grafts manufacturing, is actually running with a little bit of a delay. That means that we expect to finalize that project in the beginning of 2015. The cause for the delay is that we have decided to retain a line of synthetic vascular grafts that originally had been planned to been discontinued. This means that we need to transfer additional production machinery from the United States to France, and also to do all the validation works, et cetera, that is putting out the deadline for that project.
I mentioned also the divestment of the product line, Safeguard and Air-Band, disposed for a consideration of SEK 180 million. Revenues in a full 12-month period prior to the sale was SEK 46 million, which means it's almost a 4 times revenue, and we recorded a net gain of SEK 90 million on that transaction. We're now starting up production in the cardiopulmonary or the cardiovascular production facility that we inaugurated in 2013. Initially, we will be producing tubing sets for our cardiopulmonary business, which will then be followed by covered stents, and the sales will primarily and initially be focused on the Asian regions. Also want to mention that the Servo-u and the Servo-n, our new ventilator platform, is progressing well. We're receiving very, very good customer feedback.
The Servo-n is going to be a novelty for us, and it's aimed at positioning ourselves in a very attractive neonatal segment. We've also launched a replacement for the table system, ALPHAMAXX, which is one of the best-selling products in our cases, which is an upgrade in terms of functionality and the ability to perform new types of surgical procedures. I move on to Extended Care. Now, despite weak revenue growth, that declined in the quarter organically by 0.4%, the business area posted good earnings growth. EBITDA result grew by 21% in the quarter, and on an adjusted basis, the operating result grew by close to 30%. The stronger performance is primarily attributable to the legacy Extended Care business. TSS has performed somewhat under expectation, partly due to the delay in synergy realization that we've talked about.
Although we will exceed the synergies originally planned, they've not materialized at the speed originally planned. We've also seen that the top line came in a little bit weaker at the tail end of the year, but as I mentioned earlier, better than the peer universe. Highlights within Extended Care. In the quarter, we appointed Dr. Harald Stock to succeed Alex Myers as head of the business area. Harald has a very solid background from the healthcare industry, and I think he will hopefully be able to revitalize the top line of our Extended Care business in line with other important activities and plans we have. Integration of TSS, I would say it's almost completed.
As I said, whereas we've been running delayed, the savings as such will exceed the plans we had originally at the time of the acquisition. The current restructuring program that involves the closing of Extended Care plants in Sweden and in Germany is progressing to plan. The restructuring costs, as I said earlier, under the Medical Systems highlight section, those restructuring costs will be lower, but we're using that delta of SEK 50 million or SEK 45 million of it to carry through the right sizing of the critical care R&D organization. The business there has also made a smaller product launch of something called the Maxi Transfer Sheet, which is actually a bed sheet that can be transformed into a sling for repositioning of patients, and this is a product that we intend to seek patent protection on.
I move on to Infection Control, and here I'd like to highlight that we have ended up with a little bit of an error in the chart for the fourth quarter. The numbers for the full twelve-month period are accurate, but some SEK 60 million have gone from landed cost, sorry, into SG&A, from SG&A into landed cost and should be reversed. The effect is that the gross margin is not 39.7%, but 40.7%, and that the operating costs are a little bit higher. But all in all, I would say that I am satisfied with the performance of Infection Control. The revenue growth was, as we had anticipated, soft in the quarter, but quite okay for the full twelve-month period.
We're starting to see the effects of the restructuring programs we're undertaking, and not least on the gross margin, which is, in this business area, heavily impacted by transaction effects on the currency side. We're also seeing that we're managing to slow down the expense growth in the business area, and it's relatively flattish in this last quarter, if you consider that we took a charge of SEK 30 million in a litigation settlement, that is included in the operating cost for the quarter. If you see here on an adjusted basis, the earnings are comparable to last year, but adjusted for the SEK 30 million, up, and that the operating margin has climbed over last year's level, which is also the case on a full twelve-month basis, obviously. So reasonably good, I must say.
On the highlights for Infection Control, the property improvement program to improve Infection Control's profitability to levels beyond the 16%-17%, the EBITDA margin, is developing as planned and is already contributing to 2013, but not to its full extent, obviously. After the close of the year, we have announced the further restructuring and realignment of the global R&D products and markets organization that will affect some 100 positions, primarily in our Swedish organization. During the last quarter of last year, we launched two new products. We launched the first sterilizer in our new modularized product range that is intended to replace the entire healthcare sterilizer portfolio over time. The product is very modularized, which means that we're trying to retain the ability to customize products for customers, but at the same time, achieve a rational manufacturing environment.
We've also launched a product called Centric, and Centric is going to be the standardized machine user interface that we will deploy across all of our capital equipment, from sterilizers to washer disinfectors, and provides great help to users oversight, which in turn, we think will allow to promote more efficient use and also safer environment, when it comes to sterility assurance. So with that, I hand over to Ulf Grunander here for some further comments on our financials.
Thank you very much, Johan. The group's, the cash flow from operation was solid in the fourth quarter and amounted to SEK 1.4 billion. The quarterly cash flow from operation represented 60.4% of the EBITDA. Year- to- date, the cash conversion was 63.1%, which is within the targeted range of 16%-70%. During the quarter, inventory days, DIO, was reduced by 1 additional day and ended up on 133 days. Receivable days, DSO, remained at the level of 75 days. We could see continuously good focus within our group on collecting accounts receivable and also improving the efficiency within supply chain. A part of the increase in year-end accounts receivable balance has to do that with some large projects were finalized and invoiced in the late part of quarter four.
In summary, the group's average working capital has, in year-end 2012, been reduced by approximately SEK 100 million up to the end of December 2013. If we take a look on the balance sheet, if we adjust for currency changes and acquisition, the net debt in the fourth quarter decreased by approximately SEK 600 million. The closing net debt amounted to SEK 18.3 billion, and the closing equity amounted to SEK 16.6 billion, which resulted in a net debt equity ratio to 1.10 times, and equity asset ratio of 37.4%. That means that the group has a strong balance sheet at the end of December, and has an acquisition capacity of approximately SEK 8 billion, taking the acquisition of Pulsion also into account.
Very good, Ulf, thank you. Then just a few final comments around the outlook. Now we recognize that the outlook that we have provided is a little bit vague at this stage of the year, and I'll come back to that a little bit. But if we start off with the top line, we believe that we have put the worst of the Western or the worst piece, I would say, of the Western European markets behind us. But we believe that the recovery and the normalization of the Western European markets is likely to be slowish. We continue also, we believe that the North American market has stabilized around current growth rates.
When it comes to the markets outside of Western Europe and North America, we, there's a slight uncertainty on some key markets that have affected already the tail end of 2013. I'm thinking about the situation with the CapEx, particularly on the crackdown on corruption in China, and also the uncertainties that we have experienced in Russia in the second half of 2013. We simply have to see how those markets evolve. All in all, we have said that we think that growth will be comparable to last year, but I think there is a chance that growth could be better than what we achieved in 2013, but we simply have to keep sort of an active dialogue with the markets and update you as things progress.
We will continue to face relatively strong headwinds when it comes to the currency, and we estimate that the transactional currency effect is going to be a negative of some SEK 250 million. This is the hedging effect, if you will. In addition to that, if we look at the translational side, that is when we translate foreign, foreign PNLs into Swedish, we think there may be approximately SEK 30 million based on current exchange rates, of, of a negative effect. But, but as you know, that can change over the year, depending on how the Swedish krona and other currencies evolve. Restructuring costs will come down, and, uh, probably to the tune of some SEK 250 million, if we compare—sorry, to the tune, yeah, the tune of SEK 250 million, a little bit over SEK 250 million.
Estimated to be just under SEK 150 million for 2014. But all of those restructuring charges are items already communicated earlier in 2013. As you can see also from today's press release, we put in, you could call it a caveat or whatever, but it relates to a corporate initiative that we are planning to implement in the group over coming years, and that is aimed at better leveraging the scale of our group. The group today runs its operations in three relatively autonomous business areas. We're great believers in our existing operating model, as we believe it gives our business leaders a strong sense of ownership and of control over their destiny in the way we run it.
However, when we concluded a strategy overhaul here over the last month, we believe that there are a number of efficiencies that we could gain by stronger collaboration across our business areas without impacting that ownership of the respective business areas. So the group as a whole has costs or expenses of approximately SEK 10-11 billion kronor per annum that falls into the category of generic activities, such as finance, controlling, payroll, and so forth, and partly falls into different sourcing categories, both direct and indirect. And we've just recently sort of deepened our understanding of this category with a third-party assessment. And that would suggest that there are significant cost-saving potentials that can be achieved and that we will seek to realize over coming years.
So in light of that, we wanted to be a little bit careful when we provide guidance, just to see how much of that effect can we actually realize this year, and what costs are associated with this program. This is also partly the reason why we have decided to delay the Capital Markets Day into the second quarter, so that we can detail this program. But this will have, we believe, a meaningful impact on our ability to exceed current financial targets for the group over time. With that, I think, operators, that we can open up for questions. I'm sorry for this overview, taking up quite a lot of the hour we had.
Thank you, sir. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit 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. Again, please press star one to ask a question.
... We will take our first question from Kristofer Liljeberg of Carnegie. Please go ahead.
Yeah, hi, good afternoon. Two questions, if I may. First, could you provide some insight into the cost savings in, if you look in, in Swedish krona in 2004 from the ongoing efficiency programs? And also, if you could give some flavor, how much better earnings we could expect coming from TSS underlying, so not including the restructuring costs that you had in 2014.
I think both of those are probably questions that I will not provide answers to. I mean, we have provided, obviously, what we have spent money on, and the basic idea has been to provide sort of the savings effect through our communication around the overriding margin targets, both on a business area level and overall. Once they have been sort of included in the business, they're such an integral part that we actually sort of run it through the budget process more, and we don't specifically look at it once it has been sort of realized. So,
But the reason I'm asking is, if you look at the margin you had in 2013, obviously came in below the targets you set up at the capital markets day, beginning of 2013. And it also seems to be some delays, maybe within some of the initiatives you're doing, or slight delays at least. So the question is, the margin you guided for beginning of 2013 for this year, 2014, is that still valid?
You mean the, I don't believe we actually, I think our guidance is for 2000, I think we said 2014.
Yeah, you had the 22% margin for 2014, but you also provided the, you know, rather detailed margin guidance for, for the different business areas. At least, I don't know if it was, if it was in written, but you commented on it, where it would be in, in, like, in the 2014, 2015 or, in 2013, 2014, and then for 2015, 2016, et cetera.
Yeah, I think it's, if, if I sort of, if I look at this quite frequently, I think the guidance was for 2014-2015. And, I think that we provided more specific guidance for Infection Control, considering that the restructuring and the savings sort of reached beyond the 2014-2015 time period. That means that the full effect of the money spent in terms of savings actually materialized fully more in the 2016 time frame. So that is what we, we provided.
What I think will happen, but we'll let the review we're undertaking now take its time, is that we will roll in these new initiatives and probably provide a new sort of margin guidance here that will probably stretch over the coming three years, with hopefully a relatively detailed outlook. So, but I understand you. What I would like-
The question is simply if it's fair to assume that the margins will go up this year despite the currency helping. I assume you will be more cautious on costs, hopefully, than you were in 2013, and I guess TSS should be better, et cetera, et cetera.
Yeah, numbers are very sticky, and I think the reason we've written in our outlook the way we have, I would say, is that we provide sort of the accurate number. I just know that people will be quite kind in reminding me what I've said at this telephone conference or whatever. But what I can say is that it will have a material and a meaningful impact on our ability to expand margin, if I can leave it at that. And yes, I think we can do sort of a good like for like improvement. Again, no details given, but I think it will be impacted by these new initiatives that I think we must and should undertake.
What I would like to add, and which I think is a reality, I mean, part of the reason why, in my opinion, the earnings growth has not correlated with our top line development, right? So if you look at the outlook at the beginning of 2013, even if it was by no means specific, it talked about a revenue, or organic revenue growth that anyone probably would have interpreted as a number less than what we achieved. But I think anyone reading that same outlook would have expected the earnings growth to be higher than what we delivered in the end of the day. So you can say the group's efficacy in translating revenue into earnings was not where it should be.
What I think that we have experienced since 2009, although difficult to quantify, is that the lower growth most likely has translated into a tougher pricing environment than we had anticipated, and that the mix, or the capital equipment mix, has had a toll. I mean, if I look at the critical care division alone, it explains a very significant part of the delta we have between where we ourselves planned to be and where we ended up being, whereas the other businesses largely, and maybe with the exception of Extended Care, that fell short on TSS, the rest, I would say, performed to plan and expectations.
Okay, thanks. Then just this, the FDA inspections, how worried are you that that could have a negative impact on your potential to, to sell into the U.S. in 2014 and 2015?
We look at this constructively. The reason we've mentioned it is that it is there. There have been observation, and I think that it's a known fact that FDA has strengthened its resources directly towards the device industry. I think that they're doing that for good reasons, and there has been observations that we need to correct with sort of speed and precision. That's the plan we're working to. I couldn't actually judge if there are any sort of implications from these inspections down the road. But what we're signaling is that we're working hard, we're collaborating, and we're making progress in terms of improving our management systems.
Thank you.
You're welcome.
Thank you. We'll take the next question from Michael Jungling of Morgan Stanley. Please go ahead.
Great, thank you for taking my call. I have a question on guidance first. When it comes to the volume growth guidance for 2014, it seems to be around 4%. Can you give us a sense of how the split is for capital equipment and consumables? That would be useful. And secondly, if I look at also the guidance for 2014, 2015, is it fair to assume that the margin guidance you gave of 22%, now with these additional programs that you're doing, that number is pretty safe or maybe even very safe? Thank you.
Yes. Let me start with the first one. On the, let's see, if I base it on, we can either base that on orders or on sales. Let me base it on sales. So, the split in 2013 between capital and recurring items is that capital equipment made up 47% of our revenues, and recurring items made up 53%. And if you look at the growth of those two respective categories, then the capital equipment business grew by 1% over the full 12-month period, and the recurring revenue base grew by 7% over that same time period.
If you look a little bit geographically, for the full 12 months in Western Europe, capital was still declining by some 2%, and if you look at North America, it was growing by 3%. Then in the West, it was on the, across the other region, it was, then as a consequence, growing as well.
Johan, I was sort of more looking at 2014 for your guidance of, let's say, 4% organic growth. What are you expecting with respect to your capital equipment sales and also with consumables?
Yeah, I mean, I would probably guess that it would be on the capital equipment, maybe 1%-2%, and on recurring, somewhere between 6% and 7%, maybe.
Okay. And then on the 1%-2%, are you expecting the developed markets to be down? Or, because it's like 1%-2% means to me that if the, if the emerging markets are growing, let's say, 10-15, it would mean that you're probably still expecting a decline of your capital equipment business in, in the developed markets, which doesn't sound-
I don't think so, no. I think it could be flat, could be sort of in Western Europe, if we assume it's flattish, assuming that we'll have relatively easy comps in the first two quarters and a little bit more difficult comps in the second two quarters of 2014. In North America, remains where it is with low single-digit capital equipment growth. And then, factoring in maybe some challenges on emerging markets, we could see a little bit of slowdown in that region, but again, it's, it's speculations at this point in time.
Okay, great. And then on the restructuring costs, just some housekeeping questions.
Yeah.
Where are you with respect to cost of goods sold being sourced from the low-cost countries? I think at your Capital Markets Day last year, I think you mentioned you exited the year at 23%. Where, where do you stand at the end of 2013?
Frankly speaking, we have not extracted that number for the fourth quarter yet, but it-- I'm trying to remember. After the three quarters, I think we were up maybe somewhere close to 2% compared to the old, old number, of that magnitude.
Mm-hmm. And then on the production parts rationalization, can you just give us an update, a little stock take? In 2013, which plants were actually closed, and for 2014, which plants under the old program are yet to be closed?
Depending a little bit, I would say that the plants within Extended Care in Germany and Eslöv in Sweden will be closed during this year. They were announced last year, but will be closed now in 2014. The plants within Infection Control in Sweden that we announced at the beginning of the year will actually be closed also in 2014. The plant within Medical Systems that we have announced and provided for, I think, will maybe go into 2015 because it is dependent on the transfer of grafts from the United States to France to free up that space for the balloon manufacturing. So those are our sort of the restructuring initiatives that we have announced and how they will actually sort of materialize.
So, so effectively, we've got three in 2014, or two in 2014, and one maybe in 2015. And then in 2013, did you close any plants? I thought there were some.
I'm thinking now what actually physically closed of what we announced. I don't think actually we had-
I don't remember.
Yeah, I don't think it was. I think that's the Infection Control one, which is going into 2014. It's not fully completed, but almost.
Okay. And final question on the medical systems, the FDA inspection-
That one, sorry, the TSS plant in San Antonio was actually closed during the year and moved to Poland.
Okay. And then, final question on the medical systems with the FDA inspection. I presume you received a Form 483 letter from the FDA.
Yeah.
Would you highlight how severe those Form 483 findings are? And whether you think this could result in an FDA Warning Letter that would perhaps prohibit you from getting approvals for new products?
No, we, I mean, in we have a warning letter in our Wayne facility that dates back, I think two years, something like that. And we have a warning letter in our Atrium facility. And then we have Form 483. I mean, most inspections relate or sort of result, well, I shouldn't maybe speculate, but it's not unusual for an inspection to result in Form 483, and then it's obviously the number of observations and the severity of the observations. And you can say, broadly speaking, there are a couple of themes that we believe we should address and are addressing. One is to implement a more global quality management system within Medical Systems, which we have implemented in our two other business areas.
The second one is that we have, and by the, a global management system comes also a global, incident reporting system, if you will, so that we systematically collect data, on, complaints and, and act upon them. It's the implementation also of a uniform CAPA system, which, which stands for Corrective Action, Preventive Action. And there are also observations that relate to process validations. But I think I'm probably not the right person to give sort of the best representation, but those would probably be the three categories where, where, we have observations and where actions are in place. So what typically happens is that, FDA goes out, makes an inspection, the inspection results in observations. We respond in writing to the observations, and then we commit to correcting the observations over a period of time.
Then at a subsequent and future reinspection, the FDA verifies that we've closed out the observations. That's sort of the regular procedure.
Are these observations in a new facility where you have not yet received an FDA Warning Letter?
Yeah, no. Well, they like we said in the original press release, is that during 2013, there was a number of our facilities were inspected, covering primarily the cardiovascular business, and that there were observations in those that suggested that we had actions to take on the items that I have mentioned, and possibly also on other items that are sort of on a more detailed level. And the Wayne and the Atrium dates back a little bit from before, and the other observations resulted in Form 483, but have not resulted in warning letters as of yet.
Great, thank you.
You're welcome.
Thank you. We will take the next question from Hans Mähler of Handelsbanken. Please go ahead.
Yes, hi there. It's Hans Mähler with Handelsbanken. First, a question on the Servo-u launch. When should we expect the first installations to take place? And when it's fair to assume that it will have some kind of impact on the profitability in the unit? And secondly, I don't know if I missed it or not, but have you quantified the hedging impact on 2013 earnings? That's my questions.
Yeah, the, the hedging impact on... I'll start with the last one. The hedging impact on 2013 numbers is around SEK 120 million, approximately, so a little bit lower than we—I think we indicated SEK 130 from memory.
Right.
It ended up being 120. And this has to do with the volumes we've done in certain currencies and so forth. The Servo-u, I think, will sort of be a launch over the entire year. There are certain market approvals we're still to clear: FDA approval in the United States. And so sales, I would say, and the same goes for Japan, a little bit. So sales will predominantly be in the European arena and in other emerging markets, I would say. And we have sold and installed Servo-u, so we're sort of in the ramp-up phase with this product.
I cannot say right now when we will obtain FDA approval for the Servo-u, but I am presuming it hopefully could take place somewhere in the middle of 2014.
Okay. If you look on the performance of Medical Systems in the fourth quarter, is anything of that driven by Servo-u's, or is it a small quantity only?
No, no, I would say that Servo-u, on a, on a net-net basis, is probably more of a cost in the fourth quarter than anything else.
Okay. Thank you very much.
You're welcome.
Thank you. We'll now move to Justin Morris of Bank of America Merrill Lynch.
Hi, Gentlemen. Thanks for taking my questions. I've got three, if I may. First one is just on your 22% margin target for 2015. So you don't want to say too much around it, but some appear to be thinking that the new savings are required to make the 22% target, whereas others are thinking that it's incremental to the 22% target, the ones that you're going to announce at the second quarter. So could you maybe just give a bit of clarification around that, in terms of the 2017 guidance? Is that likely to see a pushback or of the 22% margin, or are we going to see a higher target incorporating these new savings? Any kind of color around that would be appreciated.
Okay. I'm sort of trying to distinguish between can I or do I want to, but, but I, I think I can confirm that, with, with a very, very high degree of probability, the new margin target will be over and above the 22%. But if I could sort of, leave it at that, I'd be very grateful.
Okay, that's great. That's fine. Second question I had was basically on management changes. Obviously, you replaced the head of Extended Care in December. It's not that long since you replaced the Infection Control head. So just really, any color around any changes that those new divisional heads have implemented since they've come in? And also, just more broadly, you know, do you now think you have the divisional management that can deliver on your restructuring program? Clearly, you know, execution's been a bit patchy over the last year. And also, do you believe the move to Gothenburg you made for your headquarters has actually made any difference to your ability to hire top divisional management?
Yeah, on the sort of management changes, I mean that in one of the three cases here, well, actually, all of my business area leaders are, by comparison to me at least, relatively recent. And, I think in two out of the three, they were sort of, I would say, natural courses. In one out of the three, it was more of a forced change, and I'll not go into sort of the detail. I feel comfortable that Anders Gran has a good heading up Infection Control, has a good plan in place and delivers according to that.
Harald Stock, obviously, who has been with us since the beginning of the year, it's probably hard to judge his sort of performance over the past 3-4 weeks, but I have a very good feeling about Harald's abilities. I think that in the case of Extended Care, a lot of the restructuring, the heavy restructuring, I would say, has been concluded. We still have things we can do, and we will certainly pursue those additional efficiencies. But I think getting the top line up and restoring a more dynamic business is really the priority for Harald in that business. So, yeah, I think I have the team in place in terms of business leaders to help us reach our financial objectives.
When it comes to the move to Gothenburg, then it's closely linked to the comment I made around the outlook. And that is to say, our belief is that if we are intent on delivering these additional improvements and efficiencies, that will mean centralizing certain functions that have previously been sort of embedded in the business areas, then we need to have the ability to access the competence that can help us on that journey. And this is partly people with experience from shared service operations. We have recruited a person who will be heading up global shared services for us in finance, HR, and so forth. And we're also now in the process of recruiting sort of senior purchasing professionals to help us drive the sourcing agenda, both in direct and indirect.
It's difficult to think of an environment where I think the recruitment of sourcing professional is going to be better in Sweden with the car industry. I mean, we can have opinions about the profitability of the car industry, but when it comes to the professional management of purchasing and sourcing, it's a very, very well-developed industry. So, it's worth noticing that my business area managers, none of them sort of will reside or resides today in Gothenburg and will reside. I mean, Medical is headquartered and based in Germany, Extended Care in the Copenhagen, Malmö region, and Infection Control here in Gothenburg.
... Okay, now that's great. Just lastly, if I may, other people have touched on it already, but, I mean, you, you said you had 9% order growth in Medical Systems, even though the critical care division was weak. Could you maybe just go into if you've got the breakdown of what your ventilator order growth was in the fourth quarter with the Servo-u launch? And when should we see that actually start to move the order growth on the Medical Systems side? You know, if any color on kind of which countries are going to be ramping up through the first and second quarter of 2014, that would be very helpful. Thanks.
Yeah, I'm not sure I can provide that if I have access to that data, but let me put it this way. That, from memory now, in the first, at the cycle time, I'm basing myself on revenue growth now because the cycle time on the critical care side is relatively short. In other words, there's not much of an order book. We-
Mm.
We have a very quick turnaround of orders. So, the year ended up, in organic terms, flattish, for critical care overall. And considering that anesthesia grew, you could say that respiratory declined somewhat, over the twelve-month period. Up until the third quarter, we had—we were still in growth with critical care as a total, so we ended up with a weak, around 10% decline in the final quarter of 2013. So, and we’re talking a handful of Servo-u shipments in that time period. I would think that we’re looking to grow the business in this coming year, and we’re looking to improve profitability in this coming year.
But, as we typically don't comment sort of all the way down to bottom line on individual divisions, so I think I'll leave it at that. But we're looking to a meaningful improvement in earnings in critical care.
Okay, maybe just quickly put it another way. The 7.7% order growth for Medical Systems in Europe, are you basically saying that that didn't really include much in terms of the Servo-u ramp up?
No, no, I mean, we're talking, I would say, if I say 10-20 machines, I think it's that ballpark in the quarter, and those were sort of shipped in. And that has more to do also with our ability to ship, right? So we've launched a product. We've started to make commercial deliveries in volumes we can manage to ensure that we pick up any early signs of weaknesses in field with this new, and this is typically how we do it, but we'll then see a gradual ramp up in volumes, hopefully. But, I don't think I can detail the phasing of that, but a safe assumption would be that growth will be much higher in the second half of the year than the first half.
Okay. All right, thanks for your time. That's, that's great. I'll go back in the queue.
Thank you.
Thank you. We'll take the next question from Ingeborg Øie of Jefferies. Please go ahead.
Hi, Johan. Thanks for taking my question. Firstly, on thinking ahead in terms of acquisitions, we know obviously that you'll be paying down your debt relatively quickly and be ready to make more acquisitions. So I was wondering, you know, where in which areas of the business do you see the greatest opportunities at present? And how are you thinking about the current market conditions in terms of, you know, asset prices and whether maybe we should expect things to be a bit more quiet from Getinge, given the prices in the market? Second question is on Russia and the comments that you made there. We had a couple of years where Russia was performing exceptionally well, and there were a lot of tenders.
Are we seeing a reversal here, and so we could expect a couple of years of very slow growth as the kind of big investments now are normalizing, or do you see the weakness that you mentioned there as a result of something else? Thank you.
Yeah, on acquisitions, I mean, my personal opinion, if we start with valuations, is that companies are relatively expensive at this point in time. And, this of course varies, but on average, they're high. I think it's a reflection of the general, uptick in multiples in the sector that has occurred over the past, say, 12 months or 15 months. And, but again, if almost all the acquisitions we make are justified on the synergies we can generate, so I think one needs to be on a case-by-case basis, and we're certainly looking to make acquisitions.
Even sort of after the PULSION acquisition concluded and paid for, we believe we have about SEK 8 billion, or that we can raise another SEK 8 billion of fresh debt to use for acquisition purposes. The areas where we're looking, I mean, we, we'd be happy to reinforce any of our businesses, but if we're looking at sort of larger and additions to our existing portfolio, I think we need to look in the Medical Systems business. Cardiovascular is always a hot topic for us. They may not necessarily be your several hundred million dollars worth of revenues, but they can be in the $100-$200 million revenue sizes.
I see quite a lot of opportunities in the critical care, a little bit like the PULSION, and we have, as we've expressed, the desire to build a portfolio of technologies for advanced patient monitoring, in basic monitoring, I should say. When I move over and sort of comment some around Russia, I'd say that when it comes to the number of projects available, we have sort of outstanding quotes that are higher than they've ever been. I think it's more the ability to finance these projects that tends to be a little bit the challenge. If we look at the year overall, we're down on the prior year with about 20%, and this really all revolves around medical system that makes up the lion's share.
But if we look to the last quarter of the year, we had a pretty good increase in the quarter. And just say, picking the numbers here, in 2012, I believe we had revenues of approximately just under SEK 700 million, and in 2013, we had revenues of just over SEK 500 million. But only in the last quarter, we had SEK 200 million worth of order versus around 130-140 the year before. So I wouldn't call that a trend, but it's not like it's been sort of a total stop to orders, but it is very chunky.
You know, suddenly things get released for funding, and then you experience a long period of time when very little happened, although that list of opportunities continued to grow.
Great. Thank you, Nikolai.
You're welcome.
We will take the next question from Mattias Häggblom of Danske Bank. Please go ahead.
Good afternoon. Three questions, please. You appear to have posted two of your strongest quarters in Western Europe for the last at least three years, in Q3 and Q4, and still you say that you expect the recovery to be slow. Why are you not more optimistic with these two quarters backing you now? That's my first question. Secondly, you grew orders by 13% in the rest of the world and 24% in BRIC this quarter. Any chance you could put this number into context with historical growth rates for BRIC in particular, and if any large orders drove that number? And then just lastly, coming back to what you're gonna tell us more about in Q2, but I guess another shot at it.
When you say substantial savings to be made from coordinating these SEK 10-11 billion generic costs as well as sourcing costs, do you mean in relation to the total cost base of sourcing, or in relation to the group's earnings, or what makes these savings qualifiers substantial? Thank you.
Okay. So if I get all this right, the why are we a little bit more cautious on Western Europe? I mean, I believe that is in response to the development, the way things evolve in North America after a relatively sharp decline, after the financial crisis set in. And I mean, the same thing happened in Western Europe, but only a couple of years down the road, where that sort of private debt issue has sort of transferred into a public debt issue. And that's one sort of angle to why we think it will be slow. The other reason is that I think that as we get into the second half of 2014, we'll sort of be faced with these two last stronger quarter.
My experience tells me that when you're looking at sort of good quarters and comps, et cetera, they have a tendency to surprise you a little bit, you know, 12 months down the road or four quarters later. So it's, it's really based around that and also the indications that we're getting from our markets that, yes, things are improving, but they're not improving at a tremendous rate, and public finances are still fragile in many of the European economies. The BRIC, I don't know if I can provide sort of more color on it. I would say in the case of, if I sort of more overall talk about the BRIC countries, the BRIC countries in 2012 were not great in my opinion.
We had some Russia, as we saw, was actually quite a good improvement over the prior year, and so was Latin America. That has continued to progress very nicely, or Brazil, very nicely this year. But if we look to China, and particularly on the capital equipment side, it has been disappointing for at least two of our business areas, Extended Care and Infection Control this last year. And India really was, I would say, a recovery from a pretty weak 2012, where we're looking at, you know, at solely double-digit numbers, but we had double-digit declines in the prior year period. And again, as I said earlier, I think there are variations between the business areas.
I think medical has sort of performed very honorably in the markets outside of North America and Western Europe, but I find that Extended Care and Infection Control have been disappointing in their growth in that time frame. I don't know if that answered your question, Mattias.
Sure does.
The last, just to substantiate that. So when we have been sort of reasoning around what are the resources under the control of the business areas or what are the resources that could possibly be pooled and viewed as an opportunity for the group as a whole, you could say that anything that allows the business area management to actually control the customer experience. So that is to say, the products we develop, the capabilities of those products, the sales organization, and how we decide to go to market, how we support with services or marketing, anything that sort of makes a difference in the lives of our customers. Those are quite sacred to us, and those belong to business areas. So we're not talking about doing anything by means of centralization.
But when we take those costs or expenses that are related to things that are very generic, in the sense that if we do our books in one place or another, doesn't mean a lot in the end of the day to a customer, and probably not to our own business either. But there are certain places where it's cheaper, and there are some significant benefits by centralizing processing of various administrative functions. At the same time, we have a relatively large spend outside our own group between indirect spends, and indirect can be things like travel, car fleet management, facility management, et cetera, et cetera, et cetera. Or it can be direct sourcing in components, et cetera. And when we looked at these three categories, they amount to somewhere between SEK 10 billion and SEK 11 billion on an annual basis.
In the assessment that we have made with the help of external expertise, using reasonable benchmarks, catering for maybe the relative complexity of our business, then we've sort of estimated certain savings that are substantial and that we believe that we can realize over a time period. But these savings that we can realize comes with certain costs, if we talk about the shared services, if we talk about some of the indirect, there are also certain costs associated with them. Some of those will be sort of, we believe, expenses that will come through the P&L, but certain items will probably also be capitalization or building up capabilities that will then be amortized over time.
To avoid the mistake, I think, of sort of providing some sloppy guidance here, rather than doing our homework properly and communicating this so you have the right expectations of cause and effect around these programs. This is why we would like to have this extra time and to make sure that we're not sort of misleading, or we come back to say we didn't mean that, we meant that, etc. That is sort of the context in which we're discussing these scale opportunities that we see.
Perfect. Any timing in Q2 on the Capital Markets Day?
No. Why not aim for the middle? But it's not a promise, but we—I think we would probably aim for maybe having posted the Q1 result and having definitely sort of chewed this over, we will probably do a bottoms-up review again of the business area, individual financial targets to superimpose on these, and just make sure that we have the full and comprehensive picture.
Sure. Thanks so much.
Thank you, Mattias. I think considering that we were going on for so long in the beginning, we can take one more question, but then I think we need to close this conference call.
Thank you, sir. We'll take the next question from David Adlington of JP Morgan. Please go ahead.
Hi, guys. Thanks for taking the questions. Firstly, just a couple of points of clarification around Forex. The SEK 250 million of headwind, is that at the pre-tax or the post-tax level? I also just wonder, I may have missed it, but could you give us a sort of headline or quantify the headwinds to the sales line? And secondly, if I remember back about three years ago, you gave that 22% guidance for 2013 or 2014. You've actually come in this year about 18.5. As we go into next year, you've got the Forex headwinds, sorry, into 2014 and Forex headwinds, probably showing about another 100 basis points off that.
I suppose, really, what comfort can you give us that, you know, you've got greater confidence in achieving that 22%+ margin this time than you did three years ago?
Yeah, I think we asked at this time, it sounds like we've been keeping changing it all the time. But, I think we have ample things that we can do and undertake to get us there. The challenge, I think, and we alluded to it a little bit earlier, and, is what the lower growth that the entire medical device industry has experienced since 2009, what it has done to the pricing environment. And I think we've commented on this on several occasions to say that we have very few devices that we do in large enough quantities and, consistently sort of in standardized formats that we can actually track it.
But I think it is relatively safe to assume that the price erosion that we have likely experienced in the last few years have been higher than we anticipated, and I think this is the biggest doubt that we have between realizing financial targets or not. And, I think we'll be more stringent in that, going forward. But I also think that, you know, we just have to, like, I think all medical device companies realize that, we have significant potential to take down cost in our industry. I just think that we have to accelerate that side of our, of our agenda a little bit more than we've done historically. And...
That's also why, partly why we have sort of undertaken the strategy review that we have done, to sort of give ourselves a scenario for what the healthcare markets will look like over the next five years. Where are the pockets of growth? Where are the pockets of challenges? How do we respond to this? How do we exploit the size of the group to its fullest potential without sort of damaging the operating model? All of those things have come into play in our discussions, and I'm confident that we can continue to develop our group.
Okay, can I just follow up on that? Are you expecting the pricing pressure to moderate going forward from here?
I again cannot quantify it, but I think this is an assumption that I don't think is totally unrealistic. If you consider that the growth of the global device industry in the four to five years preceding the financial crisis at the autumn of 2008 were in around double digits globally, and that in the last four to five years, that same number has been around 3%. I think it's safe to assume that it's not the procedure volume that has been cut by 70%, that there is an element of price erosion. But I must say, I cannot quantify it.
But I think if I look at the activities that we have undertaken, when I look at the development of the operating margin, and yes, the currency headwind has been quite a lot stronger than we anticipated, but it only accounts for part, I would say, of the lack of progress we've made, if you will. And I think that we have to at least assume that the other components probably could fall into the pricing category, apart from the mix issue we've had, which is definitely a reality, and one that we think is of a temporary nature.
Great, thanks. Just a Forex question, please.
Yeah-
You had another question about the hedge.
Yes.
Then if you take the hedge, that is a pre-tax effect. Also don't forget about the translation effect, which is SEK 30 million, which Johan mentioned about at the beginning. That is also a pre-tax impact.
But, and that would correlate with the top line impact, right? So the Forex transactional effect has little, has nothing to do with what the PNL will look like in its makeup. So there will be some marginal effect on the top line, but you could probably translate that backwards up if we assume that we have a pre-tax. If it's a pre, say, it's an EBITDA, to make it simple, you can multiply that by five times, and you probably have the top line impact of some SEK 150 million, would be my guess.
Great. Thank you very much, guys. Appreciate it.
Okay. Okay, with that, I think we need to wrap up. Sorry for running over a little bit. I hope no one has sort of caused anyone any problems. You are always free to call either or myself after the call if your question wasn't answered or if your question wasn't put. We've sort of put 2013 behind us. We're happy with the growth. We're a little bit unhappy about how we have used that growth and translated it into earnings, but this is something that we'll hopefully correct going forward now. And I think we have quite a lot of ammunition going forward to underpin the margin targets that we have communicated. So, thank you very much.
Thank you, ladies and gentlemen. That will conclude today's conference call. Thank you for your participation. You may now disconnect.