Hello and welcome to the Getinge Q1 teleconference for year 2020. Throughout the call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Just to remind you that this conference call is being recorded. Today I am pleased to present CEO Mattias Perjos and CFO Lars Sandström. Please go ahead with your meeting.
Thank you very much. Welcome to today's conference, everyone. With me I have our CFO, Lars Sandström. He will present the financials a little bit later. We can move directly to page number two, please. I wanted to show you this before we get into the figures and facts in the quarter. This is an opportunity, I think, to reflect on COVID-19 and what I've seen in terms of dedication, cooperation, and fighting spirit among the clinicians in hospitals and our people in Getinge throughout this crisis. It's been an exceptional cooperation, so I wanted to send a big thank you to all of you for the great work done so far. This battle is far from over, and we promise to continue to do everything we can to contribute in the continuing fight against this pandemic as well.
I also want to highlight that besides an intense cooperation with hospitals all over the world, we also have had a good dialogue with governments and governmental bodies in all regions across the globe. The same goes also for companies from other industries. We've had more than 200 companies reach out to us the last couple of months here, offering support in the task to ramp up production capacity to meet the rapidly and significantly increased demand of advanced ICU ventilators. I want to send a thank you to all of them as well, and we're looking forward to continuing to cooperate with you throughout this pandemic. With that, we can move over to page number three, please. If we look at some of the key takeaways for the first quarter of 2020, we've had exceptional order growth in Q1.
The intense COVID-19 pandemic created a huge demand for advanced ventilators and also ECMO therapy. Our world-leading positions in both these areas have contributed to an increase in orders of 47% organically, with a very high pace at the end of the quarter. The increased order volume at the end of the quarter was only to a very limited level converted into net sales, but despite this, we grew our sales by 3.8% organically and 8.7% in actual numbers. On the margin front, we can see that margins continue to improve, mainly due to increased sales in Acute Care Therapies, increased productivity, and also positive currency effects, which we'll come back to a little bit later.
We've also had a good quarter in terms of cash flow, where free cash flow increased to SEK 988 million in the quarter, thanks to higher earnings and continued good progress on working capital efficiency. The result of this is that our leverage continues to creep down, so we are at 2.4 at the end of the quarter compared to 3.4 one year ago. Move over to page number four, please. We get a lot of questions on the impacts of COVID-19 on our business, so let's take a closer look at what it has meant for us in the first quarter in the different parts of the business. If we start with the demand side, orders have increased at an exceptional pace at the end of the quarter within both critical care and cardiopulmonary.
More specifically, in these two areas, it's really about advanced ICU ventilators and ECMO therapy in two categories where we are the number one in the world. At the same time, we've seen a negative development in products related to elective surgery and also large parts of our portfolio for operating rooms and infection control in hospitals and some parts of the business in life science as well. I'll come back and dig a little bit deeper into this on the next slide. When it comes to supply and logistics, we early on identified a bottleneck linked to supply of components in order to be able to ramp up production of advanced ventilators.
I have to say, though, that this has been handled in a very professional way by the team, and therefore we are confident on ramping up the capacity to the 160% increase that we have announced. It's a significant increase. I'm also very happy with the not having any material negative effects from interruptions in the supply chain, despite the fact that we have suppliers from all over the world. This truly shows the strength in partnering and working close to suppliers with a high level of transparency, and this continues on a daily basis for the rest of the year. The same goes for production. We were very quick out of the box here, using a very disciplined process and also fit-for-purpose protocols in order to mitigate risk of infection in our different factories. The result is that we've had no material interruptions during the first quarter.
Quite the contrary, actually. We've seen that our teams have been very energized and also using the opportunity here to bring out the best in every one of us in the company and the companies that we're partnering with. This is why we've decided to ramp up production of our ventilators by 160% this year. One should also remember here that it's a totally different thing to produce an advanced ICU ventilator compared to the sub-acute ventilators mentioned in most of the ramp-up articles that you've been able to read globally during recent weeks. One should also remember that there's a reason why so many customers see the value in our ventilators. They're simply the best when it comes to treating the most difficult cases, thanks to a high level of automation, user-friendliness, and an ability to monitor the patient and put a really precise therapy into action.
It is being really customized to that specific patient, something that early research indicated is really crucial when treating COVID-19. At the same time, in our business, we have areas where we see a temporary delay of orders. We are confident the orders will come in this area as well, but they will be pushed back a few months. This means that after the end of the quarter, we have decided to initiate some furloughs in parts of businesses related to Surgical Workflows, where we have seen a decline towards the end of the quarter. Finally, from a financial perspective, we see improved margins due to MICS. The Acute Care Therapies products come with a margin that is higher than the average in the Getinge Group.
We also see strong cash flows, simply as earnings are higher, and we at the same time continue to have really good control of working capital. Here, I want to remind everybody about the simple rule that high growth normally leads to higher working capital as well. We will work actively to continue the positive trend that we have of working capital. The ramp-up of production as well will require some significant purchases of components, and this will be visible in the second quarter. This is also why we have strengthened our cash position significantly. At the end of the quarter, we had approximately SEK 2 billion in cash. Last week as well, we issued a green commercial paper amounting to SEK 1 billion at a very favorable cost.
The book-building process, I would say, was very, very quick, and this will be used for ramping up both in critical care and in cardiopulmonary. We can then move over to page number five, please. Here is a picture that allows us to dig a little bit deeper into the two trends that we see in terms of order intake, and also I will talk a little bit about what to expect going forward. When it comes to our advanced ICU ventilators and ECMO devices and related consumables, we are the global leaders with double-digit growth in these categories already prior to COVID-19. Right now, we see an extremely high demand for advanced ICU ventilators.
A large proportion of the global volume increase taking place at the moment is within mid and sub-acute ventilators as well, so not the highly advanced ICU ventilators, which is what we focus on and that so many customers want and need in this difficult situation. We see a significant increase in demand on ECMO devices as well, and I'm very pleased that we've decided to invest and grow this business over the coming five years. We are embarking on a rather significant investment program to increase production capacity and also develop new products for the long term. On the lower part of this slide, we see Surgical Workflows and Infection Control, where these are categories where we are number one or two in the world, depending on market segment and region.
Our customers in surgical workplaces where we offer products for operating rooms, they're in more of a low activity mode at the moment, which basically means that orders are delayed. This is expected to continue for probably three to six months, according to customers and independent experts in this field. As a consequence, we have initiated furloughs in parts of this business, and when things start to get back to normal, there will be a production lead time from order to delivery, usually a little bit less than a quarter for this business to ramp back up. In Infection Control, we see the same pattern as in Surgical Workflows, but with less of a decline in activity. We still do expect lower order intake for a while in this part of the business as well, and have initiated some temporary layoffs here also.
When we see order intake starting to grow again, we have between one and two quarters in lead time, depending on the product and the scale of the project. All in all, these two divergent trends make it quite difficult to give a precise outlook on how much we expect to grow net sales for 2020, even if the balance here is positive. Let's move to page number six, please. As a consequence of this uncertainty that we have because of the COVID-19 pandemic, we have chosen not to provide a forecast of how much net sales is expected to increase for full year 2020. We will come back if there's any news here, but I don't expect that we will change this during 2020. We can then move over to page number seven, please.
If we look at some of the other key takeaways from the quarter, operational leverage starts to come through the P&L, thanks to increased volumes in combination with the positive impact from restructuring activities that we implemented in 2019. We see good productivity gains in production and our supply chain as well. Our critical care product category and the production facility in Solna also received the EU MDR certification in the quarter. This process then continues in our other sites and product categories with good progress. We have also taken a decision to ramp up production capacity, as I mentioned earlier, related to ECMO, and this will be done over a couple of years. ECMO is a product category where Getinge is the market leader and where we saw strong demand already before COVID-19, and it has been significantly reinforced as a result of the pandemic.
It's also worth mentioning that we launched a couple of promising products in the quarter. One is Torin, a complete operating room management software, which was launched globally in February. Torin helps surgical departments with their surgery planning and to continuously improve the productivity of the resources in and across the different collaborating departments inside the hospital. Torin is currently being implemented in two pilot sites in France and in Japan. Those are some of the key other takeaways that we wanted to highlight this quarter. We can move over to page number eight, please. If we spend a moment on order intake here, as I mentioned in the highlights, we've had growth of 47.2% organically and 53.1% in actual numbers.
The strong order intake growth is clearly linked to Acute Care Therapies in both Critical Care and Cardiopulmonary with products for the treatments of patients diagnosed with COVID-19. I want to remind everybody again, though, that also before COVID-19, these were our two growth engines in Acute Care Therapies. Life Science and Surgical Workflows order intake decreased organically and at an increasing rate towards the end of the quarter, and this is the result of lower activity in affected parts of the hospitals and also parts of Life Science operations. Also worth mentioning, though, even though without the strong order intake related to ventilators, the order intake growth was above market rates in the quarter. When it comes to net sales, we had 3.8% organic growth and 8.7% in actual numbers.
The organic growth that occurred in the quarter is mainly attributable to deliveries within Acute Care Therapies to customers in Asia-Pacific and EMEA, and this is, of course, partly linked to the spread of COVID-19. I underline again that only a very limited part of the increased order volume in the quarter was actually converted into sales, so most of that is ahead of us. Net sales in Life Science and in Surgical Workflows were negatively affected by lower activity due to the COVID-19 pandemic, as you can see here as well. That is the order intake overview. We can move over to page number nine, please. If we look at the order intake per business area, the 47.2% organic and 53.1% increase in actuals meant that we had a total order intake of SEK 9 billion 452 million in the quarter.
As you can see in the breakdown here, SEK 3.5 billion of that is from Acute Care Therapies, where we had 96.4% organic growth. Critical Care, Cardiopulmonary in Asia-Pacific and EMEA were the main contributors to this. If we look at the other product categories here, we did not have the same strong growth as last year. For those of you with good memories, we had 8.2% growth for the business area in Q1 of 2019, so a tough comp already there. If we move to Life Science, we had -13.1% organic, but + SEK 8 million in actuals. This organically reduced order intake is mainly attributable to delays of new products, and there was, in general, good activity related to pharma production, but much slower in the lab segment. That is the dynamic inside Life Science.
This was partly offset by very healthy growth in disinfectors and consumables, though. If we then look at Surgical Workflows, we had -14% organic growth or -SEK 245 million in actuals. The organic order increase decreased in relation to the good growth that we had in Q1 of 2019, which was 6.4% at the time. We saw an increasing rate of decline towards the end of the quarter, which is due to the lower activity in those parts of the healthcare system that are not directly linked to the treatment of patients with COVID-19. This was particularly evident in surgical workplaces. A small positive sign towards the end of the quarter was that orders received in Asia-Pacific increased compared to the previous year. We can move over to page number ten, please.
If we move one step down and look at net sales, here we have for the quarter, this increased organically by 3.8% and in actuals by 8.7% to SEK 6 billion 33 million. Here we had a currency impact that was positive of SEK 204 million, and the rate of growth in capital goods was higher than compared to consumables, services, and spare parts. By business area, Acute Care Therapies had 7.8% organic growth of SEK 396 million in actuals. We had intensive work to quickly deliver ventilators and ECMO products to hospitals. That contributed to an increase in the sales at the very end of the quarter, despite that the other product areas did not reach last year's strong growth. Again, most of the sales growth is ahead of us from where we are now.
Disruptions due to COVID-19 have not had a negative impact on production and logistics during the quarter. There's been a lot of daily manual intervention in the supply chain, but we've been able to keep it going, and we expect that to continue to be the case. When it comes to Life Science, we had 1% organic growth or SEK 96 million in actual numbers. We had good organic growth in the sterile transfers and sterilizers and consumables product areas. This was also the case in the last month of the quarter. We had lower net sales related to washers and service, and again, this is the result of the impact of COVID-19. In Surgical Workflows, we had -3.2% organic growth or -SEK 7 million in actuals.
Net sales followed the same patterns as orders received in Surgical Workflows, with reduced activity towards the end of the quarter as a result of the COVID-19 pandemic. This development was most evident in Surgical Workplaces and in the Americas region. We can move to page number 11, please. If we look at the gross margin development during the first quarter, we had adjusted gross profit increasing by SEK 393 million- SEK 3 billion 280 million in the quarter, again driven mainly by Acute Care Therapies and support from currency, which in this case was SEK 189 million. The gross margin for the group continues to strengthen, mainly due to the sales mix with the increase in Acute Care Therapies and a healthy product mix overall, together with increased productivity and positive currency effect. With that, I leave over to you, Lars, and we can move to page number 13.
Thank you, Mattias. Starting with adjusted EBITDA then, it increased by SEK 292 million in the quarter, and the currency effect had an impact of SEK 139 million on the EBITDA increase and supported the EBITDA margin by 2 percentage points. Adjusted gross profit impact on the margin amounted to 1 percentage point due to reasons Mattias just mentioned. Our efforts to stabilize our adjusted OPEX is starting to have an impact year- on- year on the margin, and this quarter the impact was 1 percentage point. All in all, this resulted in an adjusted EBITDA of SEK 661 million compared to SEK 369 million in Q1 2019, and the margin increased from 6.7%- 11% year- on- year. With that, over to page 14, please. Let's take a look at BA contribution to adjusted EBITDA.
Starting with Acute Care Therapies, it increased its adjusted EBITDA by SEK 302 million, and the margin improved by 6.2 percentage points, mainly due to increased sales volume and positive currency effect, as well as some productivity measures coming through. In Life Science, adjusted EBITDA increased by SEK 2 million, while the margin decreased by 1.1 percentage points. This is mainly attributable to higher overheads compared to the same period last year as a result of acquired operations and currency effect. Surgical Workflows adjusted EBITDA decreased by SEK 8 million, and the margin decreased by 0.5 percentage points, mainly due to lower sales volume compared to Q1 2019, which was partly offset by positive currency impact. The increase in adjusted EBITDA was positively impacted by SEK 139 million in currency effect in the quarter, where SEK 81 million is related to realized hedge losses in Q1 2019.
For the full year 2019, realized hedge result amounted to -SEK 25 million, with losses in the first half and some gains in the second half of 2019. With that, over to page 15, please. This is to give you an update on the tax situation. Last year, for the full year 2019, we had a reported tax of 34.2%. As you might remember, this was impacted by the new U.S. tax regulation with more, let's say, fixed taxes on internal payment flows. If we look at the reported effective tax rate now in Q1 2020, it reached 35.1%. This is related to seasonality and the U.S. tax regulation. Here, the impact related to this U.S. part is some 3-4 percentage points.
When we look at the full year and an underlying level here, we expect that during the year to come towards 30%-32%, depending on the country mix here during the year. I'd also like to highlight, if you look at 2019, the paid tax is considerably lower than the reported tax. This is due to unutilized tax loss carry forwards. When we come into this year and going forward, we expect to continue to utilize these tax loss carry forwards. Let's move to page 16, please. Free cash flow developed positively, mainly due to the increased earnings and continued good control of working capital, which continues to decrease in terms of number of days. We are now at around 110 days, down 19 days from the peak in Q2 2018.
As a consequence, leverage is significantly improved to 2.4, which can be compared to 3.4 at the end of Q1 2019. Also, if excluding pension liabilities, the leverage was at 1.7. Let's move to page 17. Looking at net debt, this was impacted by currency and the finalization of acquisition in Life Science in the quarter. Despite this, we have improved from SEK 40 billion in Q1 2019 to SEK 12.7 billion in Q1 2020. The cash position increased and amounted to SEK 2 billion at the end of the quarter. As you have heard, we have also done further activities after Q1, with raising SEK 1 billion in the commercial paper market. This follows conscious decisions to ensure that we have a solid situation in these times. On top of this, we have committed and unutilized credit facilities amounting to more than SEK 7 billion.
Let's move to page 19, and over to you, Mattias.
All right. Thank you very much, Lars. We can, as Lars said, jump all the way to page number 19, and we'll do a short summary here. We have seen exceptional growth in order intake in the quarter, driven by critical care and in cardiopulmonary. We expect this to continue for a big part of 2020. We also see improving margins, and the COVID-19 effect on actual sales and margins is rather low in the quarter. Most of that is ahead of us here, based on the strong order intake that we've had. The improved margins are more from productivity gains, partly from mix and also, of course, from currency. We have strong cash flows and a very solid cash position as well, as Lars just highlighted.
We look forward now to continue to work just as intensely and dedicated, together with the hospitals and clinicians over the world, to continue the fight against COVID-19. With that, I open up for questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing zero two to cancel. That is zero one to register for a question. Our first question comes from the line of Annette Lykke from Handelsbanken. Please go ahead. Your line is open.
Thank you so much. First of all, just some clarification on the margins and the impact from FX. If we look at the group for whole heating and gross margin FX effect, you say that is SEK 190 or 89 million.
That corresponds to around, I would say, 300 basis points. Is it true that the gross margin impact is mainly coming or all coming from FX, and as such, product mix does not have an effect on gross margin? I understand it has not done adjusted EBITDA. My other question is, I understand you are suspending out of these times, but on page 18 in your Q1 report, you are highlighting mainly the negative as the reason for why you are suspending the COVID-19 or suspending your outlook. During your presentations, you are saying that you do see the net effect balance to be positive from increased demand within ACT and then a decline in the other two divisions. Could you please provide a little bit more color on that, saying, do you see this as a net positive or net positive opportunity for you?
I understand the situation is very fluid, but a bit more precise comments would really be nice. My final question would be on the order you have right now within ventilators and ECMO systems. Are these only acute orders, or how do you see the aftermath of COVID-19? Do you see governments or hospitals in general preparing or updating their ICU capacity in the aftermath of COVID-19? Thank you so much.
Okay. I'll start with question two and three, and then move over to Lars for the first one. If we start with the guidance bit, it's clearly net positive for us the way things look right now. The reason for withdrawing the guidance is just that it's a very big span between the best, the base, and the worst case in this regard.
We do believe that this is a net positive impact for the group, and it certainly looks that way at the moment. I think the one thing maybe to highlight is that, of course, the risk goes up a little bit as well when we're so dependent on two business or sub-business areas, which is cardiopulmonary and critical care. As long as the supply chains keep together here, it's no question that this will be net positive for the group. To what extent, we can't say, and therefore we wanted to withdraw the guidance. When it comes to the order intake in critical care and cardiopulmonary specifically, with ventilators and ECMO therapy, we did have strong growth already before COVID-19. Part of the related demand that we see now in these categories continues to be maybe non-COVID related as well.
For sure, the capacity that we have to serve now, the market goes to, especially for ventilators, to COVID-19 patients. When it comes to the aftermath, it's a little bit early to talk about that. I think you've seen many, many initiatives from building new ventilators and so on, but these are not ventilators that compete with us. These are sub-acute ventilators, emergency vents, and so on. It's very unlikely that any of these payers will stay around after this pandemic for regulatory reasons. We think that effect is likely to be very small. Other than that, I think it's a little bit too early to say the aftermath here. I think one thing that we're working actively with hospitals now is for planning for the return of elective surgeries, because we could see a lot of struggles when it came to actually managing the outbreak of the COVID-19.
We can see that there's a backlog of elective surgeries being built up as well, because this demand doesn't go away. It's important that we don't end up with a shortage of other products once we're through the peak of the COVID-19 pandemic. I'll leave it to Lars to discuss the FX margin question there.
Yeah. If we look at our gross profit margin, yes, we are impacted by currency. Taking that out, we have a 1 percentage point improvement coming through. Yes, we get some help from leverage, of course, when it comes to critical care and cardiopulmonary. We also have some lower activity in the SW side, where we get some underabsorption. We can see that the activities we have been working with all due to 2019, we have continued during 2020.
We see those activities continue to deliver when it comes to improving our margin, both in the supply chain. We see there is clearly also an underlying improvement coming through.
Thank you for the answers. I'll jump back into you.
Our next question comes from the line of Ed Ridley from Redburn. Please go ahead. Your line is open.
Good morning. Thank you. First of all, congratulations on being able to meet this crisis and the plans you already put in place. I also had a follow-up on aftermarket ventilator demand. There is a lot of debate around this. Clearly, I think there are some questions that hospitals may be oversupplied after the crisis. That seems odd to me. In my mind, there is a potential need for a permanent increase in ICU capacity and preparation.
My first question would be, what are your thoughts on that? If you've had any initial conversations with hospitals on sort of slightly longer-term planned ventilation. Secondly, in the U.S., you mentioned the capital orders were slightly weaker in the Americas and other regions. This is what we're hearing from all your large partner peers. What do you think is particularly driving the weaker, more rapid decline in demand, particularly in North America in March relative to Europe, which had the virus earlier?
All right. Thank you. Yeah. If we start from the beginning there, if I just go back and look at the discussions we're having with hospitals, we certainly don't feel that any I haven't heard that any hospital feel oversupplied with ventilators today. It's quite the opposite.
I think as well that if you look a little bit beyond the current crisis and the peak here as well, I think there is a realization. We've had a lot of political contact as well with many governments in different parts of the world the last month or two here. It's quite clear that there's an understanding that there would need to be a rebuilding of ICU capacity in many parts of the world. Many countries have slimmed down way too much to be able to handle these kinds of peaks. I think there's a lesson for everybody there. I think that will support demand also past the peak here as well. That's, I think, an important pattern that we see.
When it comes to U.S. capital decrease, the conclusion so far for us is that it is related to resources being entirely focused on fighting COVID-19. A lot of investments in more infrastructure type of products, capital goods, have just been postponed due to bandwidth reasons. We do not think the demand is gone, but it is certainly delayed, as far as we can see today.
The next question comes from the line of Michael Jüngling from Morgan Stanley. Please go ahead. Your line is open.
Thank you and good morning. I have a few questions, please. Firstly, when it comes to the acute care order book, how should we be thinking about the recognition of the orders for the coming quarters?
In particular, I would like to know if possible, very similar to what Philips did, is give us an indication for the number of units you intend, the number of ventilator units you intend to deliver by quarter, and what the average price or so is for those ventilators. Secondly, on the quality of the order book for ventilators, have you taken the typical deposits so that there is some sort of cost if someone wishes to withdraw their orders going forward? I have a Surgical Workflows question number three. Do you expect this division to show a decline in organic sales growth this year?
Yeah. Thanks, Michael. When it comes to the Acute Care Therapies order book, it is quite full in many parts of that business, as you understand now.
We've decided not to disclose the number of ventilators by month or quarters and not the average price either. In general, we can say that the peak for deliveries that we can see now is in Q2 and Q3. Like we said in the report, we expect the heightened demand to continue into 2021 also. We do get down payments for a large part of the orders that we take. We're mindful of that as well. We are also mindful about how we manage the risk for cancellations. That's been high on the radar because we're making a significant commitment here in purchase of components for dealing with ventilators. So far, the dialogue here is very good with customers in this regard. We're not particularly worried about this. When it comes to Surgical Workflows, we don't give guidance on individual business areas.
If you look at the overall dynamic, it's, of course, a very slow second quarter for Surgical Workflows that we have ahead of us now. We do see some positive signals from parts of the market that there's planning for elective surgeries to come back. I think the next step after that is that the discussions about investments in more infrastructure type of products and so on also picks up. It's too early to say how long this lower level of demand will be in place. We don't expect a big change in the second quarter, at least. For the full year, it's impossible to give any realistic guidance on this.
May I also please ask a follow-up question on Surgical Workflows? I recognize you don't give guidance for margins, but for Surgical Workflows, is there scope for the margins to be positive this year?
I mean, increasing over last year, if sales are flattish or in slight decline, do your cost savings measures and your restructuring and Surgical Workflows, is there a reasonable potential that you actually could see margins improve year- on- year?
That's a nice word, Michael, with reasonable potential, I think. I think a lot of the measures that were put into place in 2019 by Stéphane and his team in Surgical Workflows will have a positive impact in 2020 as well. Under the assumption that it's a flat year, yes, I think there's a reasonable chance that margins will improve as well.
Okay. One final question, please. You mentioned in the press release just before that you thought that the demand for ventilators will continue into 2021.
Are you referring to that the order growth momentum can continue into 2021, or are you referring to the sales momentum continuing into 2021?
In this case, both. The sales momentum is obviously lagging by a quarter or so, so that will last a little bit longer. We do think that we need to first work through this peak, which is going to be through the second and third quarters. There will be parts of the market that have been undersupplied post the peak, and there will be a need for rebuilding some ICU capacity in many parts of the world as well. That is the basis for the assumption that the demand will continue a bit into 2021 also.
Does that mean early 2021, are you suggesting that order book growth could continue to grow into the early parts of 2021?
I'm just trying to understand the statement a little bit around demand continuing versus demand continuing to grow into 2021.
Yeah. Okay. Demand continuing to demand continuing to grow was referring to the growth compared to before the pandemic that will have a heightened level of demand a bit into 2021 as well. I think if you look at the peak in order intake momentum, that's likely to be through the middle half of this year.
Great. Thank you.
The next question comes from the line of Kristofer Liljeberg from Carnegie. Please go ahead. Your line is open.
Yes. Thank you. A few questions. First of all, could you explain how the rest of the ACT business is doing, i.e., not the ventilators and ECMO and other ICU products, but the rest of the ACT?
Yes. I think we've seen a slowdown in that part of the business.
We don't disclose specific figures per subcategory, but there's been a weaker demand for the rest of the Acute Care Therapies. We've seen that towards the end of the quarter, a little bit similar to Surgical Workflows and Life Science. We do think that that part of the business, though, is likely to have a shorter comeback compared to the more infrastructure type of products that we see in Surgical Workflows, for example.
Okay. You see that declining in the second quarter?
We don't give guidance on that forward-looking. The overall dynamic, though, indicates that it's going to be definitely softer in the second quarter, but I can't give you any numbers on that. We saw a weakening towards the end of the first quarter, and that's likely to continue for at least part of the second quarter.
Talking about weakness in the latter part of the first quarter, we saw Surgical Workflows down about almost 15%. Does that reflect what happened in the last few weeks in the quarter, or did you also have cancellations or customers calling you back saying, "Okay, the orders we placed in January and February, can we postpone them?" Was there such a situation as well?
No, we've not seen any cancellations. The decline has mostly been related to the month of March in the quarter.
Okay. Looking at orders for Surgical Workflows in the second quarter, should we assume a similar drop as you had in March for the entire second quarter, i.e., a much more dramatic decline than 15% in the second quarter?
I can't give you, it's too early to give you any kind of guidance on that.
We don't disclose forecasts for the business areas going by quarter ahead.
Okay. Two more questions. On the operational leverage for Surgical Workflows or for ACT, for example, would you expect that you will be able to continue operating costs flat in the quarter or in the year? Or do you have higher costs because of selling more?
No, we don't have any particular higher selling costs here. I mean, to be honest, the increase in Critical Care and Cardiopulmonary doesn't require a lot of active selling, actually. So there's not much related to that. We stand by the guidance otherwise that we will have lower OpEx in relation to net sales. In absolute terms, we prefer not to give any forecast. There are no dramatic changes, I would say, in terms of OpEx. I don't think you should assume any big swings either way.
Okay. Final question. You talked now about ramping up ECMO production capacity, which I think is a great opportunity. Is it possible to say anything about timing and how much? This also, of course, relates to the status with FDA consent decree.
Yes. Yeah. We've been hampered. I think we've had a bandwidth challenge because of being in a consent decree with the FDA. It's been a little bit difficult to ramp up capacity in cardiopulmonary and specifically related to ECMO. We are seeing the end of remediation here, and that allows us to free up a little bit of resources to work with productivity gains. We've decided to make some investments here, orders starting now and over the next couple of years.
These are investments of several hundred million SEK for additional machinery for debottlenecking and so on to make sure that we can increase the capacity of oxygenators quite significantly. You will see that increase partly this year, but mostly for 2021 and 2022 and the years beyond that.
Is it possible to say how much you expect to increase capacity this year and next year?
No. This was a business that grew double-digit already before COVID-19, and it has been accelerated now. We do see as well that if you clear the COVID-19 effect, it was already a therapy that was gaining a lot of momentum. We do expect to sustain solid double-digit growth for the coming years. That is, I think, the only guidance we can give.
Okay. Thanks.
The next question comes from the line of Sten Gustafsson from Nordea. Please go ahead. Your line is open.
Thank you. Good morning. A few questions with regards to the ventilators. Could you give us, or if I look at the production capacity you have this year of 26,000, how much of that has already been booked in your order book in Q1? I'm trying to understand the underlying growth rate in the ACT business. Also, I know you talked a little bit about it earlier, but if you could give us any help on how you plan to ship those, the phasing of the shipments over the coming quarters, that would be helpful. Thank you.
Yeah. Okay. Out of the 26,000, we still had a lot of capacity left at the end of the quarter that wasn't booked with firm orders. We do expect now within April or May that this is going to be completely booked for the full year.
In terms of the phasing of deliveries, it's really a peak now in the second and third quarters that we have visibility on. Whether that's how much of that stretches into Q4, Q1, Q2 next year is difficult to say. We can clearly see now that everything for the second and third quarter is completely sold out. We are trying to have a dialogue with customers about accepting deliveries in the fourth quarter and early into next year as well.
Okay. On the first question there, is it fair to assume that about half, 13,000, were booked in Q1 and the other 13 will be booked in Q2? Is that a reasonable assumption?
It was probably a little bit more than half if you look at the very end of the quarter, but it's not too far off.
Okay. Thank s very much.
Thank you. The next question comes from the line of Scott Bardo from Berenberg. Please go ahead. Your line is open. I believe he did not want to ask a question, so instead, it will go to Johan Unnérus from Pareto Securities. Please go ahead.
Thank you, Johan, and good morning. Mainly follow up and start on delivery on ventilators, mainly then. You already clarified that you expect visibility; you have visibility in the peak Q2, Q3 now, and that you're sort of at your ceiling of your capacity and that you will push out some customers then to accept later deliveries for some, especially if the order continues. That's how I read it. If this level of activity, order intake, will continue, can you increase capacity a bit more? Is that possible?
Yes, it is. I think it will depend on some of the critical suppliers for components.
We are, of course, looking at ways of expanding beyond the 26,000 as well. At the moment, we cannot comfortably say that we can open up the order book for this. It is certainly a lot of active work going into this, both seeing how much we can get from our existing suppliers, but also looking at if there are alternative suppliers that we can get some of the critical parts from.
Presumably, you will communicate when that is in place so you can increase the capacity.
Yes, correct. We will do the same thing as we have done with the first two steps here. Once we feel comfortable with that, we will communicate it also.
Also, at this sort of stretch, but manageable level of delivery, is that sustainable?
If you would see not massive year-on-year growth, of course, but continuing elevated level of delivery and activity into 2021, can you still run at well above normal capacity into 2021 as well?
Yes. Yes, we can. I think if you look at the past capacity with about 10,000 per year, we can run significantly above that even with one shift, actually. The two shifts that we have in place now, we can continue if needed as well. We have the option to ramp up to three shifts as well. It is a little bit more involved when it comes to training new operators and so on, but it is certainly doable. I think we have a lot of flexibility with both scaling up but also scaling down should demand weaken quicker than we think.
Thank you. That is helpful. What about surgical workflow?
The end of Q1 was clearly very soft, and you seem to expect that softness to carry on during Q2. That's the level of visibility you got, I guess. Also, you've taken some actions already. What about sort of more deeper action or structural action or mitigations? Surgical Workflows is already not running at the, well, where you want it to be even before the COVID-19 situation.
Yeah. I think a lot of actions were taken already during 2019. If you remember, a lot of the restructuring costs that we had during last year were related to Surgical Workflows. A lot of those initiatives are already implemented, and we're seeing the positive benefits from this. We have announced as well the closure of the Ankara plant and the move of that to Poznań in Poland. That's underway also.
The other improvement programs in Surgical Workflows are generally moving on at the speed that they were planned to have. There are, of course, some restrictions when it comes to travels and knowledge transfer and stuff like that. Most of them are continuing as planned, and we expect them to have the effect that was planned as well.
Okay. There is no reason to make any further action at this stage.
Not unless, not in addition to what we have already had in our plans. The reductions we talk about in the report, these are furloughs, so temporary layoffs just because we have worked through a lot of the order book in some of our factories. We certainly expect there not to be any permanent layoffs regarding this. On the contrary, we hope that this will come back and will continue where we left off before COVID-19.
Okay. Thank you very much.
Thank you.
The final question comes from the line of Scott Bardo from Berenberg. Please go ahead.
Thanks very much. Can you hear me okay?
Yes.
Perfect. Sorry for the technical problem before. Yeah. Thank you. A few questions, please. And congratulations again to the response to the crisis. Just following on from Kristofer's question about the portfolio in ACT outside of ventilation and ECMO, can you just talk through the various different businesses, whether you're expecting them all to be negative or whether they're some of it more defensive? Of course, you have aortic aneurysm. You have intra-aortic balloon pumps, which are classically deemed non-elective, but others like vascular grafts and so forth and covered stents and what have you. I just wondered if you could just highlight, is there any differences between those buckets for us? The second question, please.
A lot of discussion about your current capacity constraints for ECMO, and please say that you're looking to address that. What I'd like to understand is, have you seen any notable change in mix for ECMO between your HLS systems and your PLS systems? Therefore, can you see significant revenue growth in this business without significant volume expansion? Maybe if you could talk a little bit to that, please. Last question, please. I think ahead of this crisis, you were guiding for 2%-4% group revenue growth and highlighting an expectation of some margin expansion for the full year, albeit more notably coming in 2021. Now, of course, things have changed quite a bit, but it sounds like you're expecting better revenue growth than this.
My question is, is there a genuine opportunity to have more meaningful margin strides for the group level this year than perhaps you would have envisaged only a few months ago? Thank you.
Okay. Thanks. Thanks, Scott. When it comes to ACT outside of critical care and cardiopulmonary, it is a little bit different. If you look at the cardiac assist part of ACT, which is the balloon pumps, we have less of a decline there compared to the cardiac surgery category and compared to vascular systems, which are more clearly linked to elective surgeries. There is a little bit of difference in dynamic there. When it comes to ECMO, I cannot at least recall seeing any major shift between the HLS and PLS patterns here.
HLS was more in demand already before COVID-19, and I don't expect that to have changed or that it will change because of this as well. When it comes to the margin expansion, as you're right, we do expect that the way things are trending at the moment to be above the guidance that we've given out, but very difficult to give a number. The dynamic, I think, when it comes to margin expansion remains the same as before COVID-19, that if we have a higher growth of the top line, it has a positive impact on margins as well. If it stays this way, it's likely that we will have a stronger margin expansion, a quicker margin expansion as well.
That's helpful. A couple of quick others, please. Obviously, a lot of demand on your Hechingen facility and on your Solna facility currently.
Hechingen is still under consent decree. Can you comment as to the flexibility that you've been afforded from the U.S. regulator to meet demand? Has there been any change in their perception of your remediation efforts? Perhaps if you can talk a little bit about that. Lastly, you're already seeing some quite significant deleverage for the group as of the first quarter in spite of the Applikon acquisition. If what you said is true and margin maybe expands a little bit faster, we all thought the business should be in a relatively strong balance sheet position by year-end. The question is, in a sense, is the financial performance of the company that you envisage over the next 12 months or so increasing your appetite to do more meaningful M&A?
Yeah. Thanks.
When it comes to the first question, the consent decree and Hechingen, I think I would only say that we've had a very constructive dialogue with the FDA during the COVID-19 pandemic. We have extended the use, for example, in the U.S., beyond six hours for ECMO as emergency use. In addition to this, there's been a good constructive dialogue about how to prioritize remediation. We both asked and they would like to get this done and completed. We are trying to make sure that we prioritize the short-term patient needs now in the coming months and quarter, but without making any significant delays to the remediation programs. We need to see this through as well. That is a bit of a balance act, but I think it's done in a good way and in a good dialogue with the FDA at the moment.
When it comes to leverage, I think it's a correct observation that there is good underlying cash generation in the business. We don't forecast what the leverage will be towards the end of the year, but it should continue to creep down. When it comes to the relation to making M&A, we never really felt that balance sheet constrained since we have a very committed principal shareholder who has been happy to guarantee rights issues in the past and would do so for the right strategic acquisition as well. When it comes to M&A, it certainly has changed the dynamic of the landscape a little bit here. There is some activity with companies who have ended up in a more difficult position because of this. That may be interesting to have a closer look at and so on.
Of course, a lower level of leverage helps in this regard, but it was never a limiting factor from that perspective. We continue to be active also in this regard.
Very good. Real quick, the mesh litigation ongoing, has that trial been delayed in this environment? Perhaps just a very brief update there, please.
Yes. There has been a delay here as well. We do not expect there to be any news other than possibly towards the end of this quarter about what will happen next step. There have been some delays.
Okay. Thanks very much indeed.
That was the final question of the presentation. I hand back to the speakers for any closing remarks.
Thank you very much. Thanks, everyone, for attending today. I think we already made the summary before going into the Q&A.
I just wish to thank you for joining the call and wish you a good rest of the day. Thank you very much.