Hello, and welcome to the Getinge AB Q3 2018 report. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Today, I'm pleased to present Mattias Perjos, CEO. Please go ahead with your meeting.
Thank you very much, and thanks, everyone, for joining today's earnings call. I have Lars Sandström, my CFO, by my side here, and he will support me during the call and go through the detailed financials a little bit later here in the phone conference. If we start then, the Q3 of 2018 has been a quarter of strong organic growth, but we've had the gross margin impacted by mixed effects. We are continuing to grow at a high pace. The net sales for the quarter increased by close to 15%, and almost half of that was organic growth.
The order intake increased by around 8%, and just under 1% of that was organic, and this, from our perspective, was expected due to a rather strong Q3 in 2017, and some timing effects between quarters. All in all, this means that we now have five quarters in a row with organic growth in order intake and four quarters on net sales. Market and product mix effects in the form of robust growth in capital goods and in markets outside the U.S. and Western Europe are continuing to have an adverse effect on the gross margin. As I've stated earlier, these effects are foreseen, and they're also naturally in a phase of growth that we are in.
We do expect that this sales pattern will support future sales of consumables linked to our—to the use of our capital goods once it's installed and up and running at our customers. In addition to this, the gross margin was negatively impacted by us actively securing a number of large business opportunity at lower-than-average margins. One area that I'm not entirely satisfied with is that despite the higher volumes, we have only limited productivity effects in our plans.
We are working on this in all our business areas in the same way as we have addressed our operating expenses, which you can see have now declined from quarter to quarter, so a lot of work still ahead of us in that regard. Adjusted EBITDA amounted to SEK 438 million , with profitability affected by lower gross margin due to the product and the market mix effects. We also had some headwinds from currency. There was a negative EBITDA impact of SEK 24 million from currency. If you look at the bottom line, we have a SEK 0.78 adjusted earnings per share.
The reported operating profit for the quarter was strongly affected negatively by the provision of SEK 1.8 billion, which is intended to cover all future costs associated with the claims related to surgical mesh implants in North America. This is also what we communicated on 14 October . Having made this provision now, we do not intend to disclose more information since this is now an ongoing process. Finally, here on cash flow, you can see a significant improvement in the quarter. We had free cash flow of SEK 801 million in Q3, and this is the result of a number of improvement activities that we've had going for a while to address working capital. With that, we can change to page four, please.
So if we look at some of the key activities in the Q3, from a growth perspective to start with, we are progressing according to plan when it comes to our key areas. We can see that our systematic sales approach continue to support growth, which I already mentioned. In the quarter as well, we have launched a number of important updates and launches in all business areas. Examples of this is our new model in the Getinge 86 Washer Disinfector series.
The compact and robust Getinge S-8668T, which provide both increased process volumes, lower water and energy consumption, and also improvements in the work environment for the operators, both in terms of safety and in terms of ergonomics. From a growth perspective, comps are expected to be a little bit tougher for the Q4, but as you know, we have a solid order book, which is a good starting point. When it comes to quality, which is really our license to operate here, we're continuing with the rollout of our group-wide quality management system.
We expect this still to be finished in the beginning of 2019, and in parallel with this, we are progressing with remediation related to the consent decree that we have with the FDA. We remain confident when it comes to the U.S. sites that they are remediated by the end of 2018. I want to underline again that this doesn't mean that they're out of the consent decree. It simply means that the bulk of the hard work is done with the remediation, and that we can focus more on our normal business and productivity improvement in those factors.
If we then look at cost efficiency, here, we are focusing on increasing productivity at the same time as we have to make still some necessary investments, and the main examples here is related to quality, and our quality management system, and also certain sales and service investments, here. But we are starting to see this coming into more of a normal state of ongoing business. We can see positive signs from our productivity improvements. So our OpEx is decreasing now from quarter to quarter. And, as I said before, we are addressing the productivity also on a plant level in all our business areas, in the same way that we have addressed our operating expenses.
Cost efficiency is not only about plant efficiency. This also involves everything like purchasing. It involves warehousing and distribution, and so on. So they're rather large initiative. We also made a provision of SEK 1.8 million to cover the costs related to the lawsuits in North America. This is related to the mesh implants portfolio. The provision is recognized as an item affecting comparability in our operating profit. We also can disclose that today our subsidiary, Atrium Medical Corporation, signed an agreement to divest its surgical mesh business to HJ Capital 1, which is the parent company of SeCQure Surgical Corporation, which is a global medical device company.
The deal is expected to be closed in the Q4 of this year, but this is, of course, subject to customary regulatory approvals and the satisfaction of other customary closing conditions. If you look at the business as such, the mesh business sales in 2017 related to the biosurgery business amounted to approximately SEK 128 million . And the divestment as such would have very no material financial impact on our results or our financial position. The biosurgery business has been a relatively small segment within Getinge's overall portfolio, and the only therapeutic asset in the general surgery field. So the divestment here is a strategic decision in order to focus on our core therapeutic solutions.
So this is really the result of a portfolio that review that we did in the middle of 2017, where we concluded that there are really no sales or operational synergies with the rest of the Getinge portfolio. So the timing of this with the provision is purely coincidental. I also want to mention that the TSO3 distribution agreement for low temp sterilization ended, resulting in an item affecting comparability of SEK 126 million in operating profit, and a positive effect in the Q3 of 71 million on cash flow. With that, we can move to page number five, please.
Just to elaborate a little bit more on the SEK 1.8 billion provision we have made, this for the expected costs associated with Atrium Medical Corporation surgical mesh product liability claims. These are claims filed in the U.S. and Canada. The suits, they consist of individual lawsuits. It's consolidated state cases and consolidated multi-district federal litigation. The first trials are expected to take place late 2019 and early 2020. The provision will impact the operating results in the Q3 of this year, and it's reported as an item affecting comparability. The provision is based on the information that we have available today, and it is intended to cover every sort of cost related to the claims, so including defense costs and handling of the claims as such.
Just to recap also the history here, the surgical mesh implants, they're manufactured by our subsidiary, Atrium Medical, which was acquired by Getinge in 2011. And I also want to underline that polypropylene mesh is the established standard of care for hernia repair globally. And the claims as such, they relate to patients claiming damages for complications and injuries allegedly sustained after receiving surgical mesh implants. We could see a material uptick in the number of claims that were being filed in late 2017, and this was following the consolidation of the mass tort litigation. We are defending these claims vigorously, and I also want to underline that there has been no adverse verdicts against Atrium Medical.
The first trials, as I mentioned earlier, are expected to take place in late 2019 and early 2020. I also want to reiterate that our future cash flows are predicted to be sufficient to cover the expenses related to these claims. One smaller aspect of this is that we're also making a write-down of mainly intangible assets related to the mesh business. This has a negative group impact of SEK 90 million on the results of the Q3. Finally, as well, I want to mention that we do hold related product liability insurance, and we're in continuing discussions with our insurance carriers regarding the scope of this coverage. And we haven't ruled out that if those discussions are not productive, we may commence litigation against our insurance providers.
With that, we can move to page number six, please. So back to sales and our growth patterns in the Q3. As I mentioned initially, we saw strong growth in the quarter. From a regional perspective, we saw really good development in Asia Pacific, Middle East, and Africa, and from a product mix perspective, very good growth when it comes to capital goods. Order intake grew 0.9% organically, and slightly more than 8% in actual numbers. This also came largely from Asia Pacific. Net sales 7.2% organically, close to 15% in actuals. Here we had growth across the board, especially high in Asia Pacific, Middle East, and Africa.
With that, we can move to page number seven to look at the contribution in order intake from a business area perspective. So out of the 0.9% that the group grew organically, ACT had 7.8%, so that's Acute Care Therapies, SEK 448 million in absolute numbers. In Life Science, we saw 17.1% growth, or SEK 121 million in absolute terms, whereas in Surgical Workflows, we had a contraction of 10% or SEK 98 million. There were a number of larger deals in the Q3 of 2017, related to mainly to operating room infrastructure products, that made this comp a little bit more difficult.
All in all, we expected a little bit slower organic growth in orders due to the slightly more challenging comp from last year. Then we move to page number eight, please. And we do the same analysis from a sales perspective. So, our net sales in the quarter increased by close to 15%, half of which was organic growth. We see that capital goods continue to grow faster than consumables, which does put some pressure on short-term margins, as the consumables normally come with a higher margin on average. Longer term, a larger install base is expected to support margins as it normally leads to higher demand on consumables as well.
If you look at the sales split from a business area perspective, in Acute Care Therapies, we had 12.2% growth, or SEK 538 million. We saw healthy organic sales growth in ventilators, in heart- lung machines, and also in vascular implants. We had high growth in India, Japan, and China, in Asia Pacific, and in Russia, Turkey, and the Middle East in EMEA. The growth that we saw in Americas was mainly attributed to ventilators and heart- lung machines, and we could see still a small decline of vascular stents in the U.S. compared to the Q3 of last year.
Sales of capital goods increased significantly faster than the consumables and the service, which hurts the margin in the short term, but creates future growth opportunities for us. If we look at Life Science, we had a contraction of 9.8% in sales. This is mainly because of sterilizers in Asia Pacific and EMEA. We saw good growth in isolators with high double-digit growth, actually, that's really, really positive. And when you look at Surgical Workflows, we had a 4.6% growth of SEK 208 million across the board, mainly when it comes to our product categories. We saw strong performance in surgical workplace in Americas and disinfection and sterilizers in Asia Pacific and in EMEA.
We could also see in Asia Pacific, we had particularly high growth in India, in China, and in Thailand. Same as in Acute Care Therapies, net sales are continuing to grow faster in capital goods than in consumables and service. Relatively speaking, Surgical Workflows has a higher future potential for consumables when it comes to the relation between capital goods and consumables sales from the install base. With that, we can move to page number nine and talk a bit about our gross margin development for the Q3 of 2018. Our gross profit increased to SEK 2,721 million in the quarter, driven by volume and also with some support from currency.
We had a weaker gross margin year-on-year compared to the Q2 of this year, and this is primarily attributable to a lower margin in Acute Care Therapies. The lower gross margin was mainly due to the product and market mix, with particularly high growth in capital goods and in emerging markets during the quarter. We also had a quarter where a number of larger orders with lower-than-average margins were delivered. There's also been a few factors of kind of one-off nature during the quarter that have had an impact on us. From a pricing perspective, as we've stated before, we see on average about a 1% price decline in the market, which obviously also has an effect on the gross margin.
As I mentioned a couple of times, the mix is natural in the growth phase that we're in. Long term, though, we do expect that the larger install base will support sales of consumables, which in turn will support the gross margin. With that, we can move to page 11, and I'll leave over to you, Lars, to go through the financials a bit more in detail.
All right. Thank you, Mattias. As you can see, the margin decrease amounted to 3.3%, whereof approximately one percentage point is explained by currency, 4% by lower GP margin, and which is then partly offset by OpEx and depreciation here. Actually, then OpEx is lower in Q3 versus Q2 and Q1 in 2018. If we adjust for currency, OpEx for Q3 2018 is in line with what we had, we could see last year, despite continued selective investments in sales, R&D, and quality management system, and despite us having also stranded costs from the Arjo spin-off. This resulted in an adjusted EBITDA of SEK 438 million, with a currency impact of -SEK 24 million. Compared to Q2 2018, adjusted EBITDA margin declined from 9.4% to 7.7%.
That's about 1 minus 1.7 percentage points, or SEK 101 million. Here, we had some support from currency that adds around some 0.3 percentage points, OpEx and 2.2. But here, also the headwind on the margin, then, reducing with some 3.6 percentage points. And this is then mainly coming from Acute Care Therapies and also depreciation. All right, then let's get over to page 12, please. All right, let's take a look at BA contribution to EBITDA then, which was—this was negatively impacted by currency headwind of SEK 24 million in the quarter. Starting with Acute Care Therapies here, the drop of 20 million, and here, the adjusted EBITDA in Acute Care Therapies was mainly impacted by lower gross margin.
In Life Science, Adjusted EBITDA declined by SEK 61 million as a result of lower sales and also lower gross margin. The high operating expenses is a result of the establishing of the business area and continuing costs after distribution of Arjo, which also had a negative impact. Adjusted EBITDA in Surgical Workflows fell by SEK 34 million and mainly related to lower gross margin. All right, page 13, please. We're looking at our cash flow. I would like to remind you that it's quite difficult to compare this year's performance with the cash flow for Q3 and full year last year, as this cash flow then included Arjo as well.
But if you look at this year, then the cash flow was positively impacted by the SEK 71 million, where from the sale back of inventory to TSO3, as well as then changes in working capital, which amounted to SEK 372 million. Together with net investments, where R&D is the most significant part, which resulted in a cash flow after net investment of SEK 801 million. And finally, the net debt increased since year-end 2017 as a consequence of currency effects and dividend then, and then, of course, the cash flow is going in the other direction. The reported leverage was negatively impacted by the provision of SEK 1.8 billion made in the quarter and amounted to 9.9 times net debt to EBITDA.
But when we look at adjusted underlying leverage, however, it was 3.3 times net debt to adjusted EBITDA. Let's move to page 14, and then over to you, Mattias.
All right. Thank you, Lars. If we then spend one moment on the outlook for 2018 here, we repeat the outlook that we've had since the Q2, that we expect to be well within the range of 2%-4% when it comes to organic net sales growth. Perhaps some of you think that is a bit prudent, and I don't disagree with that, given the growth so far. But at the same time, we would like to be a little bit conservative here, and we do have a slightly higher comp, also, for the Q4 of last year.
When it comes to currency, we see a need to adjust the outlook for currency transaction effects on EBITDA for 2018 to SEK -200 million effect, and this is due to the higher volumes in sales and production. Then we can move finally to page number 15, please. If we look at the summary and the key takeaways from the Q3, we continue to deliver strong organic growth quarter after quarter, something that we haven't seen Getinge for a long while. Our gross margin was adversely impacted by product and regional mix, and long-term, though, the mix is expected to support gross profit and margins as a larger install base is expected to drive also the sale of consumables and service.
One of our key topics here is addressing productivity in our supply chain. All our business areas are involved in this, of course, and we will address this in the same way that we have done with OpEx, so in a methodical and structured way. It involves not just the factories. This involves purchasing, but it also involves warehousing and distribution. Our OpEx is lower than Q1 and Q2, and in line with Q2 last year, if you adjust for currency. So it's really good evidence that the actions that we've taken and the productivity that we've started to work on here, it's generating some positive results. We have a provision of SEK 1.8 billion related to surgical mesh claims.
And this is impacting operating profit negatively for the quarter. It's expected to cover all future costs associated with the claims. Also wanna highlight again that we've done several product launches again in the quarter, from washer disinfectors to new LED lights for the operating room. And finally, I think one of the highlights here is that we've had very good cash generation in the Q3. So, finally, and overall, I look forward to the Q4 now with continued focus on innovation, on our customer, on quality, and on productivity. With that, I open up for questions.
Thank you. Ladies and gentlemen, if you do 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. Once again, that is zero-one on your telephone keypad if you would like to ask any questions. There will be a brief pause while any questions are being registered. Our first question comes from the line of Annette Lykke from Handelsbanken. Please go ahead, your line is now open for your question.
Thank you, Jean-Marc. I hope you can hear despite the noise in this room. On acute care therapy, you had, as you mentioned, some nice wins in India, Japan, and China, and APAC region. Can you share with us a little bit more in detail why you have these wins? Are this based on specifications, or is it more on ASP? And those wins, are there anything that can potentially be implemented into, for example, US and Europe? My second question would be on stent sales that you see to continue to fall in the US market. Can you elaborate a little bit more on this? How much does this actually mean, and why is it happening?
And also, what are the market, and how big are they as a part of the acute care therapy? Then I have a follow-up question. Thank you.
Unfortunately, Annette, I could only hear your second part of the question when it came to the stent sales. We don't have a number here off the top of our head on the reduction. It's been a little bit of reduction also in the Q3 compared to last year. But we'll have to come back with you on that number. It's roughly in the area of 10%, but I can't give you an absolute number. The first one-
But how important-
Yeah, sorry?
Sorry. How important is the decline in stents in the U.S.? Is this a high-margin area for acute care business, or how is it?
Yes. No, it is for sure. It's one of our highest margin products in the group, so it is, it is important for us, absolutely. No question about that.
What are the solutions looking forward?
The solution is to get a PMA for this part of our portfolio, so we can actively market this and gain back some of the business lost here. We've been clear on this since the problem started, really, that some of the GPOs and hospital groups have in their purchasing policies that if there is an on-label alternative, this is what has to be used, even if there is a clinical preference for our product. So what we need to get our PMA and make sure that we can fight back. That's the only solution here. There's nothing more to that.
Of course, we're also working with our cost in the factory and so on, but it's really important to get the PMA in place. We've not provided a timeline for this. We're hopeful of getting it in the beginning of 2019, but we've not given any detailed guidance on this.
Thank you.
And your, your-
Yeah.
Your first part of the question, unfortunately, there was a lot of background noise. I couldn't hear, your-
I'm sorry. I'm sorry. I'm in an airport. It's acute care therapy, and the wins you have in APAC, are these wins you have there, they are based more on specifications, or is it more on ASP features, or you could say arguments, that it is you have these wins? And is it something you can do in Europe and U.S., too?
I'm sorry, I cannot hear that.
Okay. I'll get back in and see if I can get a more quiet place.
Thank you.
Thank you. Our next question comes from the line of Kristofer Liljeberg from Carnegie. Please go ahead. Your line is now open.
Yeah, thank you. Have a couple of questions. First one on the gross margin, also. Of course, you talk about the mix effects, but besides this, if I read the report, it seems you're not satisfied with the leverage effect you have also on capital equipment products within production. Could you comment a little bit more on what's happening there and what you could do to improve that? Thank you.
Yep. Yeah, absolutely. No, you're, you're right. I think, when we made the organizational change first of October last year, so first of October 2017, one of the key things that we did then was to dismantle this, this organizational unit that that was called supply chain, that contained all the factories. So we put them back into the, into the business areas. And really, since then, so the start of this year, basically, we've had an improvement program going. It's not expected to generate tremendous results in the short term here, and it involves everything from purchasing to lean program in the factory, in factories. It involves also the distribution setup that we have with warehouses and so on.
So we're starting to see some benefits from this, but it's really early days, and we cannot be satisfied with the impact. But it is. I want to highlight that it's not that we're very much behind the plans in the program or anything like that. It's just that it's a rather complex initiative to drive, and it does take time, and those effects are yet to be seen. So it's mostly that we need.
But would you agree that there's less leverage effect now in production for your capital equipment than historically? And do you think you would need to do some, you know, bigger overhaul of the production network that you have?
I do agree that if you go back a few years before some of the main organizational changes, there is less leverage now, if you compare. But it's also a little bit difficult to compare and trace back because there's been many changes between business areas and the different structures, the support structures in the group. So, there is for sure more improvement potential here. I don't think we need to do a big overhaul of the setup or anything like that. But there are for sure some footprint adjustments that we need to look into and that we have in our longer-term plan as well.
Okay, thank you. Two more questions. The size of the large shipments you had in emerging markets that obviously had a negative impact on the margin, if you could comment on that. And then also, with orders slowing a bit there in the Q3, maybe not the major surprise, but how has that impacted the order backlog, and how do you feel about the sales outlook now for Q4?
Mm-hmm. Yeah, when it comes to the gross margin impact on some of the orders, it's true that we've had a couple of significant ones, about SEK 50 million each in sales value that has lower than average gross margin. This has been delivered during the quarter. There has also been some orders with, as we go through the warehousing structure, we're looking at products that are at risk of becoming obsolete and so on. So we've been a little bit more aggressive in driving these out into the market. So selling them rather than ending up with having to make write-offs later on.
That's also had a slightly negative impact on the gross margin. What was your second part of that question? Can you repeat that, please?
Yeah, the third and final question was-
The order book.
Yes, exactly.
Yeah. Yeah, I think, yes, I mean, with, with the slightly lower order intake, we still have a solid order book, and it doesn't really change the outlook for the full year. We reiterate that we will be very well in line with the guidance that we've given previously. We haven't increased the guidance, so we want to be a little bit more, a little bit conservative here. But there, there's maybe some potential upside here if you're not too pessimistic about the way ahead.
Yeah, I hear what you say about the full year, but that, I guess that implies slower sales year-over-year in the Q4 than what we have seen so far this year. Is that fair assumption?
Yeah, mathematically, you're absolutely correct. But again, it's we just prefer to be a little bit conservative here towards the end of the year. There's a lot of things that... It's a big quarter, as you know, a lot of things that needs to be delivered before the year ends.
Thank you.
Thank you. Our next question comes from the line of Hans Mähler from Nordea. Please go ahead, your line is now open.
Yes, good afternoon. Coming back to the gross margin, you mentioned there were some larger orders had now delivered in the quarter, and you had some one-offs. Should we interpret that as you expect a sequential improvement of the gross margin going into the Q4, and you also have the volume component there? Then also when it comes to the cash flow, how should we estimate the cash flow for the Q4? You have the payment to Brazil. Should we also figure in a rather large payment or utilization of the FDA provision? Or how should we think, is last year's SEK 600 million a good proxy for free cash flow in the Q4? Thank you.
We don't give any guidance neither on gross profit or cash flow, though I think what I would like to say when it comes to the gross margin development, we expect that the mix pattern with geographic and product mix to continue because the order book has the same type of pattern now as well. There, of course, there can be some improvement when it comes to leverage because of higher volumes and so on, but it is not something that we give any forward-looking guidance on. And same thing with the cash flow. We can confirm that we will have the SEK 276 million Brazil fine impact in Q4. That's 100% certain.
But the other aspects of cash flow, we will not guide on. I will only say that the working capital program that we have going will, of course, continue.
Yeah. I can also mention that, when it comes to FDA, your only question there, that is not a lump in that sense. It's more, it's normally rather stable, because it's covering resources that are working in the remediation work. And, but as you know, the Q4 is our biggest quarter when it comes to sales, and that, of course, generates very much receivables. So there could be quite some volatility on the working capital side, depending on the payments outcomes. So that can be, of course, impacting quite a bit.
Understand. Can I also follow up on the sales guidance for the full year? Has anything changed in terms of the order conversion to revenue? Is it taking longer time now because you have so much CapEx? Is this something that we should model in for the future, or how do you see, you know, on the order-to-revenue conversion going forward?
No, we don't see any significant change in the pattern or behaviors of customers here.
What there is, volatility, so as you know, in Life Science always, but that's not super material for the group.
Okay, thank you.
Thank you. Our next question comes from Scott Bardo from Berenberg. Please go ahead, your line is now open for your question.
Yeah, thanks very much for taking my questions. So first question, Getinge has been a company that served emerging markets for many years and had volatility in demand with capital with respect to consumable. But I think you've posted the worst gross margin that we've seen in the company's recent history. So what I'm trying to understand a little bit now is, have we reached a bottom of gross margin, in your opinion? And or is this a gross margin in the nine months of the year that you expect to be under further pressure in the Q4? Following on from that, please, I'd like to understand a little bit more how much remediation cost is flowing into your cost of goods.
I never really understood before that remediation was flowing into this line, so if there's been some reclassification there, can you split between operating cost and your cost of goods, please, to help us better model those lines? Lastly, pleasing to see the operating costs moderate a little bit for the organization. Clearly, that's been a major pressure on your margin so far. Can we have some indication now onto the Q4, do you still expect that trend to be a moderate one or a declining ratio? Obviously, we're trying to find some sort of floor to your EBITDA margin this year, for which you will no doubt talk about progressing going forwards. Thank you.
Well, I can start with on the gross margin. If you look at the growth and the sales mix pattern, now, say, historically, it's also at a unprecedented level of sales to Asia Pacific, to Middle East, and to Africa, compared to our traditional or mature markets, if you like. So that has an impact, now in the Q3. It had also before, and it will continue to have an impact. We don't expect it to swing a lot more, but it also will not swing back anytime soon.
In the Q3 as well, there's been a number of things of more of a one-off nature, as I referred to some of the effects of the warehousing improvement work that we're doing. We've had some extended plant shutdowns and clean room renovations, also in the Q3 had a negative impact. So there are a few things like that that you need to be aware of, but it's... I'm not gonna give any guidance on whether it will swing one way or the other going forward here. When it comes to the remediation cost, it's well, there's a couple of things to bear in mind.
One is that we use the accrual that we have for external costs, and it's related to the Consent Decree sites only. But we also have remediation work going on in some other plants with internal resources and external resources that are not part of the approval. So, the exact split of that is not something that we communicate externally. And then your third question on OpEx, can you repeat that, please?
Yeah. I, I think you've discussed in previous quarters how over the course of the year, operating costs start to moderate as a function of your ability to remediate in the U.S. and have better functional absorption with your top line. So we've now seen a ratio stabilization year-over-year, albeit operating costs still going up. So what I'm trying to understand is, what is the outlook for the Q4, to your best, best knowledge? Did the ratio come down a bit or year-over-year, or does it, you know, stay where it is? That, that would be helpful.
Yeah. Yeah, I understand it would be helpful, but we have to reiterate what we said after the Q2, that we need to maintain some flexibility here, depending on our dialogue with FDA and so on, and what needs to be done. So I really can't guide you in detail on OpEx, unfortunately.
Okay, so, follow-up question, please. You haven't mentioned at all during the release the FDA warning letter you received at the Datascope plant. So just wondered if you could talk to this a little bit. Is this signs that, you know, there's still with systemic problems in the organization, or is this a very different situation to what you've encountered so far? Any indications of how quickly you can resolve that and how much that will cost, please?
... Yeah, yeah, sure. No, I think the, the history here is that the, the original approval that was, was made several years ago to, to do some of the remediation work in what was then called Medical Systems, it, it didn't -- it wasn't implemented effectively in some of the plants, so Fairfield was, was one of those. So we, we discovered, ourselves during 2017 in one of our internal audits, that, there, there had been, more focus on, on individual findings rather than proper remediation. So, we, decided to do a, a restart of this ourselves, early 2018. Then we had an, a, an FDA audit that started in, in March.
So this has delayed the program a little bit, and it also confirmed the findings that we already had done ourselves, here. So it's not a systemic problem as such, it's such as something that we discovered ourselves, and had started to fix. It's driving a little bit of OpEx now. It's not part of the approval that we have for the FDA remediation work. But also, if you look at the warning letter as such, to fix those findings is far from material costs in, in well, it's more work that we'd already identified, and we were in the process of implementing. And we don't expect material costs going forward from this, either.
Okay, thanks. I'll jump back in the queue. Thank you.
Thank you. Our next question comes from the line of Ed Ridley-Day from Redburn. Please go ahead. Your line is now open for your question.
Good afternoon. Thank you. If we can just look forward a little to the Capital Markets Day, can you just give us a little color on, given your comments today around obviously programs that you have in place to improve profitability, I know you don't have much midterm guidance in terms of profitability, but isn't that something you think you should address, and that would help both perhaps your internal teams as well as the market understand the potential for cost savings? That'd be my first question.
I don't think it doesn't help our internal teams at all. I mean, we have very clear targets on what needs to be done and what the potential is, and so on. We've just, based on the history with Getinge with making a lot of guidance, detailed guidance and not hitting this, we've just decided to be a little bit more humble and not provide detailed guidance. We think it's important that we get things implemented, that we break the trend and start seeing some positive improvements stepwise here. So that's really the rationale behind not giving detailed guidance on this.
At the Capital Markets Day, that we will talk a little bit more in detail of what the programs entail and how they're implemented, to provide a little bit more understanding. So that's something you can expect in November.
Okay. Okay, thanks. And just a follow-up question on R&D. It may have been that I missed something, but it would appear that your R&D spend was a little lower in the Q3, and if there was a particular reason for that?
No, there is no. It's related to how we work with different projects and so, so, and capitalization. So I don't. There is no reason for that specifically.
Okay, so my point is going forward into sort of 2019 and beyond, should we still think about sort of the first half run rate as, you know, the sort of above 3% run rate is more realistic for your R&D spend going forward?
We, as we repeatedly say, we don't guide. There can be variations connected to capitalization, depending on when a capital project goes in, into that phase.
Mm-hmm.
There are recently stability in the underlying work we are doing.
Yeah. We've changed nothing when it comes to our strategy and the things that we believe we need to do in R&D. There's no change at all from that perspective.
Okay. Thanks very much.
Thank you. Our next question comes from the line of Alex Gibson from Morgan Stanley. Please go ahead, your line is open.
Hi, thanks for taking the questions. I have a few. I'll start off with the organic growth guidance. So you have the, still well within the 2%-4% range. Even if we take the very top end of this, you're still gonna have a negative organic growth rate in Q4. If you're not comfortable in saying if that's gonna be optimistic or pessimistic or conservative, what areas do you think are likely to slow down within your business in Q4, if you're not going to beat your numbers?
Well, I think we have said that it is a very prudent guidance. We're not pessimistic, just conservative here, and mindful of the big amount of deliveries that have to happen. We do have some significant size projects where you never know if it ends up on this side of the thirty-first of December or next year. This can be due to customer. I mean, we have a lot of projects that are being delivered to new hospitals as well, and we can be the victim of other parties changing their plans. So it's only conservatism in that regard, but mathematically, you're correct.
In terms of the divisions where that's going to be occurring, is that Acute Care Therapies, where you're less certain of which quarter it's going to fall in?
No, it's probably the other two that have more capital goods. Life Science is more of large project, customized equipment, and Surgical Workflows has a larger portion of that as well.
... Okay, thank you. And, so my next question is on, you mentioned that you have a number of products in your inventory that you feel are maybe becoming obsolete. Could you quantify in any terms how much of your inventory you think is classified as that? And, what divisions are they in?
No, no, we can't. I mean, as we go through market by market, I mean, in some cases, there is nothing. Everything is in good shape and so on. And then in other markets, we find something that is more borderline, but we do this country by country, so there's no way to give any guidance on this, unfortunately.
Okay. And, in terms of, again, the upcoming Capital Markets Day, just to follow up on the question, so I don't think we're going to be expecting margin targets based on your commentary. Is it just too early to call, say, the base trough of the margins, or as in you're not seeing them stabilize enough yet? Or is there still further decisions to be made regarding additional investments?
There's no decision, nothing when it comes to investment decisions that has any impact on this. It's really, again, I just repeat, that we've had a Getinge has had a poor history of providing guidance and then under-delivering, so it's really only about being conservative in this regard.
Okay, so you have a program that is fully outlined. It's not materially gonna change, you don't think, but it's just you don't wanna communicate it to investors yet. Is that based on a number of moving parts or just the conservatism of not disclosing?
Yes. No, I think the program is fully outlined. We know what we have ahead of us, and it's very clear internally as well, so we're just careful with how much we promise to the external world now.
Okay.
One more thing. Sorry, one thing from Lars as well.
One more thing to also, Tom, maybe to, to understand is that it's not that we have one grand master plan. We are working every day, driving improvements. We have a directions where we want to go, but we also then, like we have been working now when it comes to working capital or OpEx, we are every day tracing and tracking and finding new opportunities and driving that, and driving continuous improvement into the organization. That is quite different, maybe, from if you have one grand master plan. That is quite, that is a little bit different than how we work, maybe compared to historically.
Okay, yeah. Thank you. Helpful color. And my last one's on the tax rate situation. So we've seen pretty material move down in Sweden and the U.S. Where do you think the midterm tax rate's gonna fall for your business going forward?
The tax rate for... Sorry, I, I missed the last.
So with tax rates coming down across a couple of different regions, Sweden and the U.S., where do you think your tax rate will fall over the medium term?
Well, we don't expect significant changes, actually. And it is a little bit true, but not the full truth, yes. In some areas, the tax rates are decreasing, but also the tax base are broadening, so the actual tax is often unchanged or sometimes even higher in different countries. So, unfortunately, it's not that easy when we see it.
Okay, thank you.
Thank you. Our next question is a follow-up question from the line of Annette Lykke from Handelsbanken. Please go ahead. Your line is open again.
Yes, hopefully you can hear me better now. Is that the case?
Yes, much, much better.
Can you hear me?
Yes, much better now.
I'm sorry for the noise. Now, my second question was in respect to the wins you have had in Japan, China, and India. These wins you have had, are they mainly based on low ASP, or it's more on the specifications you have? And if you have any sort of, you know, possibilities you can make similar wins in other regions based on this kind of superiority you have for these tenders. My second question is on the R&D spending and looking at cost, they're only up SEK 60 million, but then if we look at the number of R&D costs capitalized in total, they are up, I think, a little bit more than SEK 30 million. And so what's the reason behind the higher capitalization degree, and should we expect that also looking forward?
If we start with the first question, then I think the wins that we've had in some of the emerging markets, it is not really because of lower ASP than we've traditionally had in those markets. And some of the markets you highlight have very different ASPs as well. China, for example, is not a low-price market for us, whereas India is lower. So it's more about really finding or exploring some of the white spots that we found when we did the strategy review and looked at our portfolio coverage in different geographic markets. So it's really about allocating sales resources and driving this harder.
That's really the main thing, and that's something that we're not doing only in emerging markets. U.S. is one of the better examples of this as well, where we have some white spots that we need to focus a little bit harder on them. The R&D accounting question I will leave to Lars.
Yeah. No, but there is no big change in that. That's more, timing of projects that are coming into capitalization phase compared to last year.
Okay, thank you.
Mm-hmm.
... Thank you. Our next question is another follow-up question from the line of Scott Bardo from Berenberg. Please go ahead, Scott, your line is open again.
Yeah, thanks. Just a question on Atrium, please, which I think is looking the Atrium acquisition somewhat more an increasing debacle. If one considers then the SEK 2 billion in remediation costs, Consent Decree, SEK 1.8 billion in mesh-related provision, the declining mesh and covered stent revenues. So the underlying nature of the question is, are you fearful over any potential impairment related to Atrium? Could you please give us some degree of comfort, as to how much intangible is on your balance sheet related to that acquisition, please?
Yeah. So, it's, of course, a very good question, but there is the goodwill that we have is not related to Atrium. It's connected to the full ACT business area, as well as SW and Life Science. So it's on these three cash-generating units where we are advocating tangibles. In that sense, so that's why there is no, as we see, no indication today for any impairment.
Okay, and you mentioned, and this is a bit of a follow-up on the mesh provision, please. You mentioned obviously, you're in, you know, in hot discussions with your or in discussions with your insurance provider or carrier. Can you give us some feeling, actually, as to when you expect those discussions to conclude? I.e., if they don't conclude positively, when will we likely hear about any legal ramifications there? And could this be closed very quickly or not? If you can give us some feeling there, that would be appreciated.
Yeah, I fully understand that. So I think in order for us to work this process in the best way for Getinge, we decide not to discuss and provide that information. We want to make sure we get the best outcome for Getinge.
Understood. And lastly then, because this is obviously a question that a lot of people have been having, that we didn't have the opportunity to ask on the provision announcement. But just to be entirely clear, of your SEK 1.8 billion in mesh-related provision, are we correct in assuming that this has not included the maximum potential insurance provision, but has included some assumption? Is that a fair statement?
It's the same answer there. We have included an assumption regarding insurance, legal costs, et cetera, in the provision, and we don't... As I said, for the same reason, we don't want to go into explaining how we have handled this more than that.
Okay, good. Maybe just last comment from my side. I appreciate Getinge's caution in not setting targets, if you like, that you haven't had a good history in achieving. But it is also fair to say that Getinge has not had a good history in achieving consensus forecasts, and this is another quarter reminder in that respect. So is it not possible at least to give us some framework, be it even a conservative or cautious one, just so that we can understand some direction for the business at the upcoming Capital Markets Day?
Yeah, I understand the concern here, Scott, absolutely. We still think, though, that it's much more important to focus on the underlying or the real performance here, than trying to give guidance in a time where there's a lot of moving parts still, and we're active in a quite dynamic market environment as well. So we just don't think it would be very fruitful to do this. I'm sorry.
Okay, thanks for taking my follow-ups.
Thank you. Our next question comes from the line of Peter Östling from Pareto Securities. Please go ahead, your line is open for your question.
Okay, thank you for taking my question. Most of my questions have already been asked and answered, but I have, I still have one more. What's your notion when it comes to market share loss or gains in the different areas? It seems like your growth pattern is similar to many of your competitors, but it seems like it's more tilted towards the APAC region when it related to America and EMEA. If you could give me some color about your notion about market share loss or gain in different geographies would be helpful. Thank you.
Mm-hmm. Yeah. I think, yeah, this is one of the key things that we will talk a little bit more about on the Capital Markets Day. But in broad terms, we are gaining market share in many areas. I think the distinct areas where we're losing is on the stents business, for sure. But other than that, I think a more structured overview of this we'll provide at the Capital Markets Day on the 21st of November.
Okay. Thanks.
Thank you. That was the last question with respect to all participants' time, so thank you.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.