Hello, and welcome to the Getinge AB Q2 2018 report. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present Mattias Perjos, CEO, and Lars Sandström, CFO. Please go ahead with your meeting.
Thank you. Thank you very much. Welcome to today's conference. Next to me today, I have our CFO, Lars Sandström, who will present the financials in a moment. Let's move directly to page number three. The positive overall story here is that we continue to create growth in all regions and business areas. In the quarter, order intake increased by just over 10%, and net sales by 6% organically. This is levels that we haven't seen for quite a long while in Getinge. That's positive. The gross margin is adversely affected by market and product mix effect as a result of strong growth, primarily in emerging markets and in capital goods.
We view this as a natural pattern in a growth phase like ours, and this is expected to support future sales of consumables as our install base continue to grow. In addition, in terms of mix effect, Surgical Workflows and Life Science increased their net sales at a higher rate than Acute Care Therapies, which also contributes to the lower gross margin for the group. If you look at EBITDA, then this amounted to SEK 538 million, negatively impacted by a SEK 69 million currency headwind.
We can also see that our operating expenses have stabilized after a number of quarters of incremental increase, but we can still not exclude that we'll have some incremental increases in the second half of the year, primarily as a result of ongoing remediation linked to the FDA consent decree, and there are still some needs to fill minor gaps in the sales and primarily service organization. If you look at the bottom line, then perspective, we have a SEK 1.21 earning per share in the second quarter. Then we move to page number four, please. If we go over then the key activities in the second quarter, overall, we're continuing to make progress according to our plans.
If we start with the growth perspective, we can see that our systematic sales approach supports growth in all business areas and regions, which I mentioned initially. In the quarter, we've also launched a number of important updates and new products in all our business areas. What you see in the picture here is our Flow-c anesthesia machine, which has been very well received by our customers. If we look ahead, then our comps for the second half of the year are tougher, so we've increased the guidance overall, but we don't expect to continue with the same numbers as we saw in the second quarter. We have good order intake momentum, which is a very positive base.
When it comes to quality, which is really, at the end of the day, about our license to operate, we're continuing with the rollout of the updated group quality management system. We're also progressing with the remediation related to the consent decree with FDA. Our U.S. sites are expected to be in a remediated state by the end of this year. This doesn't mean that we are out of the consent decree with those sites. It simply means that they are remediated, this is the heavy phase of remediation, and that we can focus more on productivity and also drive sales and marketing in a different way than we've been able to the last couple of years.
This is just to give you two examples of what it means. To get out of the consent decree altogether, all sites needs to be remediated for a period of time, and there's still work to be done in Russia and Hechingen, which we have mentioned earlier, and this is expected to take longer than the U.S. site. If we then move to cost efficiency, here, we're focusing on increasing productivity at the same time as we continue to make some necessary investments, and these investments are related to primarily our quality management system and sales and service. We're starting to see positive signs from these efforts.
You can see OPEX is, was flattening out, in the second quarter compared to the, the first quarter, and then, we've had a couple of quarters of increases, as you've seen before. We cannot exclude that there will be some incremental increases during the second half of 2018. We still need the flexibility that we talked about, earlier to make sure that we, we meet the requirements related to, to, remediation and within sales and, and service. A couple of other key points, when it comes to Brazil, we have been collaborating with the authorities in Brazil from, from day one, and, regarding their investigations, into, some med tech industry practices in, Brazil. As a consequence of this, we've made an agreement with one authority in Brazil.
The outcome of this is that we will pay a SEK 276 million fine, which is covered by the provision that we made in the first quarter of this year. We also have made now in the second quarter a SEK 64 million tax provision for the correction of the tax returns related to these ongoing investigations and negotiations. We continue to have negotiations with additional authorities in Brazil, and we expect these to be closed by the end of 2018. With that, we can move to page number five, please. As I said earlier, we saw strong growth generally in the quarter. From a regional perspective, we had good development in emerging markets and in capital goods.
So overall, 10.2% organic order intake growth. In EMEA, we see significant growth in Eastern Europe, in the Middle East, and in Africa. If we then look at the sales perspective, we had 6% organic sales growth in the second quarter. A similar pattern here, as overall, as with order intake, strong growth in capital goods and in emerging markets. Asia Pacific stands out as really positive with the strong growth in all of our business areas. Americas ended up being flat in the quarter, and this is mainly due to lower sales in Acute Care Therapies, and especially within the product category covered stent, where we've been seeing increased competition since the second quarter of 2017.
We do see the flattening of the decline from the end of the quarter. We can move to page six, please. If you look at where the contribution in order intake comes from, then, as I mentioned, all business areas grow in order intake 10.2% year-on-year combined. In Acute Care Therapies, we had 3.5% growth, which corresponds to SEK 110 million in absolute terms. Here, we had good momentum in cardiopulmonary and in ventilators and also our intra-aortic balloon pump business. We had very strong growth overall in Asia Pacific, where China and India are developing particularly strongly.
If we then look at Life Science, this was up 20.3% in the quarter, or a 100 and 20, 12, sorry, SEK 112 million, in absolute terms. Very strong growth in all regions and throughout the product portfolio, especially promising growth in disinfection and sterilizers, which are both capital goods sales. When it comes to Surgical Workflows, we had 18.5% growth in the quarter, SEK 372 million in absolute growth. Geographically, growth across all of our regions, and particularly strong development within infection control and in surgical workplaces. All in all, we see a strong continued momentum with really promising order intake in capital goods and in emerging markets. With that, we can go to page number seven.
If we look at the breakdown of the contribution in net sales in the second quarter, we had net sales grow with 6% organically. Actual growth was a little bit higher, 6.7%, due to a SEK 40 million tailwind from currency. We also see that capital goods continue to grow faster than consumables, which has put some pressure on short-term margins, as consumables normally come with a higher margin than the capital goods. Long term, a larger install base is expected to support margins, as it tends to lead us to higher demand on consumables and service work. If we look at Acute Care Therapies in detail, we had 1.5% growth here, SEK 54 million .
Strong development, particularly in cardiopulmonary and in intra-aortic balloon pumps. We could also particularly see cardiopulmonary grow very well in East Asia and in Latin America. We had a little bit of a drag from a decrease of sales of covered stents in the U.S., and this is again because of the increased competition that we've been seeing since one year back. We do expect the comps to be a little bit easier for the second half of the years when it comes to the covered stent situation, so the trend is changing to be a little bit more favorable here. When it comes to Life Science, we had 32.7% growth, or SEK 144 million.
Growth across the board, all regions and product categories. EMEA had the largest sales increase in absolute terms, which is mainly attributable to major projects in the U.K. and in Germany. And also here, we can see the growth in capital goods continues to increase at a faster pace than consumer goods. If we now look at Surgical Workflows, we had 7.6% growth, or SEK 164 million . Also here, from a regional perspective, growth across the board. We had extremely strong development in surgical workplaces, especially in emerging markets and related to a number of larger projects as well. With that, we can move to page number eight, please.
If we then look at the second quarter from a gross margin perspective, our gross profit increased to SEK 2,844 million in the quarter. This was driven mostly by volume from Life Science and from Surgical Workflows. When it comes to gross margin leverage from the larger volumes, we see some initial positive signs here, but this is offset by currency and the product and market mix impact at the moment. We are continuing to work on taking down costs in direct spend and also with continuous productivity improvements in each factory. But this is also the very long term continuous improvement work that will be ongoing for quite a while.
The largest opportunities when it comes to bringing down cost of life actually further ahead, and this is about R&D and pruning of the product portfolio, and also structural adjustments regarding footprint and so on. So it's a balance of short- and long-term initiatives going on here. The headwind from currency equals approximately one percentage point of the 3.1-point deviation in gross margin year-on-year. The remaining two points comes from product and market mix factors. As I already mentioned, the growth in capital goods and in emerging markets, as well as more rapid growth in Surgical Workflows and Life Science compared to Acute Care Therapies, is the main reason for this development.
The organic growth in order intake this quarter with the high volumes in capital goods and emerging markets also indicates that you shouldn't expect a sudden change when it comes to to mix factors. But as I said earlier, the mix is a quite natural development in the growth phase that we're in. And long term, we expect that the larger installed base will support sales of consumables, which in turn will support the gross margin. We also need to continue the work that we've started with our value segment offer to make sure we stay competitive going forward. With that, we move over to page number 10, and I leave over to you, Lars, to go through the financial development for the second quarter.
Thank you, Mattias. Let's take a look at the BA contribution to EBITDA, then, which was negatively impacted by currency headwind of SEK 69 million in the quarter. And if we start with acute care therapies, we have an EBITDA lower with SEK 42 million- SEK 596 million, corresponding to a margin, EBITDA margin decrease of 1.7 percentage points to 18.9%. And here, the margin impact from currency about 1 percentage point, and lower gross margin, mainly due to lower sales of stents in the U.S., In Life Science, the EBITDA decreased SEK 12 million- SEK 52 million, and here the margin reduces with 6.3% to 9.5%.
Here, the margin impact from currency is 1.6 percentage points, and the lower gross margin here is due to mix factors and some higher OPEX, due to remaining costs after the spin of Arjo, and the build up of new business area. Finally, Surgical Workflows, EBITDA lower with SEK 88 million to -SEK 39 million here in the second quarter, and the margin is reduced with 4.5 percentage points to - 1.9. Here, margin impact from currency is impacting, that's 1.5, together with lower gross margin due to the mix factors, and higher OPEX. Here, it's related to base resource in the U.S., higher logistic costs, and remaining costs following the spin-off of Arjo. Then, please move to page 11.
As you can see, the margin decrease amounted to 3.7%, where 1.3 percentage points is explained by currency, and 2.1 percentage points by lower GP margin, and the remaining 0.3 percentage points is coming down from OPEX and depreciation. And for the GP, gross profit here, the higher sales was partly offset by the lower margin, resulting in a positive contribution of SEK 16 million there. And as mentioned before, this was mainly related to the currency product and geographical mix. On OPEX, selling and admin was at a high level year-on-year, following the current cost from Arjo spin-off, and investments made during 2017, and the first quarter of 2018. But when compared with Q1 2018, OPEX is flattening out.
The difference was only SEK 14 million, or 0.7% on adjusted OPEX. This resulted in adjusted EBITDA of SEK 538 million, with a currency impact of -SEK 69 million. Then let's move over to page 12, please. When looking at our cash flow, I would like to remind you that it's quite difficult to compare this year's performance with cash flow for 2017, as this includes the cash flow from Arjo as well. Looking at in the quarter, we saw a cash flow impact from working capital of -SEK 39 million, impacted by growth in inventory as a result of increased order intake and sales. Together with net investment, where R&D is the most significant part, this resulted in free cash flow after net investments of SEK 47 million.
The payment of the fine of SEK 276 million related then to the ongoing investigation in Brazil is scheduled for the fourth quarter here in 2018. Then the net debt increase is mainly due to currency effects and the dividend paid out during the second quarter here. I just also like to mention here on the financial net in Q2, it was -SEK 74 million, versus SEK 171 million in Q1 then. And here, the reduction is mainly related to positive currency impact connected to the refinance activities during the quarter, as well as somewhat lower interest costs. So when looking at the first six months, it gives you a better view on the underlying financial net. All right, then let's move to page 14, and over to you, Mattias.
Great. Thank you, Lars. If we then have a quick view of the outlook for 2018. You can see from a growth perspective now, as a consequence of the strong growth in the first half of the year, we adjust the outlook on organic sales growth for the full year of 2018 to be well within the range of 2%-4%. Perhaps some of you think that that is still quite prudent, given the growth that we've seen so far. But it's important to remember that the comps for the first half of 2018 and the second half of 2018 are quite a bit different.
So it's much tougher comps come in the second half of this year. When it comes to currency, we also see a need to adjust the outlook for currency transaction effects on EBITDA. We estimate this now to be - SEK 175 million, this is due to the higher volumes in sales and productions. With that, we can move over to page 16, and a brief summary of the takeaways from the quarter. So the key takeaways for the second quarter is that we continue to deliver very strong organic growth, not seen in Getinge for a long while, and we're upgrading the outlook for the full year.
Our gross profit increased slightly, but the gross margin was adversely impacted by product and regional mix, and also currency. Long term, the mix is expected to support gross profit, and margin has a larger installed base, also is expected to support the sales of consumables and of service work. From an OPEX perspective, we can see that the OPEX is flattening out versus the first quarter of 2018. I want to remind you, though, that we still need some flexibility for the second half of the year, so we cannot exclude some incremental increases in the second half of 2018.
We've also reached an agreement with the Brazilian authority, which means that we will pay a SEK 276 million fine, and this is covered by a provision that we made in the first quarter of 2018. We've now made an additional tax provision of SEK 64 million in the second quarter, and this is for a correction of tax returns related to the same issues in Brazil. We've had several product launches in the quarter. We've had the Flow-c anesthesia machine in acute care. We have an upgraded and then a new Getinge Steam Sterilizer in Life Science. We've also had some good launches when it comes to surgical workplaces and the operating table portfolio.
So finally, and overall, I look forward to the second half of the year. We continue our focus on innovation, on customers, on the quality work, and also on cost awareness and productivity. So with that, I end the presentation and 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. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There will be a brief pause while questions are being registered. Our first question comes from the line of Alex Gibson from Morgan Stanley. Please go ahead, your line is now open
Hi, thank you for taking my questions. I have two. The first one's on U.S.-China tariffs. I just was wondering, how you think the U.S, China tariffs will impact your business over the coming quarters, and what remediation works would you potentially put in place? Then I'll ask my second after.
All right, thanks, Alex. The first question here regarding the U.S.- China is extremely limited. We've looked at this, and it really has no material effect on our business.
Just a quick follow-up. If there was any more products included in an escalation of the tariffs, how quickly do you think it would take to change or shift the distribution of products?
It's impossible to speculate on this. I think we've gone through the portfolio, and based on what we know now and the risk of tariffs, we don't see any material impact on our business, but I cannot speculate in what may happen here.
Okay, that's fine. And then my second one's on, you talked about further investments into the business. More broadly, can you specify precisely where these are going to be spent, and in which regions you're increasing your investments?
I think there, there's still two main categories here. One is related to quality, the future group quality system and the remediation work. So this is mostly related to the four consent decree sites. And then from an overall perspective, it’s a global investment, obviously, for a global system. When it comes to sales and service, sales is mostly related to Asia Pacific, and service is rather global.
Okay, thank you.
Thank you. Our next question comes from the line of Kristofer Liljeberg from Carnegie. Please go ahead. Your line is now open.
Thank you. Two questions from me. The first one relates to the gross margin. Could you say anything how we should think about the gross margin now in the second half versus what we saw in the first half, or maybe more specifically, the second quarter, and maybe also how to think about it versus 2017, considering that the order seems to be driven very much by capital equipment and emerging markets? Also related to the gross margin, I wonder if there's any price component here as well, because even if I look at surgical workstations in installation, it seems that the margin is down 2% there. Must be something more than FX, I guess. So that's my first question.
Then the second question relates to the FX impact, which seems to be less than 1%. And I've struggled to understand that, considering that you have U.S. dollar up 2%, I think year-over-year euro +7%, pound +9%, and the Japanese yen +6%. So there must be something going in the other direction. Maybe it's related to emerging markets, but if you could share some color on that, it would be helpful. Thank you.
Yeah. Thanks, Christopher. I will start with the gross margin, and then Lars will talk about the FX in a moment then. So when it comes to gross margin, I think the only way to think about this is look at also the order intake split, and that's why I say that you shouldn't expect a significant different or improvement in the mix from a gross margin perspective, the second half of the year. But it does swing between quarters, and it is important to grow the installed base as well over time. So we believe this is a natural swing in our business.
The other factor is related to the covered stent situation in the U.S. when you look at comps. This is a situation that started to become difficult during or after the second quarter of 2017. It has flattened out since then, so that's one mix effect as well to just be aware of it. In terms of the price-
Yeah. Yeah, go ahead.
First of all, is there any seasonality impacting gross margin we should think about third quarter and fourth quarter in installation? Maybe, you know, with Q4 being a larger quarter, you could have some additional leverage effect that wasn't really coming through during this quarter.
That there is some seasonality effect, but I mean, we can't break that down for you in this call. We can help you look at some of the historic patterns and explain those, but I can't give you any forward-looking guidance here. So we can come back to that separately, I think. When it comes to price erosion, this is something we looked at specifically as well, and there is almost nothing of this. It is a pure market mix and portfolio effect there, between categories in the portfolio and also between capital goods and recurring revenue. And it's a good question. We're very mindful of avoiding price wars or price erosion. Can we move to FX, Lars?
Yeah. On your question there on FX, how that is impacting, and I think if you look at the FX, we have a positive impact of SEK 40 million year-over-year here, and we have a negative bit of 69, where all 39 is coming from transactions. So if you purely look at translation, then, on a delta level, we still have a negative impact, and that is very much connected to the correlation that we have between the euro and dollar. And we still have a negative impact on the dollar year-over-year in the second quarter, whereas the euro is supporting and being positive.
However, the cost that we have and the revenues we have in euros are pretty stable or at the same level, so it doesn't impact the bottom line so much compared to the dollar, where we have a much bigger impact, if you look at the competition revenue and costs.
So sorry, so do you say U.S. dollar were negative year-over-year for the top line?
Yes. Year-over-year in the second quarter, the average rates were actually impacting negative.
Okay.
Yeah, that's of course now the closing rate-
Then how much-
The closing rates when we are leaving the quarter is, of course, positive.
So, how much of sales is in U.S. dollar, approximately?
We say that around 35% of our revenues is over year-over-year. Oh, sorry, 35%, approximately, is U.S. dollar coming from euros.
You said 45 or 35?
35, three five.
Okay. And, and euro?
... euro, it is, I don't have that on top of my mind now. I can come back to you on detail. I don't want to give you,
Okay.
Wrong [auddistortion] so.
Okay, thank you very much.
Mm-hmm.
Thank you. Our next question comes from the line of Hans Mähler from Nordea Markets. Please go ahead. Your line is now open.
Yes, good morning. I have a few questions. Following up on the price discussion, you're right in the presentation that no general changes in, like, for like pricing. Does that mean that the underlying pricing pressure is still around 1%+, or are you able to offset that by your new product introductions? And my second question is regarding the hernia mesh litigation. The number of lawsuits has grown quite substantially here over the past six months. Do you have any comment on that? Thank you.
Yeah, well, when it comes to to price, we've said over time, there is a general small price erosion about 1%. When it comes to this quarter, we can't see anything of this really. But I think nothing has changed otherwise fundamentally in the business from a price perspective.
Will the product introduction change that, for example, with the introduction on in ACT?
I can't guide on that going forward. Of course, everything that we develop, we really try to make sure that we have optimum pricing and improve the gross margin here. But the combination of everything that's being launched, I cannot give you guidance on this.
Okay.
When it comes to the mesh discussion here, this is something that's been going on for quite a while, but we cannot comment on ongoing processes. I'm sorry.
Can you comment on your insurance coverage for that process?
No. Well, we can, we have, of course, some insurance coverage, but we cannot comment on to what extent and how this works, so.
Okay, fair enough. Thank you.
Thank you. Our next question comes from the line of Scott Bardo from Berenberg. Please go ahead. Your line is now open.
Yeah, thanks very much for taking my questions. So the first question back to gross margin, please. Just to understand your comments a little bit better about no real change, if you like, in the back half of the year. Just to understand, I think on an adjusted gross margin basis for the first six months, you report 51.3% gross margin, which is 50 basis points decline on your full-year position for 2017. So when you refer to no similar trend, are you assuming a similar magnitude, if you like, of decline for the full year basis, so 50 basis points down on your adjusted level last year? Or, are you more referring to the couple of 100 basis points you see on a quarterly decline year-over-year, this quarter?
So if you could just be a little bit more transparent surrounding gross margin, please. Also would like just to clarify with respect to the FDA investments that you make. I think you've highlighted here that as of the second quarter, you've made something like SEK 1.98 billion investments into your remediation activities. But I understand that you only took, or you took SEK 2 billion provision, and you've still got SEK 500 million of that still unutilized. So am I correct in assuming then, that you've been investing about SEK 0.5 billion through your P&L?
Just to try and understand, one, if that's true, and two, how you see that trending now that you are a little bit more positive about your U.S. facilities fully remediating by the end of the year. So they're the first two, then I have a follow-up. Thank you.
All right. Thanks, thanks, Scott. Now, when it comes to the gross margin, the clarification I want to make is that we don't make any guidance going forward for the gross margin. The only thing I wanted to say, responding to Kristofer's question, was that if you look at the order intake mix in the second quarter, which will translate to sales in the third and the coming quarters, that gives you some guidance. So and then that's why you shouldn't expect maybe an immediate swing back to a different mix. So that's the only guidance I can and will give when it comes to gross margin.
When it comes to FDA, the overall direct costs that we've made provisions for are SEK 2 billion, or close to SEK 2 billion. We have half, or SEK 498 million remaining of the provision. Of course, there's a lot of additional costs that we've taken through the P&L from this, but this we haven't specified the amount for. So I'm not sure maybe if there's a misunderstanding here in the combination of accrual and what's gone through the P&L.
Yeah. I think in your report, you say that you've invested SEK 1.98 billion as of the second quarter, so that would imply about SEK 500 million that you expensed, given that you haven't utilized SEK 500 million of your provision. That was the point I raised. But anyway, with respect to direction, given that your two U.S. facilities you're getting a degree of comfort with, do you expect those costs to start to trend down? Can you give any directional comments there?
No, we can't. No, I can't give you any directional comments. The only thing that we've said is that once we're through remediation, we can start working both with the costs of the products in those facilities in a more structured way, and we can also start leaning the quality management system. Because what typically happens when you're through a remediation phase is that you end up with a bit of an over-engineered system that you can make more efficient. But this is a continuous improvement process that will start by the end of this year.
... Okay, and just, a quick one then on, covered stents. Can you give us, please, an indication for what the annualized revenue base is for covered stents today, and what percentage roughly they're declining? And wonder if you could comment a little bit as to the current progress of the PMA filing in the U.S. and, and what your view is about, the likelihood of approval and ability to stabilize that franchise. Thank you.
I think the stent business volume before we had the decline was roughly $100 million on an annual basis, at rather high gross margin. And we've lost in the wake of remediation here, about 30% of this volume. That's what you see in impacting some of the organic growth numbers here. And when it comes to the PMA, we've asked for an audit and-- but we can't comment on the progress of this and our dialogue with the FDA or give you a timeline. Really, it's really up to them.
Okay, good. And lastly, for me, you mentioned that you wanted a bit of operating cost flexibility, and I think you mentioned in your release you expect some slightly higher operating expenses from already relatively high levels. So, can you just give us a little flavor as to what that flexibility relates to? Are there any defined programs that are contentious or you're uncertain about? Or where are the areas that could be the swing factors, plus or minus, on the back half of the operating cost burden? Thank you.
The flexibility, the way you should read this is that we cannot rule out that we will maybe need to make some incremental investments in the second half of the year, but it's not something that we're guiding for or that we know for sure. And it is related to the ongoing program. So, the four sites themselves and a little bit to the overall quality management system as well, but that's probably a bit more marginal. And then the other part of the OPEX perspective is related to primarily the service organization and a little bit of sales force, mostly in Asia Pacific.
Thanks, I will jump b ack in the queue. Appreciate it.
Thanks, Scott.
Thank you. Our next question comes from the line of Ed Ridley-Day from Redburn. Please go ahead. Your line is now open.
Good morning. Thank you. Just on the Life Science business, obviously, strong performance there. The four projects in the U.K. and Germany you highlight, can we expect ongoing revenue from those projects through the rest of the year, or effectively, have you booked the revenues you expect from those projects in the second quarter? And can you help us, think about how we should think about the growth of that business through the second half and going forward?
Okay, let me start on the projects. These are revenue recognition issues. They are not fully recognized, all of them, so there will be some impacts going forward as well on the growth side, on the revenue side on that. Then more on the growth side, I think maybe if Mattias wants to comment on the potential going forward. Yeah, one thing, before I hand over, just to mention on, when both on, on the revenue and maybe especially there, is that we, as a comparison, we have quite a low starting point last year. So it's a little bit, as we have said before, a lumpy business when it comes to orders and revenues.
Yeah. Yeah, I think there is not much more I can say on the growth aspect. We haven't changed our view on the business. It is a business that we expect to grow in the range of 5% long term and year- over- year, but it is a very lumpy business quarter by quarter. And then, as Lars said as well, the comps here for the start of 2017 were relatively easy.
Okay, that's, that's helpful. Thank you. And then on just a follow-up on the just for clarity on your financial costs, just to be sure, obviously, slightly lower interest costs. And can you clarify the breakdown of the fall, the sequential fall in your financial costs on the... in the second quarter?
As I mentioned there, in the second quarter, compared to the first quarter, we have a positive impact on the currency impact when doing some refunding activities. So looking at the first six months together gives you a better picture on what to expect, going forward.
Okay, good. I just wanted to clarify that. Thank you.
Thank you. Our next question comes from the line of Annette Lykke from Handelsbanken. Please go ahead. Your line is now open.
Thank you very much. My first question is in respect to potential additional costs to the FDA. I think you highlighted that you have had some delay or setbacks in Hechingen and, but are now in a good process, but still some way behind the progress in the U.S. facilities. My question is simply that, would this mean that we should expect additional, or can we exclude additional FDA-related provisions, including with the Hechingen, or would you be able to compensate by that from the improvements you have in U.S. facilities?
My other question is on the Life Science business, you had a margin expansion by more than 600 basis points, and part of this is the establishment cost. How much of this is one-off, and how much should be, have additionally to this division, looking forward, as it being a more separate businesses.
Okay. Thanks for that. When it comes to Hechingen, nothing has really changed since the previous quarter. We've continued to make progress according to the plan. So the troubled history that you refer to is really back to 2016 and the beginning of 2017. So the provision we made in Q2 of 2017 is still valid, and the plan that we set after this is a plan that we're still following as well. So, and then this is progressing according to that plan, so there's nothing, no change in outlook or anything from that perspective.
When it comes to the Life Science cost structure, I think the build-up that you've seen here for that structure is also completed. We don't expect any additional cost for this going forward.
Would you expect OPEX to stay at the same high levels as it is in Q2?
We don't guide an OPEX going forward really. But what I will say is that the structure to operate as a fully functional business area is in place.
Yes, but can you then make a comment on whether some of these costs are one-off costs in establishment, or is it some cost that we should expect to continue in Q2?
Yeah, no, I cannot quantify or give you details on that.
Okay. And then you also have highlighted that you are continuing to have a dialogue with the authorities in Brazil. Can you share... I mean, should we expect a similar, or is, have you taken the bold part of it, or could we risk to see a similar fine as you have faced so far, and also a similar amount of legal costs looking forward? And what is the time frame here?
We cannot give you any forward-looking guidance, because the fact that we've settled with, negotiated and settled with one authority. There are multiple authorities. There's partly new gen legislation, so there are a lot of moving parts here, so I cannot give you any forward-looking guidance. But what I will say, though, and what became public the other week in Brazil, is that we are party to this leniency agreement, and we've done everything by the book since we became aware of the issues here.
Thank you.
Thank you. Our next question comes from the line of Sten Gustafsson from ABG. Please go ahead. Your line is now open.
Thank you. Good morning, Sten Gustafsson from ABG. Two questions. First, on the earnings development here. I can see the business growing, if you take the first half, roughly 6% on top line. But still, your adjusted EBITDA is down some 29%, and I was wondering, is this a good proxy for the earnings development for the full year, given that you talked about no major improvement in gross margin sequentially, and also, it sounds like even that the OPEX line will come up somewhat? And if you could elaborate a little bit on the logic here, how come you grow so much top line, but at a very low profitability?
My second question is related to the cash flow, which again here seems to be very low, despite sort of neutral impact from working capital changes. And when can we expect the cash flow generation to improve? I think your Brazil payment will go out in the second half, and I see a risk that the working capital changes will turn negative in the second half. So if you can give some clarity on that. Thank you.
Yeah, all right. Thanks, thanks, Sten. But unfortunately, on both questions, you're asking for forward-looking guidance, which we, we don't, don't give. I can only, reiterate the comments that we've, we've made about the, the mix, up until now, both in net sales and order intake and so on. And, and, your observation on the paying, payment of the fine is, is true, of course, in the fourth, fourth quarter. But same thing, there, in our view, nothing has materially changed in the, in the cash profile of the, of the business, the underlying business. But there are a lot of moving parts.
We're aware of this, and we understand the difficulty in predicting this going forward, but we have decided, because of the dynamic phase that we're in, not to give any guidance, neither on the EBITDA or on cash flow.
Okay. Thank you.
Thank you. Our next question comes from the line of Scott Bardo from Berenberg. Please go ahead. Your line is now open.
Yeah, thanks for the follow-up. Yeah, you mentioned that increasing your installed base will result in higher consumables in the future. Can you give us a feeling for how long that dynamic takes to, if you like, start driving higher consumables based on increased capital installed base, please? So that's the first question. Second question, we're still yet to have a date for your Capital Markets Day . Can you confirm that that still is going ahead, and give us some signal of when that may be? And just following on from that point, can you give us a rough sense of what we're gonna walk away with from the Capital Markets Day ?
Do you anticipate giving any longer or midterm guidance or benchmarking your operating cost base versus your competitors? Can you give us a feeling for what we're likely to get out of that event?
Okay. If we start with the first one, then when it comes to generating consumables and service from the installed base. If you look at, for example, a sterilizer, a washer disinfector, it starts generating consumables from the moment you start using it. But then, of course, there's a warranty period, so for service and spare parts and so on, it takes a while, depending on the length of the warranty period. But it's not like a long, multi-year, drawn-out processes. There's some delivery time, of course, especially for large projects involving, for example, sterilizers. But that's the kind of underlying dynamic.
When it comes to the Capital Markets Day , we have actually it does say at the last page of the report under other information, I think it is, with 21st of November, there is a Capital Markets Day in Gothenburg.
Great. And a feeling for what we might get from that event?
Yeah, we will, we will have a more of a deep dive into our product portfolio and markets and so on. We have not decided yet whether we will give more granular guidance on anything beyond our organic growth yet, so we'll have to come back to you on that.
Okay, perhaps lastly from me, and you touched upon it in your prepared remarks, that you're isolating opportunities for the portfolio and the amount of SKUs you have. Can you share some thoughts about how deep your work has gone into the current portfolio structure of Getinge, and have you isolated any particular businesses that you think there are better homes for, or alternatively, new areas that you look to acquire and add to the fold?
Well, we've done a deep dive, both as part of the strategy work last year that we did, and also now in preparation for the European Medical Device Regulation that's coming up. So we've done a really deep dive into this. We've not put anything on the seller list for the group. We will provide some more information at the Capital Markets Day on the overall portfolio and so on, and some of the numbers relating to this, but it's too early to do that today. When it comes to acquisitions and add-ons, we've, it's really no change since we did the strategy work last year.
We believe our core focus areas, so for example, in critical care, in cardiopulmonary remains, we're keenly interested in expanding our software business as well as part of the total offer to our healthcare customers. Life Science is an area where we see interesting opportunities also for bolt-on acquisitions. That gives you a little bit of flavor of the areas that we're looking for.
Thanks so much indeed.
Thank you. Our next question comes from the line of Oliver Reinberg from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yeah, thanks for taking my question. Three questions for me. I think you talked about the kind of tougher base to the tougher comps in the second half in terms of why the sales guidance is actually justified. I mean, in fact, if I look at the organic growth last year was 1.3%, and you had 1% in the first half last year. So for me, the comps do not look that different. So if you can talk about that, that would be helpful. And also, if you booked in the second quarter, any kind of tenders outside of what you already talked about in U.K and Germany. Second question on consumable sales.
These were overall rather weak, with 1.5% organic sales, and I think in particular in Surgical Workflows, this was -0.5% or 5%. Can you just provide some more color what was driving that? And the last question, in terms of the kind of gross margin headwind we're going to see, can you just talk about how this will continue going forward? I'm not asking for guidance, but the trends you highlight in terms of stronger growth in emerging markets, I think that's something that may carry also over into next year. Can you talk about if the kind of mix effect from cap goods with consumables is also an issue that may continue for a longer period of time?
Finally, long term, do you expect the growth in Acute Care Therapies, which has the highest gross margin, to actually reaccelerate or probably be stronger compared to the group average? Thanks very much.
Yeah. All right, thanks, thanks, Oliver. I don't disagree with your observation when it comes to the second half of the year, and I understand it might look prudent to stay within the 2%-4% range, but that's what we've decided to do based on what we know at the moment. I really cannot comment further on that. When it comes to the balance again of the sales, overall, sales of consumables, it is largely the two things that stand out, I would say, is the covered stents situation. That's the, I think, the biggest impact.
We have had some bottlenecks when it comes to service, as well in certain areas, and that's why we highlight that we may need to add some service resources in different parts of the world, really. But those are the only things that stand out of the ordinary, so to speak.
Right, and can you comment on the gross margin trends?
No, well, not, not very, was there a specific question? Because otherwise, no, not much more than I've already answered to some of the previous questions.
Okay, but we wouldn't exclude that some of these trends may continue to next year?
Well, we've decided not to guide on that going forward. I think I can only reiterate the comment about the order intake you've seen so far, and if you look at the market growth, where it tends to come from as well, you shouldn't expect a quick swing back to what it was before.
Okay, understood. And in terms of the consumable, organic growth, I mean, in ACT, it was 2.8%, so I think that already includes the kind of headwind from the stents, but in Surgical Workflows, you, I think, had some -5%. Can you just add some color on that?
... Yeah, well, in surgical work, so it is then more related to the service part. That's the only thing I can—and a little bit of software that is classified as recurring revenue as well.
Okay, thanks so much.
Thank you. Our next question comes from the line of Craig McDowell from JP Morgan. Please go ahead. Your line is now open.
Hi there. Good morning. My first question, whether you could give any updates on the like, cost of the EU Medical Device Regulation? Secondly, has there been any change at all in your sales organization? Are you incentivizing differently or, is there anything we should know about there? And then thirdly, just on net debt, EBITDA, your leverage, up to 3.5 x, again, seems a little high. Could you give any sort of, guidance on that at all? Thanks.
Yeah, sure. If when it comes to the medical device regulation, we don't give any guidance on this. We talked about it in some of the calls earlier, that this is a gradual rather drawn out process that I think long term will also be good. It will help productivity, because we need to prune the portfolio anyway, but I can't give you any cost details. We've also said that you shouldn't expect a step change when it comes to cost development to manage the EU MDR situation, but that's the only forward guidance that we give. And I didn't hear your second question. There was something about sales incentive, I think. Can you repeat that, please?
Yes, it's just whether there's anything. Whether you're incentivizing your sales force differently or is there any other reason, I guess, for the increase in organic growth?
No significant change. I think that the two changes we've made to our incentive systems is that they're more harmonized across the group, so people are measured more on the same thing. We've also lifted the ambition level overall for everybody to try to drive growth that way. But those are the two significant changes. When it comes to net debt and the leverage, I'll hand over to Lars.
It's of course, we are, as you said, at 3.5x now, and normally the second half of the year is our, especially the fourth quarter, when it comes to sales and cash flow, bigger for second half compared to the first half. So we don't expect it to continue in that sense. And we are not concerned about the level, if we go looking forward here a bit.
Okay, thank you very much.
Thank you.
Thank you. There are no more questions in the queue. I will hand the calls back to you, Mattias and Lars.
Great. Thank you very much. Thanks for taking the time to join this call today. And I'll just reiterate on the summary from this discussion we've had. That we've had a second quarter of 2018 with really strong organic growth, both in order intake and net sales. Our gross margin has been adversely impacted by product and regional mix, and also currency, shouldn't forget. From the OPEX perspective, it's flattening out compared to the first quarter of 2018. We continue to work with productivity, and in parallel, making the investments that we need, primarily in quality and regulatory control and in sales and service.
We've had a SEK 69 million negative currency impact on EBITDA adjusted. In the second quarter, we have reached an agreement with the Brazilian authority regarding the compliance issues we've had there. We've had a number of very good product updates and launches in the second quarter as well, such as our Flow-c anesthesia machine, Acute Care Therapies, and the Getinge Steam Sterilizer in Life Science. With that, I stop, and thank you for participating today. Thank you very much.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.