Good day, and welcome to the Getinge conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mattias Perjos. Please go ahead, sir.
Okay, thank you very much. The title of today's call is Planning for a Rights Issue, and I hope you can all see the slides that we've prepared. We have six pages that I will go through fairly quickly. I'm supported by our CFO, Reinhard Mayer, on the call, as well. So, the way we'll structure this is I will run through this and present the slides that we will have in front of you. And then we follow up with a question and answers session. So, with that, we move to the slide that is labeled number two.
The heading here is that we're proposing a guaranteed share issue with preferential rights to the tune of approximately SEK 4 billion. The purpose of this is to move the company faster towards a solid financial position by reducing our leverage here. The rights issue is fully guaranteed by our main shareholder, Carl Bennet AB, and as you may have seen in the press release, it's also supported by our second largest Swedish shareholder, the Fjärde AP-fonden, the fourth Swedish pension fund.
And this is a preferential rights issue to existing shareholders, and as such, it's required to have a decision at an extra general meeting that we plan for in August of 2017. The work on a detailed timetable has already kicked off, and it will be presented during the coming month, and there will obviously also be a prospectus released in due course as part of this process. That's the overview on page two, and with that, we can move to the following page, number three. And I just want to provide a little bit of background here.
As you're all aware, we are in the process of preparing for a distribution and listing of our PPAC division that will be called Arjo of-- in case we move to a successful separation of the companies. We believe these are two businesses with very promising opportunities in their own right. By proposing this rights issue and strengthen the capital structure, it capital structure of the companies, we believe that we will provide both companies with better opportunities when it comes to both organic and the M&A agenda. So that's really the key background for this proposal. I would like to underline that the efficiency enhancements that we have in the Big Five program are going on as planned.
There's no change or anything in this program. We have also, as we've mentioned earlier, launched a working capital initiative, and this will also continue with the full speed. So it's merely about improving the financial position to allow both companies to capitalize on short and medium-term opportunities. Then we can move to page number four. For those of you who have followed us for a while, you are well aware that we've had a challenging development when it comes to net sales the last few years. But we have been able to improve our cash flow though.
The Big Five efficiency program has contributed to this, and the working capital project that we have initiated with it is also starting to free up additional cash. The funds from these initiatives is mainly being channeled into to further strengthening of the company. A lot of it's allocated to quality remediation, but we're also investing in additionally in innovation and also to fill some of the competence gaps that have occurred as part of the One Getinge strategy rollout the last year. So, that's an overview of what the cash flow has been used for.
Even if we've had strengthened cash flow, and we're at a debt position of SEK 22.7 billion now, we would like to move faster towards a solid financial position. If you move to slide number five, the main message here is that we are moving in the right direction when it comes to our leverage, but there is some way to go, and we would like to speed this up. At the end of March, March 31st, we had a net debt of SEK 22.743 billion. You can see it in the left hand of the slide, in the table there.
You can see if we take the perspective from Q1 2016 to Q1 2017, our gearing has been moving in the right direction, and so is the leverage that has gone from 3.9 to 3.67. With that, we can move to slide 6, and there's an illustration there of what SEK 4 billion would do in terms of reducing the net debt position. With a starting point of SEK 22.7 billion and a leverage of 3.67, SEK 4 billion will bring us down to SEK 18.7 billion and a net debt to EBITDA ratio of 3.02. So this is more in line with the peers of our industry.
We will still be at the high end of the peer range, but much closer to where we have been. An effect of this is, of course, that we'll also expect to reduce our financial costs. We are in the process of refinancing both companies, Getinge and Arjo, and we expect to continue this process now with full speed, and reducing, improving the capital structure, reducing the debt of the company will obviously have a positive impact on the cost of financing. So, we will also, of course, improve our net turn earnings, and as I mentioned, the net debt to EBITDA ratio.
That's a very short overview of the background to this. I would like to highlight that, there's we view this as a positive thing for the company. It's strong support from our current main shareholder, and also the Fourth Swedish Pension Fund. We're kicking off now the detailed planning right away. There will be a prospectus with much more details on this going ahead, but that hopefully gives you a good overview of the background and why the board of directors is proposing to do this. So with that, I we are finished with the presentation part of this, and we move to the Q&A session and open up for whatever questions you might have.
Operator, are you there?
Yes, sir. You want to go to the audio first? Okay, if you would like to ask a question today, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on your phone line will indicate when your line is open. That's star one to ask a question. We can now take our first question from Michael Junglin from Morgan Stanley. Please go ahead, sir.
Good afternoon, everyone, and thank you for taking my call. Two questions, please. Firstly, on the rights issue, did you have a call by the banks to reduce debt, or is this something that is your own initiative? And secondly, when you talk about the flexibility or improved flexibility from a rights issue, what exactly are you looking for when it comes to M&A as being a key driver for this flexibility? Thank you.
Yeah, I can. It's Mattias here. I can answer start answering at least. It's not something that's been asked for by the banks in this in the refinancing process. It is a discussion that we've had in the board of directors and a decision purely taken in the in in the board, really, as a proactive measure. When it comes to the flexibility to take advantage of opportunities in the short and medium term, we cannot elaborate on what's going on in the pipeline.
What I can say is that we are working through the strategies for both companies, and we're optimistic about the opportunities going forward, and we would just like to provide the possibility for both companies to capitalize on opportunities as they occur, both M&A, but also organic development, really. But I cannot provide more details on this one.
Perhaps I can ask the question a different way. If you had to rank the reason for the rights issue by importance, could you, for instance, put M&A on the scale of importance, and then perhaps having a slightly better balance sheet for the purpose of spinning out the other business? I'm trying to get a sense of how important these various factors are for this rights issue.
Okay, we haven't done any internal ranking of this. It is... The decision is really to move quicker towards a more solid financial position for both companies, to allow a bit more freedom to move and capitalize on opportunities as they occur. Of course, an additional benefit of this is that we expect less financial costs also as a result of this for both companies, but we don't do any—we haven't done any ranking of these factors.
Okay. Thank you for taking my question.
Again, if you would like to ask a question today, please press star one. We can now take our next question from David Adlington from JP Morgan. Please go ahead.
Hi, good afternoon, guys. Thanks for taking the question. Really just wondered if you could give a view in terms of timing of why the decision now is in response to maybe some of the rates you were being offered on the refinancing from your banks. And secondly, just in terms of timing the rights issue, what's the timetable from here? I know you've got an EGM in August. Will the pricing be known ahead of or after your Q2 results when we have a what Q2 trading has been going? Thanks.
Rainhard, do you want to take this one?
Well, then I start with the last point. I think, let's say the pricing will be known post, Q2, release. You should expect something beginning of August, in that respect. And, why now? I mean, I think we have stipulated this is, let me say, not anything which is, let me say now, directly related, to, a planned, increase, in, external or into an internal, expansion activity. It's just for today that we feel time is right to improve our balance sheet position overall, and I think, that is the point, and it's not related at all to any discussions with the banks.
Okay, thanks.
We can now take our next question from Kristofer Liljeberg from Carnegie. Please go ahead.
Yeah, thank you. It's this hasn't been triggered by the discussions with the banks, but could you provide maybe some update in the discussions whether the covenant is likely to be changed to being based on EBITDA instead of equity, and if that has had anything with this decision? And secondly, have you been considering a larger amount? Because still after this one, I think, the room for M&A is not that big, really, considering that you're still at the higher end of where peers are trading in forms of gearing. Thank you.
On the covenant question, I mean, I cannot, let's say, comment on the covenant discussion, since we have ongoing discussions with the banks. But, basically, as Mattias had alluded, this will help us to improve overall our financing costs, going forward for both entities, and that is clearly one ambition. The second topic, regarding, I mean, will we have then a greater capacity for acquisitions? Well, you should take into account, and that is also sort of like being confirmed, by the previous communication and this communication. We still assume that we generate a good positive cash flow, which helps us to bring down debt.
With this, I mean, we improve our flexibility further, and that's where I would like to end my comment there.
Okay, I can add a little bit. The amount is such that we've discussed different alternatives, but I think we believe this is the right amount. Also, considering that we still have good cash flow from the business, and we expect to, I mean, gradually improve our position. But I do agree that compared to peers, it's still on a relatively high level, and of course, for larger M&A, we have some restrictions.
Thank you.
We can now take our next question from Scott Bardo from Berenberg. Please go ahead.
This is Scott Bardo from Berenberg. Can you hear me?
Yes.
Yes.
Thank you. Two questions, please. So again, back to the question of why now? I think that you've had higher leverage ratios than this in the past, and you also had a higher share price than this in the past. So I wonder if you can confirm what was the triggering factor, and outline whether business fundamentals have deteriorated in the second quarter, or if there is any anticipation for further large costs, which have not been disclosed to the market, such as Hechingen, which is an ongoing issue. So can you talk a little bit, please, and confirm as to why now, and whether there has been any change in the business development? Thank you.
Well, there is Mattias here. There's not been any change in the business development. It's not triggered by that at all. It's been a discussion for a long while in the board, and it's come to a point where we think this was the right move to do at the moment. There are some synergies also with the spin-off project to do this now. It's a fairly elaborate process to go through rights issue. So that has a little bit to do with the timing. But there's, I would underline that we have no news regarding, like, the Hechingen remediation, and there's nothing else in the business fundamentals that's triggering this.
This should be seen more as a proactive decision by the board.
Second question, just relates to: You've given us where you get a sense of leverage based on the Q1 figures being around 3 times net debt to EBITDA. Could you please give us some indication, and probably that's gonna be called for, as to what you see leverage for the full year for Getinge, please? And also following on, can you please confirm that you now will be eligible to issue a corporate bond rather than rely on bank debt? Thank you.
Scott, we are not guiding on EBITDA target for the year. I think we have been saying that we guide on our net sales performance, and there we still view this top line growth. Hence, the guidance on EBITDA, we do not give, and the leverage guidance is not possible at that moment in time.
Corporate bond?
We are not planning any corporate bond at this moment in time. That doesn't exclude that we never planned for corporate bond, but not at this point in time.
Okay, last question, please. So I wonder if you could give a little bit more color and a little bit more feeling as to why minority investors should give Getinge their trust and partake in this rights issue. Because it appears to me that over the last 12-18 months, we've seen some margin pressure in the business. We've seen an announcement of spinning out Arjo without any communication of the equity story. The midterm plans from the company have been somewhat up in the air, given that you've now communicated you're gonna reinvest somewhat, but not disclosed that. And now you announce a rights issue without any apparent pressing need.
So, can you please elaborate a little bit further as to why the minority investors stand to benefit from contributing to this rights issue? Thank you.
...Yeah, sure, I can, I'm not sure I can answer fully to the satisfaction of Scott, but I'll give it a try. I think it's important to remember the background that we talked about in the slide presentation here as well, that the main reason for this is that we are in the spin-off process. We see really good opportunities for both companies, even if we haven't worked through the plans fully, and we haven't communicated the plans for the companies. We've said that this will be done during the second half of the year, and this is still the plan.
There are also some practical synergies with doing this together with the spin-off project, so that explains a little bit the timing. But it's really from our perspective, it is a positive story. It's a growth story for both companies. We're well aware of the challenges that we've had in the last few years, and that still remains, of course, but I think also from that perspective, this is a positive thing to do.
Okay, thank you.
We can now take our next question from Oliver Reinberg from Kepler. Please go ahead.
Sorry, can you hear me?
Yes. Yes, we can.
Sorry, I didn't hear the introduction. Oliver Reinberg from Kepler Cheuvreux. Three questions, if I may. Given that you now decided for a rights issue, is it fair to assume that this implies that there was no approach from an external party that was potentially interested in buying your PPAC business activities? Secondly, in terms of you, you highlighted that M&A is a potential focus for you. Can you just talk about what's the likelihood for any M&A transaction in the next 12-18 months? And if you would engage in such activity, what is the maximum leverage that you would expect or would be willing to accept for getting it going forward?
And then third and last question, given the rights issue is guaranteed, is there a chance that this will basically move the voting share of your majority shareholder above 50%? And if that is the case, would it actually trigger a mandatory bid according to Nordic laws? Thank you.
Okay, that's four questions. I can start, then you cannot make any connection between the rights issue and the whether we've had any interest in parties in acquiring the PPAC business. There's no such link. That's important to be aware of. When it comes to M&A as well, we this is not something we communicate proactively. We have an ongoing open funnel and discussions and so on. That's a normal part of the business.
The main message again here is really that, we see when we develop the plans for both companies, that, there are some good opportunities, both organic and inorganically, that we would like to be able to capitalize and have the freedom to move them. But we cannot be more specific on M&A plans at this point in time. We communicate M&A only when it's done; it's not something we speak proactively about. When it comes to max leverage, it's the same question. It's not something that we have set a target for. We need to look at this on case-by-case basis when it comes to M&A.
In terms of Carl Bennet AB having guaranteed the rights issue, we have confirmed that it's not a problem from a Lex Asea perspective, as long as he is under 50% of the votes at the time of the spin-off. We believe that this is possible to manage, and it shouldn't be a risk with this.
Okay, but theoretically, theoretically, if you move through the 50%, that would require a mandatory bid or not?
Sorry, I couldn't hear your question. Can you repeat, please?
Sorry, but in theory, if you move above 50% of votes, would that require you to make a mandatory bid?
No, it doesn't. Carl Bennet AB had the control of Getinge before these rules were introduced, so it doesn't trigger those kind of questions.
Okay, thanks. And if I just may follow up on PPAC, I mean, I assume if someone would have approached you, would that not basically drive the decision to not do a rights issue, if you would have expected proceeds anyway?
Sorry, I'm not sure I got the logic. Can you repeat again, please?
If there was potentially an external partner communicating their interest to acquire PPAC from you, which basically would then give you significant cash proceeds, I would assume that such a scenario would have prevented you from doing a rights issue or not?
I don't want to speculate in this. I mean, if we'd been approached, this would have been a discussion in the board, obviously, but I think this is a theoretical discussion really. I cannot comment further on this.
Okay, thanks so much.
We can now take our next question from Mike, Michael Jungling from Morgan Stanley. Please go ahead.
Yes, thank you. Two more questions. I think you had the intention in the past to host a CMD or some sort of event later on this year to talk about the revised midterm targets. And with no pressing need to raise money, as you highlighted, why would you not take advantage of the CMD and perhaps talk a more compelling equity story before you go into a rights issue? And secondly, in the past, you've stressed that your financing on the debts or bank debt was very low, and I think you commented once it was just above 1%. With such low interest rate, why is it a good deal for current shareholders to swap very, very cheap debt for more costly equity?
Especially when, you know, I talk to my investors, the leverage really was not a big part of their concern. Their concern was execution on margins and organic growth.
Okay. When it comes to the timing, we are still committed to have a capital markets day in Q4 this year. So there's obviously be a lot more information about both companies and the business plans going forward. In terms of the timing, I repeat that there are some synergies in doing this together with the spin-off project, so that's really the main thing. I mean, we could have waited until afterwards, of course, as a possibility, and it was a scenario that's been discussed, but we've decided to do it now in conjunction with the spin-off of Arjo and the refinancing process that's going on here really.
On your second question, I mean, I don't wanna advise why you should invest in the company and so on. We're well aware of the challenges I mentioned earlier, and these are some of the things we are working diligently on. But it's really not for us to advise your investors on why to invest or not to invest in Getinge. So I would like to pass that question.
Can I just ask, is—so is it clear that the CMD will be hosted after the rights issue? Sorry if I got the timetable wrong, but is that the intention?
Yes.
CMD after the rights issue?
Yeah.
Okay.
Yeah.
Thank you.
We can now take our next question from Sten Gustafsson from ABG, please go ahead.
Yes, good afternoon. This is Sten Gustafsson from ABG. I have a question on the timing, and if you could... I think the question was asked earlier, but I'm not sure if I got the answer right here. If you can confirm that the business, underlying fundamental business has not changed dramatically during Q2, because when I look at it, you fairly recently paid a dividend, and now you're asking for new money, which is even though the dividend was obviously much lower than SEK 4 billion, but still, if you could confirm that the underlying business has not deteriorated during the quarter, that would be great. Thank you.
Okay, I can comment. First of all, we don't comment on the current quarter as such, but I would like to underline that the Rights Issue is not triggered by any change in the business performance. That there's no such connection here. That's important. But we don't comment any specifics on how things are going in Q2. And what was your second question?
Okay. Well, I mean, it was related to the timing.
Dividend.
You paid the dividend fairly recently and yeah.
Yeah. Okay. Yeah, okay, yeah. Now, I think we have, we have a dividend policy that we, we think it's, important to, to follow. So that was the reason for, for paying the, the dividend, and also, when this decision was, was taken, we, we weren't as far progressed when, when it comes to the strategies and the business plans of the two different companies. So, there's, this is, an evolving, evolving story in a way, so, that's the reason for the timing.
All right, thank you. Just one more, if I may. You said that this was not related to restructuring charges or related to hedging, et cetera, but is there risk for write-downs of other intangible assets?
There is no such connection. It's not something that we even looked at, actually.
Okay, thank you very much.
Again, if you would like to ask a question, please press Star One. We can now take our next question from Scott Bardo from Berenberg. Please go ahead.
Yeah, thank you for taking the follow-up. So, just with respect to messaging, I think for the last four or five years, Getinge has consistently messaged that there has been no need nor requirement to issue equity to strengthen the balance sheet, and that this can be done through organic cash flow development. I think that's a message that was also resonated in recent roadshows from the company. I think the message, if I understand correctly, was also that Getinge would never issue equity unless it was in the position to make a meaningful acquisition, or one that it thought that it could use proceeds to create shareholder value with.
But always suggesting that such acquisitions would not be made until the shop was in order, and the business was stronger, and margins were higher. So can you comment, has there been a shift step change in your appetite and timing for M&A? It sounds so, but I wonder if you could comment, do you now feel that the company is in the position to do M&A at the end of this year? Or is it still back to the old message that the business needs to get stronger and have a stable foundation before you go deploying capital? Thank you.
Yeah, well, first of all, as you know, Scott, I'm fairly new in my role, so I don't wanna comment on what's been said in the past. I think you've described the history quite well, but I don't really have anything to add in this regard. The main message is, as we've said a couple of times, that we just like to create some preparedness and freedom to move for both companies. We are absolutely still fully busy with some of the internal challenges when it comes to organic growth, when it comes to getting synergies out of being a larger group, when it comes to working through the FDA situation and so on.
So full focus is on there. There's no change in this regard at all, but we would like to prepare ourselves also to be ready for additional M&A going forward. But there's. I really cannot comment on anything in detail in this regard. It's more about creating the preconditions to be ready to act if opportunities occur.
Thank you. So just to press you a little bit there. Because you've come to the market and issued equity, and have this heightened preparedness, am I correct to assume that it is now a possibility that Getinge looks to make acquisitions in 2018? So you see this as something that the company could now be prepared to, and for?
Yes, I believe it's something that we need to be pre-prepared to do without, again, underlining that we do not comment on anything in particular in this regard. It is about preparedness, absolutely. But I think it's important to underline that the future strategies of both companies will, for sure, include also M&A. Assuming that we've been able to work through also at least our the bulk of our internal challenges before that.
Very last quick question, please. Historically, in discussing PPAC, and I know that you've not highlighted the capital structure of Arjo yet, but now that your intentions are made for having a rights issue and adjusting your capital structure, is it still your expectation to have similar leverage across both companies? Could you please at least share that so investors have a better sense of what they're likely to end up with Arjo, please?
We do not comment on that until we actually disclose the plans for the company. So, unfortunately, we cannot give you more details on this at this moment.
Okay, thank you.
We can now take our next question from kristofer Liljeberg from Carnegie. Please go ahead. Kristofer, you can go ahead with your question. Thank you.
Yeah, sorry. Can you hear me now?
Yes.
Okay. Sorry. Yeah, a follow up from me. I understand the point with the rights issue in M&A, but I think at the call, you also said this should support organic growth in the company. If you could explain that a little bit more, if it's about investment you will do in maybe R&D or in the sales organization or anything. Thank you.
Yeah. I'm sorry, Kristofer, but I really would like to wait until we can disclose the full plans for both companies here, not take pieces and disclose piece by piece here. But it is. You're right in the sense that it we do see opportunities both organically and inorganically, but I really wanna wait until we have the full plans and can talk about the whole picture, not just pieces of it.
Okay, I understand. Thank you.
That concludes the questions at the moment on the line. I'll now turn the call back to the host.
Okay. Well, thanks, everyone. Thanks for joining the call with such a short notice. I wish you a good rest of the day, and thank you very much again.
This concludes today's call. Thank you for your participation. You may now disconnect.