Good day, and welcome to the Getinge Group Q1 Report C onference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mattias Perjos. Please go ahead.
Thank you very much. Warm welcome to all of you, and thanks for joining the earnings call today. The presentation for today is accessible via a link in the report, and it's also available on our webpage under the investors section under presentations. Together with me on the call, I have our CFO, Reinhard Mayer, who will support me during the call, and he'll also be presenting the Q1 financials and join the Q&A session a little bit later. If we start with page 2, you find today's agenda, where we start off with an overview of the business performance during the Q1. Without further ado, I'd just like to move over to slide number 3 and some initial reflections from my personal perspective.
I joined Getinge as President and CEO on March 27, after a transition period that started effective in November of last year. The positive first impression that I had of the people in the company and what we do for our customers, and of course, ultimately, the patients, I have to say it's been reinforced during my first month with the company. I've been using the time this first month to dive into some of the most important short-term and long-term challenges that we still have in front of us. There are several of those, as you already know, and I'll come back to that a little bit later in the presentation.
But first I'd like to move over to slide number 4 and what we call takeaway number 1 of 3 from the Q1. First and foremost, we saw a moderate increase in both organic order intake and net sales, which is basically in line with our outlook for the full year, the outlook of slight organic growth. Secondly, we saw as well healthy improvements in our margins and the cash flow. The gross margin increased 2.2 percentage points to 49.4%, and the EBITA 1 margin rose to 12.3%. The cash flow from operations improved by 24% to SEK 868 million.
Thirdly, as you can see, this enabled us to reach a lower level of net debt in relation to adjusted EBITDA. If we then move on to slide number 5, and takeaway number 2, we can conclude that the improved margin largely is attributable to increased net sales. We can also see that we have enhanced efficiency in the supply chain, and, in the quarter, we also had a favorable product mix that helped us. We also saw lower restructuring and integration costs in total amounting to SEK 97 million, compared to SEK 127 million the same quarter last year. These costs are mainly write-offs of IT systems, and as such, they are non-cash related.
Altogether, this picture boils down to significantly improved earnings per share, so amounting to SEK 1.16 compared to SEK 0.46 from last year. If we then move to slide number 6, I'll talk a little bit about the challenges that we mentioned in the beginning of this call. We grouped them into four main blocks here. I want to underline that we do see continued challenges when it comes to organic top line development. We saw growth in Surgical Workflows in EMEA, but the underlying momentum could still be stronger. For example, there's a decline in organic order intake within Acute Care Therapies and also in Patient & Post-Acute Care.
Our estimates for the full year, however, remain the same as in the previous quarter, which means that we keep the outlook unchanged for the full year. We then move to our efficiency enhancement program, what's called Big Five. We continue to deliver according to the plan for the program. The overall direction and also the concept of the program remains firm and intact. But I also want you to be aware that the spin-out process related to Patient and Post-Acute Care has added a layer of complexity to this program, which we need to take into account as well.
The third block here is our quality remediation program that continues with high intensity at the four plants, which are covered by the Consent Decree with the FDA. In both Wayne and the Hudson site, we're progressing according to earlier communicated plan. In Hechingen, the situation is a little bit more complex, and at the end of the quarter, we concluded that we need to do re-planning for all the remediation work at the site. The reason for this is that we're not happy with the speed and the quality of the progress as we see at the moment. This was a discovery late in the quarter, and the potential business consequences of this re-planning will, we will communicate not later than in the interim report for the Q2.
And finally, the fourth challenge here, the preparation of the proposal of a potential spin-out of Patient and Post-Acute Care. It is progressing according to plan, and we have a first estimate of costs associated with this separation, and the costs are in the range of SEK 400 million-SEK 500 million, where close to half are non-recurring costs. Also here, we will provide a more detailed information as we go along, the overall plans as well, for both entities during the H2 of the year. Next, we can move to slide number 7, and the overall distribution of our top line between business areas and regions.
Getinge order intake for the Q1 amounted to SEK 7,229 million, which is equal to an organic growth of 0.7%. This is driven by strong performance in surgical workflows and in the EMEA region, growing organically by 5.2% and 5.8%, respectively. Acute care therapies reported a 1.5% decrease due to lower order intake within cardiopulmonary and in cardiac arrest. In patient and post-acute care, we saw a 1.2% decrease due to weak performance in rental and service, mainly. All our businesses reported organic growth in EMEA in terms of order intake, mainly driven by Northern Europe, Middle East, and also Africa.
Americas reported decline of 3.6%, due to weak performance in the U.S. within Acute Care Therapies and also Patient and Post-Acute Care. The decline in Asia Pacific is largely explained by weak demand in East Asia. If we then move to sales, net sales amounted to SEK 6,664 million, which is organic growth of 0.6%. Acute Care Therapies grew by 3.5%, mainly driven by cardiopulmonary. Surgical Workflows, it was basically flat. We had growth of 0.5%, and this is attributable to positive development in life science and in surgical workflows. Patient and Post-Acute Care had a 3.4% decline.
This is due to lower sales in capital goods and the rental business. It was partly offset by more positive development in patient handling. Net sales rose by 3.8% in EMEA, mainly driven by Acute Care Therapies in Northern Europe and Surgical Workflows in Southern Europe. Americas reported decline of 1.7%, largely due to weaker sales in patient and post-acute care in the U.S. In Asia Pacific, we had a 1.5% decline driven by lower sales in Japan, in Australia, and in New Zealand. After that summary, we can move to page 8, where we take a closer look at Acute Care Therapies.
In ACT, in the quarter, we saw a slight decline in organic order intake, but net sales improved in all the regions. We also saw improvements in gross profit and EBITDA margin, driven by higher net sales, enhanced efficiency in the supply chain, and also a favorable product mix. So this, all this contributed to significantly higher EBITDA for ACT before restructuring and integration costs. So the total amount, it was SEK 557 million, and the EBITDA margin increased to 19.7%. With that, we can move over to page nine and to Surgical Workflows. Surgical Workflows order intake rose organically by 5.2% in the quarter. All regions reported growth, but the largest impact came from EMEA.
Net sales improved slightly, attributable to strong performance in EMEA, basically. The gross profit and EBITDA margin showed healthy increase, mainly due to higher efficiency in the supply chain and higher net sales. So all this contributed to significantly improved EBITDA before restructuring and integration costs for Surgical Workflows. Then we can move to page 10, to look at the patients and post-acute care. Within PPAC, order intake declined 1.2% in the quarter due to a weak performance in Americas. Net sales declined by 3.4%, driven by Americas and Asia Pacific, while EMEA was basically flat for PPAC.
Gross profit and EBITDA margin rose by 2.2% and 0.9%, despite the weak performance in net sales. Also here, the improvement is attributable to higher efficiency in the supply chain. In terms of results for PPAC, higher OpEx dragged down EBITDA before restructuring integration costs. We landed on 238 million SEK for PPAC. And the increase in OpEx is mainly explained by currency effects in the quarter. Then we can move over to page 11. I'll talk a little bit about the efficiency enhancement program, as you know, as Big Five. This program continues to deliver according to our plans.
In the Q1, the savings amounted to approximately 100 million SEK, mainly driven by higher efficiency in direct sourcing and also within lean sales and admin. In total, the savings from the program so far amounts to approximately 500 million SEK. The savings from the program are mainly allocated to reinforce the quality organization and to product development in order to secure long-term competitiveness and also compliance. We will need to continue to allocate savings from the program to a higher degree into organization development, partly because of the quality and regulatory compliance work, but also because we had a significant unwanted attrition in the last 12 months, which has created some competency gaps that we need to succeed.
So this is important to be aware of in the context of Big Five. With that said, I think we can move to page 12 in the innovation agenda. As mentioned, while talking about Big Five, we need to channel some of the savings from Big Five to product development to secure future growth and margin. During the quarter, we've increased the spending in R&D both in actual and in relation to net sales. Allocation of the funds for the program obviously needs to be done in an efficient and focused manner in order to reach a critical mass in each of the products that we decide to go forward with.
The areas that we prioritize for in terms of innovation are cardiac, vascular, and respiratory, and also hospital infrastructure and services, and integrated and effective solutions for mobility. We obviously the possibility and the need. We will also use strategic collaborations in order to enhance the output, but also to mitigate risk in our innovations. After that summary, I think we can move over to page 13, and I'll talk a little bit about the quality remediation process in relation to the Consent Decree that we have with FDA. Before going into the details, I'd just like to give you a brief recap on why we are in this place to start with.
We all need to be aware that this is a truly complex consent decree. This is both due to external and internal factors. One complicating factor is that it comprises sites both in the U.S. and in Europe, and yet it normally operates in the U.S. only. Secondly, I also want to point out that the regulatory demands have grown more rigorous compared to when sites and scope were established. We also have a legacy factor with Getinge itself, where we have a history of decentralization with no common quality system between the different parts of the organization and the different sites.
I also want to highlight again, that the comments on the observations from FDA and the independent auditors, these are not related to the product. They're related to the production and process control, the lack of adequate quality management system procedures and design control, documentation. With that background, I'd like to take a look where we stand after the Q1. There's been intense activity during the quarter, and, there's been progress in all of the sites, but they are in different places in the remediation, here. Hudson shows a stable performance according to plan, and the move to Merrimack is also progressing well, even if the coming quarter is really a critical focus for the work.
Also at the Wayne factory, we see a progress in the right direction. In Hechingen, the picture is a bit different. This is the most complex site that we have, and here we do see a risk for another delay in the process. So therefore, we decided to do a replanning for the Hechingen site. This was a conclusion we arrived at quite late in the quarter. We need to come back as soon as possible with an update on this. And the update will take place in connection to the interim report for the Q2 at the latest, but we will give information as soon as we have it.
In terms of where we stand, financially, we did utilize SEK 65 million of the provision for remediation, leaving us with three hundred and two million SEK in provision by the end of this quarter.
Thank you, Mattias. So let us move to our results, slide 16, performance on group level. As Mattias mentioned, the order intake in the quarter grew slightly. Geographically, EMEA showed organic growth, while both Americas and Asia Pacific had a negative development. Looking at net sales, we had a modest organic increase of 0.6% in the quarter. Due to positive currency transaction effects, a favorable product mix, and good cost control in supply chain, we see a growing gross profit margin. Selling admin expenses are flat in relation to net sales. EBITA before restructuring increased with a very strong 31.9% to SEK 818 million, as a consequence from higher net sales, increased efficiency in supply chain, and the favorable product mix. Now, let's change to slide 17 and foreign exchange effects.
As we have stated before, Getinge has 2 dimensions of exposure. The first dimension is currency transaction exposure. This relates to when the group's factories are selling to the group's subsidiary, which we hedge for. The other dimension is the translation exposure. This relates to when the group's company results are translated into Swedish krona. This effect is not hedged. You can see that on the EBITA before restructuring costs, the transaction impact was 77 million SEK, and the translation impact was -44 million SEK, resulting in a total effect of 33 million SEK for Q1. It is also worth mentioning that currency transaction effects are expected to have a positive impact of approximately 200 million SEK on the group's earnings for the full year 2017. Let me move to slide 19 and our balance sheet.
Net debt amounted to SEK 22.74 billion at the end of the period. The change in net debt, adjusted for currency effects and acquisitions, amounted to SEK -451 million, and the net debt to equity ratio respectively decreased to 110.1%. Our leverage, the net debt to EBITDA before restructuring ratio decreased from 3.9 prior year to 3.67 for the period, which is calculated on a rolling twelve-month basis. Finally, we go to slide 21. If you take a look at the cash flow, the group's operating cash flow increased by a strong 24% to SEK 868 million, and the cash conversion amounted to a healthy 72%.
During Q1 2017, we have seen investments of SEK 406 million, which is an increase of 12.8% and has resulted to a cash flow after net investments of SEK 462 million. This represents a growth of 35.9% versus last year. Then I hand over to you again, Mattias.
Thank you, Reinhard. I think we can move to the next slide. So before we open up for questions, then we'll have a brief summary of the Q1. We had slight organic top-line growth, as you've seen. Despite the growth, we did see significant growth in earnings and cash flow. And this is as we touched on earlier in the presentation, and mainly thanks to continued efficiency enhancements. All in all, the efforts reached a lower level of net debt to adjusted EBITDA. At the same time, I'd like to underline that we have a couple of challenges still ahead of us.
Top-line development, where, for example, we saw the slight decline in acute care therapies in the quarter, mainly in the U.S.. The Big Five will continue the rollout of the program. It's going according to plan, but we do have to allocate a significant portion of the savings from the program into reinforcing both the quality organization, but also into innovation and market development and other parts of the organization. The quality communication program continues with good traction in the U.S. sites, but a slightly more challenging situation in Hechingen. So we will update you as soon as possible on this, at the latest in the report for the Q2.
And finally, the preparation of the potential spin-out, where we have a first estimate on cost in the range of SEK 400 million-SEK 500 million, and we will come back with the information, I think, most importantly, on the strategic plans for both the companies, during the H2 of the year. That concludes really the overview of the Q1 and the summary. So with that, I open up for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from Kristofer Liljeberg with Carnegie.
Thank you. I have a few questions. First, on the gross margin improvement, it seems the transaction effect added maybe a percentage point to the gross margin. But the remaining improvement, is it possible to split that between mix effect and how much is more sustainable from the supply chain efficiencies? And related to that also, how would you see the mix effect changing now with orders for the acute care business being down slightly in the quarter? Thank you.
Good. Thank you, Christopher, for the question. Well, you're absolutely right. There is a slight effect from the transaction hedge side. And as we have alluded, I mean, the SEK 200 million is the full year, so you can really apportion that as well into the Q1 and with the SEK 77 million, which we had, I alluded to, they are phenomenal. The price effect versus product mix effect, that we cannot separate out, because actually both influence each other. So the volume, of course, in certain areas have an effect on the pricing efficiency. So here, there's no chance to basically give you that detail. It's anyhow a combined activity. And in that context, we cannot really split it up further. Thank you.
Our next question comes from Annette Lykke with Handelsbanken.
Yes, first of all, congrats with a very solid Q1 result. At your presentation, you highlighted that the high degree of the cost savings from the Big Five program is have to be transferred back to the organizations to increase internal competences and maybe invest in frontline and innovation. I'm just wondering if you could give us some sort of feeling on how much of the SEK 2.5 billion-SEK 3 billion Big Five savings target do you think is actually going down to the bottom line? My other questions will be on the top line growth for the remaining part of 2017.
Could you elaborate a little bit on how you see both market trends, but also how Getinge is doing, in particular within acute care services, surgical workflow, and also, of course, in the PPAC division. How much more improvement should we expect in these areas? And also, in connection with the better top line growth you have had or order generation you have had in the Q1 with of, how much is this generated from the previously announced product launches? Thank you.
Yeah, thanks. I think I can start here. We're not in a position to give any details on how much of the savings from the Big Five will actually approach closer to the bottom line of the P&L. The main reason for this, I mean, in terms of the quality work, we have a solid plan that we're following. But what I mentioned about unwanted attrition, which is an effect of how the program was rolled out in the first place, this is something that's happening on a weekly, monthly, daily basis. Really, it's very difficult to estimate it and give a forecast of it. So it's, of course, not possible to give you much more information in this regard.
When it comes to the top line growth as well, we've guided for slight organic growth this year. We reconfirm this, but we're not in a position to give more details by segment and business area, unfortunately.
How about the new product? How much have they started to influence yet, or is this more a influence you will see in the H2 of 2017?
Well, also new product, it's difficult to give. We're not in a position to give you detailed numbers on this, but we have a good launch pipeline for Surgical Workflows for 2017. You don't see much effect of it at the moment. I mean, most of the launches haven't even been done yet.
Okay. Can I ask, I mean, just to be frank here, how can you not be in a position to know how much new products will help you looking forward?
I didn't say that we don't know. I just said that it's not information that we make public.
Okay. Thank you.
Our next question comes from Scott Bardo with Berenberg.
Yeah, thank you very much for taking my questions. So, first question for you, Mattias. Obviously, a few months within the organization now, I wonder if you could share some broader thoughts as to what you see are the sort of key opportunities and challenges within the organization, and also expand upon that, please, to talk a little bit about your thoughts on this PPAC spin-out. Given you've highlighted here within this presentation some relatively high separation costs and the potential for reduction in savings due to the complexity of this spin-out. So I just wondered if you could share thoughts as the combined company, your views on value creation and sustainability of that spin-out business, please. So that's the first question.
I know there's a lot to answer there, so I'll follow up after that, if possible.
Yeah, okay. Well, thanks, Scott. Yeah, just to elaborate a little bit on the initial impressions, here, I have to say, I'm positively surprised by the spirit of the organization, the level of passion and professionalism with the people that I meet here as well. I also had time to the possibility to spend some time with customers, and it's really good to see in reality that our products are serving our customers in a really good way. We have a strong position in many of our niches, so that's really good.
We touched on some of the challenges, here as well, the rollout of the One Getinge strategy that we decided to, to tweak a little bit, because obviously created some organizational fatigue, as well, and change fatigue in the organization. This is what shows up as unwanted attrition, in the, during the last 12 months. I, I do expect that we will have to, to live with the situation for a while, even though we're trying to mitigate this as, as much as, as possible. Of course, the, the Consent Decree is not new news, but it's, it's also, some, a, a dynamic situation, I would say, especially related to, to the Hechingen site where we need to do a replanning.
This is, of course, not a situation that we wanted to find ourselves in at the end of the quarter, but we decided to bite the bullet and really have a more thorough look at how we do this work to try to take more internal ownership of the situation and less, being less reliant on consultants. And then the spin-off of PPAC, the potential spin-off of PPAC, has created obviously another layer of complexity when it comes to both the One Getinge strategy and the rollout of Big Five and so on. So, it's a challenge that we need to manage.
I have to say that the team that works with the spin-off now has done a very professional job in terms of the detailed planning for this, so that's why we're in a position to announce the costs related to the spin-off. We are working in parallel on the plans for this, so we feel comfortable that we will be able to show you credible plans for growing both the different companies after the potential spin-off, which justifies the cost related to separating this.
... when will we learn about those, actually?
We've said the H2 of the year. We would like, we are trying to progress this as quickly as we can. We've shown we haven't been more specific than the H2 of the year. Now, I don't want to speak much now and give you something more optimistic at this moment.
Okay, thank you. And a follow-up, please, on Hechingen, which was a sort of an issue that continued to linger all of last year, with the FDA not, if you like, authorizing your remediation plan, was my understanding. Are you confident that you were taking the right path there, highlighted also by additional costs? What has changed, actually? Has there been an inspection that hasn't confirmed your opinion about the steps you take? Is there any risk that you could cease manufacture from this or be enforced, enjoined from this facility? Can you communicate a little bit more as to where you are, and give us some sense of the costs required to complete the plan to your satisfaction? Thank you.
Yeah, okay, thanks. We haven't had any additional information from the FDA, but we, of course, internally, we follow their remediation, both in terms of quality and speed. And we've come to the conclusion at the end of the quarter that we're not satisfied with the level of speed, so we do need to prioritize and replan the work for the site. I'm not in a position to speculate about the cost or the time plan for this, unfortunately, now, since this is something we discovered late in the quarter. And it's not based on any new information from the FDA at this point.
So we shouldn't speculate that there's a material additional cost to come from this facility, but there could be some additional costs to that being provisioned?
I would like us to avoid any speculation at all at the moment here. We need a month or two to actually work through the plans and think we'll be able to come back with details on this.
Okay, thank you. Last question, please. This relates to the Big Five initiative, which I know was your plan. I think as you've clearly portrayed the messaging of reinvestment of some of these savings in this call. So two quick questions, please. First and foremost, do you see potential for getting the group to restore the historic margins, which this plan historically was designed to deliver? Or is there some sort of caution statement here that historic targets or historic achievability is no longer structurally possible within the organization? And second point, I see that the run rate of cost savings this quarter is probably the same as the run rate last year.
My recollection was the plan, we should be seeing an acceleration, actually, 40% of this plan delivered throughout fiscal 2017. So can you talk through a little bit as to why we're not seeing an acceleration of savings as per the initial phasing of this plan? Thank you.
Right. Well, thank you. In terms of the longer term plans, I would like to wait for questions until and with answer to your questions until we actually have the plans for both the companies, maybe during the H2 of the year. When it comes to the Big Five, I wasn't part of the history that you mentioned. I'm not really in a position to answer. I know Reinhard can shed some light on this maybe.
Absolutely, will do. Scott, I mean, on the run rate and the impact of Big Five, I can say, I mean, we are delivering very much ahead and according to our plan. The positive momentum is actually seen in the increased results. As you might remember from earlier discussions, there is actually Big Five flowing into margin as well as in the costs. When you look both compositions, we are well, developing very well ahead, and I think that is clearly a sign that Big Five is delivering according to the plan. The range of 2.5-3 was at the end of the year, on an accumulated basis. I can only say, there's no slowdown.
Pace is ahead, and we have good directions on the major drivers there, which is direct spend, indirect spend, and lean sales and admin.
Thanks. I'll jump in the queue.
Thank you.
Our next question comes from Richard Koch with SEB.
Hi, Richard Koch with SEB. The 400-500 million in spin-off costs, how is that gonna be visible, really? Or you say, almost half is non-recurring. Is that gonna mean you take that as a restructuring cost, or how will that be, yeah, visible to us?
Yeah, Richard, this is Reinhard speaking. Yes, absolutely, you are correct. I mean, half of the cost is related to restructuring. It's actually a part of the information, which we have basically gained through the process as such, where we, in a way, need to separate a number of IT systems and other activities, which do lead to, let's say, incremental one-time efforts, and that is approximately SEK 200 million-SEK 250 million, back in that range. The other is associated with additional organizational costs in the feedback function and PPAC organization, which we have, let's say in 2017. I think it's very important that we box it for 2017, and this is really the guidance we have given.
... SEK 200 and between SEK 200 and SEK 250, that's going to be good enough over the remaining three quarters as restructuring costs?
Well, SEK 250 is restructuring related to the one-timers, and the rest is going to be operational costs in the future business.
Okay. Looking at the Patient Post-Acute Care, it's now the eighth consecutive quarter with negative organic growth. Do you expect this to start showing a positive growth anytime soon, or, or have you given up on this division?
I have to correct you. I think that the last quarter, we had a positive organic growth in the first place. And we have seen a weak performance, a weaker performance than last quarter. Well, I cannot say, I mean, it is now back to the old trend. To what our guidance is, today, we do see for the total group, a slight moderate growth. And let's expect that to be, let's say, across all three divisions. To which extent, I don't know.
Okay, thank you.
Our next question is from Michael Jüngling with Morgan Stanley.
Great. Thank you. I, I have three questions. Firstly, on the patient and post-acute spin out, am I reading your press release correctly, that effectively the group EBITA margin will be negatively impacted by 2 percentage points as a result of recurring charges of approximately, call it SEK 200 million-SEK 250 million per year? Secondly, on the FX margin impact for 2017, what will be the impact on gross margin and also on the EBITA margin? And question number three is on 2017 sales growth. Given that Q1 was a very easy comp for you, and you hardly grew, has the risk increased that you may not grow at all this year or may even decline in organic sales growth terms this year? That's all. Thank you.
Well, on the—let's say, answer the first question, which is, let us say, the 200-250. Well, we guide only for this year. We are not giving guidance on, let's say, what is an increased cost base of the business going into 2018, 2019, and 2020. This is due into H2 of the year, as Mattias stated. You understand that, let's say, a running organization will have ability to optimize costs as well. The purpose of the spin-off is actually to grow those businesses, to an extent, which, you know, we have not yet seen. For that, we build the organization. Part of the cost, we do actually see now coming up in Q2 to Q4, and that is what we guide on.
Financial targets for all businesses will be provided in the H2 of the year. When we come to the foreign exchange effects, I mean, the SEK 200 million, which I have given you a guidance on, will fully flow into the gross margin, while the translation effects can also impact the expense side. To which extent it affects gross margin or expense side, I cannot tell you that, because we do not make planning on that. On the hedging side, we do really have a good protected, let's say, contractual situation, so here I can give you the guidance. And the last piece I don't recollect, but that was around the-
The organic sales growth.
Yes.
Because if you... Yeah, the organic sales growth that you had in the Q1 was a very easy comps. So if you adjust it for comps, it's quite easy to see mathematically why you would have no sales growth at all this year or perhaps even have a slight decline. Hence, the question was, has the risk increased after the Q1 result that you may not grow or may even decline this year?
I think the risk has not changed. Our outlook is, as Mattias confirmed, still going forward with a slight positive growth for the full year. We assume today that all three business areas contribute to this growth. The comps perspective is one thing, but there's, let's say, growth perspective from different markets where we have incremental product launches is another thing. This all will contribute to the overall perspective of slight moderate growth in 2017.
Okay. And back to my first question about the guidance of SEK 500 million or so of total costs, of which half of them will be recurring. So I'm not asking you for new guidance for 2018 or 2019, but if you take the 200-250 in recurring costs, that seems to mean—seems to me that you're highlighting that group margins, as it is today, could be impacted negatively by around 200 basis points. Is that a correct interpretation of what you've disclosed today?
That's not correct. We gave a guidance what we see as cost impact for this years. We have not done an extrapolation or an assumption what it will mean for 2018, 2019, and onwards. Those are figures and targets which we need to investigate much far, further, and where we will come out in H2. And I think it's actually good practice that we give you early in the year-
... inform them about what we know, and then not only so to say, give them results.
Okay. Just maybe one last follow-up on this. Is it correct to say that there are going to be SEK 200 million-SEK 250 million of recurring costs as a result of the spin out? Is that a correct statement of fact?
No, it's just that they operational costs, which might turn into, recurring costs, but we cannot tell you that because we don't have those plans. Out of the SEK 200-SEK 250, it's definitely one-time costs related to additional investments into different IT systems and other investments, which we need to do in order to separate the two companies and get listed according to our timeline.
Okay, thank you.
Our next question is from Patrik Ling with DNB. Hello, your line is open.
Yeah, thank you. Two questions. You've talked a lot about that substantial part of the savings program that you have has to be reinvested into the company, into the organization and into the pipeline. This quarter, you had 4.9%, approximately, in R&D spend to sales. Mattias, what do you see long term for a company like Getinge if you want to position yourself as a strong competitor in the med tech space? Where should you be long term on the R&D side?
Thanks, Patrick. It's a good, a good question, but it's a little bit too early for me to answer it. It's my fifth week on the full-time job. We are working with both strategy reconfirmation and also the individual plans for Arjo and for Getinge. So I cannot give you a number on this today, but it's a question that I have on my to-do list as well, for sure.
But we should expect it to be up from the level that we saw this quarter?
Yes. Yes.
Yeah. Then I also have a additional question here. Have you done any acquisitions in the Q1 that you haven't disclosed?
No, no acquisitions.
Could you please explain why the number of full-time employees have increased by 342 persons from the end of 2016 to end of March?
Excuse me, can you repeat the question?
Yeah. If you look at the Note 5, it looks like your number of employees is up by 342 persons during the Q1. It seems to be a little bit too much if you haven't done any acquisitions.
Well, as I said, I mean, we are planning for expansion in the spin-off related sites. So we will have hirings there, firstly, and as we report here, the end of the quarter figures was—the end of the quarter figures were a good piece of the effect in this context. But further to that, we have not done any kind of acquisitions, and have not really, structurally increased the activity. So not that something materially has changed.
Okay. Good. Thank you.
The last question comes from Peter Costa with Investec.
Hi, thank you very much. Maybe I'll go one question at a time. You mentioned supply chain efficiencies in all the divisions, and I was wondering if you could give some sort of understanding the drivers of the supply chain efficiencies and maybe the continuing operation. And then associated with that, you've mentioned reinvestment and product and so on. Do you have a sense in terms, in terms of how this may be reinvested to, to help grow the sales?
Yeah, when it comes to the supply chain efficiency, I think the short-term benefits that you see are mostly from direct sourcing, so purchasing and so on. The longer term part of the plan is a more effective setup with warehousing, and we're entering into a 4PL setup as well, now that we believe we generate also efficiency. So that's kind of the high level picture from the supply chain perspective. And sorry, your second question was about reinvestment in the program?
Yeah, just reinvesting in product and structure to try to drive sales. Any thoughts on that going forward?
General thought is, I mean, what we've said, that we do see the need for investing part of the savings into organic growth, not just innovation, but also into market development and growing in emerging markets and so on. It's not something I can quantify on this call, though, in terms of numbers.
Okay. And then the next question was just on, on acute care order, intake. You mentioned Middle East and Africa as being particularly interesting. Were there any notable large orders won in the quarter there?
No, nothing... Nothing that stands out from the top of my head, no.
Okay. The last question was, under the previous management team, there was some discussion toward the end as to how the Big Five restructuring plan may be adapted, thinking about some of the differences in views on decentralization, coordinating manufacturing sites into larger units, and so on. I was wondering if you were having a review of this project and had any preliminary thoughts in terms of how some of that dialogue may be considered going forward.
I don't have much to add, actually. As you said, I'm getting my feet under the desk here as well, and diving into understanding the problem a bit more in detail. So there's no replanning on the horizon of the project. It's mostly going according to plan. There's not... I wouldn't say that anything has changed materially since the previous management.
Yeah. Okay. Thank you very much.
Is that the last question, moderator?
That does conclude today's question and answer session.
Good. All right. Well, thanks, everyone. Thanks again for joining the call. As I said earlier, we just like to summarize very quickly with the main messages. We have seen some high organic growth in the Q1. We're starting to also to have some traction when it comes to efficiency enhancements, so that showed in our earnings for the Q1. And also just remind everybody that we do have some significant challenges still ahead as well. This quarter, we've elaborated on during the call. So, thanks for your attendance, and look forward to talking to you again next quarter.
This concludes this call. Thank you for your participation. You may now disconnect.