Hey, and welcome to the Getinge Group Q3 Report Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alex Myers. Please go ahead.
Thank you very much. A warm welcome to everyone, and thanks for taking the time to be with us over the next hour. We'll stick to the announced time schedule, which means that we'll attempt to close this conference by 4:00 P.M. sharp, ET, European time. According to the information in today's press release, you should also have been able to access the slide presentation that we're using right now as a format for this session. We'll also have the presentation available on our webpage. Together with me, as always, is Ulf Grunander, our CFO, and he'll join me in bringing you the quarter three highlights.
So I'll jump in then to the first slide, which is, a bit of a high level slide, but also to, communicate a bit that we've had a high activity during this quarter, and, we've been focusing on two main areas. First of all, we had focused a lot on delivering a healthy order pipeline, which is very important for our, last quarter, Q4, in order to deliver according to our 2015 plan. And in addition, we focused more on cost containment, than our, running rate from the beginning of the year. And we've also decided to accelerate certain restructuring activities that we felt fit very well in our transformation plan that we, communicated in the Capital Markets Day. Secondly, we, also established and communicated an ambitious midterm plan to Getinge Group.
That was communicated in early September. We communicated a transformation plan where we focused in three big areas, Big 5 margin improvement program, One Getinge customer-centric sales structure, where we put the whole portfolio under one organization, and we also informed you of a global functional organization. Together, we keep our ambition to deliver SEK 2.5 billion-SEK 3 billion by the end of 2019. This was very well received externally, but I should also say that even internally, we have a full buy-in, that this is the right way for Getinge to go going forward, and we're fully engaged on executing on this plan. So with that, I'll go over to the slide number three, which gives you the overall picture for the Getinge Group.
Overall, we had good order growth in the quarter. We grew to approximately SEK 7.4 billion, a 15% increase, but of course, it's primarily driven by currency. But even taking away currency and looking at the organic growth, we grew by 5.2%, which I believe is a satisfactory performance. It is also slightly above our plan for the quarter, and I'm very happy to see both Medical Systems and Infection Control having very strong quarters in terms of organic growth. Then going over to the geographic standpoint, also, I would say good news, we had growth in all regions.
North America grew by 4.4%, Western Europe grew by 1.3%, but we also experienced very strong development in Japan, in Australia, and also in Emerging Markets outside the BRIC countries, and all of those grew double digits. When we look at BRIC, we experienced a decline of about 6.8%. India and China were stable, while Brazil and Russia declined in the quarter. A few comments around capital equipment versus recurring revenues. On recurring revenues, we had a continuation of a trend that we had in earlier quarters, which has been a growth rate of a lower single digit growth for recurring revenue. Capital equipment, we had a shift in trend, where we had a strong quarter this quarter, and we almost grew double digits in the quarter for capital equipment.
Both recurring revenue and capital equipment had a strong performance in the quarter. Overall, on the revenue side, not as high percentages, but we did grow 1.1%. It was slightly below our expectation, but also following a relatively weak quarter-over-quarter for quarter two. And that resulted in a lower revenue top line. Gross margins, I'd like to talk a bit about gross margins and give you a bit more insight within the decreased 210 basis points. We decreased our gross margins from 48.9% to 46.8%, which is 210 basis points. Of this decline, the negative currency effects were 103 basis points, i.e., more than half of the negative effect was currency related.
Also, the Consent Decree impacted us in a negative way, and contributed to 70 basis points, and the rest of the 10 basis points was due to low utilization of our capital goods plans, and primarily with the Medical Systems, and I should say, Surgical Workplaces, reflecting a lower order from earlier quarters, which we reversed in this quarter. So if I would comment a bit on the gross profit, I would say it's a slight improvement versus earlier quarters, but we do have a continued negative impact of the FDA-associated initiatives, and where the FDA activities or the negative feedback from the FDA is on similar levels as it was in quarter two, and Ulf will also comment on that a bit later. Expenses grew slightly, but here again, at a slower rate than earlier quarters.
Our sales expenses were actually flat versus last year, while admin expenses increased about 5.5%... and it's primarily due to our activities around consolidating our IT systems. We've also increased on the legal cost side in the quarter, and we've invested in group-wide functions, which I've also mentioned earlier, like shared services and procurement functions. And all these activities are adding to expenses in the short term, but will deliver considerable savings in the future, and is also reflected in the midterm plan, which we presented at the Capital Markets Day. On the EBITA line, we delivered SEK 828 million, this is a decrease from SEK 920 million in 2014.
And we had a negative impact of currency effect of about SEK 13 million, and then SEK 50 million negative impact as a consequence of the Consent Decree in the quarter. So in summary, if I would summarize our quarter, I should say it has been a mixed quarter, but with signs of optimism. On the positive side, we've delivered a strong order performance, which is very important going into quarter four, and we've also been able to relatively stabilize our expense increases versus the run rate earlier in the year. Our GP margins continue to be under pressure, and we've managed to, let's say, lower the decline rate of the GP margins, and as I mentioned before, a big part of it is a currency effect.
So in parallel, we're in the process of establishing a new organization to deliver, that will deliver the transformation program in the next few years. And I continue to be a strong believer that we can turn around and improve our performance over time. And we have also communicated and have a clear term, clear midterm plan, which we're now implementing. Over to slide 3, Medical Systems. Overall, a strong order intake, of almost 6%. We had very strong performances in North America and Western Europe. Both of them grew slightly above 4%. And we had also strong performance within Cardiovascular and Surgical Workplaces in the quarter. Rest of the world grew almost 9%, and, we've had a good development in most markets, within the Rest of the World cluster, except for Latin America and Russia.
Going over to gross margins, we declined 260 basis points in the quarter, primarily driven by negative currency effect, which is about 130 basis points. We also had a negative financial impact of the Consent Decree of about 140 basis points. And, finally, we had under absorption within our manufacturing units of capital equipment as a result of earlier quarters' low order growth of basis points. And, in parallel, we see actually some positive effects within other areas, which actually correspond to 60 basis points on the positive side.
Costs developed in line with plan and, at a lower run rate than previous quarters, but it did increase versus last year, due to investments in the quality and regulatory organization, and also investments in our U.S. sales organization, which has a good growth trajectory at the moment. The work within the Consent Decree framework continues to be in line with plan, and we'll give you a brief overview of this later in the presentation on a separate slide. We've also decided to implement several restructuring activities, and some of them are completed, some of them have been initiated. The total restructuring costs in the quarter is amounting to SEK 160 million. This includes the payment to the U.S. government of SEK 50 million.
We've decided to, well, we've completed actually the production of our textile-based vascular implant, which are now fully concentrated in Latin America, and that's part of our concentration of supply chain in fewer, bigger entities. We expect efficiencies of this activity to be achieved in 2016. We've also after the Capital Markets Day, we actually decided to initiate and accelerate some of the projects that we felt fit within the overall strategy. And there we've initiated the closure of an R&D center in San Jose, where we're moving it to other R&D centers within the group. This is an activity that amounts to approximately SEK 40 million in restructuring costs, but we also expect synergies of SEK 31 million starting in 2016.
So a fairly quick payback time on that activity. We've also accelerated the restructuring of several business units within Maquet, also contributing towards the new structure that we communicated at the Capital Markets Day. So overall, if I would finalize the Maquet or Medical Systems slide, I think we have had a relatively strong quarter in terms of order growth. We've focused more on cost containment versus the beginning of the year, but we still have a margin challenge which remains, and a lot of our midterm plan is, of course, focusing on the margin improvement. So I'm glad to see a good quarter in for Maquet, especially in the U.S. and Western Europe, and particularly also within cardiovascular, which is an important area for us. Over to the next slide, which is Extended Care.
Here, I must say, I can summarize this as being a weak quarter. It is following a strong quarter in quarter two. We had an order intake that declined 3%. We had also weak performance in many markets. North America, the U.K., China, and Russia were weaker markets. They were partly mitigated by positive development in Germany, Switzerland, Italy. Also Brazil and India did quite well in the quarter. The main drivers of the weak development were a continued weak development in therapeutic services, rental business, also combined with the weak quarter for our DVT consumables business, especially in the U.S.
On the rental business, again, I want to comment and reiterate a decision we took at the beginning of the year, which was to right-size the organization, and we decreased the number of depots from 85 to 58 in order to focus on fewer bigger depots. But at the same time, that had consequences on a decline of sales. So we walked away from sales, and as a consequence, we lost market share in the short-term perspective. But when we look forward, we actually see a rental market that's slowly stabilizing. And we're looking into with the footprint that we have, we need to maximize our performance from a slightly smaller base than what we had one year ago in terms of numbers of depots.
The margins in Extended Care declined, following again, a strong improvement in quarter two. But it was a decline versus last year, and that's due to a combination of, lower revenues, combined with an unfavorable product and geographic mix in the quarter. Especially, I would say, focused on the U.S., as a negative geographic mix, if you want to put it that way. In addition, we have 180 basis points of the, actually, of the 280 basis points were currency related. So again, a fairly large currency effect in gross profit decline. On the other hand, we've had a good expense control within Extended Care, and we're satisfied with the expense plan and the partial mitigation we done on that side.
EBITDA decreased from SEK 227 million to SEK 160 million in the quarter, with SEK 46 million coming from currency effects. Here, too, I should say on this Extended Care, we've initiated and accelerated a series of restructuring activities within the overall framework of the transformation program that we communicated at the Capital Markets Day. And Ulf will give you an overview of what we're doing now regarding restructuring and the projects we've initiated. Finally, I should say on Extended Care, we're very proud of launching actually two important products for Extended Care. The Flowtron 900, which is a unique DVT pump that combines both uniform and sequential active compression, and that will actually expand our market opportunities within the category.
We're also launching a mid-tier medical bed range for the emerging markets under the Essence brand, which will be produced in China. So overall, I would describe the Extended Care quarter as a disappointing one. And of course, we're fully focused now on delivering on the next quarter for Extended Care. Over to slide six, which is Infection Control. Here, a very good story. I should say I'm very happy to see a strong quarter with organic growth, actually almost 15% organic growth in the orders. Infection Control, we had a strong quarter in North America, particularly within Life Science and, we also had a strong quarter in recurring revenues. Europe also posting a healthy growth, supported by good development within Healthcare.
Emerging markets, excluding BRIC, had a very strong order performance as well. While BRIC was flat, with India and Russia growing, while Brazil declined. So overall, I would say, Infection control has a healthy pipeline, and that's very encouraging going forward into the Q4. Revenues grew organically with 6%, primarily driven by Western Europe and North America, while other regions were flat. GP margins were flat, overall, but that actually includes negative currency effect of seventy basis points, which actually means that if we exclude the currency effects, margins improved by about seventy basis points in the quarter, and that is very encouraging news for Infection control. EBITDA in the quarter grew 17% versus last year, and that again, is a satisfactory performance in the quarter. So for Infection control, we continue to focus on supply chain efficiency.
We continue to focus on the restructuring programs. We announced Rochester earlier in the year, and that is proceeding according to plan. 80 employees are affected by the closure, and we're estimating to complete the closure by the end of the year, so Q4 2015. Overall, I'd say we had a solid quarter for Infection Control, and we're progressing on the restructuring program with supply chain, which is also very encouraging to see. We also see improvements in performance, despite the slow start to the year. We're seeing Infection Control picking up, as we go through the year. Now I'll leave it over to Ulf to give you an overview of the restructuring and the integration activities.
Yes, As could be seen on this slide, you could see that the Getinge Group have a number of restructuring activities ongoing.
... The quarter was charged with restructuring costs of SEK 230 million. That mainly relates to accelerated activities of the comprehensive transformation program presented at the Capital Markets Day, the payment to the U.S. government as a part of the Consent Decree with the FDA, and the optimization measures on Medical Systems research and development function. You, I just mentioned here the three major activities, and then you could see on this slide that we also have some other ongoing activities. Restructuring costs for the full year 2015 are expected to amount to SEK 630 million, a change compared with the previously announced SEK 540 million.
The increase in restructuring costs is primarily coming from the efficient enhancement in Medical Systems , activity, research and development department, and the acceleration of the ongoing restructuring efforts, and a higher number of activities initiated as a part of the comprehensive transformation program. And, the, and then I hand it over to you again, Alex, and, and you could see on this slide what more sort of activities we have, but, I've just mentioned the main activities.
Okay, over to the FDA, short update there, on slide 9. Our remediation program is progressing according to plan. That's the main message. We've had third-party inspections that have been carried out in the Hudson, Merrimack, and Wayne facilities, and we've seen the reports to, to the FDA, from our third-party auditor. We're currently going through a fourth audit now, which is our Hechingen facility in, Germany. We see an increasing impact of the CD on our margins and costs, with increased validation procedures, slowing down production, as well as increased investments in the quality organization. The sales of Atrium products have also declined in the quarter, partly due to supply and to some extent, demand.
And we continue our efforts to keep good communication with customers regarding the Consent Decree, and the Certificate of Medical Necessity for the relevant products is still something that we're communicating and have a constant dialogue with our customers. So overall, I should say we're on plan, and actually no new news on the actual activities regarding the FDA. Then I leave it over to Ulf to go through the financial impact.
Yeah, I would like to give you an update here on, on the financial impact relating to the Consent Decree with the U.S. FDA. In the quarter, an amount of SEK 100 million was charged to the P&L, and SEK 50 million of those SEK 100 million represent loss of mostly revenues and some minor cost impacting negatively group's EBITDA result. And the remaining SEK 50 million is for payment to the U.S. government, booked as restructuring costs in the quarter. And then if I also would like to mention that the total financial consequence relating to the Consent Decree, excluding the cost of the remediation program, are now estimated to amount to approximately SEK 375 million and will impact the group's EBITDA result. If we exclude the payment to the U.S. government, the impact is SEK 125 million less than the original estimate.
A part of this positive change is, on the other hand, introduced by increased regulatory costs for building up the group quality organization and improved group quality system. We estimate that those increased activities amount to in the range of EUR 8 million-EUR 9 million. If we then move over to the consolidated results, the next slide, financials, and you can see here that organically, the group net sales increased by 1.1% in the quarter. The currency impact was 10.7%, and the divestment impact was 0.6%. As we have not made any acquisition during this year, we have the divesting a part of the Pulsion acquisition, and therefore, you could see a negative 0.6% in the quarter.
Gross margin, as Alex stated, declined by 210 basis points, and that is mainly related to negative currency and impact of the FDA, of the Consent Decree and low utilization of some of our capital goods plants. However, in some parts of the groups, the gross margin have improved in the quarter. Currency adjusted, the selling expense was flat in the quarter. Meanwhile, the administration cost increased by approximately five point, more correctly, 5.5% in the quarter, and that, as Alex also have stated, related to consolidation of IT system, increased legal costs, mainly in United States, and investment in group-wide functions. As far as to the group's financial net, which increased in the quarter by SEK 10 million approximately compared with last year, was well in line with expectation.
As the main part of the exchange exposure in financial net is hedged at this point of time, the trend of the financial net will remain stable. If you take a look on the FX effects in the quarter, I would just like to repeat that the group has two currency exposures. The first is the currency transaction exposure, and it relates to when group's factories are selling to the group's foreign subsidiaries, and that is hedged. The other is the translation exposure, when the group's companies turnover and PNL are translated into the Swedish krona, and that is not hedged. You could see here that, in the quarter, we had, from the transaction effect, a negative impact of SEK 93 million, and that goes all the way down to profit before tax.
Then on the detail level, you could see that we had a negative million coming out from translation, so that is a net of a negative 30. And the reason why the translation effect is reduced on pre-tax is the major part of our restructuring charges and amortization of intangibles on acquired companies are denominated in foreign currency, foreign currencies, such as the U.S. dollar and the euro. If we take a look on the full year effect, net, effect of exchange rate fluctuation in 2015 is expected to have a negative impact of approximately SEK 50 million on the group's profit before tax.
and you could see this on the table that of which transactions effects amounts to negative SEK 270 million, and, translation is a positive of SEK 220 million, based on the prevailing exchange rate scenario. The net change, the negative net change of SEK 40 million is a result of the recent strengthening of the Swedish krona. If I then move over to our cash flow, which was positive in the quarter and amounted to SEK 724 million, and represented a conversion rate of 69% of the EBITDA. The strong cash flow in the quarter relates to good collection of accounts receivable, and that could be seen in the reduction of DSO with 3 days to 75 -- 71 days compared with the same quarter last year.
Inventory, however, has increased up this quarter by approximately SEK 260 million to support the high number of expected shipments in quarter four. Closing net debt amounted to SEK 23.5 billion, and the closing equity amounted to SEK 18.9 billion, which resulted in a net debt to equity ratio of 1.25, and an equity asset ratio of 35.2%. Also, I would like to say that adjusted for currency fluctuation, the net debt decreased in the quarter by approximately SEK 140 million. All right, concluding that, I hand it over to you again, Alex.
Thank you, Ulf. So just a few final comments around the outlook for 2016. We have an important quarter ahead of us, still ahead of us, and we're maintaining our focus on delivering according to plan, i.e., organic revenue growth above 2014. We also have the total financial consequences related to the Consent Decree with the FDA, excluding the cost for the remediation program, are now estimated to amount to approximately SEK 375 million, the previously announced SEK 500 million, and that will have an impact on the group's operating profits for 2015. The currency effects, again, that Ulf mentioned, are expected to have a negative effect to the amount of SEK 50 million, and they will start to become positive in 2016 moving forward.
Restructuring costs for the full year are expected to amount to SEK 630 million. This is a change compared to the previously announced SEK 540 million, but we also felt that, the transformation program that we're, going into, we felt it was, better to do it sooner rather than later and get the effects as soon as possible. All this said, I'm encouraged by the healthy order growth in the quarter, but I still must say I, I remain not satisfied with our bottom line versus last year. We still have a lot more to be done there, but we have a very, very strong order growth going into, the Q4.
I remain confident that we have a plan to materially improve our performance, not only from a growth perspective, but more importantly, from a profitability perspective in the coming years. And we've begun to accelerate many of the necessary initiatives towards delivering our performance improvement plan.... We're working towards the transformation necessary to achieve our near-term plan, and at the same time, we're doing everything we can to ensure a good and healthy order and revenue growth for the final quarter of 2015. And with that, I'd like to suggest that we hand over to any questions that you might have, and I thank you once again for your attention. So over to the audience now. Thank you.
Thank you. If you'd like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask your question. We will now take our first question from Johan Nerhus of Swedbank. Please go ahead. Your line is now open.
Good afternoon. It's Johan Nerhus here from Swedbank, and congratulations to especially a really solid order quarter. And that's, I think, my prime interest as well. What can you say about this going forward? It was especially good in some mature markets. Can you say anything ahead of sixteen on that?
Yeah. First, first of all, thank you. Thank you very much for your, your comment. We, we were all- we're also happy to see the, the order growth, and, I would say I'm, I'm especially happy to see it being spread out, different geographies, so it hasn't been in one place. I would say it's been in many places. I don't think that changes, let's say, the outlook that we've communicated earlier. I think we're gonna have a quite a, a healthy, let's say, America, North America continues, as, as before. Europe is, is a bit challenging, but even there, we had a stronger, a stronger quarter, I would say, than we, than our plan, so that was positive. Again, rest of the world has been quite strong throughout the year, if we think about BRIC.
So I don't have any new news, to be honest, regarding that, other than that we share your excitement about having achieved a good order growth in in this very important quarter for us. I don't know, Ulf, if you have other comments around that.
No, no.
This worked to provide more new products, and there were some initiatives looking at slightly mid-tier or low-tier products for parts of the emerging markets. Is this something that will help going forward?
Yes, I think, what, what I can say is we're, we're definitely looking at the mid-tier. We have a lot of discussions on what the right approach is, and in the meantime, also, we have a pipeline where, where we'll have more products being launched in, in the mid-tier segments from, from the different, business areas. And some examples you've already seen, and we have, other examples in the pipeline. So, so, yes, there will be more, more focus, around that going forward.
And finally, about the growth margin, and you haven't said much about price pressure, of course, product mix is sometimes the other side of that coin. But can you say anything about price pressure in the quarter and what you see at Capital Markets Day, the signals around 1% still confirmed in this quarter?
Yeah, I would say, there it is, I still hold, and again, even though this quarter was better than the last quarter, I would say price pressure is still there. The signal is, we factor in 1% in our midterm plan. I would say it's probably somewhere between 1 and 2, 1.5, so in that range. And in the Capital Markets Day the signal was there, we're beginning to take that in as a, as a reality of life, and then we're trying, of course, to mitigate and compensate through other projects. So again, no different signals there. That's...
Great. Thanks. That sounds reasonable. I'll jump back to you.
Thank you.
We'll now take our next question from Hans Mähler of Nordea. Your line is now open. Please go ahead.
Yes, good afternoon, Hans Mähler here. Question on the strength on the hospital CapEx signs. Is that any, and has this anything to do with an uptick in sort of general markets from product time of treatment? And also, do you see a change in Europe for hospital CapEx, or is that still the same level as you seen in the first part of the year? And lastly, your changes in, I think, Consent Decree will do in 2015, does that also mean that you shouldn't expect any negative financial impact going into 2016? Those are my questions. Thank you.
Okay. I hope, I hope I caught all the questions. I think, if we look at capital equipment versus recurring revenues, I don't want to call it an uptick in the total market. I would say I'd like to call it a good performance for us. I don't want to make any general statements about the market picking up, but I should say, in Europe, we had lower single-digit growth increases on both. So our capital equipment actually grew lower single digits, also in Europe, and in the U.S.. And generally, I would say other than BRIC, we've had increases everywhere in the quarter.
What was your second-
On Consent Decree, when you lower the negative financial impact in 2015, does that mean that we should expect no impact going into 2016?
Yeah, or maybe you want to take that and I can.
Yeah, I think it's going to be no major amount going into 2016, but it's still, we will have some negative impact as some part of the products which are still under the Consent Decree has not been released, and therefore, we will still have a lot of work to be done in one factory called the Hudson factory, before we could fully get into full shipping capacity. So, but it will be absolutely less than what we had in 2016, 2015, sorry.
But we do see some impact, let's say, for the first half of the year, that had an impact, absolutely.
Can I also follow up with a question on Infection Control? Was there any kind of sort of large order that drove the demand in the quarter? Did you do any particular sales effort to drive strong growth in quarter? Was there anything unusual there?
No, nothing unusual or any kind of bigger one-off character. It wasn't there. No, nothing unusual. We did focus, however, on generating order growth in the quarter, because it's important to be able to convert that in quarter four. In that sense, we did focus on order generation, but nothing, I would say, out of the ordinary.
Thank you so much.
Thank you.
We will now take our next question from Patrick Wood of Morgan Stanley. Your line is now open. Please go ahead.
Thank you very much. I have a couple, if I may. I guess the first one would be the Australian order in Surgical Workplaces . Could you give us an idea of roughly how material that was for you? The next one would be on DVT. You called out an extended care DVT being a little bit weaker, and equally, you had the launch of the Flowtron. How should we think about that? Was the Flowtron released much further in the quarter and therefore didn't really have much impact in Q3, but it come through in Q4? How should we think about that? And then the third one is really on China. Obviously, you guys are saying it's a fairly stable market, but quite mixed feedback, I would say, from a mixture of competitors and other med tech companies.
Is there some color you can give on the Chinese market and, and how that's developing? That's, that's it.
Okay, we'll do like this. I'll take the DVT, since I also have background from Extended Care, so I can give you some of that, and then also take the Australia, and I can take the China as well. So regarding DVT, I would say, yeah, we haven't seen the impact of the Flowtron 900. I do believe it's a product that will open up our opportunities in terms of therapy, because there are two different types of therapy in the market, and we've only been working within one. So I would say we're expanding our ability to provide both therapies to the market.
What happened in the DVT in this quarter, and I think it's a general DVT theme, is that we negotiate three-year, in normal situations, you have a three-year kind of a negotiation to provide the services for our customers. And some of these have been renegotiated and are coming into effect in the quarter. And what you get is before the volumes go up, there is a certain amount of price pressure that we've seen in DVT in the U.S. market.
So my conclusion would be that price pressure around DVT, which is nothing new, actually, and we renegotiated two contracts which have come into effect in the quarter, and the innovation hasn't had its impact yet. We can take Australia now, Ulf?
Yeah, I think it is an order in the magnitude of something around EUR 1 million-EUR 2 million. But I could come back with a more definite amount later on here, but I think it is in that range, so.
In China, I don't have any new messaging around China. I would say China has been a market that, where the growth we've had a more challenging growth profile versus earlier, but in this quarter, we had a flat development. So I think in that sense, we felt it's more of a stabilization of the situation.
Terrific. Thanks very much.
Yeah. Okay, thank you.
We will now take our next question from Kristofer Liljeberg of Carnegie. Please go ahead. Your line is now open.
Yeah, thank you. Two questions, I think it is. First one on the currency effects. Is it still SEK 200 million in transaction effect you expect for next year? And also, could you talk a little bit about timing there? Do you expect a positive impact for every single quarter next year, is it coming in beginning or later in the year? That's the first question.
Now it is still SEK 200 million next year, and the main part of that is, is hedged, approximately 80%-90%. There could always be some smaller variations, so to say, depending on the unhedged part of it, but it is. As you have seen during this year, we have had small changes around SEK 30-SEK 40 million, that could also happen. And it will be coming in in the same way as sales are generated over the years. So it's the same sort of of that SEK 200 million.
... Okay, so this will turn positive order from Q1 then?
Yeah, absolutely.
Could you just remind me, how much transaction effect do you still have to come, negative in the Q1?
Yeah, so if you take where we ended up, we have said that total transaction effect is going to be SEK 270, and I think we ended up at the end of the quarter at, let me just take a quick look here. I have it here. So, if you continue with another question, Kristofer, I will give you the exact amount here.
Yeah, the second question is also related to FDA follow-up on Hans' question. You said you expect some negative impact in the first half of the year, but do you expect that impact to be lower than what we saw Q1 and Q2 this year, or similar or more? If you could comment on that.
Now, it will be lower, by all means, and than what we had in the Q1s this year. And this, we ended up on the, when we talk about the translation, we had SEK -200 in year to date, when we talked about that currency exposure.
Okay, great. Actually, one more short one. On the rental business, when could we expect that business to start improving year-over-year?
I can give you my personal view, but I think it's a very difficult question to answer. I would say, right off the cuff. But what I believe is, we should expect that in the Q1 next year, we'll meet more of a like-for-like situation. So I would estimate that to happen during the Q1. I don't... I wasn't here when we took the decision to downsize, so I don't know the exact times where the actual depots began becoming less. I think that happened throughout the Q1. So I would say after the Q1, we'll be looking like-for-like figures.
But we also have an ambition to do better already in the next quarter versus that. So if I would answer you, I would say the like for like starts maybe February, March next year. But we're trying to beat that in our own performance.
Very good. Thank you.
We'll now take our next question from Scott Bardo of Berenberg. Please go ahead, your line is now open.
Thanks very much for taking my questions. First question, please, just related to the order book. Obviously encouraging to see that pick up a little bit. Can you give us a little bit more flavor as to how much of that is short cycle and long cycle? Let me make sure the question is, should we expect largely all of these orders to be booked in the Q4? And should we expect some previously announced orders? Because I think you've seen some quite strong order book in Medical Systems, Q4 last year, Q1 this year. Is any of that sort of likely to come to support, you know, decent sales growth in the Q4? So just a little bit of clarity on the cycle of that order.
Also, with reference to you mentioned Surgical Workplaces was a big part of that. I understand that somewhat lower margin for the group. Does that have any view or impact on what you can deliver in terms of profitability in the Q4, particularly for Medical Systems? That's question number one, please. Question number two, on Extended Care. Yeah, it seems to me a little bit disappointing, not from, I think you've already flagged, from a growth perspective, how that's a bit under challenge. But I think if we refer back to your previous comments in the last transcript, you were expecting some stabilization of margin and some improvement in the second half. But we've actually seen margins slip a little bit.
I noticed you've done some restructuring here, and it doesn't really seem to be coming through in your margin. So I just wondered if you could talk a little bit more to when we get to start to improve the margin for Extended Care, because that seems to be a big part of, if you like, the pressure you're seeing at the moment on the EBITA margin side. So, a follow-up question, actually, after those two, if possible, please.
Okay. If I start with your question regarding how much of the growth of 5.2% in orders in this quarter will be, how to say, become shipments in the Q4. We start to take a look on the recurring items, which today more or less represent 55%-56%, and that was growing with, let's say around 2, 3, 4%, and that will remain into the Q4. And then if you take capital equipment, those orders we got for capital equipment, which was double-digit, I should say, more or less double-digit growth in the Q3, most of that is going to be shipped in the Q4.
But if you take, for instance, that order we got in Australia, that is probably going more into next year. But that is all the submission of that. But in general, I should say, the main part of the order growth will be realized in quarter four.
Yep. Okay, I can take the Extended Care and margin question. First of all, Q2 was positive, and I did comment, so I'm equally disappointed, to be honest, if I would start there, that the Q3 did not reflect the messaging that we had. But we did have a good Q2 where I believe we were up, I think in 20-20% or more on the EBITA when you said it organically. The Q3 was a disappointment, and I believe we have to pick up on the margins going into the fourth and beginning of next year.
But I also must say, because of the situation being going a bit up and down, we've decided to accelerate some of the restructuring programs that we have. So I think what I'm trying to do is also capture it in the bigger picture rather than having a bit of a rollercoaster on Extended Care. And that was part of the conscious decision that we have to start getting the overall Getinge agenda going.
Understood. Where you are at the nine-month and the order visibility that you think you now have, is it the right time to at least have a stab at what you think the full year adjusted EBITA margin will be, just to take out some volatility in forecast? Is it possible that you could provide that number? Second follow-up here. Just on the restructuring cost of SEK 640 million that you've announced, clarify, does that includes this SEK 100 million fine to the FDA?
And we should expect, and maybe because this has been slipped up a little bit, next year, are we still looking for SEK 800 million as announced at the Capital Markets Day, or will that basically be reduced by the amount that's been front- loaded? Thank you.
If I start with the, we are only guiding this year on top line, so we will not give any sort more guiding on the EBITA margin. You have to sort calculate that by yourself. And you said 640 in restructuring cost, but that's 6, you mean 630.
Thirty, sorry.
Yeah, no problem at all. It is, it, $100 million, which we have paid to the U.S. government, is included in those $630 million. If we then say, even if we have accelerated some of our activities already in this year and started to take some of the charges, I would not like to change the $800 million for next year in restructuring cost, because I guess we will accelerate it also what we maybe have in 2017 into 2016. I think we will still be within the range of $800 million in restructuring costs in next year.
Maybe then some of the savings coming from these measures could also be accelerated as well.
Yeah, yeah, absolutely. We have said that, of the 2.5-3 billion, we were going to get 10, make something around 10% coming out next year, and maybe that could be a little bit more as we have started some of the activities earlier.
Thanks for jumping in. Thank you very much today.
Thank you.
We will now take our next question from Lars Hevreng of SEB. Your line is now open. Please go ahead.
Yeah, thanks. Can you say anything about, I mean, the sales, the earnings so far on the EBITDA level from the Consent Decree is primarily sales impact, and is that also what we should expect? Assume that there can be a full resolution of this in towards the mid, mid-half of 2016. Is it primarily sales impact? That's one question. The other is, if you can say anything about the pricing, not on in general, but in terms of the order intake, a bit higher than usual. What is it about pricing on these bigger orders that you have received?
Yeah, if I start with the... It is sales impact. There is not a lot of cost, more than what we, as I stated in my comment, that we have ongoing costs for our quality organization and our quality system have increased, what I said, EUR 8 million-EUR 9 million. But if we talk about the Consent Decree impact, that is mainly due to lost revenue from Time view. Very little cost increases.
Okay, so the quarterly impact over 50-75 million SEK or so this year, that's that you have to recognize in the second half of 2016.
Yeah, I mean, it's due to revenue loss, let's say. So the way we calculate that is, yeah, we look at how much revenue we lost, and then we put a gross margin-
Got it.
a gross margin loss on that, and that's calculated into the exact answer. It's purely... Then we should say we increased the quality organization, and so the cost of the quality organization has grown.
Correct.
But that is not reflected in these 50 [crosstalk] And then you had a question regarding pricing, if we-- Yeah, I don't have any signals that we did anything different regarding pricing, so I don't think you should decode the increase as any kind of price aggression in that sense. But I don't have detailed information on, let's say, average prices of our order because it's quite a diversified portfolio of orders. So but nothing specifically that we did in the quarter to get to that order growth.
Okay, thank you.
Operator, we only take one more question.
Okay, no problem. We have a question here from Martin Brunninger of Jefferies. Your line is now open. Please go ahead.
Thanks very much for taking my question. I have a couple. Given your strong performance, seems almost that Extended Care has become a perennial drag on your improving performance for what you achieve in Medical Systems and Infection Control. I know you have given us some details on, you know, reshuffling your proposals for the Maquet business, et cetera. But given that this is your kind of background, previously Extended, can you give us more color and flavor, I mean, what this business generally is doing and what you're seeing on a more kind of mid to long-term future for this business? The second question is on manufacturing. You have mentioned that you had a negative hit on profitability because you underutilized some of your capital equipment.
What does that mean? Could you give us also some more color? Does that mean you are going to rationalize it more, or is it a short-term impact, that will kind of level out, over the short term? And the third question is on geographies. I mean, if I look at it in the details of all three divisions, there's only one of countries which has consistently done well, which is India. The other three, China, Brazil, and Russia, there was a very mixed performance. You can't really recognize a trend in these countries. Maybe you can give us some color there, what you see. Thank you.
Okay. I can take the Extended Care rental business and kind of the mid- to long-term view on that. I mean, I agree with you that it's been dragging us back as a group, the rental business. My-- what I'd like to do is, one is to... We have to differentiate in Europe and actually the rest of the world, also emerging markets. We've had a, I think, a positive development, and their TSS has contributed very well to our overall business.
So the focus is very much on the U.S. market, and what we're doing in the short and long term on the U.S. market. I would say the first activity was to readjust the organization to a new profit reality, and that was part of the consolidation process with the depots. We believe the market, as a market, is stabilizing, so the sharp decline rates are not continuing, so we see stabilization of the total market. In that light, also, we're launching a new portfolio of products that are coming out now, which will, what should I say, rejuvenate our fleet, which has been an issue, that we've had a fleet that's been quite aged.
So we're coming out with a new fleet of rental beds at the moment. So that's what we're doing in the short term. So I believe the market. There's a market shift. We've done the resizing and now we're coming with innovation. And what I hope is that the combination of that will begin to move things in the right direction. Also, I should say, I've been part of Extended Care, so my history is that we have turned things around also in tough times in Extended Care. And if you look at the history was that we from 2009 to 2014, we did have a bit of a turnaround. So I'll be focusing more on that also personally.
When it comes to Infection control and Surgical Workplaces or your question around the footprint and the factory utilization, because we had a fairly weak order intake, I would say probably going back from the Q2 this year, maybe a year back, we've had a few quarters of a weaker order intake. Our approach has been to not to downsize the factories, because we believe that there's a potential that these orders will come back now, and we're seeing now a double-digit growth in these equipment.
So in the short term, it has hurt us in Infection control, in some of the gear, but one factor, particularly in our Toulouse factory, where we haven't had enough volume going through, and also in Surgical Workplaces , we've had the same issue, but now we see the orders coming back. So in the short term, we haven't adapted the footprint to that, but in the long term, I do believe that we have to focus and concentrate production in fewer, bigger factories. So I still believe that we do have a consolidation to do on the factory side, but I don't believe we should doing it just because we've had a few difficult quarters in Surgical Workplaces and in Infection control.
There will be a longer-term plan, and in the short term, it has had an impact on us. On the geographies, I would maybe put them in two clusters. As you mentioned, India has consistently been mentioned in a positive way, and that continued in the quarter. China, we've had a tougher few quarters back, but this quarter was flat. So I would say with China, I wouldn't say we're optimistic, but we're careful. We feel it's not trending in a negative trend as it was before. So the two that are question marks around is, of course, Russia and Brazil.
And here, I would say Russia is we have an overall situation where many companies are facing the same situation. And in Brazil, I would say we have a downturn in the economy. So, we're also very confident we want to remain in Latin America, and we want to grow in Latin America. So, that would be my comment around Brazil.
So thanks very much. Just one on the Ulf, you mentioned that you are increasing your inventories, which obviously makes sense given your strong order that you are expecting for Q4. Can we expect that this will also positively contribute to the margin of the product mix, that because you're full or kind of coming back on stream with Extreme, and I assume there are higher margins, and the increased orders are around these products. Will you confirm that, or is that not the case?
Yes. At least when we increase inventory, it has some positive impact on margin, and because even if we are eliminated, so to say, the profit from the factory when we keep them in stock. But when it comes to recurring items, we do not have a large stock of recurring items. Those are the smaller part, and therefore, those items have the highest margin. So you will see in quarter four that we will have, again, a high margin, and that is not so much relating to recurring item, it's more relating to capital equipment, that those factories will be fully loaded with shipments coming out from those factories.
So they will have, so to say, a higher recovery rate of fixed cost during this period when they start shipping the inventory.
Mm-hmm.
Okay?
Thanks very much. Thank you.
Good. Thank you very much, and thank you all for listening in. Once again, we're focused obviously on quarter four, but also on the longer term agenda. Even though we continue to have our GP challenges, we were encouraged by the order growth in the quarter. Thank you for listening in, and I'm sure we'll be following up in the next few days also, if there are any other questions that you might want answered. Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may disconnect.