Good day, and welcome to the Getinge Group Q2 report conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO Alex Myers. Please go ahead, sir.
Okay, thank you very much, and a warm welcome to all of you, and thanks for taking the time to be with us over the next hour. We'll stick to the announced time schedule, which means we will aim to close the conference at 11:00 A.M. CT sharp. And we'll do our best also to answer your questions during this hour. As per the information you got today, in the press release, you should have been able to access a slide presentation that we use as the format for this session, and the presentation is also available on our webpage.
Right next to me, I also have our CFO, Getinge Group CFO, Ulf Grunander, and together, we'll combine our resources to give you the best possible picture of the quarter, and also talk a little bit about the future as well. So, just to start, before I go into the slides, I want to say that this is my first full quarter as a CEO. I was very, very fresh in the chair during Q1 , and I've had my 100 days up until now. I'll be presenting quite a lot of that at the Capital Markets Day after the summer, and I'll refer a little bit to that later on.
I can say my first 100 days have been both exciting, but I should also say they've been challenging, and I can reconfirm my excitement that I had before I entered Getinge. I've done an analysis now in my first 100 days, and I can say that I really believe that we do have growth opportunities, and we also have opportunities to improve our performance going forward. So I can only reconfirm, let's say, what I initially had anticipated before coming. But in the short term, I should also say we've had a challenging quarter. I'm disappointed and not happy with the quarterly results for this quarter. We haven't managed to reverse the trend of previous quarters, and we didn't reach the turning point in this particular quarter.
So what I want to do, to begin with, is explain a bit the quarter, but also reconfirm my optimism for the future, both in terms of margin improvement and growth. But also to say that I think the changes necessary are going to be greater than I originally anticipated, and I'm also looking at the possible structural changes that I plan to present after the summer at the Capital Markets Day on September 2nd. So I'll come back a little bit to that in my summing up at the very end. So moving to slide number two. Now that you have in your slide pack, a little overview on the Getinge Group, I'd like to start with order growth, and then I'll move down through the P&L.
Our order growth was approximately 13% if we include the currency effect, so we ended up at SEK 7.5 billion. But organically, we had a slight decline of about 0.7%, and I should say that was below our expectations for the quarter, following a fairly strong Q1. If I look at geographies and give you a bit of a flavor on the different regions, we experienced the growth in North America, actually following a strong Q1. We had a disappointing decline in Western Europe by 2.6%.
Outside Europe, we had a mixed picture, and outside Europe and North America, I should say, the rest of the world, we had a mixed picture with a flat development versus last year, where we had mid-single digit growth in emerging markets, if I would exclude the BRIC countries, so continued growth there. We had a flat development in BRIC, while Australia and Japan experienced a decline of 2%. If I would describe the situation a bit on BRIC in the quarter, we've had a relative stabilization of the order intake versus earlier quarters, and India, China, and Latin America actually showed growth in the quarter, while Russia continued to decline. So we have a slight, let's say, improvement and stabilization of the BRIC countries regarding the order situation.
Then regarding the mix between capital equipment and recurring revenues, I would say nothing especially dramatic has happened. We have a low single-digit growth in capital, in recurring revenues, sorry, and we have a low single-digit decline in capital equipment. So I would call the trend in line with earlier quarters, but we see a relative improvement for capital equipment, so the decline hasn't been as sharp as it has been in the previous quarters. Over to gross margins. There we had a decrease of our gross margin by about 230 basis points in the quarter, and we declined from 48.7% to 46.4%. And I'd like to focus on the three underlying and main reasons for this.
We had a negative currency effect, which is about 80 basis points of the 230. We also had an FDA impact, which I'll come back to also later, but it's 100 basis points was due to, let's say, FDA and Consent Decree-associated activities. And the final 50 basis points of the 230 is for a low utilization of capital goods plants, and that's primarily in Medical Systems and Infection Control. So there are, I would say, different underlying reasons for the decrease in margins, of which I would say the smallest reason in this respect has been the utilization of capital goods. So it's been very much FDA and currency driven in that sense.
We also see an increase of the FDA impact in a negative way in the quarter versus last quarter, and I'll also go a little bit deeper on that when I get to Medical Systems. On operating expenses, when we adjust for currency and acquisitions, we increased about 5% versus last year. So it's a higher level than that last year. And there, again, I want to give some of the main factors of the increase. One main factor is investment in our quality organization and more or less in direct association with the Consent Decree. But we're also increasing selling expenses in emerging markets. We're hiring quite a few people in emerging markets right now, especially in Extended Care.
And we're also establishing shared service centers and central procurement organizations where we expect them to drive a group agenda in order to get synergies and get considerable savings in the future. So regarding expenses, I would describe it as an investment in the short term where costs and expenses are increasing, but we do expect to deliver significant savings in the future. And then a comment on the EBITA for the quarter. We ended up at SEK 715 million for the quarter. But here I would also like to highlight some adjustments that we've done that should be considered non-recurring or one-off effects.
We had a SEK 100 million , let's call it a write-off of assets in conjunction with a restructuring, in Extended Care in the U.S.. And just that would bring us, let's say, up to SEK 815 million , which still is a decrease from the SEK 905 million last year. So we had one significant, let's say, posting of a non-recurring item. We also had a positive currency effect within the EBITA, on the EBITA level of SEK 63 million . And then finally, I want to highlight the Consent Decree effect that had a negative financial impact on us by about SEK 75 million . And that should be, again, related to the Q1, where we mentioned SEK 50 million . So we have an increased negative effect in the quarter.
So, that's a bit of an overview of the EBITA, which is a combination, let's say, of operational performance, and a series of, let's say, non-recurring, one-off effects. In summary, if I would summarize Q2, I should say I'm disappointed and not satisfied with it. We didn't reach a turning point in the negative trend, which we've had in the past few quarters. But again, I must say, I'm a strong believer that we can turn around this negative performance over time. But to do so, I think we need to look at a more holistic view of the way we work, and we'll need to look at also the structure in order to deliver what we want to deliver in the coming years.
So my continued ambition is to present the turnaround plan, and I called it the performance improvement plan at the Capital Markets Day in September. But in the meantime, we're not only waiting for the Capital Markets Day, I should say, we're looking at both short-term and long-term projects with impact. And I just wanted to highlight three areas for you that we initiated in the quarter. The first area is around quality. Our focus on quality remains, I would say, unchanged and very, very high. We have a remediation program in Medical Systems, which is progressing on plan. I will talk about that also a bit later. But I've also increased focus in the area by further appointing a new role.
We've appointed a Senior Vice President, Group Quality and Regulatory Compliance, and she'll be directly reporting to me. And in parallel, we're rolling out a program on group values and ethics guidelines, including an anti-corruption policy and a whistleblowing program internally. So we have a lot of, I would say, focus not only on the regulatory and compliance, but I broaden, let's say, the scope of that into ethics, values, and behavior from a global perspective. The second one is emerging markets, where I also would like to highlight that we're increasing our focus on emerging market presence. I mentioned the investments in field sales employees, which we're increasing. And I also want to mention a new, let's say, era in emerging markets, where we've decided to go to one Getinge approach, so one group approach.
As of the July 1st, we'll be operating all emerging markets under one company flag, where the three business areas, I would say, in combination, cooperate to meet the customer. And this is not actually an efficiency program, it's a growth program, where I strongly believe that we establish a better platform for growth in emerging markets by, let's say, fronting the outside world as one Getinge versus three independent and individual BAs. Then my final point is on efficiencies in the quarter. We're focusing a lot on efficiencies, but I'm also focusing a lot on cost containment.
We announced the closure of Rochester, a plant within Infection Control, and we'll be moving production to Poznań in Poland, and we will continue on the strategy of moving supply to low-cost country environments. And we're also continuing to build up our shared services in Kraków. We're discussing expanding both the scope and the geography of our shared services, let's say, strategy. And I've also implemented a temporary hiring freeze in mature markets. So we're taking, I would say, immediate and short-term action, but we're also investing in the future and the mid- to long-term agenda. So now going into the BAs in specific, I'd like to move to slide three, Medical Systems. Overall, a flat order intake following a strong Q1.
Positive here is that North America continues to grow. North America grew by 4% in the quarter, and we've had a strong performance within, let's say, the broader cardiovascular portfolio, so I'm very happy to see that. In light of the Consent Decree, I must say this is a good result that shows a continued growth pattern for North America and the U.S., specifically. Europe had a weak quarter, almost 5%, 4.6% decline. There, it's been, I would say, a weaker quarter than Q1. We had a decline, I would say, in most parts of Europe, except for the Nordics and Italy. So I would say there it's been overall a weaker quarter within Medical Systems for Europe.
Rest of the world, orders were flat, overall. So we've had a mixed picture, but I would say there we've had a more stable situation in the rest of the world, and also BRIC. A lot of focus on gross margins, so I'll move to that, where we've had a gross margin decline by 390 basis points in the quarter. And there, again, I think it's important to try and explain the underlying, let's say, factors to that. The Consent Decree and the negative financial impact of that is about 180 basis points of the 390. So it's a major, I would say, portion of the shortfall versus last year.
We also have a negative currency effect of 100 basis points out of the 390. And finally, we do have an underabsorption of our manufacturing units, for capital equipment, of about 100 basis points of the 390. And this is a result of the weak order intake in earlier quarters. So again, three major factors, and I, I felt it's important that, that you get a, a bit of a more detailed, I would say, build-up of, of, where the shortfall is versus last year. On the cost side, we're in line with plan, but we have increased, expenses, and investments in two areas. One area is the quality and regulatory organization. Again, very closely associated to our Consent Decree remediation.
And the other one is an investment in the U.S. sales organization, where we believe there is growth in our, in our U.S. strategy, and we're supporting that growth by investing in the sales organization there. A short comment now on the Consent Decree, and I'll get back to that in a later slide. I can say that our Consent Decree follow-up continues. We're in line with plan, and I'll give you more of a detailed information in a later slide on that one. So finally, I mentioned emerging markets several times so far, and I'll mention it one more. We're very happy to announce the launch of Servo-air in the quarter.
It's a turbine ventilator that can be used at hospitals in parts of the world that do not always have access to air from wall outlets. And we believe this is a very interesting addition to our portfolio. The same quality as other products in the Servo series, but more tailor-made to the emerging markets. We have CE Marking for the product, and it's actually been developed in close cooperation with physicians and nurses in India, South Africa, and then also Japan and the U.S. So this is a, I would say, a good example of increased focus on that part of the world, but also expanding the portfolio in places where we haven't had, let's say, an offering before.
So finally, before moving on to Extended Care, I would also like to bring forward some information regarding Medical Systems. We want to bring out some information ongoing of an ongoing litigation case in the U.S. A former employee of Atrium filed a complaint with the U.S. Federal Court under seal, and the complaint concerns alleged violations of the Federal False Claims Act and similar state statutes, which relate to the sales and marketing of certain products in the U.S. The case was originally under seal, so we were not aware of it, but it was unsealed when the U.S. Department of Justice declined to intervene.
So right now we have a discovery phase currently going on, and this involves the, I would say, research in the case from both sides, and will result in an exchange of documents, which each party possesses, and that will happen in the beginning of next year. The trial date is currently scheduled for November 7th, 2016, so the end of 2016. The reason we're disclosing this information is because if there's an adverse outcome of the process, this may affect the group results and cash flow. But however, it's very early in the process, and right now we can't assess whether this will happen, when this will happen, and to what extent this can happen.
That is why, let's say, we're disclosing it as information, and we plan to keep you updated on the progress in this case as it moves on. So finally, just a final statement around Medical Systems. It was a relatively weak quarter with a flat order intake following a strong quarter in Q1. So there is a disappointment in that, I should say. However, I'm glad to see a strong performance in the U.S., particularly the cardiovascular area, and I'm also happy to see progress regarding the remediation program. Okay, over to Extended Care. Organic order intake declined by 4%, with a strong performance in emerging markets while Europe and North America had a weaker development.
The rental market in the U.S. remains a challenge, I would say, not only for us, but an industry-wide challenge. We've taken action based on that. We've restructured our U.S. sales and rental operations, and we've rightsized our depot structure from 85 to 58 depots. I would say under the banner of focusing on fewer, better depots that can serve our customers more efficiently and with higher quality. So let's say we've focused on the best that we have, and we've also taken considerable action to resize our operations there. I'm happy to see that the expected result is going to be around SEK 106 million in savings during 2015. But also, we already see a positive effect of this initiative on the margins within Extended Care.
And here you'll see in the quarter, they're beginning to stabilize, and improve, improve slightly. So, good early signals around the stabilization of the business regarding margins. Regarding the EBITA, we're recovering operationally, as I mentioned. We do have an improvement over previous year. If you, if you, let's say, take away the one-off effect of the SEK 100 million that I will refer to in a moment. So excluding the one-off adjustment, we have improvement of about 25% in the quarter, purely, let's say, operationally, and this is very encouraging. However, the consequences of the restructuring program in the U.S. that I mentioned before have, I would say, led us to decide to write off assets for about SEK 100 million in the quarter, which is a nonrecurring, let's say, event.
Finally, a bit on launches and growth potential, and also, I would say, directly associated with the turnaround of the U.S. business. We're launching a series of products under the Citadel name. They're integrated medical beds and therapeutic surface solutions, and they're primarily developed for the U.S. market to support, let's say, the stabilization and turnaround of that business. But we do have additional opportunities in all regions. So this is also a project, I would say, directly associated with us focusing on getting the U.S. business back on track.
So overall, regarding Extended Care, I should say that we've taken action in terms of urgency and structure, and now we're seeing a period of stabilization, and we're counting on further improvement in the second half of the year. Over to slide four. Moving to slide five. Apologies. Moving to Infection Control. Orders grew organically by 1.6%, and we experienced a strong quarter in North America and also satisfactory development in Europe. While here, the BRIC countries have been more of a challenge, and we had an especially weak quarter in Brazil and Russia within Infection Control. But we do have a healthy order pipeline, which is quite encouraging for, let's say, projecting future revenues for Infection Control.
Though the revenues were flat in the quarter, gross margins were disappointing and declined by 100 basis points, and this is the result of a lower utilization of our capital equipment plan. So we've initiated here a cost containment program for the rest of the year, and focus is, I would say, very high on our supply chain strategy and program. And there, again, I want to highlight, we announced the Rochester closure, our intention to close the Rochester plant and move production to Poznań, where 80 employees will be affected, and the project will be completed, or the transfer is expected to be completed by the Q4.
So overall, for Infection Control, solid order intake overall, but a higher focus now on developing and, I would say, speeding up the supply chain implementation process, with the first, let's say, larger example of the Rochester example. So slide six is an overview, and again, I've mentioned some of these several times, so I won't go through each individual activity. But just to give you an overview of restructuring that's happening in all parts of the company and all business areas. We're reorganizing and effectivizing within our cardiovascular division and continue to integrate Pulsion within Medical Systems.
Within Extended Care, I've mentioned the U.S. restructuring, but I should also highlight that we've restructured a little bit in our R&D organization, where we're focusing the organization on fewer, bigger projects, and it's been also a slight reorganization there. And infection control, I've mentioned several times, so I won't go, I would say, more in detail than that. If there are any questions, we'll be happy to answer that. So then, a quick update from my side too on the FDA update, and then Ulf will take over after that. We're following plan, as I mentioned. We've had third-party inspections in Q2. We have three almost completed. The two have been completed, which is Hudson and Merrimack.
And we also have one underway and close to completion in Wayne, in New Jersey. We do see a slowdown due to our validation processes at the moment that have increased the negative effect of the Consent Decree, and that effect is estimated to SEK 75 million in the quarter. But overall, I should say the program is progressing according to plan, and we're continuing the close contact with our customers who remain, I would say, both loyal and using our product, which is performing very well. And we also have almost 90% of customers that have signed the so-called Certificate of Medical Necessity, showing awareness on that. So now I will hand over to Ulf.
Thank you, Alex. I will start with the financial impact relating to the FDA. The total financial consequences relating to the consent decree, excluding the cost for the remediation program, are still estimated to amount to approximately SEK 500 million, and will impact the group's operating profit in this year. Out of the SEK 500 million, SEK 75 million were charged in the quarter relating to loss of revenue and higher costs, and impacted the group's operating profit. In total, SEK 175 million has been charged to the group's year-to-date operating result. The potential additional payment of SEK 50 million to the U.S. government, if certain milestones set by the FDA in the enhancement program at Atrium's Hudson and Merrimack facilities are not completed within the six months, is now included in the SEK 500 million.
We provided, in 2014, almost SEK 1 billion related to the remediation program for strengthening Medical Systems quality management system. 101 million of the provision was utilized during the Q2, in addition to the SEK 470 million utilized in 2014, and in the Q1 this year. At the end of June 2015, the closing balance of the provision for remediation work amounts to, or approximately SEK 320 million. If we move to the next slide and take a look on the financial, Alex have covered most of it, but I will probably repeat a little bit. Organically, you could see here that the group's net sales declined by 0.4% in the quarter.
You could also see a split, what is relating to acquired business and what is relating to currency. All three business area net sales organically declined in the quarter. Alex have also described that our gross margin declined by 230 basis points in the quarter, mainly relating to the negative currency effect, impact relating to FDA, and low utilization of capital goods plans. Currency adjusted, the selling and administrative costs increased by approximately 5% in the quarter, relating to increased sales activity in the emerging market within extended care, investment in wide group function, and increased quality and regulatory cost.
As for the group's financial net, which increased in the quarter by SEK 20 million compared with last year, the main reason for the increase is the negative FX impact of approximately SEK 25 million in the quarter, as no major change in the expected cash flow has occurred during the first half of the year. The dollar exposure in the financial net has been hedged in the quarter. FX effect, you could see what's happened in the Q1, and we have split it into gross profit, EBITDA, EBIT, and profit before tax.
If we take the full year effect, it's not a major change to what we communicated in the Q1, but the net effect of the exchange fluctuation in 2015 is expected to have a negative impact of approximately SEK 10 million on the group's profit before tax, of which the transaction effects amounts to negative SEK 240 million, and exchange rate translation effects to approximately positive SEK 230 million, based on the prevailing exchange rate scenario. If we take a look on our some of our cash flow, the group's cash flow amounted to SEK 598 million in the Q2, and the quarterly cash flow represented almost 58% of the EBITDA. The lower cash flow in the quarter relates to increased inventory and reduced short-term liability.
In some of our emerging market, there has been a buildup of inventory, awaiting upfront payment from customer. And also, there have been some buildup of safety stock in connection of the transfer of manufacturing activities. As a consequence of less activity in the capital goods factory, the accounts payable balance has decreased in the quarter, which explains most of the reduction of short-term liabilities. As far as to the accounts receivable, good collection performance was achieved in the quarter, i.e., DSO was down by one day, 72 days, compared with the same quarter last year. Finally, the balance sheet, the closing net debt amounted to SEK 23.3 billion, and the closing equity amounted to SEK 18.8 billion, which resulted in a net debt to equity ratio of 1.22 times and equity ratio of 35.2%.
The dividend, adjusted for currency fluctuation, the net debt increased in the quarter by approximately SEK 1 billion. The dividend of SEK 670 million, which was approved by the annual general meeting on March 27th, but was paid out in this quarter on the April 1st. In addition to that dividend, we also paid dividends to some of our minority shareholders, amounting to SEK 50 million. So that explains a major part of the increase in our net debt during the quarter. Thank you.
Okay. Thank you, Ulf. So some final words on the outlook, and then we'll answer questions that you might have. Just a few comments. I think we can say that despite a weak start to the year, we do see a stronger second half of the year, and I would say especially in Q4. Overall, we see an organic order revenue and growth about above 2014. So we acknowledge the shortfall that we have in the first half, but we do see a stronger second half coming up. On the financial impact of the Consent Decree, we're not changing, I would say, our outlook versus earlier. We're still flagging the SEK 500 million that was communicated.
We have no reason to believe at this moment that this figure should be changed, but we're also including now, as Ulf mentioned, the additional payment of SEK 50 million to the U.S. government. That might happen if the milestones of the FDA aren't met, based on the Atrium Hudson inspection. So, the new facilities, if we haven't completed, let's say, and gotten an FDA response within the six months, we're liable for that SEK 50 million, so we've included it as an assumption. The currency effects are SEK 10 million, and we see the whole currency hedging issue becoming positive in 2016.
Regarding restructuring, we did an initial review during my first month, I would say, in my role, and that we're holding at SEK 540 million. But during the so-called 100-day period that I've done, we're doing an overall review of the future restructuring needs, and again, we'll be presenting at the Capital Markets Day in September. Again, I have to reiterate my belief and strong belief that Getinge has a potential to improve profitability in the medium term, and that remains favorable. We have many improvement initiatives already underway, of which I mentioned some of them, at least the most important ones. And I put a lot of focus on the so-called performance improvement plan for the next few years that I plan to present at the Capital Markets Day.
So I can conclude, I think, on the quarter. I conclude that I'm not satisfied with the quarter and our performance. We did not manage to reach the tipping point or the turnaround point after several quarters of decline. But I must say, I'm very confident now that I've analyzed the situation, not just from an outside-in perspective, but also being an insider now within the group. I'm confident we can materially improve our performance, both on the growth perspective, but I think most importantly, on the profitability perspective in the future. And I'm looking forward to being able to give you a clearer picture of all this at the Capital Markets Day in Stockholm on September 2nd, 2015.
So with that, I would like to hand it back to to the audience in a way, and look—we look forward to any questions that might come up. So thank you very much from Ulf and myself, and we'll answer any questions that you might have.
Thank you. If you have a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Scott Bardo from Berenberg Your line is open, sir. Please go ahead.
Yeah, thanks very much for taking my questions. First question just relates to the ongoing FDA remediation, and pleased to hear that the inspection has taken place at Hudson and Merrimack now. You mentioned that you're waiting for an FDA response. It was my understanding that Quintiles could self-certify. So perhaps if you could give us some additional clarity here and help us understand what the plan or the view is with regards to finally producing the currently injuncted products so they can come back to the market with those. Just following on from this topic of FDA remediation, you're now including this SEK 50 million additional fine because not meeting the 6-month hurdle. Is that just caution, or are things running a little bit behind your initial plan here?
And so if you could also comment on that, please. Last question, please. We've had some additional news flow on product withdrawals. We've seen now a Class I recall for Tiger Paw, as well as Flow-i, once again in North America. So just wondered if you could help us understand why that's happening, whether that's a setback to you, what the current status is for some of these previous growth projects. Thank you.
Okay, thank you very much. They were, they were all good and relevant questions. So, I can start with the remediation program and the inspections. There, we're following the plan. So, Quintiles has done the audits and the inspections in both Hudson and Merrimack, and they've delivered, in a way, they've concluded their reporting and delivered that report to the FDA. And we have a similar situation now in Hudson. So I would say there, we're following the plan. But let's say the next steps regarding a change of the condition from where we are now needs an active, let's say, FDA review and an active FDA decision to change the framework.
So there, I should say, we've delivered in a way what we had to deliver according to plan, also timing-wise. But we're, let's say, now we're in waiting mode and response mode from the FDA. And it is Quintiles, as you said, that made the inspections, which is the commonly agreed third-party auditor. So the $50 million fine, if I will, I will come to that. That's just us seeing time go by. It's not a setback in terms of us having delivered something, let's say, late or later than scheduled. It's more time going by and not having had a response from the FDA.
The clock started ticking in February 2015, and it's a six-month period. So that's, I would say it's not us being cautious. I would say it's more us being realistic, but you should not see it as any kind of negative signal in respect of us, let's say, not having followed the plan. In regard to the other announcements regarding Flow-i and the recall, I should say that this is, of course, no recalls are positive, but I would say they're not in any way associated to consent decrees or other things.
I think I should say that our increase of focus in quality and regulatory, and I would say the situation we're now creates a situation where we're taking much more, what should I say? Careful. So we're always, let's say, opting and defaulting on the careful side and on the compliance side. Probably more than before, because we just have that focus within the organization. I should also say that regarding Flow-i and TigerPaw, the impact of that, let's say, purely financially, is non-material. I can mention Flow-i being about SEK 2 million, and also TigerPaw being a very small product.
I would say we're doing this in terms of compliance and quality, and acting fast on that.
Thanks very much for your answers. And maybe just one quick follow-up, if I may. Obviously, there's a lot of volatility in getting this financial performance at the moment, and not helped by currencies and what's going on with the FDA. Very much looking forward then to the Capital Markets Day, where you're going to provide some guidance. But going into that, can we have a feeling for where you think the base will be this year, for any progression thereafter? You know, the top line has been pretty stagnant. Margins have been, you know, falling precipitously for the reasons that you mentioned. Can you give us some sort of feeling of the margin progression this year as compared to the previous year, just so we know where we're starting going forward?
Yeah. To be honest, I would like to do that in the Capital Markets Day context. We are planning for a stronger second half of the year regarding top line. And what I can give you in a way is my view on that. Margins take time to recover. And so I see more the Q4 being a strong quarter indicating that. But I really would like to refrain from giving specific numbers at this point in time.
Thanks so much, Alex.
Thank you.
Thank you. We'll now take our next question, Kristofer Lijeberg from Carnegie. Please go ahead, sir.
From Carnegie in Stockholm. Just one question. You mentioned that operating costs were up some 5% organically. Would it be possible to quantify how much of that increase is due to the one getting a program in the emerging markets and the shared service program? Because it seems you have kind of a quite a lot of investments for those two. Thank you.
Yeah. But I could take that on. I should say that the main part of the cost increase should relate to the FDA increased activities within Medical Systems. And then I should say that the group-wide functions also contribute in second. And then I should say that finally, the increase of the sales force in the emerging market is on third. So I think that gives you roughly how they are accounted for in that increase.
If you would adjust for all those three items, would you have flat or even declining operating costs then?
If you adjust for all those, I should say that we are more or less flat. That's correct.
Okay. And should we expect the investments in, for example, the shared service program continue next year as well?
The investment will continue into next year. Absolutely. We will be, so to say, you know now when we have rolled out in 15 countries, we have to take certain restructuring costs, and we are at the same time building up our Kraków center, and we are now also starting to build up our Puerto Rico center, and that will include more expenses. But we will also have a more positive impact in 2016 from this activity.
Okay. But do you think that the net effect will be positive or negative in 2016?
In 2016, it will be positive. In 2015, it will still remain negative.
Okay.
This is for the shared services activity, and so I think there's always startup costs associated with shared services. But then we should also say that we're looking at shared services also in North America from the Americas perspective. So, let's say the European one will be delivering, let's say, a positive P&L effect, but we'll have the U.S. starting up. So that, again, I would say we'll come back to the dynamics around that during the Capital Markets Day. But if we look at what we've done up until now, there will be a positive effect from the Kraków shared services.
Okay. And just finally, you talked about particularly strong Q4, but what's the visibility for that?
Yeah, I would say what we're basing our discussions around, I think we have a, if you look at our on the capital equipment side, we have a positive order book. And at the moment, we're looking at an order book that's 6% above last year. And that, let's say, represents half of our business. We have quite strong plans in emerging markets, and I would say we see an acceleration of our emerging market activities. And I think there also you'll see, let's say, on the margin side, more effect from the restructuring, especially within Infection Control and from Extended Care.
But again, I just want to say, gross profit margins is nothing you turn around from one day to the next. It's, it's, I would say, a very high focus that's, that's needed, and it, and it turns around over, over time. So that's my, my personal kind of indication on, Q3 versus Q4.
Okay, thank you very much.
We will now take our next question from Hans Mähler from Handelsbanken. Your line is open. Please go ahead.
Good morning. This is Hans Mähler with Handelsbanken. First, a question on Medical Systems. You had close to 5% order growth in both Q4 and Q1. Why didn't this translate to invoicing during Q2? And then should we expect that uptick to come in Q3 instead? And then secondly, if we talk about the write-down within Extended Care, I guess this is TSS related, or am I wrong there? Thank you so much.
Thank you. Can you take the second part just one more time? I missed the TSS.
The write-down, the write-down in Extended Care, is that TSS related, or is it related to any other function within Extended Care?
Yeah. Okay. Good. Regarding the order versus net sales conversion, I should say that you're correct in your description, and we do have a strong order book going forward. What we see is a sluggishness in converting that order into a sales. And we've seen that sluggishness, for example, in this quarter, in the Middle East, and in emerging markets. So I think that's where our dilemma is at the moment, is why isn't it coming now? And I think there is a postponement, let's say, of orders before they're converted into a final, let's say, approved sale. So there we see a general sluggishness in that.
On the other hand, I should say we do have a good order book going forward, so that gives us the optimism that we have for the rest of the year. Regarding the,
Is it fair to assume that? Is it too early to assume that it will pick up already in Q3, or is this also Q4 event you, you described?
Yeah, I see it more gradually going to Q4 and the strength in the Q4. So I would say I see it as a gradual progression.
Okay.
Okay, regarding the U.S. write-off, I would say, yes, it's primarily the TSS-associated issues, and it came in conjunction, let's say, with our decision to restructure. And I would say looking further into that, we decided to do the write-off. So I would say predominantly it comes from there, from the TSS.
If we look on the assets in the balance sheet related to TSS, is it a big risk that we will see further write-downs if the operations doesn't improve from here?
No, I should say no, because we have now, as a consequence of this restructuring, got more deeper into certain of the balance. And then, therefore, I'm quite satisfied with the work we have done now, and I do not foresee any more right major write-off. It could be very, very small amount, but not in this sort of size.
Okay, thanks so much.
Thank you.
We will now take our next question from Justin North from Citigroup. Please go ahead, sir.
Hi, gentlemen. Thanks for taking my questions. My first question is just on the recalls in Medical Systems. I mean, just beyond the financial impact, I mean, how do you think this will affect your relations with the FDA and getting over the Consent Decree, given it seems like quite a high proportion of the device recalls that have been announced in the Q2 are Getinge devices? My second question was on the write-down of the depots in Extended Care. So it looks like you've reduced your number of depots by something like 30%. And so I was wondering, you know, your U.S. orders are declining high single digit at the moment.
I mean, how do you expect that to develop going forward, given that you've decided to reduce depots by 30%? Does that mean you expect the declines to carry on for a while longer? And then my last question was just on your gross margin development. I mean, your gross margin's been coming down for something like three years now, and, you know, you mentioned currency as a reason for that. You know, pretty much no matter which way the currency moves. And, it's very rare that you mention any like, for like, pricing pressure, but most of the capital equipment companies will say that there's pricing, like for like pricing pressure.
And given your gross margin is like 7 percentage points off the peak, I was just wondering, you know, how much do you think pricing's come down like for like, you know, since 2012, for example? I'm just trying to get a feeling for, you know, what the underlying movement is here, rather than kind of mix and currency. So, those are my questions. Thanks.
Okay. I can start with the Flow-i. I mean, our approach to this issue is that we're focusing a lot on the regulatory area and the quality area. And so, you know, the decisions we're taking are based on what we think is the right thing to do, rather than, let's say, taking it in conjunction with what the FDA could think. Of course, it's never good, as I mentioned earlier, to do a recall. But I think we're doing the right thing. We're doing it in a regulatory correct way. So what I hope is we'll also get a response from the FDA that, you know, we're going by the book here.
Also just to mention, just a figure for Flow-i, in order to put it in context, the Flow-i recall involves 89 units in the U.S. So again, it's, it is a recall, but it's, you know, it's not a major impact. And from a U.S. perspective, it's 89 units, where we need to actually replace a cassette within that unit. It's a breathing circuit cassette that has to be replaced. So again, it's not good, but I think it's the right thing to do, and it's a result of our increased focus on regulatory.
And it involves 89 units, where I think there's also perspective from the FDA, that they will, they will see it as a, as more of a, let's say, contained, contained activity.
Mm-hmm.
Decline in TSS. There, what we see is we've taken a proactive approach to the depots, and of course, that is going. We do have a walkaway volume, as we see it, that we have walked away from some volume. It represents about $11 million per annum, was, let's say, our conscious decision to walk away from. But I should say that early indications show that it's not as bad as, let's say, we had anticipated or planned. So we're still retaining some of that business also after having walked away.
Our assumptions now a bit on TSS regarding the rental is that we will be looking at a decline of maybe 2% to 4%, something in that region in the short term perspective in the next quarters. But we'll be picking up and reaching kind of a stabilization point at during Q4 and Q1 next year. So let's call it a mid single digit decline for the next quarter and a half, and then a stabilization after that, when we start, let's say, also meeting our own comparisons.
Yeah.
Okay, the final one was GP margins and price pressure, and I agree with you there. Let's say we've we do have a price pressure in the market, and I think, you know, I've been asked, what's it in terms of percentage? I think we do have a price pressure of a lower single digits, so a couple % price pressure, which is, I would call it a constant price pressure that we have. And it's a, it's a price pressure that I believe we have to live with, and in a way, maybe we've undersold it or underexplained it, but I think it's also something that I believe we, as an organization, have to live with it and mitigate, mitigate it.
And from my perspective, I believe we can do much more in supply chain and much more in our own procurement, where we've had a very decentralized structure, also maybe versus other companies. So I'm a believer of, let's say, centralizing more within supply chain and bringing more seniority to the supply chain agenda, and also doing the same thing within procurement. So I believe we do have mitigation opportunities that we haven't captured ourselves.
Okay.
But I don't want to downplay the price pressure element. I just want to say that it's something that is there, and we have to live with it in the short term, and also we have to innovate in the future to improve the situation there as well.
Okay. So could I just ask a quick follow-up question? In the Q1, I think your comments were that you expected Europe to continue to improve, and in the Q2, you're now saying you expect Europe to remain weak. Is that volume? Is that price? Any kind of color you can give around what, what, what the reasons are for that, that would be great.
Yeah. I would say it's a, it's a combination of price and volume, but, I would say the main issue we have at the moment is an issue that I talked about earlier, which is kind of the conversion into net sales, of, of the order book. And again, I see Europe at the moment, I would say I see it as a weak quarter rather than a, you know, major shift in, in, in the trend. So I'm hoping we'll have a bounce back in, in, in, in Western Europe, in the, in the remaining part of the year.
Okay, thanks, Alex. I'll go back in the queue.
We will now take our next question from Martin Brunninger from Jefferies. Please go ahead, sir, your line is open.
Thanks very much for taking my questions. I have a couple. Just on the guidance, it seemed that there's not much change on the guidance. However, if you compare the wording to the Q1, am I correct, is it just a different phrasing, or do you expect now a slowdown of Europe, compared to what you were expecting in Q1? Maybe you can elaborate on that a little bit. Second, to your one name approach in the emerging markets, to turning everything into Getinge, what would you assume is the cross-selling opportunity if you base it on current market growth levels?
On the currency, the third question, it looks obviously that you have a 12% tailwind on currency, on the gross profit, and same taking away on the below the gross profit on the rest of the OpEx, so it's more neutral on the pre-tax profit, as you've shown in slide 13 very well. My question here is: what do you expect? Do you expect this to change fundamentally once your restructuring plans are over in the next few years? I'm sure you go into all the details of Capital Markets Day, but just an overview, what do you expect the natural hedge to what that will end up being after your restructuring plans are finished? Thank you.
Okay. Okay, thank you. I'll take the outlook in the emerging markets, and then Ulf can take the hedging effect on the GP discussion. So, regarding the outlook, I would say we do have a weaker start than expected. So, I would say overall, for the year overall, we do expect a weaker Western Europe base, I think also on a weaker quarterly result. On North America, we've had two quarters that I would say have been going in a more positive direction. And we'll have more of a lift off on emerging markets, hopefully based on our activities and our investments going forward.
So I would say the outlook in wording remains the same, but I think we should also be, I would say, a bit clear on the Q2 having been a soft quarter. So we do see a second half that's stronger than the first half, but we're also taking into account, let's say, a slower start to the year based on the Q2. Regarding emerging markets and the one Getinge approach, we, I think in the short term, I don't think we'll see a, let's say, a short-term immediate effect.
But there, I can tell you that the five new regions that have been, let's say, commissioned with this, and now we've gone to that organization, they're in the process of presenting, let's call it these plans where one BA can piggyback, let's say, the smaller BA can piggyback the bigger BA in order to get access to a broader customer group. So I believe there is potential there, bringing, let's say, the three BAs to an equal access of opportunities. And there, in a sense, Maquet has had a head start on the other two business areas regarding its breadth in the markets, in emerging markets. So if we call it a piggyback strategy, or if you want to call it a gap analysis, that's what we're doing.
But I do think there is potential of, let's say, improving our growth trajectory, especially in the two smaller business areas that have had less exposure to emerging markets. And then, Ulf, if you want to take the final?
Yeah, sure. Regarding the hedge effect, that's a, it's a very good question, but I must say that it is a little bit too early to give you a sort of estimate what would happen when we see what we have done with the factories. That will be presented more at the Capital Markets Day. The only thing I could say already now is that, with the situation we have on hand today, we will have a positive impact on transaction effects. We are losing this year SEK 240 million, and I'm very optimistic to say that we will probably recover most of that next year.
But then what sort of impact that will have going forward, when if we change factory location, it will be a change in that exposure. That's correct.
Okay. Thank you. And on the cross-selling, maybe back to Alex, could you maybe put a number on how, what the gap percentage is that you see, when you compare your current footprint, where you are in these different regions in emerging markets, and where you could be with the other divisions where you're not currently present, so you call it piggybacking? So how, what's the percentage, kind of, overlap or gap that you see there?
Yeah, I don't actually want to give you a number at the moment because the different regions, it's five sub-regions, and they're very different in their starting point. We will show, let's say, a little bit of that during the Capital Markets Day. So I think if you can wait until then, you'll get a clear picture. And again, the starting point is very, very different if I look in Eastern Europe or Latin America. So it's very difficult to kind of pinpoint an overall picture. But I do think we'll have the opportunities in the next three-year period to leverage, let's say, the one group perspective.
Okay, great. Thanks so much.
Okay. So I'm aware a bit of the time, I should say, but we do have seven people in the question queue, as it looks like. So what I would propose is we can continue for 15 minutes if there's interest from the questioners' perspective. So we'll prolong it until quarter past, and I'll welcome the next question.
Thank you. The next question is from Michael Jungling from Morgan Stanley. Please go ahead, sir.
Thank you, and good morning. I have three questions. Firstly, on the upcoming CMD, can you provide some insights into the structure, not the actual numbers, but into the structure that you will adopt for guidance? Will it be numbers-based, or will it be more sort of based on qualitative comments? Because expectations are running quite high into the CMD, with the market expecting precise numbers, it'd be kind of useful to maybe give some direction not to so to avoid disappointment. Question number two is on the restructuring plan, and do you have, Alex, the management depth to execute the midterm plan, or will there be some changes?
And then thirdly, when it comes to past restructuring programs, we've seen lots of them over the last two to three years, lots of costs, lots of guidance about what benefits they may achieve, and yet the cost savings have resulted in margins continuing to decline. And therefore, Alex, do you have a sense of what went wrong over the past two to three years if you look at the clean EBITA margin decline? Thank you.
If I take the first question
I'll take the other two.
Yeah, as I'm working with that. We are in progress now to see what sort of ratios we would like to present and guide the market, and it is a little bit, Michael, early to give you some information about that. But I think we have said in the past that we will probably move away from margins and more focus on growth guidance. But we are in progress in order to finalize that, so I would like you to understand that we will come back on that on our Capital Markets Day.
Yeah. Okay. Regarding then the bit, the restructuring plan and the structure, the way we're working now and what we've done is, and I made my first presentation to the board, and we have a follow-up board meeting in August. I mean, we've built a plan, a three- to five-year plan, where we're looking at what major initiatives need to be delivered during this three- to five-year period. Very much focused on margin improvement, not only gross profit, but also kind of the whole cost structure and the bottom line. And then what we're looking at now is what organization do we need to do to deliver on that plan?
And I believe that the people in the organization exist to deliver that plan, but in certain areas, the way we're structured today is not giving the necessary impact. And if I would just take an example, that we've had a very, let's say, decentralized supply chain structure from a group perspective. We've had a very decentralized procurement organization. We've had very few resources on group functions that are delivering on group initiatives across BAs. So in many ways, we've been operating as a very fragmented company, even though we're all under the Getinge Group hat.
So I believe some of those deliverables will make it necessary for us to reorganize ourselves in a much more, let's say, streamlined way, so we can get the decisions through, and we can get the effects through the business. So I'll be proposing and discussing again, a new organizational setup in some areas, and in other areas, we'll stick to what we've had before. And again, you'll hear me focusing a lot on supply chain, on margins, and group initiatives, as a guideline to that. I agree with you on, let's say, we haven't delivered on our plans in the past, and I do believe it's a combination of an organizational setup.
And also, I would say we've been very much a company that's been focused on, let's say, bolt-on acquisitions as focus. And now we're going into being much more focused on, let's say, consolidating ourselves and looking, let's say, in the way we work and delivery. So I think you'll find a different, let's say, approach to how we will deliver in the future. And again, I don't want to close the M&A opportunity.
I want to say it, it will come, and we will be, let's say, have an appetite for acquisitions, but we'll focus more on, let's say, consolidating and improving the way we work, and going more towards a one group, one group journey, rather than being a, let's say, a very fragmented, group.
Okay. Well, just one follow-up question. When you just sort of mentioned that the guidance that you will give at the CMD will be less margin focused, did I hear that correct? And does that mean that there will be no sort of precise margin guidance that we were sort of believed to have gone towards under the previous CEO, where there clearly was sort of a precise margin target? Is that a correct interpretation of what you've just said before, Ulf?
Y eah, Ulf can give a comment, and then I can give you also my comment, I should say, since we're both working on this at the moment.
Yes, we are in progress, and therefore, but I think you are, to a certain degree, right in your comment here that we will probably have more focus on growth guidance than on margin guidance. But we are still, as I said, in progress, and we need to finalize our guidance up to the Capital Markets Day.
There I should comment just to add to what Ulf said. When you're saying growth guidance, we mean top line growth and bottom line growth. So, so let's say that, and that's where, in a way, with my background, I focus quite a lot on, let's say, CAGR, during a certain period of time on top line. So how much is our top line gonna grow? And, and, and how much is our bottom line, going to grow? And of course, preferably the bottom line will outgrow the top line as a, as a, as a rule of thumb, rather than focusing on a, let's say, a magic percentage number, that, that might change over time, and acquisitions also play a part in, in that number changing.
So that's the current discussion, and again, so we'll be giving financial guidance, but we're also, we haven't agreed fully with the board, you know, on what parameters will give that guidance. But that gives you a bit of the feeling, and just so you don't decode, the growth is both top and bottom line growth.
Thank you very much.
Okay. Thank you.
Thank you. We will now take our next question, Johan Unnérus from Swedbank. Please go ahead, sir.
Hey, good day. Thank you for taking my question, Johan Unnérus from Swedbank. Yes, firstly, this Q4 tipping point, just for clarification, I presume this is related to the growth of the top line and not the growth on the margin, bottom line? That could be the first question.
Okay. Can you take that just one more time so we, so we understand more clearly?
Oh, sorry. The tipping point you referred to in Q4, is that related to the top line and not the bottom line?
Yeah, I mean, we do, we do expect the top line to grow in Q4. I would say on the gross profit, you know, I don't, I think it's very difficult to give tipping point indications on gross profit, because as you know, gross profit is something that erodes over time and then is restored also over time. So I think there, let's call it that, that part of the equation, I think you'll get a clear picture in the Capital Markets Day, how we see kind of margins returning and improving over time. And you'll also be getting a flavor of the time perspective of that.
But there, I think it's also wrong for me to say, "Okay, the tipping point is exactly Q4 on the margins," but it will be on the top line also driving the overall, let's say, performance of the company.
That's a sort of internal organic one group journey that you referred to. How long should we expect that to be the sort of primary focus and then shifting to sort of interest of M&A? Is that a two-year period or?
No, I don't want to give it a time perspective. And again, I wanna say, you know, in some areas, we will be focusing more on a kind of more consolidated approach, and other areas will continue as we are today. So, I don't see a time perspective that, let's say, we say will be two years in a way, consolidation oriented. If things, if opportunities come up, of course, we will evaluate them and look at them as we've always done. It's just that what I wanna have is a much more clear agenda, a much more clear organic agenda for the company, rather than being overdependent on the M&A.
I don't want to give a time, you know, that kind of time framework at the moment.
Thank you. And finally, on cash conversion, I think earlier you were in sort of low 50s, and you were sort of hoping to move or targeting to move into the high 50s during the year. Is that still valid, or is it slightly softer on that point?
Sorry to say, Johan, we were at 57 in the quarter, and we were over 60 in the year to date. And we have said that we would like to be in the range of 60% to 70% of the EBITDA, and I assume that we will end up within that range at the end of this year.
Continued progress, then.
Absolutely.
Okay. Thank you.
Okay, thank you. I think we'll take one more question, and then, both Ulf and I are available later during the day. So we'll take one final question, before we close.
Thank you. Our final question is from Mattias Holmberg from Danske, Danske Bank. Please go ahead, sir. Your line is open.
Thank you so much. Alex, you're now 100 days or so into the job. Is it fair to say that you've become less or more upbeat about the potential of improving margins compared to your initial expectations? And if so, why? And secondly, you mentioned in your opening remarks that changes will be greater than initially expected. Have you had the time to share your summarized findings with the board? And what support do you feel that you have from the board on those? Thanks so much.
Yeah. Okay, thank you for the questions. I would say my starting point is still the same on the potential. And I've had, let's say, opportunity in the 100 days to be more analytical about that. And I've also talked a lot within the organization. So I think, you know, I haven't changed my original start, let's say, starting point from the future potential. But what I can also say is that the first part of this year hasn't performed as much as I would have liked it to do. So my starting point, in a way, is a bit worse than I expected. So that's where I am at the moment.
So going forward, I think the potential is the same, but I think I have to kind of be realistic and say, I'm starting where I'm starting, and we have to move from there. And where I'm starting is a bit lower than what I had hoped for, and expected. Then on the organizational part, I don't want to get in because it becomes very speculative. Again, my approach has been, what do we need to deliver? I presented the plan, let's say, the plan for that to the board, and there is, I would say, support around that. Then how will we deliver it, and what kind of structure do we need? That's the next step, let's say, of the discussion.
So, we're not, we're not at a point where I can say anything about that. But I do have a lot of support from the board. I should, I should say, all the way from, from the chairman, and I think the board in, in general.
Thank you so much.
Thank you. Okay, unfortunately, I think we should round it off, but Ulf and I are available throughout the day. I would like to thank you both for your attention and I think the good questions. And again, just to reiterate, it was a quarter that I, I'm not myself satisfied with. We have a lot of short-term activities, which I hope I described to you already this year. And of course, I'm very confident on, let's say, the future perspective of the company and the opportunities that exist, and I look forward to presenting that on the September 2nd, in Stockholm. So thank you very much.
Thank you. Thank you for your participation, ladies and gentlemen. That will conclude today's conference call. You may now disconnect.