Good day, 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 Johan Malmquist. Please go ahead.
Well, thank you very much, and a warm welcome to all of you, and, I have at my side here, both Ulf, our CFO. This telephone conference is scheduled to last for one hour, and, we will try to keep some discipline around that. Should you feel that questions that you may have have not been answered, or you haven't had the opportunity to put them forward during the conference, you are, as always, welcome to call either myself or Ulf Grunander after the phone conference. And we will open up with a brief overview of the quarter, some comments by myself and some by Ulf, and then when we're done with that, we will open up for a question-and-answer session.
So, you will hopefully have been able to retrieve the presentation, if you follow the instructions provided on the press release earlier today, or you can also access it on our website, but then it's not in the interactive format. So with that, I'll turn over to the first slide, Trends in Organic Order Intake. And, the theme, I would say, so far this year, when it comes to order intake, has been stabilization and return to some growth in developed markets. And as we have said, the recovery is fragile, and the return to a more normalized situation is slow. This is particularly true for Western Europe, where many countries are still battling with significant deficits in the public sector. The theme has also been one of slowing growth in developing economies if we look at the first half of this year.
In the half-year report, we said that we expected orders to improve in developing markets going into the second half of the year. This improvement has materialized with growth of some 10% if we aggregate up developing markets in this last quarter, but growth has been slower than we planned for. And at the same time, I think it's fair to say that growth in developed markets has also been somewhat slower than anticipated, both when it comes to Western Europe, North America, and Japan. So looking at the third quarter, we see that order intake on an organic basis is flat versus the prior year period.
In Western Europe, we had anticipated a slowdown given the third quarter 2013 marked the beginning of a relatively strong recovery in Western Europe, where orders were up organically by some 8% in the corresponding quarter last year. We also had a decent quarter, I would say, in North America in the prior year period. And some of the softness you see this year relates to our therapeutic services business in the U.S. that is challenged at this point in time. We're not alone in that. Also that the life science market in the U.S. is somewhat softer than it was a year ago.
If we move over to the consolidated results, the results for the entire group, then the EBITA result improved somewhat in the quarter, despite that we had a soft top- line where organic revenues declined by 0.9 of a percentage point. Gross margin was flat compared to last year, but if we adjust the gross margin for the hedging effects, the currency hedging effects, you know, we have quite a lot of headwind on that subject. But if you adjust for that, the gross margin would have been about 50% versus 49% in the prior year period. The issue, I would say, is the expense side in the quarter here. We're up over prior year, mostly as a result of higher expense levels within Extended Care, and I'll come back and comment around that when we get to Extended Care.
And the lower pre-tax earnings is really higher levels of restructuring, some SEK 30 million, and slightly higher net financial items, which partially is translation effects. If I move on to Medical Systems, considering that revenues declined organically in the quarter by about 1%, I would say that the growth in EBITA represents a good performance. Expenses in the quarter are well under control. In fact, on a like-for-like basis, our expense level operating costs are actually down. If I look to the divisions, I'm particularly pleased with the performance in the Cardiovascular division. If we consider that this is where we have our FDA-related challenges, which has impacts on our ability to supply to the same extent that we have sort of done historically.
If we move on to the highlights of the Medical Systems area, we continue to make good progress in strengthening the quality management system. We've charged in this last quarter, SEK 160 million—SEK 116 million against the provision that was booked in this year's first quarter. The change in the size of the provision that you can see from SEK 800 million to SEK 820 million, it only reflects sort of the movement in currency is a pure translation effect, so there's no actual change in the scope of the work we plan to undertake. We launched an important upgrade to our anesthesia device, Flow-i, in the quarter. It's called Automatic Gas Control. This can best be described as a cruise control function for an anesthesia machine.
The AGC software automatically allows you to adjust the gas blend to a certain preset level. We've also conducted a benchmark study that demonstrates that this Flow-i is significantly more efficient compared to other comparable anesthesia machines when it comes to consumptions of anesthetic agents, and this is not an unimportant decision parameters for purchasers of these types of devices. Finally, with the ongoing restructuring within our Cardiovascular division, we're set to complete this activity, which represents the movement of textile synthetic vascular grafts from our Wayne facility to our La Ciotat facility in France. And this is scheduled to be completed in the second quarter of 2015. Moving on to Extended Care. Extended Care had a weak performance in this last quarter. Revenue growth declined somewhat in organic terms.
The weaker gross margin that we see is mostly mix driven. There's a little bit of negative currency hedging effects, but it's mostly mix. It's a higher proportion of capital equipment going into emerging markets, medical beds specifically, which has lower gross margins in that product category. The other challenge we have on the margin side is the very challenging rental market that we have to support services in the United States, which negatively impacts the gross margin. And as I said earlier, the operating costs developed quite a lot in this last quarter. If you just take the two numbers, it represents a 17% increase, and 7% of that is pure currency translation effects, but the underlying like-for-like increase is about 10%.
This spend increase relates largely to the U.S. business and partly reflects a higher run rate that we have of expenses in the organization. Secondly, also additional resources that we carried at this point in time to complete the integration. This integration is not sort of the operational integration, but it's really the information management integration and having the ability to have stable and effective processes in place. We believe that we will need to maintain a higher level of expenses, most likely till the end of this year. I wouldn't suggest that you will see this delta in expenses versus the prior year period as we go into the fourth quarter. This is a bit of an unusually high quarter.
If we move over to the highlights for Extended Care, we're really only sort of featuring here the launch of a product extension of the Flowtron family. Flowtron is a device that is used for the prophylactic treatment of deep vein thrombosis. It's a little bit the standard of care in parts of the world, and not least in the U.S., for patients in conjunction with mostly surgical interventions. The extension to the product line includes a device for treatment of obese patients. It also includes a device for so-called sequential treatment. The device we have already sort of performs the function of improving blood flow in the lower limbs.
Some clinicians, specifically in the United States, prefer a treatment called sequential treatment, and we now offer this feature on the Flowtron device, which will allow us to address a larger market in the US. If I move over finally to Infection Control. Now, organic revenue growth for Infection Control was essentially flat against the prior year period. The gross margin decline reflects the hedging effects here. This is the business area with, relative to its size, the biggest impact. Gross margins on a like-for-like basis are about 38% versus the 36.7% you see here. And I would also say that like- for- like, operating cost development was quite in line with plan. On the highlights, for Infection Control, the profit improvement program that has been communicated since a while back is progressing largely to plan, I should say.
It's a plan that, when fully implemented, will sort of in a material way improve the business area's profitability level. We had anticipated that the early phase of this improvement program would not yield sort of any aggressive margin expansions, and the currency headwind also is sort of dampening the visible improvement. We completed the acquisition of Austmel Limited in Australia, which is a company that provides quality assurance products and consumables for Infection Control equipment. Austmel had revenues of 80 million in the last twelve-month period, that's SEK 80 million. The purchase price paid represents an EBITA multiple of 5.5x, and this acquisition will be EPS accretive on a fully loaded basis instantaneously.
We also marked here that we have received the Red Dot Award for the Centric HMI or user interface, which is a standard user interface that will feature on all of the equipment and will facilitate the usage and training of staff. It's very, very intuitive. I think that anyone in today's audience here will probably quite successfully be able to manage the devices with minimum training. With that, I hand over to Ulf for some additional comments around our financial position.
Thank you very much, Johan. In the third quarter of 2014, the operating cash flow amounted to SEK 742 million, which represent the cash conversion of 61%.
...The main part of the increase in the restructuring cost paid during this period is due to Medical Systems remediation work, which amounted to SEK 160 million in the quarter. The change in working capital was more or less even in the quarter. The inventory increased in order to have the right inventory level for the large revenue in quarter four, and in addition, some safety inventory has been built up for the ongoing transfer of production and some other operational changes. The good collection of accounts receivable continue in the third quarter, and the year-to-date, the Getinge Group's cash conversion amounts to 79%. In general, good performance of the group's working capital.
If we take a look on the balance sheet, the closing net debt amounted to SEK 21.4 billion, and the closing equity amounted to SEK 16.8 billion, which resulted in a net debt to equity ratio of 1.27x, and equity, equity asset ratio of 34.5%. Adjusted for acquisition and currency fluctuation, the net debt decreased in the quarter by approximately SEK 160 million. The group's balance sheet at the end of September 2014 remained solid, and the acquisition capacity is the range, in the range of SEK 6 billion-SEK 7 billion. I think I stop there, Johan. Okay, thank you, Ulf. And, finally, just a few words around the outlook.
As you can see from the press release, we have lowered our volume outlook for the year and now believe that the organic revenue growth will come in a little under the previous guidance of 4%. The lower guidance is principally the effect of demand for capital equipment from emerging markets, remaining softer than we anticipated for the remainder of 2014. We expect the acquisition and restructuring charges to amount to SEK 1 billion. The increase you see here is partially the translation effects, i.e., currency translation effects I mentioned earlier, but it's also, but to a much lesser extent, incremental acquisition costs that sort of stems from acquisitions that were not part of the forecast at the middle of the year, Austmel, amongst others.
We still expect the currency transaction effect to burden this year's results to the tune of about SEK 250 million. And I think it's worth to underline that the fact that we don't have full clarity on the U.S. FDA situation means that there is, of course, a short-term earnings risk associated with the final outcome of the of that dialogue. As soon as we have clarity on that final point, there is still the intention to hold the Capital Markets Day that we postponed, as you know, earlier this year, and we're confident that the plans we had and which we intend to communicate will allow us to deliver healthy earnings growth going forward. So with that, operator, I think we're ready for the Q&A session.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Again, please press star one to ask a question. We will pause for a moment to allow everyone to signal. We will now take our first question from Rickard Koch of Kepler Cheuvreux. Please go ahead, your line is open.
Hi, Rickard Koch at Kepler Cheuvreux. Regarding the FDA issues, you're now stating that you have delivered disruptions in Cardiovascular due to this. How big is this impact? And is it due to customers not wanting to order or that you're restricted by the agency in delivering?
Yeah, thank you, Rickard. No, it's neither of those two. I mean, it's the company ourselves taking a very, very strict view on what we ship. So if there is the slightest question mark around a specific device, then we would typically not ship that device, right? That is not to say that we used to ship questionable devices in the past, but I think as you can imagine, under the circumstances, we take this extremely seriously and proceed very, very cautiously. So that is one aspect of it. The other aspect, which is a little bit more technically complex, but part of the observations from the FDA was around sampling volumes in one of our facilities.
So when we have now instigated a significantly more, or sort of a larger sampling from, from batch manufacturing, we, we have much, much bigger difficulties to adjust demand and output short- term, for devices, which means that we can't quite keep up with market demand in certain other categories. So we, we haven't had any comebacks to, to my knowledge, from any customers.
Okay. And at this point, how long before you expect a more clear view on this whole matter?
Well, it hasn't been an area where we've been particularly good at predicting, right? So these are complex discussions, and but if I was to sort of make a best guess, I would think that we're probably looking towards the end of the fourth quarter, but again, it could be later than that, and technically speaking, it could also be a little bit earlier. But my belief is that end of the fourth quarter is not an unrealistic timeline.
Okay. And last question: Did you consider to issue a profit warning for this Q3 report to the market? And if so, why did you choose not to do that, given that it was a 20% miss on EPS?
I'm sorry, what?
Did you consider issuing a profit warning?
I heard the question, but you said, considering there was a miss of what?
Yeah, considering that the earnings per share missed the consensus expectations by about 20%.
I don't think we have that number, but we may not look at the same consensus reports. No, we never considered that, to answer your question very quickly.
Okay. Thank you. That's all.
Thank you.
We will now take our next question from Kristofer Liljeberg of Carnegie. Please go ahead. Your line is open.
Yeah, thank you. Hi, Johan and Ulf. Three questions. First, the visibility for top planning in Q4, given that the third quarter was, of course, weaker than you expected after the second quarter, do you have any view when we could expect the margin to bottom out? And finally, the translation effects from currencies in the third quarter, if you could also give the year-to-date number and what you expect for the full- year. Thank you.
Yeah, I think our, our, Christopher, our visibilities are typically what our visibilities are, and, it's like I say, it is a, an environment right now where it's difficult to predict. If I pick any geography, it's difficult to predict. We work off pipelines of ongoing projects, et cetera, and try and determine when, sort of, probabilities when we'll get them and when decisions will be taken, et cetera. And, it is difficult. And, I think the volume guidance that we've given, I mean, the change from the previous guidance to this guidance is not a significant one, but we felt that it was important to suggest that it is not likely that the revenue will be above 4%, and therefore, it's a number below 4% we're looking at right now.
So, but I would say my, as I think I get this question every call for the past 10 years, and, and my visibility is no better, no worse at this point in time, I would say.
The reason I'm asking is, I think if you phrase it like somewhat lower and but the fact is that orders are more or less totally flat first nine months. Sales are up 0.4%.
Mm.
When you say somewhat, I read that as maybe 2%-3%. That still means that you need to do a very strong fourth quarter.
Absolutely.
Is that what you expect, then?
Yeah, I mean, I would say we always have large fourth quarters, and this year will be no exceptions, but I will not sort of sit and speculate in the finer points around if it's this percentage here or there. It's gonna be, as we said, somewhat lower, and by that, I don't read a huge amount. And yes, the fourth quarter will, as always, be an important quarter where a significant part of this year's profit will and shall be delivered.
Okay, and then the second question was on the margin, when we could expect to see any signs of that bottoming out. And then the third question was the translation effects on currencies.
Yeah, I mean, it all depends—I mean, on a sequential, I mean, I think it's fair to say that this year's full- year will look to a lower operating margin than the corresponding year last year. And, as we've said before that, we're confident that we can improve profitability and earnings growth going forward, and that isn't, of course, that the underlying markets are fundamentally gonna change. We will see improving top- line growth, but obviously not to drive massive change. So that is sort of the result of the work we undertake internally.
So by that suggest that there will be a return to higher levels of profitability, going forward, but I wouldn't like to speculate on exactly in what quarter this will start, or this new journey will start and take place. Hello?
Yeah, and then, if you could say something about the translation effects.
Yeah, the translation effect, if we look to the full- year, we think the full- year translation effect is gonna be about SEK 200 million.
How much have you seen of that, in the first nine months?
Uh, sixty-seven.
Five, seven?
Sixty-seven million-
Okay.
- year- to- date.
I get-
Approximately SEK 200 million for the full- year.
The last quarter is very large because we have the big generation on the profit coming in.
Mm.
Thank you, guys.
Thank you.
We will now take our next question from Hans Mähler of Handelsbanken. Please go ahead, your line is open.
Good morning, Hans Mähler here. First, a question on Extended Care. The reason why you see expense level increasing right now, could that be a consequence of underinvestment over the previous year when you had a rather good development on the margins within that business area? And, also secondly, you mentioned a bit about your project for shared services, moving functions to Poland. What kind of time horizon do you have on that? You talked about the pilot project and which would be the next business areas to be included in that project? Thank you.
So, yes, on the last question, I think we commented in the press release that the intention is to be a little bit more forthcoming at the CMD. I think this is a relatively complex process and so forth, that requires maybe a more detailed and structured way of presenting what our expectations are. But the long-term objective is, of course, to start to now leverage these functions across the entire group. But I'd like to underline, the pilot is only sort of a part of Infection Control. It's by no means the entire Infection Control, so this is quite a substantial program that we plan to undertake.
Maybe add on to that question. Well, why do you start with the smallest business area?
No, I don't think we're starting with the smallest. I don't think you should see this as a business area. This is sort of a country by country, but you want to do a pilot where you have good oversight of it, so that you take the learnings with you. So I mean, this is a process whereby we take transactional pieces of our business in finance and in HR, moved on them to a center that has, firstly, a better cost structure, and then secondly, has the ability to extract economies of scale through better processes and higher productivity. So this is the journey we undertake, and we just picked something that was in our geography since the whole effort is led from Sweden. So it's not about...
As I said, this is only a small, small fraction of the business area Infection Control we're addressing here.
Okay.
Then, if we talk about Extended Care, there are, I mean, again, by just giving a short background. So, as I said before, we have, of course, integrated this business from an operational standpoint, but the situation in the U.S., which is by far the largest piece of the TSS business, we took over some 70%. We had, as part of that integration, moving or shifting over the business that was residing with KCI into a new IT environment. And that process of bringing both TSS over onto a new business system, merging or migrating our own existing business onto the same business system, et cetera, has been a challenging, I would say, activity.
In that process, what we have uncovered, and we commented around this in the second quarter, is that we have uncovered that we had adjustments that related to earlier periods, which basically meant that we had underestimated the level of cost necessary to support the business already last year. We have this higher run rate, you could say, compared to last year. The, I think it was SEK 50 million or SEK 60 million, somewhere in that vicinity, that belonged to prior periods. You could say you have that double swing. Those are additional costs we need to carry this year, and last year's result was, you could argue, overstated to the same extent. The other piece is the resources that we now need to engage to fully complete that administrative integration so that we can develop solid processes going forward.
This is what we're looking at when you see this increase in expenses, a higher run rate and cost to address the situation so we can get back to normalized cost levels. I wouldn't like, at this stage, to sort of speculate what that is, but it will, of course, be the significantly lower levels of cost going forward. Hopefully, as we go into next year, the situation will have improved by quite a lot.
But in terms of the third quarter, there is no element of an adjustment or anything? This is-
No. No, no.
This is the underlying cost. Okay.
The adjustments occurred in the second quarter. That's when we announced it. So if you go back, I'm not sure I got that number right, but I believe it was about SEK 60 million, but I leave that a little bit open. The number is in the Q2 report.
Okay. Thank you.
Thank you, Hans.
We will now take our next question from Martin Brunninger of Jefferies. Please go ahead, your line is open.
Hi. Good morning. Thanks very much for taking my questions. I have a couple. First, could you help us to understand and quantify the sales that would be affected from the FDA decision in the U.S.? So last year, you made $4.1 billion in the U.S. in Medical Systems. How much of that would be affected from an unfavorable decision from the U.S.? That's the first question. The second question is, overall, on the company manufacturing side, I think as far as I recall, you have 29 manufacturing sites. Could you comment on the capacity utilization and rationalization process over the next two years? That would be helpful. Thanks very much.
Yeah, I think it's thanks for your questions. That I don't think that I will be, sort of, actually in a position to answer either of them in the way that you may want me to. I mean, we are in an ongoing dialogue with the FDA, and I think it would be extremely presumptuous for me to try and suggest to the FDA what the final outcome will be of the discussions. And we will, of course, communicate this at the earliest possible moment that we can. And I think there isn't really a lot more that I can say around that. When it comes to the capacity utilization of our... And you're right, it's in that magnitude.
We keep acquiring businesses, so we've added most likely some plants during the years as well. But, I think, an overall theme that we have is that the plants that are residing in high-cost countries, and those that reside in, say, countries with a better cost position, are split. So about 10 of the manufacturing plants are located in low-cost environments, and some 17, 18 plants are located in high-cost environments. And we plan to make quite substantial footprint adjustments downwards on the plants in developed markets over coming years. And again, I would sort of like to refer to the Capital Markets Day, where we will be a little bit more precise around this.
We obviously need to manage internal communications also, as we go forward, because these are changes that will impact people who currently work in the company. So I'm sorry, I think the, the FDA hopefully will gain its clarity in, in a not too distant future. On the production capacity and what will happen, I think we'll be able to be a bit more precise in the upcoming Capital Markets Day.
Mm-hmm. But on the FDA, I haven't—I'm not sure if I have asked about the outcome, giving us a prediction on the outcome. I was more interested in what percentage of sales does that FDA decision, you know, impact-
You mean-
-or affect? It's not, it's not so much the outcome, but, you know, clearly, you, you have $4.1 billion sales in the U.S. Medical Systems, but not all of those products would be affected, or are produced in plants that the FDA is inspecting at the moment, I, I assume. I don't know.
Yeah. No, no, that is absolutely true. And, I think if you take the U.S., I mean, sort of on a high level, if you take Medical Systems' U.S. revenues, which I believe you actually get in the quarterly report on an annual basis, right? Where we have North America as a market, then I think you can probably say that we have, like you say, in North America, what would you suggest, $4.1 billion in sales in the U.S. for Medical Systems in total? You mentioned a number earlier.
Yeah, that's 2013. That's in your annual report, so you, you split that out then.
Yeah. Yeah, absolutely. If I say 4.1, and, let's say that some, I would say unaffected by that or in the current discussions or sort of not in scope facility, I would say is maybe something like, SEK 500 million, potentially. So you would still look at something like SEK 3.5 billion of, of revenues, I would say, within Medical Systems, and then you can maybe carve out some services. So, so say we're still looking at a, a revenue number of somewhere between SEK 3 billion-SEK 3.5 billion.
So only SEK 500 million is affected from the FDA?
No, no, no. No. If we take the overall number of SEK 4.1 billion, and I carve out surgical workplaces, and I try and carve out services of capital equipment, which is part of our business, and then claw that backwards, I would think that we're looking at potentially something at SEK 3 billion-SEK 3.5 billion, would be my guess, potentially, if that is the number you're after.
Okay. Okay, that's, that's clear.
But I still think that is a very misleading number. I don't think you can read anything really out of it. But, if you were looking at the maximum for some reason, that would be the number I would say.
Great. Thanks very much.
Thank you.
We will now take our next question from Johan Unnerus of Swedbank. Please go ahead, your line is open.
Yes, good morning. Thank you for taking my questions, Johan Unnerus, Swedbank. A few questions. Medical Systems will obviously be important in Q4. Can you give us a sense of the proportion of larger projects or capital goods that are expected to be delivered in Q4?
... No, I mean, what I can say is that if I look to the group overall, and we look at the order book, then there is the order book at the end of the third quarter is sort of nominally up. But if we sort of factor in that currencies have advanced right, so you could say that the order book on a like-for-like basis is on a healthy level, but somewhat flat versus prior year. And I think it's more a matter also of how much of that order book actually is planned to be delivered this year. And there is, as always, you know, a number of projects in that, but nothing unusual, I mean, compared to prior fourth quarters in earlier years.
You also have a headwind from the hedging effect. How is that expected to play out early next year with these currencies? Is it going to tail off quickly or?
No, we'll continue to have headwind next year, but it's gonna be less headwind than we had this year. And then I would say that as we come out of 2015, we should be returning to a more normalized. And if translation or say, if currencies remain where they are, it could also, I believe, start to become more of a positive again. But that is next year will be a negative, but we haven't completed that calculation.
We always have, at the tail end, some unsecured or unhedged amounts that we need to assess, when we get closer to the end of the year and when we know how we have secured them, and, and that will depend a little bit, of course, how currencies evolve over the last quarter of this year and, and when we decide to, to enter into those contracts for the tail end of 2015.
Thanks. That's helpful. And finally, on Extended Care, you're obviously going through a bit of a inflated cost period with the IT systems and others. And you say that that's mainly for Q4. What about Q1? Should we see any of that or much smaller proportion, or what is the effect of that?
Our expectation is clearly for a good improvement going into 2015 in the business, given that the situation is of an unusual nature or an extraordinary nature, and it's not something that we expect will persist. But to speak of specific quarters, I'd like to refrain from that a little bit, but if I look to the full- year, a better result is most definitely the expectation.
Thanks. And finally, more like housekeeping. It seems like when we compare Q3 from last year, there seems to be some numbers that moved from COGS to sales marketing. Is that, has that been announced earlier, or is that wrong, or?
No, the only thing we have moved is the medical device tax, which was a part of other operating expense, and now it's a part of COGS.
Yeah. Okay.
You could see that under the P&L statement, how much it is.
Yeah. Okay. Can take that more into details later. But thanks. That's enough for me. Thank you very much.
Thank you, Johan.
We will now take our next question from Mattias Häggblom of Danske Bank Markets. Please go ahead. Your line is open.
Thanks so much. Stock is down 10%. But when I listen to you, Johan, it sounds like no drama around the revised full- year outlook, so seems to be a disconnect here. I guess what we'd like to better understand is how large revision the change from 4% full- year growth to the new version of a fall, somewhat short of is. And where do we draw the line between substantially short of and somewhat short of, and why is there not a new number provided in the guidance? That's my first question. Secondly, a couple of years back, your Q4 was hit by short-term cycle revenues that didn't come through due to changed customer behavior. How dependent are you on such revenues to meet your new full- year guidance? Thank you.
Well, if I start with the last question, you could say that short- cycle business ended with that quarter. It did not return the year after. So I think that is an effect that seems to be gone forever. So I don't think that we're in any way counting on some Christmas miracle here towards the end of the year. Then, when it comes to, I'm not the person who should comment on the share reaction, but I... It would seem to me that when I look to the guidance for the year, I look to what we now believe will be our earnings. Then I would maybe think that the reaction seems to be a little bit on the high side.
So, we're not far away from where I think the market expects earnings to be this year. But then again, I'm also mindful of the different consensus estimates floating around in the market at the same time.
Quick follow-up to that. You said initially in your prepared remarks that, you've said nothing around, you wanted to share with us, that you don't think it's gonna be above 4%. I think the market currently is not expecting you to be even close to 4%. But am I, am I right to understand you, that you wouldn't be too far off 4%? Is that what you're saying, or—and, and why is there still no number, like a range or?
It is semantics, I mean. This is semantics, and of course, it's deliberately so to some extent, and we don't want to set ourselves up for failure around being a little bit cautious on that number at this point in time. But when we look to the earnings side, I think that, as I said, we're not sort of really materially off the expectations for the year in the earnings outlooks that I've seen so far, at least. And so, yeah. But again, what is just under et cetera? Is it 1% or is it that magnitude? And everybody will have his own little number in his mind.
Again, I will be cited for having said this or that. So, I think we like to leave it with slightly under, I think, at least in my book, is probably a fair representation of where we're likely to end up.
Okay. And then just separately, excluding for any impact on the outcome of the FDA dialogue, do you still think it's possible for Getinge to earn more than your current EBITDA margin target of 22%? Or should we think about the future CMD with new margin targets as a complete reset of margin targets, given this year's trend towards rather 17%?
The only thing, and I'm a little bit... I think I've commented to some people around this, and I think a margin target as such is possibly not the greatest way of measuring a business. I think the business would be best served to be measured on earnings growth and capital efficiency or different measures of returns, et cetera. I think the birth of this margin target was really in a time period when we had multiple acquisitions at various stages of integration, and the market was looking to some guidance on where we would likely end up when everything was put together, and that's a little bit how we started with this margin.
I think that to the extent that we decide not to be measured on that going forward, I think our ambition is still to say, "Here is where we think we can get the margin targets in, in this time period," and this translates into some kind of an earnings growth, and that will be the earnings growth that we would like to be measured against. I think that we may make that journey, if you see what I'm saying. So that we actually go from an operating margin target to more of an earnings growth target. But if you ask me, is sort of 22% or beyond 22% no longer a possibility? Not at all. I still believe that to be sort of something that we're capable of achieving.
It will obviously not happen tomorrow, but I think that we have activities that we'll be happy to share with you as soon as we have this clarity on FDA to substantiate how we see this journey going forward.
Thank you. That's all.
Thank you, Matthias.
We will now take our next question from David Adlington of JP Morgan. Please go ahead, your line is open.
Good morning, guys. Thanks for the questions. Firstly, just returning to, I suppose, your expectations for the rest of this year. I just wanted—I saw, I saw the market is concerned that you'll, you may not set your cost base appropriately for the revenue growth that might come through. So I just wondered what sort of very near-term flex you have in your ability to flex that cost base. And secondly, on the Q2 call, you said that you were expecting the FDA to come back within 1-2 months. Obviously, we're-
Yes
... kind of substantially beyond that now. I just wondered what had changed between your discussion with the FDA to extend that timeline?
No. Look, we don't extend any timelines. We respond to questions we get, and it is a complex thing. We're dealing with an administration which I'm sure has other matters also they attend to. So we've, in good faith, tried to give our best estimate, and I'd really like to underline that when I say the end of the fourth quarter, that is also with very genuine and best effort estimates, but I have no way of saying it's going to be then. We have tried continuously to try and predict by when we could have the kind of clarity we're looking for. So, but that is not something we're in control over, quite frankly.
Okay, and your flexibility on the short-term flexibility on the cost base, if Q4 revenues don't come in as hoped?
I think we have made a sensible assumption around how things will evolve in the fourth quarter, which assumes that we manage cost both with the fourth quarter in mind, but also, of course, with our long-term ambitions in mind. So it's always a sort of balancing short-term requirements with long-term ambitions. So I think we've struck a good balance there. I don't think that you should... It all depends on what results you're aiming for and so forth. But I think we'll have relative to the volume out that we predicted, healthy and good growth in the fourth quarter.
Okay, perfect. And then maybe just a completely different follow-up. Steris coming into the U.K. market, obviously, the acquisition of Synergy. Just wondered what your-
Mm
... thoughts were on that and potential impacts on the U.K. market.
Look, they have been in the UK before. In fact, the European headquarters was based in the UK historically, and I think was a few years back disassembled, and I think they retrenched a little bit. I mean, we have been asked on numbers of occasions if Synergy would be a company that would provide a development of our Infection Control business that would interest us. And frankly speaking, this has not been the orientation of Infection Control that we have wanted to make. I think you know that we had very early on collaboration on outsourced sterile services together with a partner in France, and owned, co-owned, you could say, two, three centers in France.
We decided to hand over or to exit those assets and sell them entirely to the partner we had. I still believe, for us at least, that was the right decision. So, we will strive to increase our recurring revenue base around our technologies in terms of consumables, et cetera, but we have no plans to extend the services. We welcome Steris over to the European side. I think Europe operates to very, very different product standards than the U.S. market. So I think unless you have a portfolio, it's gonna take a while to sort of effectively compete in Europe.
Okay, great. Thank you.
Thank you.
We will take our next question from Lars Heindorff of SEB. Your line is open.
Yes, thanks. Can you say anything about this TSS since November 2012? What's been the earnings impact if you look back during the last two years?
Yeah, we don't, and I think it's. I probably repeat comments we've made before. We don't comment on individual businesses. I mean, the business areas is the level on which we comment, and then occasionally we will talk about, say, the larger divisions within Medical Systems, but not in any detail, specifically, as I'm sure you see in the quarterly statements. But if you ask me, has TSS been sort of a successful acquisition so far? No. This has been a very disappointing development. As I've commented many times, we've sort of successfully integrated the company.
We have, in terms of cost synergies, exceeded the original targets we, we had, but we have had a very challenging market environment, specifically in the United States, with, with, decline in, in the high single digits, or, or mid to high single digits, depending on the time period. We started off well and, and stabilized, the declining trend we inherited. But, but after that, the entire market, started to go into decline as customers shifted their behavior from renting to purchasing, these equivalent products.
Given that the rental business is made up of a relatively high cost structure with the different depots that you need to have in order to serve your customers with very short lead times, it means that when volumes come down, and when there's also, on top of in a declining market, you typically have a tougher pricing environment. So, with that, you sort of almost, by definition, cannot cut your costs as quickly as your top- line is declining. So, we are in a situation now where we are sort of gradually adapting our cost structure to the underlying market in the U.S. We are not performing any worse than anyone else in the market. I believe that Hill-Rom, as a listed company, report also dull numbers on the rental of support services.
So, you know, we will continue to make the necessary rightsiz ings. We're quite confident that the market will bottom out, and that the market will refind a new equilibrium between renting these products and owning these products. But with the cost of capital and the relatively ease of accessing capital for hospitals, their choice has been, at this point in time, to purchase rather than to rent.
Okay. Thank you. Can I just ask about the, I mean, the pilot project you mentioned in affecting your site in Gothenburg and some services in Poland. My question is, the group that's now been now have the responsibility for these activities, how big is that group of people gonna be? And I guess that's primarily the supervision function driven from the headquarters.
No, I'm not sure I understand, but
How many people will be responsible for these shared services, group functions, et cetera, that's gonna be rolled out throughout the company?
I think you have to... When you say responsible for, I mean, we have recruited the necessary talent to undertake the program. That's a pretty small control tower based here in Gothenburg at our headquarters, which are people who come from environments and have undertaken this journey in other companies. So they come with the expertise and the leadership, if you will. If you talk about the number of people who will actually be doing the processing of financial data in this shared service center, which we have located in Kraków, in Poland, that's gonna be a big number, I mean. So, and again, I don't want to go into the details. Again, it's sort of something we intended to be a little bit more specific around the Capital Markets Day.
Secondly, obviously, this also impacts people within our own organization, and we need to be mindful about how we communicate around these changes.
But finally, can I just ask about the timing of the Capital Markets Day? Since you expect to have this FDA resolved towards the second half of 2015, why couldn't you just, you know, leave 2015 out and go through 2016 and onwards when you discuss revised or whatever targets?
Sure. No, of course, we can do that. But, I still my experience tells me that markets likes to know also what happens short- term. But, we will obviously be detailing how we see the development over the coming, say, three to five years, would be the idea around. Anyone is free to take out 2015 from that. I don't think you should expect that we will have specifics around 2015. When it comes to the next year, I think we'll be a little bit cautious around how we guide, hopefully, a little bit wiser from past experiences.
Okay. Thank you, Johan.
Thank you, Lars.
As a reminder, to ask a question, please press star one. We will now take our next question from Scott Bardo of Berenberg. Please go ahead. Your line is open.
Yeah, thanks very much for taking my questions. Yeah, just like to go back into your previous comments about the stronger fourth quarter and how you see the full- year ending up. I think you mentioned that some of the consensus numbers that you've seen, you seem relatively comfortable with for the full- year. And obviously, given the unprecedented volatility in your shares this year, it would just be kind of helpful to refine which consensus numbers you've seen. I'm looking at the SME Direkt consensus numbers for pre-tax profit of around SEK 2.4 billion pre-tax. Is that the one you're referring to? So that's question number one, please. Just on some finer housekeeping questions from all, if possible, please.
See that net financials have started to trend up to around SEK 170 from, I think, you know, SEK 150 or SEK 155 before, and you mentioned translation. Can you give us some sense of run rate? Same, too, for D&A. D&A's peaked up at SEK 177, I think, versus, so amortization rather, versus where we were, sort of SEK 150, SEK 155 before. So again, just some sense of run rate there, please. So there are two questions, and I have a follow-up. Thanks.
Yeah, but we started to debate on this side, which was the actual consensus here. So I'm afraid, Scott, we didn't pay full attention to all of your questions. The guidance that we typically follow is the SME guidance.
So thank you. So just to understand, I'm looking at the SME Direkt consensus now, and-
Yeah, but you're not going to get any. I think my specific words were earlier, that we are not going to be far off that SME guidance, and that's, we'll leave it at that.
Okay.
Yeah.
That's helpful, but I mean, obviously, it calls for, you know, significant improvement in Q4 margin and growth, I think, more so than we've seen for a long time, actually, for Getinge. So is this just the fact that you expect then some of these additional cost burdens to abate into the fourth quarter?
Hmm. No, but as I said, we're not going to be far off that estimate, okay? I think we have to leave it there. I don't want to go into too many details. I don't want to set this up for a debate later on where I said this or that. So we keep it very high level here, and-
All right. No, that's... Appreciate it.
I think that's generous as it is, actually. Okay, what's the next story then, Scott? We need your help here to take us to the second question, but because we were sort of scribbling for that document to see who provided that estimate for the year or that consensus.
Oh, no, thanks, Johan. Just a couple of housekeeping questions, please, which was the next question. Net financial is up to about SEK 170, which is higher than what we've seen in the past. Amortization up to about SEK 177. So I just wondered if you could help us understand, sort of, are these the new run rates that you've-
Translation effect would be the biggest impact on that, if you look to the last quarter now. So all of the lines in the P&L have been obviously impacted. And then I think when you speak of the financial net, there is slightly higher net interest rates. If you also look to the cash flow, we've made the Pulsion acquisition, we've spent the money on the remediation work, as you have seen. So there is a little bit of a lower cash generation that also impacted. But, but I think it was fair to say the biggest part is probably translation in the financial net.
Well, it's a part of it, but I think if you add the acquisitions, so if you from the beginning of the year, it-
Yeah, but in the quarter now, the last quarter.
Yeah, in the... But it's still, the Pulsion is in there with full amount for and... And then, as you said, it is also the cash flow with the impact, so to say, on, on the remediation work.
Mm-hmm.
And then if you take the amortization, that is also including Pulsion and the acquisitions. So it's always sort of say, when we do an acquisition, it comes up first of the day.
You with me, Scott?
Thank you. And these are the new run rates one should accept, expect, basically, going forward, you imagine?
... Subject to exchange rates fluctuations, yes, absolutely. Mm-hmm.
All right, great. Very last question then, please. I think you did very well in Medical Systems considering the disruptions that you're currently facing there. And my focus is a little bit more in Infection Control and Extended Care, and I think both of those divisions have posted the worst quarterly margin for the company for the last several years. I'm particularly surprised in Infection Control, when you have already initiated a lot of cost restructuring measures and launched more profitable modular systems. So, I'm guessing the previous target that you had outlined as an aspiration of 13% this year is unlikely.
So just gonna help us understand why is Infection Control so weak, and is TSS loss-making for Getinge currently, and what gives you confidence that, you know, on the underlying margin for Extended Care?
If you look at Infection Control, over the last and this year, we will have had a currency headwind of about SEK 200 million, right? So in this year alone, we'll have a little bit, I think, over SEK 90 million of currency headwind in the business. So, I think if we end up somewhere a little bit above last year, that will still be, I would say, a pretty good improvement over last year on, in constant currency. So there is progress, but as we've said many times, a lot of that is masked from the negative hedging effects. And as I said, if you look to the gross margin, we've probably in the quarter, and if we look in the year, improved the gross margin by 1.5 points compared to last year.
The TSS business is not doing well for us, and like I said, we don't comment specifically on details or pieces of our business, but it isn't performing great by any means.
All right, guys. Thanks so much.
Thank you. I think we need to actually break there. We are 11:00 A.M. here, Central European Time, and, as I said initially, if there is anyone who feels that there are questions they would like to ask and haven't had the opportunity to ask during this call here, you should feel free to call Ulf or myself. So, with that, I think we wrap up. It's been a challenging and mixed quarter. We obviously have, as always, a pretty big fourth quarter to deliver. As I said, again, just to be a little bit specific, relative to, I think, expectations in the market, we don't feel that we're far away from those numbers. But we will see our revenues coming slightly below our previous guidance in terms of organic growth.
I also, again, would like to reiterate that we do look or view our future quite positively, and we are, as you, looking forward to the time when we can sort of get clarity around the FDA and reschedule the Capital Markets Day to provide that substance that I think you probably need in order to share our view on the future and our opportunities there. So with that, thank you very much.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.