Good day, ladies and gentlemen, and welcome to the First Quarter Results Release Conference Call. For your information, today's conference is being recorded, and at this time, I would like to turn the call over to Johan Malmquist. Please go ahead.
Well, thank you, operator, and a warm welcome to all of you and to this telephone conference covering our first quarter's earnings release. I am, as always, I should add, joined by Ulf Grunander, our CFO. We'll stick to the normal agenda, which means that me and Ulf will give you an overview of the quarter. That will be followed up with a question and answer session, and we will strive to conclude this telephone conference by 4:00 P.M.
Swedish time, I should add. So if I move into the presentation that I know that you can access from the web, I think there are instructions in our press release that you could follow, and I will use that format. So moving on and starting with the order development.
We had a somewhat soft quarter, order-wise, with an organic growth of orders of 0.3%. And if we factor in the manufacturing challenges that we have informed about previously and that we have experienced in the cardiovascular division, the growth in orders would have been around 2%-3% or closer to 3%.
From a business area perspective, Medical Systems showed an organic drop in orders of 3.4%, making that same adjustment that would have meant an organic order growth of about 1.5% against the prior year, when orders grew organically by approximately 7.5%. The cardiovascular division performed well in the quarter despite the supply chain issues that we had, but we had a weaker quarter in our Critical Care division.
In extended care, orders grew organically by just under 1% against a weak prior year quarter. We have a negative volume trend in the rental business of our wound care franchise, primarily in the United States, which we believe will prevail for some time to come, and that is affecting all players in the market, so this is not a unique Getinge phenomenon.
Finally, infection control posted a good quarter with an organic order growth of 8.9%, again, against a prior year quarter that was somewhat weaker. From a geographical standpoint, and I think that the weakness is best seen from, from a geographical standpoint this quarter, I think you can say that we performed well on developed markets across the board.
Western Europe is performing better as a whole, and I think this is a trend that we've seen from the latter part of last year. North America, I would describe as stable, although not reflected in this quarter. Again, if we adjust for the cardiovascular, our order growth would have been closer to the 4%, which is maybe where we would have expected to see it.
Also, the other developed markets that fall into the rest of the world, Japan, Australia, are performing well, both of them, and, and we expect them to continue to perform well through the year. However, if we look to the developing economies, we've had a weak quarter, particularly as relates to the BRIC countries.
We expect to see stronger order generation towards the end of this, current quarter, so the second quarter and into the second half of the year, but the first quarter has decidedly been a weak one. Moving on to group results. Revenue declined nominally by 0.6%, which translates into 0.4% on a currency and acquisition-adjusted basis. This number is somewhat better than we had indicated in our earnings outlook for Q1.
The lower gross margin in the quarter can be explained by the negative currency hedging effect, which accounts for about 0.7% against the delta of 1%, and the rest, you could say, is probably more related to the cardiovascular supply chain challenges we've had. Expenses in the period grew by about 2%. This gives an EBITA result of SEK 670 versus SEK 792 in the quarter.
The delta between the two periods is made up of the currency hedging of some SEK 40 million, the supply chain issues in the cardiovascular division of some SEK 60 million, and also the declining revenues that we've experienced in this period. So you will notice we also booked in the quarter here a restructuring charge of SEK 814 million. Approximately SEK 800 million of that relates to the remediation work that we are undertaking to strengthen the Medical Systems quality management system.
And this is something that we ended up discussing with our auditors, and we feel that this is a better way. We will obviously continue to report on a quarterly basis what is expensed in that last quarter, and for the first quarter of this year, that amounted to a little bit over SEK 80 million Swedish Kronas. Medical Systems.
In Medical Systems, revenue grew organically by 1.4% and nominally by 0.5%, with decent performance from both the cardiovascular and the surgical workplaces division. In the critical care division, we saw declining revenues. The lower gross margin reflects the manufacturing challenges I've already mentioned a couple of times in the cardiovascular division, negative currency hedging effects, and prevailing mixed challenges within the critical care division.
Expenses have increased at a very modest rate in the quarter, and finally, we can see that EBITA result is down by some SEK 70 million, and again, back principally sort of explained by this, supply chain challenge we've had in cardiovascular. Moving on to the highlights. We are working hard right now on improving our quality systems, and, we've made good product progress during the quarter.
We took this provision that I mentioned before, and it covers all the expenses that we expect to incur until the completion of the remediation work by the middle of next year. As you may have seen also from our previous press release, we have secured now close to 80% of the outstanding shares in Pulsion Medical, and expect to take control of the company, in the near-term future.
The restructuring program that we announced in our year-end report 2013, pertaining to the critical care division, has been completed during the quarter. The program will lead to annual savings of approximately SEK 60 million on a going-forward basis. Finally, our ongoing restructuring program relative to our global manufacturing is moving towards completion in the first half of 2015. We are experiencing some delays in this project.
I don't know, but in the previous release, we said Q1, and this is related to the quality system remediation work we're doing. We're taking a little bit height of certain validation work that we need to complete before the transfer takes place. On to Extended Care. Net sales in the quarter declined nominally by 1.5% and organically by 2.4%. Our patient handling franchise is growing well, but as I mentioned earlier, some growth challenges when it comes to the rental of support services are being experienced.
Again, as I said, this is not a company-specific challenge. We notice the same sort of declines from the other three, four larger players on the rental of support services. Gross margins have improved somewhat on the back of continuing supply chain efficiencies.
Expenses were up by about 10% in the quarter, and this reflects some one-off charges amounting to about SEK 40 million that relates to the integration of TSS, but do not qualify as restructuring charges as such. So excluding these charges, I would say that the underlying expense development was quite normal. On to the highlights for Extended Care.
The restructuring program around the closure of the Eslöv facility and the move of that production to our Poznań facility has been completed in the quarter, and the savings that we have previously announced will be realized with full effect from 2015. We expect to complete the integration of TSS during the first half of this year, so essentially in the next quarter.
Cost synergies are, I would say, materially bigger than we had anticipated at the time of the acquisitions, but the savings have been eaten up by a challenging demand situation for rental support services. In the quarter, we received the Red Dot Award in recognition of our new and unique showering solution, which is called the Carevo. That was launched actually at the second half of last year. Final business area, Infection Control.
Net sales declined by 0.19%, both nominally and organically. Factory utilization has been seasonally low, which in combination with currency hedging effects, resulted in the decline of the gross margin by some 2%, which is quite in accordance with our plan. Operating costs are down quite substantially compared to last year, and it's as a result of the ongoing efficiency improvement programs that we're undertaking.
This means that the EBITA margin and the EBITA earnings level is, is pretty level with last year. On the highlights, for Infection Control, we continue to make good progress towards improving the infection control business structurally. In the quarter, we initiated discussions with union representation with the aim of concentrating the manufacturing of all Life Science sterilizers to our plant in Sweden, and consequently, close our production facility in Mansfield, in England.
We also completed the closure of our production facility in Sjöbo, in Sweden, and the production has already been transferred to our plant in Suzhou, in China. And finally, we announced the establishment of a new production plant in Poznań, in Poland, that will be focused on producing the higher volume, more standardized products in the future. And this plant is co-located with our existing plant within the Extended Care Business Area.
In the quarter, we also launched a new washer disinfector that has been specifically developed for the mid-tier product segment in emerging markets. Together with the sterilizer product from our Turkish Trans acquisition that took place in the beginning of last year, we are now starting to build a more comprehensive range of product that are sort of trying to address the more price-sensitive customer segments in developing economies. With that, I believe I hand over to Ulf here for some additional comments.
Okay, Johan, thank you very much. In the first quarter of 2014, the operating cash flow amounted to SEK 438 million, which represent an improvement of approximately 20% compared with the same period last year. Even though the quarter included a higher payment of restructuring of SEK 160 million, the reduction in working capital of approximately 8 million, 80 million kroner funded the improved cash flow.
The quarter cash conversion amounted to 44%, adjusted for the provision of SEK 799 million relating to the strengthening of the medical system, quality management system. DIO are down by 5 days since year-end 2013. Meanwhile, DSO are up by 1 day. In general, good performance of the group's working capital. Moving over to the balance sheet.
The closing net debt amounted to, as we call, SEK 20.2 billion, and the closing equity amounted to SEK 15.4 billion Swedish kronor, which resulted in a net debt to equity ratio of 1.3 and an equity asset ratio to 34%. A part of the explanation to the change in both equity and net is that the dividend came through in the first quarter this year. As part of the net debt balance, it is also increased by the completion of the acquisition of Pulsion by SEK 970 million Swedish krona. The group balance sheet at the end of March remains solid.
Thank you, Ulf. Few quick comments around the outlook then. With the exception of the charges that relate to the reinforcement of the quality management system within Medical Systems, we have made no changes to our full year outlook. Our most recent internal forecast exercise still points to an organic revenue growth of approximately 4% for the year. But we at the same time, we recognize that the visibility on some emerging markets is, is somewhat low at this point in time.
As we have already communicated previously, we expect to present details around our revised financial targets during our upcoming Capital Markets Day on the twenty-seventh of May in Stockholm, where I hope that we will have the pleasure of seeing as many of you as possible. With that, I would like to hand over for questions.
Thank you. If you would like to ask a question at this time, please press the star key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one if you wish to ask a question at this time. We will take our first question from Michael Jungling of Morgan Stanley. Please go ahead.
Great, thank you for taking my questions. I have three. Firstly, on the emerging markets, can you give us an indication why the emerging markets have slowed down so much for you? If I look at the last sort of seven or eight quarters, comp adjusted, it is the worst number that we've seen to date.
Also on the emerging markets, how much is your guidance of 4% organic growth this year reliant on an improvement in the emerging markets in the second half of this year? Then a question about 2014, EBITDA guidance or some sort of profitability growth guidance. Will you give us that number at your Capital Markets Day, or will the Capital Markets Day only give us some guidance for the medium term?
And then, question number three is on also the Capital Markets Day restructuring programs. How much of the upside, I mean, you- it, it seems like from the, from the press release, you're giving us high hopes, of material savings, but we've now seen, for instance, with, with the acquisition of mattresses from KCI, that a lot of the upside was eaten away by other pressures.
How much of the upside are you willing to, if you like, release to us, and how much are you willing to keep in your back pocket just in case the environment gets, gets worse for you and, and, and benefits are eaten up, due to market conditions? Thank you.
Okey-dokey, that was—thank you, Michael. I'll, I may ask you for repeating some of your questions. I was trying to scribble them down as quickly as I could. But on the emerging markets, I mean, I wouldn't—there are some events in emerging markets that I would say are specifics.
And I think we've talked about before, the more cautious view of buyers in the Chinese environment, for example, that I would say has still prevailed through the first quarter and in conjunction with the crackdown on corruption in China. So I think we're still feeling a little bit of that, but sort of fundamentally, we have strong beliefs in the growth prospects of that market.
But the first quarter has been a little bit like the last quarter of last year in terms of sort of a cautiousness that I don't feel is sort of related to the needs of the market and ongoing construction and so forth. We've also seen some changes in how funding gets released in Russia, which means that where orders typically used to come a little bit earlier in the year, administratively, that funding is now released a little bit later in the year.
And hence, also the commentary I made around starting to pick up towards the latter end of Q2 and into the second half of the year. Then we have some comp issues, if we talk about Brazil, for example.
So if we, if we look specifically at this last quarter, then it is, I would say, Brazil, and it is Russia, where Russia is more of an administrative change, and Brazil was just very strong orders in the first quarter of last year. I believe if you look at medical system, where the biggest difference has occurred, we had +20% across this rest of the world segment last year, organically, and we're at -10% this year.
So if you, again, even things out a little bit, you come to more of an, sort of a, a more normalized average level. So, but, but it is fair to say that it is a situation where challenges coincides a little bit across more than one market at the same time.
And again, I would say that we obviously have relatively solid pipelines of projects that we know are ongoing. And you can say that our outlook, both when it comes to timing and the magnitude of orders in emerging markets, is very much based on those assessments of what's coming through, by when, and what is the likelihood of us getting that specific project? I think your question is sort of was how confident we are in the second half of and what contribution that the emerging markets would need to make to come to the 4%.
If we assume that the aggregate of the developed markets could well be of that magnitude. Guessing now, I could think that emerging markets and developed markets for the year will contribute a somewhat similar amount towards top-line growth. Does that make sense?
Yes, it does.
Yeah.
And then question number two on the 2014 guidance, will you give us any profit guidance this year, or is it going to be silence on that topic, on that front?
I think, I mean, we, if I answer your last question first, when it comes to the operating margin development or the margin targets, and so we've done a very comprehensive bottoms-up analysis, and we still have some work to do on this in preparation for our meeting on the twenty-seventh of May.
What we have made sure, and what I hope that we will be able to convey, are the specific measures that we plan to do to substantiate the plan better than I feel that we have done in the past. We will be most likely showing the performance on a business area level and also, obviously, the aggregate level up to the corporate.
I think it's to give as much transparency as we can because, I mean, I think the activities we can detail, and I think the cost savings, again, I think that we will realize that what we probably need to elaborate a little bit more on where there are elements of uncertainty is, of course, top line and pricing environment.
But we will try and factor that in as much as possible and, generally have sort of a very open sort of display of our thoughts and the process. When it comes to this year, I think it's highly unlikely that we will give a short-term... I think there will be very limited upside for us to do that, to be honest, at this year. But I don't rule it out, but I think it's unlikely.
Okay. Just on the Capital Markets Day, I mean, if we go back to TSS, you sort of gave us some hopes that the restructuring charges were, or sorry, that the synergies were larger than you had initially hoped, and then today, quite casually, you say they've all been eaten up.
One of the what I don't mean this in a mean way, but I'm sort of concerned that you'll give us a margin target, and a year later, or so, you'll say, "Well, I'm sorry, but they've all been eaten up." Well, so will you keep enough up your sleeve just to avoid another round of disappointment that these benefits suddenly evaporate?
I think we'll be mindful about all of this. I think it's in the interest of you know good transparency. I think that we will show you what the numbers are, and then hopefully have some degree of sort of a sensitivity analysis or an understanding of the risk inherent in any plan that sort of stretches years into the future.
What I think that we will convey very clearly is that we're very ambitious in the activities that we plan to undertake to continue to improve this business. But there are obviously factors beyond our control, and yes, I think there will be an element of cautiousness, but I don't feel that we have an intention of sandbagging.
Great. Thank you.
Thank you, Michael. Thank you.
The next question comes from Richard Koch of Kepler. Please go ahead.
Yeah, hi. Could you please explain the rationale behind changing your mind and then all of a sudden charge the full consultancy cost, and then this just one quarter?
Yeah, I, I think it's a, how can I put it? We felt like if we can put that somehow behind us in as a charge and then charge against it, it's a very well-defined activity, one that we've gone in sort of in great detail to quantify. This seemed like the better of the two options. It's no more complicated than that.
You're also stating that it's gonna be probably over 5 or 6 quarters. I mean, what's-
Well, we have one quarter has passed, right, Richard?
Ah, okay.
The first quarter is gone.
Yeah. I think just one month has passed, but okay, fine, I see. Could you provide us with any form of update on this whole situation? Has anything changed? Do you know more now than you knew a month ago?
No, I must say, I think with... It's like when you start on a project like this, and you have outside people helping us identify the shortcomings, you come up with a very, very comprehensive list. If you consider the width of our portfolio, when you really go into details, and you know that you have validation work behind essentially every product that you need to undertake.
I think now we have a good grip on the situation. I would say that leadership that has responsibility for this have popped their head above the surface, and I think we have a good overview. I feel we're making good progress on the plan, and I think that's what I can say.
I think with the rate of progress we're making now, we will complete the program as scheduled, and as indicated.
Okay, thank you.
You're welcome.
Now, the next question comes from Justin Morris of Bank of America Merrill Lynch. Please go ahead.
Hi, gentlemen. Thanks for taking my questions. First one is just, again, on the slowdown in emerging market orders. I mean, how much in terms, you know, anecdotally, have you heard about the EM currency weakness, just, you know, making capital equipment that's manufactured abroad a lot more expensive to buy?
And, you know, given the currency situation at the moment, why would the emerging market orders improve going forward? So that's kind of my first question. I'll go into the others after, if that's okay?
Yeah. No, I mean, I would say that, I mean, currency is, of course, a factor here, but I would say where our business is today, we're mostly competing with other Western companies. So we're up against companies that have their costs in dollars and euros also in these emerging markets.
I think that the sensation is if we adjust our pricing in accordance with the currency fluctuations, that our customers simply have the same amount of money to deal with that they had yesterday. I mean, if I take India as an example, which has had quite significant currency fluctuations, and I think I've mentioned this before, we sell. Where we have our own sister companies, we typically sell in the receiving country's currency.
So we sell in rupees into India, and then they sell it in rupees to their customers, so the exchange rates are absorbed at plant level. We took the stance of more aggressively push our prices up, recognizing that our competition is not Indian local companies, but other international companies. So, but that has. India is not a market where I would say that we've seen any sort of deviations from plan in terms of volumes.
So you haven't felt pricing under pressure specifically because of EM currency issues?
No.
Okay.
No.
Okay, thanks. My second question was just on the Medical Systems orders, were obviously also quite weak, even if you excluded the cardiovascular disruptions, they were kind of flat. I mean, I know the comp was quite tough, but the commentary on critical care sales being weak.
I just wondered if you could give some commentary around how your new ventilator is being received, and whether you feel there's actually, you know, a market for a new high-end ventilator at the moment, if you're still getting mixed pressures. You know, because EM order growth was weak in Medical Systems, so you'd think that would actually help the mix because EM was buying the lower-end ventilators. So some color around that would be helpful.
Mm-hmm. Yeah, I think it's a fair comment. I would say that Servo-U has been extremely well received. I think I'm fair in making that statement. But what I would say is that the launch and getting it introduced takes its time, and we haven't made the introduction into US yet.
We haven't secured regulatory approval yet for the product, and the product isn't approved in Japan either, which are two relatively important markets for us. I would say some of the more, if I call it margin issues in critical care, is also, to some extent, volume related because of the softer top line in this quarter.
But we haven't seen any significant shifts in mix in a favorable direction yet, and it's probably attributable to the fact that a trend is a trend, and we're confident it will change, but it hasn't through the first quarter as of yet. So I think that in our outlook for the year, we have some businesses doing better, and but I think critical care will do somewhat better than last year, but not substantially better than last year.
And I think the true and real remedy for our mix challenge is when we launch our TINA, which is a ventilator that is scheduled to hit the market in 2015. At that stage, we will have a totally different cost platform for our emerging markets offering on the ventilatory side.
Okay, that's great. And then my last question is just on Infection Control, seemed to be a relatively bright spot in terms of orders, albeit against a relatively easy comp. I mean, how much of that acceleration in orders is, do you think is market versus maybe market share gains from launching your new sterilizer? Has that had any kind of impact yet? Yeah, some color around that would be helpful.
I think that when I look at the market where I'm really pleased with the development is in North America, and that follows on from a very comprehensive overhaul that we made of our sales organization in the United States. This goes back now 18 months. And if you look at North America, it's sort of a good quarter on a good quarter, really.
Mm.
When you look to Europe, it's more the comps, although the relative performance is better than the two other business areas. I think one should realize that this is a business area that has been under some turmoil with relatively frequent management changes if you go back five years. We've now had sort of good stability in the management team, and I think that consistency has helped us to perform better.
The market where I would say that we were disappointed about the performance last year, and where we continue to be a little bit disappointed, is on the emerging market side, although some of that is obviously market related. But that's maybe the only area sort of where growth-wise, I feel that we're not doing well or as well as we should.
Okay. And in terms of the new sterilizer, how is the ramp-up of that launch going? You know, when should we expect that to be up to speed? 'Cause I, I believe that will have a margin benefit as well as-
Yeah
... a top-line benefit. So, yes, some color on that would be great.
Yeah. Not, I would say not before the second half of the year. That's when I would say that it starts to sort of have an impact on the business.
Okay.
It's long lead time business in Infection Control.
Okay. That's great. Thanks. I'll go back in the queue.
Thank you, Justin. Thank you.
We take our next question from Mattias Haglund of Danske Markets. Please go ahead.
Good afternoon. Thanks so much. Firstly, what risk do you see now a bit into this process that needs after your quality management systems for other divisions as well, I guess, in particular, for Extended Care? Any more thoughts on whether you have needs elsewhere in the group, you know, a few months into this process for Medical Systems?
And then secondly, what, if any, signs are there that the investment program you're going through has led to lost business for you, either in lost tenders or due to some capacity constraints as these consultants may conflict with plant activities in your current sites? Thank you.
Yeah. No, I think that it's a fair question, I think the first one. So, I would maybe suggest that Extended Care went through a similar but more self-imposed improvement program from 2005 onwards, I would say. And I think that some of you may recall the import ban that we received at one of our facilities, which was probably a bit of a wake-up call to do a sort of a more full review of all of the plants that had exposure to the US market.
So a lot of reinforcement work has been done in Extended Care, and we've had a relatively clean bill of health in the audits that have been performed in the last couple of years by the FDA. Again, this is not an area where you ever have a fix. It's one where you constantly need to move the bar and work on it. But I would say that within Extended Care, they've taken this very seriously, and I feel pretty confident that we're in good standing order there from a regulatory perspective.
But again, it's something to work on all the time. Infection Control has very few plants exposed to the US FDA. We have one Swedish plant, which went through an FDA audit last year without observations, and we have our US plant, which I believe went through an audit two years ago with one minor observation. But again, same commentary. This is something that we need to consistently work on to improve and maintain.
So, at this point in time, I would still feel that it is within medical system that the challenging lies. However, I do believe that from an FDA perspective, I would anticipate FDA to at least form an opinion if this is a group problem or if this is a Medical Systems problem. So, I would suggest that we are on high alert across all of our facilities to make sure that we are very mindful about this aspect. Then your second question, Matthias, on investments.
I mean, you know, I would say that when it comes to the Medical Systems business, we're very much focused on the remediation work on the quality side, and obviously also in the process making sure that we build robust quality management systems that are well aligned with our operational activities, so that one is not super-superimposed on the others. I think that's very important to sort of have a flexible organization and one that is sort of agile.
So far, I mean, we've had some minor disturbances in supply, but they're more based on that if there is the slightest question mark whether a product is fit or not, or a raw material or a supply is fit, then we take safe before unsafe in every single instance. So, we may have had some of those situations, but largely, I would say that we have continued to supply in a normal fashion.
Your order intake organically from Medical Systems would most likely have been similar, -3.4%.
Yeah, I would say so. And I think, again, apart from the SEK 130 million-SEK 150 million of cardiovascular revenues that were lost because of raw material supplies that have absolutely nothing to do with the remediation work we're doing. This was a raw material specification that necessitated multiple revalidations and reworks of our covered stents to make them as good as they needed to be.
That is really what caused that, and that I would say to 90% is now behind us, and in the next few weeks here, we will have sort of reached a normalized supply situation on our Covered Stents again.
Perfect. Thanks so much.
Thank you.
Lars Hevreng of SEB has the next question. Please go ahead.
Thanks. Can you please say anything more about the product mix challenges you're referring to in the critical care division, and particularly the dynamics behind that? And your comment in the report on why you are assuming that this is gonna be the situation also for the full year. If you could elaborate on that.
And the other question is on your CapEx plans for the year, on the back end, that you spent SEK 1 billion last year. Can you say anything about that level and the cost assumptions you have for the year, and the assumed depreciation and amortization plans you have for the year?
Yeah. If we... Well, I mean, I think the easy answer to your first question, Lars, is that the mix, the mix challenge is basically the same, a little bit too much Servo-s and anesthesia, and a little bit too few Servo-i's in use. I think that is the reality. The Servo-u will, and is picking up, but as I said, it doesn't have access to all the markets it's destined to be supplied to, at this point in time. But it is a great product from the feedback we have received. It's like we get feedback like, you know, a child could run this. It's so easy and so intuitive to use.
I think the people who made the experience are extremely happy with the product, and I don't think there's anything quite like it out on the market, to be frank. So, I'm pretty confident that we'll take over, and it comes at a very different and more attractive price point than the Servo-i, but it isn't out across all of the geographies.
The Servo-s, as I've said, is still a too big proportion of our business. And as I commented earlier also to Justin Morris, is that we are replacing that with a more appropriate product from a cost perspective, that will correct it and give it a margin that is equivalent to the Servo-u, and possibly a little bit better.
And then we're doing, again, we're making very good progress on the anesthesia machine, but it will be diluted to margin until we've reached volumes that are higher than what we're experiencing right now. So, so those are still sort of the challenges we have. Then we have experienced lower volumes, in this quarter, which is not sort of related to the pro-products we have, but more related to the available market during the first quarter.
We don't see this as a prevailing system, but we... or prevailing situation. Our forecast still expects growth, with a good level of growth for the critical care division for the full 12-month period this year. I think you had another question, Lars, I maybe failed to- On the CapEx.
Yeah, CapEx. So perhaps if you-
Yeah, I think we are estimating CapEx to be in the range of SEK 1 billion this year. And I also believe you asked about the depreciation and amortization.
Yes.
I think the depreciation will be around SEK 900 million, and I think the amortization of development, the capitalized development project, will be around SEK 400 million. And then if you take amortization on acquired assets, will be around SEK 600 million.
That includes the 10 months of Pulsion, I guess, but yeah.
Yeah. Correct.
Yeah.
Correct.
Okay, thank you. Was it SEK 1.1 billion in CapEx? SEK 1.0.
1 billion in CapEx, approximately.
Okay, thank you. Thank you.
Thank you, Lars.
We now take a question of Kristofer Liljeberg of Carnegie. Please go ahead.
Yeah. Hi, guys. First, could you ask the CapEx SEK 1 billion? Did you say capitalized R&D as well?
No, that is only maintenance CapEx.
So, and capitalized R&D, how much is that?
That is going to be roughly SEK 150 million.
Okay. Then the two questions I was thinking about: First, given your commentary about the weak product mix for critical care, continued soft demand for TSS, the fact that you have the negative currency effects, are there anything that you see could help the margin being better for the full year versus 2013?
You mean the gross margin?
No, I mean the EBITDA margin.
Yeah, but we have, as I said, I got that question very, very early on. Will you provide guidance on EBITDA margin for 2014? I believe I answered that question with no.
Okay. Looking then at the second quarter specifically, I don't know, maybe you don't want to comment on that either, but do you think it's a fair assumption that we see sales and earnings grow, or particularly sales growth, being a bit weak, you know, in the second quarter also, before becoming stronger in the second half of the year?
I was thinking about that you still seem to have had some of those production issues here in the first month of the second quarter, and also the comment about some of the markets picking up late in the second quarter.
Yeah, I, I think that I would maybe put it this way when it comes to elaborating on the outlook. Given that we, we have the upcoming Capital Markets Day, when we will be talking about the future earnings, performance and, and margins, et cetera, I think that would maybe be the appropriate time to also elaborate on, on other sort of forward-looking, commentary around earnings and so forth. So I, so I would probably leave conversations on that subject until the, the end of May. Hello?
Yeah, that's okay. I hear you. Thank you.
Yeah. All right.
As a reminder, if you wish to ask a question at this time, please press star one on your telephone keypad. The next question comes from Hans Mahler of Handelsbanken. Please go ahead.
Yeah. Hi, good afternoon. I have some questions regarding the FDA issue. And first off, you expensed only two-thirds of the cost for the quality management systems versus what you've guided for on a quarterly basis. Is that just a coincidence, or should we take that as evidence that there should be some downside in your cost guidance?
And secondly, also based on the most recent 483 letter on your Wayne facility, you have promised to correct 16 out of 17 observations by today's date. Has that been accomplished? And lastly, also on Servo-u, do you think that the regulatory approvals in the US could be affected by this process? That's my three questions. Thank you.
Yes. The cost, I mean, on the cost for the entire program, I would have thought that, if anything, it's not an amount bigger than SEK 800 million. So I would assume that in assessing that amount, that would be sort of more the outer limit of expenses, as sort of a general comment. And to the extent that we don't consume the full SEK 800 million, then the release will occur in exactly the same place where we made the provision, so it will be fully transparent.
On the Warning Letter and the submission there, I don't have the answer to that as we speak, but I would be extremely surprised if, under the circumstances, we have made commitment to undertake certain improvements, and then we decide not to do them, or for different reasons, we don't. So I would probably, without the knowledge, say, yes, that has been done.
But wasn't that the case? Sorry, wasn't that the case in the past that you didn't?
No, I think it's one thing is to solve the problem. The second one is to solve it to a satisfactory level, and that you won't know until there is a reinspection.
Understand. Okay.
If you take then the Servo-u, I don't believe that if you have, like, if this would have been sort of the Wayne facility, if you're under a Warning Letter, there's certain restriction on the highest class devices that you can't get approval for, which is called sort of the devices requiring Pre-Market Approval or PMA. But there are rarely or ever any restrictions on obtaining approval for other class devices. So I would say that it is somewhat coincidental and can have to do with workload. It's worth noting that the FDA introduced a Class IIa and IIb.
They broke up the IIa and IIb, where the IIb is the slightly higher classification of within what used to be all the Class II, and a ventilator is now a Class IIb, so it's a little bit more of a more scrutiny, you could say, on, on that type of device.
Okay. Thank you very much.
Thank you, Hans.
We now take a question from Michael Jungling of Morgan Stanley.
Great. I have two more follow-up questions. For the fiscal year 2014, can you please give guidance on what the FX transactional EBIT margin impact will be, by division? That will be helpful. And then secondly, on the covered stent graft, my understanding was that I thought all sizes had been available except one size, beginning 1 April 2014, meaning that the impact, the negative impact that you had in the first quarter should virtually have been fully reversed in Q2. Is my understanding incorrect?
... No, I think that's pretty much accurate, Michael, on the covered stents question.
So for Q2 then, the SEK 60 million or so that we lost in Q1 should probably-
Mm.
Should probably that SEK 60 million should come back in Q2?
No.
Or pretty close.
No, I think we've been there. No, I think we have. Well, it depends on how you... What I believe is lost, is lost. It's not like, you know, people sit and wait for a quarter for a stent implantation. But we would resume normal supply levels from the second quarter onwards.
Exactly. But I didn't mean that these people are waiting to have their graft, but effectively, anyone who would then want to reorder the product, you would expect a similar sort of run rate that you had previously to resurfacing Q2.
Absolutely.
Great.
That's accurate.
Great.
Yes. It's a larger diameter Covered Stent that I think is still in final sort of verification work. But, so I think your description is accurate. The 250, yeah, I would maybe ask Ulf to reach out to you separately on the split of the 250 in hedging effects that we have guided for in this year, into what divisions it falls. I think on a high level, that proportionately, a proportionate high, a relatively high proportion of that will fall into Infection Control. I believe that number is SEK 90 million. And-
Medical systems, so-
Medical probably up to that, and then a smaller amount in-
Yes
... Extended Care, simply because their production location is not so much, I mean, it's Poland and China. That is the Extended Care's major sites today from a production standpoint. But I can have Ulf give you a call here after the meeting.
Yes. Yes, please, because to me, it's not the actual amount, but more so what you think the percentage impact would be on the margin side. Are you losing 30 basis points or 50 basis points, and by what division? I just want to make sure that the math is correct. Thank you.
Okay, no problem. Okay.
Our final question in the queue for today comes from Scott Bardo of Berenberg. Please go ahead.
Yeah, thanks for taking my questions. Yeah, it seems that the critical care division is clearly having some weakness, some softness, which is impacting the Medical Systems business and some of your geographic sales. So what would be very helpful off the cuff is just to understand then what the revenues are for critical care and the split of ventilation and anesthesia, just to help us, you know, try and better model those mix effects going forward.
Mm-hmm.
Could you provide that to us?
No, I mean, we're already, I believe, very generous, actually, with details. I think that, you know, we try and draw a line somewhere on the level of detail. But, you know, I think that we have conveyed that the overall franchise is about SEK 2.4 billion, or thereabout. And now with Pulsion coming on top, it's probably going to end up around SEK 2.7 billion for this year. And, so I think on the basis of that, you have to sort of try and model on your own, that one.
Okay.
Uh, mm-hmm.
So just to understand fully, because we were talking about some soft- softness in mix effects, mainly aligned to, the ventilator business and, and at the same time, some softness in emerging countries. So could you help us understand, are you actually losing out to tenders in the US, Japan, emerging markets, given that you haven't got your sort of complete offering approved in these various territories? Is that part of the issue?
That, I mean, again, as we talk about one quarter here, which is a very short period of time. But if we look to last year, I think we said that our volume overall was flattish for the full 12 months, and I think that was probably well in line with others and possibly better than quite a few of the major players in the ventilation business.
So I don't feel that we've lost out. I'd be the first one to admit that we missed a beat in replacing the Servo-i, because of the delays we experienced in the anesthesia development project that I believe we were quite transparent about. And ideally, we would have liked to see the Servo-u out a year earlier than it ended up.
It may have had some marginal impact on the business, but all in all, from a volume perspective, I'm not dissatisfied with last year. I'm obviously not happy with what we've seen in the first quarter, but it's not what we're planning for the full year. As I said, we're looking to healthy organic growth in the critical care division for the full 12-month period of 2014.
Okay, thank you. And just last follow-up on this part before a quick question on another business. So I'm slightly surprised to hear that the anesthesia products are not up to or still dilutive to your margin. Now, I think, you know, these products have now been on the market for over 3 years, and it was always my understanding that within 24 months or so was the target to get these up to sort of divisional profitability.
So is this what is the issue here? Is it just related to North America, you not being in that market? Or can you perhaps at least shine sort of share some understanding why you're still a little bit behind expectations here?
Yeah, it's a, I mean, the... You could put it this way, that when the project got delayed by approximately a year, and we had a relatively, you could say that we had not the entire, but the majority of the R&D resources in the critical care division engaged in this project. So a one-year delay is a one-year extra cost to be amortized over the expected life length of this platform.
And this has meant that the cost base is a little bit higher than what's originally planned for the business, right? And so that is one element. But other than that, there isn't anything unique or special. You look a little bit to the US market, the fact that we're not there, but we're making progress in that direction.
We are capturing good, good, prices on it, but, but the cost base is not where it will be ultimately. So, I don't think I can add much more to that at this point in time. It will continue to be diluted to gross margin for this year and probably a bit into next year.
But, it will... And I think what one needs to remember also, that this is- it's a significant difference between developing an entirely new platform and developing the next generation Servo-u, even if they both represent new products, because there was a relatively-- it was like establishing an entirely new business with anesthesia. So, for that reason, I think that the investment that have gone into the anesthesia platform is higher than what the next generation will be, for example. So,
Okay, thanks. Just a quick follow-up on the extended care business. You mentioned that there's some weakness currently going on for wound surfaces at the moment.
Mm-hmm.
And that was also my understanding, that wound surfaces was the biggest business for TSS. And I think initially, you had some expectations to stabilize and regrow that business-
Mm-hmm
... in North America. So given those comments that you expect weakness in wound to continue, is it now you've made a reassessment of the growth prospects for TSS, and now expect that to sort of contract going forward, or?
No, not for all eternity. I think there is a... What has happened a little bit is that cash is relatively cheap. And therefore, I would say that what customers have tended to do over the past 24 months, to a much larger extent than we had anticipated, is to buy rather than rent product.
This, I would say, is not an entirely rational behavior, but it is customer's response to how funding is made available. So, I think this is what the entire industry is, to some extent, suffering from at this point in time. So I think that, I mean, to be practical, we substantially outperform on the cost synergies on this acquisition.
As I said, that has been, not all of it, but to a large extent, eaten up by a softer top line than anticipated. The market will regain some form of equilibrium between what is the appropriate portfolio of products for a hospital to own themselves, and what is the appropriate volume of products to rent to deal with peak volumes and specialty situations.
You may not wish to have highly specialized support solutions yourself, but rather rent them. So the market is in the near future, I think, trying to seek that new equilibrium. But right now, the trend for rental is not favorable. And at the same time, you could say that since TSS came from an almost exclusive rental model, the strength of their capital portfolio was not that good.
We were well aware of that when we acquired the company. So together with this acquisition was a relatively comprehensive product pipeline of new products to address that. So come, I believe it is the end of the third quarter and into the fourth quarter, we have two new products that will go into the portfolio that will address the capital sales side much better than we do with the current portfolio.
So, we're dealing with them. But this is, you know, this is a development of the market that was very, very difficult to ascertain at the time of the acquisition. So these are developments, these are changes that happen in a business. So I'm just telling you the way it is that we met the cost targets, but the market isn't with us at this point in time on this, on the rental side.
Okay, got it. If I can just quick-squeeze one quick one in, just on, on debt. It appears that your, sort of, well, the quarterly leverage is 1.3 times, which is I guess, pushing on towards your debt covenants, if, if, were the case on a full year basis. Can you just, and obviously, there's a lot of adjustments, there's a lot of cash restructuring costs going on at the moment.
And, you know, just, just trying to get a sense of, building a number which is reflective of the underlying business. But what would be incredibly helpful is if you could at least give us some guidance this year as to where you see group leverage. That would be a helpful number, if you could give that to us.
Around 1.2 by the end of the year, I would say. I mean, one should remember, like we've said, that this year, the dividend ended up in the first quarter. We have acquired Portchamp for close to SEK 1 billion, so we have SEK 2 billion there. So I mean, that is not a concern. We have good room, also to even if that's maybe not on top of the agenda, to acquire companies, and at least not in Medical Systems at the short term, but that is not a concern. And as I said, come the end of the year, we'll be around 1.2.
That's helpful. Thanks very much indeed.
You're welcome. Okay, now with that, I suggest then that we round off this conference. Anyone who feels that you would like to continue the dialogue with myself and all, feel free to do so. I think I can summarize the first quarter of 2014 as being probably the most challenging quarter in the Getinge history as a listed company. We're very intent on working our way through these challenges.
We continue to have very ambitious plan to grow and to strengthen our operation, and I think that we will have both an interesting and informative Capital Markets Day coming up here in the end of May. And I sincerely hope that all of you, or as many of you as possible, can join us in Stockholm.
So with that, thank you so much, and, I don't know, operator, if you'd like to close the call.
That will conclude today's conference call. Thank you for your time. Ladies and gentlemen, you may disconnect at this time.