Good day, ladies and gentlemen, 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.
Thank you very much, operator, and a warm welcome to all of you. Assisting on this call is, as always, I would say, our CFO, Mr. Ulf Grunander, and we intend to follow the agenda we normally do at our quarterly telephone conferences, meaning that I will give a bit of an overview of the quarter, comments on the financial position by Ulf, and then a few words about, around the outlook for the year before we hand over to the Q&A session. As in previous quarters, this call is supported by a slide presentation that you can access on the web. I would assume that today's release of our third quarter results will be a little bit of a no event, considering that the essential parts of the content was disclosed already a week ago.
But let me move on to the presentation and onto the order development. Overall, our orders grew organically by 2.4% in the quarter, compared to the prior year period, when our orders grew organically by around 3.6%. From a business area perspective, Medical Systems performed well, considering that the orders grew organically by 8.5% in the corresponding quarter last year. Extended Care posted the highest order growth in the quarter, a bit unusual, but also displayed the weakest order development in the prior year period. Infection Control's organic order growth in the period was on the same level as the corresponding quarter a year ago. On a geographical basis, we see encouraging signs in Western Europe, where orders grew organically by close to 8%, with healthy development from all of the business areas.
Now, this is the second quarter in a row with growing orders, and we feel that we might be experiencing a bit of a trend change when it comes to demand, particularly as it relates to the capital equipment side. North America continues to show good stability, and it is worth noting that the growth in the U.S. market has significantly outperformed the Canadian market, and specifically so in this last quarter. That's particularly true for the Medical Systems business that posted order growth in the United States in the double digits organically. Order development for the regions outside of Western Europe and North America was disappointing, even if the development in the prior year period was strong. And in the corresponding quarter last year, the orders in aggregate for the group in the rest of the world region grew by over 17%.
Both Russia and Brazil had very strong order growth in the corresponding quarter of a year ago, and consequently, is where the weakness is this year. Moving on to the results. Revenues increased organically by about 3% in the quarter and should have had a stronger input-impact on operating earnings in the quarter. On an EBITA level, earnings declined by 12.2%. If we adjust for the U.S. medical device tax and the adverse currency movements that we are experiencing, the EBITA results declined by just under 5%. A significant part of the earnings shortfall come from the critical care division within Medical Systems, which posted an EBITA result in the quarter that was about SEK 100 million lower than in the prior year period. The lower gross margin in the quarter compared to last year is the result of essentially three factors.
It's mixed challenges within the critical care division. It is the integration of the newly acquired TSS business, which structurally has lower gross margins compared to extended care in Getinge's underlying business, and also the addition of negative currency hedging effects. Moving on to the Medical Systems business. Our organic revenue growth in this business grew by about 1% in the quarter. As we mentioned earlier, the critical care division had a very weak performance in the quarter, with a drop of EBITA earnings of about SEK 100 million. The drop in performance of the critical care division in the quarter is both an effect of product mix and declining volumes, although the volume growth for the first three quarters in aggregate is up organically by a little bit more than 5%, organically.
The performance of the cardiovascular division continues to be good, and the surgical workplaces division is also performing to expectations. Moving on to the highlights of the Medical Systems Division. Medical Systems has had a busy quarter. We have, during quarter three, initiated the launch of our new ventilator platform, the Servo-u. Now, the Servo-u is a very easy to use and very intuitive ventilator. Part of the challenge for many users of high acuity ventilator is that they struggle to extract the full functionality and the capabilities of the ventilator. The Servo-u has addressed these shortcomings, and I can only say that the initial feedback that we have from customers is very positive indeed. During the quarter, we also started the rollout of the EIRUS in markets outside of the United States. It has received a CE mark.
Now, EIRUS is a new-to-the-world product for the continuous monitoring of blood glucose in critically ill patients, and the product consists of a monitor and a single-use catheter. The inability to maintain blood glucose levels within a certain bandwidth in critically ill patients can result in serious adverse events and potentially death to patients....EIRUS will be the only product on the market with the ability to continuously monitor blood glucose levels in a safe way. The EIRUS also has the ability to monitor lactate levels in patient, which is an important marker for potentially severe cardiac events. We also launched within Medical Systems, the Volista surgical light, which received FDA clearance. Volista is a surgical light equipped with a new technology that allows the operator to automatically and individually adjust each light-emitting diode to optimize shadow dilution and color rendering of the surgical site during open procedures.
When it comes to the more structural activities, the integration of Atrium is progressing to plan and will be finalized before the end of this year. The restructuring of vascular grafts manufacturing that will be concentrated to a single site in La Ciotat in France runs with a little bit of a time delay, but will be completed in the first half of 2014. After the close of the third quarter, we have reached an agreement with U.S. Merit Medical on the sale of two products for mechanical hemostasis. The two product lines have combined revenues of approximately $7 million in 2012, and will be sold, resulting in a net realized gain of approximately SEK 90 million, that will be recorded in the fourth quarter of this year.
Let me move on to Extended Care. The EBITA result for Extended Care increased by a little under 5%, adjusted for the medical device tax and exchange rate movements, the EBITA result increased by a little bit over 11%. The lower gross margin that you can see from the table, and the lower operating margin in the period, is entirely attributable to the TSS acquisition that has been consolidated from November 1, 2012. If we adjust for the TSS business, the underlying EBITA margin for the Extended Care business is on a higher level compared to the prior year. That goes also for the gross margin, which sort of adjusted for TSS, is up compared to the prior year period.
On the activities and the highlights for Extended Care, the integration of TSS is progressing with some minor deviation from the original plan. The cost synergies that we originally identified in conjunction with the acquisition will end up being higher than planned, but the realization of those cost synergies in our P&L will materialize with a time delay. We had anticipated about SEK 50 million more of cost savings to come into this year in our original plan. In other words, our synergies are not lost, but synergies are delayed, so we should see a stronger impact from 2014 onwards. The restructuring of the manufacturing setup within Extended Care that we announced at the beginning of this year is developing according to plan.
The German facility in Wetzlar will be closed before the end of the year, and the larger facility in Eslöv, in Sweden, will be closed during the second quarter of 2014. Savings from this program, when we have reached its full effect in 2015, will amount to about SEK 90 million per annum on a going-forward basis. Infection Control revenue growth, again, from an organic standpoint, has been good in the quarter, at a little bit over 9%. However, because of the adverse currency effect, particularly the strengthening of the Swedish krona, the gross margin has been negatively impacted. You can see that the cost reductions that have been implemented so far in the business area, as part of our profit improvement program, has resulted in a favorable expense development.
EBITA result grew by some 6.5% in the quarter, but again, if we adjust the EBITA result for the medical device tax, and for the negative exchange rates, then we have an EBITA that grew by almost 17% in the quarter. On the activities for Infection Control, we can just say that the profit improvement program that was presented at the beginning of this year is developing well. We will complete the closure of one of our Swedish plants in Sweden by the end of the year, and we have been quite active in the right sizing, and the overall headcount adjustment in the business area, and will continue to be so for the remainder of this year.
We've also announced in the quarter that we will be establishing an innovation center in Gothenburg, in proximity to the medical faculty, and the University of Gothenburg. Innovation and product development will become an increasingly important growth driver for Infection Control going forward, and with an organization that will be increasingly functional in design, this is an important step and an important reinforcement. We also announced in this quarterly press release that we have the intention of relocating our corporate headquarters to Gothenburg, some 120 kilometers north of Getinge. Reason for that is that as part of our future plans to improve competitiveness and profitability, we will seek to better coordinate and integrate certain activities across our three business areas.
We're particularly interested in developing scale advantage around shared service functions within finance, personnel, IT, administration, and sourcing, and believe the potential is quite significant. However, this new role of the corporate headquarters will require us to recruit certain key competencies, which will be difficult to access and find in our current location, in addition to the weak communications we have been getting at. So the move of the corporate offices will affect some 20 people, of which a number already live in the Gothenburg area. We expect the transfer of the headquarters functions to be completed somewhere in the beginning of 2014. So with that, I hand over to Ulf Grunander.
Thank you, Johan. The group's cash flow continued to improve in the third quarter and amounted to SEK 923 million. The strong cash flow represented 78.2% of the quarter's EBITA. During the quarter, inventory days were reduced by 2 days to 134 days, and the receivable days remained at the level of 71 days. Continuously strong focus on collecting accounts receivable and improving efficiency within the supply chain have had and will result in good development of working capital. In summary, the group's average working capital has, since year-end 2012, been reduced by SEK 150 million up to the end of September 2013. If adjusting for the currency changes and acquisition, the net debt in the second quarter decreased by approximately SEK 500 million.
The closing net debt amounted to SEK 18.6 billion, and the closing equity amounted to SEK 15.3 billion, which resulted in a net debt equity ratio of 1.22, and an equity asset ratio of 35.4%. The group has a strong balance sheet at the end of September and has an acquisition capacity of approximately SEK 7-8 billion.
Thank you, Ulf. Just a few final comments then around the outlook. As we have already disclosed last week, we believe now that the organic growth, both from an orders and a revenue standpoint, will end up somewhere in the range from 3%-4%, and most likely, I would say, at the upper end of that 3%-4% range. When it comes to the result, again, as we communicated in the pre-announcement of our results for the quarter, we expect the full year result on a pre-tax basis to end up in the range between SEK 3 billion-SEK 3.2 billion. This will include the restructuring charges of some SEK 450 million. It will also include other sort of non-recurring items.
It fully sort of reflects both the translation and the transaction effects, and it fully reflects the full year position when it comes to the impact of the Medical device tax. So this should be sort of the full and final pre-tax numbers come the end of the year. So with that, I'd like to hand over for the Q&A session operator.
Thank you. If you would like to ask a question at this time, please press the * or asterisk 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 * two. Again, please press * one to ask a question. Today's first question comes from Justin Mars from Bank of America. Please go ahead.
Hi, gentlemen. Thanks for taking my questions. Firstly, could you just confirm if the SEK 90 million gain on the product divestment is included in your new PBT guidance? And just to add on to that, to a more broader question, it seems to me there's a little bit of a disconnect between your top line and your bottom line guidance. Either your top line guidance is conservative, or you need quite a large improvement in the margin in the fourth quarter. So I was just wondering if you could add some color around that, given the significant decline in the margin in the third quarter. That's my first question.
Yeah. No, I think -- thank you, Justin. I think on your first question, the answer is yes. I mean, this was a sort of an a non-recurring item that was anticipated, as you can imagine, at the time when we released the full year guidance for the year with this interval. So the SEK 90 million is included. When it comes to the full year outlook, I would maybe answer it this way, in that, if you look at the year to date, our current organic revenue growth exceeds the indication that we have given for the full year. But, yeah, given that it is sort of a hard number that we have given, it may be a little bit on the conservative side.
If anything, I would maybe suggest that the revenue growth could be a little bit higher.
Mm-hmm.
But I would say that the pre-tax earnings is probably in the right range, the way it is presented. The more important number, if you would ask me, would probably be to ensure that we have a healthy order development now in the fourth quarter. And I believe that should be the case, considering that the prior year order intake in the fourth quarter, I mean, was a -1%. So we should have every chance to beat that number, I hope, in a healthy way.
... Okay, I mean, how would you reconcile the implied improvement in the EBITA margin in the fourth quarter? I mean, would the TSS situation improve in the fourth quarter? Would the ventilator mix situation already be picking up in the fourth quarter? I mean, I realize fourth quarter margin last year already had some TSS headwinds, which I guess helps on the comp side, on the margin, but I'd just appreciate a bit more kind of clarity, maybe by division, where this margin improvement is going to come from.
Yeah, I mean, I think the answer to both those questions is yes. We would anticipate that we will see some kind of improvement in the gross margin generated by the critical care division for the remainder of the year. We've had, as you know, a very challenging first three quarters in critical care, not from a volume standpoint, but from a mix standpoint. And we would anticipate that to change favorably over the fourth quarter, but not a massive change from the beginning of the year. And secondly, since we are sort of gradually gaining cost synergies into the performance of TSS, and we are at the tail end of the implementation of the integration, we are seeing cost synergies accelerating on TSS.
So again, the answer to the second question is that we would anticipate stronger margin contribution from TSS.
Okay, thanks. And a final question, if I may. Obviously, the European and US order development is relatively encouraging, but there does seem to be a slowdown in emerging markets. You mentioned a couple of points. Do you think you're seeing any kind of broad slowdown in the emerging markets? And have you seen any knock-on effect from the controversy we've seen on the pharma side in terms of obviously, GSK and you know, all the bribery allegations and so forth?
I think it is a, I would say that—well, firstly, I would say that the performance of the rest of the world is disappointing for us. In hindsight, there is always sort of excellent explanations why it is the way it is. I think one fundamental and underlying factor is obviously the very strong performance in the prior year, when the orders in this segment grew by over 17%, supported very much by the Medical Systems business that grew their orders by some 22%. If you look more specifically, it is the BRIC regions that sort of have resulted in this decline.
The other markets are largely as they have been historically, including those more mature markets that happen to end up in the rest of the world segment, like Japan and Australia, for example. So if you look at the BRIC, it's a little bit of a mixed picture between the three business areas. Medical Systems has the biggest impact, and the decline there, I believe, has more to do with the prior year and pertains to Russia and Brazil. In both those instances, we had very strong order generation in the prior year, and specifically on the critical care side. When you look at Extended Care and Infection Control, it's a little bit more around the Chinese market, and this is not clear across the board.
But we have also been experiencing a situation in China, where customers are a little bit more cautious when they place their orders because of the crackdown on bribery and corruption, which means that people want to make sure they're sort of doing things by the book to not sort of expose themselves to any criticism, and God forbid, even worse, situations. So in both Extended Care and in Infection Control, we have relatively sizable reductions, specifically in China. And on the portion pertaining to surgical workplaces within Medical Systems, which is a distinct capital equipment piece of the business there, we have a sort of a similar pattern. We believe this to be sort of a passing nature. We have seen that historically in similar situations.
We see no reason to sort of question the long-term or even the medium-term growth prospects in emerging markets. But, we've experienced, sort of some unusual items and some difficult comps.
Okay, that's great. I'll go back in the queue. Thanks.
Thank you.
Our next question comes from Kristofer Liljeberg from Carnegie. Please go ahead.
Yeah, good afternoon. I have some clarifications. First, I couldn't see the slide, so could you just give the figure for the rest of the world order? I guess it was a decline.
It was a decline. That number declined by 5.3% in the quarter, and stands at just under 5% up for the full nine-month period for the group.
Okay, thank you. Then, coming back to this SEK 90 million capital gain, I guess that's not either included in the SEK 450 million. The SEK 450 million is just restructuring costs?
Yes, absolutely. This, this will end up in other operating, so this will come out on a business area level as a reduction of expenses in the fourth quarter.
Okay.... But you're not giving out the currency effects any longer. Could you say where you expect, or is that the same as you thought after the second quarter?
We, we did give it in the presentation here. So if I read from it, since you seem to have been unable to access, hang on there, if I can. Yeah, so what the full outlook reads like in terms of pre-tax profit, we're saying that we will have, for the full year now, we will have currency, currency translation effects of about SEK 200 million, and we will have a blend of medical device tax effects and currency transaction effects of SEK 230 million. And, and I think now when we have, if you will, fine-tuned the medical device tax impact, that amounts to approximately SEK 100 million. So the overall currency effect, translation and transaction in combination is SEK 330 million for fiscal 2013.
So that should be the same as after the second quarter, then?
More or less, correct.
Yeah. Okay. Good. Just the final one on European orders, I think, very encouraging, of course. Is it possible to say what the capital equipment, how much that was up in Europe? And were there some particularly strong or large orders somewhere that helped this figure, or are you seeing a broad-based recovery in Europe?
It, I would say it's a broad base. I mean, if you're looking at patterns, the only market that is consistently down across all of the business areas is the Netherlands, which had a weak performance, but it's not sort of like a material market. In Extended Care, we had a little bit of softness in Southern Europe and in Infection Control, a little bit in German-speaking, but overall, the only sort of pattern you can see across all of the three businesses is the Netherlands. The rest, I would say, on a group level, was showing positive developments. If you look at the third quarter in isolation, the capital equipment grew in the third quarter.
If we look at the year to date, then the recurring items is up by about 2%-3%, and capital equipment now after nine months is down in very low single digits. But the last quarter showed an increase in capital equipment orders over the prior year. It sort of represents a gradual improvement. It's always-
Was capital equipment orders up more than in the second quarter? Because I think there were some improvement on that in the second quarter.
Absolutely. It was higher in the third.
But you don't want to give a figure?
I don't have it.
Okay. Fine.
I have the nine-month number, actually, but I don't have the last quarter in front of me, unfortunately.
Okay. That's fair. Thank you.
Thank you.
Our next question comes from Michael Jungling from Morgan Stanley. Please go ahead.
Thank you very much for taking my questions. I have three. Firstly, on low-cost sourcing, when you finished the year, your Capital Markets Day, I think you highlighted that 23% or so of your cost of goods sold had been sourced from low-cost countries. Where are you now at the end of the third quarter, please? And where do you think you'll be by year-end? I think you highlighted you might be as high as 40%, if I recall correctly, from your Capital Markets Day. Secondly, on the implied Q4 guidance, what sort of visibility do you have? And is it again dependent on what the performance is like in the last two weeks of December as we saw last year?
The last question is really on 2014 guidance. I'm not so, sort of, too much interested in the exact details of what the guidance will be, but will you choose to go back to more of a numeric guidance where you are quite precise, or will you choose to go 2014, again, with a very sort of broad and vague guidance using words rather than numbers? That's all. Thank you.
Yeah. Well, thank you, Michael. I on the low-cost country sourcing, as you correctly said, we stood at about 23% at the end of 2012. And I think the target communicated suggests a level between 30% and 40% in 2015. We hopefully, or we obviously expect to have made progress, but to be frank, I do not have the number for the year to date or the third quarter in here. There is no doubt in my mind that we will move continuously in the direction of more low-cost country sourcing.
But what we see, when we talk both, because this pertains mostly to the capital equipment manufacturing, and, what I would say is that as we release new generations of products, you will find that those products probably have low-cost sourcing elements exceeding 50% of the material cost of those products. And so we, we are both working on transferring existing sub-suppliers from high-cost to low-cost environments, but the most effective way in which we can achieve impact is when we design entirely new product platforms, and we, from the very start, develop the supplier base that is located in low-cost environments. So, I, I appreciate that's not a precise answer to your question.
But we're moving in the right direction, and come the end of the year, we'll obviously be able to present you with a number we achieved for 2014. I think we've been relatively forthcoming in the sense that we have said that this is sort of a little bit of an exponential development, and that the bigger impact in terms of ending up in the range of 30%-40% is going to come in 2015 and not in 2014. It would, in a way, considering our margin development, be quite disappointing if we had transferred a significant part of our components to low-cost country sourcing with the sort of earnings performance we've had so far, to be frank.
When it comes to the visibility of year-end, I would say that our visibility is not any better than in previous years. But contrary to 2012, we are not sort of banking on any end-of-the-year spare in spend by public customers, principally in Europe. So I think what caught us a little bit by surprise last year has definitely been excluded from the expectations this year. So I would suggest that the forecast we have is in many ways safer than the one that we ended up having last year. And that was largely the expectations on the market and maybe not our own communication.
We appreciate that the range we have given now is quite a hard guidance and based on our own internal calculations and not market consensus estimates in that sense. For 2014, you were asking more, how do we intend? I don't think that we have made up our minds on that. I think that but I would think that we would be quite reluctant to give a hard guidance for the full 12-month period, 2014, considering that the volatility still that the capital equipment side of our business gives. But I'd like to rest that a little bit. One way or the other, whether we provide it or whether the market provides it for us, we end up with some form of a guidance that represents market expectations.
So, if we don't do it, I'm sure the market will take care of it in a sense.
Just two follow-ups, please. First, when looking at the Q4 implied guidance, I mean, does your guidance include perhaps, let's say, a 10% decline in the emerging markets? Is this something that your guidance could handle?
Sorry, for the fourth quarter this year?
Yes. If we see, let's say, a 10% decline in the emerging markets, because many emerging markets are doing it tougher, perhaps there is a Glaxo-type impact in China. Could you handle a 10% decline in sales, and perhaps also orders, for your guidance for the fourth quarter?
Yeah, I would hope that under the circumstances, that we've taken a very realistic stance on the full year. I mean, year to date, our organic revenue growth is a little bit north of 5%, about 5.5% from memory. And we are anticipating that the growth in the fourth quarter will be lower than the year-to-date growth, and but it would still be higher than the growth in the corresponding fourth quarter prior year. So I think the fact that we are looking at improving earnings in the fourth quarter compared to last year is, you could say, a currency situation that has normalized versus prior year, whereas the first three quarter have actually more of a material difference.
It is to some extent, the unusual item that we have disclosed today. It is a better, overall revenue growth in the fourth quarter and a more benign mix, in the fourth quarter. And I feel that we have an order book, to support the expectations now for the fourth quarter, but it's by no means sort of a done deal. But you, as you can imagine, we're somewhat gun-shy after the third quarter, right?
Yeah. Yeah. And then on the low-cost sourcing, is the cost differential still as attractive as it was, let's say, 12 months ago? I mean, just referring about inflation in China and so forth. I'm just wondering whether the opportunity from low-cost sourcing is as interesting for 2014 as it was perhaps for 2013, purely from a cost differential perspective between the emerging and the developed markets.
Yeah, I would say yes. I think that when we debate sourcing internally, we think more in terms of sort of high, low, and medium cost sourcing. I think that in the old days, there was sort of a high cost, which was typically where you were, and a low cost, which was typically anywhere outside where you were. And today, I think there is more of a sliding scale, and it's more a matter of putting the right types of components into the right types of environment, with the right competencies and the right proximity to your key markets. So I think we have a more nuanced perspective on what represents low-cost sourcing for us. But the direction is still-...
What we have discussed previously, that we need to develop our supplier base to be more exposed to both medium and low-cost sourcing environments.
Great. Thank-
But I wouldn't say that it's still a very attractive proposition to move components outside of our current geographical regions.
Great. Thank you very much.
Thank you.
Our next question comes from David Adlington from JP Morgan. Please go ahead.
Hi, guys. Thanks for the question. Start off with your guidance again, implied for the fourth quarter. You've always got a SEK 200 million range for that fourth quarter. Just wondered what factors would make you come in towards the bottom of that range, and what factors would make you come in towards the top? Secondly, just wanted to check that presumably you knew about the SEK 90 million gain last week. I'm just wondering why that's kind of finally found its way into guidance today. And then finally, just in terms of the one-off charges in the fourth quarter, just wondered if you give us a breakdown, how you expect those to come in by division, please.
Yes, let me see that I captured all of your questions. The first one was on the interval between SEK 3 billion-SEK 3.2 billion in pre-tax. I would say that the remaining risk is still one of mix and, to some extent, volume. The forecast for the year has assumed a certain product mix, and it has also assumed a volume. So there is still a certain dependency on, let's say, orders that have still not come into the company, but that we need to receive and ship, but that would not be unusual in any way.
But there is obviously that assumption, and there is also an assumption that the mix would look in a certain way, and slightly more favorable than what we have seen so far in the year, but we believe that to be sort of realistic assumptions that we have made. The SEK 90 million of gains that we had, in all honesty, I would say that the exact calculation of what the net realized gain would be was only finalized after we disclosed the results a little bit, well, a week ago, to be exact. At that stage, we didn't know exactly where the net realized gain would end up.
We could obviously have announced that we had sort of signed an agreement with Merit Medical on this one, but being more sort of unspecific around what the net realized gain would be, but we did not do that. It's. I think that's the simple answer. There was nothing sort of sinister behind that decision. Sorry, David, your last question?
The last question was, yeah, I think you've got about 9, I think it was about SEK 90 million of restructuring charges in the fourth quarter. Just wondered where they'll fall in the particular divisions.
Okay, let us see. I think I'll... Let me refer to Ulf here, who has the magic book with him. Hang on.
Yeah. If you take the restructuring cost in the quarter, it's SEK 33 million.
But for the fourth quarter, to come to the SEK 450.
Aha.
In what divisions will it fall?
It will fall, let me see. It will fall, so to say, within Medical Systems, will, so to say, come another SEK 10 million. Within Extended Care, you will have another SEK 50 million, approximately. In Infection Control, you will have another approximately SEK 40 million.
Perfect. Thanks so much, guys.
Thank you.
Our next question comes from Mattias Haggblom, from Danske Bank. Please go ahead.
Thanks so much. My first question is around the move of headquarters, if possible, to quantify any savings that would lead to, and if not, if you could rank the importance of that move in context to the other ongoing savings programs, and whether or not it's included in your long-term margin guidance. That's my first question.
Yeah. No, the very simple answer to that, Matthias, is no. It's not quantified, but here we have... And again, we intend to be a little bit more sort of explicit around this subject at our Capital Markets Day, which is likely to happen somewhere in the beginning of next year. But we have recently gone through a broader sort of review of the strategic direction of the group and how we think about the future healthcare environment, what are the pockets of growth, what are the challenges, and so forth.
One of the conclusions from that review is that there is a number of, what I would call, generic activities currently going on in each of our business areas, that we could, with, with quite good results and quite good benefits, consolidate on a group level. We're talking financial services, sort of the preparation of accounts, we're talking about payroll, we're talking about information management systems, information technology. We're also talking about a relatively sizable amount of sourcing that goes on both in direct material categories and indirect categories. If you aggregate up all of these, the costs associated with, let's call it generic activities, that in other words, things that do not really impact customer experience in dealing with our company, you come to an amount a little bit north of SEK 10 billion.
We think there is good potential for extracting synergies across the business area by pooling this. We haven't quantified it, but over time, I believe this could be a very meaningful amount. The movement of the headquarters is in anticipation of the reinforcement of competence that we will need to drive the change programs that can extract this savings potential. And also obviously, a sort of a communications perspective. A lot of you have been to Getinge, as you know, it's sort of, I wouldn't say entirely in the middle of nowhere, but quite far from larger cities and quite far from airports with good connections, and this is what we're trying to correct.
So, so I believe that we will be able to communicate both a time perspective and a potential for the savings that we see coming out of this coordination between the business area, which has sort of necessitated the move of the headquarters from an environment where the labor market would not allow us to recruit the competence we think we need for the future.
It comes on top of what you've already communicated, right?
Yeah. Yeah, absolutely. However, I think that we're likely to once again, sort of include these additional opportunities into the overall margin expansion program that we have, because this will come with a sort of a slightly different timeline. I think one should anticipate that the saving potential is high. There are certain restructurings that will come in connection with this as we move from, let's say, every country running their own administration to centralizing that and possibly offshoring it would result in some one-off charges. But the investments and the return is likely to look very attractive.
My second question is around Western Europe. Is there anything to add beyond this being the second quarter with positive order intake and CapEx, or capital equipment being stronger in Q3 than Q2? Is there more anecdotal evidence, like orders that you know have been withheld or postponed that are now coming through, for you to, you know, state that you think that the likelihood of us coming through the troughs in Europe is higher today than before?
Yeah, I'd be a little bit cautious. I think that at the end of the second quarter, I think we phrased it this way, that we think that we're nearing the bottom of a business cycle or the bottoming out, specifically as it relates to the capital equipment. I think the probability that we're at that point, or have possibly just passed that point, has increased quite a lot, considering the performance. Again, when you look at Getinge, I think looking at the prior year period sometimes gives good guidance. If we look at Western Europe, we, the orders in the corresponding quarter last year was down by 5.5%-6%. So the close to 8% increase now is in comparison to a relatively weak prior year quarter.
Fourth quarter was equally weak, or in fact, even a little bit weaker in Western Europe on the capital side. So I think and so was the first quarter of the current fiscal year. So I think that there is a very high probability that we will continue to display very decent figures for the coming two quarters. And I personally believe that what we're seeing now is sort of the bottoming out of the capital equipment cycle and the decline we've seen and the turn for something better. And I believe it is supported by sort of preliminary budgetary numbers coming out of a number of European markets.
So, this would be my personal belief, but it's always nice to have a couple of quarters under your belt when you make these predictions.
Thanks so much.
You're welcome, Matthias.
Our next question comes from Scott Sheridan from Trustmark Bank . Please go ahead.
Thank you very much. A few questions, please. Firstly, just so we're on the same page, is it possible to help us understand what you expect a full year EBITA margin to be for the group? Obviously, we've seen EBITA margins down about 230 basis points for the first nine months of this year. So, could you perhaps add some color behind your pre-tax numbers? That's the first question, please. With that in mind, I think on some of the press-wise, you've discussed improving profitability even as of next year. Would that be just a normalization to historic levels, given a more favorable mix, or should we actually see some of the benefits-...
of your ongoing cost saving initiatives, taking margins much more significantly above where we are currently. So they're the two first financial questions. I have a follow-up, please.
Yeah, on the EBITA margin, I mean, we haven't sort of been explicit around the EBITA margin, but if I compare the outlook that we had at the beginning of the year and where we stand now, in all fairness, I don't think that there will be a substantial difference. We—I think it's well understood that the operating or the EBITA margin would be down compared to the prior year period. And some of that is sort of the timing under what time period the results of the cost initiatives or cost containment initiatives would actually materialize in the results, and also that we had a slightly higher headwind when it comes to some of the new items, the currency and the medical device tax.
So actually, for the full year, we will be down on, compared to last year, but I don't think that we will see... We will be better than the year to date, or the delta between the prior year period, year to date, EBITA margin, and this year's, that gap will narrow between now and the end of the year, but we will not quite reach last year's level. Sorry, Scott, did you have a follow on there or?
All right, thank you. Yeah, I just want to understand, and to clarify, actually, I believe the communication at the beginning of the year was for flattish EBITA margins, adjusted for all restructuring costs, but it now feels like EBIT margin, EBITA margin, would be more like 19% or so this year. Even that in mind, if you're successful in delivering a very strong fourth quarter, this would be then the, the strongest margin, ever reported by Getinge Group in a fourth quarter in the company's history. And given the sort of poor mix that still is unfolding in Infection Control, and in Critical Care, I just need you to provide a little bit more understanding as to why that, that might be the case. So, if you could help with that, we'd very much appreciate it.
Secondly, on restructuring expenses, thank you for outlining sort of some further potential to come from some shared service initiatives. Could you please at least highlight whether the outlined restructuring costs at the last Capital Markets Day for your 22% EBITA margin target for 2015 encapsulated some of these costs, or whether these are entirely incremental? Perhaps then you could give us some sense of magnitude of these restructuring costs as compared to the previous. Thank you.
Okay, so first, again, back to the, the EBITA margin for the full year, then you're right in saying that, I mean, I'm looking at the numbers now. So the plan for the year was an EBITA margin below actual numbers for 2012, but not massive, massively below, but below 20%. And I think that what we will be looking at now for the year is hopefully a number around 19, maybe a little bit over 19% would be my guess, on the current revenue projections.
When you talk of the impact of the discussions we just had on shared services and sort of the background to the headquarter move to Gothenburg, we haven't sort of quantified any of those potential savings in the current margin guidance we've given on a sort of medium-term perspective, nor have we included any of the potentially associated restructuring charges of carrying through this program. So this is, again, something that I believe we will be coming back to at the Capital Markets Day.
I, I think, it's reasonable to assume that if we go for sort of, this shared service set up on, on a regional basis, assuming that we'll have in North America and Western Europe, and then potentially something over in Asia to, to support our business, I think that part of the setup of that would most likely be capitalized on, on, on the basis of the matching principle, that we would capitalize some, and then when we start to get the benefit, we would, depreciate or amortize those capitalizations against the improved income. But some, I'm, I'm pretty sure, would filter through as restructuring charges.
But, the way sort of we're looking at this now, superficially, the potential, is such, sort of on a, on a, again, on a superficial level, that this will be an extremely lucrative or extremely attractive return on investment. We are currently undertaking an investigation with, with a bit of outside support, to identify, A, what do we deem the potential to be? What are the, the different work streams that we need to undertake? And what is the timeframe from start to finish, and how would the savings likely materialize over time? So I think we'll be in a reasonable position, come the beginning of next year, to, to give a more, a more, a more precise view on, on how we see this, this program unfolding over the coming years.
So thank you very much and for the extra details there. And just sorry to come back onto this point, but if the EBITA margins end up broadly in the ballpark you suggest this year, what I'm trying to understand is we're obviously in a period of adverse mix this year. So looking into next year, should we expect margins to recover back to maybe 20% just on mix effect alone? Or could some of the cost savings that you outlined, the closure of the Wayne facility, some of the transfer of production from Sweden and Germany, should we see some incremental benefits there so that there's optimism that margin expansion could be greater than the 100 basis points next year? Just to help sort of follow the logic progression into next year.
Yeah, I mean, if you-- I think we've phrased it this way, and I'd also say that our plan for 2014 is by no means completed. In fact, it's still work in progress with the business areas, so we haven't consolidated anything up on. But in our sort of longer term planning, and reaching the 22% margin in 2015, and considering where we're likely to end up the year, I would personally be disappointed if 2014 did not provide sort of a margin expansion, despite the fact that we will continue to have some currency hedging headwind. Not so much, I don't think on the translation side, if things remain where they are, that we will have much of a headwind.
But if you look at the transaction side, we know that we will have some headwind coming next year. But we believe that with the programs we have, we should be able to overcome that and contribute to margin expansion. But at this point in time, I don't think I want to be too precise, and start to sort of provide a full year guidance for 2014.
Sure. That's helpful. Thanks for the additional information.
Thank you, Scott.
As a reminder, ladies and gentlemen, to ask a question, please press star one. Our next question today comes from Martin Wales from UBS. Please go ahead.
Hello. Just following up on the comments about the longer term, obviously, you have annually put out some aspirational targets of where you want to be in 5 to 7 years. In the light of last week's warning, do those longer term aspirations still hold, or do you feel they're less achievable now in the light of the limited visibility you have in the business?
No, I don't think so. What I think is that it's a little bit how you where you devote your time or where you focus your efforts a little bit. I think that it's probably don't need to be. Well, from a medical space, we don't say space engineer, we say brain surgeons. But I think if you look at the way the healthcare market was growing pre-2009, or the 5 years preceding the financial crisis, and where the market is likely to grow in the future at a materially lower rate by all sort of statistics. I think that if you also consider that the amount, the procedure volumes underlying all of these numbers is probably relatively stable between the pre-2009 era and the post, say, 2013 era.
Therefore, I think one has to assume that the lower growth we are experiencing, all of us, is associated with a more intense pricing environment. I think that when I look sort of self-critically at our own performance, I think that we could and should have devoted more attention to the management of our costs and our expenses, not only through the structural programs that we're undertaking, but also more on a day-to-day basis. I think this is actually the reason, apart from the mix side, where I feel that the earnings growth, despite currency, medical device, and the mix, is not satisfactory if you consider the top line growth we have achieved year to date. I think this is a lesson to learn for us.
I do believe that we have good capacity to grow the business, but we need to focus harder on the expense side, and we need to educate the organization to think fundamentally different from the past, and that we're not looking at incremental, sort of cost adjustments, but we're looking to transformational cost adjustments across the entire P&L. Because I think that will be a requirement for continued margin expansion, going forward. I don't think this is something that will be overly challenging for us, but it is a new way.
And I think if you consider also how the capital markets have viewed our industry, I think it's very clear, at least if I look at Getinge, if I go back a year, 18 months, maybe 24 months, I think the concern was almost exclusively around the top line growth. If we look at this year, in most dimensions, we performed volume-wise better than our peers. We performed better than the overall industry, and now the focus has very much shifted on the ability to manage expenses structurally and just as we go along. And I think this is something obviously that we need to respond to in action as well.
So I think that the third of this year to us, I think, signals that there is an opportunity for us to manage expenses and costs in a different way and more aggressively. I don't think that will necessarily impact our top line. But I think that's maybe my takeaway from our performance so far this year.
Okay, just a quick one on acquisitions. Obviously, you haven't done a deal in the last two quarters of any size, and you backed away from one in Medical Systems from the sound of things in the last quarter. Are there fewer assets out there, or are prices getting higher? What's going on? Or is it just a function of the fact you need a pipeline and, you're refilling the pipeline, the deal pipeline there?
I think the pipeline is good, and we have sound projects in that pipeline that we believe that we could justify. You never know where they will end up, or someone feel they can justify something better and more than we can. I would agree with you if you said that the price of healthcare companies have gone up. And I think it's suffice to look at the valuation of companies in the public listed space to recognize that. I would feel that we have a couple of prospects as always that we think would make sort of attractive additions to our group, but it is always difficult to say when they when and if they materialize into sort of things we announce as acquisitions.
Okay, thank you.
You're welcome, Martin. I think we can take one more question, and then in the interest of sort of planning, I think we need to wrap this call up.
Okay, our final question today is a follow-up question from Justin Mars from Bank of America. Please go ahead.
Yes. Hi, guys. Thanks for letting me back on again. I just wanted to ask a question on the admin expenses. So if I look at the group P&L, you know, a lot of the increase in costs relative to, to my expectations at least, is that the admin expenses, were up 12% year-on-year in the third quarter versus 4% in the second quarter. I mean, how does this increase in admin expenses, I mean, how can you explain it relative to your restructuring program, which was designed to, reduce admin expenses? I mean, is a lot of that increased currency or any color around that would be appreciated.
I mean, a slight correction. I don't think that our restructuring program has, in any way, sort of targeted the admin expenses. We hopefully attempt to deal with that on a going-forward basis through these shared services and other activities we plan to undertake. I don't think I have any immediate. There may be some classifications moving up. There could be sort of prior period adjustments. We do have an admin expense growth, but I would sort of question if there's a 12% growth on a like-for-like basis. The overall result is obviously what they are and represent realities. But I would suspect that in that case, there would be some movements, possibly between the lines in there.
So the right-sizing and Infection Control wasn't targeting admin expenses in any way. I mean, I'm just wondering, what gives you confidence that your admin expenses are under control given that growth? I'm just wondering, you know, what could be driving that growth, really?
I'm confident that we can improve it in a very meaningful way going forward through the planned activities. But I wouldn't say that it is necessarily sort of, when you say, what gives you confidence that it is well controlled? I think that I've just said that I'm unsatisfied in the way that we have sort of evolved cost-wise relative to top line during the course of the first three quarters of this year. There is one sort of explanation, but it wouldn't explain the full amount, and that is around the information management system rollouts that we have. So we're now becoming more operational in the programs that we have been sort of undertaking over the last few years, associated with the CapEx that we have.
The benefits of the improved IT environment isn't necessarily coming in the admin side, but some of those investments obviously come through in depreciations and so forth, that would fall into the admin line. But I think to give you a full answer to that one, we need to dig a little bit deeper and dig out the discrepancies.
Okay, yes. That would be great. Just to understand whether there's any kind of phasing or whether it's underlying would be really appreciated.
Sure.
Okay. Thank you.
Okay, well, thank you for sort of taking part in this call here. Again, I say we're not, we're not satisfied, we're not proud of the third quarter. We feel confident that we should be able to hit the full year guidance that we have now provided. We have, as you can all imagine, a very vested interest in making sure that happens. I still believe that we have great potential as a company in making progress towards our targets. And as you heard today, we have also additional measures that are meaningful and will also provide opportunities for continued margin expansion beyond 2015, that we will be able to articulate a bit more precisely, come the beginning of next year, when we have had the opportunity to look through this in more detail.
Thank you for spending time with us, and I'm sure we will be hearing more from you in the near-term future. Thank you very much.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.