Welcome to the conference call Getinge AB. Today's conference is being recorded. At this time, I'd like to turn the conference over to Johan Malmquist. Please go ahead, sir.
Well, thank you very much, and, welcome to all of you and to this, unscheduled telephone conference, which is in response to the press statement that we issued earlier today. Hosting this conference is, besides me, Ulf Grunander, our Group CFO. Now we intend to devote most of the time on this call to questions that you most likely want to ask us. But I would like to start off by giving a little bit of an explanation and a background to the current situation. I also hope that you appreciate that at this time, we are basing discussions on somewhat preliminary numbers, and that we will, of course, have a full set of disclosures and a more complete picture in our normal reporting day on the fifteenth next week.
If we look to Getinge's development so far this year, I think that we can see that our volume development is not really the issue, as I would say, was the case last year. In fact, we expect the organic revenue growth to exceed the indications that we've given out earlier, and that we believe that we will end up with an organic revenue growth somewhere in the range from 3%-4%, which is a good number compared to, I would say, any of our peers and most of the larger medical device companies. And, come the end of the year also, we think that the organic order growth will also end up in the same range with a number between 3%-4%, and hopefully closer to the 4% mark.
However, what has caused our earnings to deviate from plan and to come out weak compared to last year falls principally into four categories. Firstly, we have mixed challenges, and most of them pertain to our Critical Care Divisions, where the overall growth so far in the year has been fine, but where we have grown a lot faster on lower margin products, anesthesia being one of those examples, but we can also see that in our ventilator portfolio, we are selling lower specification ventilators to emerging markets that have developed very strongly during the course of this year.
The fact is also that we are in a product generation shift within critical care, where our high-end ventilator, the Servo-i, is being transitioned into the Servo-u, which is being launched basically as we speak now, but which is just at the beginning. And this has also had a negative impact on the margin situation for that division. For the third quarter, I mean, just to give you some more flesh on the bones. So for the first quarter, or for the third quarter, sorry, the critical care division is down by approximately SEK 100 million compared to the same quarter last year. So 2013 will be a bit of a transition year for critical care, but we will see a return to more normal and historic levels of performance from 2014 and onwards.
The second point we have is that the integration of, or relates to the integration of TSS. So whereas we can see that we will exceed the cost synergies that were originally planned for in the business case, we can also see that we have been a little bit too optimistic in our estimates of how much of those synergies that we can actually capture in this current fiscal year. A third element is the Medical Device Tax. There's nothing new in that, but it, of course, makes comps over prior years a little bit more challenging. And the final factor, and which is one that has sort of worsened a little bit from the middle of the year, is on the currency situation.
That is a little bit more challenging than we had thought, at least if we compare to the first six months of the year. Now, if we were to look at the third quarter in isolation and adjust sort of for the things that we cannot impact so much, the currency and the Medical Device Tax, then we can see that both the Infection Control and Extended Care are showing sort of good, solid double-digit earnings growth in the quarter. In fact, they're, they're up in absolute terms as well in terms of earnings growth. But we can see that the Medical Systems business is showing an earnings decline, and that earnings decline is currency and device-adjusted, approximately SEK 100 million delta that we have out of the Critical Care division.
Now, as we have tried to assess the full-year outlook on the basis of what we have seen so far in the year, and specifically now here in the third quarter, I, I'm afraid that our conclusion is that we will struggle to deliver a result in line with the market expectations, as expressed in the current, current consensus estimates. So we now believe that our pre-tax result is likely to end up in a range from SEK 3 billion-SEK 3.2 billion on an all-inclusive basis.
If we look to the operating results, on an adjusted basis, we will still show, sort of earnings growth on some reasonable level up there, but clearly, this is, it's not the level of performance that we had expected for this fiscal year, and I know it's not the kind of performance that you had expected for the current fiscal year. So I really don't have much more to add, and I would suggest that we hand over to questions. So operator, if you're ready to manage the Q&A session for us, please?
... Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for a moment to allow everyone to signal for questions. We have our first question today from Michael Jungling from Morgan Stanley. Please go ahead.
Thank you for taking my questions. I have three, please. First, on the deviation between your initial guidance of favorable growth to what is happening now, can you perhaps provide a bit more guidance on how much of the difference is driven, let's say, by critical care, TSS, the U.S. Medical Device Tax and FX, so we can sort of reconcile the change that you've seen in the business? And secondly, on the guidance, can I just get a sense of how much do you think this is a homegrown problem versus a change in market conditions? Some sort of ratio, whether it's 30/70 or 40/60, something of that nature, I think, would be useful.
And then, and then thirdly, just, just sort of over the, the midterm picture, when we look at these cost savings initiatives that you've highlighted in the past between sourcing of low-cost components from the emerging markets and also closing down production facilities, can you give us some comfort, comfort that these initiatives are still as good as you first highlighted? Or whether perhaps you overestimated those similar to perhaps, with the TS- TSS, synergies. Thank you very much.
Yeah. No, I think if we, it seems we have a bit of an echo here, but, if we, first on the guidance, I mean, we have taken as a point of departure, the guidance actually provided by yourselves, which is the consensus estimates, right? It's the best sort of interpretation that we happen to have of where the market expects us to land. Now, you may individually, as analysts, obviously deviate from that consensus, or by definition, you will. So if you look at our current, or the way we read the pre-tax guidance was approximately SEK 3.4 billion, for this current year, and we are now guiding for a range from SEK 3 billion to SEK 3.2 billion.
So you can say that depending on where you put yourself in that interval, you could argue that this is potentially a $300 million adjustment. I would say that the medical device tax was fully understood as we came into this year, and a portion of the currencies was fully understood as we came into this year. But if you look at the delta, I would say that the critical care challenges that I mentioned, the TSS situation and the worsening of the currencies, you know, bridge that gap. Those are the explaining factors. Like in any company, if you went beyond that, if we wanted to make it very complex, there's of course a lot of puts and takes, but then again, there are puts and takes in every fiscal year we have.
So, I think that serves as a good way of explaining the gap we find ourselves in between outlook and current guidance from our side. If I answer your third question, Michael, first, before I go into the second question, I would say that we are executing, I mean, the initiatives that we have said that we will, and I think we gave a relatively comprehensive picture during the Capital Markets Day of what was in the making. And also we presented the restructuring charges that we expected to be associated with those initiatives, distribute them over time as we saw them coming and so forth.
We are carrying through those restructuring, and we are expecting to see the results, as sort of expressed in the margin targets that we have. We are, at this point in time, not suggesting that we would deviate from those targets. We have other, sort of initiatives also, in terms of cost containment or efficiency gains that go beyond, I would say, that what was disclosed, in the recent Capital Markets Day. So I think we have a relatively large pool of cost enhancement opportunities that we don't believe has any sort of customer or market impact in a negative sense.
If you ask sort of what is market and what is homegrown, I think that, you know, as I said in my opening statement, that I think the revenue side is actually performing better than we had anticipated at the beginning of the year. So I wouldn't say that market is our biggest issue at this point in time. Well, maybe with one little caveat is that the growth or the back order book we came into this year with was very much geared towards the emerging markets. And I think that if you look at the blend between recurring and capital equipment, you could possibly say that we had a little bit of a less favorable mix of businesses on hand as we set out this year.
It's a fact that a good portion of the critical care shortfall is more one of customer preferring to buy certain products we make, that at this point in time, or for different reasons, have lower margin. But they have not become lower this year. So it is truly and really a mix change. The one thing that is a little bit more difficult for us to ascertain, I would say, is sort of what are market forces at this point in time when it comes to our customers' ability to exert pressure over pricing in different environments?
I mean, I think it's a reality that the environment that we are seeing from, say, 2009 up until today, and the likely market environment we will see going forward, the economic agenda of our customers is very much gonna be in focus. And therefore, I think that it's fairly safe to assume that the lower rates of growth that I think all of us are seeing in the markets is partly a reflection of a more challenging price environment. So I would suggest that if you compared the top line of the aggregate of device companies and the underlying fundamental growth in procedure volumes globally, I think that you would probably see that the growth on the top line is more modest than the underlying fundamentals of the healthcare market.
That would suggest that there is some form of built-in price compression in this market. Where our intention is clearly to fend that off through the efficiency gains that we can make. But I wouldn't be absolutely sure that in any given time period, that we would actually be absolutely on par with those two forces. But I feel very confident when I say that we can significantly and meaningfully lower our cost position as a group going forward.
So, Jan, when I listen to you, is it fair to say that then perhaps 40% of the issue is homegrown and 60% is, are things which perhaps you could not predict at the time that you gave the guidance of favorable growth?
I think I've given, or my intention at least, was to give sort of a set of different sources, but I would not be in a position to actually attribute this percentage to homegrown and that percentage to market, to be frank.
Mm-hmm. But is it, is it fair to say that perhaps the market was the greater influence versus homegrown?
I couldn't answer that, Michael. It's... I wish I had that data -
Okay
... to give you an accurate, it always feels a lot more comfortable to blame the market, but I think part of this is, it is what it is. I mean, if we take the critical care, for example, the series of events that transpired a little bit is that, the anesthesia machine, which is doing very well for us, is sort of operating on lower margin, simply because it hasn't reached yet the volume we anticipated to do. And this is sort of an expected outcome. And, the good thing is that the business is developing very much in the right direction.
Okay.
The mix between the ventilators, which is based on the same platform, we have one ventilator called the Servo-s and one called the Servo-i. And the Servo-i predominantly goes to developed markets, and the Servo-s to emerging markets. It's based on the same platform, hence, the cost is the same for the two units, but the Servo-s is sold at, at a much lower price to capture a different type of market. That mix has changed quite fundamentally. The fact that the anesthesia machine was delayed, I would say, as a development project by 12-18 months, meant that our R&D resources were absorbed on the anesthesia project and couldn't be devoted to the next generation ventilator to replace the Servo-i, which was overdue, when really, it should have been out a year, a year and a half ago.
So as our customers now are maybe stretching the life length, coming up to replacement 8, 10 years down the road, they would like to see a new product. And some of them have been faced with sort of purchasing the same basic platform a second time. And that has been a little bit challenging for us. The Servo-u is a great product. I hope you could hear our customers talk about this, and we will correct this. So I think we are going through a transition year with critical care that has quite a toll on our performance this year, but we will be on a very different level come 2014.
Right. And a final question on the, on the TSS synergies. I mean, I sort of modeled around 10% of cost base of TSS, so let's say call it $25 million-$30 million. Is that the reasonable number for synergies? Because it seems to be quite a small number, and therefore, shouldn't have made the $300 million diff- so the SEK 300 million difference, that we talked about in, in expectations, consensus, versus, versus what you're delivering or likely to, to deliver.
We're talking three items here, right? We're talking critical care, we're talking TSS, and we're talking the worsening of the currency situation. So we're talking three items.
Exactly, but TSS was listed by you as second. Then if I look at TSS, it doesn't seem to be, at least from my model, you know, a huge number. Is it fair to say that synergies was maybe SEK 35 million-SEK 40 million for 2013?
Yeah, but I mean, if I may also, Michael, a little bit correct you when you say, it's not that we're not realizing the synergies. In fact, we will exceed the synergy calculations we did, but we are realizing them at a lower rate than we had anticipated, and this will impact this year. I would estimate that impact to be approximately SEK 50 million on the TSS on delayed synergies, possibly a little bit more actually.
Great, thank you.
You're welcome.
Thank you. We'll take our next question now from Jacob Thrane from S&P Capital IQ. Please go ahead.
Good morning, gentlemen. Thank you very much for taking my questions. A lot of it has been covered already. Just a little housekeeping regarding the delays to the TSS or realization of synergies. Does that have any impact on the guidance you've given for restructuring costs? Should we look for different numbers to what have been guided previously there? And then just regarding the replacement or the delays to the Servo-i, the Servo-s sort of knock on.
If you're now saying that your customers are buying the old machine, almost like in a, as a stock gap, wouldn't that actually also have a knock-on effect for sales plans next year, where basically these customers will not come back for the new product, and then this, again, will basically be rolling 12, 18 months forward all the time? Or could you sort of give us a little color to how you see the rollout plans coming to look from now on? That's sort of my questions. Thank you.
Yeah. Your first question was on the restructuring on TSS?
Yeah, so just the restructuring costs you've guided and what we should be looking for?
Those are remains the same.
Okay.
On the respiratory side, I think if I try and it's sort of a little bit complex, but we have undertaken some mitigating activities also. But you could say that if I sort of go over the grounds again of the Servo-i and its success or the Servo-u, you can say that the typical life length, I would say, of a ventilator is somewhere between 8-10 years. And the Servo-i has been out in the market since the beginning of 2000. So probably around 11-12 years out there.
And already in the middle of last year, we launched—we repackaged the Servo-i to prolong its life length, a little bit like the car industry would do with smaller cosmetic changes. And in our case, it represented a different interface to the user, but it was fundamentally the same product with the same embedded functionality. The new product, the Servo-u, is an entirely new product, an entirely new platform built from scratch, which will be used to branch out into different products long term, but where we are starting in its first generation to address the high acuity segments or the most demanding customers.
I think that we, you, you have a loyal, any company would have a, a base of loyal customers, and then you would have a, probably a base of customers who like you, but who may look at something new, et cetera. You know, no different to your own consumer behavior, in there. I think that what has happened is, is one or two things. Is that if customers anticipate a new product to come on the market, chances are quite high that they will delay purchase decisions.
Mm-hmm
... to get access to the new product. If they feel it's too long, and depending on what is out there on the market, they may decide to opt for something else. I don't think this is no different to any other sort of scheduled or planned, how can I put it, platform transition that we would do. I mean, part of our job is to launch new and better products. So I would think that our position would be significantly better going into next year when we have the Servo-u sort of solidly established in the market, well understood by our sales forces, customers, key opinion leaders, et cetera.
It's a truly unique and great product, and we're absolutely convinced it's like the Servo-i at its time or for a long period of time, the best ventilator, the Servo-u will comfortably fill that slot, if you will. So I can't see this being sort of a compounding issue that would then suggest you don't launch products. I mean, this happens, I mean, you can do... I think our only challenge, I would say, is that we have been late with it. I think that it would have been a lot better for us if we had had the Servo-u available at the time when most early adopters of the Servo-i would naturally look to replacement for those early investments or those products.
That, that's all we're saying, but we will get back this on track.
Okay, okay, thank you. Just coming back to the TSS integration, and Michael, Michael was asking about what was sort of homegrown. Is there any sort of specific delays or issues you've experienced that we should be looking out for? Anything that has sort of been really unexpected, or is there anything you can tell us a little more about what is causing these delays to the synergies?
No, I think it was a planning error, and most of those delays pertain on the one hand side to the European businesses, where I would say that we were not quick enough off the mark. And as you know, this is a carve-out. The U.S., you could say, was quite standalone-ish, but the European side was very much of a carve-out of sales operations that was quite embedded into TSS. And before we had sorted out what was the keepers, the sales force to take over, down to the individuals, et cetera, we weren't really in a position to start and structure the integration in Europe. So, that is one factor.
The other, if we want to be precise, is in the, the depot rationalization, where we took a little bit longer to carefully study, what depots we wanted to maintain long term and which depots we felt were redundant. And these are important decision because they have a significant bearing on the levels of service we can provide to customers. So we simply took another round to be certain before we started to reposition our depot structure in the United States. Those are the two principal reasons. So and as I said, the synergies all in all will exceed our the estimates that we have in our business case. I'm not uncomfortable. There is a bit of a timing issue.
Mm. Okay. All right. Thank you very much.
You're welcome.
Thank you. We'll move to our next question now from Patrik Ling from Nordea Bank. Please go ahead.
Yes, good morning, everyone. Just first, a follow-up question on TSS, I'm afraid. Could you say something about what is happening with the sales development? Because when you acquired TSS, it had had a very lackluster sales development for the last five years. And if I remember correctly, in connection with the Q2 report, you said that the integration was proceeding very well. So obviously something has happened quite dramatically now that you changed that. Then my second question is regarding critical care. You talked about your mix development, where you in the emerging markets, see sort of more of the low specification machines.
Do you see a trend also in developed market that customers due to budget restrictions trade down and buy sort of a lower specification model that they can later upgrade, and that you also see a mix impact in the developed markets? And then my third question, when it comes to critical care again, listening to you, I mean, we hear that the Flow-i was delayed, the Servo-u is delayed. What kind of conclusions do you draw when it comes to the development organization for critical care? Because to me, this sounds very much like a home-grown problem that comes back very much to the development organization. Thank you.
Yeah. I may ask you to repeat some of that, Patrik, because you asked so many questions, you'd have to write very quickly here. On the TSS, specifically on your volume development, and I'm not sure I fully concur with your statement on that the integration was doing very well. But to specifically talk around sales, you could say that prior, when this was still in the hands of KCI, you could say that the business outside of the United States was sort of growing in line with our own therapeutic services business, and that has sort of continued to be the story and the picture of that business.
When we look to the United States, I would say that last 3-4 years, the decline, the rate of decline has probably been around 10% on average in this business. And I think that we will come out with maybe a couple of percent minus on the TSS in North America, 1%-2%, I would think is the. So I think we're in the process of turning the revenue line around, if you will. And this is still a good business, and I think that the explanation I gave is the one and only explanation. I get questions from different angles here on TSS, but the synergy realization on the cost side is slower than we had planned for.
That is the full and only answer you will get, because that is the answer to that question. When you take on the critical care side, and just so we, again, we're a little bit on the same page, and yes, you could say that, to some extent, an R&D issue. But the only reason the Servo-u is delayed, and it's not delayed according to our development program, is because the anesthesia is delayed. So our R&D organization in Solna was fully devoted to completing the anesthesia project. And when the anesthesia project was completed, they became fully devoted to the development of the new ventilator platform, the Servo-u. So the delay on the Servo-u is only an effect of the anesthesia, and the Servo-u is launched timely, as it was anticipated.
So, the reason the anesthesia was late is one, I would say, of a classical mistake that we blended too much new technology development into an R&D project. And by doing that, if you don't base your development phase on proven technology, you're bound to get surprises. So during the course of the development of the anesthesia machine, we need to step back and redevelop parts of the new technologies, which is the unique features of the anesthesia machine. But the reality is that we should have developed the technologies before we went into sort of the development phase, which normally should be quite a predictable phase in an R&D organization.
Mm-hmm. And the last question regarding if you see a trend of trading down to lower specification models in the developed markets?
Now, when we look at this mix, so say the growth, so far from memory now, I think the overall growth of our critical care division has been approximately 5% organic revenue growth. And in that, anesthesia has done well, the Servos has done very well. If you look at the Servo-i, that volume is overall down. But I think this is probably quite consistent with the overall development in if you look at other companies, I think Care Fusion are also in this space, the only ones I've seen officially sort of commented on similar development, a relatively soft development on their respiratory business. So I don't think that we are suffering unduly.
I think there is that slowdown in the developed part, and I think part of the reason for that is that we've had enough number of potential pandemics that have resulted in relatively large one-off orders in developed countries. And I'm sure that in many countries, you can draw from that pool of overinvestment, if you will, in respiratory devices. So, but I think that with our Servo-u, I genuinely believe that we can grow that business nicely in the developed markets.
Okay. Then just a follow-up question or a housekeeping question, really. When you talked about your full year pre-tax profit of SEK 3 billion-SEK 3.2 billion, that was all inclusive, including all the restructuring and integration charges, right?
Yes.
And for the year, you still expect somewhere around SEK 400 million-SEK 450 million in restructuring, right?
We have SEK 450 million in our projections.
Sorry, 450?
Yeah, 400.
Yeah. Okay, great. Thank you.
You're welcome.
We will take our next question now from Sten Gustafsson from ABG Sundal Collier. Please go ahead.
Yes. Hi, guys. Sten Gustafsson from ABG in Stockholm. I was wondering if you could... Well, first of all, just go through the numbers again with regards to critical care and the amount of cost synergies. I believe you said SEK 100 million was related to critical care, and SEK 50 million-SEK 60 million was related to cost synergies. Does that mean that the rest sort of the remaining part is related to exchange rate effects and U.S. medical device tax?
Yeah. Mm, I think that when you, I think there's been a little bit, and maybe I'm the cause of the mix-up a little bit, but if you, I think I've said, and it says so, I believe in the— No, it doesn't in the press release, that we have approximately in the Q3 quarter alone, SEK 100 million of profit difference between the third quarter last year and this year's third quarter. So on a full year basis, that number is gonna be a little bit higher than the SEK 100 million. Then you have approximately, I would say, SEK 50 million, maybe SEK 60 million of TSS cost synergies that are not reflected in this year because of the timing, and the rest, I would argue, is currencies.
What's the total amount of synergies you expect from TSS?
We haven't talked about that. We've sort of embedded that in an overall margin target.
Okay. Secondly, so can you give us some comments with regards to your visibility for the full year, and what level of confidence do you have in your earnings for 2013?
Yeah, if I put it this way, maybe that considering the unfortunate situation that we find ourselves in, I think that we have obviously attempted to be as realistic as we possibly can in providing the range of possible results in the SEK 3 billion-SEK 3.2 billion, all-inclusive number on a pre-tax basis. I mean, that is an estimate that we have sort of worked around in the last few days, together with the management team. So, hopefully, that is a reasonably accurate prediction of the result.
All right. Thank you very much.
You're welcome, Sten.
Thank you. Johan Unnérus from Swedbank has our next question. Please go ahead.
Yes, good morning, everybody. Well, it seems like the top line growth is more or less right in line with what you said, indicated earlier but there is clearly margin pressure then, and then you and changing dynamics, partly in the market. So I got two questions then. Can you speed up initiatives to save costs? And secondly, then can you speed up initiatives to mitigate the product mix, i.e., increase innovation? And of course, these two go together. They go some different directions because you clearly need to save costs to bring up margins, but also increase innovation that will go the other way.
Yeah, sorry for that. We don't know what's happening here with our phone. Yeah, it seems to have quieted down. So, but I think our—
Are we still?
Yeah, we're still there. The innovation side of the business, I think it does provide a solid pipeline of new products. I think that we can obviously alter the amount that we invest, but I feel that what we have now is sort of measured and appropriate and sort of is hopefully the right level of investment. When it comes to the cost side, I think there will obviously be a degree of adjustments. I mean, our restructuring programs that are in there are timed with urgency, but also to ensure that we have stability of supply. I think that when we talk about closing plants and moving production, I think that we need to do this with great care so we don't get disruptions in the market.
Therefore, I don't think that programs is necessarily going to change all that much in time. But when I look at the overall expense levels and sort of pure efficiencies around SG&A expenses and other activities, I think it is likely that we will emphasize that stronger, obviously, between now and the end of the year, but also going into next year. So when we think about planning for budgets for 2014, I think that we will probably quite deliberately ask our businesses to be relatively careful when predicting the top lines and expect sort of strong concentration on management of cost expenses and so forth, so that we can deliver healthy earnings growth also on a lower level of growth.
I feel, I mean, in addition to the, the comments that have been made here, and again, these, these explanatory points that we have mentioned are, sort of what bridges the gap, if you will. But if you take sort of a more overriding picture, I feel that our expense growth has been a little bit unsynchronized with, with the top-line growth. And this is something that I think we'll want to address as we move into 2014, and to have those curves deviate a little bit more than they've done so far this year.
So you're confident in the innovation pipeline, no changes there, but you expect to add a bit more diligence on the SG&A?
Yeah, I think that's, I mean, I think that's one of our conclusions. And I think this is a little bit of planning. I mean, if your organization is anticipating higher levels of growth, I think the chances are that you plan also for higher level of expenses. They are somehow correlated. And I think that we were quite deliberately aim maybe for a little bit lower growth in our planning because salespeople have a tendency to sell not what they can and not necessarily what is on the top line. But I think that we need to put a lot more emphasis, I think, on the cost side. I think this is in sort of inherent in the overall outlook for the medical device industry going forward, that it is a tighter environment.
As I started off saying, the economic agenda is very much the focal point of most care providers today, be that in the United States or in Europe.
Thank you very much. Should we expect the Capital Markets Day like we used to, to get in early 2014?
Yeah, I think so. And we have a couple of new sort of more overriding structural initiatives that we will be presenting at that time. But when I say that's not overdramatize that, but there are other things that have been, not because of this, but that we are planning to undertake to continue to hopefully deliver solid earnings growth on, in a more modest growth environment.
Okay.
Okay.
Thank you very much.
You're welcome.
Thank you. Our next question comes from Martin Wales from UBS. Please go ahead.
Good morning. Could I start by just getting a clarification on precisely what you're saying about your top-line development? In the press release, you talk about 3%-4% organic volume growth.
Yeah.
You seem to be indicating that your revenue growth is 3%-4% on the call. Yet obviously, that would imply you're selling more units at a lower average price on the basis of your comments on mix. Is that a correct interpretation, or am I missing something?
Well, I mean, yeah, I mean, critical care is a mixed issue, if you will. So, and that is a strong contributor to the dyssynchrony between earnings and growth, I would say. So, in essence, you're right about that.
But you talk about volume growth in the press release, and you're talking about 3%-4% value growth on the call.
No, no, no. No, no. It's organic revenue growth, is sort of what we typically refer to. So I'm sorry if there was any confusion. The 3%-4% refers to our organic revenue growth for the year.
Okay. Thanks for the clarification there. Secondarily, you did indicate that overall, ultimately, you thought you'd get more out of TSS in terms of cost savings than originally anticipated, even-
Yes
... though the phasing is somewhat delayed. Are there any implications for your longer term guidance, or you just need that to make up for the mix effects elsewhere in the business?
No, no, no, no indication, no sort of effects on the longer-term guidance, no.
In terms of FX, I mean, which currencies would you particularly highlight as having been materially worse than in July that have really caused you pain?
It has moved a little bit, but I think the fundamental problem is the strength of the Swedish krona against fundamentally all currencies. And then, of course, you have, we hedge, I mean, so if you look from a transactional point of view, the number we gave at the beginning of the year hasn't materially changed. But it's the translational effects that have changed, and I would say that is principally the strengthening of the Swedish krona. Then you have a few other currencies, like the yen and so forth, that have had more severe moves, but,
Okay, there's nothing unsurprising in that. Final question: How comfortable are you with your management accounting and control systems, given that this is the second time you've had a profit warning in nine months?
Yeah, I don't think it has—you could always argue on the forecasting ability. It's always—I think that we try and put something forward that we think is realistic and maybe some from time to time, also somewhat challenging in the organization. But I also think that's how you deliver sort of development in a company. But I don't think this has to do with the management controls. I think it has to do with the challenges of predicting the future, really. And I think that in the case of the critical care business, we had hoped for, say, more natural reasons when we look at critical care, that the mix would correct itself during the third quarter, and that is when we saw in the outcome that was not happening.
I think we realized that the guidance we had on critical care, with the persistence of the mix changes that we had seen, we would sort of run into a bit of a squeeze. So you can say that is the single biggest contributor.
Okay, but it's still your intention to issue guidance that challenges your organization?
I-
Or would you be more conservative as a result of this?
No, I, I hope that we don't get conservative as a result. I mean, part of our business is still lumpy. It is. I would say it has become more difficult to guide the business now in the recent years because behavior is not entirely sort of consistent with what we've seen over the past two decades. So I, I think it's a little bit of a new reality also that from a forecasting standpoint, that we need to get better at managing. I mean, typically, in reality, the guidance is you, as analysts.
I mean, we, the 3-3.2 is the first time you see a hard number this year, and it's only in response to the shortcoming here in the quarter, where we felt compelled to provide some sort of guidance to the market because we, I think, rightly suspected in the absence of that, they could possibly be all over the place.
Okay. Thank you very much. That's very clear.
Thank you very much. Rickard Anderkrans from Kepler Cheuvreux has our next question. Please go ahead.
Hi, Rickard Anderkrans at Kepler Cheuvreux. The unfavorable product mix that you're talking about, that's likely to remain, given that you're growing more in the emerging markets. Is that true? And second question, overall, with this profit warning, why didn't you really see this earlier? As, I mean, consensus expectations used to be even higher, and Medical Device Tax, that's not new to anybody. FX hasn't changed materially in the past three, four, five, six months. Supply, holding margins down, you've also said that before, so why didn't you see it earlier?
Well, we tend to report, I mean, quarterly, right? And if you look at the end of the second quarter, our belief was that we were in line with the market estimates for the full year. And after the third quarter, we no longer think so. I don't think it's any more complicated than that. Did we see it four weeks ago or five weeks ago? Yeah, I would say possibly that we're into a cycle where we communicate around the outlook and so forth on a quarterly basis. I think there's absolutely nothing sinister with this or not something that sort of appeared all of a sudden when we closed the books.
But I think we got a more firm bearing on where we stand when we closed the books for the quarter release. I think that's... It's no more mysterious than that.
... But now you're seeing, I mean, looking at the 3,100 mid-range for the pre-tax full year, we're talking about -2.5% versus your last guidance was favorable profit growth. I think that's a quite severe change. Anyway, on- and what about the, mix change? Is that something that you think is gonna remain?
I think that in the critical care division, as we have talked about now, for a while, I think that the mix situation will improve, going into next year. But I fundamentally believe that the growth in emerging market will be higher than the growth in developed markets, going forward. And I think that we will continue to have the mix between capital and consumables, being a little bit less favorable in the emerging markets than in other parts of the world. But other than that, I would say on equipment in general, we don't have lower levels of equipment margin in emerging markets, in other product categories.
The respiratory side is a little bit unique in the fact that we have one platform branching out into sort of a lower cost offering and a more advanced offering, which is not the case in the other product lines on the equipment side.
Okay. Very helpful. Thank you.
Thank you, Rickard.
Thank you. We have a question from Scott Bardo, from Berenberg. Please go ahead.
Thank you very much for taking my questions. First question is a point of clarification, please. In the press release, your new guidance range suggests SEK 3 billion-SEK 3.2 billion, excluding restructuring costs and one-off items.
No, no, including Scott, including everything.
Right. So the point is that, of course, there's been multiple instances of miscommunication this year, but why is it then that your press release is different from the message that you're giving on the conference call? I think there's something like 8% or 9% earnings growth difference between those two guidances.
I don't see that, Scott. Could you help me understand what you mean?
Yeah, sure. Your press release says that you're guiding for SEK 3 billion-SEK 3.2 billion when adjusting for restructuring expenses and non-recurring items. But just to confirm that that is a different message from the one that you're giving on the phone here.
No, no, no. Firstly, what we're saying in the press release is that we are expecting pre-tax earnings for the full 12-month period to be in the range from SEK 3 billion-SEK 3.2 billion, including restructuring charges and all other items. So it's, it's all inclusive, SEK 3 billion-SEK 3.2 billion, including the SEK 450 million of restructuring charges, acquisition costs, what have you. All of that is included.
Thanks. Okay. Thank you for clarifying that. And, could you help us then understand, I know, you know, within the last month or so on, on various roadshows, your expectation to realize something like 20% EBIT margin this year, which was obviously flat progression from last year. Can you understand what your new guidance now implies in terms of adjusted EBITA margin? Thank you.
Yeah, I must say we haven't given a full disclosure. I don't think that we have actually communicated it. I think that we have said that it's probably gonna be slightly under 20%. And it may come down a little bit, but to be fair, I haven't at this early stage sort of confirmed that number, Scott.
Okay, thank you. But fair to say that now, EBITDA margins will be contracting year-on-year, given your updated guidance today. So in which case, could you help sort of add to comfort and perhaps help us understand why we should be believing this 200 basis point margin expansion initiative that you have by 2015? Clearly, that's not been the margin progression in the group over the last three years. So perhaps can you help us understand where we'll see the first milestone to give us some support and comfort that you're on track here?
Yeah, I think we, we have said that this will be sort of somewhat back-end loaded in this time period to begin with. And I think that prior to today's call, I think that the margin expectations of being slightly below 20% was quite according to plan. It's gonna be a little bit below that now, most likely, when we've done the math and synchronized it with the top line and so forth. The only thing I can say is that if you look at the causes of the shortfall in earnings that we have this year is critical care, which is, we believe, an unusual situation in this current year for critical care that will sort of return to more historic and normal levels as we move forward.
And secondly, I think the effect on TSS is only one of timing, and it will materialize in coming periods. So there is really nothing lost there. It's a timing issue. So I think that both of those have a degree of self-correction, if you will, at least when we talk about the longer term margin operating margin expectations. I think that, yeah, and I think we're carrying through the underlying restructuring program, which is sort of a component of attaining those margin targets. We obviously are still sort of suffering from some unknown quantities, like the exchange rates and so forth. So we've obviously had to make some form of an assumption around the currencies. But I think as we stand today, I think we're still well within that range.
But I can obviously not predict what will happen to the currencies. And there are, of course, some form of an outer limit, but what we see now would not provide sort of a risk from a currency perspective.
Okay, thank you. And so just to confirm, I understand, of course, given the evolving dynamics, why you look to be a little bit more cautious guiding the top line into next year. But can you help clarify whether you still see these levels of top line growth this year as achievable next year, or even-
Uh, sure
-improve them?
Yeah, no, and I, I think I'd like to underline that this is from a planning purpose, but if you look at our, our, revenue growth for the year so far at close to 6%, and if you look at the earnings we have translated out of that, that's clearly disappointing. And I think that when I say for planning purposes, is that we don't want, our businesses to project sort of a 6%-7% top line organic growth. We'd rather have them focus on, on, on a lower level to really get down to, to, addressing the cost more actively going forward. My belief is that the, the sort of volume environment, overall is, probably going to improve over and above this year, would be my guess. But I think you get that revenue growth anyway.
It's not because you're planning that, you make that happen. It's sort of quite natural to sell what you can. But I think from a planning perspective, we need to be a lot more mindful of how we handle the cost structure and the costs in the business.
Okay, thank you. But just one last comeback on that. So given that you've outlined that there's going to be much more emphasis on the cost side, and obviously we know what's evolving with currencies and the Japanese yen, is it too early to expect margin expansion next year? Can you at least help us with some direction there, or should we be expecting that as a milestone for your 2015 targets?
As we said, broadly speaking, I think that there will be a margin expansion next year, but I wouldn't like to quantify that, to be honest. It's nothing to do with this, but, I mean, I just don't want to go into the guidance of 2014, when we've just now guided for what we think is the outcome of this year. That time will come soon enough, but we're not prepared to take on that discussion, I think, right now.
Yeah, and last one. Critical Care, can you help provide the numbers for what your Critical Care revenues were for 2012 and what you now expect them to be for 2013? Just to give us a sense of how that's declined and how that can recover. Thank you.
Yeah, the revenues for last year were ... We have the currency involved in this as well, so it's, you know, in absolute terms. But last year, the revenues were about SEK 2.3 billion in the critical care division, and I would think on a like-for-like currency basis, you're going to see some 4%-5% growth, or say 3%-5% growth, to give that a range, in terms of organic revenue growth going into 2013. So, critical care is not a volume issue, it's a clear mix issue. It's a gross margin issue, if you will.
Mm-hmm. And margins have compressed, presumably, given the magnitude here, must have compressed 500-600 basis points or so this year.
Sorry, how much you were saying?
Maybe must have compressed 500-600 basis points this year, given the magnitude.
Yeah. Yeah, yeah, yeah.
You see that snapping back relatively quickly?
5%-6%, yeah. 5%-6%, something along that magnitude, yeah.
All right. Thanks for answering my questions, Jens.
You're welcome. Okay, operator, I think we've reached 11 o'clock now, so I think it's sort of time to wrap up. We've had a very lively discussion here. I think that we've sort of covered a lot of ground, and I think that sort of coming back to our earlier communication here, I think that what you're sort of seeing here in terms of the result impact is really down to the factors we have identified, even if I sense that the discussions here have sort of attempted to point in other directions. But and I think that this doesn't in any way impact our fundamental beliefs in the capacities of continuing or developing this growth and reaching those profitability targets that we have going forward.
So, it's unfortunate the way it is, and we'll obviously learn from this as we move forward. But, I think the explanations given are the explanations there are to be found. Thank you very much.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.