Good day, and welcome to the Getinge Group Q2 report conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Johan Malmquist. Please go ahead, sir.
Thank you very much, and a warm welcome to all of you. I am, as always, here joined by our CFO, Mr. Ulf Grunander, and the intention is to stick to our sort of traditional agenda, which means that we will be given, that is often me, will be giving you a bit of an overview over the quarter, and then make a few brief comments around the outlook for the year. And, we will also strive to limit the call to the hour. If there are any additional questions, once we close this conference, you, you're as always, free to give either myself or Grunander a ring. Sort of in brief, I must say there's always areas of improvement and areas where we could do better, but I would say that overall, we're satisfied with this quarter and not least the order generation.
And I also say that we feel that what we have seen during this quarter supports our ambitions for the fiscal year of 2013. So with that sort of brief opening, I suggest we move over to the slide on order intake, and I hope you've all been able to sort of access the website where you find the supporting slide presentation we're using here. So, to the order intake, coming into the Q2 this year, I'd say that we were aware that this would be the most challenging quarter of the year from a comp standpoint.
In the Q2 of 2012, we record a strong organic order growth of 8.2%, so posting an order growth of 5.4% in this last quarter, we believe to be a very good achievement. It's also good to know that the comps for the remainder of 2013 will be a lot easier than the comps for the first six months that we've had, sort of relatively speaking, at least. If we look to the different business areas, we can see that they all performed well in the quarter. Medical Systems that grew orders organically by close to 16% in the prior year quarter, grew orders by 4% this year.
Infection Control grew orders organically by a healthy 9.9%, and extended care, that's had a more challenging growth environment for some time, also posted good order growth. When you look geographically, at least sort of on an aggregate or a group level, we have shown growth in all the different geographical regions, even if that growth was very, very modest in Western Europe and sort of upheld exclusively by Infection Control. North America has continued to show stability, and the regions outside of North America and Western Europe continue to develop according to plan. Moving over to the group's results, the group's EBITA result before restructuring charges was marginally lower than the prior year period.
However, if we adjust the EBITA result for the adverse exchange rate changes and the U.S. Medical Device Tax that was introduced on the first of January this year, the EBITA result grew by just under 11%, and the operating margin, or the EBITA margin, advanced by about 0.5% to 18.8% in the quarter. Organic revenue growth for the group as a whole was good at about 7%. The lower gross margin in the quarter is a little bit of a mix of different, but where one is, of course, the hedging effects, where we have less favorable hedging contracts this year compared to 2012. We also now have TSS in the business, the recently acquired TSS operation, which sort of structurally operates on lower gross margins.
When we have these higher levels of growth, given sort of our normal mix, you will also see that the portion of capital equipment in the revenue mix of the quarter is higher than normally. This has also had a little bit of a dampening effect on the gross margin. You'll also see that we charged SEK 74 million of restructuring costs, of which the majority sort of pertains to Infection Control associated with the profit improvement program that was launched earlier in the year. We also have some SEK 16 million that are related to the TSS integration. Both of them are well in line with the sort of restructuring charges that we have communicated, or the envelopes of those restructuring charges.
Moving over to Medical Systems, had a strong revenue growth organically, in the quarter of 12%, and growth was particularly strong in the two sort of capital equipment-heavy divisions, that is, surgical workplaces and Critical Care. And this explains a little bit the limited gross margin leverage that we had in the quarter. The EBITA result was sort of nominally on the same level as last year, but again, adjusting, for currency and for the Medical Device Tax, the EBITA result grew by about 10%, and the operating margin also advanced over the same period last year. On the activity side for Medical Systems, we have actually relatively little to report in this quarter. I mean, we continue to do well on the HM integration.
There is really very little left, but we're sort of obliged to maintain reporting on activities that we have once opened, sort of from a press statement point of view. But at least say that the business continues to perform very nicely for us, both both sort of from a growth and a profitability standpoint. The restructure of the cardiovascular manufacturing footprint, in a sense, is also progressing. We have announced a slight delay here in the quarter, and this has to do with ensuring that we have sufficient continuity of supply on the vascular grafts, which is sort of the main part of this restructuring program, where they're actually being moved from Wayne in the United States from La Ciotat in France.
So, it's not an impact when it comes to the potential sort of earnings upside from the program. It's just a timing delay here that we have. Going on to extended care then. Extended care had a more challenging quarter from a revenue standpoint, and the organic revenue growth dropped by 1%. Lower gross margin that you see here as well is, for the very most part, sort of the effect of the TSS integration. You can say that the gross margin on the legacy extended care franchise is relatively well in line with the prior year, currency adjusted. Expenses, as has been the case here, continues to be well under control.
If Extended Care's EBITA result is again adjusted, like for Medical Systems, then we will be just ahead of last year with SEK 5 million-SEK 6 million, I think. But then one should, of course, bear in mind that TSS is contributing to earnings. So if you take away the TSS contribution as well, then the underlying Extended Care business is sort of delivering on a like-for-like basis a result that is slightly lower than the prior period. On the activity side, for extended care, you can say that the plant consolidation that we communicated and initiated in the Q1 on track, we have finalized negotiations and reached agreements with employee representation. So we're now sort of more focused on the physical move of the manufacturing to our Polish plant.
As we've also communicated, we're looking to sort of come up to annual savings of approximately SEK 90 million on this project when it's fully implemented, and the charges have already sort of been covered in the Q1 of this year. Integration of TSS also does very well. We have completed the part that relates to manufacturing. The San Antonio plant in Texas is discontinued, and production is repatriated to our Polish and Chinese facilities. We're also well into the integration of the rental depots between our existing rental business and that of TSS. Also the integration of the sales company is largely completed. We still are in the process of discontinuing transit service agreements that we have with the sellers, and that will take a while longer to accomplish fully.
Also have upgraded our product portfolio for medical beds, as you can see, and this is an area where we have sort of been and continue to be on a good path of improved profitability. This was the area with substandard financial performance when we acquired it from Huntleigh, and we sort of systematically improved profitability. Also, these two products here are products that are both novel products, but also products that will improve profitability. Finally, Infection Control. I'm glad to say that I think we're starting to move in the right direction when it comes to earnings in this business, and we now have a much better relationship between top line growth and expense growth, which was a problem up until the beginning of this year, I would say.
So, we have a good earnings growth of some 10%, and on a like-for-like basis, we're looking at a 40% earnings growth. So, I think with what we've seen so far, we're making the right or taking the right steps, and the right steps in the right direction. There's relatively little in terms of structural cost impact, so what you're seeing now is more sort of a cost adjustment to the current levels of revenues, I would say. On the activity side, I think I covered most of that just in these comments I have now. But, as you know, we have a relatively far-reaching profit improvement program that will primarily address the manufacturing footprint.
The aim of that program is to sort of, in a, sustainable way, raise the operating margins to a level of 17%, at prevailing exchange rates. So that is not sort of some fictitious exchange rate, but the exchange rate environment that we are experiencing as we speak right now. With that, I, I'd like to hand over to Ulf for a few comments.
Thank you very much, Johan. The group's cash flow significantly improved in the Q2. If we also compare with the Q1 , and which also was very much expected. The cash flow amounted to SEK 842 million, and the strong cash flow represented 68% of the quarter EBITDA. During the quarter, both our DSO and DIO were reduced. DSO by one day to 70 days, and the DIO by two days to 136 days. Continuously strong focus on collecting accounts receivable and improving efficiency within supply chain have and will result in good development of working capital. In summary, the group's average working capital have, since year-end 2012, been reduced by SEK 135 million up to the end of June.
If adjusting for the currency change and acquisition, the net debt in the Q2 increased by SEK 688 million, which mainly relates to the paid out dividend of SEK 988 million. The closing net debt amounted to SEK 19.7 billion, and the closing equity amounted to SEK 14.8 billion, which resulted in a net debt to equity ratio of 1.33, and an equity asset ratio of 33.7. The group has a strong balance sheet at the end of June and has an acquisition capacity of SEK 6 billion-SEK 7 billion.
Yeah, thank you, Ulf, and a few final comments around the outlook. So on the back of the Q2 performance here now, we have become a little bit more positive when it comes to the volume outlook for the year. But I think it is, at the same time, important to underline that the demand situation is still difficult to read, I mean, particularly in Western Europe. I think the decline in capital equipment orders in Western Europe slowed down in the quarter, but I don't think that we have sort of any grounds to say that, sort of, by then, the market will have bottomed out. But we think it's not sort of far into the future.
We are becoming a little bit more confident, I would say, on the demand situation in North America after a few solid quarters, and we're not seeing any sort of material changes to demand in the markets outside of Western Europe and North America, primarily emerging markets. And as you can see also from the report we released this morning, that the currency situation has eased off somewhat, meaning that we now believe that the currency-related translation effects for 2013 will be in the order of -SEK 200 million, compared to -SEK 300 million, that the exchange rate at the turn of the Q1 would have suggested. So that's a slight improvement as well. With that, I think, operator, that we can open up the Q&A session.
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. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone to signal. We shall take our first question from Michael Jungling from Morgan Stanley. Please go ahead.
Thank you, and good morning. I have three questions. Firstly, on the 2013 guidance, at what point are you in a position to provide some precise guidance about what favorable profit growth guidance means? We're sort of halfway through the year, and I would have thought maybe you could provide some more guidance or some more clarity there. Secondly, when it comes to the order book environment, for your rest of world emerging markets, are you concerned that order growth could slow as a result of some of the difficulties that we're hearing about in the emerging markets? And then, the third question is also on order bookings.
It seems you've become more optimistic, optimistic, and I would like to know what you feel the implications may be with respect to cost control. Are you willing to keep it tight, or would you say that maybe we will open up the checkbook a bit more to take advantage of perhaps some opportunities while competitors may be more tight? That's all. Thank you.
Okay. Thank you, Michael. Yes, guidance. Well, I think in the last few years, we’ve actually not provided hard guidance. But on the other hand, you can say that we have, from time to time, commented around the consensus outlook that sort of forms after a while. And I still think that given that last year turned out a little bit the way it was, I think we feel that there is relatively, or say there is a bit of an asymmetry around the upside of actually providing that type of guidance, and particularly in this uncertain environment. I’d say also that the volume, the biggest risk factor is obviously the volume.
I think, as we saw last year, that even in a relatively short space of time, we were taken a little bit by surprise. The good thing I would say in this year is that we had modest development in the second half, which makes it maybe a little bit easier on a simple comps. We're not sort of banking on any unusual pick-ups here in coming quarters. So I think at least for the time being, we'd like sort of to maintain this sort of relatively imprecise guidance. I think your second question, Michael, was around our sort of feel for growth in emerging markets. And...
I must say, I mean, if we look at the pockets of emerging markets and group them a little bit in, say, Latin America, Middle East, Eastern Europe, Eastern Central Europe, maybe, and then Asia. Then I say in Latin America, we feel good about the market. The rate of growth is healthy. I can't say that we see any sort of immediate changes in that arena. Eastern Europe has actually been a little bit sluggish, Eastern Central Europe. We have a good pipeline. Russia is very sort of prominent in that region, and we have a booking year to date, which shows quite a big delta on Russia that we managed to make up in other regions.
But we have a very good pipeline of business in Russia. So I think that we will see a good uptick in the second half of the year, compared to last year. Middle East is also a little bit flattish compared to, actually a little bit down compared to last year. We're seeing that picking up a little bit in the second half. Then when we look at Asia, I would say that if you take the big economies, India and China are doing very well. And I think the program, I mean, China is an important market there, and the programs in China are, I think... How can I put it? They're sort of not something I think the government would be willing to alter, in any meaningful way.
It's a relatively strong undertaking, and as part of the healthcare reform plan. So I think even if we should see a slowdown in China, I actually don't think it will impact the healthcare expenditure. And it's also fair to say, I mean, there is a sort of a natural inflection point for most emerging markets, where healthcare expenses starts to outpace GDP growth quite significantly. And I think a number of the more important markets, and not least China, are at such inflection point. Also, we are enjoying proportionately much, much better growth in the healthcare environment than obviously the overall economy.
And then I'd say the markets that happen to fall outside of North America and Western Europe, but are still mature in a sense, like Japan, we continue to do very well in Japan, and we're on a ride of improving market penetration in that market. And I can't say that I see any sort of imminent signs that we can't continue that journey to enjoy relatively good growth there. So I think that would be my commentary. And I think you, your third question is a good one.
I'm not sure I have a great answer for that because whereas we obviously have a number in mind in our heads on the earnings that we want to accomplish, which sort of tries to factor in your expectations as well as sort of the financial community. So we may, if revenues and volumes continue to improve at the rate we're seeing, be tempted to invest a little bit, but not jeopardize, I would say, the short-term sort of profit expectations. So we'll try and balance that, I would say. We are a growing concern, obviously, and we have the intention of being around for a long time. So I think we'll try and blend the delivery of short-term commitments with long-term development.
Just, just a follow-up question on, on the emerging markets. If I look at the last two years, you, you sort of grown in constant currency, organically, let's say, at 13. In the first half, you're doing 10. So we already have seen a slowdown in the first half of this year. And hence, sort of my surprise that you sort of feel that you can continue to grow, to grow the same as you have in the past. But are there not signs already that the markets are slowing for you, the emerging markets?
I don't think we have suggested that we would. The laws of numbers, I think are such that, I don't think, and I hope we haven't said that we will grow like in the past, meaning that, you know, we've had years where we grow by 20% and 15%. But I think that I'd be right in saying that we seek to grow this region in double digits going forward. And that would be sort of the overall non-Western Europe, non-North American region. And I mean, if we were to look specifically at, say, just the BRIC region for the first six months of this year, we're looking at anywhere from 20-25% organic order growth.
So, I would say that we're committed to continue to grow that market fast, and we believe that it's gonna be a significant growth lever for the group as a whole. But I wouldn't say that we would remain sort of on historic growth rates. But yeah, but good and healthy growth.
Great. Thank you.
We shall take our next question from Kristofer Liljeberg, from Carnegie. Please go ahead.
Yeah, good morning. Thank you. First question on orders for Europe. It seems that you are seeing some improvements there by saying that demand hasn't fully bottomed out. And you also said that the very slower decline for capital equipment. What was the decline for capital equipment in Europe this quarter?
I don't actually have that in front of me, but if I was to guess, I would say maybe somewhere between -5% to -10% overall. No, sorry, that would probably be more the 6-month number. So, I would think that in the quarter, we may be looking at a number of less than -5%, I would say. Less than -5%.
If I remember correctly, we're down like -20% almost in the Q1 .
Yeah.
Of course, difficult to look on this on a quarterly basis, but, is there, are there some markets where you see some improvements, or what makes you believe that we are getting closer to the bottom?
I think my commentary would most likely not be different from the Q1 . If you hear it differently, then I think I failed to sort of copy what I said then. But I think that a quarter like this and also I think we know that it will bottom out. So a quarter like we saw now in the Q2 would maybe be a nice sign that possibly we are seeing that slowdown in the decline on capital equipment. And I think it's 50% comps and 50% the easing of austerity measures that we're seeing.
I mean, if we dig a little bit deeper into the specifics, if you look at Southern Europe, I would say it's Italy, really, where we're seeing the slowdown in capital equipment orders, really. And we're also seeing a slowdown in Germany and German-speaking countries, which we struggle a little bit more with understanding, and I don't think that is a structural change. So, we're hopefully going to see a little bit more of a rebound in that region in coming quarters. So... And France has actually held up nicely. UK, I think we've commented before, is in growth mode. Scandinavia is relatively same, and Benelux was a little bit in parts weaker this last quarter.
But overall, my guess would be that we will continue to see a slowdown in the decline to bottom out in the not-too-distant future, but I wouldn't like to sort of point to a specific quarter. I think you'd remember that and hold me to that, and I simply don't have that information, that ability.
But you said Italy was down this quarter as well?
Yeah, Italy is a challenging market.
Yeah. Okay. Second question is for Ulf. Looking at the increasing CapEx seems much lower this year than what we have been used to this in the past few years. Is that only temporary, or have you reached some kind of plateau, both when it comes to capitalized R&D and more normal CapEx as well?
I should say that we are always at the beginning of the year, and when they have started to plan their projects and when they've really not started up all, so to say, CapEx projects. So you will always see more, a major part coming through at the end of the year. And when it comes to R&D, I think the capitalization has come down compared to last year. And that is a correct, so to say, statement from you. But the CapEx side will probably accelerate into the second part of the year.
Okay. But could we assume capitalized R&D being lower for the full year compared with 2012?
Yes.
Very good. Thank you.
We should take our next question from Hans Mähler from Handelsbanken. Please go ahead.
Yes, good morning, Hans Mähler with Handelsbanken. First, question, kind of what you talked about in Q1, you said that the earnings would be somewhat better in the Q2 compared to the Q1 . What's the main reason for that deviation, that it didn't happen? And then my second question is regarding the launch of your new ventilator platform. Could you be giving us some comments on when you will launch it, and then also what you think will be the impact on orders that quarter? Thank you.
Mm-hmm. Yeah, I the earnings outlook, I think, is the biggest deviation there a little bit, and I think it's well explained. I commented a little bit on it early on in the conversation. It's a little bit on the gross margin, where I would say that the mix turned out to be a little bit different to what we had anticipated, with a higher capital content in the revenue mix. And once you, in your second question, you commented on the respiratory side, and I would say that we didn't perform on the level and to plan in the critical care division.
I think it has a little bit to do with mix in that business, but also possibly a little bit to do with the anticipated launch of the Servo-U, the new generation ventilator that is coming onto the market. The only reason we haven't commented so much around it is that it is always sensitive when you're replacing an entire platform with an entire new platform. We obviously, until we're sort of fully ramped up, need to make sure that we have momentum on our existing respiratory portfolio. I think we are seeing signs that we have a little bit of a glitch between the old and new generation of ventilators.
So, I think that's you nicely managed to frame both questions in one.
And when it comes to more precise timing of the launch, is it too early to believe-
Well, we-
-The machine will be out post the summer?
Yeah, no, Hans, we have, we have launched it internally, so the product exists. And we've started to prepare our own organizations, and it will be starting to come into the market now during the Q3 . And it's gonna be a great product. But I think the reason, again, we don't want to maybe advertise this too much, until it's sort of really in front of customers, and they have that choice of the older or the new.
Okay. So if I understand you correctly, when it's out, it will both have a positive mix impact on the critical care division and some kind of positive on volumes as well, correct?
Yeah. Yes, yeah, exactly. I mean, to articulate a little bit more what our challenge has been with the critical care side, we're doing very well on the anesthesia initiatives. But as we've said on many occasions, it doesn't quite deliver the gross margin or the average of the critical care division because it's still sort of early days, and our target volume is higher than the current volume. So that is one impact. The other impact that we are seeing is that the respiratory business has been very concentrated around projects in emerging markets and less so sort of continuous volume flow in developed markets.
When we sell to emerging markets, we have a product called the Servo-s, which is more frequently used, and that product is a simpler product, but has a little different ratio between revenue and cost, which is a little bit less favorable than the overall critical care. So those two impacts in combination means that the gross margins right now in the critical care division is less favorable than we had planned for. And we also think that there may be some customers holding back a little bit on the existing Servo-i, awaiting some. Some customers most likely have figured out there is a new generation ventilator coming onto the market. So I think that this will correct itself.
I mean, launching a new product can sometimes also, I think, we probably will not come up to full speed in terms of profitability of the new ventilator immediately. So we've sort of factored that in our own outlook for the year. And as you can see, we haven't shifted anything in the overall groups. But we're probably thinking that critical care will continue to be a little bit challenging, not from a volume standpoint, but from a mix standpoint, also for the remainder of the year.
Okay. Thank you very much. That's very helpful.
Thank you, Hans.
We shall take our next question from Martin Wales from UBS. Please go ahead.
Good morning. You talked a little bit about Germany earlier. We do have a hospital reimbursement change coming in on the first of August in Germany. Are you expecting to see any benefit from that in terms of a pickup in Germany CapEx sales, firstly? Second question on acquisitions, obviously, I think you reported 2 acquisitions in the first half of this year, both of which you'd already told us about. Should we see a pickup in acquisitions in the second half of the year? I think you normally do more than 2 in a year. I guess final question, coming back to your guidance, you're obviously feeling more confident, yet clearly, as far as I can work out, you're still gonna need slightly bigger than usual Q4 admittedly against an easier comp.
I'm just wondering what, I think you would have been asked this question in the past, but how you're feeling about visibility as to what happens in Q4, particularly with any short cycle orders you might be dependent on to deliver the year?
Yeah. The first one on Germany, yeah. No, I would say that our assumptions are, at this point in time, that order intake in Germany will improve in the second half of the year. It's, I think, maybe less directly related to the reimbursement system, but I also know from experience that our customers are always a little bit more hesitant ahead of changes to reimbursement before they fully sort of understood what it means in terms of payer mix and so forth. And this may sort of persuade them to be a little bit more soft on taking CapEx decisions.
But this is maybe my sort of confidence is more based on what we have in the pipeline for decision here in the second half of the year. Your question on acquisitions, I mean, we as always work on a portfolio of opportunities that sort of materialize when they materialize. It's sort of awkward to comment around this, but I would say that our activity is no less than what it has been historically in terms of evaluating. Then, as always, it takes two to tango a little bit. And I mean, you're absolutely right, when you look at, depending on how you interpret our fluffy guidance in on an earnings basis, it's relatively clear that we need to deliver a stronger second half this year compared to last year.
I think that also translates into delivering a stronger Q4 this year to last year. I think we learned our lesson. I hope we learned our lesson on the short revenue or short cycle business, as I think we called it, that did not materialize to anywhere near the extent we've been used to. I think that our assumption is that our customers, on a going forward basis, will not be allowed the room or be given money they can decide to spend at their own will. I think that budgets that are out there are more precisely defined. Nonetheless, I mean, we think we sort of have that covered or factored that in when we've sort of created our own internal projections.
Okay, thank you. That's very clear.
Thank you, Martin.
We shall take our next question from Lars Hevreng, from SEB. Please go ahead.
Yes, thanks. Is it possible to break out the effects from acquisitions and currencies in the Q2 ?
Yeah, I think we can do that. I'm not sure we have it here, and it may be one of those questions maybe where you can—I'm sure Ulf will be happy to take you through that, if you call him up. But, the organic number is obviously adjusted for both acquisitions and currency. So, I think, Lars, if it's okay with you, could you-
Yeah, of course.
Obviously, goes for anyone else, too, who wishes to understand that, to give Ulf a call.
Yeah, of course. The other one is, I mean, again, on your guidance, are there any reasons to assume that you would not achieve sales growth in the second half?
Okay, I see where you're going. That's a good question, Lars. I think I'd like to stick with the guidance, but I hope that you note the sort of slightly changed wording around the revenue growth, going from comparable or slightly better, same level or slightly better. I think we even made a mention of it in sort of the initial part of the press statement. So we are more optimistic around the growth. But I think in answering that question, I may be answering more than I want to at this stage.
Okay. Without giving... Just hypothetically, if you would reach flat capital sales in Europe for the year, what would then the growth development for the group be? Without saying that that would be a guidance.
You're sort of challenging my mathematical abilities here to quickly answer that question. I think if you speak for Europe, I think that we will be looking at, on the recurring revenues, I think that we would maybe be looking at 3%-4% maybe in Western Europe. And if you assume it's a little bit more than half of the Western European business, I think you can probably work out the rest yourself.
Okay, thank you.
Thank you, Lars.
We shall take our next question from Johan Unnérus from Swedbank. Please go ahead.
Yes, good morning. It's Johan Unnérus from Swedbank. Two questions then, please. The first one then on, well, you seem to be sort of on track and in reasonable balance in medical systems, and increasingly so in infection control. But, it seems like you're slightly behind the curve, possibly in extended care. Are there any big single or big orders that sticks out? You had a pretty good quarter in North America. Is that the, could be the first question then?
Yeah, no, no, I think, Johan, there, there are no unique and big orders. They're actually quite rare in extended care. It's, it's more by the number than by the individual transactions, I would say. But North America has been sort of in, in an improvement, on an improvement curve, and specifically in the United States. We've had a more challenging situation in Canada, at least in the Q1 , that sort of eased off a little bit now in the Q2 . We're optimistic that we can maintain momentum in the United States.
Okay. And then when it comes to margins, then this is now Q1 was also soft on Extended Care, and it seems like you got quite a lot to do on that side. What about the bed side? Is that something we should expect to being a bit of a drag going forward as well? And is it possible to pick up speed in the TSS cost efficiency going forward, post the initial integration?
Yeah, I mean, if I was to sort of more, and hopefully by answering your question a little bit different, sort of provide a little bit more insight at the time. If you follow the development of Extended Care, they've done an exceptionally good job of extracting value out of the existing operation. I'm speaking of pre-TSS acquisition here by very actively restructuring their supply chain and completing the integration of Huntleigh, which was only half made at the time when Alex Myers joined us. And there are obviously these initial additional initiatives that were announced in the beginning of the year.
The thing is that when you look at extended care, because they've reached a level of cost efficiency, where there's only really sort of more marginal improvements you can bring, sort of through continuous improvement, with the exception of the structural change that we announced at the beginning of the year. So I think that earnings growth now in extended care is dependent on two things. It's the overall volume growth, and that is obviously our ambition to, and I think where now is probably a time where I think that we will start to see growth coming from here onwards. That would be my sincere belief. The other aspect, which is sort of has an impact, is the mix of the business.
Even having improved the profitability of the medical bed significantly, it is still not a over 20% EBITA margin, nor is it anywhere else. Our business is somewhat smaller than the likes of Hill-Rom and Stryker, for example. So we're doing a good job on the level of the business. But if we are in a situation where we get sort of a pickup in demand for medical beds and subsequently, say, a slowdown in rentals for therapeutic surfaces, then we get an adverse earnings effect, even if the volumes are growing. So we're a little bit mix dependent, and I would say that the first six months of the year has had more of that slightly unfavorable mix for the business. But I don't think this is any sort of permanent situation.
But, but just by way of explaining the, the point where they are, it's not that many levers, I would say, that will make a difference. So it is overall growth and mix. And then you, you have, obviously, TSS, that we have said is a, sort of integration-wise, we're doing very well. And, and I think, like in most of these, integration, we'll do better than on the cost side than we had anticipated, I think, when this is completed, and we're, we're making good headway. The challenge a little bit, I think, is to fully turn the corner also when it comes to growth.
So the ambition has been to stabilize top line growth this year from a situation where it has been declining, and then bring it up to sort of low digit growth in the coming years. And then also enjoy some of the cross-selling opportunities, and that would most likely translate into medical beds in the U.S. market. And we're making good headway on that particular point, on introducing and getting some traction on medical beds in the U.S., which, by the way, is sort of profitability-wise, actually the most attractive market for medical beds. But I think that's a little bit the situation we find ourselves in. We'll do better.
I mean, extended care is one of those businesses that will do better in the second half of the year, and very much on the back of improved growth.
Well, thank you. Can I also add, because Extended Care is, if we can put it towards the low technology end in your portfolio, do you see any signs of changing buying and purchase patterns, or that decisions are being taken higher up and perhaps more of austerity and cost saving considerations or competition from low cost alternatives on the margin?
No, I think with... I mean, we struggle in general with actually being able to isolate out the price component or the pricing component of our business because it has such variety, and we do very few items that are sort of standardized in high volume, so we can actually track pricing. But my gut feeling would maybe be to say that post 2008, or in these last few years, in the environment what where we've been, I think it is likely that we have had more price erosion than we have experienced historically. And I also think that it is a reality, not only for sort of, if we call it less sophisticated medical devices, to be sort of part of more centralized decisions.
I think that goes for the healthcare market overall. I think we'll see the financial agenda being much, much more at the forefront in the years to come. In fact, I think it will—this is, well, this post-2008 will most likely be a pivotal point where the financial agenda will become sort of the most important agenda for healthcare, I think, going forward. So, no, no, I don't think anything material here, not anything anyway that would have sort of happened now. But I think if you look over the last few years, I think that the pricing component has been bigger than historically.
Perhaps part of your new normal organic growth, I suppose.
...Yeah, well, I think that, I mean, if I sort of base myself on what other things about the healthcare market, I mean, I get, I think, my belief and many with me, they would probably suggest that growth before 2009 will not return, but growth as we know it now is not going to be prevailing. So we will look to growth rates that are better than today, but not the growth rates that we had before. That sort of, generally speaking, my ambition and our hope is obviously to sort of provide unique own growth initiatives relating to our industry to allow us to improve our organic growth rate over and above some form of underlying market.
I think that we have displayed good growth by all comparisons, and I think we do it as we speak now, and I think it will improve going forward.
Okay. Thank you very much.
Thank you, Johan.
We shall take our next question from David Adlington from JP Morgan. Please go ahead.
Morning, guys. A couple of questions, please. Firstly, just in terms of your, it doesn't sound like the markets are getting particularly better, but obviously you've seen an acceleration in growth. So I just wondered what you thought was driving your increase in market share, and whether you were using price maybe as a lever there? It doesn't sound like you are, but I just wanted to confirm that. And then secondly, on the M&A environment, you pointed towards, I think, SEK 6-7 billion of potential capacity, I think, from the, probably from the debt side. There are certainly some assets up for sale currently that it would be substantially larger than that. I just wondered if you would be comfortable tapping the equity markets to kind of finance any larger transactions. Thanks.
Mm-hmm. Yeah. No, on your first question, if price has been used as the lever, it's definitely unintentional, and I don't think that is the case. I mean, I think we have a good standing in the market, and I think we are in most of our categories, a supplier of choice. And I think that what we are seeing, I think, is return to better growth for capital equipment, actually, which has been sort of our pain point in the last few years. And I think, as we've said many times, the recurring revenue base has been very resilient through these difficult times, and even now as times improve, it's not significantly larger.
So I think that recurring revenue base will probably continue to be stable, and the difference will be felt in the changes in capital equipment. Recurring revenues, I think, can improve, but that would need to be through larger sales force. It would have to be through introductions of new, exciting products and so forth. But the capital, I think, is one of sort of a cyclicality, and we're sort of coming from a low point in the cycle and hopefully now moving up the curve. When it comes to acquisitions, then I would say that when it comes to raising additional equity, it is a possibility.
It would obviously need to be for the right deal, and it would obviously need to be sort of a accretive acquisition and an acquisition that would allow us to sort of improve our earnings per share, because that is the one component I would say that sort of is impacted by using equity. So I think there's an openness for it. We will always have that as a last resort, and the quality of the deal will dictate whether equity is the right thing to do or to sort of stay away from the deal altogether.
Great. Thank you very much.
Thank you, David.
We shall take our next question from Mattias Häggblom from Danske Bank. Please go ahead.
Good morning. Thanks so much. With regards to your very impressive 10% order intake figure for Infection Control, how should you think about that one? Does it come through as a consequence of slow demand a couple of previous quarters, or rather, were there a large, a couple of sizable orders in the quarter that explain the difference, or, or is this truly a change of trend?
No, I don't think, I mean... There is a trend change, I think, but to suggest that it's—I mean, I would almost say it's like 10% from here onwards. But I think that there is a trend change somewhere, and since we don't know exactly where that trend change is going to occur, it could be now, but it could also be in a couple of quarters' time. And I would say that when you look to the U.S., that was not in a dissimilar situation. I think having now two, three quarters behind us, we're starting to feel confident ourselves.
In the case of Europe, I think that we would probably like to make that same experience, but it's obviously encouraging for us to see a good quarter. On Infection Control, specifically, we had, from memory, a 1% growth in organic order intake in this quarter last year. So you could say that the comp is relatively easy. On sort of an average, you end up somewhere a little bit north of 5% between the two quarters. And I would say that is probably the level the business area is aiming for, about a 5% growth in volumes.
It was a broad demand change or comp situation rather than a specific couple of orders that we should be, you know, taking note of that explain the 10% figure?
In any quarter, there will be a mix of orders, and some of them will be large. I do not seem to recall that we've had a conversation internally to suggest that we had this significant order, so I would tend to ask that this is sort of a normal mix between smaller and larger orders.
Brilliant. Thanks so much. And the second question would be, any more color on the gross margin, development here? You spelled out the TSS integration and mix effects from medical beds, but I note that it's, there's a slight decline for Medical Systems and Infection Control as well. You mentioned the, you know, unfavorable mix in Medical Systems as well, to some extent. But, you know, how should we think of the gross margin for the full year, as an example? Will those mix effects then, you know, reach a more typical situation, or, is there something going on in particular for this year?
No, I, I don't think there's something going on. I mean, you come into a year with a plan. We have 16, 17 product lines that we sort of manage internally. Experience is that not everything goes according to plan. I think critical care is an example of a business line we've commented around. But I think the, the on a group level, I would say the three effects I talked about was more the hedging, the TSS integration, and the blend between recurring revenues and capital equipment, that at the rate of growth we displayed, came in with a slightly different blend. And we have clearly not guided for 7% growth in the year, so that blend will look a little bit different in the second half of the year.
Excellent. Thanks so much.
Thank you, Mattias.
We shall take our next question from Scott Bardo from Berenberg Bank. Please go ahead.
Good morning, gents. Thanks. A few questions, please. Firstly, on North America, quite encouraging to see that growth has started to pick up, and the order book looks relatively healthy there. We are seeing, however, some other companies reporting some pretty sort of disappointing numbers in capital in North America. So I just wondered if you could add a little bit more discussion around how you see the North American market in general, and also for you going forward. Second question, is it possible to discuss a little bit further some new product launches that you're likely to see throughout the remainder of this year and into next year? I know you've touched a little bit on Servo.
Is there anything else we should be expecting to flow in the U.S., iliac surgery for iCast? Just, just some broader understanding there, please. Last question on guidance, both near term and midterm. You I think are referring to about a 3% organic growth for the top line this year. It certainly seems to be a little bit more encouraging than that at the moment. You also are posting for Infection Control your expectations to improve profitability to about 15%-16% by 2014. All else being equal, should we see a hundred basis points expansion at the group level for margins next year? Is that broadly how you see it? I think that'd be-
Okay. I thank you, Scott. I'm not sure I want to answer all of your questions, but I'd be happy to elaborate a little bit on them. But I think on the North American, it's like, North American market and the U.S. market, maybe specifically. It is as always, you know, there is the broader market, and then there is us as a subsection of that broader market. But I can only say that in actually all of our business areas, there is a sort of a positive view, I would say, for the remainder of the year.
It is obviously, as in Europe here, if we see an improvement, the capital equipment basis, that changes, and that has improved in North America. There isn't really... I mean, we show improvement in all capital equipment categories, with one exception, and that is the Life Science portion of Infection Control, which has been a little bit more challenging in the first six months of the year. But on the healthcare side, in Infection Control, it looks good. I would say in critical care and surgical workplaces within Medical Systems, it also looks good. They've done a marked improvement here in the first six months. Also on Extended Care, as you saw, we have a very good sort of initial development.
We don't foresee that to change, sort of over the next two quarters. But whether that is our performance, our niche, relative to other companies, I really cannot say. Your second question on new product launches, and yes, we have a pipeline. Some of them you know of already, and we're maybe changing a little bit our stance from time to time. I'm not sure. Sometimes we're very transparent on new launches, and I'm not always sure it's in our interest, particularly if we're looking to replacement for existing products.
But of course, we experience that a little bit here on the critical care side, that customers who believe there is a new generation product coming into the market would tend to want that product rather than one we happen to have available right now. So, but as you know about the continuous glucose monitoring product that is coming out in the second half, we have a new sterilizer platform also that we're launching here in the second half of the year. Sort of scrutinizing my memory, we have a relatively big number of products coming out in extended care here over the next six months, significantly more than what we just had in the first six months.
We have the LAXX product in left atrium appendix occlusion that we acquired not so long ago, that we have high hopes for. So, there's a number of products coming out. On the guidance for the year, I mean, I think we've come as far as we'd like to at this stage on the guidance. And we're obviously, with the experiences from last year, sort of anxious not to repeat the mistake of over-promising or under-delivering. So I think that whereas we signaled improvements here, I would rather you make those judgment calls than me actually confirming those same judgments. But I think the quarter was a positive for us when it comes to volumes for us.
So, I think that we've actually gone over the time now.
One more question.
Oh, sorry, you had one more question, Scott, on the Infection Control?
Yeah, I mean, the question was just that, I mean, you seem to be -- Infection Control is 25% of your business, and you seem to be quite confident that you'll be able to drive margins up, you know, 300-400 basis points by 2014. So I just wanted to understand then, is my interpretation that, all else being equal, we should have 100 basis points expansion at the group level next year, you know, basically a linear progression towards your 22% margin target?
Aha! A bit to... Let us get back to that. We haven't -- we still obviously maintain our financial targets such as they are. There are absolutely no changes to that. And it's also always been understood that this is in the current ex- whatever the exchange environment is at that point in time, that would still be our ambition to hit that financial target. But we are not in a position now to sort of confirm any margin guidance for 2014. I leave that to your skillful assessments.
Thank you. Thank you.
Okay. I think we need to break now so we make sure that everyone has had the time to participate in all the questions. If there are any additional questions, as I said earlier, both Ulf and myself will be available to take those questions individually. So, thank you for spending this hour together with us. We feel that from a volume standpoint, we've put a good quarter behind us, gives us confidence moving forward, and we hope that we will be able to report continued progress here on the volume side in quarters to come. Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.