Good day, and welcome to the Getinge Group Q1 Report Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Johan Malmquist. Please go ahead, sir.
Thank you very much, and welcome to all of you. Thanks for taking time to be with us in the next hour. I'm joined here by Ulf Grunander, our CFO, and our plan is to follow the normal format as far as the agenda is concerned, which means that Ulf and I will provide a bit of an overview of the quarter, which will probably last for the next 10minutes-15 minutes, and then we'll open up for questions and answers, with the aim of completing this call by 4:00 P.M. In summary, in regards to this quarter, we can say that the quarter has evolved as planned and in line with the guidance that we provided at the start of the year during our recent Capital Markets Day.
If I move in and review the slide on trends in organic order intake. As you can see, the order intake grew organically by just under 2%. We do not feel that this fully reflects the underlying demand situation, which we believe to be better than the numbers here indicate. I think you remember that when we summarized 2012, we had two volume challenges. It was the capital equipment volumes in Western Europe, and it was also the capital equipment volumes in North America. If we look to the first quarter of 2013, we continue to see a volume challenge relative to our capital equipment business in Western Europe, but we've seen a good recovery in North America, and that recovery in North America is very much geared towards the U.S. economy.
Quarter one in Western Europe is typically a quarter that doesn't provide a lot of guidance for the year. Even, I would say, under normal circumstances, as budgets for hospitals, for our customers, is typically not released until during the second quarter. If we look to the growth of our recurring revenues, which for Q1 represents about 54% of our revenue base, they have continued to grow roughly in line with what we saw last year. That means between 5%-6% organically, so that's still very much on track. From a business area perspective, Medical Systems performed well, growing its orders organically by 7.5%.
Extended Care, which is much more exposed to the mature Western markets, had declining order intake, but Extended Care's two biggest markets, which is UK and the United States, both of those markets grew in the period. Infection Control also reported declining orders compared to a relatively good prior year period. The weaker order intake in Infection Control is almost entirely attributable to the life science market, which is a market that is quite cyclical in nature, and we're into a little bit of a low season. The healthcare piece was actually quite good in the Infection Control business. The only sort of additional comment I would like to make as far as the order situation is concerned, is that we continue to see healthy demands from the markets outside of Western Europe and North America.
Whether it will be this level or a level slightly better, it may be difficult to say, but I think the underlying signals we get and the quote backlog and so forth is very healthy in those territories. If I move over to the results on the group level, the consolidated results, you can see that nominally the revenues grew by 8%. Newly acquired TSS has obviously contributed to this number. Organically, revenue growth amounted to 6.6%, with good growth for both Medical System and Infection Control. This is partly what we alluded to with the delays that we saw at the end of last year, that to some extent have come through now in the first quarter. The slight decline in gross margin is partly due to the TSS integration and also partly due to weaker currency hedging contracts.
If you look on the gross margin on a like-for-like basis, then I would say we're probably half a percentage point up on the prior year period. The higher operating cost in the quarter is a large extent the result of the TSS additions, and then we also have five smaller bolt-ons that we completed last year, but none had been as sort of completed at this point in the year. Then, obviously, we have some investments on the emerging markets, and we have the U.S. medical device tax that has come as an addition. So if we go down to the EBITA line, we can see that EBITA has declined by 7.3%, if we compare with the period of a year ago.
But if we adjust, the results for sort of the changes in exchange rates, both transaction and translation, and we also adjust for the U.S. Medical Device Tax, we have growth in operating earnings of approximately 8%. We've also taken a relatively large restructuring charge. The bulk of that charge will go towards the closure of three facilities, as we have announced, two out of Sweden and one out of Germany, and they're all three of them going to lower cost manufacturing environments. I move on to Medical Systems. Medical Systems reported organic revenue growth of close to 11% in the quarter, with strong performance actually across all of the divisions.
The improvement in gross margin is very much from the cardiovascular division and is partly the result of the restructuring activities that we have undertaken in the last few years. Growth in expenses, again, is the result of some bolt-on U.S. medical device tax, and we also have, when we do businesses with third-party agents, the commissions paid get recorded as sales expenses, and that may vary a little bit from quarter to quarter. So fundamentally, an underlying net expense growth is quite modest and actually quite a way below the organic growth rate. The EBITDA results slightly up on the prior year period.
You can see on the slide that we have also reported the adjusted number, which in the case of each business area, represents the exchange rate differences, but also the exclusion of the Medical Device Tax. So on that level, earnings growth was close to 16% in the quarter. On the activities that relate to the medical systems business, we're very much on track with the Atrium integration. Top line growth continues to be very good. The restructuring activities within the cardiovascular division are progressing. The merger of the two plants making textile grafts is planned for the latter part of this year, and that will also allow us to complete the closure of the Fairfield plant in New Jersey and to integrate that manufacturing into the vein facility.
What we have added in the quarter is an overhaul of the R&D organization for the cardiac surgery business. It's been relocated to more appropriate premises, and it's also been right-sized to be in alignment with the R&D pipeline we have, and that will lead to annual savings of approximately SEK 20 million per annum. We completed the acquisition of a U.S.-based company, LAA, which is active in the field of occlusion of the left atrial appendage. This is a little bit of an outgrowth from the left atrium, and for patients that suffer from atrial fibrillation, or commonly sort of called AFib, the formation of thrombi in this sort of outgrowth is quite common. And some 90% of all the strokes recorded in AFib patients actually is the result of thrombi formed in this appendix.
So the technology that LAA has developed is a implant, which is placed to separate the sac from the atrium, with a special device that you can see on the picture here. We have purchased this company for a consideration of approximately SEK 180 million, and we believe that we will create a market for this specific technology of somewhere between SEK 300 million and SEK 500 million over coming years, and with what looks to be very, very good profitability. We've also launched a new retractor or a positioner for surgical interventions on the heart. The MIRA, compared to the Acrobat, is more for the minimally invasive procedures. It's a very good complement to our cardiac surgery franchise. Moving on to extended care. Extended care had a tougher quarter from a revenue standpoint.
Nominally, revenues grew by close to 18% through the definition of TSS, but on an organic basis, revenues declined by 3.5%. The lower gross margin that you see here is solely the result of the TSS acquisition in and the integration. So if we again do a like-for-like comparison, the gross margin for the old, if you will, extended care business is comparable between the two quarters. And we can also say that on an expense basis, we have for the underlying business very, very low single-digit expense growth in the underlying business. Same as with Medical Systems, again, with just for purpose of information, we have made sort of an adjusted number that takes into account the worsening of the currency situation and the Medical Device Tax.
You can see that we have a little bit less of a decline, but one should keep in mind that we have approximately SEK 25 million of EBITA contribution from the TSS business, so the underlying business has significant room for improvement. On the activities on the extended care side, then we're obviously spending a lot of energy on the integration of TSS. We're well underway, and I would say that all the different work streams have been activated. A big chunk of the saving is through the merger of the two depot structure for the rental operation around the therapeutic surfaces. It's also the merger of the sales operations in seven to eight countries. It is also the relocation of the manufacturing that was previously located in San Antonio, Texas, which will now be moved to Poland and China, to our existing facilities there.
We have recorded about SEK 60 million in restructuring charge, charges pertaining to TSS in this quarter, out of what will come the end of the year, be a SEK 70 million charge relating to this business. We also announced in the quarter, further initiatives to consolidate our manufacturing footprint. We now plan to discontinue our manufacturing in Eslöv, in Sweden, and also in our facility in Wesseling, in Germany. In both instances, the manufacturing will be moved to our production facility in Poland and partly be outsourced to a supplier in Eastern Europe as well.
We've taken a charge of SEK 146 million for the closure of the two plants in the quarter, much in line with the indication during the CMD, and we expect to save between SEK 90 million-100 million per annum once the program is fully implemented, a little bit over a year from today. We've also had two product introductions, a new hygiene solution for showering, the Carevo, and also a new therapeutic support surface called the Evolve. Finally, infection control. Organic revenue growth was good, at slightly over 10% for the quarter. Gross margins, I would say, were comparable between the two periods. If we continue or consider again the hedging side, gross margins are actually higher this year compared to last year.
Expenses is partly the Medical Device Tax, but also investments in emerging market, which is an essential growth track for this business. The EBITDA results, sort of on a nominal level, is down at 69 versus 91 in the prior year, but using the same sort of adjustments as we did for the other two business areas, the EBITDA on a currency adjusted and excluding the Medical Device Tax, ended up at SEK 107 million, which means an increase of close to 18%. On the activity side, two blocks, we did complete the acquisition of Turkish Trans Medikal. It is the market leader in Turkey with a 35% market share.
Trans Medical is intended to be part of our tier two offering for the more, for the customers in emerging markets, asking for products with simpler functionality, but also at a different price point. So we're, we're very optimistic that we can grow this business, not only in Turkey, but in a number of emerging economies going forward. We are also, as you know, in, in the very beginning of a comprehensive program to improve the profitability in the business area. For 2012, we recorded an operating margin of 12%, and, as we come towards 2015, 2016, we expect to lift the operating margins at level of 17% or beyond. And to that end, we have also sort of announced a relatively large restructuring program with charges that will fall this year, next year, and the year after.
The most important ingredients in this program is the consolidation of the manufacturing footprint. In this first quarter, we announced the closure of a plant in southwestern Sweden, in Skärhamn it's called, and that manufacturing will be moved to China here in the near-term future. We've also done some right sizings in the operation, and we're in the process of merging a couple of sales companies as well. So that program is progressing well. With that, I hand over to Ulf for some further comments around our financials.
Thank you very much, Johan. In the first quarter of 2013, the operating cash flow amounted to SEK 360 million, which represent approximately 50% of last year's operating cash flow. Even though a part of this change relates to lower operating result, a higher finance net, and a higher pay tax, the main part is a result of change in working capital. In the first quarter, we always have a build-up of the inventory, and in this quarter, it has been a little bit higher compared to last year. By a change in the business model for Medical Systems, Japanese unit. As a result of a termination of a distributor agreement, an inventory of approximately SEK 50 million was transferred to the Medical Systems, Japanese unit during the quarter.
The lower change in accounts receivable compared with last year, has to do with the shortfall in revenue in the fourth quarter last year, and a higher sales in the first quarter this year, i.e., timing different. The group's average accounts receivables days have developed value well at the beginning of 2013, and the DSO has remained solid on 71 days. A good reduction of the group's average working capital has been achieved in the period, the first quarter, amounting to approximately SEK 55 million. Accordingly, a solid performance of the group's average working capital. We still estimate that the cash conversion will be within the targeted range of 60%-70% of EBITDA. We take a look on the balance sheet. The closing net debt amounted to SEK 18.4 billion, and the closing equity amounted to SEK 15.1 billion.
The equity has been very negatively impacted by approximately SEK 470 million in currency translation. Even though that taken into consideration, the net debt equity ratio is at 1.2x , and the equity ratio is about 35%. The group has a strong balance sheet at the end of March 2013, and the acquisition capacity remains of approximately SEK 7 billion-8 billion.
... Okay, thank you, Ulf. And, just a few comments around the outlook. You will notice, or we've already had commentary from some of you, that there may be some words that need to be clarified around the outlook. But the major sort of guidance we've provided is that previously we said that we believe that organic revenue growth would be comparable to 2012 levels. We think that there is a chance of a slightly better number than that, the way we see 2013 now. We've also sort of reiterated that the earnings growth remains favorable for the year if we exclude the restructuring charges, but if we include the effect of the medical device tax and also the negative currency hedging effect.
The translational effects, and typically we make a distinction between the hedging, which is basically the contracts we have in place, so that currency effect is locked in, and it's sort of a number that we have strong control over. The translational effects is not something that we hedge, so we actually sort of suffer if the krona strengthens or if another currency weakens suddenly. You were, I think all of you provided the material at a recent Capital Markets Day to be able to make that calculation on your own. But in order to provide some clarity, so what the guidance now says is that Medical Device Tax and the hedging effects amount to SEK 230 million. So when we say favorable earnings growth, we have included that.
The entire translation effects, which at the beginning of the year was estimated at prevailing exchange rates, then at SEK 40 million, is now SEK 300 million, so that the strengthening of the krona has resulted in an incremental translation impact of SEK 260 million. The final comment we'd like to make is that the earnings, much as we stated at the Capital Markets Day, will be stronger in the second half of this year compared to the first half of this year, although we believe that we will have a Q2 that will be somewhat better than Q2 of last year. With that, I'd like to hand over to the Q&A session. Thank you.
Thank you. If you'd like to ask a question at this time, please press star one on your telephone keypad. 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 now take our first question today from Patrik Ling from Nordea. Please go ahead.
Yes. Hi, everyone. Could I just ask, when it comes to stock order intake, when we look at the Western Europe side here, for example, for the medical systems business, where you see -6.5%, adjusting for currency and acquisitions. Could you give us a feeling for how the development has been for just the capital equipment part? Because since you still say that the recurring revenues continue to grow.
Yeah, yeah, no, absolutely. We, as you know, not numbers sort of we report on a regular basis, but the capital equipment within Medical Systems in Western Europe in the quarter, organically, was down 19%.
Nineteen percent?
Mm-hmm.
Okay. And at the same time, you also see that you probably haven't hit the bottom yet. Given the visibility you have on potential orders and so on, when do you think during the year that you will hit the bottom?
You know, that's a very... I wish I had an answer to that question, but my-- I would say our organization is actually quite optimistic. So, you could say in this first quarter here in Western Europe, when budgets haven't been released, it's difficult to actually get a bearing on the direction. But I struggle to see why capital equipment purchases should sort of, and we were in decline last year. I struggle to see why the sort of decline should be larger this year compared to last year. But I may be wrong, but my belief is that it will maybe on that level, but my belief is it might be better.
Okay. Could I ask a question regarding extended care? You say in the report that TSS contributed SEK 24 million to earnings. First of all, what levels are we talking about? Is it-
EBITA.
EBITA? EBITDA, yeah.
Yeah.
What was the corresponding sales during the quarter?
I don't have that number here.
But going back, TSS have been declining quite rapidly. So is that, is that the same pattern, or has it stabilized?
We have stabilized the revenues. We're perfectly on the curve that we have for the year, and that curve represents growth compared to last year. So I must say that's one of the good things within Extended Care during this quarter.
Okay, great. I'll get back in touch with you.
You should be able to get a bearing on the growth if you do the currency adjustments and get the TSS as the residual value. You should get a reasonably accurate number, I think.
Okay, great. Thank you.
Thank you, Patrik.
...Our next question is from Hans Mähler , from Handelsbanken. Please go ahead.
Hi, Hans Mähler here. First, to follow up on what you see in the year, you mentioned that the organic growth rate in Q1 wasn't really what reflected underlying performance. Going into the second quarter, the comps and orders will get a little bit harder to beat. Should we assume that things get worse before they get better, or how should we model the year in terms of the second quarter? And then, my second question is related to extended care, the 4 percentage point drop in the gross margin, is that something we should model for the full year as well as the TSS impact, or how should we look on that? That's my two questions. Thank you.
Yeah, on the orders, knowing that they're a little bit sort of lumpy in nature when we look at the capital side, and it's really around the capital that we're likely to see the difference. I mean, our recurring revenue base continues to be growing at 5%-6% organically, globally and across all product lines. So it is the capital equipment. And, I mean, I am, let me use the word, hopeful, that we will see an improvement in order intake already in the second quarter. But it's difficult to give any guarantees on it. I can only say that I think my view on the market is very much shared across all of our different activities.
We're a little bit more sort of hesitant, obviously, on the extended care side because of our strong exposure to the Western markets. But I think it's as far as I can go in my commentary. I wish I could provide a more precise answer, but sometimes orders slip a little bit here and there. If I look on extended care, I think that you should expect the gross margin to creep up towards 50% as we get more of the synergies into the business or getting an effect in the P&L. So I would say that we should be maybe, if things work according to plan, between 49.5% and 50% gross margin.
On a full year basis?
On a full year basis, yeah.
Okay, perfect. Thank you.
Thank you, Hans.
Our next question is from Michael Jüngling from Morgan Stanley. Please go ahead.
Thank you very much. I have three questions. The first question is in relation to the emerging markets or the category called Rest of the World. It seems that you're struggling to grow in the mid-teens, at least the last two quarters have been below that. What is, if I can quote, "What is going wrong in the emerging market that you can no longer sort of deliver that fifteen percent or so growth rate?" Question number two, it seems that the U.S. and Canada for the group also showed pretty strong order growth, and the question is: Is there anything unusual in the quarter that leads to such strong growth in North America? The last question I have is on sales days.
Many companies are telling us that they're having a detriment in the first quarter due to 2 less selling days. You haven't mentioned it. Do you think your business has been affected in the first quarter by less selling days?
No, I think we follow the DSO on a sort of rolling twelve-month basis, and we continue to see gradual improvements. And,
We are on the same level as we ended last year on 71 days.
Mm-hmm. For the first quarter, that is.
Yeah.
The aim is to be the sort of projection that points towards 69, so a 2-day improvement thereabout.
No, I was actually referring to the number of selling days because of Easter between-
Ah.
the first and the second quarter, not your accounts receivable days.
Okay, got you.
The selling days. I'm wondering whether your first quarter is understated in terms of growth because of two less selling days?
On the consumable side and on the services, I mean, we don't bill on... I understand what you mean, yes. You know, it, I think the number of days is the same for us as everyone else, but I must say, we, no one has sort of used that as an argument internally, and I must say, we haven't much reflected on it. But I think it would be logical to assume that on our recurring revenue side, we would have an impact that would be more on the negative, obviously. But to quantify that, I'd actually need to go back and get some assessment to sort of provide a number there.
The rest of the world number, Michael, I think we're again, this is a little bit of a lumpy number when we look at it. When I sort of look, for example, at Medical Systems, had a healthy number in this part of the world last year, had a healthy number this year. Infection Control, I believe, had close to 30% growth in orders organically in the rest of the world region. And I must say, Extended Care, which came in a little bit weaker here, this rest of the world is, in their case, very much Australia, so it's not so much emerging markets. I must say, I don't feel that anything on emerging markets has changed.
I don't feel that there is any sort of new pattern. I'm well conscious of the fact that the fourth quarter, also for reasons of comparison, appeared to be weaker. But, but I would say we feel pretty good about it. But, you know, whether that is, is sort of a 15% or a 10%, I don't believe we have sort of said what it is, but my-- I would be-- it would be in line with my expectation, anything from, from sort of 10-... 10, 15, around 15. All of those numbers, I would say, would probably be within the range of the expectable. The expected, sorry.
The order book development in U.S. and Canada seems quite, quite good in the first quarter. Anything unusual there, please?
No, just, I think that it's very much on the capital equipment side. We have, for the last three, four years, we've had a very strong development in Canada. And if you take that, if you take North America as a geography, we're actually stronger, I would say, in Canada than we are in the United States, proportionately. So for two of our business areas, and for market-related reasons, both in Extended Care and in Infection Control, we saw relatively significant drops in order intake in the quarter. And despite that, we performed well, I would say, in North America. So I think this is a sign of improvements in the CapEx spend profile and continued good momentums on the recurring revenues. They've actually also picked up a little bit.
Great. One last question on operating profit growth. When do you think you'll be able to define favorable growth in a bit more clarity? Should this be the second quarter result?
I think that we have actually, sort of, throughout the years, remained somewhat fluffy when it comes to our earnings guidance, actually. You will see things like good, good, favorable, and those, but it's, it's rarely sort of quantified. I, I think at some stage in the year when things have, put it this way, when estimates have started to converge a little bit, we, we may start to make commentary around consensus earnings. And, and I'd maybe like to see things aligning a little bit now after the second quarter. There were quite a few outliers, so the median numbers coincided quite well with our actual outcome for the quarter, but the average, still, was sort of affected by some strong outliers. So, perhaps here over the next couple of months, depending on, on, how the consensus estimates fall out after the report.
But the one thing I would say where we have genuine uncertainty is sort of over the currency situation, which really is beyond our control. And as you saw, I mean, this single biggest impact, in fact, the only change to our outlook in this last quarter pertains to the translation effects on the exchange rates. So and we're sort of we're hoping that things will improve or at least stabilize around the levels where we see the Swedish krona now.
Great. Thank you very much.
Thank you, Michael.
Our next question comes from Richard Koch from Cheuvreux. Please go ahead.
Hi, Richard Koch at Cheuvreux. What was the level of amortization of R&D in this quarter?
I refer to Ulf here.
Yeah. On amortization, on the CapEx, it was SEK 80 million, SEK 80 million.
Okay, thank you.
You're welcome.
Second question. I'm trying to ask this question in the most objective, open-minded way possible. But if I take a longer view, and I look at the past 10 years or so, you've had numerous restructuring costs and other so-called non-recurring items. Many, but not all of them, are related to measures of the acquisitions. But acquisitions are, and I think this is safe to say, given your history, recurring. Yet your focus and targets are set on margins before these costs. When do you, in the aggregate, think that this is actually a structurally challenged industry and not just a set of one-time issues that can be explained away, but that restructurings are a part of the business? And if these are not systematic, structurally need measures, what does recurring costs look like?
Yeah. I think it's a good question. And when we... I mean, we have completed, I don't know how many, but most likely some 50 acquisitions over the past 10 years, 20 years, and some of them relatively large companies with relatively complex supply chain structures. And we have with every, at least I would say from round about the end of the 1990s, up until today, we have attempted to capture all necessary integration charges upfront as and when we have announced the acquisitions. And however, even with that ambition, I think it's very difficult to capture everything in that, because our reasoning internally has been, if we can't capture that cost or that activity within, say, a 24-month period from the time of the acquisition, we probably shouldn't provide for it.
Because otherwise we could provide for sort of stretched out restructuring programs running over three or four years, which I think is probably not a sound practice. So what we are, in essence, doing now is taking sort of—We've concluded the restructuring that was planned at the time of the acquisition, but as we get more efficient, we see new opportunities to lower our cost base. That's one side. The other side of it is that when we built up the Infection Control business, the circumstances were such that it was very difficult to consolidate fully the manufacturing because different geographies had different standards, and those standards were much easier met from within those geographies. So you can say that what relates to Infection Control, I would say, is a legacy effect that we are correcting.
What relates to the other, businesses is sort of the continued drive for improved efficiencies, and, and, I wouldn't, I wouldn't call them defensive. I would say they are very much sort of aligned with our margin expansion targets. I think that going forward, there will always be sort of efficiency improvements that may sort of result in restructuring charges. But I think you should see those as, as more part of our operating, our normal operations. Now, there, there happens to be a line that is, is sort of labeled restructuring, in, in our and many other companies' P&Ls. And, and that means that when we have activities, which in many cases I would probably have labeled other operating expenses, but if they are of a restructuring nature, they end up in on that line.
So, I think that if your question is sort of on a going forward basis, do we need to undertake restructuring to maintain our targeted profitability? My view, the answer to that is no. And to the extent that we need and want to undertake further restructuring, that should be regarded as an integral part of our EBITA result.
That's very helpful. Thank you.
Thank you, Richard.
We'll now take our next question from Mattias Häggman from Danske Capital Markets. Please go ahead.
Good afternoon. Thanks, thanks for taking my question. Your current receivables were up sequentially in Q1, and, and as a consequence, had a negative effect on your cash flow from operations, just as Ulf described. Except the Japanese inventory effect, how much of the weak cash flow would you attach to the late shipments in Q4? And was there anything due to the Easter effect, given that the quarter closed during Easter, or were the remainder of the cash flow deviation compared to last year be in relation to true underlying performance? That's my first question.
Yeah, but I think it's difficult to exactly quantify each sales in each quarter to say how what sort of impact it had. But we have done an analysis, and it was the main part of accounts receivable that it didn't come down as much as it did in last year's first quarter, has to do with the shortfall in revenue in the last quarter, and also that we did have a higher sales in the first quarter. I have reviewed them to make sure that we haven't lost in, so to say, any sort of cash payment from our customer in the first quarter, and that is not the case. We are still on the same sort of 71 days as we were at the end of last year.
Then when it comes to inventory, I have not seen any sort of special build-up in the inventory. If I review the different units we have in our group, the only thing which actually happened was the thing I mentioned about the Japanese change in business model when we took over an inventory, when we terminated a distribution agreement. So I have actually nothing more to add, but I could tell you that we have reviewed it in quite detail to see that it was no unusual thing in that sort of change in the working capital.
But you wouldn't say that the Easter, given that the quarter closed during Easter, and some companies may have taken the opportunity to pay after Easter, meaning that a lot of collection came in just at the start of Q2, is a main reason or a contributing reason to the cash flow?
I don't think so. I think, Matias, the best indicator that this is a pattern of invoicing more than anything, is that the number of DSO outstanding is intact and stable at about 71 days. I think the change in cash flow is really the timing of invoicing and collections between a Q4 of last year that fell short of expectations and an unusually, I would say, strong Q1, 6.6% organic revenue growth that we're projecting, you know, comparable level to last year or maybe somewhat better. So I think it speaks a little bit for itself.
Thank you. And the second question is, based on my calculations, TSS appears to have had around 6% EBITDA margin. Can you confirm that? And also, more importantly, where will margins for TSS end up once you're done with your actions that you've planned as part of the integration process? Will they reach divisional levels, or is this by nature a lower margin than the rest of the extended care?
We have, as we said, a relatively comprehensive integration program here, and I'd like to maybe answer the question somewhat differently. The EBITA margin target that we have for Extended Care is 22% by 2015, and you should view that margin target as sort of the target, including a TSS fully integrated. So it's sort of, but within that, you could argue that, well, maybe the underlying business is 24%, and TSS is somewhat lower than that. But the way we have decided to communicate sort of the impact of TSS is to say that we maintain the financial target, but we say also that we will have a little bit of a dip short term and then come back to 22% by 2015.
Great. My calculation of 6%, is that in the right ballpark, or?
I leave that entirely to you. Actually, still don't have the numbers in front of me.
Okay. Then lastly, you added the wording possibly somewhat better to your organic sales guidance compared to when we met in February at the Capital Markets Day. What in particular have you seen that led you to add that wording now in connection with the Q1 report?
I think a little bit. I mean, it's around our forecasting. It's obviously the sentiment within our organization. It's growth volumes, it's outstanding projects we're working on. And I mean, as I commented on at the end of 2012, we had two problem areas, which was capital equipment in Western Europe and capital equipment in North America. I must say, I feel that we now have one problem, which is capital equipment in Western Europe. So it sort of means I have one challenge area to focus on.
Thanks so much.
Thank you very much, Mattias.
We'll now take our next question from Lars Hevreng from SEB. Please go ahead.
Yes, thanks. Just to clarify on the guidance, sorry for that, but the change you have, the only change you have down, so to say, that's to go from this translation effect where you earlier said at the conference or at the Capital Markets Day, you said SEK 40 million.
Yep.
Now, now you say SEK 300 million.
Yes, correct.
All right. And that effect comes in when you say earnings growth, that excludes this change?
That excludes the translation effect. Absolutely correct.
Mm-hmm.
So we have maintained the hedging effects in there. We have maintained the Medical Device Tax, but we have—I don't think that you should... If we could have put SEK 300 million, the same SEK 300 million in there, Lars.
Yeah.
But it would have made it very difficult to construct the sentence in a way that you could understand. So I think that if you read that commentary, you can say excluding SEK 300 million on Medical Device Tax and currency effects, and then put in addition to that, SEK 260 million, that would maybe be more accurate when we talk about the forecast. But we decided to group all of the translation effects into one basket, because that's where the change occurred since the hedging effect is locked in.
Mm-hmm. Okay, I see. Thanks. The other question is on now, now since you're a couple of months into the change programs and the numbers of these programs, do you have an update to the cost assumption for this year? I mean, you cost, you earlier said SEK 470.
Yeah.
Is that something that still holds?
Yeah, I don't think we will exceed that number. I think, depending a little bit on Infection Control, how much we have of the right sizing activities, which I believe from memory was estimated at SEK 70 million-ish. I think depending on how much we use of that, I think we may end up a little bit lower, but I would for guidance purposes suggest that you use the entire number we provided.
Mm-hmm. Okay. And finally, then, on the margin assumptions you elaborate on. Now, since you're a bit into this year, what kind of sales growth do you think you would need to see to achieve these margin assumptions that you planned out? So, I mean, now you're at 2%-3%, but is that a growth rate that's good enough, so to say, to achieve these targets, given the size of the restructuring program?
Are you referring to the 2015 operating margin targets?
Yes.
Target.
And I guess you have, you know, stepwise targets until then.
Yeah. Yeah. Well, if we sort of stick with those, because those are the only sort of numbers in the public domain, then I would say that we need a growth rate that is largely in line with inflation, I would say, in our mix of geography. So say that it needs to be probably between or around 3%-3.5%, maybe somewhere around there. So anything above that would be good. But given that the margin expansion is very much reducing our cost base on the existing volume of business-
Mm.
The way I view it, we just need to stay at bay with fundamental underlying cost inflation.
Okay. Thank you.
Thank you, Lars.
We'll now take our next question from Ed Ridley-Day from Bank of America. Please go ahead.
Thank you. Yes, a couple of follow-up questions, please. U.K. growth, you mentioned, could you give a little more color on that and what is driving that return to growth in the U.K. market? And can you remind me what proportion of your revenues is now the U.K.?
... Okay, let me, well, what drives it? I have to, I don't know if I can, could I flatter myself in saying we're doing a good job, but I think that we had, actually through the first six months, almost first nine months of last year, growth, and then we saw a dip, at the, in the final quarter of last year. That meant that the year didn't turn out as well as we had supposed when we were, say, at the midpoint of the year. And what we're seeing now is a little bit a return to the pattern that we saw, in the early part. I mean, we're not talking massive growth, but we're talking growth in the low single digit, which I'm pretty pleased with.
To say, if you take on a quarter basis here, we have approximately SEK 500 million in revenues in the first quarter.
Thank you. That's, that's very helpful. In terms of the U.S., just a slight improvement in the environment there, we have some evidence that the bed market may have finally seen some improvement. Would that tally with your experience in the quarter?
Yeah. I mean, I would say that the beds may be one, but the strongest growth, I would say, across our categories was respiratory, surgical workplaces, and the healthcare infection control. Those three categories were very good. The weaker ones I would say was life science, and we had slight growth on the patient handling devices in the United States. And that partially. I mean, our bed business in the United States is very, very small, very, but today and with TSS part of the organization, we believe that we will start to make some interesting inroads into the medical beds market in the United States. But today, it's a very, very small base.
Thank you. Final question is just to our Japanese revenue exposure?
Yeah, you mean the volumes we do there, or?
No, the revenues.
I think an estimate would be about SEK 1.5 billion, I would say.
Little bit more.
Little bit more. How much would you say? Is it SEK 1.7 billion, or?
Around 2%, I should say.
Very good. Thank you very much.
We'll now take our next question from Kristofer Liljeberg from Carnegie. Please go ahead.
It's Kristofer Liljeberg from Carnegie. Coming back to the earnings guidance you're giving for the full year, you don't want to say anything about what we should expect for earnings growth if we include diverse translation effects. Are we talking about flattish growth or still a couple of % growth?
No, I don't think. They, you know, they become very sticky then. I think the idea is that you hopefully will form some opinions yourself on the earnings growth. I think we've tried to maintain it a little bit. Like I said, I think that if the range of consensus estimates come together a little bit better, I think we'll be in a better position also to comment a little bit around it. But as I said, for the quarter, the median looked good, but the average was a little bit out of sync because there were a couple of outliers. And those outliers also probably exist on both sides a little bit for the full year, so we'd like to see that narrow down a little bit.
If you don't mind, this would have been unusual for us in any given year, and so-
Yeah, okay.
We'd like to wait a little bit with that conclusion.
Okay. That's fine. That's fine. Two other questions, if that's okay. One, if you could comment on the better growth for the critical care division. Is that driven by the new product launches you talked about at the Capital Markets Day or something else?
The critical care is good development on the anesthesia side. We've got really good traction, I would say, through the first quarter here now. We've had good on respiratory. The stronger piece of respiratory has been in the rest of the world regions and the United States. Still a little bit tougher in Western Europe on critical care. And the new product, the new ventilator platform, we're expecting to launch in the third quarter of this year. That looks to be on track. It will be, I think, a very good product. And the Eirus, the continuous glucose monitoring, is being launched here towards the end of this quarter.
In a sense, it's been presented, it's been launched, but commercial shipments will start and take place at the middle of the year.
But isn't it a little bit strange that respiratory is strong, okay, mainly maybe in emerging markets, but in the United States, for example, wouldn't customers be waiting for the new version?
Well, the one we have is already the best there is-
Okay
... so if you need one. But I think what one needs to keep in mind, I don't know if you would read the Q1 report last year, I think we would have commented that we had a challenging situation in critical care. So I mean, it's very strong growth in critical care, but it needs to be put into perspective with a weak start of 2012. But all in all, you know, it's doing very well for us.
Okay. Makes sense. And then the last one, I'm struggling a little bit with the, you know, comparing reported growth rates and the one you define as organic. Is it a possibility for you to split up the currency effects and what the total effects were from acquisition? Because it's not only TSS, you did a number of smaller acquisitions also last year.
Mm-hmm. Yeah, I think that Ulf could probably do that. Sure.
I could do that.
Yeah. So you mean to say, to go from nominal, extract the acquired growth and adjust for the currencies and sort of get to the organic?
Exactly.
Yeah.
I think the easiest would maybe be for anyone interested in that to actually address Ulf directly.
Yeah.
Okay. I'll call you afterwards. Thank you.
Thank you. Thank you, Christopher.
You're more than welcome.
Our next question is from Johan Unnerus from Swedbank. Please go ahead.
Thank you for taking my question. Johan Unnerus from Swedbank here. First, on the medical systems then, you have several quarters now with improving growth margins. How should we think about that, given the currents and everything? Is that, should that be leveling out, or is that sustainable?
Yeah, I think when you look at medical as a whole, I think this is the level, give or take, say, around the 59%-60% that we expect to see the gross margin. And I think part of it, as I commented on, is we're hopefully getting some good results from the plant consolidations that we're undertaking. So some of that gross margin improvement is definitely attributable to that. Another component is that we are throughout last year and also this year now, we have enjoyed very good growth across our cardiovascular business. So that continues to perform very well.
And now we also have, obviously, the benefit of Atrium, which is, of course, growing faster than the average, and also represents gross margins that is meaningfully higher than the average. So, but the big piece of this is really the improved structural effects that we have, but the others are also contributing.
I guess we can take that as some support going forward as well then.
Yeah, I mean, as I said, I would maybe think of the gross margins within Medical Systems in the range from 59%- 60% for the full year. That would probably be my—the range, but that would then obviously also take into account the worsening of the hedging side, so the underlying is somewhat better than that.
Okay. And Infection Control, there you got, headwind, especially from the product mix. Is that the same sort of strength, or is that start to leveling out? And also-
Yeah, it's getting better because as I think we've said, we have two sources of worse margin. One is the life sciences market, which typically delivers a lower gross margin, and the other one is the sterilization side. We've seen a swing back to better growth in healthcare and weaker growth in life science, so that should sort of contribute to some extent towards improved gross margins. When it comes to disinfection, sterilization, I'd say we're still at roughly the blend we had last year, so we haven't seen sort of a swing back to what we had, for example, in 2011. But we think that will come gradually because the disinfection is actually a very small part of our life science business compared to the healthcare.
Okay. And, and then about that acquisition, LAAx, then it seems to be a very good price, considering what sort of volumes you're aiming for. Can you give us any flavor, how, what, what sort of time period, what can we expect? When can you hit sort of meaningful volumes? Already 13 or 14, or?
I, I think we would need to think more in 2014, 2015, actually. I mean, I think the good thing is that we have, given our, our sort of strong franchise through endoscopic vessel harvesting and, and the, our bypass surgery business, we have relationship with virtually all cardiac centers in this world. And, and, we talk about the U.S., where we, we have a particularly strong presence with, with a very significant sales force. So, and that is used of, of sort of selling problem- products that, represent new clinical practices. So I'm, I'm pretty optimistic that we can get sort of good traction immediately, but to get good adoption, also, we need sort of a number of, of... or a larger number of reference points for this to become, say, some form of standard of care.
I mean, our belief is that this, the occlusion of the left atrial appendage, I think, is more likely to occur surgically in a concomitant way, rather than actually conducting a surgical procedure for this condition specifically, which is a little bit comparable to the surgical ablation market, which is a market that is predominantly a concomitant market. So meaning that when you're opening up the patient to do a bypass or replace a valve or whatever you're doing through an open procedure, you would, at the same time, actually correct this medical condition in a patient suffering from atrial fibrillation.
I think it looks very promising, and there is a lot of interest right now around stroke treatment in general, but also a strong trend towards developing technologies for occluding the left atrial appendage, both interventional technologies and surgical technologies.
And what about your presence now in the minimally invasive market? Is it strong enough to step up and make additional acquisitions?
Yeah, I think so. I mean, it's obviously one of our ambitions. I think for every open technology, there is an emergent interventional technology. So typically, I think we'd like to sort of own a franchise, both in both categories, so to speak. But yeah, I think our aim is still very much to invest on the interventional side, but those investment would be very much targeted towards the peripheral arterial disease at this point in time, at least. So in other words, to build on the Atrium platform.
Yes, thanks. And finally, you've already given us a flavor about TSS and the feeling for margins to 2015. But what about the potential for improvement from Q1 already in 2013? Where will you be towards the end of the year?
I mean, this year will, as and I think we commented around that at the Capital Markets Day, that we were looking for a dip in margin. So last year, our operating margins ended up at just over 21% for EBITDA margin. And in this year, I think that you should look at the number around 19% would be my guess.
I'm thinking then of TSS specifically.
Yes, standalone, we don't comment. It's so integrated now that it will be virtually impossible to carve it out, actually. It's a blend of our own therapeutic surfaces and their therapeutic surfaces. We have soon a joint depot structure and so forth. It gets to be very difficult. If I attribute all the synergies to TSS alone and took that revenue base, I could obviously come up with a number, but I think that would be misrepresenting a little bit the margin from TSS.
Okay, thank you very much.
Thank you, Johan. I think we can take one more question, and then to allow people to continue with whatever they were doing before they called in. I think we'll try and wrap up after that. So Operator, we can take one more if there is.
Certainly. We'll take our next question from Scott Bardo from Berenberg Bank. Please go ahead.
Thank you very much for taking my questions. Just a couple, please. Firstly, you seem to have punched in the lowest margin on a quarterly basis that we've seen since the downturn of 2007. You've helped us explain, you know, why, you know, there are some currency effects and the med tech effect. But I wonder if you could help us understand if there are any noticeable mix effects that are compounding to the problem here, and/or have you seen any acceleration in pricing pressure? So that's question number one, please. Secondly, could you please just come back and clarify the outlook? It seems that we're speaking a little bit in riddles here.
You mentioned that there is the ability or the ambition to hopefully have slightly higher organic growth than your, let's call it 3% you were guiding for before. If one was to assume an additional percentage point on that growth, that's about SEK 260 million, given your current revenue base, and yet you're assuming something like a SEK 260 million delta or increased headwinds from FX. So whatever number you would have in mind for pre-tax profit on a restructuring basis on an absolute level, are we boldly saying that that number stands given the effects that we just mentioned? Or are you expecting a number a little bit less than you had in mind at the beginning of the year?
Just wondering if you could clarify that for me. Thank you.
Scott, I'm not sure I understood your second question, but the clarification on the outlook that we have made, which I must underline, is a clarification that I think most of you could have done all on your own if you all used the material that was provided at the Capital Markets Day. But the strengthening of the Swedish krona means that when we are translating foreign P&Ls into Swedish krona, we're not getting the same number of million kronor. So that effect, compared to where we were at the beginning of the year, our estimate was that we were looking to SEK 40 million of negative translation currency effects. Because of the continued strengthening of the Swedish krona, we are now looking to a number of approximately SEK 300 million.
That is the change that has happened between the beginning of the year and up until the end of the first quarter. That is, in fact, the only change. Then on sort of a more positive note, one could say, but we feel a little bit more comfortable around the growth side, and we're simply saying that if it is around last year's level, it would seem that it's more likely to be above last year's level than below last year's level.
Thank you. So the point I was just trying to raise is, if it is 1 percentage point above last year's level, then that is effectively the SEK 260 million delta that you have now as an additional headwind in currency.
No, no, no. You're talking, no, you're talking revenues, and I'm talking earnings.
Okay, all right. Thank you. All right, understood.
And then your question on margins, I presume you're on EBITA margins, right?
Correct. Correct.
Yeah, I think in this quarter, I mean, depending, I mean, our business is quite sort of. I think one needs the full year to have a sort of full view of the operating margin, given we're so back-end loaded. But I think that we will look to an operating margin on EBITA margin in this year, including TSS, which is diluted, including transaction effects, including a Medical Device Tax and so forth, that is not, which I would call probably comparable to the level of last year. So,
He also asked about if there were any sort of mix effect or price-
No, no. I mean, it's not... I think when I get the question on price, it is very, very difficult for us to sort of sort out the pricing effect, since we particularly on the capital side, where we sell products that are sort of customized. If you take a ventilator, there is probably 30 different options you can add to a ventilator, so you don't get really to a comparable product. But I would assume that in the environment, sort of post-2008, after the financial turmoil set in, and which is now sort of a sovereign debt crisis, that we have basically the same number of competitors competing for a business that is smaller. And I would have to assume that there is a stronger element of price pressure today than there was before.
I'm sure that part of the growth profile is probably also some element of pricing in there, but it would be very, very difficult for me to sort of isolate it. I think something that should provide you with a degree of comfort is that the difference between our costs and our pricing is actually such that our gross margin has climbed since the financial crisis. So I wouldn't say that there are any indications in our P&L to suggest this is a material element.
That's helpful. Thank you very much.
Thank you. Okay, I think in the interest of everyone's time, I think we'll try and wrap up here. We're both, Ulf and I, are obviously available to take any additional questions that you have or that you feel you haven't sort of been answered during this call here. As I said, we still operate in a challenging environment, but we still, even if we didn't manage to sort of have that appear into the numbers here, we feel that the volume development is a little bit more encouraging than at the beginning of the year. And also, we feel that we're delivering on our plans, and we had a more challenging first half of the year.
I think we lived up to the promise that Q1 would not be as strong as last year, unfortunately, you could say. But all in all, I'd say we feel sort of comfortable about the remainder of this year. With that, thank you.