Welcome to the Getinge AB Q2 presentation for 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to CEO Mattias Perjos and CFO Lars Sandström. Please go ahead.
Hi, everyone, and welcome to today's conference. This is Mattias Perjos, and I'm accompanied by our CFO, Lars Sandström, as well. We can move directly over to page number two, please. If we start with the summary and the key takeaways for the quarter, Getinge sales increased organically by 1.3% during the quarter due to the strong performance of Surgical Workflows. While we had order intake drop 4.5%, mostly driven by the quality and supply chain challenges that we see in cardiac assist, plus some market weakness in the bioprocessing part of Life Science.
The group sales, margins, and cash flow were negatively impacted by these challenges as well in cardiac assist and cardiopulmonary in our Acute Care Therapies business area. This is something that we'd informed about already in June. We had an unfavorable mix and inflation that particularly affected also Surgical Workflows in large parts of Life Science, and these are areas where we're experiencing longer lead times from order to delivery, and therefore, it's a bit more difficult to fully compensate by raising prices in the short term. This also have had an impact on us, of course. We continue to have positive free cash flow and a solid financial position with a healthy safety margin when it comes to leverage. We can move over to page number three, please.
If we take a step back and look at some of the key activities and events for the quarter. When it comes to our offering to customers, we signed an agreement to acquire 100% of the shares in High Purity New England, Incorporated, which has a strong position in custom single-use solutions for bioprocessing applications. From an organic perspective, Getinge Life Science launched ISOPRIME, and this is an isolator with comprehensive connectivity and traceability features, optimized for commonly occurring cell transfer applications. We also had a couple of news after the quarter ended, Getinge Acute Care Therapies was granted a 510(k) clearance from the US Food and Drug Administration for Servo-air Lite.
Like all our Servo ventilators, it offers ICU quality ventilation, but it's more geared towards spontaneously breathing patients in need of extra breathing support. It can also be operated independently from wall gas and is suitable for inter-hospital transports, and we expect this to be available for customers in the U.S. from September 2023. It's an addition to our offering that greatly increases the addressable market in the U.S. When it comes to sustainability and quality, it's worth mentioning that our carbon dioxide emissions, energy consumption, and also the share of renewable energy continue to develop in a positive direction.
During the quarter, though, we informed about additional challenges related to quality and supply within two product categories in Acute Care Therapies: cardiopulmonary and cardiac assist, which was expected to have a negative effect on sales and adjusted EBITDA for the quarter and the full year. In Q2, the impact was approximately SEK 400 million that we informed about in June. In order to give some clarity on where we are with these challenges, we've added two slides that we normally don't have in this deck, with some relevant information to explain this a bit more in detail and give you a status update. If we can move over to page number four, please. Let's look at cardiopulmonary first.
This is a business that had a bit more than SEK 4 billion in the net sales in 2022. The two products having challenges are QUADROX-i and HLS-PLS. QUADROX-i represented less than 10% of sales in 2022, while HLS-PLS made up almost half of net sales for cardiopulmonary. Both of these products are life-saving consumables, and both come with high gross margins. Both have issues with the packaging and not the products. This is important to be aware of, and no incidents have been reported for any of these two product categories. When it comes to QUADROX-i, we don't ship anything at the moment.
Deliveries can start after us bringing new packaging solution to the market, which is expected late this year or potentially during the beginning of next year, and this is then followed by applying for regulatory approval. On HLS-PLS, we're working with a dual track approach, so redesigning the existing packaging solution and in parallel, designing a new solution. The redesign is expected to be finalized by end of this year, early next year, following by an application for regulatory approval. At the moment, we are shipping these products. Due to the nature of products, they are a medical necessity. As we've said before, when it comes to the CE markets, we need to reapply for a prolonged use of Article 59 in order to be able to ship into CE markets after September this year.
We just received, after the closing of the quarter, positive information from BfArM, which is the German competent authority, stating that we are allowed to deliver our HLS-PLS without CE marking also after September 2023 in Germany, which is the largest CE market. The European Commission have the power to decide that the same applies for all CE countries, this decision is still to come. That concludes cardiopulmonary. We can move over to page number five , please. Let's have a closer look at cardiac assist. This business had net sales slightly below SEK 2 billion in 2022. The two products having challenges are intra-aortic balloons and intra-aortic balloon pumps.
The balloons represented a bit more than half of sales in 2022, while the pumps and service made up the rest. The balloons are life-saving consumables that come with high gross margin. They are used on the intra-aortic balloon pumps that come with medium-level gross margins. When it comes to the balloons, there isn't an issue with the product that we produce, but with a third-party component in the so-called Insertion Kit. After the end of the quarter, we have identified the root cause to this problem, and the global deliveries resumed in July as a part of a field action, with the corrected dilators expected to resume shipping in middle of Q3.
When it comes to the pumps, we've had both supply and quality constraints, with ongoing field corrections that we expect to have resolved later this year or beginning of next year, followed by applying for regulatory approval. We are allowed to deliver during field corrections in most important markets. Currently, though, we prioritize field service backlogs, and we expect to ramp up delivery volumes gradually during the second half of 2023. As we've said before, we've waited, we have awaited a response on the temporary CE mark suspension in Q3. It actually came very early in Q3, so just the other day, stating that the CE certificate is reinstated with immediate effect. This is good evidence of the positive traction that we have with the work here.
As we all know, these challenges have the highest possible priority in Getinge at the moment, and therefore, it's good to see these positive results. We will continue to report and update you on the progress in the coming quarters for these two categories. We can move over to page number six, please. As I mentioned in the beginning of the call, order intake declined by 4.5% in the quarter, and net sales increased by 1.3% organically. Orders were impacted by soft performance in China in the quarter, making up for most of the drop that you see here in Asia Pacific. The Asia Pacific decline was most visible in the areas with quality and supply challenges in Acute Care Therapies, so again, cardiac assist and cardiopulmonary.
There was also some weakness in China when it comes to the Life Science biopharma offering and washer-disinfectors. On the positive side, both these business areas performed well in Americas in the quarter, which explains the organic order growth in that region. When it comes to net sales, we had a positive development in both Americas and in EMEA, to a large extent, thanks to Surgical Workflows, strong performance in those regions. The decline in Asia Pacific is, to a large extent, explained by the soft performance in China, in the same product areas as for orders. Again, part of Life Science and cardiac assist and cardiopulmonary within Acute Care Therapies. We can move over to page number seven, please.
If we combine the status update where we are into an outlook for 2023, we leave it unchanged. We expect organic net sales growth to be between 2% and 5% for 2023. We can move over to page number eight, please. Let's look into the order intake evolution a bit more in detail. When it comes to Acute Care Therapies, we had a 3.7% organic decline in the quarter. This was mainly due to the temporary quality and supply challenges in cardiac assist, and also a bit lower order intake in Critical Care.
The performance was particularly weak in China, in the areas where we have quality and supply chain challenges, so cardiac assist and cardiopulmonary, while order intake in North America was strong in all product categories except for cardiac assist. When it comes to Life Science, we had a 14.3% organic decline in order intake. The lower order intake was mainly the results of a weaker trend in washer-disinfectors and the continuing soft demand when it comes to bioreactors. The performance in China was particularly soft in the quarter also for Life Science. The order intake increased in all product categories in Americas for Life Science. In Surgical Workflows, we had a 1.6% organic decline.
This was due to the decline in steam sterilizers and washer disinfectors. We saw a slight increase for all our other products in Surgical Workflows. The order intake was unchanged in the important North American market. This is despite highly challenging comparative figures from the second quarter of last year. We can move over to page number nine, please. If we do the same exercise when it comes to sales, we can see that organic sales for Acute Care Therapies increased in all key product categories, for cardiac assist and cardiopulmonary, which were impacted by the previously announced quality and supply challenges.
It takes us to a -5.4% decline or organic growth for Acute Care Therapies, and the development here was markedly negative in China. Net sales for all other product categories in Acute Care Therapies increased during the quarter. Open orders for deliveries in the current year in Acute Care Therapies are more than 20% higher than at the same time last year. If we move to Life Science, we had a 0.7% organic growth in sales, mainly as a result of higher deliveries of steam sterilizers and washer-disinfectors in Americas and in EMEA. Net sales in products for customers in the biopharma segment continued to decline year-on-year, particularly in China. The positive trend when it comes to service, though, continued.
However, if you look at total recurring revenue, it declined as a result of lower volumes of consumables targeted to the biopharma segment. Finally, Surgical Workflows, we had a 13.4% organic sales growth in the quarter. This was growth in all product categories and substantial growth in North America, which is well in line with the business area's long-term ambition and strategy. The improved situation regarding the supply of components also contributed positively to sales of capital goods for the quarter, and the backlog reduced considerably in this category. Recurring revenue also increased organically, although not to the same extent.
We can, if you then look at the currency impact of this, we had a SEK 411 million, or a 6.2% positive impact on net sales for the group in the quarter. Overall, capital goods organic growth was 6.8% in the quarter. This is positively impacted by strong deliveries in Surgical Workflows. Recurring revenue declined for the group 1.9% due to the challenges in cardiopulmonary and cardiac assist, and also continued soft performance when it comes to BetaBags , as we can see that customers are still destocking this product. We can move over to page number 10, please.
If we move further down the P&L and look at the gross margin, we can see that adjusted gross profit decreased by SEK 41 million -SEK 3,314,000,000 in the quarter, where a positive foreign exchange effect accounted for SEK 182 million . For the group as a whole, the adjusted gross margin declined by 4.1 percentage points due to unfavorable mix, lower absorption, and cost inflation, and also currency. These effects were partly offset by price increases. For Acute Care Therapies, the adjusted gross margin declined by 3.8 percentage points, mainly due to lower sales volumes related to cardiac assist and to cardiopulmonary.
The margin was also impacted by cost for an increased level of scrapping of HLS and PLS Sets being damaged during transport, as well as higher cost for input materials and also for personnel. This was partly offset by positive currency effects, price increases, and a strong performance in, for example, Critical Care when it comes to gross margin. For Life Science, the adjusted gross margin declined by 2.3 percentage points as a result of negative product mix and higher cost for input goods, personnel, and also currency effect. Price increases contributed positively to the margin in Life Science. Surgical Workflows adjusted gross margin decreased by 3.6 percentage points, primarily as a result of higher cost for input goods and personnel and negative currency effect.
This was partly offset by higher sales volume, some price increases, and also productivity improvements in the business area. With that overview, we can move over to page number 12, and I leave over to you, Lars.
All right. Thank you, Mattias. Looking at adjusted EBITDA, it decreased by SEK 461 million compared to the same period last year, where approximately SEK 400 million can be explained by the challenges in cardiac assist and cardiopulmonary. Adjusted for currency, gross profit had a - 4.4 percentage point impact on the EBITDA margin due to what was just presented by Mattias. Organically, SNA increased by some 10% versus previous year. The difference is mainly explained by lower level of variable pay last year, creating a delta of SEK 90 million year-on-year. In addition, we have some SEK 50 million of extra cost related to the challenges in cardiac assist and cardiopulmonary. When looking at underlying OpEx, it is negatively impacted by cost inflation and a higher level of activity versus last year.
This is, to some extent, mitigated by restructuring efforts, and the change in R&D is related to activities in SW, Surgical Workflows, and Life Science. The -SEK 85 million on other OpEx was mainly attributable to currency effects related to operating receivables and liabilities in foreign currencies. When putting it all together, we end up with quite a significant reduction in operating leverage and a -3.3 percentage point impact on the margin. Adjusted for currency, DNA had a positive impact of 0.3 percentage point on the margin in the quarter. All in all, this resulted in adjusted EBITDA of SEK 495 million and a margin of 6.9%. Next page, please. Free cash flow amounted to SEK 276 million and was impacted by a lower operating profit for the quarter.
Looking closer at working capital, the positive change was mainly a result of lower account receivable and a slightly higher level of liabilities. working capital days continue to be well below 100, and we are now at some 96 days, down 33 days from the peak in Q2 2018. The lower operating profit for the quarter takes us somewhat below trend on operating return on invested capital with 11.8% on a rolling 12-month basis, which is still above the cost of capital. Let's move to page 14. The increase in net debt during the year is mainly related to the settlement payment during Q1 and the dividend during Q2. This was, of course, partly offset by the underlying operating cash flows. All in all, this takes us to SEK 5 billion in net debt at the end of the quarter.
If we adjust for pension liabilities, we are at SEK 2.5 billion. This brings us to a leverage of 0.9x EBITDA, and if we adjust for pension liabilities, leverage is at 0.4 x EBITDA. Cash amounts to approximately SEK 4.4 billion at the end of the quarter. Let's move back to page 16, back to you, Mattias.
All right, thank you, Lars. Just to summarize the key takeaways quickly before we move to Q&A. We continue now to work on the quality and supply chain challenges in cardiac assist and cardiopulmonary, which had a strong impact in the second quarter, both on top line and on EBITDA and EBITDA margin. Despite all the challenges in the second quarter, we continue to have positive free cash flow from our business. We maintain a solid financial position with the ability to continue to invest in our business for the long term. The current priorities for us are really addressing the remaining quality and supply challenges to really resolve this by the end of the year, beginning of next year.
To continue to work on sustainable productivity improvements across our business, to support margin expansion. And also continue creating additional value for customers and making sure that our life-saving technologies become available to more patients around the world. With that summary, I open up for questions. Thank you.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. Please state your name and company. Please go ahead.
All right, good morning, and thank you for taking my questions. Rickard Anderkrans comes to Handelsbanken here. Two from me, please. First on cardiac assist, have you lost any market share in that product category in recent months? What's the year-to-date sales here for Q2, and how quickly do you expect to sort of ramp volumes to a run rate close to the SEK 2 billion or so that you delivered in 2022? That's the first one. Thank you.
Thank you, thank you, Rickard. The state right now is that we don't think that we lose any long-term market share when it comes to the hardware. I mean, we are a clear leader when it comes to the installed base of intra-aortic balloon pumps. When it comes to the short-term use of consumables, I think we will have a temporary loss of market share because customers need to use other consumables. We have seen, though, historically, and the same indications now that very quickly they tend to switch back to our product because it is a leading product in this category, and customers are generally very happy with the therapy.
I think that's an important part of the first half of your questions. When it comes to the ramp as such, we can't give any more guidance now than what I gave on the call, that we need to first clear the backlog of service orders that we have, and then we can continue to ramp up the shipment of the actual balloon pumps themselves as well.
All right, thank you. As you mentioned on the call, we saw quite a significant weakness in China, both in terms of orders and sales. Could you quantify the organic order decline in China, specifically in the quarter, and maybe share some thoughts on the medium-term growth outlook in the country for the group? Thank you.
Yeah, we don't break down things on country level. I mean, suffice to say, when it comes to the decline in Acute Care Therapies in APAC, the bulk of this comes from our inability to ship and supply the two constrained categories, so cardiopulmonary products and cardiac assist. That's the main explanation for the weakness in China for Acute Care Therapies. We see some weakness when it comes to Life Science as well, strongly related to bioprocessing, I would say, is the main part of the weakness there. Difficult to speculate going forward here.
We still believe in China longer term as a growth market, we can see now with the after this COVID bump that we had in the beginning of the year, that the normalization is slowly but surely happening. It's not like a strong recovery or strong positive impact on us here. I think we will see some mixed performance from China in the coming quarters.
Just a super quick follow-up there. Have you lost market share here in the second quarter in China, according to your sort of analysis or judgment?
Difficult to say. I mean, there aren't that many alternatives, for, either of the two product categories that we are constrained. I think the answer is probably similar to the global answer, that, on the consumables front, yes, we may be losing some share, but it seems like, when we're able to supply, customers rather quickly come back to our products.
Thank you. It's very helpful.
Thank you.
The next question comes from Mattias Vadsten from SEB. Please go ahead.
Hi. To begin with, just a quick follow-up on cardiac assist. If you can shed some light on the visibility in expecting to scale up deliveries of the intra-aortic balloon catheter mid Q3, and if you could say, at least to me, it sounded like it was meaningful share of the sort of SEK 400 million negative impact. If you could say anything about, you know, how much sales that category had in Q2, really?
Yeah, I understand, you want to dissect this a bit further. We don't break down sales into individual geographic markets or individual product categories. You're right in saying that the absolute vast majority of the problems came from cardiac assist when it comes to volume and margin impact. Both, of course, from a loss of volume, but also because of additional cost in addressing the problems that we're working through here right now. I can't give you any numbers breakdown on this.
Okay, thank you. On the aortic balloon pump, you have medical necessity, but how much of the lower sales right now would you say is due to supply chain constraints? How much is due to the factor of you being more cautious due to the consent decree and so forth?
I think if you look at the going forward from here, I think we are becoming less and less supply chain constrained, so we will be able to ramp up the main reason for slower ramp up during the second half of the year is that we need to meet the service orders and the backlog that we have there first before we can focus on shipment of new pumps.
Okay. The last one, I mean, order intake, obviously down here. At the same time, strong in some parts in Americas, and comps should, I guess, you know, ease in particular for Life Science, but also in other areas. What do you foresee in terms of year-on-year orders for Q3 and the second half? If you can't quantify, maybe speak a little bit about the dynamics, how you see it in the second half? That would be helpful.
Yeah, of course. No, I think we, without quantifying, as you say, but in terms of overall dynamics, we know that there is a good demand for our products. If you look at the categories in Acute Care Therapies outside of cardiac assist and cardiopulmonary, we had growth of 4%-12% in those categories, so there's a good demand situation when it comes to that. We know as well that there is a lot of pent-up demand when it comes to cardiopulmonary and cardiac assist. As long as we can work through the quality challenges, not have any new problems here, we should see a gradual improvement of this, both when it comes to orders, but also sales.
This is what we have factored into our guidance of 2%-5% growth for the group overall as well. When it comes to Surgical Workflows, I think we've had a very good number of quarters now behind us. Comps are a bit more difficult, as you've seen in the second quarter, especially for North America. We don't see any particular market weakness. There's a bit more caution when it comes to capital goods, a bit longer decision times from customers, but nothing else to call out there. When it comes to Life Science, we still have a destocking effect of BetaBags .
A little bit difficult to judge, but we can see that we have good traction when it comes to the alpha approach and the kind of leading indicators when it comes to this business, but very difficult to predict the magnitude and the timing of the comeback in this part of Life Science. Similar picture when it comes to bioprocessing with a little bit of a specific China weakness there, which again, difficult to quantify and what to expect for the second half of the year. Overall, I think we, when you put everything together, the 2%-5% guidance that we have, it feels realistic.
Thank you very much for that.
Thank you.
Please state your name and company. Please go ahead.
Good morning, Oliver Reinberg from Kepler Cheuvreux. Quick questions on there. I mean, this first one is coming back to the kind of quality issue. Mattias, can you just talk about, is there any kind of intensified dialogue with the FDA after this kind of issues? I mean, obviously, Datascope was included into consent decree, but I just wonder, is there any kind of discussion, and what are your thoughts if there could be any kind of potential further actions by the FDA?
We had a very close dialogue with FDA for several years now. I think I'd say it's a rather constructive dialogue about the ongoing problems and the priorities here. We don't expect anything in addition to what we've seen already. I think we have the constraints we have right now. We are working through the field actions one by one and in an open dialogue with FDA. There's nothing in particular, I say, to call out when it comes to the dialogue or what to expect going forward.
Okay, perfect. Secondly, just on the kind of guidance, can you provide any kind of color what you expect in terms of headwind from quality and supply chain issues in the second half after the SEK 400 million charge in Q2? Or any kind of color in terms of margin bandwidth, where you see the margin for the full year coming in?
We don't provide any margin guidance, but I think the impact of SEK 400 million that you saw in the second quarter, we will have some impact also in Q3 and Q4 from this. Our hope and expectations is that it will be gradually less during the second half of 2023. This is realistic based on the information that we have today. It won't go away entirely off the Q2 here.
Any chance to get any kind of range for the margin where you expect it to come in for the full year?
Not at this stage. I mean, there are too many moving parts when it comes to the ramp-up of the two categories where we have been constrained. We would like to work through this, the third quarter here before we provide any updated information.
Perfect, fair enough. The last question would just be on Surgical Workflows. I mean, we actually have seen a very dynamic loss of 13%. Still, the margin was down to 0.2%. I thought in the past that you've done quite some kind of cleanup in terms of getting the kind of incremental margin up. I understand there's some kind of headwind from inflation, but any second thoughts in terms of the margin recovery potential? I think in the past, you talked about the ambition to return to a 10% margin Surgical Workflows. Any update here would be appreciated.
Yeah, I think there is definitely a lot of inflation pressure in the Surgical Workflows part of the business now, and I think there's definitely room for improvement. Pricing is difficult. We can see that it's becoming a bit more competitive in several of the Surgical Workflows categories. If that's work that we will continue to implement and continue to improve. There's also a little bit of a timing effect when it comes to deliveries in Surgical Workflows, so that's important to keep in mind. Then when it comes to the structural productivity work that you touched on, that is still in place, but a lot of the work has been undone because of the inflationary pressure in the supply chain.
I think when it comes to purchasing, for example, we have a lot of work to do now ahead of us in the second half of this year and into 2024, to reinstall some of the good operating leverage we had up until about a year ago or so. When it comes to, we don't guide on margin, margins for this year, neither on group level nor on BA level. Having said that, though, we still believe that it's possible to, by 2025, to get to the 10% EBITDA level in Surgical Workflows. The cushion that we had in that ambition is more or less gone, but it's still a realistic ambition for 2025.
Perfect. Because you just touched on 2025, any kind of idea when we can get an update for the midterm guidance?
Only when we have been able to work through the quality and supply challenges in cardiac assist and cardiopulmonary. Unlikely before the end of this year or beginning of next year, I would say.
Perfect. Thanks so much.
Thank you.
The next question comes from Erik Cassel, from Danske Bank. Please go ahead.
Hi, good morning, Mattias and Lars. First, to sort of follow on Rickard's question, do you think that the order weakness for ACT in China, is more of a phasing issue, where you have that roughly SEK 170 million down year-over-year, come back in the coming quarters when you can bring back some sort of priority to China order allocations, or should these orders be seen as lost?
Very, very difficult to give any kind of accurate answer on this. We think it's definitely to some extent, a timing effect, given the market positions that we have, and how we know our customers and how they like these therapies. We definitely think there is a timing effect. How much is lost to competition? Impossible to answer today, unfortunately.
All right. I just wanted to sort of understand how far you think that you're tracking from your 2025 margin targets. I know Oliver just asked briefly on this, and you reiterated for Surgical Workflows, but do you still see this feasible reaching that, considering the trend in OpEx that we're seeing now? Would also appreciate any comments on how you're thinking about ECMO and BetaBags sales tracking for 2025 as well.
When it comes to the longer-term margin guidance, we'll need to come back to you earliest by the end of this year or beginning of next year. As I said to Oliver's questions, we need to get our arms around the quality and supply challenges in the Acute Care Therapies before we can think about any updated guidance there. The only thing I can say right now is that we don't think anything has materially changed in our end markets for the longer term, we'll have to come back on this when we have less moving parts to deal with. What was the second part of the question?
ECMO and Beta.
Oh, ECMO and BetaBags. Yeah. I think when it comes to BetaBags, we still see some weaknesses in the numbers so far this year, both on order intake and sales. There is still obviously some destocking going on among customers. Having said that, we are seeing a bit more optimism when it comes to the early indicators in this business, but I really can't guide you for the full year yet. It's a bit too early. I think we need to see Q2, Q3 before we can provide any kind of granularity on this business. ECMO is also a bit challenging to guide going forward. We've had surprisingly robust demand, I have to say, given the constraints that we've had.
Q2 is actually not bad from that perspective when it comes to orders. The outlook now in the second half of the year is also, I think, cautiously optimistic, but again, difficult to say what is pent-up demand and what is an increase in longer-term demand on this. Be interesting to see the outcome of the third quarter here, and hopefully we can have a bit more information to share about where this is heading longer term.
Okay. Thank you very much.
The next question comes from Robert Davies. Please go ahead.
Robert from Morgan Stanley. Thanks for taking my questions. My first question was just around looking across the areas of the business you flagged as needing these sort of fixes. Where, where do you see the biggest risks of time slippage across the different categories that you highlighted? My second question was just around the outlook for life sciences into 2024, given a number of warnings from some of the global life sciences peers. Just wondered how you were thinking about the sort of growth outlook at the very least into 2024. I guess around the ACT business, are you still comfortable with being able to deliver mid-20s margins over the kind of medium term? What are you thinking about the ACT potential post these issues going away?
Is there any reason for that business not to get back to where you thought before? Thank you.
Yeah, if I start with the last question, maybe I think we're still confident that the long-term guidance when it comes to margins in ACT is intact. Nothing has materially changed in this business when it comes to longer term growth in the different categories we have. I think we have even more work now to do when it actually comes to productivity improvements in everything from how we work with purchasing, with how we run our factories, with how we work with our quality system, and so on. I think that improvement potential is still all there, I would say. When it comes to the Life Science outlook for 2024, difficult to predict.
We see some really robust demand in some geographic markets. The Americas is one of those, and some product categories as well. While we have the weaknesses that some of our peers also quote when it comes to bioprocessing. As in the previous question, I touched on the destocking effect of BetaBags , which is just very difficult to size up right now. We will have to update you quarter- by- quarter on this.
When it comes to the longer term end markets, I don't think anything has changed in there, but there's obviously a bit of a threshold to get over now before we can see some return to growth, especially when it comes to bioprocessing and, possibly also when it comes to China as a geographic market. On your first question, when it comes to time slippage, there's nothing I think I would call out right now that is more risky than anything else. I think we have factored in the timing part of this into our guidance of 2%-5% sales growth this year. I don't know if, Lars, if you have anything you want to add here.
I think the biggest impact for this year, for the second half is the gradual recovery now that we see in the CICP, how that will pan out, that will have the biggest impact.
Okay, that's great. Thank you very much.
Mm-hmm. Thank you.
The next question comes from Anchal Verma from JPMorgan. Please go ahead.
Hi, I think it's David for Anchal. Can you hear me?
Yes, we can hear you.
Perfect. Terrific. Hi, guys. David Adlington from JP Morgan. Just on the growth in the second half, I just wondered if you were still targeting the low end of that 2%-5% growth guidance range. If so, that I think essentially indicates flat sales in the second half. Given inflation, the remediation costs, and the negative mix, I just wondered if you give us some sort of clue in terms of where the, where the margins are going through the, through the second half, given so far this year, they've been pretty volatile, with Q1 being flat and Q2 being down 740 bp s.
Mm-hmm. Yeah, I think the guidance when it comes to sales growth is still 2%-5%. Of course, with the challenges that we've had now in the second quarter, and the recovery that we've discussed in relation to a number of the previous questions here, yes, there may be an increased risk end up in the lower part of this guidance range, but it really depends a lot on the magnitude and the pace of the ramp-up in these two constrained categories. So I really can't give you more granular guidance than the 2%-5% today.
When it comes to EBITDA, we've never guided on the margins in the year that we're in. Again, we will have some EBITDA margin erosion this year, clearly, but the magnitude of that is not something we guide on. Even if we wanted to try, it would be difficult, given how sensitive it is to the comeback of cardiopulmonary and cardiac assist, both from a top-line perspective and the impact this has on our margin, and also related to the cost of resolving the quality problems in primarily cardiac assist, but also to some extent cardiopulmonary.
Perfect. I just follow up on the quality issues. I just wonder what the FDA's view was in terms of, you know, getting those CE marks back. Is that enough to allow you to supply into the U.S., or would you still be restricted from supplying to the U.S.?
No, I think the CE mark doesn't have any impact on sales in the U.S. I mean, that's an FDA decision. When it comes to the balloon pumps and the balloons, we have been able to continue to supply this. The only thing that we've concluded in dialogue with FDA is that we should prioritize service orders and preventive maintenance when it comes to the balloon pump before supplying new pumps. That's really the main priority. The CE mark as such doesn't have an impact on the U.S. market. It's really for Europe and the other CE markets that this is important.
Okay. The final question for me, the capitalized R&D was up quite a lot this quarter. I just wondered what was driving that?
Yeah. That is mainly related to SW, where we have quite a few projects now running in for capitalization, also to some extent, within ACT.
Any particular timelines on when those products might come to market?
We don't share that, but of course, it's, it is coming, when we come into the end of this year and into next year here.
Perfect. Thank you.
All right. Thank you.
The next question comes from Kristofer Liljeberg from Carnegie Investment Bank. Please go ahead.
Thank you. Three questions. First, I understand you're careful here about giving sales figure for on the product level, but would you agree it's fair to say that more than half of the SEK 400 million negative effect on earnings in the second quarter was from Cardiac Assist consumables?
No, I think we don't share, but it is plus/minus something in between for both of them, because it's a little bit of a different mix here. The volume in CA is there. We have, on top line, of course, for both, but then we have a bit additional cost for cardiopulmonary with the cost that we have connected to the scrapping and transportation, so that's hurting a bit. Also on the OpEx side there, with some of the cost that we have hitting as well. It is.
Okay
From both there.
Okay. Then there's, of course, a lot of question here and focus naturally on fixing the quality issues. If we look at the more medium-term potential effect on sales in [margin], when you have fixed the problems in Cardiopulmonary and Cardiac Assist, if we look at 2025 here, for example, will there still be some potential impact on sales from having a maybe smaller install base, higher quality cost, et cetera?
No, I think that will be very disappointing if we find ourselves with the, these problems lingering into 2025. It's not something that we're planning for today.
You don't see a risk here of the install base, for example, being smaller for both ECMO machines and...?
Yeah. Now, to some extent, but we really think that's marginal, given that we are able to continue to supply. We're unable to participate in tenders for a while for some hardware, but we still think that if you look at the overall evolution of the installed base, our ability to come back and regain market share while when we are able to supply again. With all the back and forth that's been in these businesses for a few years now, we don't expect the market share loss to be significant if you look at 2025 and onwards.
If I understand you correctly, you don't think it will be higher cost for running quality systems, et cetera, than what you had before?
Not compared to where we are now. I mean, it's really right now, we have a heightened level of cost for working through this quality challenges, really. We're, but I don't think that you should expect that they will go down either in 2024, if we aren't able to work with the productivity in this regard in 2025 and onwards, that will be a disappointment, I think.
Okay. Sounds good. final question. When it comes to hospital capital spending, maybe you could explain a little bit what trends you're seeing for the three different regions right now. That's my last question. Thank you.
Yeah. Yeah, it's difficult to call out trends, really. We see some delays in decision-making in in all three macro regions of the world. It's difficult to speculate in timing. I wouldn't say that there is a big change towards more negative negative sentiment or pattern, but it does seem like it's overall, it's taking a little bit longer to come to decisions on implementation in capital. Primarily, when it comes to, it's a bit more visible in Infection Control than in the other part of our capital business, but nothing else I can call out as a change or a longer-term trend.
Okay. Thank you very much.
Great. Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, I hand the conference back to the speakers for any closing comments.
Good. Thank you very much. It was good that we were able to work through all questions today. Just to reiterate here the key takeaways. We still have our work ongoing when it comes to quality and supply challenges in Cardiac Assist and Cardiopulmonary, which you've seen a significant impact from in the second quarter of this year. We continue to have positive free cash flow despite all the challenges that we've seen in the second quarter, and therefore, maintain also a solid position, financially speaking, to continue to invest in our businesses.
When it comes to priorities, number one priority is addressing the remaining quality and supply chain challenges, to work with sustainability when it comes to our productivity improvements, and continue to create value for customers and making sure our life-saving technology is available for more patients and customers globally. Thank you very much for dialing in today. I wish you a good rest of the-