Getinge AB (publ) (GETIB) Earnings Call Transcript

Welcome to the Getinge Q4 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mattias Perjos. Please go ahead.

Thank you very much, and welcome to today's conference. I have our CFO, Lars Sandstrom, with me as well, who will support during part of the financials presentation. We can move directly to Page #2, please. So before we dig into the facts and figures regarding our performance and outlook, I just wanted to briefly touch on what I think is a really important subject that was highlighted in a good way in the last edition of The Economist. And this is the fact that we nowadays get much less output from health care despite spending much more and also despite having more people than ever working in healthcare. All of this, of course, boils down to having problems with doing the right things and doing them right, what we usually call effectiveness and productivity. So the low productivity in health care is nothing new. I think the problem right now is that it seems that it has decreased a lot recently, which is, of course, impacting patients, it's impacting clinicians and also, of course, companies like ours. Some of examples of the short-term problems is that we see more patients with severe symptoms with -- you can see that the COVID quarantine in different parts of the world has led to a weaker immune system. It's also led to people staying away from hospitals and -- which means that illnesses are diagnosed at a later stage and then the people show with more -- at a more severe stage that's requires a different approach to treatment. We can also see that the productivity is lower, meaning that we have slower throughput. We can see that the engagement among people working in the system is lowering as well, the burnout ratio is shooting up among clinicians, which means that we have a loss of competence and a loss of capacity as well. So even if there are more working there, it still means that there's a lot of operational challenges in the system. Okay. Our people have worked hand-in-hand on the frontline with the people in the health care system to try to deliver as much care as possible, but it has been a challenge during the whole of 2022 and the last quarter. There's no difference in that regard. What is urgently needed, I think, is that we need to be able to more efficiently manage patient queues, staffing and other flows within the hospital, which will lead to better working environment for health care professionals. We also need products that gets -- that allow patients to leave the hospital faster and in a healthier condition than what is the case right now. And we need products that are easier for health care professionals to handle as well. There needs to be an easier learning curve to go through for new people working in this environment. We have a lot of good solutions for this. That's not the purpose of this call. But I just wanted to paint a bit of a background picture when it comes to our industry. So with that, we can move to Page #3, please. If we start with the key takeaways regarding performance for the fourth quarter of 2022, we saw net sales and order intake declining organically by 5.3% and 6.7%, respectively. This was mainly a result of continuing external challenges. This means that hospitals have not yet recovered to pre-pandemic levels for elective surgery and they're also generally experiencing lower productivity than before the pandemic, as I mentioned a moment ago. We can also see that treatment needs related to seasonal influenza was lower than expected and lower than in past four quarters, which also impacted our orders and sales negatively. In addition to this, we also have as a company changeling comparative figures in products for COVID-19 treatment and also for vaccine productions. We're also continuing to experience supply chains challenges, which negatively impacted net sales by at least SEK 400 million in the quarter. This is mainly in capital goods in Acute Care Therapies now. So the challenges have narrowed somewhat compared to the past. But in terms of the magnitude, they are similar. We had lower sales volumes and unfavorable mix effect and also a general increase in cost pressure, which contributed to lower margin from the quarter. To counteract these facts, we're continuing our work on the price adjustments, ongoing productivity improvements and also more thorough rationalizations where needed. Getinge's free cash flow and financial position remains very strong, a very low level of net debt, so keeping us in a good shape to take on additional opportunities ahead here. And finally, the Board of Directors proposes an increase of the dividend to SEK 4.25 per share. We can then move over to Page #4, please. So if you take a brief steps back here and look at some of the other key events in the quarter. When it comes to our offering and the customer perspective, one of the products that we launched in the quarter was Livit Flex. This is a system for bioprocess control that enhances the effectiveness in pharmaceutical development. We also launched ULTIMA 815, which is an optional injection dryer, and this enables quicker and more environmentally friendly processes in laboratories. And in addition to this, I also want to mention that Getinge's Flow-c anesthesia machine was approved for sale in China during the quarter. When it comes to sustainability, the journey towards carbon-neutral production continues at a fast pace. One example of this in the quarter is that the solar panels at our production facility in Turkey started producing energy during the quarter. Also I want to mention that Getinge's vascular grafts, so the artificial blood vessels, received EU MDR certificates and the production facility in France was awarded with the business areas for EU MDR certificate for its quality control. The production facility in Solna, Sweden also received the EU MDR certificate for the Servo-c ventilator. During the quarter, we also announced that the U.S. Food and Drug Administration included Getinge's subsidiary datascope, an additional facility in the company's existing consent decree. This is due to findings from previous FDA inspections and a warning letter related to operational compliance with the company's quality management system and process. We also had a few items affecting comparability in the fourth quarter. As you all know very well by now, we have a continuous improvement approach to everything that we do, and this is because we want the business and the people in the front end in the business to be agile and forward thinking. And normally, we work with gradual and continuous improvements. In some case, though, we need to take somewhat larger structural adjustments. And in this quarter, we decided to do so in order to adjust our cost base and increase productivity further in slightly bigger steps than normally. So consequently, we've made a provision of SEK 195 million, and the cost savings from this will gradually impact the P&L during 2023. The full impact will happen from 2024 and onwards. We also made write-downs related to capitalized development projects in Acute Care Therapies, and this is a consequence of the impairment tests that we do on a regular basis. This is not something that's expected to have a material impact on our forward-looking expectations on growth. Also I mentioned that in the quarter we decided to build a new production unit in Derby in U.K. The new facility is a facility that will replace the one that we acquired from Quadralene in 2020, and it will serve as a new hub in the U.K. by co-locating sales, manufacturing and logistics. This investment will also result in higher production capacity for consumables offerings in terms of disinfection products or sterile reprocessing. Just as a reference here. The income from chemicals increased by 10.7% in 2022. So significantly above the growth rate of most of our other categories. And it also comes with a higher margin than average in third quarter. We can then move over to Page #5, please. So as I mentioned earlier, order intake decreased by 6.7% and the net sales by 5.3% organically in the quarter. Orders were down in Americas and in EMEA. The comparison here is impacted by last year's strong order growth in ECMO and BetaBags due to the Omicron break at the time. We could also see, though, that orders picked up quite strongly in Asia Pacific this year, and this is mainly due to COVID flare ups in China in December. On net sales, we had a flat development in Americas to a large extent due to continued strong development in Surgical Workflows. This is something we're very encouraged by given that it's a very important part of our strategy for this business area. Net sales in Asia Pacific was negative in all business areas in the quarter, mainly due to previous lockdowns in China. This has changed now. We expect things to start to normalize in 2023. And as I mentioned before, we saw quite nice growth in orders in China in the quarter. We can then move over to Page #6, please. When it comes to the outlook for 2023, we're expecting a weaker first half of the year as a result of continuing challenging comparative figures for significant parts of Acute Care Therapies and for Life Science. Whereas, the second half of the year is expected to be stronger, and this will result in healthy growth for us in the second half of the year and then an anticipated organic sales growth of 2% to 5% for the full year. We can then move over to Page #7, please. If we look at some of the details when it comes to order growth, we can see that Acute Care Therapies had a minus 4.4% organic development in the quarter. The lower order -- organic order intake in Acute Care Therapies was primarily attributable to advanced ventilators and ECMO therapy products in EMEA for the first two months of the quarter. The quarter ended with a strong order intake in mainly China as a result of the higher rate of COVID-19 infection spreading. The order intake for products for planned cardiovascular procedures increased slightly compared with 2021. We then look at Life Science. We had a minus 32% organic development on order intakes, and the order intake for Life Science declined significantly in Americas and EMEA. This is due to challenging comparative figures in sterilizers and also a continuing falling demand for COVID-19 related products. On a positive note, the service business continues to grow. This is a very good sign as we clearly can see, a positive relationship over time between good service business -- and also a healthy business for us both from a financial standpoint but also from a customer loyalty perspective. And finally, Surgical Workflows. Here we saw a 3.2% organic improvement and the order intake in Surgical Workflows increased as a result of the positive trends in digital health solutions and in infection control. And as I mentioned earlier, the positive trend in North America is continuing, something that we're happy about. We can then move over to Page #8, please. So looking at the sales perspective then. In Acute Care Therapies, we were down 9.8% organically and the net sales here in ACT declined in all markets due to challenging comparative figures in ECMO therapy products and also shortage of components, which impacted delivery capacity, mainly related to cardiac assist within Acute Care Therapies. Net sales increased in products for elective cardiovascular procedures, but it has not yet reached pre-pandemic levels. When it comes to sales of capital goods, this was negatively affected by the continuing shortage of components. In Life Science, we saw a minus 3.6% organic development. This was a result of challenging comparative figures, in part related to COVID-19 vaccines. The positive trend, though, in sterilizers, in washer-disinfectors and also the service business continued in the quarter. Recurring revenue for Life Science declined as a result of lower volumes of consumables related to production of COVID-19 vaccines. And in Surgical Workflows, we had 0.9% organic improvement and the increase in Surgical Workflows was due to operating room and digital health solution products. And again, the performance in North America was particularly encouraging for SW. Net sales in Asia Pacific fell, mainly as a result of lower activity in China. The strong order intake in prior quarters in Americas contributed to a more increase in net sales for the quarter. And we saw an organic increase in recurring revenue as a result of the positive trend in service and in consumables. Currency had a SEK 911 million or an 11.4% positive impact on net sales for the group in the quarter. Organic net sales of capital goods declined by 4.9% in the quarter to a large extent due to supply challenges. The decline in consumables is related to lower sales of ECMO and -- or products for treatment of ECMO and BetaBags, which is part of our sterile transfer offering and something I mentioned before. With that, we can move over to Page #9. Looking at the development of gross margin, we can see that our adjusted gross profit increased by SEK 3 million to SEK 4.153 billion in the quarter, where positive FX effect accounted for SEK 469 million. For the group as a whole, the adjusted gross margin declined by 3.1 percentage point. This is an effect of an unfavorable mix, supply constraints, reduced absorption in our factories and also cost inflation. These effects were partly offset by price increases, some productivity enhancing measures and also support from currency, but obviously not fully. For Acute Care Therapies, the adjusted gross margin declined to 58.4% due to lower sales, unfavorable mix, shortage of components and also cost inflation. This was to some extent offset by positive FX effects, price increases and productivity improvements. When it comes to Life Science, the adjusted gross margin declined by 5.4 percentage points, mainly as a result of lower volumes of unfavorable mix, some supply chain challenges also here, and also non-recurring warranty costs and under absorption in some of our factories. Favorable currency effects contributed positively to the margin, but to a much smaller extent. Surgical Workflows' adjusted gross margin fell by 1.8 percentage points. This was primarily a result of cost inflation and of FX. And this could be partly offset by continuing productivity improvements. With that, we can move over to Page 11. And I leave over to Lars.

All right. Thank you, Mattias. Adjusted EBITDA declined SEK 406 million compared to the same period last year, while margin decreased to 15.5%, mainly due to negative effects from GP and OpEx, which ties back to the lower volumes, unfavorable mix effects and supply chain-related costs and challenges overall. Adjusted for currency, GP had a 3.4 percentage point impact on the EBITDA margin due to the reasons just mentioned by Mattias. Organically, we had lower SG&A than previous year, but negative FX. Revaluation of FX in other OpEx is impacting us quite negatively. Cost inflation and somewhat higher activity was partly offset by reduced variable pay to employees. All in all this brings us to a reduce operational leverage on OpEx and the 2.3 percentage point impact on the margin year-on-year. Higher activity in R&D, there was some constant development, maintenance EU MDR, but also from acquisitions. Currency had a negative impact of 0.4 percentage points on the margin. And adjusted for currency, D&A didn't have any impact on margin in the quarter. All in all, this resulted in adjusted EBITDA of SEK 1.370 billion and the margin decrease of 6.1%. Worth mentioning here is also the restructuring efforts made in the quarter, as previously mentioned by Mattias, and -- where most of the effects are expected to come gradually in 2023. Then let's move on to Page 12, please. The free cash flow amounting to SEK 708 million for the quarter and SEK 2.3 billion for the full year 2022. And working capital for the quarter was mainly a result of high material costs and supply chain disruptions, which resulted in less inventory reduction normally given the season. We expect it to normalize gradually during the year. Working capital days continued to be well below 100. And we are now at some 96 days down, 33 days from the peak in Q2 2018. And going forward, we expect working capital days to increase somewhat mainly related to the inventories and the high material costs during the first half of the year. And we are on trend on operating return on invested capital with 14.6% on a rolling 12-month basis. And that's still well above our cost of capital. And then let's move to Page 13. The change in net debt year-on-year was positively impacted by the cash flow, taking up to SEK 2.6 billion. And if we adjust for pension liabilities, we are SEK 0.1 billion. This brings us to a leverage of 0.4x the EBITDA. And if we adjust for pension liabilities, leverage is at 0x. Cash amounted to SEK 507 billion at the end of the quarter as well. And then let's move to Page 15. And back to you, Mattias.

All right. Thank you. So when it comes to summarizing the key takeaways for the fourth quarter of 2022, we can see that the organic development on net sales and orders were negatively impacted by external challenges that I mentioned in the beginning of the call. Our margins in the quarter have been impacted by lower volume, by unfavorable mix effects, some continuing supply chain disturbances and also inflation. We've been able to partly offset this with the price increases and the continued productivity improvements. We continued to have healthy free cash flow and a very strong financial position. When it comes to some of the more forward looking parts, we expect the challenges to remain. We can see gradual improvements in parts of supply chain, in parts of the operating environments in hospitals and so on. But we expect this to be only a gradual improvement during the year. This takes us then to an outlook for 2023 where we expect net sales to grow 2% to 5% organically and with a stronger second half of 2023 than the first half. Finally then, I would like to take this opportunity to thank our customers, our employees who have worked hard for a very, very long time now, sometimes under very difficult circumstances to deliver vital care to patients around the world. I look forward to 2023 with a continued deep commitment to helping both customers and patients in the best possible way. With that, I open up for questions. Thank you very much.

[Operator Instructions] Our first question comes from the line of Erik Cassel from ABG.

I thought I'd start off with some questions on 2023 and your guidance. I mean, the 2% to 5% kind of growth guidance, it's a pretty wide range. But I understand the uncertainty given how back-end loaded your year should be. But could you maybe explain what needs to happen for you to be in the upper part of that range? That's not included in the low end. Is there's some sort of larger swing factor that you see?

No, there's no larger swing factor. I think we need to see a continued normalization, primarily when it comes to the operating environments in hospitals so they can focus on getting elective surgeries back to where they need to be, above pre-pandemic levels. And we need to get rid of some of the supply chain disruptions that we still have primarily related to our cardiac assist product group.

Okay. And then in previous quarters, you've been able to provide some guidance for full year margins based on where volumes are heading. I get that there's a lot of moving parts, but is it possible to share how you're thinking about profitability in 2023?

Yes. I think as you alluded to yourself, it is a very uncertain environment to navigate in right now, first of all, from a volume perspective. And as you know, we are very volume sensitive with the operating leverage that we have. So we refrain from giving any guidance. I think we feel good about improving from where we are, but with, I mean, a few basis points. So we decided not to give any official guidance here. So volume is a key factor. We have some mix effects that are going to have an impact as well. We continue to see inflation providing some uncertainty to the development as well. And then of course, we will offset this with continued price work. That's a key thing for -- a key theme for 2023. And also some of the productivity improvements that we're already on and some of the enhanced measures now that we've implemented in the fourth quarter as well. So if you summarize all that up, we expect some small improvement, but we refrain from giving detailed guidance.

Okay. I fully understand. And then a last question for me. On the orders for China, what was the magnitude of the total order intake that you received now in Q4 and Q1? And is everything expected to be delivered during Q1? And then also if there's any ongoing discussions for more orders going to China? Or if you're done with that now?

Yes. We don't disclose details by country. We saw a heightened level of order intake from China primarily when it comes to ventilators in the quarters. We're in the process of delivering this. I mean there's ongoing discussions and so on about the additional business. But it's not something that we will speculate right now. I don't think you should assume any big step up in orders or sales because of the slightly heightened level December last year and Q1 this year. But I think on an overall level for full year 2023, nothing really material.

The next question comes from the line of Rickard Anderkrans with Handelsbanken.

So first one, margin in Life Science segment declined significantly here in the quarter, even adjusting for the one-off there. So how should we think about more normalized margins for the segment heading into 2023 in more of a sort of a post-COVID scenario? How should we think about the levels in relation to where we ended up for the full year?

Yes. When we look at -- as you mentioned, yes, we had some one-offs here in the fourth quarter. If you look at the bottom EBITDA margin, the decline there -- I would say half of it is roughly around the impact from the one-offs. And going forward -- since we will have somewhat lower share of sales on the consumable sides from BetaBags, that will, of course, impact us going into 2023. But we'll still have a very good order book when it comes to the rest of the product. So that -- and that together with the easing out of the supply chain issues that we actually have and the work we do to right-size part of the Life Science organization now with the current demand, especially on the BetaBags, we should get back to not the pandemic, say, levels, but there should be an improvement coming back.

All right. And I want to dig a little bit deeper into China. So you have previously mentioned that you're losing market share to local players in Surgical Workflow segment, but we have also seen the first approval of a Chinese developed ECMO solution rather recently. But as you mentioned, we've seen orders step up here entering Q1 as well in Acute Care Therapies. Can you talk a little bit about the dynamics in China heading into 2023 and beyond? Will be interesting to hear a bit more on the competitive landscape development and what you're doing to secure your sort of -- and protect your market shares overall. That will be very helpful.

Yes, we do see a heightened demand both on ventilators and also ECMO therapy products right now to China. As I mentioned on the call, we also had an approval of our anesthesia machine for China as well. So we think that in the short term, we definitely remain competitive. We're monitoring the developments of new entrants as well, but we have a very strong position with really strong clinical performance of our ECMO solutions, very much liked by customers. So we feel that we have a pretty robust position from that standpoint. And when it comes to the medium and longer term, we expect this market to be back to a double digit growth market. I mean, we have several categories where we are really strong, if you look at, for example, our vascular interventions portfolio. And so we remain generally positive towards our possibilities in China. We expect to be above 10% growth in the longer term. It is a decline from where we've been. We've been more like 15%, 16% pre-pandemic. But it still will remain a good market and clear numbers for 2 quarters.

Perfect. Just a super quick final one. Can you quantify or give some magnitude on the cost saving initiatives in 2023?

So when you look at what we are -- the decisions in restructurings we have done now in the fourth quarter, there will probably be some more coming here in the coming quarter. And then we expect that to gradually come through, let's say, half -- 50%, 75% of the company during 2023. Then what you should also remember is that we have an underlying cost inflation that we are fighting against here. So restructuring and continuous productivity work is what we are looking into offset from that impact.

The next question come from the line of Oliver Reinberg with Kepler.

And the first one would be on ECMO. And can you just talk to the level of inventories that you see? And given now, obviously, that Q4 was softer with some kind of increase in demand from China, is it reasonable to assume that ECMO can actually go again high single digit in 2023? And then secondly, on ventilators. And can you just confirm where you came in, in terms of ventilator sales in the full year? I think -- and I believe you talked about 6,500 to 7,000. Just trying to get information of that. And also here, is there a chance you will go back to the pre-pandemic baseline now with the incremental demand from China? And the last question is just in terms of housekeeping. Is there any kind of color you can provide us in terms of restructuring costs that we should expect for the full year? Also, can you give any kind of color on capitalized R&D? In the full year, this increased 35%. So I'm just trying to understand if anything here is noteworthy. And finally, also on a full year basis, Getinge hasn't reduced variable employee costs. Can you give us any kind of sense for the magnitude of the full year [ considered ]?

I have 5 questions. We'll try to take them one by one. And when it comes to ECMO, we do expect to return to growth. I wouldn't say maybe high single digit, but at least single digit growth in ECMO is our expectation depending on how things pan out through the year, of course. When it comes to ventilator sales, we ended up with 7,300 machines last year. We don't expect any big upswing this year with -- our expectations is basically flat. One thing I want to highlight, though, is the work on the installed base. We've had really good traction when it comes to developing the service business and developing more consumable business from this. So I think it gives maybe sometimes the wrong picture to just look at number of machines when it comes to ventilators. When it comes to your question on restructuring, we don't guide forward looking. We have a few more things that I think we can implement during the year, but we will not provide details now on the cost impact of this. We think and hope that the main things have been put into place, but there will be some additional measures. On R&D, I didn't quite hear your question. If you could repeat? Actually, Lars heard it, so he can answer.

I think I heard. You asked about the level of capitalization. I think you can expect a similar level, maybe slightly higher. You see that we have quite a few projects running now in capital project phase. So -- and that was really increased during 2020. On this level where we are now is where we are running into next year.

And on the last question on variable pay, it's also not something that we've provided granular details. So we are refraining from giving that now as well. The only thing I want to say is that the system with variable pay in the company is set up to balance out kind of the performance fluctuations that we've seen lately. So we believe that it's kind of serving its purpose.

The next question comes from the line of Kristofer Liljeberg with Carnegie.

Two questions for me. First of all, wonder about the midterm margin guidance and how you feel about that given that the starting point is now lower and you have more or less lost a year? So that's my first question. And then wonder if you could in some way maybe quantify a little bit what you mean with weak first half? Does that mean negative organic growth? Or do you think you could start to grow at least a little bit already in Q1, second quarter? And also what that means when it comes to margin and maybe earnings development year-over-year?

Yes. So I think on your last question there on what we look on -- I think what we talk about weak is a little bit connected, of course, to the comparable strength when we compare the first half '23 versus '22. I think we will probably be slightly positive, at least what we see in the first half, and then improving gradually after that in the second half. And when it comes to your first question there on the midterm, as I understood it, on the EBITDA margin you said that we lost a year, coming out now with 15.1% and what you think going forward on that? Is that correct?

Yes, I guess margin now is probably lower than what you expected to see in -- a year ago and when you announced that guidance.

Yes. No, that's true. And I think if -- for the reasons we have mentioned, during every quarter this year -- or the -- what we see in -- what we see going forward is that we see that on the supply chain issues, we should see a gradual improvement going forward that would eat up a lot of disturbances, impacting absorption and also, of course, volume. We have lost quite a bit of volume this year. As we go out the year, we've lost SEK 400 million in the quarter, as we mentioned here. So by getting that partly back -- and also together -- and we decided to improve product mix going into 2023, especially then going into the second half. That will help the margin going forward. And then as we mentioned, we have cost inflation continuing to heat up. And that we work with improvements together with the continued focus on improving the fine picture here in '23. That is why we say that we give a stable guidance on the EBITDA margin for 2023. But it is a bit tricky actually to forecast. It is very much depending on demand. And if we see volume picking up better, then we have significant -- that's helps, of course, quite significantly. But -- that's why we're a bit cautious here.

The next question comes from the line of Robert Davies with Morgan Stanley.

I had a couple. One was just around the broader CapEx environment you're seeing within the hospitals. I know you mentioned that the elective procedures are not back up to sort of a normalized level yet. But just in terms of the spending and priority, I'm just kind of curious where you're seeing the hospitals spend that money? Is it in the products you're getting? Is it in the kind of larger capital equipment machines? That was my first question. The second one is just on supply chain. Could you just give us some sense of where you're seeing the biggest bite points in your supply chain? Which particular components are you sort of struggling most to get hold of? And what gives you conviction that's going to get better? Is that just a sort of broad based improvements? Are there specific suppliers you're having trouble with? You've got visibility and that's getting better? And then the last one if I can is just around the comments you made around the installed base and service. Can you just give us some sense of the capture rate you have of your installed base against maybe some sort of smaller independent service providers and where that stands versus a couple of years ago? And where you think you can get that to?