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Edited Transcript of GETI B.ST earnings conference call or presentation 30-Jan-20 9:00am GMT

Q4 2019 Getinge AB Earnings Call

Getinge Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Getinge AB earnings conference call or presentation Thursday, January 30, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lars Sandström

Getinge AB - CFO

* Mattias Perjos

Getinge AB - CEO, President & Director

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Conference Call Participants

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* Annette Lykke

Handelsbanken Capital Markets AB, Research Division - Medtech Analyst

* Carolina Elvind

Danske Bank Markets Equity Research - Analyst

* Craig Mcdowell

JP Morgan Chase & Co, Research Division - Analyst

* Kristofer Liljeberg-Svensson

Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst

* Scott Bardo

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Sten Gustafsson

Nordea Markets, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Hello, everyone. And welcome to the Getinge Q4 report 2019. (Operator Instructions) Today, I am pleased to present Mattias Perjos, CEO; and Lars Sandstrom, CFO. Please go ahead.

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Mattias Perjos, Getinge AB - CEO, President & Director [2]

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Thank you very much. Welcome to today's earnings call. I have Lars Sandstrom with me as usual here, who will go through part of the detailed financials in a moment, but we can -- I will start with a quick overview of some of the key takeaways. So we can move over to Page #2, please.

So if we look at the key takeaways from the performance perspective, the -- on the top line, we continued to deliver sales growth, and we've ended the year right in line with our guidance, 3.9% for the full year. It's particularly good to see that we have had strong performance in our 3 largest markets in the quarter. And that's the U.S., it's China and it's Germany.

The only weak point you see is that the order intake for Surgical Workflows was slightly lower than the fourth quarter of 2018, and this is mainly related to a weak start to the quarter in Americas and in Asia Pacific.

We did not see any underlying change in the market. So we expect this to be temporary, and the quarter also ended on a much stronger note than it started. So that's positive.

If you look at the total order bookings, they were also better than at the end of 2018. So for 2020, we entered with a stronger order book than what we entered 2019 with. So we expect that our sales increase for 2020 will be in the range of 2% to 4% as previously guided and in line with the market -- underlying market growth.

If we then look at the gross margin, the gross margin for the quarter was positively impacted by a favorable sales mix. We had a good result from higher productivity in many parts of the company, and there was also a significant currency effect in the year quarter.

So all in all, this has contributed to a strengthened operating margin year-on-year.

We come up with an adjusted EBITDA margin that is 1.4 percentage points higher than 1 year ago on adjusted basis. So overall, a positive outcome from that perspective.

I also want to mention the cash flow. Our underlying cash flow was very healthy for the quarter, and the balance sheet strengthened as a consequence. And I think this is particularly good since it really shows the work that we've been doing for almost 2 years now when it comes to, of course, accounts receivables, but also our inventory levels. And to me, it's a sign that many of these underlying productivity measures that we've launched are actually gaining traction. So we're very happy about that.

When it comes to the balance sheet as such, we're now at 2.5% in leverage, which is, again, another piece of evidence that we're continuously moving in the right direction.

From a dividend perspective, the Board has proposed a dividend of SEK 1.5 per share, which implies a 50% increase versus the previous year.

We can then move over to Page #3, please. I want to just start off by some of the main events in the quarter. So the key takeaways here, one is sure on the cost side, where we got to see positive effects from the restructuring efforts that we made in the first half of 2019. Some of these were also visible in the third quarter of 2019, as you may remember, and we expect that to have a full year effect, of course, in 2020.

If you look at OpEx, however, some of the savings were eaten up by -- mainly by negative currency effect, but we also had remediation costs and the costs related to the European MDR preparations that are in full swing at the moment here.

There was also one expiring TSA from -- already where we had some seasonally elevated personnel cost as well. So that gives kind of the whole picture from a cost perspective.

It's also worth mentioning that we've strengthened our offering in the Life Science business area with the acquisition of Applikon Biotechnology, the leading company in the fast-growing area of advanced bioreactors systems for biopharmaceutical research and production. We're very happy, we closed this acquisition on the 3rd of January. So they will be with us for the full year here.

It's also worth mentioning, I think, in the quarter that we've decided and started to implement a number of important actions to improve the manufacturing footprint efficiency in Surgical Workflows. So one decision is moving the production of low-temp sterilizers from the manufacturing unit in Ankara in Turkey to our factory in Poznan in Poland.

This move is expected to be completed already by the end of 2020 with the manufacturing unit in Ankara closing entirely.

In terms of footprint rationalization, we're also in discussions with the workers councils on a project to transfer our Endoscope Washer production from Toulouse in France to Vaxjo in Sweden. So this will enable the Toulouse factory to focus entirely on our growing Life Sciences business, and for Surgical Workflows it becomes a much cleaner setup that will enable us to increase both productivity but also competence, we will establish a disinfection competence center in our Vaxjo factory.

So these are some of the main events during the fourth quarter, and we can then move over to Page #4. So if we look at the top line a little bit more in detail then, from an order intake perspective, our order intake rose 0.9% organically and 6.9% in actual numbers.

We saw continued high order intake in Acute Care Therapies, mainly due to our Cardiopulmonary business, which delivered a double-digit growth in the quarter. We also see that Life Sciences continue to grow primarily in sterilizers and in washer-disinfectors.

We have, as I mentioned, initially, little bit weaker order intake in Surgical Workflows, primarily due to a slow start of the quarter in Americas and Asia Pacific.

It's also worth noting that if we adjust for the cancellation of 2 low-margin orders in Acute Care Therapies and Surgical Workflows from back in 2017, the organic order growth amounted to 1.7%. So despite these calculations, the order bookings are higher than year ago. So if you want a proper comparison, the fourth quarter of 2018 with fourth quarter of 2019, you can adjust for this.

We don't normally report any adjusted order intake, but since it's unusual, the cancellations, we thought it would be worth mentioning this.

If we then look at this from a sales perspective, we had 1.8% organic growth in the quarter, 7.7% in actual numbers. Acute Care Therapies had good performance in all regions, accounted for the largest share of growth in absolute figures.

We also see that Life Science is showing very robust growth in both Americas and also EMEA, while organic net sales for Surgical Workflows declined in all regions, due in part to some deliveries that we made in the third quarter that normally maybe would have ended up in the fourth.

We can also see that from a consumables and capital goods perspective, sales of consumables are now growing faster than capital goods, which is generally positive for the gross margin.

We can then move over to Page #5, please. So if we dissect the order intake picture a little bit and look at the contribution from the different business areas, our organic order intake was a bit below market growth for the quarter, even with the adjustments that I mentioned earlier. We do expect this to be temporary, given the feedback that we have from customers and what we see in our pipeline.

And as I mentioned earlier, the cancellation of the 2 lower-margin orders for 2017 amounted to SEK 57 million, which takes away 0.8 percentage points from the growth figure for the quarter. So the adjusted figure then would be 1.7%, if you want to compare quarter-to-quarter from 2018 and like.

The Acute Care Therapies then, 2.9% organic growth in order intake, SEK 346 million in actual numbers. This is in line with market growth. And as I mentioned earlier, very strong order growth in our Cardiopulmonary business.

Life Science also had good growth for the quarter, 2.3% organically, SEK 48 million in actual numbers. Here, we see an organic growth with a strong trend in capital goods for Asia Pacific. China is a very strong market for us in Life Science. Also generally favorable growth for disinfectors and for sterilizers and a decline in Americas and EMEA, which we again expect to be temporarily -- temporary. The underlying growth dynamic in Life Science continues to be positive.

If we then look at Surgical Workflows, we had minus 2.4% organic order intake growth, plus SEK 71 million in actual numbers. The weakness is attributable to Infection Control in Americas and in Asia Pacific, where as I mentioned earlier, we had a slightly weak start in the quarter.

We -- it's also worth mentioning that our smallest offshore Surgical Workflows, Integrated Workflow Solutions, had organic growth of more than 20% in the quarter, so that's very positive.

With that we can move over to Page #6, please. If we look at this then below order intake and focus on our net sales, net sales for the quarter increased organically by 1.8%, in actual by 7.7%, to, in total, SEK 8.498 billion. In this, we had a positive currency impact of SEK 465 million. And as I mentioned earlier, consumables grow faster than capital goods for the first time in a long while.

From a business area perspective then, Acute Care Therapies had 5.9% organic growth or SEK 485 million in actual numbers. This is outperforming the market a little bit with growth in all regions and most of our product categories, very strong Cardiopulmonary as mentioned earlier.

We also see continued robust performance in Critical Care. This is predominantly linked to high demand for our ventilators. And it's also encouraging to see that we have a good demand for our recently released product update in Critical Care.

Life Science had a very favorable sales growth as well in the quarter, 13.9% organically and SEK 143 million in actuals. This particularly is driven by strong growth in EMEA in sterilizers, and we also had higher sales in Americas, mainly attributable to capital goods in the U.S.

Somewhat negative trend in Asia Pacific, but largely due to a challenging comp from the previous year, where we had over 46% growth in the fourth quarter of 2018. In general as well, sales of capital goods increased in Life Sciences.

Surgical Workflows, on the other hand, we had minus 5% -- minus 5.6% organic growth, minus SEK 20 million in actual numbers. The organic decline here was attributable to factors like large deliveries taking place already in the third quarter, but also a decline on products with lower margins, like, for example, our modular ward systems and some of the loading equipment related to CSSD solutions.

Organic sales in Infection Control and Integrated Workflow Solutions were unchanged in the quarter. And from a capital goods and consumables perspective, we had a decline of capital growth with 8.9% organically, while consumables grew by 2.7%.

With that, we then move over to Page #7 and look a little bit at the gross margin development in Q4 2019. So our adjusted gross profit increased by SEK 514 million to SEK 4.304 billion in the quarter, driven mainly by Acute Care Therapies, and in general, support from currency, the currency support here was SEK 316 million.

There was also an IFRS 16 effect of 31 million positive in the quarter, important to know.

If we compare with the preceding year's margin, gross margin is 2.6 percentage points higher, driven by improvements in all of our business areas. This is encouraging to see.

We have supported, of course, by positive effects from currency, as I said, but also we can see a good mix between products and geographies. We have some volume effects as well that are positive, and we have a good absorption, and in general, also good productivity gains in our supply chain. So a lot of good things happening there.

With that, we can move over to Page #9. And I leave over to you, Lars.

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Lars Sandström, Getinge AB - CFO [3]

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Thank you, Mattias. As you can see, adjusted EBITA increased by SEK 261 million and the adjusted EBITA margin improved 1.8 percentage points year-on-year.

Currency effects had an impact of SEK 200 million on EBITA and supported EBITA margin by 1.3 percentage points.

Adjusted gross profit impact on the margin amounted then to 1.3 percentage points, thanks to the positive product new mix. And the other part that Mattias mentioned here.

Looking at adjusted OpEx increased year-on-year, primarily due to currency and investments in compliance, quality and remediation, including then also preparations for the EU MDR.

Sequentially, the costs were higher following the seasonal pattern with higher cost in Q4. And the higher OpEx had an EBITDA margin impact of minus 0.8%.

All in all, this resulted in an adjusted EBITA of SEK 1.673 billion and an adjusted EBITA margin of 19.7%.

Over to Page 10, please. Let's take a look at the BA contribution to adjusted EBITA, which was impacted positively by currency tailwind of some SEK 200 million in the quarter, certainly Acute Care Therapies with a margin of 27.5%, which is an increase of 0.8 percentage points.

And SEK 165 million in actuals. Here, the main -- the increase of 0.8 percentage points was mainly due to increased sales volumes, higher gross margin and positive currency effects, which was partly offset then by higher costs.

In Life Science, adjusted EBITA rose by SEK 30 million, resulting in a margin increase of 0.5 percentage points, mainly attributable to higher gross margin compared with the year earlier and also partly then by some higher OpEx.

SW, despite the lower sales volumes in Surgical Workflows, adjusted EBITA increased by SEK 61 million, corresponding to a marginal increase of 1.5 percentage points due to improved gross margin, positive currency effects and lower operating expenses here.

Over to Page 11, please.

We continue to see improvements in the underlying OpEx development, which is tracking according to plan. And today, we are 10,538 FTEs, and we do see continuous underlying decline in the number of FTEs using the natural turnover and only refill where it brings value to customers and the business.

However, we have increased the number of FTEs in the quarter, mainly attributable to sales and also remediation and preparations for EU MDR, and also some increases in the production, where we increased some of the production phase in some of our facilities.

This is generating value over time.

At the same time, the number of FTEs within traditional back office areas are declining.

Our work continues to bring OpEx in relation to net sales to a healthy level. And as you can see in the graph to the right, adjusted OpEx in relation to net sales on a rolling 12-month basis and has declined, in particular, in the first half of 2018.

This is, to some extent, supported by positive currency effects on net sales as well.

Over to Page 12. On cash flow, the 4 changes in working capital is strengthened in relation to Q4 2018, primarily due to improved EBIT and lower taxes paid and also last year a payment for the investigations done in Brazil last year.

During 2018 and '19, we've been working intensely with improving our working capital.

And as you can see in the graph in the middle, we broke the trend in working capital days in the second quarter last year, following by decline each quarter since.

And we are now at some 112 working capital days. Also, working capital is decreasing 6.8% year-over-year. At the same time as our net sales is growing 1.8% organically.

Our efforts to improve working capital will continue just as everything else we do in order to improve productivity and as both underlying earnings and cash flow improve.

Of course, you should expect this steep decline in working capital to slow down a bit as we get into comparisons that are tougher.

And as an example, you should expect some buildup in safety stock, in inventories related to the transfer of production that is ongoing from Fairfield and Mahwah to Wayne in the U.S. during 2020. Nevertheless, we still -- we do still have many things to improve in this area.

Net investments in the quarter amounted to SEK 261 million compared to SEK 363 million previous year. And free cash flow then in total amounted to SEK 1.4 billion for the quarter.

Let's move to Page 13, please. Let's take a look at our net debt situation, which has improved in the quarter, following the strong cash flow.

Interest-bearing liabilities declined by SEK 1.8 billion during the quarter, and net debt was reduced to SEK 12.3 billion.

Our net debt besides normal interest-bearing loans that you find in our financial report, include pension liabilities and the impact on leasing liabilities under the new IFRS 16.

When we exclude the IFRS 16 lease -- related leases on the balance sheet and pension liabilities and focus on the interest-bearing loans, we can conclude that has been reduced by SEK 1.5 billion in the quarter.

The reduction in net debt in combination with increasing operating profit has contributed to a significant reduction of leverage. Net debt, including pensions and IFRS 16 is now at 1.7x adjusted EBITDA, and if we add pension and IFRS 16 effects to the net debt, we are at 2.5x adjusted EBITDA, which can be compared to 3.2 1 year ago

Let's move to Page 15, and back to you, Mattias.

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Mattias Perjos, Getinge AB - CEO, President & Director [4]

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All right. Thank you, Lars.

So just a few words on the outlook then. So we continue to guide for 2% to 4% organic net sales growth for 2020.

Nothing has really changed fundamentally on an overall level from our perspective. From -- when we look at things from a customer perspective, we expect the overall positive demand pattern to continue. And this goes for both capital goods and consumables.

We also get positive signals from customers on our newly launched products, which I think is very encouraging, and we expect the same with the ones that we have in the pipeline for 2020.

So that gives a bit of encouragement for the year in front of us. We also entered this year with a stronger order book in total compared to when we started 2019.

However, we have been facing a decline in orders in surgical workflows for 2 quarters in a row now, mainly related to Americas. So this is something that we are very aware of and addressing also internally that we're enforcing the organization here, and we keep monitoring the -- our activities closely and really working hard to reverse the trends in the last 2 quarters.

All in all, if you weigh everything together, we expect an organic growth in net sales of 2% to 4% for 2020.

Then, we can move over to Page 17, and I'll just summarize briefly before we move to the Q&A part of the call. So if you look at the key takeaways when we summarize the fourth quarter of 2019, we continue to improve our business and deliver growth. So 2% to 4% expected for next year, in line with our predictions at the Capital Markets Day in 2018.

We see a positive margin development in all our business areas. The adjusted EBITA for 2019 is 1.4 percentage points higher than the same comparison 2018.

Some of this improvement maybe came a little bit faster in 2019 than we expected, as we expected the main expansion to be in 2020, 2021, which was communicated at the Capital Markets Day, but I think it's good that things are really are front-loaded in this sense.

We continue to also see positive development in underlying cash flows. And as I said, seems to be an indicator that things are starting to work better from a productivity perspective is really all the activities that are getting traction and momentum when it relates to working capital because it's very sound for the company.

As a consequence as well, the cash flows generated our leverage has declined significantly, which, again, is another example of people's evidence that we continue to move in the right direction.

The Board has also decided to propose year-to-date dividend but we will increase the dividend by 50% to SEK 1.50 per share.

Those are really the main takeaway. And in summary overall, I will just -- we will just continue with our efforts to continue to work closely with our customers and really help them create value in their business and continue to strengthen our way of working in the coming quarters.

So with that summary, I open up for questions, thank you.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions). The first question is from Annette Lykke from Handelsbanken.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [2]

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First of all, could you provide a little bit of color on 2 order cancellations you had within Acute Care Therapy? Were these -- and also on a regional, maybe product area as well? And also why this was canceled?

Then you positively say that the FDA remediation program are on track. And you have unutilized provisions of around SEK 234 million and used about SEK 154 million in '19. So would it be fair to say that you have unutilized amounts corresponding something like 18 months? And is this in a time line you also see as a finalization for the remediation program? Or are we at risk that you will during 2020, make a further FDA provisions as you -- on top of the already 2 billion later since 2014. Then I have some questions on the FX afterwards.

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Lars Sandström, Getinge AB - CFO [3]

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Okay. At FX when it comes to the cancellation, these are our 2 contracts that we've had since 2017, which are lower-margin orders in the EMEA, cost of EMEA.

And where we've concluded that it doesn't make sense to continue to have it in our order books and finish supply for this quarter. So the SEK 57 million in total is related to both Surgical Workflows and Acute Care, but especially on high-level [dividend].

When it comes to the FDA remediation, we do feel that the permission that we have, is enough, otherwise, we would have changed it, of course, and we do expect -- our program is running at full speed in all the relevant facilities. We expect this to continue in 2020 as we guided for, and we do expect that the remaining provision is enough for that part.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [4]

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Okay. Then on the margin, and I know you're not so happy to talk about margin guidance. But if you look at the -- as we strip out the FX of SEK 200 million for the Q4, SEK 400 million for the full year '19, I think it's fair to say that your EBITA -- or adjusted EBITA margin if you strip out currency is basically flat. And although you highlighted that you are gaining traction here, what should we expect for 2020 in this respect? As you also highlighted on your call the effects you've seen have materialized already in '19.

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Lars Sandström, Getinge AB - CFO [5]

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Yes, you're absolutely right. We're not going to change our view, and we will not provide detailed margin guidance. What you need to keep in mind and what you didn't mention in your summary there is that we also have the headwind from expiring TSAs during the year. We've had remediation investments in addition to what we had the year before, and we have the preparations for EU MDR. So when we talk about underlying margin improvement, it means offsetting these effects as well. So if you -- you clear for that because these are things that we will get through during 2020. There is a better underlying margin expansion.

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Operator [6]

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Next question is from Carolina Elvind from Danske Bank.

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Carolina Elvind, Danske Bank Markets Equity Research - Analyst [7]

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So just a few questions on the FX effects, again. And it was SEK 200 million on EBITA in Q4 and SEK 400 million for the full year. Could you describe if you've had any hedging profit or losses during the year? And also, what is the value on the current cash flow hedges on the balance sheet and how that potentially will impact profit going forward?

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Lars Sandström, Getinge AB - CFO [8]

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Yes. When you look at currency impact that we have in the fourth quarter of SEK 200 million, you should also remember that the fourth quarter growth is the biggest quarter, when it comes to profit -- sales and profit. So we get the proportionately higher share in the fourth quarter. So that is more normal in that sense. And when it comes to forward-looking on our hedge we are -- we have some hedge coming in the next year, which are slightly negative, but there is not big material impact. We also have of course, capital coming in the other direction.

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Operator [9]

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And next question is from Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [10]

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Three quick questions, if that's okay. The first one is for Surgical Workflows. How soon do you expect sales and order momentum to pick up again and whether you see the weakness here in the last 2 quarters as temporary? Second quarter about the margin. You have previously said that you expect a lower margin improvement in 2020 versus 2019. Now the currency impact, of course, helped the margin more than expected, I believe, in 2019. So how do you view that previous comment evolving here? And the third question about the tax rate, 34% in the quarter seems to be higher taxes in the U.S., so how should we think about the group tax going forward?

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Mattias Perjos, Getinge AB - CEO, President & Director [11]

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All right. Thank you. When it comes to the stock returning to Workflows, then we do -- the reason we believe it's temporary still that we see good activity levels from our customers. In EMEA, we have the high market share. So outside the U.S. primarily, we don't see a big underlying weakness, especially not in our most important market.

The main concern is in Americas, in U.S. specifically, and we've worked both during the third and the fourth quarter and we're reinforcing our organization to move this in the right direction. So we do expect this to get some traction during 2020. So that's the reason for our view in that regard.

When it comes to margin expansion, we do expect still our underlying productivity improvements to continue in good steps in 2020, that you're absolutely right, that we've had little bit more currency headwinds than we expected.

So it's difficult to predict where we will end up. So the probability of a much bigger step has, of course, gone down a little bit given that we've made a bigger improvement in 2019. I can't really give any more detailed guidance on that. And when it comes to the question on the tax rate as well, I didn't actually hear that out too. Lars, speak that up.

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Lars Sandström, Getinge AB - CFO [12]

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Yes. No you asked about the higher tax rate. And yes, may have an impact on -- from the geographical mix we are making more money growing in the U.S. and in some other geographies with higher tax rates that impacts the tax rate for this year. And also, U.S. tax reform is impacting us from a [gain] and that is also contributing to higher tax rates. And given this will bring -- also continue when we go into next year, so we will have a higher tax rate than we have had historically.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [13]

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But do you think you will be able to compensate anything on this tax rate versus the 34% you have in 2019?

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Lars Sandström, Getinge AB - CFO [14]

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That is the work ongoing continuously. And we are working on that. I cannot give you more guidance on that today. But of course, we are not happy with that level. So we will work on that for sure.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [15]

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Because that returns that seems just about stats. Because I think consensus is for (inaudible). It's a big good difference that you have, 24% versus 25%. So I guess, it will be -- I think you have to give some sort of guidance there. So this is a higher level than in past?

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Lars Sandström, Getinge AB - CFO [16]

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Well, as I said, in -- the tax rate we have now is in line with the results we have. And that is impacting us going forward. We should not calculate it going back to that level. We are at 34% now and going into next year, we will work trying to bring it down from the 34%. But not -- I will, of course, give you a clear guidance more than that.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [17]

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Okay. And if you're very successful bringing it down, were you talking about down 30%? Or is that a good assumption?

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Lars Sandström, Getinge AB - CFO [18]

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I will not give you any guidance on that. Sorry, Kristofer.

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Operator [19]

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Next question is from Craig Mcdowell from JP Morgan.

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Craig Mcdowell, JP Morgan Chase & Co, Research Division - Analyst [20]

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Just 2 questions from me, please. Firstly, please, can you give us an update on the progress of mesh litigation? You previously said that trials would start early 2020. Have you had any further visibility on this on where and when trials will start? And could you give an update on case converts. And linked to that, please, could you give an indication of the cash out that you expect on the mesh provision in 2020?

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Mattias Perjos, Getinge AB - CEO, President & Director [21]

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Thank you. Unfortunately, all the short answers on this front. We have no news when it comes to mesh, nothing has changed there. As soon as we have any change that is material, we will, of course, disclose this, but there's nothing at the moment. And consequently, we can't give any guidance on the cash outflow because of the data. So we need to see the -- what ends up here with the process milestones, and then we can maybe give a bit more guidance but not today.

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Craig Mcdowell, JP Morgan Chase & Co, Research Division - Analyst [22]

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Okay. Just if I can follow-up, the various certain measures you're taking on adjusting the manufacturing footprints, can you give any indication on what restructuring charges you expect through 2020?

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Mattias Perjos, Getinge AB - CEO, President & Director [23]

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Well, there's not many restructuring charges in 2020 for the ones we've announced. Now they were taken in 2019.

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Lars Sandström, Getinge AB - CFO [24]

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What we have said when it comes to restructuring over time we have said a level of around SEK 200 million last year. And now in 2019, we were more towards SEK 300 million, and we should be moving may -- back to more normal, maybe, levels. But we don't give guidance for single years. But on the longer term, we see that around SEK 200 million has been.

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Operator [25]

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Next question is from Scott Bardo from Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

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First one, just relates to you describing 2019 as an implementation year previously with further underlying strides to -- from 2020 and beyond. You made some comments here already, but can you please give us an update as to where you are with the SKU reduction and transfer of production warning letter appeasement in the U.S.?

Just some sense of times go and whether there's likely to be any quarterly disruption or near-term impact from any of those endeavors?

Also, obviously, cash generation is coming relatively strongly and your leverage position is better than I think most would have expected. Can you please just requalify your expectation for the Applikon acquisition now. Once you've absorbed that acquisition on a full year basis, where would you expect leverage ratios to be for the group for fiscal '20?

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Mattias Perjos, Getinge AB - CEO, President & Director [27]

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Scott, yes, it's true. Throughout the first few year there are a lot of things being implemented and we're starting to see the results from this. When it comes to the SKU reduction program, that's going according to plan. There's really no news with that. It's a healthy exercise that we're going through, and has not been disruptive at all.

It's been positive for the business. When it comes to the warning letters in Mahwah and Fairfield, we are in full swing when it comes to remediation. And I would just reiterate what I've said earlier that 2020, we will spend on remediation these 2 factors as well. And simultaneously going through the move of the production from these 2 facilities to our Wayne facilities. And those projects are ongoing according to plan as well.

On your question on leverage then, the Applikon acquisition will add just about 0.2 to the leverage, and we expect to be able to work that down again during 2020.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [28]

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And a couple of minors, please. I think historically the company in previous viral outbreaks like SARS, H1N1 have benefited from strong demand in ventilators. I just wonder whether you could comment to whether you're seeing any increase in activity surrounding the coronavirus outbreak, please? And also perhaps, Mattias, you could give us some sense on the PMA for covered stents, which I think you've historically described as being one of the bigger swing factors to the revenue growth in 2020. Where are we with this, please? When will we likely get some, sort of, answer here?

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Mattias Perjos, Getinge AB - CEO, President & Director [29]

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So when it comes to the virus outbreak, we already see increased activities. So our team in China is working intensely with our factories, not only for ventilators, though I would point out, but also our hotline machine and the oxygenators required for this. So we do see a pickup in demand for this, and we're really just trying to work as closely we can with customers to help as many patients as we can as well. It's an addition, I guess, to the normal influenza peak that we see at this time of the year.

On the PMA for covered stent, nothing has really changed since we talked about this in 2019. Again, we're still in the process of the dialogue with FDA on moving this forward. So no news at this stage unfortunately.

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Operator [30]

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And next question is from Sten Gustafsson from Nordea.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [31]

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Sten Gustafsson from Nordea. A few questions. First on, could you give us a number of -- well, how much of the provision you booked related to the U.S. mesh litigation have you utilized in 2019? That would be helpful. That's my first question. And secondly, when it comes to the FX, you said, if I heard it correctly, that it would -- the hedging effect for 2020 would be negative. Is that correct? And if -- can you give us some sort of guidance on what do you expect based on current currency situation and your sort of expected deliveries for 2020? That would be very helpful.

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Lars Sandström, Getinge AB - CFO [32]

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Yes, starting with the first provision regarding mesh. As we have said before, we don't give any real information on that since we want to keep this locked to the start of the process. But the provision was made for possible outcomes and also the legal expenses. So it has only been used so far on -- connected to the legal expenses. So therefore, minor impacts and changes to that.

And when it comes to FX, as I mentioned, minor impact connected to FX hedging, but it looks depending where we stand right now. Then, of course, firstly lose and when it comes to the translation the normal for such an impact, we don't see big impact year-over-year given the rate that we have at the moment. We don't expect big impact from that as it looks. I hope that answers it.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [33]

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Well, does that mean then that the sort of SEK 400 million uplift this year will be basically 0 or around 0 for 2020? So how we should read it?

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Lars Sandström, Getinge AB - CFO [34]

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So you should -- we don't give guidance on the transaction part. We will come back and give you more information when we come in the quarters, going forward on currency development as we do every time. And -- but when it comes to pure cancellation, there is minor impacts. And then transaction we cannot give you any guidance on this, depends on how it develops.

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Operator [35]

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And we have a follow-up question from the line of Annette Lykke from Handelsbanken.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [36]

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Yes, it was just on -- first of all, on the restructuring costs. And as you say that in long term, they expected to be around the SEK 200 million. Is it fair when you have such a -- I mean, you have had restructuring costs for a very, very long period, as long as I followed you. And now you also expecting it to not to be 0 in the longer term. Wouldn't it be more fair to see those as a part of the operational cost, if they have this kind of repeating nature? Then on the MDR preparations, I might have understood what you've said before, but it was my impression that once you have finalized these, you would allocate more resources into innovations from the cost you had within admin and the costs you have had within R&D to prepare for the MDR by May this year?

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Lars Sandström, Getinge AB - CFO [37]

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Starting with restructuring. The reason why we show it is that it can be a significant amount in one quarter, you can make a decision. So it will help you to see what kind of impact that has. And then if you want to decide to have it in or out, that is your decision. And when it comes to MDR, yes, it's an intensive period, working on that. And it of course takes some of the resources from the R&D organization but also other parts of the organization. And when that phases out, some costs will disappear, what we can call external costs and some costs then of course can be more -- moving back to core R&D you can call.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [38]

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There's been some general studies made that MDR preparations could be between 300 to 500 basis points of sales in Europe. Is that something you recognize? Or will you be able to share with us how much of the MDR operations? Is it 100 basis points? Or how much of your margin has been allocated into this area?

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Lars Sandström, Getinge AB - CFO [39]

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Yes. We don't disclose what the FX amounted, but it's significantly lower than the 500 basis

points. We've heard the same benchmark figures as well. But don't see the need for that. That comes from various consultants in the area, and we're doing a lot of this work ourselves, some help with externals. And that's the increase, you can see reload further and what would be a superior number, for sure not 500 basis points.

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Operator [40]

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And another follow-up from Kristofer Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [41]

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Yes, 2 things. First, you talked about the currency effects for the full year, I'm sure I could calculate that myself, but the SEK 400 million mentioned, was that only the translation effect?

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Lars Sandström, Getinge AB - CFO [42]

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No, it's both translation and transaction together.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [43]

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Okay. And the transaction part, I'm not sure what's that?

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Lars Sandström, Getinge AB - CFO [44]

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The transaction part was SEK 132 million and translation SEK 68 million.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [45]

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Sorry, how much was translation?

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Lars Sandström, Getinge AB - CFO [46]

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SEK 68 million.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [47]

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And transaction is SEK 132 million, no?

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Lars Sandström, Getinge AB - CFO [48]

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Yes, and total SEK 200 million.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [49]

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Okay, then I mean for the full year, wasn't it SEK 400 million for the full year?

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Lars Sandström, Getinge AB - CFO [50]

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That I don't have on top of my mind, that I need to come back to you on.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [51]

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Okay, that's fine. And then finally, on the PMA for the covered stents, you said you are in dialogue with FDA. Could you give some more clarity because I think you filed that quite a while ago. So is there any problems that has emerged? Or is the process going as good as you were hoping?

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Mattias Perjos, Getinge AB - CEO, President & Director [52]

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There are no particular problems than that have emerged, it's just a very drawn out process.

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Operator [53]

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And we have an additional follow-up from the line of Scott Bardo from Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [54]

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I just want to come back to Kristofer's question on tax, please. I think Getinge's underlying tax rate has been around the 27% and 28% region for the last 13, 14 years. So what I'm trying to understand is what has actually changed for a structurally higher tax rate? And do you expect that then to be coupled with higher cash out for taxes paid? So a bit more clarity there, please, that's I think, needed.

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Lars Sandström, Getinge AB - CFO [55]

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Yes. Thank you, Scott. Yes, we are having a somewhat higher tax rate compared to historical, very stable, 27%. And from a cash out perspective, we still have cash flows carry forward that we can utilize. So somewhat lower cash out is to be expected and of course that is depending on the possibility to utilize them. And that can vary bit over years. But from a cash out perspective, over time, yes, it should be lower.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [56]

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And the reason for the increased tax rate, is that because a lot of your business is coming from now, higher tax jurisdictions? Or is it that you've now turned profitable in the U.S. market or something? Can you help explain what the structural difference is?

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Lars Sandström, Getinge AB - CFO [57]

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Well, it is mainly related to profitability or profit generated in higher tax regimes. That is the very short simple answer.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [58]

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Could you give some examples of those regions for us, please, Lars?

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Lars Sandström, Getinge AB - CFO [59]

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When you have -- as I mentioned in the beginning there U.S. impacting and also some European markets and also that we are growing outside. So say, the old European market is also impacting. So that's this. And again the trend is higher tax rate. If you look at politicians, what they are working towards, and that is impacting us as well.

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Operator [60]

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And that was our final question for today, so I'll hand the call back to the speakers for any closing comments. Please go ahead.

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Mattias Perjos, Getinge AB - CEO, President & Director [61]

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Great. Thank you very much. I think I've made the summary already before we started the Q&A. So I just want to thank you for your attention, and wish you a good rest of the day. Thank you very much.

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Operator [62]

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And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.