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Edited Transcript of GETI B.ST earnings conference call or presentation 17-Jul-19 8:00am GMT

Q2 2019 Getinge AB Earnings Call

Getinge Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Getinge AB earnings conference call or presentation Wednesday, July 17, 2019 at 8:00:00am 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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* Johan Unnerus

Pareto Securities, Research Division - Analyst

* Kristofer Liljeberg-Svensson

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

* Michael Klaus Jungling

Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst

* Scott Bardo

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

* Sten Gustafsson

Nordea Markets, Research Division - Senior Analyst

* Virendra Singh Chauhan

AlphaValue - Analyst

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Presentation

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Mattias Perjos, Getinge AB - CEO, President & Director [1]

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Thank you very much. Good morning and welcome to today's earnings call. I have Lars Sandström, our CFO, with me today who will support me during the call and also present some of the detailed financials. So we can start by moving over to -- right away to Page #2, please. So I'd like to start by summarizing the key takeaways from the second quarter. So we continue to outgrow the markets. We have positive performance in the U.S. continuing. And I was particularly happy to see that our net sales in China increased by more than 30% in the second quarter, so very strong development there. I am pleased with the development in Acute Care Therapies and in Life Science in the quarter, and it's also very good to see that our working capital is continuing to decline despite our growth, and this has a very positive impact on our cash flow as you will see in a short moment.

We do see good progress as well when it comes to many things in our turnaround plan. However, I'm not really satisfied with our gross margins, which were impacted by -- negatively by the development in Surgical Workflows. And on the OpEx side as well, we have the continued investments in compliance, in quality and remediation measures as well as the adjustments to the European Union's forthcoming medical device regulation EU MDR which does have an impact on the OpEx and, of course, we as well have continued investments in fueling our growth. So those are the main takeaways from the quarter.

We can move over to Page #3, please. So in terms of the events here, we're not satisfied with the current level of operating expenses and, therefore, we've initiated further restructuring activities in the quarter. And this is in addition to those that we presented in the first quarter. The cost in the second quarter is SEK 106 million and this is primarily related to efficiency enhancement in sales and in administrative processes. And we expect this to have a positive impact on earnings in the second half of the 2019. And just to give an example here, one of those measures is that our 2 shared service centers are being merged with all of our operations in Costa Rica being transferred to the unit in Kraków in Poland. And this, we expect to be completed by the end of September in this year.

I also want to highlight that we have no new material information to give regarding negotiations with the authorities in Brazil. There's also no update really on the mesh litigations and the FDA warning letters other than what has already been communicated.

When it comes to our portfolio, we have introduced a new steam sterilizer and the upgraded version of our strong performance Servo-u ventilators is also ready for launch now on all markets that require CE marking and that we expected to continue to fuel the growth in our Critical Care business, which is already quite good.

Also customer satisfaction is key for us. And in the quarter, we received both partner awards and excellence awards from customers. Thanks to the value that we continue to create for them.

We also received the Red Dot design award for the high-quality design and also the user friendliness of our new Maquet PowerLED II Surgical Light which was launched a couple of quarters ago. So it's a really good, positive developments in that area as well. With that, we can move over to Page #4, please.

So if we look at the organic growth from a mainly geographic perspective, we had order intake growth of 5.2% organically in the second quarter, 11% in actuals. We do see continued strong growth with Acute Care Therapies leading the development here. So they account for the largest share in -- of growth in absolute figures mainly due to very strong trend in our Cardiopulmonary business and specifically heart-lung machines and disposables for this. It's worth pointing out that most subsegments within Acute Care Therapies performed very well in the quarter from an order intake standpoint.

We had a little bit lower order intake in EMEA, attributable to Surgical Workflows in Eastern Europe where we had strong quarter in the same period last year, but we did have a decline in EMEA this year. We do see very strong growth in Life Science in Americas and EMEA and also a healthy growth in Surgical Workflows in both Americas and in APAC. Overall, very positive development on the order front.

If we then move to sales. We see continued growth in all of our business areas. If you look at the Acute Care Therapies, again, performed positively in all regions and accounted for the largest share of growth in absolute figures. We also had robust growth in Life Science in Asia Pacific, particularly related to washer disinfectors and sterilizers, but we had slightly lower sales in North America. When it comes to Surgical Workflows, we had good performance in Asia Pacific, while sales failed -- fell organically in EMEA, mainly related to Infection Control.

If we then look at the split between capital goods and recurring revenue, we can see that sales of capital goods are continuing to increase as a percentage of the total sales, which does have some negative impact on the gross margin which you will see in the coming pictures here. It's worth pointing out though that it's growing at a slower rate than in previous quarters, so a little bit of rebalancing going on there.

So after order intake, we can move to Page #5, please, and look at the contribution here by BA. So overall a very strong development for the group, as I mentioned. And if you look at Acute Care Therapies, we had 7.7% organic growth and SEK 455 million in actual numbers. So positive trend with order growth in all of our product categories, highly robust in heart-lung machine, including consumables, as I mentioned.

From a Life Science perspective, we had 15.5% growth organically and SEK 129 million in actuals. We had sterilizers in Americas contributing to large share of this and also isolators in EMEA worth pointing out.

If you then look at Surgical Workflows, from an organic perspective, we had a small decline of 0.9% but an increase in actual numbers of SEK 86 million. The decline -- the organic decline was attributable to Eastern Europe in EMEA. And if you look at Americas and Asia Pacific, we had a much more healthy performance, especially when it comes to Surgical Workplace. So that's the makeup of the order intake in the second quarter.

So let's move over to Page #6, please. So this gives you a -- an overview of the development in sales by business area. So net sales for the quarter increased organically 4%. In actual numbers it was 9.5%. So the total number was SEK 6,277 million for the second quarter. There was a positive currency impact here by -- of SEK 319 million in the quarter. And as you can see, every business area contributed positively to the sales development. We also can see that the capital goods grew 0.6 percentage points faster than consumables which does have a negative impact on the gross margin in the short term. But again it's a little bit of a rebalancing compared to past quarters.

ACT, 6% organic growth, SEK 393 million in actual numbers and good growth in all regions this quarter. We had 14% growth in Critical Care, mainly due to strong sales of ventilators. It's also positive to see that we had healthy growth in cardiac surgery products on all of our markets. And for the first time in almost 2 years, we could see that the sales of expandable vascular stents have actually stabilized in this quarter. So that's also very positive. The sales of capital goods increased also in ACT, which has a little bit of a negative margin effect for that business area.

If we look to Life Science then, we had a 3.9% organic sales growth. It was SEK 51 million in actual numbers and particularly high growth in washer disinfectors and sterilizers in Asia Pacific. We did also have good growth in isolators and sterilizers in EMEA. Americas was a bit weaker, attributable to North America primarily. And we could in Life Science as well see that the sales of capital goods increased in relation to consumables, which again has a slightly negative effect on the gross margin.

Surgical Workflows then if we move to sales in that business area, we had 0.8% organic growth and SEK 102 million in actual numbers. We had high growth in Asia Pacific and Americas, while EMEA did not meet last year's strong results in terms of sales performance. If we look at Surgical Workplaces and Integrated Workflow Solutions, we had a good -- rather good quarter in terms of sales development for those 2 subcategories.

We had a negative development in Infection Control in EMEA that hampered the overall growth a little bit. And we could also see in terms of capital and consumables, we had capital goods increasing at a marginally higher rate than consumables. So that's the overall view on net sales development in the second quarter. And with that, we can move over to Page #7, please.

So we'll spend a short moment here on the gross margin development for the second quarter. You can see that gross profit increased by SEK 257 million to SEK 3,101 million in the quarter. This is driven mainly by Acute Care Therapies and also support from currency. The currency support in the quarter was SEK 163 million here. It's also worth mentioning that there's a slight positive impact from IFRS 16 on adjusted gross profit. This amounts to SEK 29 million in the quarter.

If we then compare this with the preceding year, the gross margin is 0.2 percentage points lower mainly due to the negative development within Surgical Workflows, and the reason for this is that we had a number of large customer projects in surgical tables and other operating room hardware in the DACH region that hurt the gross margin development.

When it comes to the margin, we had a positive contribution from volume and currency and some very slightly negative contribution from product mix. And what this means is that we had more growth in capital than in recurring. It was counterbalanced to some extent by a slightly positive regional mix from increased share of sales in the U.S. but it was not enough to have an overall positive impact.

So with that, we move over to Page #9, and I leave over to you, Lars.

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Lars Sandström, Getinge AB - CFO [2]

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Thank you, Mattias. Moving over to the EBITA, Page 10, as you can see, adjusted EBITA increased by SEK 53 million and adjusted EBITA margin was flat year-over-year. Here currency impacts had impact of plus SEK 61 million on EBITA and support the EBITA margin by 0.4 percentage points. Gross profit increased by SEK 257 million but had a negative impact on the margin accounting to 0.7 percentage points then excluding currency and this is mainly attributable to the Surgical Workflow development.

OpEx increased SEK 38 million year-on-year due to investments in compliance policy, remediation and post preparations for the EU MDR as well as some currency impact here. Up on the EBITA margin OpEx contributed with 0.2 percentage points, excluding currency and IFRS 16, meaning that we have some slight leverage coming through. And all in all, this resulted in an adjusted EBITA of SEK 591 million and an adjusted EBITA margin of 9.4%.

Then we move to Page 10, please. Here let's take a look at the BA contribution. So adjusted EBITA which was positively impacted by currency, as mentioned, of SEK 61 million in the quarter.

Acute Care Therapies increased adjusted EBITA by SEK 102 million and the margin improved by 0.8 percentage points and this is mainly due to higher sales volume and currency. Life Sciences adjusted EBITA increased by SEK 11 million resulting in margin increase of 1 percentage point and that was mainly attributable to higher sales and gross margin compared to last year.

Surgical Workflows, adjusted EBITA fell by SEK 35 million to minus SEK 74 million, primarily due to lower gross margin largely as result of a number of large, as Mattias mentioned, customer projects in surgical tables and other over hardware. This was, to some extent, partly offset by continued OpEx focus in SW. And it is the BA as Mattias mentioned earlier where we see significant need improvement in our commercial execution and productivity improvements going forward. Surgical Workflows also had a headwind from currency impacting EBITA negatively. The cost for common group functions, et cetera, increased (sic) [decreased] by SEK 25 million. It is mainly attributable to the compliance areas.

Let's move to Page 11 then, please. We continue to see good development in the underlying OpEx development, which is tracking according to plan. And today, we are 10,409 FTEs compared to 10,792 by the end of Q1 2018. And we do see continuous underlying decline in the numbers of FTE, and we are using the natural turnover and to some extent restructuring activities. And we only refill, this brings value to customers and the business.

However, we had increased the number of FTEs in the quarter attributable to factory temporaries and remediation resources. And just to give you an example, we have increased some 50 FTEs in Hechingen related to remediation work and also the increasing demand in February 2019.

The increased number of FTEs together with increasing cost for quality and remediation overall together with the compliance and the EU MDR preparation had a slightly negative impact on OpEx in relation to net sales in rolling 12, but we are still significantly lower compared to the peak in Q1 2018.

Our work to continue to bring down OpEx in relation to net sales continues. During the second quarter, we announced additional SEK 106 million in restructuring related to dedicated activities to address improvement areas impacting both OpEx and COGS.

Then let's move over to Page 12, please. The increase in profit had the positive impact on free cash flow which was SEK 576 million for the quarter compared to SEK 47 million previous year. Year-to-date, we have SEK 715 million increased cash flow versus SEK 46 million previous year. Cash flow was positively impacted by the continued healthy trend in working capital despite the solid growth.

And net investments also come in at a lower level and is now below our rate of depreciation.

The dividend of SEK 272 million was paid to the parent company shareholders during the second quarter. And net debt here was adversely impacted by currency impact, IFRS 16 effects and revaluation of pension liability. Excluding IFRS 16 effects, net debt in relation to adjusted EBITDA rolling 12 was in line with Q4 and Q1 in 2019.

Then let's move over to Page 13, please. During previous year, we have been working intensely with breaking the growth trend in working capital that we saw in the years before. And as you can see in the left graph, we broke the trending working capital base in the second quarter last year followed by a decline each quarter since, and we are now at some 116 working days -- working capital days.

And working capital is decreasing 6% year-on-year at the same time as our net sales is growing 4% organically. This work will continue just as with everything else we do, in order to improve productivity and thus both underlying earnings and cash flow improved.

Of course, you should expect that the decline in working capital to slow down a bit. As you know, we're soon coming to tougher comps as we started to improve quite well in Q3 last year, reporting SEK 801 million in free cash flow in that quarter. Nevertheless, we do see a change in behavior through the factor in the organization when it comes to these things, which is encouraging as we still have many things to improve in this area.

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

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Mattias Perjos, Getinge AB - CEO, President & Director [3]

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Great. Thank you very much, Lars. So let's take it to Page #15 and the outlook for 2019. We still expect an organic net sales growth of 2% to 4% for the full year of 2019. It's in the upper range of this but still within the span that we've given as guidance. The reason for this is that nothing has really changed fundamentally. From a customer perspective, we expect the overall positive demand pattern to continue and this goes for both capital goods and for consumer goods. We also have in general positive statements from customers regarding our newly launched products, and we expect the same with the ones to come in the rest of 2019. So this kind of reconfirms the overall positive outlook that we have.

One thing to bear in mind though is that the big part of the strong order growth is also for delivery of -- in 2020, which is good and will secure the longer-term growth prospect as well. But it also means that we stay within the guidance bracket of 2% to 4% for 2019.

With that then, we can move over to Page #17 and a summary before we move to the Q&A. So if we look at Page 17, and just to reiterate the key takeaways here. We continue to deliver strong growth. Again, it's another solid quarter when it comes to growth in order intake and in sales. We have a very positive underlying development in Acute Care Therapies and Life Science, while there is significant room for improvement in Surgical Workflows. But the good news here is that our challenges in the core business is now concentrated to Surgical Workflows and we have a focused effort going on there as well since some time ago.

We're taking restructuring cost of SEK 106 million in the quarter and this is because of focused activities targeting productivity in sales and in admin processes primarily. And we do expect this to start to have a positive impact on EBITA already in the second half of 2019.

And I also want to highlight again the positive development in working capital and the free cash flow that continues. And it's important as well to keep in mind that we will continue to intensify our efforts to strengthen the profitability of the operations in general and in Surgical Workflows in particular in the coming quarter.

And I also want to take the opportunity to remind everybody that we are on a what is a typically a 4-year turnaround journey that started in the second half of 2017, we're well underway on this journey. And 2019, like we said at the Capital Markets Day in 2018, is a year of implementation. So you will see lot more activities during the course of this year and we still expect a more solid improvement from 2020 and onwards.

So that's the summary from the second quarter of 2019. And with that, I open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Kristof Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [2]

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I've 2 questions. First one on ACT, of course very positive development, impressive growth. Could you maybe describe what's driving it? How much of growth is coming from new products, and what do you think is the reason for you outperforming -- or continue to outperform market?

Second question on Surgical Workflows and the weakness there. Is it possible for you to be a little bit more specific about what type of -- what are you going to do to improve profitability, and whether the restructuring you're doing, is that mainly to help the gross margin or operating cost?

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Mattias Perjos, Getinge AB - CEO, President & Director [3]

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All right. Thank you, Kristofer. When it comes to ACT and the performance there, your first question, I'd say that it's a mix of various strong clinical performance of matching our product, especially when it comes to Cardiopulmonary and Critical Care that's driving the growth. We also have good development, as I said, on our cardiac surgery portfolio, which is also very encouraging. And this was also the first quarter where we didn't see a decline in the stent business, so that's another positive. So it's a mix of, again, strong clinical performance compared to our competitors and also good sales management in driving the growth in a targeted way here partly helped them by the bottoming out of the stents business.

When it comes to the Surgical Workflow weakness, as you say, they're following the program that we talked about for the overall group here when it comes to margin performance. So this entails everything from purchasing both direct, indirect purchasing. There is the factory efficiency initiatives that are going on. But it's early days still for Surgical Workflows. You need to remember that we've had a number of management changes in this business and the current management team is partly new as well since a couple of quarters back. So it is still early days for the turnaround in Surgical Workflows, I'd say. And the activities that are being rolled out in terms of restructuring, it's both related to COGS and OpEx but primarily OpEx. And when it comes to Surgical Workflows specifically, I would like to remind you of the cost that we took in the first quarter as well, which is related to the IWS software business, this was entirely related to Surgical Workflows. As you probably saw on the report, half of the restructuring cost is related to Surgical Workflows also in this quarter.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [4]

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If we look at the restructuring charges we have taken now in the first half of the year, how much will that -- how much improvement will that lead to in the second half and on an annual basis?

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Mattias Perjos, Getinge AB - CEO, President & Director [5]

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We don't give any detailed guidance on this. But in general, it's about a 1-year payback on the restructuring initiatives that we have communicated so far.

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Operator [6]

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And our next question comes from the line of Michael Jungling from Morgan Stanley.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [7]

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I have 3 questions. Firstly, on order backlog, can you comment on the directionality on whether the quality of the backlog is supportive of improving gross margins or perhaps the other way?

Secondly, also on order book growth. Can you comment on how you see the second half of 2019 given that you've got significantly easier comparisons, should we expect these order backlog growth rates or order intake growth rates to continue?

Question number 3 is on the EBITA margin outlook for the second half, and I fully appreciate that you don't give guidance. But I'm confused by your remarks on Page 1, right from the beginning, where you highlight that you'll see ongoing headwinds from investments in quality MDR and in the coming quarters. And then in the same paragraph, you then write strengthening profitability in the second half. Which way is it? Is the net going to be positive? Or is the net of those 2 items going to be negative for margins in the second half, excluding obviously the impact from currency fluctuations?

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Mattias Perjos, Getinge AB - CEO, President & Director [8]

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Okay. I can start with -- we start from the first question. And when it comes to the order backlog, we don't comment particularly on the quality of what's in the order backlog. I should say that there's -- we don't expect any significant change from what we've had historically here other than what you can see in the mix in order intake between the business areas and capital and recurring. And when it comes to the order growth guidance, again, we don't give a detailed guidance or a number guidance on this. But as I've said in one of the pages here earlier, we do expect -- that we still have good -- very positive sentiment from customers overall. We have above -- our new products being well received by the market as well and we do expect the same for products that are about to be launched. So we do expect continued positive momentum when it comes to order growth.

When it comes to EBITA. You're correct, we don't give guidance on this. What we have said though is that we do expect -- even if 2019 is the year of implementing a lot of improvement efforts, we still expect an underlying improvement compared to 2018. And we just want to flag that we do have quite an intense period here in 2019 when it comes to both remediation when it comes to our proactive compliance initiatives in the wake of what's happened in Brazil. There are costs associated with EU MDR as well. And of course we'll continue to invest in growth. So all of these investments, they do have an impact on the margin. We at the same time, though, have a lot of improvement efforts going on as well. And the net of this is that we do expect to perform better on adjusted EBITA this year than the year before. But more guidance than that we're not prepared to give.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech & Services and Analyst [9]

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Okay. But if I may ask a follow-up call -- question on order growth. And can you comment on the sustainability of the Americas number? I mean since Q3 of 2018, it seems that the business has definitely improved and is moving in the right direction. Can you give some comfort that what we've seen in the last 2, 3 quarters is really a fundamental improvement on which we can rely on to continue in the Americas for the next 1 to 2 years? Have you got the turnaround now ready and functioning in the Americas?

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Mattias Perjos, Getinge AB - CEO, President & Director [10]

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I think in -- if you look at the changes that we've made in Americas in terms of how we prioritize and how we allocate sales resources and so on, I do think that this is positive and sustainable. The overall market is favorable at the moment as well. We have no reason to believe that it's going to change. So we do think it's a sustainable change for the better. That's correct.

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Operator [11]

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And our next question comes from the line of Johan Unnerus from Pareto Securities.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [12]

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Just a few. To start off with Surgical Workflow, you clearly have quite a lot of work to do, and the first stage is probably about reaching stability. Is that something that we can expect already during the second half of the year? Or what should we look at that?

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Mattias Perjos, Getinge AB - CEO, President & Director [13]

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Yes. You're right. I mean if there are challenges now and turnaround efforts are -- to a higher degree it is in the core business concentrated to Surgical Workflows. As we highlight -- or try to highlight in the quarter, we've had a couple of problematic customer projects in the DACH area that hurt us in the second quarter. Other than that, I think the implementation of the improvement program is going according to plan. But it's -- again, it's not a quick fix, this. So we do expect also Surgical Workflows to improve on an underlying basis in 2019 compared to 2018. That's the only guidance we give in that regard.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [14]

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Okay. That's useful. And then the full year sales guide appears of course rather conservative. You also added that -- clarified that some of the very healthy order intake is more directed to -- well, after '19. But is it possible to say anything about the order -- the sales that you expect in second half of the year? What's the cover rate from the order book? Is that normal? Or is it on the conservative side? Or is it -- can you give us any flavor on that without being too specific?

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Mattias Perjos, Getinge AB - CEO, President & Director [15]

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Yes. Sure. I think the cover ratio, if you want to call it, that is on normal levels here. So I think we have fairly good visibility. And as I mentioned, it's an unusually large portion of the order book that is for 2020 this year. Otherwise, in terms of year-to-go orders that we need to book and turn this year is on normal levels now. So the guidance -- we remain with the guidance that we had. We realize that it can be seen as conservative, but we do want to be a little bit prudent here as well.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [16]

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Yes. That's probably very sensible. And what about the -- that the order book is unusually -- well, more extended? Is that also a reflection of a higher level of capital goods that you want? Or get support from tenders?

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Mattias Perjos, Getinge AB - CEO, President & Director [17]

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Yes. For sure, the part of the order book that is for 2020 is capital driven. That's true.

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Operator [18]

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And our next question comes from the line of Scott Bardo, Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [19]

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Yes. So firstly on Surgical Workflows. Can you talk a little bit more about the problems you had with the larger orders in the DACH region? How typical or atypical is that? And perhaps give us some feeling for outside of those projects, what the margin would've been? I mean how lossmaking were those projects? And why? Also on the group gross margin, please, just to get a feeling you're starting to see the mix more normalized as you identify towards consumables which are typically higher margin and some of the mix regionally, you supported some of your higher-margin businesses and regions, yet group gross margins have not really progressed even in Acute Care Therapies. So can we have a little bit more discussion, I know there's a lot of intense efforts to improve gross margin, but did that disappoint you this quarter? And perhaps give us some sense of how that evolves going forward?

Last question, please, on the shared service initiative. I think Getinge has spent much time building out a shared service center in Costa Rica to serve the North American market and now you consolidate that. So can you give us some sense as to what went wrong with that initiative? Why that didn't materialize as you expected? And whether there is any execution risk or opportunities surrounding the full consolidation to Poland?

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Mattias Perjos, Getinge AB - CEO, President & Director [20]

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Thanks, Scott. I think if we're starting with Surgical Workflows. I -- we do believe that it's atypical and certainly hope that is the case sometimes when you have larger, more complex projects, we do encounter implementation issues and that's what happened and they kind of became a little concentrated here to the second quarter and in DACH. So but I guess the detail or the nature of this is not something that we communicate. It's just implementation plus execution problems I would say.

When it comes to the group gross margin. You're right that we have a positive mix effect from ACT and also from the U.S. having better traction. But you need to remember that we have a significant growth in Asia Pacific as well, and not only in China but also other parts of Asia Pacific. So the net effect of this is a bit negative. And same thing when it comes to the capital versus recurring revenue. Even if it's rebalanced a little bit since previous quarters. When it comes to the shared service centers, it's a long story. I think I'd just like to remind everybody that when this was setup, it was at a time when Getinge was a SEK 30 billion company with a target of becoming a SEK 50 billion company. What happened afterwards is there was a decision to spin off Arjo, and at that point we felt that we had the math still to sustain 2 operations, especially since Arjo had communicated that they would stay with us in the shared service center setup. Now they have communicated that they will not. So we have some TSA cost impact of this also in the second quarter, and it's clear now that for the future we will be alone with a SEK 25 billion business, so half of what the shared service structure was setup to cope with. So that's really the reason for this. So it's just really a very different position we find ourselves in now compared to the plan when these were created. And we do see now that the consolidation into Kraków is good. It's sized to support the type of business we are now and we expect to be in the coming years. And we also do get some process synergies from being in one place. So we think, overall, it's healthy even if it has some restructuring impact in the second quarter.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [21]

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Okay. Just a follow-up. Can you give us some sense of what degree of savings or -- you are likely to receive from this Costa Rica initiative? And just extending upon some of the activities going on in the organization and given your efforts for the European Medical Device act, can you highlight whether you've identified any means to like SKU reduction going forwards? And whether that would lead to any benefits that you anticipate into 2020?

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Mattias Perjos, Getinge AB - CEO, President & Director [22]

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If you look at the shared service center question to begin with, and there is -- a part of the restructuring cost related to this is the same thing like the other restructuring initiative, that it's about 1-year payback on this. The absolute level is not something that we communicate. When it comes to the EU MDR implementation, that is going according to plan rather well for us I would have to say. And there is some SKU reduction here in the range of what we communicated at the Capital Markets Day, so we're -- about 1/4 of our SKUs, which will have a positive impact but it's not an impact that we have decided to quantify and communicate externally.

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Operator [23]

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And our next question comes from the line of Sten Gustafsson from Nordea.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [24]

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I had a few questions. First when it comes to the clean OpEx level. Is the H1 level you had, is that a good proxy for second half like it was last year?

And then on Surgical Workflows, could you remind me why -- and I think you have said that before, why a lot of the stranded costs following the Arjo spin out ended up with Surgical Workflows? Since like there was a big ramp up in the cost base and following the spin out.

And to follow up on the Surgical Workflows. Do you have the right product offering in place with all the approvals, et cetera, in the relevant markets in that division?

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Lars Sandström, Getinge AB - CFO [25]

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Yes. On the OpEx side there in Q1 is that it's a good proxy. As we -- you saw here in Q2, we have further investments in what we call them compliance-related activities and also the remediation work coming in here. That is a little liquid compared to Q1. But we also then are working on the restructuring activities. So exactly how that plays out, I will not tell you. But these always consider moving parameters. And when it comes to stranded costs and why it mainly impacts SW, I think these were more closely related historically. So that's why it is more impacting SW than in other parts of the ACT.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [26]

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Okay. And how is that exactly more closely related?

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Lars Sandström, Getinge AB - CFO [27]

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It was more at this facility but, et cetera, more closely connected. So that's why it's impacted.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [28]

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And on the product offering within Surgical Workflows?

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

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Yes. I think in general, we have a very good competitive offer. I think the area where you know since the call that we had more challenges obvious on the value part of the offer where a lot of our efforts now in terms of developing new product are being focused on. So that is maybe the area where we're a little bit less competitive still, a lot of efforts going into there. But overall, I would say that we have a competitive and good portfolio in SW.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [30]

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And do you have a low-temperature product approved in the U.S.?

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Mattias Perjos, Getinge AB - CEO, President & Director [31]

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Not approved in the U.S. We have our Stericool range, which is developing very well. But it's not approved in the U.S.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [32]

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Okay. Do you anticipate that to be approved soon or...

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Mattias Perjos, Getinge AB - CEO, President & Director [33]

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No. This is a long-term process really. This is the reason why we entered into the cooperation with TSO3 in back in 2015, or whatever it was, as well. But Stericool is not approved in the U.S. and this is a -- it's the ambition that it will be, but it is a long-term process here. It's not something that will happen in the next year.

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Operator [34]

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Our next question comes from the line of Kristof Liljeberg from Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [35]

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Two follow-up questions. For those problematic projects in Surgical Workflows that you have highlighted, were they lossmaking? Could you confirm that?

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Mattias Perjos, Getinge AB - CEO, President & Director [36]

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Yes. They were.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [37]

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Okay. But you don't want to highlight the significance...

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Mattias Perjos, Getinge AB - CEO, President & Director [38]

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No. We don't want to disclose a number here. But they were lossmaking in the quarter. That's correct.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [39]

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Okay. Without them would you be able to say whether EBITA -- the EBITA loss would have been larger than last year still?

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Mattias Perjos, Getinge AB - CEO, President & Director [40]

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No. We can't communicate that, unfortunately.

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

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Okay. Fine. And then on -- coming back to the restructuring charges you're taking now. Considering that they are becoming a bit larger than before, and you’re talking about the 1-year payback, does that mean we should expect like SEK 200 million in savings from them next year? Is that how we should see it?

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Mattias Perjos, Getinge AB - CEO, President & Director [42]

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Okay. Sorry.

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Lars Sandström, Getinge AB - CFO [43]

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No. When it comes to the restructuring, I think we are doing this step by step, and we think some of them are already impacting now and some of them rolled out. So it's -- we cannot say, first, year-over-year it's as simple as that. But they are rolling out and they are coming in. We think there are things happening and we are closely tracking that -- the restructuring activities. And very often, it's this connected to that, we are closely monitoring that this is happening as well in the company. Then of course there is always other areas increasing costs. We mentioned a few here today when it comes to litigation activities and the compliance activities, et cetera, going in the other direction as well. Underlying, it should come in, in the coming year and years here for sure.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [44]

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But amounts SEK 200 million plus something. Is that the correct assumption? Then maybe some of that happening already this year?

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Mattias Perjos, Getinge AB - CEO, President & Director [45]

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Yes. I think year-on-year that's the correct assumption there. I think the thing that's important that Lars pointed out is that we do have things going in the other direction when it comes to remediation and compliance, EU MDR and so the net effect is then a bit more difficult to guide on.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [46]

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Sure. And could I -- one more thing? You highlighted that CapEx now is lower than depreciation, and I see CapEx coming down a bit year-over-year. Is that the new sustainable level? Or is this just a temporary effect?

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Lars Sandström, Getinge AB - CFO [47]

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Well, I think what we are doing is when it comes to with the underlying you can say (inaudible) machineries, et cetera, there we are rather well invested. And when it comes to R&D, that is more connected to the opportunities and projects that we have. So that is more impacted by what kind of projects that are in the pipeline, et cetera, and what will come. So that is a bit different. So as you know, investments in R&D should be positive whereas the others are more connected to productivity. But as we have no intention, as I mentioned at Capital Markets Day, to increase when it comes to CapEx.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [48]

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As a percentage of sales? Or net results?

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Lars Sandström, Getinge AB - CFO [49]

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No. In absolute terms.

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Operator [50]

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And our next question comes from the line of Scott Bardo from Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [51]

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Yes. So I had a follow-up. So again just on surgical workspaces. Obviously, this is the business which continues to weigh on the organization and is below your expectation and peers. So I wonder if you could just please highlight a little bit more what is the problem child within that business? Is it operating tables? Lights? Infection Control? Disinfection? Can you give a little bit more clarity actually whether there's one particular category which is clearly flagging here?

And a question for Lars, please. Some good and healthy working capital dynamic that you've been able to deliver. Can you outline a little bit specifically how you've managed to achieve this given the growth in the top line? And what perhaps would be a target and optimal working capital day for getting that in your opinion?

And last question, please. I think you've highlighted in previous occasions you expect net debt to EBITDA leverage to come down to under 3x this year, which I think implies some reasonable EBITDA growth for the company. And I just wondered if you continue to maintain that view.

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Lars Sandström, Getinge AB - CFO [52]

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Yes. You want to start with SW?

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Mattias Perjos, Getinge AB - CEO, President & Director [53]

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Yes. I can -- yes, sure I can start with SW. And I think there is only 3 legs in SW, you have the sort of the Workplace, you have Infection Control and IWS, the software business.

When it comes to IWS, we had some challenges already last year that I believe have been dealt with. And part of the restructuring cost in the first quarter was related to this. But probably less of that at the moment. Still a lot of work to do. But I think the implementation is a little bit further ahead there.

The other 2 bigger areas than Surgical Workflows are Surgical Workplaces and Infection Control. I'd say there is a little bit similar to the overall situation for getting if you look in the park. There hasn't been enough focus on when -- on both commercial practices to some extent, I would say in terms of discipline when it comes to pricing, especially of accessories and nonstandard products that go into tenders. That's one area. I'd say there is also purchasing, indirect and direct purchasing. The factory footprint has -- there's been a number of unfortunate changes over the years, which has rather than -- decreased costs and improved efficiency, it's been the opposite. It has increased complexity and raised the cost level. So a rather difficult starting point there. So those are the main components, I guess, of the challenge in SW. And should like to remind again that it is early days that we've had a very high level of rotation of management in Surgical Workflows over the years. So Stéphane and his team, now they need 2019 and a part of 2020 I think to do a crisp implementation of their turnaround plans.

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Lars Sandström, Getinge AB - CFO [54]

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Well, coming over then to your question on working capital and how -- I think I talked about this in other occasions as well. This is not one activity that we have done. It is really a lot of dedicated activities in ensuring that working on receivables to ensure that we have a tight grip, and you to receive our money to make sure we have it. And we are, as you know, operating in many countries, so it's a lot of activities happening all over the world.

And also in inventories, so you're sure that you have a good tight grip on the inventory that we put and stock. And also the value chain from the factories out to the different sales companies that we have, really make sure that we see the right levels also. And also this is part of the incentive for people working in the company, so it helps also the motivation somewhere.

When it comes to target, we don't really work in that sense what is the right target. I see there is continuous areas of improvement. You have done a lot of, let's say, first steps. Now it will become a bit more complicated. It's more connecting to ensure that we have good flows all the way through from purchasing to the factories into the [SSUs]. So it's not -- it's getting harder to continue to drive improvements. But we have, as I said, a lot of activities running there.

And to your question on net debt. And yes, we have clear ambitions to strive towards 3 and below. I since -- know that we have -- in the first half year, we have revaluation impacts impacting our net debt, increasing it with almost around SEK 700 million to SEK 800 million. That is a little bit working against us. Revaluations, in fact, it can come from IFRS 16 currency-intention liabilities increasing the net debt. But still, we are working in this direction for the full year and then going forward as well.

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Operator [55]

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And our next question comes from the line of Virendra Chauhan from AlphaValue.

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Virendra Singh Chauhan, AlphaValue - Analyst [56]

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First of all, I joined the call a bit -- little late, and forgive me if there are some repetitions from my side.

So first question is like why is there a sudden jump in your restructuring cost? So I do understand that is largely the segment-wise allocations. But could you give me some color on that, firstly?

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Mattias Perjos, Getinge AB - CEO, President & Director [57]

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Yes. Sure. I think it's not more dramatic than we've come one step further in our turnaround journey, and we're getting more visibility on what's possible to speed up and so on. So it's mainly an effect of that, I would say. And it's not a lump-sum targeted to one specific area. It's initiatives across both group's central functions and different parts of the BA and sales organization. So it's just really that we come one step further on the turnaround journey, and there are things that we see that we can speed up a little bit.

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Virendra Singh Chauhan, AlphaValue - Analyst [58]

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Okay. And just following up on that. So I mean Getinge has been standing on, let's say, quality or remediation for a while now. So internally, how do you like kind of judge the impact of the same. In terms of visibility, how long do you expect this kind of spending.

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Mattias Perjos, Getinge AB - CEO, President & Director [59]

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When it comes to remediation, first of all, I would like to point out that we are remediated in Wayne and Merrimack so 2 of the factories under the Consent Decree. So here, the increase in spending has for sure ceased, and we're even making reductions there a little bit more forward-looking work.

When it comes to the situation in Cardiopulmonary, so Hechingen, Rastatt, there is even more intense activities. The -- I've said in previous calls that they are 2 to 3 years behind the U.S. sites, and we would like to get out of this as quickly as possible. So we have sped up the work there in the -- late last year and the start of this year, which you can see also in the remediation spend.

And then in addition to this, we have the warning letters in Mahwah and Fairfield. And same thing there, we'd like to fix these problems as quickly as possible, so there is a heightened level of spend there as well. And as you may know this, these are things that we identified back in 2017. We had some work done in 2018 but interrupted by FDA inspection. So we were kind of led to the warning letter, so the real pace of work is actually late last year and early or rather the main part of this year, I would say. So that's the reason for this.

When it comes to actually finishing this, it's really not for us to say. We follow the time plans that we have communicated to the FDA. But they are really the judge of when we're finished but both when it comes to the Consent Decree side but also with the warning letter side.

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Virendra Singh Chauhan, AlphaValue - Analyst [60]

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Okay. And I have another last question on the guidance front. So with 5% growth approximately in H1 and pretty strong order book dynamics, like why are you still forecasting 2% to 4% for the year? So I mean anything -- like what have -- from my understanding, like anything in particular driving this sort of caution? Because 2% -- or at the lower end would be a pretty bad H2.

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

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There is only 2 things driving the caution. One is that we would like to be prudent and conservative and not promise something that we can't keep. And the second reason is that there is a unusually big portion of the order book that is for 2020. So that's really the reason. So I did say earlier in the call that we expect to be in the upper part of this range. But we did not want to change the total guidance.

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Virendra Singh Chauhan, AlphaValue - Analyst [62]

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Okay, okay. And like -- could you like break that? Like what kind of order book do you expect, like, for 2020?

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Mattias Perjos, Getinge AB - CEO, President & Director [63]

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No. We do not break down that and communicate it externally.

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Operator [64]

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(Operator Instructions)

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Lars Sandström, Getinge AB - CFO [65]

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Okay. So time is out, actually. It's 11:00. And if you have further questions, please contact us via Investor Relations. And thank you for taking the time on today's call, and have a good day.