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Edited Transcript of GETI B.ST earnings conference call or presentation 25-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Getinge AB Earnings Call

Getinge Apr 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Getinge AB earnings conference call or presentation Tuesday, April 25, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mattias Perjos

Getinge AB - CEO, President and Director

* Reinhard Mayer

Getinge AB - CFO

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Conference Call Participants

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* Annette Lykke

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Kristofer Liljeberg-Svensson

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

* Michael Klaus Jungling

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

* Patrik Ling

DNB Markets, Research Division - Analyst

* Peter Testa

* Richard Koch

SEB, Research Division - Analyst

* Scott Bardo

Berenberg, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Getinge Group Q1 Report Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mattias Perjos. Please go ahead.

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

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Thank you very much. A warm welcome to all of you, and thanks for joining the earnings call today.

The presentation for today is accessible via link and the report, and it's also available on our web page under the Investors section under Presentations.

Together with me on the call, I have our CFO, Reinhard Mayer, who will support me during the call, and he will also be presenting the Q1 financials and join the Q&A session a little bit later.

If we start with Page 2, you'll find today's agenda where we start off with an overview of the business performance during the first quarter. So without further ado, I'd just like to move over to Slide #3 and some initial reflections from my personal perspective.

I joined Getinge as President and CEO on March 27, after a transition period that started effectively in November of last year. The positive first impression that I had of the people in the company, what we do for our customers and, of course, ultimately the patients, I have to say it's been reinforced during my first months with the company. I have been using the time, these first months, to dive into some of the most important short-term and long-term challenges that we still have in front of us. There are several of those as you already know. I'll come back to that a little bit later in the presentation.

But first, I'd like to move over to Slide #4. And what we call takeaway #1 of 3 from the first quarter. First and foremost, we saw a moderate increase in both organic order intake and net sales, which is basically in line with our outlook for the full year, the outlook of slight organic growth.

Secondly, we saw, as well, healthy improvement in our margins and the cash flow. The gross margin increased 2.2 percentage points to 49.4%. And the EBITA 1 margin rose to 12.3%. The cash flow from operations improved by 24% to SEK 868 million. And thirdly, as you can see, this enabled us to reach a lower level of net debt in relation to adjusted EBITDA.

If we then move on to Slide #5 and takeaway #2, we can conclude that the improved margin largely is attributable to increased net sales. We can also see that we have enhanced efficiency in the supply chain. And in the quarter, we also had a favorable product mix that helped us.

We also saw lower restructuring and integration costs, in total amounting to SEK 97 million compared to SEK 127 million the same quarter last year. These costs are mainly write-offs of IT systems and as such they are noncash related.

Altogether, this picture bodes down to significantly improved earnings per share. So amounting to SEK 1.16 compared to SEK 0.46 from last year.

If we then move to Slide #6, I'll talk a little bit about the challenges that we mentioned in the beginning of this call. We grouped them into 4 main blocks here. And I've -- when I underline that we do see continued challenges when it comes to organic top line development. We saw growth in Surgical Workflows in EMEA, but the underlying momentum could still be stronger. For example, with the decline in organic order intake with Acute Care Therapies and also in Patient & Post-Acute Care, our estimates for the full year, however, remain the same as in the previous quarter, which means that we keep the outlook unchanged for the full year.

If we then move to our efficiency enhancement program with -- called the Big 5, we continue to deliver according to the plan for the program. The overall direction and also the content of the program remains firm and intact. But I also want you to be aware that the spin-out process related to Patient & Post-Acute Care has added a layer of complexity to this program, which we need to take into account as well.

The third block area is our quality remediation program, has continued with high intensity at the 4 plants, which are covered by the Consent Decree with FDA. In both Wayne and the Hudson sites, we're progressing according to early communicated plans. In Hechingen the situation is a little bit more complex. And at the end of the quarter, we concluded that we need to do a replanning for all the remediation work at this site. The reason for this is that we're not happy with the speed and the quality of the progress that we see at the moment. This was a discovery late in the quarter and the potential business consequences of this replanning we will communicate not later than in the interim report for the second quarter.

And finally the fourth challenge here, we're in the preparation of the proposal of a potential spin-out of Patient & Post-Acute Care. It is progressing according to plan. And we have our first estimate of cost associated with this separation, and the costs are in the range of SEK 400 million to SEK 500 million. We're close to half of nonrecurring costs. Also here, we will provide more detailed information as we go along. The overall plans, as well, for both entities during the second half of the year.

Next we can move to Slide #7, and the overall distribution of our top line between business areas and regions. Getting into order intake for the first quarter amounted to SEK 7,249,000,000, which is equal to an organic growth of 0.7%. This is driven by strong performance in Surgical Workflows and in the EMEA region growing organically by 5.2% and 5.8%, respectively.

Acute Care Therapies reported a 1.5% decrease due to lower order intake within Cardiopulmonary and in Cardiac Assist. In-Patient & Post-Acute Care, we saw a 1.2% decrease due to weak performance in rental and service, mainly. All our businesses reported organic growth in EMEA in terms of order intake, and mainly driven by Northern Europe, Middle East and also Africa.

Americas reported a decline of 3.6% due to weak performance in the U.S. within Acute Care Therapies and also Patients & Post-Acute Care. The decline in Asia Pacific is largely explained by weak demand in East Asia.

If we then move to sales, Getinge's net sales amounted to SEK 6,664,000,000, which is organic growth of 0.6%. Acute Care Therapies grew by 3.5%, mainly driven by Cardiopulmonary. Surgical Workflows was basically flat. We had growth of 0.5%, and this is attributable to positive development in Life Science and in Surgical Workplaces.

Patient & Post-Acute Care had a 3.4% decline, this is due to lower sales in capital goods and the rental business. It was partly offset by more positive development in patient handling.

Net sales rose by 3.8% in EMEA, mainly driven by Acute Care Therapies in Northern Europe and Surgical Workflows in Southern Europe. Americas reported decline of 1.7%, largely due to weaker sales in Patient & Post-Acute Care in the U.S.

In Asia Pacific, we had a 1.5% decline driven by lower sales in Japan, in Australia and in New Zealand.

Now with that summary, we can move to Page 8, where we take a closer look at Acute Care Therapies. In ACT, in the quarter, we saw a slight decline in organic order intake, but net sales improved in all the regions. We also saw improvements in gross profit and EBITDA margin, driven by higher net sales, enhanced efficiency in the supply chain and also a favorable product mix. So this -- all this contributed to significantly higher EBITA for ACT before restructuring and integration costs. So the total amount was SEK 557 million and EBITDA margin increased to 19.7%.

With that, we can move over to Page 9 and the Surgical Workflows. Surgical Workflows order intake grows organically by 5.2% in the quarter, all regions reported growth but the largest impact came from EMEA. Net sales improved slightly, attributable to strong performance in EMEA basically. The gross profit in EBITA margin showed a healthy increase mainly due to higher efficiency in the supply chain and higher net sales.

So all this contributed to significantly improved EBITA before restructuring and integration cost for Surgical Workflows.

Then we can move to take a look -- to Page 10 to take a look at Patients & Post-Acute Care. Within PPAC, order intake declined 1.2% in the quarter due to weak performance in Americas. Net sales declined by 3.4% driven by Americas and Asia Pacific, while EMEA was basically flat for PPAC. Gross profit and EBITA margin rose by 2.3% and 0.9 percentage points, despite the weak performance in net sales. Also here, the improvement is attributable to higher efficiency in the supply chain, mainly.

In terms of results for PPAC, higher OpEx dragged down EBITA before restructuring and integration costs, we landed on SEK 238 million for PPAC here. And the increase in OpEx is mainly explained by currency effects in the quarter.

Then we can move over to Page 11. I'll talk a little bit about the efficiency enhancement program that you know as Big 5. This program continues to deliver according to our plans. In the first quarter, the savings amounted to approximately SEK 100 million, mainly driven by higher efficiency in direct sourcing and also within lean sales and admin.

In total, the savings from the program, so far, amounted to approximately SEK 500 million. The savings from the programs are mainly allocated to reinforce the quality organization and to product development in order to secure long-term competitiveness and also compliance. We will need to continue to allocate savings from the program to a high degree into organization development, partly because of the quality and regulatory compliance work, but also because we've had a significant unwanted attrition in the last 12 months and this has created some competent gaps we need to fill. So this is important to be aware of in the context of Big 5.

With that said, I think we can move to Page 12 in the innovation agenda. As mentioned, while talking about Big 5, we need to channel some of the savings from Big 5 to product development to secure future growth and margins. During the quarter, we have increased our spending in R&D both in actuals and in relation to net sales. Allocation of the funds from the program obviously needs to be done in an efficient and focused manner in order to reach a critical mass in each of the product that we decide to go forward with. The areas that we prioritize or in terms of innovation are cardiac, vascular and respiratory; and also hospital infrastructure and services, and integrated and effective solutions for mobility. Where we see the possibility and the need, we will also use strategic cooperations in order to enhance the output but also to mitigate risks in our innovations.

And after that summary, I think we can move over to Page 13. And I'll talk a little bit about the quality remediation process in relation to the Consent Decree that we have with FDA. And before going into details, I'd just like to give you a brief recap on why we are in this place to start with. I think we all need to be aware that this is a truly complex Consent Decree. This is most due to external and internal factors that -- where one complicating factor is that it comprises sides both in the U.S. and in Europe. And yes, it normally operates in the U.S. only.

Secondly, I also want to point out the regulatory demands have grown more rigorous compared to when size and scope were established. We also have a legacy factor, we're getting itself where we have a history of decentralization with no common quality system between the different parts of the organization and the different sites. I also wanted to highlight, again, that the comments and the observation from FDA and the independent auditors. These are not related to the product. They are related to the production and process control. The lack of adequate quality management system procedures and design control documentation.

With that background, I'd like to take a look where we stand on the first -- after the first quarter. There has been intense activity during the quarter and there's been progress in all of the sites. But they are in different phases in the remediation area. Hudson shows a stable performance according to plan and the move to Merrimack is also progressing well, even if this coming quarter is really a critical phase for the work. Also at the Wayne factory, we see a progress in the right direction.

In Hechingen, the PEG picture is a bit different. This is the most complex site that we have. And here, we do see a risk for another delay in the process. So this will be -- we have decided to do a replanning for the Hechingen site. This was a conclusion we arrived at quite late in the quarter, and we need to come back as soon as possible with an update on this.

And will -- the update will take place in connection to the interim report for the second quarter at the latest, but we will give the information as soon as we have it. In terms of where we stand financially, we did utilize SEK 65 million of the provision for remediation leaving us with SEK 302 million in provision by the end of this quarter.

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Reinhard Mayer, Getinge AB - CFO [3]

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Thank you, Mattias. So let us move to our results, Slide 16, performance on group level. As Mattias mentioned, the order intake in the quarter grew slightly. Geographically, EMEA showed organic growth, while both Americas and Asia Pacific had a negative development.

While looking at net sales, we had a modest organic increase of 0.6% in the quarter. Due to positive currency transaction effects, a favorable product mix and good cost control in supply chain, we see a growing gross profit margin. Selling and admin expenses are flat in relation to net sales. EBITA before restructuring increase, with a very strong 31.9% to SEK 818 million as a consequence from higher net sales, increased efficiency and supply chain and the favorable product mix.

Now let's change to Slide 17 and the foreign exchange effects. As we have stated before, Getinge had 2 dimensions of exposure. The first dimension is currency transaction exposure. This relates to when the groups, factories are selling to the groups, foreign subsidiaries, which we hedge for. The other dimension is the translation exposure. This relates to when the group's company results are translated into Swedish krona. This effect is not hedged.

You can see that on the EBITA before restructuring costs, the transaction impact was SEK 77 million and the translation effect was minus SEK 44 million, resulting in a total effect of SEK 33 million for Q1.

It is also worth mentioning that currency transaction effects are expected to have a positive impact of approximately SEK 200 million of the group's earnings for the full year 2017.

Let me move to Slide 19 and our balance sheet. Net debt amounted to SEK 22.74 billion at the end of the period. The change in net debt adjusted for currency effect and acquisitions amounted to minus SEK 451 million and the net debt-to-equity ratio, respectively, decreased to 110.1%. Our leverage to net debt to EBITDA before restructuring ratio decreased from 3.9 prior year to 3.67 for the period, which is calculated on a rolling 12-month basis.

Finally, we'll go to Slide 21. If you take a look at the cash flow, the group's operating cash flow increased by a strong 24% to SEK 868 million and the cash conversion amounted to a healthy 72%. During Q1 2017, we have seen investments of SEK 406 million, which is an increase of 12.8% and has resulted to a cash flow after net investments of SEK 462 million. This represents a growth, 35.9% versus last year. Then I hand over to you again, Mattias.

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

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Thank you, Reinhard. If you could move to the next slide. So before we open up for questions, then we'll have a brief summary of the first quarter. We had slight organic top line growth as you've seen despite the modest growth, we did see a significant growth in earnings and cash flow. And this is -- as we touched on earlier in the presentation and mainly thanks to continued efficiency enhancement. All in all, these efforts reached lower level of net debt to adjusted EBITA.

At the same time, I'd like to underline that we have a couple of challenges still ahead of us. Top line development where, for example, we saw the slight decline in Acute Care Therapies in the quarter, mainly in the U.S. The Big 5 will continue the rollout to the program. It's going according to plan, but we do have to allocate significant portion of the savings from the program into reinforcing both the quality organization but also into innovation and market development and other organization -- parts of the organization.

The quality remediation program continues with good traction in the U.S. sites, but slightly more challenging situation in hedging. We will update you as soon as possible on this, at the latest in the report for the second quarter.

And finally, the preparation of the potential spin-out where we have our first estimate on cost in the range of SEK 400 million to SEK 500 million, and we will come back with (technical difficulty) information I think most importantly, on the strategic plans for both the companies during the second half of the year.

That concludes really the overview of the first quarter and the summary. So 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) We'll take our first question from Kristofer Liljeberg with Carnegie.

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

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I have a few questions. First on the gross margin improvement. It seems that transaction effect rather may be a percentage point to the gross margin, but the remaining improvement, is it possible to split that between mix effect and how much is more sustainable from the supply chain efficiencies? And related to that also, how would you see the mix affect changing now with what has put Acute Care business being down slightly in the quarter?

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

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Good. Thank you, Kristofer, for the question. Well, you're absolutely right. It's a slight affect from the transaction hedge side. And as we have alluded, I mean, the SEK 200 million, it's the full year. So you can really -- a portion of that as well into the third quarter. And with the SEK 77 million, which we had alluded to, we have the number. The price effect versus product mix effect that we cannot separate it out because actually those influence each other. So the volume, of course, in certain areas have an effect on the pricing efficiency. So here, there is no chance to basically give you that detail. It's anyhow a combined activity. And in that context, we cannot really split it up further.

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Operator [4]

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Our next question comes from Annette Lykke with Handelsbanken.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Research Analyst [5]

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At your presentation, you highlighted that a high degree of the cost savings from the Big 5 program is -- have to be transferred back to the organization to increase internal competencies and maybe invest in front line and innovation. I'm just wondering, if you could give us some sort of feeling on how much of the SEK 2.5 billion to SEK 3 billion Big 5 savings targets, do you think is actually going down to the bottom line? My other questions will be on the top line growth for the remaining part of 2017. Could you elaborate a little bit on how you see both market trends, but also how Getinge is doing, in particular, within Acute Care Therapies, Surgical Workflows and also, of course, in the PPAC division? How much more improvement should we expect in these areas? And also in connection with a better top line growth you have had an order generation, you have had in the Q1 results, how much of this is generated from the previously announced product launches?

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Mattias Perjos, Getinge AB - CEO, President and Director [6]

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Yes. Thanks for that. I can start here. We're not in a position to give any details on how much of the Big -- the savings from the Big 5 will actually flow through to the bottom line of the P&L. The main reason for this, I mean, in terms of the quality work, we have a solid plan that we're following. But when I mentioned about unwanted attrition, which is an effect of how the program was rolled out in the first phase. This is something that's happening on a weekly, monthly or daily basis, really. So it's very difficult to estimate this and give any forecast of it. So it's -- but, of course, not possible to give you much more information in this regard. And when it comes to the top line growth as well, we have guided for slight organic growth this year. We reconfirmed this, but we are not in a position to give more details by segments or business area currently.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Research Analyst [7]

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And how about the new product, how much have this started to influence yet? Or is this more a influence you will see in the second half of '17?

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

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Well also, new products it's difficult to give anyway. We are not in a position to give you detailed numbers on this. But we -- and where we have a good launch pipeline for Surgical Workflows for 2017. This -- you don't see much effect of this at the moment, I mean, most of the launches haven't been done yet.

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Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Research Analyst [9]

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Okay. Can I ask, I mean, just to be frank here, how can you not be in a position to know how much new products will help you looking forward?

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

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I didn't say that we don't know. I just said that it's not fair -- it's not information that we make public.

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Operator [11]

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Our next question comes from Scott Bardo with Berenberg.

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Scott Bardo, Berenberg, Research Division - Analyst [12]

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So first question for you Mattias, obviously, a few months within the organization now. I wonder if you could share some broader thoughts as to what you see as the sort of key opportunities and challenges within the organization? And also extend upon that, please? And let's just talk a little bit about your thoughts on this PPAC spin-out, given you've hired -- highlighted within this presentation some relatively high separation costs and the potential for reduction in savings due to the complexity of this spin-out? So I just wonder if you could share thoughts as the compliant company, your views on value creation and sustainability of that spin-out business, please? So that's the first question. And there is a lot to answer there. So I'll follow-up after that, if possible.

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

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Okay. Well, thanks, Scott. Yes, just to elaborate a little bit on the initial impressions there, I have to say I'm positively surprised by the spirit of the organization, the level of passion and professionalism with the people that I meet here as well. I also had time to as -- the possibility to spend some time with customers, and it's really good to see in reality that our products are serving our customers in a really good way. We have a strong position in many of our niches. So that's really good. We've touched on some of the challenges here as well. The rollout of the one getting a strategy that we've decided to tweak a little bit. So it's obviously created some organizational fatigue as well and change fatigue in the organization. And this is what shows up as unwanted attrition in the -- during the last 12 months. And I do expect that we will have to live with the situation for a while even though we're trying to mitigate this as much as possible. Then of course, the Consent Decree, it's not new news but it's also some -- a dynamic situation I would say, especially related to the Hechingen site where we need to do a replanning and this is, of course, it's not a situation that we wanted to find ourselves in at the end of the quarter, but we've decided to bite the bullet and really have a more thorough look at how we do this work and try to take more internal ownership of the situation and less -- being less reliant on consultants.

And then the spin-off of PPAC, with the potential spin-off of PPAC has created obviously, another layer of complexity when it comes to both the one getting a strategy and the rollout of Big 5 and so on. So it's a challenge that we need to manage. I have to say, the team that works with the spin-off now has done a very professional job in terms of the detailed planning for this. So that's why we're in a position to announce the cost related to the spin-off. And we are working in parallel on the plans with it. So we feel comfortable that we will be able to show you credible plans for growing both the different companies after the potential spin-off that justifies the cost related to separating the business.

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Scott Bardo, Berenberg, Research Division - Analyst [14]

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And when will we learn about those actually?

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

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Well, we've said the second half it will be. So we would like -- we're trying to progress this as quickly as we can. We actually -- we haven't been more specific on the second half of the year now, and I don't want to stick my chin out too much and give you something more optimistic at this moment.

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Scott Bardo, Berenberg, Research Division - Analyst [16]

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Okay. And a follow-up, please. On Hechingen, which was a sort of an issue that continued to linger all of last year with the FDA not, if you like, authorizing your remediation plans is my understanding. But you are confident that you were taking the right path there and highlighted also by additional costs. What has changed actually? And has that been an inspection that hasn't -- confirms your opinion about the steps you take? Is there any risk that you could cease manufacture from this or being forced injuncted from this facility? Can you communicate a little bit more as to where you are and give us some sense of the cost required to complete the plan to your satisfaction?

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

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Okay, thanks. We haven't had any additional information from the FDA. But we, of course -- internally, we follow the remediation both in terms of quality and speed. And we have come to the conclusion at the end of the quarter that we're not satisfied with the level of speed, so we do need to prioritize and replan the work for the site. I'm not in a position to speculate about the cost of the time plan for this. Unfortunately, now since this is something we discovered late in the quarter. But it's not based on any new information from the FDA at this point.

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Scott Bardo, Berenberg, Research Division - Analyst [18]

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So we shouldn't speculate that there is a material or additional cost to come from this facility, but there could be some additional cost of that being provisioned?

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Mattias Perjos, Getinge AB - CEO, President and Director [19]

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I would like to avoid any speculation at all at the moment here. We need a month or 2 to actually work through the plans and to be able to come back with details on this.

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Scott Bardo, Berenberg, Research Division - Analyst [20]

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Okay. And last question, please. This relates to the Big 5 initiatives, which I know was not your plan. I think that you have clearly portrayed messaging of reinvestment of some of these savings in this call. So 2 quick questions, please. First and foremost, do you -- where do you -- do you see potential for Getinge group to restart at historic margins, which is planned historically with designs to deliver? Or is there some sort of caution statement here that historic targets or historic achievability is no longer structurally possible within the organization? And second point, I see that the run rate of cost savings this quarter is probably the same as the run rate last year. My recollection was the plan -- we should be seeing an acceleration actually, 40% of this plan delivered and throughout fiscal '17. So can you talk to a little bit as to why we are not seeing an acceleration of savings as per the initial phasing of this plan?

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

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Right. Well, thank you. In terms of the longer-term plans, I would like to wait for the questions until -- and with answer to your questions until we actually have the plans for both the companies ready during the second half of the year. When it comes to the Big 5, I wasn't part of the initiative that you mentioned, so I'm not really in a position to answer. I don't know if Reinhard can shed some light on this, really.

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Reinhard Mayer, Getinge AB - CFO [22]

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Absolutely, will do. Scott, I mean, on the run rate and so the impact of Big 5, I can say, I mean, we are delivering very much ahead and according to our plans. And the positive momentum is actually seen in the increased results. And as you might remember from earlier discussions, there is actually Big 5 flowing into margin as well as into costs. And when you look at both compositions, we're well developing very well ahead. And I think that is clearly a sign that Big 5 is delivering according to the plans and the range of SEK 2.5 billion to SEK 3 billion was at the end of the year on an accumulated basis. So I can only say there is no slowdown related to that, and we have good tractions on the major drivers there, which is direct spend, indirect spend and lean sales investment.

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Operator [23]

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Our next question comes from Richard Koch with SEB.

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Richard Koch, SEB, Research Division - Analyst [24]

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Richard Koch with SEB. The SEK 400 million to SEK 500 million in spin-off costs, how is that -- can be visible, really? Or you say half is nonrecurring? Is that, I mean, you can take that as a restructuring cost or how will that be visible to us?

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Reinhard Mayer, Getinge AB - CFO [25]

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Yes, Richard, this is Reinhard speaking. Yes, absolutely, you are correct. I mean, half of the cost is related to restructuring. It's actually a part of the information, which we have basically gained through the process as such where we in a way need to separate a number of IT systems and other activities, which do lead to, let's say, incremental onetime efforts. And that is approximately SEK 200 million to SEK 250 million in that range. The others is associated with additional organizational costs in the PPAC function and PPAC organization, which we have related in 2017. And I think it's very important that we box it for 2017, and this is the related guidance we have given.

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Richard Koch, SEB, Research Division - Analyst [26]

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Between SEK 200 million and -- between SEK 250 million, that's going to moving out over the remaining 3 quarters, that's restructuring costs?

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Reinhard Mayer, Getinge AB - CFO [27]

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Well, SEK 250 million is restructuring related to one-timers, and the rest is going to be operational cost in the PPAC business.

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Richard Koch, SEB, Research Division - Analyst [28]

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Okay. Looking at the Patient & Post-Acute Care, it's now the eighth consecutive quarter with negative organic growth. And do you expect this is sort of showing any positive growth anytime soon or have you given up on this division?

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Reinhard Mayer, Getinge AB - CFO [29]

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I actually correct you. I think, let's say, last quarter, we had a positive organic growth in the first place, and as we have seen a weak performance -- a weaker performance than last quarter. Well, I cannot say, I mean, is this now back to the old trend. Towards our guidances, today, we do see for the total group a slight moderate growth and let's expect that to be -- let's say, across all 3 divisions. To which extent, I don't know.

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Operator [30]

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Our next question is from Michael Jungling with Morgan Stanley.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech and Services and Analyst [31]

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I have 3 questions. Firstly, on the Patient & Post-Acute spin-offs. Am I reading your press release correctly that effectively the group EBITA margin will be negatively impacted by 2 percentage points as a result of recurring charges of approximately, call it, SEK 250 million per year? Secondly, on the FX margin impact for 2017, what will be the impact on gross margin and also on the EBITA margin? And question number three is on 2017 sales growth. Given that Q1 was a very easy comp for you and you hardly grew, has the risk increased that you may not grow at all this year or may even decline in organic sales growth trends this year?

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Reinhard Mayer, Getinge AB - CFO [32]

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Well, on the -- let's do -- let's say, on for the first question, which is -- that is, the SEK 200 million to SEK 250 million. Well, we guide only for this year. We are not giving guidance on, let's say, what is an increased cost base for the business going into '18, '19 and 20. This is due in to second half of the year, as Mattias stated. And you understand that, let's say, a running organization will have ability to optimize costs as well. And the purpose of the spin-off is actually to grow both businesses to an extent, which we have not yet seen. And for that we build the organization. Part of the cost, we do actually see now coming up in Q2 to Q4. And that is what we guide on. Financial targets for all businesses will be provided in the second half of the year. Let me come to the foreign exchange effects. I mean, the SEK 200 million, which I have given you guidance on that will fully flow into the gross margin, while the translation effects can also impact the expense side to which extent it affects gross margin or expenses side I cannot tell you that, because we do not make planning on that. On the hedging side, we do really have a good protected, let's say, contractual situation so here I can give you the guidance. And the last piece, I don't recollect but it was around the...

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech and Services and Analyst [33]

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The organic sales growth within the Q -- the organic sales growth that you had in the first quarter wasn't very easy comps. So if you adjust it for comps, it's quite easy to see mathematically why you would have no sales growth at all this year or perhaps even have a slight decline. And the question was, has the risk increased after the first quarter result that you may not grow or may even decline this year?

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Reinhard Mayer, Getinge AB - CFO [34]

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I think the risk has not changed, our outlook is, as Mattias confirmed, still going forward with a slight positive growth for the full year. And we assume today that all 3 business areas contribute to this growth. And the comps perspective is one thing, but as, let's say, growth perspective from different markets where we have incremental product launches, it's another thing. And this all will contribute to the overall perspective of slight moderate growth in 2017.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech and Services and Analyst [35]

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Okay. And I wanted to get back to my first question about the guidance of SEK 500 million-or-so of total cost, which half of them will be recurring. So I'm asking you for new guidance for 2018 or '19. But if you take the SEK 200 million or SEK 250 million in recurring cost, that seems to me that you are highlighting the group margins as it is today could be impacted negatively by around 200 basis points. Is that a correct interpretation of what you've disclosed today?

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Reinhard Mayer, Getinge AB - CFO [36]

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That's not correct. We gave a guidance what we see as cost impacts for this year. We have not done an extrapolation or an assumption what it will mean for 2018, '19 and onwards. Those are the figures and targets which we need to investigate much further, and where will come out in second half. And I think it's actually good practice that we give you early in the year information about what we know and not only -- so this is a -- give then results.

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Michael Klaus Jungling, Morgan Stanley, Research Division - MD, Head of MedTech and Services and Analyst [37]

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Okay. Maybe one last follow-up on this, is it correct to say that there are going to be SEK 200 million -- SEK 250 million of recurring costs as a result of the spin-out, is that a correct statement or fact?

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Reinhard Mayer, Getinge AB - CFO [38]

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No. It's just for today operational cost, which might turn into recurring cost, but we cannot tell you that because we don't have those plans. Out of the SEK 200 million or SEK 250 million it's definitely onetime cost related to additional investment into separate IT systems and other investments, which we need to do in order to separate the 2 companies and get listed according to our pipeline.

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Operator [39]

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Our next question is from Patrik Ling with DNB.

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Patrik Ling, DNB Markets, Research Division - Analyst [40]

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Two questions. You've talked quite a lot about that -- substantial part of the savings program that you have -- has to be reinvested into the company to -- the quality organization and into the pipeline. This quarter you had 4.9% approximately in R&D spend to sales. Mattias, what do you see long-term for company, like, you have to meet if you want to position yourself as a strong competitor in that space. Where should you be long-term on the R&D side?

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Mattias Perjos, Getinge AB - CEO, President and Director [41]

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Yes. Thanks, Patrik. It's a good question. But it's a little bit too early for me to answer, it's my fifth week on the full-time job here. We are working with both strategy reconfirmation and also the individual plans for Arjo and for Getinge. So I cannot give you a number on this today. But I -- it's a question that I have on my to-do list as well for sure.

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Patrik Ling, DNB Markets, Research Division - Analyst [42]

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But we should expect it to be up from the level that we saw this quarter?

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Mattias Perjos, Getinge AB - CEO, President and Director [43]

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Yes.

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Patrik Ling, DNB Markets, Research Division - Analyst [44]

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Good. Then I also have a, again, other short question here. Have you done any acquisitions in the first quarter that you haven't press released?

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

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No. No, acquisitions.

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Patrik Ling, DNB Markets, Research Division - Analyst [46]

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Could you please explain why the number of full-time employees have increased by 342 versus from the end of 2016 to the end of March?

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Mattias Perjos, Getinge AB - CEO, President and Director [47]

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Excuse me, can you repeat the question?

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Patrik Ling, DNB Markets, Research Division - Analyst [48]

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Yes. If you look at Note #5, it looks like your number of employees is up by 342 persons during the first quarter. That seems to be a little bit too much if you haven't done any acquisitions?

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Mattias Perjos, Getinge AB - CEO, President and Director [49]

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Well, as I said, I mean we are planning for expansions in the spin-off related types. So we will have hirings there, firstly. And as we report here for the end of the quarter figures versus end of the quarters figures there could be the effect in this context. But further to that, we have not done any kind of acquisitions and have not really, today, structurally increased the activity, so not that something materially has changed.

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Operator [50]

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Our last question comes from Peter Testa with One Investments.

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Peter Testa, [51]

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Maybe I'll go one question at a time. You mentioned supply chain efficiencies in all the divisions. And I was wondering if you could give some sort of understanding for drivers of the supply chain efficiencies and maybe the continuing operation? And then associated with that, you've mentioned reinvestment, new product and so on. Do you have a sense in terms of how this may be reinvested to help grow the sales?

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

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Yes. When it comes to the supply chain efficiency, I think the short-term benefits that you see are mostly from direct sourcing, so purchasing and so on. I think longer-term part of the plan, it's a more effective set up with warehousing, and we're entering into a 4PL set up as well. Now that we believe we'll generate also efficiency. So that's kind of the high-level picture from the supply chain perspective. And -- sorry, your second question was about reinvestment from the program?

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Peter Testa, [53]

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Yes. Just reinvesting in product and structure to try to drive sales, maybe if not from that going forward?

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Mattias Perjos, Getinge AB - CEO, President and Director [54]

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General thought is, I mean, is what we have said that we do see the need for investing part of the saving into organic growth, not just innovation but also into market development in growing and emerging markets and so on. It's not something I can quantify on this call, though, in terms of numbers.

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Peter Testa, [55]

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Okay. And then the next question was just on Acute Care order intake. You mentioned Middle East and Africa has been particularly interesting. Were there any notable large orders won in the quarter there?

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Mattias Perjos, Getinge AB - CEO, President and Director [56]

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No, nothing. We'll double-check. But nothing that stands out the top of my head, no.

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Peter Testa, [57]

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Okay. And the last question was under the previous management team, there was some discussion towards the end as to how the Big 5 restructuring plan may be adapted thinking about some of the differences on views on decentralization, coordinating manufacturing sites into larger units and so on. And I was wondering if you were having a review of this project and get any preliminary thoughts in terms of how some of that dialogue may be considered going forward?

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Mattias Perjos, Getinge AB - CEO, President and Director [58]

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Yes. I don't have much to add actually. As you said, I'm getting my feet under the desk here as well to and diving into understanding the program a bit more in detail. So there is no replanning on the horizon though of the product. It's mostly going according to plan, and nothing -- I wouldn't say that anything has changed materially since the previous management.

Well, that's the last question. Moderator?

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Operator [59]

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That does conclude today's question-and-answer session.

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Mattias Perjos, Getinge AB - CEO, President and Director [60]

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Good. All right. Well, thanks everyone. Thanks, again, for joining the call. As I said earlier, we just like to summarize very quickly with the main messages that we have seen some slight organic growth in the first quarter. We're starting to have some traction when it comes to efficiency enhancements. So that's showed in our earnings for the first quarter. And also just remind everybody that we do have some significant challenges still ahead as well this quarter, we've elaborated on during the call. So thanks for your attendance and look forward to talking to you, again, next quarter.

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Operator [61]

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This concludes today's call. Thank you for your participation. You may now disconnect.