Getinge Industrier AB (OTC:GNGBF) Q1 2016 Earnings Conference Call April 22, 2016 8:30 AM ET
Alex Myers - President and Chief Executive Officer
Pernille Fabricius - Chief Financial Officer
Annette Lykke - Handelsbanken
Scott Bardo - Berenberg
Kristofer Liljeberg - Carnegi
Michael Jungling - Morgan Stanley
Lars Hevreng - Danske Bank
Richard Koch - SEB
Hans Mähler - Nordea Markets
Peter Östling - Pareto Securities
Good day, and welcome to the Getinge Group Q1 report conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Alex Myers, the CEO of Getinge Group. Please go ahead, sir.
So thank you very much, and welcome to all of you to this telco. Apologies, we're slightly delayed. We were waiting for a few callers that wanted to also get on the call. We'll attempt to close this conference by about 15:30 sharp, so 03:30 PM CET. And as per the information you've got in today's press release, you should have been able to access this live presentation for this session. It's also available on our webpage.
I would also like to begin by welcoming Pernille Fabricius for the first time as CFO for Getinge, and this is her first report together with me. And together we'll take you through both the financials, but also the business overview.
So I'd like to go to Slide number 3, which gives you quarter one in brief. And just as a starting point, I'd like to say that we're going through a huge transformation, quite significant transformation in the company. We're in the first quarter of the journey, which is going to take three to four years to get there.
And I believe actually that a lot of things that we've started are going on track and are in place. But I should also say that we had a soft start to the year regarding revenues, and I'll be making comments on both of those throughout this presentation.
So we're departing on our full year journey and the transformation plan is moving according to plan. We see early signs of expenses going down and margins improving. We also see the sales and admin expenses decreasing by about 4.5% in this quarter, and that's an indication that the Big 5 initiatives are beginning to kick in, and have delivered an estimated SEK75 million to SEK80 million savings in the quarter. So that's a good early sign of the transformation program in terms of the Big 5, and I'll talk a bit about that later.
Last year we ended the year with good growth both in Q3 and Q4, and this year has started softer and slower than planned and actually slower than our expectations. We declined organically by 2% and net sales by 3.4% organically, and our comment is more in depth in the next slide.
Gross margins improved slightly and that was driven primarily by positive currency effects and the medical device tax, and to a lesser extent the positive product mix. The volume effect, however, has affected us negatively. So that has been the soft spot in our quarter for quarter one. Talking about profit before tax, there we saw a slight improvement, but the EBITDA has decreased versus last year.
The final point here, which I'll also return to a bit later, is that we have full focus on remediation and our quality plan. We have continued success in the U.S., where we've had a successful third-party certificate inspection in Atrium, following a very positive inspection in Merrimack. So on that hand, we have positive news to come with. On the other hand, we still have a pending FDA decision regarding Hechingen, and we have no new information regarding the financial aspects around that, and I'll get back to that as well in the later slide.
So a quick comment on topline, both order intake and net sales. Here we've had a mix picture organically and both in terms of geography, but also in terms of product groups. And here I should say we've gone over to the new organizational structure, which is Surgical Workflows, which I could call a merger between Maquet Surgical Workplaces and Infection Control. We have Acute Care Therapies, which is a big part of the legacy Maquet portfolio. And then we have Patient & Post-Acute Care, which is the extended care legacy portfolio.
So there, order intake was down 2%, down in Surgical Workflows by 4.7%, Acute Care Therapies actually increased in the period organically by 2%, and PPAC, as we call it, declined by 4.6%. We have very good growth in recurring revenues, but a decline in equipment sales. And the whole explanation of the shortfall in the quarter is due to equipment sales, and I'll give you kind of more details very soon.
On the growth side, we had Cardiac Assist growing, Cardiopulmonary had good growth and also Infection Control within the Life Science sector grew. And finally on the growth side, we also had our DVT portfolio, which is part of PPAC, which actually had a decline in part of last year. So we're very happy to see that growing again. It's also a product category with a good profitability that has helped us in the product mix positive effect that we've had.
On the negative side, we have Surgical Workplaces that has declined in the quarter, also Infection Control on the healthcare side has declined in the quarter and Medical Beds. And here I should say that on Infection Control healthcare, we've had a long period of growth and it is very much a cyclical equipment-led category. So we do see ups and downs from quarter-to-quarter. But in no way does it mean that we've lost with and we believe a lot in the Infection Control continued growth.
One final point on orders was that our rental business that was also flat in the quarter, and that also reflects a change versus earlier quarters, where we've had a continuous decline on the rental business, while this quarter we've achieved stability.
Net sales, also quick comments on that. We had a decline of 3.2%. We had growth in the Americas and very good performance in U.S. in the quarter, while we had a decline in our EMEA region and also our APAC, Asia Pacific, region.
So here on the positive side, U.S., a very strong quarter; Germany, also strong quarter regarding net sales; China and India, also performed well regarding net sales in the quarter. While on the negative side, U.K. had a negative quarter in terms of growth; Japan and Australia as well and also Brazil declined in the quarter.
So final point here is also that we've had a major transformation in our sales company, where we've essentially gone from three independent sales companies to one company structure in each of the 40 markets we're in. Also in the quarter quite a lot of focus on the organizational change, and I would say from now we have one common management team in each of the market. And in that sense, the transformation or the transition, I should say, has gone quite smoothly.
Over to Slide 5, a bit on the transformation program. I should say we are progressing on plan. We've begun showing early signs of progress and that's reflected in the quarter with about SEK75 million to SEK80 million being delivered of the so called Big 5 initiatives. And in essence, that is also reflected in lower admin sales and also lower sales cost -- sorry, admin expenses, I should say, and also lower sales expenses, primarily due to an early consolidation that we've done of the management teams around the world.
Finally, on this slide, I think it's worth noting that we talked about a lot of restructuring activities for Extended Care a year ago, a lot happened in the first quarter last year and we implemented throughout the second and third quarters. And it's good to see that we've had a positive margin development within Patient & Post-Acute Care, which is the legacy portfolio from the Extended Care. And Pernille will show you a bit more of the figures around the three business category units, which we'll get back to later.
On Slide number 6, a lot of focus on FDA and the remediation program, and overall we see a lot of progress around the world. But here, I wanted also to start with Hechingen, because I know it's a high-focus, both internally, but also externally.
In January we announced that we had an inspection in Hechingen by Quintiles, which is our third-party inspector, and it resulted in a number of observations that needed to be addressed. And since then we've initiated a lot of actions, a significant number of actions. And just to give you a feeling of what actions we've done, we've changed in the leadership of Hechingen, both on the operational side, but also on the quality side.
We took people from other parts of the company where we have a good track record regarding remediation and quality management systems and brought them to Hechingen as a specific task force. And we developed an improvement plan, which we sent to the FDA for approval, and now we're waiting decision from the FDA.
And I should say, we're in close dialogues with the FDA and are awaiting the feedback on that plan. And in the meantime we are working on that plan, because we still need to continue with the remediation work. But until we get a decision, we cannot specify the financial consequences of this plan. But at the same time we foresee that the plan, if decided and approved as it is or implemented, it will mean that we need additional investments that are going to be necessary to get Hechingen to the level where we want to.
So regarding other sites, good progress that I mentioned in the U.S., we've had a certification inspection without any observation. And this is very good news for both Hudson and Merrimack, which are part of the Atrium acquisition that we did. And we're awaiting now within 60 days response from the FDA on that inspection.
So finally, the closing balance for the remediation is SEK129 million. And as I mentioned earlier, this doesn't include the additional investments we're making to Hechingen, and there again we're waiting for a decision and approval from FDA.
So with that, I'll hand over to Pernille, and she'll take you through the financials.
Thank you, Alex. The main headline of the quarterly trade it's facing is the lower sales, which in turn to some extent is compensated by the reduction in costs. Sales in the first quarter amounted to SEK6.377 million, down 5%, when comparing to the same period of last year, of which 3.2% is the organic impact.
Looking at the gross profit. That landed at SEK3.11 million, down 4.2%, 3.4% organic. Gross profit in 2016 was positively impacted by currency of SEK35 million and last year had a negative impact of medical device tax of SEK27 million. Adjusted for this, the underlying organic gross margin deteriorated from 47.2% to 46.2% primarily, as Alex said, related to the impact of lower volumes.
Selling and admin costs, which is a great focus point for us, reduced in the quarter to a total of SEK2.406 million with SEK128 million equals to a 4.4% reduction, relating to the Big 5 program and particularly lean sales and admin. One needs to notice here, that last year operations cost basis reduced the sale of Pulsion impacting by SEK76 million.
Consequently, EBITA before restructuring amounted to SEK620 million, down 13.5% from last year, 12.3% organic. Restructuring costs relating to Big 5, we kept at SEK127 million, which is down from SEK183 million of last year. Financial items amounted to SEK157 million, down from SEK189 million of last year, positively impacted by the lower interest cost that we have or interest rates that we have.
Taxes kept at 27% and net profit for the quarter therefore amounted to SEK115 million, up from SEK107 million of last year. By the end of the quarter, we had a remaining provision for FDA of SEK129 million.
If we turn to orders and net sales to the topline and start by business category developments, then Surgical Workflows saw lower sales volumes in operations rooms, table and light, and Life Science developed negatively in the quarter. Acute Care Therapies grew and particularly within the Cardiovascular segment. Patient & Post-Acute Care reduced due to in particular lower sale in the capital equipment in Europe and China.
Looking at the geographical development. EMEA deteriorated based on a high last year with large capital projects. Americas achieved growth positively, particularly in the U.S., with negative developments in LatAm and Canada. Asia saw a negative growth, impacted in particular by large projects in Australia and Hong Kong that we had last year in Q1.
Turning to the new product segmentation. And starting by looking at the Surgical Workflows, this segment saw reduced sales of 6.7% and a lower gross margin due to lower volumes. SG&A cost reduced due to the lean sales and admin program. And EBITDA before restructuring and integration ended at SEK45 million compared to SEK59 million last year. EBITA was positively impacted by SEK32 million of currency, transaction impact of SEK27 million and translation of SEK5 million. Restructuring costs were kept at SEK42 million.
Looking at the Acute Care. That saw a growth of 0.9%, with good growth in the product categories all through this product segment. Gross margin was kept at 55%, cost was stable and EBITA landed at SEK371 million compared to SEK406 million of last year. Last year, it again was impacted by the sale of Pulsion, which reduced cost of last year by SEK76 million. Here we had a restructuring cost of SEK58 million.
Patient & Post-Acute sales reduced by 4.9%. Rental developed were positively, but capital equipment saw a negative growth. Gross margin increase was impacted by the rental business in particular and the margin ended at 47.3%. EBITA in this segment is worth noting, because it was very positively impacted by the previous restructuring, and that has happened in this segment and EBITA landed at SEK255 million compared to SEK240 million of last year.
Looking at the currency. This positively impacted the Post Acute Care segment with SEK10 million, transaction SEK6 million and translation SEK4 million. In this segment, we saw a very low restructuring cost of SEK14 million, since last restructuring already had been carried out in the previous year.
Turning to the cash flow. The cash flow from operations ended at SEK700 million, with a conversion rate of 75.5%. There is a huge focus here on cash improvements in the new organization and we are developing plans for inventory reductions, for example.
Turning to the balance sheet. Finally, we would like here to highlight the reduction of net debt to SEK22.6 billion and the ratio of net debt to EBITDA of 3.9% compared to 3.93% of last year. It is the aim to further reduce our debt level and ratio in the years to come.
With these words, I'll hand over to Alex.
Thank you, Pernille. So just a few final comments. Two more slides, before we open up for the Q&A. Regarding the revenue outlook, we see 2016 being positive and having a positive revenue outlook versus 2015. We continue to see revenue growth in EMEA, despite the slow start to this year. And we also see continued growth in the Americas and the same goes for APAC. We see North America continuing a positive trend and we also see continuing challenges in Latin America.
Regarding Asia-Pacific, we see an overall expectation to grow and we have a positive outlook for Southeast Asia and India. And actually in the last couple of quarters, we are also seeing China get back on track in terms of growth. And even though quarters vary a little bit from quarter-to-quarter, we also have China in a carefully positive growth outlook.
The financial consequences related to the Consent Decree for the time being remain unchanged, but SEK230 million in 2016. But as I said before, adjustments could be necessary, once the revised plan has been approved by the FDA.
The currency effect, the outlook there hasn't changed versus earlier, and we see a positive impact of about SEK150 million. And the same goes for restructuring, where we haven't changed the outlook from the eligible outlook of the SEK800 million that were presented at the Capital Markets Day.
So finally, over to 15, which is the last slide, before we open up for questions. I should say, again, it's a first quarter of major transformational change as a company. I think it has gone smoothly. We have made a lot of changes in the first quarter, and we believe that the plan is in line with the original estimates and ambitions of the plan.
We see efficiencies kicking-in already in the first quarter. And our weakness in this quarter, to be honest, has been the net sales and the topline. I think, also, we should see this quarter as a smaller of the quarters during the year. And as you know, we have a much heavier second half of the year than the first half of the year and we do have some catching up to do.
We have actions in place and we're very much focusing on the order generation. As we did last year, if you remember, the third quarter was very much about order generation and we delivered in the fourth quarter growth. So despite the fact that we are behind plan, I do believe that we have three quarters to do the catching up, if necessary.
We'll also be seeing more on innovation moving forward. We're looking over our innovation pipeline. And throughout the year towards the more -- at the end of the year, we'll see more innovation coming out. And we will be investing more innovation in the longer-term perspective as well.
Finally, quality management system. I want to point out that our products are saving lives on a daily basis, but we do have a quality management system that needs to be improved and made globally. I should say, having global standards in order to meet the demands from the regulatory, the regulatory demands that we have around it. And I can assure you, we have full focus on that, not only Hechingen, but in all other sites as well. But of course, right now, we have extra focus and extra resources in Hechingen.
So with that, I would like to thank you for your attention, and open up for any questions that you might have. Thank you very much. And I'll hand it over to the operator.
[Operator Instructions] We'll take our first question from Annette Lykke from Handelsbanken.
First of all, I'd like just to ask in respect to your program, the Big 5 and the timing aspects. In September last year, you highlighted that you were sort of expecting a topline growth of 2% to 4%. And I just want to know, how likely you feel it is to reach the indicated 40% of your EBITA gains of SEK2.5 billion to SEK3 billion in 2017 or if you see some sort of a potential delay in this respect?
My second question is in respect to the FDA observation you've seen in Germany, could you share with us the nature of these observations? And why it is so hard for the company or the production facility down there to be compliant with the regulatory demands from FDA? It seems for me that you have over a certain period of time, spended a lot of or invested a lot of money in some improvements.
I can start with, you're asking about the potential delay at the Big 5 and how much we faced overtime in relation also to the topline. Of course, the topline 2% to 4%, an ambition that we have over the full year period and we continue to have that ambition. But of course, we can say it's a fact. So we started a bit slow this year. But I should say the ambition is still there absolutely. And I think we should see this quarter as a slow start. But again, I mentioned, it's the smaller of the three quarters going forward.
Regarding the Big 5, what we did was we faced a 10% delivery of the Big 5 in year one. And I think we're tracking well on that. And I think it's too early to say that to make, I would say, comments on 2017, I can assure you are right now mapping all the activities that are necessary for us to deliver in 2017. And now we're doing it more as a bottom-up exercise, so it's not the top management saying that this is what needs to be delivered and it's actually middle management that is confirming this.
And so far, I don't think we should say anything that we're off plan. I think none of our internal confirmations are made. But of course, we are reliant on topline as well. The strategic plan is not that much reliant on topline as the previous plan was. But of course, if we don't grow, there will be a gap. So that would be my answer to that.
Regarding the Hechingen and the compliance, I agree with you that a lot of money has been spent and I have the same question as you're setting right now to me. I should say that money has been invested in more plants than just Hechingen. So I think we have to remember that we have invested in about 20 plants, and actually all the Maquet plants, and also the ones not under the consent decree were part of the remediation program, and Hechingen was one of them.
Hechingen has very safe and very good product that save a lot of live, so I want to emphasize that. But we haven't had the proper processes and controls there. And we also have had, what we call, document control, which is how we documented the products historically when they were developed. And also our complaints handling, which has been handled very much locally, and we're moving now to a much more professional global complaints handling system.
So my answer there is that Hechingen also originally, when we did the original inspections from the FDA had most observations. So they have the longest way to get there to the end game. So what we've done now, which is different, is that we have now a management that's mapping things and mapping progress much closer. And we also have people that have a proven track record on solving these issues that are working on Hechingen from other parts of the company. And I think it's a very relevant question you're setting.
So the nature of the observations is still on the processing and that documentations side, more than on any sort of a technical or production related issues. If I understand you right.
Yes, you can say that. It's a design validation and process, and a matter of us following the processes that we have set out.
We will now take our next question from Scott Bardo from Berenberg.
So the first one relates to the topline development, and I think clearly not a good quarter in such a topline growth. Looking back, I think this is perhaps the worst topline growth quarter that you've had since 2009. So what I wanted to understand actually was, of this topline development, do you believe any of this relates to the change in operational structure within the organization or you mentioned that there was some change in the Hechingen facility that limits your abilities to supply. Do you think that any of that was the impact here rather than underlying demand? If so, could you please quantify?
I'd also like to just quickly talk a little bit about the FDA remediation programs. Obviously, you've done your analysis now, you are waiting for the FDA to come back with some visibility on Hechingen. But can you at least share a feeling at this stage, as to what do you expect your ability to supply in the market to be impaired to or whether there is a possibility of some sort of injunction as you've seen historically in Hudson? Furthermore, on that point, can you please just give us some clarification of where we are with some of the other facilities, Wayne and Rastatt. Is there a potential for further nasty surprises there or are things on track?
Last question please, relates to a slow EBITA guidance. Now I appreciate we will try to get this last time and it was -- well, I think there was quite a lot of confusion surrounding this. But if you manage to grow the top-line modestly as you now outlined within your full-year guidance, can you please at least give us a feeling of where you see a flow EBITA for the group this year, just so we can understand how the phasing of your efficiency programs and underlying margin expectations help?
I'll take the topline and the remediation, Consent Decree of related ones, and Pernille will take the EBITA guidance. So regarding the topline decrease, again, it's very much related to equipment sales. We've had consumables and recurring revenue actually having a very, very strong performance. The changes that we've done organizationally have been on management level, and we haven't changed anything in the field really regarding organizational structure, so what has happened is management.
And regarding equipment sales, those happened over the longer term perspective, so I think the changes in the quarter, I think might have affected our focus, but I don't really think they materially affected our sales, and that is a feedback we're getting from the region. Possibly some of them, the smaller product categories in the quarter got less attention than the bigger categories in the quarter and that's something we're dealing with internally to make sure that we don't give it. So my answer would be probably not, but I do accept that we have made a big transformation and focus on management has been very much to make sure that the organizational structure is in place.
We did have supply issues on the cardiopulmonary portfolio, and the reason for that is now we're following the validation procedures and the testing procedures that we should be following in order to be fully compliant. And that has slowed down production. And we made an estimate, we think it's around SEK50 million in the quarter, I believe. I have to double check that before you write it down in phone. But we did have lost possible sales, let's say, from the quarter due to a slower production and supply.
Then you had a question on injunction or not, and I think there its -- again, we presented a plan and we're in dialogue and I can't guarantee what the FDA will decide, so I can't give those guarantees, but all I can say is we're having a dialogue with the FDA on our plan and that's where we are at the moment. It's very, very difficult to get what the FDA is thinking. I think we've given them a reasonable plan, and they know we're genuinely focusing on the area and we have a good relationship with them. On the other hand, they don't feel we did a good enough job in this particular site.
Other facilities, my answer there would be, again, you can never guarantee, but we don't see any significant risk there. But we are on the FDA's watch list, so we are monitoring much closer than we would be in a natural situation. But the FDA has visited and inspected Rastatt and other parts of the business with good results, and we've also had several FDA inspections also with good results in other parts of the business, so we don't see, an effect, let's say, hedging effect going into other sites at the moment. But again, we are on the FDA's watch list and that means we're looking out as much, much closer and much more in detail.
So over to Pernille regarding the EBITA.
So as you discussed, when I was not on the call last time, is the baseline, I think, and the baseline discussion there was for 2015. So what we can say is that the baseline for 2016 is SEK1.5 billion on the capital restructuring cost. To that, there is need to restructuring program and that we are well underway with and very, very much focused on. And as Alex said that's going to yield -- the aim is that that's going to yield SEK2.5 billion to SEK3 billion over a period of three to fours years and the 10% is the aim for this year. And we had no reason to believe that that won't be the case at this point in time, so those two elements stand.
Then in terms of giving exact guidance to run EBITA before restructuring, for the full year this is not something that we do, and what we can say is that there are other factors impacting, of course, our outlook, such as the revenue, where we still have a positive outlook and see no reason not to have that. But we also, of course, potentially could be impacted by the decisions of the FDA. So lots of thoughts around, but this is where we stand now.
Thanks very much for answering my questions, perhaps just one quick follow-up. I just wanted to make sure I understood your comments correctly surrounding the FDA. You have the green light or you're close to getting the green light at Hudson or for example there was no observations there and I'd like to understand that's also the case of Rastatt and Wayne now as well. So, you've had positive observations from Quintiles, and you're just waiting for FDA certifications?
Yes, I just have to make slight correction. You're right on your comment on Merrimack and Hudson and Wayne as well. My Rastatt comment on the inspection was that Rastatt we also have surgical work places based in Russia as a unit, so I was referring to that one. Then the Hechingen, regarding Hechingen, we have R&D that is actually located in Russia and production is located in Hechingen.
So in the sense Russia is on big different quality systems, one of which has done well in inspections, which is in Surgical Workplaces and the other one has not done well in the inspection, which is the one associated with Hechingen, so just to clarify that. And Rastatt under Surgical Workplaces, that quality system is not under the Consent Decree. So, a little bit complicated to, I would say, to describe, but Rastatt is a multiple quality management system location, if I would describe it that way.
We'll now move to Kristofer Liljeberg from Carnegie.
Two questions. First, if you could give us some more clarity on what type of visibility you have for improving top-line growth, both sales and orders in the coming quarters? Second question is on the SEK130 million negative effect from the Consent Decree on the operating line this year, is this including, in sort of a way, your best expect or best guess for what's going to happen in Hechingen or will that come on top of that?
I'll take topline growth and then Pernille will take consequence on the P&L and SEK130 million. So topline, I think what we expected, we want to catch up and we do have a plan. We're discussion with our regions on how to catch up. I should also say that we did have a soft order intake in the quarter. And as you know there has a carryover effect into the following quarters. So, our focus very much is on the order generation, and I have a few things also to take up, I think.
Regarding of Americas in the U.S., we've had a good start and we see that continuing. Regarding APAC, there we've had two very significant deals that we had in the last quarter and the first quarter last year, which was one was significant in Australia and one was very significant in Hong Kong and that has a direct effect of sales on the comparison. So we believe now we're going into a more normalized quarter in Q2 for APAC and we see the growth coming.
So EMEA, there we've had a mixed picture, so its very much focused on getting the equipment orders back in place and I think there we've shown before that we can mobilize it and we can do the catching up. And also there I should mention that the comparisons last year this quarter, I'm not at all defending on the percentages is weak, all I'm saying is we're comparing with a decent growth quarter last year in Q1, while we softened up a bit in Q2 and Q3, o we foresee a turning point in that going forward. Then on the SEK130 million, I think we have to clarify what we mean [multiple speakers].
So in the SEK130 million is what's left after provision that was made back in '14 for the remediation then. And what we are now talking about in terms of the FDA is that they'll come back to us and ask us to do further work. And the exact feedback we do not know yet. And once we know that, we will also know what the financial consequences are going to be offset and that will be in addition to the SEK130 million.
Pernille, haven't you said also, I don't know if SEK130 million is the exact figure, but there will be an -- if you look at the negative effect from lost sales from the Consent Decree, that were like SEK230 million or something last year.
Yes, I could say that that's referring to that. And so what we have now as part of remediation money left, I think it's a SEK129 million that's still left in the remediation bucket if we want to say. And this SEK130 million is the negative effect as a totality of us losing sales. And the result of that in terms of GP margin and then bottomline effect, so you're correct in that. And in that sense, in this scenario, we're losing less than we did last year. And those products are much associated to the Atrium products. So what we're talking about here the additional that might come, it would be some kind of a new remediation plan, I would say, where new remediation is necessary investment.
So from Hechingen, you expect forward that the launch effect will be on the investments you have done rather than the impacts from sales restrictions, is that what you're saying?
Yes. We don't have the decision from FDA. So from what we can see and what we know, the answer is yes. But again, the FDA has to decide and the FDA is evaluating our plan.
We are waiting their feedback.
And coming back, a follow-up also. Coming back to this baseline earnings of almost SEK4.8 billion, so you're not willing to say whether you expect to grow from that level or not, is that correct?
Now you added the two numbers together. So what we are basically saying is we have given our baseline of SEK4.5 billion and we are basically saying that we are tracking on our savings program and ploughing on with that and then there will be ups and downs, so to keep or adjust this. So you're right. In summary, no, we are not giving guidance on the EBITDA for the full year more than this.
We'll take our next question from Michael Jungling from Morgan Stanley.
I have three questions. First on the margin expansion program. You mentioned previously that it was very -- that the cost savings in the margin expansion was not dependent or not materially dependent on the topline. But now that you are declining in terms of sales, is that still hold true for 2016 and 2017? Question number two is on cost savings. I think you have a run rate of SEK75 million to SEK80 million in Q1 that probably means you will do more than the 10% run rate you had guided to. And hence, is there a more realistic run rate that you can give us for the end of 2016? And question number three is on current receivables. Can you comment as to why they increased in the first quarter and whether you see some impairments as a result of the weakness in some of those markets that you're in?
I think I will give Pernille a shot on that and then I can complement if there was anything else.
So in terms of the first one, you asked whether is dependent on the fact that the sales development has been a bit lower. So the lean sales and admin program that we are currently carrying out, we are carrying that out completely regardless of what's happening on the topline, it's very much preserving sales force and there is a focus on ensuring that sales is definitely not harmed by this. So there is no direct dependency to this.
Then in terms of the fact that you've observed that our run rate and we realized more cost savings than what we had said originally, what I can say is we have not sort of cast on stone that it's absolutely going to be SEK250 million to SEK300 million, but we are raising that as the number. Also, because there will be other items that we'll be moving around this, which could be investment in R&Ds, so we are ploughing on towards this total saving.
Then in terms of the accounts receivables and the fact that you've observed that they're increasing, I think that you're right in that observation and I can only say that we have high on our agenda to make sure that we get our cash conversion continuously at a adequate level and that we get our arms around accounts receivables and get the cash flow flowing that showing, but there is also being quite a lot of organizational change internally, but it's a focus area for the rest of the year.
So can I just follow-p? So the cost savings achieved in Q1 is not an indication that you're running ahead of your initial guidance of 10% run rate end of 2016 and 40% end of 2017?
You shouldn't take this right now, you should just take it as we're doing very well in our cost savings initiative.
And then on the current receivables, are there any indications that you are struggling to collect receivables?
No. Not really. There is an indication that we could do more reducing them.
We will now take our next question from Lars Hevreng from Danske Bank.
Can you say anything more specific about the comments in the report about Europe, sales decreased 5% and you said all product categories were weak. That's bit usual statement from your side, but if you could clarify whether there were some common denominator behind that comment. And also generally about gross margin development, this seems to be a fairly stable quarter and you also referred to some positive product mix effects in Q1, particularly for the Acute Care division.
And could you comment upon whether these were non-recurring, so to say. And these comments that you have does also on the background that you also complain about the capital equipment sales, which I guess if that could come back, so to say, then I guess that's negatively impact going forward on the gross margin.
I can take the question that. I can clarify a bit on Europe and I also thought maybe that statement was not completely clarifying. When we talked about in all product groups of product categories, we meant that three product business category units. So of course below them, they're both pluses and minuses just to make that clear. So what happened in the year was all the three product category units went down, but if I take also good statement that recurring revenues were up and had a good quarter, that also goes for EMEA, so the description on capital goods going down and recurring revenues going up that's also valid for the EMEA region.
If I look at EMEA geographically, I should say, we had a soft quarter in the north. So both NORDIC and U.K., Ireland, I would say, if I cluster those as Northern, which is also an organizational territory that we have, which has been covered more. That's where we have the softness. In the NORDIC specifically, we had a very, very high quarter last year in 2015, but we decided not to use that in a way as an excuse, something that's in a way is an excuse, but it is a fact that we had a very strong quarter last year in the NORDIC. In the U.K., Ireland there the NHS does not release funds as we had hoped for and as we had calculated with and that's where the shortfall came. So it's very much a geographic shortfall.
And actually Germany did well, the Benelux were more than flat, I would say in total if I would describe one. Spain did quite well and the South did quite well. So we were dragged down from the North so to speak. The picture isn't everywhere with everything, but it's very much north focused and equipment focused. And there I should say, partly when I look at EMEA, it's explained by medical beds, which is very much U.K. driven and also some bigger projects within healthcare, there's sterilization regarding orders in the quarter.
So that was the first question and unfortunately, I forgot the other one, so can you repeat that one?
Yes, of course. That's on gross margin, because that seems to be, I mean, in the Q1 it was similar to last year that seems to develop fine. But you also had some -- you referred to positive product mix, particularly in the Acute-Care division. I mean they tend to make out for the revenue shortfall, so to say? Will that come from capital equipment? And I guess that would dampen the gross margin development or if you see some other topline drivers?
Yes. If I would comment on the product mix, there we had a product mix, which was favorable. So generally, we have higher margins in the cardiac assist products and cardiopulmonary products, where we actually had a good overall development. Even though we couldn't supply the market fully with what it wanted. But we did have a decent development in the quarter.
And then I mentioned DVT, which is part of the PPAC, which is also high margin. So there we've had a positive product mix. However, the volumes were down, so I would say that brought us down. So it's a negative volume effect, but a positive product mix effect. And then, also, generally, recurring revenues are actually high margin for us. So I think that also should give a mix effect that improves the percentages, but again, the total is down because of the volume.
Can I just also ask these items, such as you explained at the fourth quarter call, I guess, you said the earnings started coming back to base, but you said an earnings base on the EBITA level at 4.677, and should we now see 4.5 roughly as the earnings base? And then, of course, for the second quarter, the ongoing quarter, is there anything else than this SEK100 million asset writes-off in the Media division that was used before Extended Care. Is anything else that you would highlight, which could have a big impact on the year-over-year comparison for this ongoing second quarter, similar to what you referred to this perfusion business gain in Q1?
So I think from experience, I think we are just trying to keep it a bit simple, so you are right that the indication was something like 4.56 at the fourth quarter. And I am rounding it down to 4.5. And was it 4.5 or 4.55, that's fair enough. But this is our baseline. And then on that you should not expect more deviations; that's absolutely clear. And then we do our savings program, and we do our topline, and we do our work with the FDA.
That for the second quarter, is there anything else on this SEK100 million asset write-off last year, anything on the other in the comp quarter that you would highlight already today?
No, there is not.
No. I think that was the only one and was the major one last year, yes. So it was roughly around SEK100 million in the second quarter.
We'll now take our next question from Richard Koch from SEB.
A lot of talk about the Hechingen today, but by the end of the quarter, are there selling restrictions today at Hechingen?
On Hechingen, no.
But do you expect there to be after the FDA impact or do you just don't know at all?
No, we don't know at all. I think it would be long speculate. So the restrictions were around Atrium that we've had, and I think we would be wrong to make any kind of speculation there.
And when do you expect the demand for equipment to improve. I mean, have you seen any indication of that so far, it's probably expected later in Q2 or later in the year or what's your visibility on that?
Right now, I will say part of it in Q2, but most of it in the latter part of the year. I think that's something that takes a little bit longer to fill the pipeline. And again, we have a bit of mix picture, because we have life sciences with a better pipeline and healthcare was a little bit lower pipeline. If I go back to the infection control, that's a part of the portfolio.
And lastly, across the different regions, in APAC region, it's the very weakened in all divisions except for in Acute Care, why over there's so big variations there? Why is it still strong there or why is it so weak in the others?
Can you repeat that? Is that a question on Acute Care specifically?
Order intake in Acute Care is up 14%, while in the others --
The other division is minus 16% and minus 18% or minus 19%. Why is there such a big difference?
Yes, primarily, and there APAC has been affected by two major orders that we have a year ago. So we have a major order in Australia in medical beds primarily, and also to a certain extent, in Infection Control. And also in Hong Kong, we had the same. So there the comparisons are more difficult. And that's more or less where we drop out this year versus last year. So that we see going forward -- we have a more normalized quarter going forward in those, so that's the explanation.
And in the emerging markets when you have major fluctuations in, for example, Australia, which is a major market then you see an effect directly on the total region. So it's a bit more volatile in that sense whether it's Australia, Japan and also Hong Kong is quite large when we get the big orders, when we tend to be quite large, and when we don't have them, they hit us in percentages.
Thank you. I think we can take a couple of more questions. We're beginning to run over time, but so maybe two if there're two there, that would be great.
Our next question comes from Hans Mähler from Nordea Markets.
A question about the Infection Control, sorry for taking to the all business areas. But is it fair to say that some of the growth or strong growth late in 2015 was on the expense of 2016. So on a rolling basis, you are more or less growing in line with the market instead of above the market for that segment. And my second question is related to all the Extended Care. And is it fair to assume that your rental business has troughed now and that we actually can see some growth in '16. And also, what can you say about profitability in that unit right now?
Yes, I can take those. From the Infection Control part, we did have a strong end to the year. We don't work in a way that we try and get things in one-year and move things around. So I don't have the perfect answer to that. I think partly could be that the strong end to '15, started off of smooth '16, so partly, but nothing that was planned or that we really discuss actually internally whether that's case.
I would still say, we're gaining market share slightly, but maybe not as much as, let's say, the fourth quarter. And I think I mentioned in the fourth quarter was also, I would say, significantly strong quarter for Infection Control. And it was also beyond our expectations at the time and our plan. So we were very happy to see that.
Then on the rental, we projected the flattening out of rental. I would say that we're going through that phase, and you never know exactly what quarter it's going fall in, but I hope it's troughed. I should also say that we've had partly help in this quarter that we've had the flu season in the U.S. And they also have to be open that when we get a flu season in a way beyond the normal, we do see a tendency of more sales. I would say, we're not completely -- we are flat in the quarter, but we've gotten help somehow.
And I see that's flattening out. And I don't see a huge growth in the year, but I would be happy with kind of flattening out and being under control on the topline. However, we did the restructuring, and I think that's reflected in the margin. So I think you should see that the improvement has been done due to the restructuring that we did one year ago. And now, we're comparing more apples-to-apples rather than before where we walked away from some business.
Thank you so much.
We can take the last one.
We'll take our final question from Peter Östling from Pareto Securities.
The first one, you state in the report that you have more or less aligned the sales force going forward. But at the same time, you've also stated that the materialization of any EBITDA improvement in this transformation program, and if not affected that much on the top-line growth. But I mean in my book, aligning sales forces should actually have a positive effect on the topline, which would then drive the improved EBITDA. Maybe I've misunderstood something here, if you can comment a little bit on that.
Yes, I think again, these kind of processes take time and are quite transformational. So there is going to be happening things, I think throughout the next couple of year. So just to clarify what we've done up until now is that we've just merged the management teams, we haven't done anything else than that.
So we have not merged shared services in the Americas or we were continuing to do shared services in the Europe. But we're essentially just merged the management teams and actually de-layered in the way or we have fewer managers now in the sales companies. The sales forces are intact, so we haven't changed our sales forces at all. And what will happen maybe over time is that in the sales force it that will optimize the portfolio, so each sales person maybe changes their portfolio with whatever.
10%, 20% of the portfolio the sales person might change over time. And then we'll start facing the customers as one getting it, when it comes to key accounts. So key accounts and projects, big projects there we go is one getting it. And they are believed that should be in leveraging effect where we can bring the whole portfolio to the customer, while before we were only showing the customer part of the portfolio. So I think it's a transition and just so you know all we've done up until now it's just the management consolidation and nothing more than that. So there is much more to be done over time.
Thank you very much, and once again thank you for your attention. Sorry, we went five minutes above schedule. And we look forward to any further questions both Pernille and I will be available in the coming days, if there are any more questions to be taken individually. Thank you, very much.
End of Q&A
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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