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Good day and welcome to the Getinge Q1 Report 2018 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, sir.
Thank you very much. Hi, everyone and a warm welcome to today's conference. With me I have our CFO, Lars Sandstrom, who will go through the financials in a moment. As usual, the report is available under the Investor Relations section on our website.And with that, we can move to Page #3 and look at a quick overview of our business, more as a reminder than anything specifically related to the first quarter.It's good to remind ourselves, I think, that we have a very strong portfolio as the base in our business. We have leading positions in several well defined segments in the medtech market. We have an addressable market of about SEK 170 billion, that is growing between 2% to 4% annually. We completed the spin-off of Arjo last year and post that 90% of our sales goes to hospitals. And then we've created life science as an independent business area, and 10% of our sales then goes to pharma. And in pharma we are talking both about the lab and production facilities.If you look at our hospital products, we focus strongly on the operating room. This is where 80% of the value in a hospital is created. And we believe we have a compelling value proposition to our customers when it comes to bolster, both the therapy part of this with therapists with really strong clinical outcomes and also good economics related to this. We have good evidence that we're able to reduce the length of stay of our patients and we have a very strong offer when it comes to improving productivity around the operating room, which means that we have -- also have to understand the flows around the operating room and the related part of the hospital, like to see is the cath lab and the ICU and the endoscope.We have our own strong offer as well for hospital-acquired infections, which is a huge global challenge to deal with and something that has tremendous value to our customers if we are able to successfully help them with this. We have our own representation in 41 countries, but we sell into 150 countries globally, and we had SEK 22.5 billion in sales last year.So with that overview, I think we can move to Page #5 and look at the highlights from the first quarter of 2018. In brief, we had a strong top line growth in the quarter, 3.1% organic growth in order intake and the net sales increase of 5.4%. Our adjusted EBITA, so that is the positive part of the story. When it comes to profitability and the cost level, it's more of a challenging story still. As we've said before, we will have a year that is going to be characterized by working through the challenges that are well known by now. And some of that you can see reflected in the details as well. Adjusted EBITA amounted to SEK 301 million and we had a currency impact as well of minus SEK 125 million in the quarter. So if you cascade this all the way through the profit and loss statement, our adjusted earnings per share amounted to SEK 0.46 in the quarter.If you move to the next page and look at the key activities here. One of the things that I observed very early when I joined the company is that it's in the DNA of getting it to -- to really have a sales and customer oriented approach. With all the changes that we've gone through in the last few years, I felt this was a little bit forgotten and there were a lot of internal distractions. [ And actually ] we would say that we are on our way back to the right kind of focus on the market and on our customers after a period of lot of internal activities.In my meetings with customers and our own market companies and the people on the front line, I get very positive feedback from our customers on the offer and the way we service our customers. I'm really happy to see that after the first quarter, it's another quarter where we have good momentum on the market, and we can clearly see the result of the changes that we've implemented last year and some of the investments that we've done in the sales structure during 2017 and which we will partly continue to do during 2018.We have some great examples of this in ventilation, in cardiopulmonary, in integrated workflow solutions, which is our software business. We can see that the investments that we've done also in India and China are paying off well. So basically, good offer, asset base, strong customer relationships and a good external focus from now on.I also want to comment a little bit on the FDA remediation. This continues according to our plan. You know very well by now that we had a very intense 2017. We're also now in a really critical period when it comes to the remediation work and the building of the longer-term quality system as well for us. In parallel to this, we also have to adjust to the European Medical Device Regulation and this is obviously something that's growing resources as well, which you see reflected in the OpEx of the company then. We are firmly convinced we are following our own plan, we are firmly convinced that this will take us to a good position, but it will take some time and continue to consume resources during 2018.During the quarter, we also made a provision of SEK 350 million related to ongoing investigations in Brazil that we've communicated before. This covers the period from 2004 to 2015. It's 2 of our Brazilian subsidiaries that are investigated and this is an industry-wide initiative that's going on in Brazil. So it's quite a large-scale investigation that we're involved in as well. This is something that we take very serious and we've started already from the beginning, collaborating with the Brazilian authorities on this to facilitate the investigation. It's consuming quite a bit of time and resources to go through this. And in parallel, we are also -- we've also updated our code of conduct, we have updated and rolled out once again training programs for all our people regarding this, not only in Brazil, but also it's a company-wide initiative. So that's done in parallel. When it comes to the investigations, such negotiations will continue with relevant authorities and we expect this to be finalized during 2018, but we cannot say exactly when this will be done.We've also had a number of updates and launches in our product, services and solutions. So several important updates to existing and well positioned products in the quarter, such as the ventilator range, our operating tables and the software solution. I am also happy that we've secured the CE marking for our Flow-C anesthesia machine , the high quality, compact and cost-efficient anesthesia device for the really large mid-segment market .We also received FDA approval for a new and high-quality sterilizer for the North American market, the GSS67N. This is a new sterilizer that offers both improved product capacity, due to shorter processing times and it also helps reduce the environmental impact, obvious, in the equipment.On the personnel front, very happy to let you know as well that Paul Marcun was appointed President of the Surgical Workflows Business and he will take off this no later than the 1st of July 2018, so a couple of months away. We also have life science now reported as a new business area from January 1. So a strong focus on pharma customers and customized solutions, which is the rationale for creating a separate business area for life science.We can move to the next slide and look at the market development a little bit more in detail. Both order intake and net sales showed strong organic growth in the quarter, 3.1%, 5.4% respectively. We had order intake increasing organically in all our business areas. We saw particularly good growth in Asia Pacific within acute care therapies and cervical workflows. So good on both the large business area. We also had healthy order intake in surgical workflows and life science in Americas. You may remember that we've relaunched a product for a comeback of surgical workflows in U.S. last year, and this is something that we continue to see good momentum [ top line ]. Order intake in EMEA declined a little bit compared to the preceding years -- the preceding quarter, for the first quarter of 2017. But you should remember that, that was also a pretty strong quarter last year for surgical workflows in EMEA.Other than that, when it comes to net sales, we had high growth in the 2 largest business areas, both surgical workflows and acute care therapy. We had a strong sales trend when it comes to emerging markets, both within Americas and also in Asia Pacific. And in EMEA, it was virtually an unchanged picture from a net sales perspective.In general, I would say that we continue to see positive momentum, really good demand in emerging markets, customers in mature markets like Europe, a little bit more under budget constraints, which has an impact on us as well, but relatively speaking, still a fairly good development.If you look at the -- if we move to the next page -- Page #8, as I just mentioned, all BAs grow in organic order intake. We did have some significant headwind from currency, though, so we had a SEK 218 million negative impact from this. And when you look at this by BA, in acute care therapies, we had particularly robust performance in Asia Pacific. We reported growth in all product categories there. All in all, ACT grew with 17% organically in Asia Pacific in the quarter, very positive.On the somewhat more negative side, we saw a slight negative trend in the organic order intake in Americas within acute care.Life science, our new business area, reported a 2.4% growth in organic order intake with significant growth in Americas, due to a couple of large projects. And as you probably know by now, this is a business that has a bit more lumpiness to it than, for example, acute care.If you move to surgical workflows, here we reported a [ 3.1% ] growth in organic order intake, particularly high order intake in both Asia Pacific and America, good growth in most of our product categories as well. I think it's worth noting also that our software business, integrated workflow solutions, we doubled order intake in the quarter. So very positive about that. The somewhat negative development in EMEA compared to last year's organic growth of close to 8% is more of a timing effect than anything else.If we then move to the next page, and look at the contribution in net sales, In the first quarter, just as with the order intake, we see a headwind from currency when it comes to sales. All in all, SEK 200 million impact in the quarter. We also see that capital goods grow a little bit faster than consumables, which put some pressure on short-term margins, as consumables normally come with a bit higher margins. And one of the bottlenecks we still have in rebuilding the sales organization is within service, where we do have a shortage still of service technicians in several parts of the world. So this also has an impact on the numbers.If we look at the acute care therapies business area, we saw growth in all regions in sales. Asia Pacific reported a highly favorable performance, 14.3% growth, and here cardiopulmonary and cardiac systems stood out positively in the quarter. From a life science perspective, sales declined a total of SEK 12 million organically, mainly as a result of a couple of loss products in Asia Pacific. In EMEA, life science grew due to very high sales of isolators, where -- which is a product category that we have a very strong position in. Surgical workflows, we saw a significant growth in Americas, basically across the whole product line, so that's really positive as well that the good momentum there continues. We had negative development in EMEA from a sales perspective, and this is again as compared to last year's organic growth in the quarter of close to 5%.With that we can move to the margin development in our business area. I'll give you a bit of an overview before I hand over to Lars. As you can see, the EBITA margin is lower year-on-year. The main reason behind this is higher OpEx and the currency effect of SEK 125 million that I mentioned earlier. Within ACT we had lower gross margin, partly due to currency, or mostly due to currency effect. It was partly offset by a more favorable product mix. We had higher expenses, primarily in R&D and quality. So this contributed negatively to the underlying operating profit.We then move to life science. We had higher gross margin due to good product mix, despite some of the negative currency effects. Life science, as well, has increased operating expenses, and this is primarily attributable to sales and admin, where we have some build-up of the sales resources. And it's worth noting also as well that the comparison of operating profit year-on-year was affected by a capital gain reported in other operating income and expenses in the first quarter of last year. So that distorts the comparison a little bit.If we then look at surgical workflows, the gross margin was negatively impacted here as well by currency effects, but also product and market mix. Capital goods grew 9.1% and consumables with [ 3% ]. So that had an impact on our sales. We also in this BA had higher operating expenses, mainly related to R&D and some investment in sales, that also has an impact on operating profit.So that concludes my overview and then I leave over to Lars to take you through the details of the financials.
Thank you, Mattias. And as you have noticed, this quarter the layout of the report has been somewhat reworked. First, life science has been separated out of SW. And secondly, to enhance transparency and make comparison with peers easier, several of the profit levels previously asked for are now shown. We have also decided to adjust for significant items to highlight the underlying performance here. And for these adjustments, you can see then in our report under Note 5 on Page 18.We can then go off to next. So here you have then one of the tables we have introduced to give you the different levels of profitability from adjusted gross profit down to adjusted EPS. And you'll find it on Page 3 in the quarterly report here. And the main items adjusted for are the provision in Brazil this year of SEK 350 million, and last year restructuring spend of SEK 28 million minus.And now I will on the following slides focus on adjusted EBITA, at the profitability level and the development here year-over-year. And then if you look at the adjusted EBITA for the group, it has decreased with SEK 184 million from SEK 485 million to SEK 301 million and the gross profit decreased SEK 22 million, where the impact from the organic growth in sales were fully offset by currency impact. And excluding currency impact, the gross margin improved slightly and here it is supported somewhat from product mix.On OpEx, selling and admin continued to increase somewhat following the investments made during 2017 in the sales and quality organization, which also now continued into the first quarter here of 2018. And the underlying increase in admin is somewhat higher than the SEK 40 million, due to that admin costs in Q1 last year were somewhat higher than usual.When you look at R&D, increased SEK 48 million versus last year, and this was mainly related to higher activity within ACT. So in total, S&A and R&D together increased SEK 101 million or 5.4%. And other operating income and expenses impacted with minus SEK 61 million and this is mainly related to negative currency impact this year and the capital gain last year from the sale of real estate, mentioned early under life science. This resulted in an adjusted EBITA of SEK 301 million, including a currency impact of minus SEK 125 million.If we then look to the same bridge and look at the BA contribution, you can see here ACT, minus SEK 87 million, where the high organic sales were more than offset by currency and higher OpEx and mainly related then to R&D and admin. Then life science, minus SEK 47 million, where decrease was mainly related to the higher OpEx from building up our resources and also then the capital gain from last year. SW, minus SEK 38 million and here the organic sales growth was partly offset by currency, but also somewhat lower margin from market and product mix, which were the main reasons for the lower results on SW.If we then move over to financial position and the free cash flow here, it amounted to minus SEK 1 million, where the low results led to cash flow before working capital of SEK 272 million. And cash flow impact from working capital here was a positive SEK 26 million, where lower receivables were partly offset by increased inventory and reduced accounts payable here. Together with net investments, where R&D is the most significant part, this resulted in the cash flow after net investments of minus SEK 1 million. Here, I would also like to remind you that it's quite difficult to compare with the cash flow for 2017, as this includes the cash flow from Arjo as well.The net debt increased by SEK 287 million in the quarter due to currency, which is a combination -- which in combination with the lower adjusted EBITA take us to a leverage of 3.2 to compared to 3.0, 1 quarter earlier.With that, I hand over to you again Mattias.
Thank you very much. In terms of the outlook for 2018, it's from a top line standpoint it is a good start to the year, but it's also -- it's only 1 quarter, it's the smallest quarter, so we remain unchanged with our guidance -- the outlook for 2018. And there is also a small update when it comes to the currency transaction effects, which are expected to have a negative impact of approximately SEK 150 million. So that concludes the outlook.If I just try to summarize this before we move to the Q&A. The takeaways in real brief here is that we have a stronger focus on our offering and our customers that we've been able to move the internal focus to where it belongs, outsource the market to our customers. It is paying off in strong organic growth. OpEx increased year-on-year and this is entirely related to R&D, to quality, and selling expenses. So the 3 categories that we've talked about several times also last year. We also, from a currency perspective, had significant headwind in the quarter, in total SEK 125 million negative impact on adjusted EBITA.And after that summary, I open up for questions.
[Operator Instructions] And now we'll take our first question from the queue, Annette Lykke from Handelsbanken.
My question is not surprisingly related to the OpEx spending. First of all, could you provide us with some sort of guidance for the full year '18 and how you see development for R&D, frontline, and also Q&A for the remainder of the year? And in this context, please comment on how you see total EPS growth for 2018, will they be in accordance with your guidance of at least 10%, including Brazil, restructuring cost, OpEx increases et cetera? I think it will be really nice to get some sort of hint of guidance in this respect.
As you know, we don't guide other than on the growth and we haven't changed that guidance. I can make some comment on the OpEx development. We are in a very intense period when it comes to the remediation program right now, during this quarter and the next couple of quarters. So this is consuming quite a bit of resources. We also -- I would say that the rebuild of the sales organization is largely complete. We have a couple of geographic areas where there's still some gaps, and we also have a bit of a gap in service in several geographies. So there is a little bit of resources required there still. When it comes to R&D, again, this is a very conscious investment, deliberate investment that we're making in building the company stronger for the long term. So the absolute level has increased. We capitalized about the same amount, but the rest is then on the OpEx line, so this has an impact as well. We've said for quite a while now that we've gone through this phase in 2017. It will continue to -- through 2018. There is a lot of moving parts when it comes to the remediation work. We have a close dialog now with the FDA, but in the end they are the judge of the progress, so is it's very difficult for us to make any meaningful guidance in this regard, unfortunately.
So would you say that the increased OpEx are very much by design from your point and if I'm right in that, do you think it's fair not to communicate that?
Sorry, to not communicate what?
That you actually are looking for a quite steep increase in OpEx?
Yes, we've been clear from the beginning that we are going -- as a company, we are going through a turnaround, that's been clear, I think, obvious for several years now. In addition to this, we've last year been through a spin-off of Arjo, we've had a rights issue, we have the compliance issues in Brazil that have popped up, there's quite a bit of moving parts here. And then that makes it very difficult to give any meaningful guidance on anything except the top line. From an OpEx standpoint, though, I would say that the investments we are making, they are conscious decisions. These are necessary investments to make. We don't want to take any shortcuts in building a stronger company now and this has the impact that you see at the moment. But we're not prepared to give any more detailed guidance on this development. We've just said that 2018 is another year of investment and a bit of turmoil, that's the only thing I can comment very honestly on.
One in respect to your long-term guidance or your targets is also including, I guess, is EPS growth of at least 10%. Are you not willing to comment on that?
No, we don't comment on that. The targets remain, I would say, but we don't comment on this on individual years.
Now we'll take our next question from the queue, Michael Jungling from Morgan Stanley.
I have three questions. Firstly on the gross margin leverage and also on the EBITA margin leverage. I would have thought that at 5% organic growth, you can do a bit more, and if I make adjustments to your sales and also your gross profit for the margin headwind from currency, we still see meaningful declines, especially also on gross margin. Can you please comment on question number one, why there is no gross margin leverage in the business? Secondly, when it comes to organic sales growth of 5% in the quarter, I would like to know whether there's any unusual large tenders which immediately turn to sales in the quarter and whether a 5% organic growth number is sustainable for the rest of the year, given that the comparisons are pretty much, on average, easier than they were in the first quarter? And question number three is on restructuring charges. Good to see that, that there was virtually nothing in the quarter. Can you confirm that we have completed restructuring charges for the remainder of the year and also for the foreseeable future? Thank you.
Right. So I'll take the first here on the gross profit margin leverage. As you mentioned, if we take out currency, the gross profit margin adjusted is flat. And why is there no leverage, it's a good question, I think, absolutely. And we see that we have a product mix in -- with some impacting SW and that is coming through the whole group. And we also have on the ACT side quite a big product mix on the vascular invention that is impacting is, where we have increased competition. So despite this, we are maintaining the margin actually. So -- but otherwise, you are correct in your observation for sure. And when it comes to tenders in the quarter that has materialized as deliveries. I think it's a little bit different on where we are in the business. Life science have very long lead times and when you look at the other parts on SW, and there you have short lead times, so there is for sure, but there is nothing sticking out in this quarter compared to a normal quarter.
No, there's nothing that we're aware that stands out in a significant way when it comes to book and turn orders in the quarter.
On your question there on restructuring charges, when we have smaller restructures, we take it now as a running cost, because that any company has. But when they are bigger ones, we will -- in that case, we will take them, and that we will communicate when they are coming then in that way. So I cannot now sit here and guarantee what will come for the coming -- rest of the year here, but we are working with that continuously as part of our business.
We of course share your view that it's positive, that there is nothing in the first quarter, but the nature of restructuring is also that it tends to come in lumps, it's not evenly spread over the quarters.
And can you please comment on the sustainability of the 5% organic sales growth, given that your comparisons are somewhat easier for the remainder of the year on average?
We don't change our guidance. We remain with the guidance. We said that 2018 is a ramp-up year from a sales perspective. Towards the end of the year, we should be -- at least be pacing in the 2% to 4% window. We've had a good start, a little bit better than maybe some expected, but it's 1 quarter, it's a small quarter. So therefore we don't change our guidance.
Here we can also mention last year we had an organic growth in the first quarter of 2.6% and ended the year of [ 1.3% ]. So we are learning from history here.
Okay. And just a clarification on the restructuring charges. So is there a change perhaps in the way that -- not the way you account, but the way that you record restructuring charges? So are there actually restructuring charges in the EBITA adjusted today, which previously you would have taken out and flagged as a separate item or an adjustment? [indiscernible] if you are changing the way that you are recording --
Yes, you can say we are not changing in that sense, but we are a little bit more restrictive when we look upon this, for sure, to make sure that when there is something there, it should be substantial in that sense. But what we do -- what we are trying to do with the adjusted EBITA is to give you the underlying performance.
And underlying performance includes small changes, here and there, which may previously have been called restructuring, but I think we are not.
What's confusing about that statement, though, is you're saying you're becoming a little bit more and absorbing some of those restructuring costs and perhaps being a little bit more conservative on that. Then in your press release, you specifically state, there was minus 1% of restructuring charges. So it's kind of funny to say we are including more, because then you specifically say SEK 1 million is a restructuring charge, which is a rounding error.
So as we say, it's not material. There is nothing material in this quarter. So there is nothing.
And now we take our next question from Kristofer Liljeberg from Carnegie.
Coming back to the operating costs, I'm really struggling to understand why you don't want to give a better guidance for this, given the extreme uncertainty, so what's the reason really?
The reason is that the biggest part of this is quality remediation-related and it's not really in our hands, the outcome there. It's the FDA who's the judge of this, it's very difficult to make predictions because of this. That's really the main reason.
Okay. So are you surprised yourself by the higher cost in the quarter?
No, I think -- no, we're not really. I mean we've said already last year that we need to invest in quality, in sales and in innovation, R&D and that's what we're continuing to do. I said early, it's an intense period towards the end of last year and also the coming couple of quarters here, when it comes to remediation. So it's just something that we have to go through. We are working though on plans to both mitigate this, but we've said all along that quality will continue to increase in 2018. Maybe towards the end of the year or early 2019, we can start to work more with productivity. But at the moment, we can only plan for that, because it's very much FDA who is the judge. When it comes to other part of OpEx, the stranded cost for example, there we are making progress on some of the actions we talked about the previous quarter. For example, moved some of the resources to shared service centers and so on, and also take out some of the cost entirely that we don't need now, since [ all we ] have left to do. But, overall, I think it's difficult to guide, because so much is dictated by the spend on quality.
Okay. But if you look at this a little bit further ahead to 2019 or so, do you see that there is supposed to be a little -- to start taking out the significant amount of cost. So will the margin improvement that you need to reach the EPS growth guidance eventually, will that come more from leverage effect, so that you grow top line faster than operating cost?
I think, what we've said is that OpEx as a percentage of sales, we need to be able to work this down over time. If you're asking for a large restructuring program, the answer is no. There's nothing like that in the plan. We have deliberately decided to work much more with continuous improvement rather than big disruptive changes. Part of it is growing faster than spending and part of it is working with efficiency.
And then on -- I think you mentioned that you had started to do more code of conduct training following what's happening in Brazil. So how concerned should we be about this for the overall company? Is it an area where there have been under-investments previously, is it material what we have seen on the quality side, for example?
I mean, I've no reason to speculate. We don't know anything more than what's going in -- on in Brazil, but it is for sure an area where we've both updated the code of conduct as such, but also primarily invested in training, which wasn't done the way it needed to before, maybe. So this is also -- it has some impact on OpEx, it's not as significant as the 3 other items I mentioned, but it's there for sure.
But you have had code of conduct programs before I believe, right?
Yes. I mean getting -- we've had a code of conduct for quite a while, but having a code of conduct is one thing and making sure that people are properly trained and they understand and live by and enforcing this is another step that you cannot neglect, and that's what we're trying to do really thoroughly now.
Now we'll take our next question from the queue, Hans Mahler from Nordea.
I have a few questions as well. First on the situation in Brazil. Can you tell us how far in the process you are in terms of percentage, so we know sort of the risk for additional provisions going forward before the process end? And also you mentioned a new regulation in Europe that you have additional costs for that. Can you quantify those costs and how long they will be there, will they disappear in 2019? And then also just more of a clarification. On life science, when you show the adjusted EBITA for last year, did you include or adjust for the capital gain?
Okay. I can start with the Brazil bit then. Unfortunately, we cannot give you any guidance, and this has been quite -- it's been a process that's been difficult to predict time-wise and so on. We've come quite far in this we believe. That's also why we made the accrual in the first quarter. We are firmly convinced that we will be through this by the end of 2018, but I can't be more specific than that at the moment. Mostly -- there was something else related to Brazil, or was it only life science?
On the Brazil, maybe you can sort of quantify how many of the years historically you've been through, I guess, you know roughly where the review is currently or...
The review covers 2004 to 2015. It's more that there are different authorities involved in this that kind of dictates the time schedule, not the years as such.
I think most of the investigations are done, it's more a question of no negotiation with the different authorities. So that's where we are discussing. You had a question on life science, and no, we did not put it into adjustments, because it's always tricky what should be in and out, and we decided that it's not material for the group, so, therefore, it's not adjusted for. But I would -- I wanted to highlight this as a deviation, therefore, life science as a smaller segment, therefore it sticks out.
And the other question I had was regarding the cost for the new regulation in Europe. How long it could last and if you can be specific on the amount?
No, we can't be specific on the amount. If you look at some kind of industry average or benchmark, it's been between 3% and 10%. But we cannot be more specific than this either. I don't want to forget, though, the positive side-effect of this. This makes it necessary to go through a portfolio rationalization, which is really helping in the end, but the whole Medical Device Regulation for EU is a process of 5 to 7 years. So it will be smeared out over that period of time and therefore difficult to give any meaningful annual guidance on that.
And now we take our next question from the queue, David Adlington from JPMorgan.
First I just wanted to clarify your last statement about the Medical Device Regulation, you have the 3% to 10% number, is that a percentage of sales, just to clarify?
Yes, it is.
And that's percentage of group sales or European sales?
Right, it's the -- I guess, yes, the European sales -- European part of the sales, the portfolio that's all in Europe.
Okay, perfect. And then just a couple of questions on the balance sheet. So you saw a big reduction in inventories and accounts receivable year-on-year and accounts receivable since the year-end. I just wonder what your -- if you could give us some sense or further color around that. And also your cash flow in the first quarter was probably a bit below what you were going for and as a result your net debt fell to 3.2x historic EBITA. I just want to have [indiscernible] on that sort of leverage given your trajectory on EBITA?
If you look at the balance sheet, you must remember that last year it was including Arjo. So we have used this way IFRS 5 reporting where you then -- you do the spin-off in the historical numbers on the P&L, but not the balance sheet. Of course, it's not possible. So therefore, it's a little bit tricky to compare with last year. As a general comment, a big -- on the working capital items, a big difference between 2017 March and now is the [ larger thing ] related to the Arjo spin-off, if we make it very simplified. So -- but what's happened since, during the quarter here, you can see we have a high revenue or sales during the fourth quarter and that is then coming back now as reduced receivables, and the similar event on the inventories building up somewhat after the sales was conducted in the fourth quarter, and similar then impacting our accounts payable being paid off. So that is a more normal swings that we have in the business. let's say. Having said that, are we happy with the development? No. This is -- we are doing a lot of work setting up the processes connected to distribution, warehouses, where do we have the stock, et cetera. And that is the work we are conducting during this year and bringing more and more of our stocks into our distribution centers, et cetera, to be more rational in handling our stock. And that will support us in many ways, of course, not only from a cash flow perspective. Any more questions that you had David?
Just really on your thoughts around the current indebtedness and the thoughts from here?
Yes, yes. Of course we had quite an impact. If you look at too early from the P&L and the Brazilian provision here, that impacted net debt quite a lot. And then we have dividend coming up, and then we want to pay the fine when it comes as well, and we are agreed on that. So there will be impact on net debt going forward here. But of course, we will also have a resulting cash flow coming from the ordinary business, operating cash flow. So -- but I will not guide you [indiscernible] I will guide you also on the result of course. So -- but no big swings is expected. But, of course, we have a normally better cash flow generation at the end of the year -- the second half of the year.
And now we take our next question from the queue, Patrik Ling from DNB.
Just a clarification also about Brazil. When I look at charges that you've taken, the SEK 419 million, are those related to the fines that you expect to pay, or are they also including legal costs for the process? And secondly, when you say in the report that the outcome might become more material than what you have charged for, are you thinking about higher fines or you're thinking about something that could more long-term or even permanently impact your sales opportunities in Brazil?
Yes, the accruals that we made, they relate to 2 fines. That's the main part of it. And when we say that it's not completed, it means just that the -- there are multiple authorities involved and negotiations are not finished, so there could be additional fines. We don't know this yet, but there could be. We don't see any other negative impacts from this at the moment. We are not expecting to be excluded from tenders or anything like that in the future.
Okay, great. Then a second question, you talked about your operating cost and that you're in a very intense period in the remediation program. And could you just elaborate a little bit on the cost that you've seen. I mean, normally, a lot of the costs are taking against the provisions that you have. So the cost it actually impacts your P&L this quarter. Are these costs that we should assume stays with you going forward?
Depends on what you mean with the time period of forward. The way the approval works is that we only charge the external costs that we have for remediation against the accrual. Internal resources for this you see it directly in the OpEx, both under administration, but also part of R&D is actually remediation, because they have R&D resources working on remediation. So that's the summary, I guess.
[indiscernible] Now we are handling the FDA issue, which is of course a big part, but it's also about building up the quality system that is group-wide and that is also, of course, creating some costs connected to that for sure, impacting both our cost of goods sold, admin and R&D. So that is where we are, but we are well performing in this development and we feel when that is done, we can actually reap quite some good benefits coming out of that in many dimensions.
If you look at -- I mean years ahead from now, once this is in place, this should be more productive than the quality system setup that we've had, but it's obviously a bit of a tedious and drawn out process to go through. But we're really comfortable with the longer-term plans in this regard.
Now we take our next question from the queue, Annette Lykke need a follow-up, from Handelsbanken.
My question is related to the intense remediation program, where you say you are into a more intense period. Could you elaborate on that? Is that because you are coming to what's an intense remediation program, or is it because of something is not going as you have planned for? So what is the reason for sort of the beefing up cost in this respect?
No. I mean there's nothing that's not going according to plan. If you ask for our own internal view on this, we feel that we've made good progress, because we have decided to focus on this and that focus is what creates an intense period. But again, in terms of judging the time plan and when we've passed certain milestones, I will have to leave that to the -- that's a dialog we have with the FDA, it is not something I can talk about externally.
And now we'll take our next question from the queue, Oliver Reinberg from Kepler.
Also on OpEx, I mean, I probably understand that you mean the FDA part of that is difficult to plan, but part of the increase on the OpEx is also down to setting expenditure in R&D. I think you mentioned in the past that you expect roughly SEK 100 million in terms of cost overlay, 2018 versus 2017. So is that still a number we can work with or are the other non-FDA related costs probably also chunking up a bit here? Secondly, on the stent competition you highlight in the U.S., can you give us a bit more clarity when this has started and how much of a headwind is that, are we talking more than SEK 50 million to SEK 100 million in terms of sales that you're missing here? And finally in terms of the mix effect between cap growth and consumables, is that just a first quarter effect, or do you expect this to continue in the following quarters? Thanks.
Thanks Oliver. Can you just clarify the first question, I didn't understand the SEK 100 million overlay that you talked about there?
I mean, the way I understand it, I think when you had this kind of debate following the kind of spin-off, we had a discussion on OpEx, and I think as part of that you mentioned, be aware, in the first half 2018 we have the effect from ramping-up cost and you should probably think about a magnitude of SEK 100 million in terms of increased cost year-on-year. That's what I had in mind, maybe I'm wrong.
Yes, I can't really remember that conversation if we had, I had to admit. So that's something we would have to follow up with you separately, I think.
But if you look at the cost, what we are saying then, non-FDA, then what we mention here is that we are working on positive development on the selling and there are some pockets, as we mentioned, that we were still investing in, in some markets, et cetera and also on the service side there. And on the service side, it is normally revenue generating costs, so to say, people directly when it comes to mechanics, et cetera and service staff. When it comes to the question you had on the mix between capital goods and services, if that is continuing. We can say we had somewhat of a -- little bit weaker service quarter than we -- we would expect it to be a bit better. But this mix, depends on the deliveries on the different projects that we have, that gives some -- a bit of a spike in the capital side. So it can vary between the quarters here. But on the service side, we are -- it's one of our focus areas, for sure, and we are missing some service technicians that can support us drive the growth on services. But there is more to do.
But there's nothing systematic underlying, I think [indiscernible] it's more of a normal quarterly fluctuation than anything else. And when it comes to the covered stents bit, the impact from that last year started in the second quarter. So Q1 was still largely unaffected by the decline that we saw in the rest of the year.
So you said it started in Q2 last year?
Yes.
Okay. And then just coming once back on the OpEx, when do you expect actually to reach a peak here, or should we actually be concerned that if we compare 2019 with 2018 that we still have then a kind of spillover effect, because you did not have the kind of full cost load in the first half 2018, just [indiscernible].
Yes, the only guidance that we want to give is that 2018 is still a year with a lot of moving parts and an intense year with remediation and so on. So we will need to continue to invest through 2018 and from then on we should be able to work more with productivity. But we'll don't give any detail guidance on what this means in absolute numbers.
Now we'll take our next person from the queue with Sten Gustafsson from ABG Investment.
Just a clarification on -- coming back to the balance sheet, you said something about the historical balance sheet included Arjo. But I assume that is not for the December 31 balance sheet, is that correct?
That is correct.
So from December 31, we have seen a drop in the receivables of around SEK 1 billion. At the same time you had 5% -- roughly 5% organic sales growth. Shouldn't we see receivables going up when you have positive organic growth?
Yes, rolling, yes, but you should -- you must remember that the fourth quarter is a very high share of our total sales. So we have much more revenues and invoicing being conducted during the fourth quarter compared to the first quarter.
Okay, so there is nothing else going on here? And should we expect receivables then to go back up again or...
That's the normal fluctuation, continues with the sales, so that should -- there is nothing -- we are not doing anything fishy here, settling something [indiscernible] it's normal fluctuation.
So we can expect that to revert later in the year then?
It follows a bit the normal fluctuation connected to the sales of the quarters, I would say. So there is no big -- we have a different -- we are -- it's a little bit different in different geographies where we are selling. So we are impacted quite a bit in the first quarter by the sales that we have conducted in Japan, where payments are being done. So there is -- but it's more normal situation. If you compare with last year when Arjo was in, they had a different revenue stream with a lot of this rent revenue. So that is a bit different from what we have seen historically in Japan.
But do you, -- in summary then, do you think the changes in working capital will contribute positively or negatively to your cash flow for the full year, '18 versus '17?
Of course, when you have increasing revenues that is working against you, normally, of course. But as I have mentioned, I'm not happy with the absolute level of our working capital, so it's really about working -- collecting our receivables more efficiently and also to handle our logistics and warehouse system more efficiently. And therefore drive down the days [ of sold ] inventories. So that is -- it's not an easy task, but it will give a lot of benefit. So that -- taken those 2 together, then we will see where we land in the year, of course, but that's my full intention to driver this.
And ladies and gentlemen, with that we conclude today's question and answer session. I would now like to hand the call back to our speakers for any additional or closing remarks.
Thank you very much. Not so much to add from our side here. Just a summary that we talked about in the beginning. So a good quarter from a growth standpoint, both when it comes to order intake and to net sales. And on the other side of the coin, we're working through the challenges that are well known by now. They remain with us since 2017, will continue during 2018. We are largely following our own plans when it comes to this. So that's the summary. And no change to the outlook. We remain with the guidance that we gave when it comes to top line development for 2018, and also the currency impact that we mentioned in the call.Thank you very much for attending today.
Thank you. Ladies and gentlemen, with that we conclude today's Getinge Q1 report 2018 conference call. Thank you all for your participation, you may now disconnect.