Getinge AB

STO:GETI B

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Getinge Q2 Report 2024. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Mattias Perjos; and CFO, Agneta Palmer. Please go ahead.

[Mattias Perjos, executive]

Thank you very much. Thanks for joining today's conference. With me, I have our CFO, Agneta Palmer, who will present the financials in a moment.

So let's get started, we can move directly over to Page #2, please. Let's start by looking at some of the highlights and key takeaways from the second quarter of 2024. Net sales increased by 15.7% in the second quarter, and the organic growth part of this was 8.9%. Order intake for Getinge increased by 14.4% and the organic part here was 7.8%, thanks to positive development in all our 3 business areas. Adjusted gross margins improved in all business areas and the adjusted EBITDA margin for the group improved 4.9 percentage points year-on-year. This is mainly coming from the weak comp from last year, plus healthy growth, mix and price, mitigating the negative effects from inflation that we still see. These are effects that we continuously address through productivity improvements and structural changes when and where needed. All in all, this contributes to a solid financial position that enables investments in profitable growth also going forward.

We can then move over to Page #3, please. So let's take a look at some of the key activities that will drive future growth and profitability. So when it comes to our offering and customers, I'd like to mention that in the quarter, we launched Poladus 150. It's an advanced low-temperature sterilizer that meets an important need for our customers. From a regulatory perspective, we received 510(k) clearance for our advanced clinical guidance, digital offering, which enables digital clinical decision support. And we also had an EU MDR approval for our covered stent system Advanta V12.

Within Life Science, the GEW 888 neo washer was launched, which contributes to increased efficiency in the clean room, and it also reduces water consumption by 20%. And in addition to this, we had a new version of our DPTE-BetaBag launched, and this is a version that is made from a larger portion of renewable materials. In the quarter as well, on the May 15, we had a Capital Market update, presenting an updated adjusted earnings per share target of an average growth of over 12% in the years 2024 through 2028.

When it comes to sustainability and quality, the quality improvement work linked to the balloon pump Cardiosave and the ECLS system, Cardiohelp we have, as previously communicated, post-active promotion in the U.S. of these products, but we are still able to sell and deliver if our customers see no good alternative.

We are in close dialogue with customers and authorities, but it's too early to single out any specific trend in sales when it comes to this. In the quarter, we also submitted an application for CE marking of the new packaging for the ECMO therapy consumables, HLS and PLS sets.

We can then move over to Page #4, please. So as I mentioned earlier, the order intake grew by 14.4%, were up 7.8% organically and net sales increased by 15.7%, were up 8.9% organically. Organic order intake grew strongly in EMEA and Asia Pacific, and the decline in organic order intake in Americas is mainly due to a softer quarter for Life Science and for Surgical Workflows. All regions grew net sales organically in the quarter, mainly driven by an improvement in Acute Care Therapies compared with the challenging Q2 of last year.

We can then move over to Page 5, please. So all this combined takes us to the outlook where we reiterate our previous guidance for 2024 that we expect organic net sales growth to be 2% to 5%. And in addition to this, we expect recent acquisitions to contribute with 3 to 5 percentage points of growth. And this is unchanged.

We can move to Page #6, please. And we'll take a closer look into the order intake of the second quarter. So for business area, in Acute Care Therapies, we had 8% organic growth. This increase is mostly driven by critical care, cardiopulmonary and cardiac surgery. Life Science had an 18.4% organic growth, and this was after a strong quarter in sterile transfer. And the development in bioprocessing was still weak, as you've seen in earlier quarters as well. In Surgical Workflows, the growth was 3.4% organically and increase in all product categories, except for digital health solutions. So in summary, for the group, this means 7.8% organic order intake growth, and in actuals, 14.4%.

We can then move to Page #7, please. And then from a sales perspective, Acute Care Therapies organic net sales increased sharply following higher sales of consumables in both Cardiopulmonary and Cardiac Assist compared to the difficult Q2 last year. Life Science organic net sales decreased by 13.1% in the quarter, mainly due to washer-disinfectors, sterilizer and sterile transfer. However, sales from High Purity New England in the quarter makes up for almost all of this.

When it comes to Surgical Workflows, organic net sales decreased slightly, mainly due to lower sales in infection control. The acquisition of Healthmark contributes -- continues to contribute to growth in a material way. Overall, for the group acquisitions contributed to an increase in net sales of SEK 499 million in the quarter. Currency had a minus SEK 5 million impact on net sales for the group in the quarter. And when it comes to revenue from consumables, this was strong in the quarter, contributing to high growth in recurring revenue.

Let's then move over to Page #8. And if we take a closer look at the gross margin and gross profit, gross profit increased by SEK 837 million to SEK 4.151 billion in the quarter, were FX effects impacted by plus SEK 35 million. All business areas improved their adjusted gross margin, leading to a 3.8 percentage point increase for the group versus last year's low comps. Mix price absorption and FX had a positive impact, while cost inflation still eats its way into the margin, and this is something we continue to address.

For Acute Care Therapies, the adjusted gross margin improved by 3.6 percentage points, mainly due to increased sales, the product mix inside the business area and currency. This was partly offset by higher cost for input goods, employees and ongoing quality improvement efforts with regards to Cardiac Assist and to Cardiopulmonary.

For Life Science, the adjusted gross margin increased by 2.8 percentage points as a result of favorable mix, price improvements and currency. And this was partly offset by lower volumes and lower absorption. In Surgical Workflows, the adjusted gross margin increased by 2.8 percentage points, mainly as a result of acquisitions and price increase.

And with that, we'll move over to Page #9, and I hand over to you, Agneta.

[Agneta Palmer, executive]

Okay. Thank you, Mattias. Let's have a look at adjusted EBITDA, which improved by SEK 486 million, and the margin came in 4.9 percentage points higher than last year. Adjusted gross profit had a positive effect on the margin by 3.3 percentage points due to those factors that were just mentioned by Mattias. So volume, mix, price, favorable absorption, partly offset by inflationary effects. OpEx adjusted for currency had a positive impact of 1 percentage point on the margin in the quarter, coming from operating leverage and positive contribution from acquisitions.

Depreciation and amortization, adjusted currency had a positive effect of 0.5 percentage points on the margin. And finally, FX had a slightly positive impact on the margin. So all in all, this resulted in an adjusted EBITDA of SEK 981 million and a margin of 11.8%.

Over to Page 10, please. Free cash flow amounted to SEK 0.3 billion roughly. Higher operating profit had a positive effect, while higher level of working capital impacted negatively. And higher working capital is, to a large extent, related to seasonally higher levels of receivables and inventory. Even so, working capital days continue to be well below 100, we are now at 91.6 days. We remain below trend on operating return on invested capital with 11.1% on a rolling 12-month basis, which is still above the cost of capital.

Let's move to Page 11. The change in net debt year-over-year is due to the acquisitions that were finalized in the fourth quarter of 2023, taking us to SEK 9 billion in net debt at the end of this quarter. If we adjust for pension liabilities, we are at SEK 6.3 billion. This brings us to a leverage of 1.5x EBITDA. And if we adjust for pension liabilities, the leverage is at 1.1x EBITDA. Cash amounted to approximately SEK 2.3 billion at the end of the quarter. So all in all, we can conclude that the financial position continues to be strong.

Let's then move to Page 13, please, and back to you, Mattias.

[Mattias Perjos, executive]

Okay. Thanks, Agneta. Let me just briefly summarize Q2. We continue to grow orders and net sales, and we've also launched a large number of value-adding products in the quarter, which I think is particularly encouraging. We reiterate our guidance for the full year, 2% to 5% organic net sales growth. And in addition, we expect recent acquisitions to contribute with 3 to 5 percentage points of growth.

The adjusted EBITDA margin came in 4.9 percentage points higher than last year, thanks to healthy growth, mix and price, mitigating the negative effects from inflation, which we continue to address through productivity improvements and structural changes as needed. All in all, this contributes to a solid financial position that enables continued investments in profitable growth we're getting in. The current priorities for us are really about addressing remaining quality-related challenges in Acute Care Therapies. It is to work with sustainable productivity improvements, and it is to continue creating added value for our customers.

So with that summary, I open up for questions. So we can move to the Q&A part of this call, please.

[Operator]

[Operator Instructions] The next question comes from Erik Cassel from Danske Bank.

[Erik Cassel, analyst]

Congrats on good results. First, I'd like to ask about the short-term trend you're seeing in the customer loss within ECMO, balloon pumps. If such a transition happens, my indication is that customers make that decision relatively fast. I mean if you see a real risk, you act on it basically. That's the way it's been. But why should it be different to you? Why can't you really say anything about that now?

[Mattias Perjos, executive]

Yes. Thanks, Erik. I mean it's definitely one theory. It's just difficult to predict. Some of the customers we expect will take a little bit longer to evaluate why they should change if they should change at all. So we just humble that really. But I'm sure you have a point, but I think it is a little bit too early to predict. And we don't see any customer loss effects in either of the product categories at the moment.

[Erik Cassel, analyst]

Okay. And then I just wanted to ask how much of restocking and pull forward effect do you think there is in ECMO and balloon pumps right now in this quarter?

[Mattias Perjos, executive]

We can't really measure that, and I don't see why there should be a pull-forward restocking effect at all actually.

[Erik Cassel, analyst]

All right. Perfect. Then last one, you talked about strength in Critical Care in order intake. Are you seeing some sort of trend shift or a big market share gain post the Philips exit in the U.S?

[Mattias Perjos, executive]

It's too early to say. And we -- like we said before, we think this is going to be favorable for us, but the strength right now, it's a little bit too early, just 1 data point here. So I will wait a quarter or 2 before making any conclusions on this.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

First one, at the Capital Markets update in May, you mentioned having cleared 90% of FDA's quality record backlog. Where are you now? And do you think you can complete the remaining issues or outstanding tasks before year-end? That's the first one.

[Mattias Perjos, executive]

Yes. Yes, I think the update here is that we've made continued progress. We are, I mean, closer to around 95% now, I'd say, and we are confident that we should have worked this through before the end of the year.

[Rickard Anderkrans, analyst]

Very clear. I also noticed that there seems to be a bit of pace step-up in extraordinary quality costs in the quarter, I guess, somewhere around SEK 200 million compared to SEK 100-plus million in Q1. So how should we think about H2? And how confident do you feel about the visibility of these costs, any swing factors we should think about?

[Agneta Palmer, executive]

Yes. Firstly, correctly noticed that this is a step up in the second quarter, but we expect in the second half of the year to sort of normalize, we'll go back to quarter 1 level. So roughly SEK 200 million in this quarter and then some SEK 100 million per quarter the rest of the year coming in, actually, for the full year in the range of SEK 0.5 billion.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

My first one would be, if you could share a few more words on APAC. I mean growing orders, 17% organic, quite strong in all segments. So maybe a few general words and maybe also what is happening around ECMO in China, please? That's the first one.

[Mattias Perjos, executive]

Yes. Thanks for the question. I think we've had some good traction when it comes to Surgical Workflows and larger projects in Asia Pacific. I think that's the only thing I really want to single out. There's nothing else that kind of stands out. We are overall positive about the market opportunities in Asia Pacific going forward, including China. I think if you look at the demand for health care is expected to be continued to be strong, and we have, in general, good market positions in China as well. But there's nothing in the quarter that would single out particularly here.

[Mattias Vadsten, analyst]

Okay. Good. And ECMO is more or less business as usual in that region -- in China?

[Mattias Perjos, executive]

Yes, it depends on what you mean with business as usual. But yes, I guess that's a way of expressing it.

[Mattias Vadsten, analyst]

Okay, good. And then I think quite strong contribution from acquisitions as it looks at least here in the quarter. Any special movements that we should be aware of here? Or if is it just good performance. And then if you could comment on the margin profile for both acquired companies as well in this quarter.

[Mattias Perjos, executive]

Yes. I think it's great to see the contribution from both Healthmark and from High Purity New England. So strong growth from both of them and trading a little bit better than we expected when we acquired them. But again, nothing -- I mean, they are strong companies. I mean, Healthmark is obviously a much more mature, more established company with many more customers. High Purity New England is reliant on fewer customers but doing really well with those right now. So overall, good solid development since we acquired them last year. So it's more or less 3 quarters under our belt now and encouraging performance thus far.

[Mattias Vadsten, analyst]

Okay. And then the last one for me. Full year margin expectations, I think you stand up from 12.7% here [indiscernible] rolling 12. If you could share any thoughts on whether you are set to expand margins in the second half to move this up a little bit further for the full year? That's my last one.

[Agneta Palmer, executive]

So we don't give guidance on the margin for the full year. We have activities to address the cost base. That is what we can share. And we are, as you know, very exposed to the product mix that we see, which is in the second quarter, highly positive, but that is different factually [ profile ] at the second half of the year, as you are well aware. That is how I can comment on the margin.

[Operator]

The next question comes from Oliver Reinberg from Kepler Cheuvreux.

[Oliver Reinberg, analyst]

I mean I want to come back on the first question on the strong performance in ACT. And obviously, you called out the kind of large contribution from ECMO and [indiscernible] Cardiac Assist. I'm just wondering is there any kind of color in terms of -- is there any kind of unusual support in there? I mean you talked about that there's no pull-forward effect in [indiscernible] one can imagine that some clients order quickly before there's any kind of potential restrictions from the kind of legal department. But can you just talk around that factor? And also, has there been a kind of a major improvement in the order backlog that you had for Cardiac Assist, that will be question number one, please.

[Mattias Perjos, executive]

Yes. No, as I said on the first question here, I think that is one theory, but it's not something that we are aware of. I think the only thing that has changed is that we've had difficulty to supply in parts of the offering for Cardiopulmonary. And we've been able to improve the capacity and the supply situation there. So that's a positive. And I think we will be able to sustainably serve our customers better with this. But whether there is a pull-forward effect because our customers expect some restrictions going forward, we have no evidence of that at all. I mean if we saw that we would be informed about it, but we don't see that right now.

[Oliver Reinberg, analyst]

Okay. And I guess on Cardiac Assist, the kind of order backlog in the Q1 call, you talked about that this is the kind of a couple of months. Can you just give any kind of color how significant this order backlog it is for fund space?

[Mattias Perjos, executive]

Yes. We have still quite a number of balloon pumps that are waiting to be shipped. We have small decrease month by month, quarter by quarter, but still quite a few pumps to ship. But no material change. I think it's more steps in the right direction, but no material change from previous quarters.

[Oliver Reinberg, analyst]

Okay. And second question would just be on the orders in ACT Europe. You've actually looked quite strong. I think you had 18% growth in the second quarter, 12% in the first half. I guess there was obviously some kind of support from undermining pumps. But also that you still have kind of CE mark issue for Cardiac Assist. Can you just provide any kind of color what was driving these orders in Europe for ACT, please?

[Agneta Palmer, executive]

We can say that what you mentioned, we had, of course, an effect last year also on the order intake in quarter 2 where we had different limitations to our ability to deliver. So that impacted. We also have now with the distribution agreement that we have processed. We have a slightly different ordering pattern. Bulk orders rather than recurring orders for that product type. But overall, we see good activity with our customers in the market, and that is what we also see in the order intake.

[Oliver Reinberg, analyst]

Okay. Perfect. And last question for me. Just in Life Science, I think you talked about a better demand in terms of orders for sterile transfer. I mean do you see this as a kind of turning point? And any additional color you can provide on bioprocess, please?

[Mattias Perjos, executive]

Yes. I think when it comes to sterile transfer, it's encouraging to see the better book-to-bill ratio now. So hopefully, this is now very near the end of the destocking that's been going on for quite some time. Again, we're humble about this being one data point, but I think it looks more promising. We have from our biggest existing customers, better order intake and also from our new customers for sterile transfer, we have also strength in order intake. So a good step in the right direction here for sure. And bioprocessing, it's -- it seems in most parts of the world have bottomed out, while China still is difficult for us.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Three questions. First, coming back to the previous one on Life Science. Now you have had 4 consecutive quarters with order growth. When do you expect this business segment to start grew again. Then I just wonder about the new packaging approval for ECMO in Europe or CEE regions? The timing for that and if you have any dialogue here around that? And then I wonder about when you had the Capital Markets Update early this spring, you talked about more flattish margin development I think for this year, maybe also in 2025. At the same time now, we have seen a positive start to the year. I think you said quality issue effect on earnings to be SEK 500 million, down from SEK 800 million last year, and you say that you still see no impact on customer behavior after the FDA letter. So is that comment is still relevant, flat margin this year versus last year?

[Mattias Perjos, executive]

Well, if we start with the Life Science growth, then it is, I think, encouraging to see the order intake continuing to be stronger. Sales is weaker now because we have deliveries dictated by customers more weighted towards the second half of this year. So we do expect the situation when it comes to sales to gradually improve also for Life Science. But why don't you keep in mind that these are large projects, rather long sales cycles, and our deliveries depend also on other suppliers and the overall project that the customers are running. So we're sometimes at the mercy of other people's plans in this part of the -- on the business.

When it comes to the newer packaging, we have submitted applications for both HLS and PLS. We have a good dialogue with the notified body on this. But it's not in our hands to decide when this decision will happen. So it's a good dialogue, but I can't predict the -- any date for reinstating the CE marks. When it comes to the Capital Markets Update guidance, I'll just refer to what Agneta said earlier that we don't guide on this. It looks maybe a little bit more positive after this quarter, but it's too early to say. And we remain humble when it comes to the potential impact of the FDA letter to health care providers during the second half of the year. One theory is what's been stated by some of you here on the call that we should see a quick effect of this. That may or may not be true. So we will just need to continue to evaluate this. And we've factored in our base scenario, so to speak, in the guidance that we have for growth and what we stated at the Capital Markets Update. So I really cannot give any further color today on this.

[Kristofer Liljeberg-Svensson, analyst]

And just a follow-up on Life Science. What you expect that business to grow again in the second half of the year?

[Mattias Perjos, executive]

I didn't say exactly that. I said that we expect a better momentum sales wise because deliveries are more weighted now or phased into the second half of the year. But we don't give individual [ BA ] guidance here. So Life Science sales is factored into the 2% to 5% growth that we have for the group.

[Operator]

The next question comes from David Adlington from JPMorgan.

[David Adlington, analyst]

I just wanted to focus again on ACT. So I mean, the growth you've posted this quarter is the third best both for quarter for ACT, I think in your history, only beaten by Q3 and Q4 in 2020 where you had some fairly obvious tailwinds from COVID. I suppose really, I'm trying to understand why in a normalized environment, why this has been your best ever growth quarter in ACT. It's not really very clear to me what's been the real growth driver here. And then secondly, I just wondered why you did highlight Q2 was going to be so strong, given that you had a Capital Markets event halfway through the quarter, there's no indication that Q2 was going to be so strong, I just wondered if they had anything changed post the Capital Markets Day.

[Mattias Perjos, executive]

When it comes to ACT, I mean the largest explanatory factor is obviously the weak comp from Q2 last year, where we had a lot of challenges in both Cardiopulmonary and Cardiac Assist. So there's a comp difference effect here that is significant. Combined with this, we have, like I said on one of the earlier questions here that we've been able to improve supply. We've had many customers on allocation for a long time when it comes to ECMO therapy products. So that is a positive change as well, which is sometimes difficult to predict the timing of. So that's kind of the biggest explanatory factor. Then we have strong performance when it comes to critical care as well. It remains to be seen whether this is an effect that we can count on also going forward. I think it's a little bit too early to pass verdict on that.

[David Adlington, analyst]

Can I just come back on a couple of things. Firstly, the comp was only down 5% last year. So yes, it's easy, but not -- doesn't really explain more than 20% growth this quarter in itself. And then secondly, just with respect to that comment around why not highlight Q2 was going to be a strong quarter on the Capital Market event?

[Mattias Perjos, executive]

Well, we never intended to talk about individual quarters during the Capital Markets update. And even if it's a strong quarter relative to last year, we don't see this as a particularly strong quarter. This is not a performance that we're happy with. I think that's important to underline.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Mattias Perjos, executive]

All right. Thank you very much. I think we've already summarized the second quarter of 2024, and I appreciate everyone taking the time to listen in today. So I think with that, we'll close, and I wish you a good rest of the day. Thank you very much.

[Agneta Palmer, executive]

Thanks, everyone.