Getinge AB (OTCPK:GNGBF) Q2 2024 Earnings Conference Call July 18, 2024 4:00 AM ET
Company Participants
Mattias Perjos – President and Chief Executive Officer
Agneta Palmer – Chief Financial Officer
Conference Call Participants
Erik Cassel – Danske Bank
Rickard Anderkrans – Handelsbanken
Mattias Vadsten – SEB
Oliver Reinberg – Kepler Cheuvreux
Kristofer Liljeberg – Carnegie
David Adlington – JPMorgan
Operator
Welcome to the Getinge Q2 Report 2024. For the first part of the conference call, the participants will be in listen-only mode. [Operator Instructions]
Now I will hand the conference over to the speaker CEO, Mattias Perjos; and CFO, Agneta Palmer. Please go ahead.
Mattias Perjos
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, but let’s get started. We can move directly over to page number two, please, and 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 three 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 a 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 number three, 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 offerings, which enables digital clinical decision support, and we also had EU MDR approval for our covered stents system Advanta V12.
Within Life Science, the GEW 888 neo washer was launched, which contributes to increased efficiency in the cleanroom 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 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 US 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 is 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 a new packaging for the ECMO therapy consumables, HLS and PLS sets.
We can then move over to page number four, 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 five, 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 three percentage points to five percentage points of growth. And this is unchanged.
We can move to page number six, please. And we’ll take a closer look to the — into the order intake of the second quarter. So per 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 increased 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 number seven, please. 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 SEK499 million in the quarter. Currency had a minus SEK5 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 move over to page number eight. And if we take a closer look at the gross margin and gross profit, gross profit increased by SEK837 million to SEK4,151 million in the quarter, where FX effects impacted by plus SEK35 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. Mixed 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 costs 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 low absorption. In Surgical Workflows, the adjusted gross margin increased by 2.8 percentage points mainly as a result of acquisitions and price increases.
And with that we’ll move over to page number nine, and I hand over to you Agneta.
Agneta Palmer
Okay. Thank you, Mattias. Let’s have a look at adjusted EBITDA which improved by SEK486 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 then by inflationary effects.
OpEx, adjusted for currency had a positive impact of one 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 SEK981 million and a margin of 11.8%.
Over to page 10, please. Free cash flow amounted to SEK0.3 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 though 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 SEK9 billion in net debt at the end of this quarter. If we adjust for pension liabilities, we are at SEK6.3 billion.
This brings us to a leverage of 1.5 times EBITDA. If we adjust for pension liabilities, the leverage is at 1.1 times EBITDA. Cash amounted to approximately SEK2.3 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
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 the recent acquisitions to contribute with three percentage points to five 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 for Getinge.
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.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Erik Cassel from Danske Bank. Please go ahead.
Erik Cassel
Hi. Good morning and congrats on good results. First, I’d like to ask about the short-term trend you’re seeing in customer loss within ECMO balloon pumps. If a transition happens, my indication is whether 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
Yeah. 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’re just humble about 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
Okay, thank you. Thank you. And then I just wanted to ask, how much of a stocking and pull forward effect do you think there is in ECMO and balloon pumps right now in this quarter?
Mattias Perjos
We can’t really measure that and I don’t see why there should be a pull-forward or stocking effect at all, actually.
Erik Cassel
All right. Perfect. Thank you. Then last one, you talk about strength in critical care in order intake. Are you seeing some sort of trend shift or market — big market share gain post the Philips exit in the US?
Mattias Perjos
It’s too early to say. 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 one data point here. So I would wait a quarter or two before making any conclusions on this.
Erik Cassel
All right. Thank you very much. I’ll jump back in the queue.
Mattias Perjos
Thank you.
Operator
The next question comes from Rickard Anderkrans from Handelsbanken. Please go ahead.
Rickard Anderkrans
Good morning and thank you for taking my questions. 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. Thank you.
Mattias Perjos
Yeah. Yeah, 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
Very clear. Thank you. I also noticed that there seemed to be a bit of a step up in extraordinary quality costs in the quarter. I guess somewhere around SEK200 million compared to SEK100 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
Yeah. 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, will go back to quarter one level. So roughly SEK200 million in this quarter and then some SEK100 million per quarter in the rest of the year, coming in roughly for the full year in the range of SEK0.5 billion.
Rickard Anderkrans
Very clear. Thank you for taking my questions. I’ll stop there and get back in the queue.
Operator
The next question comes from Mattias Vadsten from SEB. Please go ahead.
Mattias Vadsten
Yes. Hi. 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
Yeah, thanks for the question. I think we’ve had some good traction when it comes to Surgical Workflows, some 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. If you look at the demand for healthcare 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
Okay. Good. And ECMO is more or less business as usual in that region in China let’s say?
Mattias Perjos
Yeah, it depends what you mean with business as usual, but yes, I guess that’s a way of expressing it.
Mattias Vadsten
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 it’s just a good performance? And then if you could comment on the margin profile for both acquired companies as well in this quarter?
Mattias Perjos
Yeah, 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’re strong companies. I mean, Healthmark is obviously a much more mature, more established company with many more customers. High Pure 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 three quarters under our belt now and encouraging performance thus far.
Mattias Vadsten
Okay. And then the last one for me, full year margin expectations. I think you stand up from 12.7% here with 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. Thanks.
Agneta Palmer
Thanks. 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 structurally profile at the second half of the year, as you are well aware. That is how I can comment on the margin.
Mattias Vadsten
Okay. Thank you very much.
Mattias Perjos
Thank you.
Operator
The next question comes from Oliver Reinberg from Kepler Cheuvreux. Please go ahead.
Oliver Reinberg
Oh, yeah. Good morning. Thanks for taking my question. I mean, I want to come back in the first question on the strong performance in ACT. And obviously, you called out the kind of large contribution from ECMO and ordered cardiac assist. So 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 theory. I guess one can imagine that some clients order quickly before there’s any kind of potential restrictions from the kind of legal departments. So can you just talk around that factor? And also, has there been a kind of major improvement in the order backlog that you had for cardiac assist? That would be question number one, please.
Mattias Perjos
Yeah, 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 a 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 inform about it, but we don’t see that right now.
Oliver Reinberg
Okay. I guess on cardiac assist, the kind of order backlog and in the Q1 call you talked about that this is the kind of couple of months. Can you just give any kind of color how significant this order backlog still is for pump space?
Mattias Perjos
Yes, we have still quite a number of balloon pumps that are waiting to be shipped. We have a small decrease month by month, quarter by quarter, but still quite a few pumps to ship, but no material change. I think small steps in the right direction, but no material change from previous quarters.
Oliver Reinberg
Okay. Thank you. And second question would just be on the orders in ACT Europe and these actually look 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 comps, but also that you still have the kind of CE mark issue for cardiac assist. Can you just provide any kind of color what was driving these orders in Europe and for ACT, please?
Agneta Palmer
Yeah, we can say that what you mentioned, we had of course an effect last year also on the order intake in quarter two, where we had different limitations to our ability to deliver. So that impacted. We also have now with the distribution agreement that we have for steps, 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
Okay. Perfect. And last question from me, just in Life Sciences, I think you talked about 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 in bioprocess, please?
Mattias Perjos
Yeah, 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 our 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 strengthening order intake. So a good step in the right direction here for sure. And bioprocessing, it seems so to in — most parts of the world have bottomed out, while China still is difficult for us.
Oliver Reinberg
Perfect. Thanks so much indeed.
Mattias Perjos
Thank you.
Operator
The next question comes from Kristofer Liljeberg from Carnegie. Please go ahead.
Kristofer Liljeberg
Yeah. Thank you. Three questions. First, coming back to the previous one on Life Science. Now you have had four consecutive quarters with order growth, so when do you expect this business segment to start grow again? Then I just wonder about the new packaging approval for ECMO in Europe or CE 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 SEK500 million, down from SEK800 million last year and you say that you still see no impact on customer behavior after the FDA letter. So is that comment still relevant, flat margin this year versus last year? Thank you.
Mattias Perjos
Well, if we start with the Life Science growth then, it is I think encouraging to see the order intake continuing to be strong here. 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 one should 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 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 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 healthcare 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 Updates. So I really cannot give any further color today on this.
Kristofer Liljeberg
Thank you. And just follow up on Life Science. So what do you expect is that business to grow again in the second half of the year?
Mattias Perjos
I didn’t say exactly that. I said that we expect the best 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.
Kristofer Liljeberg
Okay. That’s fair. Thank you very much.
Mattias Perjos
Thank you.
Operator
The next question comes from David Adlington from JPMorgan. Please go ahead.
David Adlington
Morning, everybody.
Mattias Perjos
Good morning.
David Adlington
Morning, everybody. I just wanted to focus again on ACT. So, I mean, the growth you’ve posted this quarter is the third-best growth for the 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 didn’t highlight Q2 was going to be so strong given the fact 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 anything changed post the Capital Markets Day? Thank you.
Mattias Perjos
Yeah. 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 early questions here, that we’ve been able to improve supply. We’ve had many customers on allocation for a long time in — when it comes to our 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
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 — it 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 is going to be a strong quarter at the Capital Markets event?
Mattias Perjos
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.
David Adlington
Okay. Thanks.
Mattias Perjos
Thank you, David.
Operator
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Mattias Perjos
All right. Thank you very much. I think we’ve already summarized the second quarter of 2024 and 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
Thanks, everyone.
