Getinge AB (publ)

Thank you very much. Good morning and welcome to today's earnings call.

I have Lars Sandström, our CFO, with me today who will support me during the call and also present some of the detailed financials. So, we can start by moving over to – right away to page number two please.

So, I'd like to start by summarizing the key takeaways from the second quarter. So, we continue to outgrow the market.

We have positive performance in the US continuing, and I was particularly happy to see that our net sales in China increased by more than 30% in the second quarter. So, a very strong development there.

I am pleased with the development in Acute Care Therapies and in Life Science in the quarter, and it's also very good to see that our working capital is continuing to decline despite our growth, and this has a very positive impact on our cash flow as you will receive in a short moment. We do see good progress as well when it comes to many things in our turnaround plan.

However, I'm not really satisfied with our gross margins which were impacted negatively by the development in Surgical Workflows. And on the OpEx side as well, we have the continued investments in compliance, in quality and remediation measures as well as the adjustments to the European Union's forthcoming medical device regulation, EU MDR, which does have an impact on the OpEx.

And, of course, we as well have continued investments in fueling our growth. So, those are the main takeaways from the quarter.

We can move over to page number 3 please. So, in terms of the events here, we're not satisfied with the current level of operating expenses and, therefore, we've initiated further restructuring activities in the quarter.

This is in addition to those that we presented in the first quarter. The cost in the second quarter is SEK 106 million, and this is primarily related to efficiency enhancement in sales and in administrative processes.

And we expect it to have a positive impact on earnings in the second half of the 2019. And just to give you an example, here one of those measures is that our two shared service centers are being merged with all of our operations in Costa Rica, being transferred to the unit in Kraków in Poland.

And this, we expect to be completed by the end of September in this year. I also want to highlight that we have no new material information to give regarding negotiations with the authorities in Brazil.

There is also no update really on the Mesh litigations and the FDA warning letters other than what has already been communicated. When it comes to our portfolio, we have introduced a new steam sterilizer of the upgraded version of our strong performance Servo-u ventilator.

It's also ready for launch now on all markets that require CE marking and that we expect it to continue to fuel the growth in our critical care business, which is already quite good. Also, customer satisfaction is key for us.

And in the quarter, we received both partner awards and excellence awards from customers, thanks to the value that we continue to create for them. We also received the random design award for the high-quality design and also the user-friendliness of our new Maquet PowerLED II surgical knife which was launched a couple of quarters ago.

So, it's a really good positive development in that area as well. With that, we can move over to page number 4 please.

So, if we look at the organic growth from mainly a geographic perspective, we had order intake growth of 5.2% organically in the second quarter, 11% in actuals. We do see continued strong growth with Acute Care Therapies leading the developments here.

So, they account for the largest share in our growth in absolute figures, mainly due to very strong trend in our cardiopulmonary business and specifically heart-lung machines and disposables [indiscernible]. It's worth pointing out that most subsegments within Acute Care Therapies performed very well in the quarter from an order intake standpoint.

We had a little bit lower order intake in EMEA, attributable to Surgical Workflows in Eastern Europe where we had a strong quarter the same period last year, but we did have a decline in EMEA this year. We do see very strong growth in Life Science in Americas and EMEA and also healthy growth in Surgical Workflows in both Americas and in APAC.

Overall, very positive development on the order front. If we then move to sales, we see continued growth in all of our business areas.

If you look at the Acute Care Therapies again, performed positively in all regions and accounted for the largest share of growth in absolute figures. We also had robust growth in Life Science in Asia-Pacific, particularly related to washer disinfectors and sterilizers, but we had slightly lower sales in North America.

When it comes to Surgical Workflows, we had good performance in Asia-Pacific, while sales fell organically in EMEA, mainly related to Infection Control. If you now look at the split between capital goods and recurring revenue, we can see the sales of capital goods is continuing to increase as a percentage of total sales, which does have some negative impact on the gross margin, which you will see in the coming pictures here.

It's worth pointing out, though, that it's growing at a slower rate than in previous quarters, so a little bit of rebalancing going on there. So, after order intake, we can move to page number five please and look at the contribution here by BA.

So, overall, a very strong development for the group as I mentioned. And if you look at Acute Care Therapies, we had 7.7% organic growth and SEK 455 million in actual numbers.

The positive trend with order growth in all of our product categories, highly robust in heart-lung machine including consumable supply, as I mentioned. From a Life Science perspective, we had 15.5% growth organically and SEK 129 million section in actuals.

We had sterilizers in Americas contributing to a large share of this and also isolators in EMEA, worth pointing out. If we then look at Surgical Workflows, from an organic perspective, we had a small decline, 0.9%, but an increase in actual numbers of SEK 86 million.

The organic decline was attributable to Eastern Europe in EMEA. And if you look at Americas and Asia-Pacific, we had a much more healthy performance, especially when it comes to Surgical Workflows.

So, that's the makeup of the order intake in the second quarter. So, let's move over to page number 6 please.

So, this gives you an overview of the development in sales by business area. So, net sales for the quarter increased organically 4%.

In actual numbers, it was 9.5%. The total number was of SEK 6.277 billion for the second quarter.

There was a positive currency impact here of SEK 319 million in the quarter. And as you can see, every business area contributed positively to the sales development.

We also can see that the capital goods grew 0.6 percentage points faster than consumables, which does have a negative impact on the gross margin in the short term. But, again, it's a little bit of a rebalancing compared to past quarters.

ACT, 6% organic growth, SEK 393 million in actual numbers, and good growth in all regions this quarter. We had 14% growth, mainly due to strong sales of ventilators.

It's also positive to see that we had healthy growth in cardiac surgery products on all of our markets. And for the first time in almost two years, we could see that the sales of expandable vascular stents have actually stabilized in this quarter, so that was very positive.

The sales of capital goods also increased in ACT, which has a little bit of a negative margin effect for that business area. If you look Life Science then, we had a 3.9% organic sales growth.

It was SEK 51 million in actual numbers, and particularly high growth in the washer disinfectors and sterilizers in Asia-Pacific. We did also have good growth in isolators and sterilizers in EMEA.

Americas was a bit weaker, attributable to North America primarily, and we could in Life Science as well see the sales of capital goods increased in relation to consumables, which again has a slightly negative effect on the gross margin. Surgical Workflows, then if we move to sales in that business area, we had 0.8% organic growth and SEK 102 million in actual numbers.

We had high growth in Asia Pacific and Americas, while EMEA did not meet last year's strong results in terms of sales performance. If we look at Surgical Workplaces and integrated workflow solutions, we had a rather good quarter in terms of sales development for those two subcategories.

We had a negative development in Infection Control in EMEA that hampered the overall growth a little bit, and we could also see in terms of capital and consumer goods, we had capital goods increasing at a marginally higher rate than consumer goods. So, that's the overall view on net sales development in the second quarter.

And with that, we can move over to page number 7 please. I will spend a short moment here on the gross margin development for the second quarter.

You can see that gross profit increased by SEK 257 million to SEK 3.101 billion in the quarter. This is driven mainly by Acute Care Therapies and also support from currencies.

The currency support in the quarter was SEK 163 million here. It's also worth mentioning that the slight positive impact from IFRS 16 on adjusted gross profit did amount to SEK 29 million in the quarter.

If we then compare this with the preceding year, the gross margin is 0.2 percentage points lower, mainly due to the negative development within Surgical Workflows. The reason for this is that we had a number of large customer projects in surgical tables and other operating room hardware in the DACH region that hurts the gross margin development.

When it comes to the margin, we had a positive contribution from volume and currency and some very slightly negative contribution from product mix. And what this means is that we had more growth in capital than in recurring.

It was counterbalanced to some extent by slightly positive regional mix from increased share of sales in the US, but it was not enough to have an overall positive impact. So with that, we move over to page number 9 and I leave over to you, Lars.

Thank you, Mattias. Moving over to the EBITA bridge, as you can see, adjusted EBITA increased by SEK 53 million and adjusted EBITA margin was flat year-over-year.

Here currency impact had an impact of about SEK 61 million on EBITA and supported EBITA margin by 0.4 percent points. Gross profit increased by SEK 257 million, but had a negative impact on the margin, accounting to 0.7 percent points then excluding currency, and this is mainly attributable to the Surgical Workflows development.

OpEx increased to SEK 88 million year-on-year due to investments in compliance, quality, remediation and towards preparation for the EU MDR as well as some currency impact here. But on the EBITA margin, OpEx contributed 0.2 percentage points excluding currency and IFRS 16, meaning that we have some slightly leverage coming through.

All in all, this resulted in an adjusted EBITA of SEK 591 million and an adjusted EBITA margin of 9.4%. Then we move to page 10 please.

Here, let's take a look at the BA contribution to adjusted EBITA, which was positively impacted by currency as mentioned of SEK 61 million in the quarter. Acute Care Therapies increased adjusted EBITA by SEK 102 million and the margin improved by 0.8 percentage points, and this is mainly due to higher sales volume and currency.

Life Sciences adjusted EBITA increased by SEK 11 million, resulting in margin increase of 1 percentage point and also it's mainly attributable to higher sales and gross margins compared to last year. Surgical Workflows adjusted EBITA fell by SEK 35 million to minus SEK 74 million, primarily due to a lower gross margin largely as a result of a number of large, as Matthias mentioned, customer projects in surgical tables and other over hardware.

This was to some extent partly offset by continued OpEx focus in SW. And this is the BA, as Matthias mentioned already, where we see significant need for improvement in our commercial execution and productivity improvements going forward.

Surgical Workflows also has a headwind from currency impacting EBITA negatively. The cost for common group functions et cetera increased by SEK 25 million and this is mainly attributable to compliance areas.

Let's move to page 11 then please. We continue to see good developments in the underlying OpEx development which is tracking according to plan.

And today, we are 10,409 FTEs compared to 10,792 by the end of Q1 2018. And we do see continued underlying decline in the numbers of FTEs and we are using the natural turnover and, to some extent, restructuring activities.

And we only refill if it brings value to customers and the business. However, we had increases the number of FTEs in the quarter attributable to factory temporaries and remediation reporters.

Just to give you an example, we have increased some 50 FTEs in Hechingen related to remediation work and also the increasing demand since February 2019. The increased number of FTEs, together with the increasing cost for quality and remediation, overall, together with the compliance and the EU MDR preparation had a slightly negative impact on OpEx in relation to net sales in the rolling 12, but we are still significantly lower compared to the peak in Q1 2018.

Our work to continue to bring down OpEx in relation to net sales continues. During the second quarter, we announced additional SEK 106 million in restructuring related to dedicated activities to address improvement areas impacting both OpEx and COGS.

Then let's move over to page 12 please. The increase in profit had a positive impact on free cash flow which was SEK 576 million for the quarter compared to SEK 47 million previous year.

Year-to-date, we have SEK 750 million in free cash flow versus SEK 46 million previous year. Cash flow was positively impacted by the continued healthy trend in working capital despite the solid growth.

Net investments also coming on a lower level and is now below our rate of depreciation. A dividend of SEK 272 million was paid to the parent company's shareholders during the second quarter.

And net debt here was adversely impacted by currency impact, IFRS 16 effects and revaluation of pension liabilities. Excluding IFRS 16 effects, net debt in relation to adjusted EBITDA, rolling 12, was in line with Q4 and Q1 in 2019.

Then, let's move over to page 13 please. During previous year, we have been working intensely with breaking the growth trend in working capital that we saw in the years before.

And as you can see, in the left row, we broke the trend in working capital base in the second quarter last year, followed by a decline each quarter since. And we are now at some 116 working capital days.

And working capital is decreasing 6% year-on-year at the same time as our net sales is growing 4% organically. This work will continue just as with everything else we do in order to improve productivity and both underlying earnings and cash flow improvement.

Of course, you should expect the decline in working capital to slow down a bit. As you know, we are soon coming to tougher comps as we started to improve quite well in Q3 last year, reporting SEK 801 million in free cash flow in that quarter.

Nevertheless, we do see a change in behavior to the better in the organization when it comes to these things, which is encouraging as we still have many things to improve in this area. Let's move to page 15 then and over to you, Matthias.

Thank you very much, Lars. So, let's take it to page number 15 and the outlook for 2019.

We still expect an organic net sales growth of 2% to 4% for the full year of 2019. It's in the upper range of this, but still within the span that we've given as guidance.

The reason for this is that nothing has really changed fundamentally. From a capital perspective, we expect the overall positive demand pattern to continue.

And this goes for both capital goods and for consumables. We also have, in general, positive signals from customers regarding our newly launched products and we expect the same with the ones to come in the rest of 2019.

So, this kind of reconfirms the overall positive outlook that we have. One thing to bear in mind, though, is that a big part of the strong order growth is also for delivery in 2020, which is good that we secure the longer-term growth prospects as well, but it also means that we stay within the guidance bracket of 2% to 4% for 2019.

With that, then we can move over to page number 17 and the summary before we move to the Q&A. So, if you look at page 17 and just to reiterate the key takeaways here.

We continue to deliver strong growth. Again, it's another solid quarter when it comes to growth in order intake and in sales.

We have a very positive underlying development in Acute Care Therapies and Life Science, while there is significant room for improvement in Surgical Workflows. But the good news here is that there are challenges in the core businesses, now concentrated to Surgical Workflows, and we have a focused effort going on there as well since some time ago.

We've taken restructuring cost of SEK 106 in the quarter, and this is because of focused activities targeting productivity in sales and in admin processes primarily. And we do expect this to start to have a positive impact on EBITA already in the second half of 2019.

And I also want to highlight again the positive developments in working capital and the free cash flow that continues. And it's important as well to keep in mind that we will continue to intensify our efforts to strengthen the profitability of the operations in general and in Surgical Workflows in particular in the coming quarters.

And I also want to take the opportunity to remind everybody that we are on what is typically a four-year turnaround journey that started in the second half of 2017. We're well underway on this journey.

And 2019, like we said at the Capital Markets Day in 2018, is a year of implementation. So, you will see much more activities during the course of this year and we still expect a more solid improvement from 2020 and onwards.

So, that's a summary from the second quarter of 2019. And with that, I open up for questions.

Yeah. Thank you.

I have two questions. First one, on ACT, of course, very positive development, impressive growth.

Could you maybe describe what's driving it? How much of growth is coming from new products and what do you think is the reason for you outperforming or continue to outperform markets?

Second question on Surgical Workflow and the weakness there. Is it possible for you to be a little bit more specific about what type of – or what you're going to do to improve profitability?

And whether the restructuring you're doing, is that mainly going to help the gross margin or operating cost? Thank you.

All right. Thank you, Kristofer.

When it comes to ATC and the performance there, your first question, I'd say that it's a mix of very strong clinical performance of much of our products, especially when it comes to cardiopulmonary and critical care that's driving the growth. We also have good development, as I said, on our cardiac surgery portfolio which is also very encouraging.

And this was also the first quarter where we didn't see a decline in the stent business. So, that's another positive.

So, it's a mix of, I guess, strong clinical performance compared to our competitors and also good sales management in driving the growth in a targeted way here, partly helped then by the bottoming out of the stent business. When it comes to the Surgical Workflows weakness, as you say, they're following the program that we've talked about for the overall group when it comes to margin performance.

This entails everything from purchasing, both direct and indirect purchasing, there is the factory efficiency initiatives that are going on, but it's early days still for Surgical Workflows. You need to remember that we've had a number of management changes in this business and the current management team is partly new as well since a couple of quarters back.

So, it's still early days for the turnaround in Surgical Workflows, I'd say. And the activities that are being rolled out in terms of restructuring is both related to COGS and OpEx, but primarily OpEx.

And when it comes to Surgical Workflows specifically, I would like to remind you of the costs that we took in the first quarter as well, which is related to the IWS business, the software business. This was entirely related to Surgical Workflows.

And as you probably saw in the report, half of the restructuring cost is related to Surgical Workflows also in this quarter.

If you look at the restructuring charges you're taking now in the first half of the year, how much improvement will that lead to in the second half and on an annual basis?

We don't give any detailed guidance on this, but, in general, it's about a one-year payback on the restructuring initiatives that we have communicated so far.

Okay. Thank you.

Great. Thank you.

And good morning, everyone. I have three questions.

Firstly, on order backlog, can you comment on the directionality on whether the quality of the backlog is supportive of improving gross margins or perhaps the other way? Secondly, also on order book growth, can you comment on how you see the second half of 2019, given that you've got significantly easier comparisons?

Should we expect these order backlog growth rates – or order intake growth rates to continue? Question number three is on the EBITA margin outlook for the second half, and I fully appreciate that you don't give guidance.

But I'm confused by your remarks on page 1 right from the beginning where you highlight that you will see ongoing headwinds from investments in quality, MDR in the coming quarters. And then, in the same paragraph, you then write strengthening profitability in the second half.

Which way is it? Is the net going to be positive or is the net of those two items going to be negative for margins in the second half excluding, obviously, the impact from currency fluctuations?

Thank you.

If we start from the first question here when it comes to the order backlog. We don't comment particularly on the quality of the order backlog, I should say.

We don't expect any significant change from what we've had historically here, other than what you can see in the mix in order intake between the business areas and capital and recurring. And when it comes to the order growth guidance, again, we don't give a detailed guidance or a numbers guidance on this.

But as I said in one of the pages here earlier, we do expect – we still have very positive sentiment from customers overall. We have our new products being well received by the market as well and we do expect the same for products that are about to be launched.

So, we do expect continued positive momentum when it comes to order growth. When it comes to EBITA, you're correct that we don't give guidance on this.

What we have said, though, is that we do expect – even if 2019 is a year of implementing a lot of improvement efforts, we still expect an underlying improvement compared to 2018. And we just want to flag that we do have quite an intense period here in 2019 when it comes to both remediation, when it comes to our proactive compliance initiatives in the wake of what's happened in Brazil.

There are costs associated with EU MDR as well and, of course, we'll continue to invest these in growth. So, all of these investments, they do have an impact on the margin.

We, at the same time, though, have a lot of improvement efforts going on as well. And the net of this is that we do expect to perform better on adjusted EBITA this year than the year before.

But more guidance than that, we're not prepared to give.

Okay. If I may also ask follow-up question on order growth, can you comment on the sustainability of the Americas number?

Since Q3 of 2018, it seems that the business has definitely improved and is moving in the right direction. Can you give some comfort that what we've seen in the last two, three quarters is really a fundamental improvement on which we can rely on to continue in the Americas for the next one to two years?

Have you have got the turnaround now ready and functioning in the Americas?

I think if you look at the changes that we've made in Americas in terms of how we prioritize and how we allocate sales resources and so on, I do think that this is positive and sustainable. The overall market is favorable at the moment as well.

We have no reason to believe that it's going to change. So, we do think it's a sustainable change for the better.

That's correct.

Okay, thank you.

Thank you. And thank you for taking my questions.

Just a few. To start off with Surgical Workflows, you clearly have quite a lot of work to do.

And the first stage is probably about reaching stability. Is that something that we can expect already during the second half of the year or what should we look at that?

Yeah. You're right.

Our challenge is now – and turnaround efforts are, to a higher degree, at least in the core business, concentrated to Surgical Workflows. As we tried to highlight in the call, we've had a couple of problematic customer products in the DACH area that's hurt us in the second quarter.

Other than that, I think the implementation of the improvement program is going according to plan. But, again, it's not a quick fix.

So, we do expect also – Surgical Workflows to improve on an underlying basis in 2019 compared to 2018. That's the only guidance we give in that regard.

Okay, thank you. That's useful.

And then, the full-year sales guide appears, of course, rather conservative. You also added that – clarified that some of the very healthy order intake is more directed to, well, after 2019.

But is it possible to say anything about the order – the sales that you expect in second half of the year? What's the cover rate from the order book?

Is that normal? Or is it on the conservative side?

Or is it – can you give us any flavor on that without being too specific?

I think the cover ratio, if you want to call it that, is on normal levels here. So, I think we have fairly good visibility.

And as mentioned, it's an unusually large portion of the order book that is for 2020 this year. otherwise, in terms of year to go orders that we need to book and turn this year is on normal levels.

So, we remain with the guidance that we had. We realized that it can be seen as conservative, but we do want to be a little bit prudent here as well.

Yeah, that's probably very sensible. And what about that the order book is unusually – well, more extended?

Is that also a reflection of a higher level of capital goods that you want or get support from tenders?

Yeah, for sure. The part of the order book that is for 2020 is capital driven.

Yeah. Okay, thank you.

Yeah. Thanks very much for taking my questions.

So, firstly, on Surgical Workflows. Can you talk a little bit more about the problems you had with the larger orders in the DACH region?

How typical or atypical is that? And perhaps give us some feeling for, outside of those projects, what the margin would have been?

How loss-making were those projects and why? Also on the group gross margin, please, just to get a feeling, you're starting to see the mix more normalized, as you identify, towards consumables which are typically higher margin and some of the mix regionally is supportive of some of your higher-margin businesses and regions.

Yet, group gross margins have not really progressed even in Acute Care Therapies. So, can we have a little bit more discussion?

I there's a lot of intense efforts to improve gross margin. But did that disappoint you this quarter?

And perhaps give us some sense of how that evolves going forward? Last question, please, on the shared service initiative.

I think Getinge has spent much time building out a shared service center in Costa Rica to serve the North American market and now you consolidate that. So, can you give us some sense as to what went wrong with that initiative, why that didn't materialize as you expected, and whether there's any execution risk or opportunities surrounding the full consolidation to Poland?

Thanks.

Thanks, Scott. I think if we start then with Surgical Workflows, we do believe that it's atypical and certainly hope that is the case.

Sometimes, when you have larger, more complex projects, we do encounter implementation issues and that's what's happened and it kind of became a little bit concentrated here to the second quarter and in DACH. But, I guess, the detail or the nature of this is not something that we communicate.

It's just implementation/execution problems, I would say. When it comes to the group gross margin, you're right that we have a positive mix effect from ACT, but also from US having better traction.

You need to remember that we have a significant growth in Asia-Pacific as well, not only in China, but also other parts of Asia-Pacific. So, the net effect of this is a big negative.

And same thing when it comes to the capital versus recurring revenue, even if it's rebalanced a little bit since previous quarters. When it comes to the shared service centers, it's a long story.

I think I'd just like to remind everybody that when this was set up, it was at a time when Getinge was a SEK 30 billion company with a target of becoming a SEK 60 billion company. What happened afterwards is there was a decision to spinoff Arjo.

And at that point, we felt that we had the math still to sustain two operations, especially since Arjo had communicated that they would stay with us in the shared service center setup. Now, they've communicated that they will not.

So, we have some TSA cost impact of this also in the second quarter. And it's clear now that, for the future, we will be alone with a SEK 25 billion business, so half of what the shared service center structure was set up to cope with.

So, that's really the reason for this. So, it's just really a very different position we find ourselves in now compared to the plan when these were created.

And we do see now that the consolidation into Kraków is good. It's sized to support the type of business we are now and that we expect to be in the coming years.

And we also do get some process synergies from being in one place. So, we think, overall, it's healthy even if it has some restructuring impact in the second quarter.

Okay, thank you. Just a follow-up.

Can you give us some sense of what degree of savings you're likely to receive from this Costa Rica initiative? And just extending up on some of the activities going on in the organization and given your efforts for the European Medical Device Act, can you highlight whether you've identified any means to SKU reduction going forwards and whether that will lead to any benefits you anticipate into 2020?

If you look at the shared service center question to begin with, there is a – part of the restructuring cost related to this is the same thing like the other restructuring initiatives, that it's about a one-year payback on this. The absolute level is not something that we communicate.

When it comes to the EU MDR implementation, that is going according to plan rather well for us, I would have to say. There is some SKU reduction here in the range of what we communicated at the Capital Markets Day.

So, we're about a fourth of our SKUs, which will have a positive impact, but it's not an impact that we have decided to quantify and communicate externally.

Thank you.

Yes. Good morning.

Sten Gustafsson from Nordea. I have a few questions.

First, when it comes to the clean OpEx level, the H1 level you had, is that a good proxy for second half, like it was last year? And then, on Surgical Workflows, could you remind me why – and I think you have said that before – why a lot of the standard costs following the Arjo spinout ended up with Surgical Workflows?

It seems like there was a big ramp up in the cost base following the spinoff. And to follow-up on the Surgical Workflows, do you have the right product offering in place with all the approvals, et cetera, in the relevant markets in that division?

Thank you.

Yeah. On the OpEx side, Q1, if that's a good proxy, as you saw out here in Q2, we have further investments in what we call compliance-related activities and also the remediation work coming in here.

That is a bit of an increase compared to Q1. But we also then are working on the restructuring activities.

So, exactly how that plays out, I will not tell you. But these are [indiscernible] moving parameters.

When it comes to standard costs and why it's mainly impact – I think these were more closely related historically, so that's why it is more impacting SW than the other parts of the ACT.

Okay. And how is that exactly more closely related?

It was more that this facility [indiscernible] more closely connected. So, that's why.

And on the product offering within Surgical Workflows?

I think, in general, we have a very good competitive offer. I think the area where you know since before that we had more challenges is on the value part of the offer where a lot of our efforts in terms of developing new products are being focused on.

So, that's maybe the area where we're a little bit less competitive since. A lot of effort is going into there.

But, overall, I would say that we have a competitive and good portfolio in SW?

And do you have a low temperature product approved in the US?

Not approved in the US. We have our Stericool range, which is developing very well, but's not approved in the US.

Okay. Do you anticipate that to be approved too?

No. This is a long-term process, really.

This is the reason why we entered into the cooperation with TSO3 back in 2015 or whenever it was as well. But Stericool is not approved in the US and it's the ambition that it will be.

But it is a long-term process here. It's not something that will happen in the next year.

All right. Thank you very much.

Yeah, thank you. Two follow-up questions.

For those problematic projects in Surgical Workflows that you have highlighted, were they lossmaking? Could you confirm that?

Yes, they were.

Okay. But you don't want to highlight…?

No, we don't want to disclose the number here, but they were lossmaking in the quarter. That's correct.

Okay. But without, would you be able to say whether the EBITA loss would have been larger than last year's sales?

No, we can't communicate that unfortunately.

Okay, fine. And then, coming back to the restructuring charges you're taking now, considering that they are becoming a bit larger than before, and you're talking about one-year payback, does that mean we should expect, like, SEK 200 million in savings from them from them next year?

Is that how we should see it?

When it comes to the restructuring activities, we are doing this step by step. And we think some of them are already impacting now and some have been rolled out.

So, we cannot say first year-over-year is as simple as that, but they are rolling out and they are coming in. And we see we are closely tracking the restructuring activities.

And very often, it's still connected to that. We are closely monitoring that this is happening as well in the company.

Then, of course, there is always other areas increasing costs. We mentioned a few here today when it comes to remediation activities and the compliance activities, et cetera, going into other directions.

But the underlying issue in the coming year and years here for sure.

But amount, SEK 200 million plus something, is that the correct assumption? Then maybe some of that's happening already this year.

Yeah. Year-on-year, that's a correct assumption.

I think the thing that's important that Lars pointed out is that we do have things going in the other direction when it comes to remediation, the compliance to EU MDR and also the net effect is a little bit more difficult to guide on.

Sure. One more thing.

You highlighted that CapEx now is lower than depreciation. And I see CapEx coming down a bit year-over-year.

Is that the new sustainable level or is this just a temporary effect?

Well, I think what we're doing is, when it comes to the underlying [indiscernible] machineries, et cetera, we are rather well invested. And when it comes to R&D, that is more connected to the opportunities and projects that we have.

So, that is more impacted by what kind of projects that are in the pipeline, et cetera, and what will come. So, that is a bit different.

As you know, investments in R&D should be positive, whereas the others are more connected to productivity. But we have no intention, as I mentioned at the Capital Markets Day, to increase when it comes to CapEx.

As a percentage of sales or…

No, absolute terms.

Okay, thank you.

Yeah, thanks for the follow-up. So, again, just on Surgical Workspaces, obviously, this is the business which continues to weigh on the organization and is below your expectation and peers.

So, I wonder if you could just please highlight a little bit more what is the problem child within that business? Is it operating tables, lights, infection control, disinfection?

Can you give a little bit more clarity actually whether there's one particular category which is clearly flagging here? And a question for Lars, please.

Some good and healthy working capital dynamic that you've been able to deliver. Can you outline a little bit specifically how you've managed to achieve this given the growth in the top line?

And what perhaps would be a target and optimal working capital day for getting at in your opinion? And last question, please.

I think you've highlighted in previous occasions you expect net debt to EBITDA leverage to come down to under 3 times this year, which I think implies some reasonable EBITA growth for the company. I just wondered if you continue to maintain that view.

Thank you.

Yeah. Do you want to start with SW?

Yeah, sure. I can start with SW.

And I think there is only three legs in SW. You have the Surgical Workplace.

You have Infection Control and IWS, the software business. When it comes to IWS, we have some challenges already last year that I believe have been dealt with.

Part of the restructuring costs in the first quarter was related to this. But it's probably less of that at the moment.

Still a lot of work to do, but I think the implementation is a little bit further ahead there. The other two bigger areas than Surgical Workflows, Surgical Workplaces and Infection Control, I'd say there is – little bit similar to the overall situation for Getinge.

If you look in the past, there hasn't been a focus on both commercial practices to some extent, I'd say, in terms of discipline when it comes to pricing, especially of accessories and nonstandard products that go into tenders. That's one area.

I'd say there is also purchasing, indirect and direct purchasing. The factories could print us – there's been a number of unfortunate changes over the years which has rather than decrease cost and improve efficiency, it's been the opposite.

It has increased complexity and raised the cost level. So, a rather difficult starting point there.

So, those are the main components, I guess, of the challenge in SW. And just like to remind again that it is early days.

We've had a very high level of rotation of management in surgical workflows over the years. So, Stéphane and his team, they need 2019 and a part of 2020, I think, to do a crisp implementation of their turnaround plans.

Coming over then to your question on working capital and how, I think I have talked about this in other occasions as well. This is not one activity that we have done.

It is really a lot of dedicated activities in ensuring that working on receivables to ensure that we have a tight grip and to receive our money, to make sure we have it. And we are, as you know, operating in very many countries.

So, a lot of activities happening all over the world. And also inventories, ensure that we have a good, tight grip on the inventory that we put on stock and all through the value chain, from the factories out to the different sales companies that we have.

Really make sure that it is the right levels also. And also, this is part of the incentive for people working in this company.

So, it's helpful for their motivation somewhere. When it comes to targets, we don't really work in that sense what is the right target.

I see there is continued areas of improvement. We have done a lot of, let's say, first steps.

Now if we become a bit more complicated, it's more connecting [indiscernible] to ensure that we have good flows all the way through, from purchasing to the factories and through the [indiscernible]. So, it's not – it's getting harder to continue to drive improvements.

But we have, as I said, a lot of activities running. And to your question on net debt, yes, we have here ambitions to strive towards 3 and below.

[indiscernible] that we have – in the first half year, we have revaluation impacting our net debt, increasing it with almost around SEK 700 million to SEK 800 million. That is significantly working against us.

Revaluation effect is then coming from IFRS 16, currency and pension liabilities, increasing the net debt, but still we are working in this direction for the full year and then going forward as well.

Understood. Thanks very much.

Hello, Matt and Lars. Thank you for taking my questions.

First of all, I joined the call a little late and forgive me if there are some repetitions from my side. So, first question is, like, why is there a sudden jump in your restructuring cost?

So, I do understand that it's largely the segment-wise allocations. But could you give me some color on that, firstly?

Yeah, sure. I think it's not more dramatic than – we've come one step further in our turnaround journey and we are getting more visibility on what's possible to speed up and so on.

So, it's mainly an effect of that, I would say. And it's not a lumpsum target into one specific area.

It's initiatives across both groups central functions and different parts of the BA and sales organization. So, it's just really that we come one step further in the turnaround journey and there are things that we see that we can speed up a little bit.

Okay. And just following up on that.

So, Getinge has been standing on, let's say, quality or remediation for a while now. So, internally, how do you kind of judge the impact of the same?

In terms of visibility, how long do you expect this kind of spending?

When it comes to remediation, first of all, I would like to point out that we are remediated in Wayne and Merrimack. So, two of the factories under the consent decree.

So, here, the increase in spending has for sure ceased and we are even making reductions there, a little bit more forward-looking work. When it comes to the situation in cardiopulmonary, so Hechingen, Rastatt, there is even more intense activities.

I've said in previous calls that they are two to three years behind us the US side and we would like to get out of this as quickly as possible. So, we have sped up the work there in the late last year and the start of this year, which you can see also in the remediation spend.

And then, in addition to this, we have the warning letters in in Mahwah and Fairfield. And same thing there, we'd like to fix these problems as quickly as possible.

So, there is a heightened level of spend there as well. And as you may know, these are things that we identified back in 2017.

We had some work done in 2018, but interrupted by FDA inspections which then led to the warning letters. So, the real pace of work is actually late last year and early – the main part of this year, I would say.

So, that's the reason for this. When it comes to actually finishing this, it's really not for us to say.

We follow the time plans that we have communicated to the FDA, but they are really the judge of when we're finished, both when it comes to the consent decree side, but also the warning letter side.

Okay. Thanks very much.

And I have another last question on the guidance front. So, with 5% growth approximately in H1 and pretty strong order book dynamics, like why are you still forecasting 2% to 4% for the year?

So, anything – from my understanding, like anything in particular driving this sort of caution? Because 2% or at the lower end would be a pretty bad H2.

There is only two things driving the caution. One is that we would like Getinge to be prudent and conservative and not promise something that we can't keep.

And the second reason is that there is an usually big portion of the order book that is for 2020. So, that's really the reason.

So, I did say earlier on the call that we expect to be in the upper part of this range, but we did not want to change the total guidance.

Okay, okay. And could you like break that?

Like what kind of order book do you expect, like, for 2020?

No, we do not break down that and communicate it externally.

Okay. So, thank you.

Thank you very much.

Thank you.

Okay. So, time is out actually.

It's 11 o'clock. And if you have further questions, please contact us via Investor Relations.

Thank you for taking that time on today's call. And have a good day.