Getinge AB (publ) (GETIB) Earnings Call Transcript & Summary

[Audio Gap] and welcome to Getinge Audiocast for Teleconference 2022. [Operator Instructions] Today, I'm pleased to present CEO, Mattias Perjos. Please begin your meeting.

Thank you very much, and welcome to this call, everyone, and thank you for joining on short notice. This is now focused on our revised outlook for 2022. We will go on for about half an hour, and we'll start off with a brief presentation and then followed by a Q&A session where I will be also joined by Lars Sandström, our CFO. With that, we can move to Page #2, please. So the main takeaways from the press release that we published earlier today are as follows. Firstly, we revised our outlook for organic net sales growth for 2022 from the upper end of the 4% to 6% range that we had communicated to in line with 2021's net sales. These lower volumes and also an unfavorable product mix is also expected to have a negative impact of 1 to 2 percentage points on our adjusted EBITDA margin compared to 2021. Our financial position though is expected to remain strong with a low level of net debt and also positive operating cash flow. I also want to highlight that our long-term underlying demand rate remains strong, and this is the reason why our financial targets through 2025 remain unchanged. We can move over to Page #3, please. So just to color some of the main reasons for the revised outlook. The 2 main challenges leading to this revision are, first and foremost, a mild flu season globally, which means reduced demand for products for ECMO therapy mainly; and secondly, a rapidly reduced activity in the manufacture of COVID vaccines to which Getinge supplies Sterile Transfer products. And if we start to look at the flu season impact. First, normally, the world is hit by a flu season in the beginning of the year and then towards the end of the year as well, creating an increased demand for products, for ECMO therapy in our Acute Care Therapies business area. The start of 2022 has been unusual in that the seasonal influenza has been very mild and generated a relatively low need for treatment with ECMO. Business core sales for the Cardiopulmonary product area inside Acute Care Therapies still decreased in sales compared to last year as opposed to expected growth. Getinge expects the fall to bring a more normal flu season, which is expected to contribute positively to net sales. But since ECMO treatment is of an acute nature, which means that it cannot be postponed or planned, the spring's low sales are largely classified as loss. So we cannot recover this during the second half of this year. All in all, this spring's development is expected to be temporary and that the strong underlying conditions for long-term growth within ECMO remain unchanged. And this goes for both flu-related ECMO therapy as well as other application areas for the therapy. Secondly, when it comes to the vaccine effects hitting our Life Science business area, the need for vaccination in the world has at least temporarily decreased, which in turn has contributed to a reduced inflow of requests and orders linked to products within Sterile Transfer inside our Life Science business area. This may indicate that a growth plateau has occurred for Sterile Transfer, and instead of approximately 30% organic growth in Sterile Transfer for the full year 2022, our assessment is now that sales will remain unchanged versus 2021 for Sterile Transfer inside Life Science. Other parts of Life Science, we expect to continue growth. However, I also want to point out the longer-term outlook here. The underlying growth linked to the shift from traditional medicines to biopharmaceuticals remains, which is expected to contribute positively to growth within Sterile Transfer for the foreseeable future beyond 2022. Thirdly, we're also negatively impacted by supply chain disruptions. The negative trend that began in the first quarter of 2022 regarding access to key components for a number of products and bottlenecks in the global supply chain system continues. The difficulties regarding component charges are mainly linked to semiconductors and electronic components. I believe our team has handled these challenges very well during 2020 and 2021, thanks to a very systematic approach that stretched several layers down the supply chain and also constant monitoring of the spot markets. In the second half, though, of the first quarter of 2022, shortages also rose at those levels, which is why we could not meet the need for components. All business areas are negatively affected, but the effect is particularly evident in Acute Care Therapies at present. And Life Science is also disproportionately affected at the moment while the situation in Surgical Workflows has improved over the past 2 months. All in all, though, this contributes to the fact that there is some underabsorption in parts of our business at present. The disruptions also contribute to increased cost for components and transport, which we have largely managed to compensate for through price increases. We expect that the availability of components will improve in the second half of the year as China opens up and bottlenecks in the transport and supply chain systems are resolved but that there are risks of problems along the way, which is why it's likely that some deliveries may be postponed until 2023. So this is also part of the reasons for the changed outlook for this year. Last and the smallest impact here is the -- is Russia's invasion of Ukraine, and this has had a limited effect on us so far, but we are seeing a weakening order intake at present, and this trend is not expected to reverse in the second half of 2022. In 2021, Getinge sales in Russia represented approximately 1% of total net sales. Indirectly, the invasion has meant that the cost of inputs needed on oil and gas and metals has also increased, and this has again been partly counteracted for by price increases. We can then move to Page #4, please. So the challenges that I've just mentioned here, they do not change our long-term view. There is a long-term strong demand for our products, and we are structurally well positioned to support our customers with leading technology, with service and support. And I want to underline again that the reason for the revised 2022 sales guidance is due to weaker demand in ECMO therapy products and vaccine-related Sterile Transfer products. Our other product categories are developing well in line with the expectations we had at the end of 2021. So this means that our long-term targets remain unchanged. We expect to grow our net sales organically by 4% to 6% on average and grow adjusted earnings per share more than 10% a year on average through 2025. And as an outcome of these 2 targets, our adjusted EBITDA margin is expected to be above 21% at the end of 2025. With that said, it's time to move to the next page and the Q&A session. So back to you, operator.

[Operator Instructions] Our first question comes from the line of Oliver Reinberg from Kepler Cheuvreux.

The first would be on ECMO therapy. Do you have any kind of estimate how much of your 2021 demand was related to COVID? And can you give us any kind of color what is the current working assumption for ECMO? Do you now expect flat ECMO sales this year? Or is there a kind of decline that you're looking forward? And the second question would be just on margin. I mean if you would contain the pressure to 1 percentage point, I think there will be a significant success. If you have basically a 5.5% headwind from sales, we had a soft start into the year. And obviously, now the kind of volume leverage is being gone. So what are actually the factors that are partly offsetting the kind of pressure that you're currently seeing in the system? I guess some is the kind of remediation costs coming down, maybe some kind of currency effect. But to what extent have you stress-tested this kind of new margin assumption?

Yes. Thanks for the question. On the first one, we don't have visibility on how much is COVID-related versus flu-related in ECMO. There's no data on that. So I cannot answer that part of the question. When it comes to the expectations for Cardiopulmonary for the full year though, we don't expect growth. We expect a decline of sales for ECMO products for the full year. So that's factored into the revised guidance then. And then when it comes to the margin protection, we've, of course, already started implementing some mitigating activities when it comes to cost. I won't go into exact detail what those are, but we are mindful of not implementing stuff that hurts for 2023 and onwards. So these are more short-term type of mitigations. And even if there is an unfavorable mix effect from lost sales of ECMO products and of Sterile Transfer, we also have a comeback of some of the stronger margin categories in elective surgery-related products. So when you combine that with the mitigation efforts, we believe that we can keep it within 1 to 2 percentage points for the full year.

And any kind of thoughts in terms of to what extent inflation could be more of a kind of pressure as we move through the year?

Yes. I think that's -- it's certainly something that we factor in, in our scenario planning, and it's been a constant dialogue with customers since already before the pandemic actually, but of course, a little bit more intense now the first half of this year in terms of price increases. So we have been successful so far in offsetting the inflationary pressure, and we expect to continue to keep ourselves harmless for the most part here through the year as well.

So for my last question, can you just...

Go ahead, Oliver.

Sorry, last question for me. Can you just provide an update what you see in the kind of U.S. hospital space and in terms of elective treatments?

In terms of what, sorry?

Elective treatments.

Yes. We do see, in general, a recovery. I think it's -- and so U.S. is one of the markets where it is recovering a little bit more strongly than other parts of the world. But we see a general recovery, and this is in line with the expectations we had for this year. So even though there are, I think, hurdles when it comes to, for example, access to clinicians and so on, there is a recovery going on. U.S. is better than average, I'd say, from a geographic perspective. And some markets in Europe are a bit more challenging one. Overall, in line with what we had expected for this year.

[Operator Instructions] We have another question from the line of Victor Forssell from Nordea.

Starting on with ECMO. I'm a bit curious to hear your thoughts around the discussions we have here tonight given the fact that to me, it seems as if we were expecting a mild flu season. It's nothing that surprised us perhaps by the end of April. So just to hear your new thoughts on that and why this comes up to you as a surprise today.

It's not a big surprise today. We were aware partly of the weaker flu season, but we weren't expecting the tail end of it to be as weak as we have seen. So that's really the only part of the surprise, so to speak. So we were aware of this towards the end of the first quarter. We mentioned this in the Q1 report as well.

But you were hoping for this specifically in terms of the flu season rather than expanding the therapy into other sort of indications, or how should we look upon that?

It's a combination. One is, of course, the flu season impact. Then there's a general therapy expansion as well and then there, of course, also weakness when it comes to the COVID-related ECMO cases that we had expected in Q2, I would say as well. So these 3 combined, I think, is a bit weaker than we saw after the first quarter.

And just coming back to the elective surgery part of things. You mentioned it in the press release, and now it seems as if the recovery is ongoing in the U.S., a bit slower in Europe, for example. Has your sort of expectations changed for your elective surgery portfolio? Or how should we read this for the full year?

No, I think -- yes. No, I think for the full year, we haven't changed our expectations here. Things are progressing the way we expected. We never assumed in our guidance for this year or for the longer-term guidance that it will be a very quick recovery to above pre-pandemic levels of elective surgery. So what we're seeing now with anything from minus 20 to plus 10 when it comes to pre-pandemic activity in different geographies is broadly in line with what we had expected.

Could you quantify what that means for you in terms of Cardiac Systems and Vascular Systems in expectations?

Yes. No, we don't distribute numbers with that granularity.

And the next question comes from the line of David Adlington from JPMorgan.

Apologies if I missed it. I'm actually in the back of a car. I just wonder, I mean, the guidance is for actual sales. I'm just wondering what assumption you included in that in terms of FX [indiscernible].

Well, we -- yes, thanks for the question. We don't on actual sales now as you're probably aware. But we -- if you look at the currency development since the end of 2021 to where we are now, I mean, there is a strong improvement of the U.S. dollar, the Chinese yen, obviously. And most currencies, main currencies have worked in our favor. So there's a pretty big difference between the organic sales and what will be the actual here. But we -- I can't give you a number on that.

Apologies [indiscernible].

I'm sorry, I couldn't hear if that was a question. There was a bit of background noise there.

We'll take the...

Sorry, guys, it's a bad line. I'll call back.

We'll take the next question from Karl Norén from SEB (sic) [ Danske Bank ].

I just had a question on the new BetaBag factory in Merrimack, which you just opened up and was supposed to ramp up. How will this lower volumes of BetaBags for vaccine's impact, the ramp-up of this factory and how will it impact, let's say, margin, as you said, because of under-absorption, et cetera, when ramping up production?

I think the product mix effect that we discussed was mostly replacement of Sterile Transfer with other products. So not the absorption effects within Sterile Transfer itself. I mean they're included in our overall outlook as well, of course, but the main reference when it came to product mix was related -- Sterile Transfer related to other products. And how it affects the factory, we're still continuing to ramp up. I mean the first phase of the ramp-up was to take some pressure off the existing factory in France. So we're still happy with that investment and especially in the longer-term view here. So it will just be a slightly less steep ramp-up than we had expected this year.

Okay. And would you say that there's any part of this new guidance that relates to lower sales of ventilators than you would have initially expected when entering the year? Or is that in line with your expectations?

I mean it's a little bit below expectations, but it's not the material part here at all. It's much more the ECMO therapy products and Sterile Transfer. So it's really marginal, the ventilator side.

Okay. And then just the last one on the -- I think you mentioned the SEK 300 million in, let's say, delayed sales in Q1. Are you still expecting the sales to be booked as net sales in the upcoming quarters? Or are the -- have they been pushed even further out or even maybe lost?

The specific SEK 300 million that were pushed out of Q1, we expect to recover for the most part in Q2 and Q3, as we communicated. What has happened though is that there are some new delays with -- because of other critical components. So we expect this overall to linger with us for the remainder of the year. So that's why I mentioned that we have included some risk in our new guidance that some sales will be pushed into 2023.

And we have one follow-up from Oliver Reinberg from Kepler Cheuvreux.

I was wondering, is there just a chance to get kind of a quick preview for the second quarter now after this negative news? And if there's more to be expected for the second quarter, it would probably be best just to get it out. I mean is there any thinking that you can share with us in terms of organic sales growth for the second quarter and the margin development? I mean the comps get a bit easier in terms of sales, but should we still be prepared for sales decline and still for margin decline for the second quarter? And any kind of color to what extent how significantly back-end loaded do you expect this year to be? Second question, just on China. I mean China doesn't play a huge role for you. I think it's a high single digit percentage of sales. But is there any kind of change in demand pattern that you see in China directly? And the last question, please, on this kind of mitigation factors that you talked about. I mean obviously, this kind of lost sales is really in higher-margin product categories. These mitigation factors, are they significant?

Okay. Let me see if I can remember all your questions. So when it comes to Q2, we've decided not to -- we decided to wait with the communication regarding Q2 when it's time for the second quarter report. The reason for this call is purely that we see that it's no longer possible to close the gap for the full year when it comes to organic net sales. So Q2 questions and Q2 information will have to wait until the Q2 call. When it comes to China, we continue to see good demand overall from China. So the lockdown effect for us has been mostly in some delayed deliveries of orders that we already have and some of the supply chain disruptions for products that have components coming from China. This has been the main reason. But demand remains strong for us there. And what was your last question?

It was just on this kind of mitigating factors. I mean obviously, the product areas where you now revised the kind of sales assumptions are high margin in nature. So you talked about that there's some kind of mitigation factor. I'm just -- I thought that the margin effect could be larger. So how significant is this offsetting?

Well, it's several hundred millions in mitigating effects at least. We're not going to disclose the number there either, but it's several hundred millions.

And these are just temporary, which will come back next year? Or these are generally cut costs?

Well, we decided not to share a lot of details on exactly -- it's partly because of reductions to adjust to lower demand that we see. And it's partly delaying activities as well. So it's a combination of things, but we won't go into details.

Understood. And can I just ask you, in terms of the phasing of the year at least, should we be prepared for a very back-end loaded nature of the year, probably even more so than usual?

Yes, I can say that much at least. Yes, correct.

And we have one follow-up again from Karl Norén from SEB (sic) [ Danske Bank ].

Yes. Just a question on the long-term outlook. As you mentioned, you are making no changes to our financial targets for 2022 to 2025. But on your CMD, you stated that organic net sales growth should be 4% to 6% on average during the period. Should we read that as you expect to take up all these lost net sales in the years to come? Or how do you see it, Mattias?

Yes, that's correct. We still expect the -- we have the same baseline as when we have the Capital Markets Day. So we really want to point out that the weakness that we see now is COVID-related and mild flu season-related. And we believe these are one-off effects here in 2022.

Okay. So organic net sales growth will probably be even higher than in '23 and '24, I guess.

Yes, compared to straight lining. Yes, correct. Yes.

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

All right. Thank you. I have nothing really to add. I think this was already a very quick summary. So just thanks, everybody, for joining on short notice today. Thank you very much.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.