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

Hello, everyone, and thank you for joining this phone conference with short notice. My name is Mattias Perjos. I'm the CEO of Getinge. And with me, I have our CFO, Lars Sandstrom. So the reason for the call is the press release that we issued about half an hour ago regarding some additional quality and supply changes impacting our earnings in Q2 and the full year 2023. So if we can please move to the next page, #2, we will start the conference. So we have experienced during the month of May and early June here, some additional quality and supply issues in our Acute Care therapies business area, and this is specifically related to the 2 product categories, cardiac assist and cardiopulmonary. And as a consequence of these quality and supply disturbances, we will have a negative impact of roughly SEK 400 million on EBITDA in the second quarter of 2023. And we also expect this impact, of course, to have -- to be visible in the full year results of 2023. We can move to next page, #3, please. Just to give you a little bit of background and recap some of the history here. So if you go back to 2013 and '18, we were in a phase where we had received a corporate warning letter for 1 part of Getinge, the Maquet part of Getinge. And this came from a number of acquisitions that Acute Care Therapies had done or the -- what is now called Acute Care Therapies, it was then called Maquet, down this brought warning letters into Getinge. These warning letters weren't resolved quickly enough and not acted upon in a compliant manner, which then in different steps led to the consent decree in 2015. The first phase of remediation was not effective. So this is something we had to restart in 2017 and '18 with a more holistic approach to remediation and focusing more on the root causes of the quality problems. One outcome of this was that we implemented an overarching quality management system for Getinge, something that the company hadn't had before. And then in parallel with the implementation of a quality management system, we also started emphasizing much more quality culture and the quality skills of people working in the system. We can then move to Page #4, please. We take a few steps forward then into 2019 and 2022. We had slower progress when it came to some of the remediation work during COVID because there was a lot of -- a lot of focus, obviously, on the ventilator part of the business, partly the ECMO and some segments in Life Science as well, and of course, a lot of headwinds in other parts of our businesses. So a lot of moving parts during COVID, which didn't help the progress in these 2 product categories that we're talking about today. We were gradually improving the way Getinge works with quality in acute care therapies, moving more towards continuous improvements and the way the company should work in a healthy quality environment. The delays during COVID-19 had some impact when it came to remediation. It had some impact on supply chain as well and something that's been visible for a bit over 1 year now. So that's added complexity in the remediation and the improvement work in cardiopulmonary and cardiac assist. And one of the consequences of this was the Datascope, the business for our intra-aortic balloon pumps received a warning letter and then was also moved into the consent decree. We can then move to the next page, #5, please. So the more recent history here, if we go to last year and the current year. One effect of having a new quality management system is that you pick up more things from complaints from customers and other types of deviations. We also have new people in our businesses. We have a new President of Acute Care Therapies, and we have a new Executive Vice President of Quality since last year. As part of this process, we are already identifying further product quality issues and also have more-than-expected extensive product maintenance backlog. So we're addressing this in full swing. There's a need for urgent action, of course, to being fully compliant. And we -- in addition to the CE Mark suspension on the balloon pumps, we also had the CE Mark suspension on the balloon pumps. We also have the CE Mark suspended for our ECMO consumables, the HLS and PLS kits. The core products that are affected by the quality and supply chain disturbances, they are medical necessity products. So for the most part, we can continue to deliver these but it's under special processes that are a bit more cumbersome and complex than normal. And in parallel with supplying products to patients because of the medical necessity, we are working in parallel to address some of the remaining quality issues and make sure that we fulfill all regulatory requirements for these product ranges. We can then move to the next page, #6, please. So in May and June of this year, we've had a couple of additional issues popping up. So we have a packaging issue for our Quadrox oxygenators, for example. And this is similar to what you've seen for the HLS and PLS kits, where there is a risk or breach of the sterile barrier in the packaging, if it's not handled with care. So we have a global ship hold in place for this product now, and it's expected to be for the remainder of this year or the beginning of 2024, when a new packaging design is expected to be implemented and this needs to be followed then by regulatory approval as well. We don't expect the Quadrox oxygenator to be labeled as medical necessity. So this is a difference compared to the HLS and PLS kits and partly also the intraaortic balloon pumps and the balloons themselves. We also had some additional quality issues in our intraaortic balloon pump consumables business. There's been a supplier issue in the second quarter regarding the insertion kit for the balloons. We believe we have found the root cause of this, and we do expect to start deliver globally in the second half of 2023, but it's obviously a setback compared to what we had expected when we entered into 2023. We also have quality and supply issues still with the intraaortic balloon pumps themselves. We had additional supply chain shortages in the month of May and also in June. Also here, we have now identified the root cause of this. There are solutions in place, but because of lead times in getting tooling and getting up to a steady production rate, we expect this to be only gradually resolved during 2023. So we expect to deliver small pumps of -- batches of pumps now to customers from the end of this quarter. So really as we speak. We have a number of field actions ongoing as well, and these are expected to be resolved by late 2023 or latest in the beginning of 2024, and again, followed by a regulatory approval. With that, we can move to the next page, #7, please. Just wanted to provide a little bit more details on the expected time plan for resolving the main issues that we see now in cardiac assist and cardiopulmonary. So the Quadrox oxygenators, as I mentioned, there is a new packaging solution designed. It's under implementation, and we expect this to be finalized towards the end of this year, beginning of next year, and then have a regulatory approval for this in the beginning of 2024. On the ECMO consumables side, so HLS and PLS kits, we -- depending on how we're able to resolve the packaging issues that we have already communicated before, we may need to prolong the medical necessity use for CE markets under Article 59 and the medical device regulation. And we are expecting to continue to work on implementing the new packaging solutions for this and getting regulatory approval in the beginning of 2024. On the intraaortic balloon pumps, we have field actions ongoing, and we expect to resume global shipment in the second half but this will be gradual. It's still not completely unconstrained. And in parallel, we are working through the remaining quality deficiencies on our pump business. On the intraaortic balloon pumps themselves, we sent a response the temporary CE Mark suspension and the -- we expect the reply back here within short, but the time line is not completely under our control. And we have ongoing field actions here, as I've mentioned, and we expect these to be resolved latest in the beginning of 2024. So hopefully, that provides a little bit of an update on the expected time line to resolve both supply and quality issues within our 2 product categories, cardiac assist and cardiopulmonary. So with that, we can move to the next page and move over to the Q&A part of this conference call.

[Operator Instructions] The next question comes from Anchal Verma from JPMorgan.

This is Anchal Verma from JPMorgan. I'm on David Adlington's team. I have a few, please. Firstly, the SEK 400 million EBITDA impact in Q2, are you able to quantify or shed any color on the impact in Q3 and Q4? And on this part, could you also please share how much of the SEK 400 million EBITDA impact is from lost revenue versus additional costs? That's question one. And then question 2 would be, can you please share if there are any other product categories that could potentially be impacted over the course of this year from quality or supply challenges?

Yes. Thank you for the question. On the rest of the year, it's not possible for us to guide right now. As I mentioned in the presentation, I think we will be able to gradually reduce the impact of this, but it's not possible to say today, the full year impact of this quality and supply shortages. When it comes to what is lost revenue and that impact on the profit and what is other costs, we cannot break this down and communicate externally either. What I can say that there is a rather big component of having to scrap products that have been produced earlier. So make sure that they don't reach the market. So that's a big portion of the cost now in the second quarter. There's also quite a bit of additional cost for resources involved in solving these problems as well. And then in addition to this, there is some revenue and gross profit loss with this also. And we don't see -- and on the last bit of your question, we don't see any risk for other product areas being impacted by any quality or supply chain shortages at the moment.

Okay. That's clear. So just to understand, there will be a follow-on drop-off impact in Q3 and Q4, but it's difficult to quantify that at the current moment?

Yes, that's correct.

Perfect. And lastly, if I could just push you a bit on the resolution of the packaging and quality challenges, that should be completed by end 2023, H1 2024, but that would be followed by regulatory approval. From a regulatory standpoint, can you just shed some light on the steps and stages you need to go through to receive the regulatory sign off? And what would be the time line for the regulatory approval?

Yes. I think the regulatory approval is a bit out of our hands time-wise. I think what we have in our own control is the design of new packaging, which we have more or less completed. It's different versions of packaging for different subproduct categories here. But we have -- we believe, viable solutions identified. It's an under implementation now. The thing that takes time is usually the aging of products. They need to be aged and then be tested under real conditions, so to speak. So that is the main bottleneck. And the main reason it takes time from the time point where you've identified a new packaging solution until you can apply for the regulatory approvals.

The next question comes from Rickard Anderkrans from Handelsbanken.

So first one, can you shed some light on how we should think about losing any business here? Have you seen any signals of losing to competition. I understand it's a bit different in the different categories. But if you could break it down, how we should think about the sort of lost revenue vis-a-vis permanent versus more temporary loss of revenue to competition from this?

Yes. I think the loss -- there is some loss of revenue associated with this, partly because we're restricted when it comes to new tenders, for example. So that's one impact. And of course, also when we don't have a CE Mark, you have some customers who, when it's possible, prefer to use other products. So part of the SEK 400 million impact is because of lost revenue due to this. I would not say that it's dramatic, and we do think it's recoverable given that when it comes to the clinical performance of the products, both in cardiopulmonary and in cardiac assist. On the cardiopulmonary side, we do still have a competitive gap, we believe, the competition, and we can clearly see from customers that they have a preference for our products. So we believe the loss that we're experiencing right now will be recoverable. When it comes to the balloon pump and the balloons, we have a significant market share here as well. And again, feedback from customers is that they do prefer to use our products where possible. So we do believe the losses here are more or less recoverable as well. But there is an impact from this in the second quarter. We do expect that to be part of the impact in Q3 and Q4 as well.

All right. So no clear signals that you have been losing from the already installed base, so to speak.

Not that we can see or quantify today.

Perfect. And last question, please. So the work with Getinge's quality control program started already back in '14, '15 prior to you joining, Mattias, including the large remediation. Could you help us -- if 1 is not yet started and 10 is sort of a complete work through, where would you say that the company is on the journey to raise its quality control right now, sort of a scale of 1 to 10?

I think it is very different -- difficult to give an average for Getinge in this regard. You should remember that we're not talking about two of our product areas. In many others, we have a completely clean way of working with quality. We had in -- as late as last week, we had inspections with 0 findings in some of our other sites. So a large portion of the company is healthy and have a good way of working with quality. What is difference in cardiopulmonary and cardiac assist is that the problems were deeper from the beginning. We've also had issues with, I think, partly competence in the wake of the implementation of the overall quality management system, and especially when it comes to the balloon pump business, it is a product that is fairly old now and it's a little bit more challenging to address concerns that pop up. So I can't give you a 1 to 10 rating. We have some areas of Getinge that are 10, and we have some that are quite a bit lower, specifically than these 2 areas.

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

A few questions. Trying to understand what has happened after you have downplayed the financial impact from all of this quite a bit. So first, this Quadrox product, how much is annual sales for that one?

The annual sales is around SEK 200 million, if I remember correctly, in that vicinity.

Okay. And the other factors that have categories, what would you like to highlight being the major thing because it seems pretty dramatic that you suddenly will have like a SEK 400 million negative effect in the single quarter after previously having said that it could be new negative financial effects at all, so...

No, we have not said that there will be no financial effect. We've said that they have not been material. And each issue on its own has not been material either. So that is still correct. One of the main changes that we've seen in the second quarter is this high level of scrapping of products as we've gone through inventory that is on the shelf. So this one-off cost now that we've taken during Q2 is one significant thing that has changed since last time we talked about results and projections. The other thing that has changed is that we have had a couple of new supply issues when it comes to both our balloon pump business and partly also cardiopulmonary, which has delayed the deliveries, both on hardware and on consumables. So this is also additional news in addition to things like the Quadrox announcement that we did some time ago. And in addition to the packaging challenges that we have announced quite some time ago now as well, and some additional resources when it comes to adding this -- or fixing these problems. It also relates to the volume that we talked about with a couple of other questions on this call. So we have under absorption in both parts of the business as well. So when you add all that up, it reaches up to SEK 400 million.

Okay. But the supply issue, having that was the reason you were already -- when you reported Q1, you were pretty cautious on the second quarter, right?

Yes. Correct.

So the SEK 400 million negative effect, how much of that were you -- when you were talking cautiously about the second quarter, how much of those SEK 400 million did you expect to happen in the second quarter?

So we don't guide on that. But what you should remember is that it was mainly related to hardware, and we were expecting a gradual ramp up there, and that has been slower when it comes to the hardware delivery. And then, of course, when you have disposables now hurt both on CA and CP that gives us significant volume and mix and of course, then the margin impact out of that. So that is what is hurting more.

And the scrapping of products, could you explain that to the -- or what products -- specifically, what components of these 2 products and what is the reason for that happening now and not previously?

Yes. We've had to go through and do manual inspection. This is related to, for the most part, the HLS and PLS kits for ECMO products. So we've had to go through and do manual inspection of everything that's being produced. And in that process, there's been a number of deficiencies found which means that we've had to scrap the products. So this is probably the single biggest impact of -- inside the SEK 400 million.

And is it because of the packaging or something with the product?

No, it's the packaging.

Okay. So this problem has been much more common than you thought previously?

No, I think we have raised the bar significantly here to ensure that we are absolutely certain, and that's part of the whole remediation and the dialogue to really make sure that the FDA, et cetera, are comfortable with the solution that we have set up. So we have absolutely zero tolerance on anything on the packaging.

The next question comes from Gianmarco Bonacina from Equita.

A couple of questions from me, please. First is on 2024. Can you quantify if there will be still an impact? I guess you said that clearly, you expect regulatory approval in 2024. So I expect probably you could have still some headwinds. And in the following year, 2025, do you expect this to be fully recovered?

Yes. Thanks for the question. We do expect this to be gradually resolved during 2023, but it will not be fully resolved when we enter 2024. So we do expect some headwind because of these 2 issues in these 2 product areas also in the beginning of 2024. By 2025, yes, we definitely expect to be out of this and back to normal operations.

And sorry, just a quick follow-up. In the second half of the year, the gradual improvement in terms of this headwind, it could be, let's say, versus this SEK 400 million, can we expect maybe something the SEK 300 million per quarter? Or would you say it will be very minor. So -- at this time, we can expect SEK 400 million per quarter in the next couple of quarters?

No, I certainly don't expect SEK 400 million per quarter. It should be a gradual improvement, but I cannot quantify that improvement today. I think if you think about it in terms of the scrapping, we have gone through now what we had on stocks. I think that effect should disappear. But then, of course, there is a volume and mix impact that will stay with us in the second half of the year, and we will have a heightened level of cost to address some of these remaining quality and supply chain issues as well. So these are the main factors remaining with us second half of 2023.

The next question comes from Oliver Reinberg from Kepler Cheuvreux.

Quick questions from my side, if I may. Mattias, you talked in your prepared remarks that you can continue to sell in some kind of areas, but under restrictions. So can you just provide some kind of color what are these restrictions? And can you give us any kind of idea how should we think about the ECMO consumer sales progressing? So sales of consumers were 100 last year, this kind of restrictions would imply that you can still say sell around 70% just to get any kind of color here? Secondly, on the guidance, can you just confirm? I assume this SEK 400 million will not be booked as a onetime item? Or will you take that out? And also, can you just confirm when you expect to provide a kind of new guidance for this year but probably also midterm? And then last question, please, on Life Sciences. Obviously, we have seen a kind of corporate warning in the space today, which points to the fact that the stocking will last long as there's also generally softer demand. So can you just provide on the back of this also an update what you see in terms of demand profile in your Life Science space?

Yes. Thanks, Oliver. I'll try to remember all the questions here. When it comes to the restrictions, it is rather complex because it varies on -- depending on geographic market and product categories. So what we mean with that is that -- for example, for the HLS, PLS kits, there is a special way of -- the special process of handling these, of labeling the products. For example, we are restricted from participating in new tenders and so on. But the demand drop here is not that significant. It's been more actually supply chain constraints because of this improvement work that we have been working through. But I can't detail it out more of a product category because it varies a lot per geography and product group. Then when it comes to cover the ECMO sales, I think. And when it comes to the IAC question, we've not decided to classify anything as IACs as of today. We expect this to be booked in the P&L as normal. And on the Life Science bit, we obviously follow and see the same type of market dynamics as Sartorius as well. We had factored in more of that, I think, into our already released guidance here. So I think when it comes to our top line guidance, if you combine everything, we've decided to maintain it, but we are likely to end up in the lower range of the top line guidance for 2023.

And just a followup. So when you do not expect any kind of significant change in the demand for ECMO consumers, that means the kind of sales will only be slightly down compared to last year. Is it a fair understanding?

Sales will be significantly down compared to last year, but not because of lack of demand but because of our inability to supply has been the main challenge so far. It is a weaker market compared to what it was before COVID when we saw a 15% type of growth, but it's still a growing market.

Okay. So you have supply issues also on the consumable side of ECMO?

Yes, both on consumables and hardware, we've had supply restrictions here because of quality and supply chain in the second quarter. But if we expect to be able to gradually remove during the second half similar to on the cardiac assist side of the business.

The next question comes from Virendra Chauhan from AlphaValue.

Mattias. So quick one. One, what percentage of the SEK 400 million impact is coming from the scrapping of your stock, which I understood from your comments. Number two, what do you define as immaterial financial impact, which was a comment or the statement in the earlier releases related to the packaging issues as and when they were flagged. And lastly, were the issues identified in-house or as a part of a third-party regulatory inspection. So those are the 3 from my side.

Yes. Can you repeat the -- which issues you referred to when you asked whether they were identified by ourselves or a third party?

The issues regarding the packaging specifically. And the stock as well -- the scrapping of the stock as well?

The packaging bit originates from the whistleblower -- the whistleblower we had in January of 2022. So that's from an external. And since then, the additional issues that have popped up there from our own investigations and our own findings. And your first question, when it comes to the SEK 400 million in the scrapping part, I can only say that it's the biggest individual item, but it's -- we can't quantify it in specific sectors.

Okay. I could just a quick follow-up. So you're saying it is the biggest component. And in response to an earlier question, you also mentioned that you don't -- you have mostly gone through all of the stock that was to be reviewed. And hence, it shouldn't pop up in the next couple of quarters. Is that a fair understanding?

Yes. We have gone through most of the stock, as I said. So it should definitely be a smaller impact. There's always the risk with supply chain and transportation and the way things are handled as we may have scrapping because we are scrutinizing our packages on arrival to our own sales and service companies in a more stringent way than we have before as well. So we believe the bulk of this is behind us, but we can't rule out the costs also in coming quarters.

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

Thank you very much. Thanks for tuning in. And if you have additional questions after this, feel free to channel them through our Investor Relations. And once again, thank you so much for tuning in with short notice. Have a good rest of the day.