Getinge AB (publ)

Welcome to the Getinger ABQ2 presentation for 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star 5, arc their telephone keypad. Now I will hand the conference over to CEO Matthias Pergeus and CFO Lars Sandström. Please go ahead.

Hi everyone and welcome to today's conference. This is Mattias Perdius and I'm accompanied by our CFO Lars Sandström as well. We can move directly over to page number two, please. So if we start with the summary and the key takeaways for the quarter, getting a sales increased organically by 1.3% during the quarter due to the strong performance of surgical workflows. While we had order intake drop 4.5%, mostly driven by the quality and supply chain challenges that we see in cardiac assist, plus some market weakness in the bioprocessing part of life science. The group sales, margins and cash flow were negatively impacted by these challenges as well in cardiac assist and cardiopulmonary in our acute care therapist business area. And this is something that we'd informed about already in June. We had an unfavorable mix and inflation that particularly affected also surgical workflows and large parts of life science. And these are areas where we're experiencing longer lead times from order to deliver it. And therefore it's a bit more difficult to fully compensate by raising prices in the short term. So this also had an impact on us, of course. We continue to have positive free cash flow and a solid financial position with a healthy safety margin when it comes to leverage. We can move over to page number three, please. If we take a step back and look at some of the key activities and events for the quarter, when it comes to our offering to customers, we signed an agreement to acquire 100% of the shares in High Purity New England Incorporated, which has a strong position in custom single-use solutions for bioprocessing applications. From an organic perspective, Getting a Life Science launched IsoPrime. This is an isolator with comprehensive connectivity and traceability features optimized for commonly occurring sterile transfer applications. We also had a couple of news after the quarter ended. Getting an acute care therapist was granted a 510k clearance from the US Food and Drug Administration for Servo Air Light. Like all our servo ventilators, it offers ICU quality ventilation, but it's more geared towards spontaneously breathing patients in need of extra breathing support. It can also be operated independently from wall gas and is suitable for inter-hospital transports. And we expect this to be available for customers in the US from September 2023. And it's an addition to our offering that greatly increases the addressable market in the US. When it comes to sustainability and quality, it's worth mentioning that our carbon dioxide emissions, energy consumption, and also the share of renewable energy continue to develop in a positive direction. During the quarter, though, we informed about additional challenges related to quality and supply within two product categories in acute care therapies, cardiopulmonary and cardiac assist. which was expected to have a negative effect on sales and adjusted EBITDA for the quarter and the full year. In Q2, the impact was approximately the 400 million SEC that we informed about in June. In order to give some clarity on where we are with these challenges, we've added two slides that we normally don't have in this deck with some relevant information to explain this a bit more in detail and give you a status update. So if we can move over to page number four, please. So let's look at Cardio Pulmonary first. This is a business that had a bit more than 4 billion SEC in net sales in 2022. The two products having challenges are Quadrox and HLS PLS. Quadrox represented less than 10% of sales in 2022, while HLS PLS made up almost half of net sales for Cardio Pulmonary. Both of these products are life-saving consumables and both come with high gross margins. Both have issues with the packaging and not the products. This is important to be aware of. And no incidents have been reported for any of these two product categories. When it comes to Quadrox, we don't ship anything at the moment. Deliveries can start after us bringing a new packaging solution to the market, which is expected late this year or potentially during the beginning of next year. And this is then followed by applying for regulatory approval. On HLS PLS we're working with a dual track approach, so redesigning the existing packaging solution and in parallel designing a new solution. The redesign is expected to be finalized by end of this year, early next year, following by an application for regulatory approval. At the moment we are shipping these products due to the nature of products, they are a medical necessity. And as we've said before, when it comes to the CE markets, we need to reapply for a prolonged use of Article 59 in order to be able to ship into CE markets after September this year. And we just received after the closing of the quarter positive information from Bfarm, which is the German competent authority, stating that we are allowed to deliver our HLS PLS sets without CE marking also after September 2023 in Germany, which is the largest CE market. The European Commission has the power to decide that the same applies for all CE countries, but this decision is still to come. So that concludes Cardio Pulmonary. We can move over to page number five, please. Let's then have a closer look at Cardiac Assist. This business had net sales slightly below 2 billion SEC in 2022. The two products having challenges are intraortic balloons and intraortic balloon pumps. The balloons represented a bit more than half of sales in 2022 while the pumps and service made up the rest. The balloons are life-saving consumables that come with high gross margin. They are used on the intradict balloon pumps that come with medium level gross margins. When it comes to the balloons there isn't an issue with the product that we produce but with a third-party component in the so-called insertion kit. After the end of the quarter, we have identified the root cause to this problem and the global deliveries resumed in July as a part of the field action with the corrected dilators expected to resume shipping in middle of Q3. When it comes to the pumps, we've had both supply and quality constraints with ongoing field corrections that we expect to have resolved later this year, beginning of next year, followed by applying for regulatory approval. We are allowed to deliver during field corrections in most important markets. Currently, though, we prioritize field service backlogs and we expect to ramp up delivery volumes gradually during the second half of 2023. As we've said before, we have awaited a response on the temporary CE mark suspension in Q3. It actually came very early in Q3, so just the other day, stating that the CE certificate is reinstated with immediate effect. So this is good evidence of the positive traction that we have with the work here. And as we all know, these challenges have the highest possible priority in getting at the moment, and therefore it's good to see these positive results. We will continue to report and update you on the progress in the coming quarters for these two categories. We can then move over to page number six, please. as i mentioned in the beginning of the call order intake declined by four and a half percent in the quarter and net sales increased by 1.3 percent organically orders were impacted by soft performance in china quarter making up for most of the drop that you see here in asia pacific the asia pacific decline was most visible in the areas with quality and supply challenges in acute care therapies so again cardiac assist and cardiopulmonary And there was also some weakness in China when it comes to the life science biopharma offering and the washer disinfectives. On the positive side, both these businesses and business areas performed well in Americas in the quarter, which explains the organic order growth in that region. When it comes to net sales, then we had a positive development in both Americas and in EMEA to a large extent, thanks to surgical workflows, strong performance in those regions. The decline in Asia Pacific is to a large extent explained by the soft performance in China in the same product areas as for orders. So again, part of life science and cardiac assist and cardiopulmonary within acute care therapies. We can then move over to page number seven, please. So if we combine the status update where we are and into an outlook for 2023, we leave it unchanged. So we expect organic net sales growth to be between two and 5% for 2023. We can then move over to page number eight, please. So let's look into the order intake evolution a bit more in detail. When it comes to acute care therapies, we had a 3.7% organic decline in the quarter. This was mainly due to the temporary quality and supply challenges in cardiac assist and also a bit lower order intake in critical care. The performance was particularly weak in China in the areas where we have quality and supply chain challenges, so cardiac assist and cardiopulmonary while order intake in North America was strong in all product categories except for cardiac assist. When it comes to life science, we had a 14.3% organic decline in order intake. The lower order intake was mainly due to the results of a weaker trend in washer disinfectors and the continuing soft demand when it comes to bioreactors. The performance in China was particularly soft in the quarter also for life science. The order intake increased in all product categories in Americas for life science. In surgical workflows, we had a 1.6% organic decline. This was due to the decline in steam sterilizers and washing disinfectors. And we saw a slight increase for all our other products in surgical workflows. The order intake was unchanged in the important North American market, and this is despite highly challenging comparative figures from the second quarter of last year. We can then move over to page number nine, please. If we do the same exercise when it comes to sales, we can see that organic sales for acute care therapists increased in all key product categories for cardiac assist and cardiopulmonary. which were impacted by the previously announced quality and supply challenges. So it takes us to a minus 5.4% decline or organic growth for acute care therapies. And the development here was markedly negative in China. Net sales for all other product categories in acute care therapies increased during the quarter. Open orders for deliveries in the current year in acute care therapies are more than 20% higher than at the same time last year. If we move to life science then, we had a 0.7% organic growth in sales, mainly as a result of higher deliveries of steam sterilizers and washer disinfectors in Americas and in EMEA. Net sales in products for customers in the biopharma segment continue to decline year on year, particularly in China. The positive trend when it comes to service, though, continued. However, if you look at total recurring revenue, it declined as a result of lower volumes of consumables targeted to the biopharma segment. And finally, then, surgical workflows. We had a 13.4% organic sales growth in the quarter. This was growth in all product categories and substantial growth in North America, which is well in line with the business area's long-term ambition and strategy. The improved situation regarding the supply of components also contributed positively to sales of capital goods for the quarter and the backlog reduced considerably in this category. Recurring revenue also increased organically, although not to the same extent. If we then look at the currency impact of this, we had a 411 million SEC or a 6.2% positive impact on net sales for the group in the quarter. Overall capital goods organic growth was 6.8% in the quarter. This is positively impacted by strong deliveries in surgical workflows. Recurring revenue declined for the group 1.9% due to the challenges in cardiopulmonary and cardiac assist and also continued soft performance when it comes to beta bags as we can see that customers are still destocking this product. We can then move over to page number 10 please. If we move further down the P&L and look at the gross margin, we can see that adjusted gross profit decreased by 41 million SEK to 3 billion 314 million SEK in the quarter, where a positive foreign exchange effect accounted for 182 million SEK. For the group as a whole, the adjusted gross margin declined by 4.1 percentage points due to unfavorable mix, lower absorption and cost inflation and also currency. These effects were partly offset by price increases. For acute care therapists, the adjusted gross margin declined by 3.8 percentage points, mainly due to lower sales volumes related to cardiac assist and to cardiopulmonary. The margin was also impacted by costs for an increased level of scrapping of HLS and PLS sets being damaged during transport, as well as higher costs for input materials and also for personnel. This was partly offset by positive currency effects, price increases and strong performance in, for example, critical care when it comes to gross margin. For life science, the adjusted gross margin declined by 2.3 percentage points as a result of negative product mix and higher cost for input goods, personnel and also currency effect. Price increases contributed positively to the margin in life science. Certical workflows then adjusted gross margin decreased by 3.6 percentage points primarily as a result of higher costs for input goods and personnel and negative currency effect. This was partly offset by higher sales volume, some price increases and also productivity improvements in the business area. So with that overview we can move over to page number 12 and I leave over to you Lars.

All right thank you Mattias. So looking at adjusted beta, it decreased by 461 million compared to the same period last year, where approximately 400 million can be explained by the challenges in cardiac assist and cardiopulmonary. Adjusted for currency, gross profit had a minus 4.4 percentage point impact on the beta margin due to what was just presented by Mattias. Organically, S&A increased by some 10% versus previous year. The difference is mainly explained by lower level of variable pay last year, creating a delta of 90 million year on year. In addition, we have some 50 million of extra costs related to the challenges in cardiac assist and cardiopulmonary. So when looking at underlying OPEX, it is negatively impacted by cost inflation and a higher level of activity versus last year. This is to some extent mitigated by restructuring efforts. And the change in R&D is related to activities in SW, surgical workflows and life science. The minus 85 million SEK on other OPEX was mainly attributable to currency effects related to operating receivables and liabilities in foreign currencies. When putting it all together, we end up with quite a significant reduction in operating leverage and a minus 3.3 percentage point impact on the margin. Adjusted for currency, DNA had a positive impact of 0.3 percentage point on the margin in the quarter. All in all, this resulted in adjusted beta of 495 million and a margin of 6.9. next page please free cash flow amounted to 276 million and was impacted by a lower operating profit for the quarter looking closer at working capital the positive change was mainly a result of lower account receivable and a slightly higher level of liabilities Working capital days continue to be well below 100, and we are now at some 96 days, down 33 days from the peak in Q2 2018. The lower operating profit for the quarter takes us somewhat below trend on operating return on investor capital with 11.8% on a rolling 12-month basis, which is still above the cost of capital. Let's move to page 14. The increase in net debt during the year is mainly related to the settlement payment during Q1 and the dividend during Q2. This was, of course, partly offset by the underlying operating cash flows. All in all, this takes us to 5 billion in net debt at the end of the quarter. If we adjust for pension liabilities, we are at 2.5. This brings us to a leverage of 0.9 times EBITDA. And if we're just for pension liabilities, leverage is at 0.4 times EBITDA. Cash amounts of approximately 4.4 billion at the end of the quarter. Let's move back to page 16 and back to you, Mattias.