Earnings Transcript for GETI-B.ST - Q4 Fiscal Year 2024

Operator: Welcome to the Getinge Q4 Report 2024. [Operator Instructions] Now I will hand the conference over to speakers CEO, Mattias Perjos; and CFO, Agneta Palmer. Please go ahead.

Mattias Perjos: Thank you very much, and welcome, everyone, today to today's earnings call. With me, I have our CFO, Agneta Palmer. Today's conference, we'll start by looking at the performance of Q4 and then a bit of a recap of some of the key events of 2024. So we can move directly over to Page No. 2, please. So the key takeaways when it comes to performance for the quarter, let's start with that. So looking back now at a strong quarter consistent through the 3 months. Order intake grew by 11%, of which organic growth amounted to 7.4%, thanks to positive development in all regions and all business areas, except for Life Science, which was basically flat. Net sales increased by 11.8% in the quarter and there was 9.2% organic growth when it came to sales. If you look at the adjusted gross and EBITDA margins, they improved significantly in the quarter. This was mainly due to healthy price increases coming through. We had good leverage from the higher volume. We had a positive product mix and also good traction from our productivity efforts. And when we talk about financial leverage, our financial position remains solid. And even if the leverage has increased somewhat after the acquisition of Paragonix, it is trending down, and our financial position remains solid, thanks to the strong free cash flows that we generate. The proposed dividend amounts to SEK 4.60 per share, and this represents 38% of the free cash flow per share. We can move over to Page No. 3, please. So this page is focused on some of the other key events in the quarter. Let's start with the sustainability and quality. On November 15, the FDA published a letter to health care providers on its website, repeating the information about the voluntary medical device recall and supply concerns related to getting best to view hemopro endoscopic vessel harvesting systems and actions are being taken as agreed with FDA. So this is something that is ongoing. The progress has continued related to the previously communicated field actions for the Cardiosave balloon pump and the update here is that all required technical solutions are now identified and in different stages of implementation. This means that we have a time plan for this. And therefore, we've also made a provision of SEK 297 million in the quarter to cover these activities that will span across 2005, '26 and partly into 2027. If we then shift the focus to offering and customers. When it comes to our offering, Paragonix Technologies was acquired in Q3 of 2024. They received FDA 510(k) clearance for its innovative KidneyVault portable renal perfusion system. This is a system that is designed to protect donor kidneys, which is the most in-demand organ during transportation to transplantation. Currently, there are more than 100,000 patients on the national transplant waitlist in the U.S. and 86% of those patients are waiting for a kidney is a very much needed product that we're happy to bring to market. When it comes to the last bullet, we have a bit more information on the surgical perfusion withdrawal, and we'll come to that on the next page. So let's move directly to Page No. 4, please. After the end of the quarter, we have initiated a process with the strategic intention of phasing out the surgical perfusion product portfolio, which is part of cardiopulmonary inside acute care therapy. We're proud of our legacy and the products within this field. But unfortunately, we have been challenged gradually during the last 10 years, actually, with a steadily decreasing market share and eroding margins. And the main benefit of this intended phaseout is that we can reallocate the resources to areas of more profitable growth, and this is mainly within ECLS and in transplant care. From a financial perspective, the exit is expected to have a marginally positive adjusted EBITDA contribution from 2025 and onwards. This intention has been shared with relevant employee representation bodies and employees in line with local labor regulations and necessary steps have been initiated already. The final decision on the restructuring is dependent on the outcome of negotiations with the employee representation bodies. And just to put the surgical perfusion into perspective, we had net sales of about SEK 450 million in 2024. And depending on the outcome of the negotiations with the employee representation bodies restructuring costs are estimated to approximately SEK 800 million in total, of which SEK 522 million was recognized in the fourth quarter of in 2024. And this is reported as an item affecting comparability. It consists primarily of write-downs, meaning that it has a very limited impact on cash flow. We can then move over to Page No. 5, please. So if we look at the top line performance in the quarter, overall, we had strong performance, positive development in all the regions. When it comes to order intake, we had 11% growth, of which 7.4% was organic growth. Acute Care Therapies had double-digit organic growth, coming mainly from ventilators in Critical Care, ECLS in Cardiocore and from Cardiac Assist. Despite the strong orders within Sterile Transfer, Life Science was slightly down, mainly due to weak orders for High Purity New England within bioprocessing. Surgical Workflows had growth in all product categories. So that's really positive. When it comes to net sales, we had 11.8% growth and 9.2% of this was organic growth. And also net sales, Acute Care Therapies delivered double-digit organic growth coming from the same categories as orders, along with healthy growth for our EVH products within cardiac surgery. Looking at Life Science. They had a very busy quarter and managed to show an impressive effectiveness when it came to deliveries in the quarter. So the business area was up by almost 13%, mainly on the back of significant sales of sterilizers and the continuing strong recovery in sterile transfer. Surgical Workflows had a particularly good performance within Digital Health Solutions and Infection Control, where also Healthmark that we acquired a little bit over a year ago is continuing to make a substantial contribution in line with our strategy to increase sales within consumables. So with that, we can move over to Page No. 6, and I hand over to you, Agneta Palmer.

Agneta Palmer: Thank you, Mattias. So this quarter clearly shows the leverage that we get on margins when sales volumes go up. And we are also pleased to see that the focus that we have on structural measures to enhance productivity and cost efficiency are starting to pay off. For the group, adjusted gross profit increased by about SEK 1 billion to SEK 5.6 billion in the quarter primarily on the back of healthy price increases, volume and favorable geographical and product mix. If we then look at the adjusted EBITDA, the adjusted gross profit had a positive effect on the margin by 3.8 percentage points, thanks to those factors that I just mentioned. We continue to see a positive trend on the OpEx side, which adjusted for currency had a 0.7 percentage point positive impact on the margin in the quarter, mainly related to operating leverage. FX had a positive impact on the margin as well. And all in all, this resulted in an adjusted EBITDA of SEK 2.143 billion and a margin of 19.4%. Let's move to Page 7, please. The strong performance in Q4 comes through also in the free cash flow and leverage. Free cash flow increased by more than 70% accounted to around SEK 1.7 billion. Compared with last year, free cash flow was positively impacted by the improved underlying business performance, working capital increased, but to a lesser extent compared to last year. And if we look at working capital days, they continue to be well below 100. We are now at 89 days. At the end of Q4, net debt was SEK 10.5 billion. If we adjust for pension liabilities, we are at SEK 7.8 billion. And this brings us to a leverage of 1.6x adjusted EBITDA, which is well below the 2.5x, which we have as an internal threshold. If we adjust perpetual liabilities, the leverage is at 1.2x adjusted EBITDA. So this signals that we remain in a solid financial position even after then the recent acquisitions that we have made. Cash amounted to approximately SEK 3 billion by the end of the quarter. So all in all, we can conclude that the financial position continues to be strong. Let's then to Page 8, and back to you, Mattias.

Mattias Perjos: Okay. Great. Thank you very much, Agneta. That concludes the summary of the quarter. Let's take a step back and zoom out to look at the full year of 2024. As you all know, it's been an eventful year for us with a fair share of both challenges and some key achievements. And on this slide, you can see just a selection of some of the key events throughout the year. . Let's move over to Page No. 9, please, and we dive into Paragonix Technologies. So one of the highlights, of course, was the acquisition of Paragonix in 2024, a market leader within organ transport, products and servicing. And if we take a closer look at the first quarter as part of the Getinge family, we can move over to Page No. 10, please. So Paragonix showed an impressive net sales growth of about 65% in the fourth quarter, contributing to sales with approximately SEK 240 million with about 50% market share in heart and lung, respectively, in 10% in liver. Paragonix supported more transplant cases than all the advanced preservation companies in this segment combined in 2024. So it's a really impressively strong position. For 2025, we've set the bar high with an ambition of helping 10,000 transplant patients. And I want to take this opportunity again to welcome the Paragonix team on board and congratulate on the impressive performance so far. We can then move over to Page 11, please. And one topic that we've discussed in all the course this year is regarding at least since May, is the follow-up on the FDA letter in May. So on May 8 last year, FDA sent a letter to health care providers advising them to transition from Getinge Cardiosave balloon pump, the CardioHealth system and the HLS sets advance to alternative products and continue using Getinge's products only no other alternatives are available. So we thought it would be prudent to give you an update on how this has progressed. And to do that, we'll move over to Page No. 12, please. So if we exclude service and look at hardware and consumables or the categories in the U.S., they made up about 7% of total Getinge sales in the rolling 12 months to May 2024, which was at the time of the letter. And just for reference, both ECLS is a category where the bulk of the revenue is from consumables and service. And in IABP, it's also the majority, but not as heavily weighted towards consumables as ECLS. So since the FDA letter in May, what has been the impact on sales and to see that we move over to Page 13, please. And what we can see is that the sales share has remained on a similar level, meaning growth in line with Getinge over overall. It's been much less dramatic impact than we mentioned. They were expected back in May. There's still uncertainty about the progress ahead. It's clear to me, though, that the impact so far is much less than we feared. And it is proof that the products are in demand and that we have a high customer loyalty. I think it's also worth repeating that we have the strong next generation of Cardiosave and Cardio health systems in the pipeline. We can then move over to Page 14, please. In May, we also had our Capital Markets update, where we shared our ambitions for 2024 to 2028, and we guided for an expected annual growth of 3% to 6%. Landing as an expected adjusted EBITDA level of around 16% to 19%. As you can see on the left for 2024, we were a bit above the expected margin trajectory, and we still stand by the margin ambition for 2028 and trend very well towards that. So overall tracking according to plan or even a little bit better. The main drivers behind this development is linked to both product remediation that is going according to plan, including the elevated quality cost that we still remain with and have remained with in the fourth quarter as well. On the mix side, we see some normalization in biopharma and bioprocessing on the horizon. So there's some good continuing trend in line with what we've reported in the previous quarter. There is positive traction in key product segments, such as ECLS within transplant care and also in infection control consumables. We see that our R&D and innovation activities are going according to plan as well. And from a cost perspective, inflation is coming down on input materials. We will have to live with some elevated salary inflation for a while, but this is at least partly offset by some of the restructuring efforts that are kicking in that we can see the clear results of in Q4. And these measures will continue to contribute. And I also expect our price increases have contributed strongly in 2024 to continue to have a positive effect. So with that, we can move over to Page No. 15, please. So this takes us to the outlook for 2025, where we expect organic net sales growth to be in the range of 2% to 5% based on the 2024 starting point where we ended 2024. The outlook assumes sales contribution from the intended phaseout of surgical perfusion business at about half of 2024 figures, which takes us to roughly SEK 300 million. In addition, we expect the recent acquisitions to continue to contribute above this number. So with that, we can move to Page No. 17, please, and just summarize very quickly before we move to the Q&A. So we delivered a very strong performance in the fourth quarter of last year in terms of net sales, solid order intake and good margins in the quarter. All in all, very happy to report a record sales for the full year of 2024. Free cash flow was strong in the period and our financial positions remain solid, and this is why the Board has decided to increase the dividend to SEK 4.6 per share. When it comes to the outlook for 2025, we have decided to guide for an organic net sales growth of 2% to 5%. And when it comes to priorities, you will recognize most of them here. We continue to address the remaining challenges when it comes to quality and Acute Care Therapies. We continue to work with sustainable productivity improvement and cost consciousness across the company. And most importantly, we continue to create adding value for our customers. So with that, thanks for your attendance, and we move over to Q&A, please.

Operator: [Operator Instructions] The next question comes from Rickard Anderkrans from Handelsbanken.

Rickard Anderkrans: So first, a little bit on the margin outlook for 2025. I appreciate the follow-up from the May Capital Markets update, but an impressive 100 basis point year-over-year margin improvement to 14% for the full year. So how should we think about the margin uplift potential for 2025, where you stand today?

Mattias Perjos: Yes. Thanks, Rickard. We've decided not to give any more granular yearly guidance when it comes to margins. We stand by the spend that we gave from the Capital Markets Day. And I just want to reiterate that we are clearly ahead of this now tracking very well. So we expect continued improvements in the years to come, but we decided not to break this down into each year.

Rickard Anderkrans: Okay. Okay. But continued improvement then for '25 is reasonable as we stand today then?

Mattias Perjos: Yes, I think so.

Rickard Anderkrans: Okay. Okay. And it seems like you have good momentum on both orders and revenues in ECMO and balloon pump in the quarter and for the year here. So how should we think about any impact sort of boost from sort of back order deliveries here in the quarter? And how do you feel about the outlook for '25 and some assumptions around the competitive impacts we have seen increased competition in the U.S. ecmo for example. So just interesting to hear a little bit on how you feel about the sustainability and the momentum you saw in Q4, if there's anything extraordinary to call out?

Mattias Perjos: Yes. I think there is some in the fourth quarter from delivering primarily some of the balloon pump backlog that we've had for a while, but there's also a strong underlying demand, I'd say, especially for ECLS when we talk about the challenged categories. And you're right that there've been some new competition in the ECLS arena. So we're monitoring this closely. We can see that they're making some headway, but at the same time, we're still able to grow our business. So it kind of confirms our hypothesis that this is a nicely growing space, where there is both customer loyalty to our products, but also room for new entrants clearly. So very difficult to predict how this will pan out during '25 in the coming years, but it's something that we're happy to see the loyalty from our customers, and we're just continuing to monitoring the impact from competitors.

Operator: The next question comes from Erik Cassel from Danske Bank.

Erik Cassel: First question, the sort of strength in Life Science related to high deliveries of sterilizers. I believe that's to a specific customer. So how nonrecurring are those kinds of revenues? And if you actually see them as somewhat nonrecurring, what's the contribution from that on the EBITDA level sort of to split that out from the rest of the business?

Mattias Perjos: Yes. Thanks. So we don't see it as nonrecurring. We see this business as a bit lumpy when it comes to order cycles and delivery patterns given that the delivery times are often between 12 and 18 months. So and it's not -- you're right, we have some significant customers in here, but it's not dependent on one customer. I want to make that very clear. So I don't think it's possible to isolate that and think of that as something separate. I mean, if you look at the overall sterilizer business year-over-year, it's -- we have many customers in this field. And as I said, business patterns tend to be lumpy, but we do expect to continue to see growth in these categories over the planning period.

Erik Cassel: All right. Perfect. And then next question, sort of a follow-up or a repetition of the previous ecmo questions, but you're not really specifying ecmo or balloon pump consumables in dimensions of strong order intake, I believe. I mean is that just wording or are actually now already seeing order intake of hardware in those businesses as doing fairly well?

Mattias Perjos: I mean, we continue to have order intake absolutely in those categories. It's not the same growth as it would have been without these restrictions when it comes to the FDA letters and the impact from competitors. And when it comes to -- especially balloon pumps, I want to remind you that we have decided together with FDA that we do replacement business only. So clearly, new customers, new pumps will go to somebody else. That's not a part of the market that we're competing for. So that is a headwind when it comes to orders. But overall, I think the categories, as we described on one of the slides here have grown in line with getting overall despite these headwinds.

Erik Cassel: All right. Perfect. That's good here. Just other question. There's lots of mentions of price adjustments driving results this quarter. Could you give any color on what's the sort of magnitude of impact on Q4 and how you see the outlook for pricing in 2025?

Mattias Perjos: Yes, sure. I think our sales team have done an incredible job here during the whole year actually and a strong finish. So it's around 3% for both Q4 and the whole year. .

Agneta Palmer: And maybe just for.

Erik Cassel: That's something you can repeat.

Agneta Palmer: Just important to mention that on the pricing side, we do have really good traction, but it is getting increasingly difficult in the market to increase prices just to make sure that we mention that this way. .

Erik Cassel: Okay. So what are you seeing for '25?

Mattias Perjos: We continue to see price increases, but it's likely to be a little bit below the level that we've had in 2024, but no more detailed guidance than that. .

Operator: The next question comes from Aisyah Noor from MS.

Aisyah Noor: My first one is on Paragonix. Are you able to disclose roughly the profitability of this business in the fourth quarter? I think you mentioned in third quarter that it just turned profitable. Just trying to assess how we should be thinking about the margin for this business and the contribution in 2025 in our forecast? Second question is on China. I guess, Life Sciences and I guess, overall, what was the decline in Q4? And could you give some outlook for China in 2025, including any potential stimulus benefits?

Mattias Perjos: Yes, thanks. When it comes to Paragonix, we don't disclose disclose detailed numbers on like product area level. But as you mentioned yourself, they did turn profitable already around the end of the third quarter and have continued to improve profitability. . Still dilutive to the group and to ACT. But we can see that there is leverage as they continue to grow. So that's, I think, the best guidance I can give on that. And when it comes to China, we actually did have some small growth towards the end of the year. So signs of improvement there as well. And we don't disclose 2025 growth ambitions here on kind of country level.

Aisyah Noor: Okay. If I can ask a follow-up on the Surgical Perfusion business phaseout. So my understanding is that the competence in the perfusion segment would complement the Paragonix business. And I think before in the past, you said that these perfusion service models could strengthen your organ transplant portfolio. So what's changed your mind? And when you say you're going to refocus some of that investment into ECLS and transplant care. What kind of products or segments are you looking to enhance?

Mattias Perjos: Yes. We've not changed our mind at all. I think that's a misunderstanding, if that's the case. So the rationale behind withdrawing from surgical perfusion is the low market share that we continue to have really in the wake of the consent decree 10 years ago, where we had to abandon the U.S. market in surgical perfusion. So it's been a struggling category since then. So a small market share. It's a loss-making category for us as well. So we don't feel that we're a good owners of this anymore and the effect of withdrawn from this segment is that we actually free up competency and resources for transplant care and for ecmo. So that's the rationale.

Operator: The next question comes from Mattias Vadsten from SEB.

Mattias Vadsten: First one, I think you flagged ventilators as a key driver in orders and sales during Q4. So if you could give some further flavor to the development for vents isolated? And I'm also interpreting this as if we look at ventilators from a sales perspective, mainly start to grow here actually in Q4. So do you see sort of elevated growth rates in the coming quarters here? And could you give any sort of estimation on ventilator growth rates here for '25 and maybe up until '28? That's the first one.

Mattias Perjos: Yes. All right. Thanks. I mean your assumption is correct. We've seen very good momentum for ventilators now since the half year mark, roughly, we can see both strong order intake and then we are starting to translate into better and better sales as well. So we're clearly now seeing some of the benefits of competitors withdrawing from this market. But in line with like the other product areas, we don't give detailed order intake or revenue numbers per category, but it is strong double-digit growth right now for that part of the business.

Mattias Vadsten: That's very helpful. And then on Surgical Workflows, I think follow-up with Q3, where the underlying margin started to take off in Surgical Workflows sales without Healthmark. So I guess, you have reasons to believe that this will continue in coming quarters as well. And I think just sort of 9% margin here now for the full year. So Yes. Would you say the 10% level is relevant for '25? Or how should we look at Surgical Workflows? What is the main -- the key part of the improvement there?

Mattias Perjos: It's a number of things. Surgical Workflows has a good track record of working with productivity since long before the pandemic actually. And as you -- Sorry, I have some site disturbance. Yes. No, Surgical Workflows have worked in a structured way with productivity since long before the pandemic and we've been able to see through, I think, some of the progress for this whole time period as well. So they work with all the levers when it comes to moving to better margin categories. So we have some mixed rotation within the business area. There is productivity efforts. They've suffered a lot from inflation the last couple of years, but we can see now that some of the inflation mitigation effects are delivering results as well. We do also now have better price traction in Surgical Workflows. So that's also meaningful for help. So we don't give BA or group guidance on EBITDA margin in the individual years, like I said earlier. But we stand by the ambition that we communicated some years ago that we should be able to do 10% EBITDA on surgical workflows, excluding the impact of Healthmark. And we're not there yet, but we've made some good steps in that direction.

Mattias Vadsten: One last for me, maybe if there are any phasing effects worth mentioning, what struck me was that you mentioned -- he was strong the scope endoscopic vessel harvesting was strong in Q4. Is that something worth mentioning from facing dynamics in the business?

Mattias Perjos: No, nothing to call out, nothing in particular. There's been a little bit stop and start during the second half of the year, but I think we intra-quarter, this should not be a material impact.

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

Kristofer Liljeberg: Two questions. First, you mentioned this negative impact from the phaseout of the perfusion -- surgical perfusion here. Just to make sure, did you say that the negative impact will be SEK 300 million? Or is that the sales you will still have in 2025?

Mattias Perjos: It's the sales we will still have in 2025.

Kristofer Liljeberg: Okay. Great. And then I wonder about is it possible to quantify, as you have done before, the cost or the impact from the quality issues on earnings in 2024 where it ended?

Mattias Perjos: No, it's difficult to do any granular breakdown of this. We ended up well above the SEK 500 million that we had indicated before due to some of the efforts that we needed to do within EVH and acute -- all the 3 categories, I would say, in ACT. When we look at the impact of this and go back to when we started to talk about the impact in Q2 of 2022, it has been a mix of EBITDA impact from lost revenue. There's been scrapping costs. There's been under absorption in there. There's been cost for uplift of the portfolio. There's been complaint handling cost in there as well. But's there's so many different parts in here. So I think the best assumption I can make now is that we saw a peak of the quality-related costs in 2024. We should be trending down from here, but it's difficult to give any more granular guidance on that level, I think.

Kristofer Liljeberg: So you said peak in 2024. So that means it was more than SEK 800 million, which I think you said for 2023?

Mattias Perjos: That's correct, yes.

Kristofer Liljeberg: Okay. And what was the reason for doing this taking the cost for future field corrections now in the fourth quarter?

Mattias Perjos: We do have quite hopeful when it comes to.

Kristofer Liljeberg: Previously, that's cost that you have had every quarter, right before?

Mattias Perjos: Yes and no. When it comes to some of the field actions that are more significant, we do make accruals for them. Sometimes they're not material enough that we communicate them, but this one is. And the reason for doing this now is that last time we reported, we did not have visibility on the technical solutions for the balloon pump. Now I think we have been able to work through that. We've made cost assessments of this. We have a time plan for as well, and then we do make an accrual that's how accounting works for us.

Kristofer Liljeberg: And the plan is still to file for new approval mid 2025?

Mattias Perjos: Yes, correct. Both 510(k) in the U.S. and the reinstatement of the CE marks, our ambition.

Operator: The next question comes from Patrik Ling at DNB Markets.

Patrik Ling: Two questions, if I may. First of all, you mentioned that the Surgical Perfusion business is loss-making. Is it possible for you to quantify approximately how much? And then the second question is when you talk about phaseout, is that basically that you're just closing it down? Or do you actually intend to sell the operation?

Mattias Perjos: Yes. Thanks. The -- we don't disclose the -- it's a loss-making business, as you say, we don't disclose the magnitude of this. We've only said the other side effect of this, that there will be a positive EBITDA margin impact from 2025 and onwards from removing this business. And we made the accruals, as you can see in the report, we will try to sell some of the assets belonging to this business, but we've not factored that in right now, but we do believe that there is a value in there as well. But we need to come back on that when we see what becomes of this.

Patrik Ling: So how should I think about it? I mean if sales comes down and it will remain with around SEK 300 million in sales will the -- I mean, volumes go down, which normally impacts your gross margins, et cetera, et cetera. So will the margin improvement that you expect in '25, will that be primarily due to you reallocating operating expenses to other areas? Or how should I see it?

Mattias Perjos: I can let Agneta speak if there's any more granular way of looking at this. But I think the best way of looking at it is just a part of a percentage point improvement in EBITDA margin for the group here.

Agneta Palmer: Absolutely. And I think it's important to mention that this is a gradual phaseout. As Mattias mentioned before, we will remain with some sales for 2025, also for 2026. And then gradually moving out of this segment. And it is, like you say, financially net positive, this case on a stand-alone basis. That is what we will disclose. It will gradually marginally contribute slightly to the improved margins ahead.

Operator: [Operator Instructions] And there are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Mattias Perjos: All right. Thank you very much. Thanks for joining the conference today. I mean there's no additional summary here. I think we made that already ahead of the Q&A. So just thanks for your attention, and have a good rest of the day.