Getinge AB (publ) (GNGBF) Q1 2023 Earnings Call Transcript

Getinge AB (publ) (OTCPK:GNGBF) Q1 2023 Earnings Conference Call April 26, 2023 4:00 AM ET

Company Participants

Mattias Perjos - Chief Executive Officer

Lars Sandstrom - Chief Financial Officer

Conference Call Participants

Erik Cassel - ABG

Mattias Vadsten - SEB

Victor Forssell - Nordea

Rickard Anderkrans - Handelsbanken

Oliver Reinberg - Kepler Cheuvreux

Kristofer Liljeberg - Carnegie Investment Bank

Peter Ostling - Pareto Securities

Operator

Welcome to the Getinge 2023 Q1 report with CEO Mattias Perjos and CFO Lars Sandstrom.

For the first part of the conference call, the participants will be in listen-only mode. [Operator Instructions]

Now, I will hand the conference over to the speakers. Please go ahead.

Mattias Perjos

Thank you very much. Thanks for joining everybody. Sorry for the delay. There was a technical glitch apparently in the beginning here, but I think we're good to go now.

With me today, I have our CFO, Lars Sandstrom, who will go through the financials a little bit later, but we can start with moving over to Page Number 2, and talk about the key takeaways for the first quarter of 2023.

We had net sales and order intake increasing organically by 7.5% and 2.9%, respectively, in the quarter. This is a consequence of high demand for ventilators in the expansion of intensive care in China. We also saw a recovery in cardiovascular procedures and large deliveries in Surgical Workflows in order to meet the need for productivity enhancing infrastructure in healthcare around the world.

Surgical Workflows specifically increased its sales by almost 20% organically, and this is thanks to better availability of components that enables frontloading of deliveries, but also a good underlying demand situation.

The supply chain challenges that we still have with us are now mainly concentrated to intra-aortic balloon pumps and products for ECMO Therapy within Acute Care Therapies, where we still have orders worth over SEK400 million awaiting delivery.

The higher sales volume, the price increases that's been implemented and the positive currency effects contributed to stronger adjusted gross profit and EBITDA despite the higher cost inflation in goods and services and as well as personnel-related higher costs. We're actively continuing to work to raise prices and reduce our costs, which is having an effect. It's a very measurable effect, albeit with some time lag.

Free cash flow was better than in the same period last year, adjusted for large payment related to the final settlement with regards to surgical mesh. So, getting us a financial position remains very solid with a low level of net debt.

We can then move over to Page 3, please. So, let's focus on some other key events during the quarter. When it comes to our offering and our customers, I'm really pleased that Getinge's covered stent system, iCast, received premarket approval, the PMA, from the U.S. Food and Drug Administration for the treatment of patients with iliac arterial occlusive disease. We expect this to have a positive impact on sales and margins for Acute Care Therapies from the fourth quarter. [Technical Difficulty] manufacturer of ultrasonic cleaning technologies, which is used in hospitals and surgery centers to decontaminate surgical instruments. This is part of our strategic journey of securing an even more attractive product offering, a better portfolio in the important U.S. market.

Getinge also launched a new Servo-c ventilator that offers lung protective treatment functions for both pediatric and adult patients, and Servo-c is a cost-effective offering with the aim to make high-quality healthcare available to more hospitals and patients globally.

And finally, on the offering front, as a consequence of growing demand for our DPTE-AlphaPort in recent quarters, we have initiated a project to increase production capacity by 50% at the production unit in Vendome in France. This is of strategic importance for us since a larger installed base of AlphaPorts contributes to increased need for DPTE-BetaBags where we have a leading position globally.

When it comes to sustainability and quality, we can see that carbon dioxide emissions, energy consumption, and the share of renewable energy continued to develop in a positive direction, thanks to the ongoing improvements that we have in our business. We can also see that customers are placing an increasingly higher value on sustainability when it comes to tender processes, for example. So, we are ready and in a good position competitively speaking for this.

During the quarter, we also reported on a suspension of the CE mark and quality-related build measures regarding our intra-aortic balloon pump. The CE mark has also been temporarily suspended for consumables used in ECMO therapy due to shortages in the design of the packaging. However, deliveries to existing customers have been approved, citing the clinical benefits of this therapy in accordance with the EU regulation. So, we are producing and delivering as we speak, despite the suspension of the CE mark, and we -- I just want to underline that we take these issues very seriously, and we act accordingly, which may lead to some delivery disruptions during the second quarter of this year.

We can then move over to Page Number 4, please. So, as I mentioned in the beginning, we have order intake increasing by 2.9% in the quarter and net sales by 7.5% organically. Order intake was significantly positive in EMEA due to especially strong performance in Surgical Workflows. Both Acute Care Therapies and Surgical Workflows grew orders in Asia Pacific in the quarter, but due to a drop in Life Science capital goods, the overall order intake was down in the quarter in Asia Pacific.

Americas was flat on orders in the quarter with a mixed picture in the business areas, where Life Science reported a decline due to significantly reduced demand for products related to COVID-19 vaccines. At the same time, Acute Care Therapies stands out in a positive way, mainly due to a recovery in cardiovascular procedures.

On net sales, we had a positive development across the board with EMEA in the lead. This is, to a large extent, linked to large volumes being delivered in Surgical Workflows. This has been supported by a healthier situation in the supply chain, enabling earlier deliveries than we had previously planned.

The growth in Asia Pacific is due to a healthy growth in Surgical Workflows and large volumes of ventilators being delivered to China in the quarter. Our estimate is that we have been delivering ventilators of an additional value of some SEK150 million to SEK200 million versus what would have been normal in the first quarter. Our belief is that the demand from China will be muted for the rest of the year when it comes to ventilators. The outlook, otherwise, in China, we remain positive about.

Americas grew nicely, thanks to elective procedures picking up in Acute Care Therapies and Surgical Workflows delivering on the much larger order book that we have for North America versus last year. Also here, we see some support from supply, which has helped us deliver a bit earlier than planned in that region.

We can then move over to Page Number 5, please. So, when it comes to guidance, we reiterate the net sales outlook for the full year 2023 despite the positives in the first quarter. The reason is that we expect the second quarter to be slightly weaker compared to last year and that we grow slightly year-on-year in the second half of 2023, which should then take us to organic growth in net sales of 2% to 5% for the full year.

The main uncertainty is regarding supply chain and quality challenges in cardiac assist and cardiopulmonary. And again, we take this challenge extremely seriously. We are working hard as we speak to resolve all the issues related to this, so we can continue to deliver high quality and safe products to our customers and patients.

We can then move to Page Number 6, please, and dissect the order growth a bit more. When it comes to Acute Care Therapies, we had 5.1% organic growth. The increased order intake in Acute Care Therapies is mainly attributable to ventilators for the Chinese market and products for cardiac surgery in North America. Organic order intake for products for ECMO therapy increased marginally compared to the previous year.

In Life Science, we had a 12.7% organic drop, and the decline in order intake in Life Science is mainly due to lower demand for products related to COVID-19 in Americas and in Asia Pacific. The order increase in EMEA for Life Science is mainly a result of increased customer activity in North Europe.

Surgical Workflows, here, we had 6.6% organic growth in orders, and the increased -- Surgical Workflows order intake increased organically in all product categories in the quarter. Asia Pacific and EMEA accounted for significant growth, while Americas ended up slightly below last year's strong order intake quarter.

We can then move to Page Number 7, please, and do the same exercise on sales. Here, we had Acute Care Therapies growing 6.5% organically. The ACT organic net sales increased significantly in Asia Pacific as a result of large deliveries of ventilators to the Chinese market. Net sales also increased in cardiovascular products.

Net sales were negatively impacted in Acute Care Therapies by continued component shortages, primarily in intra-aortic balloon pumps and in ECMO therapy. This backlog is estimated to be at least SEK400 million in net sales, and this is something that we hope to be able to deliver in the second half of this year.

Life Science, here, we had a 10.3% organic drop in sales, and the Life Science net sales decline mainly as a result of significantly reduced demand for products related to vaccines against COVID-19, mainly in consumables. The positive trend in the service business for Life Science continues, which we're very happy about.

Surgical Workflows, here, we have the biggest increase, 19.6% organically, and Surgical Workflows grew its sales organically across all product categories and had a strong quarter in both Americas and in EMEA.

An improved supply chain situation contributed positively to capital goods in the quarter. Recurring revenue also increased organically, thanks to positive development in all the sub parts, which is consumables, service, and spare parts. In the quarter, currency had a SEK481 million or 7.8% positive impact on net sales for the group.

Capital goods organic growth was 9.4% in the quarter, positively impacted by an additional sales of the ventilators to China and also a more positive situation in the supply chain for Surgical Workflows.

Recurring revenue grew 6.5% organically, and this is thanks to continued good job in our service organization overall, then it's also thanks to strong deliveries of cardiovascular consumables and a continued positive trend in Surgical Workflows.

We can then move over to Page Number 8, please. Adjusted gross profit increased by SEK473 million to SEK3.734 billion in the quarter, where a positive currency effect accounted for SEK287 million. For the group as a whole, the adjusted gross margin declined by 0.4 percentage points, and this is an effect of unfavorable mix, some supply chain disturbances, and also cost inflation. The effects were partly offset by price increases, productivity improvements, and some support from currency as well.

For Acute Care Therapies, the adjusted gross margin declined by 0.6 percentage points, and this is due to unfavorable mix, some shortage of components, and also due to cost inflation. Here, it was also offset to some extent by positive currency effect and successful price increases.

For Life Science, the adjusted gross margin declined by 0.6 percentage points, mainly as a result of lower volumes, cost inflation, and also some under absorption. Favorable currency effects and the cost reductions contributed positively to the gross margin in Life Science.

Surgical Workflows adjusted gross margin increased by 0.4 percentage points, primarily as a result of higher volume, currency effect, price increases, and a better level when it comes to absorption as well. These positives were partly offset by cost inflation.

With that, we can move over to Page Number 10, and I leave over to you Lars.

Lars Sandstrom

All right. Thank you, Mattias.

Adjusted EBITA increased SEK133 million compared to the same period last year, while the margin was flat despite a negative effect from both profit and OpEx. So, adjusted for currency, GP had a minus 1 percentage point impact on the EBITDA margin due to the reasons just mentioned by Mattias.

Organically, S&A increased by some 7.1% versus previous year due to higher activity levels, cost inflation in purchase services, and personnel-related expenses. This was slightly beneath the organic growth for the quarter, but when adjusting for FX and other OpEx and somewhat higher R&D and putting it together, this takes us to reduced operating leverage on OpEx of minus 0.8 percentage points versus last year.

R&D activities increased in the quarter, mainly in Acute Care Therapies. And adjusted for currency, D&A had a positive effect of plus 0.6 percentage points on the margin in the quarter.

So, all in all, this resulted in an adjusted EBITA of SEK972 million and a margin of 13.6%.

Let's go to Page 11, please. Free cash flow in the quarter amounted to minus SEK700 million due to a substantial payout related to the mesh settlement that we have previously announced. We do not share the exact amount, but adjusted for this payment or this payout, the underlying free cash flow is better than last year's plus SEK400 million with a healthy margin.

Looking closer at the working capital, it develops according to the seasonality, with some buildup of inventories here in the first quarter, which is also negatively impacted by cost inflation on input materials. Working capital days continued to be well below 100, and we are now at some 95 days, down 34 days from the peak in Q2 2018. Going forward, we expect working capital days to increase somewhat, mainly related to the inventories where higher material costs are impacting and also the supply chain disturbances.

We are back on trend on operating return on invested capital with 14.4% on a rolling 12-month basis, well above the cost of capital.

Let's go then to Page 12. The change in net debt year-on-year was negatively impacted by the mesh payout, taking us to SEK3.7 billion. If we adjust for pension liabilities, we are at SEK1.2 billion. This brings us to a leverage of 0.6 times EBITDA. And if we adjust for pension liabilities, leverage is still low and at 0.2 times EBITDA. And cash amounted to approximately SEK4.6 billion at the end of the quarter.

By that, let's move to Page 14 and back to Mattias.

Mattias Perjos

Yes, thank you. So, we jump right into the key takeaways of the summary for the first quarter of 2023. So, we've seen healthy growth in the quarter in net sales, and we continue to have a strong order book as well. We reiterate the outlook for full year 2023, with the 2% to 5% organic net sales growth. We can see improvement when it comes to gross profit and adjusted EBITDA, thanks to volume, to price increase and positive currency effect. We have a strong underlying cash flow from our operations and our financial position remains very solid. And last but not least, it's very nice to finally see the PMA for our iCast covered stent system.

So, finally, I will also take this opportunity to thank our customers and our employees who are still working in somewhat challenging conditions, and look forward to seeing gradual improvements during 2023.

So with that, I open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The next question comes from Erik Cassel from ABG. Please go ahead.

Erik Cassel

Good morning, Mattias and Lars. So, first off, on the guidance. Supply chain seems to have improved quite a lot since you set it to 2% to 5% guidance. And then you also, as you mentioned, have the approval of iCast. It seems to me at least that the general hospital macro environment is also lot better. So yes, the guidance seems to be quite cautious and also allow for a lot of headwinds within supply chain still. But let's just say that supply chains continue to improve, where are you in that range in that case? And is there perhaps an upside to it?

Mattias Perjos

I think, we've given a range in guidance because of the uncertainty. I don't disagree with any of the statements that you made. We do see gradual improvements on most fronts. But it is challenging when it comes to cardiac assist and to cardiopulmonary, and I think the span of potential outcome there is wide and therefore, we maintain a wide guidance span as well. So, I can't give any more granular view on this. I think it's the whole span is still realistic depending on the different potential outcomes in those two product categories, I would say.

The rest of the business though, I agree with you that we're quite confident that we've seen the worst when it comes to supply chain hiccups. I also agree that the underlying demand is in line with what we expected and continuing to develop in a positive direction.

And on the Life Science front, maybe as well just to cover that in the guidance a bit as well, there's still some uncertainty when it comes to the stocking situation. We are seeing delays when it comes to order placements, and we don't expect this to pick up until the second half of the year. And until we have a better feel for how that's developing, I think we will remain with this guidance plan.

Erik Cassel

Okay, thank you. I understand. And then the order deliveries, as you called it, for Surgical Workflows, does that imply some sort of pull-forward effect from Q2? Or do you still have enough deliveries done for Q2 to post some sort of organic growth there as well?

Mattias Perjos

I think it's yes on both questions. So, there is a pull-forward effect from the second quarter. Having said that, though, we had good order intake in the first quarter as well, and the order book is higher when we leave the first quarter this year compared to a year ago. So, I think we're sitting in good shape in Surgical Workflows.

Erik Cassel

Perfect. Thank you. And then last question, the catch-up effect in the intra-aortic balloon pumps during H2 as you guide for, is there a potential that you see component access allowing for some increased deliveries already in Q2, or should we still wait for H2 with that?

Mattias Perjos

Yeah, I think the probability is very low for any bright development in the second quarter. I think it will remain challenging, I think.

Erik Cassel

Okay. Thank you. I'll jump back in the queue.

Mattias Perjos

Thank you.

Operator

The next question comes from Mattias Vadsten from SEB. Please go ahead.

Mattias Vadsten

Hello, there. I'll start with three questions. First one, I see your comment in the CEO letter regarding incidences related to IABP and ECMO, and that this could cause delivery disruptions for Q2. So just really, is there anything new to your knowledge versus what you had when you sent out the press release or is it something that you've seen now? And then maybe on Q2, if you could remind us what disturbs the comparison versus last year in terms of sort of COVID boost, let's say, in terms of volumes? And then, just if I understand you correctly, it will be tough to match last year's sales organically with Q2. That's the first point.

Mattias Perjos

When it comes to the delivery disruptions, I wouldn't say that there's anything new. We've been aware that it's going to be a challenging situation for a while. So, I think we had hoped that we communicate that properly already after the fourth quarter last year. So, there's nothing really new. It's just that the projected difficult situation will materialize in Q2.

The other part of the question, I actually didn't hear. Maybe Lars can fill in.

Lars Sandstrom

On the comparison with Q2 last year, we had a good quarter on cardiopulmonary and the BetaBags last year. So that will also impact, so let's say, year-on-year comparison.

Mattias Vadsten

Okay. Good. Then the next one is on the stent system, iCast, PMA here in the end of March, if I remember correctly. So, if you could shed some light on what the product means today and what you expect going forward? And what you include in your guidance regarding this product category?

Mattias Perjos

Yes, we're starting now to ramp up and plan for a proper relaunch of this and much more active sales and marketing. We don't think it's possible to have any real material impact until the fourth quarter of this year. We've included some improvement in our guidance, but it's also one of the areas where I think there is a big span of potential outcomes depending on how quickly we can ramp this up and how the demand develops.

So, I think in terms of coloring this, I think a good rule of thumb is that it has more than halved in size this business since we started to see the decline in 2017. So, we're hoping to -- and at that point in time, it was around SEK1 billion in volumes with attractive gross margins. But I can't break down the development for you in quarters or years here. But it's definitely a positive news for us towards the end of the year.

Mattias Vadsten

I think that's good. And the last one, you see this increased demand for AlphaPort in recent quarter. You will increase production, as you stated in the report. Could you just give us some more flavor on the development here and when it can bear fruit for, I guess, the BetaBag sales? And yes, if it's excluding the expectations you had maybe a year ago on AlphaPort?

Mattias Perjos

Yeah, I think the last part of the question is easier to answer. Yes, it's exceeding our expectations a bit compared to a year ago. So, it is positive to see this development when it comes to AlphaPort. What's more difficult is to predict the impact of the consumption of BetaBags, both in terms of timing and in magnitude. You need to be aware that these ports go into equipment that needs to often be integrated with other equipment at customer site, it needs to be validated. So it can be anything from six months to two, three years.

Mattias Vadsten

Thank you very much for that.

Mattias Perjos

Thank you.

Operator

The next question comes from Victor Forssell from Nordea. Please go ahead.

Victor Forssell

Thank you very much for taking the questions. I'll start -- I'll pick up on a few of the earlier ones. Lars, if I heard you correctly, you said that both cardiopulmonary and BetaBags had a decent Q2 last year. But if I recall it correctly, that was actually one of the reasons that you warned last year. So, did I just misinterpret your answer, or is it anything more to it?

Lars Sandstrom

No, that is correct, and the reason why that we saw the slowdown coming then last year, but it was not so visible already in Q2.

Mattias Perjos

In sales or the order pattern though and the forecast from customers changed significantly in Q2 last year.

Lars Sandstrom

Exactly.

Victor Forssell

Okay. And secondly, also following up on the Q2 questions, if we take the -- I mean, what would you say is the largest reason for why you think the Q2 performance, particularly for ACT, might be a little bit weaker? Is it due to supply? Or is it that there's still uncertainty regarding how much of ECMO consumables you will deliver in Europe and also the final outcome in the three months that you have for the Datascope sales or the balloon pump sales here in Europe?

Mattias Perjos

Yes. So, the vast majority of the weakness is because of supply, not because of lack of demand.

Victor Forssell

Okay. Perfect. And just curious a little bit of the gross margin dynamics. You talked a lot about price coming through in the P&L this quarter. You've had volume support, obviously, in Q1, but also tailwinds from mix in the latter part of this year is at least what I think you've stated before. So, any way you could elaborate a bit more about the dynamics for the rest of this year? And also, can we see Q1 margins as closer to the trough? Or what should we expect going forward in terms of group gross margins, please?

Lars Sandstrom

And I think it is the continuous positive impact on pricing that we see coming through. But we also see that we have the inflation part that is hurting us on the GP margin here in Q1. We see that it will continue, but it will gradually come down a little bit. So a little bit better on the price, a little bit color on the -- we will have negative impact on material costs, but it will be a little bit less, I believe, going forward here in the second half of the year.

Then you have the mix, of course, the supply chain disturbances we have. These are in product that was with good margins, so that it will have a big impact on that as well. And then, of course, we have the mix of the BAs where SW growing nicely, which is good. We like that, but of course, as a mix impact is somewhat negative. So those are the main components, I think you can take with you.

Victor Forssell

Do you anticipate a quite strong growth from Workflows in the rest of the year relative to your other BAs and thus perhaps your slightly more negative on mix for the full year. Is that a fair way to interpret it?

Lars Sandstrom

I think coming back to one of the first questions there on our guidance there from 2% to 5%. So, depending on how well we are performing and losing enough and handling out to disturbances, of course, that will help both in the product mix and the net sales mix and then we get the leverage out of that and if we are having in the lower range, of course, we have the opposite.

Victor Forssell

Thank you very much.

Mattias Perjos

Thank you.

Operator

The next question comes from Rickard Anderkrans from Handelsbanken. Please go ahead.

Rickard Anderkrans

Thank you for taking my questions. So, two for me, please. First, if you could talk a little bit about the trends in elective procedure volumes in the quarter and sort of trends into Q2 and for the rest of the year, perhaps both in a sort of pre-pandemic level, but also sequentially, would be very helpful. Thank you.

Mattias Perjos

Yes. Sorry you broke up a bit towards the end, but I think I got the question. When it comes to electives, it is one of the positive factors right now. It's one of the parts where we see good momentum. And we do expect this now to be more of a sustainable development, and hopefully, we'll continue to see that during the rest of the year.

Rickard Anderkrans

Would you say that it's above the pre-pandemic levels on your major markets?

Mattias Perjos

Yes, it has at least caught up, I think, with pre-pandemic levels now, and we expect it to stay about it. Now it was a bit more lumpy, as you may remember last year, but it feels more solid now, more robust. I think there's still personnel shortages in hospitals and a little bit of operational challenges, but it's on a better level overall than it was last year.

Rickard Anderkrans

All right. Thank you. And could you quantify the anticipated delivery disruptions for Q2 here in light of the suspended CE marks? And can you comment on your conviction that these disruptions won't impact Q3, Q4 as well? Thank you.

Mattias Perjos

I think the short answer is -- on the first half of the question is, no. We can't give you any more granular information about that. When it comes to the impact in the second half of the year, I think we have a reasonably good visibility for the actions that needs to be implemented. I think the uncertainty here is more related to the approval process and the actual lifting of suspension, which is a little bit less difficult to -- or less easy to predict, but we're hopeful and factored into our guidance is that it will be lifted in Q3.

Rickard Anderkrans

Thank you very much.

Operator

The next question comes from Oliver Reinberg from Kepler Cheuvreux. Please go ahead.

Oliver Reinberg

Thanks so much for taking my question. The first one would actually be just in terms of the general order dynamic. I mean, I appreciate there's obviously different moving part, but if I look at the order growth versus with the 2019 pre-pandemic baseline, the average growth was 2% only, similar in Q1 in terms of comps. So, when I look at the kind of 3% order growth, it still looks a bit soft compared to your general growth aspiration. So, can you share any thoughts on that, please?

Mattias Perjos

I think our order intake, you should keep in mind, it's also hampered by some of the supply chain challenges that we have. So, I think it's not an appropriate reflection of the market or end market demand in this case. We can clearly see that customers who have already placed an order and are waiting for that to be delivered, they don't place a new one until the first one delivered. So I think that's one of the explaining factors.

Oliver Reinberg

So it's a fair assumption that order growth should actually pick up from here?

Mattias Perjos

Well, it's definitely our hope, and I think there is market support from -- for this, if we can then resolve the supply chain challenges. I mean, that headwind on orders will remain until we've been able to resolve the obstacles in cardiopulmonary and cardiac assist.

Oliver Reinberg

Okay. Thanks so much. Second question, can you just provide a bit more color on the phasing of pricing action and also personal cost inflation? I think a reasonable assumption for pricing is probably 2% to 3% for the full year on average in terms of realized pricing. Can you just give any kind of color? Have we been at that level before? So how much more is there to go for? And also in personal cost inflation, have we seen the full impact, or is the impact ramping up over the course of the year?

Mattias Perjos

On pricing, I think we've had a good start. Our ambition is to hit 3% this year, and I think we made very good progress on that in the first quarter. We're a little bit ahead of that plan. So that's one thing that is working well.

Cost inflation, we will still have some additional headwind from going forward that we haven't seen the end of this with one of the things that we were hoping maybe would stop at this point, but we don't see that fully yet. So, it will have some impact in Q2 and onwards from that as well.

Oliver Reinberg

Okay. Perfect. And the third question. There has obviously been a kind of large discussion around the sleep and respiratory care issue at Philips. And one of your competitors talked about that the regulator, in particular in the U.S., is also more cautious in terms of the data on biocompatibility here. I mean is there anything that you see impacting your pipeline activities and ventilators and anesthesia or whether this could imply any kind of higher cost for doing this kind of data analysis?

Mattias Perjos

We're well aware of the development on-going, but I can't comment on the impact on our business here from what's happening with competitors, unfortunately.

Oliver Reinberg

I was just wondering if you see any kind of potential delay in the pipeline activities or higher costs for any kind of data that you have to produce.

Mattias Perjos

Not to my knowledge, no.

Oliver Reinberg

And the last quick questions if I may squeeze it in. I mean, Surgical Workflows was quite impressive with this kind of 20% sales growth and also implemented quite some kind of efficiencies. I was a bit surprised actually that the margin in terms of gross margin was only improving 40 basis points here. I would have thought that the kind of leverage effect is much stronger. Any kind of color here?

Mattias Perjos

We have the cost inflation impact, I think, is one key headwind for them as well, one of the things that we were hoping to be alleviated a bit, but it hasn't been in the first quarter. So that's probably the main effect.

Lars Sandstrom

That's true. It's tougher with the pricing, and it's tougher on the material cost, so that is squeezing the markets a bit on that.

Oliver Reinberg

Okay. The cost pressure is more pronounced in this division apparently?

Lars Sandstrom

Yeah, it's a little bit more that compared to -- if you look at our ACT product portfolio.

Oliver Reinberg

Okay. Thanks so much indeed.

Mattias Perjos

Thank you.

Operator

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank. Please go ahead.

Kristofer Liljeberg

Hi. Good morning. Coming back to this comment about ECMO deliveries in the second quarter. So, could you explain why there will be more disruptions in the second quarter versus first quarter as you, at the same time, say that you could ship the product? Is this something you have to do with packaging, something you have to change in the manufacturing process, et cetera? Thank you.

Mattias Perjos

Yes, it is changes in manufacturing processes that take some efficiency out of that. And also, despite the fact that we actually have approval to deliver, it doesn't mean that you have the same kind of demand situation. We do expect some customers to be more cautious in use of the product as well. So, there is that effect as well. So those two things are combined what make us a little bit more pessimistic about the second quarter. The other thing -- sorry. The other thing is that we also -- we have some hardware supply issues as well in that category, which also hampers demand a bit, but that's also something that we hope to get fixed by into the second half of the year.

Kristofer Liljeberg

Okay. But do you think there have been any effect of customers stocking here ahead of the CE registration was halted?

Mattias Perjos

No. We -- I don't think so. It will be very marginal in that case. I don't have any evidence of that at least.

Kristofer Liljeberg

Okay. And then a question on margin. After the fourth quarter, although you don't have any official margin guidance, you talked about margin being flat to maybe slightly up, it sounded. Anything that has changed since that would change this type of outlook?

Mattias Perjos

No, not really. I think the only thing that has changed since the guidance was created, that we had some earlier deliveries mainly related to Surgical Workflows. I think that's the main change in dynamics. Otherwise, we're confident with the guidance that we issued a quarter ago.

Kristofer Liljeberg

Okay, thank you.

Mattias Perjos

Thank you.

Operator

The next question comes from Peter Ostling from Pareto Securities. Please go ahead.

Peter Ostling

Yes, thank you for taking my questions. Most of them has already been answered. I just wanted to dwell a little bit more into the fact that you are highlighting that Q2 will be weaker than Q2 last year despite Q2 last year being the weakest quarter when it comes to organic growth. Is it only these disruptions within intra-aortic balloon pumps and ECMO that is the key part why you think that Q2 this year will be lower than last year, which was the weakest quarter last year?

Mattias Perjos

It's also related to BetaBags, which is also, we don't expect any comeback on BetaBags until the second half of the year and the second quarter was stronger than what we expect this year.

Peter Ostling

Okay. But Life Science is only 10% of your turnover. So, do you think that this change in BetaBag demand is still having that quite significant effect on the total group?

Mattias Perjos

Yes, Life Science is actually more than 10% of our turnover. It does have effect, absolutely.

Peter Ostling

Okay. Great. And then, can you say anything about your organic sales growth of 7.5% in this quarter? If you exclude the higher-than-normal demand from China, what would it have been then?

Mattias Perjos

Yes, you can take SEK150 million to SEK200 million off the growth, and that will give you the number without the boost in China.

Peter Ostling

Okay. Fair enough. And then I just wanted to double check if you -- what you said about the margin development since margins in Q1 was significantly above the market expectations. Is there anything that you will -- that you think -- will the rest of the year be that weaker that you still expect to come out margin-wise compared to the guidance that you gave during Q4, so even if H2 will be better than H1?

Mattias Perjos

I think we haven't changed our view in terms of EBITDA development. We still expect to be able to improve with a few bps, that's no change to that. I think maybe one thing that you need to be aware of is that we will have some benefit from currency in the second quarter, but it will be diminishing over the year and probably nothing towards the end of the year.

Peter Ostling

Yes. And then just two quick ones. Did you say that the strong demand or the strong sales growth that you saw in Surgical Workflows, do you expect this will continue and there will not be negative effect in Q2 and in Q3 because you pushed forward some orders in Q1?

Mattias Perjos

I think we don't guide by quarter by BA, as you know, but the development in Surgical Workflows, I think is still strong from an underlying perspective. So, we had some earlier-than-expected deliveries, but we also had, as I said, mid-single growth in order intake in the quarter, and we have an order book that is higher at the end of Q1 '23 than Q1 '22. So, I think we are in -- we haven't emptied everything in Surgical Workflows. It's an important thing to be aware of.

Peter Ostling

Okay. And finally, can you say the OpEx level that you delivered here in Q1, is that a level that we should expect for the rest of the year?

Mattias Perjos

We also don't guide on individual lines in the P&L, as you know, Peter, but we've had some inflationary impact now and it's more full year inflation from salaries coming as well. The other thing to be aware of is that our variable pay, we will have a tougher comp, so to speak, in the second half of the year. And at the same time, we are trying to mitigate this effect by some of the improvement programs that we've started to put into place. And you could see some of the restructuring costs already last quarter related to this, and we have some additional initiatives that are under implementation here. So those are the major swing factors here without giving you a number by quarter.

Peter Ostling

Okay. Thank you. I'll go back into the queue.

Mattias Perjos

Thank you.

Operator

[Operator Instructions] 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, everyone, for joining.

So, I would just reiterate that we've had a good start to 2023, strong sales growth and a healthy order book, but the outlook for 2023 remains unchanged. So, we're still expecting 2% to 5% organic growth. Continue to have good underlying cash flow from operations as well, so we remain in a solid financial position. We have, on a broad-based perspective, a better supply chain situation, but still very challenging in two of our key product categories, so there will be some headwinds for the second quarter. So, all this combined and based on that, we reiterate the outlook of 2% to 5% organic growth for 2023.

So again, thanks very much for joining.