GNGBF - Getinge AB (publ) (GNGBF) Q4 2022 Earnings Call Transcript
Getinge AB (publ) (GNGBF)
Q4 2022 Earnings Conference Call
February 01, 2023 04:00 AM ET
Company Participants
Mattias Perjos - President and Chief Executive Officer
Lars Sandstrom - Chief Financial Officer
Conference Call Participants
Erik Cassel - ABG
Rickard Anderkrans - Handelsbanken Capital Markets AB
Oliver Reinberg - Kepler Cheuvreux
Kristofer Liljeberg - Carnegie
Robert Davies - Morgan Stanley
Victor Forssell - Nordea Markets
David Adlington - JPMorgan Chase & Co.
Peter Ostling - Pareto Securities
Presentation
Operator
Welcome to the Getinge Q4 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mattias Perjos. Please go ahead.
Mattias Perjos
Thank you very much, and welcome to today's conference. I have our CFO, Lars Sandstrom with me as well, who will support during part of the financials presentation. Okay, we can move directly to Page number 2, please. So before we dig into the facts and figures regarding our performance and outlook, I just wanted to briefly touch on what I think is a really important subject that was highlighted in a good way in the last edition of The Economist.
And this is the fact that we nowadays get much less output from healthcare, despite spending much more and also despite having more people than ever working in healthcare. All of this, of course, boils down to having problems with doing the right things and doing them right, what we usually call effectiveness and productivity. So the low productivity in healthcare is nothing new. I think the problem right now is that it seems that it has decreased a lot recently, which is of course, impacting patients. It's impacting clinicians and also, of course, companies like ours.
So some of the examples of the short-term problems here, though, is that we see more patients with severe symptoms with – you can see that the COVID quarantine in different parts of the world has led to a weaker immune system. It also led to people staying away from hospitals, which means that illnesses are diagnosed at a later stage and people show up with more – at a more severe stage that requires the different approach to treatment.
We can also see that the productivity is lower meaning that we have slower throughputs. We can see that the engagement among people working in the system is lowering as well. The burnout ratio is shooting up among clinicians, which means that we have a loss of competence and a loss of capacity, as well as even if there are more people working there, it still means that there's a lot of operational challenges in the system.
Our people have worked hand-in-hand on the front-line with the people in the healthcare system to try to deliver as much care as possible. But it has been a challenge during the whole of 2022 and the last quarter was no difference in that regard. What is urgently needed, I think, is that, we need to be able to more efficiently manage patient queues, staffing and other flows within the hospital which will lead to better working environment for healthcare professionals.
We also need products that gets – that allow patients to leave the hospital faster and in a healthcare condition than what is the case right now. And we need products that are easier for healthcare professionals to handle as well. There needs to be a easier learning curve to go through for new people working in this environment. We have a lot of good solutions for this. That's not the purpose of this call, but I just wanted to paint a bit of a background picture when it comes to our industry.
So with that, we can move to Page number 3, please. We start with the key takeaways regarding performance for the fourth quarter of 2022. We saw net sales and order intake declining organically by 5.3% and 6.7%, respectively. This was mainly a result of continuing external challenges. This means that hospitals have not yet recovered to pre-pandemic levels for elective surgery, and they are also generally experiencing lower productivity than before the pandemic as I mentioned a moment ago.
We can also see the treatment needs related to seasonal influenza was lower than expected and lower than in past four quarters. It also impacted our orders of sales negatively. In addition to this, we also have a company challenging comparative figures in products for COVID-19 treatment and also for vaccine productions.
We are also continuing to experience the supply chain challenges, which negatively impacted net sales by at least SEK400 million in the quarter. This is mainly in capital goods and Acute Care Therapies now, so the challenges have narrowed somewhat compared to the past, but in terms of magnitude, they are similar. We had lower sales volumes and unfavorable mix effect and also generally increasing cost pressure which contributed to lower margins in the quarter. To counteract these effects, we are continuing our work on price adjustments, ongoing productivity improvements and also more thorough rationalizations where needed.
Getinge’s free cash flow and financial position remains very strong, very low level of net debt, so keeping us in a good shape to take on additional opportunities ahead. And finally, the Board of Director proposes an increase of the dividend to SEK4.25 per share.
We can then move over to Page number 4, please. So if we take a brief step back here and look at some of the other key events in the quarter, when it comes to our offering and the customer perspective, one of the products that we launched in the quarter was Livit Flex. This is a system for bioprocess control that enhances the effectiveness in pharmaceutical development.
We also launched ULTIMA 815, which is an Optional Injection Dryer, and this enables quicker and more environmentally friendly processes in laboratories. And in addition to this, I also want to mention that Getinge’s Flow-c anesthesia machine was approved for sale in China during the quarter.
When it comes to sustainability, the journey towards carbon neutral production continues at a fast pace. One example of this in the quarter is that the solar panels at our production facility in Turkey started producing energy during the quarter. Also, I mentioned that Getinge’s vascular grafts, so the artificial blood vessels received EU MDR certificates and the production facility in France was awarded with the business area’s fourth EU MDR certificates for its quality control. The production facility in Solna, in Sweden, also received EU MDR certificate for the Servo-c ventilator.
During the quarter, we also announced that the U.S. Food & Drug Administration included Getinge’s subsidiary Datascope as an additional facility in the company’s existing consent decree. This is due to findings from previous FDA inspections and a warning letter related to operational compliance with the company's quality management system and processes.
We have also had a few items affecting comparability in the fourth quarter. As you all know very well by now, we have continuous improvement approach to everything that we do. And this is because we want the business and the people in the front and the business to be agile and forward thinking, and normally we work with [indiscernible] and continuous improvements. In some cases though, we need to take somewhat larger structural adjustments. And in this quarter, we decided to do so in order to adjust our cost base and increase productivity further in slightly bigger steps than normally.
So consequently, we have made a provision of SEK195 million and the cost savings from this will gradually impact the P&L during 2023. The full impact will happen from 2024 and onwards. We also made right times related to capitalized development products in Acute Care Therapies. And this is a consequence of the impairment test that we do on a regular basis. This is not something that's expected to have a material impact on our forward-looking expectations on growth.
Also, I mentioned that in the quarter we decided to build a new production unit in Derby in UK. The new facility is facility that will replace the one that we acquired from Quadralene in 2020, and it will serve as a new hub in the UK by colocating sales, manufacturing and logistics. This investment will also result in higher production capacity for consumables offering in terms of disinfection products for sterile reprocessing. Just as a reference here the income from chemicals increased by 10.7% in 2022. So significantly above the growth rate of most of other categories, and it also comes with a higher margin than average in Surgical Workflows.
We can then move over to Page number 5, please. So as I mentioned earlier, order intake decreased by 6.7%, and net sales by 5.3% organically in the quarter. Orders were down in Americas and in EMEA. The comparison here is impacted by last year's strong order growth in ECMO and BetaBags due to the Omicron breaker at the time. We could also see, though that orders picked up quite strongly in Asia Pacific this year, and this is mainly due to COVID flare-ups in China in December.
On net sales, we had a flat development in Americas, to a large extent due to continued strong development in Surgical Workflows. This is something we are very encouraged by giving that it's an very important part of our strategy for this business area. Net sales in Asia Pacific was negative in all business areas in the quarter, mainly due to previous lockdowns in China. As this has changed now, we expect things to start to normalize in 2023, and as I mentioned before, we saw quite nice growth in orders in China.
We can now move over to Page number 6, please. When it comes to the outlook for 2023, we are expecting a weaker first half of the year as a result of continuing challenging comparative figures for significant parts of Acute Care Therapies and for Life Science, whereas the second half of the year is expected to be stronger. And this will result in healthy growth for us in the second half of the year and an anticipated organic sales growth of 2% to 5% for the full-year.
We can then move over to Page number 7, please. So if we look at some of the details when it comes to order growth, we can see that Acute Care Therapies had a minus 4.4% organic development in the quarter. The lower order organic order intake in Acute Care Therapies was primarily attributable to advanced ventilators and ECMO therapy products in EMEA for the first two months of the quarter. The quarter ended with a strong order intake in mainly China as a result of the higher rate of COVID-19 infection spreading. The order intake for products for planned cardiovascular procedures increased slightly compared with 2021.
We then look at Life Science, we had a minus 32% organic development on the order intake and the order intake for Life Science declined significantly in Americas and EMEA. This is due to challenging comparative figures in sterilizers and also a continuing falling demand for COVID-19-related products.
On a positive note, the service business continues to grow, and this is a very good sign as we clearly can see a positive relationship over time between good service business and an overall healthy business for us both from a financial standpoint, but also from a customer loyalty perspective.
And finally, Surgical Workflows, here we saw a 3.2% organic improvement and the order intake in Surgical Workflows increased as a result of the positive trend in Digital Health Solutions and Infection Control. And as I mentioned earlier, the positive trend in North America is continuing something that we are very happy about.
We can then move over to Page number 8. So looking at the sales perspective in Acute Care Therapies, we were down 9.8% organically and the net sales here in ACT declined in all markets due to challenging comparative figures in ECMO therapy products, and also a shortage of components, which impact the delivery capacity, mainly related to Cardiac Assist within Acute Care Therapies.
Net sales increased in products for elective cardiovascular procedures, but it has not yet reached pre-pandemic levels. When it comes to sales of capital goods, this was negatively affected by the continuing shortage of components.
In Life Science, we saw a minus 3.6% organic development. This was a result of challenging comparative figures in product related to COVID-19 vaccines. The positive trend though in sterilizers and washerdisinfectors and also the service business continued in the quarter. Recurring revenue for Life Science declined as a result of lower volumes of consumables related to production of COVID-19 vaccines.
And in Surgical Workflows, we had a 0.9% organic improvement and the increase in Surgical Workflows was due to operating room and Digital Health Solution products. And again, the performance in North America was particularly encouraging for SW. Net sales in Asia-Pacific fell mainly as a result of lower activity in China. The strong order intake in prior quarters and Americas contribute to a more increase in net sales for the quarter. And we saw an organic increase in recurring revenue as a result of the positive trend in service and in consumables.
Currency had a SEK911 million or an 11.4% positive impact on net sales for the group in the quarter. Organic net sales of capital goods declined by 4.9% in the quarter to a large extent due to supply challenges. The decline in consumables is related to lower sales of ECMO and products for treatment of ECMO and BetaBags, which is part of our sale transfer offering and something I mentioned before.
With that, we can move over to Page number 9. Looking at the development of gross margin, we can see that our adjusted gross profit increase by SEK3 million to SEK4,153 million in the quarter were a positive FX effect accounted for SEK469 million. For the group as a whole, the adjusted gross margin declined by 3.1 percentage point. This is an effect of unfavorable mix, supply constraints, reduced absorption in our factories and also cost inflation. These effects were partly offset by price increases, some productivity enhancing measures, and also support from currency, but obviously not fully.
For Acute Care Therapies, the adjusted gross margin declined to 58.4% due to lower sales, unfavorable mix, shortage of components and also cost inflation. This was to some extent offset by positive FX effects, price increases and productivity improvements. When it comes to Life Science, the adjusted gross margin declined by 5.4 percentage points, mainly as a result of lower volumes, of unfavorable mix, some supply chain strategies also here, and also non-recurring warranty costs and under-absorption in some of our factories.
The favorable currency effects contributed positively to the margin to a much more extent. Surgical Workflows adjusted gross margin fell by 1.8 percentage points. This was primarily a result of cost inflation and of FX, and this could be partly offset by continuing productivity improvement.
With that, we can move over to Page 11, and I leave over to you, Lars.
Lars Sandstrom
All right. Thank you, Mattias. Adjusted EBITA declined by SEK406 million compared with the same period last year, while margin decreased to 15.5%, mainly due to negative effects from GP and OpEx, which ties back to the lower volumes, unfavorable mix effects and supply chain-related costs and challenges overall.
Adjusted for currency, GP had a 3.4 percentage point impact on the EBITA margin due to the reasons just mentioned by Mattias. Organically, we had lower SG&A than previous year, but negative effects, revaluation effects in other OpEx is impacting us quite negatively. Cost inflation is somewhat higher activity was partly offset by reduced variable pay to employees. All in all, this brings us to reduce operational leverage, leverage on OpEx and the 2.3 percentage point impact on the margin year-on-year.
Higher activity in R&D, where some come from development maintenance, EU MDR, but also from acquisitions. Currency had a negative impact of 0.4 percentage points on the margin. And adjusted for currency, D&A didn't have any impact on the margin in the quarter. All in all, this resulted in an adjusted EBITA of SEK1,317 million and a margin increased to 6.1 percentage points. Worth mentioning here, its also the restructuring efforts made in the quarter, as previously mentioned by Mattias and where most of the effects are expected to come gradually in 2023.
Then let's move over to Page 12, please. The free cash flow amounted to SEK708 million for the quarter and SEK2.3 billion for the full-year 2022. And working capital for the quarter was mainly a result of high material costs and supply chain disruptions, which resulted in less inventory reduction normally given the season. We expect this to normalize gradually during the year.
Working capital days continued to be well below 100, and we are now at some 96 days, down 43 days from the peak in Q2 2018. And going forward, we expect working capital days to increase somewhat mainly related to the increase in high material costs during the first half of the year. And we are on trend on operating return on invested capital with 14.6% on the rolling 12-month basis, and that's still well above our cost of capital.
And then let's move to Page 13. The change in net debt year-on-year was positively impacted by the cash flow, taking us to SEK2.6 billion and if we adjust for pension liabilities, we are at SEK0.1 billion. This brings us to leverage of 0.4x EBITDA and if adjusted for pension liabilities, leverage is at 0x. Cash amounted to [five months] SEK7 billion at the end of the quarter as well.
And then let's move to Page 15, and back to you Mattias.
Mattias Perjos
All right. Thank you. So when it comes to summarizing the key takeaways for the fourth quarter of 2022, we can see that organic development on net sales and orders were negatively impacted by external challenges that I mentioned in the beginning of the call. Our margins in the quarter have been impacted by lower volume, by unfavorable mix effect, some continuing supply chain disturbances and also inflation. We've been able to partly offset this with the price increases and continued productivity improvements. We've continued to have healthy free cash flow and a very strong financial position.
When it comes to some of the more forward-looking parts here, we expect the challenges to remain. We can see gradual improvements in parts of supply chain, in parts of the operating environments in hospitals and so on. But we expect this to be only a gradual improvement during the year. This takes us into an outlook for 2023, where we expect net sales to grow 2% to 5% organically, and with a stronger second half of 2023 than the first half.
Finally, then I would like to take this opportunity to thank our customers, our employees, who have worked hard for a very, very long time now, sometimes under very difficult circumstances to deliver vital care to patients around the world. I look forward to 2023 with a continued deep commitment to helping both customers and patients in the best possible way.
With that, I open up for questions. Thank you very much.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Erik Cassel from ABG. Please go ahead.
Erik Cassel
Hi. Good morning, Mattias and Lars. I thought I'd start off with some questions on 2023 and your guidance. I mean the 2% to 5% kind growth guidance, it's a pretty wide range. But I understand the uncertainty given how backend loaded your year should be. But could you maybe explain what needs to happen for you to be in the upper part of that range? That's not included in the low end. Is there a some sort of larger swing factor that you see?
Mattias Perjos
Yes. There's no larger swing factor. I think we need to see a continued normalization, primarily when it comes to the operating environment in hospitals, so they can focus on getting elective surgeries back to where they need to be above pre-pandemic levels. And we need to get rid of some of the supply chain disruptions that we still have primarily related to our Cardiac Assist products.
Erik Cassel
Okay. Thank you. And then in previous quarters, you've been able to provide some guidance for full-year margins based on where volumes are heading. I guess that there's a lot of moving parts, but is it possible to share how you're thinking about profitability in 2023?
Mattias Perjos
Yes. I think as you alluded to yourself, it is a very uncertain environment to navigate in right now, first of all, from a volume perspective. And as you know, we are very, very volume sensitive with the operating leverage that we have. So we are refrained from giving any guidance. I think we feel good about improving from where we are, but with, I mean, few basis points. So we decided not to give any official guidance here. So volume is a key factor.
We have some mix effects that are going to have an impact as well. We continue to see inflation providing some uncertainty to the development as well. And of course, we will offset this with the continued price work. That's a key thing for a key team for 2023, and also some of the productivity improvements that we were already on and some of the enhanced measures now that we've implemented in the fourth quarter as well. So if you summarize all that up, we expect some small improvement, but we refrained from giving detail guidance.
Erik Cassel
Okay. I fully understand. And then last question for me. On the orders in China, what was the magnitude of the total order take that you received now in Q4 and Q1 and is everything expected to be delivered during Q1? And then also if there's any ongoing discussions for more orders going to China or if you're done with that now?
Mattias Perjos
Yes. We don't disclose details by country. We saw a heightened level of order intake from China, primarily when it comes to ventilates in the quarters. We are in the process of delivering this. I mean, there's ongoing discussions and – about additional business, but it's not something that we will speculate in right now. I don't think you should assume any big step up in orders of sales because of this. It's a slightly heightened level December, last year and Q1 this year. But I think on overall level for full-year 2023, nothing really material.
Erik Cassel
Okay. Thanks very much. That's all for me.
Mattias Perjos
Thank you.
Operator
The next question comes from the line of Rickard Anderkrans with Handelsbanken. Please go ahead.
Rickard Anderkrans
All right. Good morning. Thank you for taking my questions. So first one, the margin in Life Science segment declined significantly here in the quarter even adjusting for the one-off there. So how should we think about more normalized margins for the segment heading into 2023, more of a sort of a post-COVID scenario? How should we think about the levels in relation to where we ended up for the full-year?
Lars Sandstrom
Yes. Hi there, Rickard. When we look at last, as you mentioned now, yes, we had some one-offs here in the fourth quarter. If you look at bottom [indiscernible] in the decline there, I will say half of it is roughly around the impact from the one-offs. And going forward, I think, since we will have somewhat slower share of sales on the consumer side compared – and that will of course impact us going into 2023, but we still have a very good order book when it comes to the rest of the product. And that's together with the easing out of the supply chain issues that we actually have and the work we do to right size part of the Life Science organization now with the current demand, especially on the BetaBags. We should get back to not the pandemic so to say levels, but there should be an improvement coming back.
Rickard Anderkrans
All right. Thank you very much. And I want to dig a little bit deeper into China. So you have previously mentioned that losing market share to local players in Surgical Workflows segment, but we have also seen the first approval of a Chinese developed ECMO solution rather recently. But as you mentioned, we've seen orders that pop here entering Q1 as well in Acute Care Therapies. Can you talk a little bit about the dynamics in China heading into 2023 and beyond? Would be interesting to hear a bit more on the competitive landscape development, what you're doing to secure your sort of and protect your market shares overall, that'll be very helpful. Thank you.
Mattias Perjos
Yes. We do see heightened demand both on ventilators and also ECMO therapy products right now to China. As I mentioned on the call, we also had an approval of our anesthesia machine for China as well. So we think that in the short-term, we definitely remain competitive. We're monitoring the development of new entrance as well. But we have a very strong position with really strong clinical performance of our ECMO solutions, very much liked by customers. So we feel that we have a pretty robust position from that standpoint.
Now, when it comes to the medium and longer-term, we expect this market to be back to a double-digit growth market. I mean, we have several categories where we are really strong, if you look at, for example, our vascular interventions portfolio and so on. So we remain generally positive towards our possibilities in China. We expect to be about 10% growth in the longer-term. It is a decline from where we've been. We've been more like 15%, 16%, pre-pandemic, but it's still will remain a good market and a clear number twofold.
Rickard Anderkrans
Perfect. Just a super quick final one. Can you quantify or give some magnitude on the cost saving initiatives in 2023?
Mattias Perjos
So when you look at what we have, the decisions and restriction we have done now in the fourth quarter, there will probably be some more coming here in the coming quarter. And then we expect that to gradually come through let's say half, 50%, 75% of that coming in during 2023. Then what you should also remember is that we have an underlying cost inflation that we are fighting against here. So restructuring and continuous productivity work is what we are looking – need to offset some of that impact.
Rickard Anderkrans
All right. Thank you very much. I'll get back to queue.
Operator
The next question comes from the line of Oliver Reinberg with Kepler. Please go ahead.
Oliver Reinberg
Yes. Thanks so much for taking my question. The first one would be on ECMO. Can you just talk to the level of [indiscernible] that you see and given now obviously that Q4 was softer with some kind of increase in demand from China? Is it reasonable to assume that ECMO can actually grow again, high single-digit in 2023? And then secondly on ventilators, can you just confirm where you came in in terms of ventilator phase in the full-year? I think you talked about 6.5 to 7,000, just try to get confirmation of that. And also here, is a chance you go back to the pre-pandemic baseline now with the incremental demand from China.
And the last question is just in terms of housekeeping. Is there any kind of color you can provide us in terms of restructuring costs that we should expect for the full-year? Also, can you give any kind of color on capitalization on the – in the full-year this include 35%. So I'm just trying to understand if anything here is not worthy. And finally, also on a full-year basis you could see half in reduced and variable employee costs. Can you give us any kind of sense for the magnitude of the full-year? Thank you very much.
Mattias Perjos
I have five questions. We'll try to take them one by one. When it comes to ECMO, we do expect to return to growth. I wouldn't say maybe high single-digit, but at least single-digit growth in ECMO with our expectation depending on how things pan out to the year of course. When it comes to ventilator sales, we ended up with 7,300 machines last year. We don't expect any big upswing this year with our expectations is basically flat. One thing I want to highlight always the work on the installed base, we had really good traction when it comes to developing the service business and developing more consumables business from this. So I think it gives maybe sometimes the wrong picture to just look at number of machines when it comes to ventilators.
When it comes to your question on restructuring, we don't guide forward-looking. We have a few more things that I think we can implement during the year, but we will not provide details now on the cost impact of this. We think and hope that the main things have been put into place, but there will be some additional measures. On R&D, I didn't quite hear your question. Actually, Lars heard it.
Lars Sandstrom
I think, you asked about the level of capitalization. I think you can expect the similar level, maybe slightly higher. We see that we have quite a few projects running now in capitalization phase. And then that was where increasing during 2022. And I think on this level where we are now is where we are running into next year. And on the last question on variable pay, it's also not something that we've provided granular details on and we refrained from now as well. The only thing I want to say is that the system with variable pay in the company is set up to balance out the kind of performance, fluctuations that we've seen [indiscernible], we believe that it's kind of serving its purpose.
Oliver Reinberg
That's all I have. Thanks so much.
Lars Sandstrom
Thank you.
Operator
The next question comes from the line of Kristofer Liljeberg with Carnegie. Please go ahead.
Kristofer Liljeberg
Thank you. Two questions for me. First of all, I wonder about the mid-term margin guidance and how you feel about that given that the starting point is now lower and you have more or less lost the year. So that's my first question. And then wonder if you could in some way maybe quantify a little bit what you mean with weak first half. Does that mean negative organic growth or do you think you could start to grow at least a little bit already in Q1 – second quarter and also what that means when it comes to more and again maybe earnings development year-over-year? Thank you.
Mattias Perjos
Yes. I think on your last question there on what we looked on, I think what we talked about, weak, it is a little bit connected of course to the comparables when we compare the first half 2023 versus 2022. I think we will probably be slightly positive that is what we see in the first half and then improving gradually after that in the second half. And when it comes to your first questionnaire around the mid-term, as I understood it on the EBITA margin, you said that we lost a year coming out now with 15.1% and what you think going forward on that. Is that correct.
Kristofer Liljeberg
Yes. I guess margin now is probably lower than what you expected to be in a year-ago and the one when you announced that guidance?
Lars Sandstrom
Yes, that's true. And I think it's for the reasons we have mentioned during every quarter this year, or what we see and what we now say going forward is that we see that on the supply chain issues, we should see gradual improvement come forward that would ease up a lot of the service is interesting absorption and also of course, volume. We have lost quite a bit of volume this year. We go out the area, we've lost SEK400 million in the quarter as we mentioned here. So by getting that part [indiscernible] and also together and we decided improve product mix, so it means to 2023, especially then going into the second half, that will help the margin going forward.
And then as we mentioned, we have cost inflation continuing to heat us and that we work with improvements together with the continued focus on improving the five picture here in 2023. That is why we say that we give the stable guidance on the [indiscernible] 2023, but it is a bit tricky actually to – it is very much depending on demand and if you see volume picking up better, then we have significant that helps of course quite significantly, but that's why we're a bit cautious here.
Kristofer Liljeberg
Okay. I understand. Thank you.
Operator
The next question comes from the line of Robert Davies with Morgan Stanley. Please go ahead.
Robert Davies
Hello. Yes. Thanks for taking my questions. I had a couple. One was just around the broader CapEx environment you're seeing within the hospitals. I know you mentioned that the elective procedures are not back up to sort of normalized level yet. Just in terms of the spending and priority, I'd just be kind of curious where you're seeing hospitals spend that money, is it in the products you are getting, is it in the kind of larger capital equipment machines? That was my first question.
The second one is just on supply chains. Can you just give us some sense of where you're seeing the biggest bite points in your supply chains, which particular components are you sort of struggling most to get hold of and what gives you conviction that's going to get better? Is that just a sort of broad-based improvements to that specific suppliers you're having trouble with that, you've got visibility that's getting better? And then the last one, if I can, is just around the comments you made around the installed base and service. Can you just give us some sense of the capture rate you have of your installed base against maybe some sort of smaller independent service providers and where that stands versus a couple of years ago and where you think you can get that to? Thank you.
Mattias Perjos
Yes. Thanks. When it comes to the broader CapEx environment, we think it's rather positive still. We do see a continued investments in both operating room equipment. We've seen some investments when it comes to CSSD environment as well. So customer seems, I wouldn't say surprisingly, but it is positive that they're not holding back as much as one could have feared I think in this environment.
Compared to our equipment, but others, I don't really have a great insights on some of the other capital equipment categories where we are not to [indiscernible] to refrain from providing any information there. When it comes to supply chain, it has narrowed quite a bit to very specific components in certain product groups. I think there is a broad-based improvement, but we have some specific issues, especially related to our Cardiac Assist product category. So that's really where the main issue is product growth.
When it comes to the capture rate, we don't provide capture rates, but I think we are the prime supplier and partner when it comes to serving the install base. It's more often the hospitals themselves than the service rather than going to third party actors in this case, I would say. So we're pretty – we feel good about the penetration rate. It has started to improve since the big increase of installed base during 2020 and 2021. And like we highlighted some, a couple of years back even, we can see that there is better and better traction both when it comes to service offering, when it comes to consumables for some of the therapies that we offer, and also more and more interest in some of the connected solutions for managing these.
Robert Davies
That's great. Thank you.
Mattias Perjos
Thank you.
Operator
The next question comes from the line of Victor Forssell with Nordea. Please go ahead.
Victor Forssell
Yes. Thanks a lot for taking my questions. Starting off on the margins. Again, I perhaps misheard you there. Did you say that you aim to – the grow sort of – the margins in first half of this year, are they going to be slightly positive before improving much more in the second half, or did I misinterpret that?
Lars Sandstrom
No. That was the referral to net sales.
Victor Forssell
Okay. Perfect. And then just following up on the margins as well, we started to see at least, on perspective of ECMO starting to decline by Q2 in 2022, where you saw the larger headwinds. Where would you say in terms of customer destocking, et cetera, where are you on that trend line entering Q2, you think? Is it possible that that ECMO could actually hold up decently in Q2 already? Is that the way we should look at it?
Lars Sandstrom
I think we have limited visibility on stocking levels. We are very confident that they've gone down compared to what they were a year-ago, there's no question about this. But when it comes to guiding, we've said for the full-year, we expect an improvement, but not a dramatic improvement. When it comes to quarterly or half year guidance, we refrained from giving any details.
Victor Forssell
Yes. Fine. And then just lastly coming back to EBITA margins, so it's clear that you aim to improve them, it's a lot of swing factors obviously. But is the expectation feasible – the expectation of growing 2% to 5% on topline, is it feasible to see you expanding those margins in any sort of scenario depending on where you end up in the net sales range? Or would it be much tougher for you, if you end up at just 2%?
Lars Sandstrom
I think it's reasonable to expect an improvement cost becomes much easier in the upper end of the range. Mix though, I think is more probably – more important factor here than the absolute number when it comes to the margin improvement.
Victor Forssell
All right. Thanks a lot.
Operator
The next question comes from the line of David Adlington with JPMorgan. Please go ahead.
David Adlington
Hey guys. Thanks for the questions. Maybe just to push a little bit on phasing. I know you said sort first half revenues slightly up, but just so we are in the right spot for the first quarter should we expecting Q1 sales and also margins to be down year-on-year? Secondly, just a housekeeping, just wonder what the FX impact you're expecting both on topline and margins. And then finally, just in terms of your cost inflation, is your underlying cost inflation, I suppose mostly around salaries. What are your assumptions on that front please? Thank you.
Lars Sandstrom
Yes. On your questionnaire we are getting, now we are dissecting the half year as well. I think what we said, it'll be – as we said, gradually improve during the year with the first half being less good than the second half of course then gradual mix bit weaker in Q1, and then gradual improvement also in Q2. That is what we think.
And then when we look at FX, when we have a significant weaker corona now during 2022 and we don't forecast currencies, but technically then that's going forward, we will have pricing positive impact in the beginning of the year on topline. And then it saves up during the rest of the year. And then when it comes to bottom line, it is limited impact. If there is a big change in closing rates, we have a reevaluation effect and that is [indiscernible] the full cost, but if we take that away, it'll have limited impact for next week.
David Adlington
And just on wage inflation?
Lars Sandstrom
Yes. Sorry, wage inflation there as well. We don't expect anything else than anyone else here. I think, we have had gradual increases during last year mainly in U.S. which are normally quicker to adopt to a new reality. And then, of course, comes Europe now this year and we don't expect to be best or worse than that, which Europe and, you know, big broader cost base in Germany province and Sweden when it comes to people.
David Adlington
I suppose what I'm getting at is if your topline is 2% growth, but your wage inflation is 4% to 5%, it's difficult for us to model much in the way of margin expansion?
Lars Sandstrom
Yes. That can be a bit painful. So we need to work with restructuring and productivity and prices.
David Adlington
Understood. Great. Thank you.
Lars Sandstrom
Thank you.
Operator
Your next question comes from the line of Peter Ostling with Pareto. Please go ahead.
Peter Ostling
Thank you for taking my questions. Most of them has already been answered or asked, a couple of ones. When I see that – when I assess the hospital and supply chain environment, especially in the U.S. it seems like Getinge is not – is facing a much tougher headwinds compared to many of your peers, especially your U.S. peers. And looking at the hospital sector, they had a very tough first half last year, but then improved quite significantly even though staffing shortages is still a lingering headwind. So what I'm just trying to get around, if the geographical mix, U.S. ex-U.S. is negative for you in this current environment compared to your, especially your U.S. peers, that's what my first question.
And then I don't know if maybe you have already talked about this, if you could say anything about price volume during 2023 and let's say if that you end up in the middle of the 2% to 5% guidance, how much of that is volume and how much of that is price? And then lastly, you are alluding to that you have quite a number of long contracts that has not been renegotiated yet. Can you talk a little bit about your average length of those contracts and if these contracts will have a positive effect in 2024 instead of 2023? Thank you.
Mattias Perjos
All right. Thank you. When it comes to the U.S. question, I think in general, if you don't look at our competitors, most of them have closer to half of their sales in the U.S. and very often the incumbent, so to speak, benefits a bit in difficult environment. So there's probably an element of that. Having said that though, I think when it comes to for example, Surgical Workflows, we've done well in the U.S. This is a category where we've focused for a long ride, getting the right products, having the right vehicles, supporting customers on the ground, and we clearly see the results of this as well. And it's also categories where we are largely unconstrained when it comes to supplies. So the other part for the U.S. performance for us is heavily impacted by Cardiac Assist and the supply chain problems we've had there. We've had some restrictions when it comes to ECMO product supplies as well. So that also factors into the overall picture when you compare our performance in the U.S. to lots of competitors. So I think those are the main explanatory factors.
When it comes to price and volume for 2023, we have an ambition to hit at least 3% or 3% price increase in 2023. And we make guidance though, it's a mix of volume increase and price increases. So we have to make our own estimate of how success we were with the different components there in both operations. And when it comes to longer term contracts, yes, we have several of those as well, but we're not providing any overlooking information on how they expire and what the potential price impact could be. The average ambition for the group is 3% for 2023.
Peter Ostling
Okay. Thank you, Mattias. Just a quick additional question before I get back into the queue. When it comes to the mesh settlement, what's your best guesstimate now when you will pay out? What's left of that settlement? Will it be during 2023?
Mattias Perjos
Yes. It will be. We expect it to be in Q1.
Peter Ostling
And can you give us a number approximately?
Lars Sandstrom
No.
Mattias Perjos
No, not yet. We can't give you a number. We expect this to be within what we have accrued for acquisitions.
Peter Ostling
Okay. But many costs, as I understand it has been taken along the time regarding, if you compare to the initial reservations that you made. So the end amount will probably be significantly less than if you add the two reservations together?
Lars Sandstrom
Well, yes, lawyers and the legal costs are high, but maybe not so high. Assume I still look to [indiscernible] and when it comes to the payments, we don't really intend to share the number at the end of the day since this is, we want this to be not an opportunity for anyone to get attracted by anything here and store. So that is – you will see it in the cash flow when it comes and it's within the provision we have taken. And that I think we will stay on that communication.
Peter Ostling
Okay. Great. Thank you, Mattias and Lars.
Mattias Perjos
Thank you.
Operator
There are no more questions on the telephone at the moment. I would now like to hand the conference back over to Mattias Perjos for any closing remarks.
Mattias Perjos
All right. Good. Thank you. Nothing else to summarize, I think from my end. We have gone through materials and happy that we have exhausted the queue questions as well. So thanks everyone for dialing-in today. I wish you good rest of the day. Thank you very much.
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Getinge AB (publ) (GNGBF) Q4 2022 Earnings Call Transcript