Getinge AB (OTCPK:GNGBF) Q2 2022 Earnings Conference Call July 19, 2022 4:00 AM ET
Company Participants
Lars Sandstrom – Chief Financial Officer
Mattias Perjos – Chief Executive Officer
Conference Call Participants
Erik Cassel – ABG
Kristofer Liljeberg – Carnegie
Victor Forssell – Nordea
Patrick Ling – DNB
Rickard Anderkrans – Handelsbanken
David Adlington – JPMorgan
Operator
Good morning, and welcome to the Getinge AB Conference Call. All participants will be in listen-only mode. [Operator Instructions] This event is being recorded.
We have with us Mr. Mattias Perjos, CEO; and CFO, Lars Sandstrom. I’d now like to turn the conference over to Mattias Perjos, CEO. Sir, please go ahead.
Mattias Perjos
Thank you very much, and thanks, everyone, for joining today’s conference call, and we can move directly into Page number 2, please, and I will go through some of the key takeaways from the second quarter. So as expected, we saw a decline when it comes to order intake and net sales, which decreased by 5% to 7.5% organically in the quarter. One bright spot here though was that the order intake increased towards the end of the quarter, so an indication of better momentum going forward.
The development for the quarter as a whole was affected by reduced production of vaccines against COVID-19 and the number of patients in need of life support in intensive care units was significantly lower than what the health care system and we had predicted combined with a milder flu season as well. In addition to this, the Russian innovation of Ukraine, the lockdown in China and the supply chain challenges that we see globally also had a negative impact on our volumes in the quarter. From a product category perspective, this means that the demand weakness to is entirely attributable to our sterile transfer offer, our ventilators and our products for ECMO therapy.
So most of our other categories grew in the quarter, even if the growth in some areas was a bit subdued by the above-mentioned external challenges. We can see now in the dialogue with customers that they are planning for a normal flu season in the second half of the year, which is expected to lead to a recovery for us when it comes to specialty intensive care products.
The scarce supply of components had a negative impact, mainly on acute care therapies and for the group as a whole, the effects are estimated to be about bete SEK300 million and SEK400 million in the form of delayed deliveries in the quarter. If you look at demand in other product areas, such as products for elective cardiovascular procedures, infrastructure linked to operating rooms and sterilization centers in hospitals and also products for pharmaceutical manufacturing, all these categories saw an increase in the quarter.
We had a favorable earnings effect from currency during the quarter. But even if you adjust for this, the margins held up very well, given the lower volumes, the unfavorable mix effects that we have in the quarter and also the negative effect from supply chain challenges. On an EBITDA margin level, the lower variable cost for employees are an important explanation for this and also partly for the gross model. We can move that over to Page number 3, please. So we focus on some of the key activities and events for the quarter.
We start with our offering. So our work to strengthen the customer offering continues. And after the end of the quarter, the acquisition of Fluoptics, which offers the leading technology for decision support in advanced surgery was completed. We also launched a new Altaport our DPT X. This is the first of its kind has support with the external opening and integrated fund, which secures automatic aseptic transfer and also improving the operational efficiency for life science customers worldwide. This provides our customers with a secure and reliable and automated transfer solution.
We also launched a new version of the system for our anesthesia product family flow. This means that the automatic gas control option will become available also on the getting a low sea and flow and facial systems in addition to our already existing platform. ADC supports lootesia, which reduces the consumption of anesthetic agents and thereby reduce running costs and it also reduces the greenhouse gas emissions. So this is an important thing for our customers.
We’re getting also received the prestigious if Design Award for Guide, Guide is a new system for making acute care devices look, feel and behave the same way. This system is based on the assumption that it’s all getting the devices used in intensive care units and in operating rooms, look, feel and behave the same. It becomes easier for clinicians to learn how to use them. This reduces the risk of errors. It lowers the cost of trading and is especially valuable now in these times of unprecedented staffing shortages in the health care system. On the sustainability front, we have since May now the 2 production facilities in Russia and Hechingen in Germany that have converted to climate neutral gas, making their energy use carbon neutral and thereby contributing to the overall business goal of becoming CO2 neutral by 2025.
In addition to this, we’ve also invested in solar panels for the production units in Rustan such in China as well as in the geothermal heating system in the production unit in or done in France. On the quality front, during the quarter, we completed an internal investigation related to potential violations of the German Medical Devices Act for which a total of 5 current and former getting employees are being investigated by the public prosecutor’s office in Badenbaden.
We incorporate fully with the prosecutor and our internal investigation has identified some shortcomings regarding individual interpretations of the quality system and the regulatory processes. In addition to the already extensive remediation measures that we had in place, we’re now also implementing a number of structural changes and also intensified training efforts. A couple of changes when it comes to the management as well.
So it was previously communicated, Lena Hagman, our Executive Vice President for Quality Compliance, Regulatory Medical Affairs that decided to leave getting it. I would like to thank Lena for her contributions to the company. She’s been an instrumental part in our work to establish quality processes with the patient in focus, how we share all the best in the future. The will continue in our current role until the successor has been appointed, but no longer than the last day of December this year.
A few days ago, we also announced that Anita has been appointed Executive Vice President of Operational Services and a member of the gaming executive team. The newly established function covers Len group purchasing, logistics, IT and our academy and has been established to further strengthen group synergies. And tearjoined getting in 2018 and most recently held the position as Vice President of protein.
So a warm welcome to her into her new role as well. This is effective from September 15. We will then move over to Page number 4, please. So as mentioned initially, we had an order intake decreased by 5% and a net sales decreased by 7.5% organically. This didn’t match the high growth that we had last year overall. And if you look at this from a regional perspective, orders are up in Americas to a large extent, thanks to surgical workflows, accomplishing more than 20% growth in the quarter.
I’m very pleased to see that surgical workforce continues to grow order strongly in the Americas as we expect North America to be an important market for this business area in the coming years. The year-on-year order comps in Asia Pacific were especially tough this quarter due to us having record orders on ventilators from that region last year. This was — if you remember, the phase of the pandemic where India was particularly in a difficult situation.
The net sales decline in Americas and EMEA is very much linked to the tough comps in ventilators and products for ECMO therapy. While we saw that strong performance in both Life Science and Surgical Workflows explains why Asia Pacific managed to remain almost flat in the quarter when it comes to organic net sales. We can then move over to Page number 5, please. So we take everything that I’ve said here into account and based also on the release a few weeks ago, the outlook for 2022 is that the organic net sales is expected to be in line with actual net sales in 2021. So there’s been no developments at the end of Q2 or the beginning of Q3 that makes a change of mind in this respective. We can then move over to Page number 6, please.
So if we look at the order intake bridge from the quarter in the second quarter of last year to the second quarter of this year, we can see that acute care therapies is down 7.1% organic. The organic decline in acute care therapies is mainly due to challenging comps in ventilators and that the demand for ecnotherapy products was lower than previously expected in the quarter and certainly lower than what we saw last year. This contributed to an organic decrease in order intake in all regions.
And while we could see that order intake increased in products for planned cardiovascular procedures, this was not enough to compensate for the decline on ventilation. Life Science then, down 5.3% organically in the quarter. This was mainly a result of lower demand for products linked to the production of vaccines against COVID-19. This primarily affects the order intake for our DPTE beta bag within transfer subsegment of Life Science.
The organic growth in dishwater disinfectors in service and spare parts was strong in the quarter for Life Science. If we then look at Surgical Workflows, down 1.2% organically. And the organic order intake decreased slightly as a result of lower order intake in infection control in Asia Pacific and reduced order intake for products for operating rooms in EMEA. When it comes to Americas from a sort of a workflow perspective, we saw good growth in all of our different product categories.
We can then move over to Page number 7, please. So this is the net sales bridge between the same quarter last year and the Q2 of 2022. Acute Care Therapies, down 17.7% organically, mainly linked to lower demand for ventilators and action therapy products and also some component shortage challenges due to the global supply chain situation. This development overshadowed the net sales increase in products for elected cardiovascular procedures.
Net sales and capital goods declined organically as a consequence of lower demand for ventilators and also because of component shortages. In Life Science, the contrast, we sold 7.7% organic growth. And the growth in Life Science net sales is attributable to sterilizers, consumables, including the DPT Beta bags. — service and spare parts. The strong percentage growth in APAC is primarily linked to Sterile Transfer and also service products. We can see that for life science supply chain challenges had a negative impact on net sales in the quarter.
So there are some delays impacting the performance in our smallest BA as well. Net sales in recurring revenue increased significantly as a result of deliveries and orders from the previous year, primarily related to DT-batabanks. And if we then move to Surgical Workflows. We had a 7.6% organic growth. The net sales increased organically in all product categories within Surgical Workflows despite some of the supply chain challenges that we would see. In relative terms, our digital health solutions grew the most, followed by products for operating groups.
We also saw good growth in all product categories in both Asia Pacific and EMEA, while sales was slightly negative in Asia Pacific due to infection control Net sales increased both in capital goods and in recurring revenue, where you find consumables, service and spare parts. Currency had a SEK564 million or an 8.6% positive impact on net sale for the group in the quarter. Organic net sales of capital goods came down significantly in the quarter due to tough comps but also due to some supply chain constraints.
With that, we can move over to Page number 8, please, and look at the gross profit evolution. So our adjusted gross profit decreased by SEK269 million to SEK3.35 billion in the quarter, where a positive FX effect accounted for SEK348 million. For the group as a whole, the adjusted gross margin decreased by 4.7 percentage points as an effect of lower volumes, negative mix effects and increased costs linked to inflation and supply chain challenges. The effects were partly offset by price increases by productivity-enhancing measures and also support from part.
For acute care therapies, the adjusted gross margin decreased by 5.2 percentage points relative to the corresponding quarter of 2021. This is a result of the lower sales volume in ventilators and in ECMO therapy products. For Life Science, the adjusted gross margin decreased by 4.2 percentage points, mainly due to lower margins in consumables and washer disinfectors as well as some supply chain challenges. In Surgical Workflows, the adjusted gross margin remained essentially unchanged despite the increased cost and the supply chain challenges. So this is thanks to both better sales volume, some productivity improvements that we’ve been working on for quite a long while now and also currency effects.
So with that, we can move over to Page number 10, and I leave over to you, Lars.
Lars Sandstrom
Thank you, Mattias. Adjusted EBITDA decreased SEK294 million compared to the same period last year, while the margin decreased to 14.3% mainly due to just lower adjusted gross profit, which ties back to the lower volumes and favorable mix effect and supply chain-related costs and challenges for all.
Adjusted for currency, GP had a minus 5.8 percentage points impact on the margin due to the lower volumes and quite different VA mix compared to last year. OpEx is down materially organically to a large extent due to lower variable costs related to employees. But in actual, it is up SEK11 million year-on-year. This, together with the volume and mix effect on the margin year-on-year, takes us to a margin contribution of minus 0.7%.
Depreciation and amortization is impacting the margin by minus 0.3 percentage points, and currency had a positive impact of 2.1 percentage points on the margin. All in all, this resulted in an adjusted EBITDA of SEK956 million and a margin decrease of 4.7%.
Over to Page 11, please. Free cash flow continues to be positive even if we don’t reach last year’s level, that was impacted by a higher level of deliveries, net sales, operating profit and supportive terms for payments. The change in working capital is explained by a combination of seasonality, where we’re building inventory for the second half of the year. Increased inventory related linked to component shortages and supply chain services, also some purchases of safety stock for components and the market situation last year regarding mainly ventilators that contributed to favorable payment terms we get and that the current product mix in itself brings longer lead.
All in all, the free cash flow amounted to a bit more than SEK0.1 billion in the quarter. And working days working capital base continues to be well below 100. We are now at some 89 days, down 39.2 days from the peak in Q2 2018. I — we also see continued strong operating return on invested capital, where we are at 16.4% on a rolling 12-month basis, well above cost of capital. And as you can see, we are now closing in on the positive long-term trend on ROIC.
Let’s move to Page 12. The change in net debt year-on-year was positively impacted by the cash flow and revaluation effects. And also in Q2, the payment of dividend of approximately SEK1.1 billion was made, taking us to SEK3.9 billion. And if we adjust for pension liabilities, we are EUR1.2 billion. This brings us to a leverage of 0.6x EBITDA and adjust for pension at leverage is at 0.2x per EBITDA. Cash amounted to approximately SEK4.1 million by the end of the quarter.
And by that, let’s move to Page 13, and back to you, Mattias.
Mattias Perjos
All right. Thank you. We can move on directly to the following page, number 14, and look at the summary of the key takeaways for the second quarter of 2022. So we’ve seen a recovery in elective surgery, largely across the board from a geographic perspective, but this is overshadowed by a number of external challenges that we mentioned during the call here.
With continued the implementation of our strategy that we’ve been successfully implementing for 5 years now. Part of this is, of course, including strengthening our offering in different aspects, both from an organic perspective, organic development, but also inorganically, most recently through the acquisition of — we can see that our margins have been impacted in the quarter by volume decline and mix effect and also cost increase due to the supply chain challenges and the overall inflation pressure that we see in the world around us today.
We have mitigation activities in place for this. They do a good result so far, but this will continue to be active work for the remainder of this year and probably into 2023 as well. We had favorable earnings effect from Karaturing the quarter, but even adjusted for this, the volumes end up rather well. Finally, I would like to say that our biggest challenge now for our customers is to continue to ramp up elective surgery as the backlog of surgeries has continued to grow for each month since the breakout of the pandemic.
We think we expected last year that we would see a reduction on this, but so far, it’s actually been growing. So this is a continued challenge that we look forward to supporting our customers with in the coming quarters and years. We do everything that we can to continue to be a strong partner in this important task.
And with that, I open up for taking Q&A part of this conference call.
Question-and-Answer Session
Operator
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We will pause momentarily to assemble our roster. We have a first question from the line of Erik Cassel with ABG.
Erik Cassel
So first off, when we’ve discussed margins, you communicated FX tailwinds on the EBITDA margins of about 100 to 200 bps baked into the margin guidance for 2022. I mean considering now how our currencies have moved since, I guess, you should be seeing more significant FX tailwinds into H2 that by my calculation, should support it by another percentage points, basically. But considering this, do you still see EBITDA margins declining some 100 to 200 basis points despite that, then in that case, implying further distration in the underlying margins? Or should we now expect rather flat margins year-over-year?
Lars Sandstrom
Yes. When it comes to currency, I think we also need to know that there is a revaluation effect impacting us positively here this year in Q2 and the first half compared to last year where we had a negative impact. And we don’t see the same impact going forward. So that’s why we keep more or less what we have guided for so far.
Erik Cassel
Okay. So the last — the currency movement over the past month hasn’t positive — will not positively affect you for the full year, basically what you’re saying?
Lars Sandstrom
To some extent, of course, it will, but it’s not that material that you — I think when you look at it.
Erik Cassel
Okay. And then the delay of sales at the end of Q1 on supply chain issues and shortages. You talked about that as a phasing effect that would be recovering now in Q2 and Q3, and that was SEK300 million. Now you say that there has been a negative effect of SEK300 million to SEK400 million from delivery delays in the Q2 report. So first, I mean, is this relating to some sort of delivery backlog, this SEK300 million to SEK400 million number that you’re seeing, which then may also include delays from Q1. If so, how much of those SEK300 million delays from Q1 have you worked through in Q2? And how should we then think about the phasing of this SEK300 million to SEK400 million over the coming quarters?
Lars Sandstrom
Yes. So as you recall then we said SEK200 million to SEK300 million end of Q1 and now we say SEK300 million to SEK400 million. And a lot that was actually related to SW, and we have started to sort out a lot. So the growth that we see now in the 3 to 400millis mainly coming from the shift, I would say, from SW into ACT to some extent, also life sign here impacting end of Q2. And when it comes to what will come back, we see that when we — if you are capable of sorting this out, it should be handled through the rest of the year here.
Erik Cassel
Okay. And then the last question for me. I mean, considering the weakness in ACT, is there still some sort of destocking effect at hospitals for Ekovent consumables as we should have been seeing in Q1 still ongoing for Q2? Or is it mainly component shortages affecting that area? And if it is component shortage, could you perhaps quantify that effect?
Mattias Perjos
Yes, I would say it’s mainly related to component shortages. There is probably some stocking effects as well, but it’s very difficult to quantify this is we have only anecdotal evidence of this. So I think you should assume that the majority is because of supply chain challenges.
Erik Cassel
And then how much of this SEK300 million to SEK400 million is related to AST…
Mattias Perjos
Well, we don’t share a breakdown of this externally. It is — as Lars said, it’s moved more towards ACC now in the second quarter than what we saw in the first quarter. So it’s a very different SEK300 million we’re talking about now compared to Q1.
Erik Cassel
All right. I’ll jump back in the queue.
Operator
We have next question from the line of Kristofer Liljeberg with Carnegie.
Kristofer Liljeberg
I have 3 questions. First, on the working capital. Just wonder, have you started to make any payments just for the surgical mesh settlement? Or when do you expect this will happen? Also if you could provide maybe some view on the cash flow here for the second half and the full year? And how much you expect working capital will increase for the full year versus full year 2021? Then on this investigation in Germany, I think you said you have been aware of this since the beginning of the year. So I wonder what type of dialogue have you had with FDA and whether you think this will have any impact on the work to settle the consent decree there? And finally, how much higher would operating costs have been in the quarter without release of the bonus provisions…
Mattias Perjos
Okay. Well, we’ve not made any mesh payments yet. We do expect that to happen in the second half of the year, but we can’t predict the exact month today. And when it comes to cash flow going forward, it’s not something that we give any guidance on — we only talk about the working capital dynamics for the first half year. When it comes to the investigation in Germany, FDA is informed about this with there’s full transparency also with them. And we’ve had inspections by the FDA in our German sites with good results confirm that we have a compliant quality management system. So at this point in time, we don’t see any kind of impact on the relationship with FDA because of this. And when it comes to the operating cost question, it is a mix. We don’t quantify the individual buckets here. So it’s a mix of variable pay reductions because of the performance, but also we, of course, try to work with over time with shift work and also being selective when it comes to rehiring and using the natural turnover to make sure that we pace our cost evolution for the year.
Kristofer Liljeberg
But — so would you say that even if adjusting for the bonus provision release that operating cost would have been down organically year-over-year.
Mattias Perjos
We didn’t say that you only said that we don’t break it down…
Kristofer Liljeberg
Okay. But I think it will be helpful to understand if your underlying operating costs are trending higher or lower.
Lars Sandstrom
Yes. I think if you look at it, of course, there is — when it comes to the incentive and the statements that we have, they are, of course, connected to our performance, and we are now performing somewhat weaker, then of course, that has an impact. So it’s not separated from what we do in the business as such. And when it comes to the cost level as such, I think there is an underlying increase in some of the costs connected to the travel and marketing costs now coming up from very, very low levels. So that is increasing our costs somewhat and also some of the normal, let’s say, staff costs and salary costs. So that is the moving parts that we have. But as Mates mentioned, that we are working diligently to ensure that we take out consultants and also use our natural turnover to manage costs going forward.
Kristofer Liljeberg
And do you think operating costs will be down also year-over-year in the second half of the year?
Lars Sandstrom
As we say, we don’t give guidance on every line in the P&L we give you top line and a bit on the bottom line.
Kristofer Liljeberg
Okay. Fair enough. Just a follow-up on the mesh settlement payment. Would you be willing to give an indication how large those cash flow payments would be?
Lars Sandstrom
No, I don’t think we want that because it’s part of the negotiation and the final settlement agreement. So we will keep that until we are in full when that is closed.
Operator
We have next question from the line of Mattias Vadsten with Ed.
Unidentified Analyst
Some already asked. But just looking at the sort of historical performance of the company, we know sort of Q-on-Q development has been some SEK50 million to SEK60 million negative going from Q2 to Q3 on adjusted EBITDA. On the other hand, I mean you’ve had some significant headwinds for Q2, price increases on raw mat, supply chain issues, delayed deliveries and so forth. But could you just give some flavor and describe the potential for growing earnings sequentially? And what the sort of key drivers for this to think of it — I mean I know of the FX sailings if you just can keep it sort of in organic terms. That would be very helpful.
Mattias Perjos
Yes. I think it’s not much more complicated than the fact that we expect a continued recovery in elective surgeries. And most of our electric surgeries are, I mean, margin-accretive categories. So we expect this to continue and be less overshadowed by other problems in the second half of the year. We expect to continue to improve the performance in Surgical workforce in general, I would say, as you can see in the report, we have very good momentum in SW.
And I think if you take out the vaccine effect from Life Science, that’s also a business area that has positive momentum. And then, of course, we expect to gradually work our way out of this supply restricted situation that we’ve had now for the first half of this year. So these are the main organic levers for for a better performance in the second half. And then maybe the final point would be when it comes to our cardiopulmonary business and Eqiotherapy in general, that we expect more of a normal flu season in the second half of the year. If you look at what’s going on in the Southern Hemisphere now when it comes to , it is quite severe, and we can also see some of the COVID effects right now as we speak in Europe and in North America, with more people in the intensive care ward. So there is those type of dynamics that we expect that will support our business in the second half.
Unidentified Analyst
That’s perfect. And if we think about the supply semitescomponent shortage is finding more components at how and so forth, how would you describe that sort of environment in recent weeks versus what you saw sort of end of Q1, beginning of Q2. Can you just give some flavor there?
Mattias Perjos
It shifted a bit since Q1. We were somewhat positive towards the end of the first quarter, and we could see some light in the tunnel when it came to surgical workflows. And I think this has materialized while the situation is better. Then there’s been some new challenges related to acute care therapies as they to life science. We do believe that it’s possible to work through this within this year as well. But I can’t say that the situation is not getting any worse, but it’s also not improving a lot we required quite a lot of intense work here in the coming season.
Unidentified Analyst
Thank you very much.
Operator
We have next question from the line of Victor Forssell with Nordea.
Victor Forssell
I’ll rephrase some of the earlier ones here as well. But if you look at the second half now, it seems as the H2 margins will exceed last year for you to reach those 100 to 200 basis points down year-over-year. And comparing it to we’ve seen last year, if I recall it correctly, Eko had a decent Q3. Now ACT had quite poor gross margins. Also in Life Sciences, you had perhaps better deliveries of beta back than you foresee in the second half now as a relative share of your life science sales. So I mean, if you could, in qualitative terms, please on a divisional level, talk a little bit about the bridge here, that would be helpful.
Mattias Perjos
Yes. I don’t know that I’ve made one attendants. I don’t know that I can cover this much more. Lars, do you have anything to add?
Lars Sandstrom
No. I think as we mentioned here, in Q2, we have supply chain disturbance and that is, of course, not only holding back sales and deliveries. It’s also creating the under-absorption in our factories. And when that stabilizes, that will, of course, also as a general comment support better going into the second half of the year. And then with the growth we have in the expectations here, we will have a somewhat better also product mix support with higher sales of elective and also higher sales of cardiopulmonary supporting that, et cetera. So it’s supported by the product mix as well as going into the second half.
Victor Forssell
Okay. And I mean if — just to help out a little bit on the gross margin side, how — in what sort of magnitude would you classify all these headwinds starting with the largest headwind on ACT and Life Sciences, primarily if you just in qualitative terms, can explain what drove the worst performance.
Lars Sandstrom
No, I think we tried to show that in the GP margin reached there were volumes, of course, also the VA mix but factory absorption or hurting us and supply chain issues together. And those should support us also then when they were being handled during the second half of the year.
Victor Forssell
Okay. Fair enough. And just lastly, on the headwinds you’ve had on ventilators and COVID sales regarding Life Sciences. Can you sort of give us an indication of what that was year-over-year in Q2 in units sold for ventilators, for example, and also the EBITDA back sales year-over-year?
Mattias Perjos
No, I think as I said, there was an improvement in June for order intake. — ventilators was part of that. We don’t break it down in a number of units. We still have — we have a forecast of 8,000 units for the full year, and I think the performance so far is in line with expectations. So we have no reason to change our view on this. And when it comes to data base, we have rather good visibility with longer contracts as well but I really can’t add any more detail to the evolution.
Victor Forssell
Sorry, just a follow-up on the critical care ventilator side. I guess, in conjunction with the revised outlook you had 1 month ago, you said that the trajectory on ventilators were a bit slower than expectations. Has that reversed here in June then? Is that how we should read it?
Mattias Perjos
No. No, you should really — I mean, the normal year enter is about 10,000 machines for us. The assumption going into this year was a normal year, possibly with a little bit of a mix between machines and service and connect part of the connected offering and so on. So what we’re saying now is that it’s at the lower end of this, that’s the only change.
Operator
You — we have next question from the line of Patrick Ling with DNB.
Patrik Ling
Okay. Maybe I can start with just a short follow-up on the last question. When it comes to the beta bags, could you be a little bit more specific on how much that is just related to the covid vaccine sale that you talked about in connection with the profit warning — how much of the headwind comes from the vaccine side.
Lars Sandstrom
It is, of course, I think it’s what we say when it comes to the admin impact, it is impacting BetaBags, yes, it’s impacting the weak flu season in the first half of the year on codoculmonary. And then, of course, to some extent they for the vent letters. So that was what say, the main impact here that we highlighted when we did the pro…
Patrik Ling
And you do not want to give us some sort of feeling for how the year-over-year effect of just Covitvaccine because that is something that’s not really related to ACT, it’s more related to Lifesciences ways.
Mattias Perjos
No, it is — it’s not that we don’t want to. It’s difficult to assess as well. There’s been a significant slowdown that we could see here in the beginning of the year. What it will look like now…
Lars Sandstrom
It’s difficult to take…
Mattias Perjos
So the decrease is also offset by the production of the non-vaccine related products. So this dynamic is just very difficult to predict. We can’t share anything externally but…
Patrik Ling
Okay. Great. I’ll start for that. Then maybe I just missed it when you talked about it, but this investigation in Germany, could you just give a little bit more detail exactly what you’re looking for and whether this is related to historical issues or if this is something that has popped up during the last couple of months or quarters or years.
Mattias Perjos
This is an ongoing investigation. We cannot really give any more information that we have there. I think we’ve mentioned on one of the other questions here that if you look at the overall remediation work that’s been going on in our German factory, this has been site third-party inspections. These 3 portents have verified that our QMA management system is compliant. They’ve not identified the shortcoming center now are actually investing in — we will, of course, continue with the training, education and the to make sure our new quality management system is applied correctly in the day-to-day operations with the higher priority.
We really can’t give any more information. I think it’s an ongoing investigation. We — we have no obligation to disclose this. Now we felt that we wanted to be transparencies. We had concluded our own internal investigation. We can’t give any more information at this current time, and we cannot give any assessment of the potential impact either at this point.
Patrik Ling
But when you say that you’ve had third-party inspections that hasn’t identified this before, should we read that as this is something that has popped up? I mean that this is a more recent problem than rather a historical problem…
Mattias Perjos
No, it’s not a conclusion you can make from I prefer not to comment on this.
Lars Sandstrom
Yes.
Patrik Ling
Okay. Okay. Do you have any time line for what will happen before we know anything about it?
Mattias Perjos
No, unfortunately not. The time bans out of our hands. This is an investigation now led by the public securities abatement we have an impact
Patrik Ling
Okay. And you say that it’s also an investigation into former management. How long ago did these persons or person become former…
Lars Sandstrom
When do they…
Mattias Perjos
I didn’t say or management. We said the former and current employees and we don’t disclose any details on the individual service…
Patrik Ling
Okay. Then my last question, just had a short question on — you talked about your sustainable investment in climate neutral gas. Is that in Germany? And will that be setting you up for some sort of Russian exposure that whether the Russians cut the gas supplies to Germany?
Mattias Perjos
I just want to highlight that we were reliant on gas already before. It just wasn’t time neutral. And we are installing solar panels in our Rusta factory as well to offset some of these effects. So it’s not any increased exposure than what we already had…
Lars Sandstrom
I can also mention that we are working on continuous plans to handle any disruptions in the German gas supply system or for coming interruption…
Operator
We have next question from the line of Rickard Anderkrans with Handelsbanken.
Rickard Anderkrans
The first one, order backlog adjusted for currencies were 21% higher year-over-year in Q1. What’s that figure now ending Q2…
Lars Sandstrom
It is somewhat higher…
Rickard Anderkrans
Okay. So a few percentage points higher? Or is that a fair assumption?
Mattias Perjos
Yes.
Rickard Anderkrans
Great. And can you talk a little bit more? You have increased the inventories obviously here. Can you talk a bit about the visibility on access to critical components and access to hospitals for deliveries in H2, it would be interesting to just get a sense of how comfortable you feel with the path forward of delivering on this backlog and the orders coming in.
Mattias Perjos
Yes. I think it is still a challenging situation, no question about that, but it’s not getting any worse. And if anything, we are getting a little bit better visibility, that’s probably the best guidance we can give now. So right now, we feel confident that what on the order book, what is on back order that has been delayed in the second quarter, we will be able to deliver in the second half of this year.
Rickard Anderkrans
All right. Great. Just a final one. Could you help us navigate how you’re thinking internally about the impact from the most recent Omicron way that’s sort of picking up in North America and Europe, et cetera, in terms of ICU utilization vaccine boosters, selective impact, et cetera, would be interesting if you’re sort of acceding anything on that in turn and or seeing any change in order pattern or access.
Mattias Perjos
Yes. I answer the latter part of your question, beginning, we saw a change in order pattern in June with a slight pickup in ventilators, for example. So that’s one small piece of information when it comes to the evolving landscape here. Otherwise, I would say that it’s very, very difficult to predict situation going forward. We can see now that the ICU capacity in some countries is being stretched again. We certainly follow the dialogue when it comes to vaccine boosters and so on. But it’s very difficult for us to predict the numbers now what that will mean for the second half of the year. When it comes to the flu season in general as well, we can see, if you look at Australia, for example, it’s been a very difficult situation when it comes to the flu and all the planning is in full swing when it comes to the Northern Hemisphere second half of this year as well. So we believe it will be a normal flu season that will have an impact on our ventilators are used. It will also have an impact on ECMO therapy. But to put numbers on this at this point is very good.
Rickard Anderkrans
Fair enough.
Mattias Perjos
Thank you.
Operator
We have next question from the line of David Adlington with JPMorgan.
David Adlington
Just sort of slightly bigger picture question to start with. We’ve got H1 sales down about 7%, orders down 4.7%. And I know the second half is significantly in terms of comps. But maybe could you just sort of map as to how we get to that sort of flat for the year because it obviously implies a big rebound and maybe the phasing between Q3 and Q4, and particularly given those orders down 4.7%, what sort of visibility you have on that return to growth? And then just as a follow-up, I was quite surprised to see recurring revenues down 5.4%. Was that driven by the supply chain issues? Or was there a demand impact there as well?
Mattias Perjos
Yes. If we look at the dynamics between the first half and the second half. I think we’ve covered most of the variables here in a different form earlier. So you point yourself to the weaker comps in Q3 and Q4. That’s one factor, of course. And then you have everything with the recovery of elective surgeries. We can really see that there is a pent-up demand when it comes to this. So we need to resolve some of the supply chain bottlenecks that we have, which we are confident we will do in the second half. flu season normality is another factor that we feel confident about now and with the dialogues that we have with our customers. No sir the main effect, I would say, vaccine is difficult to guess. But even if you take vaccine out of the equation, there is a good underlying demand for nonvaccine related production that is positive for us. There are transfer business that is possible for the bioreactor business and so on. With everything that we know today, we feel confident with the guidance that we gave here in June that we reiterate today.
Lars Sandstrom
And on your question on recurring there, the lower sales. It is mainly related to the Exmodisposables that is impacting the weak flu season as we mentioned, is also here impacting Q2.
Operator
Thank you. As there are no further questions, I’d now like to turn the call back over to Matthias Barrios for any closing comments. Over to you, sir.
Mattias Perjos
Thank you very much, operator, and thanks, everyone, for listening in today. I think we already made the summary before we move to the Q&A. So nothing to add there. I wish everyone a good rest of the day. Thank you very much.
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