Arjo AB (publ)

Thank you very much and good morning to everyone and welcome to OREO's Q4 2023 earnings call, where Niklas and myself will give you some details on the Q4 report that we released an hour ago. Next slide, please. The agenda looks as usual and includes a summary of activities and results from Q4, shorter comments on full year 2023, balance sheet items, and details on the outlook for 2024 before we open up for questions. And we intend to keep this call to an hour and finish no later than 9 o'clock. Next slide, please. We close the year in a strong way and continue to see good underlying demand for our core business in capital, service and rental. We continue to navigate a volatile market environment in a good way and close the quarter with 4.9% organic net sales growth, with good growth in most of the major markets. In addition, and as a further positive sign, this net sales development is supported by an even better order intake in the quarter. In the US, we continue to see a still somewhat stressed but systematically improving financial situation for many US healthcare providers caused by factors known from before around staffing shortages and increasing costs. Due to this, we have continued to see slower than expected net sales development in our outcome programs, both in patient handling and pressure injury prevention, but are on the other hand, seeing continued good traction on our service and rental The beacons of light are now shining brighter than before, and we believe that 2024 is going to provide further positive developments on this important market. We continue to see good growth on major markets like Canada and France, where both capital, service and rental develop well. We also see a very good growth in our APAC region in the quarter, together with a strong focus on improved product mix in that same region. Our gross margin came in at 45.3%, which is a solid improvement versus Q4 of 2022 and sequentially over the last quarter. I am happy to see that our activities around price adjustments, internal efficiencies, product mix are generating wanted results on the gross margin and this work will of course continue into 2024. For 2024, we will continue to drive efficiency focus throughout the value chain based on the plans that we put in place for example within the supply chain. Our strong focus on price adjustments will obviously remain and it is very clear that we need to continue with that work to mitigate the additional inflationary costs expected also in 2024. On the OPEC side we are seeing an increase mainly related to salary inflation. In comparable currencies The increase in OPEX is related to higher salary costs, somewhat increased IT costs and higher net R&D in the quarter. I am satisfied with how the organization has continued to invest where we expect to drive profitable growth for the future while safeguarding our short-term commitments. Adjusted EBITDA for the quarter was 614 million SEK versus 481 million in Q4 of 2022. An increase just short of 30%, driven by the solid development of our gross margin. Adjusted EBIT improved with more than 50%, and we continue to have good stability in our earnings progress. We continue to perform well on operational cash flow, this time with 734 million for Q4, leading to a cash conversion of 125% for the quarter. The good results in this area is driven by continued improvements in both inventory and accountants receivables, a focus that is there to stay. During the quarter, we also got some further proof that our efforts in the sustainability area are generating results with a significant improvement in the ESG risk rating from Sustainalytics and also from MSCI. In summary, we are closing 2023 in a strong way. Our markets have done a good job in continuing to navigate different market conditions and have built an even stronger foundation for the years to come. Our core business develops in a solid way, and we are now gaining visible pace on our outcome paths. Next slide, please. After a start to the year that was more volatile than expected and some difficulties to get needed traction on our profitability development, we are seeing a second half of the year with good and stable development. Our core business has developed much according to plan, setting a strong foundation for the quarters to come. And we're also seeing visible steps in the right direction in our customer interaction on outcome programs. In the second half of the year, we've also seen good profitability improvements despite significant inflationary pressures on salaries. Product mix has improved as per plan. Price adjustment work is continuing with full focus and our activities to drive efficiencies in supply chain are executed on plan. From a numbers perspective, we see a full year organic growth of 4.7% with good traction on most major markets and the US that has returned to growth mode. We have strengthened our gross margin driven by factors already mentioned and are, despite the significant inflationary pressure on mainly salaries, improving our overall profitability on adjusted EBIT level with almost 25% for the full year. Our focus on cash conversion, 106% for the full year, has been strong. We're generating more than 2 billion SEC in operating cash flow for the year, and our well-executed plans on inventory reduction and accounts receivables pays off. Our leverage is now back to 2.3, and the work to reduce that further will, of course, continue. Based on this and a positive view on our development in the coming years, the board of directors are recommending an increase of the dividend to 0.0 SEC per share. All in all, we put a year of stabilization and recovery behind us where we have met short-term commitments while investing in the future. Something that we are positive will generate a good continued development on all parameters for the coming years. Then if we move into North America. Next slide, please. North America grew with almost 8% organically in the quarter, and more than 5% for the full year of 2023. We had a continued very good development in Canada, where service, rental and capital all developed well. It is especially our long-term care business that is driving the growth, and we are now focusing more and more to get the same traction within our acute care segments. It is also pleasing to mention that we, during the quarter, secured a first contract for SEM scanner usage in long-term care in Canada, which really is a breakthrough deal for us. In the US, we continue to see a step-by-step improvement of market conditions. Conversion from pipeline to order intake in capital equipment and outcome programs are still slower than expected due to the continued lack of staff and strained financial situation for many healthcare providers. But especially in our transactional patient handling, we have an improved net sales development in the quarter supported by good order intake. We expect to continue to see gradual improvement in the US on capital order intake in the coming quarters. The interest for our pressure injury prevention programs in the US remains high. Conversion rates from pipeline to start of training is still slower than expected with reasons being the same as before around staffing shortages and focus on more short-term projects. The trend on conversion has improved well in the quarter and we are seeing significant month-over-month uplift in invoicing that will generate a good development in 2024 and onwards. And I will give you some more details on the development further on in the presentation. We're seeing the same trend in our patient handling outcome programs, an area where we, as most of you know, have been active for over the last 15 years. The reasons are the same as for pressure injury prevention, which makes us confident that it is market factors causing the longer lead times now for both segments. Also in patient handling, the pipeline is good and with high quality, and we also expect this area to improve significantly during 2024. Rental in the U.S. continues to develop well with an organic growth of more than 10% in the quarter with good improvements on profitability. Also our service business in the U.S. sees growth with over 10% in the quarter and we expect good traction on service development also in the coming years. Next slide please. If we then move over to Western Europe and rest of the world that makes up the global sales region In Q4, this region recorded a solid 4% organic growth, and for the full year, the organic growth was 4.3%. In Western Europe, we see the same trends as in Q3, with a continued healthy demand for our products and solutions, together with a good development of both service and rental in the quarter. We had a slight organic growth in Q4, with markets like France and Netherlands and Ireland posting good growth numbers. For the full year, the region grew with 3%, which is a solid performance under current circumstances. Our organization in the UK continues to navigate the volatile market and are performing net sales in line with last year's quarter four. In this situation, it is pleasing to see how an improved product mix and clear efficiency gain can continue to drive good profitability improvement. Germany sees a slightly lower capital market But this is compensated well by good development and especially service for the court. Overall, our service and rental business in Western Europe develops well in the quarter, both on volume and on price. Especially the price adjustment part has gained traction across segments for the quarter. And we continue with high focus in this area into 2024. There continues to be uncertainties around capital spend levels in European healthcare. But based on our current performance, information at hand, and the pipeline development, we are positive around our possibilities to continue to see growth and continued improvements of profitability in Western Europe also in 2024. Next slide, please. Our business in rest of the world had a good organic net sales growth of 14% in the quarter, with a full year 2023 that landed on more than 8% organic growth. Our APAC region had a solid quarter on organic net sales driven by good performance in Australia. It is also for this region good to see that we work with significant effort on improving our product mix, obviously while maintaining high organic growth. India develops favorably also in this quarter with good potential for further development in 2024. Japan, as we've been talking quite a lot about in recent quarters, performs a solid quarter, regaining some momentum versus plan that will help us to secure a good development in 2024. In the quarter, we have also initiated further investments around strengthening our market activities in Eastern Europe and also in APAC, investments that are expected to support good future growth in this area alongside current activities. Next slide, please. Our gross margin came in at 45.3% for the quarter, which is a solid improvement from 41.3% the same quarter last year, and also an uptick sequentially from Q3 of 2023. The negative effects of the high inflationary environment continues to be visible, especially on the salary side. We are, as before, working hard to mitigate the negative effects with continued long-term efficiency gains throughout the value chain including solid focus on continued supply chain efficiency. The strong recovery and stabilization during the second half of 2023 in supply chain operation is obviously helping us to drive these activities in a standardized and efficient way. We need to continue to work on price adjustments as one part of the puzzle to mitigate further inflationary pressure and adjust for previous increases of costs. have executed well in this area for 2023 and quarter four is a good example of that with price as a main contributor to the strong improvement of gross margin as stated before we are starting to see a positive change in product mix and the positive effects of increasing sales in our pressure injury prevention site in the quarter the good development in both service and rental especially in u.s rental is contributing in the quarter this is well or rather this will in our view drive long-term expansion of the gross margin in the years to come. Next slide please. Our OPEC level continues to be well managed and activity levels remain high throughout the organization. We continue to invest in activities that secure both short-term revenue and solid profitable development for the future. The increase in OPEX for the quarter versus last year's Q4 is more or less isolated to salary costs in selling and admin. On top of this, we continue to see the same trend as previous quarters on higher IT costs related to significant increases in license costs and our continued improvements on IT security. R&D gross investment is at 2.9% for the quarter, a number that continues to be well aligned with portfolio plans. We have significantly higher net R&D in the quarter compared to Q4 of 2022, which is related to planned project development, but obviously works negatively on EBIT versus Q4 of 2022. We had a negative effect from revaluation of AR and AP of approximately minus 20 million for the quarter, booked under other expenses, making the performance on profitability even stronger. Adjusted EBITDA in Q4 came in at 614 million, up with 25% from Q4 of 2022. Our adjusted EBIT came in at 342 million, which is an improvement of more than 50% versus Q4 2022. Both adjusted EBITDA and EBIT recorded the highest absolute numbers in any single quarter since the spin-off, and that is really a good sign for the future as well. Restructuring came in at 25 million in the quarter, mainly related to our strategic alignment work of the UK sales force, changes in Central Europe, and a dedicated program to set our marketing functions as efficient as possible globally by eliminating some managerial positions. Next slide, please. And I hereby hand over to our CFO, Niklas Sjösvärd.

Thank you Joakim and good morning everyone also from my side. The positive trend in operational cash flow continues. We have a high focus on working capital management and we see a positive solid impact from working capital on the cash flow in the quarter. The improvement in working capital in the quarter is coming from all parts. It's strong development in the inventory reduction but also good support from the improvements in accounts receivable as well as accounts payable. Our long-term focus improvement work in working capital is paying off in the quarter, and this focus will of course continue into this year. The working capital days sees a significant decline in the quarter, down to 77 days, which is, as you can see on the slide, the lowest level in four years, but actually also the lowest level since the spin-off. The improved profitability, along with the positive impact from working capital, gives a solid operating cash flow of 734 million SEK for the quarter versus the 425 million SEK in Q4 2022. And this brings the operating cash flow for the full year for 2023 to just about 2 billion SEK, as Joakim said before. As an effect of this, cash conversion improved significantly versus Q4 2022, and we report 125% cash conversion for the quarter, giving us 106% year to date, meaning that we exceeded our target of 80% cash conversion for the full year. And also for your information, cash flow from investing activities was minus 177 million SEK in the quarter versus minus 231 million SEK in Q4 2022. And this is mainly connected to investments in our rental fleet, R&D and fixed assets. So next slide please. Our net debt continued to decrease sequentially during the quarter from 4.7 billion SEK in Q3 to now 4.3 billion SEK in Q4. This decrease is mainly attributed to the good operation cash flow mentioned before. Our financial cost has increased substantially compared to the same period last year, and that reflects the current interest rate development. The interest net specifically was sequentially lower in Q4 versus Q3 based on our lower debt levels. And we expect our reduction journey on the net debt to continue also in the coming quarters and together with potentially lower interest rates during 2024. We anticipate decreased financial costs during this year. And our cash position remains strong. Our leverage net debt to adjusted EBITDA continued to improve and came in at 2.3 as a consequence of previously mentioned activities regarding improved profitability, working capital management, and positive cash flows. This is sequentially down from the 2.6 in Q3. And also for your information, the equity ratio came in at 49.0%. It's a slight decline from the 50.2% in last quarter, and this is only due to ethics issues. So with that, I hand over back to you.

Thank you very much, Niklas. Next slide, please. And moving into our outlook, where the outlook for 2024 is that the organic net sales growth will be well within the group's target interval of 3 to 5%. Let me also share some additional details through the different segments on the coming slides, starting with the capital side. Next slide, please. Overall, we forecast that we will continue to see positive development in our capital business driven by both volume and price in 2024. Our U.S. capital sales is expected to see continued step-by-step improvements as the market recovers. We should also have good possibilities to gain market shares in the U.S. as a large portion of our competitors are in less stable positions. In Western Europe, we are facing a slightly more volatile market situation, but we still forecast capital sales volumes to be on 2023 levels. The positive trend in rest of the world is set to continue based on the good traction that we have had in the latter parts of 2023, market developments and also our additional investments in sales force and market coverage that I mentioned earlier. We are expecting to regain momentum in our outcome programs for patient handling in the US and gain further traction on new markets in this area. We forecast to build on the recent increased pace in conversions in the pressure injury prevention side in the US and here start to see additional traction on markets like Canada and the UK as well. This will add to the volume side in capital while positively impacts the gross margin. In addition, and as stated before, we will focus on price adjustments also in 2024 to continue the journey to mitigate for the higher cost levels driven by inflation since the end of 2021. Next slide, please. 2023 was a very strong year for our service development, both net sales and profitability wise. We forecast that 2024 will be a year where we continue this positive development driven by both volume coming from mainly additional preventive maintenance focus and price adjustments to meet inflationary pressure. The focus that we've had on service as an important part of our business development will continue, and I am confident that the potential here for the coming years with the right investments continues to be big. Next slide, please. Also in rental, the positive development is expected to continue. Major rental markets like U.S. and France have both secured additional contract base for 2024 and onwards and will build on this. In the U.S., we're now also actively penetrating the long-term care rental market where our activities previously have been very low. Competitors exiting this market space assist this in-row and we will, while obviously safeguarding profitability, address this market opportunity actively during 2024. A European rental business is expected to see continued growth driven by new contracts and higher demand from existing customers. We also expect to see a continuation of the profitability improvement journey as we remain focused on the price adjustments needed and further internal efficiency work globally. Moreover, to clarify any misunderstandings, our critical care rental volumes are not a part of the planned growth scenario and has never been on either top line nor profitability. As most of you know, this was a product that had an extraordinary development during the COVID period, but have since Q1 of 2022 not been a focus area for us and therefore not a part of our growth strategy for rental. Next slide, please. For outcome solutions in patient handling and pressure injury, US continues to be the main focus market with additional opportunities in countries like UK, Germany, Australia, and Canada. We foresee a favorable development of implementations of patient handling outcome solutions in 2024. 2023 did not live up to expectations due to the well-known factors on staff shortage and the financial situation for U.S. healthcare. But we forecast a good step-by-step improvement in this area for 2024. This area is well known to us, and we know what it takes to gain traction when external factors start to normalize. And we have an even stronger setup today to drive this type of business. In pressure injury prevention, we have a solid outcome offering in place for the US and some of the major markets. We continue to see a strong demand for these solutions and expect, with the same reasoning as for patient handling, that we will see a good step-by-step improvement in 2024, mainly in the US, but also in other dedicated markets. It is good to see that our partner BVI continues to get market access progress through, for example, continuous endorsements from FDA on the scanner utility. This will, over the next 12 to 18 months, have the potential to change the game plan even further around reimbursements, et cetera, in the US. Apart from the FDA endorsements on the utility of the scanner, we also receive very positive customer feedback from customers with implemented programs, including the scanner. For example, we now have a world renowned cancer center and teaching institute located in the U.S. that has adopted the Provisio SEM scanner. As I've been talking about before, the REO team has successfully trained over 1,500 nurses across the entire facility, and the facility officially implemented the Provisio SEM scanner in October of 2023. It is assumed that this program will generate around 2 million USD in the initial phases in yearly revenue for REO, while obviously ensuring significantly higher savings for the user. Unfortunately, we cannot disclose the name of this institution as it is a state-funded facility and would not agree to a publicity claim. One that we can mention is the Boston Medical Center, a 514 bed level one trauma and academic medical center located in Boston, Massachusetts, that officially implemented the ProvisioSem scanner in December of 2023. Another one is the University of Louisville, a fully integrated regional academic health system based in Louisville, Kentucky. They adopted the Provisio SEM scanner at four of its facilities starting in the end of 2022. Since adoption, they have achieved notable reductions in heel and sacrum hospital-required pressure injuries, even in some of its most vulnerable patient populations, being in the cardiovascular intensive care unit and its Fraser Rehabilitation Institute with brain injuries, spinal cord, and stroke patients. In the implemented programs, also across other larger healthcare institutions in the US, we are recording 77 to 100% pressure injury reductions, obviously leading to a significant saving for these customers and significant improvements in patient care and patient care quality. These real world data is used to continue to gain additional traction from the high quality pipeline that we carry into 2024. Before closing the outlook session, I should also mention that we forecast approximately 30 to 35 million in restructuring costs in 2024, coming from not yet decided continued strategic alignment work in our sales organization and internal efficiency program. Next slide, please. And then just a summary before we close. And we do close a year of 2023 with a solid Q4 performance where we have a strong growth in our core business. We continue to see good growth in all regions. We've continued improvement growth in the US and with other markets developing well. Our service and rental business continues to develop favorably, both on net sales and profitability, setting a solid base for the coming years. We are starting to see good conversion rates from our outcome programs in patient handling and pressure injury prevention in the back end of the year. And our assumptions are that external factors affecting the adoption rate will continue to improve in 2024 with good effects on net sales and profitability. We are clearly seeing the effects on profitability from price adjustments, internal efficiency work and better product mix. areas that will all be with high focus going into 2024 to ensure further improvements our continued strong focus on operating cash flow continues and we have good plans in place to continue this journey in the years to come with 2023 as a year of recovery and stabilization we have set a solid base for further development in 2024 and onwards where we will continue to build a winning and sustainable Oreo based on our strategic initiatives. And with that, I would like to open up for questions, moderator. So please go ahead.