Arjo AB (publ)

And also from our side, welcome to REO's Q3 2024 earnings call, where Niklas and myself look forward to give you some details on the Q3 report. Next slide, please. We'll start with a business update from Q3, a financial update, and our outlook for 2024 before we open up for questions. And as always, we intend to keep this call to an hour and be ready by 9 o'clock. Next slide, please. At the time for the Q2 report, we talked about a slightly unsure situation for capital sales in Europe due to political uncertainty in some of our major markets. This uncertainty has resulted in lower than expected capital sales in Europe in the quarter. In addition, we saw some unexpected shortfalls in China and Japan also on capital side in the quarter. And in total, we therefore report only a 1.5% organic growth in the quarter. which is around two to two and a half percentage points lower than our expectations that we had when we spoke last time in the beginning of Q3. On the positive side, we have a solid order intake on capital and also a good development of our service and rental business, which gives us stability for the coming quarters. But with low visibility into European market for capital, we currently see that we will have to navigate these circumstances for quite some quarters to come. A gross margin came in at 42%, an improvement versus Q3 of 2023, despite the current headwinds. The lower capital sales down approximately 40 million SEC in comparable currencies and more in volume versus last year is generating a negative mix effect and lower observation in our factories. And this is a trend that we will continue to see as long as our capital sales remains on the weaker side. In addition, we had a significant negative transaction effect from currency and altogether these effects are the main headwinds on gross margin for the quarter. Our current activities around price adjustments, internal efficiency and product mix continues to generate results and are compensating the higher cost levels driven by mainly salaries. We see a risk for continued weaker capital market in Europe over the coming quarters And we will therefore need to accelerate our efficiency activities, both in cost of goods sold and OPEX, to safeguard our profitability developments. On OPEX in the quarter, I think it's fair to say that we have continued to have good cost control throughout the organization. And OPEX as a percentage to net sales is so far stable versus last year, despite the high inflationary salary increases and lower than expected net sales development. Adjusted EBITDA decreased to 434 million second quarter. Adjusted EBIT decreased to 164 million versus 186 in Q3 of 2023. Impacted by the lower capital sales and significant negative currency effect, totaling to a negative delta of minus 34 million versus last year. Operationally, we are trending better on EBIT. But the lowered and expected capital sales could not compensate for the significant drop in currency this time. Our operational cash flow for Q3 was 437 million, leading to a cash conversion of 102% for the quarter. And we are well aligned with our target for the full year of at least 80%. And Niklas will take you through further details in his part. I'm also happy to inform you that Maria Fagerberg will join us as new EVP for QRC, latest on the 7th of January of 2025. And we have a solid interim set up in place until she joins. Maria comes with extensive QRC background within MedTech and will, with her track record, be a very good addition to our leadership team. I'm also very pleased to announce that Jonas Cederhage has decided to stay with OREO in his role as EVP for supply chain and operation, a decision that creates continued stability in our work to optimize our supply chain and operations efforts throughout the group. In summary, Q3 was a quarter where we, despite a lower trend on capital sales in Europe and some countries in the rest of the world, managed to grow the group with 1.5% organically. Our business in Canada continues to grow. The U.S. starts to show signs of recovery in capital sales, and our rental and service business develops well globally. The end of the quarter saw better development on both order intake and capital sales than July and August, but there is headwind and lower visibility for capital sales in especially Europe for the coming quarters. And we will make sure that we navigate this situation well going forward. Next slide, please. North America grew with 2.4% organically in the quarter and is now up 4.9% on organic net sales after the first three quarters. Canada had a good quarter with rental service and capital all developing according to plan. We continue to grow our market presence in Canada and I foresee that Canada will continue to be a very important market for us also over the coming years, both driven by needed investments into the Canadian health system and obviously good internal work. The positive trend in the US continues. Healthcare providers are step by step strengthening their financials, and with that comes also a gradual improvement of capital investments. As previously mentioned, the nature of our business does not put us first in line for these investments. That in the first phase goes more towards processes in the operating room, But we are now starting to see a better momentum towards our projects and solutions. DVT continues to be a drag on organic growth based on the previously signalized price pressure and loss of customers because of that. We have seen this development in Q1 and Q2 as well. And only in Q3, we have lost approximately 2 million US dollars and expect that to be the case also in Q4 and in Q1 of 2025. Meanwhile, for the most parts of 2025, we expect this trend to have bottomed out and are foreseeing a return to growth in this area from Q2 of 2025 and onwards as before. Our service and rental business in the US continues on a positive momentum, and especially in rental, we foresee this trend to continue as we have now secured additional customer implementations. It is also good to see that our transactional patient handling sales develops well, With one of the drivers being our air-assisted business, where the acquisition of AirPal, the product range from AirPal, develops above plan. The development of transactional sales is especially good in acute care, where both long-term care and governmental sales yet have to pick up to get to the expected levels. Even though the quarter, as expected, was low in regards to outcome programs, we are now in a realistic way looking at a Q4 where we believe that we will return to needed pace in this area. My previous mentioning around further stability in the financial situation of health care in the U.S. is the main driver, and we expect this to develop step by step also for the coming quarter. Overall, a solid quarter in North America with potential, especially in the US, to develop the organic net sales in the quarters to come. Next slide, please. Moving over to our global sales region, where the net sales declined somewhat versus last year's Q3. Western Europe was down with 0.5% in the quarter on organic net sales. We continue to have good clinical demand for our products and solutions, but decision making has been significantly more volatile in countries like France, Netherlands and the UK, leading to lower capital volumes. We continue to have good development of both service and rental, which is performing slightly better than forecast in this area. We have talked about the uncertainties around capital spend levels in European healthcare in previous telcos and for Q3 that has been clearly visible. Our pipeline is good and growing. We do not see loss of market shares in any of our main markets, but we continue to see postponement and delays of capital spend decisions. Based on our current information stand, this is something that we believe that we will have to continue to navigate for some quarters to come. It is still encouraging to see the long-term commitment from both UK and France to invest into solving the large-scale problems facing healthcare around demographic change and the need for more efficient care of patients. But it is clear that financial deficits will be a headwind for us to navigate in the short term. Also countries like Germany The restructuring of healthcare will give some short-term bumps in the road, but we feel positive around the possibilities moving forward on a market where we are already well established. Our diagnostics business grew versus low comparables in the quarter. Also in this area, given the dependency on especially UK, we are lower than forecast and expect this to continue throughout Q4. We do expect to see a quite okay growth in this area going forward, but again, from a low base from 2023. And we still have work to be done to get net sales to where we expect it to be given our product and overall offering standing. As a summary for Western Europe, continued good momentum in rental and service, a pipeline that continues to grow, but lower visibility on capital spent. The latter part of the quarter was better than July and August, but we will remain very focused when navigating this environment in the quarters to come. Next slide, please. Moving over to rest of the world then, where Q3 saw organic growth of 2.5%. Australia, India and South Africa, three important markets in this region, continue to see positive momentum and growth with capital, service and rental growing. Our business in Singapore was lower than last year due to some large projects in Q3 of 2023, but is developing well aligned with plans overall. The big disappointment in the quarter in the rest of the world was China. where we in Q3 last year saw some good capital projects, but where we have experienced an almost dried up capital project market this year in Q3. Based on information standards as of today, we believe that these low activity levels will continue for some time in China, and we will have to adapt to this significantly lower capital spend environment from an internal perspective. Japan also saw a decline versus last year, but this is in our view mainly due to a delay in our shift of business model. And we feel comfortable that we will be on growth track in Japan in the quarters to come. The significant EU funding to Poland with large amounts being allocated to the refurbishment of health to the healthcare sector has been slightly delayed versus expectations by the end of Q2. This has caused what we define as a tsunami effect, where very few capital investments have been made in Q3 in anticipation of the investment funds, but where we are expecting a significant inflow of projects in Q4 that will have a main effect in 2025 and 2026. We are well positioned to gain good market shares of these products, which obviously is very good for the long term. Next slide, please. The improvement journey on profitability continues and gross margin improved to 42% for the quarter versus 41.4% in Q3 of 2023. An improvement yet lower than forecast after end of Q2, mainly due to lower capital volumes affecting both mix and supply chain utilization, but also significant impact from negative transaction currency effects. As in previous quarters, we have higher salary costs in supply chain, rental and service, which we have mitigated through continued work with internal efficiency and continued focus on price alignment, something that we expect will continue also in the coming quarters. And as discussed also in the Q2 telco, our forecast is that we will see price adding between 1% to 1.5% growth on top line for the full year. and we are currently trending at around 1% after Q3. Given the low visibility on capital spend in Europe, this is obviously significant fine-tuning going on into this area. From a category perspective, we have continued to perform well on the patient handling gross margin, and with additional traction in this category, we expect to see a continued improvement of our product mix over time. Service sees slightly weaker margins in Q3 versus Q3 of 2023, but this is almost only due to negative currency effects. And we also continue to improve our gross margin in rental, despite the high pressure on salary costs. Transportation came in higher than expected versus last year. The continued pressure from the situation in the Middle East and horrible strikes in the US will continue to be a smaller negative in our comparisons also into Q4. both versus forecast and last year. We expect to see negative effects from the lower capital sales also in Q4. On top of already committed efficiency projects in supply chain and continued work with pricing, we will accelerate efficiency programs further to be able to navigate a lower short-term capital development. Extensive work is ongoing to further detail these activities and we are confident that we will have solid plans in place effective beginning of 2025. Next slide, please. OPEX continues to be well managed within the group, and we are seeing an increase of 2.3% or 23 million in comparable currencies, despite significant salary inflation on this line. OPEX as a percentage to net sales grew slightly in the quarter, on par for full year, mainly due to the lower than expected capital net sales development. We continue to drive initiatives for profitable sales development as before, but will actively review structures in OPEX where we are experiencing lower demand than plans. R&D gross investment is trending at almost 3% for the quarter, which is, as before, aligned with our product development plans. And as stated also after Q2, we are planning for larger launches in hygiene in the end of this year and interesting launches in pressure injury prevention and patient handling in the beginning of 2025. The main factors impacting adjusted EBIT this quarter are Total negative currency effects and re-evaluation of our accounts receivables and accounts payable of minus 34 million, and obviously the lower than expected capital sales. And we obviously also saw the same factors impacting adjusted EBTA. The structuring came in slightly lower than expected in the quarter, and we are still trending towards the indicated approximately 45 million for the full year. Next slide, please. And here I would like to hand over to Niklas.

Thank you, Joakim. And good morning from my side as well. The operational cash flow improves sequentially in quarter three versus quarter two. But it's down versus quarter three last year due to a difficult comparison with the strong release from higher than normal inventory last year, which is not repeated this year based on the more balanced inventory levels. Working capital improved in the quarter, coming from good work with all parts, including inventory, accounts receivable and accounts payable. And our long-term improvement activities regarding working capital is continuing to pay off, and this focus will of course continue. Working capital days sees a significant improvement year-over-year in the quarter, down to 78 days, compared to Q3 last year with 86 days. It's also sequentially down from quarter two, which had 79 days. The improved working capital gives a stable operating cash flow of 437 million SEK, sequentially up from quarter two, which was 344 million. The operating cash flow for quarter three last year was 565 million SEK, mainly driven by the strong release of higher than normal inventory levels I mentioned before. Cash conversion improved sequentially to 102% versus the 70% in quarter two. We are well on track towards our target of 80% cash conversion for the full year. And for your information, cash flow from investing activities was minus 190 million SEK versus minus 134 million SEK in quarter three last year. Mainly containing investments in our rental fleet, product development and fixed assets. But also now in quarter three, the payment of the Euromed acquisition. Next slide, please. Our net debt is down year over year from 4.7 billion in Q3 last year to 4.4 billion in this quarter. Sequentially, the 4.4 billion net debt is also down versus the 4.5 billion in Q2. Our financial net as well as our interest net has decreased compared to the same period last year, and it's mainly connected to our lower funding and lower interest rate. We expect our reduction journey on net debt to continue in the coming quarters and together with lower interest rates during the rest of 2024, we see now decreased financial costs during the year. Our cash position remains strong. Our leverage net debt adjusted EBITDA improved year over year and came in at 2.2 in this quarter. versus the 2.6 in Q3 last year. This is a consequence of the last year activities regarding improved profitability, our working capital focus and cash flow. Sequentially, the leverage is also down versus the 2.4 in Q2. And for your information, 2.2 is the lowest leverage since spin-off. The equity ratio came in at 50.2%, which is a small increase from the 50.1% last quarter. Then I hand back over to you, Joakim. Next slide, please.

Thanks, Niklas. And as you know, we made two smaller acquisitions in the quarter. GeroMed in Germany is a good example of what we look for in the first of our three M&A buckets when it comes to strengthening our footprint in rental and service. TechMed, as a clear market expansion possibility for our diagnostics business, also fits well into both overall strategy, and M&A focus. These two small acquisitions will generate smaller positive effects to REO from 2025, and again, are good examples of targets that we're in contact with. Next slide, please. Shortly to our outlook for 2024, where we, based on the information that we have today, still forecast to be within our target interval of 3 to 5% of organic net sales, despite the slowdown in capital sales, mainly in Europe. Next slide, please. With that, I would then like to summarize today's telco. We closed Q3 with a 1.5% organic growth, which is lower than expectations due to the lower capital sales in some European markets and also a few of the rest of the world markets. The low visibility on decision making around capital sales, especially in Europe, is estimated to continue for some time, and we will have to continue to navigate the situation in a good and focused way. We continue our improvement journey on gross margin, despite headwinds from lower capital sales and negative currency effects, and we continue to manage our OPEX in a good way. Apart from the lower capital sales, currency is also affecting EBIT with approximately a negative minus 34 million versus Q3 of 2023. Our profitability journey excluding currency continues, but we obviously have to adapt cost structures for all effects going forward. We continue to do a solid work around our cash flow, and as a result of that and other activities, we register 2.2 as leverage, which, as Niklas said, is the lowest level for Oreos in the spin-off. We now enter into Q4 with a continued high activity level where we will need to navigate a lower visibility around capital sales. We still estimate that we can reach our outlook for 3% to 5% organic growth for the full year. And finally, I would like to let you know and inform you about that we will host a capital markets update in Stockholm in conjunction with the release of our Q4 report on the 30th of January 2025. More information will follow on this as we get closer. With that, we can open up for questions, moderators.