Arjo AB (publ)

Hello and good morning to everyone and welcome to Arjo's Q4 2024 earnings call. With me here today, I have Christoffer Karlsson, our interim CFO, and we will give you some details on the Q4 report that we released an hour ago. Next slide, please. The agenda looks as usual, includes a summary of activities and results from Q4, shorter comments on full year 2024, the balance sheet items and the outlook for 2025 before we open up for questions. We intend to keep this call to an hour as always and finish no later than 9 CET. Next slide, please. We closed the year in a solid way and could see how demand and growth recovered sequentially from Q3 with strong momentum for our rental and service business again. We continue to navigate slower market environment in mainly some Western European countries, while North America is becoming more and more stable and on good growth levels. And we closed the quarter with 3.1% organic net sales growth for the group. In addition, as a positive sign for 2025, this net sales development is supported by a stronger order intake growth. In our largest market US, we now see a clearer positive development, and this is probably related to a combination of our internal efforts to create a more focused US organization, but as well as the financial situation and staff shortages improving among our customers in US. In global sales, the net sales growth showed a mixed picture with some challenges in the Western European markets, such as France and Netherlands. While we could see more activity in UK market after the approved NHS budget and UK grew double digits in the quarter. Also, Germany had a good activity level in the market and a solid growth. Our gross margin came in at 44.7% and we continue to get support from lower material costs and continued price adjustments. But in the quarter, it was not enough to match last year tough comparison. For 2025, we will continue to drive efficiency focus throughout the value chain based on the plans that we have put in place, for example, within supply chain. Our focus on price adjustments will obviously also remain to secure compensation for mainly higher than normal salary inflation. On the OPEC side, we are seeing an increase mainly related to salary inflation. We continue to invest in our organization where we expect to drive profitable growth for the future, but whilst also safeguarding our short-term commitments. And with this said, we have good improvement plans and we will accelerate efficiency activities also for our operating expenses during 2025. Adjusted EBITDA for the quarter was 653 million SEK versus the 614 million SEK in Q4 last year, an increase with 6.5%. Adjusted EBIT improved it almost 10% and we closed 2024 as one more year of underlying profitability improvement. We continue to perform well on operational cash flow with 479 million SEK in Q4. leading to a cash conversion of 82% for the quarter. We did build up some accounts receivable in the quarter, holding back the cash conversion somewhat. And this was due to a little bit later than normal sales peak in the quarter. And it's more of a timing related and something we will benefit from in quarter one when this cash flow comes. In summary, we are closing 2024 in a solid way. Our markets have done a good job in continuing to navigate different market conditions and have built a stronger foundation for the years to come. Our core business develops in a solid way and we can see how our business model with capital, rental and service is helping us to deliver stability in growth and earnings trend. In addition to this, we see several important markets showing good signs of increased activity level and demand for our products and solutions. Next slide, please. Looking at the full year of 2024, we have delivered a solid performance despite challenging market developments in mainly some Western European countries, but also in China. fully organic growth was 3.1 percent it was lower than our plans and mainly due to the weak and expected q3 while the business recovered in quarter four with sequentially stronger net sales growth and even stronger order intake growth giving a good indication for 2025. On the gross margin side, we improved year over year from 43.1 last year to 43.5 this year. And this is driven by positive mix effect, price adjustments, efficiency improvements in supply chain with lower purchasing costs and lower transportation costs. While headwinds continue to be higher than normal salary inflation. The bottom line improved as well with adjusted EBIT growing 6.5% year over year. Our focus on cash conversion, 77% for the full year, has continued to be strong. We are generating 1.5 billion SEK in operating cash flow for the year. Our leverage improved and is now down to 2.0 and this work to reduce 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 0.95 SEK. All in all, we put a solid year behind us where our business model has proven to deliver stable growth and profitability also when some markets slow down. We see several markets with increasing demand for our products and we have a larger order book entering 2025, especially in North America. Next slide, please. North America grew with almost 8% organically in the quarter and more than 5% for the full year. 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 with good profitability levels. In our largest market US, we now see a clearer positive development, and this is probably related to a combination of internal efforts to create a more focused US organization, as well as the fact that the financial situation and staff shortages are improving among our customers. The growth in U.S. in the quarter was in across our product categories. Rental and service continues to drive growth and is developing well. On the capital side, it seems that demand is coming back and all categories with the exception of the DVT was growing in the quarter. Next slide, please. Then over to Western Europe and the rest of the world that make up the global sales region. In Q4, this region had a flat organic growth with plus 0.3%. And for the full year, the organic growth was plus 1.9%. In Western Europe, we still have the challenges with some weaker markets due to uncertainty regarding the funding of the national health care systems. This is still valid in the quarter for France and Netherlands, while the funding in UK was secured and we almost directly could see higher activity level in the market and increased order intake and net sales. Countries with good demand and organic net sales growth in the quarter was in addition to UK, also Belgium, Germany and Austria. Our service and rental business in Western Europe also developed well in the quarter. There continues to be uncertainties around capital spend in some European countries, but we are positive around our possibilities to see growth and improved profitability in Western Europe in 2025. Next slide, please. Our business in the rest of the world had a negative organic net sales growth of minus 3.7% in the quarter due to a very tough comparison from last year when the growth was plus 14%. With that said, the full year 2024 landed on a healthy plus 4.1% organic growth. Our APAC region couldn't repeat last year's very strong sales in Q4, where Australia had its best quarter ever in Q4 last year. In addition, in APAC, China had a very weak finish of the year, and we are now changing the go-to-market approach to turn this market around to growth again in 2025. India continues to develop very good also in this quarter, with good potential for further development in 2025. Yeah, Japan also develops very good in the quarter and the changes in the sales organization we did ahead of 2024 now seems to pay off with good results and gives a good indication for 2025. Next slide, please. Our gross margin came in at 44.7%. We continue to get support from lower material costs and continued price adjustment. But in the quarter, it was not enough to match last year's tough comparison and to absorb the headwinds, which is mainly continued higher than normal in salary increases, especially in our larger production sites. In the quarter, our service business continued to improve the gross margins, while rental was matching last year. and capital had a slight detraction, mainly due to our DVT business in the US, which is suffering from lower volumes, which we believe will bottom out now in the first half of 2025. We are, as before, working hard to mitigate the headwinds coming from increased salaries with continued long-term efficiency gains throughout the value chain, including solid focus on continued supply chain efficiencies. We need to continue working on price adjustments as one part to mitigate further inflationary pressure and adjust for previous increases in cost. Next slide, please. Looking into 2025, we have solid and detailed plans for gross margin expansion and we will with strong focus execute these plans. On the product mix and portfolio side, we will continue to drive our business towards product categories and products which will have higher pricing power and margins. We will upgrade our product portfolio with several new launches during 2025 in key categories such as patient handling, hygiene and pressure injury prevention. We continue to roll out our tools for improved pricing, and we're implementing our pricing excellence process across more and more markets to secure and improve ASP year over year. And our supply chain efficiency program is continuing, and more and more activities are moving from planning to execution, which will support our supply chain efficiency going forward. Next slide, please. Our OPEX 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 increases in Selling and Admin. We had a positive effect from the evaluation of accounts receivable and accounts payable of approximately 20 million in the quarter, booked under other expenses. And this was negative 20 million in the same quarter last year. Adjusted EBITDA for the quarter was 653 million SEK versus the 614 million SEK in Q4 last year, an increase with 6.5%. Adjusted EBIT improved with almost 10%, and we closed 2024 as one more year of underlying profitability improvement. Restructuring cost came in at 85 million in the quarter. This is mainly related to our exit of the BVI collaboration and one-time cost for changing office for our US sales organization. This is a space optimization activity which we leave to lower cost in the future. Next slide, please. As mentioned earlier in this meeting, we had good improvement plans and we will accelerate efficiency activities also for our operating expenses in 2025. We have launched a program for indirect spend optimization during this year, during 2024, which will start to see effect in 2025. This is a classical external spend reduction activity with focus on consolidating spend volumes to less suppliers, negotiate lower prices and control the spending organization. In addition to this, we will continue our journey to harmonize our IT landscape and we will focus on that our IT investments drives process improvements and automation. And finally, we will implement improvements in our admin and selling expenses with activities that drives the smarter and leaner ways of working, among other things, with support from AI and review if we can organize ourselves smarter and more efficient for the future. Next slide, please. And here I hand over to our interim CFO, Christoffer Karlsson.

Thank you, Niklas. Q4 operating cash flow is typically our strongest quarter, and so is the case for 24 as well, even though we had a negative impact from working capital in the quarter. The negative effect in working capital caused by the fact that sales, to a great extent, happened towards the end of the quarter. And as a consequence, accounts receivable increased. Inventory reduction continue, but with smaller amount versus earlier periods. It was hold back to some extent due to inventory build up for sales and rental investment in 25, especially for the US market. Working capital days increased to 84 days in the quarter versus 78 days by the end of Q3, driven by accounts receivable build up and lower inventory reduction. The improved profitability offset by the negative impact from working capital gives an operating cash flow of 479 million SEK for the quarter versus 734 million in Q4 23. This brings the operating cash flow for the full year 24 to 1.5 billion SEK and in 23 we had 2.1 billion SEK. As an effect of this, cash conversion can mean at 82% versus 125 for the quarter and 77% year-to-date versus 106 last year. Just below our target of the 80% cash conversion for the full year. For your information, cash flow from investing activities was minus 191 million SEC versus 177 million in Q4 2013. mainly containing investment in our rental fleet, R&D and fixed assets, but also a minor 12 million SEK item rated to acquisition of TechMed in France. Next slide, please. Our net debt continued to decrease during the quarter from 4.4 billion in Q3 to 4.2 billion in Q4. This decrease is mainly attributed to the good operational cash flow. Our financial cost has significantly decreased compared to the same period last year, driven by lower interest costs and positive effects quarter over quarter. The interest net was significantly lower in Q4 versus Q3, based on lower interest rates and debt levels. We are now entering 25 with lower interest rates versus a year ago. We expect our reduction journey on net debt to continue also in the coming quarters. Together, this will improve our financial net first half in 25 versus 24 if no significant increase of interest rates will occur. Our cash position remains strong. Our leverage net debt to adjusted EBITDA continued to improve and came in at 2.0. as a consequence of the previous discussed activities regarding improved profitability and cash flow. The equity ratio came in at 51.2%, which is an increase from 50.2 last quarter, mainly due to FX effects in other comprehensive income. Then I hand it over back to you, Niklas.

Thank you, Christoffer. I'm very happy to be able to share that we have now officially launched our next generation integrating batting system, which we call Simblis. This system enables safe and efficient hygiene routines across all mobility levels. It supports workflows that reduce caregiver injuries and optimize efficiencies. We are proud of receiving the highest rating from the Dementia Service Development Center. And furthermore, this will strengthen ARDIO's long-term care market positions and give us an potential. We will be launching in US, Canada, UK and Western European countries during quarter one. We have already pre launched in Belgium and Sweden, and we actually have 90 installed baths at the customer sites. And I can say that the customer testimonials are very positive and very promising. Next slide, please. Our outlook for 2025 is that organic net sales growth will be well within the group's target interval of 3 to 5%. Next slide, please. So with that, I would like to summarize today's update. We have a solid finish to the year. It's a healthy demand for service and rental globally. We have continued growth in US and Canada and a strong quarter four in UK after the clarity in the healthcare budget. Improved profitability and also solid initiatives to improve further moving forward. Strong financial position with further improved leverage. And also now new product launches and signs of improving overall market outlook for 2025. Organic net sales growth for 2025 expected to be within the group's target interval of 3-5% as mentioned before. And with that, we can open up for questions. Moderator, please go ahead.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Matthias Vadsten from SEB. Please go ahead.

yes good morning thanks for taking my questions the first one is on the strong orders that I think you mentioned throughout the presentation could you share you know by how much orders grew or any other clarity would be helpful and to that does this mean that we should expect a strong H1 and maybe also a strong Q1 maybe towards the mid or the upper end of your three to five percent range or how should we think about that? That's the first one.

Yeah, thank you, Mattias. Yeah, but we are what I'm saying is that in quarter four, the order intake growth was bigger than the net sales growth. So that's positive. And we are also entering 2025 with a larger order book than before. It is mainly connected to North America, which I mentioned, it's a very strong momentum. So that's also important to know. When it comes to the guidance of the quarters going forward, I will not go into that, but I think an order book is delivered over time. so it's not instant deliveries and some are building projects etc so it will come during 2025 and it's good for 2025 but it is for the full year we're talking about okay thank you very much and then on the gross margin i think

It was up in 2024 by 40 bits, and here in Q4, if I'm not mistaken, down only 30 bits, excluding FX, versus a very strong, we all remember that, Q4 last year. So I guess my question is, is it fair to assume that the gross margin will expand in Q1 year over year? And how do you look at basically facing through the year, anything you want to mention there? And also looking at 2025 sort of ballpark is half a percentage points where you expect the improvement to be on the gross margin or, yeah. And any thoughts or slavery there would be helpful to us.

Yes, I understand, but we will not guide on the gross margin, but we say that our plans support year-over-year improvement also in 2025. That's the important thing. And our ambition is of course that also quarterly have year-over-year improvements, but our plan supports year-over-year improvement for the full year 2025.

Okay, good. And then on the sort of, you talk about product mix and portfolio management. So I'm just trying to get a sense, how much is this a story of 2025 or should we read it as a small impact in 25 and mainly 26, 27? And then also if you could share anything around sort of how many offerings we're talking about ballpark, because that's a bit difficult to get a sense of, uh,

I think when I talk about the portfolio and the mix improvements, it's something we have been working on also in 2024. So it's an ongoing activity where we're pushing our higher margins product categories and products. Long term, we are also looking at the portfolio setup, of course, and driving simplification in that. But you're right, those strategic moves are more for 26 and onwards. But operationally, we can do a lot of work also with the portfolio and the mix. And that is the focus for 2025.

Is it fair to say that there would be like a handful of sort of new global launches like Simbliss here that you presented in this quarter or?

Simbliss is launched in quarter one globally. It was pre-launched in quarter four. And that is what we talk about now. Then during 2025, we will also launch in patient handling and pressure injury prevention. And that I will come back to.

Sounds encouraging. Thank you very much.

Thank you. The next question comes from Christopher Liljeberg from Carnegie. Please go ahead.

Thank you. Good morning. Coming back to this gross margin topic, the much better momentum here that you appear to have in the US, how important would you say that is for gross margin improvements in 2025?

But growing faster in the US than in the rest of the world gives a geomix support. That's true. But I think that's all we can say right now.

Maybe difficult here to interpret, but the way I see it, you sound more confident on gross margin here than previously. Is that the way we should see it, i.e. that it's realistic for gross margin to improve more year-over-year in 2025 than what we have seen now in the last two years?

I think we have seen year-over-year gross margin improvements, and we will continue to drive that. And we have a crisp plan in place to deliver on that. But I don't guide on gross margin improvements. It's year-over-year improvement that is our focus.

Okay and operating cost as a percentage of sales, do we expect that to continue to improve?

Also here I would say our ambition is to have OPEX leverage so yes we would like to see year-over-year improvements also on OPEX to sales.

Okay, and then my final question. Nice to see UK, one of the large European markets, picking up here. What's your outlook for France?

Yeah, it's still uncertainties and quarter four was weak and we think they will take some more quarters before clarity in the budgets will be visible. So I think we will struggle probably first half 2025.

Very good. Thank you. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Okay, thank you very much.

The next question comes from Matthias Wadsten from SEB. Please go ahead.

Okay, with one more question. Yeah, sure. Good. It was just on coming back to the UK. So I'm just trying to get a sense, because you mentioned double-digit growth in the UK. So would you say, is it fair to say it was a really weak comparison quarter? Or let's say, is this a fair level of the growth that you will show in UK going forward? That's basically my question on UK.

okay no i i cannot say that it's a fair level we will see how how the group will look like i think we all recognize that the double digit group is very very good so let's see how the the quarters comes here but we are we are positive good and the next question was you mentioned france as the main struggling market as i see it is there any other market that you see

But you could fear will be some troublesome going into 2025, apart from France and China, or is everything else moving in the right direction, would you say?

There are some more countries in Europe. Netherlands is one where we have similar issues where the health care funding is not clear. directly showing on the capital side on the activity level. But at least the largest market UK is positive now. And maybe some more will be clarified early 2025. But it's still a mixed picture. I think that's important to know in Europe. Okay, I think that was the last question.

There are no more questions. So I hand the conference back to the speakers for any closing comments.

Okay. Thank you very much for joining the REO Q4 earnings call and looking forward to come back in 2025. Talk to the business about 2025. Bye.