Arjo AB (publ)

Thank you and good afternoon to everyone and welcome to RDU Q1 2025 earnings call. With me here today, as you heard, I have Christoffer Karlsson, our Interim CFO. We will give you some details on the Q1 report that we released an hour ago. The agenda looks as usual and includes a summary of activities and results from Q1, the balance sheet items and the outlook for 2025 before we open up for questions. We intend to keep this call to an hour and finish no later than 4 CET. Next slide, please. We closed the first quarter in a solid way and could see how demand continued in the quarter with stronger organic growth than in quarter four. We had continued strong momentum for our rental and service business and now also supported by growth in our capital sales. We see improved market condition in some more European countries and North America stay on good growth levels. And we closed the quarter with 3.4% organic net sales growth. And in addition, as a positive sign for the rest of 2025, this net sales development is supported by an even stronger order intake growth. In our largest market US, We continue to see a positive development, and this is probably related to a combination of our internal effort to create a more focused US sales organization, as well as the financial situation and stock shortages are improving among our customers. In global sales, the net sales growth improved sequentially from quarter four. We are now seeing improving market conditions in some more European countries. We continue to see growth in UK. Dash and Benelux performed very well in the quarter, and it's encouraging to see that the bounce back in Benelux, which drew sales double digit in quarter one. Our gross margin came in at 43.7%, a slight improvement versus last year's 43.5%. We continue to get support from lower material costs and price adjustments, while these improvements are partly offset by higher salary cost and currency headwind. For the rest of 2025, we will continue our work to drive efficiency focus throughout the value chain, based on the plans that we have put in place, for example, within our supply chain organization. Our focus on price adjustments will obviously also remain there to secure compensation for mainly higher than normal salary inflation. On the OPEC side, we are seeing an increase mainly related to salary costs. We continue in the quarter to invest where we expect to drive profitable growth for the future. Adjusted EBITDA for the quarter was 486 million SEK versus 502 million SEK in quarter one last year, a reduction coming from currency headwinds. Neutralized for currency headwind, the adjusted EBITDA would have increased with 30 million SEK, which is approximately a 6% improvement from the underlying business. Our operational cash flow came in at 184 million, leading to a cash conversion of 41% for the quarter. For those knowing our business, you know that quarter one is from a seasonality perspective, a weaker cash flow and cash conversion quarter. it will gradually improve over the year and we continue to be committed to our 80 cash conversion target in summary we are delivering the first quarter of 2025 in a stable way under our underlying 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 underlying earnings trends In addition to this, we see several important markets showing good signs of increased activity level and demand for our products and solutions. We now have two quarters in a row with higher order intake than sales, and we are building our order book stronger for the quarters to come. Next slide, please. Our North America business grew with more than 6% organically in the quarter. We had a continued very strong development in Canada, where service, rental and capital all developed well. It is especially our long-term care business in Canada that is driving the growth with good profitability levels. In our largest market, US, we have a continued positive development also in this quarter. The growth in US in the quarter was seen across our product categories. Rental and service continues to drive growth and is developing well. On the capital side, demand is coming back, and it's driven by our important patient handling category. While DVT was declining in the quarter, but should from next quarter have easier come after the HA customer account phase-out last year. Then over to Western Europe and rest of the world that make up the global sales region. In quarter one, this region grew with plus 1.4%. which is a sequential improvement from quarter four flat this growth development. In Western Europe, the situation seems to improve with higher activity level in the market and increased order intake and net sales for our capital products. Our important French market is still weak in quarter one sales, but order intake is growing, showing some positive signs for coming quarters also for this market. Countries with good demand and strong organic net sales growth in the quarter was, for example, Germany, Netherlands and Belgium. UK is continuing to grow in quarter one, but a lower level than the catch-up effect we could see in quarter four. Our service and rental business in Western Europe also developed well in the quarter. With improved sales growth and even higher order intake in Western Europe, we see good signs for the coming quarter in this region. Our business in rest of the world had a negative organic net sales growth of minus 5.7% in the quarter. And this is due to very tough comparison from last year when the growth was plus 11%. Our APEC region couldn't repeat last year's very strong sales in quarter one, where we had major deliveries of capital equipment in Singapore and Hong Kong. With this said, Australia is, however, standing out and growing double digit in the quarter. India develops well also in this quarter, with good potential for further development in the coming quarters. Next slide, please. Our gross margin came in at 43.7%, a slight improvement versus last year, 43.5%. We continue to get support from lower material costs and price adjustments, while these improvements are partly offset by higher salary costs and currency headwinds. In the quarter, the stronger growth in North America also contributed to a positive geomix effect. We are, as before, working hard to mitigate the headwinds coming from increased salaries with continued long-term efficiency gained throughout the value chain, including solid focus on continued supply chain efficiencies. We need to continue to work on price adjustments as one part of the puzzle to mitigate further inflationary pressures. This work is now also intensified and aligned with any impact from the tariffs coming into play from quarter two. Next slide, please. Adjusted EBIT in quarter one declined versus last year, only due to significant currency headwind. Neutralized for currency impact, EBIT would have been improving, showing a stable and improving underlying business. On the OPEC side, we are seeing an increase mainly related to salary costs. We continue to invest where we expect to drive profitable growth for the future. But with this said, I'm not satisfied with the level of operating expenses increased in the quarter, and we will further accelerate efficiency activities for our operating We had a negative effect from revaluation of AR and AP of minus 34 million in the quarter, booked under other expenses. This was positive plus 8 million in the same quarter last year. Adjusted EBITDA for the quarter was 486 million SEK versus the 502 million SEK in quarter one last year. A reduction coming from currency headwind. Neutralized for currency headwind, the adjusted EBITDA would have increased with 30 million CET, which is approximately a 6% improvement from underlying business. Restructuring costs came in at minus 40 million in the quarter, mainly related to changes in the executive team and our change of go-to-market approach in China, as well as some integration costs related to last year's acquisitions. Next slide, please. And here I hand over to our Interim CFO, Christoffer Karlsson.

Thank you, Niklas. Q1 followed the pattern that we usually see with lower operating cash flow due to some seasonal variance. Cash flow effect from working capital is typically negative in the first quarter. And in Q1 this year, it was minus 180 million SEK versus 141 million SEK in Q1 2024. The variance compared to Q1 24 is primarily driven by an inventory build-up due to the good order book and upcoming rental investments. Working capital days decreased to 81 days in the quarter versus 84 days at year-end 2024. The working capital and closing balance is heavily impacted by the FX development, which has strengthened SEC, especially against USD. A constant FX rate at December 24 and the working capital days is plus four days in the quarter, amounting to 88 days by the end of Q1 2025, primarily driven by the inventory build-up. The lower profitability, together with the negative impact from working capital, gives an operating cash flow of 184 million SEK for the quarter, versus 256 million in Q1 2024. As an effect of this, cash conversion came in at 41.3%, for the quarter versus 54.2 last year. As I stated earlier, our cash flow is typically weaker in the first quarter of the year, and we're still aiming for the full year target of 80% cash conversion in 2025. For your information, cash flow from investing activities was minus 250 million SEK versus 141 million SEK in Q1 2024. The increased investments are mainly related to investment in our rental fleet, which are 42 million SEK higher this quarter than last year. Next slide, please. Our net debt increased slightly during the quarter from 4.2 billion in Q4-24 to 4.3 billion in Q1-25. This increase is mainly attributed to lower cash flow in the period. Our financial net in the quarter is more or less flat compared to last year, but we have lower interest costs, which have been offset by the reduced positive FX fix quarter over quarter. The interest net was also significantly flat in Q1 versus Q4 2024. Currently, we have lower interest rate versus a year ago. And if the interest rates continue on the same level, we will see improvements year-over-year in both Q2 and Q3. And we expect our net debt to decline in the coming quarters. Our cash position remains strong. Our leveraged net debt to adjusted EBITDA had a normal seasonal increase and came in at 2.1 versus 2.0 at year-end. The equity rate came in unchanged at 51.2% versus the year-end. Next slide, please. With the current geopolitical landscape, we also want to take the opportunity to briefly clarify our exposure to potential US tariffs. One important message is that 40% of our US revenue is coming from service and rental business, which in nature is domestic and not impacted directly by tariffs. And to be clear, when we're talking about service business in this context, Spare part sales are not included in the 40%. The capital sales and spare part sales is coming from product produced in our factories outside US. The vast majority is coming from Poland, 20%, the main republic, 20%, and Canada, 10%, followed by China and UK with 5% respectively. We are working actively with many different mitigation activities, which includes but are not limited to price increases to customers, change flows with our manufacturing footprint, and other changes to our operational setup. Then I hand it back to you, Niklas.

Thank you, Christoffer. I'm very happy to be able to share that we have now officially launched our Maximo 5 floor lift, which is a key product for our important patient handling category. This new generation of one of Ardu's best-selling products enables safe and efficient patient transfers. New features include the new ArduMotion Assist operated via touch sensors and reacting to the caregiver push, pull, and other motions to enable efficient and controlled and intuitive transfers with a minimal effort for the caregiver. A recent independent study showed that the maximum five reduces the accumulated forces required by the care caregiver to complete the patient transfer by almost 70% compared to competitor devices. We are launching this lift in approximately 40 countries during this year, and it means that we now have two global launches in two important product categories in 2025, since we launched a new premium bath system Symbliss earlier this year. During the second half of this year, we will continue and we will have one more launch a new product in our important pressure in your prevention category. Next slide please. Our outlook for 2025 is that the organic net sales growth will be well within the groups targeting the well of three to five percent. With that, I would like to summarize today's telco. We see continued healthy growth in quarter one, with a strengthened order book and gross margin expansion. Our profitability is quite significantly impacted by negative currency effects, but the underlying business continues to develop in a good way. We strengthen our market positions with two new products brought to market, something that we are really excited about and will increase our discussions with customers going forward. We monitor the geopolitical situation closely, and are preparing a number of measures to limit impact from US tariffs. And finally, our outlook remains unchanged for 2025. So with that, we can open up for questions. So moderator, please go ahead.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from David Johansen from Nordia. Please go ahead. David Johansen from Nordia. Your line is now unmuted. Please go ahead.

Okay. Hi. Good afternoon. Thank you for taking my questions. I have three, please. So maybe first on the tariff situation, I think, which I think is one of the major topics here. Okay. It seems to be something wrong with the line there. But good afternoon and thank you for taking my questions. I have three, please. So first on the tariff situation, which I think is one of the major topics here, I think, given what we know today and your expectations for pricing and the product mix and so on, is this differing from your expectations on gross margin improvements as we look to the full year? So if you could walk us through that and the impact of that, maybe some of the offsets. I think you talked about some flexibility to adapt to the current conditions. And to what extent are you able to mitigate and what are examples of some of those measures? I'll leave it there for my first one. Thank you.

Yeah, okay. Thank you, David. Yeah, of course, it's a major topic for us as well, the tariffs. And we tried to show the exposure and the flows here on one of the slides that we presented. And I think that's the basis, of course, for how we work going forward. We will and have already initiated price discussions with our customers in US. So that will be one important part. But we also see opportunities in how we wrote and the flow of our products from our global manufacturing footprint. So without going into any details on how we do that, it's really those two. One is to flow the products through our footprint in the most efficient way and the other one is price adjustments to customers then of course in addition to that in an uncertain world and i also think we should recognize that the tariff levels seems to change over time etc we will of course also be more careful with our costs going forward in general On the GP side, we don't guide on that, as you know, and our target is, of course, our ambition is, of course, to mitigate as much as possible with activities like I mentioned. We don't hear you, David, if you're asking one more question.

Okay, then perhaps a follow up on that and a question on the overall cost base. Would you be able to provide a more general margin update, I think, for the business?

I'm very sorry, David. You're breaking up all the time. It's quite difficult to follow.

This question comes from Rickard Anderkrins from Handelsbanken. Please go ahead.

Hi, hope you can hear me. So I have a few questions, please. So could you please provide any insights into the current hospital CapEx environment in your key product categories in key markets? We've seen some increasingly cautious outlook and wording on the capital side in general. So how are you feeling about the outlook for the year and the coming quarters here? on the capital side. Thank you.

Yeah, as I mentioned from my examples of the development in North America and Europe specifically, we see it quite positively actually. We have during the quarter stronger order intake than deliveries for capital. And we're also growing on the delivery side. So it's a positive momentum. Some of the markets that we have been concerned about before and seen weaker demanding. It's actually moving in the right direction, where France is picking up in the order intake. Netherlands is not only having stronger order intake, but also growing the sales to markets we have mentioned before. And in relation to that, UK turned around already in quarter four. So I think here we see positive signs. And since the order book is is stronger, even stronger. We see it forward-looking as well. In North America, we built a fantastic order book for capital in Canada during quarter four, and it's continuing to be delivering on that in quarter one, and it will continue. And in US, as I mentioned, we also now see order intake growth in capital as well. So in general, we don't see that caution as

All right, that's encouraging. It will be interesting to hear and understand a bit more on the magnitude and facing of the accelerated cost reduction initiatives. And maybe you can elaborate a little bit on what areas you will target for cost containment here that you mentioned in the report.

Yes, when it comes to the acceleration in the operating expenses that I mentioned, We went into this year with good plans. I actually had one slide in the quarter four report where I talked about our programs around improving indirect spend, improving our processes through more IT harmonization, and also look at new ways of working and new ways of organizing. So we have solid plans for the year, but as I said, I'm not satisfied with how improvement projects further, as I mentioned. But in addition to that, we also need to be careful with rehiring and take a slower pace in activity levels that we have in the company. And you asked for a magnitude, I will not give that. But of course, what we are aiming at here is to come back to a continued trend of where we have leverage in our operating expenses, meaning that we, year over year, improve OPEX to sales rates.

All right. And then a final question. Do you think it's, as things stands with tariffs and FX, just trying to get expectations sort of on a reasonable level, I guess it's reasonable to have a base case which assumes declining adjusted EBIT margin for the full year to capture these headwinds or is there any reason to assume that the margin will be able to expand given the landscape out there?

Our ambition is, of course, to mitigate all headwinds, even if they are external factors. But in quarter one, the headwinds was especially currency so significant. We couldn't do that on that short notice. We will focus this year to do everything we can, of course. So I think I wouldn't guide here and now for something different. Absolutely. premature and when it comes to the revaluation of the APAR I mean that's a one-time impact and if the currency stays on this level it's not coming again and if it's improves we get it back you can say so I think it's too early to draw any conclusion on the full year right now all right fair enough thank you for taking my questions

question comes from Stan Gustafson from ABG Sundal Collier. Please go ahead.

Thank you. Good afternoon, everyone. Coming back to the tariff discussion here, I appreciate the information you have provided on the slide there. I fully understand that it's a lot of moving parts here, but based on what we know today in terms of where tariff rates are, how would this, and assuming that it would, you know, we don't know how long it will stay in place, but we can assume it will remain for some time. So based on the information you have today, how would this impact the gross margin for the full year? That would be my first question. The second question is, regarding the OPEX and, I mean, looking at selling expenses, for example, how much of the increase from Q1 last year would you say is FX related on the selling expenses line? And given the fact that the Swedish krona now has strengthened, Is it fair to assume that then this will come down the selling expense line in the coming quarters? That would be my second question. Thank you.

Thank you, Stian. On the tariffs, we will not guide on a GDP margin impact because we are mitigating with everything we can. So I think that we just give the wrong information, I think. So we are doing everything we can. Let's see how much price we can get out to customers and let's see how much re-routing in our manufacturing footprint we can do. But we have not given up our ambition for the year, not at all. On the OpEx side and currency impact, maybe I should ask Kristoffer if you have a take on that.

Yes. I mean, when we're talking about translation of our P&L numbers, we still have average rates that are actually higher than a year ago. But if you look isolated in March, you have the opposite. So you will see a decrease in translation. But we have a smaller negative impact year to date in the Q1 due to the translation rates compared to a year ago on the OPEX side. But it's a small number.

Yeah, I don't know if I understand the smaller, but you said the main reason for the increase was FX, but I mean, what's the sort of the organic increase in OPEX then, if you take it that way?

The major FX components in OPEX is actually in the other operating income. So it's nothing in the selling admin expenses itself. It's the revaluation of the accounts payable and accounts receivable that has been hitting our EBIT result in this quarter.

I meant on the selling expense line and the admin expense.

Six million SEK. in translation and effect on OPEX. So it's fairly small number.

Sure, that I understand. But let's say the selling expense line, what's the organic increase?

I think we can come back on that. For selling admin and R&D, what we call operating expenses on that line, it's slightly over 4%. So the organic growth in... Okay.

Thank you very much. Thank you.

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

Sorry, but I have to come back to cost development here. If we start with the salary increases, how much has that been?

But we don't go down to that detail. So our operating expenses is increasing a little bit over 4%. And that is on a level where we don't get the leverage we want. And that is what I said I'm not happy with. And that is what we will address for the quarters to come. And it's mainly related to salary increases.

Okay. But yeah, but it seems it seems Yeah, but it seems it couldn't have been any positive effect from the cost savings initiatives. And I think we all understand you're not happy with that. But maybe could you explain why you haven't achieved any savings in Q1? And, yeah, so the reason for that and in what quarter do you expect to achieve this and, you know, the confidence in actually achieving this? Thank you.

Yeah, no, but the projects that should drive improvements are moving on well. So I have confidence that we will deliver it. The timing has been later than I wanted. So I wanted to see impact in quarter one. We didn't see that. It could be projects that you're running or sometimes taking a little bit more time. And that is what we have seen. But they are continuing. In addition to that, we will take measures internally to also be much more restricted with higher rates, et cetera. So we will also be more careful with costs in addition to our sort of process improvement activities. So we will see improvements in quarter two and onwards.

Could you maybe, have you, did you, you do expect improvements in quarter two? Is that what you're saying?

Starting from quarter two, it will be a lower percentage increase and a better OPEX to sales ratio.

Can you hear me?

Yes, Christopher, do you hear me?

This question comes from Mattias Baxton from SEB. Please go ahead.

I don't know what's going on, but yeah, I hear you. Thank you.

Hi, hope you can hear me well. I have three questions as well. So first one to pick up on the recent questions on OPEX. So firstly, the restructuring line looks a bit high. Maybe if you can guide to what levels you're expecting to establish that in Q2 and maybe for the following quarters. And also, did I catch you correctly here that you anticipate OPEX to sell will fall year over year in Q2 and for the rest of the year? That's the first one.

To start with, when it comes to the restructuring, they were on a normal high in quarter one due to the changes in the executive team. So as we have been seen in our information, Joakim left the CEO and we had one more change in the executive team. In addition to that, we also had restructuring cost for changing our go-to-market model in China, and then some smaller amounts for our integration work with acquisitions we did last year. But that is higher than normal. And going forward, we don't have any unusual restructuring activities planned. It's more back to a normal run rate that we have seen from us before. And on the other one, what I said to Kristoffer was that we expect, already in quarter two, to come back to, sequentially, a lower OPEX.

And on the question around OPEX itself, if that is anticipated to fall, here we are.

Yes, so when it comes to quarter two, mean is that our organic cost increase in optics will come back to levels we have seen before meaning around three and a half percent or something like that and not on the about four percent that we saw in quarter one that is what i mean that it would be it would be sick thank you good i try with the next question now um i mean we remember the weeks in some of the western european markets

last year, especially in the second half on the capital side. So just if you would agree that the comp is much easier here for the remainder of the year compared to what we saw in Q1. And I guess also the comparison quarter, by the looks of it, is easier also for the rest of the world. So with this in mind, it is reasonable to expect Q1 to have been the lowest growth quarter during 2025, you believe. That's the second one.

I think we can say like this. Yes, quarter one had a difficult comp. And I think I've said that before. And we are very happy to see that we were able to grow 3.4% versus a difficult comp. Also quarter two last year was good. We should remember that. And then quarter three was weak. So I think that we should have that in mind at least.

Okay, good. And then I just wondered if you have, sorry if you mentioned this before, but if you have an estimate on the FX impact on the EBIT margin for the full year, if current spot rate remains. That's the last one. And thank you for taking my question.

Yeah, no, we don't have an number on that. What I said before is just that the big impact, negative impact in Quarter one from currency came from re-evaluation of APAR. And we should just remember that if the currency stays on the same level, that was a one-time hit, and it will not be repeated. And if it's improving, it could also come back. I think that was the main point there. We will not guide on an EBIT impact in portfolio.

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

Okay, thank you and thank you everyone for listening in. My understanding is that there's been a long delay between questions and answers in this Q&A session, so I apologize for that. But just to summarize, as I started off, we see that we started quarter one in a good way with our Organic net sales growth came in at 3.4% compared to a good last year. Our order intake is even stronger in the growth than that, and we are continuing to build our order book, which is something we see as a positive sign for the rest of the 2025 growth development. Neutralizing for currency headwind, we are continuing to improve our earnings trend. And we are happy to now launch our important maximum five lifts to our customers. So thank you very much for listening. Bye.