Arjo AB (publ)

STO:ARJO B

Earnings Call Transcript 2020-Q2

[Operator]

Good day, and welcome to the Arjo call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joacim Lindoff, CEO and President of Arjo. Please go ahead, sir.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, moderator, and a warm welcome to everyone on the line to this brief update following the press release that we sent out at 7 o'clock. Our intention is to keep this telco to a maximum of 30 minutes, with around 10-minute presentation from my side and then open up for any questions. And for your information, I'm joined in the room by Daniel Fäldt, our CFO, for this telco as well. And let me start by addressing the information in the press release around our Q2 performance and how we look upon the remainder of the year. Before and around the time of our Q1 report, where we, to repeat, presented one of the strongest quarter ever for Arjo, well aligned with our business plan, we paused our sales outlook. We did this based on the fact that our visibility for both Q2 and for the full year of 2020 was very uncertain, given the spread of the coronavirus. Our view was that to give some kind of relevant guidance, we need to be able to provide something for external stakeholders to be able to rely on. We also stated that as soon as we had better visibility, we would revert to the market with an updated guidance on both Q2 and the full year. The global economy and the current situation with the corona pandemic is still very uncertain, and I would in no way want to give the impression that we have a completely clear picture around what the next events will be. But based on the knowledge we currently have gained from both internal and external sources, we have a better visibility around what we expect will be the impact on our business over the next 7 months. We, therefore, also believe that it is, based on our current assumptions of this development, our obligation to update you on how we see this development. The first 2 months of Q2 has been significantly better than expected, especially on profitability. We continue to see larger declines in product categories dependent on access to healthcare facilities, like patient handling, hygiene and service, and also pretty significant decline in our DVT sales based on postponements of elective surgery in all our major markets, including the U.S. But we have also seen, as expected, a major uptick in capital sales of medical beds and therapeutic mattresses, good development in our small but profitable diagnostics business and a significant improvement, both on net sales and especially profitability in our U.S. Rental business. Even though we see a negative product mix in the quarter through lower sales of profitable categories like the 4 that I mentioned previously, we have managed to use the increased volumes in the other areas, especially in Rental U.S. to compensate to a large extent. We have also managed the tight cost control throughout the entire value chain. With good visibility on our own expectations for June, we expect to end the quarter with an organic net sales in line with last year's Q2 absolute number, which in itself saw a strong organic growth of 6.5%. And EBIT before restructuring will increase with at least 30% versus both last year Q2 and the current market estimates for this quarter. We currently start seeing small steps towards reopening of health care facilities in some markets in Asia and Continental Europe and at least signs that also access to health care in U.K. and North America will improve over the next couple of months. We also assume that elective surgery will return step-by-step to a more normal state over the next 2 quarters. Based on this, our assumption is that we will step-by-step return to a more normal state of business during the second half of 2020. The high volumes on medical beds capital, therapeutic mattresses and Rental will go back to more normal levels during Q3 and Q4. We estimate in parallel to see increased access to health care facilities and less postponed surgeries, with a gradual increase of categories related to this. Based on our current assumptions, we estimate that we will see organic growth for Q3 and Q4 within our interval 2% to 4% and that OpEx as a percentage of net sales will continue to decline. As a summary, I am very pleased with how Arjo as an organization is working through this unprecedented crisis and very proud about how we manage to continue to service our customers and their patients in a safe way for both them and for our employees. We are starting to see initial steps back towards a more normal access to health care facilities and therefore estimate that this allows us to resume realistic external guidance on organic net sales for the second half year. Arjo will continue to play a very important role in the future response to COVID-19, both helping caregivers around the actual treatment, but also playing an active role in increased need for long-term rehabilitation of COVID-19 patients and the strengthening of elderly care in general in global health care systems with outcome-based solutions. Our ability to adapt to this crisis and the excellent work by the colleagues throughout our global organization will also allow us to post a better-than-predicted net sales outcome in the quarter, in line with last year's Q2, and see a significant uptick on operating profit before restructuring of more than 30% in Q2. With that, I'll end there and open up for any questions that you might have.

[Operator]

[Operator Instructions] Our first question today comes from Kristof Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Is it possible to quantify maybe how much profit improved in the U.S. Rental business? And then also, if you could say a little bit how much rent or volumes or rental sales were up. It seems that's the major positive surprise there.

[Joacim Lindoff, CEO, President & Director]

Let me quantify the rental uptick in the U.S. by saying that it is significant. It's around double the pace of what we had before in a normal year when it comes to profitability on the Rental side, and it follows very well. As we've been discussing before, when we get higher volumes into our Rental setup, whether it's in the U.S. or in other markets, then we will have positive effects on gross margin. And that's also why we have done the restructuring in the U.K. and done the restructuring in the U.S. in 2019 to ensure that we obviously lower that level for good profitability in our Rental business. So good volumes in there drives that. And your second question, I didn't fully get that, Kristofer, if you could repeat it.

[Kristofer Liljeberg-Svensson]

No, but I -- no, I think it was also -- it was both related to Rental sales and Rental earnings. So that is fine. But when it comes to the part of the Rental business that were not so good in the first quarter, I guess that must have continued to be a drag on both earnings in the second quarter, I mean, with exposure to elective care.

[Joacim Lindoff, CEO, President & Director]

Exactly. We are -- if you look at the European rental business, we can actually see -- we don't see a COVID effect there at all. We are more or less flat when it comes to rental sales in Europe. Some markets are up, but some markets are also significantly down. And they are down, if you take Germany as an example of a country that is down in rental. That is because they have, in the end of March or mid-March, they just closed off everything which was related to normal health care and just waited for COVID-19 patients. And that inflow did not come to the extent that they wanted. So our business in, for example, in the German-speaking countries has been quite a lot lower in the first 2 months than what we usually see, not only in Rental. And we are starting to see uptick in that area also when it comes to the European business, where we are step-by-step returning with elective surgery and step-by-step, therefore, also seeing net sales in Rental returning. But it is a very slow uptick should be mentioned. It's not that they are turning from full COVID focus to no COVID focus. It's still a lot of focus on being prepared for what could come there. So it's a slow, but gradual uptick when it comes to the Rental business in the U.S. -- sorry, in Europe. When you look at elective surgery in -- where we are very dependent on elective surgeries, obviously, in our DVT business, where U.S. is our main market. And here, we have seen pretty significant drops in April and also in May. We are starting to see a small step-by-step rebound on elective surgeries in the U.S., but we are far from a, I would say, 100% level in the U.S. And here, it is very difficult to see how quickly that will happen. We are anticipating a gradual return to normal during Q3, but there are many factors playing in there.

[Operator]

We now come to our next question from Sten Gustafsson from Nordea.

[Sten Gustafsson, Senior Analyst]

Yes. Sten Gustafsson from Nordea. Could you talk a little bit about how -- this strong earnings growth you have seen now or expect to see in Q2, how much of that is due to improved gross margin and how much is sort of on the OpEx side? That would be helpful.

[Joacim Lindoff, CEO, President & Director]

It is -- given that we have -- let me start by saying this, Sten. I can't give you the exact numbers on it, but I can elaborate a little bit around the 2 lines. Given that we have a negative product mix, we have products or product categories with high margins that has seen declines in April and May, being compensated by excellent performance in our Rental part in U.S. and also, in general, a good, let's say, cost focus throughout the value chain. We will see -- if you compare it to last year, we will see a slight improvement on gross margin in the quarter. But we've also done very good work on the OpEx side. So we spoke after Q1 that we would probably see around SEK 40 million of savings in our OpEx line. We now believe that, that will be slightly bigger. So it is really good performance on all lines. But you will see an uptick in gross margin, and you will see actually slightly lower than previously expected OpEx for the quarter. Part of that OpEx will obviously need to be injected back in during Q3 and Q4, when things starts to resume. But we've also done a number of things that I hope will -- where we will learn things or where we have learned things also for the future on how to do things even more effectively than what we have maybe seen possible before. So part of that cost will come back into the P&L, but we hope that we will be able to use the other part for investments in the future.

[Sten Gustafsson, Senior Analyst]

That's very helpful. So just to be clear, this is -- now when you talk about EBIT growth of 30%, we're talking about adjusted for any nonrecurring items, right? I don't think you had any in Q2 last year. So basically, the baseline for OpEx of SEK 821 million is the one we should focus on from Q2 '19?

[Joacim Lindoff, CEO, President & Director]

Yes. Well, if you look -- when I was saying that we will have savings, we spoke after Q1 that we would see a lower OpEx level versus the one we had in Q1, where we were at 800 in actual numbers, I believe, 839 or something like that, where we believe. And now we will be -- we spoke about being SEK 40 million better than that in Q2, and we will probably be even better than that when we close out the year -- sorry, when we close out the quarters, when we close the quarters again.

[Sten Gustafsson, Senior Analyst]

Yes. And then you might see an uptick in OpEx from that new level in Q2 -- or sorry, Q3 and Q4? Yes.

[Joacim Lindoff, CEO, President & Director]

That is correct. Yes. Because of the increased activities that we will see when things are starting to get back to normal. But as I said, I think that there is not only Arjo, but a number of companies that has done thorough reviews of how we are set up and how we work within the organization and not only in OpEx, but throughout the value chain. And I think that we have learned a lot on how we can actually run our business in a slightly more effective way also going forward.

[Sten Gustafsson, Senior Analyst]

Sure. And I suppose FX movements recently will also help holding back OpEx growth?

[Joacim Lindoff, CEO, President & Director]

From -- in actual rates, yes. But all -- we will see decline also if you do a like-for-like comparison.

[Operator]

[Operator Instructions] We'll take a further question from Kristof Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson]

Yes. Another thing I was thinking about. You mentioned a little bit positive currency effect in the quarter, if it's possible to quantify that. And I don't have my figures in front of me, but could you remind us whether they were positive or negative currency impact in the second quarter last year, if that was explained, anything of the earnings improvement there year-over-year?

[Joacim Lindoff, CEO, President & Director]

On the last question, Kristofer, I will need to revert. I don't actually have that in the back of my head. We -- it was the third quarter where we had the terrible negative effect. So I believe in the second quarter, if I'm not fully mistaken, we did have some positive translations effect on the result in Q2 2019. What we -- but let us come back to that. We'll send a -- and answer that.

[Kristofer Liljeberg-Svensson]

I think -- sorry, so I think that when it comes -- yes, you're correct, it was the third quarter when you had that. Okay. That's fine enough.

[Joacim Lindoff, CEO, President & Director]

Yes. Because in the other quarters of 2019, if I, again, remember correctly, we did have positive translations effect in Q1, Q2 and Q4, but then had negative overall currency effects in Q3, which then led to a lot of discussions after Q3. If we look at Q2 this year in the running quarter, what we -- it is obviously extremely difficult to predict June. But up until now, we have positive currency effects from -- of around SEK 10 million, which has declined a little bit year-over-year -- sorry, month-over-month. So we're not expecting too much of improvement of that side. So around SEK 10 million is what we're looking at right now. Just to give you a -- we had 50. We had -- last year, Q2, we had positive translations effect on 51 -- or SEK 20 million in Q2 last year.

[Operator]

We now move to a question from Victor Forssell from ABG.

[Victor Forssell, Analyst]

It's really -- I think you alluded to it previously in some question. But in order for you to sort of seeing the 2% to 4% growth here in second half of the year, could you sort of give us, with all due respect of the visibility, but some granular on the segment? I mean if you could just break that down, what you're seeing. I think patient handling sort of if you're expecting the installation part of it to come back to positive growth in second half as an example. Could you just give some granular comments on that side?

[Joacim Lindoff, CEO, President & Director]

Absolutely. For patient handling, it's kind of the same story as when we are explaining the access to health care. When access to health care gradually improves, our possibilities of getting in for installation also gradually improves. So we are foreseeing a gradual improvement during Q3 and also consequently into Q4 and our ability and possibility to get in an install patient handling, like ceiling lifts. We also believe that, that will have a step-by-step positive effect on our service business, which has been heavily impacted in April and May through the non-access to health care facilities. And we hope that we will be able to come back pretty quickly actually on the service side in Q3 and Q4 to much more normal levels in service. Probably -- or it will be quicker back to normal in service than it is in patient handling because not only does it take time to get back into facilities, then we also, when it comes to securing orders in patient handling, obviously, need a little bit of lead time to get those orders in for patient handling. Rental is something where we believe that the European side will, in Q3, come back to more normal levels, where then the U.S. Rental business will, from a core perspective, the core rental in the U.S. will continue to perform better than last year and that's not then because of COVID, but because of the good intake we have had on projects in end of Q4 and also beginning of the year. But obviously, our critical care units that are currently the big contributor to both net sales and also profitability in rental in the U.S. will obviously go down to normal levels when the COVID situation has gone down. When we look at DVT, kind of the same story. But this time around the elective surgery, DVT has taken a severe hit in April and May. We also see the lower volumes in June, given that elective surgery is only picking back slowly. Obviously, we are currently assuming that elective surgery will resume step-by-step during Q3 and also into Q4 and that we will be on more normal levels, let's say, in end of Q3, beginning of Q4, when it comes to our DVT business. Was that enough flavor Victor, or...

[Victor Forssell, Analyst]

Yes, yes, yes. Just lastly, on the cash flow side thus far in the quarter, if you can just comment anything regarding your working capital management or on the collection side or whatnot.

[Joacim Lindoff, CEO, President & Director]

It's actually probably the area where I'm most proud of the organization. We have -- as we explained after the Q1, we have put very rigorous processes in place around our accounts receivables, and we continue to do a good job in that area. On our inventory side, we obviously see an uptick in -- or obviously, but we do see an uptick in inventory because of the fact that the markets were just switched off, and we had inventory on the way from some of the factories that we're now sitting on. We're not afraid of that inventory because it's not huge amounts, and it's all in mainstream product categories that we will be able to sell when we get access to the different health care facilities. So we see a slight uptick in inventory, but under very manageable forms. We do a good job on the payables side. We are not, in any way, squeezing our suppliers. We are keeping the level that we have had before. But in my view, a very good job in the accounts receivables side that is continuing to improve the cash flow for the group and also, consequently, the cash conversion.

[Operator]

At this time, we have no further questions in the queue, sir.

[Joacim Lindoff, CEO, President & Director]

Okay. Thank you very much to everyone then. And if there is any further information or if you wish to have individual discussion, just reach out to us and we will make sure that we make ourselves available for that. So thank you very much, and have a continued very good day.

[Operator]

Thank you. This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.