Arjo AB (publ)
STO:ARJO B
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
32.84
52.1383
|
| Price Target |
|
We'll email you a reminder when the closing price reaches SEK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Arjo AB (publ)
You don't have any saved screeners yet
Good day, and welcome to the Arjo Q3 Reports 2018 Conference 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.
Thank you very much, and hello to everyone, and welcome to this Q3 earnings call for Arjo. And thanks, again, for dialing in. I will, together with Jonas Lindqvist, CFO of Arjo, do my very best to guide you through the Q3 report that we just released 45 minutes ago. Jonas and I will start by giving you a business update for the quarter, present some highlights from the business and Jonas will then guide you through the balance sheet. And I'll then add some words on the outlook for 2018 and finish off with a short summary before we open up for questions. And as always, we try to keep this call to an hour and finish no later than 3 p.m. So let's move over to the business update. Q3 was yet another solid quarter for us and net sales grew in the quarter by 1.4% organically. This means that we now have 3 consecutive quarters with positive growth after 5 years of decline. The net sales development in the quarter was negatively impacted by disruptions, related to a planned change of logistic partner and set up for the logistic center in Europe, as a part of the separation from the SEM. These disruptions led to shipments of approximately SEK 40 million being postponed into October, and consequently, Q4 net sales. When adjusted for these disruptions, organic net sales grew by 3.5% in the quarter and 2.7% year-to-date. It is obviously unfortunate that this happens but should be seen in the light of all the activities running to create the newer, sustainable Arjo. We now have sorted the issues, and I would like to underline that this does not affect the full year plans for these markets, and we continue to see positive order intake in Western Europe in the quarter. North America grew organically by 3.9% in the quarter with strong development in both U.S. and in Canada. We have also seen continued stable development in the U.K., where we keep growing despite the challenging markets. All in all, the healthy underlying business, organic net sales up 2 percentage points year-to-date, supported by continued strong order intake, especially in Western Europe. This means that we now feel comfortable to improve our outlook for 2018 and expect organic net sales growth to be in the middle of the 2% to 4% interval for the full year instead of in the lower range, as previously communicated. The gross margin for the quarter was 43.8%, which is in line with expectations. The gross margin was held back somewhat by the lower invoicing as well as the disruptions related to the logistic setup. Low-spec medical beds continued to hit us in gross margin with profit levels that are below where we would like to play. Hence, after the end of the quarter, we have decided to divest Acare, our low-spec medical beds business as support of the action plan we have previously mentioned. Together with a number of additional activities like discontinuation of smaller third-party product lines with lower margins and more cautious pricing in some areas, this will bring improved profitability levels into our medical beds capital goods sales from 2019 and onwards. And I'll get back to the divestment shortly. On the positive side are for gross margins, the continued growth in patient handling and the first signs of better service performance were drivers in the quarter. We've had good cost control in the quarter, and we are running slightly better than planned in this area, which means that we are still well within the estimates that we have provided on OpEx for the full year. As previously communicated, we are still having difficulties in this quarter of comparing with last year's Q3 on OpEx and the numbers in our perspective since they refer to a legal and cost structure related to the face of the spin-off process at that very moment. Part of the cost in Q3 2017 was therefore still booked on Getinge group level and outside the Arjo division. Our adjusted EBITDA amounted to SEK 301 million in the quarter, which is an improvement versus Q3 last year with almost 20% and the comparison becomes even better if we would include the unfavorable OpEx comparison from Q3 2017. Let me go into a little bit of detail and starting off on a very positive note with North America, where we had another good quarter with 3.9% organic growth. Performance was strong in both U.S. and Canada, especially within capital goods, and in particular, in patient handling. The U.S. rental business is developing according to plan, and we are now 4% up year-to-date, which is very positive. We continue our strong focus on rental in North America and obviously global, with the intention of improving both top line and, especially margins in this area. Our U.S. turnaround plan continues to hit milestones, and in Q3, we have started to see positive signs from the long-term care investments that we have done in the past few months, and we now see net sales starting to pick up in this area.Moving over to Western Europe, where we see yet another positive quarter. Net sales grew by 1.6% organically, although offset by the disruptions related to the logistics set up, that I mentioned earlier, meaning that shipments of around SEK 40 million was postponed into Q4. The postponements represent approximately 4 percentage points of net sales growth for this area, which means that if we adjust for this, net sales grew organically by around 5.5% in the quarter, in Western Europe. We are reporting healthy sales growth in capital goods, in general, and especially here within the wound care and also here patient handling. I am also happy to see continued stabilization in our U.K. business that is growing despite the challenges in the market and that is very good to see that the planned family activities put in place by the new management is starting to pay off. Based on this, we now believe that U.K. will be slightly above 2017 levels for the full year. And as I said before in many of the conference calls, I am confident that U.K., being our second largest market, will be a solid contributor to our development in the quarters and years to come. Moving over then to Rest of the World. And here we can say that the performance of Rest of the World was slightly weaker this quarter, down with around 5% organically, even with the approximate SEK 10 million net sales that was pushed over from Q2. This development is modeled only due to significantly lower sales volumes, around SEK 30 million in net sales versus Q3 2017, in Australia, which is the region's largest market. Political uncertainty has led to the government reducing and postponing summer spend into the health care system lately. But we will obviously follow this development closely with local managements and make sure that we are taking necessary actions to mitigate. Besides that, we have seen positive developments in several other markets in the area such as Hong Kong, South Africa and New Zealand. Sales has also been good in distributor markets such as Central Eastern Europe and Southeast Asia. We continue our dedicated work to make our current product portfolio available in more markets, which I am sure, will further enable us to serve current active countries more efficiently and also make it possible to open up new distributor markets, in mainly Eastern Europe and in Southeast Asia. We have an ambitious target in terms of the number of product registrations to complete this year, around 1,500 in total versus a normal year of around 300. And following this up, on a frequent basis, it is good to see that we are progressing better than planned in this project. Our efforts for geographic expansion also continues, and we now have our own sales companies in place up and running in both China and Latin America. Having our own sales companies in key market will give us further control and positive momentum to the net sales development in this region going forward. Moving over to some more details regarding the profitability development in Q3. The gross margin level was 43.8% in the quarter. The margin was impacted slightly by lower invoicing due to seasonal effects. The Q3 net sales numbers generally being somewhat lower than in Q4 over Q4 -- Q2 over Q4, sorry, and the earlier mentioned disruptions related to the new logistic set up, affecting not only capital volumes, but also part of our profit was spare part sales. On the positive side, the growth in our patient handling category continues to drive margins and other activities part of the Arjo 2020 plans starts to show progress. We continue our efforts to improve gross margin in the medium and long term. As such, one such action is the divestment of Acare communicated last week, which is estimated to support improved margins for capital goods and medical beds from 2019 and onwards. We also have a number of additional actions to improve our margins in medical beds going forward as a part of our overall action plan. Gross margin was 44.3% in the period year-to-date, January, September, which is slightly below the full year margin for 2017, but in line with our own expectations. Our ambition to slightly improve the gross margin in comparable currencies for the full year 2018 versus the full year 2017 remains and this with our sharp focus and continued traction on our plans. As previously mentioned, the OpEx development is slightly better than planned and the adjusted EBITDA results amounted to the SEK 301 million in the quarter versus SEK 251 million in Q3 2017, which is up almost 20%. This gives some adjusted EBITDA margin of 15.2% in the quarter versus 14.0% last year Q3. We have improved EBIT amounting to SEK 111 million in the quarter compared to minus SEK 43 million in Q3 2017. The restructuring cost of SEK 18 million in the quarter relates mainly to the change of logistic partner in Europe, as an effect of the spin-off from Getinge. There is also a small portion coming from the change in shared service set up that was initiated in Q2 to bring the financial control closer to our own Arjo business from previous Getinge setup. Our previous indications that restructuring cost for the year will end up around SEK 80 million for the full year still stands. With that, I hand over to Jonas, that will take us through the currency effects.
Thank you very much, Joacim. I would like to start the comments regarding the currencies with a reminder and that it's difficult to compare the currency rates now with 2017, because we were at that point part of Getinge and the current system that Getinge has. And looking at the comments on the slide, Slide 9. The left-hand side relates to transaction effects and then we have as a service also put in the translation effect on the right-hand side in the table, which I will come back to shortly. The transaction effects have been positive this year compared to the same period last year, which means that we have been able to make transactions at better rates than the current rates and the positive effect there is SEK 13 million that will impact gross profit compared to Q3 '17, which is somewhat lower than what we had in Q2, which was SEK 44 million. And Q1 and Q2 are still much affected by the Getinge hedges, whereas Q3 now is getting closer to the market development and our own hedges. And we have reached a hedge degree of 80% right now and -- which will ultimately lead to a higher degree of stability for Arjo going forward. We have also included at the bottom of the page a sensitivity analysis. And looking at what can happen from now to the rest or to the year-end, that we see most important currency pair that we'll have, which is between Polish zloty and pound, because we manufacture in Poland and we transit through the U.K. There have been an increase or rather a change in the exchange rate between Polish zloty and pound of 5% will have an impact of approximately SEK 3 million of our EBIT, and that goes both ways, of course. And the same -- or the second largest currency flow that we'll have or currency pairs between the dollar and the pound and a 5% change there would also give a SEK 3 million impact on the EBIT. On the right-hand side, we have included a translation effect. And what we also did in previous quarters was to compare with the average rate at year-end SEK 1,712 million and that is what can be found in that table there. And this is the most important currencies for Arjo that have been strengthening against the krona and that is what can be seen on the table. That's it from me, Joacim. Thank you.
Thanks, Jonas. And so, let me then move over to some other business highlights. We have had the quarter with, again, very high activity level, very much in line with our Arjo 2020 plan. As I previously mentioned, we have completed a change of logistic partner and warehouse setup in the quarter. And this was one of the final stages in the separation from Getinge, and we now have a setup fully optimized for Arjo in place. Some initial disruptions led to shipments amounting to approximately SEK 40 million being postponed into the fourth quarter. And as I underlined before, we have sorted the issues and we do not see any other risk of further disruptions. We launched a new addition to our Sara Stedy offering in the quarter with Sara Stedy Compact, which is a special version of this popular patient lift that is especially designed for shorter people. This new edition adds further flexibility to our offering and also enabled us to launch in more markets and segments. Our sharp focus on quality and regulatory compliance continues and so does our focus on MDR, which was, as you know, introduced in 2017 and will come into full force in 2020. It's a process to become fully and truly compliant, will require a lot of efforts and investments from us and all other companies active in the med-tech arena. We are proceeding well in this area and running according to previously communicated plans. Given that we already have a well-invested and proactive quality system, it is our estimation as before that we will manage to cover this largely with existing resources, but we will need to drive this comprehensive product with full focus over the next years. I am, as before, confident in our ability to adapt to these changing regulations, and we have a clear governance structure in place to ensure compliance on time. And as stated before, I strongly believe that this could be a good competitive advantage for us as we are more or less already up and running on the required level. It will also accelerate the need to review all categories from an SKU perspective and force us to delete nonactive or less profitable articles from the different categories, which obviously, will drive the positive development. As previously mentioned, after the end of the quarter, we have also signed an agreement to divest Acare, our low-spec medical beds business to China-based CBL group. The divestment is a key part of our action plan to improve profitability in the capital goods sales within medical beds. The profitability levels that we have seen in this low-end segment is not the levels that we're interested in going forward, and our core strength is found outside of the value segment. This is also where we will focus to maintain and further strengthen our leading positions in this market space, which means that there is also the strategic divestment for us to further focus on core business and core offering. The divestment encompasses a production and sales unit in Zhuhai, China, that has 186 employees and generated sales of about SEK 80 million in 2017. The divestment is expected to be completed in the end of 2018. It's also like this, that the divestment has no considerable effect on cash flow or results in 2018 but is expected to have a positive annual effect of approximately SEK 25 million on operating profit from 2019 and onwards. With that, Jonas, take us through the balance sheet please.
Thank you, Joacim. And looking at the balance sheet, the story for this quarter is basically that we have had a good cash flow contribution, and apart from that, a very stable balance sheet. The equity ratio -- equity to total asset ratio is 42.0% actually, which is slightly up from year-end '17. We have also continued our focus on working capital and the contribution there is SEK 57 million in the quarter, which you can see on the next page later in the cash flow statement. What we have done there is that we have continued to collect on overdue accounts receivables, primarily in the U.S. and U.K., our biggest markets. And of course, accounts receivables that is pretty easy, because we just have to push to get that money in. Now we are moving over to a slightly more complicated area, which is inventory and -- because when we move over to inventory and develop the tools to follow this, we have to consider our operating models, and we have to deal with this in conjunction with the sales units and the supply chain. So we don't need sales in the process. Part of the story also for the balance sheet in the third quarter is that we have increased our commercial paper program with a euro part. The total program is now at SEK 4 billion. We are utilizing approximately SEK 2.5 billion out of those. And we have had a rather slow start to the euro part of the commercial paper program, and we have directed our efforts primarily towards Finland, which is a country, of course, with euro as a currency. Looking at the cash flow statement, we see that we have a strong cash flow in the quarter, like I said. The operating profit contributes obviously. We also see the change in working capital positive, which is a big shift compared to Q3 '17. However, like I said before with currencies, there are also a lot of things happening in the third quarter of 2017 in relation to the spin-off. So those numbers were -- they contain some adjustments as well. Concentrating on the Q3 2018, which is obviously relevant, we see the contribution from working capital. And investing activities, they contain the acquisition of the American operation called ReNu, and that is the single biggest part of the cash flow from investing activities. It also contains a part relating to Next Step Dynamics in the cash flow from investing activities. The cash conversion, I'm pleased to say, is at 79% year-to-date this year. Isolated in Q3, it was 71% and rolling 12 months, it's 85%. Thank you.
Thanks, Jonas. I'll now after that take you through the outlook for 2018 and then some of the presentation before we will open up for questions. So based on a healthy net sales development and strong order intake in Q3, we now feel comfortable to improve our full year outlook in terms of net sales. And we now estimate that the organic net sales growth in 2018 to reach the midrange of 2% to 4% instead of the lower range, as previously communicated. Just as in Q1 and Q2, given the complexity of comparing the groups, OpEx mainly with 2017 numbers, we have decided to provide also this quarter guidance for the full year 2018, and as I said, we are trending well here. The group's operating expenses for the full year 2018 is expected to amount to approximately SEK 2,965 million in comparable currencies for the full year of the 2018. So let me then give a short recap of the presentation. After 5 years of decline, we are now reporting the third consecutive quarter with positive organic net sales growth. Q3 grew by 1.4% organically. And if we adjust for the new logistic setup disruptions, the organic growth would have been around 3.5% in the quarter and leading up to 2.7% year-to-date. We still continued strong net sales development in North America with both U.S. and Canada reporting healthy growth. We've also seen good growth in capital sales, especially in product categories like patient handling and room care. U.K. continues to perform well. Our initiatives are paying off and estimations are now that we will grow U.K. slightly year-on-year and we find this to be realistic based on the outcome of Q3. The gross margin of 43.8% was in line with expectations for the quarter and significantly better than last year's 41.5% in Q3 last year. Gross margin was impacted by the lower invoicing in Q3, the logistics disruption and also a continued margin pressure in low-end medical beds. On the positive side, continued patient handling growth that supports the margin expansion. We continue our efforts to improve gross margin over the long term, and we took one important step after the end of the quarter by divesting Acare, a low-end medical beds business. This, together with additional actions in this area, is expected to lead to improved margins in the capital goods medical beds area from 2019 and onwards. Gross margin from the period of January to September was 44.3% and our estimations to slightly improved gross margin for the full year 2018 versus full year 2017 in comparable currencies remain. With strong order intake and good net sales growth, we now feel comfortable to improve our outlook for 2018 organic net sales going from previous guidance of entering into the lower level of the 2% to 4% interval, to now have organic growth in the midrange of the 2% to 4%. Even though, we are in the beginning of our journey, I am proud of what we have managed to achieve so far, bringing this company back to growth with a very clear strategic direction. We have a Q4 ahead of us with very high activity level, and I am confident that we will have a strong finish to this year. With that, thank you very much. And we open up for questions.
[Operator Instructions] We'll now take our first question from Richard Koch of SEB.
The kind of, the financials, it was higher than expected. Is that only due to currencies or what is that? And also what is your estimate for the full year in that financial space?
Yes. It is partly due to exchange rate effects and also partly due to some periodization of cost for our commercial paper program that has come into the quarter. And for the remainder of the year, slightly up from the level that we have communicated earlier. And the main reason for that, it depends on how well we will be able to execute the euro part of the commercial paper program.
And, which level did you communicate previously?
We communicated, in effect, SEK 90 million. We didn't say it's a write off. We had had a comparison the previous year.
Okay. And also relating to currencies, you guided on OpEx for SEK 2,965 million, unchanged in currencies from December last year. What would that cost be in -- with the currency exchange rates?
That is actually the currency exchange rate. I mean, we're trending right now, as you can see, if we would do that in SEK 1,712 million rates just for the Q3, because you know we have had a negative effect on OpEx of SEK 34 million based on this. We're actually trending very well on the cost side, apparently, Richard. So...
[Operator Instructions] We'll now take our next question from Peter Östling of Pareto Securities.
I would like to dig in a little bit about the Australian situation. Could you elaborate a little bit on what's happening there? And also, if you would exclude Australia, what would the organic sales in Rest of the World have been?
Yes. Peter. Let me state like this that Australia is, for us, a -- normally a very stable market. We have very good market shares and a significant installed base in Australia. We have not lost any projects, we have not lost any orders in Australia in the quarter. But we can conclude that the activity and the investments in, especially into capital equipment is lower than what we have seen in previous quarters. If we compare to Q3 in 2017, it's actually SEK 30 million lower net sales in Australia than what we had in the same quarter last year. SEK 30 million on -- in the region that has a yearly turnover of a little bit more than SEK 1 billion is obviously a significant movement. If you just look at the quarter, I would say that it is like 10 percentage points for the region, that SEK 30 million would mean.
[Operator Instructions] It appears there are no further questions at this time. I would like to turn the call back to you. Please go ahead.
Thank you very much. Not taking up too much of your time. Just concluding that we put behind us a third consecutive quarter with organic growth after 5 years of decline. We grow EBITDA with around 20% versus Q3 2017. And we now feel comfortable to increase our guidance on net sales to be in the midrange of the interval 2% to 4%. So all in all, a good quarter, and I look forward to a very solid and strong Q4. Thank you very much.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.