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Edited Transcript of ARJOb.ST earnings conference call or presentation 4-Feb-20 7:00am GMT

Q4 2019 Arjo AB (publ) Earnings Call

Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Arjo AB (publ) earnings conference call or presentation Tuesday, February 4, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joacim Lindoff

Arjo AB (publ) - CEO, President & Director

* Jonas Lindqvist - Chief Financial Officer

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Conference Call Participants

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* Johan Unnerus

Pareto Securities, Research Division - Analyst

* Kristofer Liljeberg-Svensson

Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst

* Sten Gustafsson

Nordea Markets, Research Division - Senior Analyst

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Presentation

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Operator [1]

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(technical difficulty)

Today's conference call is being recorded.

At this time, I would like to turn the conference call to Mr. Joacim Lindoff, CEO and President of Arjo. Please go ahead, sir.

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [2]

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Thank you very much, and good morning, and a warm welcome to this Q4 call for Arjo. So together with Jonas Lindqvist, take you through the Q4 report that we released earlier today at 7:00. We will as always start by giving you a business update for the quarter, and also this time, a year-to-date for 2019. Jonas will then guide you through the balance sheet. We'll have some words on the outlook, and then we'll finish off with a short summary before we open up for questions, and we aim at closing this call at around 9:00.

So let's start with the business updates. We finished 2019 with a quarter of good and solid organic growth for the group, where the activity level continues to be high.

We report a 2.8% organic growth for the quarter compared to a strong 2018, where we grew almost 6% in the quarter, and this is well aligned with our overall expectations.

North America continues to perform well with solid development across the different categories. In the U.S., we had a slight decline of 2.8% organically in the quarter, which is to be seen in comparison to a very strong Q4 2018, where the organic net sales growth was above 13%.

We also have 3 larger projects in the U.S., totaled about USD 2.5 million, where deliveries short term postponed into Q1 2020. The pipeline develops well, which gives good confidence also for 2020 and beyond.

In Canada, the solid performance continues, and we have an organic growth of 2.8% in the quarter, spread across the categories.

Western Europe continues to show solid growth this quarter with an organic increase of 2.5%. U.K. performed better than expected and noted an earlier than expected return to growth, 2.8% versus the Q4 2018, where we actually had a strong 10.6% growth.

We had a good finish to the year in U.K., where both service and Rental picked up some pace. We also see higher activity levels from the market, despite continued low investment levels, [formerly] driven by the Care political future.

The countries in the region outside of the U.K. is growing with a good 2.4% in the quarter, driven mainly by good capital equipment sales in Patient Handling and medical beds. The negative trend in Rental net sales continues, based on mainly lower market price levels.

We now start seeing the effects of our internal activities to improve profitability in Rental. But we have quite a lot of work left to be executed in terms of overall cost structure, mainly in Continental Europe.

As I will be speaking on later on, we will initiate a larger change program as one of the last parts of our Arjo 2020 journey.

Rest of the World sees a strong organic growth of 16% in the quarter, very much driven by continued solid performance in Australia that show growth well above last year for the quarter and also for the full year as planned.

We continue to see good growth from most of our other countries in the region, and we continue to see very good effects from our investments in many markets, both in terms of sales channels and product registrations, with more to come in the near future. All this, well aligned with our Arjo 2020 plan. All in all, a good finish to the year, where we continue to strengthen our positions.

The gross margin was 44.4% in the quarter, which should be compared with last year's 45.2%. We should not be satisfied with this level, but there are some clear highlights to point out.

In the quarter, we see a slight negative product mix versus last year due to more medical beds and flushers sales, mainly in Europe. Both of these categories have significantly lowered gross margins than all-year average, but with interesting service revenues tied to these activities over time.

In medical beds, we continued to see quarter-over-quarter improvement of gross margin within capital sales, well in line with expectations and with continued move up -- and with continued move-up the specification ladder, that journey will continue.

During the quarter, we have continued to work with centralization and reduction of inventory levels, especially with spare parts in our sales and service units. This has led to a negative effect on gross margin of around 60 to 70 basis points versus same quarter last year, but is expected to build a more efficient inventory management and increased profitability to the group over time.

We have lowered sales in percentage in the quarter to the U.S., where we have above-average gross margins, creating a slightly negative country mix.

In addition, our growing distributor business comes with lower gross margin levels compared to sales through own channels that further affects gross margin isolated. However, and this is very important to recognize, due to the lower selling costs for this setup, there is good, well aligned with average contribution to the profit level through our distributor sales.

As one of the positive things in this area, Rental is for the first quarter in quite some time, showing an uptick on gross margins. This, even with slightly lower net sales in Europe and much lower Critical Care placements in the U.S. versus Q4 of 2018.

We are starting to see the effects of our actions in U.K., and we have the U.S. restructuring program, where we have a clear quarter effect, around SEK 8 million of the yearly SEK 30 million savings, assisting us in the quarter.

We also continued to have good traction in our service, both on net sales and profitability and our North America Patient Handling business is developing well, adding to a positive product mix.

We have continued tight cost control in the quarter and OpEx relative to net sales continues to decline, well aligned with our plans and guidance. We continue to invest in selling expenses with efficiency progress in our admin part. In R&D, we continued to see better efficiency per dollar spent, based on our restructuring from 2018.

In the isolated quarter, we have slightly higher R&D costs than average due to a one-off write-down of SEK 6 million related to an old R&D investment.

Other expenses are negative in the quarter versus last year's Q4, with a delta of SEK 10 million. And we see an EBITDA before restructuring increased with 25% to SEK 513 million, including IFRS 16 effects of SEK 84 million in the quarter.

Restructuring costs in the quarter is minus SEK 17 million and is related to the final phases of the U.K. restructuring program that has been successfully implemented in the second half.

The U.K. program has seen approximately SEK 3 million to SEK 4 million effect on OpEx in the quarter, and we are well aligned to get the full yearly effects of around SEK 30 million, split between OpEx and COGS in 2020 and onwards.

Other smaller, continuous improvements to the organization that we considered to be part of normal business development, is as before booked directly into OpEx.

Based on the above, we saw EBIT in the quarter increasing to SEK 249 million versus SEK 157 million in Q4 2018. Cash conversion in the quarter amounts to 88.4%, including IFRS 16 effect and 87.9% without. Our action plans around mainly our working capital are giving results and we continued to perform well in accounts receivable and our inventory levels are decreasing, and we see continued possibilities to perform better in that area.

All in all, a solid quarter with growth, where we are starting to gain traction on profitability based on implemented restructuring programs from several other running activities.

If we move over to the full year, where we are now 2/3 into our Arjo 2020 journey and our plan to establish a new stable base camp for further profitable growth. The year in total has many -- in many ways hit or overachieved set milestones, but we also have areas where we need to continue to improve.

Net sales developed favorably, and we met both our long-term financial target and short-term guidance with an organic growth of almost 4%. North America grew more than 6%, driven by very strong growth in U.S. and solid performance in Canada. Western Europe grew 0.1% despite an almost 7% decline or equal to SEK 75 million organic net sales decline in our second-largest market in the U.K. A decline that affected not only the region, but also the group, both on net sales and profitability in a negative way. In the markets outside of the U.K., we saw good growth in, for example, France, where Patient Handling develops in a good way. Overall, that part of the region grew just below 2.5% in 2019.

In Rest of the World, we reported a healthy growth of 11.9% for the year, driven by the return to growth in Australia, and some very good performance in markets where we are building our own infrastructure, like Africa, Latin America and Southeast Asia. And seeing an almost 40% organic growth in Japan for the year, based on the front-heavy investments that we continued to do, and this is the world's third-largest health care market, gives good confidence for the future.

Gross margin for the year ended at 43.5% versus 44.6% in 2018. The decline is mainly due to our decline in Rental profitability, where we, in comparable currencies, have lost approximately SEK 90 million in gross profit between 2018 and '19 due to lower selling prices, mainly from 2018 and beginning of 2019 in Europe, and also significantly lower placements of our Critical Care units in the U.S.

We also see some negative product mix effects due to higher sales of medical beds in the year. And in addition, we have some currency effects, both transaction and translation that affects 2019 gross margin negatively, with approximately 50 basis points. There is a clear focus within the group, not only in Rental, but across the categories to improve overall profitability per net sales dollar. Dedicated restructuring programs, smaller tactical improvements and a more cautious approach to some medical beds deals will make this improvement possible in 2020 and onwards.

OpEx in comparable currencies is more or less on par with 2018 levels, and we have a tight cost control established within the company. Our EBITDA before restructuring amounted to SEK 1.728 billion. Restructuring for the year, mainly from our U.K. and U.S. programs, amounted to SEK 53 million and EBIT consequently grew SEK 178 million or 36% to SEK 671 million from SEK 493 million.

Cash conversion for the full year reached 74.7%, well within our communicated target of above 70%. The Board recommends, based on this development and a continued strong balance sheet, the dividend for the year of SEK 0.65 per share, an increase with 18% from 2018.

After the second year, as a freestanding company, where we, again, meet all of our midterm financial targets, we are well prepared for the last leg of our Arjo 2020 plan and look forward to a year with continued growth and increased profitability. And we have already started the work to form Arjo for the journey beyond 2020, which we will tell you more about during our upcoming Capital Markets Day on the 13th of May.

If we then come back to some more details on the quarter, and we start with North America. In North America, as previously mentioned, we continued to see good and profitable development according to plan. The quarter in isolation saw a small organic net sales decline of 1.6% for the region, mainly due to strong comps from Q4 2018, where sales grew more than 12% in the region.

And we also had some delays of 3 larger projects that will be invoiced in the beginning of 2020, of approximately USD 2.5 million. We are satisfied with the developed in the region, and we exited the year with a continued strong pipeline for 2020.

In more detail, U.S. continues to perform in a solid way. Organic net sales is down in the quarter, with 2.8%, but again, this should be seen versus a very strong comparative quarter of 2018 in Q4, where we grew 13%, and also the fact that we had the previously mentioned delays of 3 larger projects into the beginning of 2020.

Rental saw a slight decline in organic net sales in the quarter due to significantly lower Critical Care placements, but we still noted gross margin improvements as a clear effect of the restructuring done.

The plan is fully implemented and will generate the SEK 30 million in yearly savings that we started to see in Q4, also in 2020. The good performance in our profitable Patient Handling and service business continues. And all in all, I am pleased with our development in the U.S. also during Q4, and we have a good and solid pipeline for 2020 and onwards.

Canada continued their solid performance and grew across most categories in a profitable way, with 2.8% up in the quarter, especially Rental continues to develop well in both net sales and profitability, where Patient Handling is also developing in a solid way.

We continued to perform on or slightly above our business plan for North America. We are well positioned with necessary plans in place for a continued profitable growth in 2020 and beyond.

Western Europe, if we move in there, as the region, reported an organic growth of 2.5% in the quarter, with good net sales performance on many markets.

U.K., over performed versus expectations. And despite strong comps from Q4 2018, where net sales grew with more than 10%, we saw a return to organic growth with 2.8% in the quarter.

NHS spend is still on a low level. But we have noticed an increase in activities during the second part of the quarter, fueled by some clearer visibility of the political situation. It is also good to see that we stand well prepared for positive market development, also after our significant restructuring program during 2019.

Capital sales in U.K. grew well during the quarter, and we had Rental business that grew only slightly, but showed good development and profitability compared to Q4 2018. All the above leaves us with a slightly more positive view in U.K. for the future than what we had going into the quarter.

The markets in Western Europe, or outside of the U.K., also saw good net sales development in the quarter, and this part of the region grew 2.4% organically.

Rental net sales in this geography continued down in the quarter, mainly due to the previously communicated sales price drop earlier in 2018 and '19. But positive for the quarter, we noted for the first time in quite some time, an increase in profitability, where we start seeing the effects of our internal activities. France continues to develop very well on top line, with really good growth on mainly Patient Handling.

On the downside, we see countries like Italy and Belgium, where we, this quarter have seen longer delays of project that has affected our net sales development here. With our U.K. restructuring plans fully implemented by the end of the year, it is now time to take the next step in our journey to set the stable Arjo 2020 base camp for Europe.

Despite an okay development in net sales in our European activities outside the U.K., we have, mainly based on lower average selling price, seen a decline in profitability over the last couple of years. And we need to do a larger overhaul on how we are structured and make sure that we set the infrastructure throughout the value chain as efficient as possible.

We have, therefore, decided to implement the larger restructuring program affecting the entire value chain in Europe. Details around this program are being finalized as we speak, but our estimation is that it will lead to yearly savings of approximately SEK 50 million spread across the value chain, and where we will see 25% to 30% of the effect already this year. The cost for this program will be approximately SEK 75 million that will be booked as restructuring costs spread over the year.

Rest of the World, the organic growth in Rest of the World continued to be strong also during Q4, with an increase of a healthy 16%. The growth was driven primarily by the good performance in Australia and continued solid performance in many other markets, both distributor markets and countries where we have built our own infrastructure over the past 24 months.

And as I've said on many occasions, it is really satisfying to see this investment gain profitable traction.

Australia performance, as stated, another strong net sales quarter, based on both good performance, and in all fairness, easier comps from 2018. We are developing our Patient Handling outcome business in the country and service develops really well to single out some areas.

Well aligned with our plans, Australia is now, from a full year perspective, back on growth and has taken back almost 50% of the drop that we had in 2018, with good plans in place to continue that journey.

Markets like Singapore, South Africa and Hong Kong, where we continue to build our own infrastructure, develops well. And Japan, where we have a front-heavy investment into our organization going on, sales have increased with almost 40% during 2019.

We also see a number of our new distributor markets showing good growth in this quarter, mainly Latin America and Middle East. The traction is good in this area, well supported by our product registration process.

Now over to profit development and some more details regarding the same in the Q4, and obviously, also for the full year. The gross margin was 44.4% in the quarter, slightly lower than last year's 45.2%. Even though it is more or less on par with last year, we see -- and we see some good development in a few areas, it is not a level where we are satisfied. We have quite some room for further improvements, and this work is ongoing in most areas of the organization.

In the quarter, we see a slight negative product mix versus last year due to more medical beds globally and flusher sales, mainly in Germany.

Both these categories have significantly lowered gross margins in Arjo, in average, but with [increasing] service revenues over time tied to these activities.

As stated before, in medical beds, we continued to see quarter-over-quarter improvement of gross margin within capital sales, well in line with our expectations.

We continued to be very focused on developing our sales in higher spec medical beds, and we'll be cautious on which products to participate in and which one not to.

During the quarter, we have continued to work with centralization and reduction of inventory levels, especially with spare parts in our sales and service units, and this has led to a negative effect on gross margin isolated in the quarter of around 60 to 70 basis points on group level, versus the same period last year, but this is expected to build a more efficient inventory management and increase profitability to the group over time.

We have lower sales in percentage in the [quarter's] U.S., where we have an above-average gross margin, creating a slightly negative country mix in the quarter. This effect is, according to us, very temporary, as we foresee net sales in U.S. to continue to develop above group average in the years to come.

In addition, our growing distributor business comes with lower gross margin levels compared to sales through our own channels that further affects gross margin isolated. However, and again, as said before, this is important to recognize due to the lower selling cost for this setup, there is good, well aligned with average contribution to the profit level through our distributor sales.

Rental is, for the first time in quite some time, showing an uptick in gross margin, this even with slightly lower net sales globally and lower Critical Care placements in the U.S. versus Q4 2018. We're starting to see the effects of our actions in the U.K. and we have U.S. restructuring program, where we have clear effects of around SEK 8 million of the yearly SEK 30 million savings in the quarter.

Rental for the full year has been the big negative for our gross profit and gross margin, losing in comparable currency is around SEK 50 million on net sales and more than SEK 90 million in absolute gross profits. This is due to mainly lower selling prices developing from 2018 and first part of 2019 and significantly lower placements in 2019 of our Critical Care units in the U.S.

As described with our restructuring initiatives and other continuous improvement actions, we are confident that we, over the next 0 to 24 months, will recover at least this drop, but for the isolated year of 2019, it is obviously a large impact.

And for reference only, excluding our Rental business, our other businesses are trending on or better than last year on gross margin.

We continued to have good traction in our service, both on net sales and profitability. And in North America, our Patient Handling business is developing well, adding to positive product mix.

We continued to have a very tight cost control in the quarter, and OpEx, relative to net sales, continued to decline. The OpEx amounted to SEK 820 million in the quarter versus SEK 815 million in Q4 2018.

We had negative translation effects of SEK 32 million on OpEx. And if we compare our OpEx level in comparable exchange rates, we can note a year-over-year decline, including the number of sales organization, investments and activities that we have initiated in the last 6 to 18 months.

Our investments in selling expenses and efficiency progress in our admin part continues. In R&D, we continued to see better efficiency per dollar spent, based on the restructuring that we had in 2019.

In the isolated quarter, we have slightly higher R&D costs than average due to a one-off write-down of an old R&D investment of SEK 6 million. And as I stated previously, we had a negative effect on other expenses and incomes versus Q4 of 2018, where the delta was SEK 10 million, based on a positive effect last year of SEK 4 million and a negative effect from previous periods of SEK 6 million this year.

Moving forward to positive development of EBITDA before restructuring amounting to SEK 513 million for the quarter. The increase of 25% versus Q4 2018 includes SEK 84 million positive effects from IFRS 16.

Restructuring cost of SEK 17 million in the quarter is related to the final costs of the U.K. restructuring program, and as I said, both the U.K. and U.S. restructuring have now been completed on time and according to outcome plans, and both programs will, on a yearly basis, generate SEK 30 million in savings.

In the quarter, we saw around SEK 3 million to SEK 4 million from the U.K. program affecting OpEx positively and the SEK 8 million, as discussed in the U.S.

In my view, this is another 2 good examples of well-executed restructuring programs by the organization, where we have secured the financial benefits for the years to come.

EBIT for the quarter is SEK 249 million versus SEK 157 million last year, an increase of almost 60%.

To finish off this section, let me just update you on another highlight, which is around MDR and MDSAP, because during the quarter, Arjo has passed an audit with our notified body to see whether we comply with the EU MDR, which is the European Union's Medical Device regulation, and a certification that we have passed successfully.

We now might be one -- we may be one of the first companies to receive this certification for MDR. The EU MDR audit includes the Arjo quality management system and also technical documentation for class 1 products. MDR enters into force into May 2020, and we are well prepared to meet and comply with these requirements.

We have also been approved for MDSAP certification at our production unit in Portland -- in Poland and Suzhou in China. An MDSAP certification is strategically important for us as it is recognized in 5 countries where we are very active, being Australia, Brazil, Canada, Japan and also the United States.

With that, I hand over to Jonas to take us through the details of the currency effects and balance sheet items. Jonas?

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Jonas Lindqvist - Chief Financial Officer, [3]

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Thank you, Joacim. I will talk about currency effects to begin with, then cash flow and then touch on a few of the balance sheet items.

To begin with the currency effect. Overall, the currency effects are small in the quarter. Comparing to the same quarter last year, the hedging contracts had a negative impact on the gross margin of SEK 11 million in the quarter, and this is also in line with what we estimated after the last quarter.

We have made a change to our hedging policy, and that is to only hedge known transactions and not any more hedge for cost volume.

In the past, and in particular, the last quarter, we were hit by the sales of the general hedging that was made ahead of the transaction.

When we tied in those contracts to actual transactions, the exchange rate to, in particular, the U.S. dollar, had moved away from the contract levels, and we were faced with these effects.

The method that we now have started to apply, means that we will not have any change in the gross profit from hedging contracts. Revaluations of service derivatives and receivables, liabilities will offset each other and the remaining effect from earlier-made hedging will be negligible because those hedges have been used.

There's a translation effect in the quarter, it's shown on the right-hand side of the slide. The effect on sales is a positive SEK 117 million and the cost of goods sold is impacted by minus SEK 48 million. Consequently, the gross profit is impacted by SEK 69 million, which is in line with what can be expected. And the reported operating expenses in the quarter are impacted by SEK 32 million in currency translation effect.

Moving over to the cash flow. If we look at our cash flow for the quarter, it's been a pretty normal quarter for the business. The fourth quarter is the strongest quarter and the most important single quarter in the year regarding sales volume. This means that then normally, is the stock build up before the quarter and inventory levels go down, which is also the case this year.

In the quarter, operating cash flow, or rather cash flow from operations, is higher compared to last year by about SEK 100 million. However, 3 quarters of that relates to IFRS. In addition, there is a reduction in working capital. The working capital has decreased in the quarter and gives a contribution of SEK 54 million, which is twice as much as last year's number of SEK 27 million for the quarter.

Within working capital, the reduction of inventory has given a positive cash flow effect of SEK 104 million after the strong quarter, and the increase in accounts receivable has given a cash flow effect of SEK 223 million for the same reason. Although it is a high increase of accounts receivable, it's not -- it is on a comparable level with increase in Q4 last year.

For the full year, cash flow from operations, excluding IFRS 16, is slightly below last year's level. And the main reason for this is that in 2018, we achieved a substantial decrease in overdue debt in the U.S., and that cannot be repeated, simply because there is not that much of overdue debt anymore.

The increase in accounts receivable this year is somewhat higher than the increase in business volume, and that comes from the fact that we sometimes, in very large deals, have to concede to payment terms extended beyond our normal term.

Investments in the year came out at SEK 801 million, and we have invested almost SEK 80 million in primarily Atlas Lift Tech. We have also invested in IT systems, SAP in Australia and New Zealand, as well as in 3 investments in Italy and China.

The renewal of our Rental fleet has continued in 2019, and we are now at the level where we will see a lower investment level for rentals going forward.

Cash conversion in the quarter was 88% and for the full year, 75%, which is above the target of 70%, externally communicated target.

To say a few words on the balance sheet. It's a continued solid balance sheet, with a high equity ratio of 44% (sic) [41%]. I am pleased to say that this is the last time we have to explain the IFRS 16 effects, as of next quarter, it will be apples-to-apples and the balance sheet effects of the IFRS 16 repeat that it's SEK 1.2 billion increase in these assets and corresponding liability.

For more details regarding the IFRS 16 effects, please see the note section, where we'll go through this in quite some detail.

As I mentioned regarding the cash flow, we had a good decrease of inventory in the quarter of 2019, but also an increase in accounts receivable following the strong quarter.

Compared to last year, the quarter showed more or less the same pattern regarding working capital.

Regarding working capital, I would like to say that our working capital -- that our work regarding reduction of our inventory levels, which is partly a complex exercise because it affects so many areas of the business, and it also requires changes within thinking and behavior. However, this is where they're gaining momentum and we expect the work and the levels of inventory to come down. One example is how we store more [sensoring] to reduce overall cost levels and increase flexibility with inventory that we have.

I would like to take the opportunity to mention that when looking at the ratio, net-debt-to-EBITDA, our calculation method gives us the number 3.0, but 3.4, which is without IFRS 16, is a more accurate number when comparing the previous periods and also going forward.

We have a transition effect coming in there. This is all shown in the report at the back, in the note section, but I still wanted to draw your attention to it. During normal times, when there is no major change in the accounting regulation, like the IFRS 16, this is no problem. As I said before, as of next quarter, this will much more -- be a much more straightforward question.

Thank you, Joacim.

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [4]

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Thank you, Jonas. Let me now take you through the outlook for 2020 and sum up the presentation.

Starting with outlook. Given our current view on the markets and our own activities and plans, we believe that we will perform in the upper part of our interval 2% to 4% organic net sales growth for the full year of 2020. This should also be seen in the light of the Care intention to continue to focus on the upper segments in medical bed, which will need clear prioritization on which products to participate in or not.

This means that we will be stepping away from some of that business, unless we can connect the peer service and consumables business to those projects. There will be increased focus on profitability throughout the value chain, and I expect our gross margins to develop well, based on this.

On the cost side, we expect our operating expenses to somewhat decline as a percentage of net sales in 2020. As before, the absolute OpEx number will increase between 2019 and 2020, driven by further investments in sales activities that, over time, will drive profitable net sales. And of course, we will do further investments in R&D.

We will continue to work with all cost lines throughout the value chain, supported by the 2 implemented restructuring programs in the U.S. and U.K., and the new one in Europe.

Then let me make a short recap of the presentation. During the fourth quarter of 2019, we continued to see solid organic growth in the group. The activity level continues to be high, and we report a 2.8% organic growth for the quarter, in line with our expectations.

For the full year, we noted almost 4% organic growth, even with a significant decline in our second-largest market, U.K., of around SEK 75 million or 7% organically and almost 50% in our Rental business in comparable currencies.

North America continues to perform well. The quarter saw a slight decline versus a very strong Q4 2018 and was affected by some project delays. The full year noted a very strong 6.1% growth, fueled by good development in Patient Handling and service and, obviously, also driven by the large medical beds order in Q2. We are well positioned for further growth in this region.

Western Europe reports an organic growth of 2.5% in the quarter, U.K. returns to grow, even compared to a very strong Q4 2018. The markets in Western Europe outside of the U.K. continues to grow in a solid way, where especially France develops well.

For the full year, the region reported a 0.1% increase of organic net sales despite the full year development in U.K.

Rest of the World is growing with a healthy 16% in the quarter and almost 12% for the full year, very much driven by continued good performance in Australia. We also see good net sales development in many of our other countries in the region, with Japan [aspects] being positive.

The gross margin was 44.4% in the quarter, with a slight negative country and product mix versus Q4 2018.

On the positive side, Rental notes an increasing gross margin in the quarter, despite lower net sales and significantly lower placements on our Critical Care solutions in U.S. versus Q4 2018.

For the full year, gross margin came in at 43.5% versus 44.6% in 2018. The decline is mainly related to the drop in Rental, some negative product and country mix and negative currency impact, both on transaction and translation.

On the positive side, Patient Handling business and service continued to develop well. And as said, our gross margin, excluding Rental, is on par with last year, even with the high volumes of medical beds in 2019.

The OpEx amounted to SEK 820 million in the quarter, it's well under control and represents a decline versus Q4 2018 in comparable currencies.

For the full year, our cost as percentage of net debt continues to decline with more than a percentage point, and the full year level is more or less flat versus full year 2018 in comparable currencies, despite healthy investments in our global sales force. We report positive development in EBITDA before restructuring, amounting to SEK 513 million for the quarter, an increase of 25%, including IFRS 16 effects.

Restructuring cost, minus SEK 17 million in the quarter, including the final parts of the U.K. program. For the full year, restructuring amounts to SEK 53 million, and both our U.K. and U.S. programs are now fully implemented and has generated expected savings already in Q4 2019.

EBIT for the quarter is SEK 249 million versus SEK 157 million last year, an increase of almost 60%. On the full year, EBIT amounted to SEK 671 million versus SEK 493 million in 2018, representing an increase of 36%.

Based on this development, the Board of Directors are suggesting a dividend of SEK 0.65 per share, an increase of SEK 0.10 or 18% from 2018. The dividend is well within our dividend policy and supported by our strong balance sheet.

We look forward to a very interesting 2020, where we have every intention of continuing our positive journey, and performed the last year of our Arjo 2020 plan in a very good way. We're also looking forward to see, hopefully, many of you at our Capital Markets Day on the 13th of May in Malmö, where we will present our strategy and tactical plans for Arjo beyond 2020.

With that, thank you for your attention, and we now open up for questions. So moderator, please? Moderator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question now. It's from Mr. Kristofer Liljeberg with Carnegie.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [2]

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Could you give currency effects for the full year, the impact it had on EBIT, both for translation and transaction, please?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [3]

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Yes. Sorry, I would just need a minute, if I can come back to it.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [4]

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Yes. And then my second question on the gross margin. You said the inventory reduction had a negative impact of -- from 60, 70 basis points. So the adjustment, it was flat. But at the same time, you said that the Rental business showed some uptick for the first time. So why is the gross margin, if you adjust for the inventory reduction, not improving more? Was that just the mix and country effect, you said?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [5]

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Yes. It's Joacim here. The delta that you're describing there is the slight country effect that we don't have as much in the U.S. in the quarter. And then also the product mix, where we also in Q4 versus Q4 2019, have more medical beds out and we've also done significant, I would say, sales of flushers in -- mainly in Germany. And the flusher segment also have, I would say, well-below-average gross margins on those products, especially the ones that we're selling in Germany.

Now as I stated before, these businesses have a clear service and consumables portion connected to them over time. So it's a -- in my view, something that will strengthen both our service and consumable sales going forward.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [6]

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Okay. But then if you look at the gross margin for the full year, the reason it's down, that's more still the Rental business?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [7]

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Yes. I would -- I mean we can discuss about smaller things back and forth there, but the fact that we are losing SEK 90 million on Rental in a year-over-year comparison is obviously the main part. The good thing here is that we see a Q4 with, for the first time in quite some time, increased margins on Rental. We see the clear effects of the U.S. restructuring program.

We see also some effects of the tactical plans that we have initiated in some other markets. And I strongly believe now with the program that we will be initiating in Europe, that we will see further improvement of the Rental profitability going forward.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [8]

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Okay. So we should expect a bit of gross margin improving again in 2020?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [9]

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That is my absolute intention.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [10]

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And is it even possible, you think, to get back to the level where you were 2017, 2018?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [11]

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If we look at the gross margin level for Rental, if I take that isolated, as I stated in -- during the -- during my presentation, it is our plans to get back to at least the levels that we had in 2018, when it comes to Rental profitability within 0 to 25 -- 24 months, a continuous journey within that time period.

So in Rental, I foresee that we should be able to shore back what we have lost, and we have good traction. And we also have a good track record on our restructuring programs and the plans that we have. So I feel comfortable around that one.

We are also, I believe, need to take further steps, as I mentioned, around being more cautious on which medical beds projects that we are taking in. And also with that, I believe, that we will continue to see a profit -- a positive product mix for us going forward. So yes, I do foresee a good development of gross margins going forward.

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Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [12]

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Okay. And did you have that (inaudible)?

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Jonas Lindqvist - Chief Financial Officer, [13]

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Yes, Jonas. Yes, coming back to the transaction or the revaluation effect and the transactions effect is at SEK 34 million negative for the year, of which SEK 11 million is this quarter, as I said before. We had a pretty large effect in the previous quarter, around SEK 24 million and then we were -- we had very little in the first 2 quarters of the year.

And the translation effects on net sales was SEK 453 million for the full year of the sales and the gross profit positive SEK 174 million. We had a negative effect on OpEx of SEK 129 million, and that gives a positive EBIT effect of SEK 43 million for the full year.

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [14]

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Did you get that, Kristofer? So SEK 43 million on translation.

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Operator [15]

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I have the next question. Yes. It's from Mr. Sten Gustafsson with Nordea.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [16]

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Just to follow-up on the gross margin there, just to make sure I fully got it right. You talk about improvement in the gross margin in the Rental business, and you expect that to be at least on par with the level you had in 2018. And you also say that the gross margin for the other parts, excluding the Rental, is on par or above 2018 already now in 2019. So is there any reason why we shouldn't expect the gross margin to be above what you had in 2018 for 2020? That would be my first question.

My second question or maybe not so much a question, but if you could provide us with an update on the latest developments for your wound care product. I understand you have an ongoing study, and when we can expect to hear more on that would be very appreciated.

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [17]

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Thank you, Sten. On the improvement on Rental profitability, I would like to underline that the -- it's a clawing back what we have lost, the around SEK 90 million is, again, a journey over the next 0 to 24 months. There's nothing that will have full impact on 2020. It's something that you will see over the next 24 months in my view.

But we are trending, as I said, on par with 2018, if we exclude Rental, which is, obviously, a good sign. And we have further possibilities of stepping up the specification ladder in medical beds to make sure that we're improving that category from a gross margin perspective, further.

When it comes to Wound Express, I -- we are in the -- within the final stages of the second study of Wound Express. We will present these results at a conference on the 26th of February, and I'm looking forward to be in Milton Keynes on that day. I can't give you much more details than that right now, Sten.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [18]

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Okay. But will you send out like a press release or publish on social media or something, the results?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [19]

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We will most probably do both. And obviously, we will make sure to keep you very close in the loop, so that you have an understanding on what we expect from Wound Express, both in terms of short-term development, but also long-term possibilities. But we've -- as I said before, we want to do so when we have published. I mean we are, luckily, well aware of what's in the study, but obviously, we want to make sure that we get it in the right way to the market.

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Operator [20]

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(Operator Instructions) We have another question from Mr. Johan Unnerus with Pareto Securities.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [21]

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I think it was lost in my first attempt. Those projects in North America, I think you referred to 3 projects that were moved -- pushed into Q1, that can be the first question. Could you -- is it possible to give any sense of size and volumes in those 3?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [22]

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Yes. Johan, the volume for the 3 projects in total is around USD 2.5 million, and it is just short-term delivery postponements that we have on these fronts, and it's good projects in the areas of Patient Handling and hygiene that has been pushed forward.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [23]

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That's useful. And the level of support from the U.K. savings that actually came around during the full year. Can you -- how much of the savings program was actually realized? Was it the full savings already for 2019?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [24]

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The U.S. program has full year savings in the quarter. We are looking at SEK 8 million that is supporting the gross profit line in the quarter from the U.S. restructuring. And here, we have really good traction, and the program is fully implemented. The program in the U.K. is also fully implemented, very well done by the organization. And in the quarter, we have seen effects of SEK 3 million to SEK 4 million on OpEx from the U.K. program. And from 2020 and onwards, we will see the full yearly effects of SEK 30 million spread between OpEx and gross profits.

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Johan Unnerus, Pareto Securities, Research Division - Analyst [25]

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And perhaps you could repeat, I think you were about to repeat the currency effect, the translation and transaction, I think it was blurred during the call. I think the translation was SEK 43 million, wasn't it?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [26]

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Exactly the -- I wanted to summarize there, but the full year translation effect on EBIT is a positive SEK 43 million and the full year negative transaction effect, affecting GP, is SEK 34 million so that gives a delta of minus -- sorry, of positive SEK 9 million on EBIT for the full year.

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Operator [27]

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(Operator Instructions) We have a question again from Mr. Sten Gustafsson with Nordea.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [28]

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A quick question on large tenders. Are there any ongoing activities right now that you participate in?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [29]

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Thanks for the question, Sten. There is absolutely -- I mean we have bolstered up our corporate accounts department in the U.S., where we are now almost 15 people working only with corporate sales in our U.S. organization, and the pipeline is building. We -- I can't give you any details right now, but it is -- I was over in the U.S. last week, and it's good to see that those 13, 14 people are doing their job. That's how I would put it.

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Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [30]

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Okay. And in the other parts of the world?

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [31]

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There are projects that we are working on, actually mainly in the distributor markets. But again, I can't give you any details, but it's -- there are a few that we are working on, but it's nothing where we have any detailed information to give you right now.

That's -- if I may say so, in the distributor market, that's more one-off projects in smaller countries, where there is a bigger refurbishment that we take. We, obviously, track them very, very closely. I would say that the work around the bigger projects is much more process-driven in countries like U.S. and also in the bigger countries in Europe, for example.

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Operator [32]

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Ladies and gentlemen, it appears there are no further questions at this time. I'd like to turn the conference back to Mr. Lindoff for any remarks.

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Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [33]

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Thanks, moderator. Now -- we now close the Q4 call, after we have, hopefully, given you good details on the quarter, where we continue to improve market position, we have shown another quarter of growth, and we closed 2019 in a successful way of almost 4% organic growth. And we, as an organization, now I look forward to a good 2020 and are well prepared to continue to grow the group in a profitable way. So with that, thank you very much for today, and see you all soon.

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Operator [34]

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