U.S. Markets closed

Edited Transcript of ARJOb.ST earnings conference call or presentation 22-Oct-19 12:00pm GMT

Q3 2019 Arjo AB (publ) Earnings Call

Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Arjo AB (publ) earnings conference call or presentation Tuesday, October 22, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Joacim Lindoff

Arjo AB (publ) - CEO, President & Director

* Jonas Lindqvist

Arjo AB (publ) - CFO

================================================================================

Conference Call Participants

================================================================================

* Annette Lykke

Handelsbanken Capital Markets AB, Research Division - Medtech Analyst

* Kristofer Liljeberg-Svensson

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

* Sten Gustafsson

Nordea Markets, Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day and welcome to the Arjo Q3 Reports Conference Call. Today's conference is being recorded. At this time I would like to turn the conference to Joacim Lindoff, CEO and President of Arjo, please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much, operator, and hello, everyone, and welcome to this Q3 call for all of you. Thank you all for dining in today and I will together with Jonas, the CEO, take you through the Q3 report that we released just an hour ago.

We'll start by giving you a business update for the quarter and year-to-date of 2019, with some highlights from the business. We will also then guide you through the balance sheet, and after that, some words on the outlook for 2019 and we'll finish off with a short summary before we open up for questions. And as always, we aim at keeping this call to an hour and finish no later than 3:00.

So let's go on with an update on the business. During the third quarter of 2019, we continued to see good and solid organic growth across all 3 regions. The activity level continues to be high and we report a 4.7% organic growth for the quarter, slightly better than our own expectations. North America continues to perform very well with a growth of 5.4% in the quarter. The development in the U.S. continues to move over above plan with a growth of 5.6% in the quarter. In Canada, the solid performance continues and we have an organic growth of 4.6% spread across the different categories on this, our now fourth largest market within [Arjo].

Western Europe sees return to organic growth with 2.3% in the quarter, despite a significant decline in the U.K. of 13.9% or equivalent to SEK 37 million of decline. This decline in the U.K. continues to be an effect on Brexit uncertainty. It still leads to less capital orders than expected, but this quarter and the last quarter we can also see a softer development in mainly rental, which we are now addressing.

The countries in the regions outside of the U.K. is growing with a healthy 8.8% in the quarter, this driven by good capital equipment sales, mainly in patient handling, hygiene and medical beds, but also good service development in the quarter. The decline in rental continues based on mainly lower market price levels, something that is now being addressed. The measures include changes to our current set-up, governance and sales approach, and is expected to reach full effect gradually during 2020.

Rest of the World is growing at a healthy 11.1% in the quarter, very much driven by solid performance in Australia, with growth well above last year as per plan. We also continue to see good growth from most of our other countries in the region. As stated over the last quarters, it is really satisfying to see that our investment in the region is paying off and have profitable net sales development, well aligned with our Arjo 2020 plan. Even with the larger-than-expected decline in the U.K., we grew the quarter with a healthy 4.7% and feel comfortable around our full year outlook.

The gross margin was 41.5% in the quarter, which should be compared with last year's 43.8%. This is obviously not a level we are satisfied with. The decline is attributable to 3 main areas: significantly negative currency effects, rental margins and the development in the U.K. Currency has a negative effect of approximately 210 basis points to gross margin in the quarter. On transaction effects, we see a negative SEK 24 million for the quarter, and we also have unfavorable translation effects that has a further negative impact of around 100 basis points, and Jonas will go through the details of this more later on in the presentation.

We continue to see pressure on our rental business profitability in Europe, especially in the U.K., German-speaking countries and France. The drop here is around SEK 20 million versus Q3 2018 on gross profit. And we have, as previously mentioned, action plans in place to address this.

In the U.S., we see the first positive signs of the restructuring program with better performance in our core rental business, but still lower year-over-year placements of our Critical Care Solution, which contributes to a negative SEK 5 million to our gross profit here in the quarter. We will see full year effects of the restructuring program in the U.S. and expect higher placements of critical care in Q4 of this year.

Thirdly, the overall decline in our U.K. business means not only lower GP on [postponed] sales but also less cost absorption in the overall business. We continue to address this through the communicated restructuring program, and we are now ramping up the activities, and we'll be adding savings of approximately SEK 10 million to a total of SEK 30 million of yearly savings starting gradually as of Q4 2019.

On the positive side, for gross margin, we have very good traction in our service net sales of profitability. Our U.S. patient handling business is developing well. And we see a year-over-year uptick on medical beds margins for the first quarter in quite some time. Medical beds were net sales in the quarter is up with around 40% or SEK 40 million versus Q3 2018. It is still significantly lower than average on [GP 2], and gives a negative product mix effect. But the improvement in the quarter is aligned with our plans, and a good trend sign. As a last note on gross margin, our business excluding rental, is actually trending better than last year. We have continued good 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 see lower costs with better output based on our restructuring from 2018 where we changed the R&D footprint and created our portfolio hubs. EBITDA before restructuring costs increased with 26.6% to SEK 381 million, including IFRS 16 effects of SEK 92 million. The restructuring costs in the quarter is related to the full cost of the U.S. restructuring program and around 50% of the U.K. program. Other smaller changes to the organization that we consider to be a part of normal business development is as before booked directly into OpEx. Based on the above, we saw EBIT before restructuring of SEK 125 million in the quarter versus SEK 132 million in Q3 2018. Adjusted for the negative currency impacts in the quarter, our EBIT would have been SEK 159 million, which would have been an increase versus Q3 2018, with approximately 20%.

Cash conversion in the quarter amounts to 109.5%, including IFRS 16 effects, and 116.9% without. We are now well positioned to meet or even overachieve on our full year target in this area. Our action plans around mainly on working capital are giving results, and we continue to perform well in accounts receivable. And our inventory levels are also with a higher net debt level on the same levels as last year, well prepared to a higher net sales level and to a strong finish of this year.

With that said, I believe that we have continued very nice improvement possibilities mainly in the inventory area for the quarters to come based on the plans that we have in place.

Coming up this part, another solid quarter with growth where the U.S. continues to demonstrate good progress and being the profitable growth engine that we have planned for. If we then walk into some more details, I'm starting off with North America. In North America, as previously mentioned, we continued to see good and profitable growth, well aligned or above our current business plan. The region saw growth of 5.4% in the quarter, with U.S. up 5.6%. This growth comes with good performance in many areas, but especially our profitable patient handling and service business stands out.

In rental, we have good growth on core rental business, but we still see lower-than-expected Critical Care Solution placement versus the year before, affecting the product mix negatively in gross profit and margin.

Our long-term care investment is gaining traction, and we are well above last year sales figures with a good pipeline buildup.

Canada continued a solid performance and grew across all categories in a profitable way. And here, we actually have a good example of rental development where both net sales and profitability is higher than last year. Larger part of the Canadian plans are now used when we are benchmarking our plans for other geographical areas.

As communicated in the Q2 report, we have initiated a one-off organizational change in the U.S. rental business to improve the business model, drive efficiencies and improve profitability long term. The estimated restructuring cost is around SEK 25 million, with yearly savings of around SEK 30 million mainly in COGS. And this program is now fully implemented and will also generate the planned effects of Q4 2019.

We continue to perform on or slightly above our U.S. business plan, we are well positioned for a good finish to the year in the area and we strongly believe that we have plans in place to secure good profitable growth in the U.S. going forward as well.

Moving over to Western Europe. Western Europe returned to organic growth, 2.3% up in the quarter, despite a significant decline in the U.K., the largest market in this region. Sales in the U.K. declined organically with 13.9% or around SEK 37 million versus Q3 2018. Brexit uncertainty continues and led to significantly less rental orders than expected in the quarter. As before, this is affecting the entire industry and we do not expect the situation to improve short term as long as we have this uncertainty present. As in the last quarter, we also experienced some weakness mainly in our rental business in the U.K. during this quarter.

The markets in Western Europe outside of U.K. have seen good developments in the quarter as expected. Organic net sales is up with 8.8% in these countries, and based on good order intake, we all are now well positioned to end the year with organic growth in this area, where they are currently around 4% up versus last year.

Rental continues to be a big concern for us, mainly in German-speaking countries and France, where significantly lower market prices due to lower specification requests and competition than previous years is affecting GP with around SEK 20 million Q4 2019 versus Q3 2018 -- sorry, Q3 2019 versus Q3 2018, of course. We have initiated plans to address this, which gradually will impact from 2020.

On the positive side, we see good development of our service business and areas like patient handling and DVT continue to grow in an above-average profitable way. The Brexit uncertainty and the challenges in the rental business in U.K. will result as expected already after Q1 and Q2, in a year-over-year decline in net sales in the U.K., now probably slightly larger than previously expected. The management is addressing this with the initiated restructuring plan that we now have decided to accelerate further. With the latest development, we are now addressing a plan aiming at adding SEK 10 million to the previously announced SEK 20 million of yearly savings, savings that we expect to be evenly distributed between COGS and OpEx, and where effects will start gradually as of Q4 2019.

Moving over to Rest of the World, where the organic growth was strong during the quarter, at 11.1%, mainly driven by a very good development in Australia. Several markets where we have our own infrastructure continue to perform well on order intake and net sales, and it is again really satisfying that we're performing according to plan and gaining effects on our investments. Australia performs a strong net sales quarter are well aligned with the previous communication. We have continued good confidence that Australia will achieve organic growth during 2019 and set a good base for future years both from a sales set up and overall OpEx perspective. We also see a number of our new distributor markets showing good growth in this quarter, mainly Eastern Europe and Africa. The traction is good also here and is well supported by our product registration process. And for me, it's good to see that this is a buildup that comes with good profitability focus during the buildup.

Now over to some more details regarding the profitability development in Q3. Gross margin was 41.5% in the quarter, which is lower than last year's 43.8%. And that said, we are not satisfied with this level even if we have significant negative currency levels as a main part of the explanation. Currency has, as said, a negative effect of approximately 210 basis points of gross margin in the quarter. On transaction effects, we see a negative SEK 24 million for the quarter, and we also have an unfavorable translation effects that has further negative impact of around 100 basis points decline versus last year's Q3. We continued to see pressure on our rental business profitability in Europe and U.S., where especially U.K., German-speaking countries and France contributes to a decline of around SEK 20 million of gross profit versus Q3 2018. We have action plans in place, both in the U.K., in Continental Europe and in the U.S., as previously mentioned, and where the Continental Europe ones takes longer time to see effects of. But with our U.S. and U.K. programs well executed, and action plans in Continental Europe starting to pay off, our estimation is that we will gradually, with a start from beginning 2020, see an increase in gross margins and rental comparing to the same period the year before. The drop of almost SEK 40 million in net sales in the U.K. being one of our more profitable markets, obviously will also impact us. The absolute GP drop is clear, but also weaker country mix as an effect of this is visible in both gross profit and the gross margin.

On the positive note, we have very good traction in our service net sales and profitability business. Our U.S. patient handling business continues to develop well and we actually do see an uptick on medical beds margins for the first quarter in quite some time. As I said before, rental beds is still significantly lower than average and gives a negative product mix but the improvement on [GP] all align with our plans around higher-specification beds and the divestment of Acare and this is really a good trend sign, very much aligned with our plans.

The OpEx amounted to SEK 765 million in the quarter, which is reflecting good cost control. Excluding the negative translation effects from currency of SEK 23 million, our OpEx line would grow only 1.1% organically in the quarter and this is including the number of sales organization investment and activities that we have initiated in the last 18 months. We will continue to invest in selling expenses and drive continuous efficiency progress across our organization to be able to continue to invest in selling.

In R&D, we see lower cost but with better output based on our restructuring from 2018, where we changed the R&D footprint and created our portfolio hubs. In my view, this is a good example of a well-executed restructuring program by the organization.

We report a positive development of the EBITDA before restructuring amounting to SEK 381 million for the quarter. The increase of 26.6% versus Q3 2018 includes SEK 92 million positive effects from IFRS 16.

Restructuring costs of SEK 36 million in the quarter comes from larger part of the U.S. restructuring program and are up 50% of the U.K.-related program, all according to previously communicated plans. And our estimate is that full year restructuring costs will be around SEK 50 million. EBIT before restructuring in the quarter is SEK 125 million versus SEK 132 million last year. Without the described negative currency effects. The EBIT before restructuring would have been SEK 159 million, approximately 20% up versus Q3 in 2018.

Our year-to-date performance is well above last year. Reported EBITDA, including IFRS 16 effects has grown with more than 41% and excluding north of 10%. And EBIT is growing with 25.6% in the first 3 quarters of 2019 versus the same period in 2018, north of 30% if we would adjust for currency effects.

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

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [3]

--------------------------------------------------------------------------------

Thank you, Joacim. Unlike previous quarters, we have effect from currency. It is really impacting us in the third quarter of 2019. Above all, the strengthening of the U.S. dollar has affected us both as a translation effect and as a transaction effect. If we take our actual local numbers in local currencies and recalculate these at the exchange rates we had at the same time last year, we get the translation effects that I'm showing on the right-hand side below the pie chart. Since we do not have a complete correlation between the countries when it comes to sales and gross profit, that is we have different profit levels in different countries, we get what you might say is a mixed effect from currencies in countries that affect both profits and gross margins.

In addition, the translation effects from OpEx is large since the country with the largest parts of our OpEx, the U.S., has the strongest currency development. The effects on OpEx alone is a translation difference of SEK 23 million mainly coming from U.S. dollars, but also from other currencies as the Swedish krona has continued to weaken in the quarter.

The U.S. dollar has strengthened substantially against virtually all other currencies in the third quarter of '19. Since we are hedging the U.S. dollar to a high degree, we have not been in a position to close the transaction at the favorable exchange rates in U.S. dollar but have had to revalue our transactions downward to the hedged rates that are lower than the current rates. This has given a negative transaction effect of SEK 24 million. It's also effect of both these that Joacim mentioned when comparing currency and numbers for Q3 with the third quarter last year. This results of about 2 percentage points in margin. The hedged degree in total is on the same level as in previous years, however, with a higher hedging degree in U.S. dollars. We have achieved a better balance between currencies, which basically is what we want. But of course, if we have been able to foresee the development in the U.S. dollar, we would not have increased the hedging of the currency.

On the right-hand side of the slide, on the pie chart, you can see the relative importance of our currencies in relation to the Swedish krona and where we get the translation effect. That is, the U.S. dollar, the euro and the British pound that accounts for more than 75% of our sales, with the U.S. dollar itself accounting for 32% of our sales. The translation effects on different levels in the profit and loss accounts can be seen down on the right-hand side. And as you see, the net sales impact of translation effects is positive by SEK 83 million compared with the same period last year. Cost of goods sold has a negative impact of SEK 70 million, resulting in a positive gross profit contribution effect of SEK 13 million. However, operating expenses are impacted, as I mentioned, by SEK 23 million.

Moving over to the balance sheet. The story regarding the balance sheet in the quarter is that it continues to be very stable with an equity ratio of 44.5%, excluding IFRS 16, which is higher than in the same quarter 2018 when it was 42.0%. If we compare with the previous quarter, the only major difference is that we have utilized issue under our commercial paper program in euro that we did at the end of the previous quarter. This we had used to repay bank debt and have got the cash position down to the level where we want it to be. Compared with the balance sheet in Q3 last year, the major difference is in the IFRS 16, and we have an effect from IFRS 16 being the accounting regulation (inaudible). That impacts our balance sheet as of 2019 by SEK 1.2 billion when compared to the balance sheet at the same point in time in 2018. This is shown on the separate line in the balance sheet in the report.

Going over to the working capital, I would like to turn to the next page. Cash flow, the cash flow page. Cash flow before changes to working capital increased by 70% in the quarter compared to the same quarter last year, and 12% excluding the IFRS 16 effect. The reported cash flow from operations was high in the quarter and excluding the effects from IFRS 16, the cash flow from operations was SEK 96 million higher compared with the same quarter last year. The contribution to the cash flow in the quarter is primarily coming from working capital. We have had a reduction in working capital in the quarter. What we are seeing is that the efforts made in this area is taking off. The decrease is primarily coming from a continued reduction of accounts receivables and collection of older debts, and it's very satisfying to see older debts continuing to come down.

We do not see a reduction in inventory, which is approximately on the same level as in the previous quarter. Normally, there is a stocking up for this from fourth quarter to some extent visible in Q3. Still, the area where we are expecting to see a reduction is inventory going forward as we are increasing the inventory efficiency in our supply chain.

And finally, the cash conversion in the quarter amounted to 109.5% and 71.4% year-to-date, to be compared with the external target of 70%. The cash conversion in the quarter was a lot higher than in the same quarter last year. However, year-to-date, we are still behind this. But rolling 12 months, we are on 75% cash conversion, well above the external targets, and I do not see any reason why we would not reach [30% to 70%] for the full year. Thank you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jonas. Let me then take you through the outlook for 2019 and sum up the presentation before we open up for questions. Our outlook given the good net debt development in the quarter and the good backlog for the rest of the year, we feel comfortable around our outlook to have net sales in the upper part of the range from 2% to 4% for the full year. On the cost side, we expect our operating expenses to somewhat decline as a percentage of net sales of 2019. And as stated before, the absolute OpEx number will increase between 2018 and '19 mainly driven by further investments in sales activities that over time will drive profitable net sales and, of course, further investments in R&D. We also expect to see continued negative effects on OpEx and translation effects. We will, of course, continue to work with all cost plans supported by the 2 initiated restructuring programs to make continuous improvements to support the guidance on OpEx. All in all, including details presented over the last 25 minutes or so, we look forward to an intense and solid Q4 where we fulfill the 2019 guidance and obviously also our midterm financial targets for the full year.

Let me then summarize. During the third quarter of 2019, we continued to see good and solid organic growth across all 3 regions. The activity level continues to be high, and we report a 4.7% organic growth for the quarter, slightly better than our own expectations. Even with the larger-than-expected decline in the U.K., we feel comfortable around our full year outlook on FX.

North America continues to perform very well with a growth of 5.4% in the quarter. The development in the U.S. continues to move on or above plan with a growth of 5.6% in the quarter. Western Europe, returns to growth, with 2.3% organic growth in the quarter despite the significant decline in the U.K. of 13.9%. The markets in Western Europe outside of the U.K. has seen a good development in the quarter and organic net sales is up here with 8.8%. Based on order intake, we are well positioned also here to end the year with good organic growth in this area.

Rest of the World is growing at a healthy 11.1% in the quarter very much driven by solid performance in Australia. We also see good net sales development in other countries in this region.

The gross margin was 41.5% in the quarter, which is not, as said before, a level we are satisfied with. The decline is attributable to the 3 main areas; significantly negative currency effects, rental margins and development in the U.K. Currency with a negative effect of approximately 210 basis points to gross margin in the quarter, the transaction is SEK 24 million with an unfavorable translation effect had further negative impact of approximately 100 basis points.

We continue to see pressure in our rental business profitability in Europe and we have plans in place to address this.

In the U.S., we see the first positive signs of the restructuring program with better performance in our core rental business, but we still see lower year-over-year placements of our Critical Care solutions, which we hope will pick up. We will see full year effects of the restructuring program, and as said, expect higher placements of Critical Care units in Q4.

The overall decline in our U.K. business is addressed through the communicated restructuring program where we all are ramping up the activities and will be adding a savings of approximately SEK 10 million to a total of SEK 30 million of yearly savings starting gradually as of Q4 2019. On the positive side, we have very good traction on our service net sales and profitability. We have good traction on our U.S. patient handling business, which is developing well and we see a year-over-year uptick on medical bench margin for the first quarter in quite some time.

The OpEx amounted to SEK 765 million in the quarter, is well under control and represents only 1.1% organic growth in the quarter.

We reported positive development of EBITDA before restructuring amounting to SEK 381 million for the quarter, an increase of 26.6%, including IFRS 16 effects.

Restructuring costs of SEK 36 million in the quarter accounts from the U.S. restructuring program and approximately 50% of the U.K.-related program. And we still estimate the full year restructuring costs to be around SEK 50 million.

EBIT before restructuring for the quarter is SEK 125 million versus SEK 132 million last year without the described negative currency effect to EBIT before restructuring would be SEK 159 million, approximately 20% up versus Q3 2018.

As a summary, we look forward to a solid and intense Q4 where we are well positioned to deliver on our outlook for the year and our financial targets for the full year on reported EBITDA and cash conversion also in 2019.

So with that, thank you very much for the attention. And moderator, if you can please open up for any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will now take our next question, it comes Anette Lykke of Handelsbanken.

--------------------------------------------------------------------------------

Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [2]

--------------------------------------------------------------------------------

I have a few. First to all, when you are guiding for operating expenses to be -- to have a slight decline, can you say if that's including the FX effects and also the restructuring costs? And sort of what level are we on your reporting P&L?

Then, I'd like also when you say that you expect to meet your long-term guidance on EBITDA, is that also adjusted for IFRS 16? Or what sort of a -- if you could be more precise on what exactly you are referring to in this aspect.

And then I would like to hear a little bit of the nature of the restructuring programs you're running in the U.K. and France. And then I'll jump back in queue and ask my other questions later.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We're starting with OpEx. We look at OpEx to be out of misunderstanding. This is on actual reported rates, so net sales on reported rates and also the OpEx on a reported rate. That's also why I commented on what the organic growth would have been. But on reported rates, we see OpEx decline slightly as a percentage to net sales as we have communicated before. So this -- I would suggest that it follows kind of the line like we have year-to-date and decline also for Q4.

When it comes to restructuring, that is not a part of OpEx. Restructuring is placed below, so the minus 30 sticks you will see outside of OpEx and reported on a separate line, which is then included in the reported EBITDA or EBIT.

When it comes to the EBITDA development and/or, I would say, financial targets that we have put in place and that we executed on in 2018, I have been putting up -- [the general has been] -- or they've mostly been on standard. We will fix that also with IFRS 16 effects included, meaning that we will, from the way I look upon it, is the reported EBITDA from last year, adding the IFRS 16 effects and then making sure that we do at least 10% above that. And I would also look upon the restructuring costs from last year and say that the SEK 40 million that we had as revaluation of the U.K. pension fund should maybe be taken and put back into the reported EBITDA to be fully transparent. So instead of the SEK 1,180 million, I would say that our basis will be SEK 1,220 million for that calculation.

On the restructuring U.K., this is a plan that will cost us around SEK 25 million when it's done. It's touching 80 -- around 80 positions throughout the organization mainly in service and rental to get that up to speed. But it's also looking through all the processes that we have, service and admin. So it's really a program that is touching all parts of the U.K. organization to address the infrastructure given the decline of net sales that we have seen. We do not see that this restructuring program would make it more difficult for us to secure business. We are also well positioned, in my view, to jump on the train if the train would get going. But currently, we need to assess and address our infrastructure to make sure that we are well prepared and continue to deliver a profitable business in the U.K.

In U.K. -- sorry, in France and in the German-speaking countries what we are assessing currently is everything from governance and also to how we run our rental business, both in the back end and in the front end. And we're addressing the 3 countries there that I spoke about, France, German-speaking countries, which are more than 1 country obviously than the German-speaking countries, and the U.K. where we have the biggest impact of the decline of rental margins. So this will be less of a restructuring mode. This is more to make sure that we are well set and we don't foresee any major restructuring costs as a part of these activities during 2020.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

We will take our next question from Kristofer Liljeberg of Carnegie.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [5]

--------------------------------------------------------------------------------

I need to come back to your slide on the FX impact. I could understand the transaction or the hedging losses, but when it comes to this negative translation effect, I think you need to explain that to me. Maybe it's only me that does not understand it. So you have last part of sales in U.S. dollar, which has strengthened versus the euro and Swedish kronor, which are where you have a lot of costs. Of course, the slope is up a little bit versus the euro and the U.S. dollar. But still it seems very strange. So what -- am I missing something here?

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [6]

--------------------------------------------------------------------------------

Hi, Kristofer. This is Jonas. No, you're most likely not the only one who has problems to get your arms around it. We have done a lot of analysis ourselves. And the reason for this is that you might see the countries as a mixed portfolio. And when we get the strengthening of a sale in one country compared to another, where we have different levels of profit, we also get an effect on the total gross margin and gross profit from that. If you transfer it to, for example, as talked about, we had a strengthening of our product group beds, which have slightly lower gross margin than the other product groups. When we increase that, we get the profit -- gross profit benefit from the increase. But as an average compared to the total, it will bring down the average gross margin percentage because of the profit levels for that the specific product group.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [7]

--------------------------------------------------------------------------------

But now you're talking about product -- no, because now you're talking about product mix. I'm referring to our FX.

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [8]

--------------------------------------------------------------------------------

Yes. I was trying to illustrate it's the same effect although we were talking about different countries here and the different countries where we have different strengths in the currency. We get the same effects, we get the strengthening of the U.S. dollar and that with a high level of both. If you compare the gross margin levels in different countries, that gives the mixed impact on the total.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [9]

--------------------------------------------------------------------------------

But it's not totally the margin, it's in absolute terms also.

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [10]

--------------------------------------------------------------------------------

Yes. So correct.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [11]

--------------------------------------------------------------------------------

So could you just in a simple way, I don't know, explain why for example you have this big increase from FX on the COGS?

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [12]

--------------------------------------------------------------------------------

Yes, yes. Because of the gross margin levels that we have in the countries where we have had the strongest increase of the currency and -- that is the way we have set up the profit levels going through the complete supply chain for manufacturing to end market, then that is where you get the mixed effect of the, say, between different countries.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [13]

--------------------------------------------------------------------------------

Maybe we should take this afterwards. I don't get it, really, but...

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [14]

--------------------------------------------------------------------------------

I am absolutely available to take a call from you directly.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [15]

--------------------------------------------------------------------------------

But because of this uncertainty, and I understand you don't know where currencies will end the year. But if you now have looked at the current spot rates, could you give some indication what we could expect for currencies down in the Q4 because otherwise, I don't know, it's very difficult to forecast this business.

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [16]

--------------------------------------------------------------------------------

Yes. Are you -- you're talking about the translation effects, not the transaction effects, so I can completely understand?

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [17]

--------------------------------------------------------------------------------

Both. I guess you should have a clue what the transaction effect would also be based on the current spot rates.

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [18]

--------------------------------------------------------------------------------

Regarding the transaction effect, we have hedged most of the transactions for the rest of the year. So I think we -- as we hedge on a continued basis, we will get less unfavorable rates in the foreign contracts that we have for the rest of the year. But we still have hedged the flows for the full year. We will get an effect in Q4 as well.

And regarding translation effects, it depends entirely on where the currencies are going from here. And if the dollar remains on that very high level, we can see a similar effect in Q4. But the dollar has gone -- compared with all the other currencies, the dollar is the only currency that's gone really strong against the other currencies in this quarter. And that's what's causing this effect in Q3. So...

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [19]

--------------------------------------------------------------------------------

Sorry. So what you're saying is that a strong dollar is negative?

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [20]

--------------------------------------------------------------------------------

A strong dollar, just a strong dollar, compared to all other currencies that we have in our supply chain, yes. That is not favorable to us as the current hedging that we have.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [21]

--------------------------------------------------------------------------------

Okay. Then that -- you said it will be negative also for translation effect? No?

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [22]

--------------------------------------------------------------------------------

It is negative from a translation effect as well, yes. Although...

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [23]

--------------------------------------------------------------------------------

Okay. Sorry, my last question now. Can you explain, please, how a strong dollar could be negative for a translation effect?

--------------------------------------------------------------------------------

Jonas Lindqvist, Arjo AB (publ) - CFO [24]

--------------------------------------------------------------------------------

It's not negative in the sense that -- we get the gross profit contribution from it, but it's not as high as it had been, for example, in Europe. If the euro had had the same positive development, the gross profit contribution would have been higher than it is now in the U.S. dollar.

And then when you come to OpEx, we have a very big chunk of our costs in U.S. dollar and with the stronger dollar that gives the translation effect. That is negative for us also.

--------------------------------------------------------------------------------

Kristofer Liljeberg-Svensson, Carnegie Investment Bank AB, Research Division - Head of Health Care & Financial Analyst [25]

--------------------------------------------------------------------------------

Okay. But I guess, you're still making profit in North America, so that profit will be larger. Okay, okay. Let's take this afterwards.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

We will take our next question from Sten Gustafsson of Nordea.

--------------------------------------------------------------------------------

Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [27]

--------------------------------------------------------------------------------

First of all, could you talk a little bit about what's driving the growth rate or the growth in North America when it comes to products? And then also in between the 2 customer groups, if you could break that down for me, that would be great.

Secondly, if you could comment on your wound care -- upcoming wound care launch, when do you expect to launch your new product there? That would be helpful.

--------------------------------------------------------------------------------

Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [28]

--------------------------------------------------------------------------------

Thanks. Starting off with North America, where the shining star in the U.S. is patient handling in the quarter, we can also actually see a good development, and that is something that is contributing to the gross margin in medical beds where we have sold quite a few high-spec medical beds in the U.S. in the quarter as well. So those are the 2 things which are developing well in the quarter in the U.S. And if you look at full year, it is a solid performance of patient handling. We're very close to 10% growth year-over-year. That is adding to the good performance here. And that is something that I actually expect will continue in Q4.

When it comes to acute care and in long-term care, I don't have the split up ready here. But what I can say is that we are well above last year's number on long-term care. Long-term care then being mainly focused on the product category of patient handling and also hygiene, where we must say that the team is now starting to ramp up to the levels where we want them to be. And we can see that both through the net sales but also through the pipeline build-up. So it's good to see those but I don't have the exact split up between the good development and long-term care and starting to get traction on where I want it to be.

When it comes to the Wound Express launch, as you can read from the home page that is now available, what we are doing now is rather extensive clinical trials on this product, clinical trials that we intend to present the end of February 2020. Based on that, we will do a slightly bigger commercial launch in the U.K., where we've already started with a limited commercial launch to some selected customers. We're also starting up other clinical trials to see which other areas that we can actually use the Wound Express therapy.

But for the first part, we intend to send out or present the results of the bigger clinical trials back end of February, start a bigger launch in the U.K. after that and then step-by-step rollout to, first of all, selected European countries probably in the second half year of 2020. So we intend to give more information on the Wound Express and trying to sum up also what we can see as future possibilities with Wound Express somewhere again back end of February, beginning of March when we have all the formal documents in place.

--------------------------------------------------------------------------------

Sten Gustafsson, Nordea Markets, Research Division - Senior Analyst [29]

--------------------------------------------------------------------------------

Okay. And may I squeeze in one last question here before getting back to the queue? You say in your report that you will present a new strategy sometime in the first half. Do you have a date for that already now?

--------------------------------------------------------------------------------

Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [30]

--------------------------------------------------------------------------------

No, we don't have that. We will make sure that we deliver that date. But I would foresee it to be beginning of Q2 for that rollout as we have communicated before. So aim at the beginning of Q2 2020. But we'll make sure and take that as an action point to communicate the date as soon as possible.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

We'll take a follow-up question from Annette Lykke of Handelsbanken.

--------------------------------------------------------------------------------

Annette Lykke, Handelsbanken Capital Markets AB, Research Division - Medtech Analyst [32]

--------------------------------------------------------------------------------

Yes. My other question is that we have heard from a few other med tech companies in the U.S. that there is maybe less of an appetite of capital goods in the U.S. Is that anything you feel? I can see your numbers looks quite decent, but I'd just like to see if there is anything that you have heard of?

And then also, if you could just give us a little bit of status in China or emerging markets. Is there anything we should be aware of in this respect?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Let me start on the U.S. Based on both sales order intake and pipeline buildup, we do not see any signs of this trend decreasing from our point of view. We have a good traction in the U.S. We know how to do this. And we're not getting comfortable in any way, shape or form, but we are getting in those -- in the areas where we want to be and we're doing it in a structured and stable way.

So as I mentioned in my presentation is that I believe that we have built a good foundation in the U.S. for future growth, both in Q4 of this year but also in the years to come.

When it comes to Rest of the World, again, very happy with the development of Rest of the World and also that we see that any investment that we have done is taking off. China might be the only example of where we are not necessarily on the levels where we could be. We haven't planned for more in China because we have issues with -- or issues. We have timely issues with registration of products in China. So we are -- it's difficult for us to sell our products in China until we have the registration, and that registration process take quite some time. So China for us is not weak versus last year. We're growing versus last year but it's still obviously not on the level where we could have been and where we want it to be in the future. But to give a good example again is just to build your business in Eastern Europe and Africa that this quarter stands out with good development and as I said before, it's good to see build up and a distribute to market, which doesn't include decline in gross margins. We're actually keeping very good traction of our sales in this area and make sure that we get the effects also to the bottom line when selling in our distributor markets.

When it then comes to where we have built only infrastructure, Japan sees a very solid order intake quarter on Q3 and is well prepared for a good finish to Q4 in Japan. So continued good development in Japan as well. So I'm really satisfied with the number of markets in Rest of the World. China is not on that list but that's not because they're doing a bad job it's just because we don't necessarily have the products currently and that's something that we intend to fix over the next 24 months.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

(Operator Instructions)

It appears there are no questions at this time, so I would like to hand the call back over to your speakers for today.

--------------------------------------------------------------------------------

Joacim Lindoff, Arjo AB (publ) - CEO, President & Director [35]

--------------------------------------------------------------------------------

Thank you very much. And just finishing off by saying that we put the third quarter behind us now with solid organic growth. And we have good plans in place for an active and solid performance in Q4 to meet our outlook for the full year and obviously, also our financial targets that we have put out on the reported EBITDA and cash conversion.

So with that, thank you very much.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's call. Thank you all for your participation. You may now disconnect.