Arjo AB (publ) (ARJOB) Earnings Call Transcript & Summary

Welcome to the Arjo Q2 presentation for 2026.[Operator Instructions] Now I will hand the conference over to President and CEO, Andreas Elgaard; and CFO, Christofer Carlsson. Please go ahead.

Hello, everybody. So first of all, thanks for taking time off from your, hopefully, good start to the summer. Today, we're going to present the Q2 reports. And I would like to begin by just going through some basic information about Arjo. So those who are new to the call or new to following us get a better grip on what we do. So we really are purpose-driven. We have an organization that is really inspired by the purpose of helping patients when they need it the most to protect their dignity, their integrity, and also to help caregivers do their very important job. We are experts in improving mobility, mainly in acute care and long-term care settings. A little bit also in home care, but mainly in acute care and long-term care. So everything from patient handling, hygiene and wellness, medical beds, pressure injury prevention, VTE prevention, diagnostics and disinfection. We were founded in 1957 in Eslov by Arne Johansson, and that's where the name Arjo comes from. We had in 2025 SEK 11 billion in turnover, and we have approximately 7,000 employees globally. Our sales arms reach more than 100 countries around the world. So a summary of the Q2 reports. So really happy about the growth. Very solid organic growth of 4.7%, still pressure on the margin. This comes from cost increases. It also comes from some price pressure in certain segments of the market. But all-in-all, we believe that the quarter was good. Global sales was really leading the way, and we'll come back to that on the next slide. What is important to highlight is that there is an increasing demand for our sustainable solutions. And today, this quarter, ReNu had their all-time high sales. And ReNu is our business of taking disposables, cleaning them in a safe way and being able to use them again and not dispose of them. We have a very slight EBIT improvement. This is despite then the pressure on the margin, and this is mainly due to us being able to get some of the tariffs back this quarter. So we also have a positive development of the cash flow this month, and we have an improved cash conversion, not really according to our goals, but improvements from last year. So I will continue. Yes. Maybe I can shout out this that we have also made our strategy. I will mention that towards the end as well. But as a summary, we informed in the Q2 report that we see clear potential to improve Arjo's value generation, and we are going to share all about that in more specific numbers and terms in the Capital Markets Day on September 24. So just to shout out that North America, they continue to grow. U.S. was leading there. Canada was slightly behind last year. And Canada also came from really high numbers last year, as did also U.S. So both countries in North America really had very tough numbers to beat. So we're happy that they managed to grow. Global sales with Western Europe and the rest of the world grew by impressive 7% and Western Europe were on 6%, and it was really nice to see U.K. being back to growth. And by that, I hand over to Christofer Carlsson to go into the financial performance.

Thank you, Andreas. And as Andreas stated, we had a solid growth in the quarter. Our gross margin came in somewhat lower than last year. Looking at the drivers. During the quarter, we experienced an unfavorable sales mix driven by strong growth in global sales and relatively lower growth in North America. Increased transportation cost and cost of materials pressured the margins in all categories. Part of the increased transportation cost is an implementation of a new transportation management system where initial implementation challenges resulted in approximately SEK 10 million of one-time transportation cost during the quarter, but this will be fading out during the third quarter. Group rental margin declined in the quarter, primarily due to weaker profitability in the U.S. rental business. During the quarter, we received an initial reimbursement of SEK 22 million related to U.S. tariffs. In addition, SEK 30 million is currently being processed with the majority expected to be reimbursed during the third quarter. The reimbursement is recognized as a reduction in cost of goods sold. Excluding the reimbursement, U.S. tariff costs were at SEK 12 million lower than in corresponding quarter last year. FX had a minor negative impact on gross margin. In absolute terms, gross profit was negatively affected by SEK 23 million year-over-year. Nevertheless, this represents a significant improvement compared with previous quarter. Gross margin was impacted by a number of factors during the quarter. But as you will see on the next slide, disciplined cost control helped offset part of that pressure. Let's move to adjusted EBIT. Next slide, please. As you can see, adjusted EBIT for the second quarter amounted to SEK 211 million compared to SEK 208 million in Q2 last year. Despite continued inflationary pressure, underlying profitability, was broadly in line with last year when adjusting for one-off effects and FX. One of the drivers was continued improvement in operating expense efficiency. The OpEx to sales ratio decreased by 1 percentage point year-over-year to 34.6% compared to 35.5% last year. Organic OpEx growth was 1.9%, which is a lower than increase reported in the first quarter. Overall, the total FX had a negative impact of SEK 12 million on adjusted EBIT during the quarter. Moving on to the adjusted EBITDA, which amounted to SEK 482 million compared to SEK 475 million last year. The adjusted EBITDA margin was 17.5%, broadly in line with last year. The EBIT margin improved to 7.6% compared with 6.5% last year. The improvement was supported by lower restructuring costs, which amounted to 0 in the quarter compared with SEK 34 million in Q2 last year. Turning from profitability to cash generation. Let's look at our working capital and operating cash flow development in the quarter. Next slide, please. Operating cash flow improved during the quarter and amounted to SEK 257 million, an increase of SEK 52 million compared with the same period last year. The improvement was driven primarily by strong operating profit, partly offset by less favorable development in working capital. Working capital changed by negative SEK 122 million compared with negative SEK 87 million last year. Following a relative soft start to the quarter and a very strong June, a large share of the receivable remained outstanding at the quarter end. The increase in inventory is mainly related to finished goods in transit intended to support sales during the second half of the year. Working capital days increased to 87 days compared with 83 days in Q2 last year. Cash conversion improved to 53.3% compared with 46.6% in the corresponding period last year. For reference, cash flow from investing activities was minus SEK 194 million compared to minus SEK 171 million in Q2 '25. The number includes an acquisition of the service business in Australia amounting to SEK 30 million. Cash flow remained solid during the quarter. And with that context, let's move on to the net debt and leverage. Next slide, please. The increase in net debt during the quarter was primarily driven by the annual dividend payment of SEK 259 million and higher investment levels. Net financial items amounted to negative SEK 49 million compared with negative SEK 48 million in Q2 last year. The improvement was mainly driven by lower interest expense. As is typical in the second quarter following the annual dividend payment, net debt-to-adjusted EBITDA increased and ended the quarter at 2.4x. Our equity ratio stood at 49.5%, slightly down from 49.8% at year-end '25. To summarize, we delivered stable profitability, improved cash generation and maintain a solid balance sheet. With that, I will hand it over to Andreas.

Thanks, Christofer. My voice is breaking up a little bit, but I hope it will be okay for those listening in. So I'm happy to announce, as we wrote in the report that we have appointed 5 regional leaders to join the management team and report to me. This is something that will help us to really strengthen the voice of the customer in all group decision-making. It's also something that will help us to improve product development. It will help us to drive a common agenda and efficiency across the group. So all of these regional managers are already part of Arjo, and they lead some of our biggest markets today, but now I'm happy that they have accepted to step up and lead our regions then. So -- and then I want to just make a small advertisement for our Capital Markets Day that will take place in Stockholm on September 24. And at that meeting, we're going to share our strategy, what it consists of, the direction Arjo's intending to take in the next few years, and we're also going to validate and put concrete numbers on what shareholders can expect from Arjo in the coming years, the value creation behind and the timing of it. So this is something for everybody to look forward to. We have a strategy approved by the Board. We have activated approximately 90 leaders around this, and we are now then calculating the effects and the timing of the strategy. So I'm really looking forward to share all of that with you in September.

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie.

Two questions. First, could you maybe talk a little bit about how you view the underlying demand situation in North America and globally? And then I would like to dig in a little bit more into the reason here for the margin pressure or the gross margin pressure despite strong organic sales growth. So is it possible maybe to split the impact you see here from the negative mix and the underlying transportation and purchasing costs and also how you viewed the potential to offset this more near term?

Okay. Christofer, would you like to take that?

Yes. When it comes to underlying demand, we see a strong demand in North America. The growth in the quarter is, of course, a little bit held back due to strong comparison numbers. And we know that we have a strong pipeline for the second half year. And also in the global sales market and European markets and Rest of World, where we also see a good demand and healthy demand in the markets. When it comes to margin pressure, yes, there is an unfavorable mix due to both from a product and country mix, so to say. We have medical beds increase is part of the growth, especially in Europe and the U.K. But we also have a weight against products group in Rest of World and in Europe, that is lower margin compared to what we have in the North America countries. So when North America is not growing so fast, their share of the total is then declining and that will have an effect. We also have some kind of installation projects in Europe that is typically lower margin for the first time, and then that will drive consumable and service business going forward. So that is also part of the product mix explanation.

Could I ask -- would you say that this mix effect is a bigger impact in the quarter than higher material costs and higher transportation costs?

I would say transportation cost is actually higher.

The next question comes from Sten Gustafsson from ABG Sundal Collier.

Yes. I would like to follow up there on Kristofer's question on the gross margin. Could you potentially share with us how much of sales is related to transportation cost. That would be my first question. And also, if you look on a sort of country-by-country basis, do you see any pressure on the gross margin in any market? Or is this purely mix? That would be my second question.

So I mean, the price pressure, I mean, there is -- has been for quite some time, and we've reported on this, that in the DVT business, there has been a clear price pressure that is eroding our margins. And that is -- we don't think that is going to jump back. That's the market situation. And then Christofer, I'm not sure if we have a number on the total transport cost.

No, we have to get back on that one.

So yes, I understand the DVT business, but is that still eroding? And my question was more like if you look at the U.S., for example, would you say that the underlying margin is under pressure? Or is it flattish?

Right now, we believe it's -- yes, depending on the mix, it is -- it plays a big role. But we don't see eroding margin more than the price pressure in certain segments, if I say like that. Christofer, can we add any flavor to that or...

No. Of course, it depends a little bit on what product categories we are talking about. We have a healthy development in certain categories and for some other, there are more pressure. And as I mentioned also that the rental business in the U.S. is under pressure from a profitability standpoint.

Okay. If I may squeeze in a last question here and it's related to Canada. If you maybe you could remind me about the how the comps will look like in the second half? I believe they become easier. Is that correct?

Yes. They were a little bit softer second half, still growth. I can come back with the exact numbers there, but they had a tremendous first half last year.

The next question comes from Filip Wetterqvist from SB1 Markets.

Just one follow-up on the gross margin and transportation costs. Given that oil prices have come down slightly in Q3 compared to Q2, should we then expect some positive effect quarter-over-quarter on transportation costs? Or how long does it take before these swings impact the P&L?

I mean, we usually don't forecast anything. And right now, I think it's hard to say that the oil price is coming down in the quarter. There are attacks on Iran going on as we speak. So of course, if the oil price is going down and it hits the pumps, our transport cost will also go down. So -- but it's -- we will not do any forecast on that at this moment.

Yes. But so you don't have like hedged any freight cost or so? So it affects you directly if the oil price jumps or goes down, so to say?