Release Date: October 17, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Arjo AB (ARRJF, Financial) reported a 1.5% organic growth in Q3 2024, despite lower-than-expected capital sales in Europe and some other markets.
- The company saw a solid order intake on capital and a good development of its service and rental business, providing stability for future quarters.
- Gross margin improved to 42% in Q3 2024, up from 41.4% in Q3 2023, despite headwinds from lower capital sales and currency effects.
- Operational cash flow for Q3 was SEK437 million, leading to a cash conversion of 102%, aligning with the full-year target of at least 80%.
- North America showed positive growth, with a 2.4% organic increase in Q3, driven by strong performance in Canada and improving trends in the US.
Negative Points
- Capital sales in Europe were lower than expected due to political uncertainty, impacting overall growth.
- Significant negative currency effects contributed to a decrease in adjusted EBIT to SEK164 million from SEK186 million in Q3 2023.
- The company faces continued weaker capital market conditions in Europe, with low visibility expected to persist for several quarters.
- DVT (Deep Vein Thrombosis) continues to be a drag on organic growth due to price pressure and customer losses.
- China experienced an almost dried-up capital project market in Q3, with low activity levels expected to continue.
Q & A Highlights
Q: Do you anticipate a bounceback in capital goods sales in Western Europe for Q4, or will these markets remain weak?
A: We do not foresee a bounceback in Q4 based on current information. We expect to navigate lower visibility and decision-making speed in Western Europe and some other markets for several quarters. The interest to invest is present, but fund allocation from state budgets is needed.
Q: With lower utilization and product mix, can you still drive expected improvements in gross margin for Q4?
A: Considering negative transaction effects, lower capital volumes, and time needed to adjust our cost base, we expect sequential improvement from Q2 to Q4 but not an improvement in gross margin compared to last year's Q4.
Q: How long can you sustain service strength without improving capital sales momentum?
A: We expect service growth to continue despite lower capital sales. There's significant underpenetration in our service business, and countries not spending on capital tend to service equipment more, which supports service growth.
Q: What visibility do you have to achieve at least 3% growth in Q4 to meet financial targets?
A: We have enough visibility and are well-informed to say we are comfortable achieving 3% to 5% growth in Q4. We have good traction in service, rental, and the US market, despite weaknesses in European capital sales.
Q: Can you elaborate on cost reduction initiatives and their impact?
A: We are targeting OpEx in areas with lower capital sales, ensuring not to cut where short-term trend changes are possible. While exact quantification isn't available, these initiatives will help improve cost of goods sold and OpEx trends, setting up for increased profitability from 2025 onwards.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
