Now I will hand the conference over to Interim President and CEO Niclas Sjöswärd and Interim CFO Christofer Carlsson. Please go ahead.
Thank you, and good morning to everyone, and welcome to Arjo AB's Q2 2025 earnings call. With me here today, I have, as you heard, Christofer Carlsson, our Interim CFO. We will give you some details on the Q2 report that we released an hour ago. The agenda looks as usual and includes a summary of activities and results from Q2, the balance sheet items, and the outlook for 2025 before we open up for questions. We intend, as always, to keep this call to an hour and finish no later than 9:00 A.M. CET. Next slide, please. We closed the quarter in a solid way and could see how demand continued in the quarter, with organic net sales growth in line with our targeted range. We had continued strong momentum for our service and rental business, and now also supported by growth in our capital sales.
Our North America business is the growth engine in the Q2, while global sales are held back due to difficult comparisons, and we closed the quarter with 3.0% organic net sales growth. In addition, as a positive sign for the second half of 2025, this net sales development is supported by a significantly stronger order intake growth. In our largest market, the U.S., we continue to see a positive development, and this is related to a combination of our internal efforts to create a more focused U.S. sales organization, as well as the financial situation and staff shortages improving among our customers. In global sales, we had difficult comparisons with last year, with a strong Q2. Last year, we still see several countries in Europe with improving demand. For example, France, Germany, and Italy had good growth, but the United Kingdom couldn't match last year's sales levels.
Our gross margin came in at 43.4%, almost at par with last year's 43.6%. We continue to get support from lower material costs and price adjustments, while these improvements are offset by currency and tariff headwinds. For the rest of 2025, we will continue to drive efficiency focus throughout the value chain based on the plans that we have put in place, for example, within the supply chain. Our focus on price adjustments will obviously also remain to secure compensation for salary inflation and U.S. tariffs. On the OpEx side, we have been able to slow down the cost increase versus Q1, and our efforts to increase cost efficiency are now showing effect. Adjusted EBITDA for the quarter was SEK 475 million versus SEK 496 million in Q2 last year, a reduction coming from currency and U.S. tariff headwinds. Neutralized for currency and U.S.
tariff headwinds, the adjusted EBITDA would have increased, showing a stable underlying business. Our operational cash flow came in at SEK 205 million, leading to a cash conversion of 47% for the quarter. For those knowing our business, you know that the first half of the year is, from a seasonality perspective, weaker in cash flow and cash conversion, and it will improve during the second half of the year. In summary, we are delivering a stable second quarter of 2025. Our underlying business develops in a solid way, and we can see how our business model with capital, rental, and service is helping us to deliver stability in growth and underlying earnings trend. In addition to this, we see several important markets showing good signs of increased activity level and healthy demand for our products and solutions.
We now have three quarters in a row with higher order intake than sales growth, and we are having a strong order book for the quarters to come, making me believe in a stronger second half of 2025. Next slide, please. Our North America business grew double-digit organically in the quarter, with the U.S. as the main growth engine. In our largest market, the U.S., we have a continued strong and positive development also in this quarter. The double-digit growth in the U.S. in the quarter was seen across our product categories. Rental and service continue to drive growth and are developing well. On the capital side, demand is becoming stronger for every quarter, and it's mainly driven by our important patient handling product category, where we also see very positive reception for our newly launched Maxi Move 5 patient floor lift.
We had a continued strong development in Canada, where it's especially our long-term care business that is driving the growth, also with good profitability levels. Canada is now having more than 20 consecutive quarters of growth. Over to Western Europe and the rest of the world that make up our global sales region. In Q2, this region declined net sales with -1.8% due to difficult comparisons from last year's Q2, combined with a weaker-than-expected market in the United Kingdom. In Western Europe, the comparison to last year is tough, and we decline -2.4% versus last year's Q2. In addition to the difficult comparison, the United Kingdom is weaker than expected, and it is related to delays on larger orders, and we will need to focus on a catch-up in the second half.
Countries with good demand and strong organic net sales growth in the quarter were France, Germany, Italy, and Spain. Our service and rental business in Western Europe continued to develop well in the quarter. Overall, we see good signs for the second half of the year in this region due to strong order intake and a healthy order book. Our business in the rest of the world had an organic net sales growth of +0.5% in the quarter, with a mixed picture across the markets. India, Singapore, and the United Arab Emirates all grew double-digit in the quarter, where India stands out with an impressive 40% growth. We see good signs for the second half of the year in this region as well due to strong order intake and a healthy order book. Next slide, please. Our gross margin came in at 43.4%, almost at par with last year's 43.6%.
We continue to get support from lower material costs and price adjustments, while these improvements are offset by currency and U.S. tariff headwinds. Neutralizing for currency and U.S. tariff headwinds' impact, our underlying margin is improving versus last year. We are, as before, working hard to mitigate the headwinds with continued long-term efficiency gains throughout the value chain, including solid focus on continued supply chain efficiencies. We will also continue to work on price adjustments as one part of the puzzle to mitigate U.S. tariffs and other external cost increases. Next slide, please. Adjusted EBIT in Q2 declined versus last year only due to currency and U.S. tariff headwinds. Neutralized for currency and U.S. tariff impact, EBIT would have been improving, showing a stable and improving underlying business.
On the OpEx side, we have been able to slow down the cost increase versus Q1, and our actions to mitigate the cost increase in Q1 are showing effect. I am happy to see the response from the organization after Q1, with now a much sharper focus on cost improvements in Q2, and I believe we have set the tone for the rest of the year to manage OpEx in a good way. We had a negative effect from the evaluation of AR and AP of SEK 2 million in the quarter, booked under other expenses. This was -SEK 5 million in the same quarter last year. Adjusted EBITDA for the quarter was, as I said, SEK 475 million versus the SEK 496 million in Q2 last year, a reduction coming from currency and U.S. tariff headwinds. As I said, neutralized for currency and U.S.
tariff headwinds, the adjusted EBITDA would have increased, also here showing the stable underlying business. Restructuring costs came in at -SEK 34 million in the quarter. It's related to our change of go-to-market approach in China, as well as ongoing improvements in our global sales structure to improve the cost situation for the future. Next slide, please. Here I hand over to our Interim CFO, Christofer Carlsson.
Thank you, Niclas. Operating cash flow improved slightly compared to Q1 2025, but was SEK 140 million lower year-over-year, primarily due to buildup in working capital and lower EBIT. The increase in inventory reflects strong order book performance, upcoming rental investments, and newly launched products. These new products temporarily raise inventory levels before older ones are phased out. Additionally, we had a temporary cash flow impact of SEK 50 million due to a VAT settlement, which we expect to recover in Q3. Excluding this, receivable collection would be in line with last year. As a result of the working capital buildup, working capital days increased to 83, up from 81 in Q1 2025. Combined with the lower profitability, this led to an operating cash flow of SEK 205 million, down from SEK 344 million in Q2 2024. Consequently, cash conversion was 46.7% compared to 69.7% last year.
Adjusted for the VAT settlement, cash conversion would have been about 59%. That said, cash flow typically strengthens in the second half of the year, and we remain on track to reach our full-year target of 80%. For reference, cash flow from investing activities was SEK 171 million compared to SEK 112 million last year. The increase is mainly due to SEK 22 million higher investment in the rental fleet, as well as a new office in France and a distribution center in Sydney, Australia. Next slide, please. The increase in net debt this quarter is mainly due to lower operating cash flow and higher rental investment and the SEK 259 million dividend payout to shareholders. Our financial net improved to SEK 48 million, SEK 17 million improvement versus Q2 2024, and it's driven by lower interest rates. Despite the seasonal impact, our cash position remains strong.
Net debt to adjusted EBITDA was 2.3, slightly down from 2.4 in Q2 2024. Excluding the VAT settlement, it would have been 2.2, which is then within the normal seasonal variation. Our equity ratio stood at 48.7%, down from 51.2% in Q1 2025, mainly due to the dividend and some FX effects. With that, I hand it back to you, Niclas.
Next slide, please. Thank you, Christofer. Our outlook for 2025 is that the organic net sales growth will be well within the group's target interval of 3% to 5%. Next slide, please. With that, I would like to summarize today's telco. We have continued healthy demand for our products and solutions, with net sales growth in line with target, higher order intake growth, and further strengthened order book. The U.S. market and our important patient handling category are both standing out positively in Q2, which is very much in line with our long-term agenda. We see clearly that our cost efficiency measures are paying off, and our focus in this area will continue moving forward, of course.
Overall, a positive quarter for us, and despite the current macro environment and related uncertainty, our strengthened order book makes us confident that we will be able to deliver a strong second half of the year. With that, we can open up for questions. Moderator, please go ahead.
If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Christopher Lilleberg from DNB Carnegie. Please go ahead.
Thank you. Three questions. First, good to see the lower costs here in the quarter, so I wonder about the possibility to lower them further for the remainder of the year and whether it's maybe even possible now to keep operating costs flat as % of sales for the full year. Second question is if you could maybe quantify more in any way the strong order growth you talk about and the backlog. Finally, third question, I wonder about the reason here for the weaker UK sales and your visibility for that improving in the second half of the year. Thank you.
Okay, thank you, Christofer. On the operating expenses, we will for sure continue our effort. I think we have started a very good process within the company now. Of course, the focus continues. To say exactly the sort of increase year-over-year is probably difficult. I think the organic OpEx increase year-over-year in Q2 at 2.1% is slightly better than I expected, just as a reference point. We have an ambition to be at least flat on OpEx to sales for the full year. We will continue to fight for that for sure. On the order book, we don't report order growth, as you know, but I used the word significantly stronger. I hope you can see that it is something we would like to highlight for you, which is why we push it here in the communication.
UK sales came in weaker than we expected as well. We do have a good explanation in terms of some larger orders that were pushed into Q3, maybe due to our impression that it's a little bit longer lead times and decision processes with the NHS. You probably know that they go through a quite big reorg right now, so it could be connected to that. The orders are there. It's more a decision point than being able to deliver on them. Actually, also...
The large orders that were pushed into the third quarter, if they had been delivered in the second quarter as expected, what would have been the impact on overall Western Europe sales growth? Would that have been positive then, or...
No, I cannot say that. Just one more comment. What I want to try to say is that those two are important, the bigger orders, and that would help the situation, absolutely. We also see a little bit slower rental in the UK in the quarter. There are two things I would say explaining this. On the bigger orders, I see catch-up second half. Rental, we need to analyze a little bit more.
Great, thank you.
The next question comes from Stan Gustafson from ABG Sundal Collier. Please go ahead.
Yes, thank you. Good morning. First, on the tariffs, what do you hear? What's the latest there? Maybe on Canada and the Dominican Republic specifically, are you paying any tariffs on shipments to the U.S. from those two countries, or are they exempt from tariffs? That would be my first question. Maybe on the gross margin here, based on the backlog you have now, which sounds promising, how do you see the gross margin develop based on the backlog for the second half? That would be my second question.
Yeah, okay. Thank you, Stan. On the tariffs, your specific questions there, we can say that for Canada, it's still exempted. We don't pay tariffs from Canada factoring into the U.S. Lately today in the news media, we see things happening all the time. For Q2, no tariffs and no decisions on tariffs going on either for Canada. Let's see what happens. Dominican Republic, we do pay 10% of the base tariff in Q2. We still have hopes that maybe the free trade zone we are in could be exempt, but that's not anything we have indication of today.
Excellent, thank you.
On the gross margin, yeah, we are happy with the order book post the volume and that it's patient handling driven. I think I will stop there, actually, Stan, because I cannot guide exactly on the gross margin development for the second half, as you know. We are happy with the order book.
Okay, thank you.
The next question comes from Mattias Vadsten from SEB. Please go ahead.
Good morning. Thanks for taking my question. The first one is just coming back to the order book. My line broke a little bit there. If you provided any order growth figure for Q2, and also maybe if you could elaborate a little bit on how much bigger the order book is now versus a year ago. If you could share some thoughts on the anticipated organic growth for Q3, that would be helpful as well. That's the first one, I will come back.
Okay. No, your line didn't break up. I didn't give any indication on the size of the order book. I only said that I used the word significantly bigger than last year, same time, and significantly higher order intake growth than sales growth. I hope you can use that as a reference point. We are happy with the order intake growth. Organic growth for Q3, you know that I will not give you a number on that, but you know that it was a weak quarter last year. As I said, we have built our order book for three quarters, so part of that should be delivered in Q3. We are comfortable with Q3 growth.
Good. If you could just elaborate on what kind of mix you anticipate, geographical and by product, when it comes to the gross margin in the second half of this year.
When it comes to the geo mix, we will see that North America continues on the track that you see first half, so it's very positive. What we also are very happy to see is that in the order book, we also are seeing a very good increase from global sales. Even if global sales was declining slightly in net sales growth in Q2, second half looks better, and that is very promising. From a product category perspective, it is patient handling that is driving us for sure, but also other categories are growing. We will not guide on the mixed effect here now, but it looks good.
Thanks. Lastly, when it comes to non-recurring items, they are quite high here also in Q2. What is the general outlook for those non-recurring items to be expected ahead, and any larger restructuring to be made or anything that we should know of? That's the last one. Thank you.
No, I understand that. It's the first half of this year we have unusually high restructuring, and it's from Q1, you know it was the management changes, and now in Q2, it's more about operational changes to drive future lower cost structures. It's positive from that perspective and will help us in the future. I don't see now that we would have the same level of restructuring second half. I cannot see that. Of course, if we see opportunities to do structural improvements, we will take them, of course, to shape the company good for the future. It's difficult to say that it would be the same level as first half right now.
Thank you so much.
The next question comes from Ludwig Germunder from Handelsbanken. Please go ahead.
Good morning. Ludwig Germander from Handelsbanken. Two questions, please. Firstly, with regards to the strength in North America, would you be willing to quantify the magnitude of growth in the US and whether it included any one-time benefits? My second question would be with regards to the cash conversion in the quarter. How comfortable are you for the full year and can you expand on the nature of this temporary VAT receivable in the Netherlands? Thank you.
Thank you, Ludwig. We can talk about U.S. growth in the quarter. The net sales growth in the U.S. organically was slightly higher than 12%. We are very happy to see that. There were no one-time effects there, and it's really a very good underlying business growth given that number. When it comes to the second question, I hand it over to Christofer.
Yes, a recurrent settlement in the Netherlands VAT is something that we have investigated on our own. It's nothing that comes from the authorities. We have done our own correction of historical periods, and we are estimated to get this money back in Q3 now.
Thank you, Mr. Germander. I'll take my question.
The question on the cash conversion. We have a lower level year to date than we had a year ago, but we're still aiming for 80%. It's a little bit more stretch, of course, given where we start now after the second half. We do see quite strong working capital improvements in the second half as well. We're still aiming for 80%.
Okay, perfect. Thanks so much.
The next question comes from Ludvig Lundgren from Nordea. Please go ahead.
Yes, hi, Niclas and Christofer. Two questions for me, please. First, you highlight a $10 million tariff effect from the new U.S. tariffs here in Q2, and I wonder if you can estimate whether this level is fair to extrapolate because I assume there's some inventory effect maybe holding this down here in Q2.
Yes, we believe it could be slightly higher given that we have higher volumes in the second half. We also have an impact on our inventory and a very small impact on the rental assets as well due to this tariff because we only account them and record them in the P&L when we actually have solely goods, of course. You have a tariff component in the inventory value as well.
Okay, great. Secondly, I wonder if you can specify what type of costs are included in exceptional items, thinking mainly here about the $24 million you categorize under COGS because I think that differs a bit from how you categorize the NRIC in Q1.
Yes, that is related to our changed go-to-market model in China, where we actually have taken some costs related to all the inventory and scrutinizing some of the products that we have in the inventory there.
Okay, could you specify anything about, like, should we expect to continue the work here in H2 as well, or is this done now, so to say?
Not for China. That's complete now.
Okay, great. Thank you very much.
Thank you.
Next question comes from Christopher Lilleberg from DNB Carnegie. Please go ahead.
Yeah, hi. One follow-up question on the tariffs, and what do you think are the possibilities to compensate this with price increases in the U.S.?
Yeah, I mean, we started already beginning April to drive price increases in the U.S., and we have been successful in some pockets, but that work needs to continue. It is, of course, a work to be done in a commercial balance. Of course, we don't want to lose orders to competitors due to price increases. We do it where we have real pricing power. We do it in situations where we can rewrite contracts, etc. We are a little bit sensitive, but so far we have been quite successful, and we will continue second half as well, for sure. I see a good opportunity over time to fully compensate.
That was the $10 million. Was that the net negative effect, including some price increases also?
No, that is the cost impact in the P&L.
Okay, what do you think the net effect was in the quarter?
Our price increases is just taking effect towards the end of the quarter. It's not that much in Q2. We foresee a better impact from Q3 onwards, given that price increases take some time before.
We should expect a lower net effect then for the second half of the year.
That is our ambition. As Christofer said, there will be higher volumes going into the U.S. second half. The actual tariff amount will increase, but of course, our price increases should follow the volume as well. We have good hopes to mitigate as much as possible.
Okay, thank you.
As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Okay, thank you for that, and thanks for all the good questions. We will sum it up here quickly. We are seeing a stable Q2, and as we said, we have an order book that tells us that the second half will be stronger from a net sales growth perspective. We look forward to the second half of 2025. Thank you for listening, and have a good day.