Image Credit: RiverSide Medical Supplies, http://www.rsmedic.com
On May 20th, Arcoma AB published financial results for its first quarter of 2020. These results show that sales revenue contracted during the first quarter although profitability improved. The companies overall sales revenue reached SEK 33.4m during the first quarter, compared with SEK 34.6m during Q1 2019, a decrease of approximately -4% year-on-year. EBITDA for the quarter amounted to SEK 5.0m, an increase of SEK 3.1m compared to the first quarter of 2019.
The sales contraction during the first quarter was driven by lower sales revenue from customers based across Europe and Asia, partially offset by higher sales revenue from customers in North America which grew by approximately +90% relative to Q1 2019. Europe has historically been the companies primary market and has accounted for over 50% of total company revenues. That said, the company views the North American market as its greatest potential for future growth and has a relative new OEM partnership with Canon in North America, which is anticipated to help drive higher sales from this market.
The sales revenue originating from aftermarket products and services were approximately +6% higher year-on-year which made a “strong contribution” to the first-quarter results. The decline in sales revenue within Europe and Asia was primarily due to the spread of COVID-19 and the negative impact this had on installations, sales and orders. Some customers postponed purchasing decisions.
Despite challenging market conditions, the company successfully launched its new premium platform, Precision i5, within Europe. The first orders for this system were received during March. It is anticipated that serial deliveries will begin from June along with a product launch within Asia and North America during H2 2020. Alongside this product launch, the company has also been developing another platform in collaboration with Konica Minolta.
OEM partnership with Konica Minolta
During May 2020, the company signed a 5-year supplier agreement with Konica Minolta. This supplier agreement builds upon the development agreement made between the firms during August 2019. The development agreement involves the development of two new products based upon Arcoma’s platform technology and integrating KM’s image detectors (AeroDR series) as well as software for image processing and image management. The firms are approaching the commercial launch of the first product, the AeroDR X90, and sales are anticipated to begin during H1 2020 under the Konica Minolta Europe brand. Arcoma is the product owner and legal manufacturer. This relationship is another example of Arcoma delivering against its growth strategy; to grow through partnerships, expand its product portfolio as well as establish additional sales channels.
“The collaboration with Konica Minolta and the development of their new products have worked well and we are approaching commercial launch. The new supplier agreement confirms that this is a strategic and long-term cooperation from both parties, which creates confidence for the future. We look forward to developing the collaboration and will now in 2020 support Konica Minolta’s launch of these products. We show that we can deliver on Arcoma’s strategy, grow with partners, expand the product portfolio and establish new sales channels”Mattias Rundgren, CEO of Arcoma
OEM partnership with Canon Medical Systems
Arcoma currently generates sales globally through distributors and partnerships with large OEMs, one of these being a long-standing relationship with Canon Medical Systems. From Arcoma’s perspective, this partnership helps enable the delivery of completely integrated systems to its clients predicated upon Canon’s imaging software and x-ray detectors. It also provides the company with a greater global market presence through leveraging Canon’s sales and distribution network as well as the opportunity to participate in multi-modality transactions where Arcoma can deliver on the x-ray systems component. From Canon’s perspective, the partnership has helped to strengthen its product line-up within the diagnostic x-ray segment, particularly for fixed premium solutions. For example, the Canon-branded Aceso+ platform incorporates Arcoma’s auto-positioning technology with an ergonomic design, helping toward efficient workflow and maximizing patient throughput, desirable characteristics for many customers of premium diagnostic x-ray systems. In Europe, the two companies entered into a reseller agreement allowing Canon to sell Arcoma’s premium x-rate systems across Europe with a focus on expanding into central and southern Europe. Most recently, Turkey was subsequently included within an additional distribution agreement. The firm has reported a positive impact on business volumes following this collaboration. This has led to further distribution agreements between the firms, covering North America and Asia. The firm has reported that these reseller agreements have had a positive impact on sales activity within the United States, although notes that these agreements are still “in the start-up phase”. Within the Q3 results, Jesper Söderqvist, CEO, commented: “I am very pleased with how the collaboration with Canon in the US and Canada developed during the year, although we have not yet seen the full result in sales figures. We have joint forward-looking activities that create a strong foundation for the future.” Within the Q4 results, Jesper commented: “Canon’s sales are not increasing at the rate we want, but the level of activity is high and we remain optimistic to see results in the near future”.
The new facility opened along with streamlined production
The development and production of x-ray systems have been taking place at the company’s premises in Växjö, although the company has been in the process of constructing a new bigger premise which was completed during January 2020. This new premises will provide a bigger office for staff and visitors as well as enable the further streamlining of production processes. This forms part of the companies ongoing program to reduce production costs, delivering greater profitability and returns for its shareholders. These costs reductions are expected to be fully realised by mid-2020.
Gross margin increased to 41% of sales during the first quarter, compared with 33% of sales during Q1 2019. This also translated into higher earnings as EBITDA for the quarter amounted to SEK 5.0m, an increase of SEK 3.1m compared to Q1 2019. Rolling 12-month EBITDA has now risen for the past eight quarters. The recent improvement in profitability was driven by a combination of factors, including, a shift to a higher-margin mix of business (i.e. fewer detector sales and more system sales), higher sales and margins from aftermarket business as well as reduced production costs due to efficiencies associated with the new production facility.
The impact of COVID-19
During the first quarter as well as going into the second quarter, the company maintained a “good” production rate, although noted that “we are now seeing some slowdown in demand, therefore, we have ensured that we can respond to a period of lower sales”. The company has taken a number of mitigating actions in order to strengthen its cash and liquidity position in the event that the impact of COVID-19 is more severe than expected. This includes the following:
- All consulting agreements have been cancelled so the optionality of reducing costs is available from mid-April onwards.
- All non-critical costs have been stopped.
- Extended payment terms with many key suppliers have been agreed along with the potential for consignment stock in order to free up working capital.
- Introducing reduced working hours for employees
- The companies credit was increased to SEK 4.5 million at the end of March.
- The option of utilising the Swedish government’s crisis package along with borrowing money through the tax account also remain possibilities.
The outlook for the remainder of 2020
There is still considerable uncertainty about how the global market will develop in the coming months and therefore it remains difficult to foresee how the companies sales will be affected for the remainder of the year. A key dependency is when its partners and distributors can gain access to hospitals again in order to resume with planned installations. In the long term, the company does not foresee that the demand for its products and services will be adversely affected.
Organization & Group structure
As of the reporting date, the Group consists of the parent company Arcoma AB and two wholly-owned subsidiaries, Arcoma Incentive AB and Arcoma APAC Ltd (HK). The operations of Arcoma APAC Ltd consist mainly of sales and service. Development and production of X-ray systems take place at the parent company’s premises in Växjö. Arcoma Incentive handles options. During the quarter, the Group had a total of 30 employees.