Image Credit: RiverSide Medical Supplies, http://www.rsmedic.com
On November 12th, ARCOMA AB published its financial results for Q3 2020. These results show that sales revenue contracted significantly during the third quarter following a solid start to the year. The overall sales revenue reached SEK 22.2m during the quarter, compared with SEK 30.3m during Q3 2019, a decrease of approximately -30% year-on-year. This took cumulative 2020 sales to SEK 87.2m, compared with SEK 98.8m during 2019, a decrease of approximately -12% year-on-year. Although quarterly revenues have been lower throughout 2020, this is in comparison to explosive sales growth during 2019 which peaked to almost +40% (on the trailing 12-month basis) at the start of 2019. Cumulative 2020 sales remain approximately +2% higher relative to the same period during 2018.
The sales contraction during the quarter was driven primarily by the Coronavirus pandemic and the negative impact this had on installations, sales and orders. From a geographical perspective, sales were lower from customers based in Europe as healthcare providers postponed tenders and capital investment decisions. Sales from customers based in North America and Asia were higher relative to Q3 2019, although insufficient to offset the declines from Europe. Sales revenue originating from aftermarket products and services contributed significantly to the total sales during the quarter which also contributed toward strong gross margins.
New CEO
During April-20 the company announced that Sanna Rydberg will be appointed as the new CEO. She joined as CEO during September-20 and this was her first quarterly earnings report as CEO.
Launch of the Precision i5
Despite challenging market conditions, the company successfully launched its new premium platform, Precision i5, within the European market. The company reported it’s first order during March-20 from its Swedish distributor, Mediel AB. Within the Q3 report, Sanna Rydberg commented: “several systems have now been delivered to the customer and we are happy and proud of the positive feedback our system has received, high user-friendliness and improved patient experience are some of the comments” [translated from Swedish].
OEM partnership with Konica Minolta
During May-20, 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-19. 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 in the coming quarters under the Konica Minolta Europe brand. Arcoma is the product owner and legal manufacturer. This partnership 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.
OEM partnership with Canon Medical Systems
Arcoma currently generates sales globally through distributors and partnerships with OEMs, one of these being a long-standing relationship with Canon Medical Systems. From Arcoma’s perspective, this partnership helps enable the delivery of 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. In Europe, the two companies entered into a reseller agreement allowing Canon to sell Arcoma’s premium x-ray systems across Europe with a focus on expanding into central and southern Europe. 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. Within the Q3 report, Sanna Rydberg commented: “work is now in full swing together with Canon to soon launch the system in the North American market as well. We work intensively and focused on offering our partners virtual product demonstrations and other solutions to ensure a successful US launch. We have high expectations but at the same time, great respect for challenges linked to the pandemic” [translated from Swedish].
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 provide a bigger office for staff and visitors as well as enabling the further streamlining of production processes. This forms part of the companies ongoing program to reduce production costs, delivering greater profitability for its shareholders.
Profitability development
Despite significantly lower sales during the quarter, underlying gross margins improved and cumulative profitability remains higher for the year. The gross margin for the quarter was 46%, up from 42%. The gross margin was higher in the quarter, partly due to the product mix and the quarter’s strong aftermarket sales which accounted for a high share of total sales. Operating expenses, excluding depreciation, decreased by 26% in the quarter, and 11% during the year. EBITDA up to and including September shows an increase of 16.2% compared with last year. The company attributes this to good cost control, reduced personnel costs and streamlining of production.
The outlook for the remainder of 2020 and start of 2021
The coronavirus pandemic continues to elevate uncertainty around sales. During the quarter, sales from Europe were significantly negatively impacted by the pandemic. On the other hand, sales from North America and Asia remained stable and the company has been able to maintain its production operations. This is, in part, due to implementing pubic health safety measures as well as having a resilient component supply chain in order to continue to deliver against orders. For the coming fourth quarter of 2020 and the first quarter of 2021, there continues to be increased uncertainty around sales, particularly as we are observing an increase in infection levels. That being said, Sanna Rydberg has a positive outlook for the coming quarter and writes:
“As the new CEO of Arcoma, I look forward to continuing the work with our organization according to our strategy to develop long-term partnerships, conduct innovative product development and increase our customer focus. We are now one bit into quarter four and can see some recovery in the market which is positive. We have a continued ambitious R&D program, which strengthens our position as an innovative supplier of X-ray systems. The partnership and product development together with Konica Minolta continues and we have an optimistic view of the future. I would like to thank everyone in the organization for their great commitment during the third quarter.” [translated from Swedish].
Group structure
As of the reporting date, the Group consists of the parent company Arcoma AB and the two wholly owned subsidiaries Arcoma Incentive AB and Arcoma APAC Ltd (HK). The operations of Arcoma APAC Ltd mainly consist of sales and service. Development and production of X-ray systems takes place at the parent company’s premises in Växjö. Arcoma Incentive handles employee stock options. During the quarter, the Group had a total of 28 (29) employees, of which 28 (29) at the parent company in Växjö and 0 (0) at the subsidiary in Hong Kong. Of the employees, 7 (5) were women and 21 (24) men.
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