Arjo AB (publ)

STO:ARJO B

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Arjo Q1 2020 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joacim Lindoff, CEO and President of Arjo. Please go ahead, sir.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, and hello to everyone, and welcome to this Q1 2020 call for Arjo. Thank you all for dialing in. And I will, together with our new CFO, Daniel Fäldt, take you through the Q1 report that we released at 7:00 this morning. We'll start by giving you a business update for the quarter with some highlights from the business, but as you would expect, quite a lot of time will also be spent on the current situation. Daniel will then guide you through the currency and balance sheet and after some words on the outlook and finish off with a short summary, and I'll then open up for questions. And as always, we aim at keeping this call to an hour and try to finish no later than at 9:00. So let's start with a business update. And first of all, I would like to start off by expressing my gratitude and thanks to our team across the globe. They are doing a fantastic job in supporting health care partners during this current crisis and allowing our partners to take the best possible care of their patients. It feels good in many areas to be a part of the solution to this crisis, and we put very high focus on continuing this work in a safe and stable way for our employees. We had a strong start to the year and the first quarter of 2020 that has many sides to it. Firstly, we see a stable period in January, February with normal business where we continue to perform very well on more or less all our activities with only minor disturbance from the current corona pandemic. The situation then gradually changed during the month of March with the spread of the epidemic leading to severe lockdowns in almost all of our main markets as an effect. This change in dynamic then started to fuel a high demand for medical beds, rental and in the latter part of the quarter, also therapeutic mattresses, while the limited access to health care facilities meant declines on our business not fully related to fix the dynamic problem here now and that requires consultative sales and installation. Categories like Patient Handling, hygiene and service has mainly, in the last parts of March, seen notable declines in net sales due to this. And given cancellations of elective surgery, our DVT category started to see significantly lower demand in the last days of the quarter as well. It is very uncertain about the situation in short term where we focus as much as we possibly can on supporting our customers and their patients and obviously also focused with highest priority on the well-being of our colleagues around the globe. However, under this unprecedented situation, we managed to perform our best Q1 ever with a net sales growth of 3.4% organically. Given the start in January and February, I see this as a very positive sign, and that our business is well fit for purpose under normal market conditions. The smaller ups and downs in mid to end March did not have major impact on our overall results, and the quarter should absolutely be seen as a good example of what Arjo can perform under normal market conditions going forward on all lines of the P&L.North America continues to perform very well with a growth of 6.9% in the quarter. The development in the U.S. continues well with a growth of 9% in Q1. In Canada, the solid performance continues, and compared to a very strong Q1 in 2019, we have an on par development. Western Europe reports an organic growth of 2.1% for the quarter where U.K. posted very strong performance with 7% organic growth. Not only do we see good effects on profitability from the implemented restructuring program in 2019 in U.K., but this also shows that we are well prepared with a new organizational setup to address an increased demand. Our Continental Europe countries sees a slight increase in organic growth for the quarter. After a positive start to the quarter in January and February, we had visible negative effects mainly on our service business but also on categories requiring installation like Patient Handling. Despite lower Rental volumes in the quarter in Continental Europe due to the stop of elective surgeries in many countries where they were awaiting expected high inflow of COVID-19 cases, which now only came very much in the end of the quarter, Rental margins actually saw an uptick, thanks to the activities that we have initiated. Rest of the World saw organic net sales decline in the quarter of minus 1.9%. This decline is mainly due to the delayed projects or delayed projects in Australia and Eastern Europe as an effect of the corona uncertainty and also direct effects in India of the country-wide shutdown that they are experiencing. Other markets like South Africa and Latin America performed very well compared to last year, and the buildup in this region goes according to previous plans. All in all, a stable quarter with good, profitable growth, supported by a good order intake. We exit the quarter with a better backlog for invoicing in the current year where timing, obviously, depends on how the situation develops. It is good to see a clear trend that our underlying core activities are well positioned for further positive development once the market stabilizes. The gross margin was 45.9% in the quarter, which should be compared with last year's 44.4%. Please note that a change of reporting regarding so-called GPO fees has been reflected in both years and obviously also when comparing organic net sales growth, making all comparisons like-for-like year-over-year. I am very pleased with the work done throughout the organization on the number of action plans put in place during 2019 to get additional focus on profitable growth. I am especially pleased with the outcome of the 2 larger restructuring programs in U.S. and U.K. that both delivers above plan. Rental continues to see good improvement on our core business, and it's obviously also helped by the increased demand for our Critical Care solutions in U.S. in the very back-end of the quarter. We do have a slight negative product mix as we saw a smaller decline on Patient Handling and a smaller uptick on medical beds in the quarter. Patient Handling started off very well in January, February with growth above plan but fell back in March due to the effects of us not being able to access health care facilities for consultative sales or installation. The same happened with service where very low accessibility in March drove lower sales mainly on spare parts. On the positive side, we started to see an uptick on order intake and sales of therapeutic mattresses for pressure-injury prevention, and this category has above-average gross margins. Currency had a negative effect of approximately 30 basis points to gross margin in the quarter. On transaction effect, we see a negative minus SEK 2 million for the quarter and also an unfavorable translation effect that have had further negative impact of around 20 basis points. So all in all, a minus 30 basis point to gross margin. It's not much, but it is an additional indicator that we are doing the right things on our core business. We had continued good cost control in the quarter, and OpEx relative to net sales continues to decline in a like-for-like comparison, well aligned with our plans. The quarter is affected by a change to our cost phasing in the U.S. where approximately SEK 10 million was accounted for in Q1 that previously -- in previous years, has been spread over the full year. We also made a request to change on how we address our so-called GPO fees that previously were booked as reduction of sales. This will now, starting from Q1, be booked as selling costs, adding approximately SEK 15 million to the comparison for the quarter. Currencies affected OpEx with minus SEK 23 million, and we, therefore, saw an increase of 1.5% organically on OpEx during the quarter if we compare it like-for-like. EBITDA before restructuring increased with 7.8% to SEK 445 million. EBIT before restructuring increased by more than 20% to SEK 203 million, well aligned with our plans. The restructuring cost of SEK 37 million is related to the large restructuring to our European setup that we announced in Q4 of 2019. The program that estimated -- has an estimated cost of SEK 75 million and will generate approximately SEK 50 million in yearly savings. The program is running well, and we expect some additional savings in this year versus previous communication. Cash conversion in the quarter amounts to 70.1%, significantly better than the 43.6% from the same period last year. Our high focus on working capital continues to give results, and we feel comfortable also during the current situation with our plans. We're now putting additional focus on our accounts receivable collection to ensure full compliance, and together with good plans for inventory, we expect a good development of working capital also during 2020 and beyond. Summing up this part. The corona epidemic is short term, putting additional focus on being a part of the solution to this crisis, supporting health care systems globally. We will do everything possible to support the short-term increased demand for medical beds, therapeutic mattresses and rental, while also, short term, having to adapt to a lower demand in mainly Patient Handling, hygiene, DVT and the service. We see a solid first quarter of 2020 with only small effects of corona crisis. The main part of the quarter shows that we execute well on our initiated plans and that we can -- and we have shown what can be expected of Arjo under normal market conditions going forward. Moving over to some details on North America. In North America, we continue to see good and profitable growth above our current business plan. The region saw growth of 6.9% organically in the quarter with U.S. up 9%. This growth comes from good performance in many areas, but especially our profitable Patient Handling continues to develop well in the quarter. In our Rental business, we continued the good growth on core rental. And as an effect of the pandemic, we saw a significant uptick of Critical Care units in use in the very last days of March, adding to the profitable net sales development. In the back end of March, we, however, started to see some signs of the shutdown effects for our Patient Handling and service business. And also our DVT business started to see decline in the end of March due to cancellations of elective surgery throughout the U.S. On the positive side, we started to see an uptick in demand for high-end medical beds versus forecast. Please note that the delayed orders from Q4 of 2019 have all been invoiced in this quarter, but that we have seen some slippage of our backlog due to the described situation in the back end of this quarter as well. Canada continued their solid performance and finished on par with a very strong 2019 Q1 in terms of organic net sales. Profitability continued to improve, mainly due to further improved Rental execution. The corona pandemic is, short term, driving a slightly changed focus where we will do our utmost to support our U.S. and Canadian customers to get through this crisis. But Q1 is a stable sign that we continue to perform on or above our U.S. business plan. We have gained significant pace in especially U.S. during Q1, proving that we will be well positioned to continue a profitable growth journey when the current situation has stabilized. Moving over to Western Europe. And Western Europe saw an organic growth with 2.1% in the quarter, mainly driven by really good performance in U.K., where we saw a 7% organic growth. It is very pleasing to see how well the organization has implemented the restructuring program from 2019, making sure that this improved growth also comes with good improvement on profitability and continued ability to handle increased demands. As for all major markets, U.K. started to see notable negative effects on hygiene, service and DVT in March with increased demand for medical beds and pressure injury prevention mattresses for short-term delivery. Rental also sees a slight uptick with good recovery in margins. The markets in Western Europe outside of U.K. have seen a slight increase versus Q1 2019 when we look at organic net sales. January and February started well on plan, especially in Patient Handling. And with the same pattern as described before, the dynamics changed starting in March due to the shutdowns and cancellations of elective surgery. Patient Handling, hygiene and service started to drop significantly due to the lack of access to facilities, whereas demand and subsequently order intake for high-end medical beds and therapeutic mattresses for short-term delivery increased. Rental has been weaker than expected in volumes as many countries postponed elective surgery to allow for the expected high inflow of COVID-19 patients that did not materialize as quickly as expected. In Western Europe, and obviously throughout the organization, we are evaluating the situation more or less on a daily basis, both in terms of lockdown, but also trying to understand how things will change when countries and systems are starting to open up. We have, in addition to the running restructuring program, taken a number of cost-saving measures for mainly Q2 and Q3. And we will also participate in some of the governmental programs available, mainly in Germany, France and U.K. and mainly around the area of service and installation workforce. Given the line of activities in Sweden, we do not foresee participation in governmental programs here. Around 250 people around Europe are on or will be put on these programs over the next 3 months, allowing us to maintain a workforce ready to start working on more or less full speed when things stabilize. Move over to Rest of the World. And in Rest of the World, we reported a decline in organic net sales of 1.9% for the quarter. The drop is mainly attributed to a slowdown in installations in Australia in March based on other health care priorities. We see project delays in Eastern Europe and effects of the country-wide shutdown in India, which is hitting our business there. We see continued good development in markets like South Africa and Latin America in the quarter. And depending on when the pandemic hit the respective parts of the region, we have the same described pattern as before, decline in Patient Handling and hygiene, service and stronger short-term demand for medical beds and therapeutic mattresses versus forecast. It is our expectation that we will continue to see a fairly volatile market than the Rest of the World until the current situation has stabilized. If we move over to profit developments and some detail there. The gross margin for the quarter was 45.9%, which is 1.5 percentage points above last year's 44.4%. And as I stated before, please note that these figures have been adjusted for the rebooking of GPO fees, allowing us to compare apples-to-apples. As I stated before, I am very pleased with the work done throughout the organization on a number of action plans put in place during 2019 to get additional focus on profitable growth. I am especially pleased with the outcome of the 2 larger restructuring programs in U.S. and U.K. that both delivers above plan. It is also good to see that the Rental continues on the trend from Q4 and sees good profitability improvement on our core business. Rental margins is obviously also helped by the increased demand for our Critical Care solutions in U.S. in the back end of the quarter. We saw a slight decline of Patient Handling and higher-than-expected sales of medical beds in the quarter, which also led to a smaller negative product mix. Patient Handling started off very well in January, February with growth above plan but fell back in March due to the effects of us not being able to access health care facilities for consultative sales or installation. The same happened with service. Very low accessibility in March meant lower sales and as said before, mainly on spare parts. The extra protection for our employees, safety procedures and extra logistic costs surrounding our support in mainly Rental and service to health care in areas affected by the epidemic has seen increased costs of around SEK 8 million to SEK 9 million in the quarter, something that we foresee will continue at least through Q2. On the positive side, we started to see an uptick on sales of therapeutic mattresses for pressure-injury prevention, and this category has above-average gross margins. However, it should be mentioned the capital sales here is only around 3% of our total turnover. Currency has had a negative effect of approximately 30 basis points to gross margin in the quarter. Again, this is not much, but as I said before, this is an additional indicator that we are doing the right things in our core business. Our good cost control continued in the quarter, and OpEx relative to net sales continues to decline in a like-for-like comparison, well aligned with our plans. The quarter is affected by a change to our cost phasing in U.S. where approximately SEK 10 million was accounted for in Q1 that, in previous years, has been spread over several months. We've also made a request to change on how we address our so-called GPO fees that previously were booked as a reduction of sales. This will now, starting from Q1, be booked as selling cost, adding approximately SEK 15 million to the comparison in the quarter on OpEx isolated. Currencies affected OpEx with a negative minus SEK 23 million, and we, therefore, saw an increased OpEx from an organic perspective with around 1.5%. EBITDA before restructuring costs increased with 7.8% to SEK 445 million. EBIT before restructuring increased by more than 20% to SEK 203 million, well aligned with our plans going forward. Restructuring cost, SEK 37 million, in the quarter is related to the larger restructuring to a European setup that we announced at the Q4 2019 call. The program that is estimated to cost SEK 75 million and generate SEK 50 million in yearly savings is running well. And as said before, we expect some additional savings in this year versus previous communication. Our financial situation is very stable, which Daniel will address more in detail later on. And our cash conversion in the quarter amounts to 70.1%, significantly better than the 43.6% for the same period last year. Our continued focus on working capital gives results, and we feel comfortable also during the current situation with our plans. In light of the current situation, we are, as said, putting additional focus on our accounts receivables collection to ensure full compliance. And together with good plans for inventory, we expect good development of working capital also in 2020 and beyond. The situation in our supply chain is, given circumstances, under control. There is a lot of extra work going into mainly our sourcing activities as there is a lot of changes on a daily basis based on the current crisis. As explained before, we've seen increased demand for mainly medical beds and therapeutic services with deliveries mainly in Q2 and beginning Q3, which we do everything we can to meet. And as we have a fairly low value-add in our 5 production sites, we are very dependent on the supplier base and their ability to ramp up quickly as these additional demands only will be there for a short term, according to what we see right now. We have so far been able to increase capacity for high-end medical beds and therapeutic mattresses, well above our original forecast for Q1 -- Q2 isolated, this while navigating local regulations for our own production sites and managing our supplier base. We expect the current situation for beds and mattresses to continue through the end of Q2 and beginning of Q3, which will obviously add to our net sales possibility versus original forecast. Please just remember that we have the large Kindred order in Q2 of 2019, which was a one-off delivery of around SEK 75 million in medical beds in Q2 of '19, which we did not plan for this year. On the other side, we see a notable decline in the short-term demand for Patient Handling, hygiene and service, which will have a significant adverse effect on Q2 and possibly short beyond. DVT will also be affected as long as elective surgery is postponed, and we follow this situation daily. The ramp-up as well as the lower volumes in areas explained are situations that we try to manage as actively as we possibly can within the existing workforce. We do not have the intention at this moment to close any factory or participate in any governmental programs on the supply chain side. With that, I hand over to you, Daniel, to take us through the details of currency effects and balance sheet items.

[Daniel Fäldt, Chief Financial Officer]

Thank you very much, Joacim. And starting off with some comments with respect to currencies. We saw a positive translation effect on the gross profit of SEK 31 million, which was partly offset by a negative impact on our operating expenses of SEK 23 million. So on aggregate, translation impact was a net positive of SEK 8 million in the quarter for us. Dominating foreign currencies for Arjo continue to be USD, euro and GBP, in that order. Looking at transaction effects. There was only a marginal impact of a negative SEK 2 million, which means that the total result in currency effects landed at a positive SEK 6 million in the quarter.Moving on to the balance sheet. The already strong balance sheet continued to improve in the quarter, and the equity ratio strengthened to 42.8% compared to 41% in the same period last year. The net debt also decreased, which contributed to an improved net debt-to-EBITDA number of 3.3 versus 3.6 in Q1 2019. Given the current challenging business environment, needless to say, we're dedicating a lot of focus to making sure our working capital and cash position remain under control and on adequate levels to operate our business. Hence, inventory and receivables increased only marginally in the quarter, while payables remained at the year-end 2019 level. And our cash position is stronger now than at the same time last year and also compared to our year-end 2019 position. The cash conversion ratio reached the set target and was also significantly higher than the number achieved in Q1 last year. In terms of cash flow, we continue to generate cash on a healthy level in the business and in line with last year before changes to our working capital. Meanwhile, we're pleased to report that development of our working capital level, as indicated earlier, was well controlled, and especially noteworthy is that the inventory buildup we saw in Q1 last year and which is partly seasonal in nature was mostly avoided this year. Subsequently, the operating cash flow improved significantly to SEK 287 million in the quarter. CapEx activities were on a similar level as previous year and came in at SEK 175 million in the quarter where the lion part relates to fixed assets in general and mainly in our Rental fleet in particular. To summarize, we can conclude that our continued and increased efforts in this challenging environment are paying off, and we fully intend to continue that work in the coming quarters. And with that, I hand over back to you, Joacim.

[Joacim Lindoff, CEO, President & Director]

Thanks, Daniel. Intended also to give you a short update on Wound Express. And on that, the following could be said. After the release of the very positive clinical evaluation results in the end of February, work has continued to prepare the randomized controlled trial to scientifically conclude the profound impact on healing venous leg ulcers as a combination therapy. The RCT is expected to be finished within the next 12 months, obviously subject to challenges induced by the current COVID-19 situation. Given how well the evaluation results have come out, we have reasons to believe that Wound Express may have several other and commercially even more profound applications areas besides healing venous leg ulcers in combination with static compression. On that basis, we have decided to initiate a number of side evaluations to assess clinical efficacy for healing types of leg and foot ulcers -- or rather, for healing other type of leg and foot ulcers and also looking at the effects of the therapy without complementing static compression treatments. Good results in these areas would obviously open up additional doors for this treatment quite rapidly. We continue to build our sales force for Wound Express in the U.K. and the Nordic countries, as communicated previously, and we're also still on plan to address sales channels in other parts of the world by end of Q3. The certification process for the U.S. is initiated and is assuming to be ready within the next 12 months. As stated previously, we are realistic when it comes to the visible short-term effects from Wound Express. We are optimistic that it will drive significant revenue and margins for us in 2022 and beyond, especially when looking at the significant potential savings that this therapy could mean to health care globally.If I move over to the outlook side and a little bit into the details here. We report a first quarter -- a solid first quarter with organic net sales up 3.4%, GP improving by 1.5 percentage points and EBIT before restructuring up with more than 20% in the quarter. We have a good, well above last year's order intake in total for the quarter, and our backlog for invoicing in the running year with current timing assumptions are higher than last year same period. Also, when we take into account that we had the large Kindred order booked as order intake in February and then subsequently invoiced in Q2 last year. It should also be noted that we, at the moment, do not lose orders or potential projects in markets hit by the pandemic. It is currently only postponements due to other priorities. But also here, we need to follow the development more or less on a daily basis, not to build unnecessary inventory. The short-term demand for -- of medical beds and therapeutic mattresses has been high, and we expect this to continue with net sales well above our forecast in Q2 and beginning of Q3. Our Rental business develops well, both on core and Critical Care units, and we foresee this, based on today's situation, to continue well into Q3. But we are in the middle of an unprecedented situation affecting society and health care systems in particular in a very dramatic way. Our access to health care facilities is currently limited and elective surgery is postponed in many countries, which affects our possibilities to consultative sales, installation and service, mainly preventive maintenance. This will negatively affect categories like Patient Handling, hygiene, DVT and service in Q2 and possibly Q3 as the best assumption. A return to normal here will be dependent on when countries are opening up and in which sequence, something that we today cannot predict with accuracy. We want to be able to give a good, transparent guidance in all sorts of situations. And an outlook should be giving guidance with some precision, which we have been very focused on doing in these first years as a listed company, and the above does not give us that opportunity. We have, therefore, taken the decision to pause our guidance for 2020, and we will try to revert to guidance as soon as possible when we have better visibility. As a final word here, we believe that Q1 is a good indicator of what to expect from Arjo in terms of progress under normal circumstances, and we look forward to see the market stabilize. In the meantime, we'll do everything possible to support health care systems globally to fight the effects of the pandemic in the safest possible way for employees. And then before we open up for questions, let me just do a very short recap of this presentation. Supporting health care providers in the best possible way during this crisis with our employees' health and safety as first priority is the main focus right now. At the same time, we can look back at a really good first quarter of 2020 where we exceed our own expectations on net sales growth, reporting a 3.4% organic growth. We have had very good traction of our core business for the most of the quarter. We also see good improvement of our gross margin level, improving 1.5 percentage points in the quarter, supported by significant improvements on our core Rental in U.S. and Europe, continuing the good trend from Q4. Our EBIT before restructuring raises with more than 20%, which is well aligned with our plans for the future. Our financial position is strong, and our cash conversion in the quarter is above 70%. We feel very comfortable that Arjo will continue to deliver on or above plan when the current situation has stabilized. We can see this in our numbers before the crisis hit, and our strategy to become a mobility outcome partner, helping health care to do more for less with clear financial and clinical outcomes is even more valid today than before. We will continue to do our utmost to support our partners, providing for their patients during this crisis, and our team across the globe are doing a fantastic job every day to support it. We are working hard to create a better understanding of the short-term scenarios, and we will inform you as soon as we have better visibility. For the mid and longer term, I very much look forward to continue to drive profitable growth and further internal efficiencies within the organization and thereby continue to grow our profitability level in a good way. With that, thank you very much for the attention, and we now open up for questions. Moderator?

[Operator]

[Operator Instructions] We'll now take our first question from Kristofer Liljeberg.

[Kristofer Liljeberg-Svensson]

2 questions. First, on the Rental business in Europe. Do you think that will pick up in the second quarter? And also, I struggle a little bit to understand why you saw the negative impact in Europe in the first quarter but not the U.S. If you could explain the reason for that? And also, when it comes to the guidance, I understand there's a lot of uncertainty, but if you have to say, do you think the risk is more on the upside or the downside?

[Joacim Lindoff, CEO, President & Director]

Thank you, Kristofer. On the Rental side and Europe, the shutdown of elective surgeries in -- that actually happened in the beginning of March, made volumes of rental in Europe go down for the first quarter. We do see that elective surgery is now picking up. If you take Germany as an example, they are now discussing on how to open up clinics instead of having all -- more or less all ICU places ready for COVID-19 patients. They are now addressing that there will be 25% of the ICUs that should be prepared for COVID-19 and allowing the rest to be open for elective surgery. So our view is that it will probably be slower in April, but that we expect to see a pickup of rental in Europe in May and June, the way we see it right now. The reason for -- or in my view, the reason that we did not see that much of an up and down in the U.S. was that they locked down their systems later than what we saw in Europe. Many of the European countries took very proactive measures in the beginning of March and just shut off everything and created pretty hard barriers around health care facilities. And that came earlier in Europe than what we saw in the U.S. that continued with normal business up -- very much up until the end of the quarter. So that's probably the reasons for that.When it comes to -- yes?

[Kristofer Liljeberg-Svensson]

So for the Rental business, it's more important what's happening in elective care rather than the strong demand we have heard about for possible beds for COVID-19 patients.

[Joacim Lindoff, CEO, President & Director]

No. No. That's the tricky thing with Europe. Because in Europe, they canceled elective surgery to prepare for the expected very high inflow of COVID-19 patients. Now as you might have read in newspapers, the inflow, again, for example, into German or Austrian hospitals has actually been lower in March than what they expected. So there has been a lot of underutilization. I've read articles around seeing that 40% to 50% of ICU beds in Germany, for example, has been standing open, waiting for the inflow of COVID-19. So in a normal case, and that's also what they predicted,, was that the elective surgery would be replaced with COVID-19 cases, which was not the case, and that meant that volumes went down in Europe. So they didn't see the trade-off between elective surgery and COVID-19 patients. That's the reason.

[Kristofer Liljeberg-Svensson]

Okay. But how is this impacting your -- the hospital bed business in the second quarter now?

[Joacim Lindoff, CEO, President & Director]

Well, the -- as I said before, we have a very good backlog for medical beds throughout Rest of the World, Western Europe and also in the U.S. for Q2. Our factory for medical beds is fully loaded, and we'll do everything we can to ship out as much as we can during Q2 and beginning of Q3. But on medical beds, what we can see now is that, that very high demand is of short-term characters. So we believe that we will be back to more normal levels of medical beds starting from -- really from the beginning or mid Q3 and onwards because the initial demand has -- will be covered by Q2, and then we foresee the -- again, the spikes that will be coming will be done and taken through our Rental business. So meaning that we will also see a -- as I said before, a return to much more normal net sales, my view, on rental from May, June and also then throughout Q3 when it comes to the European business.

[Kristofer Liljeberg-Svensson]

Okay. And what's your -- could you say anything about the risk in the guidance for the -- versus the previous guidance, I should say?

[Joacim Lindoff, CEO, President & Director]

Again, as said, it is very, very difficult to do any type of projections right now because often, that's also why we have paused the outlook for the full year. It is so much dependent on how quickly that health care facilities will open up our access to these facilities short term on service and installations of the backlog that we have, and obviously, how quickly, for example, U.S. picks up with elective surgery. And I can't give you a good forecast there, but we need to pay -- I mean if you look at Patient Handling, you look at DVT, you look at service, that is patient categories that are vital for us, and we need to get those categories going in a good way to be able to continue to perform on our plans.

[Kristofer Liljeberg-Svensson]

But if I ask the question like this, what's needed for sales growth to be higher than what you guided before? I guess you won't have the situation on the Rental business, you see?

[Joacim Lindoff, CEO, President & Director]

Again, I did not hear, Kristofer. Could you please repeat?

[Kristofer Liljeberg-Svensson]

Yes, sorry. So what needs to happen -- or what needs to be happening for sales growth to be higher than what you previously guided for?

[Joacim Lindoff, CEO, President & Director]

If we want to get higher, then we need to -- then all facilities need to reopen today, my view. I mean, we need to get back to a stable situation. And if we would be in a stable situation now and we can only, so to say, ride on the increased profitable growth on Rental, then things would look quite positive. But as it is an uncertainty around when there will be reopenings of health care facilities across the globe, it is extremely difficult for us to say that. We believe, on the Rental side, that the uptick that we have seen on both organic growth and profitability is something that we will continue to see mainly on our core rental business, and that's important to state as well. We do see an uptick of Rental gross margins, to some extent, due to the higher units in use for our Critical Care side. But the one thing that is driving the underlying gross margin development is our core rentals. We do see a good demand for core rental, which is not necessarily linked to COVID-19. And now I speak from a global perspective. We have some downs in Europe, and we have some ups in the U.S. And that is a development that we hope will continue also when the market has stabilized. But we are extremely dependent on when we can get into health care facilities, when we can start with consultative sales again, which is related very much to Patient Handling, when we can get access and do service, when we can get access and do installations of the backlog. As I mentioned before, that is higher for invoicing this year than it was at the same period last year.

[Operator]

[Operator Instructions] We'll now take our next question from Johan Unnerus from Pareto Securities.

[Johan Unnerus, Analyst]

Johan here. Yes, just a follow-up, not that we expect you to give any comment on the full year. That's pretty clear. But during this period, Q2 and well, mid Q3 that you see now and clearly what you've seen in April, is it correct to take the view that the overall effect is slightly positive than for net sales, but at least to now currently, it seems to be a bit more of a softer effect on gross margins during this COVID period? Is that correct?

[Joacim Lindoff, CEO, President & Director]

I would be very reluctant to say that it's positive on net sales, Johan. I mean we are looking at, as I said, a notable decline in possibilities to invoice or sell in Patient Handling, hygiene, DVT and service in the very back end of March, and that is something that we have continued to see going into Q2. We will see an uptick of medical beds well above our own forecast. But remember that capital sales of medical beds is only around SEK 700 million on a yearly basis for us. So it's a -- compared to Patient Handling, it's obviously not as big. We do see an uptick on Rental. Rental is 24% of our turnover, and we're doing a very good job in Rental currently. So that will obviously weigh up some parts of this. But I would be very reluctant to say that it will have a positive impact to us on Q2. Remember also that Q2 last year saw an organic uptick with 6.5%, given that we have the big Kindred order invoiced in that same quarter. So we're also comparing towards a very difficult net sales quarter.

[Johan Unnerus, Analyst]

Yes. I wasn't really thinking so much about year-on-year more than the sort of effect on -- compared with normal business, but I understand.

[Joacim Lindoff, CEO, President & Director]

Yes, yes.

[Johan Unnerus, Analyst]

And on these softer part of the business that are clearly exposed now during the COVID situation and shutdown and very few elective care procedures taking place in some countries, what can you do to compensate for the costs during this period for these exposed areas? Is there more you can do than you've done so far?

[Joacim Lindoff, CEO, President & Director]

Yes, there is some. And you will see a declining OpEx level in Q2 and Q3. For one, we are participating in, as I said, in Europe in some of the governmental programs that will assist us short term. But we've also taken a number of cost measures to get our OpEx line down with a significant amount of millions in Q2 and also in Q3 and obviously being very cautious with where we are spending our money until we have full visibility here. But as I said before, I mean we want to do these activities in a way that we can get started as soon as the market stabilizes. We are very confident that our way forward is the right one, and that is also something that we get a good proof of when looking at Q1. So for us, it's about hibernating the workforces that cannot work, I would say 110% right now and making sure that we're ready for the start-up once the market starts to stabilize again.

[Johan Unnerus, Analyst]

You can sort of protect some of the costs but still remain flexible when the situation will normalize.

[Joacim Lindoff, CEO, President & Director]

That is the intention. Our intention currently is not to have any of our colleagues having to leave the organization because of COVID-19. There could be other reasons. But because of COVID-19, we currently do not foresee to reduce workforce long term. We intend to hibernate where it's possible, both through, I would say, voluntary programs but also through governmental programs and through some cost-saving activities that we have already initiated.

[Johan Unnerus, Analyst]

Excellent. And the Wound Express initiative and innovation, what about your ability to support this with studies during the current situation? Is this uncertain? Or are you confident you can proceed as planned?

[Joacim Lindoff, CEO, President & Director]

Well, as I said, it is still -- I mean we are in preparation modus for the RCT. It will obviously be dependent on how quickly we can get access to the facilities needed or to the patients needed. And yes, today, we don't see a delay in the 12-month program that we have put in place. But if this continues much longer, there will obviously be effects to that. But there are a number of things that we can do in parallel, so I'm not worried in that area. The interesting part with Wound Express is more the outcomes really since we presented the results in end of February, and that we are now increasing the areas of -- not of the RCT but of clinical evaluation where we will be looking into other leg and foot ulcers, areas where the market potential is bigger than what we have with venous leg ulcers. So -- and the initial results there looks very promising, and that is also why we're expanding these clinical evaluation tests. So on Wound Express, I'm -- yes, I'm very much looking forward to that development.

[Johan Unnerus, Analyst]

Presumably, we will hear more about that at the Capital Market Day whenever that will take place.

[Joacim Lindoff, CEO, President & Director]

Absolutely. And the intention with the Capital Markets Day is to -- again, given the situation, is to try to have that in the back end of August or beginning of September. We will, hopefully within the next month, 1.5 months, be able to give you a date on that one.

[Operator]

[Operator Instructions] It appears there are no question at this time. Joacim -- okay, we've got one. One more question. We'll take our next question from Sten Gustafsson from Nordea.

[Sten Gustafsson, Senior Analyst]

First of all, on the Wound Express, if you could just clarify there on -- first of all, you are right now in sort of a launch mode in U.K. and the Nordics. Is that correct? And can we expect to see sales from those regions already in 2020? And then the sort of -- if you could clarify, you said something about you expect strong sales and profits beyond 2022. Is that -- are you referring to the additional indications that you mentioned during your presentation? Or should we expect, overall, the sales and earnings to be positively impacted from Wound Express from the first indication in 2022?

[Joacim Lindoff, CEO, President & Director]

Maybe starting with the second questions. When I say that we are realistic in 2020 and 2021 around our possibilities and optimistic on 2022 and beyond, that is related to the current study, which is venous leg ulcers healing with -- as a complement to static compression. The additional tests that we are now taking or the evaluations that we're undergoing around other leg and foot ulcers is opening additional possibilities for Wound Express. Now these tests are -- has -- we have done some very small populations, and we are now -- intend to expand that. But that would go above the previously communicated markets for venous leg ulcers that we've been indicating in the press release, but obviously, depending on the outcome of the clinical evaluation studies in a little bit larger form than one of the very mini ones that we have done right now around these areas. So it's above what we have said for venous leg ulcers with static compression. And when it comes to the launch mode, yes, we are in a launch mode in the U.K. and the Nordics. Obviously, with the pandemic on the table, it is difficult to get access to elderly people currently. The problem for the elderly people is that their leg ulcers is not getting smaller. It's actually building up in that area to become a bit of a crisis to a lot of health care systems that the -- our elderly people with venous leg ulcers do not get the treatment that they want where, obviously, Wound Express could have an interesting impact in situations like this in the future. But having said that, there is a buildup of -- in the U.K., there is a buildup in the Nordics, and at the same time, we are then on plan with discussions and analysis on how we intend to set our sales channels for the Rest of the World, something that we hope to be able to come back as planned in the back end of Q3.

[Sten Gustafsson, Senior Analyst]

Okay. My second question would be if you could sort of talk about a little bit the feedback you get from hospitals and long-term care facilities, how the current situation is impacting the various customer groups in Europe and North America, that would be helpful.

[Joacim Lindoff, CEO, President & Director]

Yes. The feedback we very much get, and I actually spoke to a health care manager in Germany end of last week, just as an example, is that they are fully focused right now on fixing the current situation, and they need to put all emphasis on that right now. The indication we get is that they will, therefore, postpone, so to say, the parts of the budget that would be for us. It is very clearly postponed into latter quarters, and they will focus on making sure that they solve this current crisis. They're also looking now, for example, in Germany, in how a reopening and how a refocus on ICU beds will look like, how quickly that could be made. But they are also very much looking forward to get back to normal. The same thing goes for the U.S. where a number of health care providers in the U.S. are financially extremely dependent on the elective surgery being performed. And being in a situation where they can only take care of COVID -- or only allowed to take care of COVID-19 patients obviously have an impact on their own cash flow. So they are also very interested in starting as soon as they can, starting to reopen elective surgeries. But again, we are not there, and we're evaluating that situation. The inflow of patients into health care facilities and the need for rehab of patients being in ICUs over a longer period of time, I believe, will be, in the mid and longer term, positive to the Arjo business. There are a number of areas, mainly in Patient Handling, where you also, under these stressful situations, truly can see that you need to have safe patient handling also during crises like this and also during a normal situation. So again, as I said in the beginning, under normal circumstances: A, I would say that Q1 is a very good example of what should be expected from Arjo; and two, I think that the long-term play from Arjo being a mobility outcome partner will become even stronger when this crisis has stabilized.

[Operator]

It appears there are no further question at this time, Joacim. I'd like to turn the conference back to you for any additional or closing remarks.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, moderator, and we'll not keep you long. Just by saying that we are finishing off or we put a solid Q1 to the records where we are improving organic net sales, where we are improving our gross margin and where we continue to have good cost control. We will do everything we possibly can to support health care systems under this current crisis and do so in the safest possible ways for our employees. And I am looking forward, as soon as we have more clarity, to be able to give you further guidance on the full year. With that, thank you very much, and hope to see you all soon.

[Operator]

This concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.