Arjo AB (publ)

STO:ARJO B

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to the Arjo audiocast with teleconference Q1 2021. [Operator Instructions] Today, I am pleased to present Joacim Lindoff, President and CEO. Speakers, please begin.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, and good morning to everyone and welcome to this Q1 call for 2021 for Arjo. Thanks for dialing in, and I will, together with Daniel Fäldt, our CFO, give you further details on the Q1 report that we just released at 7:00 this morning. Next slide, please. I will give you a business update for the quarter and then address some business highlights and also the outlook for the full year of 2021. Daniel will then walk you through the balance sheet items. And we will finish off with a short summary before we open up for questions. And as always, we aim at keeping this call to an hour and finish no later than 9:00. Next slide, please. And let us start with an update on the business. And next slide, please. We post a very strong first quarter with an organic net sales growth of 4.1% with good profitability development. There is still a significant impact of COVID in the market, a situation that we will need to navigate also in the coming quarters. However, we continue to handle the situation in a good way and support health care where we can. The organic net sales growth is better than expected and is supported by a good activity level throughout the organization. Our Rental business continues to develop well. In the quarter, we have seen an expected decrease in our Critical Care Rental business in U.S. But our core Rental in both U.S. and Europe has compensated well and above for this. Given the long-term growth and stability that our core Rental development provides, this is obviously promising for the future. Net sales in Patient Handling is up with more than 15% in the quarter, which is strong compared to Q1 where we only had COVID effects in the back end of that period. This net sales increase generated favorable product mix, which is obviously impacting the gross margin in a positive way. In Patient Handling, we also continue to see a healthy order intake supporting a positive view for the coming quarters. Our profitability continues to develop favorably, where we, despite higher transportation and logistic costs, managed to increase both gross margin and our adjusted EBIT percentage significantly. The product mix with a higher patient handling part improved year-over-year margins in Rental and a continued improvement of our medical bed gross margin are some of the factors supporting the positive development. Our supply chain continues to do a very good job in capitalizing on the higher volumes while navigating a difficult situation in regards to the direct COVID effects related to the current component shortage and global transportation issues. The quarter has seen extensive extra work in ensuring a good supply level to our factories and outbound to our customers, and we continue to navigate this area well. On transportation, we have, apart from longer lead times, significantly higher transportation cost of approximately SEK 15 million in the quarter, something that we believe will be a level also for the coming 2 quarters. OpEx continues to develop in a good way, and our full focus in this area is here to stay. Our OpEx level in comparable currencies is down with 4% versus Q1 of 2020 and we see effects both from our implemented restructuring programs and the safeguarding of our cost reductions from smarter ways of working internally and externally. A new standard in customer-facing activities is proving itself, both from an efficiency and quality perspective and while creating a further positive work-life balance for our employees. Our cash conversion is slightly lower than last year for the same period. This is mainly related to our inventory development, where we have had -- where we've taken active decisions during the quarter to increase both inbound and outbound standard safety stock to ensure that we can fulfill promised delivery times during the quarter but also for the quarters to come. Excluding these investments in inventory of around SEK 80 million to SEK 90 million, cash conversions would be higher than Q1 2020, and we expect the increased levels to beat out over Q2 and Q3. All in all, a very solid start to the year. Our organization continues to navigate the COVID situation really well and supports health care providers and their patients in an impressive way. We also addressed the challenges around transportation and material supply in a good way. In sales, we start to see a step-by-step increase in sales activities and lead generation and a gradual return to a more normal market environment. With this as base, we enter into the coming quarters with good confidence in being able to meet our overall guidance and continue to improve Arjo. Next slide, please. If we start with some details on North America, where we have continued to see a good and solid development also this quarter with an organic growth of 7.1%. U.S. developed well with an organic growth in the quarter of 5.1%, and Canada is posting an all-time high net sales level, growing with more than 15% organically, where especially Patient Handling and Hygiene capital has developed very well. Net sales in the quarter is also well supported by good Service and Rental levels despite continued COVID restriction. In U.S., our Rental business continues to show strength. As expected, we have seen a sharp decline of our Critical Care Rental from end of January. And in the second half of the quarter, we recorded levels on par with the normal pre-COVID Q1. Core Rental continues to develop well and the increased volumes, mainly coming from winning competitive accounts and increased cooperation with existing customer change, is there to stay and will continue to support a good profitability development in the quarters and years to come. Our activity and lead generation for capital sales continues to improve in the region. The quarter has seen a solid development in capital net sales, especially within Patient Handling, well supported by a good order intake for that category. Our DVT category continues to be approximately 15% below pre-COVID levels in the quarter, but with a better traction in March. Our expectation is that volumes in the DVT area will follow the trend of elective surgery in the U.S. and that we will see a gradual improvement through the rest of the year to levels slightly above the ones we had pre-COVID. The integration of AirPal continues to develop according to plan, both when it comes to in-sourcing of manufacturing and sales activities. For the U.S., it is fair to assume based on response from our customer base that we will end the year slightly better than expected in this area, which is encouraging for the future. Service in U.S. sees good net sales development in the quarter. On an even more positive note, our profitability level for Service in the U.S. has increased significantly over the last 18 months and is now established in line with the Arjo Service average, with potential for further improvements when net sales continues to develop. All in all, Q1 has seen strong performance in North America. With a return to a more normal market situation, we see a good potential to generate continued profitable growth, both short and long term, but with a different product mix compared to 2020. Next slide, please. Going on into Western Europe. And in Western Europe, we saw an organic growth of 1.1% organic in the quarter despite the decline in the U.K. Our Continental Europe business that saw an organic net sales growth of 3.1%, continue to see strong growth in countries like France and Germany. And with our important Rental market in Austria also bouncing back. We still experienced negative effects from COVID on quite a few markets, especially Italy, but there are clear signs that we are starting to see a step towards a more normal market condition. Sales activities, in general, is scaling up and we can follow this in detail through our CRM system that is now covering 100% of our net sales. Our U.K. sales was down with 3.6% organically in Q1, however, in line with our internal expectations going into the quarter. The initial part of the quarter was affected by severe COVID restrictions, where both Service and Rental development was limited. Our capital sales in U.K. was negatively affected by the issues of getting inbound freight according to plan, an effect of current global transportation problems that accelerated also by Brexit. The organization has continued to navigate the current situation well with visible steps on the market towards a more stable situation in the latter part of the quarter. Our Rental business in Western Europe is now back and in some countries above pre-COVID levels, and we expect that development to continue also in the coming quarters. Service in the region was more or less on par with last year's Q1 for net sales with a solid improvement in March. Access is starting to increase with vaccination of both customers, patients and our own technicians. And it is our view that the coming quarters will continue to see a solid development on net sales and improvement of profitability in that area. Capital sales saw a good ramp-up, especially in Patient Handling, supported by solid order intake for the category. In line with our previous information from our Q4 report, especially medical beds will see lower volumes versus 2020 in Q2 and onwards, and will be replaced by more normal levels of patient handling, hygiene and DVT, where activity level is increasing gradually. We believe that this step-by-step recovery to a more normal market situation will continue throughout the year in Western Europe. Our restructuring program in Europe continues to develop well with sustainable savings clearly visible in the P&L. We have charged approximately SEK 6 million in additional restructuring costs in Q1 related to this program. Additional savings to get to the announced SEK 50 million on a yearly basis will come in 2021 and we are well on track to deliver and sustain this level. The move of our central logistic hub from U.K. to Sweden has been finalized during the quarter, and the system is now well tuned in with the overall operating model. The estimated restructuring cost for the full year continues to be SEK 30 million, including effects of ongoing analysis of some additional activities globally for further efficiency. Overall, again, a solid quarter in Western Europe, where we managed to navigate heavy restrictions and limited access to health care facilities in a good way. We started to see steps towards a return to a more normal market situation, where the growth of especially Patient Handling and Rental is a good sign for the long term. Next slide, please, and moving over to Rest of the World, where we grew organically with 5.4% in the quarter, with markets like Australia, Hong Kong and Singapore developing well. We have seen a continued high demand for medical beds and increased interest for new products in Patient Handling in selected markets. We have done a good job in securing profitable business, and our pipeline is solid for the coming quarters in this region. Our business in Japan and China continues to develop well, especially the Japanese market is continuing to see considerable effects from the pandemic. And while navigating that situation well, our Japanese colleagues are very much looking forward to a more normal market situation to be able to take full benefit of the investments that we have done in this very interesting market. Australia did a good job and finished above last year's Q1 in terms of organic net sales. Good development in our Service and Rental business here helped secure this achievement. Our business in India has, despite continued restrictions and accelerated spread of the virus, seen a good growth in sales versus Q1 of 2021. As you have probably followed in media, the situation continues to be very challenging, but as before, the team navigates the situation well. As we have stated on many occasions in the last quarters, we continue to build our rest of world region and we are well positioned to continue our journey in this region when the pandemic has stabilized both on markets with own infrastructure, like South Africa, Japan and China and within our strength and distributor network. Next slide, please. And moving over to some financial details on the next slide, please. For Q1, we post the highest gross margin in a single quarter since the spin-off. The gross margin improvement of 90 basis points versus Q1 2020 to 46.8% is mainly driven by a favorable product mix, improved rental profitability and higher sales of high-spec medical beds. All 3 areas have been on our list since day 1, and it is good to see what happens in terms of gross margins when we improve here. Patient Handling is one of our more profitable product categories and the return to or above pre-COVID levels has positive impact. The increased Rental net sales and continued work around efficiencies continues to prove important and Rental gross margins is significantly higher than Q1 2020. Our DVT category that normally carries above-average gross margin levels is still under pressure on net sales due to postponed elective surgery. However, as indicated before, volumes have started to return gradually in March and our expectation is that higher volumes here will continue to drive a good mix effect in the coming quarters. As stated before, our Service business sees lower gross margins than Q1 2020. There is still considerable restrictions around access for our technicians which also drives additional costs for safety procedures and personal protection equipment, all obviously very necessary to protect the well-being of our employees and our customers, but obviously putting a strain to margin development in this area. However, with the risk of repeating myself, starting in March, volumes began to see improvement and access started to get better, and with that came in slightly better profitability as well. As before, I believe that Service is an area of positive development when we have a more normal access to our customers. Our supply chain continued to work in an efficient way also during Q1 with good plans in place for continued improvements. Based on the described global freight and transportation situation, our cost in this area has gone up significantly in the quarter with approximately SEK 15 million versus a pre-COVID situation, affecting gross margins negatively. A bigger issue for us and many other companies are the availability of certain parts, something that we have been mitigating well through adding volumes on inbound deliveries and larger amounts of goods in transit. This will mitigate the risk for delays but will, short term, have an effect on our capital employed. However, as Daniel will comment on later on, this is a temporary situation, and we expect to bleed out this extra stock of standard products during Q2 and Q3. The activities that we are driving in parallel around a more efficient sourcing and a better setup for transportation and logistics will obviously have good effects on our continuous improvement of gross margin when the situation returns to a more normal state. In summary, despite continued COVID restrictions and higher transportation costs with the challenges surrounding this, we post an all-time high gross margin. We continue to work on our efficiency agenda and can see clear results when the product mix starts to return in our favor. This is a good indication of our possibilities for the long-term improvement journey in this area. Next slide, please. Adjusted EBIT in the quarter grew with approximately 28% versus Q1 2020, which is obviously a result that we are satisfied with. In addition to describe positive development on gross margin, we have continued to manage our OpEx line well during the quarter. OpEx as percentage of net sales continues down also in this quarter, and is on absolute levels down with over 4% versus Q1 2020 in comparable currency. The quarter past in comparison has seen lower travel costs and slightly lower marketing activity in general, but a more long-term -- more long-term effects from the restructuring programs and new ways of working is clearly visible. We again have rather large negative currency effects in the quarter. Translation effect is negative with minus SEK 28 million, and transaction effects related to reevaluation of accounts receivable and payables is negative with minus SEK 6 million, adding the total negative currency effects on EBIT in the quarter to minus SEK 34 million. In comparable currencies, our EBIT would, therefore, have gone up with more than 45%. A very good development of our underlying profitability, and given the described headwinds in the quarter, it is a clear proof that our activities implemented will continue to generate profitable improvements for the rest of 2021 and onwards. Over to you, Daniel. And next slide, please.

[Daniel Fäldt, Chief Financial Officer]

Thank you very much, Joacim. And now some comments with respect to our working capital development and cash flow in the quarter. So we are continuing our steadfast focus on working capital management throughout the organization. As the COVID related challenges for our supply chain remained and further intensified during the quarter, we've seen the need to temporarily keep additional safety stocks in order to safeguard production supplies and customer delivery. This necessary prioritization led to a slightly higher level of inventories than needed in a normal operating environment during the quarter. We're convinced that this is the correct prioritization at this time and that we will come back to normal during the back end of the second and beginning of third quarter. We continue to build on the improved receivables and payables management from last year and expect this could work to continue to bear fruit going forward. Given the challenges I just described, we're seeing an increase in our working capital days level to 92compared to 82 at the end of 2020. However, it's important to view this number in its proper context and it's still the lowest number in the quarter, except for the fourth quarter 2020 since Arjo became a listed company. We firmly believe that there is still some additional potential going forward in terms of optimizing inventory and receivables management. The EBIT improvement in the quarter, along with the negative impact from working capital, means that we are still posting a solid operating cash flow number of SEK 275 million in the quarter, which is broadly in line with last year. On a rolling 12-month basis, we're recording more than SEK 2.2 billion of operating cash flow. Subsequently, cash conversion took a hit and came in at 56.5% for the quarter. As Joacim mentioned, we expect this number to develop positively in the next quarters and to reach our annual target of 80% by year-end. Cash flow from investing activities was negative SEK 122 million, mainly containing investments in fixed assets and in rental fee. Next slide, please. As a consequence of the positive profit development and solid cash flow performance, our net debt declined to SEK 5 billion, which is an improvement of SEK 0.1 billion versus Q4 2020 and SEK 0.8 billion versus the same period last year. Meanwhile, our cash position remains strong, and our net debt to adjusted EBITDA has decreased from 2.9 to 2.7 like-for-like since the end of last year. On top, the equity ratio came in at 44.7%, which is an improvement since year-end 2020 when we recorded 40.6%. And with that, I give the word back to Joacim, and next slide, please.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, Daniel. And let me take you through some business highlights quickly. And next slide, please. And some words on the launch of the new SEM scanner, where we have in a very comprehensive way initiated this launch of the SEM scanner starting in February, with the initial focus on the first wave that includes markets like U.S., U.K., Germany and Australia. We are now actively engaging with customers in these markets, and the feedback so far has been overwhelmingly positive. We estimate to have more than 70 paid evaluation at sites during Q2. The first indications from the currently active customer evaluation is that they're achieving reductions in pressure injury incidence rates above expectations, at least above 50% less prevalence. As we have been discussing before, pressure injuries are a significant cost burden to health care globally with around SEK 500 billion on a yearly basis. With our approach in this area, significantly assisted by the launch of the SEM scanner through our solution, we believe that we can play an active part in preventing pressure injuries and thereby help saving significant amounts of cost for global health care and ease suffering for millions of patients. And as stated before, we believe that this will lead to a positive impact on our net sales and earnings per share starting in the second half of 2021 and that it will contribute significantly to both net sales and EPS development from 2023 and onwards. As after Q4, obviously aware that it is still early days, our forecast indicates that we continue to be approximately 15% to 20% ahead of our business plan in terms of units by the end of 2021, with good carryover momentum into the following years, given the recurring nature of this business model. We will provide further details such as before during the Q2 results. Next slide, please. On WoundExpress, development is according to the plans presented during the Capital Markets Day and after to Q4. The RCT is running according to the communicated plan. Despite COVID, it should be ready for publication in the end of 2021 or latest Q1 2022. Sales in U.K. and the Nordics is starting to get out of the starting blocks after COVID restrictions. Our FDA approval process is well underway, and we expect as before FDA clearance by the end of Q2 this year, dependent mainly on FDA workload related to COVID. Our go-to-market plans in Europe and U.S. continues to take shape and will be ready for implementation according to plan in the second half of this year to be able to hit the ground running in 2022. Overall, we follow announced plans with continued very high interest from current users, patients and key opinion leaders. A tangible example here is the consensus document published by 8 main KOLs during the quarter. Next slide, please. Some words on the outlook for 2021. Based on our current assumptions, we continue to guide that we will be able to achieve an organic net sales growth for the full year in line with our financial target of 3% to 5% organic net sales growth. The execution of the first quarter with the events described earlier in this presentation is obviously making us even more confident that 2021 will be a year of continued growth and profitability development. The organization is working well and we'll continue to work hard to handle the global transportation situation, and has so far done an impressive work to ensure deliveries to our customers. We also believe that our solid cost focus throughout the value chain will enable us to continue our journey to reduce OpEx as a percentage to net sales for the full year, which compared to our view after Q4 is a small step forward in this area. We will continue our current approach, navigating the changing environment and the COVID situation. Underlying short-term levers like continued core Rental development, a step-by-step improved access for Service in Europe and, obviously, a good continued development in capital equipment globally gives us good confidence that we will improve net sales and profitability in line with our financial targets for 2021 and beyond. Next slide, please. And just some key takeaways before we go into the Q&A. We had a strong start, as I said, through the year with very good development of our profitability. Our net sales grew better than expected with 4.1% organically, and in particular, Patient Handling grew nicely with 15%. The organization is doing a phenomenal work in navigating the COVID situation and in parallel building for the future. We have great focus on our upcoming new product launches and our latest acquisition. The SEM scanner has been very well received by customers, and we see a great potential here going forward. Also, WoundExpress continues to be promising with go-to-market plans well underway. And as we've indicated before, our focus on M&A, well aligned with our strategic direction, is picking up pace and we hope to be able to show visible signs of this already during 2021. We're now entering into the next quarters with good confidence that 2021 will be another exciting and successful year for Arjo. With that, I would like to open up for questions. So moderator, please go ahead.

[Operator]

[Operator Instructions] The first is from the line of Victor Forssell at ABG.

[Victor Forssell, Analyst]

I'll start with a question regarding Patient Handling and given the strong start of the year and -- both on net sales and order intake side of things, do you see that this could perhaps spread out your net sales growth throughout the year compared to initial expectations? And also tying the question to the profitability side. If your aim was to improve gross margin by a few basis points, let's say, 30 to 40 during this year, has this view changed somewhat during the quarter given all the details you provided us with today?

[Joacim Lindoff, CEO, President & Director]

Thanks for the question, Victor. On Patient Handling, it is, as you say, a very good start to the year, better than expected from our side. It is still early days, but obviously the start of the year gives us good confidence that Patient Handling will continue to develop well also in the coming quarters. And the direct effect on the coming quarters is obviously difficult to say. But with the start of Q1, it is pretty obvious that we have a slightly better momentum in Patient Handling than what we expected. And I believe from a profitability perspective, we'll follow the -- again, early days. We have started the quarter very well or the year very well with a strong Q1, where we have seen the effects of what happens when we get a favorable start on patient handling in terms of product mix and we also see that our Rental, even if we have seen core -- sorry, even if we have seen the Critical Care side of Rental declining somewhat, the core Rental, both in U.S. and Europe, holds up well. So it is a better start than expected in all [ same ] gross profit, but it's a little bit too early days to say whether we will outperform what we have said before. Let me say I will be the first one to tell you when we have solid indications on that.

[Victor Forssell, Analyst]

Okay. That sounds fair. And just on the OpEx side, if you could please remind us, you managed to lower that by 4% this quarter organically. And you also highlighted that it's a small step forward given your own initial expectations, at least. So what you see is a primary driver for this and also do you sense any change in behavior from customers in their own ways of working that perhaps could indicate some upside risk to this as well?

[Joacim Lindoff, CEO, President & Director]

As you say, I mean, we have started the quarter very well in line with our own plans, in some areas slightly better on the OpEx side. We continue to have a very good cost focus throughout the value chain, not only in OpEx, but obviously OpEx has developed more favorably than what we expected. This comes from slightly lower activities in marketing than what we might have hoped for during the quarter based on the COVID situation and lower travels. Some of that will obviously come back when markets are opening up. But overall, as we write in the report and as I also commented on, the restructuring programs that we have been going through, both during 2019 and also, obviously, during 2020, in Continental Europe is giving effects and giving sustainable effects in -- on the OpEx line. And I also believe that the new ways of working is giving us a more efficient way, both from an OpEx perspective but also in the interaction between our colleagues within the organization and our customers out there. I strongly believe that the physical meeting will return in many aspects. But the way that we have now set up our organization from a sales perspective, with virtual tours that allows us to work with our customers in the way that they see fit is paying off. And I believe that we will continue to see good effect of that going forward.

[Victor Forssell, Analyst]

That's great. And just last one from my side. Now that some time has passed since your Capital Markets Day, and at least you made it public your aim for becoming a mobility outcome partner, has that sort of had a positive effect on your entire organization? Or are you seeing any other sort of feedback from your customers so far?

[Joacim Lindoff, CEO, President & Director]

I believe that -- you see, if I take the external side first is that customers feel very aligned with what we want to achieve. They see the need for -- to have suppliers or partners that helps them to do more for less. So that continues to be a very positive sign. From an internal perspective, it's quite interesting because we just went through our engagement survey that we do every year, together with the Board of Directors during this week. And it is interesting to see that, especially the area around how engagement has increased based on the strategic direction that we have decided to do. We have, at least, from discussions that I've had and also from this engagement survey, we have seen a really significant change in how well our colleagues are connecting to the strategy and what we want to achieve over the next 10 years. So all in all, also from an internal perspective, a very positive feeling around the new strategy. And very importantly, that we believe that it's quite achievable and really needed to be able to help health care globally.

[Operator]

Our next question comes from the line of Kristofer Liljeberg of Carnegie.

[Kristofer Liljeberg-Svensson]

Three questions. First, I just wonder about the driver here for the -- what appears as much stronger performance for the Core Rental business and the contract wins that you have had in the quarter.

[Joacim Lindoff, CEO, President & Director]

Yes. And that is especially in the U.S., where we have during the pandemic, as I believe we have mentioned on some occasions before, seen that our good setup and solid setup in Rental in the U.S. has proven valuable to a number of new customers. And we have, also during the turbulent 2020, converted both smaller and larger customers into our Rental setup and that has also continued during Q1. And it is good to see that these customers have converted from other bigger players on the U.S. market and truly trusting the setup we have around Rental in the U.S. So that's a development that we obviously believe and given the forecast that we will see also in the quarters and years to come.

[Kristofer Liljeberg-Svensson]

So are these customers that has used your help during the pandemic on the ICU side and happy with what you have done there and, therefore, also started to use this Core Rental?

[Joacim Lindoff, CEO, President & Director]

That is a good analysis. It is -- because we have also during the pandemic helped the number of customers where other providers have not been able to help them in peaks -- in peak demands. And then they have seen that our activities have held a solid level of quality and, therefore, engaged in discussions with us, and we have been able to convince them to move their entire rental over to us.

[Kristofer Liljeberg-Svensson]

Okay. And are you saying that margins are better for the Core Rental than what you had during the peak on the ICU side?

[Joacim Lindoff, CEO, President & Director]

Not necessarily because on the ICU side, given the possibility to help save lives is even bigger in the Critical Care side. And the, so to say, savings for health care is bigger there. We managed to have a higher price point on the Critical Care side. But the good thing with core Rental is that it brings profitable volumes into the Rental system. So the higher the core Rental volumes becomes the more efficiently we can drive our Rental setup, remembering that around 95% -- 90% to 95% of all cost in Rental is fixed or semi-fixed. So we get a very nice leverage when we get additional profitable core Rental into our business.

[Kristofer Liljeberg-Svensson]

Okay. But would you say that the entire, if you combine the total Rental in the U.S., would you say the margin there in the first quarter was higher than during the maybe pandemic peak second quarter, summer last year in the U.S.?

[Joacim Lindoff, CEO, President & Director]

No, it was not higher in U.S. If you isolate out the U.S., then the -- in both q2 and Q3 and actually also in the -- in March of last year, we had significant peaks of the core Rental, which was kind of 2.5x to 3x higher than the ones that we had in Q1. So the rental margins in the U.S. is probably going to be higher Q2, Q3 of 2020 versus what we will see in 2021. But on the other hand, we, in those quarters when it comes to Rental, had very weak Rental quarters in Europe. And the return to pre-COVID levels and in some areas above pre-COVID levels is supporting the Rental profitability in a good way and in a more long-term, sustainable way. So we expect U.S. Rental margins to go down. But on the other hand, our Rental margins for the total company will not see that big of a drop.

[Kristofer Liljeberg-Svensson]

Okay. It makes a lot of sense. And when we discuss margins here, you talked about the favorable product mix, but it seems this must be sustainable because you're talking about further improvements. You're talking about DVT picking up, et cetera. What needs to happen for the gross margin to not remain at these levels for the rest of the year and maybe, yes, for the next years as well?

[Joacim Lindoff, CEO, President & Director]

That is a very good question, Kristofer. We are obviously taking a -- what we can conclude on is that we have started the quarter -- or sorry, the year in a very good way, in a solid way. There are a number of things that have affected the gross margin negatively. We have seen, however, a slightly better gross margin on, for example, our Rental business than what we would normally do. But all in all, a solid quarter with no huge or with no, so to say, extra events that have driven it in the positive direction. So let me put it like that. But we will -- we see Q1 as a very good start. We feel confident that we can increase our gross margin year-over-year from 2020 into 2021, and we continue with the activities that we have. Sorry for not being able to be more specific there, Kristofer.

[Kristofer Liljeberg-Svensson]

Okay. That's fine. And last question, pretty upbeat comments here about the SEM scanner and you mentioned you're about or ahead of plan. Is it possible to maybe quantify how much sales this might add to the group in 2021? Or at least what the run rate could be when you end this year?

[Joacim Lindoff, CEO, President & Director]

We can look into that. I don't have those numbers or I do have them, but I don't have them present here. But as you all know, the important thing for us when it comes to 2021 is to get as many customers on board as possible. And obviously, the run rate -- the exit rate out of 2021 will be the important thing, not necessarily how much we are going to sell during 2021. So let us come back to see if we can do comments on the exit rate or expectations on exit rate of 2021 when we close Q2, Kristofer.

[Kristofer Liljeberg-Svensson]

Yes. And just finally on that product. Well, you've made a comment about some early users giving feedback of 50% less prevalence. Was that one particular customer? Or is that something you hear from several customers?

[Joacim Lindoff, CEO, President & Director]

All of the customers that we have had feedback from is, at least, on that level. And I would like to underline the at least. It's -- I believe we don't have...

[Kristofer Liljeberg-Svensson]

And how many customers are we talking about then?

[Joacim Lindoff, CEO, President & Director]

I think we now have 20 live evaluations and we'll have 70 for Q2.

[Kristofer Liljeberg-Svensson]

Okay. So 20 customers are all saying that they see a 50% reduction in prevalence?

[Joacim Lindoff, CEO, President & Director]

Yes.

[Kristofer Liljeberg-Svensson]

Okay. Yes, sounds amazing.

[Operator]

Our next question comes from the line of Karl Norén of Danske Bank.

[Karl Norén, Analyst]

So I have 2 questions. If you can start with the WoundExpress and the launch of that, could you please elaborate a bit on how the progress is going in the U.K.? We have seen some good development in terms of publications on that during the quarter. And can you just elaborate a bit on how it's going with the U.K. now opening up after good progress with vaccination program, please?

[Joacim Lindoff, CEO, President & Director]

Yes. As you say, Karl, I mean, U.K. has been already from the beginning the, so to say, the initial and also core market for the WoundExpress launch. It has been held back by the COVID situation. The tempo of vaccinations now in the U.K. means that these wound care centers is now opening up and we will, I would say, resume the work that we had hoped to start before COVID when it comes to sales here. So we are reactivating those plans with high activity, and we obviously foresee a good start in the U.K. for WoundExpress during 2021. On the different publications, they continue to underline the very, very interesting results around WoundExpress and what it can achieve for health care and obviously also for the patients. And we have no indications that coming publications will be talking about anything different than that, which is really good. And we also believe that we will continue to see very promising results also coming out from the RCT. So both from a commercial perspective, restarting, relaunching now in the month of March and hope to see good traction on that one during 2021. And the work around continuing to, I would say, how should I say it, cement the understanding around this new therapy in U.K., and obviously then also step-by-step outside is ongoing with good pace.

[Karl Norén, Analyst]

Okay. Very interesting. And also a question on the AirPal acquisition. I think you mentioned in the report that it's going better than planned, the integration, and that you expect to capture larger market shares than earlier expected. Can you please just remind us what your expectations have been for AirPal? And what it could contribute with in 2021 or 2022, please?

[Joacim Lindoff, CEO, President & Director]

Yes. The -- what we have indicated was that AirPal in the U.S. was a business of -- well, we stated short of USD 4 million -- between USD 3.5 million to USD 4 million for the full year. We are very well on track to secure those volumes. And as I said during my presentation that there is current estimates that we will actually be able to overperform on that one given the pipeline that we're having. I can't give you an exact number, but that we have such good traction of the -- from customers and also in direct sales is obviously a good sign. The integration of AirPal from a sales perspective has gone very smoothly. And also from a supply chain perspective, where we -- as we have communicated before, as of end of Q2, we'll be fully in charge of the production and have this in our own hands. So all in all, a better start of that project than what we expected. It's -- I mean, it's not huge numbers in 2021, but a good start. And again, around the exit rates when we exit out of 2021 is also the more interesting stuff here.

[Karl Norén, Analyst]

Okay. And just the last question on the M&A side, would you expect to do some M&A during 2021? Or how should I phrase it?

[Joacim Lindoff, CEO, President & Director]

Yes. I would be slightly disappointed if we didn't do any. And that's all how can comment on it. As we have been discussing before, we are a lot better prepared today than we were a couple of years ago when it comes to M&A. We are putting more capacity from our side as well on both the scouting side and also the actual analysis of the different targets that we have. And we do this very well aligned with our strategic intentions and around becoming a mobility outcome partner. We will not have net sales for the sake of net sales, but we are going to be significantly more active in the M&A and build that pipeline over the -- over 2021 and also over the years to come.

[Operator]

[Operator Instructions] And next question is from Annette Lykke at Handelsbanken.

[Annette Lykke, Research Analyst]

Congrats on an impressive Q1. I have a single question just on the Patient Handing side. The growth you're seeing now, has that primarily been coming from the hospital segment? Or are you as well seeing demand from the long-term care segment? Or will we see that later through the year? I'm sort of figuring out if all market access has opened up from mid of February?

[Joacim Lindoff, CEO, President & Director]

It is mainly -- thanks for the question, Annette. it's mainly in acute care that we are seeing this. The access to long-term care is still difficult. It has improved in the latter part of the quarter, especially exiting out of March. So it is mainly a good uptick in acute care. We obviously hope that we will regain pace or we have every intention of regaining pace in our long-term care sector when long-term care opens up and vaccinations are on a different level when -- than it is right now. But that is probably a development that we will start seeing in the back end of the year. It is interesting, however, to follow, for example, in the U.S., where our activities in long-term care during 2020 was very, very low, where we have now, after -- or during Q1, see a significant ramp-up in our activities also in long-term care. And that is virtual customer meetings, but that also results in an offer or a discussion around the purchase. So that activity has increased, but we don't see it in the Q1 numbers yet.

[Annette Lykke, Research Analyst]

So it's fair to assume that once that market access is opening up, we'll see even further demand, both within Patient Handling care -- or Patient Handing, but also, for example, hygiene?

[Joacim Lindoff, CEO, President & Director]

That is a correct assumption, Annette, and that's also what we discussed after Q4. And that's why we, after Q4, indicated that we'll [ still have ] a more capital-intense Q4 than compared to the first quarters. Now we have managed to do a good capital, especially in Patient Handling also for Q1, which is obviously giving us good confidence that we will meet those expectations. On a general level, we tried to in a -- on a picture of the Q4, show how the different product categories would develop during 2021. And we are -- I'm happy to report that we are following that picture in a good way. There are no bad surprises for us versus that picture.

[Operator]

There seems to be no further questions on the line at this time, I'll hand back to our speakers for the closing comments.

[Joacim Lindoff, CEO, President & Director]

Yes. And really no further comments from myself. Very happy to report a very strong first quarter and a good start to 2021, and we look forward to continuing to develop Arjo both short and long term. One thing before we close, I would just like to remind everyone that we have changed the date, which is also mentioned in our Q report, changed the date for our Q2 report, that we will now issue on the -- on July 15 instead of the previously announced July 20, just as an information to everyone. But thank you, everyone, for listening in. And yes, have a very good day.