Arjo AB (publ)

STO:ARJO B

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Arjo audiocasted teleconference Q1 2022. [Operator Instructions]

Today, I am pleased to present Joacim Lindoff, President and CEO; and Daniel Fäldt, CFO. Please begin your meeting.

[Joacim Lindoff, executive]

Thank you very much. And as always, a very good morning to everyone, and welcome to our Q1 call 2022 for Arjo. And I will, together with Daniel, give you some more details on the Q1 report that we released at 7 o'clock this morning.

Next slide, please. The agenda today includes a short summary of the activities and results from Q1. Daniel will walk you through balance sheet items, and I will address some business highlights and outlook for 2022. We will then finish up with a summary before we open up for questions, and we aim to finish this call no later than 9 o'clock.

Next slide, please and let's move over to the business update. Next slide? During Q1, we continued to see high demand for our products and solutions and a continued growth of our overall business, despite some significant headwinds and difficult comps in some areas. We have continued to support health care globally, through the continued pandemic, navigated increased turbulence on the global market, and at the same time, continue to develop our company for the future. Throughout the quarter, the organization has navigated the current situation around material shortage and logistic disturbances in a good way. There has, however, been shipments postponed into coming periods, and we have stayed close to our customers to try to minimize the impact. I am satisfied with the achievements by the entire organization and confident that the efficiency gains implemented will support our business long term.

Activity levels on most markets are now almost back on pre-COVID levels, and this is actively driving both pipeline and order generation. Q1 saw an organic net sales growth of 1.4%, and this growth was supported by an even better order intake. As referenced, our backlog for capital goods for coming quarters is more than 30% better than the same period last year.

Net sales for Patient Handling came in on par with last year's Q1, well supported by a better order intake. Our sales in this [ category ] was held back by supply issues and chain in around -- well, a little bit shorter than what we had originally forecasted, but as stated, well positioned for the future. Our DVT sales, especially in the U.S., came in lower than forecasted, mainly due to logistic problems. Also in this profitable category, order intake, as well, is above invoice numbers, supporting a good outlook on both net sales and product mix going forward.

Our Service business continues to grow nicely, well in line with our expectations. We still saw some restricted access due to the additional COVID wave in the beginning of the quarter, which has led to continued lower efficiency in this area. And as underlined on many occasions, the focus on service development will continue to be a strong force going forward.

Our core Rental business continues to develop well in the quarter both in Europe and in North America. Our pipeline for new accounts looks promising, especially in the U.S., where we currently see a very positive trend both in conversion of new accounts but also in pipeline for new opportunities.

France, our third largest Rental business, is also a market where we have made very good market gains throughout the quarter. And with the higher volumes, we have increased our profitability. Given the long-term growth and stability that our core rental development provides, this continues to be a promising sign for the future.

Our rental sales to Critical Care in the U.S. is significantly down versus Q1 of 2021, which was at the quarter exceptionally high. The COVID wave during the quarter did not give the estimated effects, and a very mild flu season did not give the normal seasonal boost. Given the high margin in these life-saving areas, the effects on our gross margin for the quarter is obviously visible. I would, however, like to state that we are very encouraged by the continued growth in our core Rental business that covered a good part of the gap in Critical Care rental versus last year Q1, and pipeline as said in this area, remains strong.

Our gross margin came in below last year's Q1, but given the significantly lower Critical Care rental, a slightly unfavorable product mix, higher sick leave rates in the beginning of the quarter and, of course, the major disturbances and cost increases within materials sourcing and logistics, I am satisfied with our performance. Our actions to mitigate the effects with long-term improvements on efficiency and pricing strategies are starting to pay off and will be there for the long run also when the markets stabilize.

Material sourcing and related cost increases have affected the P&L negatively. On top of the direct P&L effects, we see negative variances in manufacturing, due to a very sluggish inbound logistic growth. We are working very hard to mitigate the effects with continued long-term efficiency gains throughout the value chain, together with implemented long-term price adjustments, where possible. Here, it should be noted, that we obviously continue to implement our plan for further price adjustments with good focus, and we still expect to be able to fully mitigate the cost increases of material by the end of Q3, as communicated in the Q4 [ teleco ].

We have had significantly higher transportation costs in Q1 compared to last year. The war in Ukraine has postponed the expected recovery in this area and in some areas, worsened the situation. We continue to have a sharp focus on solid measures in place to handle the situation. OpEx developed slightly better than planned in the quarter, and we continue to see a decline as a percentage of net sales, very much in line with our overall plans. We have a solid cost control throughout the organization, with investments to support our increase in sales and marketing activities, and with admin costs stable to last year in comparable currency. Our cash conversion is coming in at the low end for the quarter. This is mainly the effects of a continued buildup of inventory, to mitigate and balance off the effects of a very volatile logistics market and short-term accounts receivables, due to invoicing very late in March. However, we believe that we will have a strong performance in this area in the quarters to come.

During the quarter, we have launched a new generation of mattress systems for pressure injury prevention. This is, as many of you know, the first of a number of updates to our portfolio planned and currently executed on for the coming years. These launches will bring additional net sales possibilities, strengthen our journey towards our mobility, outcome, partner strategy, and also over time contribute to higher efficiency in manufacturing and purchasing.

During the quarter, we have also spent significant time to drive our M&A agenda forward. We continue to be picky on where we decide to go forward. The focus and capacity is increasing, and I am comfortable with our approach in this area.

As a summary, a solid quarter with organic growth, slightly better than planned, despite current material and logistic changes. Our book-to-bill is 30% higher than last year for capital goods versus the same period last year. The current demand situation on the market and our current momentum in both service, and especially core rental, brings good confidence to the future journey, and more near term 2022 net sales development.

Next slide, please, and moving over to North America, where we had -- well, we closed the quarter slightly below last year on net sales. Growth was held back by a significant decline in our U.S. Critical Care business rental of almost SEK 65 million in the quarter and slightly lower-than-expected DVT sales due to logistic issues. Canada performed another excellent quarter with solid development in most areas. In U.S., we saw good continued Patient Handling and core rental business. In U.S. rental, we continue to benefit from the new structures put in place since 2019, and we handled the increased volumes from the core business in an efficient way. The significant drop in our Critical Care rental versus Q1 2021 is obviously visible, on both top line and profitability, but again, the underlying profitability developed well.

Our activity and lead generation for capital sales, for both acute and long-term care continue to improve in the region, which we can clearly see in our order intake. The backlog position has increased significantly in high margin areas like Patient Handling and DVT. Service in U.S. and Canada continues to have good net sales development and the profitability level on these large service markets develops nicely.

Our SEM scanner business in the U.S. continues to see buildup of a solid pipeline of planned or already started customer evaluations, some with major net sales potential. The COVID wave experienced during January and February has continued to hinder our conversion pace due to significant stock shortage and C-suite focus on COVID. There has, however, been some clear light in the tunnel during the latter parts of March and into April, and we are confident that the conversion rate will pick up significantly, especially in the second half of this year.

To summarize, Q1 saw a good underlying performance in North America, with both Canada and U.S. developing well. The decline in net sales versus Q1 of 2021 is more or less isolated to the significantly lower volumes in Critical Care rental. In my view, this is the sign of continued strength and we will continue to create profitable growth in this region, both from current product and solutions, but also from initiatives like the SEM Scanner and a good continued development of our AirPal product line.

Next slide, please, and moving into global sales. As we have decided to change the segment reporting to better represent how we are organized and give further details on profitability per segment in our repots, we will from now on report Western Europe and Rest of the World as one. I will, in the coming few minutes, try to give you enough details on respective areas however.

We continue to experience high demand in Europe, and we see both our order intake and pipeline increasing during the quarter. Major markets like France, Germany and U.K. performed well in the quarter, despite severe headwinds in material sourcing and logistics. Capital sales saw good development in especially medical beds and hygiene during the quarter, with Patient Handling being more affected to supply issues. Our business in Acute Care showed stability and long-term care, based on the increased focus that this area is experiencing, as an effect of the pandemic, we are starting to see a good pipeline development of our products and solutions, with good potential for quarters and years to come.

Our rental business in Europe has continued to develop well in the quarter, both on net sales and profitability. As mentioned before, France continues a very solid net sales and profitability journey. We also see a good recovery in our U.K. activities both on net sales, but also in profitability, driven by the restructuring made over the last years. A number of other countries also see positive trends in both demand and execution.

Service in Western Europe performed well in the quarter, despite significant COVID effects on access. There is absolutely room for further growth in this area, both on net sales and profitability. And as a summary, a quarter with good organic growth in Europe despite postponed deliveries due to material and logistic issues. Demand continues to be good; activity levels are high across the region, and we have continued good traction on service and rental.

Our business in Rest of World have had an okay start to the year, despite continued COVID restrictions, logistic problems and the direct effects of the war in Ukraine, leading to the decision not to take on new projects in Russia. Larger countries in this area like Australia and India, showed good net sales and order intake growth in the quarter, whereas some of our distributor markets continue to be heavily affected by the COVID waves also in Q1.

I am happy to see that our business in Japan returned to growth mode, as expected already, in Q1. Our pipeline and order intake is strongly supporting this trend and we, as stated after the Q4 report, expect that Japan will start to get back to our business plan in 2022, and in good pace recover from the delays that we saw, of course from COVID. The potential on this market is very good for Arjo, and we look forward to continue to develop it to become one of our major markets in the next 3 to 4 years.

Australia finished the solid quarter, growing with more than 7% organically, despite continued COVID restrictions and logistic issues. Our view is that the market conditions are back to normal, and we look forward to continue to leverage our business in Australia. We will need to continue to navigate COVID and the supply situation in this region in the quarters to come. On our markets with the direct access, we see a return to normal, and we have solid pipelines for further growth in regions like Africa, Latin America and Eastern Europe. We therefore very much look forward to execute on our plan for these areas, as one of our growth engines for 2022 and beyond.

And as a short summary, for the business in global sales, a good and solid 5.2% organic growth, despite continued COVID restrictions and supply issues, and this net sales growth is supported by a solid order intake and very importantly, also by a good pipeline. We continue to experience high demand for our products and solutions, and our underlying service and rental business continue to drive long-term net sales and profitability growth.

Next slide, please, and over to some financial developments and details. Next slide? Starting off with the gross margin, and despite the impact from a negative product mix, significant increases in material and logistics cost, and increase in inflation, leading to higher energy and fuel costs, we managed to post a gross margin of 44.5%. It should also be noted, that the translation effect on gross margin is negative, with approximately 0.9 percentage points for the quarter, as you will be able to extract from the table in the quarterly report.

We experienced a negative product mix in the quarter, significantly lower margin -- sorry, significantly lower net sales in our high margin Critical Care rental in the U.S., and lower than expected Patient Handling and DVT sales, together with higher medical beds than expected, led to this slight negative product mix. As stated before, the good order intake in both Patient Handling and DVT is expected to drive the more positive product mix effect in the second half of the year.

Material sourcing disturbances and related cost increases have led to approximately SEK 13 million higher material spend in the quarter, where approximately SEK 17 million has hit the P&L and the gross profit in the quarter. The increased volatility in inbound suppliers has also, this quarter, led to inefficiencies in manufacturing. Some of the effects have been mitigated by higher efficiency and other supply chain activities, together with implemented long-term price adjustments, where possible.

As stated in the Q4 report, we continue to implement our plans for further price adjustments, as the cost trend has been increasing also during this quarter, we will continue our focus work here. Based on current information, we believe that we will see approximately SEK 80 million to SEK 90 million in higher P&L effects from material costs versus last year in total, but we still expect to be able to compensate fully for this increase by the end of Q3 2022, as communicated earlier.

On transportation, we have seen higher cost of approximately SEK 55 million compared to Q1 last year. Our expectations coming into the quarter, was that the situation in this area will stabilize, but with the war in Ukraine, we can clearly see that this will not materialize short term. We continue to have solid focus and good measures in place to mitigate as much as possible, of the effects from this situation.

Increasing inflation and energy costs are also starting to be noticeable. There is an increased inflation pressure on salaries, especially in countries like Poland and U.S., where we can expect higher than normal salary increases. Fuel prices are affecting us, considering also that we have on an everyday basis approximately 2,000 vehicles on the road in our sales, service and rental operations. That is obviously some -- an area that we need to supervise very clearly. And to give an indication, we have had approximately SEK 10 million in higher cost for the quarter, based on this.

In summary, I'm pleased with the gross margin level that we have managed to uphold during the quarter, especially considering the significant headwinds. We will continue to work on our efficiency agenda, product mix, based on our backlog, and underlying demand, and of course, the continued work around strategic and tactical price increase.

Next slide, please? Adjusted EBIT in the quarter declined with 9% versus Q1 of 2021, as a result of the activities mentioned earlier. We have continued to manage our OpEx line well during the start of 2021, and OpEx as a percentage of net sales continued to decline. We continue to see a ramp up of activities in sales and marketing, supporting a good demand and pipeline building, and very importantly also the launch preparations for our new products. We will continue to invest, where it drives the long-term profitable growth, in line with our strategy, with a good continued focus on adapting to short term changing environments.

In comparable currencies, OpEx increased with 1.5%, with most of the increase coming from higher activities in sales and marketing, together with R&D. Admin is flat versus Q1 last year, well aligned with previous communication. R&D gross investments is at 2.4%, following the plan in a good way. Net R&D is approximately SEK 5 million, higher than last year Q1, based on project phasing.

Translation effects were positive on EBIT, with SEK 11 million and transaction effects had a positive effect on cost of goods sold, with SEK 19 million for the quarter. Reevaluation effects of account receivables and account payable booked under other operating expenses, has a negative effect of minus 11 for the quarter. We recorded an adjusted EBITDA of SEK 490 million versus SEK 495 million in Q1 last year. In my view, a strong achievement, given the circumstances explained. This is giving us good foundation for the quarters to come according to me.

Then, over to you, Daniel, and next slide, please.

[Daniel Fäldt, executive]

Thank you very much, Joacim. Now on to some comments with respect to our working capital development and cash flow performance. The organization continued to face similar challenges externally as per past quarters from the second half of 2021. We still managed to perform, in our opinion, satisfactorily with regards to working capital management and cash flow delivery.

Ongoing supply chain challenges continued and perhaps even intensified further during the first quarter, mainly in terms of disturbances and price increases relative to transportation and material. This meant that the need to maintain additional safety stocks in order to safeguard production supplies and customer deliveries remained. This prioritization continues to be necessary while impacting us negatively compared to normal operating environment.

We estimate that during the first quarter of 2022, still at least SEK 150 million of additional inventory needed to be employed to mitigate disturbances both inbound and outbound in terms of componentry and finished goods. We know that this continues to be a necessary prioritization at this time and believe that this will continue to be a factor for now. Important to note is that the additional level of inventory is current and not a concern in terms of looking at our stock aging analysis.

When the external environment stabilizes, our ambition level in terms of inventory management is supported by a number of initiatives that are intended to make us even more efficient in this area. We continued our solid work on receivables management from previous quarter but had a large part, as Joacim mentioned, of our net sales growth late in March, which contributed to the increased level. Again, important to note here is that we did not see receivables dropping into older buckets in our receivables' aging analysis.

In summary, we believe that we will see a recovery in terms of operating cash flow in the coming quarters. Mainly due to the challenges I just described, along with a decrease in current liabilities, the overall increase in working capital generated an uptick in our working capital days level to 97. This represents a 5-day increase versus the 2020 year-end number. Again, it's important to view this number in context over time, given that it's an 11-day reduction, looking back 2 years while facing additional challenges.

The solid EBIT level in the quarter, along with the impact from working capital, means that we're posting an operating cash flow number of SEK 25 million in the quarter. On a rolling 12-month basis, we're recording a solid SEK 1.5 billion of operating cash flow. Subsequently, cash conversion came in at a weak 5% in the quarter, and nevertheless, we remain confident that our full year financial target of 80% is achievable. Cash flow from investing activities was a negative SEK 206 million, mainly containing investments in our rental fleet, R&D and fixed assets.

Next slide, please. As a consequence of the solid profit level, in combination with modest cash flow performance in the quarter, our net debt increased to SEK 4.6 billion, which is SEK 0.3 billion higher than year-end 2021 but an improvement of SEK 0.4 billion versus Q1 last year. Meanwhile, our cash position remains strong and our net debt-to-adjusted-EBITDA remained at 2.3% from the end of 2021, which constitutes an improvement of 0.4% since Q1 last year. Finally, the equity ratio came in at 47%, which is at the same level as year-end 2021 and an improvement from Q1 2021 when we recorded 44.7%.

And now back to Joacim, and next slide, please.

[Joacim Lindoff, executive]

Thank you very much, and moving into some business highlights. Next slide, please. As briefly mentioned earlier, we have just launched our AtmosAir Velaris, a completely new generation of mattress systems for pressure injury prevention. Pressure injuries represent a major problem to health care, and we have, as you know, a very dedicated focus in this area. Velaris will strengthen that focus and especially our outcome program significantly.

Velaris combines the benefits of a reactive surface with the ones of an alternating pressure system, and thereby, allows for instant change of therapy to address changes in the patient's risk levels without having to change the surface for the patient. This allows our customers to have a flexible and cost-effective One Surface Strategy and across patient risk categories in all care setting. With this setup, we can significantly better support our customers in driving improved clinical and financial outcomes.

So far, we have launched Velaris in over 20 countries, including large markets like the U.S., U.K. and Germany, and the launch activities will continue throughout the year. Besides improved additional value add features and sales possibilities, Velaris is also expected to contribute to higher efficiency and supply chain over time. And as discussed on several occasions, this is one of many upcoming launches that will strengthen net sales and profitability, on all our product categories over the coming years.

Next slide, please? And into some details on the SEM scanner. Given the extensive COVID wave that we saw in January and February, on almost all our focus markets for the SEM scanner, it is really only in the latter parts of the quarter, where we have been able to initiate the restart of the extensive customer valuation pipeline. The conversion rates of finalized valuations have also been significantly slower than expected, because of the same reason. However, in the end of March, we have started to see a clear light in the tunnel, with better access to C-suite and chief clinical personnel, indicating that implementation, conversions -- or conversions can be moved ahead.

The interest of evaluation continues to be high, and based on current plan and situation, our expectation is to have at least 120 evaluations completed, and approximately 100 to 120 still in the pipeline when we exit out of Q2. The results on the evaluation continues to be very good and the user continues to achieve reductions in pressure injury incidents rates, well above expectations.

We now have approximately 30 paying customers, spread across countries like U.S., U.K. and Germany, with some of the already existing customers increasing their scope to new departments and wards, based on the good results.

In Germany, our activities with the Sana Kliniken are now resumed, after being on hold during the worst parts of the latest COVID wave. We continued exploration of introduction to new wards, types and sites. A country where we have had good initial success is Spain, where we have just started implementation of what will be our largest account, in terms of annualized SEM -- consumption to-date, at around 50,000 sensors across 20 wards and further expansion is in the scope during the rest of the year. This account will serve as a very good reference account for this part of Europe, obviously.

Stock shortage and C-suite focus as a result of the severe COVID waves in Q1, has been the main bottleneck for conversion. But as stated, there is good light in the tunnel in the latter part of this quarter -- of the first quarter. It is also good to see how relevant parties acknowledge the great positive impact that the SEM scanner and our overall approach to pressure injury prevention, will have on their own hospital and their own P&L.

Our pipeline in this area is very strong and we are now listed on major frame agreements in both U.S. and U.K. We continue to invest in sales and clinical capacity to follow up and support the demand. We are convinced that once we see the negative effects from COVID going away, we will have good opportunities to convert our pipeline into healthy net sales rather quickly. We therefore stand by our previously communicated target that the SEM scanner will lead to positive impact on our net sales and earnings per share starting in 2022, adding around 0.5% to 0.7% organic net sales growth in this year. Based on the expected exit rate from 2022, we also feel confident that it will contribute significantly to both net sales and EPS development from 2023 and onwards, as previously communicated.

Next slide, please. Short update on WoundExpress, where our work continues and interest remains high. We are unfortunately heavily affected by the continued COVID implications, with very limited access to patients and healthcare staff in this area. The healthcare depth in this area, as we have mentioned before, around venous leg ulcers, especially the difficult to heal ones, is increasing by the day, but the situation is unfortunately delaying us in our work to support patients with this new technology.

Q1 has not seen improvements in terms of access to patients, and thereby causing further delays in recruitment of patients to the randomized controlled trial. We now expect that the RCT will be ready for publishing in Q2 of 2023. This delay is difficult for us to [ influence ], but we are trying everything we can, to make it happen faster. As before, our go-to-market plans in Europe, for example, in U.K., France, Germany and the Nordic countries continues to take shape and will be ready for implementation and to hit the ground running, when we have the RCT results. There will be some sales before publishing, but the RCT is still a major milestone.

The positive development in the U.S. continues, with reimbursement and FDA approvals in hand. We work actively to build the demand in this area, and especially then in the difficult to heal venous leg ulcers. As stated in previous communications, the RCT is not necessary to start this work, but when published, it will improve augmentation obviously. And as a reminder, the sales price achieved by the current reimbursement code will be putting these net sales well above average in gross margins, when we start to get volumes.

And as a last point here, net sales for 2022 and 2023 has, in our own forecasting, been forecasted on a very realistic level. So the delay of the RCT is not affecting our possibilities to reach our organic growth targets.

Next slide, please? Some words around the outlook for 2022. Based on our current visibility and the solid start to the year, we forecast to achieve an organic net sales growth for the full year of 2022, well in line with our financial target of the 3% to 5% interval. The high market demand, further increased capital backlog and the good development in both service and core rental, supports this outlook well. The experienced issues related to material sourcing and logistic challenges will continue to have short-term effect on our ability to get capital products to our customer, and it is therefore our continued assumption, that we will have a back-heavy year in net sales, driven by our capital sales development.

To give some further flavor to the net sales development, a few comments on rental. Rental is now expected to have an even more 2-phased development in 2022, than what we expected after Q4. Our profitable critical care rental sales in U.S. is now forecasted to drop around 65% or approximately SEK 230 million to SEK 240 million versus 2021. Some effects of this is already seen in Q1, with around minus SEK 65 million and we expect the additional growth to be spread across Q2 and Q4, with at least 50% of the remaining delta in Q3.

On the other hand, our core rental business in North America and Western Europe continues to develop very well, as we are converting competitive accounts in a good rate on many markets and our pipeline in mentioned regions is strong for further positive development. Our continued efficiency work would also secure a parallel positive development of our gross margins in core rental. Rental in total is now expected with the very good uptick in our core rental, to see only a smaller net sales decline of 3% to 4% versus 2021 full-year numbers, but well above our 2019 starting point, for the comparison around rental.

From a gross margin perspective, we now expect also SEK 80 million to SEK 90 million higher cost in cost of goods, sold due to material price increases versus 2021, spread across the full year. It is difficult to assess when this situation will stabilize and prices eventually will return to levels that are more normal. We are trying to act in a proactive way and have and are implementing long-term efficiency plans throughout our organization. We're also working actively with continued price increases to mitigate, and as stated earlier, we expect to be fully compensating the rolling 12 P&L effects, of now approximately SEK 105 million to SEK 115 million at the end of Q3.

On transportation cost, we currently believe that we will see approximately SEK 65 million to SEK 70 million higher cost in total for the full year of 2022 versus 2021, with the main parts coming from Q1 and Q2. Based on the information currently at hand, we estimate that the cost situation will stabilize from Q3 and start developing positively versus 2021 from thereon. Q2 is therefore also estimated to be hit by higher transportation cost than Q2 of 2021.

Our solid cost focus throughout the value chain continues. With our current information [ at hand ], we estimate OpEx as a percentage to net sales to be slightly lower for the full year 2022 compared to 2021. Q1 has set the pace for this target slightly better than expected, and we have a good view on how the higher activity levels, increased travel and new initiatives will affect.

As additional info, we estimate that the change in accounting standard following the IFRIC agenda decision concerning cloud computing arrangement costs that we outlined in the end of the year report 2021, will have an approximate effect -- a negative approximate effect of SEK 10 million on OpEx 2022, and obviously by that, EBIT versus 2021. Restructuring costs in the month -- in the quarter, sorry, is mainly related to donations made from Arjo to support Ukraine refugees in Poland. As before, we do not plan any larger restructuring costs in 2022.

We will have to continue our flexible approach to navigate the current movements and headwinds on the market, and of course the high comps from critical care rental in U.S. However, underlying levers like continued core rental development, good development in service and the demand and backlog in capital goods, gives us solid confidence that we will improve organic net sales, well in line with our financial targets of 3% to 5%, also in 2022, and we see a potential upside to this guidance, if the current turbulences around material sourcing and logistics, stabilizes quicker than expected.

Next slide, please, and just some short key takeaways. For the quarter, we report another solid quarter, and despite the significant headwinds and strong comps in critical care rental, we grow our net sales organically with 1.4%. We see a continued high demand for our products and our solutions, and a positive development in both core rental and service.

Our order book for capital goods, especially patient handling is well above the same period last year. We have launched a completely new mattress system for pressure injury prevention, well in line with our strategy and supporting our strong focus in this area, together with the SEM scanner. The SEM scanner business standalone also developed well, and apart from seeing a great potential for coming years, it is also good to see how we -- despite a delayed start, have all the tools to reach our indicated levels of sales that we said in the Q4 call for 2022. And as we have indicated before, our focus on M&A, well aligned with our strategic direction, is very much there and we'll continue with a high pace.

We would also like to give a heads up that we plan to have our next Capital Markets Day, in direct connection with the release of our Q3 report on the 28th of October, most probably in the Stockholm area. We enter into the coming quarters with high confidence based on good demand, a book-to-bill that is well above last year for capital goods, and a positive development for both our core rental and our service business.

And with that, I would like to open up for questions. Moderator, please?

[Operator]

[Operator Instructions] Our first question comes from the line of Kristofer Liljeberg of Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

A question related to the gross margin. So some different parts of this question. So the first one is, when do you expect that product mix will start to be seen in the figures? Is this happening already in the second quarter or more towards second half of the year?

And then I also wonder how we should think about the gross margin considering what you said [ the last call ] and also operating costs for the full year? And my final question relates to how easy it is for you to increase prices to customers.

[Joacim Lindoff, executive]

Thanks, Kristofer. If I start with the questions around the gross margin and starting with the product mix side, as stated, I believe that the 2 effects of the better product mix will be seen in the second half of the year where we are planning with major deliveries around patient handling and a continued good uptick, for example, of our DVT business, so major in the second half of the year.

[Kristofer Liljeberg-Svensson, analyst]

Could I ask also...

[Joacim Lindoff, executive]

Yes.

[Kristofer Liljeberg-Svensson, analyst]

Sorry. What's the reason for not being similar? Is that the supply issues you have? Or is it customers not being ready to take installation?

[Joacim Lindoff, executive]

No. It's mainly on our side, Kristofer. It is our ability to get higher volumes out. The order book is there and we are planning to obviously support our customers as quickly as we can, but it is a question of getting inbound to be able to get outbound. Also the same answer on the gross margin development, where we are foreseeing a strong development on the gross margin for the second half year based on the product mix and also the fact that we will start seeing a good impact of our price increases that we are making.

On the price increases, I mean, yes, we are generally saying that price increases in the health care sector is never easy and that customers are reluctant to take. But we have, at least from the activities that we have put in place, I would like to underline that the activities that we have in this area are, in my view, very well structured, followed up. And when I say that we are going to compensate by the end of Q3, it's not just a wishful thinking. It's very much down to implemented or very firmly planned activities that we will -- that we strongly believe will have an impact.

So it's not a fluffy PowerPoint document in any way, shape or form. And we believe that we have customer understanding around this, and therefore, making implementation of these price increases, at least somewhat easier than we -- what we would have in normal cases in health care.

[Operator]

And our next question comes from the line of Victor Forssell of Nordea.

[Victor Forssell, analyst]

I hope you can hear me well. I'll follow up on the gross margin side, and if we could understand a bit more about the phasing here. You're at 44.5% now in this quarter. Are there any reasons to expect a deterioration in gross margin sequentially into Q2? Or how should we see the sort of phasing of your full-year margins from here?

[Joacim Lindoff, executive]

As I said before, Victor, I believe that we will see a stronger second half year when it comes to gross margins, especially given that we believe that it will be a back-end-heavy year when it comes to our invoicing of capital goods and especially also in Patient Handling. We need to reflect on the comps on Critical Care rental, as I stated during my presentation that we expect a further pretty significant growth of Critical Care rental, where 50% of that additional growth will come in Q3. So there will be some effect in Q2, a larger effect in Q3 and a smaller effect in Q4 for the Critical Care rental.

We believe that, as I said as well, that transportation will be negative in Q2 but that we will start seeing a rebound and possibly slowly getting us into a positive territory in the second half year. So I can only really reiterate what I said before, Victor, that we believe that the second half year and especially the latter part of the year in total will be the strongest one when it comes to gross margins.

[Victor Forssell, analyst]

Okay. And a little bit of the same question for the top line as well, coming in at 1.5% now and obviously the challenge that persists here in the beginning of Q2 in regards to deliveries and inbound sourcing, et cetera. So you've kept your 3% to 5% range intact. Besides from stronger capital deliveries in second half, what makes you keep the upper end at this stage open for achieving?

[Joacim Lindoff, executive]

Yes. If we look at the development that we are pursuing, I mean, the backlog is obviously giving us additional confidence and the backlog is now stronger than it was -- I mean, I've been speaking about a strong backlog for some time, but it is increasing, if not by the day, then at least by the quarter and that gives us good confidence for capital sales deliveries in the back end of the year and it's -- I would like to underline again, it's not a backlog where we're afraid of cancellations or anything like this. It's a very solid backlog. So we believe that that will be one of the things that will drive our organic growth in the second part of the year, stronger than possibly in the first part of the year, and then also due to the fact that especially in Q4, the comps for Critical Care rental is obviously easier for us in this year, compared to, if we take Q2 or Q3.

So -- but all in all, I would like to underline that we feel as confident as we did after the Q4 report, when it comes to our ability to deliver net sales growth within -- well within our interval of the 3% to 5% for this year. And as I also stated during the presentation, if things stabilize quicker than expected on the -- both material and logistic market, there is a potential for better.

[Operator]

And our next question comes from the line of Rickard Anderkrans of Handelsbanken.

[Rickard Anderkrans, analyst]

The first one on the sort of price versus volume development on the top line. Can you give us some flavor how we should think going forward and what's sort of baked into your internal estimates and guidance here, would be grateful?

[Joacim Lindoff, executive]

Yes. The volume mix and price is obviously baked into our overall estimates on how the year will come out in terms of net sales growth. When it comes to the development in Q1, we haven't seen major shifts here yet, when it comes to the -- to price increases et cetera, that will really start to kick in Q2, Q3 and very much so as we are supposed to be fully compensating by the end of Q3, that we will have good effects of this going into Q4.

So fairly small effects right now, and as I said, there is a slight negative product mix effect right now in Q1, given that we have invoiced more medical beds than expected in the quarter. We had significantly less critical care rental in the quarter, in both patient handling and DVT, while having very good order intake, was a little bit lower than expected because of our -- well, both material sourcing and logistic problems. So yes, you will see more effects from a price perspective in the latter part of the year.

[Rickard Anderkrans, analyst]

That's helpful. And final one from me, looking at the new PIP mattress launch here, can you talk about perhaps, number one, how is the climate of launching new product, given staffing shortages et cetera, at the moment, how would you describe that launch climate? And can you talk anything more about the pipeline and phasing of pipeline of additional products in that segment over the new launches?

[Joacim Lindoff, executive]

Yes. I think we need to separate the launches from 2 factors. When it comes to launching new products into already existing and known areas like mattresses for pressure injury prevention, that is still very much possible and ongoing in a -- with very good pace, because it is an area that our customers are very familiar with and doesn't change protocol or ways of working. It's just facilitating, in the case of the Velaris launch. So no, so to say, decline there and we are very much on track on the launches that we've been discussing for the Velaris mattress system, over the course of 2022.

When it comes to new therapies, as I said around both the SEM scanner and WoundExpress, that is when we are in and we require both C-suite and clinical staff to change ways of working and take time to understand that and take time to implement that. That is harder during periods where we have, for example, significant COVID waves where a lot of focus goes into that area. So that is more difficult than under normal circumstances, as we've also indicated for the SEM scanner.

When it comes to launches in general, as we've been stating on numerous occasions, we will see a number of launches over 2022, 2023, 2024 and also going into 2025, where major updates to all our product families within our categories is ongoing. And as said, these are related to more bells and whistles for our sales organization, to do more value-added sales out there on the market, but also over time to make sure that we can work even more efficiently in manufacturing and supply chain, given the age that our current product portfolio is carrying and the diversity that we have in that one.

So -- and that one is going according to plan. We have decided that we are -- based on focus from our own organization, we are launching the Velaris as we speak, and then we will in the end of the year, also do thorough launches of our new bathing system that we will have in hygiene, and then going into 2023 and 2024, ongoing launches in the other product categories. And obviously smaller launches also happening with additional necessities et cetera, but that's nothing that we -- so to say, need to present here, because they are of smaller scale.

[Operator]

Our next question comes from the line of Erik Cassel of ABG Sundal Collier.

[Erik Cassel, analyst]

Another question on the gross margin and sort of how you calculate the bridge here. And I may be wrong, but I think that you may have calculated the FX effect in the gross margin bridge incorrectly. I mean, it seems to be positive in the table you present and also in the chart, and also how it logically should be. So I don't see how it affected the gross margin negatively. I mean, the positive SEK 57 million you see in the table and chart should add about 2 percentage points of support. So I guess the negative effects on margins from mix, supply chain and components is much larger than you say here. So would you be able to add any sort of granularity on that, so we can sort of calculate how the gross margin really was affected by these factors?

[Joacim Lindoff, executive]

I wouldn't be able to do that in the sitting call, Erik. We would -- we need to look into that one and then we'll revert back. Okay?

[Erik Cassel, analyst]

Okay. Very good. And then the sort of main effect on cash flow was receivables, that you explained, by strong growth at the end of the quarter. But I don't understand why cash conversion, as you seem to report, would only gradually improve over the year, if that's the main effect. Is there something else that you expect to be affecting the cash conversion over the next quarters? Because to me, it seems like a sort of one-off effect?

[Joacim Lindoff, executive]

I mean, if you look at the cash conversion and related back to what Daniel is saying during his part of the presentation, but where we are very much targeting ourselves internally to get back to our overall financial target of 80% cash conversion for the full year, that is obviously indicating something different than gradual return. We mentioned in the report, in the writing, that we believe that we will have a good development on cash conversions in the quarters to come, and that is something that you should absolutely expect.

We are going to work on our inventory levels, and I mean, we -- obviously we need to take into consideration, the difficult situation that we have. But we are going to continue to work with our inventory levels, and we will get them down, and we believe also that when things have stabilized, that there are further potential of, so to say getting beyond the starting point, when this started, and get inventory further down. But maybe then -- well, summarizing the cash conversion side and saying that we are expecting 3 very good quarters on cash conversions in Q2, Q3 and Q4. And our internal target is to get us very close to the 80% cash conversion that we have as the financial target for the full year.

[Erik Cassel, analyst]

Okay. Very good. And then the high growth is [ unrecorded ] that you say, was that mainly driven by some sort of better availability of components that sort of allowed you to deliver good volumes in the end of the quarter, or was it more due to an accelerating of demand or say, installation willingness from customers?

[Joacim Lindoff, executive]

You mean on the net sales? I didn't hear the first part of the question, Erik.

[Erik Cassel, analyst]

Yes, correctly, on net sales.

[Joacim Lindoff, executive]

Yes, I would -- it's not related to the demand because the demand for the products and solutions has been constantly high throughout the quarter, as it was in the end of last year as well, and it is more that we have been managing very well in the supply chain to get a little bit of extra net sales out in terms of, for example medical beds, which was one of the things that was driving a slight negative product mix for the quarter. So little bit more medical beds out the door than what we expected. And also our -- sorry, our core rental business has developed a little bit better in countries like U.K., France and also in the U.S. in the quarter.

[Operator]

And we have one further question in the queue at this time, that's from the line of Peter Ostling of Pareto Securities.

[Peter Östling, analyst]

Hope you can hear me well? I have 3 short questions. The first one is on material accessibility and inflation -- cost inflation. I had the notion that you have been very active on the spot market, when it comes to buying electronics. Has that improved in the latter part of the quarter and going into Q2, can you give us a little bit more granularity on this, please? The second question is on working capital days. While you are down about 17 days from Q1 '19, there is a negative trend from Q4 '20. When do you believe that this negative trend in the working capital days will reverse? And -- or could we expect that you would go back to the below 90 days in end of '22 or during '23?

[Joacim Lindoff, executive]

Yes. I only heard 2 questions there, Peter, but maybe you have a follow-up on the third later on. But Daniel will address the working capital part, but if I start off with the electronic side, as we said after the Q4 report, we are buying most of our electronics on the spot market, if not all. That has not changed during Q1. Electronics is still the area where we have the main work to be done when it comes to material sourcing and something that we are following and navigating on an everyday basis. So that has not changed from where it was, when we last spoke in -- after Q4. Daniel, on working capital?

[Daniel Fäldt, executive]

Yes. We are obviously expecting, given the fact that we are communicating that we expect to come back towards our 80% cash conversion target. We're also projecting a decrease and a break of the trend of the increase up to 97 days in Q1. And we should see an improvement on this one in Q2, Q3 and Q4. I don't want to go into whether we get below the 90 mark now, but yes, we should expect to see a break in this upward trend that we've seen this quarter.

[Peter Östling, analyst]

Yes. I just remembered the third question here is, is just a housekeeping question. I notice you have changed the segment reporting when it comes to sales, and of course it had also affected comparing figures from Q1 '21. It's about SEK 20 million difference for North America, which I assume relates to the diagnostic business. Is that the order of magnitude that we need to adjust, '21 figures in order to get in line to compare apple-to-apples going forward?

[Daniel Fäldt, executive]

I think so. And we restated the numbers also in the annual report, and obviously the numbers have been restated in this Q1 report. So I think you could assume in that order of magnitude, the diagnostics there, mainly relating to North America.

[Operator]

And as there are no further questions at this time, I'll hand back to the speakers for the closing comments.

[Joacim Lindoff, executive]

Perfect. Thank you very much and thanks for the attention over the last hour. Again, we closed a -- in my view, a solid first quarter of 2022 with an organic net sales growth of 1.4 despite headwinds both in material and logistics. Just as information, which is a good marker of the underlying demand, is that if we would have isolated our Critical Care sales off the report, we would have seen a growth that would have been above 4% organically, and that would have also meant, if we look at us meeting the 3% to 5% organic growth target that we would be growing in a very nice pace on the underlying business, apart from critical care.

So with that, have a very nice day, and look forward to speak to you all soon. Thank you.