Arjo AB (publ)

STO:ARJO B

Earnings Call Transcript 2021-Q2

[Operator]

Welcome to the Arjo audiocasted teleconference Q2 2021. [Operator Instructions] And afterwards, there will be a question-and-answer session. Today, I'm pleased to present Joacim Lindoff, President and CEO. Please begin your meeting.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, and good morning to everyone. Welcome to this Q2 call for Arjo. And together with Daniel, our CFO, we'll give you some further details on the Q2 report that we just released a few minutes ago.If we can go to next slide, please. I'll start by giving you business update for the quarter, and Daniel will then walk you through the balance sheet items. I'll then address some business highlights and the outlook for the full year of 2021. I will finish off with a short summary before we open up with questions. And we will try, as always, to keep this meeting to an hour and finish no later than 9:00. Next, please. Going into the business update. Next slide, please. We continued to develop the group in a positive way, posting a strong second quarter with an organic net sales growth of 4% with healthy profitability development. COVID is still impacting, but we continue to handle the situation in a good way and support health care in any way we can.Overall, the activity levels in sales and service are increasing. Which we take as a positive sign for the future. Our core rental business continues to develop well. In the quarter, we have seen an expected decrease of our critical care rental business in the U.S., which is now down to pre-COVID levels, approximately 4x lower than the peak in Q2 of 2020.Our core rental in both North America and Europe has compensated well for this. And as we spoke about after Q1, given the long-term growth and stability that a core rental development provides, this is obviously promising for the future.Patient Handling net sales is up around 30% in the quarter compared to Q2 2020, well supported by continued good order intake and high activity level. This development is following the expectations for the full year in a good way. The sales increase in Patient Handling generates a favorable product mix, which continues to impact gross margins in a positive way.Our DVT and Service sales also continues to develop favorably. DVT is now almost back on pre-COVID levels, driven by increased elective surgery in U.K. and U.S. and new customers that we have managed to convert to our patents [ and government ]. Access in Service increases as a result of higher vaccination rate. For both these categories, we believe that we will continue to see a gradual continued improvement in the quarters to come.As expected, medical bed sees a drop in net sales compared to a record high Q2 of 2020 that was significantly influenced by larger medical bed orders in Europe and rest of the world. Our profitability continues to develop favorably and despite significantly higher transportation costs, some impact from increased material costs and negative transaction effects, we managed to increase both gross margin and adjusted EBITDA margin. The main factor for the increased gross margin is the improved product mix and continued high-efficiency in our supply chain.Supply chain continues to do a very good job in capitalizing on the higher volumes while navigating a difficult situation in regards to direct COVID effects, effects related to the current component shortage and a global transportation issue. On transportation, we have, apart from longer lead times, higher transportation costs of approximately SEK 20 million compared to last year also in this quarter. We believe that the situation will continue throughout 2021, but we have solid focus and good measures in place to handle this situation.OpEx continues to develop in a good way, and we have a solid cost control in the organization. Our OpEx level in comparable currencies is up versus Q2 2020, driven by higher activities in sales and marketing, but continues to decrease as a percentage to net sales. We see effects from both our implemented restructuring programs and the safeguarding of cost reductions from smarter ways of working internally and externally. The new standard in customer-facing activities is proving itself from both an efficiency and quality perspective while creating a further positive work-life balance for our employees.Our cash conversion has seen a strong recovery from a slightly weaker start to the year. Despite the needed uptick in inventory that Daniel will speak about later on, we recorded an 85% cash conversion for the quarter and therefore closing in on our full year targets of 80% year-to-date.Our focus on the M&A agenda remains high. We have made 1 smaller acquisition in the quarter, the South African rental business, focused on pressure injury prevention, which is well aligned with our overall agenda. And as stated before, the ambition going forward is to have a more active M&A approach as a part of the new strategy.All in all, a solid quarter and with a solid backlog at hand, which is almost 10% higher than the same period last year. We enter into the coming quarters with good confidence that 2021 will be another year where we meet our targets and continue to develop Arjo in line with our new strategy.Next slide, please. And moving into North America, where we posted an organic growth of 1.7% in the quarter. U.S. developed on par with Q2 2020, where our critical care rental business was on record high levels. Canada records another solid quarter growing with more than 12% organically, with healthy growth, especially in Patient Handling and Service.In U.S., as expected, we have seen a sharp decline of our critical care rental during the quarter, and we are now down to pre-COVID levels. Our core rental business continues to show strength with increased volumes coming from contracts won last year, but also additional good traction in market penetration during the first part of this year. We continued to benefit from the new structures put in place in 2019, and we handle the increased volumes from core in an efficient way.We continued to see our activity and lead generation for capital sales both in acute care and long-term care improve in the region. We have seen a good development in capital net sales, especially within Patient Handling, that is also supported by a solid order intake.Our DVT category, as in the U.S., seen the expected step-by-step return to more normal market conditions, and we are now just slightly below pre-COVID levels, with estimates that also in the quarters to come we'll see a gradual increase in volumes and be slightly above our pre-COVID mark.Service in the U.S. sees good net sales development also in this quarter, and we continue to develop our profitability level on this large service market. The integration of AirPal continues to develop according to plan, both when it comes to in-sourcing of manufacturing and sales activities. As we indicated after Q1, it is still our view that in the U.S., based on the response from our customer base, we'll end the year slightly better than what we expected in this area.The introduction of the SEM scanner in the U.S. goes very well, much according to plan with a good pipeline of started and planned customer evaluation, some with major potential customers. First feedback from these evaluations are very positive, and we believe that we are on track to set a solid foundation.All in all, Q2 has seen solid performance in North America. With the expected return to a more normal market situation, we see a good potential to generate continued profitable growth, both short and long term, with a different product mix and more long-term sustainable product mix compared to 2020.Next slide, please. Western Europe had a very strong development in more or less all countries. The region saw an organic growth of 9.3%, supported by even a stronger order intake. In Continental Europe, the organic growth was 9.4%, with very good performance in France, Germany, Austria and the Netherlands as examples.Capital sales saw good development in especially Patient Handling and Hygiene during the quarter. As discussed before, we have continued to see an increased activity level as restrictions have been lifted, and we are approaching a normalized market situation that will allow us to discuss more long-term opportunities with our customers.Our rental business continues to see a good rebound, and we are now tracking well above 2020 and 2019 numbers. Service sees significant growth versus a weaker 2020 that was heavily affected by COVID restrictions in Q2.Net sales in service is now back and above 2019 net sales levels, and we continue -- and we see continued growth possibilities in this important area. Our U.K. sales developed very well in the quarter with a growth of more than 9% organically also versus a strong Q2 2020.Overall, good capital sales with Patient Handling and Hygiene as main drivers. We also continued to see the discussed step-by-step return to a more normal DVT market, which is good for net sales and profitability. The increased access to both acute and long-term care in the U.K. allows both rental and service to post pre-COVID numbers with continued potential for improvement going forward.Our ongoing restructuring program in Continental Europe continues to develop well with sustainable savings clearly visible in the P&L based on activities both in 2020 and the initial part of 2021. We have charged approximately SEK 5 million in additional restructuring costs in Q2 related to this program. And to remind everyone, the final activities of this program in 2021 will allow us to get to and keep the full communicated savings of SEK 50 million on a yearly basis.As indicated already after Q1, the estimated restructuring cost for the full year is around SEK 30 million, which is including effects of the ongoing analysis of some additional activities, mainly Europe for further efficiency.Overall, a very solid quarter in Western Europe, where we saw a clear step towards a more normalized market situation. Very good growth across the region supported by good order intake and traction on our rental and service development indicates a positive trend for the quarters to come.Next slide, please. Rest of the world saw a decline of organic net sales of 4.8% in the quarter compared to a very strong quarter in 2020, which was driven by large medical beds project. The order intake was on positive grounds, and our activity level continues to increase in those markets. However, some parts of rest of the world is still heavily affected by COVID and restrictions following the pandemic.In the quarter, we saw good growth in countries and regions like Eastern Europe, Hong Kong and Singapore, where markets like Middle East and Africa fell back somewhat due to larger COVID relief projects in 2020 that did not repeat in 2021.Our business in Japan and China continues to develop according to plan. Japan performed slightly better than last year Q2 despite severe restrictions. China is now starting to pick up pace in line with our internal targets on significant percentage growth for the year.Australia finished a solid quarter, growing with almost 7% organically. Capital sales is starting to pick up pace with service and rental developing strongly versus Q2 of 2020.India that you all know was severely hit by a second wave of COVID in the beginning of the quarter has managed the situation very well. In a very difficult situation, the team in India has continued to support our customers, making sure that our colleagues have been safe and supported at all times and, in parallel to this, developed our business very well, posting a significant year-over-year organic growth.Well aware that we need to continue to navigate severe COVID situations in some of the markets in the quarters to come, it is encouraging to see that we also continued to build on our current footprint in the region. We see solid performance from our established markets like Australia, Hong Kong and Singapore and have good pipelines for further growth in regions like Africa, Latin America and Eastern Europe.Next slide, please. And let's move on to some financial details on the next slide, please. Our good development on gross margin continues, and we post 47% gross margin for the quarter, up from 45.2% in Q2 of 2020. In comparable currencies, the level would have been 46.6%, a good improvement, well aligned with our overall plans.The improvement is mainly driven by a favorable product mix coming from higher Patient Handling, DVT and Service sales and a continued good cost control throughout the value chain. Both our DVT and Patient Handling categories carries higher-than-average gross margins. And when exchanging net sales in our less profitable category medical beds versus these categories, the effect becomes quickly visible.Service continues to be an area of larger potential, both in terms of net sales development and profitability. Q2 2021 saw a very nice development of gross margins for Service versus 2020, and we are now, despite a weaker Q1 almost on par with the levels we had in 2019 with more development possibilities at hand.Our supply chain team continued to work in an efficient way also during Q2, mitigating larger part of the continued cost increases from transportation and material costs.Our cost for transportation is up with approximately SEK 20 million versus Q2 2020 and is obviously affecting our gross profit in a negative way in the quarter. The current situation around material sourcing has so far been handled well by the organization. To ensure as little disturbance as possible in our manufacturing site, we have built additional stock of inbound material. And to ensure that we can continue to support our customers in health care with on-time delivery of needed equipment, we have also increased our overall stock with standard parts and products. This is leading to a higher inventory, but as discussed before, it is standard equipment and will be easily bled out once this current situation stabilizes.Material cost increases had some negative effect in the quarter, but so far well within limits. We are actively seeking to increase prices where we see possible. And the acceptance among customers also in the public sector is on a higher level than what is usually expected around these questions, as the reasons for higher material cost is well-known to almost everyone by now. The negative transaction effect on cost of goods sold is minus SEK 17 million in the quarter, negatively affecting both gross profit and margins.In summary, we've posted a solid development of our gross margin in Q2. We continue to work on our efficiency agenda and can see clear results when the product mix starts to turn in our favor. This is a good indication of our long-term improvement journey in this area. Next slide, please.Adjusted EBIT in the quarter grew with approximately 13% versus Q2 of 2020, a development that is well aligned with our plans for this quarter. We have continued to manage our OpEx line well during the quarter. OpEx as a percentage of net sales continues down also in this quarter despite very low selling activities in Q2 of 2020.In comparable currencies, we see an increase of selling expenses driven by higher activity levels, supporting the pipeline build spoken about earlier. The long-term effects from the restructuring programs and new ways of working is clearly contributing, and our overall cost structure is well meeting the expectations we had going into the year.In the quarter, we have booked in total SEK 5 million on other operating expenses related to our minority stake in BBI. Part of this was booked under financial cost in Q1 but has since been decided to be moved to this line going forward. As a part of our overall business plan with the equity stake in BBI, this position should be turning positive as early as Q2 2022.The negative translation effect on EBIT for the quarter sums up to minus SEK 3 million and, as said before, we have negative transaction effect of minus SEK 17 million in cost of goods sold for Q2.As for summary, EBIT before restructuring is up 13% versus Q2 of 2020. In comparable currencies, that would have been almost 21%. For adjusted EBITDA, we are, for the first time, above 23% margin, well aligned with our financial targets for 2023.It is also worth noting that our EPS of SEK 0.7 is the highest number for a single quarter since we listed on the stock exchange. Over to Daniel then. 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. The organization has, while facing some extraordinary external challenges, mentioned earlier in the call, overall, continued to perform at a very high level with regards to working capital management also in the second quarter.The COVID-related issues for our supply chain remained and further intensified a bit during the quarter, mainly in terms of disturbances and price increases in the transport market, driving the need to continue to keep additional safety stocks in order to safeguard production supplies and customer deliveries. This necessary prioritization continues to impact us negatively compared to a normal operating environment during the quarter. And our estimate is that approximately SEK 120 million of additional inventory was tied up in goods in transit in different parts of the world. We know that this continues to be the correct prioritization at this time and believe that this will continue to be a factor for the remainder of 2021.We continue to build on the improved receivables management from last year and expect this good work to continue to bear fruit going forward. Progress on receivables more than compensated for the negative effect from additional stocks while the seasonal impact of current liabilities reverted back to normal after a positive impact last year due partly to COVID relief programs in certain markets.Despite the challenges Joacim described, taking our mitigating actions into account, we are seeing a decrease in our working capital days level from 92 to 89 at the end of Q1. Again, it's important to view this number in context over time, and it's a full 11-day reduction compared to Q2 2020.The EBIT improvement in the quarter, along with the impact from working capital, means that we are posting a strong operating cash flow number of SEK 431 million in the quarter. On a rolling 12-month basis, we're recording approximately SEK 2.1 billion of operating cash flow. Subsequently, cash conversion improved significantly from Q1 and came in at 84.8%, exceeding our full year financial target of 80% that we expect to reach in 2021. Cash flow from investing activities was a negative SEK 224 million, mainly containing investment in our rental fleet and fixed assets. Next slide, please.As a consequence of the positive profit development and strong cash flow performance, our net debt has declined to SEK 5 billion, which is an improvement of roughly SEK 600 million versus Q2 2020; and flat versus Q1, mainly due to the dividend payment of SEK 232 million that was done in May.Meanwhile, our cash position remained strong, and our net debt to adjusted EBITDA has decreased from 2.9% to 2.7% since the end of last year and from 3.2% to 2.7% versus Q2 2020. On top, the equity ratio came in at 44.1%, which is an improvement since year-end when we recorded 40.6% and Q2 2020, where we came in at 38.9%.And with that, I'll give the word back to you, Joacim. Next slide, please.

[Joacim Lindoff, CEO, President & Director]

Thanks, Daniel. And we'll jump into some business highlights. Next slide, please. The comprehensive launch of the SEM scanner has continued with further customer interactions in our Wave 1 countries, like the U.S., U.K., Germany and Australia. We continued to actively engage with customers in these markets, and the feedback so far has been overwhelmingly positive. We now have 6 plants to have more than 150 paid evaluation sites either completed or up and running during Q3 and Q4. That same number of the Q1 was 70 sites either completed or planned for Q2 and Q3.We continued to get positive indications from active customer evaluations, and they are achieving reductions in pressure injuries incidence rates above expectations, at least above 50% less prevalent. We have also initiated launch into the countries that we define as Wave 2, where we expect to see traction on customer evaluations, mainly in the last parts of this year.To repeat on what we previously have stated, pressure injuries are a significant cost hurdle to health care globally with around SEK 500 billion on a yearly basis. And with our approach in this area, significantly assisted by the launch of the SEM scanner to our solution, we believe that we can play an active part in preventing pressure injuries and thereby help save significant amount of cost for global health care and prevent unnecessary suffering for millions of patients.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 '21, and it will have a significant contribution to both net sales and EPS development from 2023 and onwards.We hope to be able to report on more detailed KPIs as we proceed. The most valid KPI during this period of buildup is the customer evaluation number, which is developing well according to plan. [indiscernible] use at the end of 2021 compared to business plan would also be something to look for.Contracts with main GPOs in the U.S. would also mark another significant milestone. When we start seeing active conversion rates take off, we will follow also this KPI in parallel to actual sales numbers or the full pressure injury prevention category in 2022 and onwards. But as a general current estimate, we believe that we are tracking to the 10% to 15% better, as we indicated in the Q1 report than we had in our business plan. Next slide, please.On WoundExpress, our work continues with good speed. The RCT project is running according to plan but is, of course, impacted by COVID restrictions and following effects. We are now adding sites outside of Sweden, U.K. and Germany to make our RCT more pan-European and comprehensive. We still aim at having the RCT ready by end of Q1 2022, but the current situation could have a slight impact on that time schedule.Yesterday, the well-known Journal of Wound Care published a scientific paper by the distinguished Professor Julian Guest. The paper shows that the cost efficiency of using WoundExpress along with standard care versus standard care alone over a 24-week period and also that WoundExpress will increase the probability of healing of 58% with significantly lower pain index for patients. To have these health economic effects already after 24 weeks, not even counting the cost savings beyond this time frame, documented in a well-established journal, gives us good firepower to convince NHS that this should be the standard of care in the U.K.Our FDA approval process is well underway. The process is slightly delayed due to a slower overall process affected by a very tight and needed COVID focus and we, therefore, expect FDA clearance within the next 2 months.Our go-to-market plan in Europe and U.S. continues to take shape and will be ready for implementation according to the plan in the second half of this year to be able to get the ground running in 2022.Overall, we continue to have very high interest from current users, patients and key opinion leaders. The slight delays in the RCT and the FDA approval process due to COVID will not impact our externally communicated targets for this product line, as we only estimate significant sales contribution starting in the second half of 2022. Next slide, please.Moving over to the outlook. And 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 targets of 3% to 5% organic net sales growth. The execution of the first 2 quarters of 2021 is obviously making us even more confident that 2021 will be a year of continued growth and profitability development. The organization is working and will continue to work hard to handle the global transportation and material supply situation and has so far done an impressive work to ensure deliveries to our investments.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, very much in line with communications after Q1. We'll 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 to service in Europe and North America, and obviously, a good continued development in capital equipment globally remains and gives us good confidence that we will improve net sales and profitability in line with our financial targets in 2021 and beyond. Next slide, please.And moving into some key takeaways. Next slide. We posted another solid quarter with good development of net sales and profitability. Our net sales grew with 4% organically, and we continue to see very good growth, almost 30% up versus Q2 2020 in Patient Handling. It is also good that we continue to see the expected step-by-step return to pre-COVID levels in DVT and Service, with continued solid development of our core rental business. The organization is doing a phenomenal work in navigating the COVID situation and, in parallel, building for the future.We have a great focus on our upcoming new product launches and on our latest acquisition. The SEM scanner has been very well received by the customers, and we continue to see good potential here going forward. WoundExpress continues to be promising, now further supported by health-economic argument, with go-to-market plans well underway. And as we have indicated before, our focus on M&A, well aligned with our strategic direction is picking up pace, the small acquisition this quarter, hopefully, followed by more in the quarters to come. We enter into the second half of the year with good confidence that 2021 will be another successful year for Arjo. With that, I would like to open up for questions. So moderator, please go ahead.

[Operator]

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

[Kristofer Liljeberg-Svensson]

Yes. Two questions. First one on the gross margin. I think you said after the first quarter that it will be very difficult to keep that high level. So if you could explain a little bit more this sequential improvement actually versus Q1 and whether that's driven by an even better product mix or something else? And how sustainable this margin level is now for the rest of the year?And the second question relates to sales growth. I think you have increased sales by around 4% first half of the year, and you mentioned the backlog of 10%. Does this mean that there's a possibility you could even be above the target of 3% to 5% this year? Or is that total unlikely?

[Joacim Lindoff, CEO, President & Director]

Thanks, Kristofer. On the gross margin side, what did go very well during the quarter is obviously the development of Patient Handling and also the slightly quicker return to normal than expected in DVT, which gives us a good product mix, and given that we then exchanged from a less favorable medical bed side that has had a slightly bigger improvement -- or bigger positive impact to the gross margin than what we expected.We are more or less in line with the quarter of Q1 when it comes to our gross margin if we look at this in comparable currencies. So we are trending more or less on plan with Q1 when it comes to the gross margin, which is good.What we do know, and that has been the case, as I've said on many occasions over the last 20 years, Q3 is usually, I would say, sequentially a quarter with lower activities, and we usually see a stronger Q4. And we expect that to be the case also in this year, no different in the last 20 years. So that would be the comment on that one. But I must say, I'm really pleased with the performance that we have seen in the gross profit and gross margin side because also in the gross margin, we also have to calculate the -- minus SEK 17 million in transaction costs that we saw in the quarter and the extensive increase of transportation costs that we have met during the quarter. So the organization is doing a really, really good job to mitigate where we can.When it comes to the guidance on net sales, with risk of sounding like a parrot, I mean, we feel, obviously, today even more confident that we will be within our internal 3% to 5% of the first 2 quarters. We are posting 4.0 organic growth year-to-date. There is a good pipeline. So we'll do everything we can to continue to grow the group as much as we can. Slightly too early to say if we can increase our guidance on the top line side, but obviously, we leave the quarter with good -- even better confidence to meet our outlook than what we did going into the quarter.

[Kristofer Liljeberg-Svensson]

But the backlog you normally have at this time of the year, how much of the sales in the second half that normally represents? I guess it's still dependent on a lot of new orders.

[Joacim Lindoff, CEO, President & Director]

We are, we are. And when it's -- for example, in Patient Handling, a lot of the business that we are doing in Patient Handling is transactional within the quarter so that we are selling -- when we receive an order, we quite often have the possibility, at least when we get the order in the beginning of the quarter, to also invoice it in the same.But we are sitting with a good pipeline in -- or sorry, order book in Patient Handling, we're sitting with a good order book also in Hygiene, which is obviously good for the quarters to come, both when it comes to net sales but also when it comes to the discussed product mix development.

[Operator]

Our next question comes from the line of Victor Forssell of Nordea.

[Victor Forssell]

I will start also on the margin side of things. Now with the underlying margins here being above 23% on EBITDA, in line with your longer-term plan, so I mean, will there be sort of a period in the near term that you will need to adjust your longer-term expectations? Or how should we read this?I mean, given what you currently state here, adjusting for, let's say, the pressure from logistics, some FX and also that your product mix will continue to improve from here, should we expect any meaningful lift from here before you see good contribution from the SEM scanner or WoundExpress?

[Joacim Lindoff, CEO, President & Director]

First of all, I'm probably underlining that we will, for now, keep to the financial targets that we have communicated. But as with net sales, we would obviously be evaluating this as we go along. Your statement is right, I mean, we are managing to perform on this level in Q2 with higher transportation cost that is affecting negatively with negative transaction costs hitting our [ GP ]. And we -- yes, we have not seen the positive effect of the SEM scanner or with WoundExpress that we then expect really from 2023 and onwards in a significant way.So we are -- what we are doing right now, we are navigating with the current product range and the way that we approach this. So I obviously see a good potential of meeting our financial targets that we've set out for 2023. And I will be the first one to tell you when we feel confident enough to move that in either direction.

[Victor Forssell]

Okay. Yes. And I'm just looking at -- I mean the period here that we have until, let's say, that you get this meaningful contribution from these investments. Should we see more of a product mix benefiting your gross margin rather than perhaps your leverage on the OpEx side? Or will it be a mix even from here until, let's say, end of next year?

[Joacim Lindoff, CEO, President & Director]

On OpEx, our belief and view is that we will continue to see OpEx as a percentage of net sales continues to step-by-step decrease on the gross profit side. I mean there are short-term things that are working in a negative way, which is in transportation and which is in material costs. We are managing in a good way to compensate through higher efficiency. And the organization is doing a good job there.Once that is out of the way, which we hope that it will be somewhere during 2022, and we managed to see also the impact of step-by-step price increases, where we will have, I would say, main effects of that coming in really starting in, I would say, Q1, Q2 of 2020, some in Q4 already in 2021, but we will be able to, just through price increases, mitigate, on a rolling basis, larger part of the price increases that we are currently seeing over time. But when we are seeing these things go down to a more normalized level, then obviously, the playing field becomes slightly better for us on the gross margin side.

[Victor Forssell]

Right. Just a final one on the SEM scanner and what you stated is around 150 planned evaluations for the SEM scanner, I think if I recall it correctly that you had own ambitions of around 70 planned for Q2. Are these figures comparable at all? Or is there something else in here? And also, will all of these be paid evaluations? I mean, please remind us of your strategy here and the incentives from customers if some will be unpaid.

[Joacim Lindoff, CEO, President & Director]

All of the planned or executed are paid, and that has been our strategy from the beginning to have customer commitments, not just so that they've been giving something for free to test out. So all these are paid valuations. Obviously, increasing the number of customer sites from 70 that we had of the Q1 to now either executed or in planning 150 for -- well, for the coming quarters is obviously a really good step in the right direction for this and for us.So -- and this is then, again, as we -- as I said during the call, this is for the Wave 1 countries, where, obviously, the U.S. and the U.K. stands out together with Germany. And we have good traction there. And then we also have good hopes on a smaller scale for the Wave 2 countries that has just been launched and where we hope to have traction and customer evaluation in the end of the year. So yes, tracking well on paid customer evaluations.

[Operator]

And our next question comes from the line of Annette Lykke Handelsbanken.

[Annette Lykke, Research Analyst]

Congrats on a very nice result. My first question would go on the top line development where we have almost 2% growth in U.S. and 9% growth in Europe. I was just, due to the vaccine rollout and acceleration of the elective surgery in the states, expecting something quite opposite. Is there any special circumstances that would maybe be going to allow us to believe that the U.S. growth will be stronger in the third and, in particular, in the fourth quarter? And then on the gross margin, like the other very good questions I asked on this call, this special product mix you have now, should we expect that to continue as we will have a lower use of ICU beds and medical beds in general and a higher share also due to your strategy on Patient Handling, DVT, pressure injury, et cetera? I would like to hear a little bit more about it because it seems hard to believe that it should go down. Hence, we should get a fairly strong gross margin and EBIT margin for the full year.

[Joacim Lindoff, CEO, President & Director]

Yes. If I start with the net sales part there, the good development, which I would define as a good development also if it's only almost 2% organic growth in North America, has to be seen in the light that we were -- on the critical care rental side in the U.S. last year, we did a fantastic job. So it is a good growth in North America. It's very much driven by excellent performance in Canada, which grew 12% during the quarter with, again, good pipeline and order book continuously in Canada.What we see as positives in the U.S. is the development of both order intake but also on the pipeline activity in Patient Handling in the U.S. and that we, as I said before, are moving fairly close to the pre-COVID levels of DVT. And on top of that, having seen that we have actually taken market shares when it comes to new customers in the U.S., something that we will obviously be using to build on the momentum in U.S., Canada, being North America in the quarters to come. So I'm expecting -- and if I look upon this one from a sequential perspective, I am expecting that both -- or that North America will continue to grow in Q3 and that North America, obviously, will continue to grow probably on a slightly higher pace in Q4 than it will be doing in Q3. When -- the same thing for Continental Europe or for Europe, when it comes to net sales, we will have a growth also in Q3, but I do believe that the growth will be higher in Q4, given that the content of capital goods in Q4 always is higher than it is in Q3.When it comes to the product mix, I can't really contradict what you're saying. And as we are focusing on the product categories that you mentioned and trying to move them, and we do see a decrease in our sales in medical beds, so there will be a product mix change also in the quarters to come. Continue to think about the sequential effects of lower activities in Q3 as we have had over the last 20 years and a pickup around that one in Q4.But the product mix has started to move in the right direction, and we believe that we will continue to see the same type of trends also in Q3 and Q4 where the critical care rental side will be down on pre-COVID levels, but where we will see Patient Handling, DVT and Service continuing to pick up.

[Operator]

[Operator Instructions] And a question comes from the line of Karl Norén of Danske Bank.

[Karl Norén, Analyst]

So I have 2 questions. First on also the gross margin side. It would be very helpful if you could elaborate anything about how the raw material price inflation will impact you in the upcoming quarters? And if you could maybe compare it to how it has impacted you already now in Q2.And also another question regarding price increases. You mentioned that you already raised some prices here in Q2, I think, in the report. Can you say anything about how much of the organic growth in this quarter that was driven by price increases versus volumes? That would be helpful.

[Joacim Lindoff, CEO, President & Director]

Yes. Let me take the second question first because that's what we [indiscernible]. We have initiated the price increases in this quarter, but there is no effect of price increases this quarter because given the environment that we are navigating in, introduction of price increases to selected areas or selected product categories takes time. And that is why we believe, as I said during the telco that this will probably last up -- for us at least into Q1, Q2 of 2022 until we have full impact of the current introductions of the price increases that we are making. So Q1 -- sorry, Q2, effect on net sales has not been there in terms of price increases. When it comes to the first question on what type of impact that we are foreseeing on a quarterly basis, we have fairly small impact in Q1 -- sorry, in Q2. We are estimating that we probably will be looking at maybe SEK 10 million to SEK 15 million just as a negative impact per quarter from material cost in Q3 and Q4. That will be probably a fair estimate. And then it's obviously up to us to make sure that we are compensating as much as we possibly can out of that with selected price increases and with further efficiencies in areas.

[Operator]

As there are currently no further questions on the phone, I'll hand back to our speakers for the closing comments.

[Joacim Lindoff, CEO, President & Director]

Yes. Thank you very much, moderator, and thanks to everyone for dialing in. Arjo, again, posted a solid Q2. Very good to see that we continue to have traction on the activities that we have put in place and that we continue to navigate the situation out on the market in a good way, continuing to support our customers and their patients. So we are very much looking forward to the quarters to come and, obviously, also the further development of Arjo as a group. Thank you.