Arjo AB (publ)

STO:ARJO B

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Arjo Q2 presentation for 2024. [Operator Instructions] Now I will hand the conference over to CEO, Joacim Lindoff; and CFO, Niclas Sjöswärd. Please go ahead.

[Joacim Lindoff, executive]

Thank you very much and also from our side, welcome to our Q2 2024 earnings call, where Niclas and myself, look forward to give you some more details on the Q2 report that we just released. If I can have the next slide, please. The agenda for today. We will start with the business update from Q2, financial update and our outlook for 2024 before we open up for questions, and we intend as always to keep this call to an hour and finish no later than 9:00. The next slide, please. Q2 continues on the path from Q1 with a 3.7% organic growth and continued good growth across most of our markets. We continue to see a healthy demand for our products and solutions with service and rental continuing to develop strongly also in this quarter. We are still not up to speed with our outcome programs in Patient Handling and Pressure Injury Prevention. In Patient Handling, the progress in U.S., on customer decision-making is still slow, while our pipeline continues to develop favorably. In Pressure Injury Prevention, we continue to see good traction on customer discussions. Given that the distribution agreement with BBI for the Provizio SEM scanner will not be extended beyond the 31st of December 2024. We are now focusing on our core business in this area in a clearer way and we believe that this focus will bring traction globally. Our gross margin came in at 43.6%, an improvement versus Q2 of 2023 and also a slight improvement sequentially from Q1 of 2024. This is well aligned with plans to continue to improve gross margin for the full year of 2024. And as stated before, we believe that we have further potential to improve year-over-year. Also in this quarter, we see good development in both Patient Handling and Service volumes, where both categories are contributing to the gross margin expansion. As the share of Rental in our net sales is increasing faster than capital goods sales right now, this has a slight dampening effect on our gross margin for the group as Rental has a lower gross margin than capital sales, but an equally good effect on EBIT. We continue to see good gross margin improvement in our Rental business also in this quarter, an improvement trend that, step-by-step, will close the gap to the Arjo average gross margin for this [indiscernible]. Our focused activities around price adjustments, internal efficiency and product mix continues to generate forecasted results, compensating for the higher cost levels driven mainly by salaries. We continue to have good cost control throughout the organization, and OpEx as a percentage to net sales is stable versus last year despite the high inflationary salary increases. We continue to invest where we drive profitable growth for the future while making sure to safeguard our short-term commitments. Adjusted EBITDA for the quarter increased to SEK 496 million versus SEK 471 million in Q2 of 2023. Adjusted EBIT improved with more than 10% from SEK 210 million to SEK 232 million despite significantly worse outcome on currency items, mainly around the revaluation of AR and AP in other operating expenses cost. We are trending well aligned with our forecast for 2024, and we continue to have good stability in our earnings progress. Our operational cash flow for Q2 was SEK 344 million, leading to a cash conversion of almost 70% for the quarter, which is the same level as last year. Niclas will take you through further details. But from my perspective, another solid quarter with good actions to develop further and meet our full year target of 80% cash conversion for the full year. As you probably saw, as briefly mentioned in the report, we're also announcing some changes to the Arjo management team. Katarzyna Bobrow [indiscernible], our Head of Quality and Regulatory Compliance has been with the company for more than 17 years in total. And after being in her current role since before the spin-off, she has now decided to pursue new opportunities outside of Arjo. In addition, Jonas Cederhage, Head of Supply Chain and R&D has decided to take on a role within the Thule Group. Jonas will remain in his current position until year-end. Recruitments are ongoing for both positions, and we have solid internal solutions in place to ensure that the operations continue according to set plans. And I would really like to thank both [indiscernible] and Jonas for their efforts and wish them all the best moving forward. In summary, we put another solid quarter behind us, well aligned with our plans for the full year. The organization have done a good job in navigating somewhat challenging market conditions, and we have set ourselves up for good continuous improvement in the second half of 2024. Service and Rental continues the positive trend. Transactional capital sales in North America develops according to plan, and we strongly believe that the long-term factors that affects our business will continue to be a main priority to healthcare systems over the coming years, offering us, Arjo, a significant potential for further growth and development. Next slide, please. And moving on to North America, where we grew with almost 2% -- or sorry, 2.6% organically in the quarter, and we are now up 6.3% on organic net sales for the first half year. Canada had another very good quarter with Rental, Service and Capital, all developing well. The trend continues to be positive, and we are focused to continue on this path on this important market also going forward. The overall positive trend in the U.S. continues. Healthcare providers are seeing their financial situation improved, which gradually will open up for investments outside of short-term focus and tilted versus operating room initiatives. We are not back to the decision-making speed that we saw before the pandemic and it remains challenging to get process improvement investments in our area like our outcome programs to be signed off by all related parties. We continue to have very good acceptance for outcome programs from clinical personnel, but it is clear that we still lack the focus and fund commitment from C-suites to get the traction we want. When we saw the headwind in U.S. in the quarter was around our DVT business where, we, last year had larger project invoicing in Q2. In this area, we continue to see some price pressure as discussed in previous telcos, but it is our opinion that we are now seeing stabilization, and we are also happy to see that we have secured important new contracts in the U.S. that will build further volumes from end 2024 and onwards. Our AirPal product line that we acquired before the pandemic is now truly picking up speed in the U.S. with some good new customers on board. The advances in consumables will secure even better transparency and consistent growth in the U.S. for the coming quarter. We continue to see good development of Service, Rental and our Patient Handling capital sales. The transactional capital business in U.S. continues to improve, especially in our acute care part, whereas the long-term care side and government business definitely have more potential. But we are confident that we will regain traction in these areas in the coming quarters. Both Service and Rental posted good improvements in the quarter with operational leverage and thereby better profitability. Overall, a solid quarter in North America with potential, especially in the U.S. to further develop the organic net sales in the quarters to come. Next slide, please. Our global sales region grew with 5.2% organically in Q2 with continued good performance in many of the larger markets. Western Europe grew with 4.4% in the quarter. Market trends are as before, the same with solid demand for our products and solutions, and we continue to have good development in both Service and Rental. We have good growth in countries like France, Ireland, Italy and Austria in the quarter, whereas countries like Netherlands and Belgium saw postponement of decisions mainly in capital spend. As we have talked about in previous telcos, the uncertainties around capital spend levels in European healthcare continues to be present. Our pipeline is good and growing. And in some countries, we expand our already significant market shares, but we also continue to see postponements and delays of capital spend decisions. This is something that we [ believe ] that we will have to continue to navigate for some quarters to come, but we are positive around our possibilities to continue to see growth and continued improvements on profitability in Western Europe for the rest of this year and onwards. Our Service and Rental business remain the main drivers together with a sharp focus on pricing. On both the U.K. and French markets, we saw additional hesitations to make investment decisions in June, very much related to the elections held in both countries. I believe that we can expect continued uncertainty [indiscernible] the newly elected governments give clear directions. But it is encouraging to see the long-term commitment from both these important markets to investments into solving the large-scale problems facing healthcare around demographic change and the need for more efficient care of patients. Also in Germany, the political plan for the coming 10 years will, in our view, open up further possibilities for Arjo on a market where we are already very well established. A few words on the development of our Diagnostics business, where we also, in this quarter, saw a decline versus very strong comps from Q2 of 2023. We are down with more than 10% or more than SEK 10 million in the quarter in this business, which is obviously affecting the group's overall growth in Q2. But with that said, our order intake is picking up in a good way in this area, and we expect, as we stated in the Q1 telco that we will be back on growth mode for our Diagnostic Solutions in Q3 and Q4 based on this and also easier comps. Next slide, please. Then over to Rest of the World, where Q2 was another solid growth quarter, this time growing with 8.1%, we continued to see good growth in Australia and New Zealand, where we have good development in capital and also continued good traction in Service and Rental. Other examples of good growth comes from our Africa region, Hong Kong and India. India is a country where we see good opportunities for profitable growth going forward. And based on the plans in place, we believe that we can support healthcare in India even more effectively while growing our share of this very interesting market in the quarters and years to come. The organizational changes done in Japan during Q1 is now fully implemented, and we already now start seeing good traction. Japan sees good organic growth in the quarter. And we expect that journey to continue for the coming quarters. Again, an example of the market where we have good potential to add profitable growth long term. Our plans to strengthen our market activities in Eastern Europe, especially in Poland and Czech Republic are ongoing. The larger investment programs to healthcare in, for example, Poland, which is supported by EU funds, are now gaining traction and we expect to be a strong contender in these programs, which we forecast will give healthy growth to this market for Arjo in the coming quarters and years. Next slide, please. And moving over to gross margins. The improvement journey on profitability continues and the gross margin improved to 43.6% for the quarter versus 42.7% in Q2 of 2024. It is also a slight improvement sequentially from Q1 of this year. As expected, we have higher salary costs in supply chain, Rental and Service, which we have effectively mitigated through continued work with internal efficiencies and continued focus on price alignment. The main effect from these price increases are from activities done in 2023 where the increase is done in the beginning of this year will have full effect mainly in the last 3 to 4 months of this year, which is the same pattern as we had last year. And as discussed also in the Q1 telco, our forecast is that we will see price adding between 1% to 1.5% growth on top line for the full year, and we are trending according to this plan also after Q2. We still struggle a bit with our gross margin in our medical beds capital side, but do see an improvement within this category versus Q1. Overall, we have continued to perform well on Patient Handling gross margin, and with additional traction in this category during the latter part of this year, we expect to see continued improvement of our product mix. Service continues to improve, mainly through operational leverage through the good organic growth connected with price adjustments to counter the high inflationary pressure on salaries that we see in Service. We also continue to see good efficiency gains based on implementation of our supply chain strategy. Transportation came in approximately SEK 4 million higher than expected due to the situation in the Red Sea and Suez Canal. This is something that, we now believe, will affect us with approximately the same sum per quarter also in the second half of the year. Material cost is generally decreasing a little bit, well aligned with overall plans, but we see larger fluctuations between categories. But the trend is positive, and we follow our plans in this area. Next slide, please. OpEx continues to be well managed within the group and OpEx as a percentage to net sales declined slightly despite the higher salary cost. We will drive initiatives for profitable sales development also in the future, but we will, of course, continue to watch OpEx and [indiscernible] the OpEx side carefully going forward. R&D gross investment is at almost 3% for the quarter, well aligned with our product development and portfolio planning. As before, we expect larger launches in Hygiene, Pressure Injury Prevention and Patient Handling to come in the end of 2024 and beginning of 2025, followed by more of the same in the rest of 2025 and 2026. Our adjusted EBIT grew with more than 10% from SEK 210 million to SEK 232 million in this quarter despite the negative currency impact of approximately SEK 23 million from the revaluation of our accounts receivables and our accounts payable that we ask before report under other operating expenses. Adjusted EBITDA grew 5.5% to SEK 496 million. Restructuring came in slightly lower than expected in the quarter, and we still expect restructuring for the full year to be around SEK 40 million to SEK 45 million, as communicated after Q1. And then I hand over to Niclas, and next slide, please.

[Niclas Sjosward, executive]

Thank you, Joacim, and good morning from my side as well. The operational cash flow improved sequentially in Quarter 2 versus Quarter 1, but is down versus Quarter 2 last year due to difficult comparison with strong release from higher-than-normal inventory last year, which is not repeated this year based on more balanced inventory levels. Working capital improved in the quarter coming from good work with all parts, including inventory, accounts receivable and accounts payable. Our long-term improvement activities regarding working capital is continuing to pay off. And this will, of course, continue throughout this year. Working capital days sees a significant improvement year-over-year in the quarter, now down to 79 days compared to Quarter 2 last year with 95 days. It's also sequentially down from Quarter 1, which had 82 days. The improved profitability together with the working capital improvement gives us stable operating cash flow of SEK 344 million, sequentially up from Quarter 1, which was SEK 256 million. The operating cash flow for Quarter 2 last year was SEK 512 million, mainly driven by a strong release of higher-than-normal inventory levels last year. Cash conversion improved sequentially to 70% versus the 54% in Quarter 1. We are well on track towards our target of 80% cash conversion for the full year. And for your information, cash flow from investing activities was minus SEK 112 million versus SEK 136 million in Q2 last year, and this is mainly containing investments in our rental fleet, R&D and fixed assets. So next slide, please. Our net debt is down year-over-year from SEK 5.3 billion in Quarter 2 last year to the SEK 4.5 billion in this quarter. Sequentially, the SEK 4.5 billion net debt is slightly up versus the SEK 4.4 billion in Quarter 1, mainly due to normal seasonality with the yearly dividend payout in Quarter 2. Our financial net has increased compared to the same period last year and is mainly connected to currency effects, while the interest net is stable versus last year same period. Interest net was also sequentially stable from Quarter 1 based on the stable debt level and interest rates. We expect our reduction year-on-year on the net debt to continue in the coming quarters. And together with potentially lower interest rates the second half of the year, we anticipate decreased financial costs during the year. Our cash position remains strong. Our leverage net debt to adjusted EBITDA improved year-over-year and came in at 2.4% in this quarter versus 2.8% in Quarter 2 last year. And this is a result of the last year activities regarding improved profitability, working capital and cash flow. Sequentially, the leverage came in 0.1% above Quarter 1. And as a reference point, the dividend payout in Quarter 2 corresponds to 0.1% impact on leverage. The equity ratio came in at 50.1%. So it's a small decrease from 50.7% in last quarter and is mainly due to FX effects. And then a final comment from my side is on our reported tax for the quarter, which gives an effective tax rate of 27% and is reflecting our latest estimate for the full year tax. Based on our current year mix of profits and also planned dividends from group companies after Arjo AB to optimize our internal capital structure, which is driving onetime withholding tax effects this year. Then I hand back over to you, Joacim. So next slide, please.

[Joacim Lindoff, executive]

Thanks, Niclas, and some short words on our outlook 2024, where we, given the solid start in the first half year, continue to guide for an organic net sales increase well within our target interval of 3% to 5%. Next slide, please. And just some key takeaways. Q2 was another solid quarter where we have continued to navigate the market opportunities in a good way. Demand for our solutions and products are good and the healthy trend on Service and Rental continues, leading to an organic growth of 3.7%, well within our target interval for organic growth. We continue to strengthen profitability with increased gross margin and good OpEx control, leading to an increase in adjusted EBIT of over 10% year-over-year and our focus to further improve profitability, obviously remains. Based on this solid start to the year, we feel comfortable with the organic net sales outlook for the full year. We're now looking forward to a second half year that will be characterized by high activity levels in both organic and inorganic sides of our business, and we look forward to finish the year in a strong way with projections for the important fourth quarter, assuming the same pattern as we saw last year. With that, we can open up for questions. So moderator, please go ahead.

[Operator]

[Operator Instructions] The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

I have two, please. So first question, maybe if you could break out the second half outlook for your key Western European markets, U.K., France and Germany, given elections and hospital reform. Is your base case that we should anticipate some turbulence here in the shorter term and some pressure? I think the messaging in the report was a bit mixed. So maybe if you could just break out the key base case assumptions on these markets and your visibility there.

[Joacim Lindoff, executive]

Yes, absolutely. I'll try to do my best. As I indicated both in the report and also during the presentation, we have seen hesitation in U.K. and in France on decision-making on capital goods. We were not sure what that would mean when really after -- when we knew that the elections came, but we have seen a hesitation to sign capital orders in the end of June. We are, however, in both markets, confident on the -- and when I say long term, I don't mean 12 months down the line. But if we look back end of this year or Q4, we are confident that as soon as there are directional from the new government that we will continue to see good traction on capital sales within this year in U.K. and France. But what we might see in July and August is a little bit of continued hesitation and then a good flow in, let's say, the last 4 months of the year. That's how I would interpret it. But long term for both U.K. and France, good outlooks, especially when you read through what, for example, the labor government in the U.K. would like to do and would like to invest in energy is something that we believe will be positive for us. On the German market, the new political plans that are in place are also talking about significant investments in areas where we have a possibility away from the very strict DRG system that they have. And we believe that given that many of our solutions is not connected to that, that will be quite a positive thing for us mid and long term. The good thing in Germany is that we have, after a little bit of a slow start in capital in the beginning of the year, Germany started to see a good uptick on capital activity and also capital order intake in Germany, and that is something that we foresee will continue in Q3 and Q4. Was that clear, Rickard, or...

[Rickard Anderkrans, analyst]

Yes, I think that's clear. And second question, please. You mentioned expecting a strong finish to the year. And it seems like this will be driven by investment in capital equipment. Maybe if you could just confirm that there's a key driver for you? And do you have a book-to-bill notably above 1 for the group heading into Q3?

[Joacim Lindoff, executive]

What we are seeing is that we -- as you say, we are expecting with the same pattern as we saw with Q4 last year that we will be finishing off strongly. And in every year, we have an above average amount of capital projects that are finalized in Q4, and therefore, giving an overweight of capital net sales in Q4. And that's also why we usually have a good uptick of our gross profit in Quarter 4. But what we see rather -- but what we see going into Q4 is that we continue to see good growth on our Service and Rental business as well. So we believe that it is all 3 areas that will continue to bring good growth into our Q4 net sales. That's how we see it right now. And we feel, based on the order intake that we have, that we have a good flow of the order intake that will support a good Q4 also in this year. And -- but it is really good to see, as I said during my telco, it is good to see how we are advancing in service, how we're advancing in rental, how we're advancing in the area of disposables, which is obviously giving us better and better transparency in the short and midterm of our business.

[Rickard Anderkrans, analyst]

All right. Just a super quick follow-up, if I could. Do you expect the gross margin to be aligned with the Q4 level we saw last year in Q4?

[Joacim Lindoff, executive]

Yes. As we have indicated that we are looking to improve the gross margin for the full year in a good way. We obviously need to continue to see good year-over-year improvements in the second half year as well.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

Yes. Three questions. Could you comment what you expect operating cost as percentage of sales to do for the full year? And also whether that includes the other cost lines, so i.e., the FX balance sheet through valuation? That's my first question. The second one is if you could just highlight how much the FX impact was on the financial net. And if you could repeat what you said about one-off tax items here in the full year? And what type of long-term normalized tax rate we should expect going forward?

[Joacim Lindoff, executive]

Thanks, Kristofer. I'll take the first one on OpEx, and then I'll hand over to Niclas on the two others. Looking at OpEx, we still believe that we will do what we have said since before, and that is to have OpEx as a percentage of net sales on the same level as last year despite the high inflationary pressure that we have seen on salaries. Now with that said, we are trending slightly better than that. And as you have seen also in Q2, we are slightly better than last year on that KPI. And we continue to be very mindful about the OpEx development, and we'll obviously continue to be so also in Q3 and Q4 to make sure that we both safeguard the short-term commitments that we have financially but obviously investing where we need to drive profitable growth. The guidance on the OpEx side is outside of the other operating expenses because that line is more or less impossible for us too, to guide for or not guide for, but to give indications on. As you saw this quarter, it's affected negatively versus last year with minus SEK 23 million, and that is obviously making the comparison on the EBIT line difficult. If we would have been neutral to last year, obviously, the comparison on EBIT would have looked significantly better. So it is difficult to give you indications where that line will go. It very much depends on the Swedish kronas development versus other currencies in the years -- or sorry, in the quarters to come here. But on the operational OpEx side, which is the selling, admin and R&D, that is where we believe that we will continue to see at least the same level that we had to last year also going forward. Niclas, on the 2 others.

[Niclas Sjosward, executive]

When it comes to the finances and nets on the currency impacts in the quarter, it is the SEK 15 million, that is the difference because the interest net is flat between the quarters. So that's the simple answer. And the tax, yes, we have the 27% for estimated level for this year, but that includes some, as I mentioned, more a onetime impact. So I think going forward, it is between 25% to 27%. So yes, I would look at the 26% number long term after '24 and onwards.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

A follow-up on the gross margin. I think it looks quite solid with 90 bps expansion here in the quarter versus last year. And that's higher -- that's a higher increase than what we saw in Q1. So this is despite sort of North America growing much stronger year-over-year in Q1 versus what we see now here in Q2. So maybe some more flavor on the gross margin in the quarter and what we expect in Q3. So should that be a similar increase year-over-year versus what we saw here in Q2? That's the first one.

[Joacim Lindoff, executive]

All right. Before we answer that question more from a global perspective. We are over the entire or all markets doing a good job, in my view, in, a, making sure that we're compensating for the higher inflationary costs that we are seeing in the supply chain that we are seeing in Service and that we're seeing in Rental on salaries. And we do that through the internal efficiencies. We do it through price increases, and we do it through a step-by-step better product mix. And I strongly believe that, that is a journey that will continue. I wouldn't be able to give you a detailed number on Q3, but that we will have a good improvement year-over-year also in Q3. That is absolutely something that we expect and something, obviously, that we believe will happen given that we are saying that we will, for the full year, see a good increase of gross margin and continue from that base then on further development in the years to come. Patient Handling is a strong contributor in that area. We continue to see Patient Handling developing favorably on product mix. We see that we are selling, given that the transactional sales of Patient Handling in the U.S. is picking up speed, we continue to have good traction on this also, for example, in Canada. That is something that is helping the gross margin in Patient Handling to increase both year-over-year and sequentially in Q2, and that trend is something that we believe will continue to go in our favor. So Mattias, it is very much a global work. And obviously, if we get further traction on, for example, the outcome programs in Patient Handling in the U.S., as we expect to see in the second half of the year, that will have a positive effect to both product and geographical mix.

[Mattias Vadsten, analyst]

That's all clear. Then the next one, Diagnostics will return to growth here I think you mentioned in the second half. Could you maybe explain a little bit how much of a headwind this has been on growth in recent quarters?

[Joacim Lindoff, executive]

As I indicated, I believe I said it during the presentation that is a little bit more than SEK 10 million in negative organic growth for Diagnostics quarter-over-quarter in Q2. So that's probably in 0.3, 0.4 percentage points for the full group in organic net sales that sort of like it held back by the development in Diagnostics. Diagnostics entered into 2023 with a significant backlog, given the fact that we had problems delivering in the end of 2022 and that backlog was invoiced out in Q1 and Q2. And then we saw because of lower order intake that now is then picking up in a good way again, we started to see lower quarters in Q3 and Q4 of 2023. Important with the Diagnostics business is that we are now seeing an improved order intake. We also start to see a return on profitability. The Diagnostics business has always been a good profitability contributor, but unfortunately, during 2022 and 2023, was hit with significant extra costs in supply chain, and mainly through material. Something that is now step-by-step compensated by the management in Diagnostics. So we not only see a good potential of growing the Diagnostics business in the second half year, but also improving on the profitability of our Diagnostics business in the second half of the year and obviously from there on as well.

[Mattias Vadsten, analyst]

Good. The last one would be on balance sheet is improving in the second half, quite obviously, and you flagged inorganic opportunities here, Joacim. So what kind of acquisitions are of interest for Arjo, maybe? That's the last one for me.

[Joacim Lindoff, executive]

Yes. And thanks for the question because it leads me to something that we are working very diligently on right now. I mean we've always said that we have M&A in focus which we have had. And I believe that with a slightly clearer strategic agenda, now when we can focus only on, so to say, our core business, this is also giving us some extra room to focus even more on the M&A side and on the inorganic side. We have, as you say, a stronger and stronger balance sheet that also allows us to move there. What we are looking at in the first room, as said, and it's the same setup that we have had before. One bucket is around infrastructure projects or targets around Service and Rental. That is a part where the funnel is now building in a good way. And those targets are quite often companies turning somewhere between SEK 30 million to SEK 70 million number around there. Pretty easy to integrate into our business with good synergies without sort of, say, having to struggle too much to get those synergies when we are implementing. So very interesting both from a bolt-on perspective, but also from a profitability perspective. The second part is product companies where I -- we are looking for companies that, again, as where AirPal again, is one good example. AirPal where we're now seeing really good traction, especially in the U.S. product companies that is filling a hole in our product portfolio where we already have the call point with the customers. And then the third part is obviously more larger possibilities that might come to market and where we're obviously looking very carefully on the targets that are coming out and are taking active decision strategically, whether it's good for us to pursue or not. And then I'd say probably adding a little bit of strategic views as well is that with more time to do this, we're obviously also looking into how we can use M&A going forward over the next, yes, 0 to 5 years to build an Arjo that looks maybe a little bit different in 5 years than what we have right now. But that is a much more longer-term thing, well aligned with our strategy and it's always going to be something that is well connected to the business that we are doing right now.

[Operator]

The next question comes from Sten Gustafsson from ABG Sundal Collier.

[Sten Gustafsson, analyst]

If we could talk a little bit about North America and what you see will drive growth in the second half, you're facing fairly tough comps. And I was wondering if you could perhaps talk a little bit about the growth outlook for North American market in the second half. And where do you see the full year growth number to be, to start off with.

[Joacim Lindoff, executive]

Thanks, Sten. North America divided into the important market of Canada and then U.S. and Canada we believe we'll continue to see good development. Capital sales rental will continue to develop favorably in Canada also for Q3 and Q4, well supported by good order intake and continued financial -- or sorry, positive financial inflow on the Canadian market. In the U.S., we believe that growth will come from a pickup in Patient Handling mainly. Patient Handling transactional sales and Patient Handling on the consumables side through AirPal, but also a step-by-step improvement of the Patient Handling outcome programs, where, again, that is an area we have been active in, in many years. And we believe that we are step-by-step finding the ways of, so to say, getting back to that decision rhythm that the good pipeline deserves in the U.S. We also believe that Rental, which is trending on a very high level in the U.S. has further potential to take in more customers to continue to gain market shares. We believe that we have further potential of growing our Service business in the U.S. And we also believe that we are starting to see a stabilization around our DVT business, as I said. So we don't see a decrease or so to say, something that is bringing down our organic net sales in the coming quarters. So it is a mix of everything. We have a watch out in the U.S. around we need to get better traction on our long-term care business. The governmental side in the U.S. needs to be navigated in a good way. But all in all, we believe that we continue to have a good growth potential in the U.S. based on the factors that I just mentioned.

[Sten Gustafsson, analyst]

And is it fair to assume that the North American market for the full year will grow above the Group's target of 3% to 5%?

[Joacim Lindoff, executive]

It's -- well, I would be -- if we don't do that, given the size of it, then Arjo -- yes, as we see it, is that the West Europe markets, as we have been discussing again is a market where we already have significant market shares. And it is obviously difficult to grow those significant market shares to something substantially bigger, but we have good traction on Service, Rental and also capital sales in some countries. But I would probably expect a slightly more, I would say, yes, moderate growth in Western Europe and then the rest of the growth in the group for the coming quarters, which will be well within our net sales interval that we have indicated will come from Rest of the World, obviously. But that's only a small part of our business and then Canada and the U.S.

[Sten Gustafsson, analyst]

Great. Coming back to the DVT, could you remind me of sort of the size of that business in terms of total sales? And also maybe say a word on -- you said you had entered into new contracts, which will help growth. But are those on lower price levels? I think you indicated in the remarks or in the presentation that there was some increased competition on those products.

[Joacim Lindoff, executive]

On DVT, I believe we have indicated over the last telcos that we -- that is the area where we have had the most difficulties of adjusting our prices based on the inflationary pressure. What we have done instead in DVT has worked very diligently, especially in supply chain on the efficiency around our operational side. And we are seeing that we are compensating well for that price pressure through internal efficiencies and better work in the supply chain in the DVT range. So DVT in total is trending quite all right on the gross margin side, but mainly through the internal activities and not so much through the price as we have seen in other product groups. The DVT business that we are taking on, as I said during the telco, we believe that we now see stabilization in the prices. So it's not that we are attacking and trying to defend market share through further price erosion, we are rather seeing a stabilization and a slight trend in the other direction.

[Operator]

The next question comes from David Johansson from Nordea Markets.

[David Johansson, analyst]

Maybe to expand on the capital situation in Western Europe. I think as you highlighted in your remarks, a number of political election in the last week or so in the U.K. and France. So if you could elaborate a bit more on the implication of the selection and perhaps longer term beyond the 12 months, as you commented. I would assume the labor party winning would be positive NHS, but perhaps your perspective here, I think, could be helpful.

[Joacim Lindoff, executive]

Yes. Thank you, David. Short term, we -- as we said, and we -- I believe we talked a little bit about that after Q1 and also on other conferences that we -- we didn't really know what was going to happen in the U.K. and/or in France when that election came whether that was going to create a boost in the second quarter or if it's going to be neutral or if it was something that would work negatively for a short term for Q2. It turns out that it was, in fact, the latter part that happened. The hesitation to take decisions on projects that were very, very far in the decision process was there. And like in the U.K., there were a number of orders that has not, in any way, shape or form been lost but moved into Q3 and Q4. And customers will reactivate on signing those contracts once there is a clear direction from the new government. France, a little bit the same thing. We are seeing a hesitation on the capital side, what will the new government give out in the coming months here as clear directions. But the good thing in France is that as we have such a dependency on Service and Rental in France, we are navigating that very well. And again, there is no projects that has been, so to say, delayed or canceled. It's just a postponement of decision-making. And now we speak about the very short-term part of this, as I said during the telco. If I look long term and beyond the 12 months that you are saying, if I look at U.K. and what labor is saying, we believe that the plan that they have, the points that they have within that plan, where they speak about reducing the number of elective surgeries that are in line to be performed, which will absolutely benefit, for example, our Rental business. It will benefit also our capital sales side. There is still a big need to address the efficiency and in the healthcare environment to make sure that they can get around the problem that not only the U.K. market has around the lack of staff and where, again, our solutions and programs are very well suited for that. And also the U.K. and NHS is starting to speak very actively around prevention, which we believe speaks very much in favor of what we are offering. So both in U.K., in France and also in Germany, as I said and indicated, the journey beyond the 12 months. And even if we would, so to say, reduce the political words that they are -- because they have a tendency to speak quite a lot and then it takes some time to implement it, but even if we would reduce those promises significantly, it is a promising couple of years coming our way, the way I see it from an organic perspective. It is driven by the demographic change, the fact that we've been talking about around obesity and also the dementia problem. And on top of that, a political agenda that now starts to turn in the right direction in these areas for us. So 12 months plus, it looks positive.

[David Johansson, analyst]

And just a follow-up on the gross margin. How do you think about the phasing of the margin improvements year-on-year? It sounds like you continue to believe in a strong ending for Q4, partly to the price effects and price effects coming through and also the capital projects, as you mentioned. But does that also mean that Q3 could be maybe a bit more challenging at least looking at last year? Or do you still think we could remain on a somewhat higher level also sequentially?

[Joacim Lindoff, executive]

I think that -- well, sequentially, we'll -- as always, in Q3, be difficult. But if you look year-over-year, I believe that we will continue the same type of improvement journey that we have seen in Q2. And continue on the path of strengthening in gross margin, and that then has a tool to strengthen the overall profitability of Arjo. But year-over-year, Q2, we have good expectations that we will continue to improve our gross margin.

[David Johansson, analyst]

Okay. Great. And just a last one for me and maybe you answered this before. But if you're able to quantify the impact growth from the DVT business in the quarter? And do you foresee this having a similar effect in the U.S. for H2 as well?

[Joacim Lindoff, executive]

No. Well, we will not have the same effect in Q3 because as I said during the presentation, we had project invoicing in Q2 of 2023, which obviously impacted negatively, the organic growth. And it is a number that represents somewhere around SEK 20 million on project sales last year in Q2 that we didn't have this year in the DVT business. And that will not -- we didn't have that in Q3. So in Q3, we will compare more on a normal basis, DVT.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Joacim Lindoff, executive]

Well, thank you very much, and thanks for dialing in. We look forward to further discussions after a quarter where we are posting continued good organic growth of 3.7% and where our profitability journey continues. So we look forward to, especially a good ending the last 3, 4 months of the year to make sure that we get well within our organic growth interval of 3% to 5% and continue to make sure that profitability comes with that in a very good way also in 2024.