Arjo AB (publ)

STO:ARJO B

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the Arjo Audiocast Teleconference Q3 2021. [Operator Instructions] Today, I am pleased to present Joacim Lindoff, President and CEO; and Daniel Fäldt, CFO. Please begin your meeting.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, and good morning to everyone, and welcome to this Q3 call for Arjo, and together with Daniel, I'll give you some further details on the Q3 report that we have just released. Next slide, please.We will start by giving you a business update for the quarter, and then Daniel will walk you through balance sheet items. I will then address some business highlights and outlook for the full year of 2021. We'll finish off with a short summary before we open up for questions, and following the examples of other telecons, we aim at keeping this call to an hour and finish no later than 9 o'clock. Next slide, please. And if we go on and have a business update. The next slide, please.I can conclude that we are recording another very solid quarter and despite headwinds from logistics, material sourcing and COVID in general, we posted a strong 5.1% organic growth with good growth in all regions. Q3 has largely followed the same pattern and trends that we have seen for previous quarters in this year. COVID is, as you know, still very much present, but we continue to handle the situation in a good and professional way and support healthcare in any way we can. The positive sign is that we see activity levels in sales and service increasing and building a strong pipeline for the coming quarters.Patient Handling net sale continues to develop favorably and is up with more than 20% compared to Q3 2020, well supported by continued good order intake and high activity level in this area. As we've been discussing before, the sales increase in Patient Handling generates a favorable product mix, which continues to impact gross margin in a positive way. Our DVT sales continues to develop favorably. DVT is almost back on pre-COVID levels despite slower-than-expected development in mid-quarter in the U.S. due to the COVID surging, leading to some postponements of elective surgery.Both U.K. and U.S. continues to see good development and new customers are being converted to our system on top of the increased underlying activity. Access in service continues to increase because of higher vaccination rates. We have a good organic development in this area, both versus 2019 and 2020. And as addressed before, we believe that we can do much more in this area going forward. Our rental business continues to develop favorably in the quarter, mainly driven by good increase in our West European business, where both net sales and profitability increased well above Q3 2020. U.S. rental business held up well versus a strong Q3 2020, both on net sales and profitability. Our Critical Care rental business in the U.S. has seen a higher-than-expected net sales due to the COVID surge in the middle of the quarter with more normal levels exiting the quarter. Core rental in the U.S. continues to develop well with a good pipeline to gain for further market shares. In general, our rental business is performing better than expected year-to-date, almost 20% up versus 2019 on organic net sales growth as a comparison. And as we've been speaking about before, given the long-term growth and stability that the core rental development provides, this is obviously promising for the future.As forecasted, we continue to see decline in medical bed sales versus a strong 2020. We are trending on 2019 net sales numbers year-to-date, which is in line with indications in the beginning of the year. Our profitability continues to develop well versus previous year, and we have managed to increase both gross margin and our adjusted EBITDA versus Q3 2020. The main factor for the increased gross margin is the improved product mix driven by Patient Handling and DVT 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 COVID effects related to the current component shortage and global transportation issues.Material sourcing and related cost increases have affected negatively with around SEK 10 million to SEK 15 million in the quarter. The effects have been mitigated by high efficiency in supply chain, together with implemented long-term price adjustments where possible, and we continue to implement our plan for further price adjustments as we go along. As previously stated, our plan is to have at least full price mitigation on a rolling 12 basis as of the end of Q2 2022.On transportation, we have higher transportation cost of approximately SEK 25 million compared to Q3 last year. We believe that the situation will continue throughout 2021 and into the first part of 2022. We continue to have a solid focus also here and good measures in place to handle the situation. OpEx continues to develop in a good way, and we have a solid cost control throughout the organization. Our OpEx level in comparable currencies is down versus Q3 2020. Selling expenses are up in line with forecasts and the higher activity levels described. Admin costs are stable from previous quarters, and both lines are -- now have a more normal seasonal pattern than 2020 Q3. Overall, we continue to see OpEx as a percentage to net sales decline on a year-over-year basis, well aligned with our forecast and intention to continue to build a profitable and stable business. Despite the needed uptick in inventory to safeguard supply to our customers, our cash conversion is on a solid 75% level. Our focus here continues and we aim to finish the full year in line with our target of above 80%.Our focus on the M&A agenda remains high. We have evaluated a number of possibilities during the quarter but have declined opportunities mainly due to limited strategic fit. We continue our focused work here, but as stated before, we will continue to stay true so that we will not just acquire net sales for the sake of net sales. We continue to have a solid momentum in the organic area based on current plans and expectations and should continue to be picky, but very focused in the M&A space.As a summary, another solid quarter. And with support of our good order intake, we have further expanded our book-to-bill, which is now almost 15% higher than the same period last year. Based on this and with the current demand situation within our space, we enter into the coming quarters with good confidence that 2021 and 2022 will be years where we will continue to develop Arjo in line with our new strategy and objectives. Next slide, please.And moving over to North America, where we have closed a strong quarter with organic growth of 8.2% supported by good order intake. It is especially Patient Handling that has developed well, supported by a return to almost pre-COVID levels in DVT and higher-than-expected rental volumes. Canada continues to perform really well. And in U.S., it's starting -- and U.S. is starting to see increased activity levels both within sales and pipeline generation. We assess the demand for our products and services to be on a very good level, and we will continue to drive our market expansion plans forward in this region.In U.S., as discussed, the quarter saw good continued traction in Patient Handling, a return to more normal levels in DVT and the rental business that performed better than what we estimated going into the quarter. The higher volumes in rental are mainly coming from Critical Care sales during the COVID surge that we saw in mid-quarter, but also a good continuation of our core rental business. We continue to benefit from the new structures put in place in 2019 and handle the increased volumes seen from core in an efficient way.Our activity and lead generation for capital sales, both in acute care and in long-term care improved in the region, which we can clearly see in our order intake. A good development in capital net sales, especially within Patient Handling, supported by a good order intake, underlines the trends also seen in the beginning of the year. Our DVT category is now almost back on pre-COVID levels despite some postponements of elective surgery during the latest COVID surge. We estimate that we will continue to see a systematic strengthening in this area based on recovery of elective surgery and a continued market penetration from our side.Service in U.S. and in Canada, for that matter, sees good net sales development also in Q3, and we continue to develop our profitability level on this large service model. Our AirPal business is developing very well, both when it comes to insourcing of manufacturing and sales activity. Our performance in this area is above our own expectations, and we have every intention to continue on that path going forward. Our SEM scanner introduction in business in the U.S. develops according to plan with the continued buildup of a solid pipeline of planned customer evaluation, some with major net sales potential. As announced, we have signed a frame agreement with Vizient that in our book is a true milestone for our U.S. approach. The first orders have already been assigned, and U.S. will, as I will describe later on, move into 2022 with a high ambition in this area.To summarize, Q3 saw a very good performance in North America with both Canada and U.S. developing well. With the expected return to a more normal market situation, we see good opportunities to continue to create profitable growth in this region, both from current product and solutions, but also from new initiatives like the SEM scanner and AirPal. Next slide, please.And moving over to Western Europe, where we had a solid development in the quarter with most countries contributing positively. The region's organic growth of 3%, supported by good order intake and evidence of both a good demand situation but also ramp-up of our own activities in sales. Large countries like France, Germany and U.K. are all developing in a good way, and the more normal market conditions allows us to interact with our customers in a more long-term way. Capital sales saw good development in especially Patient Handling and Hygiene during the quarter. Our business in acute care is stable and for long-term care, we strongly believe that the increased focus this area has received during the pandemic will continue to generate investment needs and thereby benefit our business.Our rental business in Western Europe developed very well in the quarter, both on net sales and profitability. A good example here is France, where we so far this year, have seen almost 15% net sales development and profitability has gone up with almost 10 percentage points, as an effect of higher volumes and implemented efficiency plans. Obviously, the journey that we will continue not only in France but also in the other major European countries. Service in Western Europe was slightly down in net sales versus Q3 of 2020, but this is mainly due to that Q3 2020 was very strong in the light of the space created between the first wave and the second wave of COVID that struck in Q4 2020. With the same logic, Q4 comps for service in Europe is lower than normal, and based on current activities, we should be able to see good growth going forward in this area.Our U.K. sales saw good organic growth of 6%. The development was driven by a continued good capital sales in especially Patient Handling and Hygiene and the return to good rental levels. U.K. being the market where we currently see the largest opportunity for the SEM scanner outside of U.S. has despite Covid implications, a strong pipeline in this area. During the quarter, we have signed important [ plan ] agreements with NHS that will allow us to move into concrete implementation discussions with customers across the U.K. during Q4 and onwards.Also in Continental Europe, we see very good interest, and I will revert back with more inflow here later on in the presentation. Our ongoing restructuring programs in Continental Europe continues to develop well with sustainable savings clearly visible in the P&L based on activities both in 2020 and the first 3 quarters of 2021. We have charged SEK 4 million in additional restructuring costs in Q3 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 savings of SEK [ 15 ] million on a yearly basis. As indicated already after Q2, the estimated restructuring costs for the full year is still SEK 30 million.Overall, a solid quarter in Western Europe that saw good organic growth with rental picking up both from a net sales and profitability perspective. Demand is there. Activity levels across the region is picking up, and we look forward to a solid finish of 2021 and a good start to 2022. Next slide, please.Rest of the World saw an organic growth of almost 3% versus in comparison, a strong COVID-related project quarter in 2020. We had good development in countries like Australia, Hong Kong, Singapore and South Africa with some distribution markets seeing some weakness due to severe COVID-related restrictions. Order intake in the region was very good, supporting a good view for the coming quarters. Our business in Japan was affected by severe COVID restrictions in the quarter. Our backlog here is strong, but restricted access and postpone installation has limited our net sales possibility short term in Japan. We have created a solid position for our future development in this country and as soon as restrictions are lifted, we feel comfortable that we will quickly regain the long-term base.China is still on plan to deliver a significant percentage growth for the year, as communicated in previous quarterly reports. Australia finished a solid quarter, growing with almost 10% organically despite heavy restrictions in many states. Capital sales continue to pick up pace supported by good order intake, and especially service developed strongly versus Q3 of 2020.India is in a significantly better position from a COVID perspective compared to Q2, and we see more than 30% organic growth versus Q3 of 2020 here. Our rental business in India is now estimated to be back on pre-COVID levels by end of Q4 with good traction on both rental and capital sales in the quarters to come.As for the rest of the organization, the region supported by our supply chain has navigated the current situation around material shortage and logistics services in a good way and mitigated cost implications where possible. We are well aware that we need to continue to navigate the COVID situation in some of the markets in this region in the quarters to come. At the same time, it is encouraging to see that we continue to build on our footprint in the region, and we have a good pipeline for further growth in regions like Africa, Latin America and Eastern Europe. Next slide, please.And moving over to the financial details and next slide, please.Our solid development on gross margin continues as we post 46% gross margin for the quarter, up from 45.4% in Q3 2020. The improvement is mainly driven by favorable product mix coming from higher Patient Handling, DVT and rental profitability increase in Western Europe. We also see a continued good cost control throughout the value chain. Both our DVT and Patient Handling categories carries, as you know, a higher-than-average gross margin. When we exchanged net sales from Nordics profitable category medical beds versus these categories, the effect becomes as visible as in previous quarters.Our supply chain team continued to work in an efficient way also during Q3, mitigating large part of the continued cost increase from transportation and material. 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 to ensure that we can continue to support our customers in healthcare with on-time delivery of needed equipment. We've also increased our overall stock with standard parts and products in the front end. This is leading, as Daniel will be touching on later on, to a higher inventory affecting our working capital short term but as discussed before, it is standard equipment and will be easy to weed out once this current situation stabilize.Material sourcing and related cost increases have affected gross profit negatively with around SEK 10 million to SEK 15 million in the quarter. The effects have been mitigated by high efficiency in the supply chain together with implemented long-term price adjustments where possible. We continue to implement our plans for further price adjustments as we go along. And as previously stated, our plan is to have at least full price mitigation on rolling 12 basis by end of Q2 2022.On transportation, higher transportation cost of approximately SEK 25 million compared to Q3 last year is what we have seen in the quarter. We believe as before that the situation will continue throughout 2021 and into the first part of 2022 but we continue to have solid focus and good measures in place to handle this situation. In the quarter, we have had almost a neutral effect from currency on gross profit. Translation has been negative here with minus SEK 3 million where transaction effect had a positive effect on gross profit with plus SEK 6 million.In summary, we posted a solid development of our gross margin in Q3 versus the same quarter in 2020. We continue to work on our efficiency agenda and can see clear results from a favorable product. We can see this as good indications for our long-term improvement journey in this area. Next slide, please.And adjusted EBIT in the quarter grew with almost 35% versus Q3 of 2020, a significant improvement versus an already strong comps from Q3 of 2020. We have continued to manage our OpEx line well in the quarter, and OpEx as a percentage of net sales continues down also in this quarter. We continue to see a ramp-up of activities in the sales and marketing, supporting the good demand and pipeline building. We continue to invest where it drives long-term profitable growth in line with our strategy with a good continued focus on adapting to a short-term changing environment.In the quarter, we have booked almost minus SEK 3 million on other operating expenses related to our minority stake in BBI. As informed in Q2, as a part of our overall business plan for the equity stake in BBI, disposition should be turning positively -- positive sorry, as early as Q2 2022. The currency effects on EBIT for the quarter is more or less neutral. Negative translation effects on EBIT for the quarter sums up to minus SEK 4 million. Positive transactions effects contributed with plus SEK 6 million and reevaluation effects of accounts receivables and accounts payable booked under other operating expenses has had a negative effect of minus SEK 4 million for the quarter.As a summary, EBIT before restructuring is up significantly with almost 35% versus Q3 2020. For adjusted EBITDA, we posted a quarter in line with our 2023 target of 23%, lifting the adjusted EBITDA to SEK 524 million from SEK 448 million in Q3 2020. And then over to Daniel. 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 continuing to face many of the same external challenges as in the previous quarter, continued to perform at a high level with regards to working capital management. The COVID-related issues for our supply chain remained and further intensified during the quarter, mainly in terms of disturbances and price increases related to logistics, driving the need 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 140 million to SEK 150 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 also in the fourth quarter.We continued the solid work on our receivables management from last year and expect this good work to continue to bear fruit going forward. However, a larger part of the invoicing in the quarter, as expected came relatively late, which explains why some collections have been right shifted into the fourth quarter. This impact was neutralized by a slight improvement in current liabilities. Despite the challenges just described, taking our mitigating actions into account, we're seeing stability in our working capital base level, which came in at 94 days, which is the same level as in Q1 this year. Again, it's important to view this number in context over time and it's a 2-day reduction compared to the same period in 2020. The EBIT improvement in the quarter, along with the impact from working capital means that we are posting a solid operating cash flow number of SEK 390 million in the quarter, and on a rolling 12-month basis, we're recording approximately SEK 1.9 billion of positive operating cash flow. Subsequently, cash conversion came in at a solid 75%, and we are still confident that we can reach our full year financial target, as Joacim mentioned earlier, of 80% by the end of December. Cash flow from investing activities was SEK 156 million, mainly containing investments in the rental fleet and fixed assets according to plan. Next slide, please.As a consequence of the positive profit development and solid cash flow performance, our net debt continues to decline and is at the level of SEK 4.8 billion, which is an improvement of SEK 0.8 billion versus Q3 2020 and SEK 0.2 billion versus Q2 this year. Meanwhile, our cash position remains strong as net debt to adjusted EBITDA has decreased from 2.9% to 2.5% since the end of last year and from 3.1% to 2.5% compared to the same period last year. On top, the equity ratio came in at 45.2%, which is an improvement since year-end 2020 when we recorded 40.6% and Q3 2020, where we came in at 40.4%. And with those words, I give the word back to Joacim, and next slide, please.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, Daniel, and let me then move then over to some business highlights. And next slide, please.And starting with WoundExpress, and on WoundExpress, our work continues with good progress. We have received our 510(k) clearance from FDA during the quarter and are now ready to set the launch of WoundExpress during Q1 of 2022 -- 2022 in the U.S. with expected ramp-up of activities throughout next year.The randomized controlled trial is running according to plan but is, of course, affected by COVID restrictions and COVID-related effects on access. We have, as previously informed, added sites outside of Sweden, U.K. and Germany to make our RCT more pan-European and comprehensive. With the current COVID situation in Europe as basis, we continue to aim to have the RCT ready by Q2 2022, and should be underlined that we feel confident that this is achievable given current inflow.Our go-to-market plans for Europe, for example, U.K. and Nordics, where we're already present, but also France and Germany continues to take shape and will be ready for implementation and to hit the ground running in 2022, when we expect access to related facilities to be back to normal. And overall, we continue to see a high interest from current users, patients and key opinion leaders as before. Next slide, please.We -- when we then talk about the SEM scanner, we continue to actively engage with customers on markets where we have launched the SEM scanner and activity levels continues to be high. Despite COVID restrictions and access difficulties, we now have a completely filled pipeline for Q4 on customer evaluations. At the end of Q4, we will have more than 200 either finished or initiated paid customer evaluations. For reference, that same number for Q3 and Q4 after Q2 was around 150. We continue to get very positive indications from the customer evaluations and they continue to achieve reductions in pressure and re-incident rates above expectation, at least above 50% less prevalent.In the quarter, we have reached some important milestones. In the U.S., which contributes to around 50% of the market potential, we have signed a frame agreement with Vizient, one of the largest GPOs covering around 50% of all acute care hospitals in the U.S. We have already signed 5 contracts based on this frame agreement and as a large part of our customer evaluations are currently done with customers using Vizient, we expect a good acceleration of signed implementations during Q4.We're also very encouraged by that we, in October, well ahead of initial time schedule, have signed our first outcome program contract for pressure injury prevention in the U.S. Programs like this one includes products like the SEM scanner, our comprehensive solutions for therapeutic mattresses and our clinical support and will provide a guaranteed outcome for our customers. With this customer, we are looking to implement the program over 3 years, starting in Q4 to an initial value of USD2 million. Our experience from our diligent program is also that given the savings that we can achieve with these type of programs, the willingness from customers to invest significant additional money and expand scope in projects like this to more departments are high and is high.In U.K., forecasted to be the second largest potential for us in this area over the coming years, we have signed 3 large frame agreements with NHS in the end of the quarter and during October. These frame agreements will facilitate implementation discussions in the U.K. and our pipeline is solid going into Q4 and subsequently 2022 and beyond. Next slide, please.To further emphasize on the good development of the SEM scanner launch, Germany is another good example. One of the first customers to start a paid customer evaluation in Germany was SANA Hospital Group, which is the largest independent health care provider in the German-speaking area with more than 120 institutions, including more than 50 hospitals. Based on the trial in one of the largest hospitals in Dresden, they officially concluded that they have achieved 75% reduction of pressure injuries already after 6 weeks of 7 scanner usage and that they will, thereby, minimize their expenses associated to hospital acquired pressure injuries. Given their importance as a reference object for this new technology, this official statement and their planned upcoming implementation in 2022 throughout the group is another very important milestone for the project.If we look at the development from a general financial perspective, we are at least on plan when it comes to sales in 2021 despite negative COVID implications. We will be at least on expectations when it comes to exit rates for consumable [ helps ] going into 2022 and thereby in a very good position to execute on or exceed our expected sales numbers for 2022. And as stated, our pipeline for customer evaluations are developing better than planned, and we can only now take on new evaluations starting in 2022. Obviously, a good sign that we have a significant interest on the market to address this huge and costly problem around pressure injuries in a more efficient way.As previously communicated, we expect that the SEM scanner will lead to positive impact on our net sales and earnings per share starting in Q4 of this year and that it will have and contribute significantly to both net sales and EPS development from 2023 and onwards. Based on our -- next slide, please, sorry. Based on our current visibility and assumptions, we continue to guide that we will be able to achieve an organic net sales growth for the full year, well in line with our financial target of the 3% to 5% interval. The execution of the first 3 quarters of 2021 is obviously making us even more confidence here. Together with previously explained factors around order intake and good continued momentum in activities and demand, our clear internal ambition based on our current assessment and available information is to end the full year 2021 in the upper part of the given organic net sales interval.The organization is working and will continue to work hard to handle the global transportation and material situation and has done a continued impressive work to ensure deliveries to our customers. We also believe that our solid cost focus throughout the value chain will enable us to continue our journey to reduce OpEx as a percentage to net sales for the full year, very much in line with previous communications. We will continue our current approach navigating the changing environment and the COVID situation. underlying short-term levers like continued core rental development, step-by-step improved access for service in Europe and North America, and obviously, good continued development in capital equipment globally remains and gives us good confidence that we will improve net sales and profitability well in line with our financial targets in 2021 and beyond. Next slide, please.And some key takeaways. We posted another solid quarter with good development of net sales and profitability. Our net sales grew with 5.1% organically with growth in all regions. We continue to see very good growth, more than 20% up versus Q3 2020 in Patient Handling. It is also good to see that we continue to see the expected step-by-step return to pre-COVID levels in DVT with continued solid development of our core rental business and especially in this quarter in Western Europe. The organization is doing a really good job and professional work in navigating the COVID situation and in parallel building for the future. We have a great focus on our upcoming new product launches in hygiene and pressure injury prevention and our latest acquisition. The SEM scanner continues to be very well received by customers and our potential here is very interesting to say the least. WoundExpress continues to be promising with go-to-market plans well underway, supported by the 510 clearance in the U.S. and the upcoming RCT results. And as we have indicated before, our focus on M&A, well aligned with our strategic direction is very much there and will continue with higher pace. We now enter into the last quarter of 2021 with high confidence based on good demand, good pipeline and a book-to-bill that is well above last year for capital goods.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 Victor Forssell of Nordea.

[Victor Forssell, Analyst]

I hope you hear me well. Firstly, I would like to ask a question. I think, Joacim, you stated that looking at your SG&A currently that both the lines are selling and admin will [ enter ] in a more of a normalized seasonal pattern, if you could just give us more comments around that. Is it that this is actually a new cost base we should start looking to? Or is it more of just the seasonal pattern in terms of Q3 and Q4 that you're talking about?

[Joacim Lindoff, CEO, President & Director]

Yes. On the cost side, what we did not see in 2020 was this normal, how should I -- the lower levels on mainly admin and to some extent selling because we had different patterns on when people were taking vacations, et cetera. And we are in 2021 now back to a more normal Q3 pattern. So the levels that we are seeing, for example, on admin in Q3 is better to compare with when you do your forecast going into other years than what we had in 2020 where the admin line was pretty high in comparison. On selling, what we can see is that we are starting to see a ramp-up of activities as we saw in Q2, and we will continue to see that in Q4 but also in selling, that is a level that I believe is taking well care of a more normal seasonal pattern when it comes to vacations, et cetera.

[Victor Forssell, Analyst]

Alright. And a quick question also regarding how we should look at margins into next year. Are you pruning yourself to be able to deliver 23% EBITDA margins already while still having negative supply chain effects, et cetera. So could you just spend some time around this matter and talking about the moving parts for next year, especially on gross margins.

[Joacim Lindoff, CEO, President & Director]

Yes. We -- I mean what we believe that we are in right now is probably the peak of the storm and that we are handling very well. So as information are sitting right now, I mean, we -- a, on transportation are expecting that we will see a stabilization of the situation going into 2022. We will live with higher transportation costs also through 2022, but our expectations is that we gradually will see a return to a more normal state during 2022. For material costs, as I say, this is probably something that we will live with for a longer period of time. But we also have, as I indicated during the presentation, good plans in place to -- through long-term price adjustments compensate and mitigate for those cost increases. And we believe that we will be neutral versus those cost increases with our price increases by the end of 2022. So also here, we should step by step see a, say a flattening out of that cost increase with the actions that we have taken. And we continue to work on the efficiencies that we indicated in the supply chain. We continue to work with that. We continue to work with driving the product categories that are generating the more gross profit for us. So yes, I think you can expect an Arjo that continues to step-by-step work on the different components of the gross margin in a positive way, Victor.

[Victor Forssell, Analyst]

Okay. Excellent. So that also includes that you expect some positive mixed effects next year for what you see right now, at least in terms of where you push for growth.

[Joacim Lindoff, CEO, President & Director]

I think we will continue to see good growth in Patient Handling. I think we will continue to see good growth in DVT. And I believe that we have a good potential in core rental to continue on the path of step-by-step efficiencies. So maybe not the same swings in product mix, but that we will continue to work with the different categories where we have good profitability, which is very much in line with our strategic intention as well.

[Victor Forssell, Analyst]

Sure. I'll limit myself to one more. Good to see you converting SEM customers already. Are there actually any conversion rates that you can talk about for your own expectations heading into next year out of this, I think, 300 that you have in pipeline? And also when talking about the outcome-based customer that you've signed in these USD2 million, I think it was for 3 years. Does that imply a full scope of the beds at that site or is it just limited to a few wards?

[Joacim Lindoff, CEO, President & Director]

On the first one, I don't have a good conversion rate to compare with. We are following in each and every evaluation individually, so to say. And it's important to state again that there is no customer that has rejected to do an implementation. So it's more a question of working with them to get everything through purchasing and truly align with them where the different savings are ending up, which is a problem in public systems. When it comes to the outcome program, as I said, this is a very good thing coming earlier than what we expected. It is with a good customer, a customer where we are starting with a smaller part of their business. And that is why I'm also indicating that one might say that, okay, USD2 million, is that something to talk about, but we believe that it is a true milestone when it comes to the outcome programs and our experience when it comes to outcome programs is that when you start with the smaller department, when you start seeing good traction on the program, the customer is very willing to discuss expansion to other parts of their business.

[Operator]

Our next question comes from the line of Carl Mellerby of SEB.

[Carl Mellerby, Equity Research Analyst]

We can see rental spiking here again in Q3. Is it possible to isolate the impact on sales from COVID in the quarter. And of course, any color on the exit rates in rental heading into Q4 would be very helpful. And then shifting the focus to WoundExpress on the back of the 510(k) clearance in U.S. launch in Q1 next year. Can you comment on the level of sales people you currently have already in place in the U.S. and also how many you think you will need eventually to handle the launch?

[Joacim Lindoff, CEO, President & Director]

Starting with rental, I would say that the West European rental business is the improvements here are not necessarily driven by COVID. They are mainly driven by the fact that we are back on pre-COVID levels and that we have improved slightly from those in Western Europe. Because if you remember, one thing that was hurting us last year, which was a little bit surprising to us was that rental levels in Europe actually went down during COVID surges, which was surprising to us at that time. With -- in the U.S., we have, as I said during the presentation seen -- due to the COVID surge that was there in mid-quarter, we saw higher than normal for Q3, usage of our Critical Care solutions. That went back to, yes, more normal Q4 levels. Q4 is quite often the best quarter if we would have excluded COVID effects. So we are back to sort of say, normal Q4 levels. In Q4 I'm expecting a normal Critical Care quarter in the U.S. but then we don't know if there will be additional COVID waves, which there are indications that there might be and there is also indications that the flu season will be extra severe this year because of a very low flu season last year. So it's difficult to talk, but we are well prepared for any surges that would come in that area. And on WoundExpress, we are, I would say, given the 510(k), we are now, I would say, clear to start really building on the plans. We will be starting recruitment in the U.S. on needed people when we talk about and Q4 going into Q1. And I believe we have indicated before that we probably will be looking at -- or previously, I think we have said around 15 people, I don't think that we need that much because we have, I believe, a good view on how we can distribute this product in a more efficient way in the U.S. So let me guess, Carl, and say that we are probably talking about maybe 10 people that will be employed during 2022.

[Operator]

Our next question comes from the line of Rickard Anderkrans of Handelsbanken.

[Rickard Anderkrans, Research Analyst]

We've spoken a little bit about 2022, and I know you don't guide for this, but could you help us understand to what extent your order backlog is support for Q4 and not an indication into 2022. It would be interesting just to hear, any flavor on that would be very appreciated.

[Joacim Lindoff, CEO, President & Director]

Yes. The plus 15% in backlog that the group is currently enjoying based on the increased activity on the market and the good order intake that, that has generated also during Q3 is, as with any backlog split out over a -- not a long period from our perspective, but still, it's not only a 1 quarter event. So obviously, this improvement is also spilling over to 2022. And yes, improving our possibilities to execute a good 2022 as well. So if we are 15% up for Q4, we should be 15% up also for the orders that we have going into 2020, with the backlog we have going in for 2022 as a general statement. So I can only deem this as positive also for 2022, Richard.

[Rickard Anderkrans, Research Analyst]

Fantastic. And looking at the SEM scanner and the WoundExpress launches, can you launch these products with existing sales infrastructure? Or can you talk of incremental investments there?

[Joacim Lindoff, CEO, President & Director]

On the SEM scanner, we can launch the absolute majority of activities with the same sales force as we have given that we already have these call points and all -- given that we have an extensive knowledge in this area already. What we are employing and what we have been employing over 2021 and we'll continue to do so is around -- if you speak about medical affairs, making sure that we can continue to work especially on the development of our outcome programs. That is where we will put a lot of emphasis both globally and locally. And my view is that if we continue to employ people in this area, it will be mainly clinical expertise that will help us and our customers to implement the project in a good and profitable way for our customers. So -- but it's not large investments in terms of selling expenses when it comes to the SEM scanner. When it comes to WoundExpress, we have previously spoken about a need long term to have possibly 15 people more in the U.S. and 15 people more in Europe. As I indicated on Victor's question, I think that the need in U.S. is probably lower than that to be able to have an efficient launch during 2022. And in Europe, we are following that buildup. We need to employ more people. We have already employed people in the U.K. and also in the Nordic countries, and now we are looking into the need that we will need for example, in France and Germany. However, we are not speaking about loads of people, and we are speaking about specific and targeted people that will drive this in these countries. So it's not huge investments here either, well within the 15 people for Western Europe that we spoke about it in the beginning of this.

[Rickard Anderkrans, Research Analyst]

Fantastic. Just a final one from me. Looking across your offering, can you comment on to what degree you have implemented price adjustments so far? And perhaps if you could comment on if those adjustments have been -- also been made more broadly across the order book would be very helpful.

[Joacim Lindoff, CEO, President & Director]

Yes. It's -- that's why I'm talking about that we will be, so to say, neutral when it comes to price increases versus the cost increases that we have received by Q2 of 2022 because it's only on really on the new orders and also on when we have the possibility to update frame agreements, which we usually have by year-end or by the end of the budget year for different markets, which is, in some cases, in the end of March of the running year. So that's why we speak about a step-by-step mitigation of this. So the things we have done now when it comes to price increases is mainly done on a local basis. We have from global assisted in obviously adding flavor to the decisions that they have made and asking them to make sure that we are covering certain areas. But most of these activities has been based on local activities that we have followed up directly from global. So I don't have an exact summary on that one but I think it will be spread over all categories because we see a need and a potential to do more broad price adjustments across the product categories instead of just focusing on one category.

[Operator]

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

[Karl Norén, Analyst]

I have 2 questions to start off with. If we can just look at organic growth, is it possible or can you say anything with the strong growth that we're seeing. Is there any risk that it's driven by pent-up demand in, for example, Patient Handling DVT and service on the order side and also on the net sale side? Or is that just this new sort of normal levels? Is it possible to comment on that? That's my first question.

[Joacim Lindoff, CEO, President & Director]

Yes. I don't see that risk, Karl, because if you look at the developed -- if we take Patient Handling as an example, which is a category that pre-COVID was said to be growing at least 4% to 6% a year. which would indicate that we -- if it would have been non-COVID and we would have been in 2019, 2020 and then 2021, we would have seen 5 to 6 percentage points growth we would follow the market in these years. What we are seeing now is that we are up around 14% on Patient Handling versus 2019. So we are kind of following that trend, probably slightly a few ticks better because of good work that we've done on the market but I wouldn't say that what we are seeing now in 2019 is something we -- sorry, in 2021 is something where we should be scared that we can't see a 5% to 6% increase of patient turning year-over-year also in the years to come, following market trends, and then we can always hope that we do better than that. And I think the same goes for other markets. As I said, with DVT, for example, we are still not up to pre-COVID levels fully in the U.S. We hope to be there by end of Q4, but we're also adding new customers to that equation, small and larger customers. So we believe that also DVT will continue to see an interesting development in 2022 and onwards. So for me, I don't see the risk of, for example, customers putting our equipment on stock just to be sure that they have it or it's something that they, yes, are afraid of that they won't get delivered. We follow a fairly, I would say, routine-based approach with the customers, and we don't see any of them putting, I would say, warehouse orders in or anything like that.

[Karl Norén, Analyst]

That's very clear. And then another question is on your margins. I mean in Q3, usually the weakest quarter on a seasonal level. You posted an adjusted EBITDA margin of 23.3%, which is above your target for 2023. Is it possible to give a comment on how you see these targets and when kind of you can come back with an update to this because you clearly seem to trend above the targets also on organic net sales, at least in Q3?

[Joacim Lindoff, CEO, President & Director]

As I've stated on many occasions before, Karl, I think that it's too early to give updated goals right now. We will most probably be looking into that one when we are at least 12, 13 months beyond our latest or even longer than, probably mid next year, which I've indicated before is probably when we will come back to that one. And where I see the biggest potential for improved development is, as I stated before, in net sales. I think we have a very good potential of doing that and by getting good traction or better traction on organic net sales, obviously, operational leverage can follow.

[Karl Norén, Analyst]

Okay. And then just the last question on the rest of world. Can you say anything about the developments in Japan and China in the quarter? And how you see that developing going forward?

[Joacim Lindoff, CEO, President & Director]

Yes. If we start with China, which is a very, very small part of our business that is following the plan that we had. We indicated in the beginning of the year that we would see a very nice percentage growth in China, but from the small numbers we had, and we are following on that plan. We are not affected by -- currently by a weakened Chinese economy given that our sales numbers in China are that small. I would obviously wish that they would be higher, but they are small and they have been small. But we are following the path on percentage growth in China. In Japan, we have seen a very slow Q3 compared to what we had expected, and that is only based on the severe COVID restrictions that Japan has faced during the quarter with lockdowns and a significant decreased access to healthcare facilities. Order book is there. The pipeline and discussions with the customers are there. So once COVID restrictions are lifted, as I said during the presentation, we feel comfortable that we will continue on our long-term journey in Japan and making sure that we develop that to the net sales levels that we have indicated before.

[Operator]

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

[Kristofer Liljeberg-Svensson]

I have 3 questions. First, coming back to this SEM scanner and the conversion rate. Is it true that around 50 hospitals have finalized the valuation? And could you comment how many of these have become commercial customers? That's the first question. And then also related to the SEM scanner and to get a feeling for how much a hospital contract could be worked. Is it possible to say anything about this German player, SANA and how they will introduce this? Will it be in small scale at a few hospitals? Or will they introduce more broader from day 1? And then my final question, coming back to the discussion on the rental better than expected. Is it possible to give a figure for how growth were in Europe versus the U.S., for example, is U.S. up year-over-year or is it down versus a very strong third quarter last year...

[Joacim Lindoff, CEO, President & Director]

Thanks, Kristofer. If I start with the conversion rate. I don't have numbers here but what I can conclude is that we are now starting to get customers signing up in the U.K. We have customers, as I indicated, in the U.S. based on the Vizient contract that has signed agreements. We have contracts signed, for example, in Spain and also in other markets. So conversion is starting to get there. It has been, as we have said before, slower than expected because of both COVID implications that we didn't foresee starting pf the year, but around access, but also that it is taking longer time to help healthcare, especially public customers to describe where actually the savings are ending up. It is tragic as a taxpayer that we don't have better control of these things in our public hospitals, but we actually need to help them to track where the savings are ending up in their own budget, and that takes a little bit of time. But conversions are starting to happen. And as I indicated, we believe that we will exit out of Q4 with a good pipeline, both in U.S. and U.K. and U.S. being the by far most important market for us, the traction is better than expected. When it comes to the SANA implementation, we don't -- or I don't have their implementation plan, but if I would take a guess, I would say that they will start with a few hospitals and departments in those hospitals and then step-by-step ramping up when they are learning together with their staff on how to work with this new setup, and where they -- for their set-up get the best possible outcome. So I would foresee during 2020 -- sorry, 2022, a step-by-step approach by a customer like SANA that we will support in every way we can. When it comes to the rental business...

[Kristofer Liljeberg-Svensson]

Could I ask, coming back to the SEM scanner, it sounds fantastic, of course, with is at least 50% reduction for more or less everyone doing their valuation. But are you receiving any type of pushback here. Of course, you could argue that those fantastic results could just be a factor of this topic becoming more in focus while you do the valuation, et cetera. So any type of pushback...

[Joacim Lindoff, CEO, President & Director]

So actually not, Kristofer. And if I take SANA as an example again, because SANA did their customer evaluation and reduced with the 75% that I indicated. Then to -- yes, if that's okay or not, but what they did was that with those departments, they didn't use this SEM scanner for 6 weeks, and they saw a return to the previous levels of pressure injury prevention very quickly. So we also believe that the hospitals do have a lot of focus around the area of pressure injury already but they are coming to a level where they can't reduce it further, and that is where the SEM scanner and our approach in pressuring group prevention where we're helping them to, I would say, fix that last part. And that might sound small, but given again that pressure injury in total is a SEK 500 billion problem globally. There is a lot of money here to address. And that is what, for example, that SANA is doing when they are seeing that they can reduce with 75% and the money that they will save by doing so.

[Kristofer Liljeberg-Svensson]

Great. And then there's a final one on the rental one.

[Joacim Lindoff, CEO, President & Director]

Yes. On the rental side, it is like this, that the North American rental business is flat on net sales versus Q3 of 2020. So the increase that we have in rental is our Western European business. That is, in total, almost growing with 10% in the quarter when it comes to rental. They had easier comps in Q3 of 2020, but still it is a significant step-up and also better than expected in our Western European rental business but the North American rental business is flat versus last year.

[Kristofer Liljeberg-Svensson]

And North America, without the spike of COVID numbers in the middle of the quarter, how much would you expect North America to have been down?

[Joacim Lindoff, CEO, President & Director]

I would expect...

[Kristofer Liljeberg-Svensson]

How much is the underlying, if I could call it like that, how much is the underlying rental in North America improving.

[Joacim Lindoff, CEO, President & Director]

I would say that the core rental is surely up 3 to 5 percentage on organic, Kristofer.

[Kristofer Liljeberg-Svensson]

The North America?

[Joacim Lindoff, CEO, President & Director]

Yes. So the core rental is doing -- yes, is continuing their improvement journey, also in North America. What we had on Critical Care last year was that we had a very strong July and into August on Critical Care. And this year, we have had a strong September one could say. So it's a slightly shorter period this Q3 of 2020, where we had the benefits of very high Critical Care numbers.

[Operator]

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

[Erik Cassel, Analyst]

So just 2 follow-up questions on the price cost dynamics. First, as you've said, we should be seeing price increases beginning to effect in Q4. But are you -- do you see that these will be able to offset any incremental cost increases into Q4? Or if you know even better, if your price increases will be a net positive for margins Q-on-Q.

[Joacim Lindoff, CEO, President & Director]

I think that what we have seen, in fact if I start with Q3, we can conclude that we have seen slightly, and it's not big because we are only speaking here about SEK 10 million to SEK 15 million. I shouldn't overexaggerate what we have done here, but we have done probably a little bit more on our price improvements or price adjustments to mitigate the cost increases already in Q3. I don't -- we are looking at the same type of spend going into Q4 that we -- our material costs will be up with SEK 10 million to SEK 15 million, same number as we indicated after the Q2 call, and we will have some more price adjustments kicking in. And that will be the case up until, I would say, Q2 of 2022, where, as I said, we will be at least fully mitigating the increases with the price increases that we have made. Because of the slowness of the system and also that new orders that we are now taking in will only be shipped out in Q1 and Q2 to some extent and the frame agreements usually have a window of changing on a year-by-year basis when the fiscal year or the budget year for that institution is over. So usually end of year or end of Q1.

[Erik Cassel, Analyst]

Okay. Very clear. And as you said, full price increases in place in Q2, but should we expect the bulk of these increases to come in Q1 or Q2? Or what's the timing on this? And what sort of magnitude of price increases could we be seeing? So any comments on timing and the magnitude will be very appreciated.

[Joacim Lindoff, CEO, President & Director]

Yes. And we have indicated that probably the rolling effect of these price increases, rolling 12 effect would be around SEK 60 million. We have indicated for Q3 and Q4 around SEK 10 million to SEK 15 million of direct increases and our price increases will come step by step. As I said, some small quarters come in Q3. There will be some parts coming in Q4, some parts coming in Q1 and some parts coming into effect in Q2 based on the factors that I mentioned before with backlog orders in that are now being taken in on price adjusted numbers and the possibility to change frame agreement. So it's step -- probably also a step-by-step approach there is, is the best way to calculate that one, Erik.

[Operator]

[Operator Instructions] There are no further questions coming through at this time. I'll hand the floor back to our speakers for the closing comments.

[Joacim Lindoff, CEO, President & Director]

Thank you very much, operator, and thanks, everyone, for listening in. Just to remind everyone, we are putting another strong and solid quarter to the record 5.1% organic growth in all regions, and we're looking forward to a strong finish to 2021 and going into 2022. So with that, thank you very much, and have a very good day.