Arjo AB (publ)

STO:ARJO B

Earnings Call Analysis

Stable Growth Despite Market Volatility

The company reported continued stability and growth in the third quarter, following trends from the first half with a solid 4.6% organic growth and strong performance particularly in North America with 8% organic growth. Good demand across Capital, Service, and Rental aspects of the business was observed, although challenges from inflation and slower implementation of preventive programs in certain health areas were present. Gross margin improved to 42.1%, up from 40.6% in Q3 of the prior year. Adjusted EBITDA increased to SEK 504 million compared to SEK 420 million in Q3 2022, and the company achieved a cash conversion rate of 121%. Despite staffing shortages and the healthcare provider financial strains, the U.S. market saw the first signs of growth in Patient Handling and expects a gradual improvement in Capital order intake. Western Europe and Rest of the World also reported growth, with a notable 2.5% organic growth in that segment. The company is well-positioned for continued organic growth in coming quarters, with a forecasted target interval of 3% to 5% for 2023.

Navigating Market Volatility with Solid Business Performance

During the third quarter, the company has seen trends similar to the first half of the year, achieving a 4.6% organic growth, underpinned by strong underlying demand in Capital, Service, and Rental sectors. The North American market particularly stood out with over 8% organic growth, as the U.S. operations are gaining momentum and aligning with strategic plans. Western Europe reported a modest growth of 1.6%, with positive developments in key markets and service sectors. As for the Rest of the World, a stable growth rate of 5% was reported, with noteworthy contributions from markets like India and APAC, despite a lag in Japan's expected performance.

Improving Margins Despite Inflationary Challenges

Gross margin for the quarter improved to 42.1%, a respectable rise from the previous year, though not yet at the company's target owing to ongoing inflation impacts and implementation delays in preventative programs. Encouragingly, a growth in U.S. patient handling business indicates a move towards a better product mix, which is essential for future margins. The company is actively managing operational expenses which increased mainly due to salary inflation and IT costs. Adjusted EBITDA and adjusted EBIT increased notably by 40% compared to the previous year's quarter, solidifying the earnings progress. Looking ahead, the team expects material costs to decline towards the end of 2023 and 2024, providing a tailwind for gross margins.

Continued Focus on Operational Excellence

Operational expenditure (OpEx) was in line with forecasts, reflecting high activity levels and investments oriented towards future growth. The company continues to focus on improving efficiency across the supply chain, benefiting from production stability nearing pre-COVID levels. Restructuring costs for the year are projected to be between SEK 55 million and SEK 60 million, supporting greater efficiency in the future.

Robust Cash Flow and Debt Reduction

The company's robust management of working capital and focus on inventory reduction have led to a strong cash conversion of 121% for the quarter and a year-to-date figure of 98%, trending positively towards the annual target of over 80%. Net debt experienced a significant decline from SEK 5.3 billion to SEK 4.7 billion due to vigorous operational cash flow and revaluation of pension liabilities, with expectations to further improve in the upcoming quarters.

Strategic Outlook and Growth Expectations

The company maintains its guidance for organic net sales growth for 2023, falling within the 3% to 5% target range, indicating confidence in its operational strategy and market positioning. Despite anticipating continued inflationary pressures on materials and salaries, the company is placing an emphasis on pricing strategies and operational efficiencies to mitigate these impacts. Service and core rental businesses are expected to progress favorably going into the fourth quarter.

Commitment to Top Line and Profitability Development

For 2023, the company anticipates net sales and profitability to surpass the results of 2022. It has conveyed optimism in meeting its full-year organic growth guidance; furthermore, internal efficiency measures and pricing initiative continue to be robustly pursued, laying grounds for an optimistic margin and profitability outlook in the forthcoming quarters.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Arjo Q3 presentation for 2023. [Operator Instructions] Now I will hand the conference over to CEO, Joacim Lindoff. Please go ahead.

[Joacim Lindoff, executive]

Thank you very much, and a very good morning to everyone, and welcome to our Q3 2023 earnings call, where I will give you some details on the Q3 report that we have just released. And if I can have the next slide, please.

Today's agenda includes a summary of activities and results from Q3, balance sheet items and some comments on the outlook for 2023 before I'll open up for questions. And we intend to keep this call as always to an hour and be ready around 9:00. Next slide, please.

Q3 has followed the same trends seen in the first half of the year with good underlying demand for our core business in Capital, Service and Rental. We continue to navigate a volatile market environment in a good way, and we put a quarter with 4.6% organic growth behind us, with most regions on or slightly above that.

For the U.S., the small beacons of light in the tunnel that we spoke about during the last quarter report continues to be there. We continue to see a stressful situation in many health care providers, caused by the staffing shortages and increased costs. And due to this, we do not have the wanted development in our preventive program sales, but still managed to grow our U.S. business in a good way for the quarter. In my view, this is a good sign of increasing stability and opportunities when we look into the coming quarters.

We continue to see good growth on major markets like Canada and France, where both Capital, Service and Rental developed well. In some other markets in Continental Europe, development was somewhat slower, reflecting the current situation on those markets. Our gross margin came in at 42.1%, which is a solid improvement versus Q3 of 2022, but not fully where we expect it to be.

The reasons are continued significant direct and indirect effects of inflation and that we continue to be behind plan when it comes to implementation of our preventive programs in Pressure Injury Prevention and Caregiver Injury Reduction. On the positive side, we are seeing the first sign of growth in our U.S. Patient Handling business, which we are convinced will step-by-step lead to a better product mix for us.

As communicated before, we are driving continued efficiency focus throughout the value chain based on the plans that we have put in place, for example, within supply chain. Our strong focus on price adjustments also remains, and it is very clear that we need to continue with that work also into 2024 to mitigate for the additional inflationary cost. There is work left to be done over the coming quarters on the gross margin side, but I'm glad that we are seeing good improvements versus last year in this area, which is key for the quarters and years to come.

On the OpEx side, we are seeing an increase mainly related to salary inflation. In comparable currencies, the increase in OpEx is more or less only related to higher salary costs and somewhat increased IT costs. We continue to see high activity levels throughout the organization. And with this, I believe that we are positioning ourselves well for the future. Adjusted EBITDA for the quarter was SEK 504 million versus SEK 420 million in Q3 of 2022, driven by the better-than-expected net sales. Adjusted EBIT improved with around 40%, and we have good stability in our earnings progress.

We continue to perform well on operational cash flow with almost SEK 600 million, leading to a cash conversion of 121% for the quarter. The continued positive development is driven by our inventory reduction performance, but also a continued focused work around our receivables side. Year-to-date, we are at 98% cash conversion and overall, we trend well towards our target to be above 80% cash conversion for the full year.

In summary, we have, also in this quarter, seen continued good development on most major markets. Our Service and Rental business develops well, and we continue to drive our market activities with high level of focus and are expecting this to continue to generate profitable organic growth also for the coming quarters.

Next slide, please. With a continued good performance in Canada and with U.S. developing according to plan, North America grew with more than 8% organically in the quarter. In the U.S., our activity level with our new organizational setup is starting to gain speed and alignment, supported by the small positive development that we see on the market. Conversions from pipeline to order intake and Capital equipment and outcome programs are still slow due to the continued lack of staff and strained financial situation for many health care providers.

But especially in Patient Handling, we have started to see the step-by-step improved order intake in this quarter. We expect this to continue, and we expect to continue to see a gradual improvement in our U.S. Capital order intake in both Q4 and the quarters to come. Also in this quarter, our DVT business in the U.S. continues to perform well and on plan, both pricing and compliance initiatives. Volumes in the quarter are increasing slightly based on better traction on the electric surgery side, and we expect this trend to continue also into 2024.

The interest for our Pressure Injury Prevention programs in the U.S. remains high. However, the SEM scanner conversion rate is still below expected levels, and we are behind target for the full year. The reason is the same as before around staffing shortages and focus on more short-term projects. On the positive side, we have secured larger commercial contracts where implementation is taking place as we speak.

And to put it into a little bit of perspective, for one customer, which we expect will have just short of USD 2 million in annual revenue, we need to train more than 1,000 nurses, which obviously is time consuming and requires significant planning and time investments for all the stakeholders, especially under the current circumstance. Here, training will be concluded in the first part of Q4, and then the sales volumes of disposable scanner heads will start to ramp up.

Rental in the U.S. continues to develop well with an organic growth of around 8% in the quarter. This continued positive trend comes from both new customers and further development of the existing customer base. Our service business in the U.S. continues the strong net sales development from the first half year with profitability coming along well.

Canada reports now a 14th consecutive quarter of growth this time with around 8% organic growth. All areas of the business see good growth in the quarter in both acute and long-term care as before, and we expect this important market to continue to contribute to good profitable growth also in the quarters to come.

Next slide, please. Then over to Western Europe and Rest of the World that makes up the global sales region. And in Q3, this region recorded a 2.5% organic growth, and we are now year-to-date at 4.4% organic growth in this region. In Western Europe, we see continued healthy demand for our products and solutions, together with a good development of both service and rental in the quarter. We report an organic growth of 1.6% in quarter 3 with markets like France, Austria, Spain and Ireland being drivers in Western Europe.

Our organization in U.K. is navigating a volatile market development and are performing net sales in line with last year's quarter 3. In the U.K., discussions around how NHS should run health care in the future is on top of the political agenda. And it is very good to see that U.K. as one of the first markets are setting the clear strategic target for health care towards prevention, which obviously goes fully hand-in-hand with our strategy. But obviously, it is a long way and a long road to change. But the first signs are there, which is really good.

Also in this region, we see high interest for our Pressure Injury Prevention solutions, but we continue to experience the same conversion trends from pipeline to order as in the U.S. There are, as before, some uncertainties around capital spend levels in European Healthcare, but based on year-to-date performance, information at hand and current pipeline development, we feel comfortable that the short-term net sales development will follow our current expectations.

Next slide, please. Our business in Rest of the World had a stable organic net sales growth of almost 5% in the quarter with continued high activity levels on those markets. In Australia, organic net sales was down compared to a strong Q3 2022. However, and this is important to underline, order intake for this important market was significantly up, which is a good sign for the quarters to come. In addition, our focus on gradually changing our sales approach towards more outcome programs on this market continues according to plan.

APAC as a region continues a positive development in the quarter. Our business in India developed favorably also in the quarter with good potential for further development. Japan performs a solid quarter, but we continue to see a slower-than-expected uptake in orders and thereby invoicing. We are behind plan in Japan for this year, but are working with high focus to regain momentum on this important market.

Next slide, please. So let us then move over into details around our gross margin development, where the gross margin came in at 42.1% for the quarter, up from 40.6% in the same quarter last year. The negative effects of the high inflationary environment, both direct and indirect, continues to impact. Increasing salary costs and additional fuel energy are, as expected, affecting the gross margin negatively in a significant way also in this quarter.

We need to continue to work on price adjustment as one part of the puzzle to mitigate these negative effects. Targets in this area are being achieved for this year, and we need to have full focus also on this going into 2024, as our expectations are that inflationary pressure will continue to be high, especially on salaries in 2024.

Material cost has stabilized on a high level, but is as expected, showing signs to come down in the last part of 2023 and into 2024, which will be favorable to our gross margin in 2024. Transportation costs are now stable on pre-COVID levels, and this development will contribute to margin expansion in coming quarters as well. We are, as before, working hard to mitigate the negative effects with continued long-term efficiency gains throughout the value chain, including a solid focus on continued supply chain efficiency.

This work is obviously helped by the fact that we now have a stability in production that is coming very close to pre-COVID levels, allowing us to work with supply chain optimization in a more standardized and efficient way. A continued negative product mix affects us with higher-than-expected medical best sales and less outcome programs. We are overall convinced that we have a number of additional well-defined steps to take to get our gross margins to a better level. However, the improvement from last year's Q3 is a good indicator that we are clearly trending in the right direction.

Next slide, please. Our OpEx level in the quarter is well aligned with plan. Activity levels remain high throughout the organization and we are investing capacity to secure both short-term revenue and development for the future. Direct and indirect inflationary effects are clearly visible also in OpEx. The increase in OpEx for the quarter versus last year is more or less isolated to salary costs. We also see the same trend as previous quarters on higher IT costs related to significant increases in license costs and our continued improvements in IT security.

R&D gross investments is at 2.6% for the quarter, well aligned with the portfolio planning and upcoming launches as before. As you can read from the report, our net R&D cost is approximately SEK 7 million higher than Q3 of 2022. Adjusted EBITDA in Q3 came in at SEK 504 million, with adjusted EBIT at SEK 207 million, which, in the case of EBIT, is an improvement of more than 40% versus quarter 3 of 2022.

Restructuring came in at SEK 8 million in the quarter, mainly relating to the large part of our U.S. realignment. We forecast approximately SEK 55 million to SEK 60 million in total restructuring costs for the full year of 2023, as we continue with sales organization alignment in other areas in Q4, setting us up for a more efficient performance in 2024 and onwards.

Next slide, please. And on to working capital and a little bit around operating cash flow. The positive trend in our operating cash flow continues. We have a high focus on working capital management and see a positive solid impact from working capital and cash flow in the quarter. We are well on track to meet set targets for inventory reduction for the year, and we have continued our solid work on receivables management from previous quarters. Working capital days sees a significant decline in the quarter down to 92 days, and we are expecting a continued step-by-step improvement here. The improved EBIT level, along with the positive impact on working capital, gives an operating cash flow of SEK 598 million for the quarter versus SEK 280 million in Q3 of 2022.

As an effect of this, cash conversion improved considerably versus Q3 of 2022, and we report 121% cash conversion for the quarter with 98% year-to-date. We are now very comfortable that we, with the current focus and activities in place, will exceed our target of 80% cash conversion for the full year. For your information, cash flow from investing activities was SEK 167 million versus SEK 204 million in Q3 of 2022, mainly containing investments in our Rental fleet, R&D, and Fixed Assets. Next slide, please. Our net debt decreased significantly from SEK 5.3 billion in Q2 to SEK 4.7 billion in Q3. This decrease is mainly attributed to the good operational cash flow and a positive revaluation of our U.K. pension liability due to the higher interest rates in the U.K.

Our financial cost has increased substantially compared to the same period last year and reflects the current interest rate development and debt levels in Q3. We expect our reduction journey on net debt to continue also in the coming quarters, and we have full focus to achieve this. Our cash position remains strong. Our leverage net debt to adjusted EBITDA came in at 2.7 -- no, 2.5, sorry, as a consequence of previously discussed activities, and we expect, as before, a slight further improvement also in Q4. The equity ratio came in at 50.2%, which is an improvement from 47.7% last quarter.

Next slide, please. Our outlook for the year remains and we, therefore, expect, based on our current visibility of the market, the organic net sales growth for 2023 to be within the group's target interval of 3% to 5%. We expect to have continued favorable development of our organic net sales also in Q4. We expect the step-by-step improvement in the U.S. to continue, and we will have to navigate a volatile European market in the same good way as before.

We believe that our positive development in Rest of the World will continue. We are obviously following, for example, the dramatic situation in the Middle East very closely to understand the impact on our sales to this region. Just for your reference, we had approximately SEK 100 million of sales in the Middle East region in 2022. We can expect overall capital sales volumes to grow slightly for the full year despite the lower-than-expected uptick in our Pressure Injury Prevention programs, including the SEM scanner sites.

Here, it is worthwhile underlying that the belief in our Pressure Injury Prevention programs, including the SEM scanner remains on the highest level, and we strongly believe that this product will be a cornerstone in our future development as before. As additional information, we also expect our service and core rental business to continue to develop favorably going into Q4.

On gross margins for Q4, direct and indirect inflationary pressure, mainly on materials and salaries, will affect negatively, while our continued focus on efficiencies and pricing will remain to mitigate. We now expect OpEx as a percentage of net sales to increase only slightly for the full year of 2023, and that we will start seeing the expected decrease here from 2024 and onwards, despite the significant inflationary pressure in this area over the coming quarters.

In summary, we continue to expect 2023 to be a year with net sales and profitability improvements versus 2022. Based on the stable start to the year, we feel even more confident than after Q2 that we can meet our guidance of 3% to 5% organic growth and make sure that we continue the journey to improve our profitability.

Next slide, please. And a very short summary from my side. We report another solid growth quarter this time with 4.6% growth. Our underlying business is developing well in most areas, and we are following our plans and forecast well. We continue to work with further internal efficiency gains, and our initiatives around price increases continue to be driven with good focus. And we are convinced that these areas will contribute to a positive development of our gross margin and overall profitability in a solid way in the quarters to come.

We need to continue to navigate market volatility and other challenges on different markets in the same good way as we have done up until now, also in the quarters to come. We feel more comfortable today than after Q2 with our outlook of 3% to 5% organic growth for the full year. And as stated, we will continue to develop Arjo in 2023 on top line and profitability versus 2022.

So with that, I'd like to open up for questions. So moderator, please go ahead.

[Operator]

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie.

[Kristofer Liljeberg-Svensson, analyst]

I have a few questions here. First on the gross margin uptick you have talked about for Q4. Do you think U.S. sales growth is strong enough for that to happen? That's my first question. Secondly, you talk about this target for inventory reduction this year. If you could quantify that target and whether you expect working capital to improve further in Q4, despite, I guess, there will be a lot of invoicing late in the year. And my final question is if you could just comment how you see interest rates now on the borrowing and how to think about the financial net going forward?

[Joacim Lindoff, executive]

Yes. If I look into Q4, as I said during the presentation, I believe that we are now in a position where the important product groups in the U.S. will really take off -- and not really take off, but they will take advantage of the step-by-step improvements that we are seeing on the market. And that will obviously help both our product mix and geographical mix. We are seeing good order intake in Patient Handling for this quarter, and we are still waiting and very much expecting an uptick on the SEM scanner sales going into Q4. So I feel comfortable around the development in the U.S. that is following the plans that we've had or that we are having.

It will -- in my view, if I look at all the details in the gross margin, I believe that a gross margin for Q3 -- sorry, for Q4 could have a potential of being slightly and I mean slightly better than the one that we saw in Q3, which will still be a good uptick versus a Q4 of 2022. On the inventory side or rather on the working capital in total, I believe that we will continue to see good benefits from working capital into our operating cash flow also in Q4.

We have -- I can't give you an exact number to offer, but we have, I would say, absolute targets to reduce on the absolute level of inventory also going into Q4, which will help that in a good way. You are right that account receivables side, depending on where net sales comes in the quarter, can have an effect on the operating cash flow and obviously also on the cash conversion. But we are, as in any Q4, working very, very hard to match the net sales together with the accounts receivable side. So I don't think that we will see a different pattern to that area than what we have seen in previous years.

So I have good hopes that we will continue to see a good development of our operating cash flow also in Q4. And when it comes to interest rates, I mean, we are following this as you are and are dependent on the development of the global interest rate market. And our main focus is obviously to reduce our net debt. And that work is continuing with good speed, dependent on the operational cash flow, obviously, but it is continuing with good speed, and I have every reason to believe that we will continue to be able to reduce our net debt also going into Q4.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

All right. First one, I just wanted to clarify. So you expect sort of a flat gross margin development quarter-over-quarter in Q4? Was that correct interpretation? Or I just want to follow up on the previous one.

[Joacim Lindoff, executive]

I would say slightly better, because it's what I believe that we would be able to be -- it's very much dependent on how the product mix develops in the U.S., and our ability, again, to convert the very interesting pipeline on Pressure Injury Prevention and Patient Handling to orders to be invoiced in Q4. So it's on that level where we are. I think all other parts of the business is trending well. And yes, as I said during the presentation, I believe that areas like material cost is now starting to trend in the right direction.

That is having -- it takes longer than what one might expect to get those price reductions through the system, but it is at least a very good trend that will help us also in 2024. There are, yes, good signs in many directions, but we need to make sure that we keep the momentum and that we start getting, I would say, the benefits of a better product mix that we get from the sales in U.S. that is step-by-step picking up.

[Rickard Anderkrans, analyst]

All right. That's helpful. And a question on the U.S. Can you talk about the magnitude of Patient Handling order improvement heading into Q4? And also, if you could comment on sort of the book-to-bill in the quarter or year-to-date. Is it above 1? Or how should we think about the overall order situation? That would be my first question there.

[Joacim Lindoff, executive]

If I take the last one first. I mean, we have improved on the book-to-bill situation for the quarter, which is good. And especially in the U.S., where the order intake is actually not -- I wouldn't maybe use well, but it is above the absolute net sales. And Patient Handling is the Capital goods group that is growing best in the U.S. for the quarter. So that is obviously good to see it is. And we should speak openly about that. Obviously, it comes in comparison to a weak Q3 of 2022. But it is, at least in my view, a trend shift and is following very much the lines that we discussed over Q2 with the beacons of life that we spoke about them.

So really good to see that both the market is more adaptive to convert from a well-filled pipeline into orders in patient handling and also that our new sales organization or the new sales setup that we have is starting to work in a step-by-step significantly better way, and that obviously gives me confidence going into 2024 as well.

[Rickard Anderkrans, analyst]

All right. And just a quick one as well. So what do you expect for SEM scanner sales for the full year compared to the SEK 130 million, SEK 140 million you communicated in Q4 for '23? And then also, has your outlook for '24 changed anything?

[Joacim Lindoff, executive]

As we discussed after Q2 that we believe it's not really bringing any value to give you a number there on the SEM scanners, that we are behind plan, as I said. But still, with that, again, very high activity level, pipeline is absolutely there. There are no customers jumping ship. It just takes a lot longer than what we expected to get these implemented. So we are behind plan, but are still having very good outlooks on our possibility in Pressure Injury Prevention, and with that, obviously, the SEM scanner sales.

We are looking at a significant growth based on the commercial contract that we will have by the end of the year for SEM scanner sales in 2024. So it's not going to be a wishful thinking type of a forecast in 2024. It's going to be based on -- the growth is going to be based on the existing contracts that we have. So for me, going into 2024, the growth, the significant book that we are expecting on SEM scanner sales in 2024 is going to be based on the contracts that we have at and that we have implemented, trained for, and started to see commercial traction on. So that is, in my view, a big difference into 2024. But it will be one of the more interesting growth drivers in 2024 and will bring a better product mix for us.

[Operator]

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

[Sten Gustafsson, analyst]

I have a few. Looking at the U.S. business, we're obviously pleased to see that growth development is picking up. Could you share with us the utilization rate on your Rental business and put that in some sort of context, where we are compared to sort of where it troughed earlier? That would be my first question.

The other one, and I guess you have talked about this just recently. But with regards to the SEM scanner and the conversion rate, why do you think that the conversion rate will change or shorten? And what will trigger that going forward? And the final question is just on your net financials. Were there any one-offs in Q3? Or is that the interest rate level we should expect going forward?

[Joacim Lindoff, executive]

Thanks, Sten. When it comes to utilization rates on our Rental fleet, I would say that we are, now in the U.S., where we should be. It's different from country to country depending on the logistics setup that you have and the distance that you have to different customers. But I would say, in the U.S., core Rental business is now running in a good and efficient way. If you look back to where we were during COVID times, we obviously had higher utilization rate, but that is nothing that you can run for a longer period of time, because you're wearing out the system, both equipment and staff.

But on the other hand, then in the back end of 2022, we had a too low utilization, because we were, at that time, banking on that we would be able to get new orders in quicker than what we thought and overinvested into our Rental fleet. We are now back to a good state in our U.S. Rental business, and we can also see that when it comes to the uptick in our U.S. Rental margins, which is following in line with the other parts of Rental margins, that is ticking up step by step.

So let me put it like that, that we are more on a normal level or an efficient level on utilization on the U.S. Rental fleet now after a number of quarters of volatility. And that goes for many other parts of our business as well. We are back to a more stable situation. And therefore, we can also, in a more, I would say, long-term, more focused, and also detailed way, drive efficiency gains throughout the organization, because there are not too many bad surprises waiting behind the corner as it was in 2022.

The SEM conversion rate. I mean, it's the same thing as we have been talking about before. We don't think that, with the experience that we have now, these conversions will continue to take time. If we look at the customer that I was just referring to, that is a contract that we've been working with -- until we signed it in Q3, we've been working with it for, I believe, 13, 14 months to get it over line. And now it's about training 1,000 nurses in a time where they have lack of nurses, where there are staff shortages, and the focus for U.S. health care is very much around getting the financials going here and now.

So those factors will be there for a few quarters more. I believe what can change that and what we sincerely believe will change that is when the financials for U.S. health care continues to improve, where they can lift, I would say, their focus a little bit from not only focusing within the operating theater, but also processes around that. I believe that we stand a good chance of seeing those conversion rates increase. We are not there right now, but that is one of the things that could be an additional uptick for 2024.

But it is -- I mean, again, as I've said, the pipeline that we have with active customers that are actively discussing the possibility to introduce our Pressure Injury Prevention programs with SEM scanner as a part of it continue to be, 1, from a qualitative perspective, high, and 2, increasing. And we are working, I would say, day and night to make sure that we are converting that one into drive. It's a work that takes more time than expected. But when it's there, when it's implemented, it is a profitable business that we have every intention of making sure that we are fully exploiting.

The net financials, there was no dramatic one-offs in Q3. So I do believe that with the same -- if net debt is on the same level and if interest rates are not going in either direction, then that is going to be the number that we will see also for Q4. Now with that said, we have a very strong continued focus on bringing our net debt down because that is our way of getting that number down. And I hope that we will be able to continue to do that as we have done in Q3, continue to do that work also in Q4, which will have then a slight positive effect to the interest rates paid if interest rates are staying the same for Q4.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

Sorry, I was muted. Mine is also going back to the gross margin questions you got before. So when you look before the turbulent times of 2022, COVID times, 2020, '21, you have had a beneficial effect of seasonality on the gross margin going into Q4. I think that's quite obvious when you look to the years before 2020. And yes, I guess, external factors and the price point should not worsen sequentially, neither should product mix as far as I understand things. So yes, once again, if you could speak about the gross margin seasonality and explain perhaps again why it should remain at the 42%, 42.5% trajectory as, I think at least, you allude to on the answers here. That would be...

[Joacim Lindoff, executive]

I believe that what is maybe slightly, slightly different is that it is still a -- I mean, on the capital side of things, it is slightly slower, and we are seeing a good uptick on the rental business, which has a lower gross margin. It has a good flow-through to the last line. So I believe that the increase that we are seeing, for example, on lower parts of the P&L, on, let's say, adjusted EBITDA, will be more interesting than the improvements that we are seeing on the gross margin for Q4.

So maybe my advice though is just to look through the entire P&L and the belief on what type of effects we will have down to the adjusted EBITDA and also the adjusted EBIT. But you are right that normally, seasonally, we should be better in Q4, very much given the higher net sales that we usually have. And I am taking a cautious approach because there is volatility out there and, therefore, I'd say that we will most probably end up with a slightly better gross margin in Q4 than what we had in Q3.

I have, however, no doubt in my mind that we will continue to improve on that gross margin continuously going forward with the things that we are seeing in our activity box for 2024, with price increases, and also that external factors are starting to speak our language as well, plus the step-by-step change in product mix and geographical mix with a stronger U.S. market and more outcome programs. So it will be a solid, I would say, adjusted EBITDA performance and improvement in Q4, and then that journey will continue into 2024 as well.

[Mattias Vadsten, analyst]

Appreciating a third answer to the gross margin. My next one would be, the Service part of the business has been performing really strong during the quarter and through the whole year, really. Would you expect growth here to normalize somewhat going forward given sort of price increases, what I think have been strong here, should come down somewhat? And also to that for the group, could you remind us on the impact during 2023 from price increases and what you expect for the full year? If you could quantify that, it would be very helpful.

[Joacim Lindoff, executive]

Yes. We are -- on the price increases we set out in the beginning of the year that price increases should be 1.5% on organic growth, and we are trending slightly better than that, as we did after Q3. It is a good work going in there. I am not completely sure that we can allow ourselves to be lower on price increases going into 2024 than what we were going into 2023, because inflationary pressure on salaries will remain into 2024. And that is the kind of main component when it comes to cost increases in Service for us.

So I believe we need to be as hard in 2024 on price increases. And again, this is very much to mitigate our own cost. It is not about taking advantage of the situation. This is about mitigating our own costs that we have in this area. Also the fact that we have done a good job in placing installed base on the market should not be, I would say, underestimated in terms of potential for our service business. There are 2 things: a higher installed base, but also the fact that we are doing a better job in the selling service, which I believe will contribute to continued volume growth in Services well during 2024. So maybe not being at the 10% growth, but I do expect Service to continue to grow in a nice way also going into 2024.

[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]

Thank you, moderator, and I'm not going to take up much more of your time. Just reminding you all that Arjo is putting a solid third quarter to the books, a 4.6% organic growth, and we continue our journey to improve not only net sales, but also the profitability within the group and solid underlying development in Q3 that we intend to continue to build on going into Q4 and also into 2024. So with that, thank you very much, and have a very good remainder of the day.