Arjo AB (publ)

STO:ARJO B

Earnings Call Analysis

Arjo's Q3 2024: Lower Capital Sales, Steady Growth Expectations

In Q3 2024, Arjo reported a lower-than-expected organic growth of 1.5%, primarily due to reduced capital sales in Europe and disappointing results from China and Japan. The gross margin improved to 42%, yet faced pressure from currency fluctuations and a negative mix. Leadership forecasts organic sales growth of 3% to 5% for 2024 despite market challenges. They aim to accelerate efficiency initiatives to maintain profitability amid lower sales visibility, particularly in Europe, while the North American market shows promising signs with a 2.4% growth. Operational cash flow remained strong, indicating ongoing stability.

Navigating Market Challenges in Q3 2024

In the third quarter of 2024, Arjo experienced organic growth of just 1.5%, which is notably below expectations by approximately 2 to 2.5 percentage points. This underperformance was primarily attributed to lower capital sales in European markets and some declines in regions like China and Japan. Company leadership indicated that ongoing political uncertainty has resulted in cautious decision-making regarding capital expenditures in Europe, with expectations that this trend could persist in the near term.

Potential Areas of Stability

Despite the challenges, Arjo highlighted positive trends in the order intake for capital goods and a robust performance in the service and rental segments. The company is focusing on driving operational efficiencies and maintaining a stable cost structure, aiming to safeguard profitability amidst external pressures. Operational cash flow for the quarter was strong, with a cash conversion rate of 102%, suggesting effective cash management strategies.

Financial Performance and Challenges

Arjo's gross margin improved to 42%, up from 41.4% year-on-year. However, the decline in capital sales resulted in a negative mix effect, adversely impacting margins. Furthermore, significant currency effects encountered during the quarter generated a SEK 34 million negative impact on adjusted EBIT, which was down to SEK 164 million compared to SEK 186 million the previous year. The operational performance, excluding currency fluctuations, was on an upward trajectory, yet could not offset the declines in sales.

Outlook for Q4 and Beyond

Looking ahead to the fourth quarter, Arjo is projecting organic growth within a 3% to 5% range, contingent upon stabilizing capital sales. Despite the current slow-down in Europe, the management expressed confidence based on existing project pipelines and strong developments in the U.S. market, specifically in Patient Handling and service sectors. The company expects to sustain its momentum in the rental business, especially driven by U.S. market recovery.

Guidance and Strategic Initiatives

Arjo plans to improve its operational efficiencies and adjust cost structures in response to the ongoing market conditions. The management team signaled the need for increased focus on cost of goods sold and operating expenses to ensure profitable growth moving forward. Additionally, Arjo forecasts a consistent contribution from pricing adjustments, estimating that roughly 1% of organic growth can be attributed to price increases year-to-date.

Challenges in Key Markets

European markets are under immense pressure due to budgeting issues and the need for investments in healthcare infrastructure. Arjo's leadership acknowledged that while the internal demand for their products remains strong, the realization of this demand into actual sales is hindered by the political and budgetary constraints currently affecting markets like France and the U.K. The management expects that while capital sales may not bounce back in the immediate term, long-term investment needs in healthcare will eventually provide opportunities for growth.

Acquisition and Development Outlook

The quarter also saw two strategic acquisitions aimed at strengthening Arjo's position in rental and service markets. While the immediate impacts of these acquisitions are minimal, they are expected to yield positive results from 2025 onwards, aligning with Arjo's expansion and growth strategies. Ongoing product launches in Hygiene solutions and Pressure Injury Prevention are anticipated to bolster the company’s revenue potential in the near future.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Arjo Q3 Presentation for 2024. [Operator Instructions]

Now I will hand the conference over to CEO, Joacim Lindoff; and CFO, Niclas Sjöswärd. Please go ahead.

[Joacim Lindoff, executive]

Thank you very much and also from our side, welcome to Arjo's Q3 2024 earnings call where Niclas and myself look forward to give you some details on the Q3 report. Next slide, please.

We'll start with a business update from Q3, a financial update and our outlook for 2024. Before we open up for questions, and as always, we intend to keep this call to an hour and be ready by 9:00. Next slide, please.

At the time for the Q2 report, we talked about a slightly unsure situation for capital sales in Europe due to political uncertainty in some of our major markets. This uncertainty has resulted in lower-than-expected capital sales in Europe in the quarter. In addition, we saw some unexpected shortfalls in China and Japan also on capital side in the quarter. And in total, we therefore report only a 1.5% organic growth in the quarter, which is around 2 to 2.5 percentage points lower than our expectations that we had when we spoke last time in the beginning of Q3.

On the positive side, we have a solid order intake on capital and also a good development of our service and rental business, which gives us stability for the coming quarters. But with low visibility into European market for capital, we currently see that we will have to navigate these circumstances for quite some quarters to come.

Our gross margin came in at 42%, an improvement versus Q3 of 2023 despite the current headwinds. The lower capital sales down approximately SEK 40 million in comparable currencies and more in volume versus last year is generating a negative mix effect and lower observation in our factories. And this is a trend that we will continue to see as long as our capital sales remains on the weaker side. In addition, we had significant negative transaction effect from currency. And altogether, these effects are the main headwinds on gross margin for the quarter.

Our current activities around price adjustments, internal efficiency and product mix continues to generate results and are compensating the higher cost levels driven by mainly salaries. We see a risk for continued weaker capital market in Europe over the coming quarters, and we will, therefore, need to accelerate our efficiency activities both in cost of goods sold and OpEx to safeguard our profitability development.

On OpEx in the quarter, I think it's fair to say that we have continued to have good cost control throughout the organization. And OpEx as a percentage of net sales is so far stable versus last year despite the high inflationary salary increases and lower-than-expected net sales development.

Adjusted EBITDA decreased to SEK 434 million in the quarter. Adjusted EBIT decreased to SEK 164 million versus SEK 186 million in Q3 of 2023, impacted by the lower capital sales and significant negative currency effects totaling to a negative delta of minus SEK 34 million versus last year. Operationally, we are trending better on EBIT, but the lower-than-expected capital sales could not compensate for the significant drop in currency this time.

Our operational cash flow for Q3 was SEK 437 million, leading to a cash conversion of 102% for the quarter, and we are well aligned with our target for the full year of at least 80%. And Niclas will take you through further details in his part.

I'm also happy to inform you that [ Maria Fagerberg ] will join us as new EVP for QRC latest on the 7th of January of 2025. and we have a solid interim setup in place until she joins. Maria comes with extensive QRC background within med-tech and will, with her track record be a very good addition to our leadership team.

I'm also very pleased to announce that Jonas Cederhage has decided to stay with Arjo in his role as EVP for Supply Chain and Operations, a decision that creates continued stability in our work to optimize our supply chain and operations efforts throughout the group.

In summary, Q3 was a quarter where we despite a lower trend on capital sales in Europe and some countries in Rest of the World managed to grow the group with 1.5% organically. Our business in Canada continues to grow. U.S. starts to show signs of recovery in capital sales, and our rental and service business develops well globally. The end of the quarter saw better development on both order intake and capital sales in July and August, but there is headwind and lower visibility for capital sales in especially Europe for the coming quarters, and we will make sure that we navigate the situation well going forward. Next slide, please.

North America grew with 2.4% organically in the quarter and is now up 4.9% on organic net sales after the first 3 quarters. Canada had a good quarter with rental service and capital all developing according to plan. We continue to grow our market presence in Canada. And I foresee that Canada will continue to be a very important market for us also over the coming years, both driven by needed investments into the Canadian health system and obviously, good internal work. The positive trend in the U.S. continues. Health care providers are step-by-step strengthening their financials. And with that comes also a gradual improvement of capital investments.

As previously mentioned, the nature of our business does not put us first in line for these investments that in the first phase goes more towards processes in the operating room, but we are now starting to see a better momentum towards our projects and solutions. DVT continues to be a drag on organic growth based on the previously signalized price pressure and loss of customers because of that. We have seen this development in Q1 and Q2 as well. And only in Q3, we have lost approximately USD 2 million and expect that to be the case also in Q4 and in Q1 of 2025. Meanwhile, for the most part of 2025, we expect this trend to have bottomed out and are foreseeing a return to growth in this area from Q2 of 2025 and onwards as before.

Our Service and Rental business in the U.S. continues on a positive momentum. And especially in Rental, we foresee this trend to continue as we have now secured additional customer implementations. It is also good to see that our transactional patient handling sales develops well with one of the drivers being our air-assisted business, where the acquisition of AirPal, the product range from AirPal develops above plan. The development of transactional sales is especially good in acute care where both long-term care and governmental sales yet have to pick up to get to the expected levels.

Even though the quarter, as expected, was low in regards to outcome programs, we are now in a realistic way looking at a Q4 where we believe that we will return to needed pace in this area. My previous mentioning around further stability in the financial situation of health care in the U.S. is the main driver, and we expect this to develop step-by-step also for the coming quarters. Overall, a solid quarter in North America with potential, especially in the U.S. to develop the organic net sales in the quarters to come. Next slide, please.

Moving over to our global sales region, where the net sales declined somewhat versus last year's Q3. Western Europe was down with 0.5% in the quarter on organic net sales. We continue to have good clinical demand for our products and solutions. The decision-making has been significantly more volatile in countries like France, Netherlands and the U.K., leading to lower capital volumes. We continue to have a good development of both Service and Rental, which is performing slightly better than forecast in this area.

We have talked about the uncertainties around capital spend levels in European healthcare in previous telcos and for Q3, that has been clearly visible. Our pipeline is good and growing. We do not see loss of market shares in any of our main markets, but we continue to see postponement and delays of capital spend decisions. Based on our current information stand, this is something that we believe that we will have to continue to navigate for some quarters to come. It is still encouraging to see the long-term commitment from both U.K. and France to invest into solving the large-scale problems facing health care around demographic change and the need for more efficient care of patients. But it is clear that financial deficits will be a headwind for us to navigate in the short term.

Also countries like Germany, the restructuring of health care will give some short-term bumps in the road but we feel positive around the possibilities moving forward on a market where we are already well established. Our Diagnostics business grew versus low comparables in the quarter. Also in this area, given the dependency on especially U.K., we are lower than forecast and expect this to continue throughout Q4. We do expect to see a quite okay growth in this area going forward, but again, from a low base from 2023, and we still have work to be done to get net sales to where we expect it to be, given our product and overall offering standing.

As a summary for Western Europe, continued good momentum in Rental and Service, a pipeline that continues to grow, but lower visibility on capital spend. The latter part of the quarter was better than July and August, but we will remain very focused when navigating this environment in the quarters to come. Next slide, please.

Moving over to Rest of the World then where Q3 saw organic growth of 2.5%. Australia, India and South Africa, 3 important markets in this region continued to see positive momentum and growth with capital Service and Rental growing. Our business in Singapore was lower than last year due to some large projects in Q3 for 2023, but is developing well aligned with plans overall. The big disappointment in the quarter in Rest of the World was China, where we in Q3 last year saw some good capital projects but where we have experienced an almost dried up capital project market this year in Q3.

Based on information stand as of today, we believe that this low activity levels will continue for some time in China, and we will have to adapt to this significantly lower capital spend environment from an internal perspective. Japan also saw a decline versus last year, but this is, in our view, mainly due to a delay in our shift of business model, and we feel comfortable that we will be on growth track in Japan in the quarters to come. The significant EU funding to Poland with large amounts being allocated to the refurbishment of health -- to the health care sector has been slightly delayed versus expectations by the end of Q2. This has caused what we define as a tsunami effect where very few capital investments have been made in Q3 in anticipation of the investment funds, but where we are expecting a significant inflow of projects in Q4 that will have a main effect in 2025 and 2026.

We are well positioned to gain good market shares of these products, which obviously is very good for the long term. Next slide, please.

The improvement journey on profitability continues and gross margin improved to 42% for the quarter versus 41.4% in Q3 of 2023. An improvement yet lower than forecast after end of Q2, mainly due to lower capital volumes affecting both mix and supply chain utilization, but also significant impact from negative transaction currency effects. As in previous quarters, we have higher salary costs in supply chain, Rental and Service, which we have mitigated through continued work with internal efficiency and continued focus on price alignment, something that we expect will continue also in the coming quarters.

And as discussed also in the Q2 telco, our forecast is that we will see price adding between 1% to 1.5% growth on top line for the full year, and we are currently trending at around 1% after Q3. Given the low visibility on capital spend in Europe, this is obviously significant fine tuning going on into this area. From a category perspective, we have continued to perform well on patient handling across -- on the patient handling gross margin. And with additional traction in this category, we expect to see a continued improvement of our product mix over time.

Service sees slightly weaker margins in Q3 versus Q3 of 2023, but this is almost only due to negative currency effects. And we also continued to improve our gross margin in Rental despite the high pressure on salary cost. Transportation came in higher than expected versus last year. The continued pressure from the situation in Middle East and harbor strikes in the U.S. will continue to be a smaller negative in our comparisons also into Q4, both versus forecast and last year. We expect to see negative effects from the lower capital sales also in Q4.

On top of already committed efficiency projects and supply chain and continued work with pricing, we will accelerate efficiency programs further to be able to navigate a lower short-term capital development. Extensive work is ongoing to further detail these activities, and we are confident that we will have solid plans in place effective beginning of 2025. Next slide, please.

OpEx continues to be well managed within the group, and we are seeing an increase of 2.3% or SEK 23 million in comparable currencies despite significant salary inflation on these lines. OpEx as a percentage of net sales grew slightly in the quarter on par for full year, mainly due to the lower-than-expected capital net sales development. We continue to drive initiatives for profitable sales development as before, but we'll actively review structures in OpEx where we are experiencing lower demand than planned.

R&D gross investment is trending at almost 3% for the quarter, which is as before, aligned with our product development plans. And as stated also after Q2, we are planning for larger launches in Hygiene in the end of this year and interesting launches in Pressure Injury Prevention and Patient Handling in the beginning of 2025. The main factors impacting adjusted EBIT this quarter are total negative currency effects and reevaluation of our accounts receivables and accounts payable of minus SEK 34 million and obviously, the lower-than-expected capital sales. And we obviously also saw the same factors impacting adjusted EBITDA.

Restructuring came in slightly lower than expected in the quarter, and we are still trending towards the indicated approximately SEK 45 million for the full year. Next slide, please.

And here, I would like to hand over to Niclas.

[Niclas Sjosward, executive]

Thank you, Joacim, and good morning from my side as well. The operational cash flow improved sequentially in Quarter 3 versus Quarter 2, but it's down versus Quarter 3 last year due to a difficult comparison with a strong release from higher-than-normal inventory last year, which is not repeated this year based on the more balanced inventory levels. Working capital improved in the quarter coming from good work with all parts, including inventory, accounts receivable and accounts payable. And our long-term improvement activities regarding working capital is continuing to pay off, and this focus will, of course, continue.

Working capital days sees a significant improvement year-over-year in the quarter, down to 78 days compared to Quarter 3 last year with 86 days. It's also sequentially down from Quarter 2, which had 79 days. The improved working capital gives a stable operating cash flow of SEK 437 million sequentially up from Quarter 2, which was SEK 344 million. The operating cash flow for Quarter 3 last year was SEK 565 million, mainly driven by the strong release of higher-than-normal inventory levels I mentioned before.

Cash conversion improved sequentially to 102% versus the 70% in Quarter 2. We are well on track towards our target of 80% cash conversion for the full year. And for your information, cash flow from investing activities was minus SEK 190 million versus minus SEK 134 million in Quarter 3 last year, mainly containing investments in our rental fleet, product development and fixed assets, but also now in Quarter 3, the payment of the GerroMed acquisition. Next slide, please.

Our net debt is down year-over-year from SEK 4.7 billion in Quarter 3 last year to SEK 4.4 billion in this quarter. Sequentially, the SEK 4.4 billion net debt is also down versus the SEK 4.5 billion in Quarter 2. Our financial net as well as our interest net has decreased compared to the same period last year, and it's mainly connected to our lower funding and lower interest rates. We expect our reduction journey on net debt to continue in the coming quarters. And together with lower interest rates during the rest of 2024, we see in our decreased financial costs during the year.

Our cash position remains strong. Our leverage net debt to adjusted EBITDA improved year-over-year and came in at 2.2 in this quarter versus the 2.6 in Q3 last year. This is a consequence of the last year activities regarding improved profitability, our working capital to focus and cash flow. Sequentially, the leverage is also down versus the 2.4 in Q2. And for your information, 2.2 is the lowest leverage since spin-off. Equity ratio came in at 50.2%, which is a small increase from the 50.1% last quarter.

Then I hand back over to you, Joacim. Next slide, please.

[Joacim Lindoff, executive]

Thanks, Niclas. And as you know, we made 2 smaller acquisitions in the quarter. GerroMed in Germany is a good example of what we look for in the first of our 3 M&A buckets when it comes to strengthening our footprint in Rental and Service. Tech Med has a clear market expansion possibility for our Diagnostics business also fits well into both overall strategy and M&A focus. These 2 small acquisitions will generate smaller positive effects to Arjo from 2025 and again, are good examples of targets that we're in contact with. Next slide, please.

Shortly to our outlook for 2024, where we, based on the information that we have today, still forecast to be within our target interval of 3% to 5% of organic net sales despite the slowdown in capital sales mainly in Europe. Next slide, please.

With that, I would then like to summarize today's telco. We closed Q3 with a 1.5% organic growth, which is lower than expectations due to the lower capital sales in some European markets and also a few of the Rest of the World markets. The low visibility on decision-making around capital sales, especially in Europe is estimated to continue for some time, and we will have to continue to navigate the situation in a good and focused way. We continue our improvement journey on gross margin despite headwinds from lower capital sales and negative currency effects, and we continue to manage our OpEx in a good way.

Apart from the lower capital sales, currency is also affecting EBIT with approximately a negative minus SEK 34 million versus Q3 of 2023. Our profitability journey, excluding currency, continues but we obviously have to adapt cost structures for all effects going forward. We continue to do a solid work around our cash flow. And as a result of that and other activities, we registered 2.2 as leverage, which, as Niclas said, is the lowest level for Arjo's in the spin-off. We now enter into Q4 with a continued high activity level where we will need to navigate a lower visibility around capital sales. We still estimate that we can reach our outlook for 3% to 5% organic growth for the full year.

And finally, I would like to let you know and inform you about that we will host a Capital Markets update in Stockholm in conjunction with the release of our Q4 report on the 30th of January 2025. More information will follow on this as we get closer.

With that, we can open up for questions, moderator.

[Operator]

[Operator Instructions] The next question comes from David Johansson from Nordea Markets.

[David Johansson, analyst]

I want to focus on Western Europe a bit. I think listening to your comments around weakness in capital goods here in the beginning of the quarter, but perhaps ending here on a higher note, do you anticipate more of a bounce back now for Q4? Or should we expect these markets to remain on the lower level?

Then more on this capital goods weakness you are experiencing, I mean, your comment on the political decision having an impact, but it also sounds like you're expecting almost a structural weakness here for some time. Is this something that you're seeing? Or is this more maybe related to the markets alluded to previously with France and the U.K.?

[Joacim Lindoff, executive]

Thanks, David. We are not foreseeing a bounce back on capital sales in Q4, not based on the information we have today. We believe that we will have to navigate a lower visibility and a lower decision-making speed in Western Europe and some of the Rest of the World markets also in Q4 and some quarters to come, as I said in my presentation. It is difficult to know when, so to say, the spend level will be back on the levels that we have expected. Again, as I said, the interest to invest is there. It's just the allocation of funds from state budgets that needs to come.

I can't judge how long this will take, but it's obviously something that we continue to navigate. And as I said, we are not losing market shares rather the opposite. We are well positioned in these countries.

On top of that, we continue then also to see a good development of our Rental business and our Service business to continue, both in Western Europe and also in other parts of the world. The political environment, I mean, I believe that it's fairly clear what is happening in the U.K. We are expecting a budget proposal to come out here in the end of this month where we are not foreseeing anything else than an intention of continuing to invest into NHS in the U.K., which will be positive for us long term, but then it's obviously a question of getting that those funds from the paper to the actual investment side. And it's difficult to say how long that will take.

In France, still forming a government and to get a clear picture about the financial environment in France will probably take a few weeks or months more. And until then, we are expecting a low visibility on when to get capital sales going again in France in the way that we want. We are selling capital in France, but we want to be on a higher level always. Netherlands has the same type of issue. .

When it comes to -- yes, I'll stop there, David, and see if there's any additional questions.

[David Johansson, analyst]

Yes, yes. Then perhaps on the gross margin then, with this lower utilization that you're expecting and with the visibility you have now on the product mix, do you still think that you're able to drive the improvements that you're expecting on the gross margin, I think, for Q4? I think you ended Q4 very strongly here, looking back a year. So do you expect to see improvements then exiting the year?

[Joacim Lindoff, executive]

If you take all factors into consideration, both the fact that we have most probably negative transaction effects coming in to the gross margin side also in Q4. We have significantly or significant, we have lower capital volumes and value in Q4 of this year than we had last year, which has a negative product mix and the fact that we -- it takes some time to adjust our cost base in supply chain.

I believe that we will see sequential improvement, obviously, from Q2 into Q4, but it will not be improvements on the gross margin versus where we were last year in Q4.

[David Johansson, analyst]

Okay. Then just one last one for me. I think on the cost initiatives that you are taking, are you able to quantify the expected cost takeouts from these actions? Or -- and do you expect this to have an effect already by this year? Will this be more tilted towards 2025?

[Joacim Lindoff, executive]

As said, I mean, what we are doing is that we are continuing -- we already had a fairly nice amount of activities ongoing on cost -- continuous improvement both on our OpEx and also on our supply chain. But obviously, given the situation in the markets where we are seeing a downturn on capital sales, we will need to do adjustment also on the OpEx side and in other areas.

I would not be able to quantify the amount right now, but I am very much expecting that we will see our OpEx to net sales to have a steeper downwards trend than what we thought in the beginning. But the effects will only come from 2025 and onwards as it takes time to do these changes.

[Operator]

The next question comes from Mattias Vadsten from SEB.

[Mattias Vadsten, analyst]

I have 2. So the first one, I guess that would be on sales ahead as well. I mean Rental, I think is solid and Service as well. But for how long do you think you can sustain the strength in Service without really improving momentum in capital sales? So I guess the question is relating to Service in that respect because I guess that will come down if capital sale doesn't improve.

[Joacim Lindoff, executive]

Yes. It's a good question, but good for us is that I don't think that the FX will be negative. If you look over 10 years, most probably Mattias, but not in the short or midterm when it comes to Service. We still have a significant amount of under-penetration when it comes to our service, when it comes to our current installed base. And we have a lot of work to be done on the Service side.

When they are not -- when countries are not spending on capital, we -- as we have been discussing before, you have a reverse effect where they need to service their equipment more. So if we have a lower visibility on capital in the coming quarters, we will continue to see a good development of our Service business also in 2025 and 2026, which we will do anyway.

So I have good hopes that based on what I see today, that Service will continue to grow also with the decline of -- rather the opposite. With the decline of capital sales, we'll probably see Service growth slightly quicker.

Rental, as you say, stable growth. And our biggest rental market being the U.S. has, as I said, during the telco, secured further implementations and we are foreseeing good growth in Rental also in 2025, very much driven by the U.S. market.

[Mattias Vadsten, analyst]

That's all clear. Sorry for the noise around me. The next question is on the comments on better capital trends in the U.S. Should we read this as supportive for Q4? Or is it mainly a comment that will support sort of the trends that you see in 2025 in terms of sales volumes? That's the next one.

[Joacim Lindoff, executive]

We will have good growth as far as the information we have today and how is it, we will have good growth in the U.S. in Q4. We are trending well on transactional sales, especially in Patient Handling. We are securing the -- I would say, more or less the first outcome programs in Patient Handling going into Q4. Service is developing well. Rental is developing well. So growth in the U.S. is also for Q4. And obviously, then also going into 2025, which is really good to see.

And with the new management in place, with the changes that we have made, I believe that we have a good momentum also organizational-wise in the U.S. So no red flags currently. We can always be better, and we need to be better in the U.S., and we're going to continue to work very hard on improving from that position, but there are positive signs in the U.S. right now.

[Operator]

The next question comes from Kristofer Liljeberg from Carnegie Investment Bank.

[Kristofer Liljeberg-Svensson, analyst]

A few follow-ups here on the previous questions. First one on how much visibility do you think you have to grow at least 3% in Q4, which you would need to reach at least the lower end of the financial targets?

[Joacim Lindoff, executive]

Yes, if I may say so, enough visibility, Kristofer. I think we are -- as we always do, we have very tight follow-ups with countries in a situation like this. We have obviously, even more tight follow-ups with those countries to make sure that we understand the development and that we can take the right mitigating actions or ask for the right mitigating actions.

I believe that we -- yes, we are as well informed as we can be. We have good traction on Service. We have good traction on Rental. We have a U.S. market that is continuing to develop favorably. Where we have weakness is on capital sales in Europe and some of our Rest of the World markets. And there, we believe that we have captured the possible downsides and it's about now making sure that the projects that we have tangible in our pipeline to get them over the line for year-end.

But yes, I do believe that we are -- that we have enough information to say that we are comfortable to have a Q4 that is within the 3% to 5% interval that helps us to get within the interval of 3% to 5% for the full year.

[Kristofer Liljeberg-Svensson, analyst]

And then I just wonder what has happened here in the last -- since last time you reported because then you sounded quite confident that the weakness in Europe assume a temporary, you talked about elections in U.K. and France. And now it seems -- listening to what you're saying, it seems more structural than before.

[Joacim Lindoff, executive]

Structural, I'm not really sure because I do still believe that there is a huge investment need in many of those European markets that we spoke about. So -- and that will not go away and cannot be solved in other ways. So I don't think that we have a structural problem. What we do have is a budgetary problem in these major European countries.

What has happened since we spoke after Q2 -- after the Q2 report is clearly a continued weakness that we did not anticipate when moving into Q3 around capital sales. To give some light of that, but when we were sitting after Q2 versus where we are now after Q3, we have approximately SEK 100 million less in capital sales than what we thought at that time.

And those are spread out from France, Netherlands, U.K., but also a Chinese business that last year actually saw some really good projects and this year, more or less nothing. We also thought that the EU money in Poland would give us a possibility to grow already in Q3, which has not been the case. And there, we know that money will come in and help us growth-wise from Q4 and onwards.

But it is a -- I would say, a misinterpretation. If you could put it like that, of how the capital market would develop. Service and Rental is developing better than what we expected.

[Kristofer Liljeberg-Svensson, analyst]

But that means if I compare with what you said after the second quarter, obviously, you have a much more cautious view on capital sales here for Q4?

[Joacim Lindoff, executive]

That is correct. That is correct.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And then your previous comment on the gross margin, not improving year-over-year. Should we even expect the gross margin to be lower Q4 this year compared with Q4 last year?

[Joacim Lindoff, executive]

I believe so. Yes. I believe so, given the product mix with less capital and the headwinds of currency, I would estimate that, yes.

[Kristofer Liljeberg-Svensson, analyst]

Okay. And then for the full year, is that -- does this mean a more flattish gross margin for the full year? Or do you still expect to be able to improve it for the full year?

[Joacim Lindoff, executive]

Again, we don't necessarily guide on that one. But given a lower development in Q4, I believe that's an assumption that we will be just slightly better than last year is probably a good one.

[Kristofer Liljeberg-Svensson, analyst]

Okay. Great. And then my final question on the financial net here with lower interest rates going forward, could you give some sort of indication where you expect that to be in Q4 and maybe run rate when you move into, yes, 2025?

[Niclas Sjosward, executive]

Yes. But what we see is that we see the lower average interest rates coming in now to our funding. Some of that is visible already in Quarter 3, but we will see more of that coming in, in Quarter 4. So from a sequential perspective, we should see lower interest net and finance net in Quarter 4. I think I will stop saying that. Of course, we believe also that next year, that will continue, but it's, of course, dependent on the market pricing of interest rates, but we have peaked on our interest rates as we see it for sure.

[Operator]

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

[Sten Gustafsson, analyst]

A question on the -- coming back to the capital goods sales here in Europe. Could you remind me how much of total sales typically would be related to capital goods in Western Europe?

[Joacim Lindoff, executive]

That's -- I was about to say that's something you can read in the quarterly report because I don't have the exact number myself. For the group in total, it's around 40% of our turnover, that is capital goods. The rest is coming from consumables, Service and also our Rental business.

[Sten Gustafsson, analyst]

Yes, I know we can see the total, but for Western Europe, is that more or sort of on average with the global average or...

[Joacim Lindoff, executive]

I would probably say that it's slightly less than the global average because we have a bigger Service business. We have a bigger Rental business than if you take in -- if you take Rest of the World. But on the other hand, you have kind of the same mix in the U.S. and kind of the same mix in Canada. So I would say without knowing exactly, it's around the group average, Sten.

[Sten Gustafsson, analyst]

Okay. And how much do you need in order to reach the full year guidance here of 3% to 5%?

[Joacim Lindoff, executive]

Well, what we need to do for the full year guidance is obviously, to execute on the realistic pipeline that we have for Q4, both in terms of our book-to-bill Service and Rental and in and out business that we have for capital. And as I said, in my view, we do have enough visibility to say that from the current standpoint that Q4 will have a growth of -- within the interval of 3% to 5%, probably more in the lower range of that one, which will then take us and keep us within the interval of 3% to 5% for the full year.

[Sten Gustafsson, analyst]

Okay. Secondly, you talked about Arjo Insight and perhaps you can share with us what kind of potential do you see on that one? And when will that start to materialize really into your numbers?

[Joacim Lindoff, executive]

That is -- Arjo Insight is already materializing into our Patient Handling numbers. And that is why we continue -- one of the reasons why we continue to see Patient Handling becoming more and more important for us, which is obviously going to be good also from a product mix perspective.

You should see the Insight project as kind of a middle step in our journey from transactional sales to really pure outcome programs, where we believe that with Insight, we help the customer to realize value but not necessarily implementing a full outcome program, which is also helping out in transactional sales in countries where we are significantly more tender-driven.

So if you look at the 0 being transactional sales and 1 being the outcome, the Insight program helps us to maneuver the -- together with the customer along that line to create value. So it is a way of helping the customer to understand what type of needs that they have, how they best over time, exchange and replace and add new products to that, and how they, in a more efficient way should work with those products.

So it's a step on the way to a full-blown outcome program, something that we very much believe will help a lot of the markets going forward. We are currently implementing in European markets, and we are looking forward to implement our Insight in the U.S. in the beginning of the year. And Arjo Insight is one of the reasons why we have such good growth on -- in Canada, as an example, on Patient Handling.

So it's there. And I believe it will be a key tool for us going forward to make sure that we have continued good growth on our -- especially on our Patient Handling side going forward.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

Could you elaborate a little bit more on the further cost reduction initiatives, sort of magnitude of the impact and timing and maybe a bit more on where you're looking to take out costs a bit more specifically.

[Joacim Lindoff, executive]

Yes. If I start with the final part of your question, we are going for OpEx, obviously, when it relates to the areas where we are seeing lower capital sales and where we believe that we need to make adjustments in our structure to better suit the capital levels that we have. We obviously are cautious to make sure that we are not cutting where we believe that we have an opportunity and possibility to have a change of trend in the short term.

We -- as I said earlier on, we have -- well, we can't quantify right now on the exact. But what we do know is that the activities that we are going to drive is going to help our cost of goods sold, and it's also going to help our OpEx trend versus net sales. So it will be a possibility for us also -- or give us the possibility also with lower capital volumes to make sure that we set ourselves up for increased profitability in 2025 and onwards.

If we're now looking at a 2024 with more moderate improvements than what we thought in the beginning, I believe that we will, based on these activities, be back on a better improvement on profitability from 2025 and onwards, both from a COGS perspective but also from an OpEx perspective.

[Rickard Anderkrans, analyst]

All right. Very clear. And then a follow-up. How is the progress going with the new product launches in Q4 and into next year and into '26? And how does the new rollout and the acceleration of new products sort of aligned with cost cutting. It sounds like 2 different forces, I guess, in terms of accelerating the new launches there. Maybe you can elaborate a little bit.

[Joacim Lindoff, executive]

We are not touching our R&D and product launches part. That is something that is now tracking well after the both external and -- yes, external and new internal structures that we have. So our intention is not to touch that part. We believe that we will have a good structure on that part going forward. We're looking forward to the launch that is in a very active phase around new Hygiene solutions, new bedding solutions, and we are looking forward to launch new products in Patient Handling and Pressure Injury Prevention in the beginning of next year.

Currently, all on the plans that we had from, let's say, beginning of Q2 of this year. So that is running well. So we are not cutting there, and I don't think that we should be. We are obviously always looking into doing things more efficiently. But here is about making sure that we have enough resources to continue to drive a positive portfolio update.

[Rickard Anderkrans, analyst]

Very clear. And just a quick final one. Was it correct that there was roughly 1 percentage point tailwind from price on top line in the quarter?

[Joacim Lindoff, executive]

We are currently year-to-date, we are trending at around 1 percentage point on organic growth from price.

[Operator]

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, and thanks for joining in on this Q3 earnings call.

A quarter with 1.5% organic growth, headwinds, obviously being capital sales in mainly Europe but also some of the countries in Rest of the World. Good continued development of our service business, good continued development of our rental business and the North American market that continues to see traction in the right direction. So we are heading into Q4 with high activity, and are going to do everything we can to continue to grow the group in a profitable way going forward.

Thank you.