Arjo AB (publ) (ARJOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Arjo audiocast for teleconference Q4 2021. [Operator Instructions] Today, I'm pleased to present Joacim Lindoff, President and CEO; and Daniel Fäldt, CFO. Speakers, please begin your meeting.

Thank you very much and good morning, everyone. Welcome to the Q4 2021 call for Arjo. And I will, together with Daniel Fäldt, give you further details on the full year report that we just released. Next slide, please. Today, we intend to give you a short summary of the full year, an update on fourth quarter, and Daniel will then walk you through the balance sheet items. I will then address some business highlights and outlook for 2022. We'll finish off with a short summary before we open up for questions and we aim at keeping this call to an hour and finish no later than 9. Next slide, please. Let's start with a business update and moving over to the next slide, please. Q4 marks a solid end to a very successful year for Arjo. We have continued to support health care globally through the continued pandemic and at the same time continue to develop our company for the future. I am very proud of the achievements by the entire organization and the base for further development that we have created during 2021. We grew our business with 3.5% organically despite global challenges from material sourcing, logistics and a continued pandemic. In addition, we have increased our gross margin with 90 basis points to 46.4% through an improved product mix, continued efficiency work in our rental business, solid performance in our supply chain and overall good cost control throughout the value chain. Our OpEx level as a percentage of net sales has continued to decline and the numerous smaller and larger efficiency improvements as a part of a new way of working are creating tangible and sustainable results. The adjusted EBITDA has grown from SEK 1.913 billion to SEK 2.072 billion or an increase of 8.3% with our adjusted EBITDA margin moving from 21.1%, up to 22.8%, very well in line with our financial targets. Our earnings picture has increased with SEK 216 million or 41% to SEK 742 million between 2021 and 2022. Our cash conversion has continued to develop well and we achieved 85% for the full year, well above our financial target in this area. We have continued to improve our financial situation overall and now have a leverage at 2.3, which is a decline with 0.6 from last year. We enter into 2022 with approximately 20% higher backlog on capital goods in comparable currencies and with a positive momentum in both rental and service. We very much look forward to 2022 after a challenging, but strong and successful 2021. Next slide, please. In Q4 we have continued to experience high demand in most markets and despite significant headwinds, we managed to post a 1% organic growth for the quarter. Activity levels are high in both capital sales, service and rental and we continue to build both order book and pipeline. Compared to our internal estimates from Q3 and the Q3 presentation, we came approximately SEK 70 million to SEK 80 million short where half is critical care sales in U.S. and half is related to projects moved to other periods due to material sourcing and logistic problems. Patient handling net sales continues to develop well, up with 10% versus Q4 2020 and as in previous quarters, this is supported by continued good order intake. The development in patient handling continued to fuel a good product mix, which helps to improve gross margins in line with our long-term plans. Our DVT sales continues to develop well and we are by the end of the year now more or less back on 2019 levels. We have seen a nice development of our pipeline and we expect to be able to start conversions of new accounts during 2022 to further drive this category in a good way. We have managed to increase our service net sales in the quarter, but restricted access due to additional COVID waves, including significant testing requirements, has brought down efficiency in this area. Obviously this hurdle will go away once the COVID pressure eases up and the focus on service development will continue to be strong going forward. Our core rental business continues to develop well in the quarter both in Western Europe and in North America and our pipeline for new accounts looks promising. Given the long-term growth and stability that core rental development provides, that is obviously promising for the future. Our rental sales to critical care in U.S. is, as you all know, very dependent on the severity of COVID or normal flu waves and very seasonal. In the quarter, we saw significant decline with approximately SEK 80 million less sales in this area compared to Q4 2020 and given the high margins in this life saving area, the effects on our gross margin for the quarter is visible. The increased gross margin with 70 basis points versus Q4 2020 is driven by a better product mix, effects from our efficiency programs in rental and the well-managed supply chain. Material sourcing and related cost increases have affected the P&L negatively with around 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 with good focus. We have higher transportation cost of approximately SEK 40 million compared to Q4 last year, which was higher than expected. We do continue to have a solid focus 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. Selling expenses are up in line with forecast and the higher activity levels described. Admin cost is stable compared to Q4 of 2020. Our cash conversion is 123% in the quarter with continued excellent work around our accounts receivables. Full year we end up at 85%, as said, well above our financial target of 80%. Our focus on the M&A agenda remains high. We continue to evaluate possibilities, but we are picky on when we decide to go forward. Focus and capacity is there and I'm comfortable with our approach in this area. With this said, based on our strong performance and our view on our possibilities going forward, I am glad that we can propose a dividend for 2021 of SEK 1.15 per share, which is an increase with more than 35% versus last year. As a summary, another solid quarter with organic growth despite current material and logistics challenges. We have further expanded our book-to-bill, which is now almost 20% higher than the same period last year. Based on this, together with the current demand situation within our space and our current momentum in both service and especially rental, we enter into 2022 with good confidence. We strongly believe that it will be a year where we will continue to develop Arjo in line with our strategy and financial objectives. Next slide, please. And moving over to North America where we have closed the quarter with an organic growth of 2.9%. This is especially good considering that sales in critical care rental was down over SEK 80 million versus Q4 2020. It continues to be patient handling that develops well supported by a return to pre-COVID levels in DVT and continued good increase in our core rental volumes. Canada continues to perform really well and in the U.S. we see increased activity levels both in order intake and pipeline generation. Forward-looking, we assess the demand for our products and service to be on a good level and we will continue to drive our market expansion plans forward in this region with good traction. In U.S. we saw good continued patient handling, DVT and core rental sales. In U.S. rental, we continue to benefit from the new structures put in place from 2019 and we handled the increased volumes from core in an efficient way. The significant decline in our critical care rental versus Q4 2020 is obviously visible on both top line and profitability, but the underlying profitability develops well. Our activity and lead generation for capital sales for both acute care and 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 solid order intake underlines the trends seen throughout 2021. Our DVT category is now back on pre-COVID levels and we estimate that we will continue to see solid performance in this area based on uptick of elective surgery and continued market share gains. Service in U.S. and Canada sees good net sales development also in Q4 and we continue to develop our profitability level on this large service market in a nice way. Our SEM scanner business in U.S. continues to see a continued buildup of a solid pipeline of planned customer evaluation, some with major net sales potential. The COVID surge seen during the quarter and throughout the year has, however, slowed our conversion pace due to significant stock shortages and C-suite focus on COVID. We are confident that the conversion rates will pick up significantly when this current COVID wave eases. To summarize, Q4 saw a good performance in North America with both Canada and U.S. developing well. Growth was good despite a significant drop in critical care rental. In my view, a sign of great strength and we will continue to create profitable growth in this region both from current products and solutions, but also from initiatives like the SEM scanner and a continued very good AirPal development. Next slide, please. Western Europe, where we continue to experience high demand and both our order intake and pipeline has increased during the quarter. Net sales is growing with 1.9% organically in the quarter held back by material sourcing and logistic problems and orders not shipped or moved into later periods. We saw strong performance in countries like France, Netherlands, Italy, with U.K. in line with a good Q4 of 2020. Capital sales saw good development in the especially patient handling during the quarter. Our business in acute care continues to be stable. And for long-term care, we strongly believe that the increased focus in this area or rather that this area has received during the pandemic will continue to generate investment needs and thereby benefit earnings. Our rental business in Western Europe has continued to develop well in the quarter both on net sales and profitability. France, our third largest market that we highlighted already last quarter, continues a very solid net sales and profitability journey. A number of other countries also see positive trends both in demand and in our own execution around rental. Service in Western Europe performed well in the quarter despite significant COVID effects on access. Our ability to deliver growth in this area during a period where we have experienced significant negative effects on COVID on access is a sign of strength that we will continue to develop in the years to come. Our restructuring program in Continental Europe is now finished with a large restructuring cost taken to this program in Q4. We feel comfortable that the forecasted savings are there to stick. Overall, a quarter with good organic growth in Western Europe despite postponed deliveries due to material and logistic issues. Demand continues to be good, activity levels are high in the region. And with continued good traction on service and rental, we look forward to another solid year in 2022 for Western Europe. Next slide, please. Rest of the World saw a decline in organic net sales mainly due to strong comparatives from Q4 2020. Our larger countries in this area like Australia, Hong Kong, Singapore and India showed healthy net sales growth and order intake as well in the quarter. Many of our distributor markets were heavily affected by severe COVID restrictions and did not repeat the good medical bed sales that we had in Q4 of 2020. Our business in Japan continued to be affected by COVID restrictions in the beginning of the quarter and recorded a decline for the quarter and full year. The market situation in Japan started to see steps towards normalization during the latter part of the quarter and with our backlog, solid infrastructure development and necessary product legislations in place; we look forward to restarting our growth journey in Japan in 2022 and onwards. It is our firm belief that Japan, which is the third largest health care economy in the world, should be able to grow to one of our major markets within the next 3 to 4 years. Australia finished a solid quarter growing with almost 6% organically despite continued restrictions in many states. The market conditions are slowly returning to normal and supported by an overall good momentum, we look forward to continue to leverage our business in Australia going forward. India, as mentioned, had good growth of about 30% in the quarter and our important rental business in the country is now back to pre-COVID levels. We see overall good traction on both rental and capital sales in Q4 and this is also forecasted for the quarters to come. As throughout the rest of the organization, the regions supported by our supply chain has navigated the current situation around material shortage and logistic disturbances in a good way. There has, however, been postponed shipments into coming periods and we have stayed close to [Technical Difficulty]. We will need to continue to navigate the COVID situation in this region in the quarters to come. On our markets with direct access, we start to see return to normal and we have good pipelines for further growth in regions like Africa, Latin America and Eastern Europe. We therefore very much look forward to execute on our plans for this region as one of our growth engines in 2022 and beyond. Next slide, please, and moving over to financial details. And next slide, please. Our solid development on gross margin continues and we post a healthy 46% gross margin for the quarter, up from 45.3% in Q4 2020. I'm especially happy with this development as it should be seen in the light of significantly lower critical care sales in the U.S., increasing material cost and high logistic cost compared to Q4 2020. A favorable product mix coming from higher patient handling and DVT sales and core rental efficiencies increases across the board mainly drives this improvement. We also see a continued good cost control throughout the value chain. Material sourcing disturbances and related cost increases have affected gross profit negatively with around SEK 15 million in the quarter and approximately negative SEK 25 million in total for the year. The effects have largely been mitigated by high efficiency in supply chain together with implemented long-term price adjustments where possible. As we have been discussing also during the Q3 report, we continue to implement our plans for further price adjustments. As the cost trend has been increasing also during this quarter, we will continue our focused work here. We now estimate that we will have full mitigation on rolling 12 P&L effects at least by Q3 if the situation remains on this level. On transportation, we have seen higher cost of approximately SEK 40 million compared to Q4 last year and in total approximately SEK 100 million higher cost for the full year. We now believe that this situation will remain throughout the first half year and then stabilize. We continue to have solid focus and good measures in place to handle the situation. In summary, we post a solid development of our gross margin in Q4 versus Q4 2020 despite implications just mentioned. We continue to work on our efficiency agenda and can see clear results from a favorable product mix. We see this as good indications for our long-term journey in this area. Next slide, please. Adjusted EBIT in the quarter grew with 4.5% versus Q4 2020 based on the activities mentioned earlier. We have continued to manage our OpEx line well during the quarter. We continued to see ramp-up of activities in sales and marketing supporting the good demand, pipeline building and very importantly, the launch preparations for new products. We'll 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. We have approximately SEK 5 million to SEK 6 million in OpEx during the quarter, which related to one-off organizational changes that we have not defined as restructuring cost. R&D gross investment is at 2.7% following our plan in a good way. Net R&D is slightly higher than expected in the quarter based on project phasing. In the quarter, we have booked minus SEK 3 million on other operating expenses related to our minority stake in BBI. And as informed before as a part of our overall business plan with the equity stake, this position should be turning positive somewhere in Q2 2022. The currency effects on EBIT for the quarter is more or less neutral. The positive translation effects on EBIT for the quarter sums up plus SEK 4 million. Positive transaction effects contribute with SEK 1 million and reevaluation effects of accounts receivables and accounts payable booked under other operating expenses has a negative effect of minus SEK 2 million for the quarter. For adjusted EBITDA, we posted solid 22% level lifting the adjusted EBITDA to SEK 541 million from SEK 530 million in Q4 2020 making it our so far strongest achievement for a single quarter in absolute numbers. With that, over to Daniel and the next slide, please.

Thank you very much, Joacim. And now on to some comments with respect to our working capital development and cash flow performance. The organization continued to face, as Joacim mentioned earlier, similar external challenges as in previous quarters in 2021, but we still managed to perform at a high level with regards to working capital management and cash flow delivery. Ongoing COVID elated issues for our supply chain remained and further intensified during the fourth quarter, mainly in terms of disturbances and price increases related to transportation and material, driving the need to maintain additional safety stocks in order to safeguard production supplies and customer deliveries. This prioritization continues to be necessary while impacting us negatively compared to normal operating environment. We estimate that during the last quarter of 2021, approximately SEK 150 million of additional inventory was needed to be employed. We know that this continues to be an important prioritization at this time and believe that this will continue to be a factor in the upcoming quarters. We continue to build on the already satisfying progress done on our receivables from previous quarters and in 2020, which again contributed to our working capital level. We also showed an improvement in our current liabilities. Despite the challenges just described in the supply chain and taking our mitigating actions into account, we are seeing stability in our working capital base level, which came in at 92 days which is a 2 day improvement versus the third quarter. And again, it's important to stress that number and put it in context over time given that this is a full 2 week reduction looking back 2 years. The EBIT improvement in the quarter along with the impact from working capital means that we are posting a strong operating cash flow number of SEK 639 million and for the full year SEK 1.7 billion of operating cash flow. Subsequently, cash conversion came in at a strong 123% in the quarter and we managed to overachieve our full year financial target of 80% by the end of December with a final number of 85.3%. Cash flow from investing activities was a negative SEK 198 million, mainly containing investments in our rental fleet and fixed assets. Next slide, please. As a consequence of the positive profit development and strong cash flow performance, our net debt continued to decline to SEK 4.3 billion, which is an improvement of SEK 0.8 billion versus the same time 2020 and SEK 0.5 billion improvement versus the last quarter. Our cash position consequently also remained strong and our net debt to adjusted EBITDA has decreased from 2.9% to 2.3% since the end of last year. Finally, the equity ratio came in at 41.7%, which is an improvement since year-end 2020 when we recorded 40.6%. And with that, I give the word back to you, Joacim, and next slide, please.

Thank you very much, Daniel. And let me go into some business highlights. Next slide, please, and starting off with WoundExpress. On WoundExpress, our continued -- work continues and interest remains high. We are heavily affected by continued COVID implications with very limited access to patients and health care stock. The health care [ death ] in this area of venous leg ulcers, especially the difficult to heal ones, is increasing by the day due to COVID implications. The situation is also delaying us in our work to support patients with this new technology. COVID also causes delays in recruitment of patients to the randomized controlled trial and we now expect that the RCT will be ready for publishing in the end of Q3, which is a quarter delay since the Q3 report. However, our go-to-market plans in Europe; for example U.K., France, Germany and the Nordic countries; continues to take shape and will be ready for implementation and to hit the ground running when we have the RCT results. At this time, we also expect that access to related facilities to be back to full normal. We also have further positive development in the U.S. In the end of the quarter, we achieved acceptance of our application to make wound care -- sorry, WoundExpress reimbursable on the U.S. market. This means that a patient in U.S. can be reimbursed for the cost of WoundExpress and do not have to pay out-of-pocket money. Wound clinics can also now put WoundExpress on patient treatment plans. We now have the needed ticket to play to actively start to build demand in the area of hard to heal leg ulcers. The RCT is not necessary to start this work, but when published, it will obviously improve augmentation. The sales price achieved by the current reimbursement code will be putting these net sales well above average in gross margins when we start to get volumes. Next slide, please. We have concluded now for the SEM scanner around 80 evaluations in 2021 where the user achieved reductions in pressure injury incidents rates above the expectations, at least 50% less prevalence and in many cases, more. We have on top of that, more than 200 valuations either initiated or planned with customers on our key markets. As stated, we see strong evaluation results and high interest. However, our conversion rate continues to be held back by COVID. Stock shortage driven by the extreme pressure created by COVID makes it very difficult to introduce new ways of working or even to just get full training scope in place for health care providers. C-suite is for obvious reasons very short-term focus to fix the current COVID surge and are pushing all other discussions and decisions to later dates. This even if they acknowledge the great positive impact that the SEM scanner and our overall approach to pursue injury prevention will have for them and for their hospitals and for its P&L. We currently have approximately 25 paying accounts, out of which the major part is in the U.S. with the Vizient framework. We have also signed our second outcome program contract in the U.S., which is a positive sign that we in this initial phase of the launch of these programs have good customer acceptance and interest. 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 2021. The latest one being the NHS Supply Chain framework, which is the largest provider to the NHS. These frame agreements will facilitate implementation discussions in the U.K. and is a true ticket to play once the COVID situation stabilizes. Our pipeline is very strong and we are convinced that once we see the negative effects from COVID go away, we will have really good opportunities to convert this pipeline into good net sales. And as previously communicated and also with the above explained effect, we expect that the SEM scanner will lead to positive impact on our net sales and earnings per share starting in 2022 short of approximately 1 percentage point organic growth with the current forecast and that it will contribute significantly to both net sales and EPS development from 2023 and onwards. Next slide, please, and moving over to outlook for 2022. Based on our current visibility and assumptions, we forecast to achieve an organic net sales growth for the full year of 2022 well in line with our financial target of the 3% to 5% interval. The high market demand, increased capital backlog and the good momentum in both core rental and service is giving us true confidence. The current issues experienced related to material sourcing, logistics and in addition, fluctuating sick leave rates in our supply chain due to COVID will have short-term effects on our ability to get capital products to our customers. Given that, we assume based on current information that this is a situation that will be stabilizing over the first half year. We believe that we will have a back heavy year driven by our capital sales development. From a gross profit and margin perspective, we currently expect approximately SEK 65 million to SEK 70 million higher material cost versus 2021 with the main delta versus 2021 coming in the first 3 quarters. We have implemented long-term efficiency plans throughout the organization and are working actively with continued price increases to mitigate. We now expect to be fully compensating the rolling 12 effects of approximately SEK 90 million to SEK 100 million by Q3 this year. On transportation costs, we currently believe that we will see approximately SEK 25 million higher cost in total for the full year of 2022 versus 2021 with more or less the full increase affecting Q1. Our expectations is that the cost situation will stabilize from Q2 and hopefully start developing towards more positive grounds in the second half of the year. Our solid cost focus throughout the value chain will continue. In 2021 we reduced OpEx as a percentage to net sales with an additional full percentage point versus 2020, which was a lot better than forecasted going into the year. Our work in the area of internal efficiencies will continue and we will also continue to benefit from new ways of working also in the years to come. With our current information stand, we estimate OpEx as a percentage of net sales to be slightly lower for the full year 2022 compared to 2021 also with a higher activity level and where we also believe that we will start to travel again. As additional information, we do not plan any larger restructuring cost in 2022 at this moment. We will obviously continue to develop our organizational footprint and efficiency agenda. But as standard, this will be booked as a part of normal business under OpEx. Next slide, please. To give you some more flavor on net sales, we have added the same slide as we used after Q4 last year to visualize how we see the major products groups developing. And when looking at patient handling; the high demand, our market position and the excellent development of our AirPal range; gives us good confidence that we will be able to continue to grow this very important product group with 4% to 6% versus a very strong 2021, adding to the positive product mix effect. Capital sales of medical beds is expected to stabilize around 2021 levels. We will continue to drive this segment towards higher specification levels to ensure better gross margins. Our DVT business is expected to grow significantly during 2022. We forecast a growth of 10% to 15% driven by continued return to more stable market conditions and the pipeline of possible new accounts in both U.S. and other regions. Rental is expected to have a 2 phase development in 2022. Our profitable critical care rental sales in U.S. is forecasted to return to normal pre-COVID levels for the full year. This will mean a drop of around 40% of net sales for critical care rental, which is equivalent to SEK 130 million to SEK 150 million versus 2021. The effects of this will mainly be seen in Q1 and Q3 where we have larger peaks of critical care sales in 2021. On the other hand, our core rental business in North America and Western Europe will continue to grow nicely. We are converting competitive accounts in a good rate on many markets and our pipeline in mentioned regions is strong for further positive development. Our continued efficiency work will also secure a parallel positive development of our gross margins in core rental. Therefore, rental in total is thereby expected to see only a very slight decline with upside potential versus 2021 numbers and well above our 2019 starting point for this comparison. Service is forecasted to continue to develop well in 2022 and we expect a growth in the range of 5% to 7% for the full year. As we also assume that COVID restrictions will continue to ease and thereby facilitate a much more efficient work environment for our technicians, we anticipate to see improved margins in this area. We will continue our current approach navigating the changing environment and the COVID situation. Underlying levers like continued core rental development, good development in service and the demand and backlog and capital goods gives us good confidence that we will improve net sales well in line with our financial targets also in 2022 and beyond. And we see a potential upside to this guidance if the current turbulences around material sourcing, logistics and sick leave situations and supply chain stabilizes quicker than expected. Next slide, please, just to some short key takeaways. The next slide. 2021 was the strongest year so far for us with 3.5% organic growth and continued profitability improvement. I am proud of the way we closed the year given the global challenges around material sourcing and logistics and the organization has done a fantastic job. We even continued to improve our gross margin also this quarter and we posted our so far strongest EBITDA result in absolute numbers for a single quarter. We continue to see good growth in patient handling and DVT and our rental and service business has good positive momentum in terms of both new accounts and internal efficiency measures. 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 great focus on our upcoming new product launches in hygiene and pressure injury prevention and our latest acquisitions. The SEM scanner continues to be very well received and achieve excellent results in customer evaluations for patients and users and we do see great potential here. 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 high focus. We enter into 2022 with high confidence based on good demand, a book-to-bill that is well above last year for capital goods and positive momentum for both our rental and service business. With that, I would like to open up for questions. So moderator, Please go ahead.

[Operator Instructions] Our first question comes from the line of Rickard Anderkrans from Handelsbanken.

Could you elaborate a little bit more on the dynamics for the critical care rental volumes in the U.S. now? Obviously we've seen very high rates of hospitalizations in the U.S. So would be very helpful if we could get some flavor on those dynamics compared to Q4 perhaps.

Yes, absolutely. And as you say, I mean there has been a significant COVID surge in the U.S. over Q4 and our expectations going into the quarter was that, that would also mean high levels of critical care sales in rental for us. The outcome has been that what we can see is that with a significantly higher number of affected patients, the severity of the patients coming to hospitals has been luckily less and that has meant that we have seen lower sales of our critical care solutions during Q4 than expected. And it is because of the less severity of those cases coming into hospitals, something that surprised us for Q4, and that is also something that we believe that we will see going into Q1 and onwards. That's also why we indicated a lower sales of critical care rental in the U.S. going into 2022. So without being an expert in this area, it's all related to the severity of the last -- the latest COVID surge.

And can you talk a little bit about overall customer access now and especially in light of the significant staffing shortages? Can we really expect a strong new product launch trajectory in light of the staffing shortages or how are you sort of tackling that issue?

The staffing shortage for us has -- rather put it like this. Q4 has not -- in Western Europe and North America not been affected from a net sales perspective because of shortages of staff. The shortage or the postponed deliveries that we have seen is only because we have not been able to produce those products or get them to our customers in the right way. What the shortages of staff is doing, as I explained for the SEM scanner, is that given that focus has to be very much around taking care of the inflow of COVID patients during Q4 and something that has continued also in the beginning of Q1, is that the focused possibilities of introducing completely new working protocols or the focus from C-suite in new areas is difficult. And we believe that as soon as COVID releases its pressure around this that we will start seeing, I would say, a lot better interaction with our -- well, with the stakeholders both when it comes to shortages of staff, but also see C-suite focus. What has affected us in terms of access in Q4 is a smaller part around -- or not access, but COVID related is on our distributor markets where we have seen significantly less activities. It's only a small part of our business, but here we have seen severe problems with COVID and shutdowns of systems. And also when it comes to efficiency in our service due to COVID because here we have been forced to continue to do extensive testing on our service technicians before we can even go in and that has affected the service efficiency in that area and thereby also affecting our gross margins in the area of service for Q4 isolated. But again short-term things and when we get back to normal, then we believe that, that will start to tick up again.

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

Joacim, thanks first of all for providing that last slide with your trajectory at least for the product areas. When you say that you have good confidence in that net sales will be there and beyond or -- sorry, there is even upside you said I think to that. What type of upside are we talking about? Are we talking about beyond the range or is it more pointing towards the upper end?

I wouldn't -- I mean if all stars would align, I would point it to the upper end of the interval. But for now we guide for 3% to 5% given the turbulence that we are still experiencing in the areas that I said around material sourcing, logistics and also the very high sick leave rates that I believe that every industry is currently experiencing both in supply chain and in our service setup -- or sales and service setup. So we are cautious in that way and are trying to put out a realistic number, which is the 3% to 5%. But if we get all stars aligned and we continue to develop the way we want them, then we should have a potential to go to the upper part of the interval. But again I would like to underscore that we remain with the 3% to 5% guidance for now.

And just if I understood it correctly, you talked about I think SEK 70 million to SEK 80 million for this quarter at least lost volumes on net sales. So is currently half of those planned for coming quarters then? Is that how we should read into it?

We have -- what we're estimating is that we lost in comparison to the -- to what we thought going out of the Q3 report. We believe that around SEK 40 million less of critical care sales or critical care rental sales in the U.S. and a little bit more than SEK 30 million of postponed projects into other periods. And I would like to underline that we haven't lost any orders or having any -- or had any delay -- or sorry, any cancellations of orders. We've just seen postponements of it.

I'll just limit myself to 1. Any comments regarding the SANA contract that you mentioned last quarter? How that is progressing? The rollout, obviously it could be impacted by stocking as well, but any sort of details in how that's progressing would be interesting to hear.

We had in -- when we spoke about this in our Q3 report, we had good hopes that we would start the implementation already in Q1. COVID has postponed that because SANA has been forced to focus on the additional COVID surge. We now hope to be able to have this process starting somewhere during Q2 of 2022.

The next question comes from the line of Karl Noren from Danske Bank.

So 2 questions, if I may. If we start off with the gross margin coming in quite strong despite the higher input costs and the lower volume contribution from critical care rental. I'm just wondering how we should see this developing into 2022. I think you should have a pretty good mix with increased sales in patient handling and DVT and service as you mentioned. But any additional color on this would be helpful.

I was very happy to see how well the organization navigated especially in the latter part of the quarter when it came to gross margin. Remember that we lost or we had a significant decline of critical care rental sales of around SEK 80 million in the quarter where we managed to, I would say, compensate part of that with core rental. Remember that critical care rental comes with very high gross margins for us. And we had the cost increases that I indicated. What we will see, and I think we will have the same trend for gross margin as I indicated for our net sales, is that there will be a negative exposure towards the gross margin in Q1 and Q2. That is mainly because of the significantly lower critical care rental in Q1 and also, as I said, during Q3 for that one. We will have higher material cost mainly in the first 3 quarters and transportation cost will be around SEK 25 million at least higher in Q1 than what we had last year. So there will be short-term impacts on the gross margin in the beginning of the year and then I believe that we will step-by-step return to levels where we want to be in the back end of the year.

Okay. And then just on the Rest of World, the distributor markets there, you seem to be having some issues there with supply chain, et cetera. Can you just -- any comments on when you expect this to ease and when we should see a positive development within these markets again?

We absolutely estimate Rest of the World to come back to growth already during 2022. We have a number of distributor markets, which are still heavily affected by COVID restrictions and thereby COVID access or access to health care, but that is only a small part of our business. The momentum in the bigger countries where we have our own infrastructure is picking up. We are seeing a good pipeline in many of those countries. And as I indicated during the call, the Japanese market has now stabilized after, I would say, very much a year that we did not expect where we saw a decline on the yearly net sales growth. We expect Japan to come back to the growth track in 2022. So given the information that we have right now and also with the slight or with the disturbances we have on the smaller distributor markets, we believe that Rest of the World will come back to growth. And as on the supply chain problems -- or logistic problems, that is the same comment as we have had for the other regions, that we believe that the situation will stabilize throughout the year that there will still be problems during the first quarters, but that we will see stabilization in the back end of the year.

And we have one more question from the line of Kristofer Liljeberg from Carnegie.

Coming back to margins here. If you look at the gross margin for the full year, do you expect gross margin to improve in 2022 over 2021?

As always, we don't guide for that one. But I don't think I -- if you see the headwinds we have in the first part of the year, I do not believe that we will see an improvement. I think that we did a really strong thing in Q4 around ending ourselves up on 46% with the headwinds that we have and I believe that somewhere around that area would be a good mark to aim at.

Okay. So flat gross margin.

Given the information we have right now with the price increases, it very much depends on how quickly we can get price increases to the customers and mitigate for the heavy cost increases that we will or rather that we are foreseeing both for material and also for logistics. So it's very much dependent on that.

Okay. And then on operating costs, still a small increase as a percentage of sales, right?

We could -- we're aiming at a slight decrease of OpEx as a percentage to net sales versus 2021. Remember that the decrease that we did in 2021 was a full percentage point, but we still believe that we can see an additional slight decrease also towards that -- versus that number in 2022. We will on OpEx see a continued buildup of our sales and marketing activities so selling expenses will go up in 2022. Whereas I believe that our increases on the admin side will be limited to very minor in absolute terms and probably somewhere just around the 1 percentage point line for the admin cost for the full year.

Okay. The last question I have. With the SEM scanner, is it possible to say how much the new ones have been delayed here from COVID? I think if I heard you correctly, you said you expect this to start having a more meaningful impact on sales in 2023. I think that modeling is not new. But previously you have also talked a bit about potential small impact on sales already in 2022. Is that still relevant you think or more difficult now?

No, I think it's absolutely still relevant, Kristofer. I mean we have seen -- if I look to where I thought we would have been, I think we have -- through the COVID, we have probably been pushed back gross with maybe 9 months and then worked back. So we're probably 6 months delayed where we wanted to be with the conversion side of things. But I believe I indicated shortly after the Q3 report that we should be able in 2022 to see short of a -- or a little bit less than 1 percentage point of organic growth coming from the SEM scanner. That might have moved a few millions on the negative side, but we still believe that there could be a good contribution from SEM scanner sales for the full year of 2022 where obviously the main part of that will come in the latter part of the year.

And we just have one more question from Patrik Ling from DNB Markets.

Just a follow-up on the last one. Did I hear you correctly when you said, Joacim, that you expect the SEM scanner to add approximately 1% organic sales in '22 or was that in '23?

I said short of 1% in 2022. So we will not reach the full 1% organic growth, but I think that we have the potential to be, let's say, somewhere between 0.5 percentage points and 0.8 percentage points up based on our latest forecast and the pipeline that we have all working [Technical Difficulty].

And that is included in the guidance of the different business areas that you displayed on your last slide?

Yes, I was not displaying wound care where the sales ends up. So I didn't really talk about the full wound care capital sales.

And if you would have added wound care to that picture, what would that show?

Wound care would obviously show a good uptick versus this year based on the sales of SEM scanner on capital sales should be added. Remember that the wound care sales that we have is mostly within our rental business. However, SEM scanner comes with capital sales.

Despite being so much focused on the consumables from SEM scanner?

That is the way we've booked it in our for example other consumables. If you take our DVT range, those are also booked under DVT and the same thing goes for patient handling. So the consumables that we're selling is also booked under patient handling so we don't have separate consumable rows.

And as there are no further questions, I will hand it back to the speakers.

Thank you very much and thanks for listening in. As I said and as I've mentioned before, we closed the best year so far for Arjo with a solid Q4 where we, despite headwinds in terms of logistics and material sourcing, see a solid organic growth with 1%. We continue to improve our gross margin. And we enter into 2022 with a good momentum in rental and service, a good capital backlog and overall, a good demand for our products. So we very much look forward in continuing to develop Arjo and perform a solid 2022. Thank you.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.