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

Welcome to the Arjo Q4 presentation for 2023. [Operator Instructions] Now, I will hand the conference over to CEO, Joacim Lindoff; and CFO, Niclas Sjosward. Please go ahead.

Thank you very much, and good morning to everyone, and welcome to Arjo's Q4 2023 Earnings Call, where Niclas and myself will give you some details on the Q4 report that we released an hour ago. Next slide, please. The agenda looks as usual and includes a summary of activities and results from Q4, shorter comments on full year 2023, balance sheet items and details on the outlook for 2024 before we open up for questions. And we intend to keep this call to an hour and finish no later than 9:00. Next slide, please. We closed the year in a strong way, and continue to see 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 closed the quarter with 4.9% organic net sales growth, with good growth in most of the major markets. In addition, and as a further positive sign, this net sales development is supported by an even better order intake in the quarter. In the U.S., we continue to see a still somewhat stressed, but systematically improving financial situation for many U.S. health care providers caused by factors known from before around staffing shortages and increasing costs. Due to this, we have continued to see slower-than-expected net sales development in our outcome programs, both in patient handling and pressure injury prevention, but are, on the other hand, seeing continued good traction on our service and rental business. The beacons of lights are now shining brighter than before, and we believe that 2024 is going to provide further positive development on this important market. We continue to see good growth on major markets like Canada and France, where both capital service and rentals develop well. We also see a very good growth in our APAC region in the quarter, together with a strong focus on improved product mix in that same region. Our gross margin came in at 45.3%, which is a solid improvement versus Q4 of 2022 and sequentially over last quarter. I'm happy to see that our activities around price adjustments, internal efficiencies, product mix are generating wanted results on the gross margin, and this work will, of course, continue into 2024. For 2024, we will continue to drive efficiency focus throughout the value chain based on the plans that we put in place, for example, within the supply chain. Our strong focus on price adjustments will obviously remain, and it is very clear that we need to continue with that work to mitigate the additional inflationary cost expected also in 2024. On the OpEx side, we are seeing an increase mainly related to salary inflation. In comparable currencies, the increase in OpEx is related to higher salary costs, somewhat increased IT costs and higher net R&D in the quarter. I'm satisfied with how the organization has continued to invest, where we expect to drive profitable growth for the future while safeguarding our short-term commitments. Adjusted EBITDA for the quarter was SEK 614 million versus SEK 481 million in Q4 of 2022, an increase just short of 30% driven by the solid development of our gross margin. Adjusted EBIT improved with more than 50%, and we continue to have good stability in our earnings progress. We continue to perform well on operational cash flow this time with SEK 734 million for Q4, leading to a cash conversion of 125% for the quarter. The good results in this area is driven by our continued improvements in both inventory and accountants receivables, a focus that is there to stay. During the quarter, we also got some further proof that our efforts in the sustainability area are generating results, with a significant improvement in the ESG risk rating from Sustainalytics and also from MSCI. In summary, we are closing 2023 in a strong way. Our markets have done a good job in continuing to navigate different market conditions, and have built an even stronger foundation for the years to come. Our core business develops in a solid way, and we are now gaining visible pace on our outcome parts. Next slide, please. After a start to the year that was more volatile than expected and some difficulties to get needed traction on our profitability development, we are seeing a second half of the year with good and stable development. Our core business has developed much according to plan, setting a strong foundation for the quarters to come, and we're also seeing visible steps in the right direction in our customer interaction on outcome programs. In the second half of the year, we've also seen good profitability improvements despite significant inflationary pressures on salaries. Product mix has improved as per plan. Price adjustment work is continuing with full focus, and our activities to drive efficiencies in supply chain are executed on plan. From a numbers perspective, we see a full-year organic growth of 4.7%, with good traction on most major markets and the U.S. that has returned to growth mode. We have strengthened our gross margin, driven by factors already mentioned and are, despite the significant inflationary pressure on mainly salaries, improving our overall profitability on adjusted EBIT level with almost 25% for the full year. Our focus on cash conversion, 106% for the full year has been strong. We're generating more than SEK 2 billion in operating cash flow for the year, and our well-executed plans on inventory reduction and accounts receivables pays off. Our leverage is now back to 2.3, and the work to reduce that further will, of course, continue. Based on this and a positive view on our development in the coming years, the Board of Directors are recommending an increase of the dividend to [ SEK 0.9 ] per share. Thank you. All in all, we put a year of stabilization and recovery behind us, where we have met short-term commitments while investing in the future, something that we are positive, will generate a good, continued development on all parameters for the coming years. Then if we move into North America. Next slide, please. North America grew with almost 8% organically in the quarter and more than 5% for the full year of 2023. We had a continued very good development in Canada, where service, rental and capital, all developed well. It is especially our long-term care business that is driving the growth, and we are now focusing more and more to get the same traction within our acute care segment. It is also pleasing to mention that we, during the quarter, secured a first contract for SEM scanner usage in long-term care in Canada, which really is a breakthrough deal for us. In the U.S., we continue to see a step-by-step improvement of market conditions, conversion from pipeline to order intake in capital equipment and outcome programs are still slower than expected due to the continued lack of staff and strained financial situation for many health care providers. But especially in our transactional patient handling, we have an improved net sales development in the quarter, supported by good order intake. We expect to continue to see gradual improvement in the U.S. on capital order intake in the coming quarters. The interest for our pressure injury prevention programs in the U.S. remains high. Conversion rates from pipeline to start of training is still slower than expected, with reasons being the same as before, around staffing shortages and focus on more short-term projects. The trend on conversion has improved well in the quarter, and we are seeing significant month-over-month uplift in invoicing that will generate a good development in 2024 and onwards. And I will give you some more details on the development further on in the presentation. We are seeing the same trend in our patient handling outcome programs, an area where we, as most of you know, have been active for over the last 15 years. The reasons are the same as for pressure injury prevention, which makes us confident that it is market factors causing the longer lead times now for both segments. Also in patient handling, the pipeline is good and with high quality, and we also expect this area to improve significantly during 2024. Rental in the U.S. continues to develop well, with an organic growth of more than 10% in the quarter, with good improvements on profitability. Also, our service business in the U.S. sees growth with over 10% in the quarter, and we expect good traction on service development also in the coming years. Next slide, please. If we then move over to Western Europe and rest of the world, that makes up the global sales region. In Q4, this region recorded a solid 4% organic growth and for the full year, the organic growth was 4.3%. In Western Europe, we see the same trends as in Q3 with a continued healthy demand for our products and solutions, together with a good development of both service and rental in the quarter. We had a slight organic growth in Q4, with markets like France and Netherlands and Ireland, posting good growth numbers. For the full year, the region grew with 3%, which is a solid performance under current circumstances. Our organization in the U.K. continues to navigate the volatile market and are performing net sales in line with last year's quarter 4. In this situation, it is pleasing to see how an improved product mix and clear efficiency gain can continue to drive good profitability improvement. Germany sees a slightly lower capital market, but this is compensated well by good development in specialty service for the quarter. Overall, our service and rental business in Western Europe developed well in the quarter, both on volume and on price. Especially the price adjustment part has gained traction across segments for the quarter, and we continue with high focus in this area into 2024. There continues to be uncertainties around capital spend levels in European health care, but based on our current performance, information at hand and the pipeline development, we are positive around our possibilities to continue to see growth and continued improvements on profitability in Western Europe also in 2024. Next slide, please. Our business in rest of the world had a good organic net sales growth of 14% in the quarter, with a full year 2023 that landed on more than 8% organic growth. Our APAC region had a solid quarter on organic net sales, driven by good performance in Australia. It is also for this region, good to see that we work with significant effort on improving our product mix, obviously, while maintaining high organic growth. India develops favorably also in this quarter with good potential for further development in 2024. Japan, as we've been talking quite a lot about in recent quarters, performs a solid quarter, regaining some momentum versus plan that will help us to secure a good development in 2024. In the quarter, we have also initiated further investments around strengthening our market activities in Eastern Europe and also in APAC, investments that are expected to support good future growth in this area alongside current activities. Next slide, please. Our gross margin came in at 45.3% for the quarter, which is a solid improvement from 41.3% the same quarter last year and also an uptick sequentially from Q3 of 2023. The negative effects of the high inflationary environment continues to be visible, especially on the salary side. We are, as before, working hard to mitigate the negative effects with continued long-term efficiency gains throughout the value chain, including solid focus on continued supply chain efficiency. The strong recovery and stabilization during the second half of 2023 in supply chain operation is obviously helping us to drive these activities in a standardized and efficient way. We need to continue to work on price adjustments as one part of the puzzle to mitigate further inflationary pressure and adjust for previous increases of cost. We have executed well in this area for 2023 and quarter 4 is a good example of that, with price as a main contributor to the strong improvement of gross margin. As stated before, we are starting to see a positive change in product mix and the positive effects of increasing sales in our pressure injury prevention side in the quarter. The good development in both service and rental, especially in U.S. rental is contributing in the quarter. This is well -- or rather this will, in our view, drive long-term expansion of the gross margin in the years to come. Next slide, please. Our OpEx level continues to be well managed and activity levels remain high throughout the organization. We continue to invest in activities that secure both short-term revenue and solid profitable development for the future. The increase in OpEx for the quarter versus last year's Q4 is more or less isolated to salary cost in selling and admin. On top of this, we continue to see the same trend as previous quarters on higher IT costs related to significant increases in license costs and our continued improvements on IT security. R&D gross investment is at 2.9% for the quarter, a number that continues to be well aligned with portfolio plans. We have significantly higher net R&D in the quarter compared to Q4 of 2022, which is related to planned project development, but obviously works negatively on EBIT versus Q4 of 2022. We had a negative effect from revaluation of AR and AP of approximately minus SEK 20 million for the quarter booked under other expenses, making the performance on profitability even stronger. Adjusted EBITDA in Q4 came in at SEK 614 million, up with 25% from Q4 of 2022. Our adjusted EBIT came in at SEK 342 million, which is an improvement of more than 50% versus quarter 4 2022. Both adjusted EBITDA and EBIT recorded the highest absolute numbers in any single quarter since the spin-off, and that is really a good sign for the future as well. Restructuring came in at SEK 25 million in the quarter, mainly related to our strategic alignment work of the U.K. sales force, changes in Central Europe and a dedicated program to set our marketing functions as efficient as possible globally by eliminating some managerial positions. Next slide, please. And I hereby hand over to our CFO, Niclas Sjosward.

Thank you, Joacim, and good morning, everyone, also from my side. The positive trend in operational cash flow continues. We have a high focus on working capital management, and we see a positive solid impact from working capital on the cash flow in the quarter. The improvement in working capital in the quarter is coming from all parts. A strong development in the inventory reduction, but also good support from the improvements in accounts receivable as well as accounts payable. Our long-term focus improvement work in working capital is paying off in the quarter, and this focus will, of course, continue into this year. The working capital days sees a significant decline in the quarter, down to 77 days, which is, as you can see on the slide, the lowest level in 4 years, but actually also the lowest level since the spin-off. The improved profitability along with the positive impact from working capital gives a solid operating cash flow of SEK 734 million for the quarter versus the SEK 425 million in quarter 4 2022. And this brings the operating cash flow for the full year for 2023 to just about SEK 2 billion, as Joacim said before. As an effect of this, cash conversion improved significantly versus Q4 2022, and we report 125% cash conversion for the quarter, giving us 106% year-to-date, meaning that we exceeded our target of 80% cash conversion for the full year. And also for your information, cash flow from investing activities was minus SEK 177 million in the quarter versus minus SEK 231 million in quarter 4 2022. And this is mainly connected to investments in our rental fleet, R&D and asset -- fixed assets. So next slide, please. Our net debt continued to decrease sequentially during the quarter from SEK 4.7 billion in Q3 to now SEK 4.3 billion in Q4. This decrease is mainly attributed to the group operational cash flow mentioned before. Our financial cost has increased substantially compared to the same period last year, and that reflects the current interest rate development. The interest rate specifically was sequentially lower in Q4 versus Q3 based on our lower debt levels. And we expect our reduction journey on the net debt to continue also in the coming quarters and together with potentially lower interest rates during 2024. We anticipate decreased financial costs during this year. And our cash position remains strong. Our leverage, net debt to adjusted EBITDA, continued to improve and came in at 2.3 as a consequence of previously mentioned activities regarding improved profitability, working capital management and positive cash flows. This is sequentially down from the 2.6 in Q3. And also for your information, the equity ratio came in at 49.0%. It's a slight decline from the 50.2% in last quarter, and this is only due to FX effects. So with that, I hand over back to you, Joacim.

Thank you very much, Niclas. Next slide, please. And moving into our outlook, where the outlook for 2024 is that the organic net sales growth will be well within the group's target interval of 3% to 5%. Let me also share some additional details through the different segments on the coming slides, starting with the capital side. Next slide, please. Overall, we forecast that we will continue to see positive development in our capital business, driven by both volume and price in 2024. Our U.S. capital sales is expected to see continued step-by-step improvements as the market recovers. We should also have good possibilities to gain market shares in the U.S. as a large portion of our competitors are in less stable positions. In Western Europe, we are facing a slightly more volatile market situation, but we still forecast capital sales volumes to be on 2023 levels. The positive trend in rest of the world is set to continue based on the good traction that we have had in the latter parts of 2023, market developments and also our additional investments in sales force and market coverage that I mentioned earlier. We are expecting to regain momentum in our outcome programs for patient handling in the U.S. and gain further traction on new markets in this area. We forecast to build on the recent increased pace in conversions in the pressure injury prevention side in the U.S., and here start to see additional traction on markets like Canada and the U.K. as well. This will add to the volume side in capital, while positively impacts the gross margin. In addition, and as stated before, we will focus on price adjustments also in 2024 to continue the journey to mitigate for the higher cost levels driven by inflation since the end of 2021. Next slide, please. 2023 was a very strong year for our service development, both net sales and profitability wise. We forecast that 2024 will be a year where we continue this positive development, driven by both volume coming from mainly additional preventive maintenance focus and price adjustments to meet inflationary pressure. The focus that we've had on service as an important part of our business development will continue, and I am confident that the potential here for the coming years with the right investments continues to be big. Next slide, please. Also in rental, the positive development is expected to continue. Major rental markets like U.S. and France have both secured additional contract base for 2024 and onwards and will build on this. In the U.S., we are now also actively penetrating the long-term care rental market, where our activities previously have been very low. Competitors exiting this market space assist this inroad, and we will, while obviously, safeguarding profitability, address this market opportunity actively during 2024. Our European rental business is expected to see continued growth, driven by new contracts and higher demand from existing customers. We also expect to see a continuation of the profitability improvement journey as we remain focused on the price adjustments needed and further internal efficiency work globally. Moreover, and to clarify any misunderstandings, our critical care rental volumes are not a part of the planned growth scenario and has never been on either top line, nor profitability. As most of you know, this was a product that had an extraordinary development during the COVID period, but have since Q1 of 2022 not been a focus area for us and therefore, not a part of our growth strategy for rent. Next slide, please. For outcome solutions in patient handling and pressure injury, U.S. continues to be the main focus market with additional opportunities in countries like U.K., Germany, Australia and Canada. We foresee a favorable development of implementations of patient handling outcome solutions in 2024. 2023 did not live up to expectations due to the well-known factors on staff shortage and the financial situation for U.S. health care. But we forecast a good step-by-step improvement in this area for 2024. This area is well known to us, and we know what it takes to gain traction when external factors starts to normalize. And we have an even stronger setup today to drive this type of business. In pressure injury prevention, we have a solid outcome offering in place for the U.S. and some of the major markets. We continue to see a strong demand for these solutions and expect with the same reasoning as for patient handling that we will see a good step-by-step improvement in 2024, mainly in the U.S., but also in other dedicated markets. It is good to see that our partner, BBI, continues to get market access progress through, for example, continuous endorsements from FDA on the scanner utility. This will, over the next 18 -- sorry, 12 months to 18 months have the potential to change the game plan even further around reimbursement, etc., in the U.S. Apart from the FDA endorsements on the utility of the scanner, we also received very positive customer feedback from customers with implemented programs, including the scanner. For example, we now have a world renowned cancer center and teaching institute located in the U.S. that has adopted the Provizio SEM Scanner. As I've been talking about before, the Arjo team has successfully trained over 1,500 nurses across the entire facility, and the facility officially implemented the Provizio SEM Scanner in October of 2023. It is assumed that this program will generate around USD 2 million in the initial phases in yearly revenue for Arjo, while obviously ensuring significantly higher savings for the user. Unfortunately, we cannot disclose the name of this institution as it is a state-funded facility and would not agree to a publicity clause. One that we can mention is the Boston Medical Center, a 514 bed level 1 trauma and academic medical center located in Boston, Massachusetts, that officially implemented the Provizio SEM Scanner in December of 2023. Another one is the University of Louisville, a fully integrated regional academic health system based in Louisville, Kentucky. They adopted the Provizio SEM Scanner at 4 of its facilities starting in the end of 2022. Since adoption, they have achieved notable reductions in heel and sacrum hospital required pressure injuries, even with some -- even in some of its most vulnerable patient populations being in the cardiovascular intensive care unit and its Frazier Rehabilitation Institute with brain injuries, spinal cord and stroke patients. In the implemented programs, also across other larger health care institutions in the U.S., we are recording 77% to 100% pressure injury reductions, obviously, leading to a significant saving for these customers and significant improvements in patient care and patient care quality. These real-world data is used to continue to gain additional traction from the high-quality pipeline that we carry into 2024. Before closing the outlook session, I should also mention that we forecast approximately SEK 30 million to SEK 35 million in restructuring costs in 2024 coming from not yet decided, the continued strategic alignment work in our sales organization and internal efficiency programs. Next slide, please. And then just a summary before we close. And we do close a year of 2023 with a solid Q4 performance where we have a strong growth in our core business. We continue to see good growth in all regions, with continued improvement growth in the U.S. and with other markets developing well. Our service and rental business continues to develop favorably, both on net sales and profitability, setting a solid base for the coming years. We are starting to see good conversion rates from our outcome programs in patient handling and pressure injury prevention in the back end of the year. And our assumptions are that external factors affecting the adoption rate will continue to improve in 2024, with good effects on net sales and profitability. We are clearly seeing the effects on profitability from price adjustments, internal efficiency work and better product mix, areas that will all be with high focus going into 2024 to ensure further improvements. Our continued strong focus on operating cash flow continues, and we have good plans in place to continue this journey in the years to come. With 2023 as a year of recovery and stabilization, we have set a solid base for further development in 2024 and onwards, where we will continue to build a winning and sustainable Arjo based on our strategic initiatives. And with that, I would like to open up for questions, moderator. So please go ahead.

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

So first one on the gross margin outlook and trajectory for next year. Should we view 45% as sort of a base to build from in '24? Or how should we think about the trajectory and outlook? That will be my first one.

Yes. I think we should look upon everything from a full year perspective as we know that we have differences between quarter or rather between quarters. But I very much believe that we will continue our development journey on the gross margin based on the areas that I mentioned around price adjustments, around continued internal efficiencies and also a step-by-step improved product mix. So I have -- yes, we have good plans in place for further development of the gross margin in 2023 -- 2024, sorry.

That's very clear. And just a quick follow-up on that one. So what type of headwinds are you expecting on the gross margin from the Red Sea situation and potentially inflationary impacts there? And what type of price increases should we expect on a group level for '24?

Yes. On the conflict in Middle East and southbound, it's something that will affect transportation. We don't think that it will have a major financial effect to us with the information we have right now, but it's something that we are obviously observing. When it comes to other headwinds, it is continuing to be the inflationary pressure on salaries that we will need to continue to mitigate through normal efficiency gains, but also further efficiency programs that we are driving within the supply chain. And on the price adjustments, which is going to continue to be a main contributor to a strengthening gross margin for the full year of 2024, it will be maybe not to the same tone of new things that we implement in 2024, as we did in 2023, but it will be a significant contributor both to the top line and to the gross margin development.

All right. And the final question from my end. So how should we think about the growth and margin sort of improvement outlook for '24? Should we expect a bit of a back-end loaded year, given a gradual ramp-up of U.S. sales? Or how are you thinking about the progression of the year just so we can get a sense of the phasing on the growth and margin side?

I think, as always, we can anticipate a strong Q4. But as we have tried to do this year, both on organic growth and also profitability development, that we see a gradual improvement over the year. That's how I see it. I don't think there will surely be a stronger Q4 than other quarters because of the volumes. But I do foresee that we -- quarter-over-quarter, we'll continue to see improvements, both on net sales and on gross margin going forward.

The next question comes from Mattias Vadsten from SEB.

Just to follow up, firstly, on the gross margin. I think the increase in Q4 is like 4 percentage points, somewhere around there year-over-year. And the year-to-date, as of Q3, I guess was somewhere around like 1, 1.5 percentage points. So just -- you have talked a lot about it, but just to understand what makes it such a major increase in the gross margin just for Q4? So we understand that first when we put our forecast for the next year. Is it that the U.S. has improved a lot? Or just how we should see that improvement? That's the first one.

I think you should divide the increase in 3 parts where, obviously, supply chain efficiency is working on a significantly more stable environment around material and transportation. And together with internal efficiencies is playing in, where we are seeing good effects in the fourth quarter that will obviously carry in into 2024. We see a really good adjustment on prices that is helping the gross margin in the quarter and the fact also that we -- what we have been discussing before is that we did carry a not-so profitable backlog into the beginning of 2024 -- sorry, 2023, that dragged out Q1, Q2 and Q3 where we are now seeing that we are invoicing from a more healthy backlog than before. And obviously, the third part is around the product mix or the mix in general. We're increasing sales in our North American business, but also a change and a very focused change around product mix in other countries are driving a better product mix with more sales in patient handling. We are starting to see a ramp-up in our wound care part, where our pressure injury prevention is booked and that is generating a better gross margin for us than if we are selling a lot of medical beds in remote areas. So all in all, a good development on the internal side that will carry into 2024, good traction on price increases that will carry into 2024, and we also start seeing a better product and geographical mix.

1 to 1.5 was for the full year. Sorry. Yes. In my comments, in the questions, just to clarify that. Then my next one would be, if you could say something on rental, perhaps what the growth outlook is there? I mean, looking at the growth, what's been sort of the price and volumes this year would you say? And if we look on price adjustments for 2024 in this segment, what do you see there? And maybe to this question, given the quite good growth you have in the segment, how do you see CapEx for Arjo in 2024 to deliver on the plans that you have? That's the next one.

Yes, no, if you look at the growth of rental that we are seeing for the full year, it's actually mainly volume. As we've been discussing before, it is difficult to get through with price increases in rental and this will happen step by step. As an example, the larger French rental contract with UGAP is one example where we haven't been able really to touch prices over 4 years and now have the same volume but to a higher price level to compensate for the extra cost that we have. So the uptick in rental for 2023 has been mostly around volume, some price, but mostly around volume. I do believe that we have a potential of continuing with a step-by-step improvement on our pricing side in rental, but it is slower than in other areas. We need to continue to work with internal efficiencies, to continue to drive better operational leverage out of the increased volumes that we get. On the CapEx side, I do believe given the growth that we are seeing on the rental side, we will increase somewhat, not too much, but somewhat the CapEx on our rental fleet, but it will be in -- within limited frames and supporting a good net sales growth also in 2024 and onwards.

Good. And that maybe leads me into the next question or my last question a bit as well. I mean it's very early now, but let's assume the situation that we have now more or less remains the same, how should we look on prices for 2025? Because it sounds like you have a few contracts, where you have not been able to increase prices. So how do you think about those contracts? And how do you think about the profile for 2025 because I think that's very interesting if prices can remain flat or even increase slightly or very early, but just some thoughts is very appreciated.

Yes. It's obviously early, but to give some flavor on it, I mean, we go into 2024 with continued fairly aggressive plans around price adjustments. It's not only to compensate for the inflationary pressure that we have seen in 2020 or will see in 2024 that we anticipate, but also to continue to compensate for the extra cost that we have had in the system that we have not fully compensated for since really the beginning of 2022. So that work will continue more or less with the same pace as we have seen in 2023. That will obviously generate carryover effects into 2025 as well. And with a normal pace of price increases also in 2025, it's obviously in the cards that we will continue to work to mitigate inflationary pressure in a good way with price adjustments also into 2025, both with new initiatives and also carryover effects from previous years.

The next question comes from Erik Cassel from Danske Bank.

Congrats on quarter. Just first question on me. How much did the product mix change year-over-year just to get a sense of sort of gross margin drivers, and then thinking mainly of patient handling and medical beds as the share of sales?

Yes. We don't have the exact number there, but we are, I believe, just short of a percentage for the quarter if you look at the overall product mix effect on the gross margin.

Perfect. Then could you perhaps talk about SEM scanner implementations and the sort of current run rate going into '24, and then also if you expect to reach the previous guidance of SEK 200 million over the year?

As we have said before, which we have said really from Q2 and onwards is that we will try to refrain from giving exact numbers because I don't think that, that will bring any value. What I do see is that we are seeing a good ramp-up of the conversions in Q4, and we expect that to continue also into 2024. So our expectations when it comes to pressure injury prevention is that, that will be one of the main contributors to good organic growth also in 2024 or in 2024, and with that also a good effect on our profitability. On the patient handling side, on the outcome programs there, the same thing, a very slow in our books, 2023. Also a slow 2023 Q4 in the area of outcome programs for patient handling based on the external factors. We are also in that area now starting to see movements, and we expect a good step-by-step improvement of our sales of patient handling outcome programs in 2024. So a positive outlook for both pressure injury prevention and outcome programs in patient handling.

Okay. Good. And then how much of the backlog or, say, pent-up demand in patient handling do you think you managed to work through now in Q4?

Could you repeat that, Erik? I didn't hear the full question. Sorry.

Yes. Sorry. No, we previously talked about some sort of backlog of pent-up demand in patient handling. I was just wondering how much of that have you managed to work through now in Q4, if we sort of, say, so a flush of that?

There's not been a flush in Q4. This is a normal step-by-step improvement of the demand in transactional patient handling in the U.S. So there's no flush or anything from or pulling anything from 2024 into '23 or anything like that. This is a step-by-step improvement of the transactional side in the U.S. It is also interesting to see that we -- I certainly believe that we can start gaining some more traction on market shares as well in the U.S. when it comes to transactional sales as we see a competitive landscape in this area that is in somewhat turmoil. And we need to try to take advantage of that in a good and profitable way.

Okay. Perfect. And then just the last one, if I may. Maybe for you, Niclas. Working capital days now down to 77. I mean, do you think you can get even better from this point? Or do you sort of see that flattening out here?

I think the long-term improvement program will continue into 2024 and onwards. So I think our focus is to continue improving it. I think we should be aware that in the inventory, for example, there are a lot of inflation in those numbers right now. We have taken on a lot of costs. Of course, if that stabilizes, then maybe there is a potential. And then both in day sales outstanding and days payables, we continue our improvement.

The next question comes from Kristofer Liljeberg from Carnegie.

I have some questions. First, coming back to this gross margin discussion, and I'm trying to strip out seasonality. So maybe would it be possible to say something about how much did better gross margin for full year 2023 would have been if you would have had a similar price situation in the backlog, et cetera, and similar product mix as now at the ending of the year or as you had in Q4?

That's a difficult question, Kristofer. And without me making assumptions, that is not correct. I would say, if I can leave it by, say, it would have been better. And just to summarize what I said before, Kristofer, is that, I mean, we did implement price increases beginning of the year. It has taken slightly longer to get the effects out of the price increases. We have seen an uptick of sales in more interesting geographical areas in the latter part of the year, which gives a positive product mix. We have seen a change in the product mix in itself through more patient handling and also more pressure injury prevention in Q4. And obviously, we have very little intention of dropping down on the sales in patient handling or in pressure injury prevention in the coming quarters. It's also interesting to see that -- or interesting, but we have seen the weighted decline in capital sales of medical beds, which is the category that declines on volume or rather on value for the quarter, and that has a positive effect on the product mix. And that trend, when I speak about capital development going into 2024 is something that we foresee will continue to be there. We do not foresee an increase of sales in medical beds, for example, during 2024.

Yes. But I guess you agree also that a large part of the sequential gross margin improvement is just due to seasonality.

I wouldn't agree fully because seasonality has a part in Q4. It always has. It is higher volumes and it is end of year. And for many health care systems, we do get operational leverage in Q4. But we also have carryforward effects in terms of price increases, in terms of better product mix and also the internal efficiency gains that we will continue to carry into 2024. So it's not only seasonal, Kristofer.

Okay. And then operating costs, we haven't talked so much about that. How should we see them? Of course, you will have FX effects, et cetera. But if you just look at operating costs as a percentage of sales 2024 versus 2023?

I think it's fair to assume that, that will be approximately on the same level as it is right now, given the higher-than-expected inflationary pressure than what we had anticipated maybe 12 months to 18 months ago. But again, with that said, I do believe that we have a good potential of compensating that through the initiatives on gross margin and internal efficiencies that we've been talking about before.

Okay. And then my last question relates to the sales guidance. Since Europe is a bit weaker here, at least some countries, and you were guiding for flat capital equipment sales in Europe, how would you view the risk from the European situation in the full year guidance for 2024?

Maybe to express myself a little bit clear, I expect volumes on capital in Europe to be flat. And then, obviously, we have the price component on top of that in Europe. I do believe that we will need to continue to navigate a volatile capital market in Europe based on how certain markets are developing, like the German one, maybe with a little bit more volatility, whereas we do believe that we have good potential of maybe doing slightly better in France. We believe that we have good potential of -- with a solid view on product mix moving away from medical beds in the U.K., but that we continue to navigate that market in a good way for 2024. But we need to make sure that we are staying very close to this one, that we start with our activities early in the year. And yes, that we make sure that we get the right type of products into our backlog, which we have done a good job with during Q4.

The next question comes from David Johansson from Nordea Markets. The next question comes from Sten Gustafsson from ABG Sundal Collier.

Yes. Firstly, sorry for going back to the gross margin here, but I just want to understand exactly what you said about the development for 2024? Because, I mean, it looks like you made the price adjustments earlier in the year and it wasn't until now in Q4, you saw it come through in the results. And assuming that we won't see any major sort of delta in the inflation going into '24, why wouldn't the gross margin uplift continue, well, adjusted for product mix into '24? That would be my first question. And also given the fact that you said you're targeting even more positive price adjustments. So maybe we can start there.

Yes, it is a relevant question, Sten, that I will not be able to answer in details on percentage or anything. But we are confident. I mean, the reason for price increases is having an effect in the back end of the year is two-fold. As you say, it has taken longer time from the implementation until we've seen it and we have seen it a little bit in Q2. We saw it a little bit in Q3, but the main effect that we're now seeing in Q4 of this one is that we also have more or less emptied the backlog of old projects from years or from periods where we didn't have the opportunity of increasing prices or didn't increase prices. So that is one effect. That will obviously carry into 2024. On top of that, we are then also implementing additional price increases to adjust for the extra cost that we have seen in -- that we are going to see into the system around inflation on salaries and some other smaller areas. But the main headwind is on the inflationary pressure on salaries, and that goes for the OpEx side as well. And we will continue to have step-by-step improvements on the product mix as well. So as I said in the beginning, I expect to see a good development of our gross margin for the full year of 2024 versus 2023 with, obviously, I would say, quarters being slightly different with a stronger Q4 to be expected as always.

All right. I mean, yes, I mean, it really sounds like you have the opportunity to improve gross margins quite a lot then in '24, if all the sort of old -- if the backlog of orders now has been entered at the lower price points. Going into the potential for inflation and, well, prices on the freight -- sorry about this. When it comes to the freight costs and the impact from the Red Sea, perhaps it would be good to hear the percentage of sales that you have that are currently routed over the Red Sea. And if you also expect to see disturbances when it comes to supply of components or impact on raw materials due to the situation in the Red Sea at the moment?

Yes. On the last part of the question, we do not foresee material shortage or material prices going up because of that. What will be affected short term, we believe is obviously the cost for transportation. The good thing is that we have, hopefully, in this case, been fairly proactive. So we have secured slightly longer contracts around transportation, given that we are now down to very low levels on transportation. What we will obviously get is surcharges when they need to pass in a different route. But we believe that the extra cost for us in the beginning of the year here will be somewhat limited. It will be higher probably in January, February because of the Chinese New Year and the stocking up that always takes place then, but then we believe that we will be in a better position. There would be a few millions of extra cost in transportation, but we don't think that, that will be of material substance for the possibilities to improve on gross margin for 2024. I don't have a percentage on how much of our sales that is going through there, but it is the transportation from our factory, obviously, in China, that is affected by that. So it's not a major part of our transportation, but I can't give you an exact percentage there, Sten.

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

Thank you very much, and thanks for joining the Q4 call for Arjo, where we hopefully have given you details on the -- in our eyes, a good close to a year 2023, where we have seen recovery and stabilization, a good Q4, where we have continued to see organic growth, good development of our profitability side. And we enter into 2024 on an even better base than what we entered into 2023. And we look forward to a year where we will continue to develop Arjo, both on top line and on profitability. With that, thank you very much, and have a good day.