Good morning, and welcome to the Arjo's Q2 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw your question, please press Star then 2. Please note this event is being recorded. I would now like to turn the conference over to Joacim Lindoff, CEO, and Mr. Daniel Fäldt, CFO. Please go ahead, gentlemen.
Thank you very much, and good morning to everyone. Welcome to our Q2 2022 call for Arjo. Together with Daniel, I will give you some more details on the Q2 report that we just released an hour ago. Next slide, please. The agenda today includes a summary of activities and results from Q2, details on balance sheet items, and I will then address some business highlights and the outlook for 2022. We'll then finish off with a summary before we open up for questions. As always, we aim at keeping this call to an hour and ending no later than 9:00 A.M. Next slide, please. Onto a business update. The next slide, please. In Q2, we continued to see good demand for Arjo's products and solutions, resulting in a healthy order intake and continued solid order book compared to same quarter last year.
We have continued to support healthcare globally, navigated continued turbulence on the global markets, and at the same time, continued our journey towards developing as a relevant partner to healthcare across the globe. During the quarter, net sales has been held back by the current situation around material shortage and logistics disturbances globally. Shipments have been postponed into coming periods, and we have continued to stay close to our customers to minimize impact for them. Activity levels on most major markets are on a good level, and this continues to drive pipeline and order generation. Despite the significant headwinds and difficult comps in Critical Care Rental, we managed to generate an organic net sales growth of 0.2%. As said, we are exiting the quarter with a significantly stronger backlog for capital equipment than in the same period last year.
Net sales for Patient Handling came in on par with last year's Q2, but had some invoicing postponed to later quarters. Our order book has now a significant share of Patient Handling, which is positive for both net sales and product mix going forward. Our Hygiene business saw a strong rebound during the quarter after a number of months of significant material shortages. We continue to see a good demand in this profitable category, and we're looking forward to a very important launch of a new bathing portfolio by the end of the year. Our Service business is facing new ways of working, given the learnings and market changes since COVID. The current material supply shortages are also putting extra strain on execution in this category.
Despite these headwinds, it is good to see that our Service business continues to grow and keep margins on a stable level, indicating continued good improvement possibilities when current market conditions stabilize. Our rental sales to Critical Care Rental in the U.S. is significantly down also in this quarter, and given the high margins in this life-saving area, the effects on our gross margin is visible. If we look at the underlying business, excluding Critical Care Rental, our overall growth would have been close to 2.5% organic. Our Core Rental business continues to develop very well in the quarter, both in Europe and in North America, and is in isolation growing 5% in the quarter.
As before, our pipeline for new account looks promising, and I am happy to announce that we, as a part of this development, have been chosen as a supplier on a significant rental contract with HealthTrust in the U.S. This frame agreement is valued at around SEK 600 million on a yearly basis. Arjo is one of four listed companies, and we have a clear and tangible goal to address a large part of the total contract sum with full ramp-up over the next 3 to 12 months. Our gross margin for Q2 came in at 42.9% or 44.5% in comparable currency. The gross margin was affected by an unfavorable product mix with significantly less Critical Care Rental and high volumes of low spec medical beds, major disturbances and cost increases within material sourcing and logistics.
On top of that, some additional inflation pressure. Our actions to mitigate the effects with long-term improvements on efficiency and pricing strategies continues, and the organization is navigating the situation in a professional way. OPEX developed in line with expectations with activity levels now on normal levels. The growth in comparable currencies was moderate compared to a very low Q2 2021 comps. Inflation is causing headwinds, but we have a solid cost control throughout the organization to mitigate the impact. We also continue to do investments to support profitable sales and marketing activities. Our cash conversion is coming in at 37% for the quarter. The lower number is mainly the effect of a continued buildup of inventory to mitigate and balance off the effects of the very volatile logistics market and prepare for significant invoicing of capital in Q3 and Q4.
The interest for the SEM Scanner remains strong, and during the quarter, we have signed commercial contracts with hospital chains in the U.S., the most important market for us in this area. Also in UK, we are step-by-step approaching a breakthrough with further NHS frame agreement advances. In Continental Europe, implementation is as expected, moving slower, but we have a number of good advances here as well that over time will support our aggressive targets in this area. As a summary, despite significant headwinds around logistics and material sourcing and difficult comps around Critical Care Rental, we post another positive quarter on net sales. Our order book for capital goods is significantly stronger than the year before and supported by a continued good demand situation.
This together with good visibility on our large recurring business with service rental and consumables, gives us confidence that we can claw back from a weaker net sales in the H1, second half of the year. Our outlook for this changed. We saw a decline in organic net sales with 0.9%. Growth was held back by a significant decline in our U.S. critical care rental business of around $50 million, which was slightly higher than expected, and also some delayed patient handling invoicing. Excluding the critical care rental fees, growth for the region would have been around 5%. More country-specific, Canada again performed an excellent quarter with solid development across the board. In the U.S., we were, as said, affected by the significantly lower sales in critical care rental and postponed patient handling business.
Our core rental is growing with more than 12% in the quarter in the U.S., and as previously mentioned, we continue to gain market shares in this area with even more to come. U.S. Rental continued to benefit from the new structures put in place in 2019, and we handle the increased volumes from our core business in an efficient way. The significant drop in our Critical Care Rental versus Q2 2021 is obviously visible on both top line and profitability, but the underlying profitability will develop well over the coming quarters. Service in U.S. and Canada continues to have good net sales development and the profitability level are established on high levels with potential for further improvement.
Our activity and lead generation for capital sales, for both acute and long-term care remains on a good level, and we have a strong order book for capital in the coming quarters, especially within patient handling. Our SEM Scanner business in U.S. continues to develop in a good way. As indicated after the Q1 report, there was a light in the tunnel after the COVID-related delays in previous quarters. This has been visible in the latter part of Q2, where we have signed and are about to sign larger implementation contracts with high-ranked hospital chains. We are well on track for expected net sales during the year on our pipeline in the U.S., but also in Canada is now solid, and we expect to see good traction in the second part of this year.
To summarize for the region, a slight decline in organic net sales due to the difficult comps from Critical Care Rental and delayed Patient Handling business. We continue to see good activity and pipeline buildup, both in capital, but very importantly in core rental. The underlying business development in the region is healthy and has a good growth in the quarter. Next slide, please. We're moving over to global sales, and we will try to give you additional details on both Western Europe and rest of the world this time as requested. In total, the region sees organic growth of 1.2% in the quarter, despite already mentioned material and logistic headwinds. In Western Europe, the demand situation remains solid, and we continue to see good development in key markets like France, Netherlands and Germany, supported by a good pipeline for further development.
Continental Europe is growing with a solid 2.2% organically in the quarter, despite headwinds on material and logistics. The positive development is mainly driven by good execution on our service and rental business, but also a significant drawback within our Hygiene area. UK, sorry, UK sees a decline of organic net sales of almost 9% in the quarter versus strong comps in Q2 2021 that contained a number of larger profitable COVID-related projects. For the first half year, UK is, however, almost on par with last year, and pipeline for further development looks healthy. It's also very pleasing that the SEM Scanner implementation continues with high interest in the UK. We have during the quarter added another important framework agreement award, laying the foundation for acceleration of sales in the second half of the year.
In general, our European business follows previous trends with stability in acute care and in long-term care based on the increased focus that this area is experienced as an effect of the pandemic. We continue to see good pipeline development with potential for both this and coming years. A positive trend in our rental business in Western Europe has continued during the quarter, both on net sales and profitability. France continues a solid net sales and profitability journey in this area. We also see a good recovery in our UK activities, both on net sales, but also in profitability, driven by the restructuring made over the last years. A number of other countries also see positive trends in both demand and execution. As a summary, a quarter with quite good organic growth in Europe, despite strong comps in UK and some delayed deliveries due to material and logistic issues.
Demand continues to be good. Activity levels are high across the region, and we have continued good traction on service and rental. On to the next slide, please, some further details on rest of the world. Our business in rest of the world have had a good net sales development in Q2 with visible recovery versus Q2 2021. Our business in Australia continues to develop well across both capital and recurring business like service and rental, and are posting 10% organic growth for the quarter. We see some weakness versus a strong Q2 last year in Africa, but our pipeline here remains solid. Our decisions to withdraw from our Russian business has led to the expected growth in organic net sales in our Eastern European business. But also here, we have a good pipeline in remaining countries for growth in the second half of the year.
The overall product mix in rest of the world has been negatively affected by a high share of low-spec medical beds in the quarter, where also additional logistic issues has contributed to lower than expected margins. Some distributor markets are still heavily affected by COVID, and our business in China, which luckily in this situation is a small part of our business, is experiencing a very volatile situation due to COVID restrictions. Our Japanese business continues the positive trend from Q1 with significant growth steps in the quarter. Our pipeline and order intake continues to support this trend well. As we stated after Q4, our expectation on Japan is that we will start to get back on our business plan in 2022, and in a good pace recover from delays caused by COVID restrictions in 2021.
As a summary for this part of the business, a good and solid 7.5% organic growth in rest of the world markets despite continued COVID restrictions and supply issues. We continue to experience high demand for our products and solutions, and our continued build-up of infrastructure in selected countries will help us to drive good growth also in this area in the coming periods. Next slide, please. Moving over to some financial details. The next slide, please. In the quarter, we post a 42.9% gross margin. We have a negative impact from unfavorable product mix and a significant increase in material and logistic costs. We are now also seeing larger impact from increasing inflation with higher energy, fuel, and salary costs affecting our gross margin negatively.
It should also be noted that the translation impact on gross margin is negative with approximately 1.6 percentage points for the quarter, as you will be able to extract from the table in the quarterly report. In comparable currencies, the gross margin is 44.5%. As said, there is a negative product mix in the quarter where we saw significantly lower high margin critical care rental sales in U.S. and higher than expected sales of low-spec medical beds. The delays of patient handling invoicing discussed before did not help in the quarter, but are on the other hand, given the backlog a more favorable product mix than before. Given the market share gain and new awards within core rental, we have needed to start build up fleet and infrastructure to meet significant ramp up in demand in Q3 and onwards.
This is short term having some negative effect on our gross margin for rental in the U.S. As said, this will turn positive as soon as volume starts increasing in the back end of the year. Material sourcing and related cost increases continues to affect the P&L negatively. In Q2, we have approximately SEK 36 million higher material spend versus Q2 2021, where approximately SEK 33 million has hit the P&L and gross profit in the quarter. On top of the direct P&L effects, we continue to have negative variance in manufacturing due to a sluggish inbound logistic flow. We are working very hard to mitigate the effects with continued long-term efficiency gains throughout the value chain.
We're also based on the higher than expected price pressure, further strengthening our plans around external price adjustment, and we still expect to be able to fully mitigate the cost increases of material by the end of Q3 as communicated also after Q1. On transportation, we have seen higher cost of approximately SEK 40 million compared to Q1 last year. Our expectations coming into the quarter was that the situation in this area would stabilize, but with the continued war in Ukraine and continued disturbances in China, et cetera, this did not materialize. We continue to have solid focus and good measures in place to mitigate the effects from this situation. Based on current information, we estimate a decline in transportation costs versus previous year in the second half of the year. Increasing inflation and energy costs are also starting to be noticeable.
There is an increased inflation pressure on salaries in most countries, especially in countries like Poland and U.S. We have already experienced higher than normal salary increases and expect this to continue. Fuel prices are also hitting us considering that we have on an everyday basis, approximately 2,000 vehicles on the road in our sales service and rental operations. To give an indication, we have had approximately SEK 15 million in higher cost increases for the quarter based on above normal inflation and expect this level to continue throughout 2022. In summary, short-term headwinds on gross margin that we continue to mitigate through our long-term efficiency agenda and strong focus on price adjustment. Next slide, please. We have continued to manage our OpEx line well also during Q2.
We are now fully up and running when it comes to sales and marketing activities, supporting the good demand, pipeline building, and very importantly, launch preparations of our new products. We will also continue to invest where it drives long-term profitable growth in line with our strategy, with a good continued focus on adapting to a short-term changing environment. In comparable currencies, selling and admin increased with 4.4%, with most of the increase coming from higher activities in sales and marketing, and mainly inflation and activity driven in admin. It should be clearly noted that Q2 2021 was a low activity quarter across the globe and therefore difficult to compare with.
Q2 this year is on top of this affected by inflation effects of approximately SEK 5 million above last year Q2, and additional SEK 3 million concerning new accounting rules for IT that we informed about in the Q1 telco. R&D gross investment is at 2.7% of net sales, following our plan in a good way. Net R&D is approximately SEK 10 million higher than last year Q2 based on project phasing. Translation effect was unfortunately negative on EBIT level with minus SEK 7 million. Transaction effects have positive effects on cost of goods sold with 23 million for the quarter. Revaluation effects of accounts receivable and accounts payable booked under other operating expenses has a negative effect of minus SEK 17 million for the quarter.
Adjusted EBITDA in Q2 was SEK 430 million based on discussed activities and events, and adjusted EBIT came in at SEK 165 million. With that, over to Daniel, and next slide, please.
Thank you very much, Joacim. I want some comments with respect to our working capital development and cash flow performance in the quarter. Coming off a weak quarter one, we continued a high focus on working capital management in a tricky environment. Hence, we improved our cash flow and conversion, although at low levels versus Q1. Supply chain challenges that Joacim mentioned continue, perhaps even intensified further during the quarter, and disturbances and price increases relative to transportation and components meant that the need to maintain additional safety stocks in order to safeguard production supplies and customer deliveries remain. Our continued customer focus and prioritization on production supplies and safe deliveries means that we tie up more capital in stocks than usual.
We estimate that during the second quarter, still at least SEK 200 million of additional inventory was needed to be employed to mitigate disturbances both inbound and outbound in terms of componentry and finished goods. Sourcing of critical components and high levels of semi-finished products and installations due to material and product shortage being the main challenges, as we speak. We reiterate the fact that the additional levels of inventory is current, not a concern in terms of looking at the stock aging analysis. No additional balance sheet risk in this area that we see to be worried about. Our expectation is that the level will stabilize during the next two quarters. We continue the solid work on receivables management from previous quarters, and we expect this performance level to continue and to be built on going forward.
Important to note here is that we did not see receivables dropping into older buckets in our receivables aging analysis, so we see no additional credit risk at all in this area. In summary, we believe that we'll see a continued recovery in terms of operating cash flow in the coming quarters. Due to the challenges that I just described, along with a decrease in current liabilities, the increase in working capital generated an uptick in our working capital base level to 102. This represents a 5-day increase versus the Q1 level and represents a delay in breaking this upward trend. We expect to see a downward development in the coming two quarters. The EBIT level in the quarter, along with impact from working capital, means that we're posting an operating cash flow number of SEK 158 million in the quarter.
Still on the low end, but an improvement on Q1. On a rolling twelve-month basis, we're recording a solid SEK 1.2 billion of operating cash flow. Subsequently, cash conversion improved versus Q1, but came in at a relatively weak 37% in the quarter, far off from our year-end target of 80%. Nevertheless, we still see a path to reach our full year financial target of 80%, as we go forward. Cash flow from investing activities was -SEK 233 million, mainly containing investments in the rental fleet, R&D, and fixed assets. No unusual development in this area. Next slide, please.
As a consequence of the solid profit level, in combination with the improving but yet modest cash flow performance in the quarter, the net debt increased to SEK 5.1 billion, which is SEK 0.8 billion higher than year-end 2021, but just SEK 0.1 billion higher than Q2 last year. We consider this to be a temporary level and foresee our reduction journey to continue in the next quarters. Meanwhile, our cash position remains strong, and our net debt to adjusted EBITDA came in at 2.5, an improvement of 0.2 versus Q2 2021, but a minor setback compared to year-end 2021. Finally, the equity ratio came in at 44.8%, which is 0.7 percentage points above the recorded level in Q2 2021, but slightly lower than year-end 2021.
With that, I give the word back to Joacim.
Thanks, Daniel. Next slide, please. Over to some business highlights. Next slide, please. As we've been talking about in the previous quarterly telcos, we continue to take market shares in our core rental business in the U.S., and the pipeline for further competitive accounts looks promising. As an important step on this journey, I am very pleased to announce that we have been selected as one of four suppliers on a major rental contract with HealthTrust in the U.S. The contract runs over three years and covers nationwide rental of medical beds and therapeutic services with a yearly contract value of around SEK 600 million. We have solid plans to take significant parts of this contract, and we are currently building up infrastructure and fleet to be able to meet the high demand and obviously secure customer satisfaction within this chain.
This is an important milestone in our market expansion plans in the U.S., and as said, pipeline for further market share gains in core rental outside of this contract also looks promising. We obviously also intend to use this market expansion for further SEM scanner development in the future. With that bridge then over to next slide and a short update on the SEM scanner. As indicated in the Q1 telco, we have seen improved possibilities for implementation discussions around the SEM scanner during Q2, especially in North America. We have now signed our first major commercial contracts with hospital chains in U.S., and the pipeline looks promising. Also in Canada, implementation goes according to plan with a lot of commercial interest from both acute and long-term care customers.
Apart from a continuous flow of important new evaluations across North America and Europe, where interest for the solution is high, especially after the customers concluded the trial from the evaluations. We have during the quarter taken additional steps in, for example, UK, where we're now been listed on the NHS Drug Tariff. SEM Scanner single-use sensor is the first and until now, the only product listed within preventive diagnostics. Listing on the Drug Tariff requires significant clinical and health economic verification, and this listing is another important step towards a smooth implementation in UK, enabling customers in England and Wales solid routes for access and reimbursement. The submission process for Scotland and Northern Ireland will be initiated during Q3. We also have positive development on a number of other markets.
In Poland, as an example, SEM scanning is now recommended in national guidelines for pressure injury prevention, and we look forward to develop this commercially in the coming quarters. To summarize the current situation for the scanner, I would like to say that we have a better than expected traction in North America after the COVID delays and are still seeing a slower ramp up in Europe due to system setup and long decision times. All in all, on track to secure the indicated SEM sales volumes for 2022 or 0.5%-0.7% organic growth with good rolling twelve effects into 2023.
Not really a part of this slide, but I would just like to inform that the market access work in Europe and U.S. for WoundExpress continues according to previous communication, with the same goal to have the randomized controlled trial finalized in Q2 of 2023. In summary, no change to the communication from the Q1 report in that area. Next slide, please. A few words on the outcome. Based on our current visibility of the market, we still forecast to achieve an organic net sales growth for the full year of 2022, well in line with our financial target of the 3%-5% interval. The good market demand, solid profitable capital backlog, and the good development in both service and core rental supports this outlook. The experienced issues related to material sourcing and logistics challenges will continue to have an impact.
With current inventory levels, we are positive that we can mitigate and get needed capital goods to our customers to meet the outlook for 2022. To give some further flavor on the net sales development, a few comments and starting on them with rental. Given the lower than expected Critical Care Rental sales in U.S. in Q2, this area is now forecasted to drop almost 70% for around $27 million, or approximately a little bit, obviously, depending on currency development, but around SEK 270 million versus 2021. The drop in this category in Q2 was 50 million or $5.3 million, and we now expect the additional drop to come with around $11 million in Q3 and around $3.5 million in Q4.
Our core rental business, on the other hand, both in North America and Western Europe, continues to develop well as we are converting competitive accounts at a good rate on many markets, and our pipeline, especially in U.S., is strong for further development. Rental in total is still expected with the good uptick in core rental to only see a small net sales decline of around 4% versus 2021 full year numbers. Our continued efficiency work will also secure a parallel positive development of our gross margins in core rental for H2. On capital, a significant uptick is expected and planned for in Q3 and Q4. Based on how backlog, pipeline, and inventory buildup are shaping, we are forecasting to see growth of above 10% in capital in the second half year. Service has every possibility to see growth on or above current pace.
With a further stabilization of material flow, we expect this number to continue to develop well. From a gross profit and margin perspective, we now expect approximately SEK 120 million higher cost in COGS due to material price increases versus 2021, where Q3 and Q4 most probably will see the same negative P&L effect as in Q2. It is difficult to assess when the situation will stabilize and prices eventually will return to levels that are more normal. We are trying to act in a proactive way. We have and are implementing long-term efficiency plans throughout the organization. We also continue to work actively with continued price increases to mitigate, and as stated earlier, we expect to be fully compensating the P&L effect from yearly material costs of the now approximately SEK 120 million when entering into Q4.
On transportation costs, we believe that we will see approximately SEK 17 million higher cost in total for the full year of 2022 versus 2021. Based on information currently at hand, we estimate that the cost situation versus last year will stabilize in Q3 and start to develop favorably and positively from there on. Our solid cost focus throughout the value chain will continue. With current information stand, we will and still estimate that OPEX as a percentage to net sales to be slightly lower for the full year of 2022 compared to 2021, compensating for additional inflation effects in coming quarters through continued and long-term efficiency improvements. We will have to continue our flexible approach to navigate the current movements and headwinds on the market and the high comps from Critical Care Rental in U.S.
However, underlying levers like continued Core Rental development, good development in service, and the demand and backlog in capital goods gives us solid confidence that we will improve organic net sales well in line with our financial targets 3% to 5% in 2022 and beyond. Next slide, please. Now some short key takeaways. Next slide, please. To summarize, we see a continued good demand for our products and solutions and a positive development in both Core Rental and service. Despite short-term headwinds and strong comps in Critical Care Rental, we continue to drive growth. Excluding the Core Rental drop, the group is growing with approximately 2.5% in the quarter, and we continue to carry a solid order book, especially in Patient Handling, for the quarters to come.
We continue the positive development in core rental, especially in North America, where our one supplier position on the significant HealthTrust frame agreement will accelerate the growth in the back end of the year, with additional pipeline for further market share gains. As we've indicated, numerous times before, our focus on M&A, well aligned with our strategy, is very much there and will continue with high pace. We would also like to remind you all that we plan to have our next Capital Markets Day in direct connection with the release of our Q3 report on the twenty-eighth of October, this time in the Stockholm area. We enter into the coming quarters with good confidence based on good demand, a book-to-bill that is well above last year for capital goods, and a positive development for both our core rental and service business.
With that, I would like to open up for questions. Moderator, please go ahead.
We will now begin the question and answer session. To ask a question, you may press star and 1 on your telephone keypad. If you are using a speakerphone, please pick up your headset before pressing the keys. If at any time your question has been addressed and you would like to re-withdraw your question, please press star followed by 2. The first question comes from Kristofer Liljeberg from Carnegie. Please go ahead.
Hi. On the sales growth target, should we expect organic growth to improve to this 3% to 5% range or in the third quarter, considering the difficult comparison for U.S. rental? Also, could you just repeat what you said about the gross margin? Did you say that we should expect the same negative impact in the third and fourth quarter, despite the price increases you are implementing? Thank you.
Thanks, Kristofer. On the first question, yes, it's a reasonable assumption to say that we will grow within also with the large drop that we are anticipating in Critical Care Rental of $11 million. It's still realistic to believe that we will have growth within our interval in the third quarter. When it comes to the cost impact, what I spoke about was the cost impact. We do believe that material cost impact in Q3 and Q4 will be on the same level as we had in Q2, which was SEK 33 million. We believe that we will be on a stable level versus last year on transportation in Q3, and that we will see a good improvement on transportation cost versus the year before in Q4.
There will be inflation costs to the same tune as we had in Q2, also in Q3 and Q4, the way we see it right now. Just to remind everybody, it was approximately SEK 5 million on OPEX and SEK 15 million on COGS. On the price increases, which is then connected to the material price increases that we have received, we still remain with the same communication as before that we have the intention of fully compensating for those price increases when entering into Q4 with the price adjustments that we have then. Those price adjustments are of long-term character, so they will obviously remain also when the situation stabilizes and hopefully moves in the right direction. Same communication as before.
The next question comes from Rickard Andersson from Handelsbanken. Please go ahead.
First one, can you provide some details on, you know, the key swing factors to reaching, you know, either the lower end of the growth guidance or the sort of reaching the higher end?
Well, now the swing factor is obviously a significant deteriorating situation when it comes to material or inbound logistics. If that would happen and it would further deteriorate, then obviously the situation could become. This is the more difficult. What we are saying around the 3% to 5% organic, that is based on the information we have today, based on the situation that we have today, which is already now a fairly critical one. I mean, the backlog is there. It's a backlog that is, I would say, well-founded, no error in that backlog. It's more an execution out of our own factories on the capital side. What more happen?
I mean, we are not 110% sure what will happen with further COVID waves in what we're currently experiencing, at least we'll start to see in Europe, as an example. I don't know if that will. We don't think that it will have a major effect on us. It's also obviously something that we need to monitor. To summarize, without just pointing out all the risks, I think we've done a good assessment of where we are from a backlog perspective, made a good assessment on where we are in terms of the recurring business from service, rental build up, and also our consumable side, which is accounting for 60% of our yearly net sales.
All in all, my view, a good analysis of what we intend to do for the full year, landing into that we feel confident that we will meet the overall outlook of 3% to 5%.
Perfect. Just a final two-prong question here. Can you quantify the order book versus last year in constant currencies, sort of the backlog there? Can you talk also about the visibility you see around access to components for H2 deliveries? You know, how can you feel so certain about being able to deliver on it given the component situation, specifically?
First of all, our backlog for the coming two quarters are about 20% higher than the same period last year. It is a backlog which is slightly more tilted versus Patient Handling than it was when we spoke the last time, where we had a fair share of the low-end medical beds that we now got out in the last part of the quarter. Again, our view on how I would say how access will be on electronics, where I would say we've had the most problematic situation during both Q1 and Q2, is obviously based on the view and the information that we have right now.
We are, as Daniel was speaking about, I mean, we have a fairly large chunk of additional inventory for critical parts that should be there as a buffer and make sure that we are delivering upon our outlook and making sure that we have enough components in our factories. We are doing everything possible to mitigate and get further clearance into Q3 and Q4. We have a fairly good visibility on how the supply possibilities look for us based on current situation for Q3 and Q4. Again, we have gone through this one in detail and we feel confident around the 3%-5% guidance for the full year.
Perfect. Thank you very much. That's all from me.
The next question comes from Viktor Forssell from Nordea. Please go ahead.
Thank you very much. I'll start with a question on the component situation in regards to the Q2 result, the flattish growth that you deliver here, and you talk about postponements in Patient Handling. For example, are those postponements only regarding the component situations? Did they arrive late in the quarter, or was it anything from the customers that drove this development?
It's a little bit of a mix here, Viktor. The fairly large part of the Patient Handling movement was actually not products, capital products. It was more from the consumable side of things where the delays came, and that is more us not being able to produce in the tempo that we should do, which we are ramping up to. There are also some delayed invoicing in Patient Handling, which is related to a mix of us not being able to get the components on time to our customers and also customers that have moved installation dates, but that's the smaller part, for example, around ceiling lifts.
It is a little bit of a mix, mixed bag of the moved invoicing from Patient Handling. The second question, Viktor, sorry, I...
No, that was my first question. Yeah, exactly. Have you seen any improvement in this area now, or schedule here for July and August, for example, in terms of the consumable delays and also of you already being able to deliver better here in the beginning of Q3 as you point to a quite decent growth in your comments?
I think there are two things here. First of all, we have done over the first half year a significant buildup in terms of FTEs in our factory in Dominican Republic, where we aim to meet the growing demand around our consumable side on patient handling, but also to cover for the insourcing that we have done of the full air path production that we've been talking about earlier on. We are running on a very high level in our Dominican Republic site. That's one thing. Then again, back to what Daniel spoke about, I mean, the SEK 200 million in excessive inventory that we are having right now, we don't have it there because we don't necessarily like to have SEK 200 million more in inventory.
That is to create that buffer and to be able to fulfill the commitments that we have versus our customers in terms of delivery in Q3 and Q4.
Thanks. A final one on the gross margin for quarter three. I appreciate that you don't guide exactly on the quarter. If we take everything here into consideration, you have additional inflationary pressures, you have the price hikes that will mitigate materials, even more negative leverage from critical care, I assume, in the U.S., and improved, you know, deliveries and installations on the capital sales. If we break all this down, you know, is it fair to assume that excluding currencies perhaps our gross margin is heading in the wrong direction even for Q3, you believe? From Q2.
I think I mean, all the things that you've listed is obviously something which is not going to help us on the gross margin side in Q3, and especially the critical care drop that has happened. That's probably what I can say around that one. Where I would like to reiterate is, again, Q4 with the assumption where we have less critical care effect, where we will be seeing the full compensation of from a quarterly perspective on material costs. We expect logistics to come back to slightly more normal levels. I think that as we said after the Q1 report, that Q4 will be a quarter where we are again back to where we should be as a company when it comes to gross margin.
Okay. Thanks a lot.
Again, if you have a question, please press star and 1. Star followed by 1. Gentlemen, so far there are no questions.
Okay.
Sorry. We have a question from Mattias Westén from SEB. Please go ahead.
Hi. Thanks for taking my question. Many of them asked, but I have one on the contract that we thought hit on first October on rental of medical beds and therapeutic services, that you wrote in the CEO letter. Can you give some flavor on how to think about this and also provide us with some thoughts at least around how it will hit sort of group gross margins? That would be interesting.
Yeah. First of all, just adding one thing, maybe answering from the back end of your question. Our rental business, as we have said before, is not necessarily improving our overall gross margin. Given that the flow through of what we are achieving on gross margin is very good down to the EBIT line and the EBITDA line, we are, because of the lower OPEX that you have in this area, it is very interesting when you're further down in the P&L for us. When it comes to the contract itself, it is a major milestone for the U.S. business. This is a GPO where we have not been active before. We have assisted HealthTrust during the COVID period to some extent, but we have never been listed on this contract.
It was previously held as sole source by one of our biggest American competitors. We now are in a situation with this contract that is around SEK 600 million on a yearly basis that, when the contract starts in the first of October, we are then going to start converting step-by-step customers on to our infrastructure around rental. That is a build-up, as I said during the call, that is probably gonna last over the next 3-12 months to get up to full volume that we expect from this contract. That's also what I mentioned shortly. We are already now building up the fleet and also building up infrastructure within our U.S. organization to be able to meet that increased demand.
Again, adding SEK a few million to the gross profit or to the cost of goods over Q2. Our expectations for this contract is that we will be a very active player and without saying too much, our absolute assumptions is that we're gonna take above the average theoretical percentage that a supplier would have of this contract. I think we are well positioned with many of the direct hospitals under this GPO to do so.
Perfect. Thank you very much.
We have a follow-up question from Viktor Forssell from Nordea. Please go ahead.
Yeah, thanks for the follow-up. Just a quick one on the SEM scanner development. Just to understand your thoughts around the 0.5% to 0.7% organic addition for this year, what does that imply in terms of conversion rates now from here? I assume they will improve, of course, compared to the initial parts of the year, but are there any sort of figures you can give us in terms of understanding how conversion rates will improve from here? That would be interesting.
I don't have any specific numbers on conversion rates, Viktor, but the 0.5%-0.7% organic growth, which is then corresponding to. Well, if we calculate it at 9.5 something what we did last year, or 9 that we did, or between 10, it doesn't really matter, but SEK 50-70 million worth of net sales. That's less from a how big of a conversion rate we need to have. That's more of the actual customers that we have in pipeline that will start buying from us during the second half year.
All right. Are these, you know, the normal sort of lead times then? We should not expect this to be even higher if things go your way in the second half? Would that end up rather in 2023 then?
I'd probably think it would end up in 2023, and I wouldn't like to stick my nose out further than to say it's 50%-70%. I think when doing that, and as we've said after the Q1 report as well, the carryover effect into 2023 by securing that net sales in the latter part of this year is obviously quite interesting.
All right. Thanks a lot.
Gentlemen, so far there are no further questions.
Okay. I suggest I just do a quick sum up and say thank you for participating in today's telco. We continue to work with the organization and with our customers, and we do feel confident that we will reach our outlook 3%-5% net sales growth for the full year of 2022. With that, a big thank you and have a good rest of the week.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.