Welcome to the Arjo first quarter presentation for 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to CEO Joacim Lindoff and CFO Daniel Fäldt. Please go ahead.
Thank you very much. Good morning to everyone, and welcome to this first quarter call, 2023. Together with Daniel Fäldt, our CFO, I will give you some details on the first quarter report that we released at 7:00 AM this morning. Next slide, please. Today's agenda includes a summary of activities and results from first quarter. Daniel will give some details on balance sheet. I will then address the outlook for 2023 before we open up for questions. As always, we intend to keep this call to an hour and finish at around 9:00 AM.
Next slide, please. Let's start with a business update and then a look at first quarter. Next slide, please. Following the trend that we had coming into the year, we continued to see good demand on most major markets for our solutions as well as capital sales, service, and rental.
As expected, our net sales development was held back by the development in US, with significantly lower critical care rental volumes and where we continued to see weaker demand for our more long-term patient handling programs. This resulted in an organic growth of 4.3% for the quarter, setting a good base for the rest of 2023. The activity level in US remains on a good level, but it continues to be the conversion from lead to order that is slower than usual due to the continued stressed financial situation of many healthcare providers due to the known staffing shortages and increasing costs.
There are some small positive lights in the tunnel when talking to customers, but they are more confirming our current view that we should see a step-by-step improvement on the US capital equipment market from third quarter and onwards.
Our critical care rental business is, as expected, seeing a significant drop in the quarter, but this is now the last quarter where we have high COVID-related comps in this area. As of next quarter, we will be able to see the full effect of our core rental business that continues to develop well. Excluding the critical care rental part, the group grew with almost 6% organically in the quarter.
The postponement of invoicing that we saw in our diagnostics business in fourth quarter has been addressed in an okay way during the quarter, and we have cleared some of that backlog in the smaller part of our business. Inbound supply of electronics in diagnostics has continued to be volatile in this quarter, and prices has remained on a very high level.
Also here, we do have some light in the tunnel in the back end of the quarter. We continued to see good growth on major markets like Canada, France, Germany, and Australia, where both capital, service, and rental developed well.
Our gross margin in first quarter came in slightly better than expected at 42.2%. The gross margin continues to be affected by high material prices, inflation effects on fuel, energy, and salaries, and negative mix effects from critical care rental and obviously the lower patient handling sales in the US. On the positive side, we are now clearly starting to see transportation costs come down, well in line with our previous forecast.
The current gross margin level is obviously not a level we are satisfied with going forward, but we did see a trend shift versus the last two quarters, and we continue our efforts to drive long-term improvements in this area. We continue to drive efficiencies throughout the value chain. Our US rental efficiency program is now completed and generates forecasted gains. Our US sales reorganization is implemented during the quarter, setting us up for a good strategy alignment going forward.
We have consolidated parts of our Nordic sales and rental business, and supply chain continues to work on efficiencies in a number of areas. Our price increase focus remains with good traction and customer understanding also during first quarter, and we will see both carryover effects from 2022 and effects of new initiatives from first quarter in the quarters to come.
OPEX was well under control in the quarter, with the reported level reflecting higher activity levels than first quarter 2022, which was still very much impacted by COVID. Adjusted EBITDA for the quarter was SEK 474 million, well in line with our expectations. With solid plans in place to further improve profitability over the coming quarters versus 2022, this result sets a stable base for 2023.
Cash conversion develops on plan for the quarter below our yearly targets, but still an okay start to the year. We continue to lower our inventory levels in line with forecast, and the 59% cash conversion is mainly due to larger amounts of invoicing at the end of the quarter with low quarter-end collection as a result.
We continue to keep a very high focus on both AR and inventory and still expect that we will be able to meet our 80% cash conversion target for the full year. In summary, good development on most markets with overall net sales developing well. Our growth in the quarter was held back by significantly lower critical care rental levels in the US and lower patient handling net sales in the US as main reasons. Our service and rental business continues to develop favorably across almost all markets and will be an important growth engine for 2023 and onwards.
Next slide, please. Moving into North America, where we saw an organic growth of 0.7% for the quarter. Our US business, that has now completed a significant reorganization during the quarter, had negative organic growth due to a few main factors.
Critical care rental decreased with the expected approximately SEK 40 million versus first quarter of 2022, which has an effect not only on net sales comparison, but also as a negative mix effect on gross margin. As stated before, this was now the last quarter with high COVID-related comps, and coming quarters, the invoicing in this area is expected to hover around $1.5 million that we have seen over the last four quarters.
Excluding the critical care rental part, our US business had a positive underlying growth versus first quarter of 2022. One driver here is our core rental business that continues to develop well, and new contracts are being implemented with continued good pipeline.
Here, it should also be noted that we have now finalized the implementation of our US rental efficiency program, and from the end of first quarter, we are having the full efficiency savings corresponding to $5 million on a rolling 12 basis. As forecasted, we also saw lower patient handling sales in US compared to first quarter 2022, mainly coming from the low numbers or low volumes of more long-term outcome programs in this area. As before, this slowdown is related to the fact that the short-term willingness to invest has been limited due to the current financial situation for most US healthcare providers.
A situation caused by staff shortages and higher cost to run their business. The need to focus on day-to-day activities instead of changing protocols and way of working, even if it makes clear financial sense for the long run, continues to be there.
Customer interest is high. We continue to work our pipeline in this area. The current drop in patient handling net sales in the US also has a negative product and geographical mix on gross margin. Patient handling continues to be a higher-than-average gross margin category. Outcome programs sales in US is based on the very clear return on investment for our customers in itself, a higher margin activity. Our DVT business in the US performed well, especially on pricing and compliance initiatives. Volumes are increasing somewhat based on slightly better traction on the elected surgery side.
We expect this trend to continue throughout the year. We continue to see a high interest for our pressure injury prevention programs in US and our overall sales in this area, which is also driving our rental volumes and is trending well aligned with forecast.
The uptick on SEM conversion, despite a continued very high interest from our customers, did not reach the expected levels. It is clear that conversion from positive trials to full-blown commercial usage continues to be more cumbersome than what we would like to see. Finally, a few words on Canada, where we continue to see an impressive performance also comparing to the record year, 2022. Our organic growth in Canada in the quarter is above 10%, with good development in capital, service, and rental, and with a good mix between long-term care and acute care.
As stated before, the Canadian split in segment sales is something that we're trying to build also in other main countries, and it is clearly giving both business stability and a step-by-step improvement on margins.
As summary, on the start of the year in North America, it's well aligned with our forecast going into the year. Customers are indicating smaller beacons of light in the tunnel on the US capital equipment side. That confirms our current view that we should be able to see a step-by-step improvement from third quarter and onwards. We have continued good traction on our service and core rental business. Our Canadian market performs a very solid start to the year.
Next slide, please. If we then move over to global sales, where we then, as always, will focus on both Western Europe and the rest of the world. The region in total had an organic growth of 5.6% in the quarter. In my view, a stable performance well in line with our forecast for the year.
Starting with Western Europe, where we continue to see good demand for our products and solutions together with a good development of both service and rental in the quarter. The area grew with more than 6% in the quarter, with major markets like France, Germany, and Austria showing good growth and are building on long-term plans. In the UK, we have an organic growth just above last year's high level in first quarter.
We have also here good traction on service and rental, where we in both areas have managed to implement price adjustment that starts to mitigate the material cost increases that we are seeing, and the organization has done a focus job around this area during first quarter.
We are deliberately stepping away from low-end bed products in the UK, which step by step will allow us to increase gross margin in this category, but also focus on more profitable segments on this market. In general, our European business continues to confirm positive trends from the second half year of 2022, and we see development in line with our plans in both acute and long-term care.
On to next slide and some further details on rest of the world. Our business in rest of the world, again, had a healthy net sales development, an organic growth of almost 5%, with continued good market demand and higher activity levels.
In Australia, we have a good position both in service and rental, and our capital business is growing despite the lower focus on low-end medical beds also here. India, Hong Kong, Singapore also adds to the momentum, and it's now good to see that we are back to pre-COVID activity levels on most markets in the region. Our Chinese sales and service activities have started to pick up speed in the end of the quarter.
Again, a small part of our current business, but with potential to grow gradually. Japan is performing on plan so far and is expecting higher net sales numbers versus last year starting in the second part of 2023.
All in all, rest of the world has started the year in a solid way, well aligned with our plans, and I feel comfortable that this part of our business will continue to grow in a good way given the current pipelines and implemented plans. Next slide, please. Moving on and over to some financial details. Next slide, please. For the quarter, we have a gross margin of 42.2%, slightly higher than previous expectations and also higher than the last two quarters.
We continue to see negative product mix effect due to less patient handling equipment and negative geographical mix as we are selling less percentagewise in the US also in this quarter. For your information, the drop-in critical care rental is having almost a percentage point negative effect on gross margin.
Material cost is again significantly higher versus corresponding quarter in 2022 and affecting negative with more than SEK 40 million in isolation. This is higher than expected, mainly due to the continued high cost of electronics, especially in our diagnostics business. It should, however, be noted that we continue to see stabilization in the inbound deliveries, and we also buy less electronics on the spot market, which is a good sign for the future. Transportation came in almost SEK 30 million lower than last year's first quarter on a volume for volume-like basis.
On top of this, we had around SEK 10 million in lower logistic costs, thanks to the inventory reduction plans, an effect that we do not expect to be as high in the coming quarters. However, transportation in general is trending better than expected.
Increasing inflation and energy costs are affecting the gross margin negatively in the quarter with around SEK 15 million versus first quarter of 2022, a value which is in line with our expectations for the full year of 2023. We are, as before, working hard to mitigate the negative effects with continued long-term efficiency gains throughout the value chain. The US rental efficiency program is now fully implemented, our continuous improvement plans in the supply chain continues to perform according to plan.
We are seeing external factors move both towards stability and in some cases, lower cost levels. Price adjustments to mitigate for the higher material cost is still of highest focus. We are compensating well for material cost increases in the isolated quarter. Obviously need to continue to work in this area to compensate for the drop seen in 2022.
Given the additional adjustments made in many countries and with the majority of our product portfolios, I continue to feel confident that we will perform on or slightly above previously communicated effects for pricing in 2023, adding at least one and a half percentage points in organic net sales for the full year. Next slide, please. Our OPEX level in the quarter is well aligned with plan and are reflecting a considerably higher activity level in sales and marketing compared to first quarter 2022.
Again, first quarter 2022 was much affected by severe COVID lockdowns across the world with low cost levels as a result. In first quarter 2023, we are up to full speed, and we are working with pipeline, launch preparations, and investment supporting, for example, our pressure injury prevention focus buildup in a good way.
Additional inflationary cost in OPEX is approximately SEK 13 million in the quarter versus the same quarter of 2022. Salaries will continue to trend upwards in the coming quarters, with energy and fuel most likely flattening out. Admin cost is also negatively affected by approximately SEK 9 million on higher IT costs versus a very low first quarter of 2022. The additional cost comes mainly through the new accounting rules applied and also the higher activity levels that I indicated before.
R&D gross investment is at 2.6% for the quarter, well aligned with our portfolio planning and upcoming launches. Our net R&D cost is approximately SEK 5 million higher than first quarter 2022 as an effect of this. Adjusted EBITDA in first quarter was SEK 474 million, with adjusted EBIT ending up at SEK 195 million.
Here, I would also like to shortly comment on the restructuring cost of SEK 19 million in the quarter. Main parts of this restructuring is coming from a larger change in our Nordic operations, the final implementation phase of our US rental efficiency program, and also the implementation effect of our US sales reorganization that has been finalized during the quarter. For your information, we forecast approximately SEK 40 million in total restructuring costs for the full year of 2023. Over to Daniel. Next slide, please.
Thank you very much, Joacim. Coming off a relatively challenging 2022 in terms of operating cash flow and cash conversion, we delivered a solid start to 2023 in line with our plans, as Joacim mentioned earlier. Through continued high focus and improvement on working capital management, we managed to come back to a neutral impact from working cap in first quarter compared to a significant negative impact in the same period last year. We are confident that our cash conversion target for the full year 2023 of 80% is well within reach.
The situation with regards to material supply and logistics continued to stabilize during the first quarter, giving us further confidence that our working capital improvement ambitions are achievable. Given that, we managed to continue to improve working capital days for the second consecutive quarter.
Encouragingly, the main positive effect comes from continued inventory improvement building on the last quarter of 2022. We want to stress that the fact that our inventory continues to be current and not a concern in terms of looking at our stock aging analysis, no additional balance sheet risk in this area to be worried about. We continued our solid work on receivables meanwhile and building on previous quarter, even taking into account significant invoicing late in the quarter of which collections are expected in second quarter.
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, much like inventory aging analysis, hence, no additional credit risk to be concerned about.
Along with a slight increase in current liabilities, we managed to decrease the working capital days level by one day in the quarter to a level of 101, building on the four-day reduction we accomplished in the fourth quarter, 2022. The EBIT level in the quarter, along with a flat impact from working cap overall means that we're posting an operating cash flow number of SEK 271 million compared to SEK 25 million in the same quarter last year.
A solid start to the year that we will continue to see progress on in the coming quarters and a significant improvement compared to first quarter, 2022. Subsequently, cash conversion improved considerably versus the same period last year, where we came in at 5%, and now we achieved 59.2% in the quarter.
Cash flow from investing activities was a negative SEK 211 million, mainly containing investments in our rental fleet, R&D, and fixed assets. Next slide, please. The profit level in combination with the cash flow, including financing and investment activities along with some negative currency effects, resulted in our net debt increasing slightly to SEK 5.2 billion, which is SEK 1.2 billion higher than the previous quarter. To remember is that financial cost has increased substantially compared to the same period last year, and it reflects the current interest rate expense and debt levels in first quarter.
Even so, we expect our reduction journey to resume mainly in the second half of 2023. Meanwhile, our cash position remains strong, and our net debt to adjusted EBITDA came in at 2.7%, a slight deterioration of 0.2% versus fourth quarter, 2022. A minor setback due to the net debt development described earlier. Finally, the equity ratio came in at 47.7%, which is 0.5% points above the recorded level at year-end 2022. Now back to Joakim.
Thank you very much, Daniel. Some business highlights. Next slide, please. As stated earlier in the telco, we continue to see high interest for our programs and solutions around pressure injury prevention. We can see a clear interest from caregivers around the world to address this huge cost bucket, especially as a lot of this cost is preventable with the solutions that we provide. We also continue to experience a high customer interest in our SEM scanner as a part of these programs with a significant pipeline building.
However, the conversion progress from positive trials and customer discussions to fully fledged commercial usage continues to be slower than expected. We are behind our own forecast in SEM sales for first quarter and expect this lower trend to be present also for the coming quarters.
We therefore now believe that we, based on a reassessed position, will see around SEK 150 million in SEM scanner and scanner head sales in 2023 versus the previously communicated around SEK 200 million. With the majority tilted mainly to the second half of the year.
Next slide, please. An update on WoundExpress, unfortunately, we are experiencing a slow recruitment pace to our randomized controlled trial for WoundExpress. As we described at our capital market stage, we have changed the previous protocol to allow a quicker uptake, while obviously not jeopardizing the quality of the study, recruitment continues to be slow.
Feedback that we are getting is that our targeted sites, especially in UK, are still suffering from very volatile patient inflow based on post-COVID effects and recently a very severe flu season, with strong focus from caregivers on just fixing here and now. Randomized controlled trials outside of areas like vaccine and cancer treatment seems to be, at least in the UK, delayed throughout. Must conclude that we most likely will experience additional delays probably until summer 2024 until we can see published data.
This is obviously not the wanted position. It will not have a material effect on our short to mid-term financial performance, as we already, for the last financial target communication, had included only moderate sales numbers for WoundExpress based on sales not directly related to the RCT. Next slide, please.
Moving over to the outlook and our current view on organic net sales performance for the year, where we, based on our current visibility of the market, expect that the organic net sales growth for 2023 will be within the group's target interval of 3% to 5%. As previously communicated, we expect the year to be tilted more to the back end, especially when it comes to the expected important improvements in our US patient handling sales and our SEM Scanner sales as discussed before.
We still expect overall capital sales volume to grow slightly for the full year, with a forecasted positive development in patient handling and pressure injury prevention, while capital sales of medical beds will decline given the focus on gross margin instead of volumes in the low-end segment.
We expect our service and core rental business to continue to develop well during the year. Core rental, especially driven by the current implementation of new contracts in the US, and service by a mix of volume and price effects globally. Price increases are still expected to add at least 1.5% organic growth across the group for the full year. From a gross profit and margin perspective, the message is as before.
We expect material prices to continue to increase, with effects visible, especially in the first half of the year, and in total now be slightly higher than previously expected for the full year. Based on our current trends, we believe that the slightly increased material cost will be well compensated by the lower cost for transportation during the year.
We expect energy and fuel to remain on today's high level, which means that the effect versus second quarter and fourth quarter will be more or less neutral. Inflation effects on salaries will be clearly visible in COGS, both in manufacturing but also in service and rental. Our continued focus on price adjustments and internal efficiency work will continue to mitigate factors to this increase.
We expect OPEX as a % to net sales to increase for the full year of 2023, and it will start to decrease again from 2024 and onwards. This as before, mainly based on a higher activity level, but also much from the added inflationary pressure on salaries that will come into effect from second quarter and onwards.
In summary, we expect 2023 to be a year where with net sales and profitability improvements versus the full year of 2022, however, continue to think that this will be tilted towards the back end. Based on the stable start to the year, we feel confident that we can meet our guidance of 3% to 5% organic growth and make sure that we start the journey to improve our profitability in current year. Next slide, please.
Some short key takeaways. We have started 2023 in a solid way with a return to organic growth, more precisely 4.3% organically. Our underlying business is developing well in most areas, and we are following our plans and forecast well.
We are starting to see good effects of our initiatives around price increases and internal efficiencies, areas that will contribute to positive development of our gross margin and overall profitability for the full year of 2023. Despite continued volatility on several markets, we feel comfortable with achieving our outlook of 3% to 5% organic growth based on the solid start. We look forward to continue to develop Arjo in 2023 on both top line and profitability versus 2022 full year. With that, I would like to open up for questions. Moderator, please go ahead.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Erik Cassel from ABG Sundal Collier. Please go ahead.
Hi, good morning, Joacim and Daniel. I have two questions. I'll start with the first one. The, the strong organic growth here in first quarter seems to me to be largely driven by better component access than we may be expected. Is, is this correct? Also, could this be seen as some sort of pull forward of second quarter and H2 deliveries in that case? As you know, it churns out the backlogs somewhat, rather than, you know, the good first quarter growth adding to full year. That's the first one. Thank you.
I think that in the only area where better access to material has material net sales is in the work with the backlog in our smaller diagnostics business. Where we have probably been able to get out, well, a little bit more than SEK 10 million from what was postponed from fourth quarter. That would be the only area where I would say that the net sales growth is related to better access to material.
The better access to material is more in the back end and more as a gross margin or profitability related. We have a more stable situation when it comes to inflow of components to our production sites, which means that we are step-by-step getting a better production situation.
We are also not forced to air freight as much as we had to do before, and we can into significantly better extent meet customer expectations. I wouldn't say that we have dragged forward any net sales. It's based on a good development on the markets that I mentioned, with a solid development on both service and core rentals for the quarter.
Okay. Thank you. That's welcome. The second one, yeah, SEM Scanner not living up to expectations, really. Could you quantify in some more detail where the SEM Scanner is tracking now compared to previous guidance? Also, if you think that this has any longer term implications for where it should have been in 2025. Thank you.
No, I mean, we obviously would like to be slightly higher for the quarter when we were. The frustrating thing again is that we have a pipeline that is as big as the city of Malmö now on interesting customers on the SEM scanner. The overall interest for our pressure injury prevention side is increasing by the day. Our customers are seeing the need to prevent something that is truly preventable. In our view, this is just a move in terms of time this year. We are still confident that we, with our pressure injury prevention solutions, have something that should be considered as a game changer.
For the more long-term targets in 2023, 2024, or rather in 2024 and 2025, I wouldn't be looking at this as a problem, because obviously, even if we have a very significant pipeline, we are always kind of careful when we are putting the targets on 2024 and 2025. A delay here in 2023 will not have a material impact when we go forward in 2024 and 2025.
Okay, perfect. Thank you very much. I'll jump back in queue.
The next question comes from Kristofer Liljeberg from Carnegie Investment Bank. Please go ahead.
Thank you. I also have two questions coming back to the SEM scanner. Could you please explain a little bit why you think or what do you think is the reason for the slower conversion to commercial contracts? Also, would you see any risk that you don't reach some sort of minimal sales level stipulated in the distribution agreement you have? Yeah, maybe take this one first.
On the contractual side, I believe that we, it's difficult to comment on that one, given that it is a cooperation between two companies. We are working very tightly with BBI, and I feel comfortable that we are going to make sure that we have a long-standing relationship. What is hindering the or rather the conversion to a large extent is the smaller factors in my view. It is the, to some extent, the short-term focus that healthcare providers in the US still has given the problems that they are seeing.
We can also see a significant workload when it comes to tying our SEM scanner solutions to different hospitals' EMR systems, connecting them in a digital way into patient journals, et cetera, which is a very cumbersome process with IT departments and different hospitals and different solutions. That is taking more time than what we had expected. Again, it's a little bit like.
Those things just needs to be fixed, and when they are fixed, the customer starts using the product and get these usage into their protocols, which is very good when we have done that, but those type of things takes longer time than expected. That's one example of things that are more cumbersome in the conversion process than what we had believed initially. Kristofer?
Sorry, I was muted. My second question is if you could comment on the seasonal pattern for the EBIT margin. Also given your comment that earnings improvement this year will be back-end loaded, does that mean you expect the EBIT or adjusted EBIT to be down year-over-year in second quarter as well? Thank you.
No, I hopefully I didn't say that for second quarter. Should probably put it like this, that we have had a stable start to 2023. We would like to point out that we still see a volatile market. We still see instability on supply chains. We would like to keep and stay realistic for the quarters to come, and I think that is an important message to bring with you. We have no intention of letting off steam when it comes to developing our business on top line or on profitability for the full year.
We remain with what we have said before, that 2023 is going to be a year where we improve on organic net sales, where we meet our interval target of 3% to 5%, and where we, for the full year of 2023, will see a higher profitability than what we had in 2022.
On that topic, I think first quarter was the most difficult comparison for sales, as you had the high, critical care volumes in first quarter last year. With this in mind, do you see any reason why sales growth should be slower in the coming quarters year-over-year than the positive surprise you had there in first quarter?
I would like to remain realistic and say that for the full year, I feel comfortable that we will do the 3% to 5% organic growth, Kristofer.
Okay. That's fair. Thank you.
The next question comes from Rickard Anderkrans from Handelsbanken. Please go ahead.
Thank you for taking my question. First one, could you elaborate a little bit on the beacons of light, as you describe it in US clients in terms of patient handling and the overall capital equipment demand in the US? Elaborate a bit more on the discussions and what you're hearing and what signals you are picking up for that H2 recovery. Thank you.
Yeah. Again, would like to underline that the beacons of lights are small, but still there, and confirming our view that we should see a step-by-step improvement from third quarter and onwards. The beacons of lights is more customers speaking about that they are seeing a way back to a more normal situation. They're not there yet, but they're starting to see things easing up. They are starting to see that they can produce more elective surgery than they've done before.
They see a path to that. It's more discussions like that. Also then adding to the customers' views is what our competitors on the US market are speaking about and what market players in general are talking about.
Our impression when it comes to our line of products and solutions is that these indications is confirming our view that we should see this return to a step-by-step growth in third quarter and onwards. It's more a message around that the situation has not deteriorated, it has rather stabilized in the right direction to confirm what we have said before.
All right. Thank you. Could you elaborate a little bit more on the development in Canada? Should we extrapolate and expect, you know, similar performance in the next few quarters here or any flavor? I mean, it's a relatively big market, right? It would be helpful to get some more commentary there. Thank you.
Yeah. I'm very impressed by the development of our Canadian market. We have a good mix between acute care, long-term care. We have a cultural set up in that country that always aim at improving more and more and more. I feel comfortable that Canada as a country will continue to develop well.
If I look at North America as a region, Canada, obviously, even if it's a significantly smaller market than our US business, Canada with the current traction has a possibility to continue to compensate if we would continue to see a very volatile market in the US also in second quarter. More looking upon Canada as a with the traction that they have as a mitigating factor, if we would continue to see some volatility on the US market higher than what we expect.
Right. Would you say that Canada is above or below gross margin contribution for group?
Above.
All right. Thank you.
The next question comes from Mattias Vadsten from SEB. Please go ahead.
Hi. My first question may be another way of asking the same question as before. Anyway, I guess we're seeing, you know, clearly an uplift for Arjo this quarter no matter how we look at it compared to last year. If you could just single out the effects more important for this than maybe the others, and some further elaboration, what happened quarter on quarter? It seems US is still, you know, quite volatile and uncertain and so. Just the more important factors.
Yeah. The more important factors for me is. Again, there has been a lot of good work going into already in the second half-year in making sure that we set ourselves up for a better performance in 2023. If I would single out three that has stood out is a continued good development of our core rental business across the globe, our service development across the globe. Obviously, especially in the service, pricing has performed slightly better than expected.
I am really happy to go through and work through the initiatives that we have around pricing, the initiatives that we introduced already in 2022, where we are now starting to see the effects, where we have the effects that we have introduced in first quarter, which obviously don't have that much of effect in the first quarter, but that will continue to trend well. Yeah, pricing, service, and core rental, I would point out as the three main factors for a better than expected performance in first quarter.
That's very clear. Thank you very much. If you could just try to talk a bit about the product mix in the quarter within product service and maybe, you know, how you should expect this to develop in the following quarters. I guess for the second half with US expected to lift its performance, that should help too. Just some thoughts around this matter as well would be helpful.
As I said during the telco, we are experiencing a negative product mix from less patient handling sales. It is down in absolute numbers versus last year in first quarter, which obviously has a negative product mix effect for us. I also said during the telco is that we do expect patient handling from a volume perspective for the full year to grow, which means that we should be able to see, especially in the second half year, a more positive product mix from patient handling in the second half of the year. That is really on the positive side.
On the medical bed side, we do see a decrease in capital sales in sales of medical beds capital in the quarter. That is something that will continue probably at a higher pace in second quarter, third quarter, and fourth quarter. I think that it's important to mention from a few aspects, I mean, we are actively stepping away from business in low-end medical beds area.
If we would have done what we have done in previous years, our organic growth might have been slightly higher than what it actually is right now. We also believe we do believe that this is the right way of doing it and focusing more on the high end of medical beds and staying true to that message.
I do think that sales of medical beds in the, in the capital area will continue to go down, which in itself then will have a positive product mix if we compare to previous quarters or quarters in 2022. There is the geographical mix, as you mentioned in your question as well, and that is when we are selling in the US, when we're selling patient handling in the US, that is giving us a better geographical mix, especially when we're selling that in our outcome programs. We do expect both geographical and product mix to improve, especially in the second half of the year.
I think that's very clear. My last one, just on the balance sheet and inventory, could you comment approximately how much excess inventory you have now? I guess there is a price of component, of course, but the volume part. Is there anything else that we should think of, you know, for the remainder of the year?
I think that we saw quite steep progress, from, you know, the all-time high level that we had in October last year. We saw quite significant improvement in November and December. Typically from a seasonal point of view, we have a slight inventory build-up in the beginning of each year, so in January, February, which was also true this year.
That trend, in 2023, we broke substantially in March, but we still see quite good room for additional improvement during 2023. I think we have reduced inventory since October by a quarter of a billion SEK, roughly. We have somewhere, not as much as that left in the tank for 2023, but perhaps half of that at least.
That's very helpful. Thank you very much.
The next question comes from Victor Forssell from Nordea. Please go ahead.
Thank you very much. Two questions from my side. Firstly, starting off with the comments regarding the supply chain. I think you highlighted it as quite volatile still, but we're still hearing from some of your peers that it's actually improving. You know, now that you delivered solid sales growth here in this quarter, wasn't it anything that you've seen as an improvement for which you actually could deliver better already now in first quarter, and that this will be supportive further on?
I hope I expressed myself in the way that we are seeing better stability throughout our supply chains. I mean, in many areas, it is not necessarily fully back to where it was, but significantly more stable. The area of concern still continues to be electronics, which continues to be volatile, but again, light in the tunnel around stability also in electronics. We are buying less and less components on the spot market, which has an effect on stability, but it also has an effect on price levels.
The only areas I said in the beginning of the Q&A that where we could see that higher access to components gave a possibility to clear backlog was in our smaller diagnostics business where we, I believe, a little bit north of half, or sorry, of SEK 10 million of that full amount that we said was postponed from 2022 was delivered out in first quarter. That could then be specified as an invoicing that has come through better access to components.
Apart from that, as I said before, the stability on the insourcing or the sourcing side is rather giving us a possibility to now step by step start manufacturing in the way that we should in a more stable way, and then hopefully step by step starting to see improvements on the material side after probably a very high level in the first half year, and then step by step starting to see stabilization also on the pricing side.
Perfect. Thank you. My final question is on the margin bridge for this fiscal year. Now that with somewhat lower SEM sales here for this year, you know, what is your visibility of improving it in the latter part of this year? Do you think that this could be positive on the gross margin side already by second quarter? Also, you know, has anything changed? Do you still expect it to be, you know, somewhere closer to one percentage point up this fiscal year? Thank you.
From a SEM scanner perspective, I mean, we are talking about around SEK 50 million of reduction. It's obviously not where we want to be, and we hope to have a better traction going forward, but it's not hugely material to the overall expectations for 2023. I won't be able to comment on exact details on the gross margin, but again, just reiterating the work that we are doing on internal efficiencies, that we are doing on product mix, what we hope to achieve with the improved geographical mix, and what we believe that a higher stability in our supply chain will mean, especially in the second half of the year.
We stay confident that we are able to grow the group with 3% to 5% organically, and that we should see some improvement on profitability also during 2023, as we stated after fourth quarter as well. The stable start in first quarter is kind of just again, confirm that we're on the right track to meet those targets.
All right. Perfect. Thank you very much.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Great. Thanks for listening in, everyone. We are, as said, recording a good organic growth in first quarter, and we continue a relentless work to improve 2023 versus 2022 and make sure that those improvements and efficiency gains are there for the long term. With that, thank you, and have a very good day.