Ambu A/S (AMBUB) Earnings Call Transcript

Good morning, everyone, and welcome to the conference call for Ambu's Q3 Results. I'm Nicolai Thomsen from the Investor Relations team. I'm here with our CEO, Britt Meelby Jensen; and our CFO, Thomas Frederik Schmidt. Today's presentation can be found on our home page and there will be a Q&A session at the end of the call. And with that brief introduction, I'm very happy to hand over the word to our CEO, Britt Meelby Jensen.

Good morning, everyone. Hope you're well. Nice to have you on the call for this Q3 results. For those of you who may not know me, I've spent over 20 years in health care, in senior leadership positions at Novo Nordisk as CEO of DARCO, Zealand Pharma and most recently as CEO of Ates Medical. Also, I've been on the Board of Directors of Ambu for almost 3 years.

Good morning, and also a warm welcome from my side as well. My background is I'm a chartered account by training and have for more than 20 years, been both living and working abroad across Europe and Asia Pacific. Most of my career, I've spent in the Roche Group in various financial leadership roles and most recently as General Manager of the Roche Pharma Switzerland business. I'm very excited to have my first quarterly earnings call today in my new role as CFO of Ambu.

Thank you, Thomas. And today's call is the first conference call that is hosted by Thomas and I as new management. And I'll cover the first 2 agenda items. On the status today, I'll share a few reflections on the business and an overview of initiatives that we have taken to improve business performance. On the business update, I'll talk about third quarter performance, and I'll give an update on the different visualization segments. Hereafter, Thomas will go through the financials and the guidance for the full year, which is maintained on the back of the revised guidance that we provided on the 3rd of August. And then at the end, we'll open up for questions. So I'm passionate about working in health care. And I joined Ambu because I'm excited about the opportunity we have to influence the way endoscopy is performed providing a safer alternative to patients and solutions to support our health care system in providing better care. So there are 3 things that gives me great confidence in our future ability to succeed. First, is how the single-use endoscopy market is growing. Penetration in existing segments is increasing and new products have potential to expand our addressable market. Secondly, I believe Ambu is well positioned to strengthen our world-leading position with our high-quality portfolio covering all 4 major endoscopy segments. We have years of experience as we were among the first to enter the single-use endoscopy market. And we have 85 years of history of saving lives and making a difference in health care. Thirdly, we have opportunities to do better. Our profitability and cash flow are under pressure. We have invested significantly, which has both strengthened our pipeline and our commercial footprint, and it has deepened our expertise. So there's a lot to build on. But my team and I are committed to improve how we execute. We'll take a more focused approach in where we invest to make a big difference for our customers and not least to drive growth and improve long-term profitability. We are in the process of assessing our strategy and future priorities. We'll take our time to get it right and therefore, plan to communicate our conclusions in November this year. But we have taken some action. As Thomas and I joined Ambu, we took a hard look at the business. We identified opportunities and improvements, and we are happy about the initiatives we have taken, some of which were announced early August. The first thing we said we would do was to strengthen our financial position and flexibility. We announced a cost reduction program with DKK 250 million in annual savings from next fiscal year. Here of 2/3 CapEx and 1/3 OpEx. It's progressing as planned, taking local regulation into account, and we have completed 70% of the planned workforce reductions. Then we said we would address pricing. We have adjusted our pricing practices to reduce the level of discounts and rebates, which is being implemented and it will have a negative financial revenue impact of DKK 40 million in the last quarter of this financial year. Pricing is a key priority for us, and we are reviewing our pricing approach across all segments and for new product launches where we want to make sure we reflect the new cost situation as well as the level of innovation we bring to market. Finally, we are focused on improving long-term profitability. We have kicked off initiatives to improve our efficiency, such as increased use of shared services and inventory management, to name a few. Let's look at the Q3 results. In Q3, we delivered 8% organic growth, 16% on a reported basis, mainly due to the appreciation of the U.S. dollar against the Danish krone. We reported an EBIT margin of 3.7% for the quarter compared to 9% in Q3 last year, mainly driven down by a higher distribution cost ramp up in Mexico and inventory write-down. I'd like to make a few remarks also about the environment where we are experiencing some of the same dynamics as highlighted by most companies in our industry. Rising inflation and interest rates, COVID lockdown in China and disrupted supply chain are all elements that affect our company and in particular, manufacturing and distribution costs. Our focus is to become more resilient as we face continued macroeconomic uncertainties and we are implementing different measures to secure this. For example, on pricing, as I mentioned a few minutes ago and on cost and inventory management. But we do continue to create value for our customers and the patients we serve. And I'd like to emphasize the double-digit growth in ENT and cystoscopy as well as Anaesthesia and PMD. Now let me talk about the different segments that we operate in. We are excited about the comprehensive visualization pipeline, which builds on 15 years of development, manufacturing and commercialization of high-quality single-use endoscopes. We are present in the 4 largest endoscopy segments today, ENT, pulmonary, GI and urology. And we see significant growth opportunities across all segments. On this picture, you see the key products highlighted. And in addition to this, we also have products in development that will expand the total addressable market. We've made progress across all segments, which I'll get into on the next page. Starting off with our biggest of the visualization segment, pulmonology. We were excited to receive FDA clearance on aScope 5 Broncho in July. It's now approved in U.S., Europe and Australia. And the commercial launch is gradually ramping up with customer trials. It's still early in the launch, but we get the expected positive feedback that aScope 5 Broncho is suitable and accepted for advanced procedures, which are performed in the bronchoscopy suite. And thereby, we are expanding our total addressable market. aScope 4 will remain in the market as it continues to be an attractive product. And if we look at the total pulmonology market, I feel very confident that we are well positioned for growth which will, in the future, be accelerated by the launch of our new Video Laryngoscope 2.0 as well as additional sizes of aScope 5 Broncho. Moving on to the ENT segment. This is a market we expanded into -- back in 2018/'19. The success over the last 3 years has been impressive in this segment where we did not have experience. In April, we expanded the addressable market as we got approval to target fees procedures. These are procedures to evaluate swallowing, and they're typically at a higher reimbursement level, which is a key driver for adoption of single-use endoscopes. Urology was also an unknown territory for us. And when we launched aScope 4 Cysto back in 2019/'20. The product has seen and continues to see rapid adoption and is a key growth driver. We plan to expand into ureteroscopy as an attractive market, which will further strengthen our footprint in urology. So let me round off with GI. This is the largest endoscopy segment. It's also a segment that is new for us when we entered with our duodenoscope, and where we are now excited to launch our second product, aScope Gastro, which has been approved in U.S., Europe and Australia. With the gastroscope we're in the early commercial launch phase where customers have trialed the gastroscope with overwhelmingly positive feedback. For aScope Duodeno, the uptake has been slower than we expected. This has especially been driven by the fact that the ERCP procedures, they are clinically complex relative to other procedures. And that leads to higher performance requirements and also lower willingness among physicians to change their practice. Over time, we still expect this market to convert to single use but we expect it will likely be a more gradual uptick compared to other segments. We are advancing our aScope Duodeno platform with aScope Duodeno 2.0 in development. Finally, we are aiming to expand into more GI procedures such as cholangioscopy where the single-use market already exists and colonoscopy, where we will be first mover. So with this update, I'll now hand it over to Thomas, who will take us through the financials.

Thank you, Britt. As mentioned, we -- Britt and I since our start. And over the past months, we've worked intensively conducting a more detailed review of the business performance, which has led to 3 initiatives, as mentioned. One, the cost reduction program; two, the change in pricing practices; and three, further initiatives to improve efficiencies. And together with the leadership team, the identified opportunities will certainly strengthen our financial performance and our cash flow position and will serve as the first building blocks to ensure long-term success for Ambu with high and profitable revenue growth for the next many years. With a more focused approach in our innovation and commercialization and with more rigor in our cost management, it's our clear ambition to build a highly profitable company with a high return on the invested capital. And our reported growth for Q3 is 16%, which corresponds to the 8% organic growth. And in addition to that, a positive currency impact, primarily driven by the strong appreciation of the U.S. dollar versus the Danish krones. The dollar has appreciated 13% versus same period last year. And as more than half of our commercial revenues are invoiced in dollar. This strong appreciation of the dollar certainly has a positive impact on our reported growth. And strong growth we have seen in our ENT and urology business as Q3 was another solid quarter with double-digit growth across all regions. The growth was offset by a decline in our bronchoscopy business, which represents our largest visualization segment, which again means the visualization revenue for the quarter was flat with an organic growth of 0%. However, it's important to note that our total bronchoscopy revenue has grown 75% compared to pre-COVID, which reflects the significant growth that single-use bronchoscopy has had over the period. The segment performance in Q3 and for that matter, for the full financial year is impacted by high COVID comparables in-market inventories as customers have built stocks during the Omicron wave in particular, in Europe, where we've seen a decline of 25% compared to Q3 last year. In the U.S. we've been negatively impacted by lower ICU admissions and increased competition. However, with markets normalizing post-COVID and with our newly launched aScope 5 Broncho, it's our expectation that we will -- we can continue to grow and build our position as the leading single-use player with both OR, ICU -- within both OR, ICU and the bronchoscopy suite. Our Anaesthesia and Patient Monitoring & Diagnostics business continued strong growth with 14% and 20%, respectively, and with double-digit growth in all regions. Both business areas are positively impacted by pent-up demand and the continued reduction of our backlog orders. To get a sense of the growth on a normalized basis, these 2 areas combined have delivered a 3-year compounded annual growth rate of 5%. Looking at our regions and from a regional perspective, North America certainly has shown a very strong double-digit growth rate of 16% with growth in all business areas. Europe also posted a solid growth of 4%, as mentioned on the back of the decline in bronchoscopy. Rest of the World markets declined 4%, heavily impacted by the lockdown in China and in-market inventories levels that has been normalized and now being normalized. In addition to the change in sales mix. The main elements impacting our EBIT margin for the quarter are seen in the gross margin and relate to 3 key elements. One is higher distribution cost; two is cost related to our Mexico production site ramp-up; and three is inventory write-down. The latter is more one-off in nature as it relates to our voluntary recall of VivaSight. Ramp-up costs reduce -- certainly reduce our margin. However, once our Mexico plant is in full operations, it will improve our production cost and lower our distribution cost into the U.S. market and thereby benefiting our distribution cost. And our overall distribution cost is certainly a focus of ours. And one of our efficiency improvement initiatives we have started where we will and we are improving our processes and cost base in order to lower our overall distribution cost and also to reduce the need of air freight. So we are taking active steps to improve our EBIT margin as the current level certainly is not where we would want it to be. The initiatives we have started and as mentioned, has the very clear ambition of increasing our profitability level and to improve our cash flow and thus providing more financial flexibility and enabling us to finance our innovation engine and our continued growth. I'm certainly not satisfied with the current EBIT, cash flow and gearing level that we have. We are, therefore, addressing this with the cost reduction program and actions already taken and combined with, again, more rigor in our project and cost management, we will improve our gearing ratio over the course of next financial year to be much -- to be at a much healthier level for us as a high-growth company. We are very aware and also very focused on what needs improving. And when looking at the past year decline in margin, that certainly shows. And in order to achieve the free cash flow, we aim for -- we are committed to improve EBITDA, net working capital and also our CapEx. The cost reduction program, our change in pricing practice and efficiency initiatives are set to improve our EBITDA. Net working capital, we have initiatives targeting the entire net working capital from inventory to S&OP to vendor and supplier management and trade receivables. So that will certainly also be a key focus of ours. And we will continue to invest in R&D and continue to invest into our exciting pipeline to ensure that we bring innovative products to the market and to our customers. We will invest in line with our peers within the med-tech industry. And I'm convinced we will be able with this to improve across all areas and thus improve our free cash flow and thereby creating the necessary financial flexibility needed. The improvement will be seen during the full next financial year. Finally, our financial guidance for the full year '21, '22 is maintained compared to the revised guidance we announced on August 3. For the full year, we continue to expect an organic growth -- revenue growth of no less than 4%, and EBIT margin before special items is expected to be no less than 2%. The financial guidance builds on high single-digit organic growth in the combined Anaesthesia and Patient Monitoring & Diagnostics business as well as expectations of more than 700,000 endoscopes sold for ENT and cystoscopy. With that, final -- financial -- sorry, with that financial recap, let me give the word back to you, Britt.

Thank you, Thomas. So there are many reasons why I'm confident in this business generating solid growth and long-term profitability and being a solid investment. So I'll leave you with 3 key messages before we open up for questions. First and foremost, we remain ambitious, and we are confident that Ambu is well positioned to strengthen our leading position in single-use endoscopy. Secondly, we have a fantastic portfolio and pipeline and a solid commercial footprint in key geographies across the 4 major endoscopy segments. Finally, we have a great foundation to build on for future success. But as you've heard, we are focused on improving our business in a number of areas to secure the sustainable growth and higher long-term profitability, and we are addressing these now. So thanks for listening, and I hereby open up for questions.

Okay. So I believe we have lost our moderator. So I suggest we open up for questions. I'm not sure who is in the queue. So please state your name as the mic opens.

This is Benjamin Silverstone from ABG.

What's your question, Benjamin?

So my first question is for you, Thomas, regarding the payables, they seem to be up around 60% year-on-year. I was just wondering if you could please give an indication of what is driving this increase? And how would you think about this in terms of the current capital -- sorry, capital position of Ambu? So is this because you have sort of lengthened your terms with your suppliers? And when would this sort of expect to reverse? The second question is in terms of the sequential decline seen in the visualization sales in Europe. So you do mention that there obviously been a decline in bronchoscopes, which I think is very understandable. But could you just elaborate a little bit about how you see potential destocking in Europe? And also when you would expect this sort of sequential decline in Europe? Is this trend to sort of reverse as well? And then lastly, it would be much appreciated if you could just give us an indication or an update on how August has been trending so far?

Thank you, Benjamin. And let me maybe then start with your first questions around payments. So first and foremost, let me just reiterate our current net working capital, our cash flow and our EBITDA is certainly not where I would want it to be. So that's why we are focusing on how we improve the entire -- in all 3 elements and to improve our cash flow position. Regarding payments, we are certainly also looking at that and negotiating both as mentioned, with suppliers and vendors. And there are some one-off effects from a timing perspective in Q3, that certainly benefits our cash flow position. But our focus will remain in terms of improving the cash flow position. On the topic of visualization, maybe Britt you would want to answer that.

Yes, I'll comment on that. So if we look at the bronch sales in Europe, it's true that it's partly related to stocking with customers as we saw a high buying of bronchoscopes in connection with the Omicron wave, which were not used but other than that, it's related to consumption. And we see a significant -- we saw a significant increase in usage driven by COVID, and that's now normalizing. And if we look at it overall and focus only on Europe, 65% growth in bronchoscopy relative to pre-COVID we have seen a significant uptake in that area. And and the number is 75% on a global level. So therefore, we also, as we look ahead, we do see the market coming back to normalization, but at higher single-use penetration that we saw pre-COVID.

And then let me maybe just comment, I think your last question was how are we trading in August. So today, our full focus is on Q3, and we're not making comments on the trading in August. That will have to wait until our full financial year.

The next question. So please state your name and the question.

Our next question comes from Thomas Bowers from Danske Bank.

Yes. I hope, you can hear me. So I'll just kick off with sort of the longer-term growth outlook here. So right now, consensus is around 10% for next year. I know you haven't guided yet, but Thomas, on the call here, you stated Ambu is a high-growth company when you're addressing the gearing level. So I'm just wondering what does this mean? Is this apply that you already see Ambu as a high-growth company again here next year? And is high growth? Is that double digit in sort of your mindset? And then maybe just on a question to gross margin. And I'm just wondering if you see more headwinds here going into the fourth quarter, so quarter-on-quarter here? And then I'm just wondering in regards to the cost-cutting program. Now you have completed 70%, as you stated in the report. And I'm just wondering, whether you have identified more potential to this cost-cutting program with a high focus you have on the cash flow. And then maybe just a last question before I jump back into the queue. So just on the legacy business, I assume that you still look to a 3% to 5% growth potential, you also mentioned the CAGR of 5% over the last 3 years, so in the high end of that. So I'm just wondering, given all the order backlogs and the pent-up demand, is the current level for the legacy business, is that sort of the base from now onwards or is there still going to be some volatility in the fourth quarter?

Thank you, Thomas. So let me start, at least from the top with the questions that you have asked. Yes, we certainly have set ourselves the ambition and that's also where the cost reduction program starts that we have the ambition to continue with Ambu as a high-growth company. I think our business not only to serve that, but also shows the possibility that we can do that and our pipeline certainly also confirms that. Now that requires a lot of focus, and that's where the cost reduction program basically starts. So that we are -- that we are certain and fully committed to. And your second question was around gross margin and the question towards Q4, as I noted, and potential headwind in Q4. We expect the gross margin in Q4 to be in line with Q3. So no bigger deviations to that number. Third question you had, I noted was around our cost reduction program and the question to the 70% that we have achieved up until now. So I think we've achieved fast and efficiently, a big portion of the communicated DKK 250 million saving. We, of course, still have to do a lot of work in pulling that through, but there are certainly opportunities to drive further operational efficiencies. So that was the third point that both Britt and I also mentioned that we have initiatives that will drive further operational efficiencies through the full next year also. And then ...

You mean beyond on the DKK 250 million, right?

Yes. Yes. So we have a cost reduction program as one. Second is the price practice that we -- that will change and the third is further operational efficiency initiatives. So yes and then your forth -- the fourth question. I believe you had was around our legacy business, so being Anaesthesia and Patient Monitoring & Diagnostics business, we -- I mean, for -- generally, of course, we don't comment on the outlook for next year, but we have communicated for the full year that we expect low single-digit growth within that business.

Yes. And you can say for this year, I mean, the expectation is slightly higher as we come back from COVID. So we are more in the high single digits range for this year.

Oh, sorry, did I say low? sorry, sorry, sorry. Yes.