Ambu A/S (AMBUB) Earnings Call Transcript

Perfect. Good afternoon, everybody. I'm David Adlington. I head up the research team for European MedTech for JP. It's my pleasure to introduce Britt Meelby Jensen from Ambu. There will be a Q&A session afterwards. But with that very short introduction, Britt, over to you.

Thank you, David, and good late afternoon, everyone. I've been looking forward. It's not my first time at the conference, but the first time proudly presenting Ambu and the Ambu story to you guys. So at Ambu, we have an 85-year history, and we have a long tradition of focusing on rethinking health care together with our customers, and that's really what we do to improve and save lives of our patients. Last year, we helped over 100 million patients worldwide. So we are Danish-based company. Last year, we had over USD 600 million in revenue. Over the past 5 years, we've had a 14% CAGR. Our products are available in around 100 countries. We are direct in the largest markets. The U.S. represents roughly half of our sales. So that's by far our largest market. If we look at our products, we have decades of experience in anesthesia and patient monitoring, which is where we started to let our more mature businesses -- that are still growing nicely. And then we have our higher growth endoscopy business, which we went into around 15 years ago. So the graph that you have here shows the revenue development over the past 5 years, where you can see we have roughly doubled our revenue. And if you look at the red bars on the graph here, representing the endoscopy sales, that has almost quadrupled in -- over the period, and that's also by far the highest growth business that we have where the anesthesia and patient monitoring business is growing high -- low single-digit, sorry, and then that's what we are continue -- expecting to continue. So we are here to serve our customers. And on a day-to-day basis, our customers is hospitals and clinics, and we help them serve the patients. What's very clear is that the health care systems around the world are challenged these years. What we see is, number one, staff shortages that is starting to impact the number of procedures being done. Secondly, we see health care budgets being constrained. We see last year hospitals in the U.S., as an example, reporting losses. And then we also face the demographic challenge of an aging population, putting increasing demand on health care systems. So these are all serious challenges for the health care systems, but where we at Ambu have a strong focus on helping our customers. And we are actually well positioned and very focused on helping, and single-use endoscopy does provide some benefits that addresses some of the challenges that our customers have, that I just went through. If we start on the cost side, I mean, what you see on the graph to the left up here is that -- and a study that we have not been involved in, with over 14,000 patients a cost-effectiveness study showed actually that using a single-use endoscope instead of a reusable, reduced the readmission rate to hospitals with over 50%. And if we look at the cost benefit from this study, it was a saving of around DKK 600 million per procedure using single-use versus reusable. Secondly, a benefit is around the workflow. So not only does it provide increased flexibility to use single-use endoscopes, but if we look at the workflow in the hospitals, the fact that you don't need to go through the washing and have people staying after the last procedure to clean the scopes, represents a major benefit that we hear more and more from customers to address this challenge of staff shortage. The third thing that is also very important for our customers and for us is sustainability because we do -- we are aware that we are a single-use company. However, there are studies out there, not sponsored by us, that shows evidence that there is reduced CO2 emission by using single-use scopes instead of reusable. I'll come back to this point, but I want to say here that this is a strong focus of us being a Danish Scandinavian company, I mean, to improve the footprint -- the environmental footprint of our company. So in November, we launched a new strategy that we call Zoom In. We launched this strategy on the back of a period where we had high volatility, not only in the world that's around us, but also in Ambu, as we were investing heavily into both innovation and commercial. I'll come back to that. I joined the company mid-May this year after having been serving on the Board for a couple of years, and we launched a cost reduction program when I joined, followed by this strategy. We call the strategy Zoom In because it's very much about being more focused, and it's about strengthening our execution. It has 4 elements, the first one around innovative solutions. We have focused in our innovation pipeline to focus on the key products in each of the categories we are in, and also helping rethink solutions to the better of our customers. Then a very strong focus in the strategy is about execution. I mean -- and that's coming again on the back of high investment levels. So we are very dedicated to not only improve how we execute and how we drive excellence across the value chain, we are also very focused on increasing our profitability, improving our pricing, improving also our COGS and also optimizing our portfolio to help achieve that. Then we have as a third pillar, sustainability, that I'll refer to shortly. And then the fourth pillar is around our people. In order to transform Ambu as a company, we are very focused on having the right -- attracting the right people and having a highly engaged and performance-focused culture where people are set up for success, bringing in the best and also developing our people. And by delivering on this strategy, we are very convinced that we should deliver strong profitable growth as a company. So the market that we focus on to achieve that focusing on our endoscopy solutions, is large. So if we just look at the countries that we are present in, it represents around 100 million procedures being done every year. Single use only represent a couple of percentage of these million procedures, and Ambu is leading in single use with a market share of just below 2%. So there's ample room to grow. And if we look at the single use solutions that are available out there, we are not today able to meet the needs of all the 100 million procedures that are done every year, represented by the second largest box that you see here. This is what we -- we haven't put numbers out there, but this is what we roughly believe, we target today. And our aim is, as we expand our portfolio and improve the performance of our products, to gradually expand the use of single use in this market. And we believe that we are, as leaders today, very well positioned to be the ones continuing to lead this transition of the market. We are the only company that is present in the 4 major endoscopy segments, so the ENT, pulmonology, gastroenterology and urology. We have clear synergies across these segments, not only in how we go to our customers and on the commercial side, but also very much in R&D and on the innovation side. We provide endoscopes and endoscopy systems, which is the intelligent monitors that comes with the endoscopes, together with also hospital connectivity, imaging enhancing features, areas that we continue to evolve and where also we benefit across all the segments that we focus on. So we started our journey into endoscopy in pulmonology with our bronchoscope. So we were the first to come out with a single use endoscope in 2009. Since then, we advanced the product launching the second, third generation. And when we launched the fourth generation, it really took off addressing the OR and ICU. Last year, we launched the fifth generation. And this is the only single use scope and the first single use scope that is addressing the needs in the bronchoscopy suites, which is where the most advanced procedures are being done. A recent study that was done, that you see up here comparing our aScope 5 with the reusable scopes and with other single use scopes, shows that this is clearly superior to other single use scopes, but also -- and interestingly, it also shows that we are on par and on some parameters perceived to be better than reusable scopes. So we are setting a completely new bar here when it comes to single use endoscopes, something that we are very excited about ourself. Some of the technology we have used in this aScope 5 is also being applied in the other endoscopes that we provide in the other segments. So to sum up our approach here, we went into this segment targeting a niche area of the market, and then we have gradually expanded to cover more and more of the market and now the more advanced procedures. And this is also the approach that we want to take and that we take in other segments that we go into. Before moving on to that, I mean, given that pulmonology is our biggest market, I just want to touch upon what has happened in this segment, because here, we have had a lot of impact in the past couple of years from COVID, both positive and negative. Clearly, when COVID broke out, there was a strong need for our bronchoscopes, which increased our sales quite a lot. Then after that, we saw a dip. And then last year, when the Omicron wave came, we saw hospitals buying a lot of bronchoscopes in case they needed it. But fortunately, for the world health, that was less severe. So that means that we have been hit by a decline in the past year as hospitals have had their inventories that they have been using from this purchase. But if we look at the period from pre-COVID until today, we have a CAGR in the segment of 16%, and we have overall grown 58% in pulmonology. Then I'd like to turn to another example of how we show that we can go in and change the paradigm in segments. In urology, we launched the first single use cystoscope around 2.5 years ago. It's our -- before that, we were not present in urology. So it was our first move into urology. And we have, in that period, established a very strong presence. We continue to see very strong growth in this segment, and we have become a well-known name with strong customer relationships in this market. So it also is a lot of this experience that we use when we penetrate other markets. As you know, the largest GI market is -- sorry, the largest endoscopy market is GI. We went into GI a couple of years ago with our duodenoscope, being the -- addressing the ERCP procedures, the most complex procedures that you do in GI. We had a tough learning there as we went investing heavily, also fueled by the fact that FDA has had a lot of focus on cross contamination in this area with patients being infected. We also had our learnings, and what we learned was that this -- given these are complex procedures, the gastroenterologists are more reluctant to switch. They require the best possible tools that are out there, and we did not overall meet the level of needs that they had. So we learned from that, and we have taken that feedback, and we are now, as we are preparing with Version 2.0, taking a lot of that feedback in to develop a product that addresses the needs. We will also go not broad as we did a couple of years ago, but we will have a more targeted approach, because we also know now which are the customers that has the biggest needs in this segment that we can target. So this is, again, the same approach that we use in the other segments. We launched last year a gastroscope using some of the technology that is in aScope 5 as well, and this is a segment where the procedures are much simpler compared to the ERCP procedures with the duodenoscope. We are taking this step-wise approach. So we are now -- and first going after the niche that has the highest needs and benefits, the most from single use. And given it's still early days, we do see strong traction in this segment, and we expect to continue to have this gradual stepwise approach as we penetrate this market. And there's 20 million gastro procedures done every year. We can by far, with the product we have today, not target all of them, but it's again the step-wise approach, and as we gradually improve our offering. In colonoscopy, it's slightly more different to identify those attractive needs, but we have a colonoscope that is close to ready to be launched. So our aim is yet not to do a commercial launch, but rather to make that available and work with a few centers to gain experience. And then to complete our portfolio in GI, we have a cholangioscope in development. This is a market that is already converted to single use, so one that we look forward to also bring to market. So overall, an attractive offering and attractive portfolio. And if we look across the other segment as well, we do have new products in the pipeline across all these segments coming out of the high investment levels that we have had in the past couple of years into innovation. So you should expect both -- in pulmonology, where we have a high focus on video laryngoscope 2.0 that we have in late-stage development; we have in urology ureteroscope in development and a high-definition version of our cystoscope. We have an improved rhinolaryngoscope in GI. I just talked about that. And then on the endoscopy systems side, we're also continuing to advance our offering with more advanced software to fulfill the needs of the doctors. Sustainability, I talked about that being a key focus. And we have already done a lot, meaning that on some of the sustainability ratings, we have increased our ratings, and we are accelerating higher than some of our closest competitors in the field. But this is not where we stop because we do believe that this is going to be a key demand from our customers going forward, and we already see that now. So we have in this area, 2 focus areas. One is around the circular products and packaging. There's a lot of development ongoing on bioplastics and so on, which we are tapping into, to make sure that we can continue to offer more environmental-friendly solutions. We are also working on hospitals to take our products [ pack ] in order to make sure that they are recycled properly. And then we have, as a second focus, responsible operations, making sure that we reduce our CO2 footprint. And we have a clear ambition to be net 0 as soon as it's possible for any player in the industry. So a key focus area that -- where we are focusing a lot. Then, when it comes to our financials, and what does all this lead to. With our strategy we have, we see with our endoscopy business continuing with the offerings that we have to grow nicely. And we have an aspiration to be long-term, sustainable, double-digit -- delivering double-digit revenue growth. And then, when it comes to our margins, because of the over investments that we have done in the past couple of years, we have come to a level that is too low. We have taken measures on that. We launched with our strategy and transformation program, and we have a clear focus to get back to industry level margins. We are not putting any more specifics around this at this point. The key reason is not only the external volatility, but we actually also want to make sure that we can balance the growth opportunities that we have with the improved profitability, and making sure that we focus on both. But clearly, from what you have seen from Ambu the past couple of years, increasing profitability is a key focus area and also a key focus in the strategy that we have launched. Our fiscal year runs from the 1st of October to 30th of September. So for the fiscal year that we entered a couple of months ago, we see this as a transition year for Ambu, as we last year reported 4% revenue growth and 3% EBIT. We are focusing with a transformation program that we launched together with the strategy, to get back on track. And we are executing on some of the detailed plans we have in this transformation program so we can get to the growth that I just -- the growth -- fulfill the growth ambition that I just shared with you as well as the margin ambition. But we do see the year that we are in now as a transition year for Ambu. So with that, and to sum up, we still see the market for single use endoscopy to be very attractive. And also, when we look at the position we are in, we are well positioned to win in this market, basically to address some of the key challenges that we see among our customers in terms of a need for patient outcomes at a lower cost of care and improved workflow and availability in the hospital, making sure they are less dependent on having as much staff available, and then the environmental impact, which we need to reduce, and we will reduce. We believe the strategy that we launched, the Zoom In strategy, will address this nicely. We are more focused. It's a strategy that takes a starting point in the needs of the customer and the dynamics that we have around that, and then with a strong focus on how we execute as a company to also get to good growth levels and also industry level profitability. And this is the focus that we have, and we are very committed to deliver on asset management. So this concludes my presentation. I'm putting up here an open invitation. We are hosting a capital market event at our head office in Copenhagen in March, where we'll both give some more details around the segments that we are in, and we'll also showcase and demonstrate some of our products, and I hope to see as many as possible there in-person. So with that, David, I'll hand over to you for the Q&A session.

Perfect. Thanks, Britt. So you came as CEO, what -- about 8, 9 months ago now, and you came into a situation where there have been a lot of investment put in for a lot of product launches, and launches have not probably taken off quite as well as hoped. And so, we had a bit of a margin kind of squeeze. You've come in and assessed the cost base, so kind of initially trying to improve that situation. Where have you looked to kind of address the cost base? And what implications does that have for the growth expectations?

Yes. So basically, I think, the first thing I did when I came in was to look -- I mean, we had a situation, as you say, where margins were depressed and also we had a negative cash flow, which is not sustainable in a company like us and also in the environment we operate in. So the first focus was to stabilize the cost base. And given -- I mean, we had just built a factory in Mexico, but we have also capitalized a lot of our R&D costs. So, I mean, the first focus was to make sure that we could stabilize the cost base going into this fiscal year. So that's where we did a workforce reduction, focused a lot on innovation, where we had -- we were above industry benchmarks. Now we are down on industry benchmarks. Innovation or R&D is part of our DNA. So it's something that we remain very focused on. But we did see an opportunity to bring it down to a more normal industry level. That was one. Then, we had heavily invested in the field force in the commercial setup, and that's also where we rebalanced a bit based on the learnings we had. So that was like the #1. And we did that fairly fast in order to also improve both on the CapEx and the OpEx side, our cost base going into the new year. And that also means, if we look at the year that we are in now, we expect to improve our cash flow situation with between DKK 350 million and DKK 450 million. So that's around -- in dollars, around $60-plus million, and then, I mean, leading to -- I mean, moving towards cash flow usual by the end of the year. So that's, I mean, one area. And then we launched, as a second step in all this, a transformation program with the strategy where we, as I mentioned, look at how do we improve our position on pricing, how do we improve our COGS, also looking at our OpEx, looking at our working capital. So we have very detailed plans that we execute against simply to improve the financial situation of the company, and we do that with a balance of also growing. But given that the focus from previous management was a very volume-driven strategy where there was not a lot of focus on cost, I think we have good opportunities to be successful in this plan.

And you've indicated you're targeting a return to industry level margins over the medium term, but you've not really defined either.

No.

So, I might just try and push you in terms of, A, time frame, and B is, what you think industry margins are?

Yes. And I think -- I mean, I think I'll not at this point be more specific, I'm sorry. But I think it's really back to -- I mean, I think we do see an environment with increased uncertainty. We need to take that into account. Then also, I mean, for me coming in, we have not delivered on our commitments to the market. So we had, I mean, in the past 1 to 2 years, multiple downgrades. So I think what's important for me is not to push us into a corner where we are forced to deliver on something that we have committed to. And I think, as I mentioned, the balance between growing revenue and profitability -- Profitability is extremely important, but I don't want to lock ourself into a situation where we are not able to do what is in the best interest of our shareholders.

Is that something we might get a bit more color on at the Capital Markets Day? Or are you going to trying to leave it as [ lose ] as possible?

I think we'll give more granularity at the Capital Market Day, but probably not as much as you would wish for. I have to...

Fair enough.

Disappoint you on that.

Fair Enough. So obviously, your first product where you had a lot of success was on the broncho side. Like you said in the presentation, it was a big tailwind and that's become a bit of a headwind. Where do you think you are in terms of the destocking of -- particularly I think in the NHS, they took a lot of safety stock on. And when do you think you're going to get out through the other side and that we'll actually see the underlying demand coming through?

So yes, so we have -- I mean, NHS being our biggest customer, that's, of course, where we look closely. But then we have also -- I mean, destocking at various, I mean, hospitals around the world who bought this large amount. And I think we are gradually in the process now and over the coming quarters see some of, I mean, this stock being used, and also with the flu season that we're going through now. And it's a little bit the same with NHS that may take a bit longer for NHS because they bought in our areas as well as other areas, huge safety stocks with COVID. So that may take a little beyond the quarter that we are in now. But we are gradually getting out. And then again, you can say the flu season also, of course, helps to use up some of that stock.

And do you -- how much visibility do you have in terms of the end market demand and usage versus -- I suppose you're in a situation where you've got competition coming, you've got the COVID stocks being unwound. How do you think end market demand is, or usage is looking for your products?

Yes. And I think we are fairly close to our customers. So that's -- I mean, from that -- I mean, there's not a specific data out there that we can purchase as in other areas. But being close to our customers, we have a fairly good understanding of their inventory levels, and that's also when we sum that -- all that up, we can see that it's gradually improving. And also that we see, I mean, a strong demand also in the market for our products. You mentioned competition. It's also very clear that we were alone in -- as the only single use bronchoscope for many years. But when you [ enzyme ] build an attractive category, it's only natural that, that attracts competition. So we do see more competition now, actually mainly in the U.S. and in the U.K. And that's, of course, where I think our experience and our position in the market there is helpful. And then, with the new launch of the aScope 5, I mean, that will benefit us. We are the only one who can address the needs in the bronchoscopy suite. And then we have a video laryngoscope in development which will be used together with the bronchoscope, and it's based on the same platform. So you will have that dual view on our system. So I think some of that helps to mitigate and bring us ahead of competition.

And the aScope 5, in terms of the numbers of procedures that it addresses compared to what you're currently addressing, how much does that expand your market?