Ambu A/S
CSE:AMBU B
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Ambu A/S
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Good day, and thank you for standing by. Welcome to our update of financial guidance conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, CEO Juan Gonzalez. Thank you, and please go ahead.
Thank you, and welcome, everyone. Thank you for joining us this morning. Yesterday, we issued a company announcement, and the idea of this call is to give you just a brief perspective in terms of our preliminary Q3 results in terms of the 2 factors which are driving our revision of the guidance and also a perspective in terms of the health of our Visualization business. And then we can open it for Q&A. So first of all, in terms of our Q3 results, we grew 7% driven by our Core business growing 15% and our Visualization business being flat on top of a record 81%. And we should put these Q3 results in the context of what was last year, a record performance in Visualization on the back of what was the pandemic back then. We also are expecting to see 380,000 units of endoscopes, which will put us as year-to-date selling 1.129 million units. And the most important thing when we look at our Q3 results is the following: #1, when you look at our Visualization business, there is no change of ASP within the segment. There is no change of our broncho ASP driven by competition as we actually have not experienced any competition in Q3. And we actually expect that the impact of competition in Q4 will be minimal. And actually, we do not expect to review our prices on the back of competitor centering. We understand their technology relative to ours, and we are confident in terms of attractiveness of our value proposition. The second thing is that when you look at the change of ASP in Visualization, this is driven by mix. Our broncho business will continue to grow this year versus last year. What you are seeing is a very rapid growth of our ENT and cystoscope. And when you think about ASP going forward, as you can imagine, we will have our broncho business, we will have our ENT and cysto businesses. And then we will enter into anoscopy. We'll enter into the broncho suite. We will enter into gastro. We'll enter into colon. And you have basically to look at cost of doing reusable procedures in those segments, and you can assume that our pricing will be in line with that. And that will help you to basically have a better sense in terms of how our ASP will be projecting. Let me just give you my perspective in terms of the 2 factors driving the revision of the guidance. And we basically said that we are expecting elective procedures recovering at a slower rate than what we anticipated by the end of Q2. And by the end of Q2, we were expecting that in April, we were already at normal levels. And then we will see a healthy development on the back of pent-up demand that has been accumulated over the last 1.5 years. And we have seen the results in May. We are seeing in June, and we are concluding, like most hospital-related companies, that elective procedures are indeed coming back. It's just that, relative to our fiscal year that finish in September, it's going to be a slower recovery. One of the reasons why the recovery -- we're forecasting the recovery to be slower is also because of the impact of the COVID Delta variant. We are seeing some markets delay in their opening, like the United Kingdom. We're seeing some countries going back into lockdown, like also Southeast Asia or Australia. And we basically anticipate countries going back and forth into lockdown to try to control the variant while they continue with the vaccine results -- rollout. So overall, the elective market will come back, but relative to our fiscal year of 2020, '21, it will just be at a slower rate. Now the impact of elective procedures coming down at a slower rate is different depending on our Core versus our Visualization business. In our Core business, in some segments, we have very high market shares. So for example, we have around 40% market share of face mask and about 20% market share in cardiology and neurology for our electrodes. So the performance of this business really move with the elective market. The elective market expands, we grow. The elective markets reduce, we see the reduction in our Core business. In the case of Visualization, the most important business we have in terms of elective procedures are our ENT and cysto. And of course, there is a dynamic in terms of the -- what is the overall elective market, but the penetration is so small that, really, our performance is driven by the speed of penetration in those segments. And as we are in that 2% to 3% penetration by the end of this year, that is really a more important driver of our performance. And then we go to supply chain disruption. And I think all of you are familiar with what we are observing in terms of the increase in transportation costs and raw materials and shipment delays. Basically, what we are seeing is that, on top of a disruption in the U.S. West Coast and the Suez Canal, one of the most important ports in China, Shenzhen, went into lockdown for 2 weeks, which is basically increasing the port congestion and, more importantly, the lead time in terms of shipments going from Asia into the U.S. So just to give you a sense, before the pandemic started, the lead time to go from Asia to the U.S. was about 6 to 7 weeks, being raised to 10 weeks. And now with what we are seeing with the Chinese port, it could be 14 to 15 weeks. What does it mean in practice for us? It means that some shipments that was authorized in September will arrive in Q1. And we do not consider that this is going to impact our product availability at the health care system level because it's too small but, of course, will impact our sales in Q4. In terms of Visualization, we are not impacted by this because we have the ability to increase our level of airfreight from our plant in Malaysia to the U.S. and Europe. Now one remediation that we are doing is we are accelerating the construction of our Mexico plant. In our previous announcement, we mentioned that the plant will become operational in 2022, '23 and now is going to become operational in 2021, '22. So we consider these disruptions to be short term in nature and have no impact in terms of the growth outlook for the company. Now in terms of the health of our Visualization business, first of all, we are indicating that, this year, we are going to grow above 30% on top of a year where we grew 81%. This year showed the very strong momentum of the company. The second thing is that we are achieving this momentum when we actually just started rolling out our products. We have 20 new launches over the next 3 years, and there will be 8 launches next year and another 8 the following year. So we believe that we have a Visualization business that will maintain a very strong growth rate. And as you can imagine, one of the reasons why we are accelerating the buildup in Mexico is not just because we will be able to reduce our lead times to the U.S. or else we'll be able to reduce our transportation costs. It's also because we were running out of capacity in Penang much faster than what we anticipated. Our target is that we will be producing out of Mexico a bronchoscopy, ENT and cystoscopy by the end of next year. So with all that into context, let me just comment on the updated guidance. We basically have said, on the back of the disruption, our sales will go from 17% to 20% to around 17%. Our EBIT will reflect the impact of the lower sales and the increased costs from all the supply chain disruption, especially our distribution costs, and it's now going to be 10%. And in terms of the number of scopes on the back of the strength of the Visualization business, we are going from 1.3 to 1.4 to above 1.4 million. And we are indicating again that our Visualization business will be growing above 30%. So with that as a context, let's open the Q&A.
[Operator Instructions] Your first question comes from the line of Annette Lykke.
My first question goes to this slower-than-expected recovery in the elective surgery area. [ Preclose cost ] with a number of other suppliers to the hospital segment in the Nordic regions have actually shown that, in their cases, the speed of improvement has been faster than they expected and also reflected both in sales and order growth. Have you been good enough to predict this development? Or do you have a different geographic range? Or why is it this is coming as a surprise to you right now? Then on the supply issues, it has, of course, an impact on the top line but also on the margin guidance. Could you maybe, Michael, allude a little bit to how much of the guidance on the market that is related to this, also including additional freight cost? How long should we expect this to go into maybe will go as long as second half of next year for you? And then on the margin -- also on the margin guidance, where I must say, surprisingly, as you downgrade on some of the, I would say, low-margin areas as the Core business are, is it because you're growing also faster in ENT and cystoscopes then leading to a gross margin difference? I don't know where the gross margin of these lower-ASP scopes are. Call it around 50%. I think you have said that Visualization is around 85%. Is ENT and cysto somewhere between? Or could you maybe say a little bit more on that? I'll stop there.
Thank you very much, Annette. So let me just comment on the elective procedures, and then Michael will talk about the margin. So it really depends on your portfolio what is a level of speed of recovery. For example, orthopedic, which is a business I'm familiar with, we can see them recovering faster than some other segments. But specifically, in terms of the portfolio of Ambu, we are basically talking about timing. We are not really talking about whether the elective market is recovering or not. We believe and we see the elective market slowly going back into recovery. We also know that when we go back to a normal situation, there will be a pent-up demand that will further drive growth for the market. But our assumption at the end Q2, it was based on the medical claims data we had. For example, in the U.S. was showing that April was back to above a normal level. And we were actually expecting that we will see a positive trajectory from that all the way to the end of September, which is the end of our fiscal year. And actually, what we have seen is that in May, it went back into a slow decline and from there is building up. And what we are basically forecasting is that, at the end of Q2, we did not take into consideration the impact of a COVID Delta variant, and we were basically assuming that the vaccine rollout will open up elective faster. And now with the COVID Delta variant, we are seeing a bit more noise from now until the end of our Q4. Again, it doesn't change the fundamentals of the market, and elective procedures will come back and will come back to a healthy level but, specifically for our fiscal year, is going to be lower than what we forecasted. Michael, do you want to...
Thank you for the question, Annette. I think when we talk about supply chain, I think we've also spoken about that at Q1 and at Q2 and probably also last year that we have seen a steady increase in the cost of driving the supply chain. So container market have been really expensive, and we have spent a lot of money and funds in airfreighting products, mostly the scope portfolio. And I would say that, for this year, when you look at it from a helicopter, the overall impact is somewhere around 1% and 1.5%. So it is very significant. And then what has fallen all the way down to the bottom line is not so much the mix impact, and it's more the leverage that we don't get from the lower top line that we talked about in this quarter. Of course, there's a difference in the contribution margins on the various products, but it's not something that we will see here. And the overall effect that we see is very close to what we had planned for. So that's not what we are -- that's not what we're guiding for.
Okay. Two follow-up here. This additional cost of around 100 to 150 bps. Would it be prudent to apply this for next year as well? And then there's a question I also had on the ENT and cystoscopes. Are they somewhere between the Core business gross margins of 50% and the visualization of 85%?
Yes, I think that's fair to say without really commenting on the numbers. And I think on how the supply chain costs are going to evolve as we move forward, I think there are 2 things to be mindful about. The first is that we have been building an air bridge for Visualization. We have -- of course, as we have been expanding capacity, we're also building a sea bridge. So we will be rebuilding our inventories on land. And then, of course, as the market improves, the freight rates, which we cannot really comment about, you're going to see that this cost item here is also decreasing. But my point is that there are 2 components: the need to do airfreight and then the cost of the sea freight.
And your next question comes from the line of Thomas Bowers from Danske Bank.
A couple of questions from my side. Just on the raw materials. I remember you phased out silver in your PMD products some years ago. So I'm just wondering what's the primary impact that copper prices or oil, plastic -- or what's primarily affecting you here? And then maybe can you -- maybe just elaborate a bit on the split between, you could say, the slower return of elective procedures and then the supply chain issues. So I'm just wondering how should we see hospital inventory levels look like now in the U.S. So just to get an idea on whether we should expect a very strong Q1 or it will be maybe more gradual over the next fiscal year with the return of elective procedures. And then maybe just a quick comment, if you may, again, on Mexico. So can you maybe add a bit on what you see as the immediate capacity we're looking at here. So I noticed you mentioned ENT, cysto and broncho to produce -- be produced immediately. So is this going to cover the 100% of the U.S. market for, more or less, day 1? And then lastly, can you just update us on the aScope. Do you know -- so where are you now with the upgrades, currently? And is there still some items that you need to solve ahead of the planned October launch? And for example, is the elevator adjustments -- are those fixed now?
Thank you, Thomas. Let me talk about the raw materials, and then I can make just a brief comment in terms of Duo, and Michael can take the rest. So first of all, in terms of raw materials, raw materials is a small percent of our cost of goods. So we are seeing significant volatility in what is a small component of our costs. Now we're seeing the volatility in silver, in copper, in resin and plastics. And of course, we are growing our volume very rapidly, and our volume growth drives reduction in terms of the cost of camera and sensors. But when you look at it within the rest of the year, we are being negatively impacted by raw materials. But I don't think it is something that is going to change the overall profitability of our Visualization business, for example. I mean this is not a Q3 earnings call, and I'd love to leave something to say for the call then. But I can say that we remain on target to bring our Duo 1.5. We actually continue to have evaluation of our improvements with key opinion leaders, especially in the U.S. And the target is to have a commercial launch in September ahead of the expansion of endorsement for inpatient procedures expected in October.
Thank you. And, Thomas, I heard you had 2 residual questions here, one on the impact of the slower return of electives and how we see that is impacting hospitals' inventories. Is that correctly understood?
Yes. It was mainly just to get an idea on how we should look at next fiscal year. So are these -- so you have the supply chain issues. So I'm just wondering whether we should expect an extremely strong Q1 or this is maybe more related to -- so the split is more tilted towards the slow return of elective procedures. So should it be more gradual over the full fiscal year? So that was sort of my question.
Yes. Yes. And of course, it's a super good question, Thomas. But I don't think this is really the time to go in and talk about how we see performance next year. I think we talk about this year, and we talk about first quarter. And then you asked about Mexico, and that's also a typical...
Yes. So -- but could I just ask then on the inventory levels? Are they sort of in a state where you need to consider to go by airfreight to secure supplies? Or where are they now?
The inventory levels, to my knowledge, are where they should be. Of course, we are carefully planning our inventory levels, and we have the impact here that we have talked about today. But apart from that, I don't have knowledge of anything about inventories that are not according to normal.
I mean our priority is to maintain service levels. So in the case of Visualization, as I mentioned, we will continue to airfreight as much as it is necessary to fulfill demand. But I mean that's as much as we can comment. About Mexico...
Yes, Thomas, you asked about the capacity in Mexico. And I think that's also a classic question that we've had before. And now today, we are saying that we are advancing the operation of Mexico, but we're not going to share with you the capacity that we are building over there. That, we would save for a later time.
Your next question comes from the line of Christian Ryom from Nordea.
I have a couple as well. So my first is to the mix in the Visualization business here in the quarter. Can you elaborate a bit on whether there was any sort of exceptional items in the mix, just thinking about this rather low ASP or revenue per unit or whether we should expect that to -- sort of these trends to continue into Q4 because I would assume that both ENT and cysto should be expected to grow faster than the overall portfolio? And given that, at least my understanding, why aren't we seeing you raise your scope guidance further? So I'm struggling a little bit with squaring the above-30% organic growth guidance with guidance for "only above-1.4 million" scopes. So that's my first question. And the second question is to the implications of the acceleration of the Mexico plant buildup. What are the implications here for CapEx this year? And how will -- how should we expect the New Mexico plant to impact the gross margin next year?
All right. Thank you, Christian. And let me address the question regarding mix, and then Michael will talk about Mexico and the financial implications of that. So first of all, in terms of mix, I wouldn't take Q3 as an indication, for 2 reasons: One is when we talk about our performance in Q1, we mentioned that, in the United Kingdom, we had a large order that will account for the full year results. And that's why within Broncho you have, let's say, more volume coming in the first half of the year than in the second half of the year. The second one, which is the most important one, is the rapid growth of our ENT and cysto business. And I think at Q3, we'll probably comment the quarter-on-quarter growth of this business, but you can imagine that it is very rapid. Now I would say the way we look in terms of our mix and ASP should be more -- rather than looking at Q3 and projecting, it should be looking at full year and projecting. And when you look at full year and projecting, the 2 key considerations for you to have is Broncho is going to grow and the ASPs within the segments are not changing. So it's everything related to the relative mix by the end of the year. And when you look at next year, you have to do your projections in terms of this business and then look at the impact of our new launches. And that will give you a sense in terms of how that mix is developing. Mexico is a very important investment that we are making. It reflects the scale of our aspirations. It allows us to manage better this type of disruptions. But of course, we are doing it to make sure that, at every point of time, we have the ability to fulfill demand. But Michael can talk about...
Yes. No. Yes, of course. I think we have talked about in the past question that the overall infrastructure in Mexico is on a lease. So that's not something you're going to see into our free cash flow. But of course, it's something that will impact our overheads as we move along. There will be some CapEx relating to setting up the manufacturing line and building clean rooms and so forth. And the port part of that will come after the -- after Q4 this year. I think talking about the overall overhead impact for the site, that one will take when we move into next year.
Okay. Just a quick follow-up to make sure that I've understood the Q3 mix dynamics correctly. So basically, what you're saying is that due to sort of pull-forward by the NHS order, bronchoscope volumes were probably a bit lower than, say, trend levels here in Q3. On the other hand, ENT and cysto was maybe a bit above trend levels, and therefore, we sort of have it askew in the mix that we should not necessarily expect to continue. Is that correct?
Yes. Yes. That's a good assumption. We are -- I mean we are positively surprised by the rapid penetration of ENT and cysto globally. And I think we mentioned that in Q1 and Q2. And we believe we are finishing the year now with very important growth engines. And on top of that, our broncho business, as I mentioned, continue to grow on what were already record comparables. So that just gives you a sense in terms of where we are.
And your next question comes from the line of Yiwei Zhou from SEB Bank.
I have 2 follow-up questions here, actually. Firstly, the -- could you please give an indication of your sourcing contract? We understand that you have the exclusive suppliers. And could you please comment on if those contracts are fixed-price contracts or the price is actually related to the market index? And secondly, just on the contribution margin for Visualization. Could you also give us an indication on whether it has been stable? Or it has trended down along with the product mix?
Yes. Thank you. When you look -- if we start on the contracts, I think, really, I can comment on the dynamics and how they're being handled in 2 quarters. But of course, they are not fixed price in the long term. So we do see fluctuations up and down. We talked about [ metals ], and we have a lot of components that are going in. This call is not about saying that our overall COGS on our manufacturing is increasing. So I think we can park that one there. On our mix, I think we've spoken about that already. We see very stable prices product for product -- by product. But what is driving the overall margin is a mix impact from the relative contribution of the relative product lines.
Okay. Just on the contribution margin. So it's fair to assume the contribution margin for the ENT and cystoscope is very close to the aScope, so that will be above 80%.
I think we've said in the past that we have individual margin on the individual indications but that the overall will be stable in the longer term. So yes, some products are more profitable than others. On the aScope, we have been able to really drive down our manufacturing cost because we have been excelling at scale and have extremely low scrap. So every product has its history. But what we're talking about here is the overall impact. And here, we don't see any, really, changes except for what has been driven by the mix impact quarter-on-quarter.
And your next question comes from the line of Mr. Kumar from Kuvari Partners.
Just a question on the impact of Duo this year. Is there any delay to the timing of number of scopes -- timing and number of scopes you thought for Duo you're going to recognize in this year? And secondly, is there any extra cost burden for Duo versus your expectations because of this move to sort of a 1.5 product that you described in your previous statement? And perhaps you could give some color about that 1.5 product, i.e., what were some of the feedback issues that led you to want to change the specifications?
Yes. But thank you for the question. I think we have said everything we can say about mix and, really, the impact that is leading to this call here, and Duo is not one of those that is driving the agenda for this call here. So we don't have much more to comment, but we would love to refer that to our results for Q3 when we meet around mid-August. I think unless there are any really different questions compared to the topics that we have been addressing now, maybe we should take just one more round of questions, and then we would love to end this call.
Okay, just to be clear, you don't have to comment on Duo, specifically. But is there an extra cost in that EBIT margin guidance you talked about today? Is there extra cost that we should be aware of that's gone into investment there that...
There's no impact specifically in this announcement here that can be related back to the Duo. If that was the case, then we would; have reported it.
[Operator Instructions] Your next question comes from the line of Niels Leth from Carnegie.
My first question is about airfreight. So you've already used airfreight in previous quarters but had the ratio of products being shipped by airfreight increased in fiscal Q3. And my second question is just a clarification on the effect on the margin. You talked about a negative effect from increasing logistics and freight cost of 1 to 1.5 percentage points. So is that on the gross margin? Or is it on the EBIT margin?
Thank you for your question. So just to take the last one first, I was addressing the EBIT margin. And as for the first, I don't think there's any relative difference this quarter compared to the first and the second quarter. I think what we're really trying to say is that we have been absorbing quite a significant amount of additional supply chain costs, and that is really what is eventually leading to the conversation that we have here today.
Okay. And then just on the bronchoscope business. Since you are launching the aScope 5 later this year, is there any effect from end-of-life sales from the aScope 4 in this quarter and the coming quarters?
Not at all. Not at all.
All right. Thank you very much for joining us this morning. I would say you have gotten a glimpse in terms of our Q3 preliminary results. You have got a sense in terms of some of the disruptions we are experiencing that I would say is not dissimilar to the disruption most companies are experiencing in one way or another. But more importantly, I hope you get a sense regarding the strength and health of our Visualization business, which has been the #1 growth engine of the company and will continue to be the growth engine for the company going forward. So thank you very much, and enjoy the weekend.
All right. Thank you, everyone. That does conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stand by. Thank you.