Ambu A/S

CSE:AMBU B

Earnings Call Analysis

Company Reports Strong Growth and Profitability

The company kicked off the year with robust organic revenue growth of 14%, notably 25% in Endoscopy Solutions, outpacing last year's 3%. EBIT margin soared to 10%, up from 6%, driven by soaring sales and operational efficiency. Free cash flow surged to DKK 135 million, a remarkable improvement over the preceding year's DKK 309 million. These gains herald transformative product advances such as European regulatory clearance for urology devices and a sustainable, bioplastic ureteroscope rollout. Global expansion persists despite FX headwinds, with growth across all regions. However, significant revenue from the ureteroscope isn't anticipated this fiscal year.

Organic Growth in Anaesthesia and Patient Monitoring

The company reported a modest 1% organic growth in the anaesthesia and patient monitoring business area, slightly affected by foreign exchange impacts. This growth comes despite the strategic decision to exit 40 markets, which had a minor revenue contribution of around DKK 20 million, to reduce complexity and focus efforts. The company is actively working on improving profitability by adjusting pricing, which may involve letting go of certain contracts for long-term financial health.

Commitment to Sustainability

Sustainability is a central focus, with the company committing to net-zero emissions by 2045, a demand from large buyers and customers. Short-term targets are set to reduce Scope 1 and 2 emissions by 35% by 2029-30, with a goal for 82% of suppliers to set science-based targets by 2026-27. Efforts in sustainable product design and packaging are ongoing, with the implementation of bioplastic in endoscopes being rolled out during the fiscal year.

Solid Financial Performance with Improved Margins

Revenue reached DKK 1.254 billion, with 14% organic growth and an overall reported growth of 11%. All major regions exhibited growth despite a negative currency exchange effect in the U.S. An impressive increase in EBIT margin to 10% from the previous year's figure was driven by OpEx scale effects. The gross margin improved slightly due to favorable product mix and efficiency measures, albeit partly curbed by overhead costs and forex effects. OpEx ratio decreased by 3.6 percentage points, thanks to higher sales and controlled cost management.

Strong Cash Flow and Investment in Growth

Q1 generated a positive free cash flow of DKK 135 million, marking a substantial improvement over the same period last year. This reflects higher earnings and a positive trend in net working capital. However, expectations of increased capital expenditures and normalization of working capital ratios may temper free cash flow outcomes in the subsequent quarters.

Consistent with Long-term Guidance

The company aims to reach a 20% EBIT margin in the long term but retains flexibility to invest in growth opportunities that can accelerate further expansion beyond the five-year period. Investments are channeled mainly into the growing endoscopy area, and R&D investment as a percentage of endoscopy revenue sits above 10%. Nevertheless, there is an anticipation of leveling R&D expenses around 7% of sales, suggesting continued commitment to innovation while watching the bottom line.

Urology Product Development and Competitive Dynamics

The development of a ureteroscope is progressing, with intentions to leverage existing Transperineal Prostate Biopsy (TPT) codes for the U.S. market upon approval. This adds to Ambu's cystoscope offering, and together, they reinforce the company's competitive stance in urology. Competition is expected, as seen with Boston Scientific's recent collaboration, but the company believes in the strength of its value proposition and the ability to maintain and grow its market position.

Maintained Financial Guidance

Ambu upholds its financial guidance for the fiscal year with an organic growth projection of 7% to 10%, an EBIT margin between 8% and 10%, and a free cash flow expectation of DKK 270 million plus. Operational expenses are expected to reduce as a percentage of sales over time, helping Ambu work toward its EBIT margin goal of 20%. No specific guidance on OpEx percentages is provided, upholding the focus on scaling and profit growth.

Earnings Call Transcript 2024-Q1

[Britt Jensen, executive]

Good morning, everyone, and welcome to this earnings call this morning, where we will report on Ambu's first quarter results in our fiscal year '23-24. My name is Britt Meelby Jensen. And it's a pleasure for me to welcome our new CFO, Henrik Skak Bender, who had joined us the 1st of January to lead our finance, legal, and IT function as our Chief Financial Officer.For the agenda today, Henrik and I will first go through our financial results. I'll present a business update and hand over to Henrik for the financials and then we will finish the call with a Q&A session.So starting with the highlights of the business. We are off to a strong start for our first quarter this year with a 14% organic revenue growth, hereof a 25% growth in our key business area, our Endoscopy Solutions area compared to 3% in Endoscopy last year. This strong revenue growth is partly the reason why we also can report a strong EBIT margin before special items of 10% for the quarter compared to 6% last year. And then, looking at our free cash flow, we report DKK 135 million for the quarter, which is an improvement over last year's quarter of DKK 309 million. So overall, we are very satisfied with the strong start to our fiscal year.Let's look into the progress that we have made on the different zoom-in areas in our strategy. So as usual, we report on these 4 different areas. And this quarter, I'm happy to announce that we have had progress across all 4 areas.If we start looking at our Solutions, the key events that we have had in the quarter has been in our urology business, where we both had our ureteroscope aScope 5 approved in Europe, end of November. It's still pending in the U.S. I'll come back to some details on this. And then we had also our aScope 5 Cysto, so our advanced cystoscope receiving European regulatory clearance.When it comes to our focus on excelling in execution, I'm also happy to announce that we continue to be on track on our plan with the transformation program to deliver improved efficiency and scalability. I'll let Henrik, later in his presentation, comment on some of the plans and progress that we have in this area of our transformation program.Then looking at sustainability. This continues to be a key focus area for us across the business. And we continue both on a corporate general level and also when it comes to our solutions, to deliver strong progress. And I'll report on that a little later, where in the quarter that we report on, we set our net zero emission target for 2024 and we also had our short-term SBTI approved.Then the last area is around our people. This continues to be a key focus area. And we are continuing to make progress in optimizing how we work within our values of the company that we launched last year. At the same time, it's also a pleasure to announce that we now have our executive leadership team complete with Henrik joining January 2. And we have announced a few weeks ago that on February 1 we will have Rummana Hasan joining us as the Chief Marketing Director or Chief Marketing Officer, sorry. So with that, to conclude, this represents solid continued progress across the 4 areas of our zoom-in strategies that we continue to be on track on delivering on.Let's look at some of the different business areas that we are in. Overall, for the quarter, we delivered revenue of DKK 1.254 billion, which represents a reported 14% growth, 25% in endoscopy, and 1% in anaesthesia and patient monitoring. This also means that for the quarter, Endoscopy Solutions now represents 60% of the total revenue versus 40% for anaesthesia and patient monitoring.If we look into the different areas -- business areas starting with Endoscopy Solutions, again, we grew 25% in this area and continue a quarter-over-quarter growth within Endoscopy Solutions. The growth is mainly driven by progress with our already marketed solutions in a single-use market that continues to grow.If we look into the different components, starting with pulmonology, we had solid growth in pulmonology in the quarter. But also bearing in mind here that we have relatively low comparables from last year where we were still through the normalization after COVID.Our ENT and urology areas continue solid double-digit growth due to both new customers and expansion of our presence within the existing hospitals that we are in. So overall, a very good momentum in our Endoscopy Solution business.For endoscopy, we report on pulmonology and we report on everything else, so excluding pulmonology. If we dive into the pulmonology segment first, again, 18%, so a solid growth when we compare to the relatively low comparable from last quarter, but still a quarter-over-quarter increase compared to the last couple of quarters.Last year, we had the normalization from COVID, where we still had inventory in some hospitals that they had bought from the last wave of COVID that they didn't need. And this, we are completely through now. So we are looking at completely normalized data in this segment. What is also exciting in pulmonology is that we have a strong portfolio that we are continuing to advance. We still have strong progress on our most advanced solution, our aScope 5 Broncho.In December, we could report that we had, with the Center for Medicare and Medicaid Services, CMS, in the U.S., we had been granted a special additional payment that I'll explain a little bit on later in this call.If we look at one of the factors that partly influenced the pulmonology sales, that's flu levels. And just a snapshot into how the flu season is looking and was looking in the previous quarter. What you see on the graph here is U.S. numbers. The pattern, when we look at European data, is quite similar. And what you can see is that if we look across a 5-year average, the flu levels in the quarter that we just exited were higher than what we have seen over the 5 years -- past years in average.But if we look at last year, so where we're immediately comparing to, we can see that the levels last year were slightly higher. What you also see on the graph is that in the past couple of weeks, we track this on a weekly basis; the numbers have been going down. But again, it's very difficult to predict how will that move from here.In some years, as you can see in the graph, it goes back up. And in other years, it doesn't. So this is something that we follow. And that typically impacts the revenue positively in the Q1 and Q2 of our financial years.If we go back to this status that we got with CMS that I alluded to, let me just explain a little bit what this is about. So CMS has granted as the only bronchoscope, we have been granted this TPT, so the transitional pass-through payment. The reason why we have been granted this payment, which is in effect from January 1 this year, is basically as CMS referred to, it's based on the evidence that our bronchoscope is a substantial clinical improvement over currently available options. This is very good news for us.It's something that will last at least 24 months, potentially expanded another year, where it basically means that we will, in terms of financials that for the large part of the procedures being performed, the device cost should be covered by this additional payment by CMS.This is not something that we expect to have immediate financial impact. It's something we expect to see gradually and it's a little difficult right now to fully estimate the financial impact. But it's something that we are, of course, following closely. And we are making sure that this is as broadly known among our customers as possible.Now let's look at the part of our endoscopy business that is not pulmonology. Here we saw an impressive 34% growth in the quarter. And the main growth driver in this segment is -- continues to be our ENT and urology offerings that continue to grow very strongly in quarter-over-quarter. When we look at the quarter, as I mentioned before, we have seen a strengthening of our urology offering with our Cysto high definition for the more advanced procedures and then also with our ureteroscope, which was -- which received CE Mark in Europe end of November.Let's look at the ureteroscope and how we see this new product. Basically, as I said, it was approved in Europe. It's not yet approved in the U.S. For Ambu, this is the first time that we launched a single-use endoscope into a market where we are not first movers. This is because this market has partly already been starting to transition into single use.We have a very strong value proposition to our customers in this segment. The image quality is very high for our product that we launched to the customers. We are also launching this as part of our integrated urology platform. So basically, with a system that can cater for our ureteroscope and cystoscope combined and also that integrates on a number of parameters into the hospital systems. And then, with our sustainability focus, it's also the first single-use ureteroscope that is made of bioplastic material in the handle.So on the right side, on the graph here, what you see is where we are in the launch process. And just to recap one of our launch processes, because what happens when our product has been approved is that if we, for the first time, are able to test our product in real-life cases and in real-life patients. So this is a process that we refer to as our controlled market release, where we test the technical features and the quality of our product in a number of cases before we proceed into the launch phase.This is also why we refer to the launch phase of our product for -- that is a period of 6 to 12 months that we are right in the middle of and why you should not expect any significant revenue from the ureteroscope in this fiscal year '23-24.So let me finish off by looking at the business area; anaesthesia and patient monitoring. In this area, we grew, when we look at organic growth, 1% reported. It was slightly less due to FX impact. The comparison from Q1 last year, it was -- is slightly higher compared to where we are today due to the fact that we, by end of the last fiscal year, exited 40 markets to reduce complexity and increase focus. In these 40 markets, we had a rough revenue corresponding to DKK 20 million, where the vast majority were anaesthesia and patient monitoring products.Also what is a key focus in this business area is improving profitability. This is where we have a very strong focus on pricing, where we, in some instances, are taking quite significant price increases in order to also improve our profitability and where we are also prepared to let go of some contracts and volume in some cases in order to strengthen profitability. This is something that we are in the middle of and where we still see a lot of opportunities to drive more price increases in the year that we are through now.Our contracts are typically anywhere from 1 to 3 years. A lot of -- a large part of our business is contracted. So this is something that happens gradually. And where once a contract is negotiated, it still takes some months before we have a full overview of the volume impact.So last but not least, before I hand over to Henrik, let me look at the sustainability progress that we have made in the past quarter. Sustainability is a core part of our strategy and something that is a key focus for us in management. This quarter, we not only finalized our plan and our commitment to be net zero emission by 2045, something that is also becoming a requirement for some of the big buyers and big customers.We are also very happy that we got our SBTI targets approved, our short-term targets, where we basically have set an ambition for Scope 1 and 2 to reduce our emission by 35% by 2029 to '30. When we look at our Scope 3 emission, which is a large part of our total emissions, we have set a target of 82% of suppliers to set science-based targets by fiscal year '26-27. So an area where we now have complete focus on delivering and progressing.Another key part of our sustainability focus is on our products and packaging and how we can also help our customers be more -- to operate more sustainable. We reported in the last quarter on our circular products with the bioplastic that we are on track to rollout and implement on all our endoscopes, which is happening gradually over this fiscal year. Then our focus is also on circular packaging and we're doing different pilots on recycling to also optimize that part.So overall, this concludes my section. And I'm pleased to hand over to Henrik to go through our financials.

[Henrik Bender, executive]

Thank you very much, Britt. Thank you for the warm welcome. I've been with Ambu now for a month and had a chance to meet the organization. I look forward to now present the quarter 1 results and over the course of the next weeks and months, meet you; investors and analysts. Today I will start out by talking about the key financials. Then I'll talk a little bit about our transformation program and then end with some comments on our guidance.So starting with revenue. As Britt said, we had a very solid Q1, a very solid start of the year. Overall revenue of DKK 1.254 billion, corresponding to a 14% organic growth, partly offset by negative FX effect, leaving us with an 11% overall reported growth.Next to all of the segment updates that Britt provided, looking from a geographical perspective, all of our 3 major regions grew, both in North America, U.K. -- North America, Europe, and rest of the world. U.S. in particular, impacted obviously by the negative currency effects. And that was mainly a negative effect from the USD-DKK development during the year.Still it's important to say, as Britt also noted, when looking at the revenue growth that we are looking at a comparable Q1 from last year where we had some effects with NHS reordering coming in this year and in particular within the pulmo segment, pulmonology, a strong Q1 versus last year, also because of the weaker Q1 last year.Looking at margin, we also posted a very solid EBIT margin at 10%, corresponding to a 4 percentage point increase versus last year. The majority of that driven by scale effects on our OpEx. In other words, we had a strong organic growth and managed to still invest in the organization, but drive a higher scale on our OpEx ratio. I'll come back and comment both on the gross margin and OpEx development on the following slides.Starting with gross margin; a slight increase in gross margin of about 0.4 percentage points, driven by a combination of a favorable product mix, having our endoscopy business growing by 25% with a higher margin than our A&PM business, growing by 1%, obviously driving up the gross margin.Offsetting that in part, both FX effects, but also still a higher-than-planned overhead cost in Mexico, driving down the margin partly, but still a very satisfactory result and a good step on the journey towards increasing our gross margin.Looking at OpEx, our OpEx ratio decreased by 3.6 percentage points, driven by a combination of the higher sales and still a prudent approach to how we manage our costs while investing in more resources into our commercial organization. The OpEx cost will still continue to be a focus area, both, on one hand to ensure that we can drive long-term organic growth, but also on the other hand to ensure that we can deliver on our ambitions to scale OpEx costs more. In the quarter, we had a slight increase in management and administrative costs, mainly because of higher administrative costs. The rest developed as planned.Turning then to cash flow. As Britt said earlier, we had a strong cash flow for Q1, posted a DKK 135 million positive free cash flow, which is more than DKK 300 million better than the same quarter for last year. This is driven by, in part, obviously, the improved earnings that I described before, but also a continued positive development on net working capital.If we double-click on some of the key drivers, our net working capital ratio, which is total net working capital at the end of the quarter divided by the last 12 months rolling revenue ended at 19%, slightly below our expectation level of around 20% that we have earlier communicated. And we are expecting to see a little bit of increase also relatively speaking, in the quarters to come. So this is also driven by some one-off effects with slightly lower inventory, slightly lower AR than we would normally see.Next to that, our free cash flow was also positively impacted by lower CapEx ratio of revenue at 4%. Again, this is more timing. We're expecting this to pick up in the coming quarters, but with some of our key development projects only really starting up and scaling up now, it ended lower in the first quarter. So all in all, a very satisfactory development on our revenue line, on our margin, and in particular, also on our cash flow.With that let me turn a little bit to the transformation program. We've communicated earlier, back 1-1/2 years ago, initially when launching the zoom-in strategy, that there was an initial phase of scoping, then a phase of quick wins, and then a phase running from this year and onwards on building the foundation for the future.I'm happy to say overall that with what I've seen, I think a lot of great things have been done already. Still I think from my perspective and from the management perspective, we have more to do on quick wins. And therefore, we will still continue to initiate on quick wins for this year and driving up towards summer while initiating the work that is required to build the foundation for the future.Speaking about the foundation for the future and coming back to our longer-term guidance. Having been part of Ambu for a month now, I'm happy to confirm that we believe still in the long-term guidance and the potential of over time driving a 10% organic growth CAGR and driving towards a 20% EBIT margin with potential trade-offs in potential growth investments over time.We've talked a lot about growth, and Britt has already mentioned some of them. So I will focus more now on some of the drivers for improved margin. We are still seeing a potential for driving a higher gross margin through better pricing. We talked about pricing in anaesthesia and patient monitoring, but also in our manufacturing and distribution footprint, we see potential for further improvements.Even more so, we see potential within our OpEx. But balancing it against on one hand, investing in our commercial organization to drive organic growth, which will be a key focus also going forward while really ensuring that we work more efficiently globally as one Ambu to drive growth while also increasing the margin. I, we are optimistic that we can still deliver on these going forward.And then lastly, let me comment on the guidance. We are maintaining our financial guidance for this financial year, i.e., a revenue growth, organic growth in the range of 7% to 10%, an EBIT margin of 8% to 10%, and a free cash flow of DKK 270 million plus.With a strong Q1 behind us, obviously, we are happy with how we've started the year, but still maintaining the guidance as we still continue to see some risks in terms of how the momentum will continue for the rest of the year, particularly on revenue. And therefore we are leaving the guidance unchanged, though still on a solid Q1.With that, I thank you for your attention and hand over for questions, so handing over back to the operator.

[Operator]

[Operator Instructions] Our first question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, analyst]

So first of all, on the quarter, could you please help us quantify the impact of the NHS reordering here in Q1, just so we get a sense of the tailwind for -- from that one in Q1?

[Britt Jensen, executive]

So I can take that very briefly. So basically, we don't communicate on detailed customer revenue specifically. But we did have last year because, and it has had a quite significant inventory. We were seeing a very low demand from NHS, where NHS are now back fully to a regular order pattern where it's spread over, I mean, quarter-over-quarter. So what you saw a couple of years ago with a big spike, this is not what we are seeing anymore. It's more -- a more, I mean, regular corresponding to demand buying pattern that we see from NHS. So that has normalized compared to what we saw during COVID.

[Rickard Anderkrans, analyst]

And just following up on Henrik's last comment here. You mentioned that even though you had a very strong Q1 on the growth compared to your outlook for the full year. You still sort of added the commentary that you should see some risks and some, I guess, some downsides to the momentum we saw here in Q1. Maybe if you could elaborate a bit more on those risks and, yes, give us some more details on what the moving parts you're thinking about in particular?

[Britt Jensen, executive]

Thanks for that. And I think I'll let you do that, Henrik.

[Henrik Bender, executive]

I'll be happy to comment on that, Rickard. So I think we mainly see 2 areas of risks of potential slowing down momentum on one hand. As Britt also explained, within pulmonology, we've seen a very strong start of the year in part because of this reordering pattern. We expect that to continue into the next quarter here, Q2, but might taper off in Q3 and Q4. So that's one specific area. The other specific areas within our anaesthesia and patient monitoring business where, as Britt also mentioned, we are implementing price increases. This is happening gradually. And so far, we are happy to see that we're seeing fewer volume losses than we expected. But with this gradual price increase still happening, we still see some risks that these volume losses might pick up. And therefore, the combination of these 2 things means that we keep our guidance as it is.

[Rickard Anderkrans, analyst]

Just a quick follow-up, if I could. Could you please quantify the price increase and sort of gross margin improvement in the core business, anaesthesia and patient monitoring now after following these initiatives? It would be helpful to get some insights on, yes, the gross margin uplift and any quantification on the price there.

[Henrik Bender, executive]

I'm happy to take that also. So we don't go in details on the gross margin impact of it, but to give you a sense of the price increases. On an overall level, obviously, this is a mix of price increases on the individual contracts on the country and on the segment. We're seeing a solid single-digit growth in prices on a by region level, netted out by then some of the volume losses we also described before. So I think the honest answer, we will only see the net effect of where we are and the continuous momentum when we're through the next 2 quarters because then we will really see what will be the continuous buying pattern post having implementing these price increases.

[Operator]

Our next question comes from Christian Ryom from Danske Bank.

[Christian Ryom, analyst]

I have a couple as well. The first one is on the aScope 5 Broncho and whether you can talk a bit to how important that has been in the sequential growth development we're seeing here from Q4 to Q1? I think revenues in the Endoscopy Solutions business up by DKK 25 million, about 3%. To what extent that's being driven by new products or whether it's the existing portfolio? And then the second question I have is to the gross margin outlook and say, the main push and pulls we should be aware of for the next quarters relative to where you are here in Q1?

[Britt Jensen, executive]

Thanks, Christian. I'll take the first one and hand over to Henrik for the second one. So we don't disclose the split between, I mean, the different components of our pulmonology revenue, as you know. But what I can say is that we have a good mix of growth in aScope 4 and aScope 5. So aScope 4, as you know, I mean, there were -- the comparables were also lower. But we see a good demand partly also from the flu season that is picking up. And then, when we look at aScope 5 in general, I mean, we are entering a new segment, the Broncho suites with our aScope 5. That has been a process of establishing relationships into the suites. We are seeing good momentum in that. And we are continuing to see a nice growth also of new customers and the pipeline looking promising. We're also seeing some demand in the ICU and OR where this was not originally positioned. So in general, I mean, we are quite -- have quite a high comfort level between our aScope 5, but it's still a gradual improvement. So the split in the growth is between that and our aScope 4.

[Henrik Bender, executive]

Yes. I'm happy to comment on the gross margin outlook, Christian. I think we, as you know, we don't guide on gross margin. So I will not comment on the specific percentage levels, but just repeat what we communicated on Q1 being that the major driver behind this is really product mix. So this will be very much driven by how much will we continue to see growth in our endoscopy solutions, and in particular, as Britt just explained, within pulmonology versus how much will our anaesthesia and patient monitoring business continue to grow. And that we expect will be the main driver for either an uptick or a downtick on gross margin for the rest of the year.

[Operator]

Our next question comes from Niels Granholm-Leth from Carnegie.

[Niels Granholm-Leth, analyst]

Henrik, welcome to Ambu, and perhaps you could provide us with a few examples of the quick wins that you talked about right before. And could you also just explain what you mean by potential trade-offs with growth investments that you also mentioned when you look at the strategy towards 2028.

[Henrik Bender, executive]

Sure, happy to, and thank you for the welcome. So let me start with the quick wins. I think there are a number of things that have been communicated already that we are still in execution mode on. I think the 2 major ones I will highlight is pricing. We highlighted it for anaesthesia and patient monitoring, in particular, where prices are still being implemented and gradually implemented in the contracts. We still see more potential and coming in from the outside, I certainly also still see more potential and that's something we are going to work on both for this year, but also for the coming years. I think the other thing I will highlight is really this point of scale in OpEx where a number of initiatives, I will not go in details now, but are already in motion. Both in ensuring we drive the right OpEx ratio short term, but also in ensuring we lay the foundation for the future scale effects that we have as part of the plan and part of the long-term guidance. So really a continuation, and I would say, in particular, pricing as a key initiative, as a concrete example.Next to that, you can also say, one of the things we have done in the business that are now completed, just to mention one of the things that we're done with, you could say, is that with the review that was undertaken on our distributed markets where we exited 40 markets. That is now completed and as such behind us. Obviously not in the comparison numbers, but in terms of how we've implemented in the organization.Looking ahead and referring to the potential trade-offs. What I specifically was alluding to is that there will be a couple of considerations for long-term guidance in terms of our investments in the commercial organization. And that's also back to my comment on the -- of the full year guidance for this year. We do see a need to continue to invest in our commercial organization. And there is a ramp-up time from when you hire a person to they start delivering the results. So that will mean that there will be gradual investments in absolute terms, particularly on our commercial organization that we will need to do.Other long-term potential trade-off is mainly if we, along the way, see potential growth opportunities in terms of investments to secure absolute EBIT improvement, something we also communicated at our Capital Market Day. And therefore, it's more a matter of what will be the timing of such potential opportunities. It's still way too early days to be concrete on this, but that is specifically what I'm referring to.

[Britt Jensen, executive]

Yes. And maybe I can also add to that one because this was also how we presented our long-term guidance at the Capital Market Day to highlight that around the 20% EBIT margin is where we believe that we, as a company, should be and what we should aim for. At the same time, because growth is our #1 priority, because we are making our way into creating a new single-use endoscopy category, we wanted to make sure that we don't lock ourselves into delivering on a 20% margin, if there are obvious growth opportunities that when we come to year 5, can help us further accelerate growth in year 6 and 7. So that's also part of the reason why we have this caveat that we are putting in. And then we have clear internal plans that we are tracking well against in how we, in the 5-year period, will reach the 20%, which, again, this is where we believe we need to be. But we are a growth company. And we want to give ourselves flexibility to invest, which is also -- or should also be in the interest of our creating shareholder value.

[Niels Granholm-Leth, analyst]

And then just lastly, your R&D CapEx was unusually low in this quarter. Is this supposed to continue for the coming quarters?

[Henrik Bender, executive]

So I'm happy to comment. So I think the short answer is no. As I briefly commented then, this was mainly driven by slower ramp-up of certain products and product development initiatives. So we are expecting this to trade up again towards the historical levels of more like 7%, then -- or 6% to 7%, then the 4% we had in the quarter.

[Britt Jensen, executive]

And I think maybe also worth noting here that we invest mainly in R&D in the endoscopy area. And given that, well, now around 60% of our revenue in the quarter; that also means that if you look at our R&D investments as a percentage of the endoscopy revenue, we are well above the 10%. So that also means that we're still quite confident in that we are investing into a new innovation, which we also believe we should continue to do. But I agree with Henrik, around that level of 7% is where we right now believe is the right place to be.

[Operator]

Our next question comes from David Adlington from JPMorgan.

[David Adlington, analyst]

Just one on freight, please. I just wondered how much freight was a tailwind possibly in the quarter to margins and also how you think about freight rates evolving from here?

[Britt Jensen, executive]

Yes.

[Henrik Bender, executive]

I'm happy to take that. So freight ways being a potential headwind or tailwind, I think 2 comments. One, of course, with the situation in Red Sea, there is increases on freight costs like-for-like and that we are also seeing in the numbers. That said, as you will also see our selling and distribution costs are actually down versus last year, because we have had an explicit focus on a change in our distribution setup with more sea freight and less airfreight. So in net-net, we are actually in absolute terms down on distribution costs versus last year at this moment. It's obviously something we are keeping a very close eye on also for the future. And some of the areas where we might see a little bit of risk also for the rest of the year with potential higher distribution costs, given the world situation.

[David Adlington, analyst]

Are you able to quantify the potential headwinds in the rest of the year?

[Henrik Bender, executive]

We don't quantify that.

[Britt Jensen, executive]

But you can say, of course, the setup we have now where we are still ramping up in Mexico and where we from Mexico are supplying our U.S. market, which is roughly half of the revenue. You can say that's, of course, where we then are less affected. And then, I mean, it's primarily Malaysia and then also China, where we are supplying to Europe. That's, of course, the part that is the most affected.

[Operator]

[Operator Instructions] Our next question comes from Yiwei Zhou from SEB.

[Yiwei Zhou, analyst]

It's Yiwei from SEB. I have 3 and I will take one at a time. And first question is a follow-up on the aScope 5. Britt, you've previously mentioned that it has been the best launch in pulmonology. Could you comment if you see the pattern has continued?

[Britt Jensen, executive]

Yes. I mean, I think we continue both, when we look at -- I mean, the continuous, I mean, acquisition of new customers and the growing revenue we have within -- I mean, at the customer sites that we are and combined also with the pipeline. I think we are quite pleased about the traction and how we are moving forward. It's also very clear that we continue to have a very strong value proposition. I mean, we -- late in the last financial year, we had the full complete range of all the different sizes approved. So that has, of course, also been something that we -- I mean, that we are starting to see some increased interest from some customers who are waiting for the full offering to start buying. So we are quite confident moving into this fiscal year. And as we look ahead, that this is continuing to have solid growth.

[Yiwei Zhou, analyst]

And can I just also follow-up on this in relation to the NHS order? NHS has been a big acquirer of the aScope 4 and other pulmonology products. And could you say if aScope 5 Broncho has also been included in this order now?

[Britt Jensen, executive]

Yes. We are not commenting on the specific products that specific customers are buying. But as I also said before, in general, and also when it comes to pulmonology, I mean, we had the huge swings with NHS where they bought a huge amount that was on inventory. And that has completely been cleared out now. So we are back to normalized ordering pattern where we also have -- I mean, compared to pre-COVID a much more, I mean, spread over the quarters where they buy more in relation to the demand that they have rather than that they sit on large inventories, which was more the pattern of the past. But I cannot comment on the split of the aScope 4 and 5 on a specific customer.

[Yiwei Zhou, analyst]

And my next question is on cash flow, maybe a question to Henrik, and Henrik also, welcome to Ambu. So Q1, you've already generated DKK 135 million. And it's already 50% of your free cash flow guidance and we still have 3 quarters here. Is there any cost headwinds for you to generate less free cash flow in the coming quarters? You probably have mentioned the investment in the R&D will increase. Is there any other headwinds we should kind of be looking for?

[Henrik Bender, executive]

Good question and fair given our strong start. So just reminding us all, the guidance is plus DKK 270 million. I think there are 2 main drivers behind why we are not changing the guidance there. One is, as you mentioned yourself, CapEx was low relative to revenue for the first quarter. As we said, we are expecting that to pick up and as for the full year and closer to what we have been historically with a disproportion of higher investment in endoscopy versus A&PM. So that's one driver.I think the other driver, which in absolute terms are probably even bigger here, is net working capital. So as I said in my update, both inventory levels were lower after Q1 and specifically our AR levels were lower than usual. And we are expecting those to move a bit more back towards the historical level of around 20% versus our 12-months rolling revenue.So on both these 2 items, we expect over the next quarter to see a gradual move back and that will have a negative in those quarters' cash flow effect. So that's why we're keeping the guidance.

[Yiwei Zhou, analyst]

And my last question is on OpEx to sales ratio. I noticed there has been around 49% of sales over the 3 quarters, last 3 quarters. Is it possible to provide a guidance -- softer guidance for the coming quarters?

[Henrik Bender, executive]

We don't provide guidance on OpEx percentage levels. So I think the only thing I would comment is to say, if we look at it long term, as I showed on our long-term guidance, we are expecting to continue to see scale effects on OpEx and a gradual move further down to drive the increased EBIT margin target of reaching the 20% that we believe is the right level for Ambu in the long term.

[Operator]

We have a follow-up question from Niels Granholm from Carnegie.

[Niels Granholm-Leth, analyst]

Could you talk about if your volume growth in number of endoscopes shipped in the quarter was higher or in line with the organic growth recorded for the endoscopy solutions division? And then, secondly, when it comes to your ureteroscope, there are already a couple of scopes on the market on TPT. Would you be able to utilize the same TPT code when your ureteroscope is cleared on the U.S. market?And in connection with your ureteroscope launch in the -- you would obviously have a broader assortment within urology. Would you expect a response from some of the bigger players in ureteroscopy; Boston, STERIS, et cetera, to go into cystoscopy?

[Britt Jensen, executive]

Yes. I think I can comment on this. So first of all, we don't provide -- I mean, I know we did in the past. But because that also caused a lot of confusion, we don't provide volume numbers on the different endoscopes also because, again, as you are well aware of the different values of the different scope, so I cannot comment on the details on this. Then on this TPT code and your questions on urology, so we believe that we should be able to apply this TPT code when we have our ureteroscope approved. That's at least our -- where we have some evidence and confirmation right now. So I think it's something that we're, of course, very excited about and believe we can leverage a little uncertain about the revenue impact.When it then comes to the -- I mean, the question on the cystoscope and what we expect. So if we look at the ureteroscope segment, basically, there are 2 main players in that segment that has a meaningful share today when we talk ureteroscopy. And that's Boston Scientific and it's a Chinese player, [ Pusen ].What we do, and the dynamics are slightly different in U.S. and Europe, where Boston has a significantly larger share in U.S. and Pusen has a very limited share in U.S. and then it's a little the other way around in Europe.When we look at the cystoscopy, it's very clear. I mean, we were, again, here the first with the cystoscope. We do see activity from some Chinese players to enter this market. We also saw an announcement last week that we are looking into where Boston made a collaboration with an Asian company on a cystoscope. We have very little information on that right now as it only came out a couple of days ago. But I think, for us, I mean, it's back to the point of that, yes, I mean, we have come in and created an attractive, high-growing, single-use category also here with our cystoscope.So as we see in pulmonology, we are prepared. And we do expect competition also coming into this segment. I think we very much believe that our combination of having a strong value proposition with the cystoscope and ureteroscope being used on the same system being attractive.And this is for everything we see now, not the case with the collaboration that Boston has because it's a very different supplier. So in general, we are, of course, doing what we can, never to underestimate competition. But at the same time, also build on the stronghold that we have in the market and, again, continue to improve and expand our offering.

[Operator]

Ladies and gentlemen, this was our last question.

[Britt Jensen, executive]

Thank you. Then I'd like to thank everyone for joining the call this morning. Thanks a lot for great questions and have a good rest of day.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call. And thank you for participating in the conference. You may now disconnect your lines. Goodbye.