Ambu A/S

CSE:AMBU B

Earnings Call Analysis

Ambu Delivers Steady Growth Amid Transitions

Ambu showcased resilience with a Q2 year-over-year organic growth of 4% and reported revenue increase of 6%, holding steady at an EBIT margin of 3.9%. The company anticipates a slight acceleration in growth for the second half of the fiscal year, maintaining its guidance for organic revenue growth at 5% to 8% and an EBIT margin of 3% to 5%. Key factors included the relaunch of their VivaSight 2 product, CE Mark approval for aScope 5 Broncho, and a strong performance in urology and ENT within Endoscopy Solutions, especially in North America. Ambu raised capital to reduce leverage from 3.9x to 1.6x EBITDA, allowing investment in growth avenues amidst macroeconomic uncertainties. Net working capital improved with inventory reductions and better cash collections, signaling a move towards a more normalized state. As part of its sustainable growth strategy, Ambu is driving initiatives to become more customer-centric and develop a scalable business model, aiming to harness fast-growing market opportunities, including a potential DKK 15-20 million single-use endoscope market within five years.

Strategic Commitment towards Growth and Customer Centricity

Ambu's management, under CEO Britt Meelby Jensen and CFO Thomas Frederik Schmidt, has mapped out a strategic direction focused on reinvigorating growth and placing customer needs at the forefront. With a commitment to becoming the most customer-centric player in their field, Ambu is eyeing a trajectory of robust and sustainable profitable expansion. In Q2, the 4% organic and 6% reported growth, alongside an EBIT margin resonating with expectations at 3.9% for the quarter and 4.9% for the half-year, set the stage for this narrative.

Overcoming Healthcare Market Hurdles

The healthcare sector is showing signs of bouncing back to pre-COVID activity levels, albeit with a slight reduction driven by persistent staff shortages and hospitals grappling with financial constraints. These factors indirectly impact Ambu's business, as procedure volumes are a critical growth driver for the company.

Innovation and Execution as Strategy Pillars

Ambu's strategy hinges on pushing innovation and executing across their value chain. Triumphant examples include the successful launch of the aScope 5 bronchoscope and the relaunch of VivaSight 2, expanding their portfolio's market opportunity. Similarly, in GI, a new gastroscope with an increased working channel indicates Ambu's commitment to therapeutic innovation. A highlight from Q2 is a notable shift towards a positive cash flow attributed to strategic inventory reductions.

Fostering People and Commitment to Sustainability

For Ambu, investment in human capital and sustainable practices remains a strategic priority. A reshuffling within the executive leadership team aims to align competencies closer to the strategic goals. Moreover, Ambu is making strides in product and packaging sustainability, with an eye on bioplastics, recyclable packaging, and aiding hospitals in waste management.

Market Potential & Segment Dynamics

Ambu is tapping into a significant market, estimated at 23 million procedures, that could harness their endoscopic solutions. The fiscal year is expected to bring a structured plan to achieve net-zero emissions, bolstering their sustainability commitments. Segment-specific growth varies, with 11% in endoscopy but a decline in anesthesia stemming from previous quarters' over-performance. Still, an 8% increase is observed in patient monitoring, fueled predominantly by cardiology in the U.S..

Financial Health and Capital Raise

Ambu stands on firmer financial footing after a capital raise, trimming its leverage from 3.9x to 1.6x EBITDA and injecting flexibility for investment into growth opportunities. Geographically, North America remains a strong growth driver, while Europe shows a minor decline, and the rest of the world posts healthy increases. An improved OpEx ratio counters some gross margin pressures caused by higher production costs and mix. Notably, inventory levels and trade receivables have been deftly managed, establishing a positive Q2 free cash flow reversal from Q1's deficit.

Guidance and Market Outlook

Ambu maintains its guidance for the fiscal year, projecting an organic revenue growth of 5% to 8% and an EBIT margin before special items of 3% to 5%. This outlook is supported by quarter-over-quarter accelerations in growth and a strategic approach to operational scaling aimed at profitability improvements. Acknowledging the transitional nature of the current year, Ambu anticipates gross margin pressures to persist due to input costs and product mix but retains a confident outlook for their market positioning, particularly in the untapped GI segment.

Earnings Call Transcript 2023-Q2

[Britt Meelby Jensen, Chief Executive Officer]

Good morning, everyone. And welcome to this Q2 2022/2023 Results Call with the Ambu. My name is Britt Meelby Jensen. I'm the CEO of Ambu. And I'm joined today by Thomas Frederik Schmidt, our Chief Financial Officer.

So the agenda for this meeting is that I'll go through an update on the business, I'll hand over to Thomas to take you through the financial results, and then we will, as usual, finish off with the Q&A session.

But let's dive straight into the results. So, in Q2, we delivered an organic growth of 4%. And if we look at the reported growth, this was 6%. And overall, for the first six months of our fiscal year, we delivered also 4% organically and 8% reported growth.

Our EBIT margin is in line with our expectation, reporting 3.9% on the quarter and 4.9%, on the full half year period.

If we look at the market, and let me put a few comments on the health care market in general, what we do see out in the hospitals where activity levels is a main driver for our business, we do see the activity level coming back to close where it was pre COVID. However, in most countries, slightly below the pre COVID levels in terms of number of procedures. And that slightly lower level is much driven by the staff shortages that we see, both in Europe and in the US. And then we also continued to see our customers being challenged on their financial results.

We launched our ZOOM IN strategy in November, and we are progressing well in terms of delivering on the strategy. Our focus on the strategy is to be the most customer centric in our field. And by doing that, and by delivering on our strategy, we will deliver strong profitable growth.

So if we look at the four areas, on our focus on innovative solutions, we made progress in particular in two areas over the quarter. The first one is pulmonology where we, end of March, relaunched VivaSight 2 which we recalled voluntarily in May last year. We also achieved a CE Mark in Europe on the smaller sizes of our aScope 5 Broncho, which is expanding the market, and we do expect also clearance in the US relatively soon for this range of product, which will further support the aScope 5 bronchoscope that we launched last year.

Within GI, which is also a focus area for us, we announced that we have a new product in development in the quarter, gastro large – a gastroscope with a larger working channel that allows more therapeutic use. So this is one that we excited to have in development and where we have not communicated on the launch timelines.

Our focus is very much on execution across the value chain. And a large part of this is our transformation program that we launched with the strategy. We are overall progressing well with the strategy and with the transformation program. A major highlight I will say is that we returned to slight positive cash flow in the quarter, driven by the inventory reductions, which is part of the transformation program.

We continue to be very focused also on pricing with a number of initiatives, although we still have some restrictions in the part of the business that is contracted. And then, we are focusing on streamlining the portfolio. So, basically, looking at some of the areas where we have better products that we can offer to our customers. And looking into some of the offerings that we have in selected smaller geographies.

Then on the people and culture side, this remains a key focus because we are very committed to our people who are delivering the financial results. And as a natural part of the strategy that we launched mid-November, we, a couple of months ago, did some changes to the executive leadership team to strengthen the capabilities and the competencies to deliver on our strategy. I'm therefore also very pleased that, earlier this week, we had Henrik Birk joining us as the new chief operating officer who will be responsible for all our operations globally.

Then, finally, stainability is a very important part of our strategy as well. When we hosted our Capital Market Day end of March, we announced some of our 2025 target when it comes to our products and packaging. We focus on using more bioplastics in our products, we focus on the packaging being fully recyclable, and we focus also on helping our customers address the challenges with waste by making sure that we are also responsible in how we get rid of the products in the hospitals. These are some of the initiatives. But it goes broader than this when it comes to our commitment.

The second focus we have is on net zero emissions. And that's where we are, this fiscal year, developing a detailed plan on how we will achieve that, which entails a number of relevant initiatives.

So let me dive into the different segments now. And I'll, for a change, with Anaesthesia and Patient Monitoring. So, overall, when we look at this area, we saw a decline starting with anesthesia of 11% in the quarter. This comes on the back of quite – a couple of quite strong quarters. Last year where we came out of the supply chain challenges, so we were able to clear both our backlog and we also saw, in particular in Europe, some stockpiling last year, driven by the geopolitical uncertainty that increased just over a year ago.

When we then look at our Patient Monitoring business, this business, we saw a growth of 8% in the quarter. And a key driver of this was our cardiology business in the US that developed very strongly.

Turning to Endoscopy, we delivered 11% growth in the quarter for this business, leading to a 7% growth when we look at the full half-year period. This was driven heavily by growth in Cysto and ENT. And also, we saw for the first time in a couple of quarters, growth in our bronchoscopy business.

If we look at pulmonology then where bronchoscopy is the most part of – you can see here that that is actually declining by 3% in the quarter versus 10% for the full half-year period. So when I talk about growing the bronchoscopy business, you have to remember how we report on this pulmonology category, we also include VivaSight, the product that we voluntarily recalled last year in May and that we are just relaunching end of March. So that is what drives the overall minus 3%.

Having said that, and looking at our new product, the aScope 5 Broncho, we continue to see very strong performance and satisfaction with the performance among our customers in the bronch suites doing the advanced procedures. So we are continuing to see a growing customer base here. And when we combine that with the launch of the smaller sizes in Europe and coming up later in the US, this puts us in a very strong position in this area, specifically.

Broader in bronchoscopy, we do continue to see some level of competition as we have communicated earlier. And this is where the combined portfolio with aScope 4, aScope 5, VivaSight and then also the video laryngoscope which we have in development will be a very important part of this full offering that we have in this segment.

Looking at the remaining part of the endoscopy business, so the one that excludes pulmonology, so this is urology, ENT and GI. Starting with urology, we had a very strong momentum. And the total category here grew by 36% in the quarter.

We see very strong growth with our cystoscope in Europe, but in particular in the US. And when we look at the urology space, we also have our ureteroscope in development, which will be an attractive product for us to launch, in particular because a big part of this market has already converted to single use.

Then when we look at ENT, this had a strong quarter, in particular again here in the US, and where we see our fees indication supporting the expanded clinical use.

And then finally, when it comes to GI, this is the area that we stepped into the latest, but also the biggest market, so an area that we continue to be very focused on.

Our key focus right now is our gastroscope where we are continuing the launch and rollout with that product where we are present now in all major target markets. And we are also receiving very strong feedback on the performance of the product among customers.

So if we take a step back and look at the single use market, I would like to show a picture that we showed at the Capital Market Day just to recap the market that we are playing in with our endoscopy solutions.

So when we look at the big market, there's 150 million to 200 million procedures that are done annually worldwide with endoscopes. And when we look at our target markets, this is roughly 100 million.

What we aim to do was to look at the pipeline that we have, the markets and the near term pipeline, and this is what you see on the left hand side here. And when we map that across the different segments, we estimate a total of 23 million procedures is what we believe that we can address with this portfolio over the coming years.

If we assume, moving to the next part of the slide, these 23 million procedures are fully – that this is fully penetrated using a blended ASP, we see a total market potential of DKK 45 million. However, we believe that the uptake in these segments of single use endoscopes takes time. We also believe that the uptake will be driven at different speeds across the different segments.

So when we try to put our best estimate of how this will evolve, you'll see the pies or the Harvey balls on the right hand side where you can see how we estimate the penetration to be in these markets over in a five-year timeframe.

And then when we also add that this is the market that we are playing in, together with the competition that is coming in, we estimate that this total market in five years will be roughly DKK 15 million to DKK 20 million.

So with this, and before I hand over to Thomas, I'd like to conclude with saying that these numbers, at least to us, documents that we have a fast growing market potential also with very clear customer needs that we see when we are out there every day.

We also get confirmation every day from our customers that we have a leading and very attractive portfolio. And we believe that the focus areas that we have with our transformation program and other initiatives to develop a scalable business model is what will bring us to deliver the strong, sustainable, profitable growth that we're aiming for.

So this concludes my business update. And I'll hand over to Thomas to go through the financials.

[Thomas Frederik Schmidt]

Thank you, Britt. And also a very warm welcome from my side. And I'm glad to be able to now present the key financial figures for the Q2 of our financial year.

It's been a good second quarter, as Britt also has mentioned, with a quarter where we delivered 4% organic growth and 6% reported revenue growth with a positive impact coming from our exchange rates, the foreign exchange rates.

For the half year, as also mentioned, it's also 4% organic growth and with a reported growth rate of 8%. Again, also here, a positive impact from foreign exchange rates.

Another key event in the second quarter has surely been our capital raise. So, on March 24, we completed a capital raise where we strengthen our capital base of around about 5% of our total share capital. This has enabled us to reduce our financial leverage faster than we planned and also has enabled us with enough flexibility from a financial and operational point of view, which again gives us some flexibility to invest into attractive growth opportunities.

The financial leverage has been reduced from 3.9 times EBITDA in the Q1 to now 1.6 in the Q2, and that certainly gives us also a buffer in terms of the macroeconomical uncertainty that we operate in. And I'm very pleased with what we have accomplished here from a balance sheet strengthening perspective.

Looking at our revenue and looking at our revenue by geography, North America, which is our biggest region, showed organic growth of 8%, driven by Endoscopy Solutions. And within Endoscopy Solutions, record demand for our products within urology and ENT. And also, within Patient Monitoring, we've seen high growth rates coming from cardiology.

This is certainly also very pleasing to see and is also a strong indicator of the benefits that our single use endoscopes bring and how that actually also resonates well with our customers.

Europe showed organic decline of 1%. Britt mentioned that just earlier, mainly driven by Anaesthesia where we had high comparables last year coming from backlog or reducing backlog in Q2 last year and also stockpiling due to geographical uncertainties or political uncertainties last year.

In rest of the world, we have shown organic growth of 7%. And similar to North America, this was also driven by high demand for our urology and ENT business and also solid and high growth within Patient Monitoring, and more specifically also there within cardiology.

4% revenue growth has resulted in that we achieved an EBIT margin of 3.9% for Q2, which is comparable with 4.2% from the Q2 last financial year. The decrease in EBIT margin is mainly driven by a reduction in gross margin. And the gross margin is due to higher input prices, but also continued ramp up of our Mexican production site. Whereas a slightly better mix have somewhat offset that increased cost from a gross margin perspective.

If we compare the gross margin with Q1, there is a further deterioration or decline in our gross margin in Q2 of 2.7 percentage points, which is mainly driven by indirect production costs, as we've been very successful, and I will come back to that later in reducing our inventories.

The decline in gross margin has, to a large extent, been offset by improvement in our OpEx ratio, and OpEx ratio, where we've improved by 1.5 percentage point versus Q2 last year.

Our cost reduction program has certainly helped in improving our OpEx ratio, and also a very good and tight cost management throughout the year. So in Q2, we've maintained the cost from an OpEx ratio perspective of 52% due to, as mentioned, cost consciousness, allowing us far better control of our finances. So that is very pleasing also to see. And it's certainly also testament to the focus that we have put into this.

As we've also mentioned in the recent Capital Markets Day, scale in our OpEx is one of the key drivers for us to improve our profitability, and it will therefore remain our focus also in the remaining year and also in the following years to come.

Another key focus is cash flow, has been cash flow, still will be cash flow. And we have had a very strong focus on that throughout the year. And also in Q2, we now start seeing how those efforts are materializing. So we've posted positive free cash flow for the quarter of DKK 21 million versus a negative cash flow in Q1 of DKK 147 million. So it certainly also shows that our free cash flow in relation to revenue now shows the right stats showing the right trajectory in Q2.

The improvement is mainly coming from improvement in our net working capital. And more precisely in the net working capital, a good and solid reduction of our inventories. We've reduced our inventories by DKK 136 million versus last financial year. And we start moving into a more normalizing level of that. Still work to be done and still focus. And we are coming down from a high level also.

Furthermore, trade receivables has also been reduced. So we have been looking at our processes and how we more efficiently could also collect cash. And within Q2, we've also improved our trade receivables and cash collection by DKK 76 million compared to the financial year 2021/2022.

So achieving a lower net working capital, as mentioned, also reducing our inventories are starting to show, but still will be a key focus of ours moving forward. We still have a net working capital at a relatively high level. But as you can see also here, inventories certainly moving in the right direction. And it certainly is a key focus. And we remain committed to improving our cash flow for the year by DKK 350 million to DKK 450 million versus the financial year 2021/2022.

That brings us to our financial guidance for the year. And we maintain our guidance for the year. It's important to yet again note that we are in a transition year in this year for Ambu.

Our guidance for the organic revenue growth we confirm to be 5% to 8%. We have also earlier mentioned that the growth is expected to accelerate quarter over quarter, which also means that we do expect a slightly higher growth rate in the second half of this year.

EBIT margin before special items, we also confirm according to the guidance of 3% to 5%. The EBIT margin as one of the assumptions is also that the gross margin is expected to decline by roughly 2 percentage points compared to last year due to input costs, Mexico ramp up and product mix. And that will also impact the EBIT margin in the second half of this year and also due to some postponed investments that we will do in the second half of the year. But EBIT margin, as mentioned, confirmed between 3% to 5% of sales.

With that, thank you very much. And we now move into the Q&A session of our presentation. And I therefore hand back to our operator to navigate and take the first questions.

[Operator]

[Operator Instructions]. And the first question comes from Christian Ryom from Danske Bank.

[Christian Sørup Ryom, Danske Markets]

I have two, please. So the first one is to you, Thomas, and is regarding the gross margin outlook for the next couple of quarters. So can you help us a little bit with the pushes and pulls for the margin relative to this 55.8% that you delivered here in Q2?

And then the second question is with respect to your pulmonology sales in the quarter and whether the year-on-year growth in bronchoscopy sales can be attributed to a contribution from the aScope 5.

[Britt Meelby Jensen, Chief Executive Officer]

I think I can take the second question, but I think, Thomas, you can start with the first.

[Thomas Frederik Schmidt]

For the full year, as mentioned, as also in the assumptions around our guidance, we do expect that the gross margin will decline by roughly 2 percentage points when we compare it against last year. And a number of effects play into that, as mentioned already. Certainly, input cost is one of those when we compare against last year, Mexico ramp up, which we continue to also do, also plays into that. And then also, the margin. The mix, we further alluded also to that especially some of our newly launched products, of course, in the ramp up phase, also comes with lower margin compared to the remaining part of our business within Endoscopy Solutions.

On top of that, as you've also seen, and we've talked about in the Q2, we have also seen impact from indirect production costs also coming in. And that will certainly also continue as we continue to have full focus on reducing our inventories in the second half of this year. So that will also play into effect.

[Christian Sørup Ryom, Danske Markets]

If I may just quickly follow up, so when we talk about Mexico ramp up and mix effect, is that expected to be an incremental headwind in the second half relative to the level that we're seeing in Q2?

[Thomas Frederik Schmidt]

Yes. To some extent, yes. That's in our planning for our expectations for the second half of this year.

[Britt Meelby Jensen, Chief Executive Officer]

So you can expect our gross margin to be roughly at the same level throughout Q3 and Q4. And then maybe to come in on the other question on pulmonology, so on bronchoscopy specifically, so still very much the vast majority of our bronchoscopes sales remains aScope 4. So, we do, of course, continue to see increasing revenue as we should with aScope 5. We continue to see an expansion of the customer base and also the number of customers rebuy. But, again, as we have talked a bit about before, it is a gradual uptake in the bronchoscopy suites where we have not been before where they have not used single use before. So this is of course – the sales cycles are taking some time. This is in line with what we also talked about it at the Capital Market Day, but it is a contributor to the growth. But we also, at the same time, have had a good quarter and a good half year on our aScope 4 business, which remains a focus area.

So, the overall take away from the bronchoscopy or the pulmonology business is that the bronchoscope sales is back to growth, I think that's worth noting, a lot of that by strong aScope 4, is our completion of our portfolio with our aScope 5 smaller sizes and the VivaSight relaunch which should contribute to continued growth. And then it's the video laryngoscope that we have in development that we have not talked about a launch date for it yet, but which is a high priority project.

I hope that answers your question, Christian.

[Operator]

The next question comes from Rickard Anderkrans from Handelsbanken.

[Rickard Anderkrans, Handelsbanken]

Two for me, please. First, if you can quantify the statement of increase in customer base and perhaps also quantify anything on the share of customers rebuying in the GI segment, you seem to highlight that things are moving a bit slower there. So it'll be interesting to just to get a sense of the magnitude of the sort of sequential improvements and expansion there.

[Britt Meelby Jensen, Chief Executive Officer]

We don't comment specifically on the customer base and number of customers. There's some similarities when we look at the aScope 5 launch and also the gastroscope launch. The first one, which is very similar, is that we get very strong feedback from the customers on the product performance. So that is, of course, something that is very important because we can see that they like the product, it does the job for the procedures.

Then also, we continue to see quarter-over-quarter revenue growth also, as we would expect. And then secondly, I think it's very important. Again, this is about – it's a new customer group. That also means, when we look at the reported revenue on Endoscopy Solutions, excluding pulmonology, GI continues to be a smaller part of that revenue because it does take time for us to go in and get familiar with how we sell gastroscopes, very much in line with how it happened when we launched the aScope. It was a gradual uptake where it took us six years before we saw really a meaningful revenue. We don't necessarily expect it to be that long, but we expect a continued positive trajectory.

I think the market is, in general, embracing single use endoscopes much better than we saw in the past, and that we do see a spill over and a familiarity in GI. Just coming back from the big endoscopy GI conference in Dublin a couple of weeks ago, it's very clear that we have a well-established name and recognition among key opinion leaders and key gastroenterologists. So I'm very confident in our ability to deliver. And with the size of the GI market and the potential, we have to be there. As we have also talked about before, that launch phase is taking time and it does also take time to get the meaningful revenue that will move the needle.

So I hope that clarifies. And I know I'm not addressing your specific question for customer numbers.

[Rickard Anderkrans, Handelsbanken]

Second question, you seem to have quite tough comparables in both Anaesthesia and Patient Monitoring from looking at Q3 from last year. So should we expect negative organic growth in these segments in the next quarter? It just would be interesting to hear a little bit how we should think about the comparables just so we don't get caught sort of wrong footed here moving into the next few quarters?

[Britt Meelby Jensen, Chief Executive Officer]

Yeah, no. Thanks for asking that. And I think it's fair to assume that we will see the revenue for that part of the business remaining roughly. So, Anaesthesia, Patient Monitoring remaining roughly at the same level as we have seen in Q2. Again, back to that it is quite high comparable, strong comparable, strong quarters from last year.

[Operator]

And the next question comes from Martin Brenøe from Nordea.

[Martin Brenøe, Nordea Markets]

First question is regarding the flu. Can you maybe just give us a little bit of some qualitative numbers on how the flu impacted the quarter because it delivered positive growth on the bronchoscopy business despite the flu season being pushed from Q2 into Q1.

And just on the gastro, can you maybe just help us a little bit understanding? It's a slow trajectory. But how slow are we talking about? Are you selling hundreds or thousands or tens of thousands would be very helpful to understand also.

[Britt Meelby Jensen, Chief Executive Officer]

If I start with the flu season, so as we talked about before, it did spike in Q1 as we previously talked about, and I think when we look at the flu numbers from Q2, we saw a fairly modest level, but still also – as we've seen in the earlier years, but overall a limited flu impact, I would say, when we look at the US market in the quarter. That came primarily in the first quarter of our fiscal year. And then we saw a little more flu in Europe in the quarter, but still not at any spike as we as we saw in Q1 in the US.

In terms of GI, my comments is not – it's not – and I'm just judging from your question to say that this is an area that we are disappointed around that we don't see a strong traction. It's more to balance in terms of when we look at the bigger picture. And I'm not going to comment specifically on number of scopes that we are selling, but we are seeing a fairly satisfactory number when it comes to customers that are buying for the first time. We're also seeing that customer base continuing to grow. We are also seeing the number of customers rebuying continuing. So we actually quite confident with the traction that we see.

As we went into this, I think we have had our learnings when we came out with the duodenoscope. The gastroscope is a very different story when it comes to the product performance that it's working. So it's for us a question of making sure that we continue to be out there, addressing the product with the resources that we have available. And that's very clear, as you know, from last year. We had a couple of years back ramped up a lot when it came to our GI sales force. We brought that down. And now we are having a more balanced sales force addressing balancing across the different segments that we are in.

And then also being flexible. So we can go after the opportunities. There's no doubt that we see this being a big market with high potential. Our focus when it comes to GI is very much on the gastroscope. And we have no competition in the segment at this moment. So we go as we have talked about before with a targeted approach of the segments where we see the biggest need and we learn from that and expand.

I am in general very positive about this. It's just taking time to evolve. But as long as we're on that continuous slope with increasing customers and increasing rebuying, which we are seeing, I'm very positive. At the endoscopy conference, we also showcased, of course, the product and also our gastro large that we have added to the portfolio with very strong feedback. So I am quite confident for the future for us in this area. And it remains important.

[Martin Brenøe, Nordea Markets]

Can I just squeeze one more question in just to you, Thomas. When I look at the margin guidance for the second half of the year, you're already trending towards the high end of the guidance in the first half. In the second half, you expect to have a step up change in the overall growth of the company. You now say that you expect flat gross margin. So why don't you expect any leverage on your OpEx in the second half of the year? Because that must be what should drive some margin equity – some margin expansion for the year.

[Thomas Frederik Schmidt]

First and foremost, when we do look at the margin, an therefore, of course, your comment relates to the EBIT margin, of course, it will be lower in the second half of the year. If you take the two quarters that we're in, you can also see that the quarter one and quarter two, there's a difference in the two quarters that we have reported up until now. So the continuation is impacted by, as I mentioned before, the gross margin. And a big part of that will also be that we further and continue will see impact also from indirect production costs when we are and will continue to reduce our inventories over the coming months and quarters. So that puts a bit of a pressure, if you will, on the gross margin.

And on the other hand, we will be working with OpEx, of course, but can't compensate that in full for the remaining half of this year. So that's why we expect that we see half year over half year slightly lower margin in the second half of the year.

[Operator]

The next question comes from Niels Granholm Leth from Carnegie.

[Niels Granholm Leth, Carnegie Bank]

My first question is on your growth rates for the endoscopy, other categories, so the ENT, urology, et cetera. So the growth deceleration that we saw in this quarter, is that effectively explained by difficult comparatives to last year or why is it that growth rates keeps trending down in this segment?

My second question would be on the one-time cost that you incurred in administration costs. Could you provide a little bit more color on the level of those one-time costs?

And then a third question on potential one-time cost included in your net financials in the quarter.

[Britt Meelby Jensen, Chief Executive Officer]

I think the two last questions are for you, Thomas. Maybe I can start with the first one. When we look at the growth in Endoscopy Solutions excluding pulmonology, which I think was your question, we have a strong growth in the quarter of 36%. And as we say, it's in particular we see the very strong growth coming out of the US. It's on the urology business where we are seeing, with the cystoscope, both a continued expansion in terms of the customer base and also where we see the amount that our customers are buying is continuing to increase. I think that continued growth, even that we are expanding our base or percentage wise, that will, of course, not continue to be equally high. I think that that looks to us very promising.

A bit similar when it comes to ENT. We got the fees indication last year. So that's where we continue to also see a strong growth in that area. And then we talked about GI before that is still a smaller part of that segment.

I would say, overall, I'm comfortable taking time, as we have talked about in the call today, but I think that's how we will continue to expect the strong growth in this part of the business. And then, that combined with that we're getting back to growth rates in pulmonology, I think puts us in a good position in Endoscopy Solutions, which is our main focus.

[Thomas Frederik Schmidt]

Niels, to your two questions, both to some extent, related to one-off costs, one being, as you asked around in our OpEx cost. And I assume you refer to the cost that relates to the restructuring that we did within the executive leadership team. It is exactly one-off costs, obviously not something that will reoccur in the second half of this year. But it's also not a number and a figure that we will communicate. So I can't talk and won't talk too much more about that, other than to say, yes, it's a one-off and it's certainly not something that we expect in that nature to see, of course, due to the one-off nature.

In the net financials, we have also – yes, had some one-offs as we've obviously done our capital increase. And to the furthest point, we've used that to reduce our net debt situation. And that has, of course, also come with some one-offs in our net financials that we, on the other hand, will benefit from in the second half of this year. So, the net impact in Q2 was roughly on the net financials were around DKK 15 million that we then won't be seeing and actually benefiting from in the second half of this year.

[Niels Granholm Leth, Carnegie Bank]

Is the one-off DKK 15 million or is that number the run rate?

[Thomas Frederik Schmidt]

What sorry, again?

[Niels Granholm Leth, Carnegie Bank]

So is the DKK 15 million the underlying run rate per quarter in net financials…?

[Thomas Frederik Schmidt]

That was the one-off. Yes.

[Niels Granholm Leth, Carnegie Bank]

So, the underlying run rate for financials per quarter would be to the tune of DKK 10 million?

[Thomas Frederik Schmidt]

Correct.

[Niels Granholm Leth, Carnegie Bank]

Can I just add one more question about your number of employees. Back in August last year, you announced a staff reduction of 200 people. But if you look at the number of employees, it's now down from 5,100 to 4,300. So quite a bit more than the 200 you announced a year ago. What's going on?

[Britt Meelby Jensen, Chief Executive Officer]

That's a good question. So, basically, a lot of this is – the majority of our workforce is blue collar workers. And that's where we have more flexibility. So when you look at the actual numbers and the reduction, a large part of that is blue collar workers that we have reduced. And that has simply been also a part of the inventory reduction. We had quite a number of products in inventory. And as we're putting that down, we have slightly adjusted some of workforce.

And then I would also say we have also – we have not made more workforce cuts, but we have held back on refilling positions since last year in order also to manage the cost base. So these are some more recent the adjustments to the workforce. But the majority of these are the blue collar workers.

[Niels Granholm Leth, Carnegie Bank]

So, you have effectively reduced the number of employees by 800 people.

[Britt Meelby Jensen, Chief Executive Officer]

Yeah, we were not exactly up at the 5,100, I believe. That number, it's not a full 800 people reduction. We were closer around the 4,900. But it is true that we are down a couple of hundred when it comes to our blue collar workers, which again, as we are emptying some of our inventories, we will see a slight increase in that number again.

[Niels Granholm Leth, Carnegie Bank]

So, you expect this number in this quarter to be the trough?

[Britt Meelby Jensen, Chief Executive Officer]

I think so. With the current plans we have, yes. And as we are reducing our inventories on some of these products with these finished goods, we will, of course, ramp up slightly again.

[Operator]

The next question comes from Yiwei Zhou from SEB.

[Yiwei Zhou, SEB Enskilda]

Yiwei from SEB. I have three questions here. Firstly, just one follow-up on the EBIT margin guidance for second half. We understand the gross margin expectation. Just curious on your OpEx assumption where you have changed the assumption, talking about postponed investments in the second half. Could you maybe elaborate a bit on this? Is it in the sales organization or R&D? And what is the reason here for this?

[Britt Meelby Jensen, Chief Executive Officer]

I can take this. So, in terms of the postponed investments, it's not so much on the commercial side, it's mainly on the back office when it comes to innovation and operations that there are some costs that we have slightly postponed related to some clinical studies and so on.

[Yiwei Zhou, SEB Enskilda]

Secondly, you mentioned now with the lower financial gearing that you will be able to invest in the attractive growth opportunities. Could you also elaborate a bit on this? I'm asking because this conflicts with the fact that you have just downsized the organization and cut down the R&D spending quite significantly. So, looking at your CapEx investment in the coming years, should we understand you are also now looking into some sort of bolt-on acquisitions?

[Britt Meelby Jensen, Chief Executive Officer]

That's a good question. Thomas talked well about this. With the capital increase, of course, we have now brought our debt down to a very minimum level, which is good from the interest rate cost perspective. But more importantly, I would also say it gives us flexibility on the business that we're able to invest in growth faster than we were otherwise. Having said that, I think it's important for us to stay focused and committed on our transformation program. We have a clear plan to increase our profitability.

But, of course, we are a growth company. So that also means that we will and need to continue to look in investing for growth. But, again, striking that balance between increasing profitability.

It's not that we have a strong focus on M&A right now, I believe, with the new products that we have just launched last year with the upcoming products that we have in pipeline and the transformation program. I think there's enough for us to focus on. And it's important that we still continue to be focused on delivering on the opportunities with that and focused on execution and delivering on our transformation.

[Yiwei Zhou, SEB Enskilda]

Lastly, a question on the aScope 4. Followed Boston Scientific's launch and its upgrade on the EXALT B, your peer, Verathon, recently launched the BFlex 2 and also claimed the main selling point being the stronger suction power than the market leading product. Do you still believe your aScope 4 can compete on this clinical performance? Or should we expect also a product upgrade from you?

[Britt Meelby Jensen, Chief Executive Officer]

I think definitely. I think we have a very competitive portfolio when it comes to bronchoscopes. The aScope 5 is clearly the best-in-class and the best product that is out there. So we have the full offering, I would say, is number one.

The choice for the customers where they need to use the best scope and go for single use, that's where we have our aScope 5, which I don't think that the BFlex 2 is near to compete against.

Then you can say our aScope 4, I see that remaining a market leading product. It's true that there is competition coming in. And for us, we remain fully focused on delivering on our customer needs.

And of course also, as we have done previously, we continue to improve our product and also look at how is it that we can further strengthen our products to better deliver on the customer needs. I think that's an ongoing basis. So that's what we do on the bronchoscope specifically.

And then, of course, with the video laryngoscope, we will then have the full pulmonology offering where we are also looking at very much the full solution we are offering with the system and the bronchoscope and the video laryngoscope.

[Operator]

The next question comes from David Adlington from J.P. Morgan.

[David Adlington, J.P. Morgan]

First one is on pricing. I just wondered if you could talk to the pricing environment across the three segments, and maybe more specifically Endoscopy, what you're seeing on the on the broncho side?

Secondly, just on Anaesthesia and Patient Monitoring, I was wondering if you have any views into why you're seeing such strong stocking and destocking in Anaesthesia, but lesser in Patient Monitoring?

[Britt Meelby Jensen, Chief Executive Officer]

On the pricing first, pricing is a key priority for us. And that goes across the full portfolio. It's also on our Anaesthesia and Patient Monitoring where we do think we need to have prices that also reflects the desired profitability. And the same goes for our endoscope offerings. So, on the aScope 5, as we have previously communicated, we do have a price premium of 30% to 50%. We are also seeing that we are able to deliver on and get those prices for our aScope 5. When it comes to aScope 4, given the increased competition, it is of course something that we are close to. Competition, of course, also focuses on the prices. So that's, of course, where we are more modest in our expectation for price increases compared to other parts of the portfolio.

For Anaesthesia and Patient Monitoring, maybe on this inventory thing, maybe just to clarify, this happened basically one year ago. And because the products in Anaesthesia are products that are saving lives, so quite instrumental for hospitals, and because we have a strong solid business of that in Europe as well, this is where we basically saw some of the stockpiling to make sure that the hospitals had those products in stock in the hospital. And this was also where we had some of the supply chain disruptions and some of the backlog that we cleared out around a year ago. So that explains why it's hitting our Anaesthesia business more.

On the Patient Monitoring side, as I also alluded to, this is where we see a very good momentum when it comes to our US business, in particular on the cardiology side where we have had a very good quarter.

But, overall, I would say when it then comes to our pricing, maybe to wrap that up, overall, I do think that it's important to note that we do, as we renew contracts, remain focused on pricing. But we do also, which I think was in your question, see the hospitals being under pressure on their own financial situations, which of course also makes these negotiations quite tough sometimes. But I think there is, in general, a good understanding on the other side of the table that we have had increases in our input prices that we also need to get price increases through.

[David Adlington, J.P. Morgan]

Maybe just follow up, are you able to sort of quantify maybe across the entire portfolio, you're seeing low-single digit, mid-single digit price increases?

[Britt Meelby Jensen, Chief Executive Officer]

I think we are not out talking about specifics on the price increases and how the ratio is, but it varies, of course, across the portfolio. But we do see, in some of the segments, successful price increases.

[Operator]

So, there are no further questions at this time, and I hand back to Britt Meelby Jensen for closing comments.

[Britt Meelby Jensen, Chief Executive Officer]

Thanks a lot. And we are also getting close to the hour here. So I would like to thank you all of you for attending the meeting this morning. Thanks also for the very good questions. And have a good day, everyone.