Ambu A/S

CSE:AMBU B

Earnings Call Transcript 2023-Q3

[Britt Jensen, executive]

Good morning, everyone, and welcome to this Q3 2022-'23 financial results from Ambu. My name is Britt Meelby Jensen, I'm the CEO of the Company. And with me today, I have Thomas Frederik Schmidt, our CFO. So on the agenda today, I'll start going through the Q3 results with a business update, and then I'll hand over to Thomas to take us through the financials, and we will end the session today with a Q&A session.

Starting with the highlights from the Q3 this year, we have announced an 8% organic growth for the quarter, driven by a strong 23% growth in Endoscopy Solutions with Pulmonology returning to year-over-year growth and with a strong performance in Urology and ENT. We also report an EBIT margin for the quarter of 7.6%, having increased the full year outlook back in July to 5% to 6% from previous 3% to 5%.

Then I'm happy to announce a cash flow for the quarter of DKK 157 million. This drives us to an upgrade in terms of our expectations for the full year of improving the cash flow of over DKK 500 million for the year versus what we previously expected of DKK 350 million to DKK 450 million, leaving us to a positive cash flow.

Then on the product portfolio, we also had exciting news of the quarter as we expanded our portfolio with the FDA approval of the aScope 5 smaller sizes. So overall, I believe we have had a very strong quarter with meaningful progress across most areas. Looking at the numbers. So we had an 8% organic growth in the quarter. Reported this is 6%. And if we look at the 9 months of the year that we are through now, that leads to a 5% organic growth and a 7% reported growth. Looking at our EBIT margin, again, 7.6% for the quarter And for the first 9 months of the year, it results in a 5.8% EBIT.

On the strategy that we launched in November last year, we are making strong progress across all areas. If we start with the innovative solutions, we had, as I already alluded to, progressed in terms of expanding our portfolio in Pulmonology, our largest Endoscopy segment. We had European CE mark of our VivaSight 2, single-lumen tube. We had the clearance of the 2 smaller sizes of our aScope 5 Bronco, completing now the full offering with this new generation of bronchoscopy. And then we had the aScope the FDA clearance of the next-generation aView 2 Advance that also supports the endoscopes that we have in the market with attractive features.

We are making progress also on our execution, which was a key focus in our strategy as well. So the 23% Endoscopy growth and the free cash flow of DKK 157 million are strong results of this. Growth is our #1 priority in Ambu, but we also remain very focused on both improving profitability and cash flow as we laid out with the strategy in the beginning of this year.

We have taken a number of initiatives across the organization to improve the profitability. Some are reducing complexity with exiting some of the smaller markets where we are not profitable, which I will come back to. Then in terms of people and culture, this remains a strong focus area for us in Ambu to both attract and retain the best and create a strong Ambu culture. And this quarter, I'm happy to announce that we welcome a new member to the executive leadership team, Finn Mohring, who joined us on August 1 to head up our R&D organization as Chief Technology Officer.

Then when we look at sustainability, this is a key area for us as well, and it's an important part of the strategy and also an important part of the dialogues and the engagements we have with our customers to support them with more sustainable solutions.

So a few highlights from the quarter includes that we are continuing to reduce our waste. So we had a 9% reduction in our waste compared to last year. Also, we submitted this quarter the science-based targets, both for how -- for Scope 1, 2 and 3 when it comes to bringing down our carbon emissions. And then we renewed our partnership with the Plastic Bank also to show our strong commitment here to the environment.

So let's look at the different business segments, starting with Endoscopy Solutions. So as mentioned, we had a strong growth in the quarter of 23%. This was mainly driven by high growth in Urology and ENT. Very strong growth in particular geography-wise, I would like to highlight the U.S. and then we returned to growth in Pulmonology. So starting with Urology and ENT, this area alone grew by 33% in the quarter. This was driven, as I mentioned, by first of all, Urology, where we maintained the high growth, both attracting new customer and continued also to grow our existing base with existing customers. Then in ENT, we also see high growth across all regions.

And with the added functionality with our aView 2 Advance, we are also able to even serve the needs that our customers have better, for example, when they conduct the FEES procedures.

Then we continue to focus on GI with the launch of the gastroscope making nice progress also with continued strong feedback from the customers. The progress is in particular coming in the areas outside the GI suite, where we see a strong and meaningful uptick with those products. And again, based on strong feedback and reception that the product is performing well in the procedures that our customers are doing.

If we then turn to Pulmonology. As predicted when we started the year, we were predicting a higher growth towards the second half of the year. And we see a 16% organic growth when we compare against the last year. If we compare against the recent quarter, where we also had a very strong quarter driven by seasonality and flus we see that this segment is strong, and it's very much driven by the aScope 4 solid performance, the new launch of VivaSight and then also the aScope 5, which I'll come back to, but which provides superior performance to any other single-use endoscope out there in the market. So also, this is an area that we have zoomed back into and are focusing a lot on with our video laryngoscope in development as well will help to complete our product portfolio in this area.

Then moving to Anesthesia and Patient Monitoring. We saw in this area a decline of 7% in the quarter. This should be seen against the Q3 that we had last year, where we saw a growth of 17%. So we do in this market see some fluctuations quarter-over-quarter. But when we look at the graph here, which is showing the reported revenue LTM wise over a 5-year period, we can see that as we are expecting this market to grow low single digit, we see over the 5-year period a 2.3% CAGR overall. And when we put that into the different segments, it's a 1.7% growth in Anesthesia and 3.1% in Patient Monitoring, with some impact also from COVID that you see in this period. So overall, progressing as planned in this segment, despite the decline in the quarter we report on.

Then moving into our transformation program. So as you recall, with the ZOOM IN strategy, we launched a transformation program, and we are making strong progress on this in line with the plan. It's a program when we launched that, that seeks to improve our profitability and to set us up for strong profitable growth. And we also announced this program to be a program that we would run for a couple of years. In the quarter, a few examples of the things we have done is, one, we have reduced our geographical complexity by exiting 40 markets. And to comment on that, we have so far operated in 100 markets in total. And what comes with operating in a lot of markets is complexity, a lot in relation to maintaining registrations and the product liability that we have.

We had 40 markets that made up less than DKK 20 million in revenue in total. And this was mainly Anesthesia and Patient Monitoring products and of course, came with a lot of complexity. So we have decided to also with the focus on strengthening our business and improving profitability to exit these markets.

Other things that we are looking at is our products where we either have low margin or where we are not profitable. This is not sustainable. And therefore, we have started to address these as an example, with sizable price increases in the area where we have sold our products at 2 low prices, again, with a clear focus to improve our profitability. So our focus on optimizing our portfolio, our focus on allocating resources more effectively improving operational efficiency should all be seen as initiatives to strengthen our competitive position and also to set us up to deliver the sustainable growth many years ahead.

So growth is our #1 priority. So therefore, it is also important for us that we do these initiatives to be able to invest in the most attractive opportunities that we see to drive growth going forward. And this is where we continue to focus with this program, and we'll continue to come back and give you updates on how we are progressing, which so far is very well in line with the plan that we set out when we kick this off.

So before handing over to Thomas, let me touch upon the portfolio in Pulmonology that we also announced. So we do now have the most advanced single-use Pulmonology portfolio in the market. The features we have with the launch of aScope 5, which has also been proven in our customer interactions, has superior image quality to any other product out there and superior functionality. So these products together also with the next-generation aView 2 Advance of the endoscopy system that goes with the products, makes us -- puts us in a very strong position for future growth.

Together with aScope 4, where, as you may remember, we were already addressing 3 million procedures globally, we have expanded our reach with the aScope 5 to an additional 2 million procedures, thereby having an attractive market in front of us with plenty of room to grow.

So taking a step back, let me conclude by highlighting that we still see a market with huge potential and also with substantial unmet needs when we engage with our customers. We are still convinced every day by our engagements with our customers that we have unique innovative solutions across all the major Endoscopy segments. Our relentless focus on securing a scalable business model will also enable us to deliver on the strong potential that we have ahead of us, thereby delivering strong, sustainable profitable growth.

So with that, I'll hand over to Thomas to go through the financials.

[Thomas Schmidt, executive]

Thank you, Britt. And also good morning from my side and a warm welcome to our call today. And I am happy to go now through the key financial figures and data for the Q3 of our financial year '22-'23. It's been a good quarter, as mentioned, with 8% organic growth, 6% reported growth as we've been impacted negatively by currency impact by 2 percentage point. The 8% organic growth in Q3 has been driven by good growth momentum in our Endoscopy Solution business in both North America and also in Europe. North America also being our biggest market, grew revenues in Endoscopy Solutions of 30% for the quarter, strong and high demand of our Urology and ENT segment but also strong growth within Pulmonology.

Due to high comparables when we compare with Q3 in the financial year last year, '21-'22, Anesthesia and Patient Monitoring, however, declined by 12% and 16%, respectively, bringing North America as a whole to a 9% growth for the quarter. Europe grew organically 10% in the quarter and also similar to within North America. Europe actually also posted very good and strong growth within our Endoscopy Solutions business of 20%. And also here, we've seen continued good momentum -- growth momentum within Urology and ENT and we've also seen increase in our Pulmonology business within Europe.

Patient Monitoring declined in Europe by 4%. But as we also did see general recovery in the hospital market, we've also seen Anesthesia in Europe grow by 7% for the quarter. In Rest of the World, similarly, Endoscopy Solutions business grew positively for the quarter, however, offset by a decline in Anesthesia and Patient Monitoring. Operating profit continues to improve in Q3 with a reported profit margin of 7.6%. This is more than a doubling of our profitability compared to Q3 last year. And the margin improvement has been driven by an improvement in our gross margin, as shown here on the slide by 0.4 percentage point due to strengthening of our mix versus Q3 last year. But the majority of our improvement in our profitability comes with a 3.5 percentage points improvement in our EBIT ratio from scalability and efficiencies within our operating expenditures. And this is due to our restructuring cost reduction program from last year. However, also lower freight rates and general cost efficiencies and cost containment throughout the year and also throughout Q3.

With the focus on driving efficiencies and auto scalability within our operating expenses, this also really forms part of our strategy and our long-term financial targets. In Q3, we've continued to improve the scale and this efficiency. And we've -- we are now bringing down our operating expense ratio from 55% end of the financial year last year to 52% at half year and now for the quarter 3 to 49% as shown on this graph. If we also look at the absolute operating expenditure in Q3 versus Q3 last year, we actually decreased our spending by 1% also meaning that we actually have fully absorbed inflations within the Q3 this year and salary increase impact in the operating expenses.

As mentioned, scalability and efficiency is one of our key drivers in improving our profitability and therefore, also will remain a key focus when we look forward. Profitability also impacts, of course, cash flow and improving cash flow is another of our key elements and key focuses. And in Q3, we really accelerated our positive cash flow development. And I'm very pleased about the results that we can show for the Q3. We now post a positive cash flow of DKK 157 million for the quarter and also nicely shown here on the graph, we are also improving our free cash flow ratio to sales with a trajectory that really shows the right direction. A trajectory that also highlights that we are improving cash conversion and that we're also getting to sustainable cash flow positive levels.

Year-to-date, we now have, at the end of Q3, a positive cash flow of DKK 4 million. And for the full year, we now expect to improve that with more than DKK 500 million versus last year. That is, as mentioned, an improvement above what we earlier have guided of between DKK 350 million to DKK 400 million. As mentioned already, I'm very, very pleased about that development and also very proud that we've come this far and so forth. But it does not, of course, stop there, and we will continue to look to improve cash flow and strengthen our position there.

The improvements can be divided into 3 main areas. Of course, one of the elements is our profitability coming out of our operating activities shown here with our EBITDA and EBITDA certainly is a strength, as shown also before, by strengthening our mix but also improvement, scalability in our OpEx spend. And we now, in Q3, have posted an EBITDA of 14.5% and up 4 percentage points versus Q3 last year of 10.5%. Second, we've been improving and lowering our net working capital, is also shown here, and we are now getting into an area of where we see more normalized net working capital ratio with 21% in Q3. Inventory has been reduced throughout the full year since the beginning of the year by no less than DKK 237 million, obviously also helping on the cash flow side.

And then finally, but not last, also looking at how we spend our capital and capital expenses. Our CapEx ratio we have lowered to roughly around 7% also as we see lower spending and more efficiencies within our operations. but only also within a better project prioritization and a better project utilization within our R&D setting.

That brings us to the financial guidance for the full year '22-'23. The organic revenue growth we now narrow the revenue guidance to 6% to 8% for the full year, a narrowing from 5% to 8% as earlier communicated. Our EBIT margin before special items, we maintained at 5% to 6%, as we've mentioned also in the last update in July 10. In terms of other assumptions for this financial year, we assume that within Anesthesia and Patient Monitoring, the organic growth for the full year will be approximately around about 0 percent. That's down from low single digit that we -- growth that we earlier had expected.

Our gross margin for the full year, we expect to be within the range of 56 to 57 percentage point improvement versus the -- roughly the 55.5% that we expected earlier. And as mentioned already, free cash flow we now expect for the full year compared to last year, an improvement of more than DKK 500 million, an improvement and up from DKK 350 million to DKK 450 million from earlier expectations.

And finally, CapEx for the full year in percent of revenue, we expect to be roughly within the range of 7% versus earlier expectations of 9%. And as mentioned, improvements within -- how we spend within operations, but certainly also based on better prioritization and better utilization within the projects that we run. .

With that, thank you, and I now will hand over to our operator, and then we will start the Q&A session. Thank you.

[Operator]

[Operator Instructions]

The first question is from Christian Ryom from Danske Bank.

[Christian Ryom, analyst]

I have three, please. So first question is to the initiatives that you are launching for Anesthesia and Patient Monitoring and whether you can quantify the impact of them? So I think in the report, you talked about this DKK 20 million in revenues from the markets that you exit. But then I would assume that -- there is also some incremental negative impact from the pricing initiatives. Can you give us some sense of what the combined impact from these 2 initiatives is. And then second question is to the development within the pulmonology subsegment here in the third quarter? And specifically, the development relative to the previous quarter, where revenues are down slightly relative to Q2, despite the relaunch of VivaSight, whether there is anything specific to call out there other than normal seasonal fluctuations?

And then the third and final question is to the development in your sales and marketing cost line, where costs for the quarter was down by around 9% relative to Q2 and how sustainable the level that we're seeing here in Q3 is?

[Britt Jensen, executive]

Thanks a lot, Christian. I'll address the first two and have Thomas comment on the last one. So on the Anesthesia and Patient Monitoring initiatives, what I should say is that the initiatives that we are doing here are in order to improve our profitability overall as a company. And the combined impact it's -- on this is a little hard to be very specific about. However, I think what's important to state is that it will have some negative impact and which is also why if we look into the -- I mean, that's not only for this fiscal year but when we look into the next fiscal year, it will affect our revenue, but we will improve our profitability of the overall business.

The things that we are doing on the countries that we are exiting, we can quantify that very specifically to around DKK 20 million annually. On the other ones with price increases, it's very hard to say because the negotiations are on contract renewals are happening throughout the year. And then -- and we do -- we have seen some good momentum of being able to address price increases and still remain the volumes. It's very clear that with higher price increases, we do in some instances lose the exclusivity that we have had, and that's where it's harder to predict. But again, we believe it's with the focus on improving profitability is the right things that we are doing to set us up also for long-term sustainable growth.

On pulmonology, you are right that if you compare the second quarter with the third quarter, I mean, you don't -- you see actually a slight decline. And that has to do with some of what you mentioned. I mean, we had, of course, VivaSight launching back in Q2. But then it's very much related to some seasonality in relation to our pulmonology business, in particular, that relates to the flu season and then some of the normal hospital ordering timing of those orders. So there's nothing more to read into that. On the OpEx, do you want to comment on that, Thomas?

[Thomas Schmidt, executive]

Yes, certainly. So relating to the operating expenses, and you also, Christian, mentioned the sales and marketing expenditure. So yes, it's, of course, correct that we are, relative to Q2, looking at a slightly lower spend. But we do have some element of -- I wouldn't say seasonality, but higher spending also to expect in Q4. You will also be able to see based on earlier quarters, we do have quite a lot of activities, of course, in the second half of the year, also due to summer periods and so forth that we do see an uptake and do expect an uptake in spending in Q4.

This is well aligned with our strategy. It's well aligned with the direction that we're taking and certainly also, as I mentioned before, we will, of course, continue to look at efficiencies within our spending behavior and certainly also to take full advantage of further scale effect there. But we do expect higher absolute OpEx in the Q4.

[Christian Ryom, analyst]

Great. That's very clear. Maybe just a quick follow-up on those DKK 20 million from market exit, are those expected to impact revenues this year or next year?

[Britt Jensen, executive]

Yes. So those -- so it's DKK 20 million annually. And as we are in the process right now of exiting, there will be a small tail. So it will, of course, I mean, we compare to this -- I mean, not be part of the revenue next year.

[Christian Ryom, analyst]

Okay. But there will be some impact already in Q4?

[Britt Jensen, executive]

Yes, but more limited as it's something that we are executing here in this half of the fiscal year.

[Operator]

The next question comes from Martin Brenoe from Nordea.

[Martin Brenoe, analyst]

Martin from Nordea. So just two questions for me. Maybe just a quick follow-up here on the PMD and Anesthesia. Can you just maybe clarify for me whether you expect revenue in Patient Monitoring and Anesthesia to decline next year? So i.e., negative organic growth in the next financial year, is that what you are implying? It's not completely clear to me.

And second of all, just wondering how this will impact your medium-term targets because you have the 2% to 4% 5-year CAGR target for Anesthesia and Patient Monitoring. Will that be impacted by lower run rate for next year and potentially going forward from that? That's the two questions for me.

[Britt Jensen, executive]

Thank you, Martin. Yes -- and good, maybe I should clarify on the whole Anesthesia and Patient Monitoring. So I think, as also it says in the report, I mean -- these initiatives, I mean, can result in a potential revenue decline within Anesthesia and Patient Monitoring for the next fiscal year '23-'24. So I mean, it will be in November where we come out with the guidance on '23-'24, but it's more to set the scene to say we are doing these things, I mean, to improve profitability, and that may come with some impact that leads to a potential decline, but we will come back to that more in November.

In terms of the targets that we have set out of low single-digit growth of 2% to 4% on a 5-year CAGR that we still believe should hold. Some of the things that we are doing to improve profitability will also over time help some of our more profitable products in this portfolio. So we don't right now see any concern that we will not be able to deliver on this 5-year CAGR target that we have set out.

[Martin Brenoe, analyst]

Okay. Very clear.

[Thomas Schmidt, executive]

Maybe just, Martin, if I may. As CFO, I just want to fully underline, Britt has mentioned it already. But also the exiting of market really will improve our margin and cash flow. And I think it's just -- I just feel it's important also from my side to underline what Britt already had mentioned, but it really should help us with margin and cash flow improvements.

[Martin Brenoe, analyst]

And on absolute EBIT, will there also be an improvement? Or will it mainly be on the margin side?

[Thomas Schmidt, executive]

Yes, more on the margin side of things. Of course, there will be some element of cost also exiting these markets, but margin should improve with this also.

[Operator]

The next question is from Yiwei Zhou from SEB.

[Yiwei Zhou, analyst]

I have three and I do one at a time. First question is on the VivaSight relaunch. Could you maybe comment a bit on the -- if there has been any sales contribution in the quarter? I understand there is 1 month additional sales as compared to Q3 last year. And I know you have a -- used to have a monopoly position for this product. Have the sales come back to the previous level? Or if not, when should we expect?

[Britt Jensen, executive]

Yes. Thank you for that. So as we relaunched the VivaSight in the previous quarter, I mean, you should see that as a gradual ramp-up also in line with as we -- that we get our production back up and running. But you can say that it is -- I mean, at this stage, now back to the level that we had more or less prior to the recall. Still a little below, but we are getting close to that. But again, it has been a gradual ramp-up.

[Yiwei Zhou, analyst]

Okay. Great. Very clear. And my next question on the aScope 4. Britt, you mentioned the aScope 4 also had a strong performance. Could you maybe elaborate a bit here? Should we assume it has been a fast growth in the quarter?

[Britt Jensen, executive]

That if we should assume what, sorry?

[Yiwei Zhou, analyst]

Positive growth for aScope 4 in the quarter?

[Britt Jensen, executive]

Yes. So we don't comment on the -- I mean, specifically on the individual products within the pulmonology portfolio. But it is very clear -- I mean as an overall portfolio on the bronchoscopy side with aScope 4 and aScope 5, we do see that we have a very competitive offering out in the market, both with very strong traction on our aScope 4 and the aScope 5. But if you -- I mean, specifically, what I think I can say is that if we look at aScope 4 alone, we did see a positive -- or we did see a growth in the quarter.

[Yiwei Zhou, analyst]

Perfect. And then my last question is on the core business. It's not a follow-up question, but just take a longer-term perspective on the business. I understand the regional pruning initiatives you are having. Could you maybe comment on the possibility for pruning also on the product level? I'm asking because I also recall -- some of the latter products that you have in this product category carry a very low profitability. Is there any potential also to do a pruning?

[Britt Jensen, executive]

Yes. And the short answer is yes. I mean it's very clear. If we look at the Anesthesia and Patient Monitoring portfolio, I mean, this is our legacy business. We have been in this for decades. We have very strong -- I mean, loyal customers, a very stable demand. We spend the majority of our resources, just to be clear, both when it comes to commercialization and innovation on the Endoscopy side, but we're actually able to run a strong business with -- I mean, with the strong customer relationships in this area.

However, what is also the responsibility of all companies, I mean, we need to continue to optimize the portfolio. And as we have also launched new and improved products, we have not been fully focused on also addressing the more low-margin product. So that is what we are doing now. And as I alluded to, part of this will lead to an upgrade to the new and better products, which are also at a higher both price and profitability. And then there will be some of where we simply have to exit in the cases where we are not able to deliver profit. So I think that -- I mean this is something that we are very dedicated to and where we take a more long-term view to make sure that we -- I mean, as part of the transformation that we secure long-term profitable growth. So that is why we have decided that we have to take some of these decisions to clean up in order to reduce complexity and drive overall profitability.

[Operator]

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

[Niels Granholm-Leth, analyst]

First one would be on your EBIT margin for quarter 4. Could you talk about what would be holding back the EBIT margin progression in quarter 4, given that you're implicitly guiding for a margin decline as far as I can see? Would that be the sales and distribution costs that you alluded to before? That's my first question.

My second question would be on your balance sheet, which is now approaching kind of normalized, I guess, financial gearing. Would that imply that Ambu would soon be ready to do acquisitions again? And then my third and last question would be on the staffing situation in Ambu now following 4 quarters of fairly hefty staff reductions this quarter. So a slight increase to the number of staff. How do you see your staffing situation developing in the next few quarters since this is probably one of your biggest cost items?

[Britt Jensen, executive]

Yes. And I can maybe take the two last questions and hand over to Thomas for the first question. So on your question around balance sheet, I mean, I think this is, of course, something that has been a very key focus for us since we joined about a year ago, and we are very happy and proud of that progress because that is exactly to your point -- I mean, what we are aiming for, we are a growth company. What we are aiming for is to put us in a situation where we are able to invest in growth opportunities.

So while we don't have any strong near-term M&A plans in front of us, it is, of course, very top of mind for us that growing our business may also come in the future with investments, whether it's M&A or other things. And we definitely want to make sure that we have a balance sheet that allows us to do so when there are opportunities that make sense. But again, given what we come -- what we have been through in the past year or so, it is not something that has been top of the -- in the list for us.

On the staffing situation, it's correct that if you look at the staffing for this quarter, we are -- we have 600 -- roughly 600 FTEs down compared to last year. And you should look at that as a good 1/3 of this is white collar workers in line with the reductions that we have made. And then there is still a good portion of this reduction that is blue collar workers related to also when we look 1 year back, we -- I mean, we were producing and had fairly high inventory. So we have been able to reduce the level of blue collar workers. But in general, it's, of course, also part of how it is we set us up efficiently to also drive the profitability without jeopardizing growth. And that's, of course, the big balance that we have. But again, we are -- I mean, we have been looking for efficiencies in relation to staffing as well and have come down to this level also make sure that we reduce our cost. And there has been given we had rapid growth in FTEs, not only blue collar, but also white collar. There has been some obvious efficiencies that we could take out, and that's what we have been looking at.

[Thomas Schmidt, executive]

Yes. And to your question, Niels, on EBIT margin and for Q3, my short answer would be, yes. Similar to what Christian also asked a question our OpEx -- operating expenditure in Q3 will be higher compared to what we have seen in Q3, and we actually also do expect a slightly higher ratio to that. So that is certainly one of the main reasons why if you look at EBIT in terms of what we guide for the full year, obviously, impacts that in Q4. But well, again, I just have to say that, well aligned with the plan that we have and also well aligned with the seasonality that we see and the activities that we, of course, make in terms of growing the business.

[Operator]

There are no more question at this time. We have a follow-up question from Niels Granholm-Leth from Carnegie.

[Niels Granholm-Leth, analyst]

But just a follow-up question on your Mexico plant. Can you elaborate on the capacity utilization in your Mexico plant and to what extent this plant is tracking down your margin and gross margin, I guess, it is?

[Britt Jensen, executive]

So that's a very good question on the Mexican plant. So just a step back. So we -- I mean, we started producing in Mexico in October 2022, so about a year ago. And we have, because also, I mean, we have had to balance with the high inventory levels that we had in some product categories. It has been a very, very gradual ramp-up where we balance the production that we have in Penang and what we have in Mexico.

We feel it's very prudent that we have our manufacturing in Mexico to have that dual sourcing, which in the world of more uncertainty compared to the past, that serves us well and also in particular, with the strong demand and growth we have in the U.S. market. So what we currently produce in Mexico is bronchoscopes, ENT and cystoscopes, and then we also have some of our Anesthesia and Patient Monitoring products there. And we are on track on our plans, I would say, with plenty of capacity to expand from. We do not comment on exactly the gross margins of the products coming out of Mexico versus coming out of Malaysia. But we are, of course, constantly looking at the total of the cost, including distribution costs and so on to make sure that we have attractive gross margin levels and at the same time, we are able to supply our customers in a timely and meaningful way.

[Niels Granholm-Leth, analyst]

But could you then perhaps comment on when you expect the Mexico plant to no longer be a drag on your profitability?

[Thomas Schmidt, executive]

Sorry, again, can you repeat that question, Niels?

[Niels Granholm-Leth, analyst]

So can you then comment on when the Mexico plant will no longer be a drag on your profitability?

[Thomas Schmidt, executive]

So when you refer to drag, Niels, I assume you referred to also that we earlier have, of course, spoken about the ramp-up costs. So of course, as Britt also alluded to, we are, of course, constantly looking at what is the right setup from the production side of things to also the site in Mexico. We are producing, as she also mentioned, bronchoscopes, ENT, cystoscopes and also Anesthesia and Patient Managing production lines there. So it's a constant look to see based on also the growth that we see in the market what else do we need to produce in Mexico? And how do we set that up most efficiently from a cost perspective? So of course, from a continued ramp-up cost, there may be some, but it won't be similar to what we've seen in the past.

[Britt Jensen, executive]

So you can say, as we do have a gradual ramp up, you can expect that we continue to have -- I mean, costs related to that. But again, we are managing that and have already done the setup of some of the major product lines as we alluded to.

[Niels Granholm-Leth, analyst]

Okay. Great. So it sounds like the Mexico plant is no longer a material drag on your margins anymore?

[Britt Jensen, executive]

Yes.

[Thomas Schmidt, executive]

Yes. From a ramp-up perspective, that is correct, yes.

[Operator]

We have a follow-up question from Yiwei Zhou from SEB.

[Yiwei Zhou, analyst]

I have a question here on CapEx. This year now, we are up to be 7% of top line. And how should we look into next year because I remember you used to guide 9% of the cost-saving initiatives? And if this could be the run rate also for the longer term?

[Thomas Schmidt, executive]

Yes. Thank you, Yiwei. Let me take that question. So as I mentioned also in my part of the presentation, yes, you're right. We did guide earlier at least in our soft guidance that we do show the expectation that we would have a CapEx expenditure this year in the area of 9% to revenue. Also within CapEx spending, we've really, really looked in to see how we most efficiently could spend also in that area.

So CapEx, of course, relates to operation expenditure, other expenditure and also R&D. So it's not only R&D, and I just want to underline that also. We still will invest into R&D. I think that's also an important point to make. So that we have done this year and that we will continue to do also other years. But the reduction from 9% to 7% this year has maybe more been in terms of efficiencies and making sure that we spend and utilize the spend in the best possible way. We're not yet guiding on next year or future years. So I will leave that to November when we close out the year and start guidance for next year.

[Operator]

We have a follow-up question from Christian Ryom from Danske Bank.

[Christian Ryom, analyst]

Just a question on whether you can elaborate a bit on the, say, key uncertainties in your top line guidance here for the remaining months of the year, considering that we have only 1 month left of the year, the range appears, I would say, fairly wide. So can you pinpoint what would say push you to the upper or the lower end of the range?

[Britt Jensen, executive]

So you can say we are adjusting -- I mean, from 5% to 8% narrowing into 6% to 8%. And we believe that, I mean, given -- despite that we only have 1 month left that this is a prudent range for us to guide on. And the basis for this is really that if we look at what drives our business, our business is very much driven by hospital orders and some of them quite sizable. So there is -- I mean, there is still going into the last month some uncertainty relating to the exact timing on some of these orders. And what we want to give ourselves room for is to make the right business decisions. So in other words, I mean, we are not providing year-end attractive deals to customers, which we did to some extent in the past. So we want to make sure that -- I mean, we meet the orders when the demand is there from the customers, and that we are not giving any rebates to mix between the quarters. So that's actually also why we feel it's safe and comfortable for us to maintain this range.

[Operator]

[Operator Instructions] There are no more question at this time.

[Britt Jensen, executive]

Good. Then I think I can end this call by thanking everyone for joining the call this morning, and wishing all of you a good day. Thank you very much.