Ambu A/S

CSE:AMBU B

Earnings Call Analysis

Ambu Achieves Strong FY22/23 Growth

Ambu welcomed a robust financial year in 2022/23, nearly doubling its organic revenue growth from the previous year to 7.6%, and significantly increasing its EBIT margin to 6.3% from 2.7%. In a noteworthy turnaround, the company reported a positive free cash flow of DKK 192 million, rectifying the previous year's near DKK 0.5 billion deficit. This success stems from several strategic moves: launching the aScope 5 bronchoscope portfolio in pulmonology, improving systems like the AView 2 Advance, and exiting 40 low-profit markets - now operating in 60 countries. Price increases in Anesthesia and Patient Monitoring also bolstered profitability. Additionally, the Endoscopy segment revenues rose by 15%, including a notable 38% growth excluding pulmonology. With significant progress in sustainability, including the introduction of bioplastic scopes and submission of 2030 SBTi targets, Ambu positions itself for a continued positive trajectory.

Ambu Delivers Strong Financial Year with Focused Growth and Profitability, Setting Upbeat Guidance for the Future

Ambu has reported its financial and business results for the fiscal year 2022/2023, showcasing substantial progress across its operations and financial metrics. Under the leadership of CEO Britt Meelby Jensen and CFO Thomas Frederik Schmidt, the company achieved an organic revenue growth of 7.6% for the full year, a significant improvement from the 4% marked last year. The fourth quarter alone saw an organic revenue growth of 14.1%. Ambu's EBIT margin before special items more than doubled, from 2.7% last year to 6.3% this year, while also announcing a positive turnaround in free cash flow from a negative DKK 0.5 billion to a positive DKK 192 million.

Ambu's Calculated Moves: Strategy Execution and Market Focus

Ambu launched its 'Zoom In' strategy a year ago, leading to impressive outcomes in product range expansion, market execution improvements, and operational efficiency. The company has successfully introduced an advanced single-use bronchoscopy portfolio, the aScope 5, and other significant product launches. They made a strategic decision to exit unprofitable markets, scaling down from selling to 100 countries to 60. Ambu also implemented pricing increases, particularly in Anesthesia and Patient Monitoring, pushing for improved profitability.

Strengthening Organizational Structure

Ambu has made strides in enhancing its organizational workforce, revising its purpose and core values, and solidifying its executive team, all contributing to the impressive results of the year. The firm has effectively responded to the necessity for change, setting a solid foundation for future growth initiatives and maintaining a clear direction focusing on internal priorities.

Emphasizing Sustainability and Social Responsibility

The company has placed a greater emphasis on sustainability over the past year, submitting SBTi targets for 2030 and innovating with the launch of the world’s first scope made with bioplastic. These efforts demonstrate Ambu's strong commitments beyond financial performance, aiming for a positive environmental impact.

Financial Performance Breakdown: EBIT Margin, Gross Margin, and Costs

Ambu achieved an EBIT margin of 6.3%, attributed to profit-focused growth and operational scaling which also led to an increase in gross profit by 6% to DKK 2.7 billion, even with a slight decline in gross margin. Their operational expenses (OpEx) ratio showed remarkable improvement, a testament to successful cost containment and efficiency programs.

Strong Regional Performance and Future Expectations

The 7.6% organic growth was driven by momentum in Endoscopy Solutions across all regions. North America recorded a 32% revenue growth in Endoscopy Solutions for Q4, contributing significantly to the overall performance. For the fiscal year 2023/24, Ambu anticipates an organic revenue growth of 7% to 10%, with Endoscopy Solutions expected to grow by 15%, though on the lower end of their long-term CAGR targets.

Guidance for the Upcoming Fiscal Year

Ambu has issued forward-looking guidance for fiscal year 2023/24, projecting an EBIT margin of 8% to 10% and aiming to achieve a free cash flow above DKK 270 million. These targets are grounded in ongoing strategic measures and reflect the company's determined path toward achieving long-term goals, including a potential 20% EBIT margin, while maintaining the flexibility to invest in opportunities.

Earnings Call Transcript 2023-Q4

[Britt Jensen, executive]

Good morning, everyone, and a warm welcome to this morning's call where we are going to announce our full year '22, '23 financial and business results for Ambu. My name is Britt Meelby Jensen. I'm the CEO of Ambu. And with me today, I have our CFO, Thomas Frederik Schmidt. The agenda for this morning's call is that I'll go through a business update. First, I'll hand over to Thomas for a financial update, and then I'll come back and share our outlook for '23/'24. And then after that, we'll open up the floor for questions.

So starting with our highlights. Overall, we had a very strong year in '22, '23 with a lot of progress on many fronts. Highlighting the 3 main financial results, starting with the organic revenue growth, where we had, for the full year, 7.6% organic revenue growth and for the fourth quarter, an organic revenue growth of 14.1%. If we compare with what we delivered last year, this is almost a doubling of our organic revenue growth compared to the 4% last year.

Then moving on to our EBIT margin before special items. We ended the year with 6.3% margin, and that's also more than doubling compared to last year where we finished at 2.7%. Then moving to our free cash flow. We are proud to announce today a positive free cash flow of DKK 192 million for the year. I guess you all remember the last year where we finished with a negative cash flow close to DKK 0.5 billion. We were at that time in a serious situation, and we have been very determined to turn this situation around. And therefore, I'm very pleased with the results that we are reporting today on free cash flow.

It's also 1 year ago since we launched our Zoom In strategy. And on that, we have also had solid progress on a number of fronts. If we start with our innovative solutions and our abilities to serve our customers, we have made progress in our offering to customers. In pulmonology, we, throughout the year, launched the full range of products within our newest and most advanced single-use bronchoscopy portfolio, the aScope 5. If we look at our systems that supports endoscopes across the different therapy areas, we have also, during the year, had advancements with our AView 2 Advance adding features to that throughout the year. In urology, a high-growth segment, we have launched aScope 5 Cysto HD. And then in GI, which I'll come back to later, we had, in the recent quarter, 2 important approvals, the CE mark of our Gastro Large in Europe and then the FDA approval of our colonoscope.

Moving on to our focus on execution. We have continued to improve how we execute throughout the year across the entire business. We launched a transformation program 1 year ago in connection with the strategy, and we have continued to have improvements on our cost and efficiency. We have also reduced complexity and an example of that is that we have exited 40 markets where we had no profits and very low sales in the individual markets. So that is behind us now, which means that we are now selling to 60 countries instead of the 100 countries that we were selling to before. So we are still in all major markets.

Then when it comes to pricing increases, in particular, in Anesthesia and Patient Monitoring, in our focus to have improved profitability across our business, we have had a dedicated focus to bring up prices at different levels, including solid double-digit price increases on some contracts and some products. And I'm also very pleased with how we have made good progress on that during the year.

Then focusing on the people and culture side, we have had a strong focus on improving throughout the year, how we work as an organization, reducing our complexity and providing clear direction sitting on what our priorities are internally. Then we have launched our new purpose, and we have launched updated values to be clear about how we, as one Ambu work together. Also, we have strengthened our executive leadership team. Most recently, we have announced a new CFO that will join us January 1.

Overall, when it comes to people, it's our colleagues at Ambu worldwide that has provided the strong results that we are announcing today. I'm very pleased about the progress we have made. It has been a year of change, which has been required on several dimensions, and I'm extremely proud of how the organization has responded to this.

Then comes sustainability. Sustainability is an area that we elevated as a focus area around a year ago and where we have also made very strong progress. I'll come back to that a bit later in my presentation. But overall, some highlights are the SBTi targets that we have submitted for 2030 submitted this year. And then we have also launched the first scope in the world where we use bioplastic, something that we are very proud about and that is only one of the full portfolio so far.

So looking at the results. We have, as mentioned, delivered 7.6% growth and reported growth 14.1% in the quarter. We saw a quite heavy impact on exchange rate in the fourth quarter. So the reported growth for the fourth quarter was 8.3% and 7.4% for the full year. On EBIT margin, we had, in the fourth quarter -- 7.7% was where we landed, and that corresponds to a 6.3% for the full year.

Then moving into our Endoscopy segment. Our focus segment that now contributes to 56% of our total revenue. Overall, in the year, we grew our Endoscopy revenue with 15%. What we said 1 year ago when we gave the guidance was that we expected this to be a higher growth in the second half of the year compared to the first half of the year, and that's where we're also reporting today a strong 25% growth for the fourth quarter. If we look at what is driving the growth, I'd like to highlight the urology and ENT areas which have grown a lot this year. And then at the same time, also pulmonology, where we have seen a growth in the last half of the year also, again, as we predicted when we started the year.

Then moving into the 2 segments that we report on. Firstly, we report on everything excluding pulmonology. And this is urology, ENT and GI. And this area with DKK 1.2 billion in revenue for the full year. This now makes up 45% of our total Endoscopy revenue. What has driven an impressive growth of 38% for the year and 37% in the fourth quarter has primarily been a very strong growth in our urology business, driven by a mix of new customers that are being added and then also serving our existing customers more than we have done previously. A lot of the growth has come from our U.S. organization, but we also see strong momentum elsewhere in EMEA particularly. On ENT, we also maintain a high growth level, and this is also a lot related to our U.S. business, and we see the growth there coming from FEES procedures and also improvements in our systems that are adding features that benefits our ENT customers.

Then coming to GI, and I'll come back to this later. We also see the launch of aScope Gastro continuing to progress nicely. Our focus is very much on specific niches as previously communicated. A significant part of these are in the OR, so outside the suites, and we continue to see good momentum and progress and not least, very good feedback on the product and performance, which we are very happy and proud about.

Then moving to our largest segment, which is pulmonology, and this one looks a little more busy than the previous one. But let's just start with the highlights here that overall for the year, we grew 2% on the revenue in pulmonology. And if we look at the fourth quarter, we grew 16%. We said when we started the year that the first part of the year would still be affected by a period of normalization after corona. We saw the inventories that our customers had bought during the Omicron wave, but that were not used, still impacting the sales in the first half of the year where the customers still had inventory that they had to use, but the good news is that we believe that we are behind this. So now we are fully normalized when we look at our business. What we have tried to illustrate on the graph here is an illustrative estimated impact of corona because we did see a huge demand driven by corona over the past years from -- of our bronchoscopes.

And this, again, is normalizing. But when we look at a CAGR on a full year horizon, it still was at 12.5%. And if we go 1 year back because we had the Tri-anim buyback in '18, '19, it's actually also close to 12%. So we have seen a good uptake.

What I'd like to highlight here also is our aScope 5 portfolio because this one we launched as the best-performing single-use endoscope to date. It was targeted initially at the bronch suites in the hospitals where they do the most advanced procedures. But we also see the demand in other segments in the hospital, which is driving good momentum and which is very promising for our future in pulmonology.

Then moving to our Anesthesia and Patient Monitoring business. For the year, we saw a decline of 1% in this business. And if we look at the fourth quarter, we had a 2% organic growth. This segment has been impacted. If we look at the graph here, we have 3 years where it was more or less flat. And then because between '20, '21 and '21, '22, we saw some supply chain contractions due to COVID. So last year, we have a very high comparable because of the stockpiling and the backlog that impacted that year. And now we have continued to be on the same level where they had the inventories at the customer level going into the year. And we expect to continue to also have a fully normalized business here, where we, as previously communicated, have taken some strategic initiatives to also improve our profitability in this area, some of them also impacting our revenue growth. But this is what I'll come back to some of the balance that we are making between growth, which is our key focus, but also improvements in profitability.

If we look back to Endoscopy and look at the portfolio that we have in the market right now, what you see here is our full portfolio and products in development across the 4 segments that we operate in. The red or pink dot represents products that are already in the market. The blue dot represents products or solutions that have been approved during the fiscal year we just exited, and then we have the green dots that are products in development.

Overall, I think there are 2 areas that I would like to highlight. And one is pulmonology, where we continue to be focused on our video laryngoscope in development, but where we also have a new program here, which is our next-generation bronchoscope, which is a scope that is supposed to continue the success of our aScope 4, which will coexist in the market with the more advanced scope aScope 5 Broncho.

The other thing that I would like to also draw your attention to, which is new here is under the system where one thing is that we continue to have advancements on our system, which benefits our endoscopes across the different areas. But we have also, in the past couple of years, done work within AI. And recently, we launched our AI solution in bronchoscopy for training purposes. So basically, we have a bronchoscopy positioning system that allows new health care professionals to use it as a training where you can basically, with our AI solutions, see in what parts of the body has the endoscope in. So you're certain to make sure that you have looked into all parts of -- all relevant parts of the body when using AI. So we have a lot of other features in development where AI can benefit our customers going forward. This one is for -- now for training purposes and not yet approved by regulatory bodies, but is already in the hands of customers with very good and positive feedback.

So I talked about GI and that I wanted to return to GI. And as mentioned, we had, in the quarter, 2 new solutions approved. We had our Gastro Large. So the first gastroscope with a 4.2 millimeter working channel, which improves the suction function, which is very important for gastroenterologists. Then we also had a project approved by the FDA, our colonoscope, a project that has been in development for a number of years now.

We continue to be very excited about the GI market and potential in this area. As you can see to the left of this graph, the total market in terms of procedures is over 68 million procedures that are annually performed within gastroenterologists. Right now with our portfolio consisting of aScope 2 1.5, aScope Gastro and now Gastro Large and our colonoscope and the niches that we are targeting, we are only targeting 5.5 million of these procedures. As we have also previously said when we launched our new strategy, we reshuffled our commercial resources and took some focus away from GI to focus on the more immediate revenue drivers in pulmonology, urology and GI -- sorry, ENT.

So for GI, we have a much more limited commercial focus right now. It's an area that we see being very attractive for Ambu on the long-term horizon. It's an area when we visit customers and engage with key opinion leaders that we see significant unmet where we believe that we can address those with our solutions. It's also an area where we didn't get it right in the first place. So we have moved even closer to our customers to make sure we fully understand their needs. And therefore, we are very excited to continue to focus in this area, but again, with a balance of resources, so we take a very niche-based approach commercially just in the same way as we did when we launched our bronchoscope some 15 years ago.

So hopefully, that clarifies our focus. We still have two solutions in development in this area, a cholangioscope and then our Duodeno 2, so the second generation, which is built on the same system and platform as the other endoscopes we have in the market and where we also aim to take a much more niche-based stepwise approach when that comes to market.

Then I also said I would return to sustainability. And let me just talk about the achievement that we are very proud about in that we have, as the first company in the world, launched the bio-attributed plastic handle in our Gastro Large that is on the market. And this is only the first step because during the next fiscal year, we expect to use the same material for all our scopes. And we aim to be done with that in around a year from now. So this is faster than what we set as a target for ourselves, but we believe our commitment to the sustainability agenda is extremely important.

The material that we are using here will actually reduce the carbon footprint by 70%, and given that the handle takes up a significant part of the plastic used in the endoscope, this is something that will have a meaningful reduction and something that we get very good response from with our customers.

And turning to why we're doing this, it's twofold. It's first of all because we have a strong commitment to sustainability ourselves, but it's also because we see increasingly that this is a focus for our customers. Our customers also want to be more sustainable. And we actually believe by being leading in our area that this is also a competitive advantage. We see this being a criteria in an increasing amount of tenders. We see this also being something that is introduced in more and more countries. So we are very excited about this step.

But this is only one of many things that we are doing. If we just look at a few other areas that we have focused on in sustainability, we submitted our near-term targets for SBTi, not only Scope 1 and 2, but now we also have a plan for Scope 3. We also continue to improve on the energy sources that we use. And we are -- we increased our share of renewable energy by 1.3 percentage point this fiscal year compared to last year.

And then we have a number of things that we do to continue to optimize our production. Not only does aScope 4 now have a 55% lower CO2 footprint than Scope 1 had when we launched that, but we also focus on other measures. Examples mentioned here is reduction in water consumption and total waste over 7% on both of these individually in the year.

Where others has a strong focus on Net Zero, our focus has been expanded also to focus on the products and packaging exactly because this is something that our customers find important. The bioplastic in the handles of all our scopes is just one example that I just talked about. We are also taking initiatives on our packaging for high-volume products that we have in our portfolio.

And then we are offering recycling programs in our main markets, something that we are learning from and expanding because we want to help our customers also be more sustainable.

So with that update, I'll now hand over to my colleague, Thomas, who will go through the financial results from the year.

[Thomas Schmidt, executive]

Yes. Thank you, Britt, and also a warm welcome from my side. So let's jump into the financials. It has been a good year with solid performance and strong progress throughout the year and where we've delivered 7.6% organic growth, and throughout the full year with a little bit up and down, but for the full year, limited and modest currency impact from foreign exchange by a modest DKK 7 million, resulting in a reported growth rate of 7.4%.

The 7.6% organic growth for the full year has been driven by good momentum in our Endoscopy Solutions business across all regional geographies and the main growth driver also resulting in an overall Q4 organic growth of 14%. North America grew revenues in Endoscopy Solutions by 32% in Q4 and 23% for the full year, with continued high growth in urology and ENT.

As a result of high comparables last year, Anesthesia and Patient Monitoring remained flat with organic growth, respectively, of minus 1% for Anesthesia and 1% for Patient Monitoring, resulting in a total growth for North America of 12% for the full year. Europe, full year organic growth of 3% driven by Endoscopy Solutions also in Europe, a growth of 16% in Q4 and 5% for the full year.

Patient Monitoring in Europe declined by 1%, while Anesthesia grew 2% for the full year. And rest of the world grew organically by 5%. Also here in this part of the world, we saw a positive growth in Endoscopy Solutions and also Patient Monitoring, respectively, with 18% and 10% for the full year while our Anesthesia business also here declined by 13%, again, also impacted by high comparables and stockpiling last year.

If we then have a look at our EBIT, we have delivered an EBIT margin before special items of 6.3%, resulting in that we have more than doubled our absolute earning compared to last year from DKK 112 million (sic) [ DKK 122 million ] in '21, '22 to now DKK 302 million in '22, '23. The improved EBIT margin of 3.6 percentage points is a direct result of the activities and initiatives that we have started in the beginning of the year to drive profitable revenue growth and also scale in our operating expenses.

And if we have a look at our gross profit and gross margin. Gross profit was a total of 2.6 -- sorry, DKK 2.7 billion, representing also an increase of 6% compared to last year. And our gross margin in Q4 reached 56.8% and also equal to the full year gross margin level of 56.8%. It does represent a decline of 0.7% versus last year, primarily due to higher input prices, but also higher overheads from our scaling of our factory in Mexico. However, also offset by strengthened revenue mix for the full year.

Clear focus of ours has also been in driving efficiencies and scale in our OpEx cost and that's part of our strategy and also part of the long-term financial targets. In the second half year, we've executed well and also fast to drive scale in our OpEx. So we've reduced our OpEx ratio down from 55% end of last year to 52% at half year and now down to 49% in Q4.

For the full year, it's -- it represents an OpEx ratio of 50%, meaning a full 5 percentage point improvement over last year. And that we have achieved by our cost reduction program and lower staff costs throughout the year, from lower freight rates and distribution cost, especially, also lowering of air freight and by driving efficiencies and general cost containment throughout our operating expenses. So very pleasing to see the good progress that we have made in the OpEx scaling and also, as mentioned, very much aligned with our long-term target of an EBIT ratio of approximately 20%.

Cash flow and positive cash flow, of course, has been a key -- is key for us to be able to fund our innovation and therefore, of course, of high importance of ours. And we've been very focused throughout the year to improve our cash flow and to secure that we deliver sustainable positive cash flow through a more disciplined capital allocation. And through a detailed plan and execution, we've delivered significant improvements in free cash flow quarter-over-quarter.

So starting from an improved, however, still negative cash flow in Q1 to a slightly positive cash flow in Q2 to a good and strong cash flow in Q3 and then even further strengthening that cash flow in Q4 to DKK 188 million for the fourth quarter. Therefore, of course, I am particularly pleased and also proud to report a full year free cash flow of DKK 192 million, an improvement of a full DKK 650 million compared to cash flow last year. That certainly puts the company in a good position from a cash flow perspective, but also from a balance sheet perspective. And the improvement in free cash flow we've achieved by delivering on our improved EBITDA through a drive for profitable growth, efficiencies and scalability in OpEx, as just mentioned, resulting in a very healthy EBITDA improvement from 6.6% Q4 last year to now 15% for the Q4 '22/'23. We've reduced our inventories from an all-time high inventory end of last financial year of DKK 1.2 billion to now DKK 907 million end of this financial year, so an improvement of more than DKK 300 million within 12 months.

Net working capital, ahead of plan. We've actually achieved our midterm target of a net working capital ratio of 20% end of this financial year through inventory, as just mentioned, but also better payment terms and improved cash collection. And last, but certainly also not least, we have a lower CapEx spend. This achieved due to a better project prioritization, better planning and certainly also better cost control. So in conclusion, 2022, '23, has been a very good year with a strong progress and where we've strengthened our financial position and where we've delivered on our financial targets for the year.

And with that, that concludes my presentation for the financial year 2023. And I now hand it back to Britt.

[Britt Jensen, executive]

So thank you, Thomas. And before opening up for questions, let me go through our financial guidance for the fiscal year that we already entered strongly for '23, '24. So commenting on these numbers. But first, taking a step back, if we look at the year that we just left, it was a year that was affected in the macro environment by a lot of volatility on the geopolitical front on inflation and so forth. And this is something that we expect to continue. But I also think that we have taken the measures needed. So we are not that exposed on the geopolitical front.

Also, when it comes to our key customer group, we continue to see health systems and hospitals being under pressure, suffering both from resource -- human resource challenges as well as financial challenges. And this is also something that we expect to continue, which is both for Ambu an opportunity, but also that causes some challenges.

So with that in mind, we feel very confident to put out an organic revenue guidance for the year that we have started now of 7% to 10% organic revenue growth. This growth, we expect to be driven by our key focus area, Endoscopy Solutions, which we expect to grow by 15%. If we compare this with our long-term targets that we set out in March, our long-term CAGR over a 5-year period for the revenue, total revenue was 15 -- sorry, was plus 10%; and for endoscopy, 15% to 20%.

So we are with the 15% at the lower end of this. Also, when we look at our growth, and this is important to note, strategic initiatives that we have taken related to our Anesthesia and Patient Monitoring business, we talked about this in the last quarter as well, going -- exiting countries, product discontinuations that actually is baked into the outlook, but would have had -- or does impact the revenue by 1% to 1.5%, but again, included in our guidance.

Then when it comes to our EBIT margin, we also have a long-term target of 20% potentially to be offset by opportunities to invest. Here, we expect and we are very committed to increase from the 6.3% that we exited this year with. So we are guiding for 8% to 10% next year. And then last but not least, on our free cash flow, we continue to improve that. And our guidance is to be above a free cash flow of DKK 270 million for the year. driven by both a higher EBIT margin and also continued savings from our cost reduction program.

So let me finish by concluding that we strongly believe that we are an interesting company with a very attractive potential. We are in endoscopy in an attractive fast-growing market for single-use endoscopy, where there's significant unmet needs that we can target and also a focus on more patient safety. So the single-use benefits in terms of workflow improvements, patient safety, health economics and sustainability resonates well, and we are well positioned with the largest single-use endoscopy portfolio to win in this area.

And with our dedication in sustainability that we talked about today, that should be a competitive edge in the years to come. We have a scalable business model that is also a key focus in our transformation program. We built on a strong legacy of high innovation know-how and continue to expand our capabilities. We have scalable production facilities and a strong global commercial infrastructure with our own presence in all major markets. We launched an exciting transformation journey that we are continuing to have as a focus for the next couple of years.

And with a strong balance on growth as our #1, but also improving profitability, we confirm also our long-term targets and are looking forward to deliver on these in the period to come.

So that concludes Thomas and my presentation. And I'll now hand over to the operator to open up for the Q&A session. Thank you.

[Operator]

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

[Rickard Anderkrans, analyst]

So 2 questions for me, please. First, if you could elaborate a bit on your assumptions for organic growth in the pulmonology segment as well as for the core business for '23, '24, just to get a sense of the bridge and your internal assumptions for the segments.

[Britt Jensen, executive]

The core -- the bridge -- yes, for the organic growth -- sorry, just -- so on the core business, basically, if we look at anesthesia and patient monitoring, our focus, as we have said, is that we have a focus on driving more profitable growth in this segment. So that means that we still have contracts that are coming up where we see a need to take significant price increases to remain on a profit level. And there's some uncertainty related to these because we don't know how they will end up. And also, it will be a little unsure pending the final conclusion on these when that will have an effect in the market. We have seen then when it comes to our Endoscopy business, strong growth in pulmonology and part of the business returning to growth. We have seen that in Q4, and we also expect growth in pulmonology when -- as we move into next year.

And then you can say the key areas of growth, urology and ENT, last year, we expect those to continue to grow and then the GI area will be more a gradual ramp-up based on the niches that we are targeting. So I think that's the overall how we see it. In pulmonology, maybe I should also add that the aScope 5, as I alluded to, we do see strong momentum on this. And as we see the demand both in the suite and outside the suite that will also be a contributor to the growth in the fiscal year that we are entering.

[Rickard Anderkrans, analyst]

All right. Just a quick follow-up then. So you do expect growth in the core business somewhere between 2% and 3%? Or how should we think about next year? Because you do have the -- obviously, the pruning effect and rationalization effect you mentioned as well.

[Britt Jensen, executive]

Yes. No, thanks for that. And as you've also noted, we haven't guided on this and you can, of course, calculate with the math of 15% in endoscopy and then it's around -- it's plus/minus around negative. And that uncertainty actually relates to some of the bigger contracts that remain uncertain at this point. So when we then look at the -- so this is something that we are going through now in order to be more profitable in the future. We still believe that the 2% to 4% CAGR that we have communicated as part of our long-term guidance will continue, but we do not want to limit ourselves from -- in this fiscal year from making some of the right decisions and also in order to drive profitability. So this is why we are not specific on -- specifically guiding on this area. In Q4, just also to be fully clear, we said that we will potentially be negative, but that was -- I mean, we don't see anything more specific than that and that is still potentially as we talked about in Q3.

[Rickard Anderkrans, analyst]

All right. And then just a final question. If you could elaborate on your sort of assessment of gross margin improvement for the next fiscal year as well, that would be helpful, some of the puts and takes and sort of the magnitude of the improvement you're thinking about on the gross margin That would be final one for me, please.

[Britt Jensen, executive]

Yes. So -- and as you have also noted last year, we -- I mean, we put out some soft guidance around our gross margins, and we have decided not to do that this year. But you could say the EBIT margin improvements we -- I mean how we look at that will be a mix of gross margin improvements and also improvements in the OpEx ratio. You can say that -- and what is driving the gross margin is, of course, it's an area that we continue to focus on our transformation journey. And then it's also product mix related, which is also where, of course, given the other uncertainties I talked about on the Anesthesia and Patient Monitoring side, those are, of course, also impacting this area. But what we are, of course, looking at is higher endoscopy sales, which has a favorable impact on the gross margin. So I think I cannot be more specific on that at this point.

[Operator]

The next question comes from Christian Ryom with Danske Bank.

[Christian Ryom, analyst]

Congratulations on the solid free cash flow performance here for the end of last year. I have a couple of questions to the pulmonology subsegment. So you mentioned several times that you're seeing good performance and strong momentum for the new Broncho 5. Can you help us with a bit of specification on the magnitude of this? So pulmonology overall, I think, delivered about 2% organic growth for the year. Can we essentially expect that, that was driven by the Broncho 5? How significant is the product at this stage?

And then a second question on the pulmonology outlook for '24. So your cost show on one of your slides in the presentation today that the pulmonology business has, on average, grown something like 12% over the last -- annually over the last 5 years. Is that a similar kind of growth outlook that you're envisioning for this business for '24? Or where should we think about that basically between, say, positive and up to this 12% That's my two questions.

[Britt Jensen, executive]

Thank you, Christian. And yes, let me comment on these. So when we look at the -- if we take the last one first on the outlook. So as you rightly said, we showed like looking backwards and taking out some of the COVID effect. We had a CAGR of around 12%. If we look ahead, we are not commenting specific on what we expect on pulmonology, but we do expect a continuous growth as we have normalized post-COVID. And that is driven by a mix of aScope 5 and the rest of the portfolio. And I think what we look more at is the different segments that we are in, where we do see growth coming in the ICU, OR, which has been our key segment so far. And then we also, of course, are moving into the bronch suite, but we are not commenting on these specifically in detail. But what we do find interesting, as we have seen this year and expect to see as we move forward. And this goes specifically for the U.S. is that we see a need for some of the procedures that were previously done by our aScope 4 that they are moving to aScope 5 as a better solution because of the positive feedback.

Also, I will say when we look at the totality and maybe that can give you some flavor on the pulmonology market and the limited data we have access to market share data for the U.S. specifically, we have seen looking at some of the data from one of the large GPOs, representing roughly 30% of the market. We have seen in the recent period and the recent quarters an increase in our market share overall, which makes us very comfortable. And I think that's a result, you can say, of our improved offering with aScope 5. But I think it's, in particular, also of our -- an effect of the stronger focus that we have on pulmonology compared to the last couple of years. You remember that we put some more resources -- commercial resources behind that last year. I don't know if that answers -- I don't give you any specific numbers on our outlook on pulmonology, but if that gives you some flavor of how we think about it.

[Christian Ryom, analyst]

Yes, that's still helpful. But can you maybe help us with a bit of a better understanding of the significance of the Broncho 5 at this point. So really, whether it has, let's say, a meaningful contribution to growth in pulmonology for the last year. So essentially, if it's the reason why we see positive growth in the pulmonology portfolio for '23?

[Britt Jensen, executive]

It's not -- I mean it's actually a combination. So it's -- our growth in pulmonology has not just been driven by aScope 5. It has been a helpful add-on, and it's only towards, you can say, the end of the fiscal year that we saw a stronger demand in the ICU and OR. So overall, when we look at the full franchise, we have seen the growth also on the aScope 4 side.

[Operator]

Next question comes from Niels Granholm-Leth with Carnegie.

[Niels Granholm-Leth, analyst]

First question is on the timing of your updated ICU OR pulmonary aScope. Could you talk about the timing of this launch, which you called out as being under the development? And then a couple of housekeeping questions. Could you also talk about your CapEx ratio for the coming years? Should we expect it to remain at around 7% of sales? And could you also talk to your net financial costs?

[Britt Jensen, executive]

Thank you. And I'll start with the first and let Thomas handle the financial question. So if we look at the ICU next-generation, as we now talk about for the first time externally, it's a project that we have been working on internally and where we -- as how we operate with our endoscopes that has some synergies to some of the other developments that we have in other areas. We are not -- and that's primarily for competitive reasons, we are not commenting on our launch time line for our new products. But I can say that it's a product we have in development still with a bit of a way to go before we are in the market. I think that's as specific as I can be. But it's one where we use some of the news technology and some of the newest features that we have been working on internally in the company and still also being focused on the COGS and the cost of this product. So we can still have it at a level not too far from the aScope 4 level. And so it will be a lower price version compared to the aScope 5. Thomas, will you comment on the...

[Thomas Schmidt, executive]

Yes, no, good. Thank you, Niels, also for the comment. So on net financial costs, maybe a couple of comments just back to what I also presented. First and foremost, we've, of course, done a capital increase, as you know, back in March. And that capital increase, we have basically used also to lower our debt. Secondly, with the very significant improvement in our cash flow and a positive cash flow, as you also will see in the details of the annual report, we basically don't have any outstanding debt towards the banks anymore. So that also means that the net financial cost we really have been driving down, and we don't really expect anything major within the net financial cost looking forward. So a very good and healthy position from a balance sheet also.

[Britt Jensen, executive]

And maybe I can say on your CapEx question, I mean, it was 7% in the past year. We do not guide on CapEx, but I think you can assume it will be around the same level in the next fiscal year. It is not completely off.

[Niels Granholm-Leth, analyst]

And so does it mean now that you don't have any bank debt left that you would consider share buybacks in the coming years or potential to become more active in terms of acquisitions?

[Britt Jensen, executive]

Yes. No, a very good and relevant question. And I think what is very clear is that, I mean, we -- our focus is very much on being a growth company and continuing to invest in growth. But at the same time -- I mean, we're also focused on increasing our profitability. So that's, of course, where we are right now looking at, I mean, ultimately, our -- I mean, we have to develop value for our shareholders and only invest in areas where we can see that we have -- where we can create an attractive return. So we are not more specific around what our plan is with the new situation of improved cash flow, but it's something we will come back to at a later stage.

[Operator]

The next question comes from Martin Brenoe with Nordea.

[Martin Brenoe, analyst]

Martin Brenoe from Nordea. Two questions from my side, please. First of all, I would just like to understand the guidance and just how you bridge it to the Q4 performance a little bit. I mean, you delivered 25% organic growth in Endoscopy Solutions in Q4, which is quite nice to see and very comforting to see. But then you guide for 15% organic growth for the next financial year, that's an oddly specific number with relatively low visibility. Could you maybe clarify how you got to that number and whether it should be seen as a floor rather than the number that we should use as our sort of our point of guidance here.

And then on the EBIT margin, you are already at 8% EBIT margin here in Q4. You guide for 8% to 10%. How does that work when you consider the inventory impact that you had in the last financial year operating leverage and everything else being equal, the profit improvement you should see in the core part of the business? Maybe some more words on that would be very helpful.

[Britt Jensen, executive]

Yes. Thanks, Martin, for good questions. Maybe if we start with -- I mean, with the guidance -- or maybe to start with an overall comment on our guidance. I mean, how we guide, we have, of course, had, I mean, our careful or thorough internal process and what we guide on is in line with what we internally see when we put the full picture together. So it is what we consider as being what is realistic for us to deliver on -- given the environment that we have. And given some of the uncertainties we have, be it external uncertainties in both macro environment, but also health systems. And then internally, you can say what are our major uncertainties. That's basically also 2 things. It's some of the decisions on that we make to balance profitability in Anesthesia and Patient Monitoring and then it's also some of the new launches where it's still our new launches, I think we have learned the hard way, and we have also tried with our Capital Market Day to put some more transparency around what happens when we have new launches and that gradual ramp-up.

So these are some of the uncertainties that we build in. Having said that, I think you need to be a bit careful comparing the Q4 with the full year. We have some swings quarter-over-quarter in our business basically because a lot of our business is related to contracts. So we sometimes have some orders that are related to bigger contracts. I think with the 15% Endoscopy growth that we put out, we are actually excited about that. And we also believe that this is what we, as a business, can deliver on. And that also brings us on track for the long-term targets that we have set out. So that's how we see that.

Then you can say when it comes to our EBIT and the 8% to 10%, we also still, you can say, have some quarterly swings on our cost side. But more importantly, you can say we continue to see inflation. It has gone a bit down compared to where we were a year ago. But you have to remember also that the inflation is still one that affects our cost, but where we are not, to the same extent, able to put that on our customers at the same speed, lot of that because we -- our -- a lot of the business is tied up on contracts. But I would also say on this one and as we are continuing also our transformation program, we are very dedicated to get to a significantly higher level as is also in our targets. So that's how to think about it. But again, I mean, we have some quarterly swings and one should be careful concluding on those and extrapolating those to a full year. I hope it gives some clarity.

[Martin Brenoe, analyst]

No, it does, definitely. Just one follow-up maybe. In your best assessment, how much of the 15% is going to come from the red dots on your Slide 10? So what's the solutions in-market? And how much of the growth will actually come from new solutions in the market like how much is baked in from new solutions coming to market here?

[Britt Jensen, executive]

No. And that's exactly a very good question because I think the majority of the revenue and the growth will still come from -- you can say the red dots or the products that are already in the market. Then as we bring new products into the market, the dynamics that we see because we -- I mean once a product one of our endoscopes is approved, it's really the first time with the approval that we are able to test it, if you will, or to use it in humans. So that means that when we have an approval, it takes a couple of months before we really are in full commercial launch mode because we are testing it in a smaller group of patients before going broader.

And then you can say, once we then go to the commercial launch phase, we have also some months of negotiations with the hospitals or the GPOs before the sales really starts. So that's one thing that means that there's a time lag from when we have an approval until we see revenue. Then something that we are also taking a slightly different approach on than previous is that we are a little bit more stepwise when it comes to country rollout. So we are making sure that -- I mean, whatever feedback we have that requires some adjustments that we get that early before we roll it out too broad. So that is basically -- that basically does mean that, I mean, the ramp-up time for the new launches takes more time. And that's also what we have now built into our forecast that we are not too aggressive or too optimistic on our forecasting for the new solutions. It doesn't mean there are less ambitions on those because we do think that we have attractive products in the pipeline that will fuel our longer-term growth, but we are just a little more careful on our forecasting for the early phases.

[Martin Brenoe, analyst]

So just -- sorry, last follow-up for me, and then I promise to jump back in the queue. But just -- the way you phrased it, and correct me if I'm wrong here, but it sounds like the 15% is more or less entirely based on the products that you already have in market because you don't really have the visibility in the new products. So any faster-than-anticipated take-up in the new products would be sort of upside to the 15%. Is that fair to say?

[Britt Jensen, executive]

So I'll not comment on the exact split, but you can say it's correct that a key part of the 15% growth is from existing products, yes.

[Operator]

Your next question comes from David Adlington with JPMorgan.

[David Adlington, analyst]

So most have been asked already, but I've got a couple of more technical ones. So just on CapEx. Your CapEx was DKK 80 million in the first 9 months, but for 12 months it was only DKK 71 million. So I just wondered what was going on there to get a negative CapEx in the fourth quarter. And then secondly, just around R&D capitalization and amortization, the delta was about DKK 60 million for this year with capitalization behind amortization. Just wondered in terms of how you're thinking about capitalization versus amortization of that R&D this year.

[Britt Jensen, executive]

I think these -- thanks a lot, David, for the questions. I think these are more questions for you, Thomas.

[Thomas Schmidt, executive]

Yes. Thank you, David. So with the first question you had was around the CapEx. Maybe I just will come back to the second one. I'm not sure if I got that 100%, but let me maybe just answer the first question. What you're referring to, of course, I assume, is what you see in the cash flow overview of the total of DKK 71 million for the full year from a cash flow perspective. It is, of course, a net number, as you are aware of. So of course, there also will go some sale or disposals out of that number, but let us come back on that topic also. The second question, I'm not sure if I understood that completely. Could you just repeat the second question?

[David Adlington, analyst]

Yes, maybe I just want to get a feel for how you're feeling about capitalization of R&D versus amortization. Should we see more normalization? Or should we expect capitalization to still exceed amortization?

[Thomas Schmidt, executive]

Okay. No, good, understood then. So of course, we don't make any changes within our accounting policy. So that, of course, will mean that we will continue to capitalize, obviously, our R&D -- primarily our R&D expenses. So you will continue to see an increase also next year of the depreciation and less so on the amortization, but it's going to normalize rather than anything else. And that goes back to the CapEx ratio that we also mentioned about. So roughly the 7%, so it will come to a more normalized level.

[Britt Jensen, executive]

I think we are aware that we have a -- I mean that we have a slightly higher capitalization of R&D than many other companies. And that's, of course, a point of attention for us. But also, I mean, we believe that it takes some time before we can normalize and match completely.

[Operator]

The next question comes from Wei Zhou with SEB.

[Yiwei Zhou, analyst]

It's Wei from SEB. I have 3 left. I will do one at a time. Firstly, could you maybe give us a softer guidance for Q1, especially on the Endoscopy growth as you did from last year?

[Britt Jensen, executive]

Yes. I think we are not giving any soft guidance for Q1, unfortunately, but I can say we are off to a good start through the year and again, with full normalization post-COVID, so we don't have those effects weighing in anymore.

[Yiwei Zhou, analyst]

Okay. Fair enough. And secondly, on the margin guidance. Last year, you had this ramp-up costs for Mexico plan. And for the 2023 -- '23, '24, could you maybe comment on if we still expect the same amount of ramp-up costs?

[Britt Jensen, executive]

Yes. So I mean, we have had, as you say, ramp-up costs in -- I mean, in the '22, '23 for Mexico. We are not at full capacity where we want to be, but we're doing it gradually. So you can still expect to see some of that, but -- yes, and then we are not giving specific guidance on the amount, but there will still be some ramp up during the year.

[Yiwei Zhou, analyst]

But can you say if it will be at the same level or lower than the '22, '23 level? Because I can see the amount from your notes, financial notes.

[Britt Jensen, executive]

And we are not guiding specifically on it, but I'll say it will not be -- we do not, at this point, expect it to be remarkably higher than what we had in the previous year.

[Yiwei Zhou, analyst]

Okay. And lastly, you mentioned the aScope 5 strong momentum. But could you maybe comment on if it has kind of cannibalized your aScope 4 sales? Because as I understand, it is also now penetrating well in the ICU and ORs.

[Britt Jensen, executive]

That's a very good question and something that we are monitoring closely. And I will say that we are seeing a limited, but of course, I mean, some level of cannibalization as we're moving into ICU and OR, but that's still relatively early days. And you can say -- I mean, the good rationale for being present in ICU and OR is also because that's where -- and all this is specifically U.S. focused. That's also where we see more competition from others. So what we do see is that it's also a way to have the full portfolio. So it's often the customers using aScope 4 that will use -- that are customers using competitor products. So we see a limited amount of cannibalization, but some of it -- but the endoscope is obviously at a higher price. The price premium is, as we said when we launched the product, around 30% higher than aScope 4, and that's still the case. And then we are, of course, using our full portfolio also as we see competition to have a stronger position.

[Yiwei Zhou, analyst]

Okay. Maybe just one follow-up here. So when you're looking at aScope 4 sales, I guess that's the product where you have faced most of competition. Can you confirm it has now returned to a positive growth?

[Britt Jensen, executive]

Yes. So in the last -- you can say, in the last quarter that we have had a positive growth on aScope 4 as well. So the 16% growth that we refer to, it's not only driven by the aScope 5.

[Operator]

In the interest of time, we will take one last follow-up question from Martin Brenoe.

[Martin Brenoe, analyst]

I guess I was lucky here. I just wanted to understand a little bit. I'm sorry for being a bit obsessed with the Slide 10 here, but there's a lot of blue dots on this slide. Could you maybe elaborate a little bit on where you are in terms of capacity, whether there are some products that you have needed to postpone a little bit in terms of video laryngoscope and the ureteroscope and whether you see further scope for product launches in the next fiscal year?

[Britt Jensen, executive]

Thanks for that question. And I also do think Slide 10 with our portfolio is an important one. You can say, overall, what -- I mean, what we basically did last year was that we -- I mean, we focused in. So we had, I mean, more projects that we were focused on that were -- I mean, we're not on the slide. So we are focused in and then you can say some of the approvals that we have had this year, if we take GI with, I mean, with our colonoscope as an example, it's projects that were more or less done last year. It's very clear that we have a prioritization to make sure we also resource the highest priority projects. We do see projects like the video laryngoscope as one that is fully prioritized in our portfolio.

The same goes for some of the other key products that we have, ureteroscope also being one that we are quite progressed with, but it has been a rebalancing of our priorities that we did around a year ago and also adjusting our way of working. At the same time, I will say, and that's also what I was trying to allude to when it comes to our systems. We are looking at a much more integrated approach when it comes to our systems and investing more on the software side to see how can we also make improvements on a system that can benefit across the different segments because we see that some of the demands that are coming from customers can be met by the technology advancements that we do on the systems itself. So that's how you should look at that as a full portfolio where we will do improvements on the system that benefits across the different segments.

But we are deliberately not more precise on the different products and launch time lines. Unfortunately, we are on track and prioritizing some of the key ones, and we'll continue to do so. And also, we are thinking a bit ahead to make sure that we can continue to be innovative and leading in the segments that we operate in, where we do see competition in some of the segments. We have our new Chief Technology Officer started August 1, and he's off to a very good start and has a good experience and understanding of how to operate that. So I feel quite confident in how we work and that we have clarified more priorities, reduced our complexity in how we work, so we can get a better throughput and focus on the right solutions for our customers.

[Operator]

This concludes our Q&A session, and I hand back to Britt Meelby Jensen.

[Britt Jensen, executive]

Thank you to the operator, and thanks to everyone for joining us this morning. Thanks for good questions. I hope you'll have a good rest of day. Everyone, thanks for joining.