Ambu A/S (AMBU-B.CO), a leading medical device company, has reported strong financial results for the second quarter of the fiscal year 2023-24, with a significant increase in organic revenue growth and EBIT margin.
The company's CEO, Britt Meelby Jensen, outlined progress in Ambu's transformation journey and the introduction of innovative products, including a new endoscope made of bioplastic material in the US market. Ambu has raised its endoscopy revenue guidance and expects continued growth across its product segments.
Key Takeaways
- Ambu's organic revenue grew by 15.5% in Q2, driven by a 22.3% increase in the Endoscopy business.
- The EBIT margin before special items rose to 14.2%, a significant improvement from 3.9% in the same quarter last year.
- Free cash flow reached DKK128 million for the quarter, with total organic revenue growth of 14.9% for the first half of the fiscal year.
- The Endoscopy segment, which includes pulmonology, ENT, and urology, accounted for 59% of total revenue.
- FDA approvals were granted for aScope Duodeno 2 and aScope Gastro Large, with plans for commercial release in fiscal year 2024-2025.
- Ambu is focusing on niche markets and a cautious, stepwise sales strategy for its new duodenoscope.
- The company is open to potential mergers and acquisitions that align with strategic priorities and growth areas.
- Competition from companies like Verason, Boston Scientific (NYSE:BSX), and Chinese entrants is acknowledged, but Ambu remains focused on maintaining its leadership position.
Company Outlook
- Ambu has raised its guidance for endoscopy revenue growth to above 15%.
- The company expects positive growth in anesthesia and patient monitoring for the fiscal year.
- Full-year revenue growth is projected to be between 10-12%, with an EBIT margin of the same range.
Bearish Highlights
- Ambu faces harder comparables in pulmonology, which may challenge growth momentum.
- The company acknowledges increased competition in the medical device market, particularly in pulmonology, urology, and ENT.
Bullish Highlights
- Strong financial performance in Q2, with total reported sales of DKK1.367 billion and a gross margin of 59.5%.
- Ambu's leadership position and differentiation in the market are emphasized as strengths.
- The potential conversion of the gastroenterology market to a single-use market is highlighted as a long-term growth driver.
Misses
- Specific pricing for the new version of the duodenoscope was not disclosed.
- Inventory write-downs, while at a normal level, were a concern in the past.
Q&A Highlights
- Ambu plans a controlled market release for the Duodeno 2 product in key hospitals for feedback before the commercial launch.
- The adoption of the TPP code for the aScope 5 is ongoing, with potential for an extra push.
- The company is further along its "Zoom (NASDAQ:ZM) in" strategy than anticipated, leading to better margins in Q1 and Q2.
Ambu's CEO concluded the call by expressing confidence in achieving long-term guidance and thanking participants for their questions. The company's focus on innovative solutions, efficiency, scalability, and sustainability, along with its strategic approach to market releases and mergers and acquisitions, positions Ambu for continued success in the competitive medical device market.
Full transcript - Ambu A/S (AMBUBc) Q2 2024:
Britt Meelby Jensen: Good morning, everyone. And welcome to this call today with the Q2 2023, '24 financial results from Ambu. My name is Britt Meelby Jensen. I'm the CEO of Ambu. And with me today, I have Henrik Skak Bender, our CFO. The agenda for today, as usual, is that I'll go through some of the business highlights. And after that, I'll hand over to Henrik to cover the financials, and we will finish today's meeting with a Q&A session. So let's dive right into it, starting with the financial highlights. So for the Q2, our second quarter of the fiscal year, we delivered a strong organic revenue growth of 15.5%. This was driven by a strong momentum in our Endoscopy business, where we grew 22.3%. If we look at our profitability, we continue to also strengthen that with an EBIT margin before special items of 14.2% compared to 3.9% in the quarter just one year ago. The free cash flow, we also continue to strengthen that. We delivered DKK128 million for the quarter, again, continued strong momentum here. And if we look at the overall business from the first half of our fiscal year '23, '24, we have delivered a total organic revenue growth of 14.9%. So later this month, it will be two years since I took over as the CEO of Ambu. I'm very proud about the momentum that has been driven in these two years. It's basically coming from very dedicated colleagues, that understand how we deliver value to our customers who go to work, engaged and motivated every day. We have made great progress on the transformation journey that we launched with our Zoom in strategy, but there's still a lot more that we believe that we can do to take this even further. So let me give, as usual, an update on our progress on the strategy. Starting in the top left corner here with our innovative solutions. Because we did have some progress this quarter with two new FDA approval in our gastroenterology portfolio, we had our new generation of our aScope Duodeno 2, approved by the FDA a little over a month ago, and we also had our aScope Gastro Large with a larger working channel approved. And then on top of that, we are announcing a broncosimulator that I'll come back and talk about, which is a good training tool within our key segment, pulmonology. We are continuing our transformation and our strong focus on how we execute in this quarter as well. You see that both in the revenue growth, but also in the increased profitability. We are laser focused on taking price increases in the areas where there's a need to improve profitability. And then we also continue our transformation to improve efficiency and scalability in how we work. And we are on the plan that we launched together with the strategy, end of 2022. On the people side, we have strengthened our organization, bringing both new people into the leadership team and also bringing new capabilities in to improve on how we work in delivering on the strategy. And then we are also making progress in how we work strengthening both our global mindset and also the impact we have in front of the customers. On sustainability, I, in the last quarter, talked about how we have our science-based targets approved, and how we are also -- we have also made a clear plan for how we are net zero by 2045. What I'll report on this quarter is that we are now with our Gastro Large launching the first endoscope in the US market, made of the bioplastic material that we are gradually converting all our endoscopy portfolio to be using this material, which we will be complete by as previously announced, early in the next fiscal year '24-'25. So overall, again, another strong quarter with good momentum and progress across the full portfolio. Let's look a bit at the financials. So we delivered in the quarter a total revenue of DKK1.367 billion. That represents a growth of 15.5%. If we look at how big a share this is of our total revenue, we are now with endoscopy at 59% of the total revenue, driven by the 22.3% growth. And then with a nice growth in anesthesia and patient monitoring, this represents today 41% of our total revenue. So if we dive into the segments now, starting this time with anesthesia and patient monitoring. So as you could see here, we delivered DKK560 million corresponding to the 7%. And for the full half year, we delivered 4.2% growth. If you look at these numbers, and compare with last year, you have to reduce the focus by DKK20 million, which is DKK20 million we had of revenue in the 40 markets that we also reported on last time that we have exited. Then another key focus that we have in this segment specifically is on price increases. We have carefully examined our business and have looked to increase prices in the areas where we're either not profitable, or have too little profitability. This, we are delivering on in line with our expectations. And actually, the outcome of some of these negotiations on big contracts, which is something that is continuing also into the next quarters that we look at. That means that what we have seen now is that we expect for this fiscal year, positive growth in anesthesia and patient monitoring. This was a little more difficult to have a full transparent view on a couple of quarters ago, where we still had more of these negotiations in front of us. Now let's look at our endoscopy business. Again, we grew 22.3%. We delivered DKK807 million for the quarter. And if we look at the total growth also coming from a strong Q1 that we reported on a couple of months back, we are now year-to-date at 23.6% growth in our endoscopy segment. This is driven by a combination of strong growth, both in pulmonology, ENT and urology. Looking into the details of what we have delivered and the strong momentum, it also means that the guidance that we set for this segment, in the beginning of this year, of delivering around 15% endoscopy revenue for the full year, we are increasing that to say, above 15% because we believe that we can do better with where we are today than the 15% that we previously reported on. Let's go more into the two different segments that we report on. Starting with pulmonology, which remains still our biggest endoscopy segment. This is a segment that you know has been previously impacted by COVID. We are now post that and have come to the normalization, as we also mentioned in the last quarter. This quarter's revenue of $427 million and a growth of 13.9%, brings us to a year-to-date growth of 15.9% and a total of DKK825 million. We are, as usual, at this time of year, we are affected by the flu season. I'll come back and comment on that shortly. We continue to have strong momentum, both on our aScope 4 and also strong progress in our most advanced scope aScope 5. And then we have VivaSight, which we did not have in Q2 last year. It was launched around the end of the Q2 last year. Then on the aScope 5, as you know, we previously reported that we are the only bronchoscope out there, that has received this special reimbursement status, with the Center for Medicare and Medicaid Services. This means that for procedures done with our aScope 5 scope, hospitals can get additional reimbursement. We are happy to announce that we are continuing to see positive interest towards this opportunity, and it's something that we are continuing to focus on. Let's just look at the flu data. And what you see on this graph is data from the flu season, focused on the US. You see the flu season development in -- measured as visits to a healthcare professional driven by flu like symptoms. And what you see on this graph is that not only in this fiscal year, in the first half, we have had an above average compared to the last five years in terms of flu rates. And remember, this is a positive -- does have a positive impact on our pulmonology business. What we saw compared to last year, we had a very strong Q1 in terms of flu levels where it was slightly lower this year. If we then look at the Q2 that we just finished, we saw last year that the flu levels went down quite significant where this year, they stayed at a higher level compared to previous. So overall, this does have a positive impact. We do not specify exactly how much. It can be a little difficult to get the full details, but we definitely see a strong correlation here. Now let me move to what I talked about before our broncho simulator, which is a product that we have made available for training purposes of pulmonologists around the world. Basically, it's a product that you cannot use -- that is not yet approved to be used in patients. So it's only for training. And therefore, it's also not a product that is generating any form of meaningful revenue for the business, just to make that very clear. However, it is a product that receives a lot of interest and positive feedback, because it enables health care professionals in a training session to look at both, to document and also to track where in the lung anatomy have you been with the endoscope. So overall, this is something that we -- for us is the first of many steps into using AI into our products. It's a key focus in our R&D team, because we do believe that through AI technology, we are able to improve the performance of our scopes going forward. Something that you'll hear much more about in the coming years. But for now, this is a tool that is available for trading purposes. So let's look at the endoscopy business that is outside pulmonology. So this is ENT, urology and GI. In this segment, we had for the quarter, an impressive 33.3% growth, leading to a total revenue of DKK380 million. And for the first half of the year, we are at 33.7% growth. This is mainly driven by continued very strong growth in both our ENT segment and in urology. If we look at the urology segment specifically, this is -- continues to be the cystoscope driving the majority of this revenue. We did some quarters get our ureteroscope approved in Europe. It's still pending in the US. But this is not yet driving any meaningful revenue, as we are still in the controlled market release phase as we call it, when we are still testing the product with key hospitals. Also to strengthen our revenue in this area, we are continuing to expand our portfolio and I'm happy to touch upon two key approvals that we had with the FDA in this quarter. The first one is our new generation aScope Duodeno 2. So this is a product that represents a new generation of our Duodeno 2. It's based on our existing technology platform that we use for all the other scopes. It's a product that is designed to both relieve the burden of the complex reprocessing that you have today, but at the same time also with a fully sterilized endoscope meet the demands that the healthcare professionals have when they're performing these quite complicated procedures. We have worked closely with leading physicians in the space to come up with this new generation and improved solution, where we have enhanced compared to the best version that we came out with, enhanced the product on a number of key features such as imaging, such as the way that the product is handled, and some of the components around the maneuverability. Given that the nature of ESCP procedures is quite challenging for physicians, we do not have strong expectations of a rapid uptake. How we are going to do in the coming months is that we are working with selected key hospitals for, again, what we call our controlled market release, where they, for the first time, can use the product in patients and give us the feedback that we are looking for, before we are looking to bring this out commercially in our fiscal year '24, '25. What is also very clear is that for this product, it was an area that we made a huge bet in a couple of years back. The approach that we take today in this segment is quite different. We are very focused on taking a step-wise approach, as when we launched our bronchoscope many years ago, it was a step-by-step until we got a meaningful penetration. And we are expecting to do exactly the same. We have learned a lot from the physicians from our previous experience. We have built a strong network, and we do believe that we have something to offer, but our -- most of our commercial resources are still focused on the three other segments that I talked about, pulmonology, urology and ENT. Let me talk about the other approval that we had with the FDA, and this is our aScope Gastro Large. So basically, the only gastroscope out there with this large working channel. This is something that has been quite in demand from a number of healthcare professionals because having a 4.2 millimeter working channel, allows them to do therapeutic procedures that much easier than they have been able to do before. An example of this could be acute bleedings that are performed in many countries in the ICU department. So this is also a product that fits well into our GI portfolio, where we will exactly as I talked about with our duodenoscope, together with the existing gastroscope that we have on the market, we are taking a step-by-step focused on the niches where there's a high need approach in how we roll this product out. So before handing over to Henrik, let me just look at the market finishing off with that and also to illustrate why we are focusing across the different segments. What this graph shows, and you have seen this before, is the number of procedures performed in the countries that we focus on, which is still around 100 million procedures in total. The value of an endoscope across these procedures varies across the segments, and we have not included that for simplicity on this map. But what you do see on this map is the dark blue color, which is most prevailing to the left in the pulmonology, urology and ENT segment. This is the current sales volume that we have today. So we stopped some quarters back announcing specific volumes in terms of number of scopes that we distribute, or that we sell in each of the different segments that we are in, but this should give a rough picture. The light blue color that you see on the picture is how we best assess the addressable market out there with our current portfolio. Here, it's important to mention that this is, of course, very subjective for health care professionals. Some believe that it's useful in some processes, others do not. So it's an overall estimate. And what is also important to note here is that we are continuing our innovation and R&D efforts to expand the use of the scope, within each of the segments. So this is only a picture that you see now where the light blue color will expand over time. My final point with this slide is to note that the GI segment represents around two thirds of the total number of procedures done in endoscopy. This also explains why this is a market that we continue to see an opportunity in, because this market is compared to pulmonology, urology and ENT, where not so many years ago, these segments were not served by single-use endoscopes, but they are today. And we do see in gastroenterology over time, with the longer term glasses on, that this market has potential to convert segment by segment into a single-use market. And this is where, as market leaders in single-use endoscopy, we believe that we should be at the forefront, and we have now products that we can continue to expand from, and that can be used in the hospitals. So this concludes my session, and I'm happy to hand over to you, Henrik, to go through the financials.
Henrik Bender: Thank you very much, Britt. And I'm happy to be here today and present the financials for Q2. So let's jump into it. As Britt said, we had a very strong Q2. Total reported sales of DKK1.367 billion. Total reported growth of 15%, of which 15.5% was organic growth and a negative currency effect of 0.5%. If you look at the growth by segment, Britt has addressed that, of course, that was mainly driven by our endoscopy growth, second by Anesthesia and patient monitoring. From a geographical perspective, we had strong growth across all of our three overall geographic regions with particular continued strong momentum in US and also very solid growth in EMEA. So a very -- another very solid quarter. Turning to margin. As Britt also said, we had a strong pickup in EBIT margin in our second quarter, both if you compare to last year where we had an improvement of more than 10 percentage points. And also if you compare it to our Q1. The main driver of this improvement is still a better OpEx ratio, so OpEx leverage. Second, by also an improvement in our gross margin. And let me just double click on that. So starting with gross margin. We had a pickup of a total gross margin level to DKK813 million, representing an improvement of almost 4 percentage points in gross margin level, versus the same quarter last year, bringing us to a 59.5% gross margin for Q2. The main drivers of this improvement is a combination of one, the price increases in anaesthesia and patient monitoring that Britt also talked about; the mix between endoscopy and anesthesia patient monitoring, where endoscopy still has higher gross margin; production efficiencies and also a bit of tailwind on the currency side. But the main drivers still being pricing and the mix between endoscopy, anaesthesia and patient monitoring. Secondly, looking at OpEx, we saw a leveling out, a plateauing of our total OpEx. So our Q2 OpEx ended at DKK619 million, which is pretty much flat versus last year at EUR618 million. Therefore, with a solid growth, the OpEx ratio dropped almost by 7 percentage points, 6.7 to be exact. Even though we have been investing more in our commercial resources across the organization. The main driver of this is that we still see a drop in our distribution costs, which is only partly offset by more investments in our commercial organization. Looking ahead, we will continue to invest in further growth. And therefore, we are expecting the total OpEx to go up in the quarters to come, but we're also still targeting a further improvement in the OpEx ratio. Turning to cash flow. We were very happy to report another quarter with a strong cash flow. We reported a total free cash flow for Q2 of DKK128 million, bringing the first half year to DKK263 million. If you see how that has developed over the last five quarters, you can see that now we're at a more stable level. Our net working capital ratio for Q2 ended at 20%. Something I'll comment more on in a second. And overall, we see a good and solid cash conversion in the business. However, we also still see a slightly lower CapEx level than we would expect going forward. And therefore, even though we are now guiding on a higher cash flow, we will expect a slightly lower free cash flow for the second half of the year. More specifically, as I said before, our net working capital ratio against revenue is now at 20%, which is also the level we're targeting long term. We're seeing a solid development both on trade receivables and payables, and also an adequate buildup in our inventories to support further growth. CapEx ended low, even though it was up from the last order from 4% now to 5% in Q2. It's still below the historical level, and we are expecting this to go up in quarter three and quarter four. So overall to go up in the second half of the year. Overall, with the continuation of the implementation of the Zoom in strategy, we are expecting the EBITDA to continue to go up, supporting also a further improvement in our EBIT margin. So lastly, we are happy to reiterate that we are on the 10th of April, increased our guidance for the full year on revenue to 10% to 12%, from a previous guidance of 7% to 10% and on EBIT margin also from 10% to 12% from a previous guidance of 8% to 10%. Furthermore, on cash flow guidance now of total of $370 million plus. Next to this, we are now on revenue, as Britt also mentioned before, specifying on revenue growth, specifically that we're expecting our endoscopy solution to grow more than 15%, compared to previously where we were guiding around 15%, and also that we are now expecting positive growth from anesthesia and patient monitoring. All of that said, we are still seeing ahead of us for second half, as I commented on in our Q1 update, some challenges ahead in terms of the percentage growth levels, both with harder comparables on pulmonology for Q3 and Q4. And also, we are still seeing some risks within Anesthesia and patient monitoring, which is why we're still keeping the guidance at a total growth of 10% to 12%, despite the very strong second quarter. That concludes the finance update. And with that, I will hand it over to the operator for questions. Thank you.
Operator: [Operator Instructions] The first question is from the line of Martin Brenoe from Nordea.
Martin Brenoe: Congrats with another solid quarter. I'll start with two questions, please, and I'll just take them one by one, please. So first, I also noted the change of wording on your endoscopy solutions guidance, now expecting above 15% organic growth. And it's always nice to see that the sky is the limit here with no cap, but could you maybe give some color on how you should -- how we should think about the run rate in H2 compared to H1 with, as you said, Henrik, the tougher comparison base and less help from the bulky and NHS orders and the flu tailwind that you got. Is there anything that could suggest that you should see an incremental acceleration in H2? That would be the first question.
Britt Meelby Jensen: Yes, I can let you
Henrik Bender: Thank you, Martin, and thank you also for commenting on the strong Q2. So overall, we are now guiding more precisely on the plus 15%, as you note. Our long term guidance is 15% to 20% level for our endoscopy solutions. We're not being more specific on what exactly we're expecting for the second half of the year. But I just want to reiterate the point that we are now up against harder comparables. So we are very focused on ensuring that we continue the momentum we see. The harder comparables are mainly within pulmonology, whereas in everything else, but pulmonology, in particular within urology and ENT, we are still seeing very strong momentum, and we're expecting that to continue also for the second half.
Martin Brenoe: And the second question would be to the new Ambu Broncho Simulator. Just trying to get my head wrapped around how you see, the potential attachment rate on this and whether we should see this as a potential incremental growth driver or rather something that is reinforcing the entry barriers in the pulmonology space here?
Britt Meelby Jensen: And it is important to specify that this is for training purposes only. And the reason why we are bringing this out is, that as market leaders in single-use pulmonology, we believe we have an obligation and an important role to play when health care professionals are being trained in endoscopy of the upper airways. So it's a product that we are bringing out now, and that could potentially later be also one that we want to pursue for clinical use, but that's not where we decided to go at this stage. It's an important way, in particular for younger and newer pulmonologists to feel comfortable around the whole procedure of making sure that you -- I mean, that you look into all the detailed areas of the lung anatomy. And at the same time, there's also potential over time for documentation purpose. So you can actually afterwards, see that the endoscope has actually been in all parts of the anatomy. So that's really how we look at it. It's very important to say that at this stage, it's not a revenue-generating product of any meaning, but simply one that adds to our portfolio as we expand our leadership in pulmonology.
Martin Brenoe: Just one quick follow-up on that. Should we see this as the first novel step into implementing more AI and software into let's say, the devices that you're selling? And at some point, this could be implemented as a part of also the actual procedures and not just the training part of it?
Britt Meelby Jensen: Definitely, I mean I think we have a benefit, and we are increasingly focusing on our software and our solution. And our benefit is with the broad portfolio of the scopes that we are, to a larger extent, building all of these on the same technology platform. So that basically means that we have some interesting technology and some interesting features that we are, for competitive reasons, not talking so much about that actually can significantly improve the performance of our scopes going forward. So this is something that will come out over time. But of course, I think we have a clear focus on, the more we can enhance the performance of our scope through the technology. I mean, that comes with a number of benefits. And that's where technology is mature enough that we can actually do that now. So it is a major focus area for us and has been for a couple of years, and now we are just pushing that even more. It's part of our focus as well, I should say, moving from an endoscopy to a solution provider, which is something that we believe is where we need to go in the future.
Operator: The next question comes from the line of Christian Ryom from Danske Bank.
Christian Ryom: I have two as well, and I'll take them one by one. So the first question is a bit along the same lines as Martin's first question, dwelling a little bit on the implied guidance for the second half of the year. So when I look at the top line guide at the group level, it appears to imply that even at the top end of guidance, the revenue run rate will be slightly lower in Q3, Q4 relative to the level that we've seen here in Q2. Can you talk a bit about the assumptions that you put into that? I understand that you might have a concern around, say, a drop-off in pulmonology sales due to flu season seasonality, but is there anything else that we should be aware of as risk factors here for the second half? That's the first question.
Henrik Bender: So I think the two things you should mainly keep in mind is one, as you mentioned, pulmonology, where we are seeing strong momentum still. And also as part of Q2, as you correctly note, a continued strong momentum. We are now, for the second half of the year up against harder comparables, and that is one of the risks we see for the second half of the year that, that will taper off a bit, even though we have strong belief in the underlying momentum for the longer run. That will be an impact and a risk for second half. The second thing is that we also mentioned in Q1, on anesthesia and patient monitoring and then as Britt mentioned earlier, we have seen successful outcomes of the contract negotiations we've done on price increases. So far, we're also seeing solid volumes being bought on these new contracts at higher prices. But we still see some risk in terms of the volume development for the second half of the year. And that's the second risk factor we see mainly for the second half. That could basically end up resulting in a slight decline in the momentum in Anesthesia and patient monitoring. So pulmonology and Anesthesia and patient monitoring are the two risks.
Christian Ryom: And then the second question is to the margin development also looking into the second half of the year. And it's a bit of a split question. So maybe if you can first help us with some -- how you're thinking about the gross margin level here at 59.5%, going into the second half, whether there is sort of significant pushes and pulls that we should consider for the development in the second half? And then the second part of the question is really, I think, Henrik, in your prepared remarks, you said that you will be targeting a further improvement of the OpEx to sales ratio. What time horizon should that come and be understood over? Is that also relevant for the second half, relative to the level that you realized here in Q2 or is that more of a longer term comment?
Henrik Bender: So as you know, we don't guide specifically on gross margin, but just to paint the very overall picture. I think we've now seen a gradual improvement in gross margin. We still, as we also communicated in our long term guidance or targets at the Capital Markets Day about a year ago, see potential for further improvement. But the level we are at now in terms of the mix of the business is, I think, a level that we want to see continue for now in the short run until we implement further initiatives. As the main initiative this year is, one, the higher growth in endoscopy versus Anesthesia and patient monitoring and two, the price increases in Anesthesia and patient monitoring. So that is the guidance, I think, overall, the direction on gross margin. In terms of the OpEx ratio, thank you for that question also. I think to be more concrete as we have communicated both in our Q1, and now also in the statement for Q2. We are investing more in our organization to drive further continued growth on the mid to long term. That does mean that for Q3 and Q4, we are expecting a gradual increase in the absolute OpEx level and also, therefore, at the short to mid term, a flattening out or perhaps even a slight increase in the OpEx ratio. So the comment on OpEx ratio decline is more a mid to long term one, where we -- again, if you look back at the Capital Markets Day, we're guiding a further improvement of OpEx ratio and clearly one, we still believe in for the long run. So what you should expect for Q3 and Q4 is more an investment, which will come at a cost, short term, but then a further leverage on the OpEx ratio long term.
Operator: We have a question from the line of Yiwei Zhou from SEB.
Yiwei Zhou: I also have two questions here. Firstly, on the gross margin development, the 3.7 percentage point, it was quite impressive. And you mentioned different drivers here. Could you please quantify this tailwinds mostly or if there's any headwinds? And one factor you didn't mention is the inventory write-down. And I realized last year, you had a pretty big inventory write-down. It was -- I think it was around DKK50 million or DKK45 million, I can't remember exactly. But do you still expect the same level of write-down here this year? And -- yes, I'll do the next question later.
Henrik Bender: We're getting more and more specific on gross margin now. But good questions. We will not split the exact effect of the underlying drivers on gross margin. Perhaps to give you a little bit of direction, the main drivers behind the improvement in the gross margin level bring us up to the 59.5%, as you correctly note, are a combination of the mix, endoscopy and anesthesia patient monitoring, where we do have higher gross margins in our endoscopy business. And you saw there now the Endoscopy business representing a larger and larger share of our total sales. One and two, the price increases in Anesthesia and patient monitoring. So those two are the two main drivers. As they are now being gradually implemented then, of course, particularly the effect of the anaesthesia and patient monitoring pricing will run for the next six months and a bit into next year, but then they will also taper off. So that's the main driver right now. Secondly, on inventory, I'll not go in detail on the inventory write-down, other than just saying the level for Q1 and Q2 is now normal. And last year, it was a bit higher than normal. So this is a positive driver also, but a smaller effect on total gross margin.
Yiwei Zhou: Just one to follow up here. So the inventory write-down -- or less inventory write-down would be also in the second half by…
Henrik Bender: We're not expecting anything above normal inventory write-downs either for the second half.
Yiwei Zhou: And my next question here is on the version two of duodenoscope, you have had some learnings over the last couple of years on this one. And for you to succeed with version 2, apart from the technology upgrade you have done, could you also comment on your sales strategy given the hard lesson from the past.
Britt Meelby Jensen: And I can maybe start by saying we will take a very different approach than we did last time. I think we -- I mean, as you know, close to two years ago, I mean, we pulled significantly back from the GI segment and reallocate our commercial resources across the three other segments that we have with pulmonology, urology and ENT. And that's where we see strong growth momentum right now. We do also expect, because of the nature of the product addressing very difficult procedures that this is something that will take time. And we believe with the potential that we see in other segments, we are not planning to make heavy commercial investments into this segment. So that's back to why I talk about niche -- by niche segment. We have identified both some very specific hospitals and also some specific niche segments, where we see a high need for a product like our aScope Duodeno 2 compared to other alternatives. And we will be very targeted towards these, which will then require a limited commercial investment. But again, we are in the next six months' time or so, we are going to do the controlled market release, where we work with the key hospitals, so we get a better understanding of exactly how we are best addressing their needs. So it will be for us, a much more stepwise cautious approach, taking a longer term view that we are taking right now. I hope that clarifies. And we will, of course, as we move forward into next fiscal year, continue to update you on the progress.
Yiwei Zhou: I just want to follow up on if you could give any indication on the pricing and contribution margin on this product. I know you don't want to be too specific, but any comment would be appreciated.
Britt Meelby Jensen: I think unlike what we did last time, we are not going to disclose the specific price. What I will say, though, is that the gross margin in this segment is fairly attractive. That's number one. Number two is that what we also learned last time, and you may remember that we went out with a price, somewhat lower than Boston Scientific. And what we found was that the price sensitivity in this segment was not really very high. So I think we are taking a slightly different approach, overall surprising that we had some years ago, but we are not disclosing the detailed price.
Operator: The next question comes from the line of Niels Granholm-Leth from Carnegie.
Niels Granholm-Leth: First question is about your Anesthesia and patient monitoring businesses. Could you talk about what proportion of your customer base have now converted to your new higher price level in order to get our understanding, if these price increases will be front-end loaded or back-end loaded over this three year implementation period. And then my second question on your aScope 5. Can you talk about the TPP adoption among US healthcare centers, is the TPP training or the knowledge about the TPP code, is that lower than you would have anticipated? And would that require an extra push from your side in order to accelerate the adoption of the aScope 5?
Britt Meelby Jensen: Do you want to comment on the pricing then I'll take TPP?
Henrik Bender: You can comment on the TPP. So thank you, Niels. Good questions. On the anesthesia and patient monitoring pricing, your question was on the adoption in our customer base. I think like we talked about in our Q1 announcement, the main new contracts went into force during this second quarter, so in the middle of and the end of, and runs between one and three years. So without going into specifics, we've now converted the vast majority of all our contracts into this new pricing scheme. Most of them converted during Q2. i.e., we will still see, on a comparable basis for the next three quarters, i.e., quarter three and four this year and quarter one next year, relative price increase versus what we've seen before. So it is still a gradual implementation, which is also why back to my comment on the guidance, we are still a little bit cautious on what this means for the volumes on these contracts. So in essence, we basically now for the vast, vast majority on the new pricing scheme. And when we do the next cycle, of negotiations on the contract, we will again review pricing with an intention to increase further in certain subsegments.
Niels Granholm-Leth: I read this as if the ASP uplift in anesthesia and patient monitoring would be much less in year two and three?
Henrik Bender: Correct.
Britt Meelby Jensen: And then maybe on -- I mean your good questions on the TPT, which is and as you know, it came into effect in January 1. So we are still in full transparency learning and adjusting our efforts in this area. And I think it's fair if you go out and ask some of the doctors performing these procedures, there will probably still be an awareness level -- an unawareness level, you could say that is higher than we would want. So this is, of course, something that we are focused on continuing to push this across. I will say, though, that what we're also trying to understand the dynamics around one, what is the awareness level? And then second, how much of that leads to behavior change. We see in our interactions, both on a sales rep level and also when we meet customers, that there's a strong interest in this, as I also mentioned in my presentation. So we are still quite optimistic. But to your question around whether we should give this an extra push, this may very well be, and that's something that we are discussing. I think you can you can only overcommunicate around things like this, and you need to repeat it a certain number of times before everyone has heard it. So I would characterize where we are right now that it's positive momentum, but how much of the revenue it's driving at this stage being four, five months into it, is still something that can be further improved, and that's a continuous push here from our side.
Operator: [Operator Instructions] We have a follow-up question from the line of Martin Brenoe from Nordea.
Martin Brenoe: Just a quick one, and that's kind of a different question that you've received here, your balance sheet has improved quite a lot and looking quite healthy. And I think that you have also previously alluded to the fact that you are getting more and more geared up to potential M&A. How do you view sort of the landscape in terms of M&A? And can you maybe just put some color on what kind of M&A you would be interested in doing? Would it be sort of the accessory market? Would it be software AI space or would it be further building on the endoscopy solutions space in general? That would be my follow-up.
Britt Meelby Jensen: Maybe I should start by saying that, I mean, as you've heard us say, I mean, our focus is a #1 on growth. And our focus when we talk growth is primarily on organic growth. So that's where we continue to push and also where we make the necessary investments. Having said that, of course, our financial situation and our balance sheet, as you mentioned, is in a slightly different position than we were in two years ago. And that, of course, means that given our focus on growth, we are on -- should be open to consider organic inorganic growth, sorry. And this is what we are doing. And right now, we don't have anything that is waiting. We are waiting to announce just around the corner. But we are looking in full transparency into different avenues of growth, both, I mean, the more high-value products, that within the segments that we are already serving and then some that are more adjacent in nature. So we do see a couple of options, but all linked to some of our already existing growth areas. Having said that also, I mean, it's very important for us also that we are very thoughtful in what we bring forward, and that it's fully aligned with our strategic priorities. So we don't go out and get carried away by suddenly having a strong balance sheet. So we will be very thoughtful and also look at the totality of our growth early before we proceed with any acquisitions. But it is something that we -- when we look in the next years that we should consider as a way to accelerate growth. That's how we look at it at this point.
Henrik Bender: If I can supplement just briefly, Martin, thank you for the question. I think fully aligned on the short to midterm, long term, how should we think about it? Well, again, in the Capital Markets Day, we gave a guidance on what we think is the appropriate long term level for Ambu, at a total of max 2.5 net interest-bearing debt times EBITDA. And obviously, now with us approaching zero, that does open for firepower to look at this. So that's also in that context that we are looking at it. But it really needs to be strongly linked with our strategy.
Operator: We have a follow-up question from Niels Granholm-Leth from Carnegie.
Niels Granholm-Leth: Can you talk about the competitive situation across the main endoscopy businesses, pulmonology, ENT and urology? There's almost not a month that goes by without a new player entering these categories? And then secondly, a question for Henrik. Now you've been CFO for Ambu in about five months. Have you found additional cost savings potential since you joined the company?
Britt Meelby Jensen: So I will take the competitive situation, then -- yes. So I think you're very right, Niels, that I mean -- while we were the first to enter single-use endoscopy, there's -- I mean, it's definitely an area that is attracting a number of companies now. And I think maybe just to state it upfront, this is not something that we necessarily only see as a negative, because we see that as as a way also to faster expand the market, which we don't think we can do as well alone. The dynamics that we see in the different segments that we play in are slightly different. And we do -- I mean, not see one competitor playing across all the areas right now, but we see different buckets of competition. There is, of course, the ones that have been there much longer than us, the reusable players. But if we look in the single-use category, we have the more high-end players that are, I mean, leading in their field with other products. So in pulmonology, we have Verason that continues with -- I mean, a main focus on the US and to some extent, the UK are strong. They are in the airway management company that have entered that segment. And then also if we then -- and then we have had Boston Scientific in that segment that we have seen pulling a bit back. Then the big area where we see a lot of competition is urology. And that's where we see a large part of companies based in China, entering the market, mainly in Europe and to some extent in the US through distributors. We don't see them right now taking a lot of market share. We, of course, not in the US we expect they may take a little more in Europe. We should, of course, never underestimate these. Then in uroscopy, the area that we are just entering now. I mean, it's an area that is partly converted there. We also see more players and you follow this as well. Boston is the leader in this in this area, we have some Chinese players. And then we most recently also heard that, Olympus is bringing on a single-use endoscope. And then ENT, we have a couple of players also entering I think the way that we look at it, I mean, we follow this very carefully as we should do, but our focus is really on driving, where is it our leadership position, and where is it our differentiation point is, which is not about only entering the price game that you could easily see. We feel at this point that we are well positioned with the things that we are focusing on, to continue to expand our leadership as we also see the overall category expanding. But it is, of course, a very different environment. And we have to think about our business differently than in the past, when we were only up against reusable players, which I hope that gives a little view of how we see it. But clearly, we are -- I mean, it's an area with increased competition for sure.
Henrik Bender: And I think perhaps to just add one comment on that, and then I'm happy to comment on cost levels also in this. I think one important notion, as Britt also alluded to is competition is also helpful in the sense that if it's single-use competition, it also helps drive conversion from reusable sinus. And they are, when you're alone, bringing that message, you have less power than when you [Technical Difficulty] more. So I think you should also see it in that light. And as Britt said, we feel well positioned overall. Turning to cost savings. I think for me there, there are sort of three things I would say. First of all, as I think I commented that also in the Q1 announcement, I think Ambu overall is in a good state, and frankly, much to my colleagues, Brace, I think we are further on the Zoom in strategy than we thought we would be by now. And that's also what is reflected in Q1 and now in Q2, again in better margins, both gross margin and OpEx ratio. So one, we are better off. I think secondly, if you then look at the mid to long term, are there opportunities for more? Absolutely. I think what is super important to underline is that success here is profitable growth. And therefore, we could save ourselves to a higher margin increase at the short term, but it can not come at the expense of slowdown in organic growth. So I think as one third, the way you should really think about it the way I think about it is, how do we ensure we have a solid foundation to drive further growth in the long term, still meeting our long term guidance, which I'm very confident we can. And I think what you're starting to see in the numbers is already starting to illustrate that. So I am happy with where we are, and quite confident that we can go where we want to, but at the same time, very focused on real success is driving profitable growth.
Operator: That was the last question, ladies and gentlemen. I would now like to turn the conference back over to CEO, Britt Meelby Jensen, for any closing remarks.
Britt Meelby Jensen: Thank you very much. And I think what's left for me to say is thanks a lot to everyone participating on the call today. Thanks for the great questions as well. And we wish you a very nice rest of sunny spring day here in Copenhagen and wherever you are. So thanks a lot.
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