Ambu A/S (AMBU-B.CO) Q3 FY2025 Earnings Call Transcript & Summary

Hello, everyone, and a warm welcome to this earnings call where we will present our Q3 '24-'25 financial results. I'm Britt Meelby Jensen, I'm the CEO of Ambu; and with me today, I have Henrik Skak Bender, our Chief Financial Officer. We'll give a short presentation on the business results, the financial results, and then we will open up for questions. If we move to the next slide, the usual disclaimer. And then moving into the highlights of this quarter or the first 9 months of our financial year ending September 30. We have seen solid growth momentum continuing, and looking at the 9-month period that we have had, we have a total growth of 14.3%. Again, with our fiscal year ending September 30, that also means that we are comfortable with today's results to also lift the lower end of our guidance. So the guidance on our organic revenue growth for the full year is now 12% to 14% instead of previous 11% to 14%. On the new launches, we continue to have good progress both on the pulmonology and urology side. I'll come back to that. But exciting advancements in the quarter of the portfolio. In terms of sustainability, which also remains important both for us and for our customers, we also have great progress on our Recircle Program. And then on the EBIT margin after 9 months, we are at a solid level of 13.9%, a lot of this driven by continued improvement in our operational leverage, but also we are continuing to invest in future growth. And then we have -- and I'll let Henrik talk more about this, we have had some FX headwind in the quarter as we are reporting in Danish kroner and have a lot of our business in U.S. dollar. Let's look at some of the momentum that we have had in the quarter. So more specifically, our organic revenue growth in the quarter ended at 12%. And if we break that down to, first, Endoscopy Solutions, we had 15.9%, and that is for the full 9 months of the year, corresponds to 16.4%. On the Anesthesia & Patient Monitoring side, we are growing 6.4% in the quarter. Our EBIT margin before special items in the quarter in actual FX is 11.3%, and then we report a free cash flow of DKK 128 million. Let's look at some of the progress on the strategy front, where we continue to progress across the different ZOOM IN areas that we define in the strategy that we launched over 2.5 years ago. On the solution for the customer needs, we are continuing to expand our portfolio, both with the SureSight Connect, where we now have a full range of 10 blades launched and available for customers. Most recently in the quarter, we had our pediatric blades included as well. And then on the urology front, we have the FDA clearance for the first ever cysto-nephroscope, which is an opportunity to use our aScope 5 system for more complex procedures. We continue, and that's also where we track it, on our margin and other internal KPIs, we continue to be on a very good track on our operational leverage and our execution excellence. That was a key focus area in our strategy. On sustainability, as I mentioned, we are making progress on the Recircle Program, which is basically our take-back program, where we now are in full operation in 4 of our largest markets U.S., Germany, U.K. and France, where we are actively in collaboration with a third party, taking the endoscopes back from the hospitals after use and they are repurposed for other use. And then we continue to also have a strong focus on our culture and how we work with strong engagement scores, strong retention, able to attract very talented colleagues. And then most recent, we are this morning announcing that we are making a leadership change in North America, and we will on Monday look forward to welcoming Scott Heinzelman as our new President for North America. And let me just put a few words for that given the importance of this role in this market. Scott will be replacing Steve Block, who has been with Ambu for the past 12 years and done a fantastic job driving and growing our North America business to where it is today. I've had a very good collaboration with Steve since I joined over 3 years ago, and we have had a planned process for the past number of months as Steve had a wish to semi-retire, which has been actually a very good way for us to have ample of time to also look for the best candidate to take over from Steve to drive the next chapter in the exciting growth journey that we are on with Ambu. And that's where Scott Heinzelman has a super relevant background, over 20 years in medtech, most recent as a Divisional Vice President in a large medtech company where he has led a business that is more than double the size of our North America business today. He comes with a lot of experience both from big and smaller medtech. And I think he's the perfect replacement, taking over at a time where our performance in North America is very strong and then taking that even further. So a huge thank you to Steve from my side also, personally having enjoyed a lot working with him. And then also a very warm welcome to Scott. Let's move on and look at the business and the pulmonology segment where we had organically 11.2% growth in the quarter. And if we look at how does that look on a rolling organic growth for the last 12 months, we are at 10.7%. So still at the double-digit level that we have also previously talked about is where we see this business. We do see the growth coming a lot from continuing to expand our existing portfolio, both in terms of continuing to get new customers and also expanding the penetration with existing customers. And I would like again this quarter to single out our aScope 5 in the U.S. as a product or a solution that continues to show very strong growth. Also, our SureSight Connect is a new solution that we are bringing to market, where we are off to a super strong start in the launch of that. And this is one that I'll like to put a few more comments on. So this is the product that you see on the picture here, where we have launched the product initially early this calendar year with 5 blades. It got tremendous positive feedback from the customers as a superior, very strong offering. We have then in the quarter that we are reporting on launched additional 5 blades, including also the pediatric blades. So now we have a super strong portfolio that we can both expand our customer base on but also expand the challenges that we are solving for our existing customers who are today using our bronchoscope, aScope 4 and aScope 5. The beauty of this solution is that it works on the same platform, the same monitors, the same software system as our bronchoscopes. So it's very easy to sort of plug the Connect version in. You can even have both the SureSight, the video laryngoscope and the bronchoscope on the screen at the same time, and then you can use the both products at the same time during the procedure and then add the disposable blades that comes with light and camera. Very excited about the customer feedback that we have, and we look forward to continue to also see gradual uptake on this solution together with our full portfolio in pulmonology that we are strengthening. Let's move to the other segment in endoscopy, our urology, ENT and GI. In this segment, we report an organic revenue growth for the quarter of 20.8%. If we look at how that translates into the last 12 months rolling growth, it's 21.9%, so a good percentage point higher. If we look at where the growth is driven from here, it's a continuous growth of single-use offerings versus reusable across the 3 different areas. Our aScope 4 is the main growth driver when it comes to amounts, both when we look at specifically urology and ENT, where we are seeing both a good traction on continuing to get new solutions in even though these solutions have been on the market for 6, 7 years by now. And also, we are continuing to expand the penetration among existing customers. So I think this also shows the cycles of use among our customer base, that they're gradually continuing to expand. And we are continuing to see new customers seeing benefits with our solutions, very much driven by improved efficiency in the hospitals and clinics where they simply believe that with fewer people, fewer staff, they can treat more patients something that resonates very well in the health systems of today. Then also, we have our good focus and good traction on our new product launches, the aScope 5 Uretero, the aScope 5 Cysto also with the expanded cysto-nephroscopy indication. And then when we look at our overall single-use market share that we see with the addition of the new segments continuing to grow, although the revenue, as we have talked about earlier, continues to be limited in the bigger scheme of things from the newly launched products. But this also reflects very much what we have talked about numerous times, the typical time of the sales processes that we have. If I just put a few words on urology where we have expanded the portfolio and take a step back. This is an area that Ambu was not known in or not in 5, 6 years ago and where we today have managed to redefine how endoscopy is done, leading what I talked about before, the higher patient throughput, the efficiency in the hospitals and clinics and doing it in a sustainable way. The addition of the indication for aScope 5 Cysto as well as the Uretero launch is basically positioning us in a way where we are able to address the needs of more -- in particular, in the hospital, more departments, more doctors as we are moving away from where the cystoscope has been super successful, a lot focused on the bladder cancer screenings and treatments, into the more complex procedures around kidney stone management and more complex urology procedures. This is a way where we also can leverage our full system and platform where it's the same basically monitors and software that supports across the full portfolio in urology, thereby having a very strong offering to drive growth for the next many years to come as we are continuing to focus on urology. Let me, before I hand over to Henrik, put a few comments to Anesthesia & Patient Monitoring. Here, we saw growth in the quarter of 6.4% overall. And if we look at the last 12 months rolling, it's 10.9%. It's as expected and previously communicated, it's lower than the rolling 12 months, the reason being that, as you may remember, we last year took some quite high price increases that made the comparable relatively lower. And those took place in the spring 1.5 years ago. So those high -- lower comparable are now over. So that's why we are also expecting to see slightly lower growth rates or more normalized growth rates, if you will, than the double digit that we saw for a couple of quarters. If we look at what has driven this growth, we had a very strong quarter when it comes to patient monitoring with 9.3% organic growth. And then the growth in anesthesia was 3.9%. So still a nice growth driven both by volume and pricing. Pricing is the area, as I just talked about, where we have won a lot. And it continues to be a focus, but we are more down to normalized gradual price increases than the higher prices that you saw some 1.5 years ago. So that concludes my part, and I'll hand over to you, Henrik, to go through the financials.

Thank you very much, Britt, and happy to take you through the financials. So I'll start where Britt also landed and comment on overall growth first and reiterate that we feel we had a very strong growth in Q3 and organic growth of 12% overall. Of course, then if you convert that to reported growth and 9% growth is a bit -- quite a bit lower, and this was mainly affected by the U.S. dollar depreciation versus both the euro and the DKK, a factor that I will come back to also, both the impacts on margin but also what that means for how we see the rest of the year. If you look at the growth by geographical region, we were very happy to see strong continued growth in U.S. and in Europe and also very solid growth in rest of world. So overall, a very solid quarter across all of our business areas and also all of our geographical regions. If you look at the EBIT margin, we also landed at what we think was a very solid EBIT margin, obviously lower than the previous quarters at 11.3% but heavily impacted by the FX. Taking aside the FX effect, we more or less landed actually slightly above the same quarter last year, i.e., the 12.9% that we had in Q3 of our '23-'24 financial year. And that, for us, therefore, means that this shows a continuation of our margin expansion with balancing, on one hand, solid organic growth and the resulting operational leverage that drives higher EBIT margin and, on the other hand, continuing to invest in growth, continuing to invest in commercial activities that will drive growth going forward. But let me pause a second and look a little bit more into two factors that are impacting our results and our margins, one that had a significant impact in the quarter and one that we are more monitoring that had a minor impact in the quarter. Those two are obviously not surprising, FX and tariffs. And let me start with FX. So overall, as I said before, our numbers are impacted by the fact that we have slightly more than 50% of our total sales in U.S. dollars. That means that with the U.S. dollar depreciation, as we saw in Q3, it has a negative impact on growth but also a negative impact on margins. Ambu has a natural hedge from the perspective that we have a number of -- a significant part of our production in China and in Malaysia. And therefore, with the correlation between the U.S. dollar and the ringgit, the Malaysian currency, and the U.S. dollar and the Chinese currency, renminbi, there is a natural hedge that typically helps us. That said, the way that the FX impact our numbers is that with the drop in FX, you have an immediate impact on revenue. That is what you also saw in the difference between organic growth and reported growth from the page before. Whereas the impact on COGS comes with a few months delay driven by the fact that the full FX effect needs to go through production, on inventory and actually be sold to a customer before you see the P&L. That also means that when we look further into margin and separate EBIT margin into gross margin and our OpEx ratio, you will see a negative impact on the gross margin, mainly driven by FX and mainly driven by the fact that we in Q3,more or less purely saw the negative effect on revenue and saw limited effects on the lower COGS, something that will then come and support the margin in Q4. So overall, FX is a topic -- and we also, therefore, decided more explicitly to call out that for the quarter alone, we saw a negative impact on EBIT for slightly more than DKK 30 million in that quarter alone. If we look at the tariffs, it is still a very limited impact for the quarter. We are monitoring the effects that we see now implemented from the most recent changes, and those are still coming with short notice. We still overall have a solid setup, as we also commented in the previous 2 quarters, and believe we can limit the effects, particularly the effect in this financial year where it will be a small still total effect even with what we know today. So the key message here is that when we look at margin, I think, in FX effects and separating that from the operational performance, super important. Tariffs, something that is on our radar but still a very small item for Q3, something that we're more monitoring for Q4 and as we go along further out also into next financial year, but where we still see we have a lot of mitigation actions to limit the effects. With that and those two specific items explained, let me go back and explain a little bit more what are the dynamics on the margins. So we start on the gross margin. We landed the quarter at 58.9%, which is 1.3 percentage points lower than the same quarter last year. This is mainly driven by FX where, if we adjust for FX, we were actually again slightly above last year, driven mainly by the fact that our positive effects from higher gross margin in Endoscopy Solutions still on a relative basis strong pricing in A&PM and still on an overall level a better and better utilization in our manufacturing setup, particularly in Mexico. All of this, though, still when we consolidate it all up, was more negatively impacted by FX and, therefore, the comparison is slightly lower. That said, therefore, we still feel we are on the right journey. And setting aside FX, we had actually a very solid quarter also on gross margin. If we look at the operating leverage, our OpEx relative to our revenue. We had a small increase. This is mainly driven by our sales and distribution costs, which were mainly affected by the continued commercial investments in sales and marketing aimed at driving higher organic growth, still something that we will see the full effects of going forward and something that we're investing in now also to keep the growth momentum into next year and the following year. On the longer run, as I've also explained before, we remain very confident that with the growth journey we are on, that we can continue the journey of operating leverage and driving down the OpEx ratio. And therefore, that is still, as we see it in the longer run, the main contributor of our further margin expansion towards our '27-'28 goals. If we turn from margin to cash flow. We had a solid cash flow in Q3 and DKK 128 million, something more similar to the previous quarters if you take aside quarter 1 and quarter 2. That said, the cash flow is still negatively impacted particularly by net working capital, which we deliberately are investing a bit more in and allowing to be slightly higher to manage the whole geopolitical situation and the uncertainty around tariffs. Therefore, the quarter was quite solid actually considering that we had this higher level, and we continue to maintain a higher level for the full year. Next to that, we also had slightly higher capital investments, which is something I'll come back to on the next page. And last but not least, with an FX effect on our earnings, that also impacts our cash flow. Putting all these things together, we've therefore decided to update our soft guidance on free cash flow from plus DKK 500 million to around DKK 400 million for the year, again, mainly driven by our net working capital, a higher net working capital ratio to support the business in this geopolitical situation. If we break it down into the different drivers of free cash flow, as I said before, if we start on the right side, the EBIT margin did drop, I explained before the impact particularly from FX being the main driver. CapEx did move up. As I also explained, we did decide consciously to invest more, amongst others, particularly in R&D, where we are seeing an increase versus previous quarters deliberately with investments we're making for the future. And last but not least, with a higher net working capital ratio that did drop relatively speaking to the previous quarter but are still higher than our longer-term target of 20%. We still believe we can get to the 20% longer term, but are deliberately allowing it to be slightly higher given the geopolitical situation. So despite the revision in the free cash flow, we still feel quite solid performance and also on the right track towards our longer-term targets. That means, in summary, if we summarize it all, we are happy today to specify that our organic revenue growth guidance is now narrowed from previously 11% to 14% to 12% to 14% with a strong continued growth for Q3 and with the prospects we see into Q4, we feel a very strong testament to the continued growth journey we are on. Secondly, we're happy today to confirm our guidance on the EBIT margin, keeping it at 13% to 15%, though noting that with the current assumptions, particularly on FX, as I mentioned before, it needs a positive effect for FX in Q4 for us to end in the upper range of that guidance. And therefore, with what we know today, it is still, we feel, a solid testament to our performance that we can keep it as it is. And then last but not least, a revision to our free cash flow from the previous plus DKK 500 million to around DKK 400 million, we feel still a deliberate intended investment in higher net working capital, slightly higher CapEx being the two main drivers next to FX, a strong position to be in and a position where we continue to build balance sheet strength with more and more liquid funds and a negative net interest-bearing debt. Overall, that concludes our presentation on what we feel is a very solid quarter, and we're now happy to hand over the word to the moderator and take questions from the participants.

[Operator Instructions] Our first question comes from Thyra Lee, UBS.

I just have two, please. You've done really well on revenues this year. But just given the guide, there's a little bit of an implied slowdown for Q4 at the midpoint. I just want to double check that this is slightly driven by Anesthesia & Patient Monitoring comparatives and that you feel -- you continue to feel good about underlying growth here. And then I'll take the second afterwards.

Yes. So I can comment on the revenue, and nice to have you on the call, and thank you for the question. I will say that you are completely right that when we -- I mean, when we look at the quarters that we have had looking back, the revenue growth has been abnormally high for a couple of quarters due to price increases in Anesthesia & Patient Monitoring, which has, of course, also brought the whole -- I mean, the total revenue growth, as you mentioned, up. We do think when it comes to endoscopy, we have our long-term guidance is 15% to 20% endoscopy revenue growth. And we do feel that we are comfortable that we land in this with a good mix of continued growth in the segment of urology, ENT and GI, which is where we see the highest growth rates. And then we also see double-digit growth in pulmonology which, coming out of COVID, was a little bit more volatile, but where we are now into the solid double-digit range as well. So it is very much as we look ahead, the Endoscopy business areas that is going to drive our future revenue growth.

Great. That's super clear. And then my second question is while we know there's going to be challenges coming from FX and tariffs, given the strong revenue growth, do you guys think you can still grow margins?

I think overall, the clear answer is yes. I think if you're asking specifically for Q4, obviously, there's still uncertainty. And as I said on the last slide on guidance, what we really wanted to highlight today is that the single biggest uncertainty we have seen so far is FX. Obviously, there's also some impacts from tariffs but they are still limited. So for us, the key thing is to manage the ongoing expansion and, therefore, to answer the second part of your question of do we believe in our long-term margin expansion plan, very much so. There are several mitigating factors that are impacting us and we can maneuver as we go forward. So nothing in what we've seen in Q3 changes our long-term view.

And maybe I should add to that also, I mean, the reason why we feel comfortable around that and also the long-term guidance we have towards an EBIT margin at 20% is that we continue to see opportunities for operational leverage on one hand. And then as we have talked about in the previous quarters, given growth is our key focus, we are also and have in the recent quarter been investing mainly in commercial resources to make sure that we are set up for future growth. And this is something that we, of course, have an opportunity to balance. But we do also want to, I mean, manage the speed of how we get to the 20% EBIT margin in a way that allows us to continue to also invest in long-term growth with also continuing to see benefits from operational leverage. But as Henrik also alluded to and when he spoke about the guidance, I mean, the FX headwind also does mean that if it continues at the level we are at, one should not expect that we will land in the high end of our EBIT margin guidance. However, we do feel for this year that we should deliver on the guidance that we have set out, which is why we are maintaining that where it is.

Our next question comes from Jesper Ingildsen, DNB Carnegie.

I have two questions. On the endoscopy business, which is now at above 20% margin that you have, could you maybe talk a bit to the competitive dynamics that you called out in Q2 which make you go slightly below that range? What is -- is it driving the improvement relative to Q2? Have you had to lower prices? Or how should we think of this? And then maybe secondly, on the gross margin. I appreciate that you're calling out FX as the biggest impact on the margin. But you also mentioned the placement of discounted monitor to some extent as it relates to the video laryngoscope launched having put pressure on margins. Could you maybe give us understanding of how much of a drag that has had? And to some extent, going into Q4, I think you previously said that you're going to maybe a place even more monitors in regards to the launch. So how should we think of the gross margin in that context during Q4?

Yes. Thank you, Jesper. And maybe I'll take the first question and then hand over to Henrik for the second one. So it's correct that in the last quarter, when we reported we talked about competition. And this was basically also driven by a lot of questions. And as all of you will know, we were the first to enter into the single-use space and have been alone for many years. And as we have built an attractive category, we started to see competition coming in. So that's also what we wanted to comment on. What I want to be clear on is a couple of things. One is, as I mentioned in my presentation, we are continuing to see market share increase overall. So we are continuing to see we are strengthening the portfolio. If I then look at the quarter that we exited specifically, we have not seen strong losses or significant losses to competition of any of our customers, and we don't see remarkable losses in the existing sales processes that we are in due to competition nor we see strong price erosion. So I think overall, we feel -- I mean, we don't want to underestimate competition. So we keep being very alert, but we don't see a lot of effect on our business overall. We, of course, have to remember that our launch into ureteroscopy is the first time we enter a segment where we are not the first. So that's, of course, where we see dynamics being slightly different. However, what we do see as well is that our strong offering being the only one with a broad portfolio in urology that plays on the same software technology with -- or monitor with all the technology and functionality that can benefit customers. We do feel very comfortable that we have a very competitive solution and that we are not seeing any dramatic impact. The only thing that we have seen is that some of the evaluations that our customers do are slightly longer. So that delays a little bit their decision-making -- the decision-making at customer sides. But that's basically what we have seen. So we are quite comfortable and optimistic, although, I mean -- and we welcome competition as well, I should say, because that's part of helping grow the single-use category, which by having a bigger share of voice, but we are not overly concerned when it comes to our future growth prospects.

Fully agree. And then perhaps building on the last point, I think I also want to reiterate. We talked about last time the potential uncertainty around price erosion. We've seen really good price development and ability, as Britt also referred to, both in pulmonology but also now in urology to sell higher-end products, the Cysto 5 HD, to procedures that are done on the same reimbursement code as our Cysto 4. So the portfolio mix is actually also helping us more and better than we expected. If we turn to the gross margin question, good question. We highlighted in the last quarter that there could be -- and actually also in quarter 1, that there could be at the end of this financial year, some negative impacts from placement of monitors, particularly related to the launch of our VL solution, where when you're converting a hospital, you typically also want to change the fleet of monitors. To be very clear on quarter 3, why I called out FX and did not mention monitors is because it had a limited impact for two reasons: one, we see actually a slightly better price on the monitor so far, so it has a smaller commercial impact and had really none or very little in Q3; and two, also when we look forward, we still see a very, very good pipeline. Britt also mentioned it for VL. But we are more optimistic that it will have a lower gross margin impact than we feared before. So overall, the key message is that FX was and continues to be the biggest drag when we look at the margin development, gross margin and EBIT margin, both for Q3, but also as we look into Q4 and why, again, we feel actually it's a strong statement to keep the EBIT margin guidance at 13% to 15%, even though with what we know today, we will likely not end in the high end of that guidance.

The next question comes from Tobias Berg Nissen, Danske Bank.

I hope you can hear me. So perhaps another question on this competitive dynamic in the U.S. You did mention here in the report in the prepared remarks, but I'm just wondering how is played out over the quarter and if you see any acceleration, deacceleration and how this might have impacted growth? It doesn't sound like a lot so far, but also how you expect this to evolve here going into Q4. That will be my first question. And perhaps also just on the new products here in urology, limited sales but how should we expect this segment to accelerate going into Q4? And when should we expect this meaning for revenue to come into effect going into next year?

No, I think -- thanks, Tobias. Good questions. And you could say, if we look at the competitive dynamics in the U.S. in the quarter and the period hereafter, you could say. I mean there has, of course, been a lot of external unpredictability in terms of tariffs and so forth. We have not seen an acceleration of competition. We have probably seen slightly more, I mean, the competition going down. So we don't -- I mean, where we were getting nervous if there were high price decreases from competition, we have not really seen that to that extent. It's -- we are, of course, following it closely as we don't have any reports we can read this on. So some of it becomes a little anecdotal. But given also we can see we are not losing customers. We are not in processes where we have super aggressive competitors on the pricing. We feel quite comfortable. And again, we believe that there will not be significant changes into I mean, the coming quarter. But of course, I mean -- and that's how the nature is in many industries that there will, from time to time, be something coming up in a contract where customers or where competitors go lower on price. But it's not something that we see as more systematic or anything like that. So I think that's good. On your question on our new solutions, and I guess you speak both to the ureteroscope, the aScope 5 Cysto and the expanded indication, we actually see a very good traction, and we are quite optimistic. I think what we are looking at when it comes to the dynamics is that these are all addressing more complex procedures. So there's a shift in also our selling from more simple procedures that we have been selling to for the aScope 4 Cysto and then with these new solutions. And that's actually working very well, and we are super excited about the positive feedback we get both how our ureteroscope is performing with the customers, but also our aScope 5 Cysto, specifically in the U.S. that there is actually a willingness to pay more even to, in some cases, address some of the same procedures, but with a better solution. And then with the expansion of the indication with the cysto-nephroscopy -- that I have to rehearse to say, I think we are quite comfortable about, I mean, the growth potential for many years for this. But again, also the sales processes and the nature of how we -- I mean, how our products penetrate, it is longer than you see in some other industries, something that we also commented on in our last quarter by showing how much growth is still coming from products that has -- that have been in the market for a number of years. So I think we are comfortable about also the longer-term growth potential that we have as we bring these solutions out. I hope that answers your question.

Yes, Britt. That's perfectly clear.

Our next question comes from Martin Brenoe, Nordea.

Henrik and Britt, congrats with the quarter. Although I must say I feel a little bit cheated for the opportunity to ask when we will see ex-pulmo rebound above 20% this time, but I'll take it. Just one question. You didn't lose customers. You didn't see price dumps from competition. But the first question would maybe be just how would the run rate have looked like ex-pulmo if you had seen a normal sales cycle? So if you hadn't seen these prolonged processes in the tenders? That's the first question. And then on the second question, would be great to understand a little bit on the video laryngoscope, giving that some love, given the lack of questions here. Have you -- is it a requirement that you have the full range of blades to be fully commercial ready? Is that the feedback that you have received? Should we expect a pickup now that you have the full range also with the children that you're now addressing? Or is it more sort of just an incremental add-on that you have added here? That's my second question.

Yes. So good questions, and let me try and address this. First, I think what's important or I feel like saying is that when you talk longer sales cycles versus normal sales cycles, I think it's very important that we try not to go down a path where, I mean, it's not normal sales cycles that we are seeing because it's actually very standard and not any changes in that. Some sales cycles, the customer need to buy something new. They put out the specification. They wait a couple of months very much like a tender process, Then you submit. Then they evaluate. And then you win and then you start. So it's not that there is something that is longer, then you have other customers where you can do a faster sale. And typically, it's the large volumes that takes time. So I think we have to -- and then for the more complex procedures, the evaluation procedure is slightly longer because when something is more difficult, they want to evaluate more and longer. So it's not that there's anything that has come to a complete surprise. But it's just, for us, when we enter to new and more complex procedures, it takes more time to get that ball rolling. So I think your question, how would it have looked, I don't think it's really possible to answer because I think we are -- we still see the strong potential and the big market that we are going to penetrate. And then we will continue to comment on how are we tracking, how big of flat is that curve. But we do feel comfortable that there's a lot of runway for a very long time, both focused on getting new customers and then growing our share of wallet with the existing customer, which is happening at different pace with different customers. So I think that's how it is. And that's also where we then add the competitive dynamics so that it's expected, as you also are well aware with competition coming in. And that also helps accelerate both the conversion to single-use and it continues to also support the offering and the benefits that we are making to the customers. So I think that was the first one that I hope I addressed what you asked. Then on the VL, and your very good question, is it a requirement to have the full range of blades before a customer will buy? And the answer is it's not a clear yes or no. But the answer is, in most cases, it does, the reason being that customers often like to have one video laryngoscope solution that they can use for all the procedures. So if you come in with only some blades and they have to then switch to an alternative system when they have a patient that need different blades that makes it a little more cumbersome. And that's why some will say let me have all the blades. So then your question is, so now you have all the blades, would we then see a hockey stick effect? And I think that's also where we want to be balanced to say this is a new market we're entering. But with a lot of synergies to the bronchoscopes, we see super strong feedback and also our opportunity pipeline keep building up. But again, the nature of the business we are in, it is gradual. But we are super excited and comfortable around how we are seeing the progress and also relative to the potential in the market what we expect longer term on this product. But I'm not going to be more specific on what to expect when yet.

And I think if I can build just on the last one, and thank you for pointing to the pulmo segment also, where we see really good traction. Martin, I think the key point we also want to convey is besides the VL products, driving new sales, as we also explicitly highlighted in the last quarter, one of the very exciting things there to Britt's point is that it will also drive more aScope 4 and aScope 5 sales because we are converting in settings where typically you use the VL solution in conjunction with the bronchoscope. And in some of these cases, it's not our bronchoscope. So it's the combination of the two. But it will be a gradual increase. You will not suddenly see a massive hockey stick. But we are very comfortable with what we're seeing and the pipeline we are building.

It makes total sense. And just a brief follow-up, which should be yes or no answer to you, Henrik. The Recircle Program, which has now expanded into several markets, we were told by you that we wouldn't see it in the numbers. So the small pickup in distribution costs, I guess that's not related to this Recircle Program. Is that correct?

It's still at so low scale that I think it will require rounding on the numbers to really see. So that's not the driving effect.

Our next question comes from Anchal Verma, JPMorgan.

I have two set of questions, please. The first one, and apologies to pursue a bit further on tariffs. As you now have line of sight into Q4, are you able to provide any rough quantification of what the net tariff impact could be just so we can get kind of our head around how to look at Q4 with FX -- what the FX headwind be and how much is tariff out of that? And also in relation to that, can you give us an update on how your Mexico facility is ramping up? Have you managed to move a few of the Malaysian lines into Mexico? And how should we be thinking of that? And then the second one is a bit more into next year when we look at 2026. Can you help us build the bridge into 2026 in terms of the tailwinds and headwinds for top line and margins, especially when we think of the top line in the context of the ramp-up of new products, can we potentially expect ex-pulmonology to grow sequentially from 2025? And then on the flip side, on the margins, you will have -- or do you have further investments in OpEx? And how does that sit versus potential headwinds we may see from FX and tariffs?

Good questions. I think I will dive into it. I think if I start with your last point first on next year, we are not commenting today on what happens into next year. I think the main comment I want to reiterate from what I presented earlier is that we feel we have a lot of mitigation actions we can implement in time to mitigate some of the downside risk. And overall, as we've commented both on pulmonology and our urology, ENT, and GI segments combined, for ES, we feel we are seeing really good traction and great pipeline building. So in that sense, we feel very comfortable that we have a good momentum going into next year. But I'm also cautiously then observing what is happening on FX, obviously, and also what is happening on tariffs as that is changing. I think to come back to your first question on tariffs specifically for Q1 -- sorry, Q4 and Mexico. We don't comment specifically on the next quarter of the tariffs. But I will reiterate that the tariffs, which you are right, that we more or less know now the impact of in Q4, are already included in our EBIT margin forecast and guidance. And that also means that we, within the 13% to 15%, have included what we see right now of tariff impact. The tariffs impact with the slight delay and as also mentioned in the material will impact sales and distribution costs. So part of the increase in that cost item preempting the discussion we will have after next quarter will be a combination of tariffs and then also the continued commercial investments. So we will not be more specific today, and we will not be more specific on what quantification could look like for next year simply because it's been changing so much that today it doesn't really make sense to give a guidance more specifically. But I will just come back and say with the mitigation effect we have, the gradual improvement in EBIT margin towards the '27-'28 target of 20% is long term not affected by what we are seeing in the market right now, and we feel we have a lot of actions we can take. Specifically, one of those actions, and thank you for pointing that out, is the ramp-up in Mexico, where we continue that ramp-up. As we said already back actually in Q1 and reiterated in Q2, that is a continuation of a journey we've been on for a long time. I, for a couple of times, have said we are only about 50% utilized if you look at the space. I can happily say we're starting to pass beyond the 50%, but I will not be much more explicit than that at this stage. But we are really happy that the Mexico factory, as we talked about in Q2, is now at an output and efficiency level that's comparable with the other factories, and that means that we can produce and do final manufacturing of a product in Mexico, ship it to U.S. and at a landed cost basis, it's the same cost, excluding tariffs, as if we produce it in other place in the world, one; and two, we are also increasing the capability level, enabling us in Mexico to do more and more complex products. So it's a gradual journey. We are not going to be more specific than that, but this is one obviously of the key levers of why we think we can mitigate the tariffs quite a bit with our Mexico factory.

And again, maybe just a quick add on to that last point. If we look at the revenue that is generated in the U.S. today, more than half of that is from products that are either manufactured in the U.S. or in Mexico. So that puts us already in a solid position, too.

Absolutely.

Perfect. And maybe if I can squeeze in a last one. I'll see if I can get an answer on this, and I don't want to steal your thunder from the CMD. But what can we -- can you give us a rough outline of what we can expect at the CMD? Will you be revisiting your midterm target? Or perhaps is it more of an opportunity to provide an update on the new product launches?

Yes. So I think what you can expect, and good question, Anchal, and we look forward on to seeing you there. What you can expect from us is it is an update, of course, on the business and the launches, but also an update on our strategy where -- and that includes, of course, both business priorities. And also we will comment on our financial -- long-term financial targets as well.

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

It's Yiwei from SEB. Firstly, on the -- I just want to follow up on the EBIT margin guidance. And I would like to ask in a different way. Just to be more specific, I mean, you kept your EBIT margin guidance, which imply it is a 10% to 18% range for Q4. But when we consider your gross margin for Q3 and also the OpEx level, isn't the lower end of the guidance range is more realistic? I'm actually a bit surprised that you have not removed the 15% EBIT margin scenario for the full year. Could you please help me to understand some of your assumptions? Yes.

Absolutely. So I can start with that. So I think, for us, there are two key points to highlight, Wei. There are still obviously potential upside from some of the external factors, particularly FX. I think the volatility, particularly in the U.S. dollars has been unprecedented in the last couple of months. So I think that could be one of the external factors that drives beyond us delivering obviously, a very solid sales for the quarter. I think besides that I -- we're at least trying to and I will reiterate the point that we are also saying with what we know today, there is low likelihood that we ended in the upper range of the range you just also calculated yourself on what Q4 could look like, which is a different way of saying with what we know today, obviously, there's a higher likelihood that we end in a lower range of the EBIT margin. We feel still if we separate out the external factors that this is a very good result. Why are we not changing it? Well, if we look at the proceedings for the market, it's very few that even in Q4 narrowed the EBIT range to a 1 percentage point. So for us, it's more been to say if we're within the guidance and feel safely we are, even though it might not be in the upper range, we keep it. So that is more us trying to not set the proceedings where we have to be very, very specific on the guidance in every Q4 -- or Q3, sorry, every year.

Okay. In this context, I just want to also follow up on this mitigation initiatives towards the tariff impact. Should we see some of those initiatives start to already benefit or materialize in Q4? Or it will be more next year?

So it's actually a combination of things that have already been done and are already showing in numbers, which is also one of the reasons why we're saying it's a very minimal impact. Note that the whole structural level of tariffs has been increased both for China but also for the rest of the world by quite a bit and not something you're really seeing in the numbers if you adjust for FX. So that's one. And a number of those things are also in our supply chain, particularly the Mexico ramp up, as we said. We have more we can do on the operational front that is in the making right now and also things that we're preparing for going forward. I think really it comes back to what we communicated in our Q1, which is our main priority remains to serve our customers in the best possible way and to drive the organic growth. And even if that comes at a slight expense of slightly higher inventory or that we need to hold inventory in 2 manufacturing sites as we are ramping up in Mexico, then that is the key priority. And we still have a lot more we can do, particularly as we said now, as Mexico is performing well, and so is our U.S. factory, not to forget. So we feel we have a lot of things we can do and maneuver, but we're not in the game of doing things short term. And at this stage, we are only for selected products, particular products coming out of China directly, adjusting prices. Otherwise, we're not doing broad-based price adjustments.

Okay. Very clear. And my next question is actually on the Patient Monitoring, 9% growth in the quarter on top of 11% last year is quite impressive. But I still got an impression that it would be low single digit for this quarter. Was there a benefit from any like phasing of large orders? And what we should expect for the coming quarter?

I think how you should look at these businesses, I mean, if we look at patient monitoring specifically, I mean, it's overall a market that continues to also have some strong under -- I mean, not strong, but fairly strong, I would say, underlying market growth. So it's basically -- I mean -- and then you can say the combination of a good growing market, a competitive product portfolio. And then there is some timing on orders that I think is where you should not pay too much attention to the quarter-over-quarter because there will be -- I mean, we are running the business when there's a demand from the customers, not trying to balance across quarters. But still, I mean, it is actually quite an attractive business with, I mean, again, a competitive product portfolio that we have. So that's where we are. But it's not a business, as we have talked about before, where we are investing heavily or doing something different. So that's also why, I mean, we stick to the guidance for now that we put out our long-term guidance for both Anesthesia & Patient Monitoring businesses combined.

Okay. Can you -- is it possible to provide a soft guidance for Q4 then?

No, we will not. Thank you for asking the question, but no, we will not.

All right. Fair enough. And my last question on the -- actually the video laryngoscope launch. You have talked about very good feedback from the customers. But in your view, what is the key selling point as compared to the competition like Verathon and even some of the Chinese competitors? I mean, I understand you are being -- you have this one platform, which is benefiting you quite a lot. And besides this, anything else you want to highlight?

Yes. I think that's a very good question, Wei. I think there's a number of factors that the customers are highlighting, I think, the whole -- one thing that stands out is, of course, what we are talking about the flexibility and how it works with the portfolio where we both have the aScope 4 and the aScope 5. So we -- and the different sizes of the scope. So we actually have a very complete portfolio that helps. And we are -- this is so far only launched in U.S. and U.K. And if we look to U.S., that large market, a lot of the hospitals will have problems with space and so on. So the fact that they can put everything on one system is a benefit. I think then to go into the specifics, the two things that we get a lot of positive feedback on is, number one, very much on top of that solution, image quality. The image is super sharp and it enables them to do the procedure. That's where we get feedback, anecdotal still. We don't have a clinical study on this around the image quality. And then it's also around some of the software functionality that we have supporting the product that is addressing a lot of the needs with the customers.

Agreed. If I may follow up also on this, could you maybe indicate a bit on the contribution margin or gross margin for this product? I actually got impression that in the beginning, it was a very low-priced product and the margin could be lower. And then I think the -- your previous communication that it was more in line with the rest of the business. But when I speak to your competitors recently, what they indicated is even though they are paying a higher tariff today, the margin is actually very high for this product for the -- even the price is so low.

It's a great question, Wei, and I think we will also feed it back to our U.S. sales colleagues who are -- with whom we are debating what is the right way to price it. But we share the view, and I think that's also what I alluded to a little bit that we have previously said we were expecting some margin dilution, particularly in the early phase. So you're correctly referring to particularly what I said in the last quarter, when we convert hospital systems with a lot of monitors. I think what we're seeing right now that there is a positive reception for the customers also to pay for some of the initial upfront installments of equipment. I think that said, for us, it's important to say it is still a full portfolio view we take on the gross margin impact. And that means that for a customer where we convert to our VL solution, when we also sell more aScope 4 and 5, it is certainly a very gross margin accretive business. But if you start separating the 2, it could be in the very short term, initially a slight dilution. And then as you sell more blades and more scopes, an increase again in gross margin. So I think that is what we try to allude to. And with your point here on the market -- other market participants, I think that's actually also what we're seeing a slight positive -- more positive reaction to the cost of the capital equipment and our ability to price that also in the initial offerings.

Yes. But as Henrik is also alluding to scale, as we have seen with our endoscopes where we have scale driving, I mean, very good costs on our products. We will see the same over time. We're still in the early phase. But we are quite confident in that we have a good setup here and not commenting on the specific margins of our solutions.

Our next question is a follow-up question from Tobias Berg Nissen, Danske Bank.

I just have two fast ones. Just on gross margin, Henrik, perhaps I missed it. But what should we see in terms of expected trajectory here also going into next year given you face these multiple headwinds, especially from the U.S. dollar, and your current assumption of the dollar/krone at least DKK 6.75 here for the full year. And then just for Britt also, you make this change in the U.S. or North America. What will be Scott's strategic priorities here when he starts, also like driving penetration for urology, but also in terms of your setting a new GI strategy, we will hopefully hear more about him at the CMD.

And maybe I'll comment on the last one. So we will obviously share a strategy update at the Capital Markets Day, October 1. So I'll comment on that. But basically, again, I think it's -- as I said in my presentation, Scott comes in with really a very relevant background in medtech and has seen both from smaller and larger companies how to operate. So I think it's just a natural progression in where we are again after Steve has been successfully run the business for 12 years. So it's -- I mean, I think you will, to a large extent, see a continuous focus on how is it that we deliver growth based on the big potential that we still have in the U.S. in the existing segments that we are in, I mean, there's still a lot to go after. So we are not necessarily looking to bring someone in that can, I mean, go take the next steps. We'll come back on -- again on the Capital Markets Day and talk about how we see that. But very much in the businesses that we are in with the new launches that we have had, we see plenty of opportunity to really accelerate and continue to grow strongly. And that's really where I think he has a very solid background to do that together with an organization that is performing very well already. So I do feel it's a perfect time to actually make that change because we have a solid team and some really strong colleagues in our North America organization.

Fully agree. And I think turning back to the gross margin and FX question, I think, Tobias, the 2 key things to note is we have our sales mainly in U.S. dollar, as we also explained. And therefore, we will see an impact on the reported revenue from a continuation of the current low dollar level. And I think you and your colleagues are, as you say, forecasting a continuation of this or even some of the banks are now also forecasting a further depreciation. As we also said, if you look at the mid- to long term, then we have a natural hedge from the fact that we have a very big part of our cost base in China and in Malaysia. And that means that if you look at the longer run, there's not a significant effect from FX because a lot of this can be mitigated. But we are deliberately not hedging any equity impact from this. And therefore, when you have, like we had in Q3, a significant depreciation within a quarter that happened very fast, then obviously, that has a higher impact in that quarter. As long as it's more stable over time, it's less of an impact quarter-over-quarter.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Britt Meelby Jensen for closing remarks.

Thank you very much, and thanks for joining today's earnings call and also for the great questions. I do hope to see most of you in our headquarter in Ballerup, Copenhagen on October 1, where we will host our Capital Market Day. Please remember to sign up and hopefully see you there. Thank you. Have a great Friday and a great weekend.