Ambu A/S (AMBUB) Earnings Call Transcript & Summary

Good afternoon, and good morning to everyone. My name is Craig Mcdowell. I'm a member of the equity research team at JPMorgan. Today, I'm very pleased to welcome Juan Jose Gonzalez, CEO of Ambu. Before I hand over to Juan Jose, just a reminder of the format for these sessions. We will first have around a 20-minute presentation from Jose after which, we will use the remainder of the time for Q&A. Investors are very welcome to ask questions to Juan Jose, which you can do using the Ask a Question button inference portal. With that, let me say thank you very much to Juan Jose. And let me hand over to you for your presentation.

Thank you very much, Craig, and hello, everyone. Let me spend a few minutes talking about single-use endoscopy market. Who we are as a company, our strategy, our progress on our key priorities, the performance and the outlook and what can you expect from us? Let's start with a single-use endoscopy market. And single-use endoscopy considered one of the most attractive new marketing metrics. This is a market that last year was about $500 million with a penetration of less than 2% of endoscopy market and is expected to grow to $2.5 billion by 2025. And there are three main drivers behind this transition from reusable to single-use. Number one, there is a higher focus on infection control and very importantly, a higher awareness regarding all the contamination issues related with reusable endoscopy. Number two, there is more awareness regarding the benefits in terms of workflow and efficiencies from single-use endoscopy, as hospitals are able to avoid complex and long reprocessing world with the countable usable endoscopy. Another three, technology that powers single-use endoscopy, sensors, image enhancement, software are moving very rapidly. That basically means that every new generation of single-use endoscopes is more powerful than the previous one, and you are able to perform at a level similar with the usable endoscopy. Each of these drivers are actually becoming stronger independently and together is what is driving this accelerated transition towards single-use. Now within this new market being created, Ambu is the #1 player in single-use endoscopy. And our aspiration by 2025 is that we not only continue to be the largest player, but we are also the most innovative one. And we have three key strategic priorities: Number one is to build the most comprehensive and technologically advanced portfolio in single-use endoscopy. We want to be in each of the segments with a complete portfolio and moving to the next generation very rapidly. Number two, we want to leverage our high-scale, low-cost manufacturing to help hospitals migrate from reusable reducible to single-use in an affordable way. we believe that is actually critical for a success of single-use endoscopy. And number three, we want to maximize our first-mover advantage by rapidly scaling our commercial infrastructure. So those are our strategic priorities. Now in terms of COVID-19 and the recent wave, including Omicron, I think our experience is similar with what has already been shared COVID-19 putting significant pressure on health care system and meta companies. We continue to see elective procedure being depressed. We see hospitals with more problems in terms of labor shortage. Actually, that's becoming more acute now with Omicron. Meta company continue to experience, supply chain volatility. Certainly, we continue to experience supply chain volatility. Now within all this COVID environment, single-use endoscopies actually play a very important role supporting health care systems. We help with the efforts to reduce cross-contamination, and we also help them with a labor shortage, and this is actually becoming very evident in every COVID-19 waves, but especially in the last one, we are actually seeing hospitals realizing that given the workload and the demand, single-use endoscopy is a better way to try to manage this process. And that's why we say that the overall COVID-19 pandemic helps to highlight the benefits of single-use endoscopy and helps to accelerate our penetration. Now our priority throughout all this period has been around maximizing our first mover advantage, making sure that we bring our products for the treatment of COVID-19 patients, whether it is single-use bronchoscope or resuscitators, but that we also bring our innovation and that we strengthen our infrastructure. Our objective has always been to make sure that we emerge from the COVID-19 pandemic as a much stronger company. Now we have made very important investment during this period in each of our three competitive advantages. In terms of our R&D model arranging. We built a dedicated R&D center 4 GI in Germany in terms of our manufacturing. We are building in Mexico, what is going to be the global largest single-use endoscopic plant. And in terms of our commercial infrastructure, we actually have tripled our commercial infrastructure in 3 years, including going direct in the U.S. and Japan. Now let's look at our performance. Over the last 2 years, the company continued to grow very rapidly. Last year, we reached DKK 4 billion in revenues, growing 16% on top of 26% the previous year. This growth was actually powered by our visualization business, which is our single-use endoscopy business, which grew 31% on top of 81%. So this is a remarkable growth. Actually, in 2018, '19, single-use endoscopy accounted for 30% of our company sales. Last year, it was 55%. So this is very important because it helps to accelerate the momentum of the overall company. Now if we look, we're seeing this visualization business. And you look at it over 3 years, our revenue growth is 37%. CAGR. Our volume growth is actually faster. It's 40% CAGR. If you look in terms of number of units, over the last 3 years, we nearly triple our volume exchange 1.5 million scopes last year. Now to understand what is driving this accelerated growth is really our innovation -- and this is an innovation which is actually highly profitable. And what you have here on the left-hand side is the evolution of our gross margin over the last 5 years. And as you can see, our gross margin actually has increased more than 7 points. It's 8.5 points in gross margin. And that basically shows that this model has the potential of driving very healthy levels of profitability. We are basically growing rapidly, driven by a business that have higher gross margins than the average of the company and with significant opportunities to scale up our manufacturing and our commercial -- and the investments in our commercial infrastructure. Now our modular innovation engine is what is very important to understand and what really makes an who is so unique as a company. We basically took all the expertise in terms of modularity in automotive with a rapid cadence of consumer electronics and created an innovation engine that allow us to develop in parallel multiple products across different endoscopy segments with a much shorter time to market, high levels of efficiency and the ability to integrate advanced technology across the portfolio. And that's basically what is allowing us to bring to market such a level of innovation. And let's look at the performance of our recent launches. We have always been the #1 player in pulmonology. And we entered into ENT and urology markets that combine are 6x larger pulmonology. So it was very important for us to be successful there. And as you can see on the right-hand side, we have had a very rapid penetration of these markets, and we became #1 in ENT and also #1 in urology last year. This is a very important example in terms of our ability to enter into new segments, without reputation, all relationships but on the back of products, which are technologically advanced and affordable and without being able to build these businesses. Now It's not just about the ENT and urology. We have placed an important bet in GI. I have shared the clinical and the early clinical data and data from our controlled market release for our do 1.5 launch, showing that the product performs across all levels of complexity. And we are also seeing that actually the environment to support the transition from reusable to single-use in becoming more and more favorable. I think we are all familiar with the communications from the FDA in terms of recommending U.S. hospitals to migrate from reusable to single-use. We have also seen the special reimbursement from CMS for any hospital that due to endoscopy is using single-use products, both for in-patient and out-patient procedures. But now we are seeing on top of that private payers setting additional reimbursement also to support the migration. On top of that, we are also looking at the recent Class II recall and safety warnings from reusable endoscopy anoscopy system that helps to highlight the challenges in terms of a contamination and a very complex reprocessing process and why single-use is actually -- we consider a better solution. All of that means that we expect a gradual adoption of duodenoscopy, is certainly a more complex procedure. Omicron over the next couple of months is going to be -- you're going to make it more visible to go ahead with trials and pro demonstrations. But all of this environment make us be confident that by 2025, we expect duodenoscopy, to be the largest single-use endoscopy segment. And similar to pulmonology, ENT and urology. We also expect to be the #1 in hot. Now our bet in GI is more than duodenoscopy. Very soon, we are going to share with you our launch into Gastro, which is a market of the same size as pulmonology, ENT and cystoscopy combined. So we are very excited in terms of what this market can do for the company. Now the plan is to extend our first mover advantage by introducing more launches than our key competitors combined. If we look at the period of 2017, '18 to 2019, '20, we introduced 5 launches in single-use endoscopy. For the next 3 years, our plan is to introduce is to have 20 launches. That basically means to enter into the Broncho suite on the back of our aScope 5 to enter with our single-use ureteroscope into new segments in urology. In GI, that basically means coming up with our next innovation of 2.0 to enter into gastro colon, Colombia scope to have new claims to have next generation of monitors and processors. And all of that combined, if I want to ensure that we fulfill our aspiration in terms of being the most innovative company. Now our objective is to make sure that we create the most advanced and comprehensive ecosystem. What you have on the right-hand side is our portfolio and ecosystem today -- As you can imagine, this ecosystem is going to be transformed by 2022, '23 when we have that 20 launches in the market. We actually have proprietary technology across our sensor platform and modular camera in terms of our image processing, in terms of our maneuverability and ergonomics. Over the last 2 years, we have filed more patents than in the previous 10 years together. And all these proprietary technology is what we are putting together in this ecosystem. The objective is to make sure that we create a single-use endoscopy offering that allows hospitals to do endoscopy procedures, wherever they want, whenever they want it, in an affordable way without concerns of contamination with everything connected, which is trying to give them significant flexibility. Now sustainability is going to be a very important part of our strategy, and we have clear objectives by 2025 in terms of reducing our carbon emissions and being PVC freeing or new launches and having 100% sustainable packaging. But in addition to that, we are looking at our environmental agenda for single-use products. Something that is important to know is that the transition from reducible to single use is going to significantly reduce hospital waste. There was an independent study that showed reducible that showed that cleaning a reducible cystoscope generates 3x more waste than a single-use cystoscope. So this migration is going to be positive for the environment. But in addition to that, we have programs in terms of being plastic neutral. We have recycling pilots. Our objective is to make sure that we create this new market in a sustainable way. Now in terms of the outlook for the company. Our guidance reflect our accelerated growth and our profile as a high-growth company. For this year, we are targeting to grow 15% to 19% in revenues with an EBIT margin of 7% to 9%. That's basically reflecting, again, all of the benefits from the investment in innovation, our launches that continue increasing penetration and the important investments we are making. So that's what I wanted to share with all of you and correctly open for the Q&A.

Excellent. Thank you. Juan Jose Yes, let's move into Q&A. [Operator Instructions] If I can start with one of my own. You've previously spoken about the selling process for single-use as needing to address multiple stakeholders from clinicians to nurses, general managers, hospital CEOs, CFOs, et cetera. I'm just wondering, from experience in the field, who's the most easily converted and how convinced? And who is the hardest in terms of getting them over the line?

I mean, first of all, it's a very complex selling process, and we consider having a dedicated commercial infrastructure that only sell single-use products as a key differentiator because of what you said. There are multiple stakeholders. I would say the biggest conversions vary significantly from a health care system that have infection incident that drives a very abated conversion. You also have hospitals that have very complex reprocessing that also makes very expensive to use reusable endoscopy and that makes the transition much faster. But overall, our experience is that we enter into hospitals. Typically, they are being used in certain locations, and for certain patient profiles. And then every year, we drive more and more penetration. And that's basically the model. If I look at the ENT and urology, we are basically already in some of the largest ENT and metrology departments on the back of the offer. And I think once hospitals understand and get comfortable with the product, it's easy for them to see how they benefit from it.

Super. And then from the outside at least, it seems like more credible competition is entering the single market -- single-use market, specifically in Gdansk and bronchoscope segments. Just wondering what you see from within the business? And then in those competitive situations, does the customer only choose based on price? Or what are the important factors?

Yes. I mean, first of all, the -- as I mentioned, the penetration of single-use endoscopy is very low. And last year, it's less than 2%. So it's very important for a creation of a market that we have more players coming into single-use endoscopy. So we are actually very pleased to see all the activity of Boston Scientific. Now Olympus declaring that they are going to focus on making the case for single-use endoscopy. I mean our view is that although it varies again by procedure, the pros have to perform technically. Clinically, they need to be able to do the job. That's kind of a minimum requirement in terms of adoption across all the segments. Doctors have to be comfortable that they will be able to have the automation. Now depending on the procedure, actually, pricing is very, very important. And if you look at ENT and cystoscope for example, we were not the first one to enter with a single-use product. We were the third one that had a product that was technologically advanced, but also affordable that make the healthcare economic case for a hospital to move from reusable to single-use neutral. And that's really what drives the adoption. And we believe that, that's going to be the case in duodenoscopy, gastro, colon. You basically need to have those requirements together to be able to be successful.

Excellent. And then also, when we think about competition, we only think about the single years competitors. I would be interested to hear what your reps see from the reusable players? How are the reusable players responding on the market when you go to them? And specifically, if you could address high disposable end caps and [indiscernible] scopes are being received in the market?

Yes. And first of all, I would say there has been a significant change in the communication from reusable endoscopy player. So when I joined Ambu, reusable endoscopy companies were considered in single-use endoscopy as something niche that was really only happening in pulmonology with really limited potential to travel across endoscopy. Today, they acknowledge the potential of single-use endoscopy, I think Olympus indicated that they expected this market to grow double digits for the next decade. And that is from their point of view, of course. But I just basically show that they acknowledge that this transition cannot be stopped. In general, it's difficult for reusable players to compete effectively in single-use because they still are focused on advancing the reusable business. So they consider single-use as part of a choice that they will make it available. But I don't think they are going to be making the case against reusables in the same way as us. The level of activity right now it's basically nonexistent. We haven't seen much activity from reducible players. I think PENTAX indicated some manufacturing problems, which is delaying that launch. Olympus has announced that they have launches coming, but nothing really yet hitting the market. Now in terms of their disposable caps in reducible duodenoscopy, this solution has been in the market for some time of by. There are a lot of sites that show that is possible gaps do not solve the contamination issue as the contamination happens across the entire scope. And that's actually why in a spy there was a solution the FDA communication, CMS issued the additional reimbursement, which is only specifically for single-use duodenoscopy, and it does not include that it's possible that. So on the back of all this, we still believe that, as I said before, when you look at the duodenoscopy 5 years from now, a single-use duodenoscopy is going to have a very high level of penetration.

Great. Let's move on to bronchoscopy. And this segment has previously seen large volumes on earlier waves of the pandemic. How is this latest Omicron wave compared to earlier waves?

Yes. I mean we are monitoring the situation, and I think things are unfolding as we speak. In general, we always have seen the penetration of our single-use bronchoscopy business increase with every wave and not going back once the way pass. So that's very important. Now specifically in terms of Omicron, the driver of demand is different to what we have seen in the previous wave in the sense that it's not mainly driven by hospitalization of people going into intensive care, although that is raising probably we'll see more cases in the rest of January and February. But actually, the demand is driven by labor shortage. Hospital to not have the manpower to be able to clean reusable scopes and they are actually relying more and more in single-use products. And it's important to know because if you look at ICU and OR, the penetration of single-use bronchoscopy is around 30%. There is still a 70% volume being done with reusable scopes. So we believe that Omicron will also be favorable in terms of the development of our business.

Thank you. Then let's move on to [indiscernible] gastro launching this year and questions in from the line. The first one, how should we think about the rollout of gastroscope that is seen to be approved launch/launched? What is the initial feedback and who would be the early adopters?

Sure. And this is a launch that is coming very soon, and we are very excited in terms of what will mean we are being in a pro that has the most advanced technology we have is at the most advanced sensor and also have an economic offering that is going to allow a hospital to be able to use single-use customer calls. Now I have to say that conditions in gastroscopy are very similar to what we have seen in ENT and cystoscope. It's less about contamination, although there are cases in terms of contamination. But there is a lot in terms of availability and convenience hospitals actually experienced a lot of problems in terms of having reusable gastroscopes or they breaking up or wanting them to use it in surgery and not being able to move the power. So actually, we are confident in terms of being able to bring a pro that should start to drive penetration at a healthy pace. But of course, the market doesn't exceed and we are only going to find that when we launch.

Excellent. Another question from the line. I'll read it [indiscernible] on gastroscope as well. And the question is, what's the clinical value proposition of single-use gastroscopes versus reusable scopes?

I mean from a clinical point of view -- again, first of all, there are patients they could have diabetes, they could be going through chemotherapy as part of a cancer treatment, they could be immune compromised. They could have an infection and you do not want to expose them to any risk of infection. So that's one group of -- one type of opportunity. The other type of opportunity is you want to do gastroscopies beyond the GI department. You want to do it in surgery. You want to do gastroscopy emergency setting. You are able to do it with a single-use product. And then finally, in terms of operational flexibility, you have 5 gastroscopes, but you have 7 patients. You want to do it over the weekend. You want to start, but a tower being used by another doctor and the patient is [indiscernible]. I would say those three combined together what represent the value proposition of single-use gastroscopy.

And linked to that, you are the only player present in gastroscope and [indiscernible]. Why do you think that's the case? Are there either incumbents and reusable or new players have entered into bronchoscope and duodenoscope. We haven't seen the same followers into these two segments. Why do you think that's the case?

I think, Craig, that's an excellent question because when you look at competition, competition is really focusing in what is called niche segment high price ureteroscope, duodenoscope, colonoscope, and that's really what we expect to see most of the competition. We are pretty much alone in ENT and cysto and we expect to be alone in gastro and colon, mainly because it's very difficult to bring to market technology advanced products at affordable prices. We can do it because we have a higher scale, low-cost modular manufacturing. Last year, we hit over 1.5 million scopes. I think our next play -- the next competitor is at around 200,000 scores. And this is an advantage that is actually widening as we are growing volume much rapidly than our competitors. And that basically means that we expect that for about 80%, 85% of the endoscopy total volume, we are really going to experience little competition for quite some time. But that's basically our thinking in terms of why you don't see single-use gastroscope coming to market.

Super. Thank you. Let's move to duodenoscope. Firstly, at the market level, do you get a sense that the key markets where you're launching the duodenoscope procedure volumes are fully recovered since pandemic? Or are you still launching into depressed markets?

Yes. I mean, although duodenoscopy procedures are elective, it's very difficult to delay them. So I will say they are depressed and what we are experiencing is a lot of volatility, but not to the level that we're seeing in other elective procedure where you see a waiting list that we know is going to come back and is going to drive a higher [indiscernible]. I don't think we see that in the case of duodenoscopy. Now that the market doesn't exist. So this is really less about the overall market size and more about our ability to penetrate what is going to drive our success.

Excellent. And then similarly, to what extent have you faced challenges in getting into hospitals to sell the product. Is this still continuing with Omicron variance?

Yes. I have to say that if I look at October and November, we had an environment where we were able to do pro demonstrations [indiscernible] there was quite an easy level of access and so forth. I think from mid-December, and I'm sure it's going to be the case through January and February, [indiscernible] becoming more difficult. Hospitals are getting [indiscernible] to deal with the Omicron wave. So that's making it more difficult for us to do our pro demonstrations. But on the other hand, we are part of a solution because if you are a GI department, the latest guidance in terms of cleaning our reusable duodenoscope, is over 200 steps. So either you move to single use or do something because you do not have the manpower to be able to go through such a complex procedure in the middle of the pandemic with the risk that you do all of that and scope could still have some level of contamination. So I have to say there is a lot of volatility, but we know that at some point, sir going to go back to normal, and we will be able to execute the launch as we have planned.

Excellent. And just similar [indiscernible] points, but on the adoption of single-use duodenoscope, Boston Scientific CEO, you previously stated that he does not expect a hockey stick in terms of adoption. To what extent do you agree with that statement?

Yes, we agree with that statement. It's a more complex procedures. The evaluations are longer. Hospitals or GI surgeons wants to be confident that they are able to perform across all levels of complexity and so forth. So it's certainly not going to be something similar to what we saw in ENT and cystoscope. Now by the same talking in our discussions with hospitals, they have more detailed evaluation because they are clearly looking at a much higher level of conversion in the medium term. That's why we have this view that it's going to be a more gradual uptick. But by 2025, this will be the largest single-use endoscopy segment.

Super. Then moving on to in a bit more operational, but there's been lots of commentary from companies around semiconductor shortages, resulting in either constrained revenues or higher costs to secure supply. To what extent has your business experience that?

Yes. I mean we have experienced raw material inflation, including inflation in terms of sales of some panels, but we do not have any issues in terms of product availability. Our sensors for these companies are more profitable. And therefore, if they have supply constraints, they tend to support us more than other segments. But that's basically where we are.

Excellent. And some of a related question from the audience are really [indiscernible] You have been very successful in expanding gross margins. How should we think of the puts and takes in gross margin through 2022?

Yes. I mean, first of all, in terms of 2021, '22, we actually, as part of our guidance, indicated that our gross margin this year is going to be slightly lower than the previous year. And that's driven by two things: One is the short-term raw material inflation; and the second one is because we are building our Mexico plant, so we are carving higher levels of overhead. Now over the medium term, you should expect to see our gross margin continue to expand as it has expanded before. We are entering into segments with attractive pricing, but actually very healthy gross margins. And overall, the mix of all of our launches will ensure a continued improvement in our overall gross margin.

Okay. Helpful. And just in terms of the gross margin for the year, you've said just below the full year '21 level, I think that was [indiscernible]. The exit rate, I guess, of Q4 '21 was sub-60. How should we think about progression of gross margins through the year?

Waiting in a silent period, and we are not really providing any more guidance any more guidance beyond that. I have to say in terms of where we are is still going to be about our top line. And we have, right now, if you look at this year in our P&L, a short-term impact in terms of raw materials. And we already know that a good percentage of that will go away in a couple of years. And we are facing higher costs in terms of logistics, both because we are airfreighting and because of rates are also higher than normal. As we move forward, those two things will reverse. You will have a business where Visualization is going to be higher, with a higher gross margin and more leverage of our manufacturing and commercial infrastructure. And that is what is going to drive a very healthy improvement in the profitability of the company.

Superb. Okay. Moving on, the shape and the scale of the company has changed dramatically in nearly 3 years that you've been CEO. To what extent do you think you can realize the growth on all the product launches over the next 3 years with the existing OpEx be?

I mean, first of all, we have done very important investments in our sales and marketing infrastructure. As I mentioned, we basically have tripled it in 3 years, including going tapering in what we consider two critical markets: The United States and Japan. Going forward, it will really depend in terms of level of penetration that we are getting with our launches and we know that there will be variability. Some will be very fast. Some ones will be slower. And based on that, we will continue to adjust our commercial infrastructure. But we don't think it's going to be to the same level of what we have done before. I think in some cases, we already have good size of organization to be able to drive out launches.

Excellent. I think that brings us nicely to time. With that, let me say thank you very much Juan Jose.

Thank you very much, Craig. A pleasure to be here.

That's been a great 40 minutes. And we look forward to hearing from you in early cap.

Thank you. Thank everyone.