Ambu A S Ord

Good morning everyone and welcome to the conference call for AMBUS Q1 results. I am Nicolai Thomson from the investor relations team. I'm here with our CEO, Bonkrosé Gonsález, our CFO, Michael Heigard, and Basil Refai, our Chief Marketing Officer. Today's presentation can be found on our homepage and there will be a Q&A session at the end of the call. As usual, please limit yourself to two questions at a time and get back into the queue if you have additional questions. And with that very brief introduction, I'm very happy to hand over the word to our CEO, Juan José González.

Thank you, Nicolai. Hello, everyone. We are going to spend a few minutes talking about the company, the development in the market, our performance, the progress in terms of our innovation, And then we will open for Q&A. So let's start with the key messages for this call. First of all, the driver for the creation of a single-use endoscopy market continues to accelerate. Whether it is the focus on contamination, whether it is the pressure in terms of labor shortage, all that is highlighting the challenges with a reusable endoscopy model and the benefits of single use. In our Q1, we are reporting very strong performance adjusted by the NHS safety stock order. The company grew 13% driven by visualization growing 26% in revenue and 46% in volume. ENT and SYSTO continue to be the number one growth engine for the company. And I will spend a few minutes talking about the rapid penetration of ENT and SYSTO. And we are also advancing our entrance into GI. And Basel will talk about the progress with our Duo 1.5 and with our Gas for Launch. There is volatility in the market driven by Omicron. And I think many meta companies have talked about the impact on elective procedures and labor shortage. It's unclear in terms of how this will unfold. We see this as a short-term impact, and it is on the back of that that we are reflecting this higher volatility in our guidance. And in terms of our innovation, what is going to drive the continued rapid growth of our company, we are actually confirming our ability to bring all of our launches by 2022-23. including major launches in 2022, whether it is our entrance into the ESCO 5 in the Bronco Suite or the launch of our Duo 2.0 that will give us technical superiority, whether it's our entrance into Gastro or into Colon or Ureteroscope or our Cysto High Definition, the company will immerse as a leading single-use endoscopy player. Now, let me just spend just a brief moment to introduce SAMBU to any new investor in the call. And just for context, single-use endoscopy is one of the most attractive medtech markets. The market is expected to grow from $500 million to $2.5 billion by 2025. And the three main drivers of endoscopy are an increased focus on infection control, an increased need for workflow and efficiency, which is further highlighted on the back of the labor shortage, and rapid technology advancements. This is sensors, this is image enhancement software. So basically, every generation of single-use scopes is more powerful than the previous one, is more competitive relative to the reusable endoscope, and has a benefit around infection control and efficiency. Now, within this market, I'm with the number one player in single-use endoscopy. Over the last three years, the revenue take-up for the company is 16%, driven by a visualization business growing 34%. Actually, in the last three years, we have tripled our volume And we have increased our growth margin in the last five years by eight points, showing the profitability potential of this model. And our strategy is very clear. Number one, we want to build the most comprehensive and technologically advanced portfolio. by leveraging our R&D modular engine. Number two, we are introducing these products with a pricing that enables the rapid transition from reusable to single use. And we're able to do that because of our high scale low cost manufacturing setup. And finally, we are maximizing our first mover advantage by rapidly scaling our commercial infrastructure so we are in a position to effectively commercialize all of these new products. And it is on the back of this strategy that we will emerge in 2025 as a clear leader in single-use endoscopy. Now, let's talk about the recent developments in the market. And there are two things. One is the reports around endoscopy-related contamination from reusables continue to increase year over year. And if you look at this trend, if we pick a year, 2016, 709 reports in the U.S. By 2021, five years later, it's more than three times the number of reports. And going forward, we expect this to increase as the FDA is asking for more detailed reporting of this level of incidence. And the issue with this is that regulators and reusable endoscopy players are responding by setting more complex, more longer, more labor intensive reprocessing guidelines. creating more burden in the hospitals. This is an issue because at the same time we are facing a labor shortage challenge. Whether it is the American Nurse Association indicating that there is a national crisis, whether it is 24% of US hospitals reporting critical staffing shortages, there is basically no ability to be able to do more endoscopy procedures. And this market is growing year over year with the reprocessing guidelines that are becoming more complex while having these labor shortages. And all of these environments is highlighting the benefits of single-use endoscopy and why single-use endoscopy is a more efficient and effective way to do endoscopies in the future. And it is on the back of this that we have achieved a very strong performance in Q1. Basically, as I said before, adjusted for the NHS safety stock order in Q1 last year, our organic visualization revenue growth was 26% and our volume growth was 46%. I mean, this is a record 419,000 units sold this year. If you look at our Q1 2021-22 unit sold, it has actually more than doubled in two years. And as a result, our visualization sales as a percentage of a company have increased from 35% three years ago to 55% this year. Now, if you look at the main driver for this volume growth, it is our ENT and cystoscopy offering. We continue to see a very strong traction of these two products, and they are actually growing double digits over previous quarters for the last six quarters. Actually in Q1, our ACE-COP-SYSTO have already generated more than 50% of what we sold in the full year last year, reflecting the rapid transition to single use. We are expecting this year that Urology and ENT combined are going to exceed the 700,000 units sold. This is very important because This is not a segment driven by contamination. This success is driven by the acknowledgement that with the technology of these products and the significant benefits in terms of workflow and efficiency, single-use ENT and cystoscopy is the smart way to move forward. And even with all the challenges that we are seeing in terms of labor shortage, we see that the more challenge, the more likely the hospital to rely on single-use endoscopy to be able to manage their hospital capacity. Now, many companies have talked about the impact of Fomicron. I think over the last few weeks, we have been seen reports from all the major hospital medical companies talking about the impact of Omicron on their business. Let me just give you a perspective in terms of how we see this impact in Ambu. First of all, we see the impact from Omicron started in mid-December last year and is expected to have a further negative impact in Q2 and Q3. We expect it to be more of a Q2 impact and in Q3 it will start coming out, but overall we see a negative impact in both quarters. In the short term, Omicron has the following negative impact. First of all, it is less severe, so it generates less extra demand in bronchoscopy than previous variants. It drives a contraction of elective procedures due to the hospital staff shortages driven by infection and self-isolation, and illimit access to hospitals to demonstrate new products, like in the case of our S-COP Duo 1.5. As a result, we expect our visualization cell growth to be impacted in Q2 and Q3 this year, and in spite of the Omicron disruption, we still expect our core business, our PMD and anesthesia, to deliver double-digit growth. Now, this is the impact of Omicron in the short term. Of course, at the same time as Omicron is impacting the elective market, it also further highlights that in the midst of labor shortage challenges, single-use represents the best alternative. So we actually see a benefit in terms of penetration of single-use endoscopy. over the medium term. We will emerge from this Omicron variant with a higher level of penetration than before. Now, I just spoke about the development in the market. I talk about our performance, the rapid growth of ENT and SYSTO, Omicron as a short-term factor that is driving volatility. Let me pass it to Basil Refai who will talk about our entrance into GI.

Thank you. And as Juan Jose shared, our goal is to be the number one player in single-use endoscopy, and a key part of that is to drive leadership in GI, which will be the largest single-use market in 2025. Now, we have an aggressive agenda in GI, which began with Duo, which is going to continue with Gastro, and follow with Duo 2.0, Colon, and Colangio, so that we build a full range of GI single-use scopes in our portfolio. And today I'm gonna focus on Duo 1.5 and on Gastro. So as we advance our Duo 1.5 launch, there are two key messages to take out from today. Number one is that this is going to be one of the largest single use endoscopy markets in 2025 because all the drivers of market creation are getting stronger and stronger. Reimbursement for single use is expanding. It began with Medicare outpatients and then expanded to inpatients And now, even over the past few months, we're seeing many more major private insurers providing a special payment for hospitals for doing single-use duo. And at the same time, reusable systems are continuing to have more problems. So just over the past few months, we've seen a Class 2 recall for the Olympus 180 system. We've seen a safety warning for the Olympus 190 system. And that just shows the complexity, and it shows the shortcomings of reusable duodenoscopes. And key message number two is that within that large single-use market, just as we're the market leaders in pulmonology and in ENT and urology, we believe that we will be the market leaders in duo. Technically, we have a scope that is very competitive. We just finished our 150-patient trial with eight of the leading ERCP centers in the U.S., places like Indiana University, which is the highest volume center in the U.S., the Mayo Clinic in Baylor, And across those 150 patients, we're seeing a more than 97% success rate. And that compares very favorably versus the competitor scope, which published a success rate of less than 91%. So technically, we have a scope that's very competitive. And then from an economic point of view, we have a more favorable price point. And we believe that these two combined are going to give us a higher win rate. And based on our experience so far in head-to-head trials, we're confident that we're going to be number one globally and especially outside the U.S. where pricing is an even more important decision factor. So on Duo 1.5, although we're seeing the near-term disruption from Omicron in terms of hospital access, overall we're very pleased and very encouraged with the high level of interest and the outlook for the product. Now, we've always said that Duo is going to be one of the largest segments in 2025, and the next question is, how big can gastroscopy be? So let's talk about gastro. First of all, Gastro is one of the largest endoscopy segments. It's bigger than pulmonology, ENT, Cysto, and Duo combined, so it's a very large market. It's also a very diverse market, so gastros can be performed in the endosuites by GI doctors, but they can also be performed in the operating room by bariatric and foregut surgeons, They can be performed in intensive care when patients are too frail to move from intensive care to the endosuite. They can be performed in the emergency room. So there are millions of gastroscopies that are taking place both inside and outside the GI department. And then the question is, are the conditions in gastro similar to what drove single-use adoption in Cysto and ENT and Bronc? And we believe that the conditions are similar. And there are three main challenges with reusable gastroscopy systems. First of all is lack of availability. So there's a need to do gastroscopies across these multiple care settings while reusable equipment is mainly available in GI departments. That makes it difficult outside of GI departments because you need to move a tower or invest in having a specific tower, which is not always possible. And when we speak with doctors, they talk about the challenges of operating across multiple sites of care. They describe the cumbersome process of moving bulky towers throughout the hospital. And they share that that's why more than 2 million procedures are delayed every year because of scope availability. The second challenge is the workflow burden. And there's a need to do more and more gastroscopies, but the complexity of the current reprocessing model simply does not allow that, especially with the staff shortages that we're seeing today. And again, when we speak with doctors, they talk about the burden these volumes are putting on nurses and other staff and the impact that has on morale and burnout and staff turnover. the uk is a great example where you know as a nhs system they want to have less than one percent of patients waiting more than six weeks for gastroscopy before covid started just purely because of staffing shortages that number was at 10 and today that number is over 40 so that means there's a significant waiting line that will not be addressed through reusable endoscopy and that situation in the uk It's the same as the situation we're seeing in Germany, in France, in the U.S., in Japan, in most of our key markets. So, by the way, these first two points, lack of availability and workflow burden, those are exactly the drivers that led to the adoption of single-use in ENT and SYSTO. And then on top of that, you have a contamination risk with a more than 500% increase in cross-contamination FDA complaints just in the past five years. So those are the challenges with reusables. And of course, single-use gastro allows you to address all of them. It allows you to perform gastroscopies at all times in any setting with low capital investment. It eliminates 100% of reprocessing, and it's 100% sterile, which by the way, for areas like the operating room, which is a sterile environment, is important. And single-use is a better solution than taking a non-sterile reusable into that site of care. So those are the conditions that support single-use penetration in gastroscopy. Now let's talk about our single-use gastro system, which we're excited to share was just approved last week. Now the overall message here, the most important thing to know, is that this is by far the most advanced technology we've introduced, both in terms of scope and in terms of display platform. Now in terms of the Ascope gastro, this product was specifically designed to target half of total gastroscopies. It has a camera sensor that's four times more powerful in terms of image resolution than our Ascope 4, and the feedback from doctors is that it is so similar that they can take this with practically no learning curve and put it into practice immediately. They share that the mechanical performance and maneuverability is on par with reusables, and they even share that some features like bending performance is superior to reusables, especially compared to the reusable scopes that they work with day to day, the scopes that have degraded over time. And we're gonna be launching this scope with a global ASP of $350, and that means that we're gonna have an economic value proposition to go to the product performance that supports transitioning large volumes of procedures to single use. Now in terms of our display and processor platform, we designed the ABOX2 to be at the center of our ecosystem for the future. It has a full HD image with advanced image processing, and it has increased processing power versus AVU2. And that, combined with our new camera sensor, will set a new benchmark in terms of image performance. It has a touchscreen display, which doctors describe as intuitive and like an iPad. And, of course, the compact design combined with a low capital investment and a global ASP of 7,500 makes it more easy to adopt in multiple sites of care and unlock those volumes. So with a very large and diverse market, with the conditions that support the transition to single use, with the most advanced technology we've introduced, and with all the positive feedback we've gotten these past few months from dozens of KOLs in different markets, we're excited about what single-use gastro can do, and we're proud of everyone at Ambu who helped bring this important innovation to health systems, to doctors, and to patients. And we're confident that with both 301.5 and gastro are poised to be important growth engines for the company as we expand our presence in GI. And now to share more on our broader innovation pipeline beyond GI, I'm going to hand it back to Juan Jose.

Thank you very much, Basil. And I have to say, Ascope Gastro is just one example of many in terms of what we are planning to do with single-use endoscopy, bringing next generations of more technologically advanced products at affordable prices to drive a very rapid transition from reusable to single-use. Our strategy is to build the most advanced and comprehensive ecosystem in single-use endoscopy. And basically we are building a set of, we're building a modular engine that has proprietary technology around modular camera and sensor platforms, image processing, and ergonomics and maneuverability. Actually, if you look at our patents behind these technologies, we have filed in the last two years more than in the previous decade combined. There is significant focus on building proprietary technology to create this ecosystem. And on the right hand side is the ecosystem today. And it is starting to look more powerful, certainly more powerful than three years ago. The most important thing is how is this ecosystem going to look like. Now, we are on track to launch our rich pipeline by 2022-23. We have in this calendar year very important launches. The next important launch is going to be our ESCO 5 Bronco that will allow us to enter into the Bronco suite. It has the same advanced technology that Basil described in terms of our ESCO gastronome. But it's not only going to be that. We will also launch what we will consider a technologically superior video laryngoscope that will be connected with our entire pulmonology offering. And it's not only that. We will enter into ureteroscopy. The number one reason why ureteroscopy is not 100% single use is pricing. It's an endoscopy procedure where the reusable scopes break often, is very expensive and very complex. And we are going to bring a product which is competitive from a technology point of view, but at a fraction of the price. And on the back of that, we will drive significant penetration, also leveraging our already presence with our cystoscope. And in cystoscopy, we are growing very rapidly, and on top of that we will introduce a system of high definition, which will further accelerate our growth. And in terms of GI, this year is not just Duo 1.5, is not just our Ascope Gastro, but it is also the introduction of our Ascope Duo 2.0, which will consolidate our technical superiority against competition. And on top of that is going to be our Colonoscope. These are just some of the most important launches that we have for the year 2022. They are not all of them, but they are the most important ones. They will be the ones that we believe will drive significant growth going forward. There will always be some volatility in terms of approval timings and so forth. but you can rely in terms of these launches coming in this calendar year and our entire pipeline by 2022-23. And with that, I pass it to Michael Holward who will talk about our financials.

Thank you, Juan Jose. I will take you through the financial highlights for the quarter and in the end, I will elaborate a little bit on our revised guidance and the assumptions that we have put behind. Let's start out with the financial results for the quarter. Organic revenue growth in the first quarter came in at minus 1% and was in line with expectations following the high growth performance in the first quarter of 2021. If we adjust for the NHS safety stock orders of bronchoscopes in Q1 last year, the organic growth in the first quarter is 13% with visualization at 26% growth. Combined for all regions, we sold 419,000 endoscope units, which correspond to a volume growth of 13%. Again, if we adjust for the NHH order, the volume growth is 46%. We are very satisfied that we have been able to pick up the revenue from an extraordinary quarter last year and, at the same time, further grow number of units sold. The growth in units sold reflects the rapid expansion of our single-use endoscopy portfolio, which now covers multiple segments beyond pulmonology. Our gross margin ended at 61.5%, and the decline from Q1 last year is driven by lower revenue from higher-margin products within visualization and an increased cost level, including building capacity in Mexico. Finally, EBIT earnings ended at 40 million Danish kroner with a margin of 3.9%. The total visualization growth rate of minus 2% was significantly influenced by last year's high comparable, but when we look at the three-year perspective, the organic revenue compound annual growth rates for visualization is 34%. All of our geographies present three-year revenue cables for visualization well above 25%, which reflects a healthy geographical split of the demand for single-use endoscopy. Overall, visualization now makes up 55% of the total business in the first quarter, which is 20 percentage points more than just three years ago. The performance contributed by anesthesia and PMD is more blurred. We see volatility in elective procedure activity, a disrupted supply chain environment, and we therefore exit the first quarter with backorders in both anesthesia and PMD. Looking at the geographical distribution, North America reported an organic growth of 18%. Growth in visualization came out strong with 34% organic growth, but anesthesia was impacted by lack of supply, while PMD, on the other hand, was positively impacted by a return to near pre-COVID revenue levels. The revenue in Europe declined organically with 16%. The decline was as expected since the NHS orders were non-recurring and if we adjust for these orders the organic growth is 10%. For visualization organic growth for the quarter came in at negative minus 23% but plus 22% when adjusted for the NHS orders. Like in the US, we see a nice pickup in PMD on top of a depressed base, and we see negative growth in anesthesia, partly due to a high comparable. Rest of the world posted organic growth of nil, that's a flat development with visualization at 11%, where we continue to see very positive results from our single-use endoscopy portfolio in key markets. Anesthesia and PMD were negatively impacted due to backorders and downturn in elective procedures. Now allow me to comment on some of the relevant financials we have in the quarter. Our gross margin in Q1 declined with approximately 4% point, driven by sales mixed and increased production costs. The mix had a negative effect on Q1 revenue due to last year's higher relative share of bronch within visualization, caused by the NHS safety stock orders. We estimate this impact to equal a decline of the gross margin of approximately 2 percentage points. Our production costs have increased by 46 million kroner, corresponding to a 13% increase since last year. The cost of scaling up factory in Mexico, paired with increased prices on raw materials, have had a further negative effect on this quarter's gross margin of approximately 2%. Combined, these two factors equal the decline of approximately 4% in the gross margin. The global supply chain continues to be disrupted. And this drives a need for continuous use of air freight. This, paired with the fact that freight rates have continued to be extraordinarily high, have caused a total additional spend on freight to be roughly 35 million kroner in the quarter, which equals approximately 3.4 percentage points of the quarter's EBIT margins. Finally, let me provide some color on the revised outlook we announced this morning. The impact from the Omicron variant is expected to continue to create volatility into our second and third quarter this financial year and will therefore have a short-term negative impact on our business performance. The impact is driven by lower elective procedure activity as hospital staff face shortages reduced access to hospitals to demonstrate and to launch our new products, and the fact that the variance is not driving an extraordinary demand for single-use bronchoscopes like previous variants did. As a result, we have revised the outlook for organic growth from previously 15% to 19% to now to be equal to or higher than 15%. and the outlook for EBIT margins from previous 7% to 9% to now be equal or higher than 7%. With that, I'll hand back the word to you, Juan Jose.

Thank you very much, Michael. I mean, we are growing AMBU as one of the highest growth, most innovative meta companies. We are doing it in the midst of significant disruption, whether it is Omicron, whether it is supply chain, whether it is inflation. It's an environment with significant volatility. But we are 100% focused on the execution of our strategy. The single-use endoscopy market will emerge as one of the largest new markets in METEC. And within that environment, and on the back of our innovation, on the back of our R&D modular engine, our high-scale locus manufacturing, we will emerge as a clear leader in single-use endoscopy. Thank you very much and let's open for Q&A.

Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 0 and 1 on your telephone keypad and you will enter a key. After you are announced, please ask your question. Please limit your questions to two at a time. Please hold until we have the first question. Yes, good morning.

Thank you very much. A couple of questions. I'll try to limit myself to two here. So first of all, just on the margin development, so obviously a very back-end loaded year, as you also have highlighted back in November. But can you maybe just share a little bit of color on how we should see these levels here in H2 and maybe Q4 flow into the next year? because there is a quite large spread in the consensus numbers. So I think it would be much appreciated in the market to understand when we actually should expect these subdued levels on earnings to go back to at least sort of historic levels for when you were at the mid-teens with the core division. And then maybe also... Give us a bit of understanding on the risk to the balance sheet here, and then we're, of course, looking at the debt ratio and also the subdued cash flow, so how we should sort of picture that in the next 12 months' time plus, maybe. And then just to understand your guidance revisions here for this fiscal year. So you are still – well, actually, you're guiding now dropage growth in Coral, And so I'm not really sure you see much impact despite the extended order backlog here. And then on ENT and SYSTO, you died above 700,000 units. I sort of read this as a better than expected. So this is mainly driven by Duodeno uncertainties and maybe also sort of a perfect storm here with lower Bronco. impact on COVID and then limitations to elective procedures. And then if we can stay in half a question, just on the two-day trial, can you just comment on the complexity levels in this clinical trial? So does this reflect, you would say, the real-life setting with, you would say, one-third proportion of level 3 and level 4 ERCP? Thank you.

Thank you very much, Thomas. I think I counted four questions, but I think they are all relevant. So let's go through each of them. Let's start with the last one. Our dual clinical trial was done across eight sites, which include the largest and most prestigious ERCP centers in the United States. And they actually cover all levels of complexity. Actually, and you will see this when we present the DDW. when you look at the 150 procedures done with our Duo 1.5, the mix in terms of level of complexity is actually higher than what you see in the overall market. So it's something we pressure test the scope against the most complex procedures. And what is very encouraging, of course, is the better performance to our competitor 200 patient clinical study. That basically shows that you have a product that is better able to reach a successful completion of the procedure with much better economics. Now in terms of the guidance, so we guide for double digit growth in core. A lot of our growth in core is also driven by the fact that last year our performance was depressed and the backlog that we carried from last year into this year. We are guiding for a volume for ENT and CISO combined of over 700,000%. But what we are doing is we are reflecting the uncertainty of Omicron in terms of elective procedures, how much will they be depressed, for how long. Of course, the shorter it is, the better for us, the longer it is, the worse for us. And the impact in terms of our ability to showcase our products, which we also consider in terms of a short-term challenge. I think we are going to get more clarity by the end of Q2 and we'll be able to get a better sense in terms of what is the real impact for Omicron, but at this point we consider prudent to have that guidance. Now, in terms of margin development, however is your forecast for AMBU quarter over quarter? By quarter four, we are going to have a high level of sales and a high level of profitability. In a year where our profitability will remain depressed because of the abnormally higher logistic costs and raw material inflation. Two of which we expect to reduce going forward and to further capture efficiencies from our Mexico plant. which will reduce the need to air freight from Asia Pacific to the US and that will reduce the need of inventory tied to our sea pipeline. That basically means that going forward, if we move into the following year and the following one, the company will continue to grow rapidly on the back of our existing products and innovation. and we will see the leverage from that in terms of our commercial infrastructure and we will get this one-off benefits correctly. And it is on that basis that we always say that AMBU has the potential to have attractive profitability levels. We cannot give you a guidance right now in terms of what will it be. but there is a clear path towards an improvement in terms of our EBIT. I leave the questions around the risk of the balance sheet to Michael. And I don't know if you want to comment anything more in terms of the market development, but I think

No, I think you said it well, and I think we have historically proven that our model is highly scalable. So I'll leave that with the operating model. But Thomas, with respect to the balance sheet, I think also at this call here, we have demonstrated that we have a very high innovation capacity, and you have seen pictures of the most recent products that have been cleared. So my point is that everything we are doing is done in a very controlled manner and yes you have a point that we are spending more than 160 million of cash in this quarters but of course we have taken pro-actions in order to secure that the plan we have laid in front of us we are able to finance. So I think that's probably the best answer I can give to that question.

Great, thank you very much.

The next question is from Alexander Deutschland, Bank of America. The line is now open. Please go ahead.

Thank you very much. First, I just want to clarify a bit on the average selling prices. Is this just solely a mixed effect, that's more ENT and neurology, or is there anything on pricing here, or anything on potential volume discounts, so higher volume discounts? That was my first question. The second one, if I can try, is just to focus a little bit on the balance sheet again, given the relatively high leverage. Can you help us with anything about how to think about cash movements in the sense of working capital to sales, for example, is quite high now. Do you expect to get any kind of working capital release towards the end of the year? And then also, if you can give us any kind of sense of how to think about cash R&D spend throughout the remaining quarters, given you capitalized on the balance sheet. So that would be very helpful.

All right, Alex. Thank you very much. So let me first answer your question regarding ASP. And this is 100% driven by our mix effect. We have a strong performance in Bronco. And we are growing ENT and system very rapidly. I mean, the growth in these two platforms is really remarkable. And I have to say much faster than what we ever anticipated when we first introduced these products. There is no volume discounts. There is no need to do any volume discounts because we have the most competitive prices in every segment where we participate. Now, in terms of our balance sheet, if you look at our working capital, a lot is also tied to inventory. And, of course, we expect our situation in terms of inventory to improve as the time of delivery from Asia to the U.S. go back to normal levels. Right now it's twice longer than what it used to be. That is going to help us to free up inventory. Mexico is also going to help us to be able to do that. So that, I would say, is going to be a very important improvement in terms of our working capital. Michael, I don't know if you want to comment anything else in terms of where cash R&D is spent.

But I think we have been very open about that innovation is at the core of our strategy. So we are, yes, we are spending a lot of resources within innovation and we have a very rich pipeline of products to be launched. I think the most important, Alex, is that we are very loyal to our accounting policies. We are diligent in the way that we register our innovation projects and the spend goes into the projects and is being released for amortization upon the time where we receive the FJ approval of the product. So from this quarter you will see, or you will not see, but we are going to start amortizing the impact from the gastroscope and so forth. So there is really no change into that.

Thank you.

The next question is from Christian Ryan. Please go ahead.

Hi, good morning, and thank you for taking my questions. I have two as well. So the uptake trend for ENT and Sisto clearly continues to look very, very impressive. The flip side of that is that at least as far as I can gauge, bronchoscope sales appear to have been stagnating or down over the last few quarters, say quarter over quarter. What is the explanation behind that? Is that purely COVID dynamics that you would attribute that to? That's my first question. And then my second question is also related to ENT and CETS, though. So given this very, very impressive momentum, are you transferring increased resources to these two products? And if so, at what expense are you doing that? Thank you.

Sure, Christian, thank you. And excellent questions. So if we look at our Bronco business, you basically have two dynamics. One is 2022 is going to be more of a normalization year after a couple of years where the overall ICU market was very large on the back of the pandemic. of the COVID pandemic and last year on the Delta variant. The second thing is that our penetration of this market continues to increase year over year. And that's why you see this year as if there is a slowdown in our growth. And actually we expect our bronchoscopy business in the following years to continue to grow at an accelerated rate. And that's even before we introduced our ESCO 5 into the Bronco suite. So there is a market last year which is very large. This market is smaller and now we are driving more penetration. Now, if you look at ENTN system, what we are doing is we are not reallocating resources from other areas. we have invested in setting dedicated urology resources both in the US, in Europe and Asia Pacific to drive a more rapid acceleration. And our performance on ENT and CISO in Q1 does not reflect the benefit of this investment in dedicated commercial infrastructure. We actually expect to see the benefits of that in quarter two, quarter three, and quarter four. Great. Thank you. Thank you, Christian.

The next question is from Richard Anderson. The line is now open. Please go ahead.

All right, good morning. Thank you for taking my question. So first one on the gross margin, should we still expect the gross margin to be slightly below last year levels after previous guidance? And secondly, can you give some flavor on the current commercial infrastructure in GEI? Will you need a larger footprint to make an impact already this year for the ASCOPE gastro? And should we expect additional studies for the ASCOPE gastro needed to drive meaningful demand here?

Sure, in terms of the commercial infrastructure for GI, we have the infrastructure that we need to commercialize effectively our Duo 1.5 and to start the commercialization of Castro. So we don't see the need of more commercial infrastructure. In terms of clinical, we don't expect to share any clinical results in terms of gastro this year. We have a clinical program across our endoscopy area. And as we make the results public, we will share them. In terms of gross margin, I think we talk about in our guidance that our gross margin was going to be below last year, and I think Michael talked about the drivers for our performance in Q1, starting with Mexico, with raw materials, and with our mix. What is important to know is that when you look at our overall pipeline of launches, the overall gross margin should be assumed to be constant, which basically means that as we grow visualization, the gross margin for the overall company will continue to increase. And on top of that, we will have the benefit from moving away from that part of a short-term impact in terms of raw materials. And of course, as we move into the next year, we will see more leverage from our Mexico investment. So overall, that So, those are some of the considerations as you project our gross margin.

Thank you.

That's very helpful. The next question is from .

Thank you. A couple of questions on financials. So, could you talk about your expected cash burn for the next few quarters? In continuation of this, could you talk about if you are happy with your current net debt to the DA ratio of 2.7 times? Thank you.

Hi, Niels, and thank you for the questions. We're not guiding on the cash flow, so I cannot give you an exact number, but of course it's easy to model out based on our guidance that our overall net cash position for the year is going to be negative. I think you understand all the reasons and I think I already explained that this is happening in a very controlled manner. This takes us to the second point about the gearing which is actually smack on where we have estimated it to be when we exit this quarter here and I think that reaches back to the answer I gave earlier here that we have clear plans on how we are going to finance our way ahead not only for this year but also as we move forward.

Yeah, and this is maybe just for the overall group. We basically have a very clear strategy. Our strategy is to maximize our first mover advantage by introducing superior innovation at a scale across multiple endoscopy procedures and building our commercial infrastructure. very rapidly. We are doing this because we believe it is the most financially attractive way for the company to move forward. We are doing this because we believe the value creation of a company will be maximized by 2025. And everything you are seeing in terms of financials, our position in terms of cash flow, our gearing, reflects the strategy and reflects our plans. And therefore, we have already some time ago secured all the financing for everything that we need as we move to execute this strategy with significant freedom to operate. So this is actually in line with our plan. This is what you're seeing in terms of our financials is the strategy of a company.

Great, thank you. And could I just follow up with one additional question, if I may? When it comes to your strategy as to, what should I say, receive full payment for your monitors among European hospitals, historically monitors have been used as a way to ramp up new customers. Is this still the case, or should we expect you to to a much higher extent actually charge full price from monitors going forward, also considering the high component prices right now.

Yeah, thank you for the question. I mean, first of all, just to put into context, monitors is less than 2% of our sales. So we're talking about a very small part of our business. Now, we are not really changing our commercial practice across U.S., Europe, and Asia-Pacific. In some cases, the monitors are sold. In some cases, they are part of large contracts to drive penetration of our scopes. But overall, what we have been doing over the last three years will continue to be done as we introduce our new products.

And that regards with the... a box too as well. So this is also a product that will be used to ramp up new customers.

Yeah, again, in some cases we sell the product. In some cases are part of large contracts. At the end of the day, two things are true. One is this will continue to be less than 2% of our sales. Our growth is really driven by scopes. And the financial profile of monitors will remain how it has been in the last three years. But Alicia, why don't we move to the next questions?

The next question is from Frederick McDowell, JP Morgan, the Linus Open. Please go ahead.

Hi there, it's Craig McDowell from JP Morgan. Good morning, everyone. Most of the grinds we've covered, but just one question on pricing. You said that your pricing is based on a theoretical cost neutral versus reusable. I'm wondering, in particular on duty, can you comment on what your reps are seeing in the field today? Do customers recognize your theory behind your pricing? And has your experience in pricing of GeoDinascope had any impact on the price sector of Gastro, which I think is a bit lower than what was previously sort of indicators? Thank you.

Yes, Fredrik, thank you, and excellent questions. First of all, we see our pricing strategy as a major competitive advantage when we introduce our products. And in the case of our Duo 1.5, I think Basil mentioned we expect to be the number one player in duonoscopy globally, especially outside of the US. And I have to say outside of the US, we really don't see much competition. Most of our evaluations are alone. There are not even head-to-head competitions. because of how important is pricing, how important it is for healthcare systems to know that they have an option which is neutral in cost of transition. Now, specifically in the case of the US, the environment is becoming very favorable to drive the transition from single use. We went from a special reimbursement in Medicare for outpatient procedures to also have it for inpatient procedures and then to have all major private payers also setting a special reimbursement if hospital use single use colonoscopy. If I take Medicare for inpatient procedures and private payers, they are setting a level of reimbursement for single use colonoscopy, which is higher than our pricing. That basically means that any hospital that decides to go with our Ascope Duo will actually get economic incentives from doing it on top of the normal reimbursement they get in Duo-Noscopy. And as we go through the evaluations and do our pro-demonstration, that's clear resonating in terms of level of interest for adoption. And by the way, this environment is the same environment we have seen before when there is an incentive for a market to transition from one technology to another. And that's basically what we are expecting. Now, the pricing for our gastroscope, I mean, I think duonoscopy is a reference and there are some learnings on that. but cystoscopy it falls for reference and ENT and pulmonology. What we have learned is that what is critical for us is to look at the reusable gastroscopy procedure cost and making sure that our pricing enables a neutral transition. And that's really what is informing our gastro pricing. The combination of what is actually a new benchmark in terms of technology and image resolution with our 350 scope is what will guarantee our ability to uh to penetrate this market super thanks so much the next question is from lee ray zoo sc the line is not open please go ahead

Hi, thank you for taking my question. I have two. Firstly, a follow-up question on the Mexico plan. So how much production volume can be done in your Mexican plan from the end of this year? And when should we expect the ramp-up costs to normalize in the coming quarter?

Yeah, listen, thank you for the question. I don't think we have provided any capacity numbers regarding our Mexico plant. What we have said though, is that this is going to be the largest single use endoscopy plant. So this plant is projected to be much bigger than our plant in Malaysia. We are starting production this year and the ramp up is an accelerated one, but of course in terms of normalization in terms of the impact of a cost will depend on how rapidly our volume grows in that plant and we are not providing any guidance at this point.

Okay, so let me just follow up here. Considering the current transportation challenges, is it fair to assume you would produce more in the medical plant than the your old plan in Malaysia?

I mean, so if you look at the medium term, Mexico is projected to produce more than Malaysia. More importantly, Mexico has been built to be able to support the U.S. business. And coming online this year and then scaling up over the next quarters, That basically will allow us to do two things. One is reduce our distribution costs. We don't need to either send by sea or by air products from Asia into the U.S. and reduce our levels of inventory. That's why we are so excited in terms of our Mexico plan. This is not just about getting more capacity to support a company growing at 46% volume growth. This is also going to allow us to do it more efficiently.

Okay, thanks. And my next question is regarding the gastroscope. You mentioned the gastroscope is performing different health units. So could you comment a bit on which units were you talking initially, and when do you expect the uptake to look? And maybe, if allowed, could you also elaborate a bit on the wonderful feature you mentioned on the product catalog for gastroscope? So here I realize there is sort of a feature which we don't see for other scopes, that's the image enhancement. Could you also comment on this new feature?

Sure, I'm happy to take those questions. So first of all, in terms of hospital units, I think what I shared earlier is the total effect of, operating in multiple parts of the hospital is what creates this challenge when it comes to logistics and availability. So our plan actually will be to target different sites of care in the hospital. Now, there's going to be some where they're most acutely dealing with this challenge, which is areas like the operating room and the ICU. And for those, it's going to be a very welcome thing where they're usually waiting more for procedures where they can benefit the most from a sterile environment and so forth. So the operating room with bariatric and foregut surgeons is going to be a natural entry point. But I will say that, you know, looking more broadly, when we look at the endosuite, we know there's going to be huge logistics benefits from handling cases where scopes are broken or unavailable, handling first cases of the day, last case of the day, nights and weekends. For sure, there's going to be a big, you know, target market there. In terms of the operating room, we can see because of the lower volumes they have there, but the need for sterility and availability, we can see high opportunities for conversion there. And then, of course, for the intensive care units and for emergency room where quite often availability, urgent availability is most critical, we see high opportunities there. So I think all of those will be areas that we target as we move forward with our commercial launch. And then the second thing in terms of image quality or image performance, the most important thing is that with this launch, we're taking the next step in terms of technologies that relate to image performance. That means a camera sensor that's four times more powerful, image processing unit that's more powerful, and on top of that we're adding our first image enhancement feature. And that's gonna be basically allow doctors and staff to see more clearly, you know, vasculature. And that's important in many kind of routine diagnostic procedures. So you can imagine that in the future we're also gonna be introducing more and more features that supports improved image quality and image processing in the coming years. But we come already to the market today with this advanced technology that supports over half of the 20 million gastroscopy procedures worldwide.

Super, thanks. Listen, thank you very much.

All right. Thank you very much, everyone. And I appreciate you guys joining our quarterly call. And we look forward to our next meeting where we'll be talking about the progress of our innovation and our next major launches. Thank you.