Hello everyone and a warm welcome to this earnings call where we will present our Q3 2024-2025 financial results. I'm Britt Meelby Jensen, I'm the CEO of Ambu A/S and with me today I have Henrik Skak Bender, our Chief Financial Officer. We'll give a short presentation on the business result, 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 nine months of our financial year ending September 30, we have seen solid growth momentum continuing. Looking at the nine 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.
The guidance on our organic revenue growth for the full year is now 12% - 14% instead of previous 11% - 14%. On the new launches we continue to have good progress both on the pulmonology and urology side. I'll come back to that. 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 nine months we are at a solid level of 13.9%. A lot of this driven by continued improvement in our operational leverage. We are continuing to invest in future growth. I'll let Henrik talk more about this. We have had some FX headwind in the quarter as we are reporting in Danish Krona 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. More specifically, our organic revenue growth in the quarter ended at 12%. If we break that down to first Endoscopy Solutions, we are 15.9% and that is for the full nine months of the year corresponds to 16.4%. On the anesthesia and 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 two and a half years ago on the solutions 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 recent in the quarter we had our pediatric blades included as well. On the urology front we have the FDA clearance for the first ever Cysto nephroscope, which is an opportunity to use our aScope 5 Cysto 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 four 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. 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. Most recently 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. Let me just put a few words to that.
Given the importance of this role and 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 three years ago and we have had a planned process for the past number of months as Steve had a wish to retire, which has been actually a very good way for us to have ample 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.
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. 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 that looks on a rolling organic growth for the last 12 months, we are at 10.7%. 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. 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'd like to put a few more comments on. This is the product that you see on the picture here where we launched the product initially early this calendar year with five blades, and 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 five blades, including also the pediatric blades. 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. It's very easy to 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 both products at the same time during the procedure and then add the disposable blades that come 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 when 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 three 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 six, seven years by now. We are continuing to expand the penetration among existing customers.
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. We have our good focus and good traction on our new product launches, the aScope V Uretero, the aScope 5 Cysto, also with the expanded Cystone indication. 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 product.
I think 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 A/S was not known in or not in five, six 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 of focus 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 and 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 one and a half years ago. Those lower comparables are now over. That's why we also are 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%. 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.
We are more down to normalized gradual price increases than the high prices that you saw some one and a half years ago. 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. 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, an organic growth of 12% overall. Of course, if you convert that to reported growth, 9% growth is 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 and 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 the U.S. and in Europe and also very solid growth in Rest of World.
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. That is the 12.9% that we had in Q3 of our 2023-2024 financial year. 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.
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. Let me start with FX. 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 a 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 significant part of our production in China and in Malaysia. 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 impacts our numbers is that with a 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 it in 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. 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 two 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. The key message here is that when we look at margin, I think in FX effect and separating that from the operational performance, super important. Tariff, something that is on our radar, but still a very small item for Q3, something that we more are 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 effect.
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? If we start on the gross margin, we landed the quarter at 58.9%, which is 1.3 percentage point 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 an NPM and still on an overall level a better and better utilization in our manufacturing setup, particular in Mexico. All of this though still when we consolidated 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.
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 are 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.
Therefore that is still, as we see it in the longer run, the main contributor of our further margin expansion towards our 2027/2028 goals. If we turn from margin to cash flow, we had a solid cash flow in Q3 at DKK 128 million, something more similar to the previous quarters if you take aside quarter one and quarter two. That said, the cash flow is still negatively impacted, particular 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 CapEx investments, which is something I'll come back to on the next page.
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 DKK 500 million to around DKK 400 million for the year, again mainly driven by our 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.
Last but not least, with a higher net working capital ratio that did drop relatively speaking to the previous quarter but is 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. 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% - 14% to 12% - 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 are happy today to confirm our guidance on the EBIT margin keeping it at 13 %- 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. 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.
Last but not least, a revision to our free cash flow from the previous DKK +500 million to around DKK 400 million we feel is 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. We are now happy to hand over the word to the moderator and take questions from the participants.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and then one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and then two. Questioners on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star one at this time as our first question comes from Thyra Lee, UBS. Please go ahead.
Hi. Morning, Britt. Hi, Henrik. Thank you for taking my questions. 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 likely driven by anesthesia and patient monitoring comparatives and that you continue to feel good about underlying growth here. I'll take the second afterwards.
Yeah. I can comment on the revenue. Nice to have you on the call and thank you for the question. You are completely right that 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 and patient monitoring, which has of course also brought the total revenue growth, as you mentioned, up. We do think when it comes to endoscopy, our long-term guidance is 15% - 20% endoscopy revenue growth. 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.
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. It is very much, as we look ahead, the endoscopy business areas that are going to drive our future revenue growth.
Great, that's super clear. My second question is, while we know there's going to be challenges coming from FX and tariffs, given this strong revenue growth, do you guys think you can still grow margins?
I think overall the clear answer is yes. If you're asking specifically for Q4, obviously there's still uncertainty. 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're still limited. For us the key thing is to manage the ongoing expansion. 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. Nothing in what we've seen in Q3 changes our long term view.
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 quarters been investing mainly in commercial resources to make sure that we are set up for future growth. This is something that we of course have an opportunity to balance. We do also want to 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.
As Henrik also alluded to when he spoke about the guidance, 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
Great.
All very clear. Thank you very much, guys.
Thank you.
Thank you.
Our next question comes from Jesper Ingildsen, Carnegie. Please go ahead.
Thank you.
I have two questions. It's on the online task business, which.
Is now.
20% target that you have.
Maybe talk a bit to the.
Competitive dynamics that you called out at Q2 which made you go slightly below that range. What is it driving the improvement relative to Q2? Have you had to lower prices or how should we think of this? 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 monitors to some extent in relation to the video laryngoscopy launch having put pressure on margins. Could you maybe give us an 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 place even more monitors in regards to the launch, but how should we think of the gross margin in that context going into Q4?
Thank you. Yeah, thank you, Jesper. Maybe I'll take the first question and hand over to Henrik for the second one. 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. As all of you will know, we were the first to enter into the single-use space and have been alone for many years. As we have built an attractive category, we started to see competition coming in. 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. We are continuing to see we're 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. We don't see remarkable losses in the existing sales processes that we are in due to competition, nor do we see strong price erosion. 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 urology is the first time we enter a segment where we are not the first. 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, 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 sites. That's basically what we have seen. 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.
We are not overly concerned when it comes to our future growth prospects.
Fully agree. 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 now 5 Cysto HD2 procedures that are done under the same reimbursement code as our aScope 4. 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 one, that there could be 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 three, 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. It has a smaller commercial impact and had really none or very little in Q3. Two, also when we look forward we still see a very, very good pipeline.
Britt also mentioned it for video laryngoscopy, but we're more optimistic that it will have a lower gross margin impact than we felt before. 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% - 15%, even though with what we know today we will likely not end in the high end of that guidance.
Thank you.
The next question comes from Tobias Berg Nissen, Danske Bank. Please go ahead.
Hello Britt and Henrik. I hope you can hear me smiling, so I believe you. I have another question on this competitive dynamic in the U.S. You didn't mention it here in the report and the prepared remarks, but I'm just wondering how this played out over the quarter and if you see any acceleration, deceleration, and how this might have impacted growth. It doesn't sound like a lot so far, but also how you expect this to evolve going into Q4. That will be my first question, and perhaps also just on the new products here in Urology, limited sales. How should we expect this segment to accelerate going into Q4, and when should we expect this meaningful revenue to come into effect going into next year?
No, I think that's a good question 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. We don't, I mean where we were getting nervous if there were higher price decreases from competition, we have not really seen that to that extent. 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. 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 in, into I mean the coming quarter. Of course, I mean 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. 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 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.
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. We are super excited about the positive feedback we get both how our ureter aScope 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. With the expansion of the indication with the cysto and ureteroscopy that I have to rehearse to say I think we are quite comfortable about, I mean, the growth potential for many years for this. 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 have been in the market for a number of years. I think we are comfortable about also the longer term growth potential that we have as we bring these solutions out. Hope that answers your question.
Yeah, thank you Britt.
That was perfectly clear. I'll jump back in the queue.
Thank you.
Thank you.
Our next question comes from Martin Brenoe, Nordea, please go ahead.
Hi 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 Pulmonology rebound above 20% this time. I'll take it. Just one question. You didn't lose customers, you didn't see price dumps from competition. The first question would maybe be just how would the run rate have looked like ex Pulmonology if you had seen a normal sales cycle? If you hadn't seen these prolonged processes in the tenders, that's the first question. The second question would be great to understand a little bit on the video laryngoscopy. Giving that some love given the lack of questions here. 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 pick up now that you have the full range also with 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.
Good questions, and let me try and address these 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, I mean, it's very standard and not any changes in that. Some sales cycles, I mean, the customer needs 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. 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 last large volumes that take time.
I think we have to. For the more complex procedures, the evaluation procedure is slightly longer because when something is more difficult, they want to evaluate more and longer. It's not that there's anything that has come to a complete surprise, but it's just for us when we enter into new and more complex procedures, it takes more time to get that ball rolling. I think your question, how would it have looked? I don't think it's really possible to answer because I think we are, I mean, we still see the strong potential and the big market that we are going to penetrate. We will continue to comment on how we are tracking, how big or flat is that curve.
We do feel comfortable that there's a lot of runway for a very long time, both focused on getting, creating new customers, and then growing our share of wallet with the existing customers, which is happening at different pace with different customers. I think that's how it is. 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. 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. I think that was the first one, and I hope I addressed what you asked. On the VL and your very good question, is it a requirement to have the full range of blades before a customer will buy?
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. If you come in with only some plates 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. That's why some will say, let me have all the blades. Your question is, now you have all the blades, would we then see a hockey stick effect? 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 broncoscopes. We see super strong feedback and also our opportunity pipeline keeps building up.
Again, the nature of the business we're 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. I'm not going to be more specific on what to expect when yet.
I think if I could build just on the last one. Thank you for pointing to the Pulmonology segment also, where we see really good traction. Martin, I think the key point we also want to convey is besides the video laryngoscopy products driving new sales, as we also explicitly highlighted in the last quarter, one of the very exciting things here to Bridgepoint is that it will also drive more aScope 4 and aScope 5 sales because we are converting in settings where typically you use the video laryngoscopy solution in conjunction with the bronchoscope. In some of these cases it's not our bronchoscope, so it's the combination of the two. It will be a gradual increase. You will not suddenly see a massive hockey stick. We are very comfortable with what we're seeing and the pipeline we are building.
Makes total sense. Just a brief follow up, which should be a yes or no answer to you, Henrik. The Recircle program, which is now expanded into several markets, we were told by you that we wouldn't see it in the numbers, small pickup in distribution cost. I guess that's not related to this Recircle program, is that correct?
It's still at so low scale that I think it would require rounding on the numbers to really see. That's not the driving effect.
Perfect. That's the answer I needed.
Thank you.
You're welcome.
Our next question comes from Anchal Verma, J.P. Morgan. Please go ahead.
Hi, good morning. Britt and Henrik. Thanks for taking my questions. I have two sets of questions, please. The first one, and apologies to push you a bit further on tariff, 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 a rough kind of our head around how to look at Q4, what the effects ahead wouldn't be and how much is tariff out of that? 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? 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 X pulmonology to grow sequentially from 2025 and then on the flip side, on the margins you will have or actually do you have further investments in OpEx and how does that fit versus potential headwinds we may see from FX untapped?
Good questions. I think I will dive into it. If I start with your last point first on next year, we are not commenting today on what happens into next year. 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. Overall, as we've commented both on pulmonology and our urology ENT GI segments combined for years, we feel we are seeing really good traction and great pipeline building. In that sense, we feel very comfortable that we have good momentum going into next year. I'm also cautiously then observing what is happening on FX obviously and also what is happening on tariffs as that is changing.
To come back to your first question on tariffs specifically for Q1, so 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 forecasts and guidance. That also means that we, within the 13% - 15%, have included what we see right now of tariff impacts. The tariffs impact with a slight delay and, as also mentioned in the material, will impact sales and distribution costs. 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 investment.
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. I will just come back and say with the mitigation effect we have, the gradual improvement in EBIT margin towards the 2027-2028 target of 20% is long term not affected by what we're 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. 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. That means that we can produce and do final manufacturing of a product in Mexico, ship it to the U.S., and at a landed cost basis it's the same cost, excluding tariffs, as if we produced it another place in the world. We are also increasing the capability level, enabling us in Mexico to do more and more complex products. It's a gradual journey.
We're not going to be more specific than that, but this is obviously one of the key levers of why we think we can mitigate the tariffs quite a bit with our Mexico factory.
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. That puts us already in a solid position to.
Absolutely.
So then.
Perfect.
Thanks both, and maybe if I can squeeze in a last one, I'll see if I can get an answer on this. I don't want to be the offender from the CMD, but 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?
I think what you can expect, and good question, Anchal. We look forward to seeing you there. What you expect from us is, I mean, is an update of course on the business and the launches, but also an update on our strategy, where I mean, and that includes of course both business priorities, and also we will comment on our financial, long-term financial targets as well.
Perfect. Thanks so much.
Thank you.
As a reminder, if you wish to register for a question, please press star. Our next question comes from Yiwei Zhou from SEB. Please go ahead.
Thank you for taking my question. Firstly, I just want to follow up on the EBITDA margin guidance and I would like to ask in a different way just to be more specific. I mean you kept your EBITDA margin guidance which implies it is a 10% - 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 more realistic? I'm actually a bit surprised that you have not removed the 15% EBITDA margin scenario for the full year. Could you please help me to understand some of your assumptions?
Yeah, absolutely. I can start with that. I think first there are two key points to highlight where there's still obviously potential upside from some of the external factors, particularly FX. I think the volatility, particularly U.S. dollars, has been unprecedented the last couple of months. I think that could be one of the external factors that drives beyond us delivering obviously a very solid sales for the quarter. Besides that, we at least are trying to, and I will reiterate the point that we are also saying with what we know today, there's low likelihood that we end in the upper range of the range. You just also calculated yourself on what a Q4 could look like, which is a different way of saying with what we know today, obviously there's 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? If we look at the proceedings for the market, it's very few that even in Q4 narrow the EBIT range to a 1% point. 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. That is more us trying to not set a proceedings where we have to be very, very specific on the guidance in every Q4 or Q3, sorry, every year.
Okay, thank you. In this context, I just want to also follow up on these mitigation initiatives to address the tariff impact. Should we see some of those initiatives start to already benefit or materialize in Q4, or will it be more next year?
It is 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 world by quite a bit, and not something you're really seeing in the numbers if you adjust for FDA. That's one. 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. Even if that comes at a slight expense of slightly higher inventory or that we need to hold inventory in two manufacturing sites as we are ramping up in Mexico, that is the key priority. 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. We feel we have a lot of things we can do and maneuver. We're not in the game of doing things short term. At this stage we are only for solidity selected products, particular products coming out of China directly adjusting prices. Otherwise we're not doing broad based price adjustments.
Okay, very clear, thank you. My next question is actually on the patient monitoring. 9% growth in the quarter on top of 11% last year is quite impressive. I still got the impression that it would be low single digit for this quarter. Was it benefit from any like phasing of large orders, and what should we expect for the coming quarter?
Yeah, I think how you should look at these businesses, I mean if we look at patient monitoring specifically, it's overall a market that continues to also have some strong, I mean not strong, but fairly strong, I would say underlying market growth. 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. It is actually quite an attractive business with, I mean again, a competitive product portfolio that we have. That's where we are.
It's not a business as we have talked about before where we are investing heavily or doing something different. That's also why we stick to the guidance for now that we put out, our long term guidance for both anesthesia and patient monitoring businesses combined.
Okay, is it possible to provide a soft guidance for Q4 then?
No, we will not. Thank you for asking me the question, but no, we will not.
All right, Henrik, and my last question on the actually the video laryngoscopy launch, you have talked about very good feedback from the customers. 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 a, you have this one platform which is benefiting you quite a lot. Besides this, anything else you want to have?
I think that's a very good question. I think there's a number of factors that the customers are highlighting. One thing that stands out is of course what we are talking about. I mean the flexibility and how it works with the portfolio where we both have the aScope 4 and the aScope 5 and the different sizes of the scope. We actually have a very complete portfolio that helps. This is so far only launched in the 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. The fact that they can put everything on one system is a benefit. To go into the specifics, the two things that we get a lot of positive feedback on are, 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. 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. I think your previous communication said it was more in line with the rest of the business. When I speak to your competitors recently and what they indicate is even though they are paying a higher tariff today, the margin is actually very high for this product, even if the price is low.
It's a great question, Wei, and I think we will also feed it back to our U.S. sales colleagues with whom we are debating what is the right way to price it. 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. 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 is that there's a positive reception for the customers also to pay for some of the initial upfront installment of equipment. 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 BL solution, when we also sell more aScope 4 and aScope 5, it is certainly a very gross margin accretive business. If you start separating the two, 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. I think that is what we try to allude to. With your point here on the market, other market participants, I think that's actually also what we're seeing—a slight more reaction to the cost of the capital equipment and our ability to price that also in the initial offerings.
As Henrik is also alluding to, it is scale. As we have seen with our endoscopes where we have scale driving very good cost on our products, we will see the same over time. I mean 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.
Great, very clear. Thank you so much.
Thank you.
Our next question is a follow-up question from Tobias Berg Nissen, Danske Bank. Please go ahead.
Yeah, thank you. I just have two fast ones just on gross margin. Henrik, perhaps I missed it, but what should we see here in terms of expected trajectory here also going into next year given you face these multiple headwinds, especially from the U.S. dollar and their current assumption of the dollar crown of DKK 6.75 here for the full year, and then just to bid 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 you setting an NGI strategy, we will hopefully hear more about him at the same day.
Maybe I'll comment on the last one. We will obviously share a strategy update at the Capital Markets Day October 1st. I'll comment on that. 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. I think it's just a natural progression in where we are again after Steve has successfully run the business for 12 years. 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. There's still a lot to go after. We are not necessarily looking to bring someone in that can go take the next steps.
We'll come back again on the Capital Markets Day and talk about how we see that. 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. 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. 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. I think turning back to the gross margin and FX question, the two key things to note are 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. 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, we have a natural hedge from the fact that we have a very big part of our cost base in China and in Malaysia. That means if you look at the longer run, there's not a significant effect from FX because a lot of this can be mitigated.
We are deliberately not hedging any equity impact from this. Therefore, when you have, like we had in Q3, a significant depreciation within a quarter that happened very fast, 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.
Perfect.
Thank you.
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 headquarters in Copenhagen on October 1st where we will host our Capital Markets Day. Please remember to sign up and hopefully see you there. Thank you. Have a great Friday and a great weekend.