Company Participants
Britt Jensen – Chief Executive Officer
Thomas Schmidt – Executive Vice President & Chief Financial Officer
Conference Call Participants
Christian Ryom – Danske Bank
Rickard Anderkrans – Handelsbanken
Ed Ridley-Day – Redburn
Niels Leth – Carnegie
David Adlington – JPMorgan
Yiwei Zhou – SEB
Martin Brenoe – Nordea
Britt Jensen
Good morning, everyone. Nice to have you online and on the call this morning for Ambu’s Q1 Results Meeting. Together with you on the call, I am Britt Meelby Jensen, the CEO of Ambu and with me today I have Thomas Frederik Schmidt, our CFO.
Lets start the meeting by reminding ourselves about Ambu’s purpose, something that is very close to our heart and our every day work at Ambu. We help healthcare systems and healthcare professionals, both improve save lives and improve patient care in the hospitals.
The agenda we have for today, I’ll start by going through our business update for the quarter, and then I’ll hand over to Thomas to go through the financials. And then, at the end, we will wrap with a Q&A session.
Also, I’d like to remind you that we have today opened registration for our Capital Market Day, which will – which we’ll host in our head office in Ballerup on the 21st of March outside Copenhagen.
So, let’s dive straight into the results. So, in Q1, we delivered organic growth of 4% corresponding to reported growth of 10%. The growth came from our Endoscopy Solutions business that grew 3% and our Anesthesia and Patient Monitoring, which grew 6%.
Looking at the EBIT margin, we had a 6% growth in the quarter over last year, where we had 3.9%. So, overall, I believe it’s a good start to the year. I am very excited as we embark on the next quarters and the opportunities we have ahead of us.
Let me update you on some of the key events that we had in the quarter and the progress on our ZOOM-IN strategy. So mid-November, we launched our new strategy and we are well underway rolling that out in the organization. When it comes to innovative solutions, we had a couple of product approvals in the period in this quarter.
First of all, we had regulatory clearance in Europe of our Ambu aView2 Advance, our endoscopy, newest endoscopy system. Also in the U.S., we had FDA clearance of our aScope5, Broncho HD Sampler Set, also a very important solution together with our aScope5. And then, as one of the first meta companies, we are very proud that we now have 100% of our portfolio fulfilling the new MDR regulation requirements in Europe.
When it then comes to execution, this is a key focus in our strategy and a key focus in Ambu, every day. So we launched a transformation program together with a strategy, which I’ll update on in a minute. At the same time, we are continuing to ramp up our production in Mexico and also selling to customers and more and more customers from this side.
And then lastly, when it comes to commercialization, the two big launches we had of aScope5 and aScope Gastro in the last year we are continuing to roll that out, something that I’ll also update you on later.
Sustainability is a very important virtue for Ambu and we are fully dedicated and working on making plans to be more focused on sustainability, identifying key initiatives that we are going to roll out in the years to come.
At the same time, something I will come back to us while we saw the launch of a results in a new study comparing reusable to single-use and actually showing that it’s more environmental-friendly to use a single use endoscope cystoscope. I’ll come back to that.
And then, when it comes to the organization, we have worked a lot internally on rolling out the strategy making sure that it’s clear to each and every employee, how they contribute not only to customers and better patient care, but also how they fit into the strategy and that rollout is going also as planned and very well.
Then let’s take a look at our transformation program. So we launched the transformation program mid-November with a clear focus to sustainably increase both growth and profitability in the years to come and we have a much better balance between achieving maximum growth and profitability than we have had in the past.
This is a program that I’m personally very close to and where we are fully on track in identifying initiatives that will deliver on these ambitions. It’s also a program that is taking time. We expect to gradually, both in this fiscal year, but also next fiscal year to see improvements from this program. It’s something that takes time and we are very focused on making sure that the improvements that we are making are improvements that are sustained in the organization and fully anchored.
So we already in November identified a couple of areas that are very important and that’s the full areas that you see here. It’s about a focused go-to-market approach. It’s about making sure that we drive even more commercial best practices, improving our gross margin is a major focus for us as well, and then it’s about strengthening our operating model.
So I am going to update you on the progress of this program in the quarters as we move forward, but overall, off to a strong start but also a program that is reaching out in the next many quarters.
Let’s get back to the business results. So going forward, we will report on our endoscopy business on two main categories. One is Pulmonology, which is our biggest segment and the second is our Endoscopy Solutions excluding Pulmonology. So the latter category comprises of urology, ENT, GI and our Endoscopy Systems and I’m very excited to report that compared to Q1 last year, this segment has grown 47%. It now make up 44% of our total Endoscopy Solutions.
When it comes to Pulmonology, that remains the largest Endoscopy segment. And there we had in line with expectations a decline of 17%. This is due to the high comparables that we had from last year due to COVID. But the numbers are also positively impacted by the flu, which we saw peaking earlier than we’ve seen in previous years.
Despite this negative growth, which we expect to continue into Q2 that we are in the middle of now, I’m very excited about this segment when I look both due to our aScope5 launch and due to our increased focus on this segment, as we have allocated more resources some months ago, and then we all have a couple of other new launches coming up the slim versions of our aScope5 Broncho.
We have VivaSight2 relaunch coming up and then we have our Video Laryngoscope that we are working on bringing to the market.
So if we look at the flu just to make sure that we all look at the same picture, what you see on the graph here is influenza like illness where you see the red curve and this is U.S. data peaking at high peak compared to previous years and also peaking much earlier, which is exactly what I referred to before that we benefit from in particular in the U.S. in the Q1 of this year in terms of higher revenue.
It’s also clear from this graph as you see that the sales is – are the flu, I am sorry, is declining and that means that basically what we had anticipated to get of benefits from the flu in Q2 came in Q1, so slightly earlier than we anticipated. If we look at the flu pattern in Europe, it’s somewhat a similar pattern that we see as we see in the U.S. with a slightly lower peak, but also on its way down again here in Q2.
So let’s look at some of the other drivers of the attractiveness of the single-use segment. So that continues to be stronger and stronger evidence that shows both the cost benefits and sustainability benefits and patient benefits of using single-use Endoscopy Solutions. What we have on this picture here is three new studies that have come out.
The first not being published yet that shows benefits and attractiveness of using single-use Endoscope Systems. So if we look at the first one, it’s a study done in the UK with our ENT study comparing a single-use ENT scope with a reusable scope and it shows that the average cost per procedure using a single use scope is declined or it’s 35% lower than with a reusable scope. So there are clear cost benefits of using single use Endoscope Solutions.
The second study looks at the patient outcomes, patient safety. This is a retrospective study that is done in the US in over 800,000 patients using Medicare claims where it basically looks at the at the infection rates following and ESEP procedure using single use scope versus a reusable scope. And what this study shows is that there is 60% fewer infections when patients are being treated a single-use scope compared to reusable scope.
The last study is the sustainability that I referred to earlier. This is in urology with a Cystoscope using our Cystoscope compared to a reusable scope that basically shows that the impact on the environment measured as CO2 impact is reduced by one-third when using a single use endoscope compared to a reusable scope.
So these results are in line with some of the feedback that we hear from our customers every day. On top of what we illustrate here from the studies, we also hear clear efficiency and workflow benefits being more and more in focus in with our customers, a lot of that driven by the fact that we do see significant staff issues in hospitals both around Europe and in the US.
If we look at our two new launches, it’s the aScope5 Bronco and the Gastroscope. We are also progressing in Q1 as planned in line with expectations with these two launches. So to remind you that aScope5 Broncho expands the total addressable market by two million procedures, so from three million to five million procedures.
We have launched this product in US, Europe and Australia. In the recent months we have seen a major US GPOs adopting the product. We see continuous very strong feedback from our customers also when it comes to the workflow benefits, but more importantly also the clinical performance. It’s a product that we continue to focus on and we have now major hospitals, in particular in the US using the product and when we look ahead, there’s no doubt that the Pulmonology segment remains a very important area for us.
And with the launch of aScope5 combined with the new launches of our Video Laryngoscope, slimmer versions of aScope5 and the relaunch of VivaSight2, we are very excited about the future position that Ambu has in this segment which we were the first to enter.
When it comes to our aScope Gastro, we are also seeing strong progress with this product, which we have also launched both in US, Europe and Australia. We do see GPOs also adopting this product. We see initial success in – with our customers. A lot of this been outside the GI suite where we are focusing initially on customers that benefit the most from the workflow benefits and the performance that we see with our product.
So GI remains a focus area for Ambu and as we said in connection with our two main strategy in mid-November it’s also an area that we are addressing niche-by-niche. So we are balancing the resources in this area relative to the return as we continue to gain traction.
So I’d like to finish off with an overview of our portfolio in Endoscopy. Both the products that we have on the markets and those that you see in the boxes those that we have in development. So it’s very clear that as the only company being present in the four major endoscopy segments, we continue to focus in these segments both on strengthening the position of the products we have in the market, but also of bringing new products to the market that has clear benefits for our customers and for patients.
And we are well on track with some of the products, new products that we have in development after we late summer refocused and rebalanced our portfolio. And we continue to drive the progress on this in line with also additional features on our Endoscopy Systems that supports the full portfolio that we have.
So this concludes my part of the presentation and I’d like to hand over now to Thomas to go through the financials.
Thomas Schmidt
Thank you, Britt and also a warm welcome from my side. I am glad to present the key financial figures for the first quarter of our financial year 2022 to 2023. It’s been a good start to the financial year as we, for the first quarter delivered 4% organic revenue growth and in reported – and reported revenue growth of 10% positively impacted by the appreciation of the U.S. dollar versus the Danish Crown.
Looking at our business areas, the combined Endoscopy Solutions business excluding Pulmonary had posted very strong growth rates of 47% growth in the first quarter. The growth rate has however and as expected been offset by a 17% decline in our Pulmonology business which means the organic growth for the Endoscopy Solutions business for the quarter was 3%.
Our Anesthesia and Patient Monitoring business for the quarter was positively impacted by increasing pent-up demand and recovery post-COVID and continued reduction of our backlog orders. In terms of organic growth, Anesthesia posted 4% growth and Patient Monitoring posted 6% growth for the quarter. From a geographical perspective, the Q1 was characterized by some significant differences across our regions.
Our biggest region, North America has delivered strong growth of 9%, driven by Endoscopy Solutions. However, Europe saw negative growth of 4% due to high COVID comparables from Q1 last year. Rest of the world delivered 14% growth also strong growth within Endoscopy Solutions and Patient Monitoring business.
With 4% revenue growth, our EBIT margin ended at 6% for the quarter, compared to 3.9% quarter last year. The increase in EBIT margin has been driven by revenue growth, operational efficiencies in our sales and marketing organization, tight cost management and positive impact from our cost reduction program. The selling and distribution as a percent of revenue have improved by 5.3 percentage points, compared to last year. So a good achievement.
This has however been partly offset by a decline in gross margin compared to Q1 last year were the main reasons for that decline related to change in sales mix, as sales growth have been higher in Anesthesia and Patient Monitoring business than for our Endoscopy Solutions business.
Secondly, we have seen higher input prices and higher distribution costs due to high inflation and higher costs for sea and road transportation. And last but not least, we also have higher ramp up cost related to our Mexico production site.
We ended the quarter with a negative cash flow of DKK174 million and a gearing ratio of 3.9 times EBITDA. The main reasons for the negative cash flow relates to our net working capital. We are yet to see benefits from reduction of our inventories. And we’ve seen in Q1 cash outflow related to non-recurring cash items such as severance costs.
It’s important to say that this is in line with our expectation. However, improving our gearing ratio and cash flow over the coming quarters remains a key focus of ours. And we have a plan to improve the free cash flow in a range of DKK350 million to DKK450 million DKK for the full year and we are addressing net working capital, our cash conversion, cost containment and profitable revenue growth. Within net working capital, we have a clear plan of how we will reduce and normalize our inventory levels. In Q1 we started to see initial and early inventory reduction.
However, we will, over the coming quarters accelerate that reduction and we will be reducing both our finished goods and our raw material inventories. Initial benefits have also been seen from our cost reduction program and tight cost management in Q1. And this has helped improve our EBITDA and this has helped improve our CapEx ratio to sales and we will continue to have full focus on this throughout the year.
Finally, but and, last but not least, we will drive profitable growth and accelerated revenue growth is expected and planned for the quarter-over-quarter and we will therefore improve cash flow from operating activities, especially in the second half of this year.
This brings us to our financial guidance for the financial year 2022/2023. We maintain our guidance for the year and it’s also at the same time important to stretch that this year is still a transition year for Ambu. Our guidance for the organic revenue growth is maintained at 5% to 8%. As we’ve earlier mentioned, the growth is expected to accelerate quarter-over-quarter with higher growth expected in the second half of the year.
Our guidance for the EBIT margin before special items is maintained at 3% to 5% of revenue. Gross margin is expected to decline for the year by approximately two percentage points and this is due to higher production costs, continued Mexico ramp up and also product mix for the entire year.
My last slide is as Britt has mentioned earlier, we really – she has highlighted focus and execution in our strategy. This also means that we will be more focused in our capital allocation where we aim to have high return on invested capital and as a result create value for our investors. We will drive strong profitable growth and we have an aspiration to be a company that delivers long-term sustainable double-digit revenue growth and a company that has an EBIT margin that is continuously trending upward to industry levels.
With that, I hand it back to you, Britt.
Britt Jensen
Thank you, Thomas. And I’d like to conclude the session again by inviting you and putting attention on our Capital Market Day that we host the 21st of March at our headquarter outside Copenhagen. It’s from 10:00 to 3:00 PM CET followed by a product demonstration. The meeting can be followed online, but the product demonstration session from 3:00 to 4:00 will only be for people that are there live. So, we hope to see as many of you in person for this day.
And with that, I’d like to conclude the presentation and open up for the Q&A session.
Question-And-Answer Session
Operator
[Operator Instructions] We’ll take our first question today from Christian Ryom with Danske Bank. Your line is open.
Christian Ryom
Yes, good morning and thank you for taking my questions. I have, two please. So, first one is on the outlook for the gross margin. So, Thomas, you kindly restated that that you still expect these two percentage points lower gross margin for the full year. And how should we expect that to come through during the year? So, here in the first quarter, you bit, of course, come out better than the gross margin you delivered last year. That’s the first question.
And then the second question is to the pulmonology business and maybe a bit of a split question. The first has any comments are you can make to watch how the pulmonology business developed in the U.S. relative to where it was in Q4? And then more broadly, how we should think about the facing for the pulmonology business over the year. You already alluded a bit to this with the flu season, but any additional commentary would be helpful. Thank you very much.
Britt Jensen
Thank you, Chris. And I think Thomas can start with the first question and then I will take the second question.
Thomas Schmidt
Yeah, very well. Thank you, Christian. So, yes, so the gross margin, we do expect as Also earlier communicated that for the full year that we have a reduction versus last year of two percentage points, and this will be driven by product mix throughout the coming quarters and also our production cost including the input prices that we have seen and that we are expecting. On top of that, we also see of course, cost coming in and our production. As we also are reducing inventories over the coming period that will obviously also increase our production cost based on production variances. But the mix is an important factor to mention. As we also over the coming months, will continue to increase our newly launched products that has an impact on our gross margins.
Britt Jensen
Thank you Thomas and maybe I’ll comment on the pulmonology revenue and the pulmonology segment. And you asked specifically also about US. I’d say overall. if we look at the at pulmonology, it’s very clear that we have high compares – comparables from H1 last year. This is also why we are very clear that we are expecting a continuous in this quarter and on Q2 decrease versus last year.
What we do see is not only Omicron, but we also see as we have talked about before competitive pressures in the US and we see some of that in the UK and to a minor extent in the rest of Europe and that continues, you can say. If we if we look at the overall, we do expect that we return to growth in the second half of this year. And then, again our product Pipeline with aScope5 launch progressing Video Laryngoscope, Go VivaSight makes us very confident that we have a strong position in this segment.
Commenting is specifically on the US, it’s clear that in the U.S. we had also a fairly good quarter in Q4 and that continued in Q1 very much driven by also positive flu impact. You can say, if we if we look at the overall business in the US and where we are late summer, we put more sales focus on the pulmonology sales, on the pulmonology segment. We are also training our people much more as we are – as we have different competitive dynamics. We used to be alone in this segment as the first with very limited compared competition from single-use.
Now those Dynamics are changing and that’s of course are also one of the drivers behind our stronger focus in the sales and we do see results from that kicking in and it will continue to remain a big focus where in all fairness when we were very focused on GI last year that had taken our foot a bit off the pedal in pulmonology in the US. But that’s where we are coming back and we do see an impact from that, which makes me very optimistic. But again, the competitive dynamics are, of course, bigger than what we saw in the past.
Christian Ryom
Great, thank you very much.
Operator
We’ll take our next question from Rickard Anderkrans with Handelsbanken. Your line is open.
Rickard Anderkrans
Right. Good morning and thank you for taking my questions. So, first of all, on the positive impact from the flu season. Could you could you perhaps quantify that a bit more both in terms of top-line, but also perhaps on a gross margin basis. Obviously pulmonology segment typically brings in a higher gross margin profile. So that’s the first one. Thank you.
Britt Jensen
And I can maybe comment on that. So, we do not quantify specifically, the – I mean the actual impact from the flu. What happens with the flu just to clarify for everyone is that, in some markets in particular the US and also some markets in Europe and elsewhere, when you have the flu, these countries tend to use bronchoscopes for more patients where we see that to a lesser extent in other markets. So that’s where there are some differences across the markets.
Having said that, I mean, U.S. is a market where the bronchoscope is used a lot in compared to in connection with the flu. So that’s, of course, the impact that we have seen. That’s also where, again, I’ll repeat what we said before, because the flu season peaked earlier than what we expected. It means that we still expect Q2 pulmonology sales to be negative and the effect that we had baked in for Q2 we saw more of that coming in Q1 than anticipated.
On the gross margin, it’s right, what you say, Rickard that our gross margin for our aScope4. So the product used for – in connection with the flu is high. So that also, I mean, has a positive impact on our gross margin, which is still by what Thomas alluded to as our full year guidance being, our full year expectation being slightly lower than what we, what we have in Q1, again, driven by that product mix and then, of course also to some extent increasing raw material prices.
Rickard Anderkrans
Right, thank you. That’s very helpful. And a final one for me. So you mentioned in the report that the aScope5, Broncho enabled two has been on par with previous launches in the first month of sales. Can you help add some flavor, is that on par with previous pulmonology launches or in a broader endoscopy launches or just add some flavor would be super helpful. Thank you.
Britt Jensen
Yeah, so and this is a very good, very good – a very good and relevant question, because obviously what we do is that we come, I mean the products that we launched are not directly comparable. What we do see and we, of course, track the launch curves that we have, because the big uncertainty is when you bring in a new product in an area that used to use a reusable, which is the case with aScope5 where we are addressing the bronchoscopy suite and the more advanced procedures that we did not address before.
It’s very difficult to see or to predict how fast they will adopt. We are still early in the commercial launch. We are seeing an increasing number of re-buying customers. We are seeing positive clinical feedback and also from some of, as I mentioned, from some of the major hospitals in the US as an example. So, I think that makes us very confident and this is one of the most important parameters for us, that the product actually works.
We had a forecast which we built on previous launches for Q1 that we delivered on and then we have of course built in an increasing forecast over the year. But again, since we are still early in the year, we are following this closely as we are still too early to make predictions. But I think I am over all very confident also that this product addresses the needs in the advanced procedures, which no single-use endoscope has done before.
So, I think that’s definitely promising for the years to come. And with the launch of the slimmer versions that I referred to, maybe just to clarify that, I think there are customers that are reluctant to switch to a product before they have the full range that can be used for the different patients. So having the smaller sizes is also beneficial that we expect to gradually see a benefit from.
Rickard Anderkrans
All right. That’s super helpful. Thank you for taking my questions.
Operator
We’ll go next to Ed Ridley with Redburn. Your line is open.
Ed Ridley-Day
Good morning. Thank you. Firstly, Thomas, I’ll just ask about the restructuring you’ve highlighted again today. Could you just give us some color on what the contribution in terms of cost savings were in the first quarter to the margin improvement? And also if you could remind me of the expectation you have for the contribution from efficiencies for the full year and also any related costs? That would be my first question.
And secondly, a follow-up on the pulmonary competition. We have had a discussion of price cuts in the market. Could you give us some color on the pricing in your pulmonary number in this quarter? That would be helpful. Thank you.
Britt Jensen
Yes. So I think I’ll let Thomas comment on number one. Maybe I can start with number two. So, basically, I mean, it’s pricing pressure, when you see more players, additional competition, then, I mean, that tends also to bean increased focus on price. We were – we had, as we have previously indicated, we had a more volume-based ready in the past, meaning that we also went out ourselves with aggressive pricing in some cases, very much in the way of rebates and that’s what we ended, I mean, some months ago was also communicated.
But it’s very clear that, I mean, overall, we do not see – if we look at the ASPs, we do not see any decline or any change. So that remains unchanged. We are, of course, in a market that is expanding, as you know, with competition coming in. And I think it’s very encouraging for us to look at the fact that both we can keep the ASP that we have right now, but also that we have been able to achieve a premium of 30% to 50% for aScope 5, reflecting the added value and quality of that product.
So, I am not so concerned as such about the price pressure and the discounting, but we, of course, follow that closely and then we clearly benefit from our expertise and our 15 years in the market. And then our own strategy has slightly changed by being more focused on the right price and rebating less than we did in the past. Thomas?
Ed Ridley-Day
So, just to confirm, the 17% decline then is primarily volume?
Britt Jensen
Yes, exactly. That is volume, and that’s again based on the high COVID comparables that we saw.
Ed Ridley-Day
Great.
Thomas Schmidt
Yes, and then your other question was related to restructuring cost and the impact that we see – the benefits that we see from the restructuring program. And obviously, as mentioned and also shown in my slide earlier, within the sales and marketing – sales and distribution, I should say, of our cost, we do see quite an improvement that boils down into our EBIT ratio. And, of course, a part of this, as I also mentioned is very specifically coming from our cost reduction program.
If you remember, we also communicated earlier that we had targeted a cost reduction for a full year equivalent of DKK250 million that we have actually achieved, but a third of that roughly, as also earlier communicated is what we see benefiting our OpEx side of things. The other benefits we see within more the CapEx side of things.
But it is a good mix of cost reduction program, tight management – cost management, but also efficiencies that we are pulling out of the sales and marketing organization throughout. And that correlates into this 5.3 percentage point improvement in our EBIT margin in Q1. So it’s a mix of things, of course, in that bag. But definitely, our cost reduction program is impacting and positively impacting our profitability.
EdRidley-Day
Again, that’s helpful. Just a quick follow-up on that. In terms of the sort of the phasing of those cost savings as you say, you’ve previously guided to, but should we effectively assume a bigger contribution in the second half?
Thomas Schmidt
No, I think most of that we have been quick to realize. Of course, we will continue to look to see how do we optimize, how do we pull out more efficiencies within our cost structure. But most of what we’ve achieved from a cost reduction program we have realized also in Q1 already.
Britt Jensen
Yeah, and maybe to add to that. So it’s – I mean, to add to what Thomas says, I mean, this was the Phase I with the cost reduction program we did in this summer. The Phase II is more – I mean, is the transformation program that we launched where we will quarter-over-quarter both this fiscal year, but also into next fiscal year, I mean, this is a more long-term thing to improve our profitability towards the industry level, as we have talked about.
And that is going to take some time, but that is what we work very diligently with different initiatives that I shared earlier in order to make sure that we should steadily improve our margins and our profitability while, of course, balancing that with growing the business and the revenue.
Thomas Schmidt
And maybe just one last comment. Just to be a clear reminder, OpEx – so we, of course, will starting OpEx-wise also salary increases in our Q2. So since we – the first quarter was in the latter part of the calendar year, you should expect slight increases in our OpEx spend also. But we will work diligently in terms of managing our cost base throughout the year.
Ed Ridley-Day
That’s very helpful. Thanks.
Operator
Our next question comes from Niels Leth with Carnegie. Your line is open.
Niels Granholm-Leth
Good morning and thank you for taking my questions. So, in order to understand your gross margin development, I guess, we need to pay attention to your inventory changes, as well. Could you talk about what proportion of your inventory value, which would consist of indirect production costs, which obviously affects the gross margin?
And my second question would be on your freight costs. You mentioned on Page 11 that you still have some headwinds from higher freight costs. Could you talk about what – how much would be the tailwind from lower freight cost given the current freight rates that you’re seeing during the second half of this year?
Thomas Schmidt
Yes. Yes, thank you, Niels. So on the – first and foremost, on – if I take your first question around in direct production cost, it is clear that when we will reduce now over the coming quarters, our inventory, of course, some of the indirect production cost will rather come in and hit over the P&L.
That’s also what impacts our gross margin in the coming quarters and that also relates back into the 2% lower margin that we expect that we have calculated and planned with a reduction in inventories and therefore, also higher indirect production cost over our P&L side of things. So that’s included in the 2% guidance or outlook for the remaining part of the year.
Freight costs, as we do have higher inventories, it takes us a little bit longer to actually benefit from the lower freight costs that we are seeing. It will come in, but it will come in only once we really also lower the inventories and therefore, channel that through in the whole system. So that takes a little bit longer time and will rather be expected in the second half of this year.
Niels Granholm-Leth
Previously, you quantified the headwinds from higher freight costs as compared to before the pandemic, I think to, three percentage points or so. Is this still a fair estimation?
Thomas Schmidt
Yeah, that is still a fair estimation, yes.
Niels Granholm-Leth
And then, when it comes to the indirect production costs, is it fair to estimate that indirect production cost makes up around 20% of your inventory value?
Thomas Schmidt
So, we’ve not commented on the level of indirect production cost. So that I will not comment on, but the absolute number of that, but it will, of course, impact as we lower our inventories, the P&L.
Niels Granholm-Leth
Okay. Great. Thank you.
Operator
We’ll take our next question from David Adlington with JPMorgan. Your line is open.
David Adlington
Okay guys. Thanks for the question. So sorry, I may have missed it, but I am just wondering if you have any more specific updates on the timing of the laryngoscope launch and how important that was to turn around the bronchoscope sales in total? Sort of following on from that, Verathon also recently quite vocal about getting to #1 market share in the U.S. for broncho. Do you think the combination of laryngoscope and aScope 5 can prevent that?
And then thirdly, just a housekeeping one, I don’t think there is any disclosure on the number of scopes sold in the quarter. Is that something that we’re not going to see going forward? Thanks.
Britt Jensen
Yes, thanks, David, and I’ll comment on those. So, starting from the last question. So going forward, just to clarify that, we have decided not to report a number of scopes anymore. The reason being that, we find it’s a bit of comparing apples and pears, because the value of the different scopes is very different. So I think we have had a lot of questions relating to the inconsistency between number of scopes in the past and growth in that versus revenue growth.
So that’s why we decided instead that we think it’s more transparent and meaningful to report on the categories of the segments, so pulmonology and then we pull the other segments together as one. So that’s how we’ll report going forward and not on number of scopes.
Then in terms of the U.S. dynamics, the laryngoscope – Video Laryngoscope launch, we have not commented on when we will launch the video laryngoscope. But I would like to clarify that we still have a very strong position in the U.S. We expect to return to positive year-over-year growth in the second half of this year.
We continue to ramp up our aScope 5, which is clearly superior to any other single-use scope out there. And then pulmonology remains a high priority area where we have also put more commercial focus on in recent months.
Both the VivaSight and the Video Laryngoscope 2.0 will give us a position as a leader where we see the most competition in the U.S. and is basically from a company that has both the Video Laryngoscope together with a bronchoscope and we believe our offering that we have in development is clearly a very high-quality and will be a very high-quality winning solution with our customers.
And they are definitely looking forward to us having also a video laryngoscope on the market. But for competitive reasons, we do not comment on the timing.
David Adlington
Okay. Perfect. And then, maybe just a follow-up on the rest of the business. I was just wondering if you’re able to quantify the contribution to growth from pent-up demand and clearing the backlog for both Anaesthesia and Patient Monitoring and whether if you thought that backlog wasn’t pretty cleared and the impact obviously in same through backlog is really quite help with your gross margin. Again, just wondering if the impact of any and getting gross margin in the first quarter. Thanks.
Britt Jensen
Yes, so I think overall, I mean, we see nice contributions from these two segments, as you see. And there is clearly a contribution from clearing the backlog. So I think – I mean, we have – I mean, our backlog down to a very minimum levels. So I think our supply situation is working very well. So that is – I mean, that is a big driver of some of the increase this month of the 5% in Q1, where we have – if we look at the three year CAGR, we are looking at a number that is, we expect to be slightly lower and more in the range of 2%.
What we do see is that, we continue to see, as I alluded to, health systems being challenged and they’re working through all their challenges in terms of both strikes, staff shortages and then on top of that, their own backlogs, if you will.
David Adlington
Okay. Thank you.
Operator
We’ll take our next question from Yiwei Zhou with SEB. Your line is open.
Yiwei Zhou
Hey, it’s Yiwei from SEB. Thank you for taking my question. Most questions have been answered, but I have two left here and first, a question on gross margin. You have not talked about the margin dilution from the new products as you did in the last quarter. Could you maybe elaborate a bit here what has happened in Q1? And I’ll do a second question afterwards.
Thomas Schmidt
Okay. I can – thank you, Yiwei, and I can speak to that. What we’ve mentioned also, it’s been a little bit covered within the question around our gross margin for the remaining quarters and for the full year, where we do expect that we come down two percentage points versus last year. And this is, amongst other things also driven by lower margin on the newer launched products.
So that’s included in our expectations around the reduction – a further reduction of the two percentage points for the full year on our margins. And as we continue to grow those two products, of course, that will be more and more dominant.
Yiwei Zhou
Great. And can I just follow up here? So if you’re looking at the gross margin for aScope 5 and Gastro, compared to last quarter, have you seen an improvement already on the contribution margin or gross margin?
Britt Jensen
I can comment on that. So, I think what we have also said before is that, on these products, I mean, we do expect, because they have a lower gross margin compared to our other scopes. We do expect a dilution impact over the quarters as these products ramp up and that’s, of course, something that we are fully focused on improving, but that doesn’t happen from one day to the other.
But it will happen medium term, both as we have more focus on it and also as we ramp up the scale of these products.
Yiwei Zhou
Great. That’s very helpful. And my next question is probably in the coming quarter. Now we see China is opened and then there’s a lot of hospitality, a lot of patients, ICU patients. We have seen some other medtech companies talk about increased demand for the ICU medical device. And so, should we expect any COVID-related demand for your bronchoscope and the resuscitators driven by the China demand in Q2?
Britt Jensen
Yes, so a very good question. So it’s very clear that when it comes to China, I mean, and I want to clarify also, we don’t reveal specific revenue for China, but it is – China remains a small part for us. But what we clearly see in China is that, access to hospitals is starting to improve. So that’s a very good indicator for us. Also, we see that China is, I mean, it’s still early days, but we do see a slow improvement.
We have also seen a positive impact with our scopes from COVID and we remain, I mean, focused on China, but again, as a smaller part of our business, but it’s definitely, I mean, we see the improved access to hospitals being a good sign.
Yiwei Zhou
Is it fair to understand you have not seen any COVID-related demand so far from China?
Britt Jensen
Okay. Sorry, yes, we have – sorry, if that was not clear. Yes, we did see COVID demand, both on our bronchoscopes and on the resuscitators. We have seen that. But again, because China is still a relatively small part, it’s relatively modest in the global picture. But we see the increase as the hospitals are opening up and have opened up, that has definitely given us some tailwind.
Yiwei Zhou
Great. Very helpful. Thank you. I’ll jump back to the queue.
Operator
[Operator Instructions] We’ll go next to Martin Brenoe with Baird. Your line is open.
Martin Brenoe
Thank you. It’s Martin Brenoe from Nordea. I just have two brief questions. Just first of all, on the aScope Gastro. Can you – I know it’s super early stage, but can you maybe help us understand if you have had any actual orders yet or maybe even some reordering of the Gastro that would be very helpful to understand sort of the dynamic when you say you have positive customer feedback?
Secondly, I would like to understand a little bit better perhaps how we should understand the phasing of the cash flow for the year. I think that it’s clear that you still have sort of the cash flow improvement for the full year, but how should we think about the next quarter coming in? And I think that the most important part here is the net working capital.
So should we already from Q2, expect that inventory is going down? And is there anything sort of — like this quarter, anything in terms of payables or receivables that we should be aware of when we do our models? Thank you.
Britt Jensen
Thanks, Martin. I’ll take the first question and hand over to Thomas. So, I mean, we definitely have both customers that are buying and we also have rebuying customers and that number is continuing to increase. Also, I mean, we do see increased positive feedback among customers. We have some larger hospitals that are both ordering and reordering. So, from that perspective, it’s actually, I mean, very encouraging.
It is very clear and also to put in perspective to some of our previous launches like the duodenoscope in GI, I mean, this is a very different product. It’s addressing very different and much simpler processes or procedures than the ERCP procedure. So that’s also where you can say, I mean, the use of our product is much more smooth and we can see that it’s working.
It’s addressing some clear unmet needs with our customers. So I think we are very encouraged with that development. And then again, we do take a slightly different approach than we did with the duodenoscope on more – and niche-by-niche segment as we ramp up the sales here. But definitely, I mean, it is out there with both buying and rebuying customers.
Thomas Schmidt
Yes, and to the question, Martin, relating to net working capital and cash flow. We did also in the beginning of the year, communicated that you should expect our cash flow to improve over the years – over the quarters of the year, which also means that Q2 should be expected to be negative. That we have commented also earlier and it’s still also in line with our expectations for Q2.
We are, as I mentioned, also focusing on very much so on our inventories and you should expect to see reduction of inventories also in Q2. It takes us maybe a little bit longer than most other companies, because we also have a quite good strong and long agreements also with some of our suppliers.
But we are working very hard and diligently on reducing our inventories and that you should expect to see in Q2, further in Q3 and also further in Q4. So every quarter, you should expect to see a reduction in our inventories as we move forward.
Martin Brenoe
Okay. Thank you so much.
Operator
We have no further questions in queue at this time. I’d like to turn the program back over to our speakers for any additional or closing remarks.
Britt Jensen
Thank you very much, and thanks to everyone who participated in the call and online this morning. Thanks for great questions. Wishing you a very nice day. And then, I hope to see as many as possible live face-to-face for our Capital Markets Day. So thank you very much.
Thomas Schmidt
Thank you.
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