Good day and thank you for standing by. Welcome to the Embla Medical Q1 2024 conference call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Alternatively, you may also submit the questions via the webcast at any time by typing them in the question box and clicking submit. Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Mr. Sveinn Sölvason, President and CEO. Please go ahead.
Thank you very much, and good morning, and thank you all for joining our call. With me here today is Arna, our CFO. Today we'll cover the financial results for the first quarter, followed by a Q&A session. Quarter one was an eventful quarter where we continued to take steps to execute on our Growth 27 strategy. This is the first quarter we report as Embla Medical. The establishment of Embla Medical parent entity is strategically an important milestone, a natural next step as we develop the business from being a niche product supplier to a company that is working across the whole value chain, serving individuals with chronic mobility challenges, as well as providing bracing solutions. Our stock market ticker is now Embla. In January, we acquired FIOR & GENTZ, a leading maker of lower limb neuroorthotic components.
This acquisition is a big step on our journey and marks our entry into the neuroorthotics field, further enhancing our ability to support individuals with chronic mobility challenges and fully aligns with our Growth 27 ambitions. And we're excited to leverage our global infrastructure to bring more FIOR & GENTZ products to individuals in need of these types of solutions. Also, in January, Medicare, the main public payer in the U.S., published a draft proposal that would broaden access to high-quality mobility devices, granting low-active amputees access to bionic solutions. This is a significant development and supports our strategic objective of bringing high-quality prosthetic devices to more amputees, thereby creating value for both patients and healthcare systems. And the effective date for when these proposed changes will be effective is yet to be announced. If you go to the next slide, please.
Yeah, I'm very happy to report strong sales performance in the first quarter of the year, with 10% sales growth, of which 7% is organic. The growth is largely attributed to strong volume growth in prosthetics and neuroorthotics and patient care, driven particularly by very good performance in our EMEA region. Gross profit margin was flat compared to last year, and we have executed on cost reduction initiatives in manufacturing to lower unit costs. EBITDA margin is increasing, driven by scalability in our cost structure. I would also like to note that the first quarter is seasonally the weakest in terms of sales and therefore operating margins, yeah, stronger in the second half of the year. Free cash flow was, as expected, low here in quarter one, further impacted by high CapEx. The leverage ratio is above our target range.
However, this was expected and ties back to the acquisition of FIOR & GENTZ here in January. Go to the next slide, please. Total sales amounted to $200 million. Here we have an overview of growth across our geographical and business segments for the quarter. I'll go through this in more details on the following slides. Starting with this segment has been renamed to Prosthetics and Neuroorthotics to include sales from FIOR & GENTZ. Organic growth amounted to 10%, driven by strong volume growth, also comparing to strong quarter one from last year. Growth in EMEA was very good in the quarter, driven by solid contribution from Bionics. Sales in Americas were also good, while sales in APAC were soft as they were impacted by a decline in Australia, which is a result of, yeah, delay in reimbursement approvals. We expect this situation to be temporary.
Sales growth in other APAC countries continues to be solid. Bionics sales accounted for 21% of Prosthetics product component sales in the quarter. Moving on to Bracing and Supports, which grew 1% here in quarter one. Growth in APAC was strong, and we had good growth in EMEA while sales in Americas declined. In Americas, growth was, yeah, in line with our expectation, in line with market in January, in February, but sales were partly impacted in March as an indirect result of the Change Healthcare cyberattack in late February, which impacted our customers' ability to process claims in the US market. If you go to the next slide, Patient Care organic growth amounted to 6%, attributing or related to strong patient volume growth, while increases in reimbursement rates are generally limited.
We had a strong start of the year in EMEA, while sales in Americas were soft and, again, in APAC, declined due to the previously mentioned delay in reimbursement approvals. If I could now hand it over to you, Arna, to go through the financials in more details, please.
Yes. Thank you, Sveinn. In the quarter, we had $6 million positive sales contribution from acquisitions, and currency impact on sales was neutral, resulting in positive sales growth of 10%. The gross profit margin was 62% before special items, same as in the comparable quarter last year. Our unit cost in manufacturing has been increasing at faster rates than sales price increases in recent years, driven by inflation. We executed on cost savings initiatives in late quarter one to lower unit cost and increase productivity. We therefore expanded special items for $3 million in the COGS line with expectation to save $5 million-$6 million on a full-year basis, or $4 million-$5 million in 2024. We did mention discounts are part of our 2023 results, and therefore the estimate is already reflected in the margin guidance for the year.
EBITDA before special items amounted to $33 million, or 70% of sales, compared to 60% of sales in the same quarter last year. The EBITDA margin is increasing with strong sales and scalability in our SG&A, despite the negative currency impact of 70 basis points. The effective tax rate was 24% Net, 10%, and Net profit amounted to $8 million, although impacted by special items. If you go to the next slide, please. Free cash flow was negative as it is seasonally low in quarter one, but also impacted by high CapEx. We expect higher cash flow throughout the year with increasing operating profit and lower CapEx. Inventory levels remain high. Inventory reduction remains a priority and is expected to gradually normalize. CapEx was high in the quarter and above normalized levels due to facility upgrades. We do expect CapEx to be lower in the second quarter.
The net debt to EBITDA was 3.3x at the end of the quarter, above the range of 2-3x EBITDA. The ratios are above our target range, as expected, due to acquisition of FIOR & GENTZ, but all else equal, we expect to be back within the range in 2024. That concludes our overview of the quarter and over to you, Sveinn.
Yeah, thanks. Thank you, Arna. No changes have been made to the financial guidance where we expect organic sales growth to be in the range of 5%-8% and EBITDA margin before special items to be 19%-20%. For modeling purposes, we updated the special items line to $4 million in relation to the cost reduction initiatives in manufacturing. The line for CapEx and tax remained unchanged. Now, that concludes our review for the quarter. Operator, if you could please go to the Q&A session.
Thank you, Sir. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Once again, please press star 1 and 1 on your telephone and wait for your name to be announced. If you wish to ask a question via the webcast, please type them in the question box and click submit. Thank you. We are now going to proceed with our first question. The questions come from the line of Martin Brenøe from Nordea. Please ask your question. Your line is open.
Hi. Thank you very much for taking my questions. I'll just start off with two, and then I'll jump back in the queue. I'll take it one by one, please. My questions are related to the top line, just maybe trying to dissect the numbers a little bit more than in the statements given. When I look at the geographical segment, I see that you have quite nice growth in the EMEA region, but it's actually flat organic growth in Americas and APAC. Can you maybe elaborate a little bit what's behind these quite big differences across the geographical areas that you have? Thank you.
Yeah. Hi, Martin. Yes. If we start with the Americas, as we mentioned in our report, the bracing business declined in quarter one in the U.S. And across our other business segments in the U.S., growth was largely in line with expectations, perhaps a little bit slower than what we anticipated in the beginning of the year. But looking at the rest of the year in the Americas, we don't have any reason to believe that we won't get back on track. It's hard to estimate the exact impact of this cyberattack on Change Healthcare, which provides revenue cycle management and exchange of payment information in the U.S. But that has definitely had some impact, especially here in March in our bracing business. If we look at APAC, we generally have to continue to have good growth across our private pay markets.
In the Asia region, let's say the reason we are flat in APAC is principally due to a change in reimbursement approval processes in Australia. This has caused a big or created a big backlog of approvals in that system. But when we expect that to normalize in the remainder of the year, the system, in a way, remains the same. It's paying the same prices for the same product. So it's more a delay than anything else. And then EMEA was simply a very strong performance across all our major markets and all business segments.
Okay. Thank you very much. Just the second question, and then I'll jump back in the queue. I guess that you haven't really flagged it in the report and not either in the statements, but you were, I guess, to some extent, negatively impacted by facing. And I guess Easter must have been also a negative, the timing of that, on a year-over-year basis. So can you just help me a little bit? How much were you negatively impacted by Easter, by your best assessment and some facing? And also, how big is this potential backlog? How big are the numbers, just roughly speaking? Thank you.
On a quarter-over-quarter basis, we have around 1 fewer selling days. We had, yeah, almost 3 fewer selling days in March, but more sales days in the prior months. But obviously, the whole Easter week is shifting between quarters, so that has most definitely had some impact on our patient care business, particularly in Europe. So it's hard to put an exact number on it. But let's say it has had a small, moderate negative effect here in quarter one.
Okay. And the backlog that you were talking about, just how large numbers are we speaking here? Just, yeah, whatever you can say to elaborate a little bit on that would be helpful.
You're referring to the backlog in Australia or?
Yep. Yeah, exactly.
How should I put it? I mean, in the absence of this delay, we would have seen just as our typical run rate has been in the APAC region, close to double-digit sales growth.
Okay. That's very clear. Thank you.
Thank you. We are now going to proceed with our next question. The questions come from the line of Christian Ryom from Danske Bank. Please ask your question.
Yes. Good morning. Thank you for taking my questions as well. They are also related to the top line and maybe somewhat along the lines of the questions that Martin have just asked, but I still wanted to pursue them a bit more. So now you remarked on the potential facing impact from these delays in Australia. When we think about these sort of disruptions that you've seen at Change Healthcare, two questions in there. First, is that only related to the bracing business, or has it also impacted your prosthetics business?
And the second part of that question is, should the basic assumption there be so looking at the last few quarters, you basically delivered between 5%-11% organic growth year-on-year in the Americas region. Any reason to expect that this quarter should have looked materially different from that absent this cyberattack effect at Change Healthcare? Yeah, that's my first couple of questions.
Yeah. So on this Change Healthcare issue, we estimate that largely to be impacting our bracing business. Our O&P customers are not exposed to that particular setup as far as we know, at least. So we don't estimate that to impact our prosthetics business. And what we do see, we see some clear patterns, at least in the customer segments in bracing that have been exposed to this, to the Change Healthcare cyberattack, that rather sharp decline in March, at least. Yes. I mean, looking at the U.S. in general, apart from this, nothing has really changed as such in terms of the underlying dynamics. And our priorities remain largely intact. And again, going back to obviously, we have not factored in any impact from these potential reimbursement changes that will open up for more access for lower active amputees. That remains to be seen when and how those changes will be rolled out. But overall, we haven't changed our view on the Americas market as such, even though we had a rather slow beginning of the year.
And if I may, just one more question on this Change Healthcare issue. Just to understand the market structure, so should we think of this basically as part of the market that hasn't been served due to this cyberattack disruption, meaning that all things equal, there is an unserved demand that should come back in April and May? Or is there a likelihood that this demand has basically been channeled through other distributors or other vendors and that it will end up being, say, lost for you?
That's a great question, and I think remains to be seen. Because let's say it's not the way I understand it, at least, is that it varies what vendors a lot of our end customers use for this revenue cycle management and exchange of healthcare and insurance-related information. So yes, some of the business might have been lost, and some will be regained. For what it's worth, we've seen a decent start to quarter two.
Okay. Great. Thank you. And then my final question, fairly quick one, the gross margin trajectory. So when we look at the adjusted number for the quarter, this is sort of slightly below 62%. How should we think about that? Should we think about that this is so basically, what are you thinking in terms of gross margin trajectory for the year? Should we expect meaningful upside from current levels as we look to the coming quarters, or how are you thinking about it?
If we look back at what has been impacting our gross profit margin, it's been principally two or, yeah, three things. It's been, well, if we start on the positive side, generally, our higher margin business has been growing faster with prosthetics and neuro-orthotics division growing, patient growth for patient care and bracing and support. Where the headwind has been on, firstly, the supply chain disruption going back to 2021 in particular, where we've had to onboard new vendors as well as having some disruption in terms of ability to source the right components. And then there's also been this just general inflation across all input categories. So we've seen unit cost growing faster than our ability to pass on pricing, so putting some pressure on our gross profit margin.
Now, going into 2024, we see some of these things easing, inflation coming down, some price increases in the end markets from public payers. What we are doing now here in quarter one is we are adjusting our capacity. We've had some overcapacity, as we've consistently communicated, due to these supply chain complications. We are making that adjustment and expensing cost in relation there too. Again, gross profit margin expectations for the remainder of the year will depend on sort of product mix, but we should start to see some progress on the unit side. I don't want to give a we don't guide on gross profit margin in particular, but our guidance assumes progress over 2023 or positive progression compared to 2023.
Yeah. Great. Thank you very much, Sveinn.
Sure. Thank you, Christian. Appreciate the questions.
Thank you. We are now going to proceed with our next question. The questions come from the line of Niels Granholm-Leth from Carnegie. Please ask your questions. Your line is opened.
Thank you, NC. Thank you for taking my questions. Could you elaborate on the manufacturing changes that you are implementing, which will then generate most of your one-off costs for this year? And then just on the same topic, so you're expected to generate cost savings of $5 million-$6 million from these changes, which are apparently included in the guidance for this year and has been included in the guidance from the beginning of the year. So why didn't you flag the one-off costs associated with the same changes in the beginning of the year? And then on another topic, working capital, would you say that the changes to the working capital in this quarter is according to plan, or is the reduction that you're expecting in working capital progressing according to plan? Thank you.
Yeah. Hi, Niels. Thanks for your question. On the gross profit margin side and the changes that we've done in manufacturing, this is in relation to lowering headcount in manufacturing and impacting our major locations. And as I did mention briefly in my answer to prior question from Christian, is that we have had some overcapacity on the manufacturing side, partly in relation to some sporadic delivery of key raw materials and other supply chain complications. Such that we've had to sort of operate with some sort of an overcapacity. And this adjustment we've made here in quarter one, the reason we're not explicit about it when we communicated our 2023 numbers was simply due to the sensitive nature of these changes. So we were not able to be very detailed in our communication around that. And now we are, yeah, detailing these actions.
On the net working capital side, what I mean, seasonally, quarter one is always a low quarter for us cash flow-wise. We usually end the year, December, with a moderately big month and sort of and close the quarter with one of our strongest sales months of the year. So on the receivable side, it's usually a quarter where we absorb some cash. The only sort of variant from our expectations is probably that the absorption around accounts payable and that the reversal of our overinvestment in inventory continues to be our priority. But we did expect marginally more cash impact on the inventory side than we did see here in quarter one.
Okay. Thank you.
Thanks.
Thank you. We are now going to proceed with our next question. The questions come from the line of Yiwei Zhou from SEB. Please ask your question. Your line is opened.
Hi. Good morning. Thank you for taking my question. I have a three-question left here. First question, just follow up to Nils' question here. You have mentioned that the one-off cost here in the manufacturing. I just understand this headcount reduction, I mean, how much is sort of a permanent change? Are those reduced headcounts replaced by automation or increasing efficiency, or you have to increase headcount again at some point in time when the demand is increasing further? I'll do one question at a time.
You can assume that this is just permanent reduction in cost. But then again, as the business grows, we'll have to grow our capacity. And as I referred to earlier, we've had to operate with some sort of an overcapacity in certain locations due to some of the complications we've had around our supply chain. So we are making that adjustment. But obviously, as business grows, we'll need to add headcount or find other ways to operate more effectively, which is always the theme in and around our manufacturing operation, to find opportunities to lower cost and increase productivity.
Okay. Clear. My next question is, is the timing to harvest the cost savings? Should we already expect some savings from the Q2 on the second half, or has to be next year?
You should expect $4 million-$5 million, let's say, in this year. But on a full-year basis, we set $5 million-6 million. So you'll see some of it phase into quarter one next year.
Okay. Okay. Cool. The last question is on the Patient Care. You mentioned the strong volume growth in the key markets in EMEA. Could you elaborate a bit here on the volume growth? Is it driven by a strong market, or do you think you have gained or increased the share of the market with the clinics?
Our growth in our patient care business is driven principally by, obviously, getting the right getting patients in our patient care facilities and also dependent on what types of solutions we are making. So what we see here across our patient care platform in the EMEA and, frankly, in a global context, is that patient volumes continue to be healthy. And we continue to see a positive impact also in terms of the solution mix that we are providing, meaning all is equal to better mobility devices for proportionately more people. All is equal. That drives value growth. And yeah, I think that's it's a little bit hard for us to be explicit about whether this has translated into market share gains, as we're the only public company here that reports on a quarterly basis. But we are happy with the progress that we're making in our patient care business.
Okay. Very clear. Thank you. If I'm allowed, I have one more question here regarding the U.S. Medicare reimbursement expansion. Is there any update from your side?
No. No update, really. I mean, since we spoke last time, there has been a process where Medicare has collected feedback from the industry. We have provided feedback as well as the other industry stakeholders. And now we wait until we hear more about how this proposal will ultimately be implemented, the details in and around these changes and timing, obviously. And yeah, we don't have a firm confirmation of when that can be, but we expect it this year.
Okay. Great. Thanks, Sveinn.
Thank you, Yiwei.
Thanks.
Thank you. We are now going to take our next question. The questions come from the line of Martin Brenøe from Nordea. Please ask your question. Your line is open.
Hey. Thank you very much for taking my follow-up question here. I have two, and I'll just take them one by one. Just on the special items, I completely appreciate that you have some sensitivity towards your employees and when you do these kind of things. But I guess shareholders will be a bit curious whether you have any other secret operations going on or anything like that. So can you completely confirm or deny whether you have any special projects going on that might creep up the special items during this fiscal year? That's the first question. Thank you.
No. We don't have any expectations of further one-off costs this year. And just so that's said, it's always tricky with these one-off costs. We had communicated one-off costs in relation to the, obviously, acquisition of FIOR & GENTZ, which is a neuroorthotics, some of which is a reasonably large project for us. And the deal costs are reasonably high also with regards to these changes that we've done in manufacturing. It's always a choice whether to simply take the cost as they come along, but we would always be explaining it. And it's our view that this provides more transparency to do it this way. But again, it's complicated when you are doing changes that impact people's jobs and organizations, on how we can be transparent about our plans. But we don't have any reason or we don't expect any further one-off costs this year.
Okay. That's very clear. Thank you for that, Sveinn. Again, I'm glad you brought it up. FIOR & GENTZ, I guess that you didn't expect to get away with just saying that it was a strong financial performance on the analyst call here. I mean, what should we think in terms of you previously have had teens growth in the teens area. Is that also what it delivered here? And in terms of the EBITDA margin, I guess with no synergies, it's around 30% EBITDA margin. Maybe there's some seasonality in there. But can you confirm that we are in the sort of historical level of the performance with both the growth profile and the margin profile of FIOR & GENTZ?
Yes. Absolutely. Strong quarter one with just continuing on the same growth trajectory, double-digit growth, and margins are in line with the average margins that we communicated for that business on a full-year basis.
Okay. Sorry, just one follow-up on that. In terms of the margin profile, how much can you actually do on the cost synergies here in 2024? Is some of the one-offs that you have had actually partly related to the acquisition here?
No. Not related to the acquisition. Cost synergies in and around that acquisition will not be a meaningful or have a meaningful impact on our P&L. It's principally our growth case. If anything, I continue to be just very, yeah, optimistic on the potential of these products. Remember, we are acquiring a company that has built up a strong presence in one of the biggest healthcare markets in the world, in Germany. We have relationships with O&P clinics that serve patients that have the same mobility challenges that can be helped with these FIOR & GENTZ solutions. Our focus with regards to FIOR & GENTZ is more on the commercial side, how to make the right investments to bring these products to more individuals.
Okay. Thank you so much for taking my questions. Congrats with a strong start to the year.
Thank you very much, Martin.
We have no further questions on the phone line. I'll hand back to you. Thank you.
Appreciate the questions and all of you listening into our call this morning. Please reach out to our investor relations team if you would like to have a meeting or if any follow-up questions come up after this call. Yeah, wishing you all a good day. We'll speak after quarter two. Thank you very much.
Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.