At this time, I would like to welcome everyone to this Embla Medical Q1 2025 conference call. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be on this listen-only mode throughout the presentation, and afterwards, there'll be a question-and-answer session. I would now like to introduce CEO Sveinn Sölvason. Sveinn, over to you.
Thank you very much, and good morning, and welcome to the Embla Medical conference call where we will review the first quarter for 2025. I'm Sveinn Sölvason, President and CEO of Embla Medical. Joining me on today's call is Chief Financial Officer Arna Sveinsdóttir and Embla Medical's Head of Industrial Relations Klaus Sindahl. The presentation should take approximately 15 minutes, after which there will be an opportunity to ask questions during a Q&A session. If you now go to the next slide, please. We are off to a reasonably good start here in 2025. Sales in the first quarter amounted to $203 million, and organic growth came in at 4%, where we had a particularly good few weeks at the end of the quarter.
Growth was strong in our prosthetics and neuro orthotics segment, supported by, I would say, continuous good momentum and solid volume growth in the EMEA and APAC regions, while the year started out on a softer note in the Americas, following a strong end to Q4 of last year. Our EBITDA margin for the quarter came in at 18%, one percentage point above the same period last year. The stronger margin was driven by the positive effects from the cost reduction initiatives implemented in manufacturing one year ago, in Q1 last year, as well as a positive contribution from product mix and continued cost control. We're pleased to welcome André Rocha to Embla Medical as our new Executive Vice President of R&D. André previously served as a partner at McKinsey & Company and brings more than 25 years of experience and a proven track record across all organizational levels.
During Q1, we also advanced our Navii and Icon bionic knees into full launch, following very encouraging user feedback during our pre-launch activities. In neuro orthotics, we have now crossed the one-year milestone on our integration of FIOR & GENTZ, which we acquired in Q1 of last year, and we are pleased with the progress. We continue to move ahead according to our plan of expansion into new international markets. In patient care, our ForMotion brand continues to be gradually rolled out to existing markets that we operate in. During the first quarter, clinics in Norway were rebranded to ForMotion, and our clinics in Sweden are up next year in Q2.
Similar to André's appointment, we are also pleased to announce Conal Harte as our new EVP of Patient Care in the first quarter, and most recently, Conal served as our Vice President of Patient Care in Europe and, prior to that, held various roles at Össur and Touch Bionics. We reinitiated our share buyback program in early February as our net interest-bearing debt over EBITDA has reached our target range of two to three times. The purpose of this program is to calibrate our capital structure and ultimately reduce the company's share capital and adjust, yeah, thereby distributing capital back towards shareholders. Now, despite the variability in performance across regions, we are overall pleased with the performance here in the first quarter in an environment with high uncertainty on the global economic outlook.
We do reiterate our full-year guidance of 5%-8% organic sales growth and 20%-21% EBITDA margin. If you can please turn to the next slide for an overview of the key highlights for the first quarter, please. Sales in the MEA and APAC were strong this first quarter. We delivered 7% organic growth in the MEA. The strong growth trajectory we saw in prosthetics and new orthotics from 2024 continued in key European markets during the first quarter. In APAC, our sales came in strongly, as well with 13% organic growth driven by solid performance in both prosthetics and new orthotics, as well as patient care. Lastly, sales in the Americas saw a decline of 1% in the first quarter, mainly due to lower sales across markets in our patient care business area. Turn to the next slide, please.
On prosthetics and new orthotics, we delivered 9% organic growth for the quarter. In the MEA, as earlier mentioned, we see, yeah, strong momentum from last year continue to be driven by good volume growth across all key markets, coupled with an increased uptake of our recently launched innovations, such as Navii and Pro-Flex Terra, our new mechanical feet solution. Growth was also strong in APAC, supported by good growth in Australia, where we are seeing the reimbursement backlog from last year's delay in the approval flow impacting our APAC sales positively. The good growth was, however, partially offset by somewhat softer sales in other APAC markets. In the Americas, our performance was more modest growth. As communicated previously, sales of Navii and Icon related to the US Medicare coverage expansion program are yet to contribute meaningfully as both products went into full launch in Q1.
We expect both Bionic knees to address active K2 amputees consistent with the coverage standards published by Medicare. The uptake is, however, expected to increase gradually in the periods to come as prosthetists are gaining experience from fitting the first patients and submitting reimbursement claims. The initial feedback we're getting from the first patients from a clinical performance perspective is very encouraging, and we will continue our focus and efforts to enable more active K2 functional level amputees to gain access to advanced Bionic knee technology. Lastly, our new orthotics business is moving ahead according to plan, following the expansion into new international markets last year. You turn to the next slide, please. Sales in bracing and support were flat in the first quarter, while we have seen pockets of growth in key European markets, such as Germany, Benelux, and the Nordics.
We also see a decline in other markets where especially the U.K. market has been challenging. In Americas, we recorded a good start to the year in bracing, which was, yeah, somewhat offset by slower growth towards the end of the quarter. In APAC, sales ended down, mainly explained by a decline in China. The decline in China and other select markets in APAC is partially offset by very good performance in bracing in Australia and New Zealand. We're yet to see any material effect from tariffs in our bracing business, as tariffs on products produced in China only came into effect towards the end of the quarter. If you go to the next slide, please. Sales in patient care ended flat. Solid growth in select European markets, such as Norway, counterbalanced by softer growth in other key markets.
In APAC, we recorded strong growth driven by the recovery of reimbursement backlog in Australia, following the delay in reimbursement from a year ago. In Americas, our patient care sales declined across all major markets, mainly due to lower patient volumes, as well as slow approval process of reimbursement claims. This somewhat correlates with moderate development we also saw in the product side of the business. This concludes our sales performance overview for the quarter, and I would like to hand it over to you, Arna, to go through the financials in more detail, please.
Thank you, Sveinn. If you can please turn to the next slide for an overview of our financials. In the first quarter, the gross profit margin was 63%, compared to 62% before special items in Q1 2024. The 1% gross profit margin expansion for the quarter was supported by cost reduction initiatives in manufacturing implemented in Q1 2024, positive product mix, and manufacturing efficiency. OPEX amounted to $106 million, or 52% of sales in Q1, which compared to $104 million, excluding special items, for the same period last year. Consequently, we delivered an EBITDA margin of 18%, which is 1 percentage point above the last year's level. The improved profitability is mainly driven by increasing gross profit margin and effective cost control in SG&A, while currencies impacted earnings positively by 30 basis points net of hedging for Q1.
Net profit increased by 45% in Q1 and amounted to $12 million, or 6% of sales, compared to $8 million, or 4% of sales in Q1 2024. The increase is driven by stronger operating result and the absence of special items this quarter compared to Q1 2024. If you please turn to the next slides for the status of our cash flow and leverage. During the first quarter, CAPEX was $6 million, or equivalent to 3% of sales. CAPEX has come down since last summer as facility expansion programs to support our growth have now been concluded. All things equal, we expect our CAPEX to remain at a normalized level of 5-4% of sales for the remainder of the year. Our free cash flow remained strong in the first quarter with $8 million, or 4% of sales, compared to negative free cash flow of $7 million in Q1 2024.
The increase in cash flow is benefiting from strong operating result and less CAPEX than in the comparable period last year, partially offset by changes in net working capital. It should, however, be noted that free cash flow is seasonally low in the first quarter of the year. Our inventory remains slightly elevated following the build-up of inventory related to the global launch of Navii and Icon in Q1. As Sveinn mentioned in the beginning of the call, we have reinitiated our share buyback program in February, as our net interest-bearing debt to EBITDA ratio is back within our target range. During Q1, we bought back around 300,000 shares. With this overview on our financials, I'll hand over to Sveinn for her closing remarks and comments around our guidance.
Thank you, Arna. If you please turn to the next slide. As earlier mentioned, we are off to a reasonably good start here in 2025. Our guidance for organic sales growth to be in the range of 5%-8% for the full year remains unchanged, as well as our EBITDA margin, which is expected to be in the range of 20%-21% for the full year. While the financial guidance for 2025 assumes impact from U.S. trade tariffs already implemented, it's important to stress that uncertainties persist, which makes it too speculative to quantify the exact direct and indirect impact from these tariffs. It is, though, our expectation that we will be able to mitigate part of potential additional tariff cost in the short term and, in the medium term, make adjustments to our supply chain to mitigate potential impact to a large extent.
With this overview, our presentation is now concluded, and we would like to open the call for questions. Operator, if you can please move to the next slide, the Q&A session can begin.
Thank you. If you do wish to ask a question, you will need to press five star on your telephone. To withdraw a question, press five star again. Our first question will be from the line of Martin Brenøe from Nordea. Please go ahead. Your line will be unmuted.
Thank you very much, and thank you for taking my questions. I have three, if I may. First of all, the question on tariff, I understand that it's very uncertain right now, but if we exclude all of the speculative part and just say, right now, how much of your cost base is bracing and support from China to US out of your total cost base, just to have an understanding of the magnitude of that? That's the first question. I'll just go through each of them, and then you can answer them in the order that you want to. The second one is on APAC, really strong growth, quite impressive. How much of that is driven by this backlog being sort of improving in Q1?
If you cannot be completely clear, can you maybe just say whether you would still be in the double-digit territory in APAC if you had not had that sort of backlog extra growth in there? The last question is on the K2 patients. I think this is the first time where you actually state quite clearly that you expect positive impact from the US Medicare coverage expansion for active K2 patients. I am just a bit curious when you say that, is that because you expect to see some meaningful impact already from this quarter, or is it more still a very back-end loaded support you expect to get from the coverage expansion? That would be the three questions for me. Thank you.
Good morning, Martin, and thanks for good questions. First and foremost on the tariffs, bracing and support constitutes about 17% of overall sales for Embla Medical, of which the U.S. is a substantial part of those sales. We have also been transparent in terms of, let's say, how our supply chain setup is on the bracing and support side. We manufacture mainly in Mexico, and then we rely on outsourcing partners in Asia, of which most of them are located in China. These are relationships that we have had for over 20 years.
Let's say we've been hesitant to put out a specific number on the impact of tariffs here in the short term, both because the tariff rates have been fluctuating and there are uncertainties with regards to what, yeah, medium-term stability will look like in that regard, and also what the potential indirect impact could be from cost increases that some of our suppliers will be subject to. However, we think that we will be able to take action to mitigate both, let's say, on the short term, but certainly also in the medium term, taking actions to adjust our supply chain. Yeah, but in summary, there will be an impact this year from tariffs, but we are not ready to put out any specific numbers on that, just given the overall uncertainty around the situation. I hope that gives you something to work with.
On the APAC side, Australia, let's say the recovery around the reimbursement backlog plays a big role in the good growth we have in the APAC region. You mentioned whether we would be in the double-digit area if we somehow try to normalize for this impact. I think we would be probably not, no, because, again, we see a not a favorable development in our business in China, which is one of the bigger markets for us in the APAC region. This backlog does play a big role here in the performance in the APAC region. I also want to just underline very, very solid underlying performance also on our organic level in our Australia region. On the K2 patients in the Americas, I would say the development is just largely in line with our expectations.
We see gradually more K2 patients being fitted with bionic knees with our clinical customers in the United States and also within our own patient care network. However, again, as previously stated, clinicians are cautious, and as they test the new reimbursement protocols, and we expect this, as always, to be sort of a medium-long-term story for growth in the Americas, but certainly also certainly some impact this year already.
That's very clear. Thank you for taking my questions, Sveinn. I'll jump back in the line.
Thanks, Martin.
Thank you, Martin. Our next question comes from Yiwei Zhou from SEB. Please go ahead. Your line will be unmuted. Yi-Wei, are you there? It seems Yiwei is not here, so we will move on to the next one. The next in line is Tobias Nissen from Danske Bank. Please go ahead. Your line will be unmuted.
Good morning, Sveinn. I have a couple of questions. Let's start with patient care. You have seen these lower patient volumes in the U.S. for the first couple of months, but this has been better at the ending of the quarter. I am just wondering, what are you seeing in April so far, and when do you expect this to normalize? Also, does this mean that it will be like a pent-up demand for this with some catch-up effect later in the year? I also have a question following up on Martin's on the APAC region on this backlog. How much more backlog do you have for the remaining of the year in part two, Australia, and do you expect this to materialize in Q2 or in the second half of the year? That is my question. Thanks.
Hi, Tobias. Thanks for the questions. On US patient volumes, patient volumes were lower than what we had anticipated here in the quarter. Remember, there is always this seasonality with quarter one being a slow quarter, and it is very much reimbursement related. What we have also seen as a trend over the last couple of years is that we have seen volumes gradually shifting towards the latter half of the year. The logic around that is, in the US, there is always a copay or some participation in healthcare costs. With more uncertainty, patients are, in some cases, incentivized to postpone a cost event of some sort. We are not yet changing our expectations for the year in patient care in the United States, and we do expect patient volumes to pick up.
There is also an element of some slowness in reimbursement approvals in the United States that has some impact as well. Overall, a slow quarter, but it has not as of yet changed our expectation for the year. On APAC, the reimbursement slowness, you could say, particularly impacted the first half of last year. You should see less impact year over year towards the second half of the year in APAC.
Thanks. That's very clear.
Thank you.
Thank you, Tobias. Next up, we have Yi-Wei again. Let's see if we can get him through. Yi-Wei, are you there?
Yeah. Can you hear me now?
We can.
Yep.
Go ahead, please.
Perfect. Sorry, it was a technical issue. I also have a question here. Firstly, on the US, I recall that you previously expected that there would be a recovery here in 2025, but then the 1% decline here does not look very impressive. I was just thinking that if there is any sort of structure issue in the US market, I know I have asked the same question last year where you had almost flat and more mild growth, but here the minus 1% is still not very impressive.
Thanks, Yi-Wei, for the question. No, we are certainly not pleased with the growth in the U.S., which remains our largest and most important market. It's important to keep in mind that there has not been any structural change in the market as such. Reimbursement is there. As we talked a lot about, obviously, more tailwind than headwind on the reimbursement front in terms of a bigger group now having access to better technologies, which will help the industry going forward. However, there has been some, you could say, especially here towards the first months of the year, more uncertainty overall in the U.S. market. As I mentioned in my answer to Tobias, there is the way the U.S. healthcare system works, there is always some element of copay that can lead to some decisions being made on postponement of care.
Obviously, taking that decision to postpone, it varies very much case by case, whether that's an option or not. There is no other underlying structural change, and the demand for our products and solutions is there, and we remain optimistic on our potential in the US market and remain very focused on executing well in this region.
All right. I still want to follow up here. I mean, you mentioned you expect the volume to pick up later this year, but given the new administration in the U.S. has done this cost-cutting in the Medicare/Medicaid, I was just thinking that how realistic is that we see the pickup here later this year, given the staff reduction and must have delayed the process, the reimbursement process, as you mentioned? I mean, how confident are you in that guidance?
We are confident enough not to change our expectations for the year. It's one quarter, and again, there has not been any change in reimbursement. I think it's important to underline that there is talk about some reform needed to be, especially on the Medicaid side, but nothing has been decided, or we have heard nothing about potential changes to access to care for the patient groups that we are focused on. Now, you mentioned delays in reimbursement approvals due to some turbulence. Yes, there has been some commentary around that. However, we still believe that, I mean, the patients are there, the need is there, and even though we've had a slow start towards the year, we still believe we can grow in the US market here in 2025.
Okay, great. You highlighted the new product, Navii, in the US market launch. Could you maybe indicate a bit on your orders so far?
Yes. The Navii, we moved from, you could say, controlled or limited launch into full launch here in the latter half of the quarter. What I can say is just the feedback is very good on the Navii. It is an excellent product. It provides very solid new features for both active and less active above-knee entities. We are just, yeah, optimistic about the potential both in our European markets as well as the United States.
Is it possible to indicate a bit on orders so far?
No, I wouldn't want to go into just any unit volume expectations or anything like that, but we have done a lot of trials on both sides of the Atlantic Ocean and have had lots of customer activity trials with lots of our key clinical customers. We are just optimistic about the uptick here in the latter half of the year.
Okay, great. My last question is on M&A. Given the leverage now is sort of go down to below the two times in that EBITDA, and your range is two to three times, I guess. Is there any M&As back on the agenda now?
M&A is essentially always on the agenda as such, and we continue to focus on building a pipeline around the three M&A themes that we've talked about, one being acquisition of product technology where we can leverage our global reach and infrastructure, second being growing our patient care business in selected regions, and third being market access driven, where we have, in many cases, used M&A as our vehicle to establish a presence in an attractive market. In all three areas, we have potential projects and are likely to have some M&A impact in 2025, although that can never be said for certain.
Okay, great. Thanks. I'll jump right to the key.
Thanks, Yi-Wei.
Thank you, Iwe. Our next question will be from the line of Niels Leth from Carnegie. Please go ahead. The line, I'll be unmuted.
Good morning. On the topic of tariffs, how quickly would you be able to relocate manufacturing of the relevant bracing and support products to new countries to avoid the high tariffs on China imports? Secondly, could you talk about the expected effect on revenue and EBITDA, given where the US dollar is today for the full year 2025? Thank you.
Hi, Nils. Thanks for your questions. On the tariffs, again, I think we are, obviously, as all other companies, closely following and studying the impact of tariffs and how they will change our operating environment and how they could potentially change our strategy with regard to supply chain. Just from prior experience, when it comes to moving product categories from either our own manufacturing to our external partners or the other way around, this is typically an effort that will take 12-18 months, just again, depending on product complexity and volume, etc. That is what we refer to when we say that we believe that we will be in a position to mitigate potential tariff impact in the medium term. Taking such action, obviously, requires some visibility with regards to how the tariff landscape looks like also for other countries and China.
There is still a lot of moving parts, if you will. Yeah, I hope that helps. Arna, if you could maybe take the question on FX.
Yes, on FX, I think it's important to start by saying that the exchange differences we have in our P&L for the first quarter are unrealized exchange differences. So it's not paid, and it's coming from balance sheet items, which we expect, and we have seen already reversed. Given that the dollar is now weaker than it was end of quarter one, it's around 5% weaker than end of quarter one. If the dollar would stay approximately where it is today, we would see between 2-3% positive effect on our sales and probably around 25 basis points negative effect on our EBITDA, giving our head strategy for our profitability. Is that clear, Nils?
Sounds good. Thank you so much.
Thank you, Nils. The next question will be from Dominic Rose from Intron Health Research. Dominic, you're welcome.
Hi, this is Dominic from Intron Health. Thanks for taking my question. I was hoping you could give a little bit on bracing and support, in which you said there were pockets of growth in some markets. Just wondered a bit kind of where these were and what's driving that, whether we can expect to see a persistence there, whether they might improve further. What kind of long-term view on this segment is?
Hi, Dominic. Thanks for your question. Yes, I mean, if we look at our bracing business, on one side, it's our, you could say, our traditional injury business, full offering of products that are needed to stabilize joints or stabilize minor injuries or for post-operative care, products that are used for a short period of time. The other big part of our bracing business is our osteoarthritis bracing, where we are offering bracing or osteoarthritis bracing, principally as an alternative to knee replacement surgeries for mild OA. This part of our bracing business has had pretty consistent, solid underlying growth dynamics. Most of our European or EMEA bracing business is on the OA side. This has shown rather consistent, healthy, organic growth rates.
Where we see more pressure on growth has been in the injury business, where we are competing in categories where there's less room for innovation or differentiation on the product side. We can see some volume fluctuations due to price competition in pockets. To answer your question, these pockets of growth are mainly around our OA business in selected European countries, while we are seeing more pressure on the commoditized injury business in some of our larger bracing markets.
Okay, thank you very much.
Thanks.
Thank you, Dominic. Our next question will be a follow-up from the line of Tobias. Please go ahead.
Yeah, okay. I just have a follow-up on the tariffs. We mainly talk about bracing and support here, but I just want to confirm on prosthetics that these are exempt from the U.S. If you can confirm that, also if you have shipped any prosthetics here during Q2 and any delays or whatever that could be from these new tariffs, if you can have any comments on that. Thanks.
Yeah, thanks for clarifying, Tobias. Yes, prosthetics are for the vast majority exempt from tariffs. Yes.
Perfect. That's very clear. Thanks.
Thanks.
Thank you, Tobias. As a reminder, please press five star to ask a question. The next question will be a follow-up too from Martin Brenøe. Please go ahead.
Hi. Thank you for taking my follow-up question here. It's just a brief one on the K2. I just wanted to understand how you think you will go from here from a product perspective. Sorry if I missed it. I got cut off for a moment. As far as I understand, the K2 segment is a quite broad audience compared to maybe the K3 and K4, which is sort of more of a similar group of people. As I understand it, your products that you have now are targeting the more active part of the K2 population, so the ones that did not meet the threshold of getting into the high-active patients. What are your plans for targeting the K2 patients with a less or lower need for these kinds of products? When should we expect you to broaden out your portfolio in the segment?
Thanks, Martin, for the follow-up. Yes, you're correct in the sense that our current Bionic Knee portfolio does address, in many ways, the K2 population in the United States in the sense that these products completely comply with all the reimbursement requirements as such. However, when it comes to whether these products are the best products for these individuals, it will again depend a bit on their activity levels. We have assumed that these products will take part of the K2 volume in the US. It is clear also that we will strengthen our offering and aim to bring to market a product that is perhaps more specifically designed for less active entities, meaning a Bionic product or more focused on the specific needs on K2 patients.
Thank you for that. Is that something that is in sort of a near-term pipeline, let's say, within the next 12 months, or is that something that is a bit further out in the future?
I would not like to comment on exact timelines at this stage.
Okay. Fair enough. Thank you, Sveinn.
Thanks, Martin.
Thank you. As no one else has lined up for questions in this call, I'll now hand it over to Sveinn for any closing remarks.
Thank you very much, and thanks everyone for calling in this morning. If you have any follow-up questions, I encourage you to reach out to our investor relations team. Have a nice day.