Welcome to today's presentation, where we have the pleasure to present Embla Medical. To help us through today's presentation, and this presentation will also be a Q&A, we are joined by CEO and President, Sveinn Sölvason. Today's event, of course, will cover your Q3 results, and also maybe take a look at the expectation for the rest of the year. As always, there's a box down below where you can ask your questions. Do feel free to do it during the presentation, but we will take the Q&A session after a short presentation here from Sveinn. But for now, I will hand the stage over to you, Sveinn.
Thank you very much, Michael, and good morning, everyone, and appreciate you calling in. I will go through just a couple of slides with highlights from quarter three, and then we'll do Q&A. This morning, we reported a good quarter as such, 4% organic growth, 5% when we include impact from currency and M&A, and our margins are on par with same quarter last year. If we look at the first nine months of the year, we are up 5% organically, 10% when we, again, include impact from M&A and FX, and our margin is around 21%, EBITDA margin. What is not on the slide here, our net profit is up about 19% when we compare to the first nine months of last year.
What has been a big focus in our reporting cycle this time has been the status of our Patient Care division, and I will say a few more words about that later. Otherwise, as always, an eventful quarter where we had good progress in our core business. Just a few words on the business segments, starting with our Prosthetics & Neuro Orthotics business, which is the main growth engine of Embla Medical. This is where we are manufacturing and commercializing products that are used by individuals that have a lifelong mobility challenge, either as a result of limb loss or lost the ability to use the muscles in the lower part of their body. Here, we continue to demonstrate good growth rates.
7% organic growth rate here in quarter three, a little bit lower than in prior quarters, but remember, we're also comparing to an exceptionally strong quarter from last year where we generated 13% organic growth rates. So generally across the portfolio, good progress, but exceptionally good progress this year in our EMEA region, which is also impacted by higher sales to Ukraine. Our Bracing & Supports business, a little bit uptick from prior quarters, 2% organic growth rate here in quarter three. We are seeing good progress in our biggest markets in the United States, also in the APAC region, but with a little bit of headwind in selected markets in Europe. This is the only part of our business where we are providing products that are used for a short time or acute mobility challenges. About 15% of our sales. Then finally, our Patient Care business.
This has been a big part of our story this year. We are revising our guidance towards the lower end of the range for the year, mainly because growth in our Patient Care division has not been where we expected it to be for the year. We expected to gradually get back to around mid-single digit organic growth rates, but are not there yet. We see here in Q3 a little bit uptick from prior quarters. What we also communicated here in this quarter is that we did lose a tender in Sweden. Sweden is a big part of our Patient Care business here in the beginning of the year. This will impact the overall Patient Care business by about 2 percentage points this year. We have, however, won another tender in another Swedish region, which will give us about 2 percentage points of organic growth rate next year.
It's a little bit of an unusual situation where we are between tenders. Sweden is the only region or only country where we operate Patient Care, where we have this type of tender business, and we don't stand to see any major changes in that regard over the next many years. We continue to be optimistic about our progress in Patient Care, but we have to acknowledge that it's coming in slower than what we anticipated in the beginning of the year. Just as a final slide here, Michael, before we go to the Q&A, this is what I did mention also briefly earlier.
We are adjusting our growth guidance from what was 5%-7% to around 5%, and are being more specific around the EBITDA margin guidance from a range of 20%-22% to are now are expecting around 21% for the full year. I think I'll pause here, and we can open up for questions.
Perfect. Let's jump into it. You mentioned Ukraine in your report and also here. I also saw an article with you saying now it's actually being a big part of your business. There's a question here, how can you actually operate in the country where everybody unfortunately looks like the bombardments are increasing? Any thoughts about maybe the worsening situation and how you are able to operate and it being an important market for you? How do you set that up, Sveinn?
It's a good question, and it's a very challenging situation, to say the least. Our business in Ukraine today is selling products to clinics that are serving patients, and we have also set up our own clinic in Kyiv that is serving patients. But the operating conditions are very challenging with regards to keeping operations stable, just given the situation that is on the ground in Ukraine. We are working through it. It's a little bit of a day-by-day situation. But the fact of the matter is that there is a very large population of mostly young men that need prosthetic devices after this war has been ongoing for over four years now. This will be an important market for Embla Medical going forward. We are a company that can support this situation.
We will have to see how a public reimbursement system will develop to support this population of amputees that need prosthetics. We are, as a company, just determined to do our very best in Ukraine, but it is a super challenging situation at the moment, just given the situation that is on the ground. So it's a little bit of a day-by-day task.
Short term, I know you need to build up a network there to really be there, but could it be moving patients out of the country and so on and using your networks otherwhere or any thoughts about that? I guess people need to live there and so on, and you also need to operate under these conditions, but could that be some kind of maybe a solution to it?
We have been servicing Ukrainian patients outside of Ukraine, both in the U.S. and also in some of the Nordic countries. But the long-term solution will have to be a Ukrainian system and a network of clinics in Ukraine that has the clinical capacity to maintain solutions for this population group. So it remains, and it will be incredibly important to get this part of the Ukrainian population back into active life when this horrible war ends. We're just committed to be part of that recovery.
Yeah, and I guess with 80% of recurring business and being follow-up on patients, you kind of need to build that network.
Yes.
Okay.
Absolutely.
The next question here, could M&A help your lower growth in the Patient Care or is that organically? Is that getting your own business in order before you add on M&A, or M&A, is that even a viable solution in the Patient Care business?
Our top priority is to get back on an organic growth track in Patient Care. If we take a step back and look at years post-COVID, we generated good growth in Patient Care. Over the last seven quarters, we have, however, not grown in our Patient Care business, and that coincides with our change in operating model from historically operating many small independent entities with their own brand, everybody with their different ways of working to really building a global business. Over the last two years, we have been integrating. We have rolled out one brand. We have implemented one system in terms of how we drive our clinical activities clinic by clinic. If we look at our 200 clinics today, we are making very good progress in a very big part of the network, meaning we are seeing patients, we are utilizing our clinical capacity.
We are also implementing technologies and process changes that help our clinicians use more of their time on Patient Care, and we are managing our costs. The net impact of that is healthy financial results. We are, however, working through some isolated issues, I will call it, the Sweden issue we talked about earlier. Then there are pockets in large markets like the U.S. where we are going through some integration that we initiated beginning of the year. We are gradually getting some of these things behind us. The most important piece here is that the market is a healthy market. It is a growing market, and we are already demonstrating good financial results in a big part of our portfolio. It is about doing the things we are already doing well in a bigger part of the network.
We'll get there, but unfortunately, and we are disappointed that we are behind where we would have wanted to be at this point in the cycle.
Not to be too McKinsey consultant, you have 200 places. How many of the places are now reaching your benchmark? I guess this is a benchmark exercise, right? Where you know what works here might also with some tweaks work here, so it's getting the benchmarks up. An idea on how much of the 200 locations is actually already operating and thereby proving that it is possible with this system to reach you might say your targets that you set out.
Yeah. That's a good question, Michael, and I understand that this is a question I get from others as well, just give us a metric that we can hold you accountable to. We're not disclosing—
Okay
—that in that level of detail, but I can say that we are seeing gradual progress in the right direction. It is a heavy lift moving from a system where we've acquired good companies in most of our mature healthcare markets that we operate in, and shifting from, as I mentioned earlier, a rather fragmented model to a more global model. That is a heavy lift, introducing a new brand, introducing, in some cases, new systems, different type of processes, and that takes time. In a business where it's all about capacity utilization, seeing patients, and if there is some disruption around that dynamic, that will impact your financial results. We believe we're doing the right things and we are seeing progress, but we have to acknowledge that that progress has been slower than what we anticipated.
Perfect. Then there is a question about your return policy. Will the lowered expectation lower also your share buybacks, or is that a fixed program?
Our cash flow remains very healthy. Our free cash flow generation is strong. We have this capital allocation policy or dividend and capital allocation policy that we aim to maintain a certain level of net debt to EBITDA. We are now towards the very low end of that range, but we continue to buy back shares, and we will have to evaluate how we approach our capital allocation as we move towards the lower end of our current range.
Yeah. So, no real changes by
No
this slowdown, and of course, here the cash flow matters. Then there is low growth in the U.S. Are you losing market share or is the market just not growing very fast in this quarter?
If we look at the U.S., we are reporting flat sales in the Americas market, and that's a combination of, from a geographic standpoint, that's U.S. and Canada. From a business area standpoint, it's all our three business areas. It's Bracing & Supports business, it's the Prosthetics & Neuro Orthotics business, it's Patient Care. Here in Q3, our Bracing & Supports business is showing moderate growth rates, while we are flattish in both the Prosthetics and Patient Care business. On the Patient Care side, it's mainly a result of this last major integration we're doing in the U.S., that is pushing our financial performance or growth towards flat growth, but we're seeing good progress on the margin side. On the product side of the business, we are competing with what was an exceptionally strong third quarter last year.
We see good progress on some of the high-tech products, Bionics, also our College Park brand is doing well, but have some temporary weakness on more the mechanical side. We do expect that to normalize, especially as we have, over the last year, launched some very strong products, especially around the mechanical feet range, and we'll start to see the impact of that. The market in the United States is all else equal healthy market.
Sitting from your chair, I have followed you for a long time, single quarters is not a good. It can hit Australia, then it can hit New Zealand without being a trend. Is that also what you're seeing from your chair that sometimes we shouldn't exaggerate single quarters in certain regions, it is simply a little bit more volatile if you look at a certain region. Is that also what you feel here about the U.S. here, that it's not structural, as you indicate, that you see healthy market growth?
Yeah, we don't believe it's structural. If we elevate ourselves above the kind of quarterly dynamics, the structural growth dynamics in our core business, the chronic mobility business, are very strong. That is because number one, too few people also in reimbursement markets we see are not adequately receiving high-quality prosthetic devices. So there's plenty of room still to grow the utilization of high-quality devices, and that's a fact across all major reimbursed markets. Also, when it comes to the private pay markets, this is where we see the highest relative growth rates in our business today. That is mainly, it's not driven by reimbursement like it is in many of the mature healthcare systems. This is simply a growth in purchasing power and awareness drives more utilization of high-quality healthcare devices.
So, there's plenty of these structural growth drivers are all intact, but as always, we'll see some quarterly fluctuations. But if we look over, our average growth rates in our chronic product business is towards the high single digits, and that's what we strive for going forward.
Check. Then a little bit about the China. You talked about competition and looking from the outside, is that local Chinese competition and every time I hear that, I guess you will also be now asked by large investors. I've seen them move out. That's always the fear when you hear about China, that they first innovate and then they try and conquer their own markets and then also moving out on other markets. So can you talk a little bit about this local Chinese competition, if it is local or if it's from the outside
It is local.
It's not a big problem.
It is local, mainly. However, we see some products also from Chinese manufacturers in some of the big markets, and that is something we've seen over the last many years. I wouldn't say that we see any fundamental change in the competitive dynamics as such. These companies are typically focused on a specific product segment, not everything. Like, for example, we look at ourselves as a complete provider of everything that is needed to build prosthetic legs. We have proprietary technology around sockets. We have the full range on the mechanical portfolio and unique Bionics technology. It's healthy competition, and it's healthy for the industry, and ultimately, I think it will just enable more people to get access to good prosthetic devices.
It's nothing new. You have seen that for a couple of years, so it's not something that starts now, and we need to look forward, for you have seen that.
No, but I think it's fair to assume that these companies will be strong competitors going forward, and I think we've seen that in other similar industries. But I think it will, at the end of the day, be good for access. I think it will help access in some of these private pay markets that we have more players, and some local players in these countries will influence the market, I believe in the right direction. So, there are positives and I think it's just another competitive dynamic that we need to be aware of and just compete effectively with these companies.
Okay. Then a little bit, some of it that you actually lower your growth guidance, but actually you target the middle of your range guidance. Patient Care is part of that explanation, but you also had indicating a little bit of retainment on your cost side, that you're holding a little bit back. How long can you continue to do that without it damaging your growth perspectives on the longer run?
Yeah.
A little bit about, it's always the balance, a little bit slower growth than expected. We can take down the cost a little bit, but will not continue with that because we're also investing in the future growth. A little bit thoughts about that balance.
Yes, and that's a good question. What we see here year to date, and also here in quarter three, is that despite the fact that we are flat on the top line in Patient Care, we're making good progress on the underlying margin. We talked a little bit about some short-term cost increase on the manufacturing side on our product business here in quarter three, where we are simplifying our manufacturing footprint, which is upping our cost temporarily on you could say the product side, but we are more than compensating for that on the Patient Care side. But that's part of our journey in Patient Care, where we are utilizing our cost more effectively. We're implementing changes that enable our clinicians to spend more of their time seeing their patients. And we still believe we have lots of work to do there.
That is the main kind of theme in and around margin here in quarter three is that we are seeing progress on the Patient Care side that is helping us in the bigger scheme of things. It is in many ways a sign of strength that despite the fact that we are not where we wanted to be in the quarter on top line, we're still defending our margin and reporting very healthy profitability.
A very direct question. You are not cutting down on the R&D and on the sales and the launch of your product. That's a very direct question.
R&D is actually here in quarter three. That's where we're actually seeing quite a bit of investment somewhat above if we just look at our relative increase in sales, our relative increase in our R&D spend is almost twice the relative increase in sales. We're definitely not holding back in on that regard, and we have a good pipeline.
Perfect. Final question, and I'm not asking you to guide for 2027, so maybe we're a little bit premature with these questions. Can you still reach your high end of the 2027's long-term goals of, I guess it's 5%-7% organic growth. You are delivering 5% this year. I'm not asking you to guide for next year, but sitting from your chair, is there anything looking into next year where you hope to get some of the Patient Care growth back? You will get it by this one. Is there anywhere structurally that would not allow you to reach the most high end of your long-term guidance you have out there next year?
Yeah. I can talk about sort of some of the assumptions behind what would it need in order to be around the higher end of the guidance. For example, this year, we are aiming towards around 5% organic growth rate, and that will be a year which is principally driven by our Prosthetics and Neuro Orthotics division, and with very little growth in Patient Care and marginal growth in Bracing & Supports business. So what we need to deliver towards the higher end is that we need the Patient Care division to be around mid-single digit. If we look at 2027, we already have half of that from just the tender business. We don't need a lot of growth in our base business to be at least on market in Patient Care.
Then just to continue what we've been doing on the chronic product side, that will all else equal theoretically, I'm not guiding.
No
put us in the higher end of that midterm range.
Perfect. I think that's as far as I will get you to talk about 2027 before year end. That was the last question. Thank you to you, Sveinn, for taking us through your results and answering questions, and may everybody have a nice day.
Thank you very much, everyone. Have a nice day.