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At this time, I would like to welcome everyone to this Embla Medical Q1 2025 Conference Call. Today's call is being recorded. [Operator Instructions]

I would now like to introduce CEO, Sveinn Solvason. 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 Solvason, President and CEO of Embla Medical. And joining me on today's call is our Chief Financial Officer, Gudny Sveinsdottir; and Embla Medical's Head of Investor 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 & Neuro Orthotics segment, supported by, I would say, continuous good momentum and solid volume growth in EMEA and APAC regions, while the year started out on a softer note in the Americas, following a strong end to quarter 4 of last year. Our EBITDA margin for the quarter came in at 18%, 1 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 1 year ago in quarter 1 last year, as well as a positive contribution from product mix and continued cost control.

We're pleased to welcome Andre Rocha to Embla Medical as our new Executive Vice President of R&D. Andre 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 quarter 1, 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 1 year milestone on our integration of Fior & Gentz, which we acquired in quarter 1 of last year and we're pleased with the progress, and we continue to move ahead according to our plan of expansion into new international markets.

In Patient Care, our ForMotion plan 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 quarter 2. Similar to Andre'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 Ossur 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 2x to 3x. And the purpose of this program is to calibrate our capital structure and ultimately, reduce the company's share capital and adjust, thereby, distributing capital back to our 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 higher uncertainty on the global economic outlook. We do reiterate our full-year guidance of 5% to 8% organic sales growth and 20% to 21% EBITDA margin.

We can please turn to the next slide for an overview of the key highlights for the first quarter, please. Sales in EMEA and APAC were strong this first quarter. We delivered 7% organic growth in EMEA. The strong growth trajectory we saw in Prosthetics & Neuro 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 & Neuro Orthotics as well as Patient Care. Lastly, sales in 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 & Neuro Orthotics, we delivered 9% organic growth for the quarter. In EMEA, as earlier mentioned, we see 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, delay in the approval flow impacting our APAC sales positively. The good growth was, however, partly offset by somewhat softer sales in other APAC markets.

In Americas, our performance was more modest growth. As communicated previously, sales from Navii and Icon related to the U.S. Medicare coverage expansion program are yet to contribute meaningfully as both products went into full launch in quarter 1. 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 commence ] 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 Neuro Orthotics business is moving ahead according to plan, following the expansion into new international markets last year.

If you turn to next slide, please. Sales in Bracing & Supports 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 somewhat offset by slower growth towards the end of the quarter.

In APAC, sales ended down, mainly explained by a decline in China. And the decline in China and other select markets in APAC is partly 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 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 process 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. And this somewhat correlates with moderate development we also saw on 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 details, 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 quarter 1 2024. The 1 percentage point gross profit margin expansion for the quarter was supported by cost reduction initiatives in manufacturing implemented in quarter 1 2024, positive product mix and manufacturing efficiency. OpEx amounted to $106 million or 52% of sales in quarter 1, 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 quarter 1. Net profit increased by 45% in quarter 1 and amounted to $12 million or 6% of sales, compared to $8 million or 4% of sales in quarter 1 2024. The increase is driven by stronger operating results and the absence of special items this quarter compared to quarter 1 2024.

If you please turn to the next slide 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 3% to 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 quarter 1 2024. The increase in cash flow is benefiting from strong operating results 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 buildup of inventory related to the global launch of Navii and Icon in quarter 1. 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 quarter 1, we bought back around 300,000 shares.

With this overview on our financials, I'll hand over to Sveinn for his 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% to 8% for the full year remains unchanged as well as our EBITDA margin, which is expected to be in the range of 20% to 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 the uncertainties persist, which makes it too speculative to quantify the exact direct and indirect impact from these tariffs. It is 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, then the Q&A session can begin.

[Operator Instructions] Our first question will be from the line of Martin Brenoe from Nordea.

I have 3, 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 & Support from China to U.S. 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? And 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 hadn't had that sort of backlog extra growth in there?

And then just 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 U.S. Medicare coverage expansion for active K2 patients. So, I'm 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 3 questions for me.

Martin, thanks for good questions. Well, first and foremost, on the tariffs, Bracing & Support constitutes about 17% of overall sales for Embla Medical, of which the U.S. is a substantial part of that -- of those sales. And we've also been transparent in terms of, let's say, how our supply chain setup is on the Bracing & 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, and these are relationships that we have had for over 20 years.

So 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 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. So yes -- 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 reimbursement backlog plays a big role in the good growth we had in the APAC region. And you mentioned whether we would be in the double-digit area if we somehow try to normalize for this impact, I think we would probably not know because, again, we see not a very -- not a favorable development in our business in China, which is one of the bigger markets for us in the APAC region. So this backlog does play a big role here in the performance in the APAC region. But 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 more -- 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.

Our next question comes from Yiwei Zhou from SEB.

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.

I have a couple of questions. So, let's start with the Patient Care. You have seen this lower patient volumes in the U.S. for the first couple of months, but this has like been better for the ending of the quarter. So, I'm just wondering what are you seeing in April so far? And when do you expect this to more to normalize? And also, does this mean there will be like a pent-up demand for this with some catch-up effect later in the year?

And then I also have a question following up on Martin on the APAC region on this backlog. How much more backlog do you have for the remaining of the year in part to Australia? And do you expect this to like materialize in Q2 or on the second half of the year? That's my question.

Tobias, thanks for the questions. On U.S. patient volumes, patient volumes were lower than what we had anticipated here in the quarter. And remember, there is always the seasonality with quarter 1 being a slow quarter, and it's very much reimbursement related. What we've also seen as a trend over the last couple of years is that we've seen volumes gradually shifting towards the latter half of the year. And the logic around that is in the U.S., there is always a co-pay or some participation in health care costs. And 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. And there is also an element of some slowness in reimbursement approvals in the United States that has some impact as well. So overall, a slow quarter, but it hasn't as of yet changed our expectation for the year. On APAC, the reimbursement slowness, you could say, was particularly impacted the first half of last year. So, you should see less impact year-over-year towards the second half of the year in APAC.

Next up, we have Yiwei again. Let's see if we can get them through. Yiwei, are you there?

Can you hear me now?

We can. Go ahead, please.

Perfect. Sorry, it was a technical issue. I also have a couple of questions here. And firstly, on the U.S., I recall that you previously expected that there will be a recovery here in 2025. But then the 1% decline here doesn't look very impressive. I was just thinking that if there is any sort of structural issue in the U.S. 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, Yiwei, for the question. No, we are certainly not pleased with the growth in 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. And as we've 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.

And as I mentioned in my answer to Tobias, there is -- the way the U.S. health care system works, there is always some element of co-pay 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. But 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 U.S. market and remain very focused on executing well in this region.

All right. But 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 you will 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?

Well, we are confident enough not to change our expectations for the year. It's 1 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 U.S. market here in 2025.

Okay. Great. And then you highlighted the new product, Navii, in the U.S. 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. And what I can say is just the feedback is very good on the Navii. It's an excellent product. It provides very solid new features for both active and less active above-knee amputees. And we are just, yes, 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 been -- have had lots of customer activity trials with a lot of our key clinical customers. And again, we're just optimistic about the uptick here in the latter half of the year.

Okay. Great. And my last question is on M&A. Given the leverage now is sort of -- go down to below the 2x net debt EBITDA and your range is 2x to 3x, I guess is there like 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 3 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 a vehicle to establish a presence in attractive market. So in all 3 areas, we have potential projects and are likely to have some M&A impact in '25, although that can never be said for certain.

Our next question will be from the line of Niels Leth from Carnegie.

On the topic of tariffs, how quickly would you be able to relocate manufacturing of the relevant Bracing & Support products to new countries to avoid the high tariffs on China imports?

Secondly, could you talk about the expected FX effect on revenue and EBITDA given where the U.S. dollar is today for the full-year 2025?

Niels, 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. But 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 months to 18 months, just again, depending on product complexity and volume, et cetera. So, that's 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. But taking such action obviously requires some visibility with regards to how the tariff landscape looks like also for other countries than China. So, there's still a lot of moving parts, if you will. But yes, I hope that helps.

Arna, if you could maybe take the question on FX?

Yes. On the FX, I think it's important to start by saying that the exchange differences we have in our P&L for the first quarter is 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 1. It's around 5% weaker than end of quarter 1. If the dollar would stay approximately where it is today, we would see between 2% and 3% positive effect on our sales and probably around 25 basis points negative effect on our EBITDA, given our hedge strategy for our profitability.

Is that clear, Niels?

The next question will be from the line of Dominic Rose from Intron Health Research.

This is Dominic from Intron Health. I was hoping you could give a little bit detail on Bracing & Supports 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 the persistence there, whether they might improve further? And what kind of long-term view on this segment is?

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. And this part of our bracing business has had pretty consistent solid underlying growth dynamics.

And most of our European or EMEA bracing business is on the OA side. And 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 and we can see some volume fluctuations due to price competition in pockets. So 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 [ pricing ] markets.

Our next question will be a follow-up from the line of Tobias.

Sveinn, I just have a follow-up on the tariffs. We mainly talk about Bracing & 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?

Yes. Thanks for clarifying, Tobias. Yes, that's our -- yes, prosthetics are for the vast majority, exempt from tariffs, yes.

[Operator Instructions] The next question will be a follow-up too from Martin Brenoe.

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. And sorry, if I missed it, I got cutoff for a moment. But 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. And as I understand, your products, as you have it now, is 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 kind of products? And 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 are completely comply with all the reimbursement requirements as such. However, when it comes to how -- how -- whether these products are the best products for these individuals will again depend a bit on their activity levels. But we have assumed that these products will take part of the K2 volume in the U.S., but it's 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 amputee, meaning a bionic product less or more focused on the specific needs on K2 patients.

And 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.

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. And please, if you have any follow-up questions, I encourage you to reach out to our Investor Relations team. Have a nice day.