Embla Medical hf. (EMBLA) Earnings Call Transcript & Summary

At this time, I would like to welcome everyone to this Embla Medical Q3 2026 Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce President and CEO, Sveinn Solvason; and CFO, Arna Sveinsdottir. Sven, please begin.

Thank you very much, and good morning, everyone, and welcome to Embla Medical's Third Quarter 2026 Conference Call. I'm Sveinn Solvason, President and CEO of Embla Medical. And joining me today are our Chief Financial Officer, Arna Sveinsdottir; and our Head of Investor Relations, Klaus Sindahl. We expect the presentation to take around 15 minutes, and we will then open the call for questions. Let's move to the next slide, please. For the first 9 months, sales reached $741 million with reported growth of 10% and organic growth of 5%. Growth in the quarter was led by prosthetics and neurototics, while Bracing & Supports delivered moderate growth. Patient Care was flat in the quarter and performance is below our expectations that we set at the start of the year. We are, however, moving in the right direction. And for a large part of our clinic platform, we're making very meaningful progress. And I'll come back to this in more detail later in the presentation. Our EBITDA margin remained strong at 22%, in line with the third quarter last year. This was supported by disciplined cost control and increased profitability in patient care despite the lower-than-expected sales growth. We also continue to make good progress on innovation. During the course we launched a new neuro swing joint in neuroathotics and 2 new adapter kits in our prosthetics segment. Based on our performance in the first 9 months and our outlook for the fourth quarter, we are narrowing our full year guidance to around 5% organic sales growth and an EBITDA margin of around 21%. Let's move to the next slide, please. EMEA was the main driver of sales growth in the third quarter, supported by continued strong performance in Prosthetics & Neuro Orthotics across both established and new emerging markets. Sales in Americas were flat organically, while sales in APAC decent. If we now now move to looking at each segment in more detail, and please turn to the next slide. Prosthetics & Neuro Orthotics delivered again strong organic sales growth of 7% in the third quarter. EMEA continued to perform strongly, supported by a broad-based volume growth in prosthetics, including Bionic and growth in sales in Ukraine. The Striper business also contributed to strong growth here in the quarter. In the Americas, growth was flat in quarter 3, strong performance in our College Park portfolio, and Bionics was partly offset by softer sales in other categories. In APAC sales were soft during the quarter, strong growth in Autralia New Zealand was offset by weaker sales in Asia, mainly due to increased competition in China. Neuro orthotics performed well in EMEA and the Americas also contributed positively, although from a low base as the U.S. commercial rollout continues to progress. Overall, Prosthetics & Neuro Orthotics remains Embla Medical's main growth driver, supported by our broad portfolio, strong innovation pipeline and expanding international reach. Please turn to the next slide. Trading & Support delivered organic sales growth of 2% in the third quarter. The Americas performed well, supported by new business and broad-based demand across our core product portfolio. APAC also delivered strong growth, while EMEA was flat, contributions from new products and growth in selected markets in Europe were offset by changing market dynamics elsewhere. If you turn to the next slide, please. Patient Care sales were flat in the third quarter and slightly up from prior quarters. As I mentioned at the beginning of the call, patient care sales have developed below the expectations we had at the beginning of the year. EMEA returned to growth here in quarter 3 with a solid performance across all major markets with the exception of Sweden, Performance in Sweden has been impacted by a loss of a regional tender from the beginning of 2026, impacting overall sales growth in the Patient Care business by approximately 2 percentage points for the full year. We have, however, secured a new tender in another Swedish region. This will start towards the end of the year and is similar in size as the tender we lost and will therefore impact our growth in 27 positively. In the Americas, we continue to make progress across the majority of our clinical network, however, offset by impact of the last major integration in the U.S. We are encouraged by the progress we are seeing in both productivity and profitability across the network. At the same time, there is still more work to do to deliver consistent sales performance across all tenets. With a more integrated and efficient operating platform now in place, our focus is on strengthening commercial execution and turning these operational improvements into renewed sales growth. That concludes my overview for the quarter. I'll now hand it over to Arna, who will take us through the financials in more detail. Arna, over to you, please.

Thank you, Sveinn. If you please turn to the next slide for an overview of our financials. In the third quarter, our gross profit margin was 62% compared to 60% in quarterly 2025. I stronger gross margin in our Patient Care business was partially offset by tarry costs related to the optimization of selected model manufacturing sites in our prospective business. These initiatives are expected to improve efficiency and support profitability over time. For the first 9 months of 2026, the gross profit margin was broadly in line with last year. at 62.4% compared to 62.6%. OpEx was $160 million or 46% of sales, in line with quarter 3 2025. Organic OpEx increased by 2% in the quarter compared with organic sales 4%. This reflects our continued focus on disciplined cost control, particularly within SG&A, as well as improved profitability in Patient Care. As a result, the EBITDA margin was 22% in the quarter, in line with quarter 3 2015. For the first 9 months, the EBITDA margin was 21%, also in line with the same period last year. Net profit was $26 million or 1% up from quarter 325 million Higher operating profit was partly offset by increased net financial expenses due to adverse exchange rate movements. For the first 9 months, the net profit increased by 19%. Let's now move to the next slide for an update on the cash flow and leverage. CapEx was around $7 million in the third quarter, equivalent to approximately 3% of sales. For the first 9 months, CapEx was approximately 2% of sales. The full year, we now expect CapEx to be between 2% and 3% of sales, compared with our previous expectations of 3% to 4%. This reflects the moderate level of investment during the first 9 months. Free cash flow was $31 million or 5% of sales compared to $38 million in the third quarter last year. The year-on-year decline in the quarter mainly reflects timing effects while free cash flow for the first 9 months increased by 30%. Cash flow continued to benefit from strong operating performance, disciplined working capital management and moderate CapEx. Net interest-bearing debt to EBITDA was 2.1x at the end of the quarter. And that concludes the financial overview, and now hand over and hand back to Sveinn into our closing remarks and guidance.

Thank you, Arna. Please turn to the next slide. Based on our performance in the first 9 months and our outlook for the fourth quarter, we are narrowing our organic sales growth guidance to compared with the previous range of 5% to 7%. The revised outlook mainly reflects a slower-than-expected recovery in patient care despite the continued improvements we're seeing in productivity and profitability. In Prosthetics & Neuro Orthotics, we expect solid performance to continue in the fourth quarter, supported by strong momentum in EMEA, continued growth in Bionix and our recently launched innovations. We're also narrowing our EBITDA margin guidance to around 21% compared to the previous range of 22%. That concludes our presentation. We are now ready to take your questions. Operator, please move to the next slide and the Q&A.

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

Sveinn, Arna, I just have 3 questions, if I may. Can you maybe just speak a little bit to the market growth that you're seeing currently in the U.S. overall? And dive a little bit into what is going on, especially in the Patient Care segment here? What is it exactly that is holding the performance back? I see that you mentioned the ongoing integration and onboarding of additional clinics to broadly constrained growth -- can you maybe elaborate on what that means? So that's the first question on market growth in the U.S. and what you mean about the constrainment of growth. And then secondly, my question would be about the margin here. You are seeing a pickup in patient care, offset by the weakness in Prosthetics & Neuro Orthotics due to the print changes can you maybe put a bit more numbers on exactly what you're seeing here? And when should we expect this change our footprint to show positive margin impact in your numbers? That's question number two. And then question number 3 is when do you see yourself a potential inflection point in the patient care business overall as a group. Is it when you start to get the center contract out of your numbers in Sweden and the new tender contract into your books or do you see any bigger structural changes that could happen over the next, let's say, in 6, 9, 12 months or so?

Thanks for your question. On the U.S. growth, our view is that the market growth remains healthy in the United States mid-single-digit organic growth rates in the O&P market as a whole. What we see here in quarter 3 for our business, starting with the Patient Care business and back to your reference from our communication this quarter, we -- across our U.S. business, we see good progress across our network with the exception of the last, I would say, a major integration that we initiated here in the beginning of the year, which is platform, a meaningful part of our platform, let's put it that way. And when we go through these integrations, we usually see a depend performance as we are integrating processes, integrating new systems, more times that are not seeing patients. So we are encouraged with the progress which we are across the whole portfolio, but with the exception of these integration efforts. And I will also say that the impact of this integration has been higher than what we anticipated. On the product business, we are comparing to, I would say, an exceptionally strong quarter from last year on our prosthetics and neuro business. Here in cost, we continue to see good progress in our bionics business, our college park business, but with some unusual slowness across our mechanical portfolio, which we don't expect to be sort of systemic going forward. So overall, our view on the market is that it remains a healthy market, and we're in a good position to generate a is market growth rates. On the margins, kind of the base picture in the quarter now around March, we're on average reporting stable margins compared to same quarter last year. And in our prosthetics business and Europe business, we are a little lower year-over-year, mainly because we are doing consolidation in our manufacturing footprint. This has been pushed off our ongoing strategy always on the operational side to consolidate it into let's say, our main sites, and that will all is equal, help us with scalability going forward and help us to continue the trends that we've seen historically that year-over-year, we find cost efficiencies to outweigh the year-over-year increases we always see on labor costs. So this exercise here that is costing us a little bit in the quarter will put us in a strong proposition forward to deliver -- continue to deliver on the scalability we see in our operational platform. But what is encouraging to see on the margins is that the Patient Care business, despite being flat on top line, we still see more margin contribution, which speaks to the actions we've taken on the cost side in that business. So once we see more traction on the top line, we will see also more impact on our margins. And that's a good connection to your last question on the Patient Care inflection point. This tender situation in Sweden is -- has a relatively big impact for us this year. Usually, we will not comment on on things like won or lost centers. But this is a little bit of a unique situation in Sweden is a relatively big part of our patient care platform as the only country where we are operating in a center system like that. And the center we lost started impacting our numbers actually at the beginning of this year. So it is a full 2 percentage point impact on organic growth. And we have also secured another tender, but that will not start to impact our numbers until the beginning of next year. So next year, we will help get good help from this tender situation. So that is part of the story, Martin, in the patient care inflection point. But we are making good progress. And the easiest way to think about it always is that we have these 200 clinics where we are driving progress around patient intake capacity utilization cost. We see with every quarter that passes more of our clinics being on the right side of the benchmark we set for financial performance. So we are gradually moving in the right direction. But with that said, we are still now -- we are -- in 2026, we are below where we thought we'd be when we set guidance for the beginning of the year. And that's, of course, disappointing.

The next question will be from the line of Tobias Nissen from Danske Bank.

Just to touch on Martin's question on Patient Care here and return to market like growth. How should we think about this should be expected to gradually come back going into next year? Or will there be some kind of catch-up effect when some of these integration efforts in the U.S. in. Just to get a lot more like understanding on how this transformation is progressing and any feedback on that? And perhaps just you called out this tender situation in Sweden. It's just kind of unfortunate, but to see any other major tenders coming up that can actually move the needle here in the short term? That would be my second question. And lastly, just on the gross margin where you call out this temporary cost from the site optimizations. Can you quantify how large these costs are and when they end and the expected payback and tailwind from when you are completed with this optimization?

Tobias, on the Patient Care growth trajectory, we will give more specific guidance when we close the year and guidance for '27. But again, repeating my answer from the previously, I mean, the tender situation in Sweden will obviously help us quite a lot next year if we assume that market growth rate is mid-single digits, we will get half of that just from the tender situation in in Sweden. So you can do the math. It requires less offers to at least be at market growth rate next year in patient care. We don't have any other tenders that are coming up here in the short term. that we have a risk of losing to put it that way. So I wouldn't zoom in on that being any catalyst of any sort. This is a little bit of a unique situation now when we are between tenders like this that have a meaningful impact on the overall situation. I will say for the gross profit margin impact of these manufacturing relocations. I mean we are -- this is mainly a story, maybe slightly slipping into quarter 4, but it's not a major topic. It is an explanation here in the quarter for -- so in the absence of this, we would have had a slightly stronger gross profit margin because we're making good progress, especially on the productivity side in patient care. And the benefits of this will -- the way I look at the benefit is that we have a more scalable platform going forward and are in a strong position to continue to create continuous improvement that outweighs the normal sort of wage or labor cost increases we see every year.

The next question will be from the line of Beatrice Fairbairn from Berenberg.

So firstly, I just wanted to clarify 2 points on what you've discussed earlier regarding patient care in Sweden. Firstly, is this new tender expected to kick in in Q1 next year. You mentioned at the beginning of the year, but I just wanted to further clarify about that. And then on the flat sales growth in Americas that you mentioned, is this just due to weakness in the mechanical segment? And if could you give some more color on what's driving that? And then secondly, you noted in the presentation, increasing competition in China in a procurement how much an impact on segment sales has this been? And could you elaborate more on what this looks like in terms of product categories affected and type of competition? And then finally, can I just clarify timing on when we should expect the ramp-up of the neurohitronic MPKFO in the U.S. And for the K2 and PK launch, is this a full control launch or initial limited launch in the latter part of 2027.

Beatrice, thanks for your questions. On Question 1, yes, the tender was started from first -- approximately first of January. It's good to confirm that. On the flat sales growth in the U.S., yes, it's mainly weakness in our mechanical portfolio. And we've seen these fluctuations historically. This is our historically been our strength liners feed, and we are currently very enthusiastic about the reception we are seeing from our new -- relatively new Pro-Flex Tara foot that also has a reasonably favorable reimbursement dynamics in the U.S. So we expect the mechanical range to pick up going forward in our important U.S. market. In China, it is mainly competition in the knee segment from local local Chinese companies that have impacted our growth in China. If we look at the APAC region as a whole, China is 1 of our 3 major markets. It's -- our biggest markets in APAC region are the Australia and New Zealand and Japan and then China. So this is having a meaningful impact on our -- this competition from local Chinese companies is having a meaningful impact on our our position in China. However, we still remain 1 of the kind of few holistic supplier. So everything that is needed to build prosthetic Deluxe, and we still see opportunities in this region. But here, short term, we see an impact from this increased local competition, if you will. Neuro Orthotics in the U.S. continues to gradually build some traction. Reimbursement is there. Product is solid. We are doing lots of education and sales efforts with our customers and expect that to gradually ramp up. And as we're growing from practically a 0 base, this will have our growth rates. And finally, on the K2 question, we're still on track for launch towards the end of next year, that will be in a more limited fashion with full launch in 2018, I get.

[Operator Instructions] For our next question, please state your name and company before asking your question.

Tom Rosenfeld from Intron Health Research. Just 1 question from me today. And that's on the manufacturing side optimization costs. Could you give us some more color on the magnitude of these costs and how long we'll expect to see them fall.