Embla Medical: Strong Q2 despite US sluggishness - ABG

- Q2 EBITDA beating by 9-13% on product mix, scale and cost focus
- Guidance hiked despite continued US market sluggishness
- Expect +5% Consensus estimate changes

Strong Q2 in numbers
Embla reported 6% organic growth in Q2 (6% in H1) for sales of USD 216.7m (-1% vs Cons) with 63.9% gross margin (+150-210bp vs expectations) and EBITDA pre-items of USD 47m (+9-13%) for a 220-270bp margin beat. EPS came to US 4.7c (+23% y/y). Geographically the Americas continued its sluggish growth pattern with 1% organic growth (H1 1%), while both EMEA and APAC delivered strong with 11% and 9% respectively. The product categories continued along similar patterns ie 6% organic in Prosthetics & Neuro, 2% in Bracing & Support and 9% in Patient Care. Bionics is not specified in the report but we expect it to have delivered strongly. And also did the acquired FIOR & GENTZ appear to also have performed strongly in Q2.

Key points
1) Guidance - Embla narrows growth guidance from the low-end after a strong H1, as comps get a bit easier and as certain markets may still show improvements over Q2 e.g. Australia (strong performance in Q2 despite still working through reimbursement delays), and a US market which is still uncharacterically sluggish (may be due to continued impact from Change Healthcare cyberattack) and some possible pre-Medicare coverage expansion cautiousness, and as new Prosthetics products are now entering a controlled launch phase. The gross margin beat healthily which appears to be due to stronger and earlier effects of the employee reduction announed in Q1, a more positive product mix and scale. OPEX grew organically 3% ie at only half the clip of the organic topline, supporting the leverage story that is increasingly visible in Embla.

2) US Medicare coverage - Embla is not including anything in its guidance from the expanded US Medicare coverage for microprocessore controlled prosthetics (starting 1 September). We believe this is the prudent approach as the impact on patient demand is yet unclear, though it might easily turn out to be overly cautious approach.

3) Cash & Debt - Embla generated a healty USD 41m in CFFO in Q2 (33m Q2'23), and despite elevated CAPEX did Embla convert earnings to USD 18m in Free Cash flow and reducing Net Debt to USD 470m at quarter-end for 3.1x Net Debt / EBITDA ie approaching the higher end of the 2.0-3.0x target range.

Impact on the case
We will expect Consensus to hike estimates by +5% driven by the margin beat. The investment case appears solidified after the Q2 which supports the margin leverage story into a period with higher quality topline generation.

Länk till analysen i sin helhet: https://cr.abgsc.com/foretag/embla_medical/Equity-research/2024/7/embla-medical---strong-q2-despite-us-sluggishness/