Medartis Holding AG

SIX:MED

Earnings Call Analysis

Company Optimistic Despite H1 Margins Drop

In the first half of the year, a series of mix effects triggered a gross margin decline by approximately 250 basis points. These effects included manufacturing sales dilution, distributor sales depressions, and inventory efficiency initiatives reducing production utilization. Nevertheless, the company sees these impacts diminishing in the second half. Operating expenses (OpEx) decreased around 7 percentage points year-on-year, indicating strong business leverage and confidence in meeting the full-year EBITDA margin guidance. Despite a CHF 50 million cash outflow and increased investments, the management expects H2 cash outflow to be significantly lower due to working capital improvements, non-recurrence of certain investments, and anticipated higher sales and gross margins. Consolidating the U.S. office to Warsaw improved the cost basis, with potential for expanding in various medical indications. The company confirms guidance for the full year, with internal sales growth between 15-18% and an EBITDA margin of 13-15%.

Confidence Amidst Challenges

In the face of increasing manufacturing costs accounting for a 1.5 percentage point margin impact, the company has launched measures to enhance inventory efficiency. A temporary reduction in production utilization has led to a 1% decline in margins for the first half of the year, but there is an expectation that this will improve in the latter half. With a strong operating expense (OpEx) management, showing a 7 percentage point year-on-year decrease, the company anticipates better EBITDA margins in the future. The company reports an EBITDA margin of 12.6% (14.3% excluding IT attack costs) and remains steadfast in meeting the full-year EBITDA margin guidance.

Steady Growth Prospects

Despite operational hiccups, the company's leadership maintains a positive outlook, reconfirming full-year financial guidance with expectations of 15% to 18% internal sales growth and an underlying EBITDA margin between 13% to 15%. The company is optimistic about improving gross margins and not anticipating further IT-related expenses, suggesting a fair target margin around 14% may be achievable.

Strategic Partnerships and International Expansion

A focus on international contracts and expanded portfolios has empowered the company to negotiate larger deals. The formation of a National Accounts Team and wider product offerings have facilitated entry into major Group Purchasing Organizations (GPOs) in the U.S. market, which is not expected to alter margins. Forward-looking expectations for the Australian market are robust, predicated on a strong volume growth of approximately 15%, even as it navigates mandated price reductions. This indicates a strategic emphasis on volume over price and optimism for continued double-digit volume growth in the region.

Adapting to Supply and Demand Dynamics

The company employs a pragmatic approach to non-strategic incremental sales (NSI), which is viewed as opportunistic rather than core to the business. It provides additional top line, cash flow, and fixed cost absorption while the company incrementally shifts to filling its Warsaw production with its own products. Over the next two to three years, it is likely that the reliance on NSI will diminish substantially as the company expands its in-house production capabilities.

Resilience in the Face of Cyber Attacks

The impact of a recent IT hack was regionally varied. European operations bounced back within 4 to 5 days, while the U.S. experienced nearly a month of operational challenges. This uneven impact reflects the proximity of regional operations to the headquarters, with closer regions showing stronger resilience. Although there was some effect on top line revenues, particularly in the U.S. and Asia Pacific, the overall recovery was swift, showcasing the company's robust disaster recovery and business continuity planning.

Earnings Call Transcript 2023-Q2

[Operator]

Good morning or afternoon, and welcome to today's webcast where representatives of the Medartis Executive Board will discuss the half year results 2023. [Operator Instructions] This meeting is being recorded.

At this time, I'd like to hand the call over to Fabian Hildbrand, Head of Corporate Communications. Please go ahead, sir.

[Fabian Hildbrand, executive]

Thank you, Saske. Good morning and evening, everyone, on the call. Welcome to this video webcast, Medartis 2023 half year results. We appreciate you taking the time to dial in on this Tuesday, despite your busy schedule since Tuesday, after the back-to-school event in Switzerland, a popular reporting day.

As usual, I'm joined by our CEO, Christoph Bronnimann; and our Chief Financial Officer, Dirk Kirsten. As customary, we will use the presentation slide deck, which was published this morning on our website together with our press release as well as our H1 report.

Turning to Page -- or Slide 2, in particular, I would like to draw your attention to the disclaimer on Slide 2 regarding forward-looking statements.

On Slide 3, you can see today's agenda. At the end of the presentation. As Saske mentioned already, we will look forward to answering all the questions you might have.

And with this, I would like to hand over to our CEO for his opening remarks and the key highlights of the first 6 months. Christoph, please go ahead.

[Christoph Brönnimann, executive]

Thank you, Fabian, and good afternoon, everyone. Also from my side, thank you very much for taking the time and dialing in, in our presentation of our H1 '23 results.

On Page 5, you see an oversight of the key figures. We're proud to report that we have achieved total sales of CHF 103.3 million, which is an increase of 20.8% in constant exchange rate. We're very proud and pleased with the performance in EMEA as one of the key contributing area followed by the U.S. who has been the fastest-growing region in the first half of this year. The revenue growth -- internal revenue growth, and that excludes the NSI third-party and custom manufacturing, reached 16.1%. The reported EBITDA margin achieved 12.6%, which includes the one-off cost for the remediation of the IT attack that occurred in the second half of May. Excluding those one-off costs, the margin would have reached 14.3%. Underlying half 1 results were in line with our full year guidance. The IT attack at the end of May temporarily slowed this down, but we are confident of regaining our momentum in the second half of this year and thus confirm our financial guidance for the full year.

On the next page on the business highlights, 3 out of the 4 regions grew double digits, and we are particularly pleased with our performance in EMEA and also in the U.S. The execution of our strategic initiatives leads to market share gains in our key segments, Hand & Wrist, drives growth across lower extremities. And also, all of our key markets have been on track with performance.

Our partnerships with KeriMedical and Field Orthopaedics are gaining momentum and adding to our growth, especially pleased with the KeriMedical performance, which is doubling sales on a year-on-year comparison. While sales volumes in Australia surged 15%, the anticipated price adjustments in the private sector mandated by the Australian authorities dampened the growth in the APAC region down to single digit.

At the end of May, we have experienced an IT attack, which was enormously well handled and managed by the entire organization and had only a temporary impact on our top line and profitability. We're looking forward to the completion and inauguration of our new IBRA Institute here in Basel, which will be formally inaugurated at the end of August. The effective OpEx management mitigates the impact of a lower gross margin in the first half of this year, which can be attributed to a combination of various factors, which Dirk will soon explain in more detail.

With those opening remarks, I would like to hand it over to our CFO, Dirk Kirsten. Dirk?

[Dirk Kirsten, executive]

Thank you, Christoph, and good morning and good afternoon, everyone, also from my side.

Before going into all of the figures, let me start with informing you about the incidents, which happened end of May, as Christoph has already mentioned. On a Saturday evening, equipment IT hack organization was able to invade our system. We immediately discovered it and protected ourselves by driving down our complete IT infrastructure. The good news is that there's no data which was destroyed, and thus we also didn't need to pay any money to the invader. Nevertheless, the attack was a huge challenge and stress for the entire organization and forced us to spend unexpected money for restoring systems by additional IT security and engage IT and legal advisers. Also, we announced over time done during almost 6 weeks at an additional P&L impact.

While we didn't compromise our business activities with customers, a short manufacturing break and subsequent delivery delays have had some limited impact on top line. For the full year, we believe this will not affect our growth and profitability materially. But for the first half, it will have -- or it has some impacts that I will show you. Now this being said, let me now first lead you for our regional and product sales performance.

On Page 9, you see sales on a like-for-like basis. Our own Medartis business grew 16.1% at CER. Including third-party manufacturing sales from former NSI, the growth amounted 20.8%, as Christoph already said. For the first half of '23, we report CHF 103.3 million net sales on a group basis, CHF 51.5 million in EMEA, CHF 19.9 million for the U.S., CHF 15.8 million from APAC and CHF 10.5 million from LatAm. Finally, the third-party manufacturing business contributed CHF 5.6 million.

Turning to Page 10. Our business in the U.S. has again improved sequentially and reached 20.1% (sic) [ 21.1% ] internal growth by H1. Christoph will later elaborate on this one and is -- for this important and strategic region. In EMEA, the German-speaking countries region was, once again, specifically strong, fueled by KeriMedical products as well as strong demand for Medartis' screw and plate products.

We are happy to report that the U.K., a market of rising importance, has grown very strongly, although Brexit and the fact that the U.K. has a very high sterile business makes supply chain and set management more demanding. France supported lower-than-anticipated growth. Poland developed very nicely, And I'm specifically proud to that Spain, once again, generated growth of almost 100% versus prior year. Supported by strong demand for most distributors, the entire EMEA region grew almost 18%.

Moving to APAC. At a first glance, APAC growth looks rather soft on this chart, however, this can be explained. In July 22, the Australian authorities enforced a 10% price reduction in the private market segment followed by another 5% right now and finally 5% to come next July. On a volume level, Australia grew mid-teens year-on-year. However, the price decreases diluted the according value growth. At the same time, Japan grew very strongly again, albeit still on small absolute level over the region report 6% growth year-on-year.

In Lat Am, we reached 17% growth year-on-year, slightly below our own expectations, political term at the beginning of '23 as well as prolonged regulatory processes temporarily affected Brazil's growth. On the positive side, Mexico overcompensated this through successful participation in new public tenders and some price increases implemented.

As mentioned earlier, the IT hack had some limited impact on top line in H1. We estimate a low single-digit amount for H1, mainly derived from the U.S. This transforms into 2 to 3 percentage points growth for the first 6 months.

On Page [indiscernible], we show the growth breakdown per product segment. Our largest segment, which is up by extremities, grew 13%, driven by good distal radius plates, growth with distal ulna, wrist spanning and the forearm shaft plates. Our KeriMedical's sales nearly doubled year-on-year and allow us to convert new customers in the country where -- in the countries where we distribute Keri.

The lower extremity segment grew 33%. This includes sales from some NSI products, on which Christoph will inform later. CMF as well as other products, including Field Orthopaedics grew about 14%. This includes a negative year-on-year performance from one agent CMF distributor who would had high amount of Modus 2 in H1 '22, which creates a high comparison basis.

With that, let me turn towards costs and profitability. On Page 12, you can see the like-for-like gross margin, which came down from 83.1% to 77.7% in the last 12 months. The mix changes within the core Medartis portfolio had a negative impact of 0.8%. Another 1.1% year-on-year dilution comes from high third-party manufacturing sales of former NSI.

Last but not least, as we are selling Keri products only as a distributor and the sales of that business has almost doubled year-on-year, we experienced an additional negative margin impact of about 40 basis points. The combination of all of these factors, let's call it mix effects, have brought down the gross margin about 250 basis points.

On the manufacturing side, we had several cost increases, which account for about 1.5 percentage points margin impact. In addition, our global operations teams launched several measures and initiatives to improve inventory efficiency. The temporary reduction of production utilization has caused a margin decline of about 1% in H1. A part of that will clearly disappear in the second half of the year again.

While this gross margin doesn't look surprising at a first glance, I would like to recall that our Medartis business -- our own Medartis business has still a margin of about 81%. Going forward, a combination of ongoing efficiency improvements in Basel and the sequential increase of production utilization in Warsaw are expected to compensate for some of the negative product mix of factors, which are in line with our defined strategy and which drive above-market growth. We are confident to show some improvement in our gross margin again for the full year.

Page 13 shows our progress on cost management in H1 '23. While the headquarter has maintained its absolute cost level, we report slightly higher spending in the regions. Please recall with me that the increase in the U.S. now fully includes the entire Warsaw organization for 6 months whereas, in H1 '22, only 2 months were included. We have successfully completed the close out of our offices in Exton, Pennsylvania. The related restructuring costs are reported as ordinary costs as a part of the CHF 5 million increase. In this chart as one-offs, we only show impacts from the IT cyber attack.

Overall, our underlying OpEx ratio has come down about 7 percentage points year-on-year besides arithmetic support from the higher third-party manufacturing business that shows that the operational leverage of our business remains strong and should lead to clearly stronger EBITDA margins and the periods to come.

Page 14. We show an EBITDA margin of 12.6%, including IT attack costs and 14.3%, excluding such. The latter reflects the gradual improvement versus last year, following the initial impact from the NSI acquisition. While we cannot avoid any FX influences, we have compensated the negative gross margin impact fully the OpEx ratio improvement. Assuming some accretion of our gross margin in H2 and the nonrecurrence of additional IT costs, we thus remain also confident to meet the EBITDA margin guidance for the full year.

Slide 15 shows the main changes of the net result year-on-year. Besides the operational factors explained earlier, we faced CHF 1.3 million, mostly unrealized FX losses for the first 6 months mainly due to a stronger Swiss franc against the U.S. dollar, the euro and the Australian dollar. In addition, the financial guide also includes about CHF 1 million annualized interest expense accruals for the contingent payments expected in context with the NSI acquisition.

And finally, I would like to close my comments with Page 16, which shows year-on-year cash movement. The combination of continued debt investments, initial inventory building for Keri and Field Orthopaedic products in the U.S., CapEx for IT, the new IBRA training center lab in Basel as well as capitalized R&D have led to CHF 50 million cash outflow since December. In addition, we've increased our stake in KeriMedical towards 47% in the meantime. A small capital increase after the full year results generated cash inflow of about CHF 30 million, and the combination of all of these developments led to a cash on balance sheet of CHF 50 million, which is supported by external credit line.

We do expect the cash outflow in H2 clearly lower due to planned improvements in working capital, the nonrecurrent of recent investments and a higher top line and gross margin in H2. Of course, it is all bearing unforeseen events and doesn't foresee any larger spending due to the IT in H2.

And with that, let me hand back to Christoph.

[Christoph Brönnimann, executive]

Thank you, Dirk. Let's move on with the business update. We continue to execute our strategy, which drives significant growth across all our e-segments and markets. Our strategic priorities on the left-hand side is to deliver the innovation, continue to penetrate the markets and deliver profitable growth and the third is protect our margin.

And our main activities in delivering our innovation, very happy about the LapiPrep launch that has started at the end of March, at the end of Q1, and we continue to receive very positive surgeon feedback and also interest during our [ med labs ] where we invited surgeons for training and also for conversion. We have now also in combination on the first cases with StealthFix, which is a compatible technology with LapiPrep for the treatment of Lapidus and osteotomies. In line with the launch of those NSI technologies, we are focusing and continue to focus now to support the launch with the focus on search and conversion training, the sales force training and also expansion, especially in the lower extremity sales channel in the U.S. The global launches are on track. We're very pleased also about the addition of the digital enhanced patient-specific offering now in the lower extremities in the ankle indications.

Number two, the profitable growth. As we see significant potential across all the markets across all our portfolio, our key priority remains to increase share and gain additional customers in the Hand & Wrist across all our key markets. The Field Orthopaedic portfolio and also the KeriMedical, as mentioned before, are gaining traction and become a significant part of our growth, especially in the Hand segment.

Focus on the training in surgeons in the treatment of rhizarthrosis and driving market penetration with the TOUCH prosthesis and also with KERIFLEX used in the replacement of finger joint. On a worldwide basis, we continue to expand our sales force with a special focus on expanding the lower extremity sales force, especially in line with the attractive product pipeline on the NSI technologies on one hand, but also of the plate and screws extensions and pipeline developed here in Basel.

On the third, Dirk has already alluded to us, we expect this all the initiated measures on the gross margin, especially in our operation area. We expect a continuous improvement now throughout the second half of this year.

Let me move to the next slide, on Page 19, an overview of the launches. With all the launches we are on track, I'm very pleased about, as I mentioned before, the interest and feedback that we received on LapiPrep, especially in the workshops, in the training sessions, but also as we use more and more surgeons now to help us on the peer-to-peer training. The feedback that we received is mainly and very consistent in direction of the impression of the precision in the reproducibility correction in all planes, the easiness of handling, the standardization of the entire procedure, allowing better outcomes for less trained surgeons. And also what many surgeons pronounced and highlight is the flexibility in the fixation as the LapiPrep system allows the surgeon to use the fixation of their choice, which could be screw only, plates and screws or a StealthFix. StealthFix is fully compatible with the LapiPrep system. And below, you see what most of the surgeons highlight is the versatile fixation of the StealthFix for various deformities that also minimizes soft tissue irritation due to the low profile of the StealthFIx.

Going forward, we're on track with the KERIFLEX launch in the U.S. and also the Distal Ulna Plate, which is a line extension. Very pleased about the enhancement of our digital offering with adding the CMX Ankle and looking forward to the launch of the CMX Orthognathic in the second half of this year. To come is also the CalcShift. That's the third NSI technologies that we're looking forward to, but also the CCS expansion in the Metacarpal, which even more complements our offering in the Hand segment. And with the Foot Ortho, we're going to expand and complement our foot and ankle plate and screws portfolio, addressing indications in the mid- and hindfoot deformity corrections.

On the next slide, we are proud to support that we continue to build our momentum in the U.S. As we have heard, the internal growth in the first half of this year reached 21%. And was even before the IT attack, we were at the run rate of 27%. We have made strong improvements in all territories, with 3 out of the 5 areas in the U.S. are outperforming. And we are also on track in expanding our sales channels, where we focus on the top 20 states and also shifting towards larger distributors and distributors are fully dedicated to trauma and extremities.

We have gained a very good momentum in the lower extremities with excitement and positive interest and feedback from our surgeons around LapiPrep and also the StealthFix, and we will continue to increase our efforts in expanding sales force and training surgeons for those launches that will continue in the second half of this year. The KERIFLEX and NX Nails from Field Orthopaedics complement our Hand & Wrist portfolio, have gained traction and contributes to the strong growth in the U.S. in the Hand segment.

A milestone has been achieved by our National Accounts Team as we have signed a large national account multiyear agreement with one of the top healthcare systems in the U.S., which brands of unrestricted access to more than 3,000 hospitals and ASCs as of July 1. That means the entire portfolio with all the contracts have been preapproved, are listed as a full-fledged supplier is preapproved pricing.

We continue to expand and invest in our IBRA professional education offering, collaborating with fellowship centers across the U.S. Following the closure of Exton office, we have now improved our cost basis for the U.S. organization, which now has been consolidated in our Warsaw office.

We also had reasons to celebrate. In May this year, we have sold the 1 million APTUS Distal Radius 2.5 plate in May since its introduction. This is a clear milestone and some facts around it that means the run rate of the distal radius plate is about every 5 minutes on a worldwide basis 1 distal radius plate is currently sold. All plates and manufactured in Basel. And if we count and add the screws, we also have been producing 7 million screws only for the distal radius indication. It has become as one of the most researched and best documented implant systems in the industry and has been the foundation for our success in the European and Australian market with market shares of above 30%. And it will remain the foundation that we see the potential of continue to expand and grow into other indications in the upper as well as also in lower extremities.

In the opening comments, I mentioned that we have -- and we're getting close now to the inauguration of the IBRA training center -- the IBRA institute here in Basel, which includes a very modern training lab and training centers for surgeons and OR staff where we have now the entire competencies and infrastructure on the one roof in Basel from the idea to the development, manufacturing until the training of our surgeons. We have a full-fledged lab where we also produce the pre-fractured specimens to expand and enhance the training experience of the surgeons to basically bring in very close to the reality what they face in the OR.

The Institute is a key milestone for us as we see visiting surgeons that we can show, not only manufacturing, we can bring the surgeons together with our engineers. We can discuss about ideas. We can show and demonstrate our portfolio. And now we even have the ability and the infrastructure that we can take them into the lab, either train them or share some experiences on their new ideas together with our R&D engineers. That's for a great milestone that we're looking forward now to the formal inauguration on August 24.

With that, I would like to conclude the business outlook. It remains -- the guidance, as I have mentioned, despite the IT hack, we are very confident to rebuild and further enhance our sales momentum and, therefore, confirm the financial guidance for the full year with internal sales growth in the range of 15% to 18% and an underlying EBITDA margin in the range of 13% to 15%.

So with that, I would like to conclude. I would hand it over to Fabian for Q&A.

[Fabian Hildbrand, executive]

Thank you, Christoph. Excellent. We will now move seamlessly to the Q&A session. We have a few questions coming in. [Operator Instructions]

As usual, we will now first answer the questions from the audio participants. We have reserved enough time for all the questions. So please limit your questions to two and stay online or rejoin the queue afterwards. That makes it a bit easier for the management to answer all the questions.

Operator, we have very experienced people on the conference call, but can you please remind the conference call participants of the technical details of the Q&A queue, please?

[Operator]

[Operator Instructions]

[Fabian Hildbrand, executive]

Thank you, Saske. Can we now have -- can you open the microphone of the first participant, please?

[Operator]

Certainly, our first question today comes from Chris Gretler from Credit Suisse.

[Christoph Gretler, analyst]

Let me ask my first two questions. The first is just on APAC. Could you maybe discuss your Japanese business, in particular I think the upper extremity business and how that's been doing?

And the second question is just with respect to the gross margin. There was quite a bit of a drop, as you pointed out. If I look into second half, is it not fair to assume the underlying gross margin 77.7% and then maybe add the production cost and variances, so that something like above 80% is a reasonable expectation. Maybe if you could discuss that and specify your expectation of improved gross margin for the second half.

[Christoph Brönnimann, executive]

Thanks for joining. Thank you for your questions. Let me address the Asia Pacific, the Japanese business. Overall, the setup that we have in Japan is currently -- we are direct in the lower extremities. That's the local team and the local affiliate. The upper extremities is within the distributorship, which is MES call. And there is a second distributor for the CMF business, which has started the activities about 2 years ago.

Overall, we see very strong growth in the lower extremities, but it's still on a low level, nevertheless. The upper extremities business has been built by our distributor, which we don't see that much growth. And I would say there is certainly more opportunities in the upper extremities in the Japanese market. And the distribution contract, together with MES, will expire. And then we will keep any option of whether we're going to extend the contract or not.

[Christoph Gretler, analyst]

Okay. That sounds like an opportunity.

[Dirk Kirsten, executive]

So far, I will take the question on the gross margin. It's Dirk. So yes, you're right, a couple of factors which arise. Question was the second half of the year, yes. I would expect that some of the things, as shown here, are on higher production costs and balances. So the 2.9% to improve, let's say, 1%, maybe slightly more. And also, of course, the costs, which are related to the IT hack, which was the manufacturing interruption or the break which we had for a couple of days that, that would also not recur.

So having said that, let me guide you for 100, 150 basis points up for the second half of the year, which gives you 70 -- low to high 78%. And then probably for the full year, 78% plus. We will not be able to reach the 80% this year as long as we have such a strong growth on Keri, which we like, actually, and also as long as we get the support from the third-party manufacturing business, which is good on a top line basis and, of course, also on our EBIT and cash flow basis, but unfortunately has the negative gross margin impact. So 79% probably is the maximum for this year.

[Operator]

And we're moving on to our next question, which comes from Sandra Dietschy of Octavian.

[Sandra Dietschy, analyst]

I have a question on the contract with one of the GPOs in the U.S. So you highlighted that you have signed such a contract recently. Can we expect more such contracts to be signed in the coming months? And maybe also why is Medartis only now focusing on these GPOs. I think it would be very helpful if you, Christoph, could elaborate a bit on the importance of such agreements for Medartis and its U.S. momentum going forward?

So second question is for Dirk, again, on the margin now given the robust EBITDA margin in the first half year to explain the improvement of the gross margin in the second half. Is it fair to say that the guidance of 13% to 15% is rather cautious? Or are there any growth investments we should be aware of in the second half?

[Christoph Brönnimann, executive]

Okay. Let me start with the GPO and the U.S. question. I think, yes, indeed, it's the first national contract that we have signed -- that we have been able to sign. Basically, the contract includes now all the pricing, all the construct across the entire portfolio.

Why now? Certainly, we have been so far playing with smaller contracts. I mean it doesn't mean that we didn't have any contracts. I mean with individual health care systems, we always have contracts. But we were -- most of the time, we were playing more in the 20% rather than in the 80%. So that meant, in some areas, you start getting restrictions in terms of volume that the surgeons were kind of limited of using Medartis implants as soon as they were approaching the 20% mark.

So it's -- the expanded portfolio that we have with the upper and lower extremities, it was about time to get into the larger 80% segment of the health care systems to become almost an unrestricted -- not enormous, an unrestricted supplier. And in terms of market access, that enormously helps because also then, going forward, onboarding new distributors, for example, you can always provide contracts, which is basically a license to sell for those distributors. So there are multiple reasons to try to get more and more into international contracts. And with the portfolio growth that we have, now we can qualify much more across the entire portfolio.

But it also is a question of onboarding capabilities. We have onboarded and started to build the National Accounts Team mid of last year that have the time and the experience and also the relationships to negotiate and contract such larger deals. That's one. And the second one is certainly the portfolio that helped for it. We continue to negotiate other bigger deals. I would expect that we may be able to sign 1 or 2 more for this year. So that means we will more and more try to get into the large GPOs, which will then be like an umbrella. It's not a committed volume but it's an umbrella agreement that we have, which helps also in the onboarding of new distributors.

[Dirk Kirsten, executive]

Sandra, I'll take the second question was on the EBITDA margin, well on to courses of 13% to 15%. As you go to Page 14 and you look at the very right, we're currently at 12.6%. That's the starting point. We had a discussion whether we should confirm that 13% to 15%, and we do feel comfortable that we can do that because, as said, we expect a slight improvement of the gross margin and also the IT costs -- the IT hacking costs are not expected to recur. Now that being said, 13% to 15% is probably a very fair assumption. If you ask me, of course, I'm always ambitious to get to 15%, but I would be uncomfortable to guide you beyond the 15%. So take a midpoint, 14%, and then everything else is a result of top line, which needs to come and then the real, the effective improvement of the gross margin.

[Operator]

And of next, we have Dylan van Haaften from Stifel with our next question.

[Dylan van Haaften, analyst]

Just two questions from my side. So just on this GPO contract and what you're explaining about sort of this umbrella agreement. Does that mean you'll be running with higher indirect sales going forward? And how do you sort of expect that's going to -- that's also going to have a knock-on impact on your gross margin? And would you also expect sort of CapEx to come up from these levels given sort of these bigger contract and this bigger growth set opportunity that you're developing? So that's my first question.

And the second question would just be on Australia. Do you sense that there's still a catch-up mechanism in place there as sort of surgical volumes for quite a weak first half last year and second half last year? Would we expect sort of double-digit volumes pulling through for the remainder of the year into next year as well?

[Christoph Brönnimann, executive]

Dylan, thanks for dialing in as well. On the GPO, I think it has not an additional impact on the margin or whatsoever. I think it's -- you can understand it in the way of having a contract with a health care system. So that every single rep that walks into one of those hospitals or ASCs has a predefined and agreed upon price per construct. So that means the sales rep, whether it be a direct rep or an independent distributor rep, he can sell without going through an approval process or a value committee. So we basically listed as a supplier. And once the surgeon wants to use one of the implants and systems, he can do it without any price or economical restrictions. I think that is the benefit. The impact to margins, the sales margin of the sales commission remains exactly the same. It's not impacted by the GPO contract.

On Australia, the 10% price reduction was mandated and started in July '22. There's another 5%, which was implemented in July '23, and there will be another 5 percentage points reduction in July of next year. So when we look at the overall business development on a volume basis, Australia remained strong, growing double digit, about 15% on a volume basis. We also see the Australian market now, after the lifting of the COVID restriction, is gaining and normalizing, getting back to a more normal case load. So based on that, our forward-looking expectation for the Australian market is to continue to grow on a double-digit volume base.

[Dylan van Haaften, analyst]

Excellent. And just on that GPO contract, so basically the balance of direct indirect is expected to be the same in the sort of ASC centers. So no changes.

[Christoph Brönnimann, executive]

There is no changes and also the expansion of our sales force is mainly executed through the onboarding of independent agents. So we feel we can onboard and expand our sales force much more efficiently and much faster by onboarding of independent distributors. And now we're striving towards getting more distributors, larger distributors, that normally have dedicated reps for upper and lower extremities and also larger distributors, but distributors that are dedicated to trauma and extremities and do not have any joint replacement lines carrying.

[Operator]

And we now take a follow-up question from Chris Gretler, Credit Suisse.

[Christoph Gretler, analyst]

Just one or two follow-up questions. The first is just on market growth. Do you think kind of you had some extra growth in the first half that it's worth calling out? Or is your market share kind of small enough that doesn't really matter that much because I guess we have seen, particularly in some of the recon segments, quite strong market growth. Is this something kind of you consider when issuing your guidance for the second half or for the full year? So that would be one question.

And the other, just a quick check on Keri TOUCH. Is this U.S. launch, still on track for some time '24?

[Christoph Brönnimann, executive]

Thank you for the follow-up. On the market growth, I think, indeed, we see, in general, a more positive market, especially coming out of COVID and so on. The market growth per se is not a significant factor in our guidance. I think we are still, in most of the markets in terms of market share, small enough that we project our growth mainly coming from market share gain. The exception is certainly the EMEA region, where we have strong market shares, especially in the upper extremities in Germany, but also U.K., France. But that will certainly have an impact on the growth or it's still more favorable in those regions. But on the global level, the market growth and the market shares that we have is very minor.

[Christoph Gretler, analyst]

Keri TOUCH?

[Christoph Brönnimann, executive]

TOUCH, still on track with the FDA approval process in the U.S. We still expect an approval somewhere during the second half of next year. Third quarter -- end of third quarter, that's still the same time line that you look at.

[Operator]

And we have a follow-up from Sandra Dietschy of Octavian.

[Sandra Dietschy, analyst]

Yes. I have 2 more questions on NSI. So the first is on the NSI product you have launched and also the upcoming launch in the second half of this year. Based on these product introductions, it is reasonable to assume you can generate this year with these products single-digit million range revenue next year in the double-digit range. And are there any plans to launch these products also outside of the U.S.?

And the second question is on the third party, the NSI sales. Can you update us there? Is it still unclear when this business will fade out? Or are there already kind of concrete plans?

[Christoph Brönnimann, executive]

Thanks for the follow up, Sandra. On the NSI technologies, yes, we're on track with the LapiPrep and the StealthFix. Those are the ones that we're currently in the launch and accelerate, and that's where we focus on in terms of search and education and conversion. The CalcShift is ready to get launched as well. The projection are still the same as we have communicated. I think the focus right now in the first phase is certainly that we launch all those technologies in the U.S. Build and expand the sales force, that's our priority. And then eventually, we will also launch those technologies in the other markets, EMEA and certainly Asia Pacific, but it's not going to be next year. It's going to be -- the focus will now be on the full launch in the U.S. with all the capacity in terms of training, manufacturing in case.

[Dirk Kirsten, executive]

I think there was another question...

[Sandra Dietschy, analyst]

Yes.

[Dirk Kirsten, executive]

The NSI sales, that's a tough one. We don't plan it, to be honest. We take this as an opportunistic element of the top line. We had some estimates, which are slightly longer than -- lower than what has come out in the first half of the year. I can't even tell you what exactly is the volume, which we expect for the second half of the year. This is not strategic for us. What we do and what is our behavior or strategy is to take this business as long as it generates some cash, what it does, and as long as we cannot fill all of the capacities which we have with our own products. And now you have a process over, I would say, 2, 3 years, where, systematically, we build up our production of our own products in Warsaw. We fill our capacity. And it's in our hands to decide to what extent we want to keep that third-party manufacturing business or not.

So I would expect that over the next 2 years, it will fade out. I can't tell you whether 100% or whether it's going to be 40% or 50%. But at this point of time, I'm even glad that I have it because it gets me the top line, it gives me cash flow generation and fills my capacities and also absorb some of the fixed costs, which I have in the Warsaw production. So I'm actually even thankful for it. And I know it's difficult to plan for you as it is for us.

[Operator]

[Operator Instructions]

[Fabian Hildbrand, executive]

Perfect. Thank you, Saske. So I'm trying to bundle the questions a little bit because some of the questions have been answered already. There's a question coming from telephone -- from a webcast participant. The person would like to know, where all regions equally impacted by the hack?

Yes, probably a question for you.

[Dirk Kirsten, executive]

The answer is, no. As a general answer, I could tell that the close of the region is to the headquarters. The lower the impact, the more distance there between the headquarter, physical distance. And the region, the higher the impact was. Explaining that very, very quickly. When the hack happened, we were able to build up all the systems within shortest time for all of the European countries. They flew in. They came in here over the weekend. They worked. And actually, I think we were within 4, 5 business days where we're fully operational again.

When you have a country such as Australia or Japan, it's not that easy. Same also for the U.S. where some processes were just transferred on the former Exton into Warsaw with new people, not that stable. So the impact for the U.S. was probably almost a month, not 100% on top line, but I would say, challenges on the procedure side. Whereas for Europe, it was a couple of days.

In Asia, somewhere in between. We have a very, very experienced team in Australia. They -- I would say they were coping with it more or less in 2 weeks' time. Japan, a little bit behind. But Europe was very strong and came back into the business 4, 5 days later again. And that's also then the impact on top line. I would attribute a little bit more to the U.S., a little to EMEA and a little bit also to Asia Pacific. LatAm, not so much because they have relatively high inventory levels.

[Fabian Hildbrand, executive]

Thank you, Dirk. Thank you for sharing. Just as a detailed results, so the 27% run rate going into the hack was based on the internal growth and the total growth, just to make that crystal clear.

So the next question coming also from -- in written, it's probably a question which is addressed with Christoph. Can you elaborate on the competitive landscape in the U.S.?

[Christoph Brönnimann, executive]

Sure. We certainly compete directly with all the big ones that have a trauma or an extremities business, which is J&J, mainly DePuy Synthes, Zimmer Biomet and Stryker. In the upper extremities, I would name Acumed and Skeletal Dynamics. And then we have lower extremity companies dedicated like Paragon28, Treace, especially in the [indiscernible] and probably in [indiscernible]. Those are probably the key competitors for us in the U.S.

[Fabian Hildbrand, executive]

Thank you Christoph for your details. There's a question for Dirk. So you mentioned the gross margin in H2 will improve and you already elaborated a little bit on that. What are the main reasons for your optimism in the second half?

[Dirk Kirsten, executive]

The main reason comes from the manufacturing side, where we also made the decision that was really intentional to adjust our capacities for some meantime. And cash and also inventory management is one of our key KPIs. Our CEO looked at the inventory position. Also the [indiscernible] investors are very, very strong. So we made a decision to reduce the capacity utilization to improve inventory. And that being said, it had a negative impact on the gross margin. Technically, these are balances which are coming through. I would not expect them to come through in the same level in the second half of the year. And that's why I said earlier, 1 percentage point comes from there. IT hack, nonrecurring. Hopefully, we all hope another one -- another 50 basis points. This is where taking optimism of 150 basis points, 100, 150 points up for the second half of the year.

[Fabian Hildbrand, executive]

Okay. Great. There is another question, what KPIs, key performance indicators, are you focusing on in the medium term? Who would like to answer that question?

[Dirk Kirsten, executive]

You can take it if you want. It's not rocket science to see traditional ones. We're living from top line. We have a gross margin of 80%. If I'm not getting the top line, I have a niche. So top line is important. It's the market share, specifically in the U.S. And specifically, I would say it's the conversion of new customers, especially the interesting customers, the efficiency of the -- even sales agents, which we have. And also, of course, the growth and cross-selling from the customers, which we already own. So that's on the top line side.

For me, typically, the CFO answer would be cash flow is the most important as well. So that means it's not only about cost management, but more importantly then it's about the efficiency, which we have with the employees' capital. It's not so much with [indiscernible], but it's also the debt investment which we do. So it's also an evolutional process that we drive the efficiency, and we put our capital assets there where we get the highest return with the customers, which grow most and quickest. And for me, this is the key driving factor also for our cash flow. So I would say top line cash flow, these are the most important ones.

[Fabian Hildbrand, executive]

I'm sure everyone agrees on the view on that. There are no further questions on -- in the queue and also no written questions. I guess then we can close this [ counts ] for today. But before we terminate this webcast, let me draw your attention to our IR calendar, which is on Slide 26. The media, as you want, any of these in person, either on the road show or one of the listed conferences.

But before, I wish you a pleasant day, and goodbye. I'd like to hand over to Christoph Bronnimann, our CEO, for his closing remarks.

[Christoph Brönnimann, executive]

So I would like to take -- and thank you for the time and the interest dialing in our H1 results presentation despite a very busy day. We really appreciate and wish you a great rest of your day and a great week. Thank you very much, everyone.

[Operator]

Thank you. That concludes today's call. You may now disconnect.