Earnings Call: Q4 2019

Feb 4, 2020

Summary

FY 2019 sales rose 16% in local currency, with 5% organic growth and 22% EBITDA margin before special items. FY 2020 organic growth guidance is 3%–5%, while competitive conditions, U.S. sales uncertainty and supply-chain exposure remain key risks.

Ladies and gentlemen, welcome to the Össur Q4 and full year 2019 results. Today, I am pleased to present Mr. Jon Sigurdsson, President and CEO. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Jon, please begin. Yeah, thank you. First of all, I would like to welcome you here to the Össur Investor Conference Call, where we will cover the results for the full year and the fourth quarter of 2019. My name is Jon Sigurdsson, and I am the President CEO of Össur. And with me here today is Sveinn Sölvason, our CFO. We will be beginning by going through the highlights for the quarter, followed by the quarter results, and ending with our guidance for 2020. A question and answer session will then follow. Sales for the full year amounted to $686 million, corresponding to 16% growth in local currency and 5% organic growth. EBITDA before special items grew by $35 million or 30% and amounted to $150 million, which corresponds to 22% of sales. Excluding the impact of IFRS 16, EBITDA amounted to $130 million or 19% of sales, the same margin as in 2018. Össur acquired three companies during the year with combined sales of around $20 million that began to contribute in the fourth quarter of 2019. As previously mentioned, sales amounted to $686 million in 2019 compared to $613 million last year. The prosthetics segment grew by 7% organic. We have a good momentum in our prosthetics segment globally with excellent contribution from high-end products, including our high-end mechanical feet portfolio and bionics. The remainder of the prosthetics portfolio also performed well during the year. We would like to highlight that the sales of bionic products amounted to 23% of prosthetic component sales compared to 22% in 2018, in line with a strong performance of bionic product, which is in line with our trade up strategy. Bracing and support grew by 3% organic, which is in line with our estimates for the market growth. Total reported growth was 12%. Acquired companies contributed 11 percentage points reported growth and with change in currency rates, sales were negatively impacted corresponding to a four percentage point impact on reported growth. Americas local currency growth was 24%, and organic sales growth was 3% for the year. Prosthetic sales in the U.S. were good but slowed down towards the end of the year. Prosthetic sales growth in Canada was strong. In the bracing and support segment, performance in Canada continues to be strong while sales in the U.S. were soft. Local currency growth was 8% in EMEA and organic sales growth was 3% for the year. Growth in prosthetics was good in major market regions during the year. In bracing and supports, growth was good apart from France, where sales were negatively impacted by competitive market environment. Organic growth in APAC was 19% for the year, where we continued to see strong results in both prosthetics and bracing and supports. We are very pleased to see excellent results in the emerging markets. Now over to you, Sveinn. Thank you, Jon. As Jon already covered, organic sales growth was strong and amounted to 5% over the year, and local currency growth was 16%. The gross profit margin was 64%, both with and without IFRS 16, compared to 63% last year. Increase in gross profit margin can mainly be attributed to strong sales growth, positive impact from product mix, and ongoing savings initiatives. Special items for the year amounted to $8.3 million, out of which roughly $6 million are related to the efficiency initiatives as previously communicated. The remainder of the one-time costs are related to signing the agreement to acquire the prosthetics manufacturer, College Park Industries, as communicated in July 2019, and the recent acquisitions that Jon mentioned. EBITDA before special items grew by $35 million or 30% and amounted to $150 million, which corresponds to 22% of sales. I will discuss the EBITDA development on the next slide. The effective tax rate was 24% and therefore in line with our guidance. Net profit was $69 million or 10% of sales. The ratio to sales is lower than last year as the comparable period in 2018 was impacted by $21 million due to a one-time reevaluation of a previously acquired share for a minority shareholding. In summary, a strong P&L for the year. Go to the next slide, please. The key items impacting the EBITDA between the years are first and foremost impact from companies acquired late in 2018 and during 2019. Strong sales growth has resulted in increased gross profit. Growth in sales and marketing expenses, let's say excluding the impact from acquisitions, is mainly due to investments in emerging markets. We had moderate increase in R&D investment, but it is expected that we will up our investment in R&D during 2020. Moderate growth in G&A when adjusted for acquisitions. IFRS 16 contributed or impacted EBITDA by about $20 million for the year, and the impact on reported dollar EBITDA from FX was neutral. When it comes to EBITDA margin, EBITDA margin before special items was 22% for the year. But excluding the impact of IFRS 16, EBITDA margin was 19% of sales, which is similar as for 2018. We continue to see underlying increase in margin due to, let's say, positive changes in product mix, scalability, and the impact of the efficiency initiatives. But let's say due to investment in our sales infrastructure in emerging markets, and since we have acquired companies that have a lower operating margin than in our business, the net, let's say, impact on EBITDA margin for the year is neutral. Next slide on cash flow. Free cash flow amounted to $72 million compared to $46 million last year. The main items impacting the free cash flow between the years are, first and foremost, positive impact from strong operating results. We have a temporary increase in net working capital, which we expect to reverse in the first half of 2020. Paid cash taxes is higher in line with higher profitability and CapEx is largely unchanged between years. Lastly, net interest-bearing debt was about $302 million at the end of the year, which corresponds to a 2 times net interest-bearing debt to EBITDA, and hence in line with the updated capital structure and dividends policy of 1.5 to 2.5 times net interest-bearing debt to EBITDA. The capital structure and dividends policy was updated due to the implementation of IFRS 16, where lease liabilities are now included as part of net interest-bearing debt, and the EBITDA is also higher by the previously mentioned, $20 million. So in essence, there's no change in our philosophy around the capital structure and gearing level of the company. That concludes the highlights for the full year. Now, Jon, if you could go ahead with the quarter review, please. Yeah. Thank you, Sveinn. Now let's briefly look at the quarter. Sales in the fourth quarter amounted to $180 million, corresponding to 10% growth in local currency and 1% organic growth. It should be noted that the fourth quarter had one less selling day than in the comparable quarter last year, which impacted growth negatively by about one percentage point. EBITDA grew by $4 million or 13% and amounted to $37 million or 21% of sales. Soft sales in the quarter impacted relative profitability. America's local currency growth was 13%, and organic sales growth was negative 3% in the quarter. Prosthetic sales in the Americas declined due to lower than expected sales to one customer. As already mentioned, the impact is expected to be of a temporary nature. Sales in the bracing and support segment were soft in the Americas, primarily due to a competitive market environment. Local currency growth was 4% in EMEA and organic sales growth was 1% in the quarter. Growth in prosthetics was soft across most major markets. In bracing and supports, growth was good apart from France. Organic growth in APAC was 22% in the quarter, where we continued to see strong results in both business segments. Growth in China, Japan and Australia was strong, and we see good results in other emerging markets. Over to you, Sveinn. Yeah, thanks, Jon. As already covered, organic sales growth amounted to 1% in the quarter. Local currency growth was 10%. Gross profit margin was 63%, the same as in comparable quarter in 2018. EBITDA grew by 13% and amounted to $37 million in the quarter or 21% of sales. Excluding the impact of IFRS 16, EBITDA margin was 18%, slightly lower than in the comparable quarter in 2018. The lower EBITDA margin is mainly a result of slow sales growth in the quarter. OpEx growth, excluding impact from acquisitions, was moderate. The effective tax rate was 25% in quarter four, but 24% for the year, and hence in line with our guidance as previously mentioned. Net profit amounted to $18 million or 10% of sales. Again, lower than in quarter four last year, but again, due to the, let's say, impact in quarter four last year by the reevaluation of minority shareholdings, which impacted our P&L in quarter four 2018. Yes, Jon, over to you on the guidance. Yeah. Thank you. Thank you, Sveinn. As already mentioned, Össur made three acquisitions in 2019. The combined full-year sales of three acquisitions amount to about $20 million. The acquisitions are expected to have a negative impact on the EBITDA margin in 2020. For the last five years, organic growth has consistently been around 5%, which is at the upper end of estimates for the market growth rates. Going forward, growth is expected to continue to be at the upper end or slightly above estimates for the market growth rates. For 2020, organic sales growth is expected to be in the range of 3%-5%. In prosthetics, continued good performance in key markets and high-end products are expected, including our high-end mechanical feet portfolio and bionics. The lower end of the guidance range factors in some uncertainty in the U.S. market related to the temporary slowdown in sales in the fourth quarter of 2019. Growth in prosthetics is estimated to be at or above estimated market growth in 2020. In bracing and supports, we expect to see a continued good performance in high-end products, including our Rebound and Unloader product lines. In 2020, the competitive market environment in France and the United States is expected to prevail. Continued good performance is expected in other key markets. Growth in bracing and support is estimated to be in line with estimated market growth in 2020. EBITDA margin before special items is expected to be in the range of 21%-23% of sales. Continued underlying increase in profitability will be supported by positive development in product mix, as higher margin products are expected to grow faster than the remainder of the product portfolio. In addition, we expect savings from the ongoing efficiency initiative and scalability in core operations. Recent acquisitions are expected to have a slightly negative impact on EBITDA margin. It should be noted that quarter one is, and has been historically, seasonally the weakest quarter of the year in terms of sales and profitability. The recent acquisitions have a greater seasonality in their operations compared to the pre-acquisition Össur business. Consequently, the seasonality of Össur sales and profit is expected to slightly increase in 2020. CapEx is expected to be in the range of 4%-5% of sales. CapEx relative to sales is therefore expected to be higher in 2020 than the historic and normalized level of 3%-4% due to changes in the supply chain related to ongoing efficiency initiatives. The expectation is that 2020 effective tax rate will be in the range of 23%-24%. Thank you all. Let us now go to the question and answer session. Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad and you will enter a queue. After you are announced, please ask your question. Our first question comes from the line of Benjamin Silverstone from ABG. Please go ahead. Thank you. Hi, Jon. Hey, Benjamin. I just have a quick question. I have a quick question regarding the B&S product produced in China. I do know that these are the more low-tech, high-volume products. They carry, I assume, a lower margin than the other B&S products. But do we know the percentage of the products being produced there out of your entire B&S segment? Hi, Benjamin. Yes. Let's say we do have some sourcing of the more low-end, commoditized part of our bracing and support business from Chinese vendors, which will be impacted by the coronavirus shutdown in certain parts of China. The total sales of products manufactured in China is about $30 million in sales value for Össur. And the gross profit margin on those products is slightly lower than the average gross profit margin for our business. You can do the high-level math in terms of the level of production in China of bracing and support products. This is something we are monitoring very closely. We have inventories of these products on hand for one to two months, and these are products where we have some alternatives when it comes to sourcing, and we would just monitor this situation very carefully and look at what alternatives we have to secure a supply of these products going forward. All right. Thank you so much. My last question is just to clarify that the College Park Industries is still a signed agreement, but it is not yet finalized, right, the acquisition? That is correct. We are still in discussion with FTC in U.S. and waiting for their opinion on the case. All right. Thank you so much. Welcome. Thank you. Just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. As there are no further questions, I will hand it back to the speakers. Then I would like to thank you for your participation, and we will be on the road this week for a visit to European countries in relation to the quarterly roadshows. In the next couple of months, we will be presenting at a couple of conferences. Please reach out to our investor relation team if you would like to meet us or if you have any questions after this call. Thank you all for listening and have a good day. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.