Good day and thank you for standing by. Welcome to the Össur Q3 2022 Results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Sveinn Sölvason and Gudný Arna Sveinsdóttir. Sveinn, please go ahead.
Thank you very much. I would like to welcome you to the Össur Investor Conference Call, where we will cover the results for the third quarter of 2022. My name is Sveinn Sölvason, and I'm the President and CEO, and with me here today is Gudný Arna Sveinsdóttir, our CFO. We will go through the highlights for the quarter and a question and answer session will then follow. If you go to the next slide, please. Sales amounted to $177 million, which corresponds to 4% organic growth. Sales were strong in APAC, both in China after lockdowns in quarter two and in Australia, which is regaining ground. Sales growth in Americas was driven by strong prosthetic sales, while after many quarters of strong growth, sales in EMEA were softer than we had anticipated.
We were very pleased to announce that we closed the acquisition of Naked Prosthetics in August. Naked Prosthetics is a market leader in mechanical finger prosthesis, and the acquisition strengthens our position in the upper limb area and allows us to address a broader group of individuals that need the prosthetic solutions. Last year, Naked Prosthetics sales amounted to $90 million. Supply chain challenges continue to have a short-term negative effect on our productivity and product supply, as well as we're still facing shortages of certain raw materials and components. We continue to see some inflation in raw material prices while freight cost is gradually declining. We implemented safe price increases during the year and will increase prices further in 2023.
To support further growth and profitability, we made organizational changes and initiated cost savings in the quarter, as well as specifying our operations to better leverage key strategic locations. Yearly cost savings are estimated to be around $15 million. We proceed to reinvest around one-third of the cost savings mainly into our emerging markets platform and our digital team. EBIT before special items amounted to $35 million or 20% of sales, and Arna will later elaborate a little bit more on finances. Price increases, normalization of supply chain costs, cost inflation, and the cost savings initiatives are our key focus areas. Our view remains that underlying profitability will remain intact, but subject to some fluctuations as we've seen this year. If you go to the next slide, please.
Here is some overview of the growth in our three regions and product segments. Prosthetics sales increased by 4% organic, driven by sales growth in Americas and APAC. The Tauni continues to be in good demand, although we face raw material and component challenges to keep up the manufacturing output that we would like to. Sales growth in Americas and EMEA was particularly affected by the discontinuation of the outsourcing contract with the Department of Defense in the U.S., which we announced in the beginning of the year, and the continuous suspension of sales to Russia due to the ongoing war in Ukraine.
Adjusting our geographic segment for these extraordinary topics, organic growth in Americas would have been 6% and organic growth in EMEA would have been 5%, and total organic growth 7% compared to the reported 4% organic growth rate. Sales of bionic products accounted for 22% of Prosthetics component sales in the quarter, compared to 20% in the comparable quarter. Bracing & Supports sales increased by 2% organically. Patient volumes have fluctuated adversely, affecting mainly the demand for Bracing & Supports products in our Americas segment. Over to you, Arna.
I will go through the P&L highlights. Organic growth was 4% as previously stated, and reported growth was -2% in the quarter. Reported sales were negatively impacted by $14 million due to the currency movements, which correspond to around 8 percentage points negative effect on the reported growth rate. The adverse FX impact is primarily due to strengthening of the U.S. against euro and other key currencies. The gross profit margin was 61% in the quarter, but 63% excluding special items, mainly due to aforementioned cost initiatives. Cost of goods sold is estimated to be affected by $14 million in 2022 due to higher freight costs and inflation in raw material prices compared to the pre-pandemic levels. We saw freight rates coming down this quarter, but later than we had anticipated.
We are also still making use of expedited means of freight as we are emphasizing supplying our products and solutions. In addition, productivity in our manufacturing operation has also been impacted negatively by the supply chain turbulence. However, we expect this to normalize as supply chain challenges subside. Operating profit was ISK 21 million. EBIT adjusted for net special items amounted to ISK 35 million, or 20% of sales. Net special items cost items amounted to $14 million, mainly due to the cost saving initiatives. The effective tax rate was 22%. Net profit amounted to $7 million or 4% of sales. Go to the next slide, please. Here we have historical trends for the last 7 quarters. Cash flow has been impacted during the year by the supply chain situation.
Build-up of inventory, both for outsourcing finished goods of Bracing & Supports products, as well as build-up for safety stock and delayed raw material delivery. Free cash flow amounted to $12 million or 7% of sales. The net interest-bearing debt amounted to $382 million at the end of the quarter, and the net interest-bearing debt to EBITDA was 2.8, which is within the target range of 2-3. In line with our capital structure and capital allocation policy, we have temporarily paused share buybacks as we are at the upper end of the target leverage range. Over to you, Sveinn, again.
Thank you, Arna. The financial guidance for the full year 2022 remains 4%-6% for organic sales growth and 18%-20% EBITDA margin before special items. Currently, we estimate that our organic sales growth and EBITDA margin before special items will be around the lower of the guidance range. By applying the current FX rate, the EBITDA margin is expected to be negatively impacted by about 50 basis points for full year 2022. Cash tax is expected to be in the range of 3%-4% of sales, and based on the current mix of taxable income, the expectation is that the 2022 effective tax rate will be in the range of 23%-24%. That concludes the review of the third quarter. Let's go to the Q&A session, please.
Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Once again, please press star one and one if you wish to ask a question. Please stand by while we compile the Q&A queue. We will now take the first question. One moment, please. It comes from the line of Yiwei Xue from SEB. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking my question. I have two here. Firstly, on the component shortage, Sveinn, could you please indicate the impact from this? And would you also elaborate a bit on the back orders? When do you expect them to be delivered? Thank you. I'll do one at a time.
All right. Hi, Wei. On the main issues we have faced on the component shortage are on the electronic side, chips, batteries, and circuit boards. Our estimate that if we would have been able to produce to demand on the bionic side, our sales would, in the quarter, have been probably $2 million-$4 million higher in a normalized situation, let's say. I will though also say that in general, the supply chain is a bit tighter, and I would say the situation is not better than it was three months ago. We're still able to keep producing to demand across the board with the exception of bionics.
Wait. Can I just follow up here? Last quarter, you also mentioned there was back orders. Could you indicate if back orders have been increasing or it's been at the same level?
Yeah, it's pretty stable.
Okay. Yeah, thanks. My next question is regarding the freight cost because we have seen a big ease in the global freight market. Why haven't you seen this benefiting you? I can see your estimate on your cost headings here in the report. Your estimate in Q3 actually increasing compared to last quarter on this freight cost. Could you elaborate a bit here?
Freight costs have come down and are going down. We had anticipated to see a slightly bigger impact. There is some delay in the spot rates you see and the rates that we secure on a 1-2-month forward basis. That is one thing. The other thing is that we are bringing in much more volumes than we were bringing in the comparable period last year. Last year, we were still ramping up, especially our Asian vendors for finished goods Bracing & Supports. The units were much lower. We're bringing in much more volume today after having ramped up manufacturing. You can also see that in our inventory numbers, that inventory has gone up significantly.
Just to for you to cross-reference that argument. We expect to see a benefit on the freight side. What is also having a negative effect on our freight cost is that we are having to use expedited air freight to bring in raw materials into our manufacturing locations using expensive air and expedited sea freight as well. This all ties back to the tight supply chain situation.
Okay. Clear. Thanks. Bye. Thank you.
Thank you.
Thank you. Once again, as a reminder, if you wish to ask a question, please press star one and one on your telephone keypad. Once again, please press star one and one if you wish to ask a question. Participants, please, if you wish to ask a question, please press star one and one. There are no further questions at this time. Please continue.
Operator, can you give us a few seconds to record further questions?
Yes, of course.
Thank you.
We have one further question now.
Thank you.
One moment, please. It comes from the line of Christian Ryom from Danske Bank. Please go ahead. Your line is open.
Yes, good morning. This is Christian Ryom from Danske Bank. Just a question on how to interpret the cost savings that you are now implementing. Net of reinvestment, I understand that you expect to be realizing cost savings of around $10 million for next year, or roughly 1.5 percentage point on the EBITDA margin. What should we use as a starting point? Should we basically expect that to be incremental to where you expect the margin to end this year? Or how should we think about the impact of these cost savings? Thank you.
Yeah. Hi, Christian. That's a good key question. I'll give sort of try and give the big picture overview. I need to tie it back to both let's say pricing and unit cost, and then ultimately what we expect in inflation on our labor cost. Going into 2023, I will not give, let's say, expectation on margin in 2023. You'll have to wait until we guide for next full year. We will like we expect to realize price changes north of the price changes that we have implemented here in 2022. On the unit cost side, we do expect unit cost to taper off somewhat from having peaked this year, earlier this year.
Where freight is expected to decline. Also as we, let's say, the supply situation normalizes, we expect our productivity to go back to, let's say, previous levels. You get to the labor cost side. We have about $300 million of labor cost. We have, with these changes that we've done here in quarter three, reduced our labor cost. However, we will see labor cost inflation in all of our markets above, somewhat above average increases going into next year. You need to, I think, look at all of these factors combined and find.
Our underlying assumption is that we will navigate through this turbulence around inflation and supply chain complications with the underlying profitability in the business intact. I know this is not a very scientific answer, but I think these are the main components that you need to work with in order to make up your assumption for next year and the margin going forward.
Okay, great. That's very helpful. We showed sort of rough understanding is that the cost savings that you are implementing is essentially in part to address rising labor costs from inflation. Whereas the pricing increases is to a large extent a lever you pull to apply unit cost.
Yes. Exactly. The cost, let's say, reduction in cost now is both to give us some headroom to invest in or another way to look at it, we're reallocating part of our cost base towards areas where we see more growth opportunity. Part of the decrease in cost will fund the increase we see in our labor cost going into next year. Yes. Absolutely.
Great. Thank you very much.
Thank you.
Thank you. We will now take the next question. One moment, please. The next question comes from Niels Granholm-Leth from Carnegie. Please go ahead. Your line is open.
Yes, thank you and good morning. A question on your temporary stop for your share buyback. Could you give a little bit more color on the reason for stopping your share buybacks? Is it because that you're seeing a stronger and a larger pipeline of M&A opportunities? Secondly, could you remind us of the debt profile expires and how we should think of your net financing cost going into next year and the year after, basically? Thank you.
Yes. Hi, Niels. On the share buybacks, it's such that we are now in the very upper end of the range. Our net debt to EBITDA ratio has increased here in the last couple of quarters, both because we've made an acquisition of Naked Prosthetics here in August, but also we see free cash flow being unusually low because of the supply chain situation and mainly the absorption of cash and inventory. We are at the upper end of the range. Our M&A pipeline is there. It's not more or less active than what it has been in the recent quarters, but we are pausing share buybacks to maintain flexibility to do M&A as we are in the very upper end of the range.
We will evaluate on a quarterly basis to when we will restart the program. We will restart the share buyback program. But as we are now in the upper end of the range, it's our option to, let's say, preserve some flexibility for M&A. On the financing cost, we are currently in the process of refinancing our part of our long-term debt. We expect to see a net increase in net financing cost to the tune of $300,000-$400,000 on a full year basis from 2023 onwards, approximately.
Great. Thank you. Would you say that, for next year you would expect your net working capital to be reduced, as a percentage of sales?
Yes. I would expect, let's say, going back to, yeah, the pandemic, so let's say when we reduced heavily our, especially our, volumes from our finished goods suppliers in Asia, which we had to ramp up quite rapidly, from mid last year. We are seeing that impacting our working capital situation and also just the fact that we are having much more safety stock on a large range of our raw material needs. Absolutely, as we have much higher inventories than we would need in a more normalized situation. Yes, I would expect, somewhat of a reversal, but I'm cautious on timing just given the situation on the supply chain side remains quite tight.
Great. Finally, just a question on your freight cost. Given the most recent freight contracts that you have entered, would you say that it's fair to assume a major part of the ISK 10 million of extraordinary freight costs that you are experiencing this year will be eliminated next year?
I would expect a substantial part of that freight cost to go down, yes. Part of the increased freight cost is also using expedited air and sea freight. Yes, I would expect this to gradually normalize. I'm not gonna speculate on whether it will go down to pre-pandemic levels, but it will absolutely be one of the levers working with us going into 2023.
Great. Thank you.
Thank you.
Thank you. As a reminder, to ask a question, please slowly press star one and one on this telephone keypad. As a reminder, that is star one and one. Please stand by and press star one and one.
If there are no further questions, operator, we can go ahead and close the call.
Okay, no problem. In that case.
Yeah. If I can just close. Thank you very much for listening in and for the questions. Please reach out to our investor relations if you would like to have a meeting or if there are any follow-up questions after this call. Thank you very much.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.