Good day and thank you for standing by. Welcome to the Össur Q4 and full year results for 2022. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, you can please press star 1 and 1 again. Please note that today's conference is being recorded. I would now like to hand over to your first speaker, Mr. Sveinn Sölvason, President and CEO. Please go ahead, sir.
Thank you very much. I would like to welcome you all to the Össur Investor Conference Call, where we will cover the results for the fourth quarter and full year 2022. My name is Sveinn Sölvason, and I am the President and CEO. With me here today is Arna Sveinsdottir, our CFO. We will begin by going through the main topics that impacted performance in 2022, then move into highlights for the quarter and the year, ending with our guidance and a Q&A session. If we go to the next slide, please. Despite a challenging external environment, we grew the business in all our regions and business segments, and will cover the growth in more detail as we go through the presentation. We remain focused on growth through innovation and have continued our investment in research and development.
In 2022 growth in R&D investment outpaced our organic sales growth. We were proud to launch the Power Knee at the beginning of the year and have been very pleased with how positively it has been received in the market. We continue to focus on growing the business through acquisitions. In August, we announced the acquisition of Naked Prosthetics, which strengthens our position in the market for upper limb prosthetics. We continue to manage supply chain challenges, including shortages of certain raw materials and components that has also affected our productivity and cost of goods sold when we look at the year 2022. Also a topic that we'll touch on later in this presentation.
In quarter three, we made organizational changes and initiated cost savings to support further growth and profitability, and simplified operations to better leverage some of our key locations. Total annual cost savings amount to about $15 million, of which we plan to reinvest around one-third into our growth initiatives. In 2022, the dollar strengthened against the euro and other key functional currencies, which resulted in adverse effect on reported sales of about $50 million, which led to the flat reported growth year-over-year in US dollars. If we go to the next slide, please. The last three years have been impacted by various external factors. Here you can see the development in sales from 2020 to 2022, as well as organic and local currency growth.
In the period 2015-2019, we had a fairly stable organic growth of around 5%. In 2020, sales declined due to the impact of COVID-19, and in 2021, we rebounded well and grew organically 10%. If we look at the last couple of years, 2021 and 2022, the prosthetic segment has demonstrated solid growth, especially bionics, which we'll go into more detail with on the next slide. Demand for bracing and support products and activity in our clinics has been impacted over certain periods by lower patient volumes on the bracing side and some capacity constraints due to lack of staffing impacting both bracing and our clinics. In 2022, there are also two specific topics that have impacted organic growth.
The discontinuation of the outsourcing contract with the Department of Defense in the U.S., which we announced in the beginning of 2022, and the continued suspension of sales to Russia. These two events have impacted organic growth by about 2 percentage points negatively here in 2022. If we go to the next slide. Bionics remains a very important growth driver for us. Only a small part of the amputee population today has access to bionics, and we remain committed to improving that access. Over the last decade, bionics as a percentage of prosthetic component sales has increased by about 10 percentage points. Q4 was the largest quarter in sales of bionics that we've had. The Power Knee contributed well this year. The Power Knee has been on the market for years.
This year, we, however, launched an improved version, and despite being challenged with supply chain complications to sale, sales of Power Knee in 2022 contributed to a 1 percentage point on organic growth. We are optimistic on the potential of powered prosthetics. Going into 2023, the Power Knee will be one of our key focus areas, as well as other product launches in bionics that we expect in the second half of 2023. Now, supply chain has been a big topic in a couple of years, and here we have an illustrative picture to review some of the main items that are impacting our unit cost, which have been freight, raw material prices, productivity, and now labor cost inflation. Freight rates have been the main contributor.
Freight rates have already come down, so we foresee freight costs to decrease in 2023. Although we are still using more expensive means of freight for some raw materials. Inflation in raw material prices has increased here in 2022, which we expect to ease off somewhat in 2023. Labor cost increases were moderate in 2022. However, it will be higher in here in 2023, and labor cost represents about 30% of our unit cost. Due to mainly sporadic delivery of certain raw materials and components, we have operated with some overcapacity in our manufacturing setup, an estimated impact of 50 to 100 basis points on the gross profit margin.
The net impact of all of this is that our unit cost has increased or grown about 10% here in 2022, of which the majority is temporary in nature. We will see stable to moderate growth in unit cost here in 2023, principally driven by labor cost inflation, however, outweighed by lowering freight cost and increased productivity as supply chain regains balance. Moving on to the details around the quarter performance. Here is an overview of the growth in our three regions and product segments for the quarter. Sales were strong here in quarter four, amounting to $191 million, which corresponds to 6% organic growth. Sales in 2022 amounted to $719 million, corresponding to 5% or 4% organic growth in line with our guidance for the year.
Sales were strong here in Americas and EMEA, driven by prosthetics. Australia also contributed to the strong organic growth in the quarter while China was again affected by some of the COVID-19 related restrictions. Prosthetic sales increased by 7% organic. bionics were particularly strong accounting, yeah, for 25% of prosthetic component sales here in quarter 4 compared to 23% in the same quarter last year. Bracing and support sales increased by 5% organically. Patient volumes recovered somewhat towards the end of the quarter in Americas and hospitals were claiming less impact from last lack of staffing. With that, over to you, Arna, on the P&L, please.
Thank you and good morning. I will go through the P&L highlights for quarter four. Organic growth was 6% as previously stated, reported growth was 2% in the quarter. Reported sales were negatively impacted by $14 million due to currency movements, which corresponds to around 18 percentage points negative effect on the reported growth rate. The adverse FX impact is primarily due to the strengthening of the US dollars against euro and other key currencies. The gross profit margin was 61% in the quarter. Cost of goods sold was adversely affected by the beforementioned supply chain challenges, causing higher costs, adverse impact on productivity and product availability. Operating profit was $21 million. EBIT amounted to $34 million or 18% of sales. The effective tax rate was 21%. Net profit amounted to $13 million or 7% of sales.
Next slide. Here we have historical trend for the last eight quarters. This was a very unusual year with regards to cash generation, which is generally one of our strong points. Cash flow has been adversely affected by increase in receivables and supply chain challenges resulting in higher inventory, largely a safety stock due to long lead time, delay in raw material delivery, and uncertainty in the supply chain. The net interest-bearing debt amounted to $404 million at year-end 2022, and the net interest-bearing debt to EBITDA was 3.2, which is above target of 2 to 3. Net interest-bearing debt increased by $22 from quarters 3 to quarter 4, mainly due to renewals of lease contracts leading to an increase in lease liabilities and contributing to higher leverage ratio. We expect the leverage to be within our target range in 2023.
In line with our capital structure and capital allowance policy, we continue to pause share buybacks. Here's an overview of the growth in the three regions and product segments for 2022. Prosthetic sales increased by 4% organic, mainly driven by EMEA, Americas, and Australia. Sales for bionic products amounted to 10% of prosthetic component sales in 2022. Bracing and support sales increased by 3% organically. Take a look at next slide. Now we see P&L highlights for the year. Organic growth was 4% and reported growth was flat in 2022. Reported sales were negatively impacted by $47 million due to currency movements, which corresponds to around 7 percentage points negative effect on the reported growth rate as we showed you earlier.
The gross profit margin was 61% for the year, but 62% excluding special items, mainly in connection to cost-saving initiative announced in Q3. Cost of goods sold was affected by $13 million in 2022 due to higher freight cost and inflation in raw material prices compared to pre-pandemic levels. Thereof, higher freight cost was $10 million. Operating profit was $60 million. EBITDA adjusted to net special items amounted to $128 million or 18% of sales in line with guidance. Net special items costs amounted to $40 million, mainly due to the cost-saving initiatives. The effective tax rate was 23% for the full year. Net profit amounted to $43 million or 6% of sales. That closed the P&L review. Over to you, Sveinn.
Thank you very much, Arna. Now on our guidance, the organic sales growth outlook for 2023 is expected to be in the range of 4%-8%. The key factors impacting sales growth will be effect from price increases, stability in product supply, impact from new product launches, and successful execution in emerging markets. The EBITDA margin before special items is expected to be in the range of 17%-20% for the full year 2023. An underlying increase in profitability is expected, supported by sales growth and by improved sourcing of raw materials and components, as well as growth in higher margin products and scalability in core operations. Freight costs, which has been the main contributor to higher supply chain costs, is expected to decline, while other input cost is expected to be stable or grow moderately.
Inflation is estimated to affect cost of goods sold as well as OpEx during the year, cost savings related to the restructuring activities made in Q3 in 2022 are expected to partly offset this effect. By applying current FX rates, the EBITDA margin is expected to be positively impacted by about 30 basis points in 2023. Cash backs in the range of 3%-4% of sales and based on the current mix of taxable income, the expected effective tax rate is in the range of 23%-24%. That concludes the review for the quarter and the full year. We can now go to the Q&A session.
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, you can please press star one and one again. Once again, it's star one and one if you have any questions or comments. We are now going to proceed with our first question. The first question comes from the line of Benjamin Silverstone from ABG. Please ask your question. Your line is open.
Thank you very much. Good morning, Sveinn and Arna. I hope you are well. My first question is regarding price increases for 2023. You did mention it, could you just reiterate how you see it on a group level for 2023? I do know that you mentioned that some areas will be close to zero, while some will be full inflation, price increase. Just to get an idea of what we should expect on a group level, that would be much appreciated. Also how you expect the salary cost component for 2023 to develop, that will also be helpful. Thank you. My second question is regarding the CMD for March. Could you just elaborate a little bit on what we should expect to hear about here? Also in terms of the current gearing, are there any?
Are there anything holding you back when you look at any strategic reviews for 2023 or for the CMD, given the current gearing, or is the gearing just something that is still being worked on but not having an impact per se? Thank you so much.
Hi, Benjamin. Thanks for your questions. On the price increases, this is a major topic for us. Let's say what we did see in 2022 is that average price increases on the product side were between 2%-2.5%, something along those lines. What we look at when thinking about and evaluating our potential to increase prices is what the reimbursement systems are doing, because that's what our own clinics and what our customers are faced with in terms of ability to pass on to the ultimate payer. We see price increases in some of the systems that we operate in, while some systems have not done any price increases. What we have done is we've approached price increases on a regional basis.
What I can say now is that we expect price increases on average for us to be north of what we achieved in 2022. On average, higher price increases to the tune of, yeah, maybe 1-2 percentage points, something like that, above the 2022 increases. That would be my guidance on that. Salary increases, we expect the salaries to increase around on average 5%. Again, regional variances depending on regional variances in inflation, but that's sort of what we have implemented across most of our regions and is our effective increase in labor cost going into 2023. The Capital Markets Day, we will hold the Capital Markets Day here towards the end of the quarter on the 13th of March.
What you will hear about there is a combination of continuity and new themes. We will go into more detail with that on the Capital Markets Day itself. I'm not gonna go in much more detail here. At the end of the day, it will be about growing access for mobility solutions for more individuals across the team, across the whole portfolio that we are operating in, and we'll get more into details with that in the Capital Markets Day. On the gearing, finally, yes, gearing is above our target range, mainly because we have been implementing or signing new lease or contracts here in our real estate portfolio.
That has pushed our gearing a little bit above the target range, but we expect to be well within the range here in 2023. I don't expect this to have any impact on our ability to pursue our strategic objectives. Thank you.
Thank you very much, Sveinn. Much appreciated.
Thanks.
We are now going to proceed with our next question. The question comes from the line of Christian Rasmussen from Danske Bank. Please ask your question. Your line is open.
Yes. Good morning. I have 3 questions as well. Thank you for taking them. The first is on the gross margin. Can you elaborate a bit more on, say, the specific drivers here in Q4 and in particular, the supply chain challenges that you are alluding to? What specifically is that? And maybe tagged on to that, a question of what the gross margin impact is of the higher bionic sales that we've seen in this quarter. That's the first question. The second question is, you previously talked about order backlog and supply constraints for particularly the Power Knee. I don't see any mentioning of that in the report out this morning. Is that to be understood that that backlog has now been cleared?
Then a final question is on any comments you can add, around the phasing of growth, here for 2023, whether we should expect growth to accelerate during the year or of say, any other dynamic. Thank you.
Thank you, Christian. On the gross profit margin, the main themes around our gross profit margin has been freight costs, increase in raw material prices, although that remains somewhat volatile. We've seen some easing off of that here towards the end of the quarter or end of the year for some, but not for others. And then there's been the productivity/labor cost component. Now, we do expect freight to come down significantly here in 2023, but our supply chain challenges has been around electrical components on the bionic side. Again, our volumes are low.
We're often dependent on single source suppliers, so our supply chain has been a bit stretched, and we've had to also spend effort and resources and time on re-engineering or changing some of the protocols around some of our high and more complicated products. Also going back to productivity, because of sporadic delivery on certain raw materials, we've had to operate with some level of overcapacity in our manufacturing organization. It has been several factors that have impacted the gross profit margin. Simply most importantly, it has our unit cost has simply outgrown or grown at a faster rate than we have implemented, been able to implement price increases.
Going into 2023, you will see some of those points easing off in terms of pressure on the, on the unit cost, and we will see higher price increases than in 2022. Ultimately this will find, or we will regain our balance here. On your second point regarding the backlog on the Power Knee, yes, we are not mentioning any backlog on the Power Knee, but it's important to note that we have scaled back our commercial efforts earlier in the year because of our inability to supply to demand. Yes, we don't have a backlog, but if we would have been able to keep up, let's say supply all is equal, we would have sold more units in last year.
We are cautiously optimistic on Power Knee will be a growth driver for us here going into 2023. Now, regarding the growth phasing we did, the first part of last year, especially quarter two, was weak. Remember, quarter one was also some COVID-related impact. We should have easier comparison here in the first half of the year, at least when it comes to growth year-over-year comparison. I hope that addresses your points.
Yes, it does. Thank you very much. Just maybe a quick follow-up on the say, commercial support for the Power Knee? Where are you today? Have you sort of scaled commercial efforts back up or are they still at a reduced level?
We are, let's say the Power Knee has been mostly available or most of the sales we had on the Power Knee in 2022 were in the U.S. market, and we have. Yes, I mean, our commercial effort there on the Power Knee will be in full force here in 2023, and we will selectively push the Power Knee in European markets where we will have access or where we will have reimbursement support for that product, which is in selected European markets. So we will continue to emphasize the Power Knee here going into 2023. Yes, for sure.
Okay. Thank you.
Thanks.
Once again, as a reminder, if you have any questions or comment, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, you can please press star one and one again. Thank you. We are now going to proceed with our next question. The question's come from the line of Niels Granholm-Leth from Carnegie. Please ask your question. Your line is open.
Good morning, thank you for taking my questions. The first question on your networking capital, which is a little higher than normal. How quickly would you be able to normalize your networking capital? Secondly, a question on freight costs. Given the current freight rates, which I thought used to come down quite a bit, how quickly would you expect the current freight rates to be fully replicated into your freight costs? Then lastly, are you experiencing any effect from hospital strikes or staff shortages, as to the number of new patients that you treat? Thank you.
Hi, Niels. Thanks for your questions. On the networking capital side, we are very much over-invested on inventory. That relates both to our finished goods on the bracing side, where we work with vendors mainly in Asia. That goes back to the COVID-19 period where we suppressed demand from these vendors, but then again had to scale up quite quickly here in the beginning of 2022. We are, yeah, we are very much over-invested on the inventory side. This has also impacted our freight cost because we've been bringing in, building inventory at a time where freight costs have been high.
We've been bringing in more volumes at an average unit cost per container shipped at a much higher rate than the average rates are going into 2023. Our cautious estimate is that freight cost in 23 over 22 will be at least $7 million lower, just to give you a firm number on our expectations there. I hope that, yeah, and to maybe add a bit more concrete on the networking capital as well, I mean, we expect that we will release in 23 up to $20 million from inventory, into our free cash flow. Accounts receivables are also on the higher side.
There's nothing structurally changing there. We ended the year with very strong sales, so there's some cash absorption also on the AR side. We do expect these things to contribute to a more normal, let's say, cash flow year going into 2023. Finally, on the staffing, no, we've not had any feedback from the field in terms of this having a particular impact on our business. I mean, staffing levels have been a challenge, especially, we feel on the U.S. side throughout 2022 impacting elective procedures, impacting patient volumes. Our feeling is that this is easing off somewhat going into the year. Yeah. I'm sorry I don't have more details on that.
Okay. Thank you.
Thank you.
Once again, as a reminder, if you do have any questions or comment, please press star one and one on your telephone and wait for your name to be announced. It's star one and one on your telephone to register for questions. Thank you. We are now going to take our next question. It's from the line of Christian Rasmussen from Danske Bank. Please ask your question.
Hi. Hi again. Just a quick follow-up, if I may. Can you elaborate a bit on your expectations for your net financial costs? Particularly how, say, higher interest rates will impact that line here for 23. Thank you.
Yes, Christian. I think we have an estimate of around $3 million-$4 million higher finance cost going into for full year 2023, just reflecting higher base rate on our debt. About half of our debt is a fixed rate contract that were signed let's say well before we saw the changes in the financial e-environment. On our floating rate debt, we will see higher interest rates, yeah, impacting net financial cost probably to the tune of $3 million-$4 million for 2023.
Okay. Great. Thank you very much.
Thank you.
We are now going to proceed to our next question. It's again from the line of Christian Rasmussen from Danske Bank. Please ask your question.
That's probably a mistake. I'll lower the hand here. Thank you.
We have no further questions at this time. I will now hand back the conference to you for closing remarks.
Thank you very much. Just a repetition of what was earlier mentioned that we are hosting a Capital Markets Day on Thursday, the thirtieth of March in Copenhagen. There we will go through our strategy outlook, and we'll send out a save the date at the beginning of February with all the details and look very much forward to seeing you all there. Thanks for your questions. Thanks for your participation. Please reach out to our investor relations if you would like a meeting or have any follow-up questions after this call. Thank you very much and have a nice day.
This concludes today's conference call. Thank Thank you for participating. You may now disconnect your lines. Thank you.