Good day. Thank you for standing by. Welcome to the Össur Q2 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will hear an automated message advising your hand is raised. Alternatively, you may submit your question via the webcast. To withdraw your phone question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, 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 second quarter. My name is Sveinn Sölvason, and I'm the President and CEO, and with me here today is Arna Sveinsdottir, our CFO. We will begin by going through the highlights of the quarter and end with our guidance for 23. A Q&A session will then follow. If we start by going through the key takeaways, I'm very pleased to report continued strong sales performance across all regions and business segments. The growth was largely driven by volume growth in prosthetics and patient care, as well as favorable solution mix, where we are selling and fitting more high-end solutions. Additionally, we are seeing an impact from implementation of price increases in our prosthetics and Bracing & Supports business.
EBITDA margin increased from 18% to 19% between the comparable quarters. We are seeing a higher gross profit margin with increased productivity and lower unit costs, although I would say that unit cost is still above normalized levels. OPEX growth is mainly driven by inflation, both in terms of labor cost increases and other costs. Cash generated by operations is increasing as we are focused on reducing our safety stock within Bracing & Supports. Our leverage ratio is slightly above our target range, but we expect to be within the range before year-end. In line with strong sales performance, we are narrowing our organic growth guidance to the upper end of the range for 7%-8% organic growth, and the CapEx guidance has been changed to approximately 5% of sales.
I will cover this better towards the end of the presentation. Here we have an overview of growth across our regions and business segments for the quarter. Total sales amounted to $201 million, and organic growth was 11%, driven by, again, strong contribution from all our business segments and regions. In line with our strong sales performance in the first half of the year, we are firmly on track on our recently introduced Growth 2027 strategy, and I will cover the segments in more detail on the following slides, please. Here we have an overview of sales and EBITDA development for the last five quarters.
As we can see, organic growth is increasing in line with what we already mentioned, but I would also like to draw your attention to the favorable comparison we had in this quarter, and that we are coming up against stronger comparable quarters in the second half of 2023. If you go to the next slide, please. Here we have an overview of sales performance in prosthetics. Organic growth in prosthetics amounted to 18% in the quarter, and we had a strong performance in all regions, which can largely be attributed to strong volume growth and again, positive product mix. Our high-end solutions, especially our bionics portfolio, performed very well in the quarter, with strong contribution from our flagship Rheo Knee, as well as growth in the Power Knee.
Furthermore, we're also seeing strong performance in the newest version of our bionic Proprio Foot, which is now waterproof, which we launched here towards the end of April. This waterproof feature is on top of mind for many of our patients, and we're working further on introducing waterproof solutions. I'm also pleased to report that bionics accounted for 25% of prosthetic sales in the quarter, which is among the highest ratios we've seen historically. Moving on to the next slide, going into bracing and supports. Growth in the quarter can somewhat be attributed to price increases, but also volume growth. Again, growth was quite strong across all our regions, as in prosthetics, and we're seeing strong contribution from our high-end bracing solutions.
We continue to focus our efforts on executing in line with our Bracing Simplified strategy, which is aimed at providing our customers and partners with an increasingly simplified and stronger portfolio of bracing solutions and ease of doing business. Finally, patient care. Growth in patient care was driven by strong patient volume growth, as well as positive solution mix, across, again, all our regions, where we are seeing more fittings of high-end solutions such as bionics. Reimbursement increases very significantly between regions, where reimbursement is following inflation in some of our larger regions, while others are unfortunately still lagging behind. Note also that the historical figures for patient care show a comparison to quarters in 2021 that includes sales to the Department of Defense in the U.S., this specific outsourcing contract was discontinued by...
the Department of Defense towards the end of 2021, this largely explain the lower organic growth that we see in the second and third quarter of 2022. This concludes the overview of the sales performance, I can hand it over to you, Arna.
Thank you, Sveinn. Now we go through the PNL. Revenue growth was 11%, same as the organic growth. We had a positive contribution to our sales after acquiring Naked Prosthetics in the fall of 2022, sales was negatively impacted by changes in currency rates. The gross profit margin was 63% and is increasing compared to the same quarter last year. Following a couple of years supply chain challenges, we are starting to see increased productivity in manufacturing and some normalization in our unit cost. Trade cost is declining in line with our expectations, driven by lower rates and reduced bracing and support volume shipped from Asia. EBITDA amounted to $37 million on 90% of sales, despite currency headwinds and inflation-related OpEx growth, we are seeing an increase in our EBITDA margin.
In line with inflation, OpEx grew mainly due to higher labor cost and other cost increases, but this was partly offset by the cost-saving initiatives we announced last fall. The effective tax rate was 23%, in line with our guidance range. I am pleased to see that we grew our net profit by 10% in the quarter, even though interest rates are high and our leverage ratio is above our target range. If you can go to the next slide, please. Now I would like to turn our attention to the cash flow and leverage. As in previous quarters, cash flow continues to be impacted by increasing inventory in the first half of 2023.
We are currently over-invested in inventory, mainly to secure bionic production, but also due to a buildup of bracing and support products in the last two years, due to the global supply chain challenges. We have begun to lower our bracing and support safety stock. Inventory levels are expected to gradually normalize. Capital expenditures are unusually high in the quarter due to investments in scaling our Össur Log concept and expansion of key location, impacting our cash flow generation. Net interest-bearing debt amounted to $410 million at quarter end. The net interest-bearing debt to EBITDA was 3.1, slightly above the target range of 2 to 3 times EBITDA. All else equal, we expect the leverage ratio to be back within our target range before year-end.
Because of our leverage ratio and in line with our capital structure and allocation policy, we continue to pause share buybacks until the ratio is back within our target range. Sveinn, it's you again.
Thank you, Arna. Now finally, on our guidance, in line with what I have covered previously on the strong sales performance year to date, and bearing in mind the also stronger comparable quarters coming up in the latter half of the year, I am happy to be able to narrow our organic growth guidance to the upper end of the range to 7%-8%. EBITDA margin in the first half of the year is 17%, same as in the first half of 2022. As already mentioned, the second half of the year is stronger in terms of sales and therefore, relative margins. All else equal, given current FX rates, we expect the EBITDA margin to be in the range of 17%-20%. Given current outlook, we expect to be around the middle of the range.
Capital expenditures in the first half of 2023 amounted to 6% of sales. CapEx in the second quarter of 2023 was above normalized levels, mainly due to investments made to support further growth. Due to the impact, we expect CapEx to be approximately 5% of sales for the full year. CapEx relative to sales is therefore expected to be in the higher end of in 2023, so compared to the average historical levels of 3%-4%. Guidance for effective tax rate remains unchanged in the range of 23%-24%. That concludes the review of the quarter, and let's go to the Q&A session.
Thank you. 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, please press star one and one again. If you wish to ask a question via the webcast, please type it into the box and click Submit. We will now go to your first phone question. One moment, please. Your first question comes from the line of Tobias Nissen from Danske Bank. Please go ahead.
Yes, good morning. Thank you for taking my questions. I have 3, at least initially. First question is on the ASP contribution in your product sales business this quarter. I believe our understanding was that you had roughly 3-4 percentage points of pricing contribution to growth in the first quarter. Was it on a similar level here in Q2, of anything, any special developments we should keep in mind there?
That's the first question. I think I'll take them one by one.
Hi, Tobias. Thanks for your question. The answer to that is yes, on the pricing. We've increased the pricing in our prosthetics business and on our, in our bracing business. Price increases on the patient care side will be in line with what is ultimately being done on reimbursement in the respective countries where we operate patient care. And the landscape there is very much, very fragmented, I would say. Everything from price increases that are in line with the underlying inflation to areas where we don't see any changes in reimbursement. The simple answer is that pricing, impact of price increases is to the tune of 3%-4%, and it's mainly on our product business.
Okay. It's 3%-4% for the group?
Yeah.
Yes. Okay, great. Second question is on the freight savings. You are targeting these $6 million-$7 million in annual savings for this year versus last year. How did the run rate of those savings develop here in Q2 versus Q1? Did you see an increased level of savings here in the second quarter?
We are seeing pricing as planned, as we expected. Run rate is in line with what we have previously communicated, just like you said.
Okay. I think what you said was that in Q1, you were still at, say, closer to $1 million for the quarter, expecting to ramp, with savings expected to ramp a bit further during the year.
Yeah. We are seeing now in the Q2, we are seeing the same to be around $2 million compared to $1 million in the first quarter. We are on track with what you expected.
Okay, great. Thank you. The final question. Relative to these roughly 10% organic growth that you saw here in the first quarter, the implied guidance for the second half expects or implies that growth should roughly half to around, say, mid-single digits in the second half. The slowdown that you expect there, is that to be expected mainly on the product sales business or the patient care business? Where do you see the most difficult comps, essentially?
Tobias , let's say if we look at the last year and the quarters that we're now going to be comparing against are stronger quarters, especially quarter four. I think that's the main thing that sort of guides our view on how we are positioning the full year guidance. We expect just a maybe a moderate slowdown on top line, but we still have good momentum across all our regions and all markets. It's mainly the comparison side.
Okay. Nothing specifically to call out between products and patient care?
No, not specifically.
Okay, great. Thank you very much.
Thank you. Once again, if you would like to ask a question, please press star one and one on your telephone keypad. If you wish to ask a question via the webcast, please type it into the box and click Submit. We will now go to our next phone question. The question comes from the line of Martin Brenøe from Nordea. Please go ahead.
Hi. Thank you very much for taking my questions. I have two, if I may. First of all, I would like to hear maybe a little bit more color on the bionics, on prosthetics, just to understand what exactly have driven the larger penetration. Is it merely the fact that it's in free float, or have you done anything from a commercial perspective to push these products? That would be the first question.
Hi, Martin. Yes, I mean, what the bionics growth in the quarter is driven by all of our key bionic products, meaning Rheo Knee, Proprio Foot, Power Knee, and our Touch Solutions or hands. We have, if we compare to the same period last year, we are. Obviously, the Power Knee is growing, as we had only launched the Power Knee in the beginning of 2022. We have growth over 2022, good growth over 2022 on the Power Knee. We launched the Proprio Foot here in quarter two, which is also contributing very nicely. I think it's fair to say also that there is some impact of pent-up demand of some sort.
I mean, we are coming out of this period of last couple of years, where the demand side has been impacted by slowness or let's say, limited access due to COVID. There is some sort of impact from pent-up demand in the prosthetics industry. I think that's clear. On the bionics, the simple answer is that we are seeing good progress on simply as a bigger portfolio of strong bionic products.
Okay. Makes sense. Then my second question, before I jump back to the queue, would be on your profitability guidance.... you are guiding for implicitly guiding for a 17%-23% EBITDA margin in the second half, if my math is not completely wrong. Now we just heard that the freight is, you are halfway done with the savings there in the first half. What exactly will make you able to go above 20% EBITDA margin in the second half? Thank you.
At the end of the day, I mean, sort of, EBITDA margin development and growth, and business mix go hand in hand. Depending a bit on sort of how growth will develop for our different business segments, how much progress we're able to make on the unit cost side, OPEX growth is a little bit front-end loaded for the year. Yeah, how quickly we're able to get back on pre-COVID unit cost levels. I think that is, I think these are some of the considerations that you need to look at in order to estimate sort of how we end up on the EBITDA margin for the full year.
Do you think it's mainly operating leverage, so higher sales overall-
Yeah.
that will be the key factor here?
Yeah.
Okay. All right. I'll jump back in the queue.
Thank you.
Thank you. There are currently no further phone questions. I will hand the call back to you.
Maybe we can just leave the line open for a little while and see if there are other questions. We can see here in the box that there's a lot of incoming calls scheduled.
Of course. We do have one further question now.
Yeah.
One moment, please. Just before I open the line, as a reminder, if you'd like to ask a question on the phone line, please press star one and one on your telephone keypad.
Could you open the line, please, for Niels Granholm-Leth at Carnegie?
Sorry, sir, I've already opened Martin's, but I will open his next.
Okay.
Thank you.
Okay. Thank you.
Martin, your line is open.
Hi. Thank you. Yeah, sorry about that. I thought I would jump back in the queue if there were no further questions, but just one follow-up question also a little bit related to Tobias's question. I mean, momentum has actually accelerated for the last few quarters for you. I guess I understand that you have a comparison base, which is a bit tougher perhaps in Q4, but can you maybe say how was the momentum through the quarter? Did you also accelerate there, or was there some pent-up demand during the quarter that made it peak early in the quarter?
No, I would say that the momentum has been quite consistent here during the year as such. Remember, Quarter one was the first quarter we were no longer comparing to the headwind from not having sales to Russia and not having sales to the Department of Defense in the U.S. These things are now out of the system, and that is one, a very big part of the step up in the sales trend. Please keep that in mind also. No, we haven't seen any acceleration as such in the last months. Please remember also that quarter two was very weak last year, where we had -1% organic growth rate.
Okay. Thank you so much.
Thank you.
Thank you. We will now go to our next question. One moment, please. Your next question comes from the line of Niels Granholm-Leth, lead from Carnegie. Please go ahead. Your line is open.
Good morning. Thank you for taking my question. There seems to be something wrong with the software. I was trying to push star 1. Anyway, my first question would be on the revenue effect from Naked Prosthetics. Could you elaborate on the effect it had on the quarter? Secondly, could you also talk about if there was any channel filling effect from your launch of the Proprio Foot in the quarter, or if all orders are basically built to specific end users? Thank you.
Hi, Niels. Thanks for your question. Sorry about the complications around the system. On Naked Prosthetics, our expectations around Naked Prosthetics was that this would be accretive for our growth rate. This is a solution that is vastly or addresses a vastly a problem, let's say, that is where the utilization is very low among partial hand amputees. It simply, it's growing in line with our expectations. I mean, there's the pro forma impact is about, what was it? 2 percentage points, almost on just pro forma reported growth, and organic growth is a strong double-digit organic growth rates. Yeah, did I understand your question correctly on the Proprio Foot?
I mean, this is just all off the shelf products. There's no customization as such, and the Proprio Foot is definitely one of the drivers for our strong bionics performance in the quarter.
Would that mean that the Proprio Foot is since it's an off-the-shelf product that it actually generates a certain degree of channel filling when you launch the product?
No, I wouldn't say so. I mean, most of our independent clinical customers who are ordering the Proprio Foot, it's an expensive product. It's ordered specifically for a patient that's either pre-approved or it has been eligible for reimbursement. No, I would, I wouldn't, I'm quite confident in saying that there's no element of channel filling as such around the Proprio, no.
Right. Could you just talk about the timing of the launch of your next generation Rheo Knee?
That's still on target for a limited launch here on either side of the new year, or yeah, late this year or early next year, as in limited launch. We're still on track for that.
Okay. You're not anticipating any revenue contribution from the new Rheo Knee in this fiscal year?
That would be limited.
Okay, thank you. Just finally, in the beginning, you talked about still being over-invested in inventories. Could you talk about the timing of and normalization of your networking capital?
Yes. We are still over-invested in inventory. Like we said, we have too high inventory in bionics component. We already started to see Bracing & Supports inventory decrease in the first half of the year, and we expect that to continue for the remainder of the year. At the same time, we are preparing for launches, like Sveinn mentioned, for new products at the end of the year. We will remain high in bionics components probably until end of the year. It will be balanced, reduced in Bracing & Supports, but still a bit high on bionic components.
I think it's fair to say that our over-investment in inventory is to the tune of $15 million-$20 million.
Yes, still it is.
Okay, right. Then just finally, on your M&A pipeline, how do you view the pipeline right now and the full year effect from M&A? How would you assess this at this point?
I mean, we have an M&A pipeline, both with regards to strengthening our product, the product side of the business, and also with regards to patient care. I think the best answer I can give is that referring back to our capital markets day, where we expect contribution from M&A to be a couple of percentage points, 2-3 percentage points on average, on a yearly basis. Yeah, I think that's what we can say about that. Yes. I think
Okay, great. Yeah. Thank you.
Thanks a lot.
Thank you. We will now go to our next question. One moment, please. Your next question comes from the line of Yiwei Zhou from SEB. Please go ahead. Your line is open.
Hi. Thank you for taking my question. Can you hear me?
I hear you loud and clear. Hi, Yiwei.
Hi, Sveinn. Hi, Arna. I have two questions left here, and I'll do one at a time. Firstly, could you maybe add a bit of color on the higher CapEx spending? You mentioned in the report is relating to the scale-up of Össur leg solution and also expanding to the key locations. Should we expect this scale up continue into next year?
No, this is a bit just the timing and lumpiness of CapEx spending. The, a big part of the investments recorded this quarter is to grow our Össur Leg concept of, and our capacity basically in the U.S. As a reminder, the Össur Leg concept is around selling, yeah, full legs and offering our customers a, an ability to outsource some of the customization work to us. This is something that we've seen grow nicely in the last couple of years. We are investing into scaling our facilities in that regard. The other expanding our R&D capacity here as well. That are simply the main reasons.
This is just a little bit timing rather than anything else, and we don't expect these levels going forward.
I just want to follow up here. I remember a year ago, you talked about the introducing the Leg solution to certain European countries have been quite challenging, because it's difficult to educate your the OB clinics in Europe. Is any sort of market dynamics has changed now, or could you give us an update on the progress?
No. I mean, we are still, we firmly believe in the concept around Össur Leg, U.S. has been a market where we have gone first to market, let's say, with this strategy or this approach, and it has worked well. We will also gradually build this business here in our key European market. That is, that still remains the plan, we are confident that this is a strong value proposition.
Okay. Good. Thank you. My next question is relating to the variable compensation. You said it is higher in the quarter. Is it possible to quantify a bit of the impact on earnings? How should we look at it into the second half?
Let's say, I mean, the growth in cost, the year-over-year, is principally driven by inflation. We have higher than average increases in labor cost and other costs. Also we are comparing to quarters where we had very little or even negative organic growth rates, so variable compensation is growing year-over-year. That is what we are trying to explain in the announcement, the sort of how or what is driving OpEx growth in the quarter, which is at the high end, due to these factors. No, we have not split up what is just normal merit or normal labor cost increases versus what is the variable component. The main component is just the increase in salary cost due to inflation.
Okay, fair enough. Thanks. I'll jump back to the queue.
Thanks, Wei.
Thank you. There are currently no further questions. I will hand the call back to you.
All right. Thanks, everyone, for calling in and for asking questions. Please reach out to our investor relations team if you would like to have a meeting or if there are any follow-up questions, I would just like to wish you all a good day and a good summer. Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.