Good day and thank you for standing by. Welcome to the Össur Q2 Results 2022 Conference Call. At this time, all participants are in a 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 slowly press star and one on your telephone. You will then hear an automated 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 our speaker today, Sveinn Sölvason, President and CEO. Please go ahead, sir.
Thank you very much. I would like to welcome you to the Össur Investor Conference Call, where we will cover the results for the second quarter of 2022. My name is Sveinn Sölvason and I am the President and CEO. We will go through the highlights for the quarter and a question-and-answer session will then follow. Sales amounted to $181 million, which corresponds to a negative 1% organic growth. Sales growth continues in EMEIA and all key markets in APAC except for China. It is good to see that Australia is now back on track in the quarter. As projected, China was impacted by the COVID-19 related lockdowns, and we continue also to suspend all sales to Russia due to the ongoing war.
Sales in Americas were slower than expected, as sales were affected by the supply chain challenges that we will elaborate on later, as well as some capacity constraints in the market overall due to mainly labor shortages. We foresee that the supply chain cost inflation will further increase cost of goods sold for the full year than what we estimated at the end of last quarter, an additional $2 million. We implemented sales price increases in quarter one and seek to increase prices further in 2022 and mainly in 2023, which are eventually estimated to absorb the increases we see in our unit cost. EBITDA amounted to $33 million or 18% of sales. As per our announcement on Monday, 18th of July, we revised our organic growth guidance and EBITDA margin before special items for the full year, and we will go through that here towards the end.
If you go to the next slide, please. Looking at the sales by geographies and product segments. Prosthetics sales declined 1% organic, again, mainly due to the softer sales in America and some of the supply chain complications. However, sales were quite strong in most of our key markets in EMEIA or continue to be strong in our key markets in EMEIA and APAC. Besides, as previously mentioned, China. Sales of bionic products accounted for 18% of Prosthetics component sales in the quarter, compared to 19% in the comparable quarter last year. The POWER KNEE continues to receive outstanding feedback and is in high demand. But again, due to shortages of certain electrical components, we have experienced orders and backorders on the POWER KNEE , and this has affected our bionic sales here in quarter two. Bracing & Supports sales declined by 1% organically.
Sales of Bracing & Supports products were good in EMEIA and APAC, while the macro environment in America seems to have negatively impacted volumes of elective procedures which, yeah, ultimately has impacted volumes in the Bracing & Supports markets. Now going to the next slide, please. A few comments on the P&L. As previously stated, 1% negative organic growth, and reported growth in dollars down 5%. There are major changes in FX rates impacting our reported dollar sales amounting, or the impact is about $12 million compared to the same quarter last year, which corresponds to around 6 percentage point effect from currency changes. It is again, mainly due to a stronger dollar versus the euro and other key operating currencies for us.
The gross profit margin reflects the environment around the supply chain, mainly affected by increase in unit cost due to higher freight cost and inflation in raw material prices. It is, as in previous quarters, high ocean and air freight rates, as well as our increased use of expedited freight, both sea and air, to support production and demand. These are the main drivers. Then we have also now experienced some shortage of certain components, which has also had some raw materials, which has also had some negative impact on our productivity. But we are working hard to optimize the situation. OpEx is rather flat in the quarter. Effective tax rate 24%, around the level we have guided for. Net profit impacted in dollar terms by the previously mentioned items is amongst the $14 million or 8% of sales. Now, if we go to the next slide, please.
Here we have some trends for the last six quarters. I want to highlight particularly the cash flow. Free cash flow was very low here in the quarter in all comparison. The main reason here is we do have a little bit higher AR than normal. Normally, AR is high after the month of June, which is a big sales month for us, but the DSOs have come off a little bit, but this is something we expect to normalize. Now, the main reason for the low cash flow is that we have been building inventories, and of both raw materials and finished goods as means of building up higher safety stocks due to the uncertain environment around the supply chain.
It is also worth mentioning that during the COVID time, we did reduce capacity also with some of our finished goods vendors, and it has taken time to build that up again. We are sitting on some high inventories now for particularly finished goods around Bracing & Supports that we source from finished goods vendors. Now, net interest-bearing debt amounted to $367 million at the end of the quarter, and net interest-bearing debt or EBITA was 2.7 x, which is within the target range of two to three times. We go to the next slide, please. The financial guidance for 2022 has been revised as previously stated, due to now lower than expected sales, and higher than expected supply chain costs for the full year.
The financial guidance for 2022 is 4%-6% organic sales growth, previously 6%-9%, and 18%-20% EBITDA margin before special items, previously 20%-21%. Currently, it is our estimate that organic sales growth and EBITDA margin before special items for the full year will be around the middle of the new guidance range. The revised financial guidance assumes that quarter three and quarter four will be largely unaffected by any further disruptions as a result of COVID-19. In addition, at current FX rates, sales are estimated to be negatively affected by around, or let's say, the US dollar reported sales are estimated to be negatively affected by around 6 percentage points for the full year. Also by applying the current FX rates, the EBITDA margin is expected to be negatively impacted by about 40 basis points when we compare to full year 2021.
Other items of the guidance are unchanged. CapEx 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 second quarter. If we could open up for Q&A, please.
Thank you. As a reminder, to ask a question, you will need to slowly press star and one on your telephone and wait for your name to be announced. If you'd like to ask a question, please press star and one slowly on your telephone keypad. Please stand by while we compile the Q&A roster. Once again, before we take our first question, please slowly press star and one on your telephone keypad. We will now take our first question. Please stand by. Your first question comes from Yiwei Zhou from SEB. Please go ahead, your line is open.
Hi. Good morning. Can you hear me?
Yeah, we hear you.
Great. Just a quick question here on China. Could you elaborate a bit more on the Q2 performance and maybe also, what is your assumption for China for the remaining of the year? We can see there are still some regional lockdowns, and do you expect the same level of impacts in the second half as you have seen in the Q2?
Thanks, Wei, for that. China was more impact in quarter two than we anticipated in the beginning of the quarter. We did expect all the business to come back earlier. But we only opened our warehouse on the 1st of June, which is situated in Shanghai and was closed for up to two months. We are very cautious about quarter three. As you mentioned, there are some uncertainty around potential lockdowns. Yeah, we are uncertain about that, and our assumption is that we will be closer to normal in quarter four. But again, I think what we're mainly focused on here is that we believe the business will normalize. We've seen that, for example, in Australia, where we were very hard hit by COVID, and now we seem to be back on track fully. Yeah, we're cautious around quarter three for China.
Okay. If I'm allowed, my second question here is regarding the second half. If you're looking into different business units, the first half you deliver only 2%, and now you are guiding for 6% for the full year. That imply you would need to deliver a very strong second half.
How should we look at the contribution from different units in Q3 and Q4? Could you maybe comment a bit more and just give us more indication on your assumption?
Yes, absolutely. One thing to keep in mind is that Q3 and Q4 were quite a lot impacted last year by COVID, with the Delta variant impacting sales quite significantly in quarter three in all markets, but also somewhat quarter four. That is one thing to keep in mind on the comparison and also keep in mind that quarter two last year was sort of a pause from COVID. We are somewhat up against a little bit tougher comparison here in quarter two. Other things to look out for is, for example, our ability to solve the supply chain complications around the POWER KNEE. We have sold the POWER KNEE for a few million dollars here in the first half of the year and have a strong pipeline of demand for that product. We estimate the POWER KNEE to be in the market towards the end of August.
I think these are some of the things to keep in mind. Given our best estimate of how we look at the business today, we will end the year within this guidance range.
Okay. Just want to follow up on the POWER KNEE .
Yes.
Could you remind us, just given the back orders, what is your assumption for the sales contribution from the new product for this year?
Our original assumption was that the POWER KNEE could contribute with up to $4 million-$5 million in sales for the year. Best case scenario is higher than that, given how the demand side has developed. It could be somewhat above that if we are able to solve the situation around the missing components.
Okay, great. Thanks.
Thanks, Wei.
Thank you. Once again, if you would like to ask a question, please press star and one slowly on your telephone keypad. Please leave at least one second between pressing star and one to ask a question. Thank you. We will now take our next question. Your next question comes from Thomas Bowers from Danske Bank. Please go ahead. Your line is open.
Yes. Thank you. I hope you can hear me. My line is breaking up a little bit here. I just have a question regarding the U.S., just on second half, how do you see the outlook now for elective procedures? Have you seen some early improvements here in late Q2, early Q3? Secondly, what is it actually that you do not see, why I do not see a positive or at least sort of a neutral impact in Bracing & Supports in the U.S. from elective procedure delays? I know, of course, you have both pre-op and post-op products. I also would assume that any delays in elective procedures also would maybe have some sort of positive impact on the pre-op products. Can you maybe just give us a little color on how to understand the impact for B&S here? Thank you.
Hi, Thomas. You came through clearly. Yes. On the elective procedures and volumes in Bracing & Supports, what we see in our data is that volumes came down from approximately middle of quarter two. Our, let's say, read on that situation is sort of tied back to the overall macro environment, where because the users of a bracing product as the reimbursement system is structured in the U.S. too, let's say it has a cost impact for people if they do not sort of, it depends on how their overall healthcare cost will look like for a year. As you get closer to year-end, people have more visibility on their overall healthcare cost. Hence, there is an assumption that, let's say, with people having more visibility, that could have some impact on volumes or positive impact on volumes here towards the second half.
This is a little bit anecdotal and just the feedback that we get from the market. Bracing volumes, just again, a reminder as I sort of said on the previous question, that volumes were also impacted quite a bit in quarter three and quarter four last year from COVID. We are cautiously optimistic that we will see a more positive trend in bracing volumes here towards the latter half of the year.
Okay.
Thank you. Once again, if you would like to ask a question, please press star and one on your telephone keypad. Thank you. We will take our next question. Please stand by. Your next question comes from the line of Benjamin Silverstone from ABG SC. Please go ahead. Your line is open.
Thank you very much. Hi, Sveinn. Hi, Edda. Hope you are well. I have a question in terms of the sales for Q2. We do know that the American and APAC markets were dragging the overall group down, but could you give us some nuances as to how the emerging markets has been doing? The same question is regarding the cash flow for the rest of the year, are there any sort of elements we should be extra focused on going into H2? Thank you very much.
Hi, Benjamin. Thanks for that. On the emerging markets, our emerging market sales are approximately 10% of overall sales, if we just pull out what we consider as emerging markets from the three reporting segments that we are working with. Our emerging market sales are doing very well. We have very solid growth in every market except China, which we categorize as part of that segment, has held things back for obvious reasons. It is also worth noting that we have in some of these markets, we have very high inflation and are pacing our unit cost at the same rate as these inflation rates. I would say we are very happy with the progress in emerging markets and we went direct in six new markets last year, and this is contributing in line with plans.
With regards to the cash flow situation, what I would say here is, if we look at the year as a whole, I would not expect any structural changes around payables or AR, but I assume a step up in inventories, which we could go a little higher on inventories. For other items, I would not assume any structural change. That should give you something to work with.
Thank you very much.
Thanks a lot, Benjamin.
Thank you. Once again, if you'd like to ask a question, please slowly press star and one on your telephone keypad. Once again, star and one if you would like to ask a question. There are currently no further questions, sir. I will hand the call back to you.
Thank you very much. And thanks everyone who called in and for your participation and look forward to talk to you next time after quarter three. If there are any questions come up, please don't hesitate to reach out to our IR team. And have a nice summer. Bye.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.