Ladies and gentlemen, welcome to the Össur Q3 Results 2021. Today, I am pleased to present Mr. Jón Sigurdsson, President and CEO, and Mr. Sveinn Sölvason, CFO. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Mr. Sigurdsson and Mr. Sölvason, please begin.
Yeah, thank you. Össur investor conference call, where we will cover the results for the third quarter of 2021. My name is Jón Sigurdsson, and I am the President and CEO, and with me here today is Sveinn Sölvason, our CFO. We will begin by going through the highlights of the quarter and ending with our guidance for 2021. A question and answer session will then follow. Sales in the third quarter of 2021 amounted to $180 million, which corresponds to 4% organic growth.
Sales in EMEA and APAC were strong, with the exception of Australia, which was impacted by lockdown measures. In addition, we experienced softer sales in Americas due to effect from COVID-19 Delta variant in the quarter. Sales growth in the first nine months of 2021 amounts to 12% increase organic and slightly behind 2019 in organic terms. EBITDA amounted to $37 million, or 21% of sales.
Sveinn will later elaborate further on the financials. Next slide, please. As previously mentioned, sales amounted to $180 million compared to $172 million in the same quarter last year. We saw continued growth in prosthetics while Bracing & Supports sales were soft, mainly in Americas. The prosthetics segment grew by 7% organic, but the Bracing & Supports segment was constant organically over the same quarter last year. Reported sales increased by 5%. Net impact from acquisitions and divestments was negative by 1 percentage point in the quarter. With changing currency rates, sales were positively impacted, corresponding to a 1 percentage point impact on the reported growth. Sales are developing well in many of our key markets. Sales continue to be strong in EMEA, especially in prosthetics, including bionics, while Bracing & Supports sales are slightly behind the 2019 levels.
APAC showed strong sales as well, apart from Australia, that was affected by measures to control the COVID-19 pandemic, resulting in an unusual negative organic growth rate for the APAC region. However, the COVID-19 Delta variant primarily affected both prosthetics and Bracing & Supports sales in Americas. Although organic growth was impacted by softer sales in Americas, the performance in other key markets strengthen our belief that the long-term prospects and underlying fundamental drivers of the prosthetics and bracing & supports market are not expected to change as a result of the pandemic, and that we are well on our way. Furthermore, Össur continues to monitor the development of the bionic sales closely as the sales recovery has been slower compared to the mechanical products. As the reimbursement process for bionic products is more elaborate, resulting in lengthy and often delayed approval process.
However, the product pipeline is strong, and the demand for bionic products has not changed, as we saw in EMEA this quarter. Now over to you, Sveinn.
Thank you, J ó n. As J ó n already covered, the sales growth did vary by geography here in quarter three. Gross profit margin is at 62% in the quarter, mainly affected by freight costs and inflation in raw material prices, extraordinary high ocean freight rates, and increased use of air and expedited sea freight to support demand. The supply chain challenges are expected to affect cost of goods sold negatively by $9 million-$11 million on a full year basis compared to the estimate of $4 million-$6 million communicated after we reported quarter two. Our prediction is that these costs will normalize as the COVID-19 related impact on global supply chain diminishes. Excluding this impact, actually, our gross profit margin was quite strong in the quarter. Operating expenses in organic terms increased by 5% here in quarter three.
The main drivers for higher cost is variable sales and marketing costs, which are increasing in line with higher in-market activities, as well as cost in relation to further investments in our emerging markets platform. EBITDA amounted to $37 million, or 21% of sales, compared to $36 million, also 21% of sales in the comparable period. The effective tax rate was 24% in the quarter. Net profit amounted to $17 million, or 10% of sales, compared to $15 million in quarter three last year. Go to the next slide, please. Here we have the historical sales and EBITDA trends for the last 11 quarters. Sales were back to 2019 levels here in quarter three in organic terms, and we expect sales to further normalize and some pent-up demand in the quarters ahead. The EBITDA margin was 21% in quarter three and 20% year-to-date.
The EBITDA margin remains slightly below a normalized level, mainly due to temporary negative impact on operating leverage. In addition, we have continued to invest in R&D and made further investments in especially our infrastructure in emerging markets throughout the COVID-19 impacted period, as mentioned before. As sales will continue to normalize from 2019 levels into 2022, EBITDA margin will consequently also not be in line with pre-pandemic levels here for the full year 2021. Next slide, please. Briefly on cash flow. Free cash flow amounted to $13 million in quarter three. The cash flow is impacted mainly by an increase or an investment in inventory and to some extent timing of tax payments. Underlying cash flow remains healthy.
The net interest-bearing debt amounted to $386 million at the end of the quarter, and the net interest-bearing debt over EBITDA was 2.9x , which is within the target range of 2x-3x . Share buybacks remain temporarily on hold. Over to you, J ó n, please, again, on guidance.
Yeah. Thank you, Sveinn. The financial guidance for 2021 has been narrowed to the lower end of the organic sales growth, the guidance range, at around 10% organic sales growth and the lower end of the EBITDA margin guidance range at around 21% EBITDA margin before special items. In quarter two, we estimated that the organic sales growth would be around the middle of the 10%-15% guidance range. The full year financial guidance then assumed that the quarter three and quarter four would be mostly unaffected by the impact from COVID-19. However, in quarter three the COVID-19 Delta variant affected sales primarily in Americas, which is Össur's largest market as well as Australia. The full year 2021 organic sales growth guidance of around 10% assumes moderate effect from COVID-19 for the remainder of the year.
The full year 2021 EBITDA margin guidance of around 21% takes the estimated organic sales growth into account and assumes that the cost of goods sold will be adversely affected by $9 million-$11 million on a full year basis. Other items in the financial guidance for 2021 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 2021 effective tax rate will be in the range of 23%-24%. This concludes the review of the third quarter, and we can now go to the question and answer session.
Ladies and gentlemen, if you have a question for the speakers, please press 0 and one on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. If you would like to withdraw your question, you may do so by pressing 0 and two. Please hold until we have the first question. The first question is from Benjamin Silverstone, ABG. Your line is now open. Please go ahead, sir.
Thank you very much. Hi, J ó n and Sveinn. I hope you are well. I have three questions, if I may. The first one is an update..
I'm sorry. Apparently, the line was disconnected, so we'll just continue with the next in line. Just hope that Mr. Silverstone comes back into the queue. The next question is from Christian Ryom, Nordea Markets. Your line is now open. Please go ahead, sir.
Hi. Good morning, J ó n and Sveinn. I also hope you're well. I have three questions from my side. First is to the freight and raw material price inflation impact in this quarter. You're guiding for around $ 7 million-$9 million of total impact for the second half of the year. Can you qualify how much of that we've already seen here in Q3? The second question is to the impact of COVID-19 in the Americas region and how you've seen that develop throughout the third quarter and here going into Q4. Have you seen market activity begin to improve as COVID cases have subsided or what has been the most up-to-date development? My third and final question is to your share buyback program, which is currently on pause.
Where do you need to get to in terms of leverage ratio for you to be comfortable with restarting the buyback program? Thank you.
Hi, Christian. Thanks for your questions. I will take the first one, and J ó n will take the other two. On the freight and raw material prices, I would assume approximately $ 3 million-$4 million here, and $ 3.5 million is in quarter three. The remainder of the $ 7 million-$9 million in quarter four are still with some degree of uncertainty, plus/ minus. I just want to mention also, just to go into a little bit more depth with the freight cost. It is partly prices. The majority of the increase is just higher prices, but it is also that we are using more expedited freight. Both expedited air freight just to secure or to keep the supply chain going and manufacturing going, and also having to just maintain sales volumes and meet demand in the various markets.
It is also important for how you model 2022 to take, because we experienced approximately $ 2 million increase here in the first half of the year. We will see in the first half of next year, if we just assume the same run rates but a little bit less expedited freight, you should see around $3 million additional impact just in the first half of next year, just to get us up to speed on sort of the run rate impact.
Great.
I hope that adds a little color on all this.
Yeah. On the impact. Go ahead, Christian. Did you have any other?
No. Please go ahead.
Okay. Thanks. The impact of COVID in the U.S., we saw actually, the run rate in U.S. was pretty similar than that of EMEA, but it changed quite a lot in the beginning of the quarter, and it is still affected, although we see improvement as of today. Regarding the share buyback program, we are now within the financial range. We can start the share buyback program. The only thing I want to comment on it now is that I believe that we will pursue the share buyback, but the last development of the COVID-19, I think we want to stand on a little bit firmer ground on the COVID-19 development before we assume.
Okay. Thank you very much.
You are welcome.
You are welcome, Christian.
And we have Benjamin Silverstone back on the line. Your line is now open again, sir.
Thank you. Apologies. There must have been some IT issues here. Hi, everyone.
No issue.
I hope you're well, and thank you for taking my question. I have three for me. The first one, I think Christian did mention about this or asked about this, just a brief update on your supply chain visibility and perhaps how it's changed from Q2- Q3, if at all. Then a product question in terms of the new POWER KNEE. You do mention that it's a new era of the POWER KNEE and the only one in the market that is actively powered. We do know that launches in the past of new products has historically not had an immediate material effect on growth. But could you share some nuances on how the limited sales has been versus previous limited launches in the past? And also perhaps some details on how it's been received by the practitioners.
Then my last question is in term of acquisitions. It seems that there haven't really been a lot of activity here in Q3. If you have any sort of update on that would also be greatly appreciated. Thank you.
Thanks, Benjamin. I'll take the first one, and Jón will comment on two and three. Regarding the supply chain visibility, I think the main things that have changed since quarter two is, again, further price increases and further use of expedited freight in principle and mainly air freight for us. In terms of, let's say, availability of raw material and components, that remains similar. All else equal, there is more risk than usual, obviously, with all the complications that are in the global supply chains, but we have not faced any major complications as a result of this. So it is still a challenge out there, but we are managing.
On the POWER KNEE, you are right to assume that it's not a blockbuster product. You are right when you say that we are the only one. There is nobody out there that has powered prosthesis. The situation is that there is a reimbursement code in U.S. So our main marketing activities are there. It has been received very well. But having said that, this is a complicated product. This is a new product. This is a product that requires more involvement in the reimbursement side, and you can see that because of the pandemic, the application process has been slower than usual. But having said that, we are well on our way. In spite of the pandemic, we are exactly where we wanted to be and on the forecast. The third one was slow M&A activities in the quarter.
I mean there is really no reason for it other than this is the nature of M&A activities. We don't need to buy anything, and I think it's just one of those quarters. There's really nothing more than to say that our fundamental M&A strategy hasn't changed, and we have the ability to buy, and when something comes up which we like, we buy it. But we don't if we can't see anything.
Thank you very much, J ó n, Sveinn. Just a quick follow-up to you, J ó n, on the product-related question. Do we have any indication of how the price and margin of the new knee differs from the old version?
No. It is basically the same. But I'd like to add a little bit more color on it, and that is a fairly large service provision in the price or the cost of the product, built into the cost of the product. The bionic products typically increase the margin the longer they are and the more secure they are, and the less the service requirement. But other than that's a general comment on those bionic products. But other than that, it's pretty similar.
All right. Thank you so much, J ó n and Sveinn. Appreciate it. Thanks.
You are welcome.
The next question is from Thomas Bowers with Danske Bank. Your line is now open. Please go ahead.
Yes, thank you very much. A few questions here from my side. Maybe just staying a little bit to the freight congestions that you also struggle with. I am just wondering if there is any, can you maybe comment on the inventory levels as some of your key customers? Is there anything we should be aware of here, and also, are we looking at potential order backlogs going into next fiscal year? Then just on bionics, 20% of sales in the quarter seems quite okay, especially that you should have some issues still in the U.S. Are you starting to see any real pent-up demand in EMEA? Are users now starting to go from sort of interim mechanic solutions to bionics, or is this still maybe going to be a little bit more gradual going forward?
Then just finally, just as we see the lockdown in Australia, can you maybe add some color on how much does Australia actually account for in APAC? Thank you.
Hi, Thomas. Thanks for the questions. On the freight situation, that is right. Inventory levels are something we are extremely focused on, and from the start of the COVID-19 pandemic, we did slow down our supply chain and have had to then ramp it up gradually as demand is coming back online. Also given just all the complications around moving product around the world, maintaining inventory of our high volume, high selling products has been more of a challenge now than ever before. And we do have back orders. We have higher back orders than we've had also previously. It's not such that it fundamentally changes the picture. For example, when we look at the full year growth, it's not to those levels. So I guess the answer ultimately is that we are prioritizing inventory above cash at the moment.
Just given the supply chain complications, we are building our inventories just to make sure we are able to serve our customers to the best of our ability.
Also regarding the raw materials, because those more complicated products, knock on wood, we haven't stopped the production of any one of our products. As you know, those are complicated products, and you only need to have a problem in one single item, you can't produce them. As Sveinn said, we are prioritizing the security over the cash at the moment.
Maybe I'll also take a question too, Thomas, on the bionics, and regarding pent-up demand. I sort of go back to the big picture in prosthetics. If we look at our prosthetics business, our mechanical products are doing well and have actually captured most of the demand that we technically lost in 2020, and are really performing very solidly. The demand that we still haven't captured is more on the bionic side. We've explained the demand on the bionic side has been impacted by the fact that these products take a more complicated selling procedure and a fitting procedure requires more time with the user. There are delays around the reimbursement component. Just in general, the healthcare authorities have pushed back on high price items. But fundamentally, both the demand side and the pricing side on bionics has not changed.
What we see here in EMEA in quarter three are very positive signs in terms of the bionic sales picking up nicely, and we have a good pipeline around bionics. Our hypothesis has always been that bionics would just take longer to come back from these complications that COVID has brought on us. That is a good sign, but we are not ready to quantify pent-up demand in bionics. There will be some.
Great.
The final question on.
Go ahead, sorry.
Sorry. It was just on Australia, yes.
Yes. Australia has been approximately close to one-third of our business in APAC. We also had a little bit slowness in China here in quarter three, but China for the full year will be very strong for us. In general, our performance in emerging markets is very strong organic sales growth wise. Just to mention also, we have made investments throughout the COVID period. We have invested in growing and expanding our emerging markets platforms. A part of the story around EBITDA margin, both for the full year and for the quarter, is that we have made these investments but are not yet seeing the benefit on the top line. That will surely come in the short to medium term.
I would like to add on the APAC, the China run rate is quite good, but this quarter had a very difficult comparison with last year. That pulls us down a little.
Okay, great. Just to get an understanding and feeling on Australia, can you maybe just comment where you are in October and are you starting to see it coming a little bit back? Where are you index- wise?
I mean Australia has been in a very strict lockdown. I mean Sydney and Melbourne have been in lockdown for, what is it?
Melbourne was over 200 days, and Sydney less than that, but still far over 100 days. We are talking about lockdown where police stop people and ask them where they are going.
Yeah, it's pretty strict lockdowns. They will be out of lockdown mostly here end of October. We expect less impact here. We expect some impact in APAC due to this COVID impact in Australia, definitely in quarter four, but somewhat less than in quarter three.
Okay, perfect. Very helpful. Thank you very much.
You're welcome.
The next question is from Niels Granholm-Leth, Carnegie. Your line is now open. Please go ahead.
Thank you, and good morning. Three questions from my side as well. First question would be, in which cost lines do we specifically see the effect from the $9 million-$11 million extra cost related to freight and raw materials? Could you just point out the individual cost lines? My second question would be, to what extent is it possible for you to adjust your prices upwards in EMEA and in the U.S. for those two regions specifically? My third question would be, the weakness that we are seeing on the U.S. market, is that entirely caused by the reduction in elective surgeries? Thank you.
Hi, Niels. Thanks for this. On the trade, this is purely COGS. This is inbound freight and raw materials that we are focused. Our outbound freight, that is contracted rates, and that is much less impacted. It is mostly the freight from Asia and on these typical high price routes. This all flows through the COGS. There is a little bit of inflation in outbound freight, which is in sales and marketing cost, but you should just model all of this on the COGS line. J ó n, do you want to comment on the prices?
On the prices, it is a good question, which means that we do not have a very good answer to it. We will increase our prices, and everybody is talking about it now, and we have been increasing our prices. But of course, in a lot of cases, our customers are bound by our prices that are fixed. They will not get any reprice from those contracts. We can increase the prices, but we are looking at it to what extent we will do that. But we will. I know it is a very vague answer, but we are looking at it. There are a lot of discussions on the freight, whether we should put a surcharge on that. There is no conclusion there yet, but we are in the process of looking at it. On the U.S. market, obviously elective surgeries has gone down in the U.S.
That explains a lot of the bracing & supports development there. However, that is not the only reason. Before the pandemic, we talked about the competitive bidding, and we had raised that issue with all of you for some quarters before the COVID. I must say that we are positively surprised that we think that the competitive bidding has had lesser impact that we had planned for. But on the other hand, it is really difficult to say, because the competitive bidding and the COVID comes at the same time. So it is difficult to say what is what. We can also see that the COVID has negatively impacted the prosthetics as well. So it is not only elective surgeries, it is all over.
Right. Thank you. And then perhaps just a follow-up question here. What would be your sales exposure to those Eastern European countries now entering lockdowns? Those would be Russia, the Baltic countries, Romania, and I believe it is Slovakia.
Yeah, I do not have the number.
It is very small.
It's small. It's not big.
Unfortunately, to some extent, these are not very big markets for us, although they will be in the future. But that will not have a material impact, no.
Okay, great. Thank you.
The next question is from Felix Wienen, SFO. Your line is now open. Please go ahead, sir.
Hi, good morning, J ó n and Sveinn. Just one quick question, please, on the clinic business that you have expanded over the last couple of years, separately in Europe and in the U.S. If you could dive a bit into that, how that performed during the quarter and also probably during the last two, three quarters, whether that's had a major impact on the group or whether it has fared better than the product business. Thank you.
Well, in general terms, Felix, the clinic business has been slower in recovery. It typically comes after the product business. Regarding how it has been developing, it has been developing over the last quarters very well. But with the exception of the last quarter, the pandemic hit it quite hard in U.S. and also a little bit in France as well. But other than that, in general, we see a slower recovery there. The recovery there is a little bit later than the product business, and it's probably because of the nature of the business. The products are shipped before the service happens.
Thank you. And a quick follow-up probably to that. I know that the players there have been willing to sell over the last couple of years, and has this probably increased the willingness to exit the business and join a much bigger, financially stronger group? Has that probably spurred discussions for acquisitions or more consolidation in the market?
Yeah. As a general trend, Felix, that's quite true. We see there's a lot of small players that are kind of stopping up and say, "Maybe it's better for us to belong to a bigger group." But we don't let that have any impact on our activities level per se. That is a general trend. But your assumption is right, yes.
Thank you very much.
Thanks, Felix.
Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press 0 and one on your telephone keypad now. There are no further questions at this point, so I hand back to the speakers.
Yeah. That concludes our session for today. Thank you for the questions, and please reach out to our investor relations if there is anything you want to further discuss. Thank you for listening, and have a good day.