Welcome to Össur's Q2 2021 results. Today, I am pleased to present Jón Sigurðsson, President and CEO, and 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. Speakers, please begin.
Yeah. Thanks for this. I would like to welcome you to Össur investor conference call, where we will cover the results for the second quarter of 2021. My name is Jón Sigurðsson, as previously mentioned, and I am the President CEO, and with me here today is Sveinn Sölvason, our CFO. We will begin by going through the highlights for the quarter and ending with our guidance for 2021, a question-and-answer session will then follow. Sales in the second quarter of 2021 amounted to $190 million, which correspond to 32% organic growth. The sales growth is high in Q2 as the comparison quarter was the most affected by COVID-19 last year. Sales continue to normalize in our key market, both in Prosthetics and Bracing & Supports. The impact from COVID-19 varies by geography, with strong growth in APAC while sales are normalizing in Americas and EMEA.
Sales in the first half of 2021 correspond to 16% increase organic compared to the first half of 2020 and almost on par with the 2019 in organic terms. In the second quarter, EBITDA amounted for $42 million in Q2 or 22% of sales. Sveinn will later elaborate further on the EBITDA development. During the quarter, we completed acquisitions that contribute about $11 million to sales on a full-year basis.
As previously mentioned, sales amounted to $190 million in the second quarter of 2021 compared to $135 million in the same quarter last year. As markets were opening up, some pent-up demand has been realized both in Prosthetics and for post-op and OA bracing with Bracing & Supports. The Prosthetic segment grew by 30% organic, and the Bracing & Support segment grew by 36%. Reported sales increased by 41%. Net impact from acquisitions and divestments were positive by 1 percentage point.
With the changing currency rates, sales were positively impacted, corresponding to an 8 percentage point impact on reported growth. The impact of COVID-19 is diminishing in many of Össur's key markets. Sales continued to normalize in Americas and key European markets, as restrictions in connection with COVID-19 were being lifted. In Americas, Prosthetics and Bracing & Support sales are developing in a positive manner, slightly behind 2019 levels. In EMEA, sales are recovering well with some regional and product segment variances. In some of our key markets, injury volumes are still down compared to 2019, impacting sales of Bracing & Supports. Both in EMEA and APAC, Prosthetics is growing compared to the comparable quarter in 2019. Sales continue to be strong in APAC with especially strong quarter in China.
Össur continues to monitor the development of the COVID-19 pandemic closely as new lockdowns and measures have recently been introduced in markets in Europe and APAC. While mechanical Prosthetics products show strong growth, Össur also monitors the development of bionic sales closely as the sales recovery has been slower due to the nature of that part of the Prosthetics segment. Over to you, Sveinn.
Thank you, Jón. As Jón already covered, sales continued to normalize in the quarter after strong sales towards the end of Q1. The gross profit margin is 63%. Operations were at normal capacity, but the COGS was adversely affected by higher paid cost and inflation on raw material prices in the quarter, which is estimated to have a continued $2 million-$4 million negative impact on cost in the second half of the year and an estimated $4 million-$6 million on a full-year basis. Our prediction, however, is that these costs will normalize as the COVID-19 related impact on supply chains diminishes. OpEx declined compared to the second quarter last year, mainly as several extraordinary charges were recorded last year in relation to the divestment of Gibaud.
Aside from that, OpEx is growing in line with increased activities and investments being made in predominantly market entry in emerging markets. EBITDA amounted to $42 million or 22% of sales compared to $12 million or 9% of sales in the comparable period. Effective tax rate was 23% here in Q2. Net profit amounted to $19 million or 10% of sales compared to a net loss of $18 million in Q2 last year. Again, as the second quarter last year was the quarter that was most heavily impacted by COVID-19 and the before mentioned extraordinary items in related to divestments. We go to the next slide, please. Here we have historical sales and EBITDA trends for the last 10 quarters. Sales are gradually climbing back to 2019 levels, and as Jón mentioned, we are on par with 2019 in organic terms.
We expect continued growth and some realization of pent-up demand here in the quarters ahead. EBITDA margin, as previously mentioned, 22% here in Q2 and 20% year-to-date, and profitability is therefore normalizing in line with the sales recovery. As sales will continue to normalize from 2019 levels into 2022, EBITDA margins will consequently not be in line with pre-pandemic levels here for the full-year 2021, is our expectation. Next slide, please. Free cash flow amounted to $21 million in the second quarter, in line with increased amount of cash flow is impacted by an increase in inventory and receivables and collections, they continue to develop well in all markets.
To reflect the current capital structure and support further growth opportunities, our capital structure and dividend policy has been updated to a desired level of 2x - 3 x net interest-bearing debt to EBITDA from a prior level of 1.5 x- 2.5 x. The net interest bearing debt amounted to $393 million here at the end of Q2, and the net interest bearing debt was 3x . Share buybacks and dividends are still temporarily on hold. Now over to you again, Jón, please.
Yeah, thank you, Sveinn. The financial guidance for the year remains unchanged. However, management currently estimates that organic sales growth for 2021 will be around the middle of the guidance range of 10%-15%. The first half of the year has largely developed in line with the management estimates. The full-year financial guidance assumes that the third and fourth quarter will be mostly unaffected by impact from the COVID-19 and some realization of pent-up demand.
The EBITDA margin before special items is expected to be in the range of 21%-23%. Underlying gradual increase in profitability is expected as sales recover further, supported by growth in higher margin products, divestment, and scalability in core operations. Acquisitions are expected to have a slightly negative impact on the EBITDA margin. CapEx is expected to be in the range of 3%-4% of sales. Based on the current mix of taxable income, the expectation is that the 2021 effective tax rate will be in range of 23%-24%. That concludes the review on the second quarter, and we are ready for the Q&A session.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name's been announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Christian Ryom of Nordea Markets. Please go ahead. Your line is open.
Hi. Good morning, Jón and Sveinn, and thank you for taking my questions. I have three to start with. First question is, I noticed that in the report you write that relative to Q2 2019, sales have been in the range of 90%-120% over the three months of the quarter. Can you qualify a bit more how the sales development has been over the quarters of Q2, whether we've seen a continued improvement or whether there's been some backsliding during the quarter?
The second question is to the acquisitions, where they are mostly centered, those acquisitions that you've done here in Q2, both geographically and in terms of what business area they mainly fall into. Third and finally, the around $2 million that you report in extra COGS for raw materials and increased freight costs here in the first half. Have they mainly been expensed during Q2, or are they spread across both Q1 and Q2? Thank you.
Hi, Christian. Thanks for your questions. Let me comment on question one and three. If you look at the sales development over the quarter, if you compare to 2019, for example, we're above 2019 levels for all months, April, May and June. June being the strongest month. June is typically a very strong month for us. This is before summer holidays and there's a big push usually in June, and that is seasonally our biggest month. So we saw a positive trend during the quarter. I hope that sufficiently answers your question.
Regarding the increase in raw material prices and freight cost, you're right in the sense that I think the best assumption here is that these have come in during quarter two, the $2 million, and then we expect another $2 million-$4 million in the second half of the year, depending on how pricing develops here in the second half of the year. I n other words, $4 million-$6 million on a full-year basis.
Regarding the acquisitions, regarding the question number two, the acquisitions were a mixture of workshop and distribution. If I recall, in the U.S., yes. Most of them by far has been in the U.S.
Okay, great. Evenly split between Bracing & Supports and Prosthetics?
They usually are, yes.
Slightly more heavy, actually, on Prosthetics.
Slightly more.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Benjamin Silverstone of ABG Sundal Collier. Please go ahead. Your line is open.
Thank you. Hi, Jón and Sveinn . I hope you're all well, and thank you for taking my questions. My first question is in regards to the Prosthetics growth. We see quite a very strong growth of 30% organically in Q2. I was wondering if you could provide some details on how the underlying bionic segment has been growing. You do mention that there is a strong pipeline, so if you get some further information on that, I think that'd be very helpful, thank you.
My last question is in terms of your capital structure. You mentioned that it is changing now for a new target of between 2x-3 x gearing, which means you're already at the high end now or within the range. Should this mean that we should begin to assume that a share buyback will be initiated again, or do you have a strong M&A pipeline that you wish to utilize first? Thank you.
Yeah, we start with the bionic question. As you mentioned, the Prosthetics growth has been very profound, with the bionic lacking a little bit. The reason for this drag is that the sales process in the bionics is more involved, more visits, and for the first and the second one is that the case management in the insurance companies is a bottleneck because of COVID-19. We believe that the underlying growth in that segment will revert to normal when the COVID-19 is over.
Regarding the bionic pipeline, I believe we previously communicated that we have a very robust pipeline there. In actually, this quarter or Q2, we came with Power Knee on the market, even though that's just an addition to the already very robust product line. So all in all, we believe that this is a timing issue. We believe that, bionic will revert to the same, when the COVID debacle is over. It's really difficult to say when that would be completed, but that's improving very rapidly.
Yes. Hi, Benjamin. Let me comment on the capital structure. Let's say over the last 18 months, I would say we've invested in excess of the free cash flow in the business, which has meant that our and at the same time, our EBITDA has been temporarily pressed down due to the COVID impact. So we've been, our net debt to EBITDA has been above the level where we want it to be. However, now as profitability is normalizing, we are moving back into a more normalized territory.
However, as I mentioned earlier, because we've made investments in excess of our free cash flow, we are the ratio despite normalization of the EBITDA, we are now operating at a slightly higher gearing. That is simply the reason we are pushing this range up such that we have some more flexibility to do M&A if that comes our way. Also, it helps us open up for share buybacks sooner than if we would have operated it with the old range.
Thank you very much, Jón and Sveinn .
Yeah, sure. Thanks for your question.
Thank you. We currently have one further question in the queue. Just as a reminder to participants, if you do wish to ask a question, please dial zero one now. That next question comes from the line of Niels Granholm-Leth of Carnegie. Please go ahead. Your line is open.
Thank you, and good morning. My first question would be about your extraordinary high freight and component cost. Could you talk about which lines are affected by this? Are those extra costs entirely booked in production cost, or are they even spread on OpEx? My second question would be regarding all the acquisitions that you have made in the past few quarters, shouldn't we expect any integration costs in relation to these acquisitions? Thank you.
Hi, Niels. This is entirely on the COGS line. 90% is on the COGS line, maybe 10% is outbound freight on the sales and marketing line. So the majority is there, is on the COGS line. Regarding the integration cost, yes, we are taking on cost to bring these newly acquired entities on board. However, we've been taking those costs as more like a normal course of business cost as we've been making these acquisitions here every year. W e've not been highlighting these particularly as extraordinary costs, but yes, there is some cost associated with bringing these companies on board. But with regards to those newly acquired entities, it's not a cost that significantly changes the big picture.
It also means those acquisitions are completely initiated and done in-house. We don't use external advisors on them. I t's within our cost structure, basically.
Right. When it comes to making more substantial integration programs for many of the workshops that you have acquired, putting them on the same IT platform, etc. So we shouldn't expect any kind of restructuring programs or the like for all these acquisitions?
I wouldn't say that that would never happen, Niels. In the event that we would, let's say, initiate a program of that size, we would commit to communicate both the cost and the expected benefits of that.
Right. Just a final question on components. Would there be any components which are in shortage right now that you are having difficulties to procure?
Yes. We have, I think like most companies these days, we have had to scramble to secure certain components, but not one would have any operational hiccups because of this. There are supply chain complexities. As we sit here today, we don't expect this to have a material impact on our operation as we've been able to secure the raw materials and components that we need. All that equal, while this COVID-19 related impact on supply chains is still there, all that equal, the risk is slightly higher that there will be some issues.
Okay. Thank you.
Thank you.
Thank you. We've had a couple more questions come through. The next is a follow-up from Christian Ryom of Nordea Markets. Please go ahead. Your line is open.
Yes. Hi again, Jón and Sveinn. Just a quick follow-up on the impact of the new lower fees for off-the-shelf braces. I think last quarter in Q1, you talked about that the effect that you saw in the first quarter since the new fees took effect were maybe a bit lower than what you had previously communicated, on the low side of what you previously communicated. I'm keen to hear how that has developed in the second quarter. I think you previously talked about a drag of, say, up to around a couple of million U.S. dollars per quarter from these lower fees. Is that around the level where you're seeing the new lower fees panning out at this point?
Yeah. That's the size of it, but it's still really difficult to say what is the competitive bidding or what is the COVID. Because there are some fundamental demand changes where it comes to injury brace, because of the lesser activity, that it is a lesser injury. And we see that on the hospital system very clearly. So one is very difficult to pinpoint at this point, but the overall shortage from a normal level is probably pretty much the same as we have anticipated.
Okay. Thank you.
Thank you. We have one further question in the queue at this time. That comes from the line of Thomas Bowers at Danske Bank. Please go ahead. Your line is open.
Yeah, great. Thank you very much. Just two questions remaining from my side here. On your full-year guidance, can you maybe just give us a little bit of color on your pick, a sort of a soft solution I would call it. Keeping the 10%-15% organic growth. I am just wondering, do you see any increased concerns about the COVID-19, the Delta variant here in H2 compared to your previous communication?
Or is this maybe also related to, as Niels also addressed in regards to component shortage or also supply chain concerns, uncertainties related to COVID-19? My second question, just to clarify on your new net debt EBITDA target. Is this what you would say, see as a long-term target going forward, or is this more related to short mid-term? Let us say five years out, is this still something that you could see yourself targeting going forward? Thank you.
On the guidance, Thomas, there is an increased uncertainty, and our view on the business reflects that, both on regards on the guidance and the Delta variants, and our guess is really as good as yours. Yeah. The guidance reflect that. The COGS increase, it is the same there. Most of it is, all of those uncertainties are COVID-19 related in some way or form.
Okay.
On the capital structure range, Thomas, this is what we look at as the short to mid-term range, and we would be comfortable operating the business at these levels. I think ultimately what could change these levels again is our appetite for M&A, cost of capital, etc. For now, this is where we want to be in the short to mid-term until some of these underlying assumptions change. I would say, but you are better to see the cost of capital than us. If that changes drastically, then the board would probably go back and look at it.
All right. Okay, great. That is it, thank you very much.
Thank you very much. Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. As there are no further questions from the phones at this time, I will hand the call back to our speakers.
Thanks for the questions, participation, and please reach out if there is anything we would like to. If you have any further questions after this call, and thank you for listening and have a good day and enjoy your summer. Thank you.