Ladies and gentlemen, welcome to the Össur Q1 Results 2021. Today, I am pleased to present Mr. Jón Sigurðsson , 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 Q&A section. Please go ahead to start meeting.
Yeah. Thank you. I would like to welcome you to the Össur Investor Conference Call, where we will cover the results for the first quarter of 2021. My name is Jón Sigurðsson, 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 for the quarter and ending with our guidelines for 2021. A question and answer session will then follow. Next slide, please. Sales in the first quarter of 2021 amounted to $161 million, which corresponds to 2% organic growth. We saw continued impact of COVID-19 in the quarter, with a soft January and February, but strong sales in March and continuing into April. The impact from COVID-19 varies by geography with strong growth in APAC, while sales are recovering in Americas and EMEA. EBITDA amounted to $29 million into one or 18% of sales.
EBITDA is increasing in line with expectations, which Sveinn will elaborate further on. Next slide, please. As previously mentioned, sales amounted to $161 million in the first quarter of 2021, compared to $154 million in the same quarter last year. The Prosthetics segment continues to be more resilient than the Bracing & Supports segment throughout the pandemic. The Prosthetics segment grew by 3% organic, partly due to pent-up demand, and the Bracing & Supports segment declined by 1% organic. Reported sales increased by 5%. Net impact from acquisitions and divestment was negatively impacted by 2 percentage points. With changing currency rate, sales were positively impacted, corresponding to a 5 percentage points impact on reported growth. Next slide, please. Sales were gradually recovering in the Americas with impact from COVID-19 beginning to diminish in most U.S. markets.
Prosthetic sales grew in the U.S., while Bracing & Supports sales remained soft due to general lower activity levels in hospitals and clinics. In EMEA, sales continued to recover with pent-up demand realized in some markets. However, sales in North Europe, which includes some of Össur's key markets, remained volatile due to COVID-19. In APAC, sales were strong in all major markets with pent-up demand in some markets, both Prosthetics and Bracing & Supports segments reported positive organic growth in the quarter. Now over to you, Sveinn.
Thank you, Jón. As Jón already covered, sales started to normalize towards the end of quarter one. Gross profit margin was strong in the quarter compared to same quarter last year of 64%. The gross profit margin is back to a more normalized level. Productivity was good, and pricing remains stable with some positive impact from product mix. Reported OpEx growth was 1%, while underlying OpEx growth, when adjusting for currency and M&A, was flat. EBITDA amounted to $29 million or 18% of sales, compared to $22 million or 14% of sales in the comparable period. The effective tax rate is back to a normalized level or 24% in the quarter. Net profit amounted to $11 million or 7% of sales, compared to a net profit of $7 million or 5% of sales in the first quarter last year. If you go to the next slide, please.
Here we have historical sales and EBITDA trends for the last nine quarters to give us comparison both to the, let's say, the COVID impacted period in 2020 and then the non-COVID impact period in 2019. Sales recovery is underway with 2% organic growth. Sales growth is expected to continue its upwards trend, and organic growth will be impacted quite significantly here in quarter two as our comparison will be weak. Profitability has been volatile in 2020 due to impact from lower sales as a result of COVID-19 and also cost in relation to divestments completed in quarter two and quarter four last year. Profitability was, however, strong here in quarter one as sales are gradually normalizing, and we also have positive impact from acquisitions and divestments and changes in currency rates.
It should also be noted that quarter one is and has historically been seasonally lower or smaller than other quarters of the year. Profitability is recovering, and we are confident that we will return to pre-COVID levels as sales normalize further. If you go to the next slide, please. Free cash flow amounted to $9 million here in the first quarter. The cash flow is impacted by an increase in inventory, which is in line with increased demand. Accounts receivable are stable and the quality of our accounts receivable remains high. Net interest bearing debt amounted to $386 million at the end of the first quarter. The net interest bearing debt to EBITDA was 3.9 x, which is temporarily above our target range of 1.5x- 2.5 x. Share buybacks and dividends are therefore still temporarily on hold. Over to you, Jón, again, please.
Thank you, Sveinn. On the guidance, no change have been made to the financial guidance for the year. As Sveinn mentioned, it should be noted that quarter one is, and has historically been, seasonally the weakest quarter of the year in terms of sales and profitability. The financial guidance assume continued impact from COVID-19 in the first half of 2021, but gradually subsiding in the quarter two, while quarter three and four are expected to be largely unaffected with some realized pent-up demand. It is emphasized that the outlook for 2021 remains more uncertain than usual as changes in the measures to control COVID-19 pandemic in Össur main markets can affect the financial performance. The organic sales growth outlook for 2021 expected to be in the range of 10%-15%. EBITDA margin before special items is expected to be in a range of 21%-23%.
Underlying gradual increase in profitability expected as sales recover, supported by growth in higher margin products. Divestment and scalability in core operations. Acquisitions are expected to have 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 the range of 23%-24%. Next slide, please. I am proud to share with you that in March this year, Össur was recognized by WIPO, an agency of the United Nations, as Össur ranks second in the world for top patent applications in conversion of mobility assistive technologies. This is the result of the first study to systematically investigate patenting and technology trends across assistive technology at scale, analyzing data from patent filing from 1998-2 019.
WIPO acknowledgment of Össur contribution to innovation confirms the company industry leadership in R&D. Next slide, please. As a part of Össur larger commitment to sustainability and commemorate the company 50th anniversary, I am pleased to share with you that Össur will be carbon neutral this year, in 2021. This includes carbon neutrality for energy and fuel consumption, waste generation, business travel, transportation of goods, and electricity consumption of finished good suppliers. This concludes the review on the first quarter. We can now go on to Q&A session.
Thank you. If you do wish to ask a question, please press zero one on telephone keypad. If you do wish to withdraw your question, you can do so by pressing zero two on telephone keypad. Our first question comes from the line of Christian Robinson from Nordea. Please go ahead, your line is open.
Hi. Good morning, Jón and Sveinn, and thank you for taking my questions. I have three, please. First, can you comment a little bit on whether the sales development that you've seen here in April, whether that's been consistent with March? Then somewhat related to that, just to confirm the numbers that you quote in the report where you say that January and February was 90%-100% of 2019 sales and March was 100%-110% of 2019 sales. Was that organic sales or including acquisitions? Then my second question is to the acquisitions that you've announced here in connection with the Q1 report. Can you elaborate on whether these acquisitions are mainly within Prosthetics or within Bracing & Supports? Finally, can you comment on how you see the outlook for further M&A for this year? Thank you.
If I can maybe take the first question on the sales trend. Yes, we can confirm that sales growth has continued into April and quarter two has started in line with how quarter one ended. I can also confirm that the indexing that we provide in the announcement is benchmarking is organic. It does not include any M&A.
On the acquisition, Christian, you can assume that those acquisitions we are buying are both Bracing & Supports and Prosthetics & Neuro Orthotics at the typical mix of both distribution companies.
The outlook for-
On M&A outlook.
Yeah.
Going forward, we have-
The M&A outlook is I would probably look at the same continuation there.
Okay, great. Thank you very much.
Thanks, Christian.
You're welcome.
Thank you. Our next question comes from the line of Benjamin Silverstone from ABG. Please go ahead, your line is open.
Thank you. Hi, Jón. I hope you're well, and congratulations on a solid quarter. I have three questions, if I may. The first one is in regards to your organic growth guidance for the full year 2021. You do now mention explicitly that we expect to see some pent-up demand. Could you just reiterate what the guidance holds in terms of pent-up demand? As far as I remember, the higher end of the organic growth was accounting for pent-up while the lower wasn't. But if you could just clear it out, that would be great. Thank you. My second question is in regards to the Prosthetics sales and also somewhat related to pent-up demand. We are seeing this segment be much more resilient as we have in the last couple of quarters.
You also now mentioned that the Bionic Products sub-segment account for 19%, which is somewhat down compared to what it normally stands for. Could you perhaps give some indication of whether or not we're going to see some pent-up demand in the Prosthetics segment coming from Bionic Products, or how your outlook is on this? My third question is in regards to your gross margin. Sveinn, you mentioned that you are now seeing it back at more normalized levels, with manufacturing and warehouse being back at normal capacity. But could you just quickly mention whether or not Q1 has been back at normal levels for the entire quarter, or if we will see some additional margin improvements for Q2 when you have a full quarter with normal capacity? Thank you.
Yes. Thanks, Benjamin. Maybe I can on the organic guidance and pent-up demand, what we've said about pent-up demand is on the Prosthetics side. Remember last year on the full year results, we communicated that the mechanical products were virtually flat year-over-year, while we saw a bigger decline in Bionics. When it comes to 2021, we expect Bionics to gradually come back online, and that is also partly answering your second question. As Bionics is a more intensive sales process, it requires more time with the user. These sales have been more impacted than on the mechanical product. So we expect some pent-up demand here for Bionics here in 2021. On the Bracing & Supports side, the drop in demand has mainly been related to fewer injuries because of less activity.
We have said that we don't expect any meaningful pent-up demand on the Bracing & Supports side, only perhaps for some of the product categories like postoperative bracing. So I don't have a scientific answer for you in terms of how much pent-up demand, or let's say such that you can calibrate the full year guidance based on how much we will realize in terms of demand lost last year. But the way we've thought about the guidance is that at least the pent-up demand, depending on how that develops, will have an impact on where we end up for the full year. So I don't have a scientific answer on that, unfortunately. Gross profit margins, I would be cautious to model higher gross profit margins. Also remember, due to Bracing & Supports being lagging behind Prosthetics, has also had a positive mix impact here in quarter one.
As we get the Bracing & Supports business back on track, we will have a slight negative impact from a mix standpoint on the overall gross profit margin going forward.
Thank you very much.
I hope that answers your questions. Thanks.
Absolutely. Thank you.
Thank you. Once again, if you do wish to ask a question, please press 01 on our telephone keypad now. Our next question comes from the line of Niels Granholm-Leth from Carnegie. Please go ahead, your line is open.
Good morning. Following up on the acquisitions you made. You mentioned that you expect acquisitions to continue at the same pace for the next few quarters. That would then anticipate adding 11 million or so in sales per quarter or 7%. Is that correct? The 7% to annual sales, is that a correct assumption?
Well-
Yes, you can answer this one.
Okay. Sorry, I thought you were. Okay, sorry. That will assume that we can consummate those acquisitions. As you know, Niels, it is really difficult to plan acquisitions. What we are saying is that this is our current strategy. The pipeline is there, but whether we can localize suitable ones, it is impossible to say. But yes, the appetite is there.
How much would be your M&A capacity at this point in time, given that your net debt to EBITDA is above your target range?
That is a good question, Niels. Our net debt to EBITDA is certainly above our current target range. However, we should take into consideration that this is based off an EBITDA impacted by both COVID-19 and all these M&A or divestment projects that we completed last year. So as the business normalizes here towards the end of the year, we will move closer to the top end of the target range. But you are right, our bandwidth to do acquisitions is, of course, constrained somewhat in the short to medium term due to temporarily high leverage. Yes. That is a good point.
But would that mean that there are actually acquisition possibilities that you are not able to pursue at this point in time?
We have not said so.
Because we have also been clear that this net debt to EBITDA range is a target range. But we have also said that we could temporarily move out of that range if the right acquisition opportunities present themselves. So, that is how we look at the range. We want to operate the business within this 1.5x-2.5x net debt over EBITDA, but we have also said that we can temporarily move outside of the range if the right M&A opportunities arise.
And is it fair to-
Sorry, Niels. We have a full backing of the banks and those lenders. Really, the explanation for it is that there is a drastic fall in the EBITDA, and that's what we are dragging with us out this year. I don't think if we get a good opportunity for acquisitions, that will not stop us.
Is it fair to assume that the acquisitions you just made and the next acquisitions to be done are still within the prosthetic workshop business, though?
Yeah. There are some few fully product companies we are looking at as well. Those would be in the prosthetic segment.
Right. Just a final question on competitive bidding. Would you expect the effect from competitive bidding to have the same effect in the coming quarters as in quarter one?
The competitive bidding has had a lesser impact than we had anticipated. We would like to wait another quarter to answer whether that is permanent or temporary.
Okay. Thank you.
Thank you. Our next question comes to the line of Yiwei Zhou from SEB. Please go ahead. Your line is open.
Hi, gentlemen. Thank you for taking my question. I have two left here. Firstly, a follow-up on the competitive bidding. Is it possible for you to quantify a bit on the impact in the quarter? Secondly, could you sort of confirm that you have not received any government subsidy in the quarter?
Yeah. We've not received any government subsidies in the quarter. On the competitive bidding, as Jón said, the year started a bit slower than what we had anticipated in terms of the financial impact materializing. But as of now, we are not changing our view on the overall impact of our estimated impact of competitive bidding. It is a complex process. It impacts the whole value chain in the U.S. Even though the impact, how should I put it, hit us from 1st of January onwards, but as of now, we don't have a reason to change our estimates of how this will impact our business.
All right.
On the statistically, what is actually affected by competitive bidding is difficult to say. It is the overall sales. It's really difficult to pinpoint what exactly we'd say is affected and which isn't.
Okay. Fair enough. Thank you.
You are welcome.
Thank you. We have no more questions from the line. I will hand it back to our speakers for closing comments.
Then, thank you for your questions. Please reach out to our IR if you want to have a call with us or you have a question after this call. Thank you all for listening, and have a good day, and good luck with all your reporting coming in now. Thank you very much.