Ladies and gentlemen, welcome to the Össur Q2 Results 2020. Today, I am pleased to present Mr. Jón Sigurðsson , President and CEO. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question -and- answer session. Speaker, please begin.
Yeah, thank you. I would like to welcome you to the Össur Investor Conference Call, where we will cover the result for the second quarter of 2020. 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 the financial results, after which a question -and -answer session will follow. Financial performance has been significantly impacted by the COVID-19 pandemic. Sales were negatively impacted in many of Össur's main markets due to social distancing and other measures that were implemented by local authorities in relation to the COVID-19 pandemic. Sales in the second quarter of 2020, therefore, amounted to $135 million, which corresponds to a 25% organic decline. Sales in the first half of the year declined by 16% organic.
Even so, our sales have been gradually improving since the beginning of April, when sales were about 60%-70% of last year. June was at 80%, 90% attainment, and sales attainment for the first weeks of July was slightly over 90%. The outlook remains uncertain, but we want to highlight that the long-term prospects of underlying fundamental drivers of the Prosthetics and Bracing & Supports markets are not expected to change. We also expect that the impact from COVID-19 will lead to some pent-up demand, but we do not find it possible to quantify the pent-up demand at this stage. EBITDA amounted to $12 million of Q2 or 9% of sales, and EBITDA in the first half amounted to $34 million or 12% EBITDA margin. Even so, our cash position remains strong, but I will let Sveinn elaborate further on the financial later in the presentation.
We recently completed the acquisition of the prosthetic manufacturer, College Park, and entered into exclusive negotiation to divest Gibaud, which is the part of the France business that does not sell into the O&P channel. Gibaud has supported our effort to build a platform within the O&P channel in France, where our market share is strong in Prosthetics. With the potential divestment of Gibaud, Össur sales in France would primarily go through the O&P channel, which is our primary sales channel in Europe. The potential divestment will therefore allow us to focus our effort in France and strengthen our position within the O&P market. If we turn towards the quarter sales amounted to $135 million compared to $179 million in the same quarter last year.
The Prosthetics business has proven to be more resilient than the Bracing & Supports through the pandemic, where the Prosthetic segment declined 21% organic and the Bracing & Supports segment declined 32% organic. Reported sales declined by 25%. Recently acquired companies contributed 3% to reported growth, and with the change in currency rates, sales were negatively impacted, corresponding to a 2% point impact on reported growth. Impact of COVID-19 varies by geography.
In America, sales were significantly impacted in April and May but began to gradually improve in June. Outlook in the U.S. remains uncertain, in line with recent increase in COVID-19 cases in some of Össur's major market within the U.S. In EMEA, sales were also significantly impacted in April, but then began to gradual recover in the remainder of the quarter, in line with ease of lockdown measures in most countries. In APAC, sales in China and Australia continued to be on track, while sales in the emerging markets were negatively impacted. Over to you, Sveinn.
Thank you, Jón. The P&L is significantly impacted by lower sales as a result of COVID-19, as J ó n went through, and also other items and costs in relation to the potential sale of Gibaud and other extraordinary items on the cost side. Lower sales result in lower gross profit, and gross profit margin is temporarily lower due to lower utilization in manufacturing. As we had communicated as part of quarter one, we are able to reduce OpEx by $8 million when excluding the impact of, again, the potential Gibaud divestment costs. In relation to the potential sale of Gibaud, we are booking $17 million write-down or let's say impairment of trademark and goodwill. These are obviously both non-cash items. Then we have about $3.2 million transaction cost in relation to the potential divestment. Ultimately resulting in a negative EBIT of $17 million.
The effective tax rate was - 4% in the second quarter as it was again impacted by some extraordinary items, mainly in relation to the potential sale of Gibaud. The effective tax rate would have been around 25% in the first half of the year, excluding these items. Net loss in the quarter was $18 million. To the next slide, please. Reported EBITDA amounted to $12 million. As a result, the EBITDA margin was 9% here in quarter two. Fundamentally, underlying profitability remains intact on in market pricing, our ultimate, let's say, productivity, cost structure, and capacity remains in place. As sales recover, margins will return to pre-COVID levels. In quarter two, currency movements net of our hedging agreements had a neutral impact on the EBITDA margin in quarter two. We expect, let's say, moderately lower OpEx in quarter three year-over-year.
But we believe the operating profit in general will improve for the second half year of 2020 as sales recover. If you go to the next slide, please. Free cash flow was strong and amounted to $20 million in quarter two. The key items affecting the cash flow in the quarter are, first and foremost, lower operating profit as already covered. We have a positive contribution from net working capital in connection with cash management activities in the quarter, and our accounts receivable were stable. In general, we continue to see good collection rates, and our customers' ability to maintain payment terms has been very strong in the quarter. CapEx is lower than in the comparable quarter and amounted to $5 million. Our liquidity position is strong with cash and undrawn credit facilities amounting to $282 million at the end of the quarter.
Net interest-bearing debt was $331 million at the end of the quarter, which corresponds to 3.0x net interest bearing debt to EBITDA. This ratio is now temporarily exceeding our target range of 1.5x to 2.5 x. If you go to the final slide, as mentioned before, we entered into exclusive negotiations to divest Gibaud in France. Signatures of the final agreements are subject to consultations with the employee representative bodies of Gibaud and Innothera. The completion is expected in the second half of 2020. You can find the pro forma financial impact in the table here on this slide, and we would like to highlight that the potential divestment will be accretive to our organic growth and profitability.
If we look at adjusted figures for last full financial year 2019, meaning that organic growth would have amounted to 6% in 2019 compared to the reported 5%, and the EBITDA margin would have been 23.4% compared to reported 21.8%. We would also like to highlight that the balance sheet items related to Gibaud are currently classified as assets held for sale. That concludes our overview for the quarter, and let's go to the Q&A session, please.
Thank you. If you have a question for the speakers, please press zero one on your telephone keypad, and you'll enter a queue. After you're announced, please ask your question. Our first question comes from the line of Thomas Bowers from Danske Bank . Please go ahead.
Yes. Thank you very much. Good morning. Just a few questions here from me. If we kick off with the sales attainment. Can you give us any color on what is the split between the U.S. and Europe right now? I am just wondering if you have any concerns about the current development in the U.S. with the increasing number of COVID-19 cases. Then, I think I heard you in regards to the July numbers, can you just confirm that it was above the 90% level? Then maybe just on CapEx, the $5 million level, is that something that we should look for in Q3 and Q4 as well? Then maybe just lastly on the full year guidance, or, well, remains suspended, but do you have any comments on the share buyback program, which also was put on hold? I think I will stop there. Thanks.
Regarding the U.S.A., as of now, we are seeing very similar development in U.S. and Europe. However, of course, we are concerned about the recent development or resurging of the situation in those big markets, Texas, Florida, and in California. But I think there is very little we can say about it. We can confirm that it was slightly over 90% attainment in July, the first few days of July. CapEx?
Thomas, I think you should expect CapEx to be similar or let's say per quarter for the remainder of the year. On the share buybacks, again, let's say I will refer just back to our capital structure and dividend policy. We are currently above, let's say our target levels of 1.5x to 2.5x. We would need to move into that range for us to resume our share buyback program.
The guidance and the share buyback, we cannot comment on that, really. We have suspended the share buyback. When we will revert to that, it is too soon to say.
Okay, great. Thank you very much.
Sure.
Thanks so much.
You are welcome.
The next question comes from the line of Christian Ryom from Nordea Markets. Please go ahead.
Yes, good morning. Hi, Jón. Hi, Sveinn. A couple of questions.
Hi
Three questions from me as well. First is maybe if you can dwell a little bit further into the current sales attainment and whether there are any markets where you are actually seeing this pent-up demand being realized, say, what are the current trend in some of the countries that were quickest to emerge from lockdowns? My second question is to the gross margin and how we should think about that, particularly if you can maintain or improve on the current sales attainment. Is a sales attainment above these 90%, would that put you roughly at a gross margin around the 62% level that you delivered in Q1, or how should we think about that? The final question is whether you have any update on some of the status on competitive bidding in the U.S. Thank you.
Yeah. Let me start with the first one, current sales and pent-up demand. Remarkably, U.S. has shown a quite resilience in the recovery, in fast recovery, and that is still the case, actually. Having said that, the development in U.S. have turned worse at the moment. How that will impact, we don't know. Regarding the pent-up demand, we saw some in China. At the moment, unfortunately, I just would like to say that this is a speculation at the moment. Common sense prevailed that there is some pent-up demand.
We know that discussing with some of our customers, everybody thinks that there will be some pent-up demand. To what extent and how much, it's very difficult to say. Further than that, I would also like to point out that Southern Europe came back very strongly from a very low trading level. And the speed of the recovery indicates some pent-up demand. I know I sound like a politician here. On the other hand, the rate of increase has been leveling off over the last weeks, but there's very little more I can say, really.
Yeah, on the-
Sorry, go ahead.
Just one clarification on your comment on the U.S. You said that there's been resilience in recovery, but it has recently turned worse. Is that what you're seeing in your sales, or are you just referring to sort of the caseload in the U.S.?
No, we have not seen that in our case. More references to the external environment in U.S., which we all see the same news on that. Generally, Christian, there's just a lot of regional differences in how sales are coming back in these markets, and it's largely very much just correlated with the underlying actions that are being taken in each of these markets to control the spread of the pandemic. Like we mentioned in quarter one, markets like Germany, Sweden, have been much less impacted than other markets that have had strict closures or lockdowns, and let's say the recovery correlates very well with these developments.
Ultimately, let's say the pent-up demand will be there. It's also just a matter of capacity out in the clinical field and with our core customers, the O&P clinics, there's some capacity constraints there to perhaps take on the full extent of the pent-up demand. As Jón said, we're simply unable to put a scientific or provide you with a numerical answer on the size of the pent-up demand, unfortunately.
Yeah. We can see that those clinics that are within the hospital environment, they are really hard hit. We can see some of our very good customers that are in those big hospital systems, they have dropped off quite significantly. Those who are more removed from the hospital systems have shown a much quicker return.
Right.
Okay, so on the gross profit margin, what we see here in quarter two 2020 is that our gross profit margin is somewhat lower than what we would expect in, let's say, a normal quarter. The reason for that is just that we are not utilizing our full capacity. We have idle capacity during the quarter. You can also see on the working capital side, we are decreasing our inventories in the quarter. Still having, obviously, a decline in sales. So we've not been producing to inventory to, let's say, keep up gross profit margins.
Our in-market margins remain the same, meaning pricing, product mix as such, although Bracing & Supports is sort of not growing as strongly as, or not recovering as fast as Prosthetics. So there's some negative mix effect. But it is purely because of lower utilization in our manufacturing platform. As sales recover, we will gradually get to a more normalized level. I hope that gives you some color on this. Then with the current trading, we are getting closer to what is, I would say, normalized gross profit margins.
Okay. Thank you.
On the competitive bidding, no. There's no news as such on competitive bidding.
No, we don't know anything. We've been asking, and we think it's safe to assume that that will continue, although the system is quite clogged at the moment in U.S. So it might be delayed, but we don't know.
Okay. Thank you very much for the answers.
Thank you.
Just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. Our next question comes from the line of Niels Leth from Carnegie. Please go ahead.
Good morning. My first question would be a question which I also think I asked last quarter. Could you remind us what share of amputations are considered elective surgery? Since there is a delayed effect from the COVID-19 as amputated are waiting kind of six to eight months, I guess, to get fitted, would you then expect a delayed effect into the second half of this year from amputations that are potentially being delayed? Thank you.
Yeah. This is a very good question, Niels. At the moment, everything around this, even though it's very interesting, remains pure speculations. There are two indications pointing at a different direction. There is the delay in amputation, and there is a delay in vascular surgery. What kind of effect that has on the amputation rate is a very interesting question. Some of our customer maintain that this will mean increase in amputations later on because of angioplasty, vascular surgery has been delayed. As I say, Niels, your guess is as good as mine. We don't know. It's a speculation at this point.
Maybe to add to that, just maybe a reminder that let's say on average, and it varies between countries and by customers, 60%-80% of the business with our customers is just servicing existing amputees.
Yes.
Obviously, yes, if there's a delay in amputations because of complexities in the hospital system as a result of COVID-19, that will have an impact. We do not have any, again, clear statistics to be able to give a scientific answer on this.
So it's not that you can see how much of your sales that goes to newly amputated patients?
No.
Okay. Great. Then I just have a housekeeping question. Where did you book the $3.2 million of transaction costs in quarter two?
That's in P&L.
Great. Do you expect to deconsolidate the Gibaud from your P&L in Q3?
Our expectation is that we will be able to complete the sale of Gibaud in the second half of the year. As soon as we are able to complete on that, Niels, we will announce that, yeah. Then we will obviously separate that from our underlying P&L. But, let's say we've shared the information with regards to the approximate P&L impact of all the pro forma numbers, which you should have.
Okay. I guess my question was if you expect to put Gibaud in a separate line in the P&L, discontinuing operations.
Yeah. If we just look at the pure or definition of the IFRS standard, for us to be able to do that, Gibaud needs to be a separate, let's say, cash generating unit, which it's not. We're just selling part of our French business. Therefore, from an accounting standpoint, we are applying the IFRS standards. We are not able to do that. But let's say, you should be able to estimate the impact based on the numbers that we have shared. We talk about Gibaud as a company, but in reality, we are selling a certain part of our French business out of us. We are keeping a very good part of the French operation. The big part of French operation still remains intact, and it's a very good business we have there.
Okay. Thank you.
Our next question comes from the line of Yiwei Zhou from SEB. Please go ahead.
Hi. Good morning, gentlemen. I have three questions. Firstly, a follow-up question regarding the capacity with the O&P clinics. Is it possible for you to indicate an average utilization in this O&P clinics? Secondly, when you say the sales attainment, could you please confirm that is not impacted by the acquisitions? Could you give us an update on M&A opportunities? Do you see any change in the market dynamics, especially with the independent O&P clinics at the moment which are suffering?
Could you repeat the second question, please?
Yes. It's the sales attainment. Could you please confirm that is not impacted by acquisitions? Acquired growth.
Acquisitions. Yeah. Okay.
All right.
Yeah. We can answer that now. That is just pure organic, let us say. It is not impacted by acquisitions.
Let us take the capacity. We can see the capacity in the healthcare system in general is very defined, and it is difficult. The whole system in our clinics do not have a lot of idle capacity. To what extent our customers are able to ramp up their production or ramp up their services, we do not know. Our own clinics, we have been quite successful in our own clinics, but how the customers in general will be able to, we do not know. We can say there is a big difference between our customers. Some are able to, but some are not. The market dynamics, if we judge from our account receivables, our customers in general have been able to ride the storm quite successfully. We have not seen distressed customers. Customers are paying on time, and we do not see a big trouble there.
Okay. Can I just follow up the utilization question? Is it possible for you to quantify an average utilization rate with your own O&P clinics? Do you see it could improve if the pent-up demand occurs?
I would say, the way that the general answer to that is that the utilization is largely in line with just our own sales in these different markets. In markets which are further along the recovery curve, the utilization correlates with that. In markets like, again, as Jón mentioned, China, which is further along the recovery, we see, let's say, market back to good growth levels and obviously then full utilization in the clinical part. Again, the utilization will just correlate with how our sales are developing ultimately in these markets. But there are two efforts. This is a very interesting line of questioning. These are questions we are asking ourselves every day. There are two factors that come in play there. First of all, patients coming into the clinics. Secondly, the capacity of the clinics to serve those customers.
We see that there's a lot of customers, the need of the customers, specifically those who need service, they seem to be willing to brave the situation and show up. This is a more question of the restriction of the authorities, how much can you If people can't leave their home, they can't go to the clinics. But if they can, they show up. Then there is a question of, are the clinicians able to perform their duties? How many can stay in the waiting area? All of those restrictions come into play. But we see that if people need specifically Prosthetics care, and that might be the reason for the difference between Prosthetics and Orthotics. So people try to show up if they need the care.
Okay, thanks. I guess back to the queue.
The last question comes from the line of Benjamin Silverstone from ABG. Please go ahead.
Thank you. Good morning, Jón and Sveinn. I hope you're all well. Thank you for taking my questions. I have three, if that's okay.
Yeah, sure.
Thank you. First, I was wondering if you could provide some nuances as to how R&D is currently progressing, and also more in relation to the ongoing traction happening on the points presented at the last CMD. If there's anything happening on the exoskeletons, the mind-controlled aspects or also the emerging markets, and so how perhaps your thinking about this has changed during the COVID-19. Lastly, just to be sure that I understand correctly the impact that this divestment will have, could you put a few words on how your French commercial infrastructure will look after the divestment? Currently, it's my belief that the divestment will not have a material impact on the sales channel, but I just want to make sure that is correctly understood. Thank you.
Yeah. Thank you. Thanks, Benjamin. Let me start with the R&D. The R&D is progressing remarkably well. I'm personally very impressed by how the R&D has been able to keep all major projects going. There have been some problems with testing, because it's been difficult to get to patients to test. But other than that, we believe the R&D pipeline is largely intact. I wouldn't say completely 100%, but largely so. Going back to, let's say, the capital markets day and some of the growth initiatives we talked about there. When you mentioned emerging markets in particular, COVID has not changed our willingness to invest in this part of the world. As we went through on the capital markets day, we are underrepresented in some of those key markets, and we have a very ambitious plan to grow that part of our business, and we will continue to do that.
There's no change in those plans whatsoever, and that remains one of our biggest growth opportunities, and we are very much committed to that. On the French infrastructure, like Jón mentioned earlier, we continue to have a sizable business in France. France remains one of the biggest healthcare markets in the world, and we are one of the key players in particularly Prosthetics in the French market. Our go-to market in France will be focused on the O&P clinics. We'll continue to maintain and grow that business. But with the potential sale of Gibaud, we are now moving away from the Bracing & Supports to pharmacy business in the French market.
What we have done then in France, we will keep everything but the business that is not going into the O&P, and we sell both, of course, Bracing & Supports and Prosthetics into the O&P market, and that will be intact. That is a very lucrative and very nice business which we have been building up in France. On the exoskeleton question, nothing has changed. We do not see that the COVID-19 situation per se will change anything there.
Very clear. Thank you so much.
Thank you.
You are welcome.
We have one follow-up question from the line of Niels Leth from Carnegie. Please go ahead.
Great. Thank you. Before you mentioned that some U.S. hospital systems are badly hit by the COVID-19 outbreak in terms of profitability. How is this economic crisis in the U.S. hospital system affecting your business? I guess that most of your products are fully reimbursed, so how would that affect a company like yours?
Thanks for being able to clarify this. In absolutely most cases, we do not have a direct business with the hospital system. Some of our customers, even though they are independent from the hospitals, they have locations in the hospitals. We have seen hospitals just close and close down for all but the most vital cases. I don't want to mention any examples, but our clinicians have not been able to come to the hospitals, and the access to the hospitals has been severely restricted. That's the effect of it rather than the hospital systems per se is having direct business with us.
Again, just to reiterate, in most cases in the U.S., our O&P clinics are outside of the hospital setting. There are these few examples which have then been more impacted than the rest of the market, you could say.
Bracing & Support s is a different story, where large part of our Bracing & Supports is post-elective, quote unquote, "elective surgeries," and those have been postponed quite a bit.
Okay. Thank you.
You're welcome.
No further questions. I'll hand it back to the speakers.
Thank you for your questions and please reach out to us if you would like to have a call with us or if you have any questions after this call. Thank you for listening and have a good day and good summer. Thank you very much.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.