Ladies and gentlemen, welcome to the Össur Q1 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. Mr. Sigurðsson, please begin.
Yeah, thank you. First, I would like to welcome you to the Össur Investor Conference Call, where we will cover the results for the first quarter of 2020. As already mentioned, my name is Jón Sigurðsson, I am the President and CEO, and with me here today is Sveinn Solvason, our CFO. We will begin by going through the highlights for the quarter, followed by status on the impact of the COVID-19 pandemic, and then go through the quarterly results. A question- and- answer session will then follow. Financial performance in the first quarter of 2020 was impacted by COVID-19 pandemic, both in terms of sales and profitability. I will, on the next slide, go through the highlights of the impact that COVID-19 has on the operation of Össur.
Sales in the first quarter of 2020 amounted to $154 million, corresponding to a 2% decline in local currency and a decline by 4% organic. Month-to-date sales for April are down by approximately 45%, as the markets where we generate most of our sales are now impacted by the COVID-19 pandemic. We are, however, already seeing gradual signs of recovery in key European markets, and sales in China were, in April, back at levels comparable with 2019. EBITDA amounted to $22 million or 14% of sales. Lower EBITDA than in the comparable quarter is mainly due to lower sales. Due to the uncertainty caused by COVID-19 pandemic, we withdrew our guidance on March 17 and temporarily suspended our share buyback program. On April 7, we received an approval notice from FTC regarding the acquisition of College Park.
Given these uncertain times, parties have agreed to remain flexible on the closing date, but aim to conclude within three months. Lastly, additional financing of $225 million was secured in March to strengthen Össur financial position through these uncertain times. Now, let's look at the high-level overview of how the pandemic has impacted our operations. Over the last couple of months, our primary focus has been on business continuity and safety of our employees and customers. Our manufacturing site and warehouses across the world are largely operational, with employees working in shifts and current demand is being met. We have taken extensive safety measures to ensure production and minimize the risk of contagion. Many of our office and sales employees are working from home, while sales, marketing, and educational activities are being refocused to digital and online.
Our IT infrastructure continues to work well, and business continuity plans have been implemented in all areas of the business. Össur strategy and strategic initiative remain unchanged, and we will continue to invest as necessary to support future growth. This includes investment in research and development, and continued investment in sales and marketing infrastructure in the emerging markets. The pandemic is having short-term negative impact on demand for Prosthetics and Bracing & Supports products. We do, however, highlight that the long-term prospect and underlying fundamental drivers of the Prosthetics and Bracing & Supports markets are not expected to change. The impact from COVID-19 is furthermore expected to lead to some pent-up demand. Financial performance is negatively impacted. Sales growth in the first two months of the year was in line with earlier expectations, but sales began to be impacted in March.
Sales month to date in April are furthermore significantly impacted as they are down by approximately 45%, as some markets have strict lockdown measures in place. We do already see signs of recovery in some markets, but it remains uncertain when markets will be back at normal operational levels, and we are therefore not able to provide any update on financial guidance. Due to the temporary decrease in sales, Össur has taken several actions to reduce cost in short term. These actions include furloughing employees and participating in government support programs where applicable. In addition, a voluntary temporary decrease in salaries for top management has been implemented and strict control on all variable cost items. These cost reductions are not reflected in the first quarter financials, but the currently identified OpEx reductions will amount to about $8 million-$10 million in the second quarter.
Even so, we are well-financed and confident that we are in a strong position to get through these uncertain times, where available cash at the end of the quarter amounted to about $300 million. Finally, I would like to thank all our employees and customers for continued flexibility, positive team spirit, and their effort in this challenging time. We have yet to discover the full impact on society and our businesses, but what we do know is that now is the time to act responsibly, decisively, and collaboratively. If we turn towards the quarter sales, the sales amounted to $154 million compared to $160 million in the comparable quarter last year. The sales impact due to the COVID-19 pandemic has been similar in both Prosthetics and Bracing & Supports, where sales performance was in line with expectations in the first two months. The Prosthetics segment declined by 4% organic.
Sales of bionics accounted for 21% of Prosthetics component sales, the same as in comparable quarter last year. Bracing & Supports declined by 7% organic, partly caused by discontinued product line in emerging markets. Reported sales declined by 4%. Recently acquired companies contributed 3% to reported growth, and with changing currency rates, sales were negatively impacted, corresponding to a 2% impact on reported growth. If we briefly go over sales by geography, it varies significantly between countries on how much the COVID-19 pandemic impacted sales in the first quarter. If we start with APAC sales in China, were impacted January through March, but other countries within the region were less impacted, such as Australia, where the impact has been very limited. Looking at EMEA sales impact also varies by country.
While many countries in the regions were materially impacted by pandemic, relatively large markets such as Sweden and Germany were in March impacted less than the market such as Southern Europe or other countries where lockdown measures were put in place. In Americas, both the U.S. and Canada were impacted in March, which are our two largest market in the region. Now over to you, Sveinn.
Thank you, Jón. As Jón already covered, organic sales declined by 5% and 2% in local currency. The gross profit margin was 62% here in quarter one. The lower gross profit margin is mainly a result of lower sales and slightly lower productivity as a result of lower manufacturing volume in the month of March, mainly caused by the COVID-19 pandemic. EBITDA amounted to $22 million, or 14% of sales, compared to $30 million or 19% of sales in the comparable quarter. I'll review the EBITDA development on the next slide. Also, as Jón already mentioned, cost reductions are not reflected in the first quarter financials, but we expect OpEx reductions to amount to $8 million-$10 million in the second quarter.
The cost reductions are based on information we have today and are subject to change depending on changes in local government plans and how quickly we see sales growth resuming. It should also be noted that most of the cost reductions are temporary measures while sales are impacted by the COVID-19 pandemic. The effective tax rate was 25% compared to 24% in the comparable quarter. Net profit was $7 million or 5% of sales, compared to $14 million or 9% of sales last year. Go to the next slide, please. A few comments on EBITDA. As previously mentioned, lower gross profit and gross profit margin, mainly as a result of the lower manufacturing volumes in March.
Growth in sales and marketing expenses is mainly due to acquisitions as sales and marketing expenses would, let's say, if you adjust for acquisitions, be lower year-over-year due to less activity and lower variable payroll costs. There's a slight decline in R&D costs due to some temporary project delays and less activity in connection with, again, COVID-19. Finally, there's an increase in G&A, which is mainly driven by recent acquisitions and related investments there too. As a result, the EBITDA margin was 14% in quarter one. Currency movement impact is the EBITDA margin positively by about 40 basis points. It should be noted that the ISK, which was the main reason for the positive FX impact, has depreciated further here in April. Free cash flow was strong and amounted to $15 million compared to $4 million last year.
The key items affecting the free cash flow between the years are, firstly, lower operating profit. On the working capital side, we have lower investment in inventory than in the comparable period, and a reversal of accounts receivables from quarter 4 and somewhat stable accounts payable. Paid cash tax is also slightly higher, and CapEx is higher than in the comparable quarter due to, again, the efficiency initiatives and investments in a new CRM system. Cash flow will be impacted as a result of the COVID-19 pandemic. Accounts receivables are expected to increase in the coming months due to unexpected delay in payment collections from some customers. It can also be expected that a temporary increase in bad debt will occur.
Some reductions in accounts payable can be expected as vendor purchases have been reduced and inventory levels are expected to be largely stable as current product demand is being met. CapEx is expected to decrease in the remainder of the year relative to recent quarters. Also, we secured additional financing of $225 million in March, including a $75 million loan from the European Investment Bank and a $150 million incremental credit facility from Danske Bank and Nordea. The terms of the new financing were favorable and in line with existing credit facilities. Net interest-bearing debt was $308 million at the end of the quarter, which corresponds to a 2.2 x net interest-bearing debt to EBITDA. Cash in addition to undrawn facilities at the end of the quarter amounted to $304 million. Now over to you again, Jón.
Yeah. Thank you, Sveinn. As announced on March 17, we withdraw our financial guidance due to the uncertainty caused by the COVID-19 pandemic and due to the rapid day-to-day changes in the regional markets across the world. We are still unable to assess the magnitude and length of the expected impact of COVID-19. We can therefore not yet provide an updated financial guidance for 2020. As soon as we can estimate the expected financial impact of the COVID-19 pandemic, an updated guidance for 2020 will be published. Thank you all. Let's now go to the question- and- answer session.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. After you're announced, please ask your question. Our first question comes from the line of Christian Ryom from Nordea Markets. Please go ahead.
Hi, good morning, Jón and Sveinn, and thank you for taking my questions. I have a couple at least. Can you first help us with what you estimate the impact of COVID-19 to have been in March? You say you have seen April sales be around 45% below normal here in April. What was the figure for March? That is my first question. My second question is on the recovery that you are seeing, particularly in China, where I understand that you are now saying that you are back to 2019 levels. Should that be understood as you believe that the market there has normalized, or are you still below where you would like to be, considering that I believe you were growing quite rapidly, maybe something to the tune of 10%-20% prior to the COVID-19 pandemic? That is my first two questions. Thank you.
Hi, Christian. I can take the first one. The sales decline in March was 15%.
Okay.
Which means that growth in January and February was just around flattish.
Okay. Thank you.
Just a reminder, Q1 last year was a very strong quarter organic growth wise. We expected quite moderate sales growth here in Q1.
Regarding the China question, the normalized growth there is about at level last year. It is up and down, and it has not stabilized yet, but we think it is going into a normal trading relatively fast.
Okay.
Yes, that is true. There is quite a bigger growth. We do not see a growth yet there.
Okay, great. Just a couple of additional questions, if I may. Can you just clarify on the cost reduction of these ISK 8 million-ISK 10 million that you are talking about for Q2, is that versus the cost base in Q1, or how should we think about that? Secondly, do you have any-
Yeah, Christian. Sorry. I'd like to add a very important point in China. I don't want to spend too much time here, but the amputations in China are predominantly by trauma and caused by accidents, work-related accidents or traffic. Because of the lockdown there is quite a big difference in the amputations level in China while the restrictions were in place. It's not-
Okay
... it's not a typical market. Okay, sorry. Yeah, go ahead.
On the cost reductions, is the reductions that you're talking about for Q2 of these ISK 8 million-ISK 10 million, is that versus the cost base in Q1, or how should we think about that?
Yes, that's right, Christian. I would though point towards the fact that Q2 OpEx is usually slightly higher due to seasonality than quarter one, but it is from the run rate.
Okay, great. My final question, have you heard anything new around competitive bidding in the U.S. and whether the implementation might be postponed due to the COVID-19 pandemic?
The answer is no, we have not heard anything. It might not be unreasonable to think that it would be at least delayed, but we don't know.
Okay, great. Thank you very much.
Our next question comes from the line of Niels Granholm-Leth from Carnegie. Please go ahead.
Good morning. My first question is about the 45% sales decline you saw in April. Could you break that down between the Bracing & Supports and the Prosthetics businesses? My second question would be that, when you look at the net working capital, the worsenings that you're expecting in the second quarter, would you expect those net working capital increases to remain for the second half of this year, provided that we see a recovery in your markets during the second half of the year? Thank you.
Okay. Let me take the 45% decrease. It's a slightly bigger decrease in Bracing & Supports, and Prosthetics is not, but not material. There is a discontinued product in Bracing & Supports, specifically in the emerging market that plays a big role in it. It's pretty similar, but a little bit more in Bracing & Supports.
On the working capital, Niels, it's our expectation that payments from our customers, DSOs will be extended as we get into March and June. For the month of April, our DSOs are developing in line with what they're largely stable. We haven't seen any deterioration to date in our accounts receivable. It is still our expectation that DSOs will go up over the next couple of months. When it will sort of get back to normal levels, I think that would largely be in line with how we see sales recovering. It is our operating assumption that sales are sort of already started to gradually climb up to normal operating levels.
I'm afraid I can't give a very precise answer on that because it ties into how things will materialize over the next couple of weeks and months.
Okay, thanks. On the M&A situation, how would you expect the COVID crisis to affect the M&A market in your businesses?
Well, your guess is probably as good as In the long term, I think that the consolidation will increase. O ther than that, I don't know. H aving said that, our customer seems to be quite robust, and we have not seen any particular delays yet in payment. So the business seems to be pretty sound as of now.
How about you? Have you appetite for acquisitions in these markets, or have you put your search for M&A targets on hold?
Now everything is on hold, Niels. But our appetite and our strategy has not changed. We are still discussing with potential targets if they want to discuss with us. But as I say, everything is in slow mode now. But other than that, our strategy is still intact and the same.
Okay, thank you.
The next question comes from the line of Benjamin Silverstone from ABG. Please go ahead.
Hi, Jón and Sveinn. Thank you for taking my question. Most of the question has been answered already, but I was wondering if you could elaborate a bit on the CapEx. I see it increased quite significantly in Q1, but do you expect it to increase in the following quarters?
Yes. The high CapEx here in quarter 1 is mainly a result of these business initiatives that we are now in the process of finalizing. We have been moving our operations from Albion in the U.S. to Mexico. That has required investment in new equipment and some leasehold improvements in the Mexico facility. That is the main reason for the above average CapEx. But for the remainder of the year, we expect CapEx to go down as we have, let's say, changed the priority on CapEx that can wait. Therefore, we expect lower levels in the remainder of the year.
Thank you very much.
I do not want to give our precise guidance at the moment.
Yeah. Thank you.
Thanks.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. Our next question comes from the line of Yiwei Zhou from SEB. Please go ahead.
Hi, it's Yiwei Zhou calling from SEB, and thank you for taking my question. I have two. Firstly, could you add a bit of color on the U.S. operation? Have you seen any early signs of recovery as now they are also talking about easing lockdown? Secondly, actually is a follow-up question to Niels. How do you see the change in the market dynamic caused by COVID-19, just in a longer-term perspective? What I'm seeing with these private clinics and for their business, I guess, now they all have quite a significant cash flow issue, especially in the U.S. What are you seeing right now? Do you think it will be more M&A activities and at a better price, let's say, in the longer-term perspective? Thanks.
Okay. Let me take the U.S. U.S. is probably two weeks behind Europe. We have seen some sign of recovery there. It seem to be a little bit later than Europe. On the long-term prospect, we don't see how this will impact the long-term effect of either Bracing & Supports and Prosthetics. Bracing & Supports might be a little bit slower in the uptake because it's more tied to hospital operations, but it's a pure speculation on this point. But the long-term impact on Bracing & Supports and Prosthetics, we can't see that this would have any effect on the M&A. If you take that.
Yeah. On the M&A, again, that's partly speculative, but as Jón mentioned earlier, it's our expectation that this pandemic perhaps will push some further to the consolidation that is already ongoing to some degree. As we get out on the other side of this one, we have looked at scenarios where there could be more M&A activity. I think it's too early to say. It's to some degree speculative. We just need to see how the next couple of months develop. As Jón mentioned, our appetite for acquisitions is still the same. I would caution you to make the conclusion that there will be a widespread fire sales on the other side of this, because there is no sign of distressed customer which would be a typical target for us.
Okay, thanks.
The next question comes from the line of Thomas Bowers from Danske Bank. Please go ahead.
Yes. Hello, can you hear me?
Yes.
Yes, we can.
Yeah. Thanks. Thank you. Just a couple of follow-up questions here. Just on your full year guidance. Everything is, of course, suspended, but is it fair to at least assume a relatively stable tax rate level in the 23%-24% level? Or is there anything I am missing here on that part? Then you mentioned a bigger impact in Bracing & Supports in April. Not at all surprising, of course. But do we then expect a potential rebound as we go a little bit longer? I am primarily focusing on we have a lot of postponed elective procedures, so do you expect any uptake here, for example, the Unloader sales, where you have a lot of the, for example, the knee surgeries being postponed? Then just lastly, you mentioned the year-over-year decrease in March, but I did not really catch the number. Was it 50% you said?
I think it was Christian asking that question.
15. 1-5.
Okay.
15%. 15%. Yeah.
Yeah.
On the tax rate, again, I will have to refer back to that we are not ready to give a guidance on that for the full year. But I think that your best guess now is our prior view on this. But with that said, there could be some change because of, let us say, markets are impacted differently by this pandemic, therefore taxable profits, let us say, will be impacted, or the balance will be shifted a little bit. So there could be some change in the effective tax rate, sort of short term. But longer term, you should still model 23%-24%. But for this year, I am not ready to give that guidance, but the best estimate is probably what we had previously indicated.
Yeah. On the bigger impact of Bracing & Supports, as I said before, I don't think we should read too much into it. First of all, the difference is very small between Bracing & Supports and Prosthetics. Regarding the bigger Unloader sales, yeah, it's very logical to think that a larger
Larger time to surgeries should lead to more Unloader use. Yeah, it's logical to think that way, but we haven't seen it, and it's pure speculation if it does. I don't know. Y eah. It's very difficult to say.
All right. Thank you very much.
We have a follow-up question from the line of Niels Granholm-Leth from Carnegie. Please go ahead.
Thank you. With the recent depreciation of the Icelandic krona, what kind of effect would that have on your cost base for this year? I am sure I can do the calculation myself, but I guess that your Icelandic krona cost base will come down this year compared to last year because of your cost savings. How will that impact your P&L in U.S. dollar terms?
Yeah, Niels, our Icelandic cost, as a percentage of our total cost, is around 11%-12%, and the Icelandic krona has depreciated around 20% year- to- date. Currently, we estimate maybe up to a slightly less than a percentage point impact on margin, but approximately.
Okay. Thank you.
Yeah. In, let's say, a normal operating cost.
Yeah. Okay.
All right.
As there are no further questions, I will hand it back to the speakers.
Yeah. If not, then we wish all of you good luck out there. It's a strange world. As a final remark, we will on a virtual road show next week in relation to the quarterly results. Please reach out to our Investor Relations team if you would like to have a call with us, and also if you have any questions after the call. I hope that you and your family are safe, and good luck out there. Thank you for listening, and have a good day.
This now concludes our conference call. Thank you all for attending. You may now disconnect your line.