Earnings Call: Q4 2019

Jan 14, 2020

Earnings release

Summary

Preliminary FY2019 sales reached $606 million, up 5% organically, while EBITDA before special items was $150 million. Q4 softness in Prosthetics drove revised guidance; 2020 growth was expected in line with or above market levels.

Yeah. Thank you, and good afternoon. Thank you for joining us on this conference call, where we will cover the revised guidance for 2019 based on the preliminary figures for the fourth quarter of 2019. My name is Jón Sigurðsson, and with me here today is Hreinn Sigurðsson, our CEO. We will begin with a short overview, after which we will have a question and answer session. We are today revising our financial guiding for the full year of 2019 due to the lower than expected Prosthetics sales in the fourth quarter. Preliminary results suggest that sales in the fourth quarter of 2019 amounted to $180 million, corresponding to 1% organic growth and 10% local currency growth. Sales for the full year of 2019 therefore amounted to $606 million, corresponding to 5% organic growth and 16% local currency growth. EBITDA before special items for the fourth quarter of 2019 amounted to $37 million, or 21% of sales. EBITDA before special items for the full year 2019 amounted to $150 million, or 22% of sales. It should be noted that these results have not been audited. Based on preliminary results, we now expect organic growth about 5% for 2019 and EBITDA margin before special items, about 22%. Other guidance parameters remain unchanged. The reasons for the soft sales in the fourth quarter are mainly due to lower than expected sales to a large customer in Americas region and soft sales in some of our key markets. We would like to highlight that we consider the soft sales performance in Q4 to be of a temporary nature. In sum, the preliminary results for the quarter are disappointing. However, sales for the full year are strong, with a growth of 16% in local currency and 5% organic growth, which is at the upper end of our range for estimated market growth of 3%-5%. Furthermore, despite a temporary slowdown in Prosthetics sales in the fourth quarter, our market position continues to be strong and we expect continued organic growth in 2020, in line with or above estimated market growth. Profitability was lower than we expected in 2019, which can largely be attributed to lower than expected sales in fourth quarter. In 2020, we do however expect continued gradual increase in underlying profitability with both in product mix scalability and savings from our ongoing efficiency initiatives. Having said that, we will provide more details on the financial guidance for 2020 when we publish our annual report as scheduled on the 4th of February 2020. Now let us go to the question and answer session. Ladies and gentlemen, if you would like to ask a question, please press 01 on your telephone keypad now. Our first question is from Thomas Schultz Bowers from Danske Bank. Please go ahead. Your line is open. Yes, thank you very much. Just a couple of questions here from me. In regards to the impact here going into 2020, given that you see a temporary nature with this U.S. customer, should we still, first of all, expect orders from this customer? I guess, should we expect the relationship to maintain? What's the reason for this? It's just a delay, some inventory stuff? Could this become a boost to your Q1 sales, potentially? Then maybe, you highlight it to be a mix between EMEA, APAC softness and this U.S. customer. I'm just trying to figure out here the split. How much impact from the U.S. customer and how much is EMEA and APAC? Then maybe finally, could you add on some colors on to any Is it related to any specific products within Prosthetics that you have seen some, both again in regards to the U.S. customer and also in rest of world? Maybe, any emerging competition here that has impact somewhat in Q4? Thank you. Okay. This is basically three questions. Okay. Let's start with the customer. Obviously, we don't want to go too much into detail on specific customers. Having said that, you asked specifically whether this would carry into 2020 or maybe this would be compensated somehow in 2020. We don't believe so. We believe that this will carry into 2020, and we think about $2 million per quarter for two or three quarters. But then we don't expect that to have any effect anymore. You asked about EMEA and rest of the world. What is specific there is just that there is an overall softness. We have no reasons to think that is any shift in the market, but this is just one of those quarters that everything goes against us kind of thing. You mentioned whether this was one product or if that was product related. The answer to that is no. Okay, perfect. Thank you. You are welcome. Our next question is from Christian Ryom from Nordea Markets. Please go ahead. Your line is open. Yeah. Hi, good afternoon. Just a couple of questions from me. First is just whether you can clarify whether the impact with your U.S. customer, whether that's only related to the Prosthetics business and also these $2 million per quarter that you're talking about an adverse impact for the coming quarters, whether that will only be Prosthetics or whether there's also some impact on your bracing and supports business. Then, as a secondary question to that, the softness that you've seen in the APAC and EMEA regions, how that splits between the two business areas. Then finally, a question to your commentary on the 2020 outlook. You say that you anticipate to grow in line with the market or slightly faster. Can you just confirm that your expectation is still market growth of 3%-5%? Thank you. Yeah. Hi, Christian. Thanks for this. Yes, the $2 million that we expect to carry into the first two to three quarters of the year is on the Prosthetics side. The general softness across our key markets is obviously with EMEA weighing or being a proportionately bigger part of our portfolio that has a bigger impact. We have decent growth in emerging markets in the quarter, so it's mostly across the main EMEA markets that has perhaps the biggest proportional impact. On the 2020 outlook, what was the question exactly again? Yeah. Yeah. Numbers on 3%-5%. That is our view on the average market growth rate for our current portfolio. Our specific comment in the announcement is that we expect our organic growth rate to be within that range or slightly above. Okay. Thank you very much. Our next question is from Benjamin Silverstone from ABG Sundal Collier. Please go ahead. Your line is open. Hi, everybody. Thank you for taking the question. My first question is regarding the EBITDA, just how come the downgrade in EBITDA is quite material compared to the downgrade in the top line? The second one is regarding, I know you do not mention any names for the customer in the U.S., but if it is one big customer, there are not that many of them. We do have Hanger, for example, who is publicly traded, and we can see that their sales of Prosthetics have been quite steady. Are you guys certain that this might be a one-off or is this maybe a scenario where competitors have taken market from Hanger or the large customer in the U.S.? Sorry. Thank you. Well, let me start with the last one. We do not say this is a one-off. We say that this will continue into the next year. Of course, we do not know. We do not want to comment on specific customers. That is your guess. As I said, we do not think that this is a one-off. We said that this will- Yeah. The 2 million approximately per quarter over the next two to three quarters. Just to add to that, fundamentally, there's no change in the market. No. The demand for our products is unchanged. The pricing reimbursement, there are no changes in that regard. Just so we all keep this in perspective. On the EBITDA comment, yes, you're right. The shortfall in EBITDA is largely due to the slow, let's say, growth in Q4. We're only growing 1% organically, and what we're missing on sales drops straight down to our bottom line. So all else equal, yes, we're slightly more off on the EBITDA margin than on the sales guidance, but it is pretty much due to just the drop in top line. All right. Thank you. You're welcome. And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. Our next question is from Nils Granholm-Leth from Carnegie. Please go ahead. Your line is open. Good afternoon. Getting back to the question about the effect on sales and EBITDA. Since the EBITDA effect is bigger than the sales effect, I presume there must be some kind of cost overrun in the business. How is the profitability in the service clinics that you have recently acquired? How is that performing? Yes, you are right, Nils. The cost is slightly higher than our expectation. That is not the big picture. The big picture is the top line. Again, because like we have communicated before, Prosthetics is the more profitable part of our business, so the proportional impact is perhaps higher, and some slight negative impact on gross profit margin as a result of that. Again, on the clinical side, those companies are performing in line with our expectations. That is not the result of the variance. So when it comes to the EBITDA margin guidance for 2020, and since this will continue into next year, should we interpret this in a way where the 22% run rate will continue into 2020? Let's say, when it comes to margin, we expect continued improvement in our underlying profitability. Where we'll end up for 2020 will largely depend on our M&A pipeline because all else equal companies that we are acquiring have a lower EBITDA margin than ours is. What we see for 2019 is that there is this continued gradual margin expansion that has however been neutralized by the impact from acquiring companies with a lower operating margin. So we continue to expect underlying improvement in our margins. Let's say the end result will largely depend on the development of our M&A pipeline. But if I remember correctly, you did consolidate more service clinics into your P&L in Q4, so the contribution from Yeah service will be bigger in 2020 compared to 2019. Yes. But that sort of, let's say the impact in Q4 is maybe that's about. We'll go into more detail with this in the full year when we release the full year numbers, but that's not of the magnitude that that's going to fundamentally change our trajectory. Okay. Then just finally, any update on the acquisition process of College Park? No, we do not have any. We are cautiously optimistic that we can bring that to conclusion within, well, let's say a few weeks. I do not know. But we are cautiously optimistic. Okay. Thank you. Our last question is from Yiwei Zhou from SEB. Please go ahead. Your line is open. Hi. Thank you for taking my question. I have two. Firstly, is it possible for you to give us the indication on the Q4 gross margin? Secondly, just come back to the question on the one customer in the U.S., could you confirm that the pricing with this customer has been stable? Also, could you also give indication about the U.S. market and Prosthetics business? Thanks. We are not prepared to give you a gross profit margin Q4 now. We'll do that in due time. It would largely be in line with- Yeah. It's not a material difference. Stable price on We do not want to go into that. Your third question was the general market in U.S. There is nothing in the market in U.S. I mean, the reimbursement is the same, the demand for our product is the same. We don't see any fundamental change in the U.S. market. All right. Fair enough. Thanks. You're welcome. As there are no further questions, I will hand the word back to the speakers for any final comments. Okay. Thank you very much for participating, and we'll hear again February 4th. Thank you very much.