Earnings Call: Q3 2019

Oct 22, 2019

Summary

Q3 sales reached $168m, with 5% organic growth and adjusted EBITDA margin of 21% excluding IFRS 16. FY organic growth guidance was narrowed to ~6%, while prosthetics led performance and French Bracing & Supports faced sustained pressure.

Ladies and gentlemen, welcome to the Össur's Q3 Results 2019. Today, I am pleased to present Mr. Jon 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 question and answer session. Mr. Sigurðsson and Mr. Sölvason, please begin. Yeah, thank you very much. I would also like to welcome you to the Össur Investor Conference Call, where we will cover the results for the third quarter of 2019. As previously mentioned, my name is Jon Sigurðsson, and I am the President and CEO, and with me here today is Sveinn Sölvason, our CFO. I will start by going through the highlights of the quarter and end with our guidance for 2019. A question and answer session will then follow. Sales in the third quarter of the year amounted to $168 million, corresponding to 19% growth in local currency, 5% organic growth, and 15% reported growth in USD. In the first nine months of the year, local currency growth amounted to 19% and organic growth was 7%. EBITDA before special items grew by 34% in that quarter and amounted to $40 million, or 24% of sales. Excluding the impact of IFRS 16, EBITDA amounted to $35 million or 21% of sales, which is the same as in the comparable quarter last year. With strong sales growth in the first nine months of the year, the financial guidance for the organic growth range has been narrowed to approximately 6%. Össur recently acquired two companies with combined sales of around $13 million, which will both begin to contribute to our operating income in the fourth quarter of the year. As previously mentioned, sales amounted to $168 million in the third quarter of 2019 compared to $145 million in the same quarter last year. The prosthetics segment grew by 6% organic. Bearing in mind a strong comparable quarter, we continue to see a good performance in prosthetics, where high-end innovative products continue to deliver strong growth in the segment globally, which includes the recently launched PROPRIO FOOT®. Growth in the other product categories was also good in the quarter. Bracing & Supports grew by 5% organic. Good growth can be attributed to sales of high-end products such as the OA and Rebound product lines. Total reported growth was 15%. Companies acquired in 2018 contributed 13 percentage points to total growth, and sales were negatively impacted by changing currency rates corresponding to a negative three percentage points impact on total growth. America's local currency growth was 25%, and organic sales growth was 1% in the quarter. Growth in the prosthetics segment was good with excellent growth in Canada. Sales in the Bracing & Supports segment were soft, primarily due to competitive market environment and lower sales to large distributor. Local currency growth was 11% in EMEA, and organic sales growth was 8% in the quarter. Growth in prosthetics was strong in all main market regions. In Bracing & Supports, growth was good apart from France, where sales were negatively impacted by competitive market environment. Organic growth in APAC was 19% in the quarter, where we continued to see strong results. Growth in China, Japan, and Australia was strong, and we see a good result in the other emerging markets. Over to you, Sveinn. Thank you very much. Jon? As already covered, organic sales growth amounted to 5% in the quarter, and local currency growth was 19%. The gross profit margin was 64%, both with and without the impact of IFRS 16, which is the same margin as in the comparable quarter last year. In the first nine months of the year, the gross profit margin is increasing, which can be attributed to a positive impact from product mix, new savings initiatives, and scalability in our global manufacturing platform. Special items in the quarter amounted to $8.3 million, out of which roughly $6 million are related to the efficiency initiatives as we had previously communicated. The remainder of the one-time costs are related to signing the agreement to acquire the prosthetics manufacturer, College Park Industries, as communicated in July of this year, and also the two recent acquisitions that Jon mentioned. EBITDA before special items grew by 34% and amounted to $40 million in the quarter, or 24% of sales. EBITDA margin excluding the impact of IFRS 16 and special items amounted to 21%, which is the same as in the comparable quarter last year. EBITDA margin before special items for the first nine months of the year was 22%. I will discuss the margin development in some more details on the next slide. The effective tax rate was 23% in the quarter and for the first nine months of the year, and therefore, in line with our guidance. Net profit was $15 million, and the net profit margin was 9%, compared to 10% of sales in the comparable quarter in 2018. It should already be noted that the quarter three in 2018 included a one-time impact of $5 million related to reevaluation of minority interests. In the first nine months of the year, net profit grew by 12%. If you go to the next slide, please. The key items impacting the EBITDA margin between the comparable quarters are, we have a slight positive impact on gross profit margin, where product and customer mix in the quarter are neutral. We have temporary, in the quarter, I would say, higher manufacturing cost, which was though offset by savings from the efficiency initiatives. There is an increase in sales and marketing costs, which is driven by the addition of the recent acquisitions, in addition to also investment that we have made in growing our emerging markets sales infrastructure and also other new business development initiatives. Excluding the impact of acquisitions and special items, G&A costs are flat between the comparable quarters in, let us say, organic terms. R&D costs grew faster than sales measured in local currency here in quarter three. Lastly, currency impacted EBITDA margin positively by about 60 basis points net of our hedge on the Icelandic krona. Also note that the IFRS 16 increased the EBITDA margin by 2.9 percentage points in quarter three, and we expect a similar impact for the full year. On the next slide, we have the EBITDA margin development for the first nine months. We see a healthy increase in profitability driven by a combination of strong sales growth, scalability on the cost side, positive impact from changes in product mix, and ultimately savings from the efficiency initiatives. On the next slide, we have cash flow. Free cash flow amounted to $43 million, compared to $25 million in the comparable quarter last year. Now, the main items affecting cash flow in the quarter are positive impact from strong operational results and positive impact from net working capital, mainly due to, here in quarter three, contribution from payables that are to some degree shifting between quarters, but also a reversal of some net working capital investment from prior quarters in the year. Similar paid interest, tax, and capital expenditure as in the comparable quarter. Lastly, net interest-bearing debt was $261 million at the end of the quarter, but excluding the impact of IFRS 16, the net interest-bearing debt was $167 million, which corresponds to a 1.3 times net interest bearing debt to EBITDA, and hence in line with our capital structure policy. If you would then now go ahead, Jon, please, with the guidance. Yeah. Thank you, Mr. Sveinn Sölvason. Growth in prosthetics has been strong in the first nine months of the year, with 9% organic growth. The strong performance can be attributed to a good momentum in sales of high-end innovative solutions and good market acceptance of recently launched products, such as the Pro-Flex LP Align and the new bionic PROPRIO FOOT®. Growth in prosthetics is therefore estimated to be above estimates for market growth in 2019. Growth in Bracing & Supports is still expected to be in line with estimated market growth in 2019. As such, the financial guidance for organic growth range has been narrowed to approximately 6%. We would also like to highlight that Össur recently made two acquisitions in the beginning of the Q4 2019. Combined sales in those two entities on a full year basis amount to around $13 million. The acquired companies have a lower full year EBITDA margin than Össur, and they also have a greater seasonality in their business, where the first quarter of the year is seasonally the weakest and the fourth quarter the strongest. We therefore expect to see a slight increase in seasonality of Össur next year. Please note that the acquisitions do not impact the parameters included in the guidance, but we would like to emphasize that quarter four of 2019 will increase sales and profit from the acquisitions, and hence quarterly growth measured in dollars will be impacted. The full year guidance is therefore as follows: Organic sales growth is expected to be approximately 6%. EBITDA margin before special items is expected to be around 23% of sales. We expect capital expenditures to be in the range of 4%-5% of sales. The effective tax rate is expected to be in the range of 23%-24%. Thank you all, and let's go to the question and answer session. Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad and you enter a queue. After you are announced, please ask your question. Our first question comes to the line of Christian Ryom from Nordea Markets. Please go ahead. Your line is now open. Yes, good morning. This is Christian here from Nordea. A couple of questions from me. First, can you elaborate on the developments in the French market in Bracing & Supports? To what extent do you see the effects here being a reflection of changes in regulation or reimbursement, or simply a matter of intensified competition? Maybe adding to that, what your expectations are for when you could potentially see a more positive development in France. My second question is to your guidance, and your guidance for Q4, having delivered 7% year to date and guiding for around 6% for the full year. I think you are suggesting organic growth of 3%-4% in Q4. Where do you see the squeeze coming in the fourth quarter? That's my first two questions. Thank you. Yeah, thank you, Christian. Let me start on the French market. You mentioned, is it the regulation or is it adverse condition in the market? It is both, and it's probably the best way of describing it is that there is a squeeze in the regulation reimbursement, specifically on the compression stocking side, which leads to adverse conditions and tougher competition and quite a lot of price fight. We think that this will continue. I don't think we will see change of that. It's still not bad market, but it will continue to be adverse conditions there, although I don't think it will be any worse than it is. On your second question, Christian Ryom, we don't necessarily expect any squeeze as such or any major change in our growth trajectory. Yes, you're right, all is equal growth in quarter four will be lower than in the previous half of the year. We are now starting to compare with periods from prior year where we had launched a new PROPRIO FOOT®, for example. As such, expect, let's say similar to slightly lower growth than what we reported here in quarter three. With what we know today and the way we look at the development for the next couple of months, we expect to report 6% organic growth rate for the full year in 2019. Okay. Thank you very much. Just a quick third question. Can you provide an update on the status of the College Park acquisition? Can you repeat, please? That's on the College Park. That is still under regulatory review. Okay, and it is still your expectation that you will close it this year? We cannot confirm that. Okay. Thank you. Our next question comes to the line of Mr. Benjamin Silverstone from ABG. Please go ahead. Your line is now open. Thank you. Hi, gentlemen. I was quickly looking through the report, and I saw that the bionic segment of prosthetics accounts for 22% of the revenue this year. Would you happen to have a number of the amount of the volume that it accounts for this quarter? I mean, the volume is still like what we previously communicated. This is in the low single digit in terms of the units we ship outside the door when it comes to our products sales. Even though bionics are around one fourth of our dollar sales in prosthetics, it is still a low single digit in terms of units that we ship out the door. Still around the 2%-ish. That is not a bad assumption, no. All right. Thank you. Sure. Thank you. Just as a reminder, if you would like to ask a question, please press 01 on your telephone keypad. Our next question comes to the line of Mr. Nils Granholm-Leth from Carnegie. Please go ahead. Your line is now open. Good morning. My first question, how come that you are able to make a provision for integration of College Park when you don't have the regulatory approval in place? The second question, could you talk about the two acquisitions that you announced today? In which line of business are they, and where are they placed geographically? I'll take the first question, Nils. On this, we're not making a provision for this question because this is just the fees, basically, that we've incurred, let's say, for the acquisition of College Park and the other two acquisitions that we have closed now in the beginning of Q4. This has nothing to do with any sort of estimated integration costs or anything like that. Does that mean that we should expect integration costs related to College Park when you have the regulatory approval in place? If we get the regulatory approval in place, I would not necessarily assume so, no. Okay. Thank you. The second question is, those two companies are small American companies in the O&P industry, which is service and manufacturing of mostly prosthetics. Okay. Thank you. Thank you. There are no further questions at this time, so I will hand back for closing comments. Please go ahead, Mr. Sigurðsson and Mr. Sölvason. Yeah. Thank you for your questions and participation. As our final remark, in the next couple of months, we will be presenting at conferences Europe and U.S., so please reach out to our investor relations team if you would like to meet with us and if you have any questions after this call. Thank you for participating, and have a nice day. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.