Earnings Call: Q1 2019

Apr 30, 2019

Summary

Q1 sales rose 13% reported and 8% organically; EBITDA increased 51%, with a 16% margin excluding IFRS 16. FY guidance was unchanged, while Easter timing is expected to weigh on Q2 EMEA comparisons.

Ladies and gentlemen, welcome to the Össur Q1 Results 2019 conference call. 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 a listen-only mode, and afterwards, there will be a question and answer session. Speakers, please begin. 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 2019. As previously mentioned, my name is Jón Sigurðsson, and I am the President and CEO, and with me here today is Sveinn Sölvason, the CFO. We will begin by going through the highlights of the quarter and with our guidance for 2019, followed by a question and answer session. Sales in the first quarter of the year amounted to $160 million, corresponding to 19% growth in local currency, 8% organic growth, and 13% reported growth in U.S. dollars. The Prosthetics segment grew 10% organic, and the Bracing and Supports segments grew 5%. EBITDA grew 51% and amounted to $30 million, or 19% of sales. EBITDA excluding the impact of IFRS 16 amounted to $25 million or 16% of sales compared to an EBITDA margin of 14% in comparable quarter last year. As previously mentioned, sales amounted to $160 million in the first quarter of 2019 compared to the $142 million in the same quarter last year. The Prosthetics segment grew by 10% organic. 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 Bionic PROPRIO FOOT. Growth in other product categories was also good in the quarter. Bracing and Supports grew by 5% organic. Growth in the segment was good in the quarter, but it should be noted that sales were slow in the U.S. and France for the quarter. Total reported growth was 13%. Recently acquired companies contributed 11 percentage points to total growth, and sales were negatively impacted by changing currency rates corresponding to a negative 6 percentage points impact on total growth. I would like to highlight that we have Easter vacation shifting between comparable quarters, and we should therefore, all else equal, expect a tough comparison for the second quarter of this year. Americas local currency growth was 29%, and organic sales growth was 5% in the quarter. Growth in the Prosthetics segment was strong with a good contribution from recent product launches. In the Bracing and Supports segment, sales in the U.S. were slow. Our own distribution companies continue to perform well after their restructuring was finalized at the end of 2017. Local currency growth was 11% in EMEA, and organic sales growth was 8% in the quarter. Growth in Prosthetics was good in all main market regions. In Bracing and Supports, sales were impacted by product rationalization efforts and a competitive market environment for compression therapy products in France. Growth in other main markets was good. Organic growth in APAC was 16% in the quarter where we continued to see strong results. As in previous quarters, growth in Australia and China has been excellent, and we see a good result in our direct sales model in emerging markets as well. Having said that, over to you, Sveinn. Thank you, Jón. As already covered, Bionic organic sales growth amounted to 8% in the quarter, and reported growth was 13%. As of January 1, Össur implemented a new IFRS 16 leasing accounting standard, which has had a significant impact on the reporting of financial performance. As previously communicated, the standard will not be applied retrospectively and therefore the 2018 comparative figures will not be adjusted. We will, however, throughout 2019, continue to report on key financial metrics as they would have been without the implementation of IFRS 16. The gross profit margin was 64% compared to 62% in the comparable quarter last year. The increase in gross profit margin can mainly be attributed to a positive impact from product mix with our Prosthetics business growing faster than Bracing and Supports, the savings initiatives, and scalability in our increasingly more consolidated global manufacturing platform. EBITDA grew by 51% and amounted to $30 million in the quarter, or 19% of sales. EBITDA margin excluding the impact of IFRS amounted to 16% compared to 14% in the comparable quarter last year. It should be noted that the first quarter of the year is seasonally the weakest in terms of sales and relative profitability. The effective tax rate was 24% in the quarter, the same as in the same quarter last year and in line with our guidance. Net profit was strong and amounted to $14 million, equivalent to 37% growth. Net profit margin was 9% of sales compared to 7% of sales in the comparable quarter in 2018. If you go to the next slide on the EBITDA margin bridge, the key items impacting the EBITDA margin between the comparable quarters are positive impact from gross profit margin, as previously mentioned. There is an increase in SG&A cost, which is driven mainly by the pro forma impact of the recent acquisitions, in addition to investments made in new business development and emerging markets. R&D costs were at a similar absolute level as last year, but we are growing our investment in R&D at a faster pace than we are growing our top line for the full year. Lastly, currency impacted the EBITDA margin positively by about 70 basis points net of hedging. But the combination of strong sales growth, scalability on the cost side, and positive impact from changes in product mix and impact from our savings initiatives are the main drivers of strong relative profitability this quarter compared to the same quarter last year. Also note the previously mentioned IFRS 16 impact, that is impacting EBITDA margin by around 3 percentage points in the quarter, and we expect a similar impact for the full year. Next slide is just a brief reminder around our efficiency initiatives, which are on track, and we target savings of $6 million in 2019 compared to the baseline of 2017, which translates into an expected additional $3 million in savings compared to the savings already realized in 2018. Next slide on cash flow. Free cash flow amounted to $4 million compared to negative $4 million in the comparable quarter last year. There is a positive impact from stronger operating results in this quarter compared to last year. Net working capital is neutral. We are paying a little bit higher interest in line with higher debt levels. Also, paid tax is higher in line with higher profitability, but CapEx is a little bit lower than in the comparable quarter last year. Lastly, net interest-bearing debt was $289 million at the end of the quarter, but excluding the impact of IFRS 16, the net interest-bearing debt was $191 million, which corresponds to a 1.6 times net interest bearing debt to EBITDA, and hence, in line with our capital structure policy. If you would then, Jon, please go ahead with the guidance. Yeah. Thank you, Sveinn. No changes have been made to the full year guidance. If I repeat that, organic sales growth is expected to be in range of 4%-5%. EBITDA margin before special items is expected to be around 23% of sales, or around 20% of sales when excluding the impact of IFRS 16. We expect capital expenditures to be in the range of 4%-5% of sales, and the effective tax rate is expected to be in the range of 23%-24%. Having said that, thank you all, and we are ready to go to the questions and answer session. Thank you, Sveinn. Ladies and gentlemen, if you have a question for the speakers, please press zero followed by the one on your telephone keypad. Once again, to register for a question, it's zero followed by the one on your telephone keypad. There will be a brief pause whilst questions are being registered. Thank you. Our first question comes from Christian Rue from Nordea Markets. Please go ahead, your line is open. Hi, good morning, Jón and Sveinn. I have three questions. My first question is, can you quantify a bit further this Easter effect? What is your estimate of the impact on the numbers that you've seen here in the first quarter, and what kind of impact are you expecting for the second quarter? My second question is to the acquisitions that you made in 2018, did they have any impact on the gross margin? Were they accretive to the gross margin, or were they neutral in this quarter? Finally on your Prosthetics growth and the PROPRIO FOOT, your new product that you specifically mentioned, can you comment a little bit about how much it actually supported sales here in the first quarter, and whether we should expect a larger impact on sales in the coming quarters? Thank you. Yeah. If I take the quantifying the Easter effect, theoretically, we have pretty much neutral impact, but we assume that there is a lot of holidays being taken, and we think it's a couple of points in EMEA. It does not affect the U.S. market. Okay. Yeah. So it's about, let's say about 2 percentage points for the EMEA region, Christian Rue, is I think our estimate of the Easter impact shifting between quarters. On your second question with regards to gross profit margin impact from acquisitions, the impact is neutral approximately for the acquisitions. So no impact on average, they generate the same on average gross profit margin as in the pre-acquisition Astra business. The third question, and that's specifically PROPRIO FOOT. The good growth in Prosthetics was not because of PROPRIO FOOT, it was because of all product segment is very positive. PROPRIO FOOT was a contributor. That will continue, but that's not the main reason for it. Okay. Thank you. You're welcome. Thank you. Another reminder, to register for a question, please press zero followed by the one on your telephone keypad. There will be a further pause whilst questions are being registered. Our next question comes from Yannick, from ABG. Please go ahead. Your line is open. Hi. Thanks for taking my question. Just two questions, please. I think for the Bracing and Supports, strong performance, but I also think the comparative versus last year was quite soft. So expectations to B&S going forward. The second question goes to acquisitions journey. So four acquisitions last year. Any expectations or thoughts around further acquisitions going forward would be appreciated. Thanks. Yes. On the Bracing and Supports growth in quarter 1, we grew 5% organic. Let's remember that the comparison is quite favorable as we declined 1% organically in Bracing and Supports in quarter 1 last year. Looking ahead, we still expect to grow in line with market growth in Bracing and Supports. That is what we communicated, and so we reiterate those expectations as to quarter 1. Yeah. On the acquisitions, we are really hesitant to give any guidance on acquisitions. It's really difficult to say. Other than we are acquisitive, we think that there is a good investment possibility, continue to be in the market, and our strategy is to continue, but when and how much, it's very difficult to say. Can I follow on that one? Obviously, the latter, fully appreciate that. It was just more getting overall thoughts. It could also maybe be regional perspectives if they are. Now you're seeing strong growth in some of the Asian markets. It could be potentially, you could say, expanding presence in some of them. So maybe there is something about what you're looking out for without, of course, disclosing specifics. Yeah. The acquisitions are really opportunistic because it's the availability of suitable targets that dictate what we do more than our strategy, because companies have to be for sale and the right price. We would be very willing to look at some acquisitions in all our market categories. Given the experience that there seem to be more available targets in Western Europe than U.S., that's because of the availability rather than our strategy. Okay, thanks. Thank you. There appear to be no further questions. I will return the conference back to you, speakers. Yeah. Thank you for your participation and questions. As a final remark, I would like to let you know that we will host a Capital Markets Day on September 24th this year. Further details on the Capital Markets Day including an invite, the agenda, location will become available in due time. Please reach out to our investor relation team if you would like to meet with us or if you have any questions after this call. Thank you for listening and have a good day. Thank you, ladies and gentlemen. This does conclude today's conference call. Thank you very much for attending. You may now disconnect your line.