Earnings Call: Q1 2017

Apr 28, 2017

Summary

Q1 sales rose 17% in local currency and 7% organically, with prosthetics leading growth and EBITDA margin steady at 16%. FY 2017 guidance was unchanged; FX, acquisition dilution and U.S. Bracing & Supports distribution challenges remained key factors.

Yeah. Thank you very much. I would like to welcome you to Össur's first quarterly conference call in 2017. My name is Jón Sigurðsson, and I am the President and CEO. As previously mentioned, here as well is CFO Sveinn Sölvason. I will begin by going through the highlights of the quarter. Sveinn will then go through the quarterly financials in more details, and we will end with our guidance for 2017. As usual, the question and answer session will follow. We are delighted to close the first quarter of the year with strong growth and stable profitability, bearing in mind that our first quarter is seasonally our weakest. Sales growth in the quarter was good, where sales amount to $131 million and sales growth was 17% measured in local currency and 7% organic. Bracing & Supports sales growth was 3% in local currency and the same organically, while prosthetics growth was excellent, 35% local currency growth and 11% organic. Gross profit amounted to $82 million and 62% of sales. The EBITDA was $20 million, or 16% of sales, and grew 26% when measured in local currency. Due to the depreciation of a few major operational currencies against the U.S. dollar and the appreciation of the Icelandic krona against the U.S. dollar, operational results were negatively impacted. Sales by $2 million and EBITDA by the same amount, or $2 million. We are pleased to see our high-end innovative products driving growth on a global scale in both prosthetics and Bracing & Supports. Here we are returned to products such as our bionic knee and our Unloader braces, for example. EMEA and APAC performed well in both prosthetics and Bracing & Supports, and the same goes for Americas in prosthetics. in 2016, we further strengthened our market position with the acquisition of Touch Bionics and MedePro Prosthetics. The integration of the companies is on track and in line with our business case. If we look at the growth by segment and geography, we see an excellent 35% growth in prosthetics while Bracing & Supports grew 3%. Sales of bionic products in the quarter amounted to 26% of prosthetics component sales compared to 15% in quarter one 2016. EMEA grew 22% and APAC grew 21%, while Americas grew 10%. Let's look further at each market, starting with Americas. Americas sales grew 10%. Growth in prosthetics in Americas continue to be strong, driven by our high-end innovative products. The Bracing & Supports sales were, however, soft. The performance in Europe, Middle East, and Africa was good in the quarter. The growth was 22% and 11% organic. Sales were good in both product segment and across all major markets, where growth was primarily driven by our high-end innovative products. APAC sales grew 21% and 14% organic. Here, we also saw a strong growth in our high-end product offering, and we are as well beginning to see positive momentum after adjusting our sales approach in China, as previously communicated. Sveinn Sölvason, our CFO, will go through the financials in more details. Please go ahead, Sveinn. Thank you. Local currency growth amounted to 17%, and organic sales growth in local currency amounted to 7%. As Jón mentioned, we see good growth contribution from both product segments and all regions in the quarter. As a reminder, the acquisitions of Touch Bionics and MedePro Prosthetics were completed in April and September, respectively, last year. Hence, this is the last quarter where these acquisitions will result in such a, let's say, significant difference in the reported local currency and the organic local currency growth rates. Furthermore, due to Easter shifting between quarters, we have two additional sales days in many of our major sales regions in quarter 1, and this is having a positive effect primarily on our European regions. As for previous quarters, we had an impact on our reported USD sales and profits with changing currency rates and especially the EBITDA margin, and I will elaborate on that further on the next slide. Gross profit margin is relatively stable in the quarter, or 62.4% compared to 62.5% in the comparable quarter last year. The main items affecting the gross profit margin are positive, let's say, contribution from good growth and product mix in both prosthetics and Bracing & Supports. However, changes in foreign exchange rate had a negative impact of about 40 basis points. EBITDA margin amounted to 16%, same as quarter 1 last year, and again, I'll go into a little bit more detail on the next slide with that. Finally, net profit is up by about 13% in USD terms compared to the same period last year. If you go to the next slide, please. EBITDA amounted to $20 million in the quarter, which corresponds to a 16% EBITDA margin. The main items affecting the margin on a high level in the quarter compared to the comparable quarter last year is first and foremost good sales growth, especially in prosthetics and operational leverage, resulting in an underlying margin improvement compared to the first quarter of 2016. But the impact from acquired companies had a negative or temporary negative impact on margins of about 70 basis points, and the adverse currency movements affected the margin negatively by about 120 basis points. So excluding these two items, we have, I would say, a healthy underlying margin improvement in our core business. The integration efforts are ongoing, and we maintain our previous expectations that both Touch Bionics and Med Prothetics will contribute to profitability in line with our average operating margins from 2018 onwards. New one-time costs were communicated as part of the acquisition of Med Prothetics. We now expect the total one-time cost to amount to approximately $3 million, and these will be expensed here in the next quarter. Cash flow amounted to $10 million, or cash flow from operations amounted to $10 million or 7% of sales. Seasonally, cash flow is low in quarter 1. In addition, there was some absorption in working capital that we expect to reverse in the next few quarters. Net interest-bearing debt was $149 million at the end of the quarter, which corresponds to a 1.5x net interest-bearing debt to EBITDA, which is in the middle of the capital structure range we have previously communicated. Now, if you can finish up with the guidance, please, John. Yeah. Thank you, Sjard. It is going to be easy because we are keeping our guidance unchanged for the year. Local currency sales growth is expected to be 7%-8%. As the external growth is fading out slowly, organic sales growth in local currency is expected to be in the range of 4%-5%, and EBITDA margin is estimated 19%-20% of sales. We expect capital expenditures to be around 4% of sales this year. Thank you for listening. We are now going into the question and answer session. Ladies and gentlemen, we are now ready to take your questions. If you wish to ask a question, please press 01 on your telephone keypad. That is 01 on your telephone keypad to ask a question. Please stand by for the first question. The first question comes from the line of Christian Ryom with Nordea. Please go ahead. Your line is open. Yes, good morning. This is Christian Ryom from Nordea Markets. Thank you for taking my questions. I have a couple of them. Firstly, could you maybe elaborate a little bit on the operational challenges that you are seeing in your U.S. distribution of Bracing & Supports products, and maybe what the outlook to resolve these operational challenges is? Secondly, to what extent can this high growth momentum that we see in the EMEA region in this quarter be sustained? I understand that there was some benefit from the timing of Easter compared to last year. What is your expectations for the rest of the year? Then I have a follow-up question. Thank you. Yeah, Christian, regarding the operational challenge in Bracing & Supports, it is true that this is below our ambitions, but we are operating our own distribution companies in U.S., which are independent from our other organization. We are, of course, running it. For various reasons, in order to streamline these companies, we are putting all the back-office functions together in order to increase profitability of those organizations. That is the one reason. The other reason is that in some instances, we are going out of third-party distribution more and more, and that could have a dent in the top line. We will see negative effect on the top line in this company throughout the year. In the high growth sustainability, you said. In EMEA, Christian, you are right in the sense that Easter had a somewhat positive effect, obviously, in quarter one in Europe. Probably a few percentage points on the growth in the region. But overall, it is going well in EMEA as it has been for the last few years, and we expect to continue to do well there, although perhaps not at the same organic growth rate. It is going to come down a little bit in quarter 2, but overall, we still expect a good year for this region. Great. Thank you. My follow-up question is related to the EBITDA margin. From what you say in terms of the FX headwind and the dilution from M&A, it would suggest that you have an underlying margin improvement of around 130 basis points in this quarter. Is that the level of underlying margin expansion that we should expect also for the rest of the year? How do you see that? Well, you are right in the sense that excluding the FX and the acquisitions, the underlying margin improvements is within that region. I also want to remind you all that, let us say, at current rates, the FX impact will not be as significant in the latter part of the year, as the FX impact is primarily from the appreciation of the Icelandic krona, and that appreciation sort of came in in the second half of 2016. If we move forward at similar rates as we have today, the FX impact is going to subdue somewhat. Regarding, let's say, whether this is the level of underlying margin improvement we should expect for the remaining quarters, the thing with these operational improvements, it's not always a linear process. I would go back and say that, yes, this is in line with our expectations in general, that we will continue to get a margin benefit through product mix and through operational leverage, resulting in these steady margin improvements. This quarter shows that development, yes. Great. Thank you. Thank you very much. No further questions in queue for the moment. Ladies and gentlemen, as a reminder, please press 01 on your telephone keypad if you wish to ask a question. 01 on your telephone keypad if you wish to ask a question. Please stand by for any follow-up question. We have a question coming from the line of Nils Leth with Carnegie. Please go ahead. Your line is open. Mr. Leth, please go ahead. Your line is open. There seems to be an issue with the line. Bear with me. Please go ahead, Mr. Leth. Your line is open. Hello, can you hear me now? Yes. Yes, we can. Great. Morning. A quick question on the prosthetics division. Could you talk about which products beyond the Rheo Knee that drove the strong growth in Quarter 1? Or was it just the Rheo Knee basically driving the 11% growth? Let me. As you know, we have a very stable progress in all our product lines. But overall, it's not only the Rheo Knee. It's also the liners and feet that has contributed very nicely. But generally, the technology upgrade is coming along very nicely. Then, of course, Touch Bionics is contributing very nicely as well. How about your new feet product? To what extent is that product driving growth? Yeah, that as well. Both the liners and feet, and our feet products are contributing very nicely as well. Okay. Then just a technical question on the number of trading days. As far as I understand, you have enjoyed one or two more trading days in Quarter 1 compared to Quarter 1 last year. How important is that for a business like yours? You are right. It is important for our European business. It is two additional sales days in Quarter 1, and I would say that this has impacted our reported organic growth rate for the EMEA region to the tune of 2-3 percentage points for the organic growth rate in that particular region. So probably see somewhat in excess of 1% help there. Yeah, for the overall organic growth rate. Yes, we see that, Nils, in Quarter 2, some spillover effect of having lost sales days compared to the comparable period last year. Okay. Thank you. Thank you very much. No further questions in queue for the moment. With that, I would like to return the conference call to the speakers. Well, then thank you all for participating and good questions, and thank you