Good day, and thank you for standing by. Welcome to the Össur Q4 and full year 2023 investor presentation conference call and webcast. At this time, all participants are in listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Alternatively, you may also submit your questions via the webcast at any time by typing them in the question box and click Submit. Please note that today's conference being recorded. I would now like to hand the conference over to our first speaker, Sveinn Sölvason, President and CEO. Please go ahead, sir.
Thank you, and good morning, everyone. Thanks for joining our call this morning. With me here today, also is Arna, our CFO. I will start with a few highlights, then a review of the quarter and the year, and conclude with our guidance for 2024. A Q&A session will then follow. This has been an eventful year, and I would like to start with a few milestones and key highlights. In March, we introduced our Growth'27 strategy, a five-year strategy focusing on reaching more people in need of mobility solutions, with the ultimate goal of achieving 7%-10% average local currency growth over this period. Also, at the same time, to increase transparency in our financial reporting, we implemented a new sales segmentation, prosthetics, bracing and supports, and patient care.
I'm very pleased to report that we're off to a good start with strong growth across all our business segments in 2023. EBITDA grew in line with sales and was positively impacted by strong growth, positive product mix, and lower freight cost. Inflation, however, impacted cost levels during the year, and productivity and manufacturing was below a normalized level. Our product pipeline is strong, and we expect new bionic launches as we go into 2024. I would also like to highlight some events that occurred early in 2024. On January 16th , Össur acquired Fior & Gentz, a market leader in lower limb neuro orthotic solutions. This is an important milestone for us as it marks our entry into the highly synergistic neuro orthotics market.
The addition of Fior & Gentz will be accretive to organic sales growth and aligns seamlessly with our Growth'27 strategy. On January 18th, Medicare published a draft proposal that would give patients with low mobility levels access to prosthetic knees and feet, previously limited to patients considered high active. While the proposal is still in a draft form, it represents a significant shift in reimbursement coverage, potentially opening access to high quality mobility solutions to a much larger part of the amputee population. However, we don't know at this point when the proposal will be finalized, but this obviously represents a very big potential change in the overall reimbursement landscape in what is our largest market. Go to the next slide, please.
I'm very pleased to report continued strong sales performance with 9% organic growth here in quarter four. The growth is largely attributed to strong volume growth in prosthetics and our patient care business. Favorable solution mixed with strong performance in our high-end solutions. In addition to, as for previous quarters, some price increases in prosthetics and bracing and supports. EBITDA margin was 18%, same as in the comparable quarter last year. Cash generation and free cash flow were strong in the quarter. Arna will cover that later, and our leverage ratio is still in the upper end of our target range, and therefore we continue to pause our share buyback program. Go to the next slide, please. Here we have an overview of growth across our geographical and business segments for the year.
Total sales amounted to $210 million in the quarter, and as I mentioned earlier, organic growth was 9%, and I'll cover the segments in more detail on the following slides. Starting with Prosthetics. Organic growth amounted to 9%, driven by strong volume growth, positive solution mix and some price increases, and performance was strong in all geographical segments and across our whole product portfolio. Our high-end solutions, especially the bionics portfolio, performed very well in the quarter, accounting for 24% of prosthetic sales. I would also like to highlight that in relation to our acquisition of Fior & Gentz, we'll be renaming our Prosthetic sales segment to Prosthetics & Neuro Orthotics to include the sales of Fior & Gentz as of the first quarter of 2024. Go to the next slide, please.
Organic growth in bracing and supports amounted to 1% in the quarter. Growth in APAC was strong, and growth in EMEA was, let's say, modest, mainly driven by good performance in AFO solutions and some price increases. Sales in Americas were impacted by changes we are making to our e-commerce channel in the region, as we had also communicated last quarter. These efforts are in line with our Bracing and Supports Simplified strategy, which is aimed at providing our customers and partners with an increasingly simplified and stronger portfolio of bracing solutions. Then if we move on to patient care, where organic growth amounted to 12% here in quarter four, we're seeing strong growth across all our markets, driven by growth in patient volumes and positive solution mix. We were very pleased with this performance.
I will, however, note that the growth in the quarter was, yeah, notably strong and all else equal. We should not expect growth in Patient Care at these levels heading into 2024. This, yeah. Now, this concludes the overview of the top line performance. Arna, if you can then go through the P&L.
Yes, thank you. Thank you, Sveinn. In the quarter, we had positive currency impact on our net sales. The reported growth was 10%. The gross profit margin was 61%, same as in the comparable quarter last year. The profit margin was positively impacted by strong sales growth, favorable product mix, and lower freight costs. However, gross profit margin was negatively impacted by unit costs being above normalized levels, partly attributed to changes in supply chain and vendors for creating raw materials—for certain raw materials and components. The investment we are making in scaling up our select manufacturing sites have led to some temporary inefficiency that led to some cost increases, and what we refer to as time lag in reimbursement, where we have limited reimbursement rate increases in our clinics, but inflationary cost growth.
Going into 2024, we expect inflationary cost increase to ease, and we have initiated focused initiatives to increase productivity in manufacturing in 2024. The three largest cost drivers in manufacturing are labor cost, raw material, and finished goods, and machinery and housing. EBITDA amounted to $37 million, or 18% of sales. Stable margin compared to same quarter last year, and in addition to the items mentioned impacting gross profit, EBITDA was positively impacted by operational efficiency and savings from streamlining announced in the fall of 2022, but negatively impacted by currency of about 60 basis points and inflationary cost increases. The effective tax rate was 21%, and I am pleased to see that we grew our net profit by 49% in the quarter.
But I should note that the net profit was positively impacted by effects from associated companies and lower net exchange rate differences. We go to the next slide, please. Cash flow was strong in the quarter with positive effects on net working capital. However, inventory remains high, mainly to secure bionic production in line with strong sales performance in Bionics, but also due to a build-up for bracing and support products in the last two years due to global supply chain challenges. Bionics inventory has normalized, and BNS, their bracing and support inventory is decreasing. We do expect inventory levels to further normalize in 2024. Capital expenditures are high in the quarter, as they have been during the year, but CapEx investments are expected to normalize in 2024.
The interest and debt to EBITDA was 2.8x at the end of the year, with a target ratio of 2x-3x EBITDA. The ratio is in the upper end of the range, and therefore, we continue to pause our share buyback program. Also due to acquisition of Fior & Gentz in January 2024, the leverage ratio is expected to be temporarily slightly above the target range. All else equal, we expect to be back within the range in 2024. That concludes our overview of the quarter and over to you, Sveinn, for a full year discussion.
Thank you, Arna. For the sake of completeness, here we have an overview of growth across our geographical and business segments for the full year. We ended the year with $786 million in sales and organic growth of 9%, with solid performance in all markets and business segments, and the EBITDA margin was 18%. We go to the next slide, please. Also, for the sake of completeness, here you have the full year P&L. Again, reported growth was 9% for the year, same as the organic growth, where we had the positive impact from acquired growth, but negative impact from currency effect. The gross profit margin was 62%, and EBITDA margin, 18% of sales, same as in 2022 when excluding special items.
As Arna went through in the review of the quarter, we had some positive effects from sales and product mix, but negative impact from higher unit cost than what we refer to as this time lag in reimbursement. We go to the next and final slide on guidance. The organic sales growth outlook for 2024 is expected to be in the range of 5%-8%. The key factors impacting sales growth are expected to be contribution from strong volume growth in all our segments, positive impact from product mix, impact from new product launches, and some price increases in prosthetics and bracing and supports.
We expect minimal reimbursement rate increases for 2024, and no impact has been assumed from the recent Medicare reimbursement coverage proposal due to uncertainty around timelines. The guidance includes estimated organic growth for Fior & Gentz. In addition of Fior & Gentz, the addition of Fior & Gentz is expected to be accretive to our organic sales growth, which was also the case for Naked Prosthetics, which were acquired in 2022, and therefore both these companies are, you could say, accretive for our average organic growth profile. The EBITDA margin before special items is expected to be in the range of 19%-20%.
We expect positive impact from sales growth, positive product mix, and also, impact from focused initiatives to increase productivity in manufacturing, resulting in further normalization of unit costs, as well as accretive impact from the acquisition of Fior & Gentz. We do expect similar payroll increases in 2024 as in 2023, but less, you could say, inflationary cost increases across other input items. By applying the current FX rate, the EBITDA margin is expected to be negatively impacted by about 10 basis points in 2024. We expect to also expense $1 million in special items in the first quarter of 2024 due to the acquisition of Fior & Gentz . CapEx is expected to be in the range of 3%-4% of sales, and effective tax rate, 23%-24%.
Now, that concludes the review of the quarter and the full year. If we can go onward to the Q&A session, please.
Thank you. As a reminder to ask a question on the phone line, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one on your telephone and wait for your name to be announced. If you wish to ask a question via the webcast, please type them in the question box and click submit. Thank you. We are now going to proceed with our first question. The questions come from the line of Christian Ryom from Danske Bank. Please ask a question. Your line is open.
Yes, good morning. Thank you for taking my questions. I have three, please. So, I think I'll take them one by one. So the first is on, the sales development here in Q4 in the patient care division, whether there is any impact on a phasing of sales, in the number that we see here in the fourth quarter. I recall that after Q3, you were talking about that there were some markets in which you were experiencing delays in claims approvals. Have you seen those coming through here in the fourth quarter? That's my first question.
Yes, that's, that's impacting our patient care sales, probably about $2 million in the quarter.
Okay. And then second question is, looking at the EBITDA margin for Q4, it's down by around a percentage point relative to Q3 despite a higher top line. Can you help us a little bit with what has been the sequential or the drivers in the sequential margin development?
Yes. Despite the sort of a very strong top line here in quarter four, our margin was a little bit below our expectations as when compared to where we were as we closed quarter three. The main reason is, again, higher unit cost and higher production cost also in our Patient Care on the Patient Care side of the business. And these are themes that have also been prevalent for most of 2024, where we are still catching up from the turbulence around the supply chain and changes that we have had to do in our manufacturing setup.
We are not as far as what we anticipated in the beginning of the year in terms of getting back on track with regards to our efficiency in manufacturing and cost on the production cost on the patient care side was also higher than what we had anticipated. These are both as we go into 2024, we all equally expect this inflationary pressure to ease, as well as going into sort of focused initiatives on our unit cost to improve efficiency.
Okay. And that, that probably leads well into my, my third and final question. So, the margin outlook that you're providing for 2024 and the margin expansion that is embedded within the assumptions there, to what extent do you expect that to be driven by gross margin recovery versus OpEx or increased leverage on OpEx?
Well, I expect contribution on both sides. Definitely improvement in gross-profit margin, but also scalability on our OpEx side. I mean, inflation, let's say, there is some spillover, or you could say that we still have above what is normalized labor cost increases going into 2024, sort of, inflationary related. But sort of our margin guidance obviously assume that we'll have a good top line, but that we'll see progress on gross profit margin and some scalability on the OpEx side as well.
Okay, that makes sense. Thank you very much.
Perfect. Thank you, Christian.
... Thank you. Once again, as a reminder, to ask a question, please press star one and one on your telephone and wait for your name to be announced. If you wish to ask a question via the webcast, please type them in the question box and click submit. Thank you. We are now going to proceed with our next question. The question's come from the line of Martin Brenøe from Nordea. Please ask a question. Your line is open.
Hi, good morning. Thank you very much for taking my questions. I also have three, if I may. I'll take them one by one, thank you. The first question would be this Medicare draft proposal. Could you maybe just give us a bit more of your reflections of how much this could turn into in terms of market expansion and potential sales upside, without specifying any dates or how much of it you actually expect to realize? Just to give an idea of that, what seems to be a breakthrough in that regard.
Hi, Martin. Thanks for the question. Yes, this is a very big change in the industry if this goes through, and this would be the biggest change in access for amputees in terms of better access to better mobility solutions that we've seen in decades. We are cautious with regards to commenting on, let's say, what impact this will have on market size and growth until we know more about the details and timelines, et cetera. But what I can though say is, if we just look at Medicare data today, and Medicare is the, we estimate to be the biggest, let's say, ultimate payer for when it comes to prosthetic solutions in the U.S. market, a single payer.
If you look at the total value of, let's say, in terms of volumes of claims, the K3 patients are about half of all volumes, but constitute 80%-90% of all payments made. So, if we are assuming that the K2 or the lower active part of the population has similar access as the higher active part of the population, we should see a quite significant expansion in the overall size of the market. But again, we are cautious in terms of being too specific until we know more details.
Okay. Thank you very much. I'll jump to the next question. In terms of the margin development that we've seen over the past few quarters, it seems that there's a bit of a trend that there are some bumps on the road that's making it difficult to predict the margin development. Can you maybe give me some feedback on whether that's improving in terms of the visibility, or if it's the same that you are able to see out there in terms of the supply chain disruption, the unit costs that you have, all these things combined would be quite interesting to understand from my perspective?
Yes. I would say that our transparency and predictability is there. However, we've gone through a year with unprecedented inflation levels. And the two biggest items that have impact, or let's say, the main themes that have been prevalent on the gross profit margin side throughout the year, have been unit cost in our product manufacturing side, and then also on the Patient Care side, we have seen both labor cost inflation and inflation in all input prices exceeding increases in reimbursement levels in most of our markets. So these have been two topics that have obviously impacted our cost here in 2023.
But it's also important to take into consideration the cost or the streamlining initiatives that we executed end of 2022, that have sort of contributed to us protecting our margins here in 2023. And ultimately, the root cause for the inefficiency on the manufacturing side has been pre-COVID, we used to have a lot of single supplier relationships with critical vendors, that if you remember, caused some of these delays in us launching some of our flagship products in 2022. And we have been working through those changes, onboarding new suppliers, which has impacted our operating rhythm on the manufacturing side. And we have a big job to do to get back on track here in 2024.
And we are confident that we will do that, as well as we'll see inflationary pressure ease. And assuming we have good volume growth, or continue to have volume growth in our patient care business, we should see more scalability and more leverage on our overall cost base, which is part of the underlying assumptions for how we position guidance.
Okay. That's, that's very clear. Thank you very much, Sveinn, for that. And just the last question, and then I promise I'll jump back in the line. When you say that you expect some moderate price increases in 2024, how... What does moderate mean in terms of a more quantitative measure? And how confident are you that you are able to increase prices during a time where we actually see that, you know, the inflation is coming down and the whole system seems to be more pressured compared to two years back, where it seemed to be more easy to get through with the price increases, with the-
You're absolutely right. I mean, price increases now compared to beginning of last year, it's a different environment, and inflation is going down rapidly in all of our major markets. In each and every country, it's always the point of departure is what is the underlying reimbursement system doing? For example, in the U.S., the way we understand price increases there is that Medicare will increase prices maybe 1%. In some of our markets in Europe, there will still no price increases have been communicated. So we expect modest price increases on the product side, maybe around 2%-ish, is what is our baseline assumption. Higher in some markets, lower in some other markets.
That's very clear. Thank you so much, Sveinn, and congrats with the results.
Thanks a lot.
Thank you. We are now going to proceed with our next question. The question comes from the line of SEB. Please ask a question. Your line is opened.
Hi, good morning. I have two questions left here, and I'll do one at a time. Firstly, can you just want to follow up on this profitability in the patient care? I recall that in previous quarters, you also mentioned that there's a time lag increase in the reimbursement. What is your expectation now? Could you give an update on this? And yeah, I'll do next question later.
Yes. What we have said around reimbursement increases, we did see some reasonable increases, for example, in the U.S. in 2023, in some of the European markets. But in markets where we have quite extensive patient care operations, we've not yet seen an adjustment in line with the underlying inflation, which has put some temporary pressure on, let's say, the margin that we generate in that part of our business. We do expect, although nothing has been confirmed yet, we do expect some price increases in some of the big European markets, but that's, this will become clear as we get a little bit further into the year.
So what we mean with this time lag is basically that ultimately we expect some alignment on the pricing side from public payers. But in the meantime, obviously, this will and has impacted our gross profit margin on the Patient Care side. The fact that we are having to absorb both labor cost increases and increases in pricing on all our inputs and are not able to pass that on. But again, as we go into an environment with less inflationary pressure, again, assuming continued strong patient volumes, we will, just from the scalability we have in the underlying business, see margins get gradually back on track.
Can I just follow up here? So, when looking at the 2024 margin guidance and how much of the margin improvement were dependent on the just increase in the reimbursement?
Well, we've guided on a range of 19%-20%. We have not assumed any significant price increases from public payers into these numbers, not at all. I mean, it is the underlying assumption for the margin guidance is principally that we deliver a solid top line and deliver a underlying productivity increase in principally our production setup, as well as scalability on the OpEx side.
Okay, cool. Thanks.
Yeah.
Then the next question is regarding the freight rate. It has been quite a volatile in Q1, and actually the last 25 days. What do you see it, I mean, any impact on the in the short term?
No, I mean, the... Yes, you're right. I mean, the freight rates have increased short term. This is not. We have not factored any significant change in freight rates into our forecast, no.
And you haven't seen much impact as in previous years? Just want to clarify.
Well, what we've just observed the increase here in the short term in the spot rates, yes. But due to the turbulence around freight rates in general. But no, we haven't assumed any change, let's say, from average 2023 levels for our 2024 forecast. No, any material change.
Okay. Thanks. I'll come back to the queue.
Thanks, Ray.
Thank you. We are now going to proceed with our next question, and the questions come from the line of Niels Granholm-Leth from Carnegie. Please ask your question. Your line is open.
... Thank you, and good morning. Could you firstly talk about the contribution on your organic growth for 2023 from Naked Prosthetics? And secondly, could you talk about your anticipated contribution on margins and growth for that matter from Fior & Gentz in 2024? I'm sure we can do the backward calculations ourselves. I just wanted to hear where you would arrive on this. And then lastly, could you briefly comment on your M&A pipeline? Thank you.
Yeah, hi, Niels. Thanks for those questions. I mean, Naked Prosthetics was an acquisition similar in nature as Fior & Gentz, where we're buying a solid or a great product that we aim to bring to market through our global infrastructure. And the expectation was that this business would grow strong, double-digit, and that's what it's done here in 2023, therefore contributing positively to the overall picture. And the same, let's say with regards to our expectations for Fior & Gentz, we communicated that the business, the turnover was expected to be around $23 million for 2023, and we expect that business to grow strong, double-digit growth rates in line with historical growth rates over the last couple of years, which has been around 14%.
And that's what we baked into our guidance for 2024, that this will be accretive for both our organic growth profile, around 30 basis points, and actually the same for margin, approximately accretive around 30 basis points. As Fior & Gentz business has an EBITDA margin of around 30%. Does that-
Yes, great. And then perhaps just thought to follow up on, on Fior & Gentz. When would you expect to bring the company's products outside of Germany?
We are in the process of prioritizing. I mean, at the end of the day, we have relationships with O&P clinics in a global context that serve patients with neuromuscular complications when it comes to mobility level. So we will focus on our biggest European markets. That's the focus in 2024, and that work is well underway.
Will this encounter an additional build-up of sales capacity in new markets that will, I guess, that would be included in your margin guidance already?
Yes
... but,
Yes. Yeah, that's included in our margin guidance already, and there will be some investment in focus commercial capacity to, let's say, make sure we address the large opportunity that we think we have to bring these solutions to more patients.
Lastly, on your M&A pipeline.
Yes, sorry. We do continue to have a pipeline. Obviously we will now, as we have funded the Fior & Gentz acquisition, we will temporarily again go above the upper end of our guidance range when it comes to net debt to EBITDA. But we continue to manage our pipeline, which is a combination of, you could say, product companies that strengthen our portfolio and also on the patient care side. But we are, yeah, I mean, for now, we're above the range, and we would most likely not go much higher until maybe latter part of the year as cash flow contributes to declining ratio.
Okay, thank you.
Thank you, Niels.
Thank you. We are now going to proceed with our next question. The questions come from the line of Martin Brenøe from Nordea. Please ask your question. Your line is open. Hello, Martin, your line is open. Please go ahead with your question.
Hi. Sorry, I think I was muted here, but thank you very much for taking my question. I just wanted to follow up on the last M&A pipeline question here. With the leverage being around the high end of your target range, you are a bit constrained in terms of how much you can execute on. Are you looking to raise capital in the case that you see a good target that you want to execute on, or do you exclude that completely? Thank you.
We have not, we have no plans around that. And we have been clear in terms of just our overall approach to M&A. We expect to, as we communicated around our capital markets day last year, we expect to generate 5%-7% organic growth, and on top of 2%-3% M&A driven growth, and that's on average over these five years. So we'll continue to manage and build our pipeline in terms of potential acquisition targets that strengthen our ability to execute.
But, but at the same time, we need to pace ourselves with regards to ability to integrate and, and all these aspects and, and maintain our capital structure within the parameters that we have defined. But of course, I mean. And we've always been, I think, clear on that as well, that we can temporarily go above the range. But, but that is also- I mean, we want- we, we don't wanna stay permanently above the range. So, we expect strong cash flow this year that will bring us within the 2x-3x range, and we should have ample cash flow to be able to do the deals that we want to.
Okay. Thank you very much.
Thank you.
We have no further questions at this time. Please continue.
Excellent. Thanks a lot for your participation here this morning, and if there's any follow-up, please reach out to our investor relations team if you have any questions or follow-up or a request for a meeting. But otherwise, I'd like to thank you for your participation this morning, and have a nice day.