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Ladies and gentlemen, welcome to the Össur Interim Report Q1 2018 Conference Call. Today, I'm pleased to present Mr. Jón Sigurdsson, President and CEO; and Mr. Sveinn Sölvason, CFO. [Operator Instructions] Speakers, please begin.
Thank you. I would also like to welcome you to the Össur investor conference call, where we will cover the results for the first quarter of 2018. My name is Jón Sigurdsson, and I'm the President and CEO. And with me here today is Sveinn Sölvason, our CFO. We will begin by going through the highlights for the quarter and end with our guidance for 2018. A question-and-answer session will then follow. Sales in the first quarter of the year amounted to $142 million, corresponding to 8% growth and 1% organic growth. Prosthetics grew 4% organically in the quarter, with good contribution from high-end products, such as bionics. Bracing and supports had a slow start of the year, and sales declined by 1% organically. Please note that we had a strong comparable quarter in 2017, and shift in sales days between the comparable quarters negatively impacted growth. Gross profit margin was 62% of sales, which is the same as the comparable quarter last year. EBITDA amounted to $20 million in the quarter or 14% of sales. In March 2018, Össur entered into a new financing agreement with Nordea and Danske Bank. The new financing reflects Össur's strong financial profile and outlook with lower interest rate margins and greater operational flexibility. Sales in the first quarter amounted to $142 million compared to $131 million in the first quarter of 2017, where the total organic growth was 1%. The prosthetics segment grew by 4% organically, corresponding to a 2 percentage point contributing to total growth. Bracing and supports sales declined by 1% organically, with negatively 1% point impact on total growth. After a slow start of the year in bracing and supports, we expect the remainder of the year to be stronger, supported by recent product launches.Total growth in dollar terms was 8%. With change in currency rate, sales growth was positively impacted by $9 million. This corresponds to a positive 7 percentage point contribution to total growth. Now let's look further out at each geographic region, starting with the Americas. Americas sales growth was 1% in the quarter. The prosthetics segment in the Americas continued to show good growth. With bracing and supports, sales in the U.S. declined slightly, which can be traced to delays in new product launches and competitive market environment for certain products. However, our own distribution company showed modest growth after 2- to 3-year period of negatively impacting consolidated growth of around 1% point each year. I've already mentioned that the expectation is that sales growth in the remainder of the year will be strongly supported by recent product launches and better market condition. Sales in the EMEA declined by 1% organically, but it should also be noted that growth in the EMEA region was negatively impacted by about 2 percentage points due to shift in sales days. In both prosthetics and bracing and supports, we've continued to see good contribution from our high-end innovative product in an otherwise soft quarter. As in the Americas, we expect sales growth in the remainder of the year in EMEA to be stronger. APAC sales were excellent in the quarter and grew by 19% both prosthetics and bracing and supports. We are seeing strong growth with all major regions performing well there. Over to you, Sveinn.
Thank you, Jón. As already covered by Jón, the organic sales growth amounted to 1% in the quarter. Gross profit margin was stable or 62.4%, which is exactly the same as we had in the comparable quarter last year. EBITDA amounted to $20 million or 14% of sales compared to 16% in Q1 last year, and I will put the margin difference on the next slide.Share in net profit of associated companies amounted to $1 million in the quarter. The profit is from a few minority investments in both technology and distribution companies, and we expect similar profit from these investments going forward on a quarterly basis, although subject to some fluctuations between quarters. Income tax amounted to $3 million, corresponding to 24% effective tax rate compared to an effective tax rate of 26% for the comparable quarter in 2017, which is then in line with the -- our guidance on the effective tax rate. Net profit was $10 million, same as in the comparable quarter last year, and amounted to 7% of sales. Next slide, please. Now as I mentioned earlier, EBITDA amounted to $20 million in the quarter, which is 14% EBITDA margin compared to 16% in quarter 1 of 2017. And on this slide here, you have a bridge on the left. And to bridge the difference, we have sort of a slight positive impact on the gross profit margin, mainly from sort of product mix and -- however, we grew our sales and marketing expenses by 4%, with increased investments in sales efforts, primarily in a few emerging markets. R&D expenses grew 9%, mainly due to investments in projects for high-end products, such as the bionic bracing. And the G&A expenses grew 3%. And finally, the currency movement impacted the EBITDA margin negatively by about 50 basis points. Now the combination of low sales growth in the quarter and the OpEx investments led to lower relative profitability now in the first quarter of the year compared to last year. With expectations of higher sales growth in the next couple of quarters and somewhat lower OpEx growth, and also contribution from the savings initiatives, we will see higher profitability in the remainder of the year. Go to the next slide, please. Just a very short update on this efficiency. Initiatives which are basically on track. We've made investments in various equipment in our Mexico manufacturing facility, and good progress has been made in several categories relating to initiatives within strategic sourcing. And the previously communicated savings of about $3 million in 2018 are expected to materialize towards the second half of the year. Next slide, please, on cash flow. Cash generated by operations in the first quarter amounted to $6 million or 4% of sales. Cash generation is seasonally weak in the first quarter, partly due to sales and profitability being seasonally low, but also due to some working capital movements which we expect to reverse in the next couple of quarters. CapEx was high, amounted to $8 million or 6% of sales, and this is also mainly related to the efficiency initiatives and also various investments in computer equipment and integration of a new CRM software. About $2 million can be traced to the efficiency initiatives. And again, CapEx will be somewhat lower towards the latter half of the year. Net interest-bearing debt was about $146 million at the end of the quarter, which corresponds to a 1.4x net interest-bearing debt to EBITDA. And Jón, if you could go over the guidance, please.
Yes, thank you, Sveinn. No changes have been made to the financial guidance. The full year guidance is as follows. Organic sales growth in local currency is expected to be in the range of 4% to 5%. EBITDA margin before special items is expected to be around 19% of sales. And we expect capital expenditures to be around 4% of sales. And effective tax rate to be in the range of 23% to 24%. Thank you all. Let us now go to the question-and-answer session.
[Operator Instructions] Our first question comes from Christian Ryom from Nordea.
This is Christian from Nordea. I have 3 questions. The first is on the growth in bracing and supports. Can you help us a little bit with some color on what -- how the different effects stack up against each other? So you talk about that you had a challenging quarter in soft goods solutions. How big a share of bracing and supports, say, is that? And how does the negative impact from that compare to the effect from delayed product launches? And then secondly, on your OpEx growth in the quarter, I noticed especially that you saw quite a big uptick in sales and marketing, marketing investments. How should we think about this for the rest of 2018, and should we expect this to be nominally flat for the coming quarters? Or what is the outlook here? And how will this impact also your expectations for growth in emerging markets? As it seems that, particularly here, that you've increased your investment. And then finally, on currency. You now state in your guidance statement that you expect a 20 to 30 basis points negative effect on the EBITDA margin for the full year. Is -- that should be understood as increased headwind on the EBITDA margin relative to your guidance in connection with the full year results?
Yes, first of all, thanks for that. The bracing and supports growth, yes, we had quite a headwind in the soft goods or the soft goods part. It is not a very well-defined for the group it -- kind of a word-of-mouth, soft good is the products that are not the generally more inexpensive product. I would say that -- and then the -- there is an effect of the offer delay, I'm not going to go into how much the soft good days in relation to the other product because we don't categorize it in a very accurate way. I would say that the biggest part of it is the delay of the products we have decided -- we have planned to be out there. But more than that, and then there is softness in the market. And it's really difficult to say how much is attributable to the Easter, going between quarters, and also that we had a very, very -- we had very bad weather on the East Coast that -- I hate to mention that as an explanation, but we can see that the East Coast is softer than the other parts of the countries. I know it's not a very clear answer, but that's about the best I can do. On the OpEx growth.
Yes, I'll take that. OpEx growth, yes, on the sales and marketing side, in local currency, we grew our OpEx by about 4% in the quarter. And that is mainly investments we've been making in a few emerging markets. For example, you see our growth in APAC region, which is largely driven by China. Also, we've changed our sort of go-to-market model early last year, and this is somewhat reflecting those changes; and we are taking the benefits of that. And yes, you mentioned whether we expect higher growth from this region as a result of some of these investments, and the answer to that would also be yes. We expect this region to continue to contribute at least double-digit organic sales growth. And yes, towards let's say the latter half of the year, I would expect the increase or growth in sales and marketing cost to level out somewhat as some of the increase we see now in quarter 1 was in relation to investments that we made in quarter 2, quarter 3 last year. So we have the full impact now in the first half of the year. On the currency impact, yes, we -- let's say, since we set the guidance, the currency has moved again a little bit against us, so it's mainly Icelandic króna has appreciated -- or let's say the average exchange or average rate of Icelandic króna was stronger than -- or 10% stronger than our average in Q1 last year, which is a bit -- sort of moving a bit against us. So yes, we expect some slight more headwind for the full year. Yes, I think that's fair to say. Maybe just to add to your first question on the bracing and supports, because I want to make a reference to what has been sort of a red threat in our communication on bracing and support growth, with the sort restructuring we've been doing on the distribution companies in the U.S., that is now sort of complete in the sense that those businesses contributed marginally to our growth, actually in quarter 1. And let's say the bracing business has, on average, been growing roughly in line with market if we adjust for the impact for the distribution companies. And even though we've had a very slow start to the year, this is still what we expect from this segment for the remainder of the year.
Our next question comes from Thomas Bowers from Danske Bank.
I'll tee off with the prosthetics. So you again see quite solid growth in RHEO and Touch. So -- but I also get the impression that sort of the rest of the division seems to be at close to 0 growth. I'm just wondering if you see some quarterly fluctuations here or any competitive pressures in certain areas, maybe new launches from competitors. So are there any concerns now here after Q1 on the outlook, especially if the RHEO launch, sort of, the momentum start to wear off? And do you, for example, expect that for you -- the upgrade, do you expect here to launch in mid '18, just to sort of takeover in order for you to keep momentum here? And then maybe just, Sveinn, a question just on the associated companies. I noticed that you get about $1 million in the quarter, so quite significantly higher than previous quarters historically. So what do you expect from here? Is this sort of something that is a one-off or is this going to be longer term that you will see these levels? And then just on the FX, just to follow up on the previous question. I didn't really catch -- when you see -- when you say that you see some slight, well, headwinds, is that compared to last year? Or is that compared to your full year guidance for '18?
Regarding the prosthetics growth, Thomas, we don't see any change in the market. This is just -- I mean, this is just one of those quarters. This is just slow -- this is just a soft quarter. And we -- there's a lot of things that just go against us, the Easter, it's the seasonal weather, it's just a lot of things and there's nothing we see out in the market that should change the dynamics on the market against us in any way, I don't think so. And so -- and already, this quarter is starting well.So we are -- there's nothing that indicates that we don't -- we'll live up to the expectations which we have.
On the associated companies, Thomas, we have sort of a handful of investments in companies where we hold a minority of the shares, and these are both investments in technology companies and also on the distribution side. We, let's say, expect this level of profitability on a quarterly basis going forward; although with some fluctuations. So around maybe yes, $600,000, $700,000 to a $1 million in profit on a quarterly basis going forward until we communicate otherwise. Just to clarify on the FX, I was probably unclear earlier. Let's say when we communicated the guidance, we expected -- with the exchange prevailing, exchange rates at that time, we had communicated that the impact would be approximately neutral for the year. However, with the exchange rate, as they developed during the quarter, we now see about maybe 30-ish basis point impact on a full year basis in '18,
[Operator Instructions] The next question comes from Niels Leth from Carnegie.
First question on the timing of your bionic brace. Since you have scaled up the R&D expenses for this product also, could you talk about the timing of the product launch? And secondly, could you just give a few words on your M&A pipeline.
Yes, thanks, Niels. The timing of the bionic brace, we are looking at 2019. As of now, it's a mid-2019, but we have seen those deadlines flip in the past. But so far, it's a 2019.
The M&A pipeline is, as we mentioned many times, it's very, very difficult to comment on it. The business is such that it is hot and cold, but I would categorize the M&A pipeline more active than it has been for a long time.
There appear to be no further questions. I'll return the conference back to you, speaker.
Yes, thanks. And thank you for your questions. And lastly, I've been asked to do a bit of advertising here. We will be on the road in relation to our first quarter release, starting in Iceland in the beginning of May and then visiting the mainland of Europe in mid-May. It's a little bit later than usual. Please reach out to our Investor Relations team if you want to [indiscernible] interest or if you have any follow-up question 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 lines.