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Ladies and gentlemen, welcome to the Össur Q1 Results 2021. Today, I'm pleased to present Mr. Jón Sigurdsson, President and CEO; and Mr. Sveinn Sölvason, CFO. [Operator Instructions] Please go ahead with the meeting.
Yes. 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 2021. 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 ending with our guidelines for 2021, a question-and-answer session will then follow. Next slide, please. Sales in the first quarter of 2021 amounted to $161 million, which corresponds to 2% organic growth. We saw continued impact of COVID-19 in the quarter with a soft January and February, with strong sales in March and continuing into April. The impact from COVID-19 varies by geography with strong growth in APAC, while sales are recovering in Americas and EMEA. EBITDA amounted to $29 million in Q1 or 18% of sales. EBITDA is increasing in line with expectations, which Sveinn will elaborate further on. Next slide, please. As previously mentioned, sales amounted to $161 million in the first quarter of 2021 compared to $154 million in the same quarter last year. The prosthetics segment continues to be more resilient than the bracing & supports segment throughout the pandemic. The prosthetics segment grew by 3% organic, partly due to pent-up demand and the bracing & supports segment declined by 1% organic. Reported sales increased by 5%. Net impact from acquisitions and divestments was negatively impacted by 2 percentage points, with change in currency rate, sales were positively impacted, corresponding to 5 percentage points impact on reported growth. Next slide, please. Sales were gradually recovering in Americas with impact from COVID-19 beginning to diminish in most U.S. markets. Prosthetics sales grew in the U.S., while bracing & supports sales remain soft due to general lower activity level in hospitals and clinics. In EMEA, sales continue to recover with pent-up demand realized in some markets. However, sales in North Europe which includes some of Össur key markets remained volatile due to COVID-19. In APAC, sales were strong in all major markets with pent-up demand in some markets, both prosthetics and bracing & supports segment reported positive organic growth in the quarter. Now over to you, Sveinn.
Thank you, Jón. As Jón already covered, sales started to normalize towards the end of quarter 1. Gross profit margin was strong in the quarter compared to same quarter last year or 64%, because the gross profit margin is back to a more normalized level. Productivity was good and pricing remains stable with some positive impact from product mix. Reported OpEx growth was 1%, while underlying OpEx growth when adjusting for currency and M&A was flat. EBITDA amounted to $29 million or 18% of sales compared to $22 million or 14% of sales in the comparable period. The effective tax rate is back to a normalized level of 24% in the quarter. Net profit amounted to $11 million or 7% of sales compared to a net profit of $7 million or 5% of sales in the first quarter last year. If we go to the next slide, please. Here we have historical sales and EBITDA trends for the last 9 quarters to give us comparison both to the, let's say, the COVID impacted period in 2020 and then the non-COVID impact period in 2019. Sales recovery is underway with 2% organic growth. Sales growth is expected to continue its upward trend and organic growth will be impacted quite significantly here in quarter 2 as our comparison will be weak. Profitability has been volatile in 2020 due to impact from lower sales as a result of COVID-19 and also costs in relation to divestments completed in quarter 2 and quarter 4 last year. Profitability was, however, strong here in quarter 1 as sales are gradually normalizing. And we also have positive impact from acquisitions and divestments and changes in currency rates. It should also be noted that quarter 1 is and has historically been seasonally lower or smaller than other quarters of the year. And yes, profitability is recovering, and we are confident that we will return to pre-COVID levels in sales normalized further. If you go to the next slide, please. Free cash flow amounted to $9 million here in the first quarter. The cash flow is impacted by an increase in inventory, which is in line with increased demand. Accounts receivable are stable, and the quality of our accounts receivables remains high. Net interest bearing debt amounted to $386 million at the end of the first quarter. The net interest-bearing debt to EBITDA was 3.9x, which is temporarily above our target range of 1.5 to 2.5x. Share buybacks and dividends are therefore still temporarily on hold. Yes. Over to you, Jón, again, then, please.
Yes. Thank you, Sveinn. On the guideline, no change has been made to the financial guidance for the year. As Sveinn mentioned, it should be noted that quarter 1 is and has historically been seasonally weakest quarter of year in terms of sales and profitability. The financial guidance assumes continued impact on COVID-19 in the first half of 2021, but gradually subsiding in the quarter 2, while quarter 3 and 4 are expected to be largely unaffected with some realized pent-up demand. It is emphasized that the outlook for 2021 remains more uncertain than usual changes in the measures to control COVID-19 pandemic and as main markets can affect the financial performance. The organic sales growth outlook for 2021 is expected to be in the range of 10% to 15%. EBITDA margin before special items is expected to be in the range of 21% to 23%. Underlying gradual increase in profitability expected as sales recover, supported by growth in higher margin products, divestment and scalability in core operations. Acquisitions are expected to have slightly negative impact on the EBITDA margin. CapEx is expected to be in the range of 3% to 4% of sales based on the current mix of taxable income. The expectation is that 2021 effective tax rate will be in the range of 23% to 24%. Next slide, please. I am proud to share with you that in March of this year, Össur was recognized by WIPO, an agency of the United Nations, as Össur ranks second in the world for top patent applications in conversion of mobility-assisted technologies. This is the result of the first study to systematically investigate patenting and technology trends across assisted technology at scale, analyzing data from patent filing from '98 to 2019. WIPO acknowledgment of Össur contribution to innovation confirms the company industry leadership in R&D. Next slide, please. As a part of Össur larger commitment to sustainability and commemorate the company 50th anniversary. I'm pleased to share with you that Össur will be carbon neutral this year in 2021. This includes carbon neutrality for energy and fuel consumption, waste generation, business travel, transportation of goods and electricity consumption of Finnish group suppliers. And this concludes the review on the first quarter. We can now go on to Q&A session.
[Operator Instructions] Our first question comes from the line of Christian Ryom from Nordea.
I have 3, please. So first, can you comment a little bit about -- a little bit on whether the sales development that you've seen here in April, whether that's been consistent with March and then somewhat related to that, just to confirm the numbers that you quoted in the report where you say that January and February was 90% to 100% of 2019 -- 2019 sales. And March was 100 to 110% of 2019 sales. Was that organic sales or including acquisitions? And then my second question is to the acquisitions that you've announced here in connection with the Q1 report. Can you elaborate on whether these acquisitions are mainly within prosthetics or within bracing & support? And then finally, can you comment on how you see the outlook for further M&A for this year?
If I can maybe take the first question on the sales trend. Yes, we can confirm that sales have growth, sort of has continued into April, and quarter 2 has started in line with how quarter 1 ended. And I can also confirm that the in-taxing that we provided in the announcement, benchmarking is organic. It does not include any M&A.
And on the acquisition, Christian, you can assume that those acquisitions we are buying, are both bracing & support and prosthetics, as a typical mix of both distribution companies.
And the outlook on...
And on M&A outlook, yes. Going forward, we have...
And the M&A outlook is, yes, I would probably look at the same continuation there.
Our next question comes from the line of Benjamin Silverstone from ABG.
And congratulations on a solid quarter. I have 3 questions, if I may. The first one is in regards to your organic growth guidance for the full year. You do now mention explicitly that we expect to see some pent-up demand. Could you just reiterate what that guidance holds in terms of pent-up demand? As far as I remember, the higher end of the organic growth was accounting for pent-up, while the lower wasn't. But if you could just clear it out, that would be great. And my second question is in regards to the prosthetic sales and also somewhat related to pent-up demand. So we are seeing this segment being much more resilient as we have in the last 12 quarters. But you also now mentioned that the bionics subsegment account for 19%, which is somewhat down compared to what it normally stands for. Could you perhaps give some indication of whether or not we are going to see some pent-up demand in the prosthetics segment coming from bionics or how your outlook is on this? And my third question is in regards to your gross margin. So when you mentioned that you are now seeing it back at more normalized levels with manufacturing and warehouse being back at normal capacity. But could you just quickly mention whether or not Q1 has been back at normal levels for the entire quarter? Or if we will see some additional margin improvements for Q2 when you have a full quarter with normal capacity?
Yes. Thanks, Benjamin. Maybe I can sort of -- on the organic guidance and pent-up demand. What we've said about pent-up demand is on the prosthetics side, remember, last year, our -- on the full year results, we communicated that the mechanical products were virtually flat year-over-year, while we saw a bigger decline in bionics. And for -- when it comes to 2021, we expect bionics to gradually come back online, and that is also partly answering your second question. As bionics is a more intensive sales process, it requires more time with the users, so these sales have been more impacted than on the mechanical products. So we expect some pent-up demand here for bionics here in 2021. But on the bracing side, the drop in demand has mainly been related to fewer injuries because of less activity. And we have said that we don't expect any meaningful pent-up demand on the bracing & supports side, only perhaps for some of the product categories like postoperative bracing. So I don't have a scientific answer for you in terms of how much pent-up demand or, let's say, such that you can sort of calibrate the full year guidance based on how much we will realize in terms of demand last year. But the way we've thought about the guidance is at least the pent-up demand, depending on how that develops, will have an impact on where we end up for the full year. So I don't have a scientific answer on that, unfortunately. Gross profit margins, I would be cautious to model higher gross profit margin. Also remember, we have due to bracing being lagging behind prosthetics has also had a positive mix impact here in quarter 1. So as we get the bracing business sort of back on track, we will have a slight sort of negative impact on gross -- from a mix standpoint on the overall gross profit margin going forward. Hope that answers your questions.
[Operator Instructions] Our next question comes from the line of Niels Leth from Carnegie.
Following up on the acquisitions you made. So you mentioned that you expect acquisitions to continue at the same pace for the next few quarters. So that would then anticipate adding then $11 million or so in sales per quarter or 7%. Is that correct -- 7% to annual sales? Is that a correct assumption? And then -- yes, you can answer that. Please go on.
Okay. Sorry, I thought you were -- okay, sorry. But yes, that will assume that we can consummate those acquisitions. But as you said, as you know, it's really difficult to plan acquisitions. I mean -- but we are -- what we are saying is that this is our current strategy, the pipeline is there. But whether we can localize suitable ones, it's impossible to say. But yes, the appetite is still there.
And how much would be your M&A capacity at this point in time given that your net debt-to-EBITDA is above your target range?
That's a good question, Niels. I mean our net debt-to-EBITDA is certainly above our current target range. However, we should take into consideration that this is based off of sort of -- EBITDA impacted by both COVID and all these M&A or divestment process that we completed last year. So as the business normalizes here towards the end of the year, we will move closer to the top end of the target range. But you're right, we are, let's say, our bandwidth to acquisitions is, of course, constrained somewhat in the short to medium-term due to temporarily high leverage, yes. That's a good point.
But would that mean that there are actually acquisition possibilities that you are not able to pursue at this point in time?
We have not said...
Because we've also been clear that we -- I mean, this net debt-to-EBITDA range is our target range. But we've also said that we could temporarily move out of that range if the right acquisition opportunities present themselves. So that's how we look at the range. We want to operate the business within this 1.5 to 2.5x net debt over EBITDA, but we have also said that we can temporarily move outside of the range if the right M&A opportunities arise.
And then we are -- sorry, I, but we have a full backing of the banks and the really -- and those lenders and the really -- the explanation for it is that there is a drastic fall in the EBITDA. And that's what we are dragging with us out this year. So I don't think if we get a good opportunity for acquisitions, that will not stop us.
And is it fair to assume that the acquisitions you just made and the next acquisitions to be done are still within the prosthetic workshop business?
It's -- yes, but but there are some few fully pool of companies we are looking at as well. But those would be in the prosthetics segment.
Right. And then just a final question on competitive bidding. Would you expect the effect from competitive biddings have the same effect in the coming quarters as in quarter 1?
The competitive bidding is -- it has had a lesser impact than we had anticipated. And we would like to wait another quarter to answer whether that is a permanent or temporary.
Our next question comes from the line of Yiwei Zhou from SEB.
I have 2 left here. Firstly, a follow-up on the competitive bidding. Is it possible for you to quantify a bit on the impact in the quarter? And then secondly is, could you sort of confirm that you have not received any government subsidy in the quarter?
Yes. We've not received any government subsidies in the quarter. And on the competitive bidding, as Jón said, it has started year -- started a bit slower than what we had anticipated in terms of the financial impact materializing. But as of now, we are not changing our view on the overall impact of our estimated impact of competitive bidding. It is a complex process. It impacts the whole value chain in the U.S. and we -- yes even though the impact sort of -- it did not sort of -- it has sort of hit us from 1st of January onwards. But we -- as of now, we don't have a reason to change our estimates of how this will impact our business.
And on the specifically, what is affected by competitive bidding, is difficult to say. I mean, that's really. It is the overall sales. It's really difficult to pinpoint what exactly would say this is effective and this is not.
We have no more questions from the line. I will hand it back to our speakers for closing comments.
Yes. Then thank you for your questions. And then please reach out to our IR, if you want to have a call with us or you have a question after this call. And thank you all for listening, and have a good day, and good luck with all your reporting coming in now. Thank you very much.