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Ladies and gentlemen, welcome to the Össur Interim Report Q2 2018 and Consolidated Financial Statements for full year 2018. Today, I am pleased to present our host, Mr. Jón Sigurdsson, CEO; and Mr. Sveinn Sölvason, CFO. [Operator Instructions] Gentlemen, please begin.
Yes, thank you. Yes, I would as well like to welcome you to the Össur investor conference call where we will cover the result for the second quarter of 2018. As previously mentioned, my name is Jón Sigurdsson, 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 second quarter of the year amounted to $158 million, corresponding to 9% growth and 6% organic growth. Prosthetics grew 7% organically in the quarter with a good contribution from high-end products. Our bracing and supports grew 4% organically and we are pleased to see our OA solution growing well globally. Gross profit margin was 63% of sales compared to 62% in the comparable quarter last year. EBITDA amounted to $32 million or 20% of sales compared to 19% in the same quarter last year. The profitability increase is driven by scalability, strong sales growth and positive changes in product mix. Starting from the left, Americas sales growth was -- I'm sorry, sales amounted to $158 million in the second quarter of 2018 compared to $145 million in the same quarter last year where total organic growth was 6%. The prosthetics segment grew 7% organically corresponding to a 4 percentage point contribution to total growth. We have a good momentum in our prosthetics segment globally with excellent contribution from high-end products such as bionics and Pro-Flex feet, which were launched in 2017. The remainder of the prosthetic portfolio also performed well in the quarter. Bracing and supports sales grew 4% organically with 2 percentage points contribution to total growth. After a slow start to the year in bracing and supports, the second quarter came in as expected with stronger sales growth. Total growth in dollar terms was 9%. With the change in currency rates, sales growth was positively impacted by $5 million. This correspond to a close to positive 3 percentage points contribution to total growth. Starting from the left, Americas sales growth was 2% in the quarter. The prosthetics segment performed well with good growth in both Canada and U.S. In the bracing and supports segment, performance in Canada continued to be strong while sales in the U.S. soft goods business declined slightly. Slow sales growth in the U.S. can mainly be traced to delay in new product launches, which were expected to be launched last year, but now belongs in the first half of 2018 in addition to lower sales to large distributors in the quarter. We expect sales growth in the second half of the year to be stronger in Americas, supported by recent product launches. As in the first quarter of the year, our own distribution companies in the U.S. are performing well. Sales growth in EMEA was 7% in the quarter. After a soft beginning of the year, growth was good in the prosthetics segment across most major regions. In bracing and supports, our high-end solution grew in all major regions while our soft goods solutions had a slow quarter. The main reasons being slow sales in Compression Therapy in France and rationalization of a limited number of products in selected markets. Growth in APAC was 19% in the quarter where we continued to see excellent results in both prosthetics and bracing and supports. As in previous quarter, growth in Australia and China has been strong. Over to you, Sveinn.
Thank you, Jón. Now going through the period, I will make references to both the second quarter numbers and for the half year as with Easter shifting between the comparable quarters, the half-year numbers -- the half-year comparisons is also very relevant. Well, as already covered, organic sales growth was strong in the second quarter and amounted to 6% and organic growth rate was 4% for the first half of the year. Gross profit amounted to $99 million in the quarter and the gross profit margin was 63% compared to 62% in the comparable quarter last year. Year-to-date gross profit margin is also up by 8 percentage points compared to the first half of last year, amounting to 63%. EBITDA amounted to $32 million in the quarter or 20% of sales compared to 19% in the second quarter last year. I will discuss the margin development for the quarter in more detail on the next slide. The EBITDA margin for the first half of the year is 17%, the same as in the first half of 2017 when excluding special items. 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, however, subject to some fluctuations between quarters. Income tax amounted to $6 million corresponding to 23% effective tax rate compared to an effective tax rate of 25% for the comparable quarter in 2017, hence, in line with our guidance on effective tax rate. Net profit was strong and amounted to $20 million or 12% of sales compared to 9% of sales in the comparable quarter and grew by 49%. In summary, on the P&L, there is good progress on all parameters for the first half of the year. If we go to the next slide, please. EBITDA amounted to $32 million in the quarter, which corresponds to a 20% margin compared to 19% in the second quarter of 2017. The key items affecting the EBITDA margin between the 2 comparable quarters are, starting from the left: positive effect from prosthetic margins, mainly driven by a positive development in product mix as our high-end products are growing faster than the remainder of our product portfolio. Sales and marketing expenses grew 4% where growth in cost is mainly due to investments in sales efforts and new business development and emerging markets. R&D expenses grew 9% mainly due to investments in projects for high-end products such as bionic bracing. And finally, G&A expenses grew 3%, hence, the operating leverage from at least sales and marketing costs and G&A. And finally, currency impacted the EBITDA margin positively by about 40 basis points net of the hedge we have on the Icelandic króna. The combination of strong sales growth, scalability on the cost side and positive impact from changes in product mix are the main drivers of strong profitability in this quarter compared to the same quarter last year. Now if you go to the next slide, please. Just a quick status on our efficiency initiatives. Basically, the program is on track. As in the first quarter of the year, additional investments were made in various manufacturing equipment and good progress has been made in several categories relating to initiatives within strategic sourcing. The West Coast distribution facility in the U.S. has now been closed and moved to our Mexico manufacturing facility where savings are already beginning to materialize from this initiative. And if you go to the next slide, please, on cash flow. Cash generated by the operations in the second quarter of the year amounted to $23 million or 15% of sales. Changes in net working capital negatively impacted cash flow generated by operations partly due to a temporary increase in inventory relating to the efficiency initiatives. CapEx amounted to $6 million or 5% of sales. CapEx in the quarter was relatively high due to investments related to the efficiency initiatives in addition to various investments in leasehold improvements and the integration of a new CRM software. We expect lower CapEx in the second half of 2018. Net interest-bearing debt was about $134 million at the end of the quarter, which corresponds to a 1.3x net interest-bearing debt-to-EBITDA. Now, Jón, over to you again on the guidance, please.
Yes, thank you, Sveinn. There is -- no changes have been made to the financial guidance. The full year guidance is as follows as previously: 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 the effective tax rate to be in the range of 23% to 24%. Thank you all. Let's now go to the question-and-answer session.
[Operator Instructions] Our first question comes from the line of Christian Ryom from Nordea Markets.
This is Christian from Nordea. I have a couple of questions on your bracing and supports sales and one question on the efficiency program. On the bracing and supports sales, you mentioned that you've implemented some product rationalizations in this report. When exactly have you implemented these product rationalizations? And how do you expect them to impact your sales going forward? And then secondly, also on bracing and support, you mentioned that you have some of the [ slight shifts ] in U.S. sales is due to low sales with a couple of large bracing and supports distributors. Do you expect this to improve in the second half? And then I'll come back with my final question on the efficiency program.
Yes. Regarding the product rationalization. Yes, we are going through an SKU regionalization project and we initiated that a couple of years back and -- where we are taking the long tail out and getting rid of some -- first of all, overlapping products and secondly, low profit margin product. And in addition, it was decided to rationalize certain item -- limited number of products in selected markets and -- affecting U.K. and Nordic regions. And then on the large distributors, we have been, although that is more in other parts of the market in U.S., we've been fading out products, which we are selling as a distributor for other manufacturers. And the rationalization will impact sales in bracing and supports in 2018 only and that's in the neighborhood of, what is it?
$1 million.
$1 million, yes.
$1 million to $1.5 million, yes. And just to add, this is a concentrated effort so that -- and we -- it's ongoing, and yes, we will have concluded this by the end of the year. So it's about $1 million, $1.5 million, so nothing material as such.
Okay. And then just to be clear, on the last year's distributors, do you expect an improvement then in the second half of, what should we expect there?
We expect an improvement in bracing and supports sales in the second half of the year, yes. But this is still an ongoing sort of trend that we -- our direct businesses is growing. We are -- sort of where we go to market through our direct sales force, but through these distributor sales that -- which is not a very big part of our overall bracing sales in the U.S., that has been under some pressure.
Okay. And then on the efficiency program, can you confirm whether you still expect to realize around USD 3 million in savings from the program this year? And how much of these savings have been realized year-to-date?
Yes, we stick to the numbers. We have already communicated that it is -- we have sort of realized sort of, let's say, they will be slightly more back-end loaded, let's say, the $3 million. But it is sort of -- maybe it's fair to say that we sort of have in our P&L now about 1/3 or something like that of the $3 million and the rest will come in the second half of the year.
And our next question comes from the line of Thomas Bowers of Danske Bank.
Just to stay on the bracing and support. I remember in connection with the Q1 that you had some late Q1 product launches and those were expected to positively impact in Q2. So now, I'm just wondering are we seeing a sort of a further delay in the U.S. where you have seen some positive impact in EMEA? Or how should I see this? And then just -- maybe could you just elucidate on the bracing and support growth in the U.S. alone, I see that's 2 percentage points over also. So what is -- [ on the ] bracing and supports, is that a negative impact for -- a negative growth for Q2? And then maybe, finally, just what's actually the estimated impact on the growth from the extra sales days during the quarter due to the impact of the Easter holiday in Q1. So how much of an impact do you expect to have seen in Q2?
On the bracing and supports growth in the U.S. and the reference to product launches, yes, we reiterate, let's say, the same message as in Q1 that we expected these launches to come in late '17, but they came late Q1. Hence, we expect sort of this to halve our growth in the second half of the year, so it's basically the same explanation as in Q1. These parts have been -- sort of came and sort of -- yes, at least a quarter later than we expected. So that is why we make the reference to this in the report now and we expected to have our growth rate in the second half of the year. And this is mainly in relation to the U.S. part of our business.
And maybe on the B&S growth you had in U.S., could you explain that?
Yes, that is declining slightly in the U.S.
Okay. And then on the extra sales days for the Q2?
Let's say, if we would have had the same number of sales days, they would sort of -- our organic growth would have been around 5% instead of 6%.
Okay. And then maybe could you just on the CapEx, you still have 5% for the first half. So given that you are guiding 4%, are we looking at 3% for H2? Or is CapEx maybe going to be slightly above 4% for the full year?
What has driven our CapEx up in the first half of the year is all the preparation and all the investments that we've needed to do in Mexico to be able to absorb the activities we are moving from Iceland and also investments related to moving our West Coast distribution facility into a manufacturing facility in Mexico, and these investments have already taken place. So that is the principal driver of CapEx being above the average. So I expect somewhat lower CapEx in the second half of the year and still expect that to be around the guided number as relative to sales.
[Operator Instructions] And okay, there seem to be no further questions, so I hand back to our speakers for the closing comments.
Yes. Thank you for your questions and participation. And we just want to quickly highlight that we will be on the road in the fall where we will presenting at a couple of conferences in Europe and the U.S. Please reach out to our Investor Relations team if you would like to meet us and if you have any questions after this call. Thank you for listening, and have a good day.