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Ladies and gentlemen, welcome to Össur Q2 Results 2019. Today, I am pleased to present Mr. Jón Sigurdsson, President and CEO; and Mr. Sveinn Sölvason, CFO. [Operator Instructions] Mr. Sigurdsson and Mr. Sölvason, please begin.
Yes. Thank you very much. I would like to welcome you to the Össur investor conference call where we will cover the results for the 2nd quarter of 2019. 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 of the quarter and with our guidance for 2019. A question-and-answer session will then follow.Sales in the first quarter of the year amounted to $179 million corresponding to 18% growth in local currency, 7% organic growth in 13% reported growth in US dollars. In the first half of the year, local currency growth amounted to 19% and organic growth was 7%. EBITDA grew by 33% in the quarter and amounted to $42 million or 24% of sales. EBITDA excluding the impact of IFRS 16 amounted to $37 million or 21% of sales compared to an EBITDA margin of 20% in the comparable quarter last year. With strong sales growth in the1st half of the year, the financial guidance for organic growth has been upgraded to 5% to 6%.As announced on Friday last week, Össur has signed an agreement to acquire College Park Industries, a global provider of lower and upper limb prostheses and supporting devices. Closing is expected later in 2019, subject to closing conditions.As previously mentioned, sales amounted to $179 million in the 2nd quarter of 2019 compared to $158 million in the same quarter last year. The prosthetics segment grew by 11% organic. We continue to see a good performance in prosthetics where high and innovative products continue to deliver strong growth in the segment globally, which includes the recently launched bionic PROPRIO FOOT. Growth in other product categories was also good in the quarter.Furthermore, sales of bionic products accounted for 24% of prosthetic component sales in the quarter compared to 22% in the comparable quarter last year. The increase can be attributed to strong sales in bionics.And bracing and support grew by 1%. Organic growth in the segment was impacted by slower sales in the US and France. Total reported growth was thus 13%. Recently acquired companies contributed 11 percentage points to total growth and sales were negatively impacted by changing currency rates corresponding to a negative 5 percentage point impact on total growth.Americas local currency growth was 31% and organic sales growth was 8% in the quarter. Growth in the prosthetics segment was strong, with a good contribution from recent product launches. In the bracing and support segment, sales in the US were slow. Our own distribution companies continued to perform very well.Local currency growth was 6% in EMEA and organic sales growth was 3% in the quarter. Growth in prosthetics was good in all main market regions. In bracing and support, sales were good in the main European markets, but were negatively impacted by competitive and market environment for compressing therapy products in France.Organic growth in APAC was 21% in the quarter where we continue to see strong results. Growth in China, Japan and Australia were strong and we see a good result in emerging markets as well.Now over to you, Sveinn.
Thank you, Jón.As already covered, organic sales growth amounted to 7% in the quarter and reported growth was 13%. The gross profit margin was 64%, both with and without the impact of IFRS 16 compared to 63% in the comparable quarter last year. The gross profit margin is increasing for both the quarter and the first half of the year. The increase can be attributed to a positive impact from product mix, the savings initiatives and scalability in our global manufacturing platform.EBITDA grew by 33% and amounted to $42 million in the quarter or 24% of sales. EBITDA margin excluding the impact of IFRS 16 amounted to 21% compared to 20% in the comparable quarter last year. EBITDA margin for the first half of the year was 21%, and I'll discuss the margin development in a little bit more detail on the next slide.Effective tax rate, 24% in the quarter and for the half year and, therefore, in line with our guidance. Net profit was strong and amounted to $23 million, equivalent to 15% growth. Net profit margin was 13% of sales compared to 12% of sales in the comparable quarter of 2018. In the first half of the year, net profit grew by 23%.If we go to the next slide, please. The key items impacting the EBITDA margin between the comparable quarters are, first and foremost, positive impact from gross profit margin. And there is an increase in SG&A cost, which is driven by primarily the pro forma impact of recent acquisitions, in addition to investments made in new business development.R&D cost was similar as last year, but we are investing in R&D efforts and expect R&D costs to grow faster than sales for the full year -- than organic sales growth for the full year. Lastly, currency impacted EBITDA margin positively by about 90 basis points, net of hedging. Also note that IFRS 16 increased EBITDA margin by 2.8% percentage points. And we expect a similar impact for the full year result.On the next slide, we have the EBITDA margin development for the first 6 months, which then neutralizes any impact of, let's say, Easter moving between the comparable quarters. And we see, overall, for the first 6 months, a healthy increase in profitability, which is driven by a combination of strong sales growth, scalability on the cost side, positive impact from changes in product mix and, ultimately, also impact from the savings initiatives.If you go to the next slide, please. Free cash flow amounted to $17 million compared to $9 million in the comparable quarter last year. The main items affecting cash flow are positive impact from strong operating results, slightly higher net working capital as inventory levels are high due to the efficiency initiatives, similar paid interest, tax, and capital expenditure as in the comparable quarter.Lastly, net interest-bearing debt was $288 million at the end of the quarter. But excluding the impact of IFRS 16, the net interest-bearing debt was $188 million, which corresponds to a 1.5 times net interest-bearing debt to EBITDA, and hence in line with our capital structure policy.If you, Jón, would then please go ahead with the guidance.
Yes. Thank you, Sveinn. Growth in prosthetics, as we have seen, be strong in the 1st half of the year with 11% organic growth. The strong performance can be attributed to a good momentum in sales of high-end innovative solutions and good market acceptance of recently launched products such as Pro-Flex LP Align and the new bionic PROPRIO FOOT. Growth in prosthetics is therefore estimated to be above estimate for the market growth in 2019. Growth in bracing and support is still expected to be in line with estimated market growth in 2019.As such, the financial guidance for organic growth has been upgraded to 5% to 6%. The full-year guidance is, therefore, as follows. Organic sales growth is expected to be in the range of 5% to 6%. EBITDA margin before special items is expected to be around 23% of sales. We expect capital expenditures to be in the range of 4% to 5% of sales. The effective tax rate is expected to be in the range of 23% to 24%.Thank you all. Let us now go to the question-and-answer session.
[Operator Instructions] The first question is from Christian Ryom of Nordea Markets.
I have 3 please. So my first is to your upgrade to guidance and whether you can be a little bit more specific about whether it is -- or what products in the bionic portfolio that seems to have driven this. As I understand you, it is particularly the bionic products that has done better than expected. So is it the new PROPRIO product that has exceeded your expectations? Or is it some of your new products? Or what is driving this?My second question is then, to your French compression therapy business, do you have any expectations for improvements here or initiatives that you can implement to turn around this business?And then my third question is whether you can comment on what potential synergies you see in the acquisition of College Park Industries, both in terms of potential sales synergies, but also in terms of potential cost synergies? Thank you.
Yes. Let's start with the first question, bionic. The bionic sales is overall good. The only proud that had exceeded our expectation is PROPRIO. The rest is just very good and solid performance. The upgrade is not solely [indiscernible] because of our bionic product. The prosthetic product line continued to perform very well in general, and it's just a solid performance everywhere.
Regarding compression therapy business in France, fundamentally, the compression therapy businesses is a good business. What has sort of driven the -- particularly the pricing pressure that we are experiencing in France recently are changes that have been done on the reimbursement front. And we expect, let's say, the impact of those changes to neutralize in 2019 and we'd expect to grow this business from 2020 onwards.
And if we look at the College Park, the potential synergies, we are planning to establish this as a second brand then more in the lower segment in the market, in the prosthetic market, a segment which we have been not focusing on for the last 20 years. And we, therefore, have -- we have some synergies on the operational side, the financial and some in the production. But other than that, this will be sales synergies in the medium term.
The next question is from Benjamin Silverstone of ABG.
I have two questions, if that's okay. My first one, to follow-up on the acquisition of College Park Industries, I was wondering if you could elaborate on the rationale behind this acquisition. So I hear about the synergies. But was it more based on the synergies? Or was it more because you identified an emergent competitor?And my second question would be regarding the organic growth rates, which we see is very impressive for prosthetics. And we also have to upgrade the guidance for the year. How is the production facilities ready just to facilitate this organic growth? Thank you.
Okay. Let's take the acquisition rationale. Historically, we have been -- our strategy has been technology upgrade and our claim to fame is we are very good at offering very, very high tech, expensive and high impact solutions to the market. And the lower part of the market, the lower segment, it has been -- we've been -- we have relatively low market share there. We believe that the establishment of the second brand is, therefore, the best way of capturing that market, and that's the reason why we are buying College Park, which has excellent product range in the lower categories. That's the main reason why we are doing it. There is, of course, synergies possibilities along the way, but that's not the main reason. Also these categories, these product categories, we believe that we can -- we have quite a big distribution power in emerging markets as well, and those will fit very well there. So that's the main rationale behind it.
On the second question regarding organic growth and our ability to support this organic growth, yes, the prosthetics business is doing extremely well in recent quarters, and in recent years for that fact. And we are, let's say, fully equipped to support that growth from the manufacturing side. And as part of that equation, we have also been transferring part of our manufacturing of, let's say, high volume prosthetic components to our manufacturing facility in Mexico, which is giving us some increased capacity to meet increased demand.
[Operator Instructions] There are no further questions at this time. Please go ahead, Mr. Sigurdsson and Mr. Sölvason.
So thank you for your questions and for the participation. As a final remark, I would like to let you know that we will host our Capital Markets Day in Copenhagen in September 24 this year. Further details on the Capital Markets Day, including invite, the agenda, location will become available in due time. Please reach out to our Investor Relations team if you would like to meet with us or you have any questions after this call. Thank you for listening and have a good day.