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Ladies and gentlemen, welcome to the Össur's Q2 2021 Results. Today, I am pleased to present Mr. Jon Sigurdsson, President and CEO; and Mr. Sveinn Solvason, CFO. [Operator Instructions] Speakers, please begin.
Yes. I would like to thank -- I would like to welcome you to Össur investor conference call where we will cover the results for the second quarter of 2021. My name is Jon Sigurdsson, as previously mentioned, and I'm the President and CEO. And with me here today is Sveinn Solvason, our CFO. We will begin by going through the highlight of the quarter and ending with our guidance on 2021. A question-and-answer session will then follow.Sales in the second quarter of 2021 amounted to $190 million, which correspond to 32% organic growth. The sales growth is high in Q2 as the comparison quarter was the most affected by COVID-19 last year. Sales continued to normalize in our key market, both in prosthetics and bracing & supports. The impact from COVID-19 varies by geography with strong book in APAC, while sales are normalizing in Americas and EMEA. Sales in the first half of 2021 correspond to 16% increase organic compared to the first half of 2020 and almost on par with 2019 inorganic targets. In the second quarter, EBITDA amounted to $42 million in Q2 or 22% of sales. Sveinn will later elaborate further on the EBITDA development.During the quarter, we completed acquisitions that contributed about $11 million to sales on a full year basis. As previously mentioned, sales amounted to $190 million in the second quarter of 2021 compared to $135 million in the same quarter last year. As markets were opening up, some pent-up demand has been realized both in prosthetics and for post-op and bracing with bracing & supports. The prosthetics segment grew by 30% organic and the bracing & supports segment grew by 36%. Reported sales increased by 41%. Net impact from acquisitions and divestments were positive by 1 percentage point. With the changing currency rates, sales were positively impacted, corresponding to an 8 percentage point impact on reported group.The impact of COVID-19 is diminishing in many of the Össur's key markets. Sales continued to normalize in Americas and key European markets as restrictions in connection with COVID-19 were being lifted. In Americas, prosthetics and bracing & supports sales are developing in a positive manner, slightly behind 2019 levels. In EMEA, sales are recovering well with some regional and product segment variances. In some of our key markets, injury volumes are still down compared to 2019, impacting sales of bracing & supports. Both in EMEA and APAC, prosthetics is growing compared to the comparable quarter in 2019. Sales continue to be strong in APAC with especially strong quarter in China.Össur continues to monitor the development of the COVID-19 pandemic closely as the new lockdowns and measures have recently been introduced in markets in Europe and APAC. While mechanical prosthetics products show strong growth, Össur also monitors the development of bionic sales closely as the sales recovery has been slower due to the nature of that part of the prosthetic segment.Over to you, Sveinn.
Thank you, Jon. As Jon already covered, sales continued to normalize in the quarter as strong sales towards the end of quarter 1. The gross profit margin is 63%. Operations were at normal capacity, but the cost of goods sold was adversely affected by higher freight cost and inflation on raw material prices in the quarter, which is estimated to have a continued $2 million to $4 million impact -- negative impact on cost in the second half of the year and an estimated $4 million to $6 million on a full year basis. Our prediction, however, is that this cost will normalize as the COVID-19-related impact on supply chains diminishes.OpEx declined compared to the second quarter last year, mainly as several extraordinary charges were recorded last year related to the divestment of Gibaud. Aside from that, OpEx is growing in line with increased activities and investments being made in predominantly market entry and emerging markets.EBITDA amounted to $42 million or 22% of sales compared to $12 million or 9% of sales in the comparable period. Effective tax rate was 23% here in quarter 2. Net profit amounted to $19 million or 10% of sales compared to a net loss of $18 million in quarter 2 last year. Again, the second quarter last year was -- cost of that was most heavily impacted by COVID-19, and before, I mentioned extraordinary items related to divestments.If we go to the next slide, please. Here, we have historical sales and EBITDA trends for the last 10 quarters. Sales are gradually coming back to 2019 levels. And as Jon mentioned, we are on par with 2019 in organic terms. We expect continued growth and some realization of pent-up demand here in the quarters ahead. EBITDA margin, as previously mentioned, 22% during quarter 2 and 20% year-to-date. And profitability is, therefore, normalizing in line with the sales recovery. Sales will continue to normalize from 2019 levels into 2022. EBITDA margins will consequently not be in line with pre-pandemic levels here for the full year 2021 is our expectation.Next slide, please. Free cash flow amounted to $21 million in the second quarter. In line with increased demand, the cash flow is impacted by an increase in inventory and receivables. And collections, they continue to develop well in all markets.To reflect the current capital structure and support further growth opportunities as the capital structure and dividend policy has been updated to a desired level of 2 to 3x net interest-bearing debt to EBITDA from a prior level of 1.5 to 2.5x, the net interest-bearing debt amounted to $393 million here at the end of quarter 2 and net interest-bearing debt 2 to 3x. Share buybacks and dividends are still temporarily on hold.Now over to you, Jon, please.
Yes. Thank you, Sveinn. The financial guidance for the year remains unchanged. However, management currently estimates that the organic sales growth for 2021 will be around the middle of the guidance range of 10% to 15%. The first half of the year has largely developed in line with the management estimates. The full year financial guidance assumes that the third and fourth quarter will be mostly unaffected by impact from the COVID-19 and some realization of pent-up demand. The EBITDA margin before special items is expected to be in the range of 21% to 23%. Underlying gradual increase in profitability is expected as sales recover further, supported by growth in higher-margin products, divestment and scalability in core operations.Acquisitions are expected to have a 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 the 2021 effective tax rate will be in the range of 23% to 24%.That concludes the review of the second quarter, and we are ready for the Q&A session.
[Operator Instructions] And our first question comes from the line of Christian Ryom of Nordea Markets.
I have 3 to start with. So first question is I noticed that in the report, you're right that relative to Q2 2019, sales have been in the range of 90% to 120% over the 3 months of the quarter. Can you qualify a bit more how the sales development has been over the quarters of Q2, whether we've seen sort of a continued improvement or whether there's been some backsliding during the quarter?And then the second question is to the acquisitions, where they are mostly centered, those acquisitions that you've done here in Q2, both geographically and in terms of what business area they mainly fall into.And then third and finally, the -- around USD 2 million that you're reporting, extra COGS for raw materials and increased freight costs here in the first half, have they mainly been expensed during Q2? Or are they sort of spread across both Q1 and Q2?
Christian, thanks for your questions. Let me comment on question 1 and 3. The -- let's say, if you look at the sales development over the quarter, if we compare to '19, for example, we see all -- we're above '19 levels for all months, April, May and June but, let's say, June being the strongest month. But June is typically a very strong month for us, and this is before summer holidays. And there's sort of big push usually in June, and that is seasonally our biggest month. So -- but yes, so we saw a positive trend during the quarter. I hope that sufficiently answers your question.And regarding the increase in raw material prices and freight costs, you're right in the sense that I think the best assumption here is that this can come in during quarter -- let's say, during quarter 2, the $2 million, and then sort of we expect another $2 million to $4 million in the second half of the year, depending on how -- let's say, how pricing develops here in the second half of the year. So -- and then another was $4 million to $6 million on a full year basis.
And regarding the acquisitions and regarding the question number #2, the acquisitions were a mixture of the workshop and distribution. And if I recall...
The U.S.
In the U.S., yes. Most of them by far has been in the U.S.
Okay. Great. And sort of evenly split between bracing & supports and prosthetics.
They usually are, yes. Yes.
So slightly more heavy actually on prosthetics, slightly more here.
And our next question comes from the line of Benjamin Silverstone of ABG Sundal Collier.
Jon and Sveinn, I hope you're all well. My first question is in regards to the prosthetics growth. So we see quite a very strong growth of 30% organically in Q2. I was wondering if you could provide some details on how the underlying bionic segment has been growing. You do mention that there is a strong pipeline. So to get some further information on that, I think that would be very helpful.And my last question is in terms of your capital structure. You mentioned that it is changing now for a new target of between 2 to 3x gearing, which means you're already at the high end now or within the range. Should this mean that we should sort of begin to assume that a share buyback will be initiated again? Or do you have a strong M&A pipeline that you wish to utilize first?
Yes. Let me start with the bionic question. As you mentioned, the prosthetics growth has been very profound with the bionic lasting a little bit, and the reason for this drag is that the sales process in the bionics is more involved and more visits. And for the first -- and the second one is the case management in the insurance companies is a bottleneck because of COVID-19. We believe that the underlying growth in that segment will revert to normal when the COVID-19 is over.Regarding the bionic pipeline, I mean we've previously communicated that we have a very robust pipeline there. Actually, this quarter of quarter 2, we came with POWER KNEE on the market, even though that's just an addition to the already very robust product line. So all in all, we believe that this is a timing issue. We believe that bionic will revert to the same when the COVID debacle is over. But it's really difficult to say when that will be completed, but that's improving very rapidly.
Yes. Benjamin, let me comment on the capital structure. So let's say, over the last 18 months, I would say, we've invested in excess of the free cash flow in the business, which just meant that our -- and at the same time, our EBITDA has been temporarily sort of pressed down due to the COVID impact.So we've been -- our net debt to EBITDA has been above the level sort of where we want it to be. However, now as profitability is normalizing, we are moving back into sort of a more normalized territory. However, as I mentioned earlier, because we've made investments in excess of our free cash flow, we are -- the ratio -- despite normalization of EBITDA, we are now operating at a slightly higher gearing. And the reason -- that is simply the reason we are pushing this range up. So I said we have some more flexibility to do M&A that comes our way. And also, it helps us open up for share buybacks sooner than if we would have operated with the old range.
And we currently have one further question in the queue. [Operator Instructions] And that next question comes from the line of Niels Leth of Carnegie.
My first question would be about your extraordinary high freight and component costs. Could you talk about which lines are affected by this? Are those extra costs entirely booked in production cost? Or are they even spread on OpEx? And my second question would be for -- regarding all the acquisitions that you have made in the past few quarters. Shouldn't we expect any integration costs in relation to these acquisitions?
The -- let's say, this is entirely on the COGS line. Let's say, sort of -- 90% is on the COGS line, maybe 10% is on -- is outbound freight on the sales and marketing line. So the majority is on the COGS line.Regarding the integration costs, yes, I mean we are taking on costs to bring these newly acquired entities on board. However, we've been taking those costs as more like a normal course of business cost, as we've been making these acquisitions here over the -- every year. So we've not been highlighting these particularly as extraordinary costs. But yes, there is some costs associated with bringing these companies onboard. But with regard to those newly acquired entities, it's not that cost that significantly changes the big picture.
And it also means -- I mean those acquisitions are completely initiated and done in-house. We don't use external advisers. And so it's within our cost structure, basically.
Right. When it comes to making a kind of more substantial integration programs for many of the workshops that you have acquired, putting them on the same IT platform, et cetera, et cetera, so we shouldn't expect any kind of restructuring programs or the like for all these acquisitions.
I wouldn't say that, that would never happen. In the event that we would, let's say, initiate a program of that size, we would commit to communicate both the costs and the expected benefits of that.
Right. And then just a final question on components. Would there be any components which are in shortage right now that you are having difficulties to procure?
Yes. I mean, we have -- I think like most companies these days, I mean we have had to scramble to secure certain components, but we've not, knock on wood, had any operational sort of hiccups because of this. But there are supply chain complexities, but we don't -- as we sit here today, we don't expect this to have a material impact on our operations as we've been able to secure the raw materials and components that we need. But all else equal, while this COVID-19-related impact on supply chains is still there, all else equal, the risk is slightly higher. There will be some issues.
We've had a couple more questions come through. The next is a follow-up from Christian Ryom of Nordea Markets.
Yes. Jon and Sveinn, just a quick follow-up on the impact of the new lower fees for off-the-shelf braces. I think last quarter, in Q1, you talked about that the effect that you saw in the first quarter since the new fees took effect were maybe a bit lower than what you had previously communicated -- on the low side of what you previously communicated. I was keen to hear -- I'm keen to hear how that has developed in the second quarter. I think you previously talked about a drag of, say, up to around a couple of million U.S. dollars per quarter from these lower fees. Is that around the level where you're seeing the new lower fees panning out at this point?
Yes. I mean it's really difficult to -- yes. Yes, that's the size of it, but it's still really difficult to say what is the competitive bidding or what is the covered, because we have -- there are some fundamental demand changes when it comes to injury bracing because of the lesser activity that it is a lesser injuries, and we see that on the hospital system very clearly.So one is very difficult to pinpoint at this point, but overall shortage from a normal level is rather pretty much the same as we have anticipated.
And we have one further question in the queue at this time. That comes from the line of Thomas Bowers at Danske Bank.
Yes. Great. So just 2 questions remaining from my side. So on your full year guidance, can you maybe just give us a little bit of color on sort of your pick -- sort of a soft solution, I would call it? So achieving the 10% to 15% organic growth. So I'm just wondering, do you see any increased concerns about the COVID-19, the Delta variant here in H2 compared to your previous communication? Or is this maybe also related to -- as Niels also addressed in regards to component shortage or also supply chain concerns, uncertainties related to COVID-19? And then my second question, just to clarify on your new net debt-to-EBITDA target. Is this what you would say -- see as a long-term target going forward? Or is this more related to short, mid-term. So let's say, 5 years out. Is this still something that you could see yourself targeting going forward?
On the guidance, Thomas, I mean there is -- I don't know, but there is increased, I mean, uncertainty, and our view on the business reflects that, both on regards on the guidance and the best of our [indiscernible]. And our guess is really as good as yours. Yes. I mean, I -- and the guidance reflects that. And the cost of goods sold increase, I mean it's the same there. I mean most of it is -- all of those uncertainties are COVID related in some way or form.
And that's on the sort of -- on the capital savings, Thomas. I mean, this is what we look at as the short to mid-term range, and we would be comfortable operating the business at these levels. I think, ultimately, what could change these levels again is our appetite for M&A capital -- cost of capital, et cetera. So for now, this is where we want to be in the short to medium term until some of these underlying assumptions change.
Yes. I would say -- I mean -- but you are better to see the cost of capital than us. And if that changed drastically, then the Board would probably go back and look at it.
[Operator Instructions] As there are no further questions from the phones at this time, I'll hand the call back to our speakers.
Yes. Thanks for the questions, participation, and please reach out if there is anything you would like to -- if you have any questions, further questions after this call. And thank you for listening, and have a good day. And enjoy your summer. Thank you.