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Good day, and thank you for standing by. Welcome to the Ossur Q2 2023 Results Conference call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Sveinn Solvason, President and CEO. Please go ahead, sir.
Thank you very much. I would like to welcome you all to the Ossur Investor Conference Call where we will cover the results for the second quarter.My name is Sveinn Solvason, and I'm the President and CEO. And with me here today is Arna Sveinsdottir, our CFO. We'll begin by going through the highlight of the quarter and end with our guidance for '23. A Q&A session will then follow.If we start by going through the key takeaways, I'm very pleased to report continued strong sales performance across all regions and business segments. The growth was largely driven by volume growth in Prosthetics and Patient Care, as well as favorable solution mix where we are selling and fitting more high-end solutions.Additionally, we are seeing an impact from implementation of price increases in our Prosthetics and Bracing & Supports business. EBITDA margin increased from 18% to 19% between the comparable quarters. We are seeing a higher gross profit margin with increased productivity and lower unit costs, although I would say that unit cost is still above normalized levels. OpEx growth is mainly driven by inflation, both in terms of labor cost increases and other costs.Cash generated by operations is increasing as we are focused on reducing our safety stock within Bracing & Supports. Our leverage ratio is slightly above our target range, but we expect to be within the range before year-end. In line with strong sales performance, we are narrowing our organic growth guidance to the upper end of the range for 7% to 8% organic growth. And the CapEx guidance has been changed to approximately 5% of sales. And I will cover this factor towards the end of the presentation.Here, we have an overview of growth across our regions and business segments for the quarter. Total sales amounted to $201 million, and organic growth was 11%, driven by, again, a strong contribution from all our business segments and regions. In line with our strong sales performance in the first half of the year, we are firmly on track on our recently introduced Growth '27 strategy. And I will cover the segments in more detail on the following slides, please.Here, we have an overview of sales and EBITDA development for the last 5 quarters. As we can see, organic growth is increasing in line with what we already mentioned, but I would also like to draw your attention to the favorable comparison we had in this quarter and that we are coming up against stronger comparable quarters in the second half of '23.And if you go to the next slide, please. Here, we have an overview of sales performance in Prosthetics. Organic growth in Prosthetics amounted to 18% in the quarter, and we had a strong performance in all regions, which can largely be attributed to strong volume growth and again, positive product mix. Our high-end solutions, especially our bionics portfolio performed very well in the quarter with strong contribution from our flagship Rheo Knee, as well as growth in the Power Knee.Furthermore, we're also seeing strong performance in the newest version of our bionic Prioprio foot, which is now waterproof, which we launched here towards the end of April. This waterproof feature is on top of mind for many of our patients, and we're working further on introducing waterproof solutions. And I'm also pleased to report that bionix accounted for 25% of Prosthetics sales in the quarter, which is among the highest ratios we've seen historically.Moving on to the next slide. Looking -- going into Bracing & Supports. Growth in the quarter can somewhat be attributed to price increases but also volume growth. And again, growth was quite strong across all our regions as in Prosthetics, and we're seeing strong contribution from our high-end bracing solutions. We continue to focus our efforts on executing in line with our Bracing Simplified strategy, which is aimed at providing our customers and partners with an increasingly simplified and stronger portfolio of bracing solutions and ease of doing business.And then finally, Patient Care. Growth in Patient Care was driven by strong patient volume growth as well as positive solution mix across, again, all our regions where we are seeing more fittings of high-end solutions such as bionics. Reimbursement increase is very significantly between regions, where reimbursement is following inflation in some of our larger regions, while others are unfortunately still lagging behind.Note also that the historical figures for Patient Care show a comparison to quarters in '21 that includes sales to the Department of Defense in the US, but this specific outsourcing contract was discontinued by the Department of Defense towards the end of '21. And this largely explains the lower organic growth that we see in the second and third quarter of '22.Now this concludes the overview of the sales performance. And I can hand it over to you, Arna.
Thank you, Sveinn.So now we go through the P&L. Reported growth was 11%, same as the organic growth. We had a positive contribution to our sales after acquiring Naked Prosthetics in the fall of 2022, but sales was negatively impacted by changes in currency rates. The gross profit margin was 63%, and is increasing compared to the same quarter last year. Following a couple of years of supply chain challenges, we are starting to see increased productivity in manufacturing and some normalization in our unit cost.Freight cost is declining in line with our expectations, driven by lower rates and reduced Bracing & Supports volume shipped from Asia. EBITDA amounted to $37 million or 19% of sales. And despite currency headwinds and inflation-related OpEx growth, we are seeing an increase in our EBITDA margin. In line with inflation, OpEx grew mainly due to higher labor costs and other cost increases. But this was partially offset by the cost-saving initiatives we announced last fall. The effective tax rate was 23%, in line with our guidance range. I'm pleased to see that we grew our net profit by 10% in the quarter, even though interest rates are high and our leverage ratio is above our target range.So if we can go to the next slide, please. So now, I would like to turn our attention to the cash flow and leverage. As in previous quarters, cash flow continues to be impacted by increasing inventory in the first half of 2023. We are currently over-invested in inventory mainly to secure bionics production, but also due to a build-up of Bracing & Supports products in the last 2 years due to the global supply chain challenges.We have begun to lower our Bracing & Supports safety stock and inventory levels are expected to gradually normalize. Capital expenditures are unusually high in the quarter due to investments in scaling our Ossur Leg concept and expansion of key locations, impacting our cash flow generation. Net interest-bearing debt amounted to $410 million at quarter end, and the net interest-bearing debt to EBITDA was 3.1x, slightly above the target range of 2x to 3x EBITDA.All else equal, we expect the leverage ratio to be back within our target range before year-end. Because of our leverage ratio and in line with our capital structure and allocation policy, we continue to push share buybacks until the ratio is back within our target rates.And then, Sveinn, it's you again.
Thank you, Arna.And now finally, on our guidance in line with what I have covered previously on the strong sales performance year-to-date and bearing in mind also stronger comparable quarters coming up in the latter half of the year, I'm happy to be able to narrow our organic growth guidance to the upper end of the range to 7% to 8%. EBITDA margin in the first half of the year is 17%, same as in the first half of '22. And as already mentioned, the second half of the year is stronger in terms of sales and therefore, relative margins. And all else equal, given current FX rates, we expect the EBITDA margin to be in the range of 17% to 20%.Given current outlook, we expect to be around the middle of the range. Capital expenditures in the first half of '22 amounted to 6% of sales. CapEx in the second quarter of '23 was above normalized levels, mainly due to investments made to support further growth. Due to the impact, we expect CapEx to be approximately 5% of sales for the full year. CapEx relative to sales is, therefore, expected to be in higher end of what is a higher end of -- in 2023 sort of compared to the average historical levels of 3% to 4%. Guidance for effective tax rate remains unchanged in the range of 23% to 24%.Now that concludes the review of the quarter. And let's go to the Q&A session.
[Operator Instructions] And your first question comes from the line of Christian Ryom from Danske Bank.
Yes. I have 3, at least initially. So first question is on the ASP contribution in your product sales business this quarter. I believe our understanding was that you had roughly 3 percentage points to 4 percentage points of pricing contribution to growth in the first quarter. Was it on a similar level here in Q2 or anything -- any special developments we should keep in mind there? That's the first question. I think I'll take them one by one.
Christian, thanks for your question. And the answer to that is just on the pricing. We've increased pricing in our Prosthetics business and in our Bracing business. Price increases on the Patient Care side will be in line with what is ultimately being done on reimbursement in the respective countries where we operate Patient Care and the landscape there is very much very fragmented, I would say, everything from price increases that are in line with the underlying inflation to areas where we don't see any changes in reimbursement. So the simple answer is that pricing impact of price increases is to the tune of 3% to 4%, and that's mainly on our product business.
Okay. But it's 3% to 4% for the group?
Yes.
Yes. Okay. Great. And then second question is on the freight savings. So, you are targeting the $6 billion to $7 million in annual savings for this year versus last year. How did the run rate of those savings develop here in Q2 versus Q1? So did you see an increased level of savings in the second quarter?
So, we are seeing freight savings as planned as we expected. So run rate is in line with what we have previously communicated, just like you said.
Okay. So, I think what you said was that in Q1, you were still, let's say, closer to $1 million for the quarter, expecting to ramp -- with savings expected to ramp a bit further during the year.
Yes. So, we are seeing now -- in Q2, we are seeing the savings to be around $2 million compared to $1 million in the first quarter. So, we are on track with what you expected.
Okay. Great. And then a final question. So relative to this roughly 10% organic growth that you saw here in the first quarter, the implied guidance for the second half expects [ implied ] growth should roughly half to around, say, mid-single digits in the second half. The slowdown that you expect there, is that to be expected mainly on the product sales business or the Patient Care business? Where do you see the most difficult comps essentially?
Christian, let's say, if we look at the last year and the quarters that we're now going to be comparing against our stronger quarter, especially quarter 4 and I think that's the main thing that we -- that sort of guides our view on how we are positioning the full-year guidance. And we expect just maybe a moderate slowdown on top line, but we still have good momentum across all our regions and all markets. It's mainly the comparison side.
Okay. And nothing specifically to call out between products and Patient Care?
No, not specifically.
[Operator Instructions] And the question comes from the line of Martin Brenoe from Nordea.
I have 2, if I may. First of all, I would like to hear maybe a little bit more color on the bionics, on prosthetics just to understand what exactly has driven the larger penetration? Is it merely the fact that it's in free float? Or have you done anything from a commercial perspective to push these products? That would be the first question.
Martin, yes, I mean what -- the bionics growth in the quarter is driven by all of our key bionic products, meaning Rheo Knee, Proprio Foot, Power Knee and our touch solutions or hands. And we have -- and if we compare the same period last year, we are -- obviously, the Power Knee is growing as we had only launched the Power Knee in the beginning of '22. So, we have growth over '22, good growth over '22 on the Power Knee, and then we launched the Proprio Foot here in quarter 2, which is also contributing very nicely.I think it's fair to say also that, that there is some impact, yes, of pent-up demand of some sort. I mean, we are coming out of this period of the last couple of years where the demand side has been impacted by slowness or, let's say, limited access due to COVID, and there is some sort of impact from pent-up demand in the prosthetics industry. I think that's clear. But on the bionics, the simple answer is that we are seeing good progress on simply a bigger portfolio of strong bionic products.
Okay. Makes sense. And then my second question before I jump back to the queue would be on your profitability guidance. You are guiding for -- implicitly guiding for a 17% to 23% [sic] [ 20% ] EBITDA margin in the second half, if my math is not completely wrong. And now we just heard that the freight is -- you're halfway done with the savings there in the first half. What exactly will make you able to go above 20% EBITDA margin in the second half?
At the end of the day, I mean, sort of EBITDA margin development and growth and business mix go hand-in-hand. So depending a bit on sort of how growth will develop for different business segments, how much progress we're able to make on the unit cost side. OpEx growth is a little bit front-end loaded for the year. And yes, how quickly we're able to get back on pre-COVID unit cost levels. I think that is -- I think these are some of the considerations that you need to look at in order to estimate sort of how we end up on the EBITDA margin for the full year.
And do you think it's mainly operating leverage? So higher sales overall, that will be the key factor here?
Yes.
Okay. All right. I'll jump back in the queue.
[Operator Instructions] There are currently no further phone questions. I will hand the call back to you.
Maybe we can just leave the line open for a little while and see if there are other questions we can see here in box that there's a lot of incomings calls. Could you?
Of course. We do have one further question now. [Operator Instructions]
Could you open the line, please, for Niels Leth at Carnegie?
Sorry, sir. I've already opened, Martin, but I will open it next.
Okay.
Yes. Sorry about that. I thought I would jump back in the queue if there were no further questions. But just one follow-up question, also a little bit related to Christian's question. Is the -- I mean, the momentum has actually accelerated for the last few quarters for you? And I guess I understand that you have a comparison base, which is a bit tougher, perhaps in Q4. But can you maybe say, how was the momentum through the quarter? Did you also accelerate there? Or was there some pent-up demand during the quarter that made it peak early in the quarter?
No. I would say that the momentum has been quite consistent here during the year as such. And remember, we are -- quarter 1 was the first quarter where we were no longer comparing to the headwind from not having sales to Russia and not having sales to the Department of Defense in the US. So, these things are now out of the system, and that is the one -- a very big part of the step up in the sales trend. Please keep that in mind also. But no, we haven't seen any acceleration as such in the last months, but please remember also that quarter 2 was very weak last year, where we had minus 1% organic growth rate.
We will now go to our next question. And your next question comes from the line of Niels Granholm-Leth from Carnegie.
There seems to be something wrong with the software. I was trying to push Star 1-1. Anyway, my first question would be on the revenue effect from Naked Prosthetics. Could you elaborate on the effect it had on the quarter? And secondly, could you also talk about if there was any channel filling effect from your launch of the Proprio Foot in the quarter? Or if all orders are basically built to specific end users?
Niels, thanks for your question. Sorry about the complications around the system. On Naked Prosthetics, our expectations around Naked Prosthetics was that this would be accretive for our growth rate. This is a solution that is vastly -- or addresses vastly a problem, let's say, that is where the utilization is very low among partial hand amputees and the -- and simply, it's growing in line with our expectations. I mean, there's the pro forma impact is about, what was a 2 percentage points almost on this pro forma reported growth and organic growth is a strong double-digit organic growth rates. And did I understand your question correctly on the Proprio Foot? This is just all off-the-shelf products. There's no customization as such and the Proprio Foot is definitely one of the drivers in our -- for our strong bionics performance in the quarter.
So would that mean that the Proprio Foot is -- since it's an off-the-shelf product that it's actually -- it actually generates a certain degree of channel filling when you launch the product?
No, I wouldn't say so. I mean, most of our independent clinical customers who are ordering the Proprio Foot, it's an expensive product. It's ordered specifically for a patient that's either pre-approved or has been -- is eligible for reimbursement. So no, I wouldn't -- I'm quite confident in saying that there's no element of channel filling and such around the Proprio, no.
Right. And could you just talk about the timing of the launch of your next-generation Rheo Knee?
That's still on target for limb towards -- on either side of the new year or -- yeah, late this year or early next year as in limited launch. So, we're still on track for that.
Okay. So, you're not anticipating any revenue contribution from the new Rheo Knee in this fiscal year?
That would be limited.
Okay. And then just finally, in the beginning, you talked about still being over-invested in inventories. Could you talk about the timing of a normalization of your net working capital?
Yes. So, we are still over-invested in inventory. Like we said, we have too high inventory in bionics component. We already started to see Bracing & Supports inventory decrease in the first half of the year, and we expect that to continue for the remainder of the year. At the same time, we are preparing for launches like Sveinn mentioned for new projects at the end of the year. So, we will remain high in bionics components probably until end of the year. So, it will be balanced, reducing in Bracing & Supports, but still a bit high on bionic components.
I think it's fair to say that our overinvestment in inventory is to the tune of $15 million to $20 million.
Yes. Still it is.
Okay. Right. And then just finally, on your M&A pipeline. So how do you view the pipeline right now and the full year effect from M&A, how would you assess this at this point?
I mean, we have an M&A pipeline, both with regards to strengthening our product -- the product side of the business and also with regards to Patient Care. And I think the best answer I can give is that referring back to our Capital Markets Day, where we expect contribution from M&A to be a couple of percentage points, 2 percentage points to 3 percentage points on average on a yearly basis. And yes, I think that's what we can say about that, Niels.
We will now go to our next question. And your next question comes from the line of Yiwei Zhou from SEB.
Can you hear me?
Yes. Very loud and clear, Yiwei.
So, I have 2 questions left here and I will do one at a time. Firstly, could you maybe a bit of color on the higher CapEx spending. You mentioned in the report is relating to the scale-up of Ossur Leg solution and also expanding to the key locations. And should we expect this scale-up continue into next year?
No. This is a bit just the timing and lumpiness of CapEx spending. A big part of the investment recorded in this quarter is to grow our Ossur Leg concept and our capacity basically in the US. And as a reminder, the Ossur leg concept is around selling full legs and offering our customers an ability to outsource some of the customization work to us. And this is something that we've seen grow nicely in the last couple of years. So, we are investing into scaling our facilities in that regard. And the others are expanding our R&D capacity here as well. So, that are simply the main reasons. This is just a little bit timing rather than anything else, and we don't expect these levels going forward.
I just want to follow up here. I remember a year ago, you talked about introducing the leg solution to certain European countries have been quite challenging because it's difficult to educate your -- the O&P clinics in Europe. Is any sort of market dynamics has changed now? Or could you give us an update on the progress?
No. I mean, we are still -- we firmly believe in the concept around Ossur leg. And US has been a market where we have gone first to market, let's say, with this strategy or this approach and it has worked well. And we will also gradually build this business here in our key European market. That still remains the plan. And we are confident that this is a strong value proposition.
Okay. Good. My next question is relating to the variable compensation. You said it is higher in the quarter. Is it possible to quantify a bit of the impact on earnings? And then how should we look at it into the second half?
Let's say, I mean, the growth in cost year-over-year is principally driven by inflation. We have higher than average increases in labor costs and other costs. And then also, we are comparing to quarters where we had very little or even negative organic growth rates. So variable compensation is growing year-over-year. That is what we are trying to explain in the announcement sort of how -- or what is driving OpEx growth in the quarter, which is at the high end due to these factors. No, we have not split up what is just normal merit or normal labor cost increases versus what is the variable component. But the main component is just the increase in salary costs due to inflation.
Okay. Fair enough.
Thank you. There are currently no further questions. I will hand the call back to you.
All right. Thanks, everyone, for your -- for calling in and for asking questions. And please reach out to our Investor Relations team if you would like to have a meeting or if there are any follow-up questions. But then, I would just like to wish you all a good day and a good summer. Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.