Ossur hf
CSE:OSSR
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
26.4
34.4
|
| Price Target |
|
We'll email you a reminder when the closing price reaches DKK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
Welcome to the Össur's Q3 Results 2020. [Operator Instructions] I'll now hand the floor to our speakers. Please begin your meeting.
Yes, thank you. And I would like to welcome you to the Össur investor conference call where we will cover the results for the third quarter of 2020. 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 financial results, after which a question-and-answer session will follow. Sales are gradually recovering in all major markets, and we have begun to realize a pent-up demand in some markets in APAC and EMEA, even though the outlook regarding the COVID-19 remains quite uncertain. Sales in the third quarter of 2020 amounted to $172 million, which corresponds to about 5% organic decline. Sales in the first 9 months of the year declined by 13% organic. Sales in September were at 90% to 100% of prior year sales, and the first weeks of October have been around 100%. Our guidance was reinstated in September, with sales growth expected to be between 0% and minus 8% organic decline in the second half of the year. The upper end of the range assumes continued recovery in Össur's key markets and some pent-up demand towards the end of the year. The lower end of the range assumes slow recovery and potential further COVID-19 related lockdowns in key markets. As of today, the most likely scenario is expected to be around the midpoint of this range. Even though the outlook is uncertain, the long-term prospect and underlying fundamental drivers of the prosthetic and bracing & support markets are not expected to change. EBITDA amounted to $36 million in Q3 or 21% of sales. I will let Sveinn elaborate further on the financials later in the presentation. We completed the divestment of Gibaud to Innothera at the end of September. Gibaud has supported our efforts to build up a platform within the O&P channel in France, where our market share is strong in prosthetics. With the divestment of Gibaud, Össur sales in France will primarily go through the O&P channel with its -- our primary sales channel in Europe. Next slide, please. If we turn towards the quarter, sales amounted to $172 million compared to $168 million in the same quarter last year. The prosthetic business has proven to be more resilient than bracing & support through the pandemic, where the prosthetics segment declined by 4% organic and the bracing & supports segment declined by 7% organic. Reported sales increased by 2%. Recently acquired companies contributed 6 percentage points to reported growth. And with changing currency rates, sales were positively impacted, corresponding to a 2 percentage point impact on reported growth. Next slide. The impact of COVID-19 varies by geography. In Americas, sales were impacted by COVID-19 in the U.S. and consequent restrictive measures implemented by local governments. Even so, sales are gradually recovering. In EMEA, sales continue to recover with some pent-up demand realized in selected market. Sales in the U.K. remain very volatile. And the recent surge in COVID-19 cases in Central Europe makes the outlook for the remainder of the year uncertain. In APAC, sales in China and Australia were strong with some pent-up demand, while sales in the emerging markets were still slightly below last year's sales. Now over to you, Sveinn.
Thank you, Jón. The P&L is impacted by lower sales as a result of COVID-19. However, we see profitability trending in the right direction. Gross profit margin is slightly lower in the quarter compared to same quarter last year mainly due to lower utilization and manufacturing. However, we are pleased to see how well the gross profit margin is holding up and across to where we have 5% organic sales decline. Regarding operational cost, acquisitions and cost relating to legal settlement and severance are blurring the picture a bit, but if we adjust for these items, our operating costs are declining. The legal settlement and severance amounted to about $3 million in the quarter. The effective tax rate was 27% in the third quarter and 55% for the first 9 months and was impact -- and the tax rate was impacted by various extraordinary items mainly related to the divestment of Gibaud. Excluding this impact, the effective tax rate would have been 25% in the first 9 months of the year. It should, however, be noted that the tax rate is further impacted by the impact COVID-19 has had on our business mix and taxable profits in various geographies. So we expect the effective tax rate to normalize as sales normalize. The net profit in the quarter amounted to $15 million or the same as in quarter 3 2019. We go to the next slide, please. Here we have 5 quarter sales and EBITDA trend. Sales -- as Jón went through, sales have been recovering in all major markets since the beginning of April. Prosthetics has recovered slightly faster, and we are starting to see pent-up demand in a few key markets. In the first weeks of October, sales were around 100% of last year's sales. Reported EBITDA amounted to $36 million. And as a result, the EBITDA margin was 21% in the quarter. And as previously mentioned, profitability was quite acceptable considering the impact on top line and underlying that profitability will return to normalized levels as sales recover. In quarter 3, currency movements, net of our hedging agreements, had a neutral impact on the EBITDA margin. Now free cash flow amounted to $22 million in quarter 3. The key items affecting the cash flow in the quarter are, first and foremost, good operating profit, as already covered; a slight negative impact from net working capital; inventory, however, is declining from a temporary high level in relation to the efficiency initiatives we completed last year; and we see an increase in receivables as a result of increasing sales. CapEx is lower than in the comparable quarter and amounted to $4 million. Our liquidity position is strong, with cash and undrawn credit facilities amounting to $313 million at the end of the quarter. Net interest-bearing debt was $321 million at the end of quarter 3, which corresponds to a 3x net interest-bearing debt to EBITDA. The ratio is, therefore, temporarily exceeding the target range of 1.5 to 2.5x. And finally, as mentioned before, we completed the divestment of Gibaud in France at the end of September. And you'll find the pro forma financial impact in the table here on this slide and in our announcement. That concludes the overview for the quarter, and let's now go to the Q&A session.
[Operator Instructions] And we have a few questions coming through. The first is from Christian Ryom of Nordea Markets.
I'll start out with a couple of questions. First, on the sales activity. You mentioned that the first 2 weeks of October have seen sales activity at approximately index 100 versus last year's levels. And you also write in the report that the comps are, for October, a bit easier than they were in September. Can you talk a bit about what the comps are like in the next couple of months? Because your guidance seems to assume -- or the commentary about ending in the mid -- at the midpoint of guidance seems to assume that you see sales slowing relative to last year's level in the next couple of months.And then my second question is to OpEx and whether you can help us with how much of OpEx is variable. So here in Q3, as I understand it, your underlying OpEx was around $80 million. Can you maybe give us some idea of where you would have been if you would have been -- if you had, had positive organic growth for the quarter?
Yes, let me jump in here on the sales growth. So yes, sales growth was around -- let's say, our attainment to prior year was around 100% after the first couple of weeks of October. However, we've sort of normalized a little bit because September last year was very strong, while October last year was weak. So sort of normalizing for some of the whole shift between quarters, we -- our sales are currently at around 100% sort of compared to last year, yes, around mid-October. So looking at the remainder of the quarter. If we look back at last year, quarter 4 was somewhat a slightly weaker quarter than the rest of the year. I don't know if you remember, we had sort of commented around business shifting from a large distributor in the U.S. So if we take this into account, we have a reasonable or not very tough comps. But I think that's perhaps -- I think the main issue is, however, just to read into the trends and how the resurgence of COVID-19 will -- in our main markets in Europe, how that will impact sales. And like we stated in the announcement, our best estimate today is that we'll be somewhere -- it will end up somewhere in the middle of the range. On the OpEx side, our -- let's say, what we've done on the OpEx side is not just -- I mean obviously, with less -- our sales people, our commercial people are not able to be in the field as usual, and that drives down also variable cost such as travel and costs correlated to various marketing events. So ultimately, our cost base, if we exclude acquisitions or impact from acquisitions and these onetime items in the cost base, our costs are declining about 4.5% organic. I would say that in a normalized scenario where we're growing in the quarter our top line, our cost would have been still around flat year-over-year because we've also done some further underlying cost cutting. So I hope that gives you some indication.
Yes. That's very helpful. And just to clarify, when you're talking about the sales attainment, you're talking about sort of an organic sales attainment?
Yes.
And our next question comes from the line of Benjamin Silverstone at ABG Sundal Collier.
My question is predominantly in regards to how we are seeing the profitability improving with the sales recovery. As we are seeing the sales recovery very volatile from market to market, I was wondering if you could please add a few words to which triggers you're seeing in each market. So for example, in the U.S., what is it that you guys have identified that is causing the market to decline as much? Is it predominantly restrictions on movement due to COVID-19, closed clinics or what are the factors that you are seeing? And the same in, for example, APAC. Which sort of regulatory implementations have happened over there which are causing the market to be able to grow now? Are they able to now move freely around, and that's why they're coming back to the clinics? Don't they have any limits on patient going in and out of the clinics? And which other aspects are you seeing that are helping to drive the growth there?
Yes, the most impact we see is that -- well, first of all, we've seen in the first wave of the pandemic, we were surprised of the resilient of or the dedication of people to go into the clinics. And if they were able to go into the clinics, they did. But for example, in U.K., there are certain restrictions where they severely limit the number of patients that can be in the clinic at the same time, so -- and that cuts the capacity of the clinics quite substantially. In the APAC, there are no -- in specifically China, as far as we know, there is -- there are no restrictions. I mean they -- their clinics are running at full speed. We believe -- I mean we have not very good way of proving it, but we believe that we have gained some market share there in China and -- because of our reaction to the market and our support to our customers in the beginning. But there is no way of saying how much that are impacting. But the answer -- direct answer to your question is that the restrictions of people going into the clinics are by far the biggest factor of the sales development.
[Operator Instructions] And the question comes from the line of Yiwei Zhou of SEB.
I have 2. Firstly, you mentioned that the -- at the beginning of this year, you have a major product launch later part of this year. And so how should we expect the product launch now with the COVID-19? And then secondly, also early this year, you had an issue with this largest U.S. distributor. Could you give us an update on this? Has the pandemic or the change to your negotiation with this distributor?
Yes, the product launch. The product launch are remarkedly unaffected by the COVID. We've been able to keep the product pipeline, largely impact, there are -- there will be some testing delay if this prolongs for a very long time, specifically restrictions between our movement between countries. So we don't expect much delay there. In the issue of the large distributors, there are none. I mean we have basically solved that, and it's not a major issue as we speak.
But given the uncertainty in the U.S. and the U.K. you mentioned, are you still confident to have this first market full-scale launch in the later part of this year?
Well, it remains to be seen because there is -- there are 2 aspects to this. First of all, there is a technical on how the -- when the products are ready. But then, of course, there's a -- there is some restrictions or there is some issues to launch a product when the COVID is going on. So I mean as I said before, we don't foresee any major delay in our overseas product launch.
Okay. And then could you just follow up on this? When do you expect to have the full-scale market launch then?
Full-scale market launch of what?
For POWER KNEE, for this next-generation POWER KNEE?
Yes. No, we have not -- we are not giving -- given exact date there.
Okay. Okay. Fair enough. And the question regarding the U.S. distributor?
Yes, the question was what?
Yes. Remember, you had the issue with the largest U.S. distributor.
No, I mean that has been -- yes, I mean, that has basically been solved, and we don't have that anymore.
Okay. You lost some of the sales with the distributor. Is it fair to assume now they have bought it again or the current sales level would be the run rate for next year?
No, I mean the issues were more that they move between quarters rather than lost it. So I don't think that, that particular issue did not have a major effect on our long-term trading, product trade.
And our next question comes from the line of Felix Wienen at SFO.
Jón and Sveinn, just 2 more quick questions, please. The first one about the Gibaud divestment by the end of September. First question there, did the money already come in, in the quarter or should we expect in Q4? And could you give us a rough indication of the magnitude of proceeds?
Yes, I can answer that. Felix, we have -- yes, the deal has been closed and money has been transferred, except for a part of the payment which is contingent on performance. That is sort of a -- the majority has been -- already been settled, but there is a smaller portion which is related to performance, which we'll see -- but that would be towards the end of next year, where that will become clear. But the majority has been paid, yes.
Okay. So with the Q3 results, we see it in the cash flow statement, right?
Yes, yes.
Perfect. And then the other question probably following on from that. The leverage 3x net debt to EBITDA is mostly a function of lower EBITDA this year, right, rather than anything else?
Yes. Yes. I mean we will have to track quarter 2 2020 with us for 4 quarters for the trailing 12-month net debt-to-EBITDA multiple sort of will be above what we consider the right level for the business. So yes, it's currently 3...
Sure. But not so close to current ...
No, no, we are sort of -- we are not concerned as such. This is obviously a somewhat higher level than what we've been used to over the last many years. But the business is -- continues to be cash generative, and we see that both here in quarter 2 and quarter 3 sort of that the cash flow -- underlying cash flow is strong, and our ability to service this debt is very, very strong.
Perfect. Very good. And the last question also following on to that is any update on clinics' M&A also in the U.S.? I would assume that with the lockdowns, some of the clinics have been particularly hit. And I don't know how strong their balance sheets are generally, but have anything opened up there either in terms of deals or in terms of discussions and the owners being more willing to probably join your obviously financially strong group?
Yes, I mean let me take that, Felix. We see our customers generally very, very resilient, and we don't see any financial distress. And we are a little bit surprised by it, but that's not the case. Having said that, all those disturbance on the market and uncertainties makes people, as you raised it yourself, more willing consider to join a stronger group. So we a lot of -- there's a lot of clinics, a lot of companies talking to us and very interesting to join us. But there are no fire sales going on. That's not the case.
And we have one further question in the queue at this time, and that's from the line of Niels Leth at Carnegie.
My first question would be about competitive bidding. So you mentioned the sensitivity from a 30% price decline. Is that because a price decline of this magnitude would be your best guess at this point? And when would you be able to say more accurately what will be the effect of the competitive bidding? And my second question would be about EBITDA guidance. So what actually prevents you from reinstating the EBITDA margin guidance with less than 1 quarter left of the year?
Well, first of all is the competitive bidding, the 30% decline is completely shoot in the dark, and we -- this is our wild guess basically. But this is based on previous durable medical equipment competitive bidding. Whether that will be the case here, we have no idea. Furthermore, the reason why we are very uncertain about everything about competitive bidding is that, of course, these are our customers that are subject to competitive bidding, not us. So how much of this will flow down to us is completely uncertain. What we think that this -- we will have to lower our price post bidding. Which our customers will prevail in their bidding, how much they will bid is not something that we have complete visibility over, and that's the reason for the uncertainty. On the guidance, I mean we are pointing you -- we are seeing a very uncertain situation. And with this flare-up in Western Europe that's indicating that -- I mean we are very uncertain how that will pan out. But of course, we are kind of stating that we will be in the middle of the range.
Let me just add a few words on that, on the EBITDA guidance. This has been obviously a very unusual year, and we've decided to focus our financial guidance on, at each point in time, giving our best estimate on how we think the top line will develop. And at the same time, we've stated that we -- it is our estimate that we will -- or let's say, the profitability of the business will return to pre-COVID levels as sales normalize, so we focused on that. And I think what we see here in quarter 3 is that we are well on -- or the underlying profitability is intact. And with 1 quarter remaining of the year, we would guide you towards sort of -- I mean you'll have to make your assumptions on where the top line will end up. But on the cost -- on the gross profit margin side and cost side, gross profit margin is -- again, could be impacted by lower utilization in manufacturing because we've been very focused on adjusting our capacity to the demand situation. And on the cost side, we will again see sort of cost not growing organically and even declining slightly. So it should be -- yes. So those are the assumptions you should use for whatever estimate you put down on EBITDA for the year. But our focus has been that underlying profitability will get back to where it was pre-COVID levels. And in addition to that, I mean we note here in the quarter that we have done -- that we are reporting some severance costs as a result of some savings initiatives that we've executed both in quarter 3 and throughout the year. And those are actions that we've taken to protect the underlying profitability of the business and also to create some maneuvering room to invest in the growth -- our main growth themes, which, again, are the push into emerging markets, technology trade-up and expanding our service offering in the market. So I hope this gives you some of the parameters, Niels, to be able to estimate the profitability for 2020.
Okay. Great. And then just one final question, would you expect to incur any one-off items in quarter 4?
No. That's not our estimate today, no.
Thank you. And as there are no further questions coming through at this time, I'll hand back to our speakers for the closing comments.
Okay. Then I would like to thank you for your participation in questions, and please reach out to the Investor Relations team if you have any further questions. Thank you very much.