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Ladies and gentlemen, welcome to the Össur Q3 results 2021. Today, I am pleased to present Mr. Jon Sigurdsson, President and CEO; and Mr. Sveinn Solvason, CFO. [Operator Instructions]Mr. Sigurdsson and Mr. Solvason, please begin.
Yes. Thank you [Audio Gap] Össur investor conference call, where we will cover the result for third quarter of 2021. My name is Jon Sigurdsson, and I'm the President and CEO. And with me here today is Sveinn Solvason, our CFO. We will begin by going through the highlights of the quarter and ending with our guidance for 2021. A question-and-answer session will then follow.Sales in the third quarter of 2021 amounted to $180 million, which corresponds to 4% organic growth. Sales in EMEA and APAC were strong with the exception of Australia which was impacted by lockdown measures. In addition, we experienced softer sales in Americas due to effect from COVID-19 Delta variant in the quarter. Sales growth in the first 9 months of 2021 amounts to 12% increase organic and slightly behind 2019 in organic terms. EBITDA amounted to $37 million or 21% of sales. Sveinn will later elaborate further on the financials.Next slide, please. As previously mentioned, sales amounted to $180 million compared to $172 million in the same quarter last year. We saw continued growth in Prosthetics while Bracing and Supports sales were soft, mainly in Americas. The Prosthetics segment grew by 7% organic but the Bracing and Supports segment was constant organically over the same quarter last year. Reported sales increased by 5%. Net impact from acquisitions and divestment was negatively -- negative by 1 percentage point in the quarter. With change in currency rates, sales were positively impacted, corresponding to a 1 percentage point impact on the reported growth.Sales were developing well in many of our key markets. Sales continued to be strong in EMEA, especially in Prosthetics, including bionics, while Bracing and Supports sales are slightly behind the 2019 levels. APAC showed strong sales as well, apart from Australia that was affected by measures to control the COVID-19 pandemic, resulting in an unusual negative organic growth rate for the APAC region. However, the COVID-19 Delta variant primarily affected both Prosthetics and Bracing and Supports sales in Americas.Although organic growth was impacted by softer sales in Americas, the performance in other key markets strengthen our belief that the long-term prospects and underlying fundamental drivers of the prosthetics and bracing and supports market are now -- are not expected to change as a result of the pandemic and that we are well on our way. Furthermore, Össur continues to monitor the development of the bionic sales closely as the sales recovery has been slower compared to the mechanical products as the reimbursement process for bionic products is more elaborate, resulting in lengthy and often delayed approval process. However, the product pipeline is strong, and the demand for bionic products has not changed as we saw in the EMEA this quarter.Now over to you, Sveinn.
Thank you, Jon. As Jon already covered, sales growth did vary by geography here in quarter 3. Gross profit margin is at 62% in the quarter, mainly affected by freight cost and inflation in raw material prices, extraordinary high ocean freight rates and increased use of air and expedited sea freight to support demand. The supply chain challenges are expected to affect cost of goods sold negatively by $9 million to $11 million on a full year basis compared to the estimate of $4 million to $6 million communicated after we reported quarter 2. Our prediction is that these costs will normalize as the COVID-19-related impact on global supply chain diminishes. So excluding this impact, actually, our gross profit margin was quite strong in the quarter. Operating expenses in organic terms increased by 5% here in quarter 3. The main drivers for higher cost is variable sales and marketing costs, which are increasing in line with higher in-market activities as well as costs in relation to further investments in our emerging markets platform. EBITDA amounted to $37 million or 21% of sales compared to $36 million, also 21% of sales in the comparable period. The effective tax rate was 24% in the quarter. Net profit amounted to $17 million or 10% of sales compared to $15 million in quarter 3 last year.Go to the next slide, please. Here, we have the historical sales and EBITDA trends for the last 11 quarters. Sales were back to 2019 levels here in quarter 3 in organic terms, and we expect sales to further normalize and some pent-up demand in the quarters ahead. The EBITDA margin was 21% in quarter 3 and 20% year-to-date. The EBITDA margin remains slightly below a normalized level, mainly due to temporary negative impact on operating leverage. And in addition, we have continued to invest in R&D and made further investments in especially our infrastructure in emerging markets throughout the COVID-19 impacted period, as mentioned before. As sales will continue to normalize from 2019 levels into 2022, EBITDA margin will consequently also not be in line with pre-pandemic levels here for the full year 2021.Next slide, please. Briefly on cash flow. Cash flow amounted -- or free cash flow amounted to $13 million. In quarter 3, the cash flow is impacted mainly by an increase or an investment in inventory and to some extent, timing of tax payments. Underlying cash flow remains healthy. The net interest-bearing debt amounted to $386 million at the end of the quarter. And the net interest-bearing debt over EBITDA was 2.9x, which is within the target range of 2 to 3x. The share buybacks remain temporarily on hold.Over to you, Jon, please, again on guidance.
Yes. Thank you, Sveinn. The financial guidance for 2021 has been narrowed to the lower end of the organic sales growth guidance range at around 10% organic sales growth and the lower end of the EBITDA margin guidance range at around 21% EBITDA margin before special items. In quarter 2, we estimated that the organic sales growth would be around the middle of the 10% to 15% guidance range. The full year financial guidance then assumes that the quarter 3 and quarter 4 would be mostly unaffected by the impacts from COVID-19. However, in quarter 3, the COVID-19 Delta variant affected sales primarily in Americas, which is Össur's largest market, as well as Australia. The full year 2021 organic sales growth guidance of around 10% assumes moderate effect from COVID-19 from -- for the remainder of the year. The full year 2021 EBITDA margin guidance of around 21% takes the estimated organic sales growth into account and assumes that the cost of goods sold would -- will adversely be affected by $9 million to $11 million on a full year basis. Other items in the financial guidance for 2021 are unchanged. CapEx is expected to be in the range of 3% to 4% of sales. And 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%.Now this concludes the review of the third quarter, and we can now go through the quarter and answer -- question-and-answer session.
[Operator Instructions] And the first question is from Benjamin Silverstone, ABG.
And I have 3 questions, if I may. The first one is an update...[Technical Difficulty]
So the next question is from Christian Ryom, Nordea Markets.
I have 3 questions from my side. First is to the freight and raw material price inflation impact in this quarter. So you're guiding for around $7 million to $9 million of total impact for the second half of the year. Can you qualify how much of that we've already seen here in Q3?And then the second question is to the impact of COVID-19 in the Americas region and how you've seen that develop throughout the third quarter and here going into Q4. Have you seen market activity begin to improve as COVID cases has subsided? Or what has been sort of the most up-to-date development?And then my third and final question is to your share buyback program and -- which is currently on pause. Where do you need to get to in terms of leverage ratio for you to be comfortable with restarting the buyback program?
Christian, thanks for your questions. I'll take the first one, and Jon will take the other 2. On the freight and raw material prices, I would assume approximately $3 million to $4 million here, and $3.5 million is in quarter 3. And then, yes, the remainder of the $7 million to $9 million in quarter 4, still with some degree of uncertainty, plus/minus.And I just want to mention also, let's say, just to go into a little bit more depth with the freight cost, it is hefty prices -- the majority of the increase is just higher prices. But it's also that we are using more just expedited freight, let's say, both expedited airfreight just to secure or to keep the supply chain going and manufacturing going and also having to just maintain sales volumes and meet demand in the various markets. So -- and it's also important for you on how you model 2022 to take -- because we experienced approximately $2 million increase here in the first half of the year. So we'll see in the first half of next year just -- if we just assume the same run rate but a little bit less expedited freight, you should see around $3 million additional impact just in the first half of next year just to get us up to speed on sort of the run rate impact. I hope that adds a little color on all this.
It does.
Yes. On the impact -- go ahead, Christian. Did you have any other?
No, no, no. Please go ahead, Jon.
Yes. Okay. Thanks. Yes, the impact of COVID in the U.S., we saw actually the run rate in U.S. was pretty similar than that of EMEA, but it's changed quite a lot in the beginning of the quarter. And that -- and it's still affected, although we see improvement as of today.Regarding the share buyback program, we are now within the range of -- the financial range we can start the share buyback program. The only thing I want to say now, comment on it now is that I believe that we will resume the share buyback. But the last development of the COVID-19, I think we want to see a little bit firmer -- we will -- just stand on a little bit firmer ground on the COVID-19 development before we resume.
And we have Benjamin Silverstone back on the line.
Apologies, there must have been some IT issues here. So I have 3 for me. The first one, I think Christian did mention about this or asked about this, just a brief update on your supply chain visibility and perhaps how it's changed from Q2 to Q3, if at all.Then a product question in terms of the new POWER KNEE. So you do mention that there's a new era of the POWER KNEE and the only one in the market that is actively powered. We do know that launches, in the past, of new products has historically not have an immediate material effect on growth. But could you share some nuances on how the limited sales has been versus previous limited launches in the past? And also perhaps some details on how it's been received by the practitioners.And then my last question is in terms of acquisitions. It seems that there hasn't really been a lot of activity here in Q3. If you have any sort of update on that, that will also be greatly appreciated.
Thanks, Benjamin. I'll take the first one, and Jon will comment on 2 and 3. Regarding the supply chain visibility, I think the main things that have changed since quarter 2 is, again, further price increases and further use of expedited freight in principle and mainly airfreight for us. In terms of, let's say, availability of raw material and components, that remains similar. I mean all else equal, there is more risk than usual, obviously, with all the complications that are in the global supply chains. But we have not faced any major complications as a result of this. So it is still a challenge out there, but we are managing.
Yes. On the POWER KNEE, yes, I mean, you are right to assume that it's not a blockbuster product. It will be. I mean you are right when you say that we are the only one. There is nobody out there that has powered prosthesis. The situation is that there is a reimbursement code in U.S., so our main marketing activities are there. It has been received very well. But having said that, this is a complicated product. This is a new product. This is a product that is more -- requires more involvement in the reimbursement side. And you can see that because of the pandemic, the application process has been slower than usual. But having said that, I mean, we are well on our way. We are -- in spite of pandemic -- despite of the pandemic, we are exactly on -- where we wanted to be and on the forecast. Now the third one was slow M&A activities in the quarter. That has -- I mean there is really no reason for it other than this is the nature of the M&A activities. We don't need to buy anything. And I think it's just one of those quarters, and there's really nothing more than to say our fundamental strategy -- the fundamental M&A strategy hasn't changed. And we have the ability to buy. And when something comes which we like, we buy them, but we don't if we can't see anything.
Just a quick follow-up to you, Jon, on the product-related question. Do we have any indication of how the price and margin of the new knee differs from the old version?
No, no. I mean it is basically the same. And -- but I'd like to add a little bit more color on it, and that is a fairly large service -- that there is a service provision in the price or the cost of the -- built into the cost of the product. And the bionic products typically increase the margin the longer they are and the more secure they are and the less service requirement. But other than that -- that's a general comment on those bionic products. But other than that, it's pretty similar.
The next question is from Thomas Bowers with Danske Bank.
Yes. A few questions here from my side. So maybe just digging a little bit to the freight congestions that you also struggled with. So I'm just wondering if there's any -- can you maybe comment on the inventory levels at some of your key customers? Is there anything we should be aware of here? And also, are we looking at potential order backlogs going into next fiscal year?And then just on bionics. So 20% of sales in the quarter seems quite okay, especially that you should have some issues still in EMEA -- sorry, in the U.S. So are you starting to see any real pent-up demand in EMEA? So are users now starting to go from sort of interim mechanic solutions to bionics? Or is this still maybe going to be a little bit more gradual going forward? And then just finally, just as we see the lockdown in Australia, so can you maybe add some color on how much does Australia actually account for in APAC?
Thomas, thanks for the questions. On the freight situation, that is right. Inventory levels are something we are extremely focused on. And sort of through -- with the -- from the start of the COVID pandemic, we did slow down our supply chain and have had to then ramp it up gradually as demand is coming back online. And also, given just all the complications around moving product around the world, maintaining inventory and -- of high-volume, high-selling products has been more of a challenge now than ever before. And we do have back orders. We have higher back orders than we've had also previously. And so -- but it's not such that it fundamentally changes the picture. For example, when we look at the full year growth, it's not to those levels. So I guess the answer ultimately is that we are prioritizing inventory above cash at the moment. Just given the supply chain complications, we are building our inventories just to make sure we are able to serve our customers to the best of our ability.
And also, regarding the raw materials, because -- I mean those more complicated products, knock on wood, we haven't stopped the production of anything but -- any of our product. But as you know, the -- it was a complicated problem. You only need to have a problem in one single item and you can't produce them. So as I said, we are prioritizing the security over the cash.
Maybe I can also -- I'll also take question, Thomas, on the bionics and regarding pent-up demand. I'd sort of go back to the big picture in prosthetics. If we look at our prosthetics business, our mechanical products are doing well and have actually captured most of the demand that we technically lost in 2020 and are doing really -- performing very solidly. The demand that we still haven't captured is more on the bionic side. And we've explained the demand on the bionic side has been impacted by the fact that these products take -- it is a more complicated selling procedure and a fitting procedure, requires more time with the user. There are delays around the reimbursement component, and just in general, the health care authorities have pushed back on high-priced items.But fundamentally, both the demand side and the pricing side on bionics has not changed. And what we see here in EMEA in quarter 3 is -- are really -- are very positive signs in terms of the bionic sales picking up nicely, and we have a good pipeline around bionics. So our hypothesis has always been that bionics would just take longer to come back on -- back from this complication that COVID has brought on. So that is a good sign. But how -- but we're not ready to quantify pent-up demand in bionics, but there will be some.And then the final question on -- yes, go ahead, sorry.
Yes, yes, sorry. It was just on Australia, yes.
Yes, yes. Australia has been approximately close to 1/3 of our business in APAC. We also had a little bit slowness in China here in quarter 3, but China for the full year will be very, very strong for us. And in general, our performance in emerging markets is very, very, very strong sales -- organic sales growth-wise.And just to mention also, we have made investments. Throughout the COVID period, we have invested in growing and expanding our emerging markets platform. So we -- a part of the story around EBITDA margin both for the full year and for the quarter is that around -- is that we have made these investments but are not yet seeing the benefit on the top end, but that will surely come in the mid -- short to medium term.
And I would like to add on the APAC. The China run rate is quite good, but this quarter had a very difficult comparison the last year. So that puts us down a little.
Okay. Great. And then just to get an understanding and feeling on Australia. So can you maybe just comment where you are in October? And are you starting to see it coming a little bit back? So sort of where are you index-wise?
I mean Australia has been in a very strict lockdown. I mean Sydney and Melbourne have been in lockdown for -- what is it?
Melbourne was over 200 days. And Sydney, less than that but still [ far over ] 100 days. And we are talking about lockdown where people always -- stopped people in less than...
Yes. It's pretty strict lockdowns. We -- I mean they would be out of lockdown mostly here end of October. So we expect less impacts here. We expect some impact in APAC due to this COVID impact in Australia definitely in quarter 4 but somewhat less than in quarter 3.
And the next question is from Niels Leth, Carnegie.
Three questions from my side as well. First question would be in which cost lines do we specifically see the effect from the $9 million to $11 million extra costs related to freight and raw materials? Could you just point out the individual cost lines? And my second questions -- my second question would be to what extent is it possible for you to adjust your prices upwards in EMEA and in the U.S. for those 2 regions specifically? And my third question would be, so the weakness that we are seeing on the U.S. market, is that entirely caused by the reduction in elective surgeries?
Niels, thanks for this. On the freight, this is purely COGS. This is inbound freight and raw materials that we are focused on. Our outbound freight, that is contracted rates, and then that is much less impacted. It is mostly the freight from Asia and on these typical sort of high-priced routes. That -- and this all flows through the COGS. And there's a little bit of inflation in outbound freight, which is in sales and marketing costs, but you should just model all of this on the COGS line.Jon, do you want to comment on prices?
Yes. On the prices, it's a good question, which means that we don't have a very good answer to it. I mean we will increase our prices. And everybody is talking about it now, and we have been increasing our prices. But of course, our customers are -- in a lot of cases, our customers are bound by prices that are fixed with that, and they will not get any reprice from those contracts. But -- so our -- we can increase the prices. I mean we can, but we are looking at it to what extent we will do that. And -- but we will. I know it's a very vague answer, but we are looking at -- there are a lot of discussions on the freight out -- on freight, whether we should put a surcharge on that, I mean. But there is no conclusion there yet, but we are in the process of looking at it.On the U.S. market, I mean, obviously, elective surgery has gone down in the U.S. That explains a lot of the bracing and supports development there. However, that's not the only reason. I mean we have -- I mean before the pandemic, we talked about the competitive bidding. And we had kind of raised that issue with all of you for some quarters before the COVID. Now I must say that we are positively surprised that we think that the competitive bidding has had lesser impact than we had planned for. But on the other hand, it's really difficult to say. Because the competitive bidding and the COVID comes at the same time, so it's difficult to say what is what. We can also see that the COVID has negatively impacted the prosthetics as well. So it's not only elective surgeries. I mean it's all over.
Right. And then perhaps just a follow-up question here. What would be your sales exposure to those Eastern European countries now entering lockdowns? Those would be Russia, the Baltic countries, Romania and I believe it's Slovakia.
Yes. I don't have them, but...
It's very small.
It's small. It's not big.
Unfortunately, to some extent, these are not very big markets for us, although they will be in the future. But that will not have a material impact now.
The next question is from Felix Wienen, SFO.
Just one quick question, please, on the clinics business that you've expanded over the last couple of years separately in Europe and in the U.S. If you could dive a bit into that, how that performed during the quarter and also probably during the last 2 or 3 quarters, whether that's had a major impact on the group or whether it has fared better than the product business.
Well, on -- in general terms, Felix, the clinics business has been slower in recovery. It typically comes after the product business. And regarding the -- how it has developed, it has been developing over the last quarters very well but with the exception of the last quarter. It was pandemic -- the pandemic hit it quite hard in U.S. and also a little bit in France as well. But other than that, it's -- in general, it's -- we see a slower recovery there. It's a bit -- recovery there is a little bit later on -- later than the product business, and it's probably because of the nature of the business. The products are shipped before the service happen.
And a quick follow-up probably to that. I know that the players there had been willing to sell over the last couple of years. And has this probably increased the willingness to exit the business and join a much bigger financially stronger group? So has that probably spurred discussions for acquisitions or more consolidation in the market?
Yes. As a general trend, Felix, that's quite true. We see -- there's a lot of small players that are kind of stopping up and say maybe it's better for us to belong to a bigger group. But that -- but we don't let that have any impact on our activities level per se. I mean that is a general trend, yes. But your assumption is right, yes.
[Operator Instructions] And there are no further questions at this point, so I hand back to the speakers.
Yes. So that concludes our session for today. Thank you for your questions. And please reach out to our Investor Relations if there is anything you want to further discuss. And thank you for listening, and have a good day.