Ossur hf
CSE:OSSR
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Earnings Call Analysis
Q3-2023 Analysis
Ossur hf
The essence of Össur's Q3 2023 call revolves around a robust sales performance bolstered predominantly by the Prosthetics and Patient Care segments. The company observes significant volume growth in these areas alongside a favorable product mix, leaning toward higher-end solutions. The driving force behind this uptrend is both market share gains and market strength, indicative of some pent-up demand release post-COVID-19 disruptions. Particularly impressive is Bionics, representing 25% of Prosthetics sales, marking it as a noteworthy contribution to the overall revenue uplift. The company’s EBITDA margin, however, experienced a slight dip to 19% from the previous year’s 20%, attributable to increased unit costs and investments into the Össur Leg concept that, despite being partially offset by lower freight costs and a positive product mix, have pressed on the profitability.
Looking forward, Össur stands firm on its guidance, projecting 7% to 8% organic growth for the year. The EBITDA margin guidance also remains unchanged at 17% to 20%, with current expectations leaning towards the midpoint of this range. The balance between organic growth, favorable product mix, and lower freight costs on one side, and higher unit costs, reimbursement challenges in Patient Care, and certain currency headwinds on the other, underpins this guidance stability. It’s worth noting the company’s forward-looking apprehension regarding reimbursement rates, particularly in some European markets, which have yet to catch up with inflation, suggesting a hope for future adjustments to relieve margin pressure.
Operational complexities endure, as highlighted by delays in reimbursement approvals in Patient Care, which render some revenue recognition on hold. Moreover, challenges have emerged within their e-commerce channel in the Americas, ostensibly a consequence of strategic adjustments that seem poised to settle and normalize in upcoming quarters. The leverage ratio, at 2.9x, stays within the target range and brings the share buyback program to a halt, reflecting a cautious approach to capital allocation given the leverage and investment dynamics.
Significant discussion circled the Össur Leg manufacturing site—an initiative to allow customers to outsource the fabrication process to Össur. Although still scaling up to reach optimal capacity utilization, the investment into this larger facility surfaces as a strategic move to cater to growth and innovation demands. Regarding M&A, the acquisition of Naked Prosthetics has integrated smoothly, with a pipeline pointing towards future activity, though no substantial contribution to growth is expected in Q4. As for the long-term, the aim remains to achieve a 2% to 3% growth contribution from acquisitions.
Internal sales have surged, particularly in Prosthetics, attributed to both market share and Bionics focus. Questions surrounding external factors such as potential impacts from GLP-1 studies on the osteoarthritis bracing market were addressed, with the consensus being that it’s too early to predict the repercussions, though optimism is retained about how it will shape the healthcare landscape. Lastly, the company’s volume growth in Prosthetics is said to be an amalgam of market share capture and a market rebound; however, the exact duration of this heightened demand remains uncertain.
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Good day, and thank you for standing by. Welcome to the Össur Q3 2023 Results Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Sveinn Solvason, President and CEO. Please go ahead, sir.
Thank you very much. I would like to welcome you to the Össur investor conference call where we will cover the results for the third quarter. My name is Sveinn Solvason. I'm the President and CEO. And with me here today is Arna Sveinsdottir, our CFO. We will begin by going through the highlights of the quarter and end with our guidance for '23. A Q&A session will then follow.
If we start by going through some of the key takeaways here in quarter 3. I'm very pleased to report the continued strong sales reports. The growth was largely driven by volume growth in Prosthetics and our Patient Care business as well as a favorable solution mix where we are selling and fitting more high-end solutions. Additionally, we're seeing some impact from the implementation of price increases in Prosthetics and Bracing & Supports. EBITDA margin was 19% compared to 20% in the comparable quarter. We see gross profit margin slightly impacted this quarter due to higher unit cost and investments we are making in our Össur Leg concept, although partly offset by lower freight cost and positive product mix. Cash generation and free cash flow was strong in the quarter. As we had previously communicated, our leverage ratio is now back within our target range, although still in the upper end, and we are, therefore, still pausing our share buyback program. Other parameters around our financial guidance are unchanged.
Go to next slide, please. Here, we have an overview of growth across our regions and business segments for the quarter. Total sales amounted to $193 million and organic growth was 7%, driven by again, strong contribution from Prosthetics and the Patient Care segments and the Americas and EMEA regions. In line with our strong sales performance in the first 9 months of the year, we are firmly on track with regards to our recently introduced Growth'27 strategy. And I will cover the segments in more details on the following slides.
If you go to the next slide here, we have an overview of sales and EBITDA development for the last 5 quarters as we can see organic growth steadily rose during the first half of the year. But as we had already expected and communicated, we're up against stronger comparable quarters here in the second half of the year. And if you go to the next slide, please. Here, we have the highlights on Prosthetics. Organic growth amounted to 12% in the quarter, and we had strong performance in Americas and EMEA, which can largely be attributed to, again, strong volume growth and positive product mix. Reported organic growth was impacted in APAC, mainly due to extraordinary strong comparable quarter. Basically, our China business was largely closed in quarter 2 last year and there was a lot of pent-up demand that was released in quarter 3. So we're comparing against that. That is mainly resulting in lower reported organic growth rate for this segment as a whole.
Our high-end solutions, especially our Bionics portfolio have performed very well in the quarter with a strong contribution from basically the whole product line, the Rheo Knee, Power Knee and the recently launched upgraded Proprio Foot. I'm also very pleased to report that Bionics accounted for 25% of Prosthetics sales in the quarter. Same ratio as in quarter 2 and among the highest relative levels we've seen historically. If you go to next slide, please. Moving on to Bracing & Supports. Growth in the quarter is, as in previous quarters, somewhat attributed to price increases, but also volume growth. Growth was very strong in EMEA, driven by the sales of high-end bracing solutions such as the Unloader One.
Growth in APAC also strong. Sales in the Americas were, however, softer than what we had expected, and it's mainly related to some changes we've done to e-commerce channel in this region, which is albeit a small part of our business. In the first 9 months of the year, growth was good across all our regions in Bracing & Supports. We continue to focus our efforts on executing in line with operating simplified strategy, which is aimed at providing our customers and partners with an increasingly simplified and stronger portfolio operating solutions.
Go to next slide, please. Here, we have an overview of sales performance in our Patient Care segment. Growth in Patient Care was strong and driven by volume growth and also positive solution mix across our global Patient Care business. However, price increases are decided by public and private payers, and this varies significantly across our main markets. In some markets, we see modest price increases, but in markets where we have substantial operations, for example, in some markets in EMEA, there have been little or limited increases to reimbursement rates, which has had some impact on organic growth and margin development in those markets.
Regarding regional performances growth in Americas, it was very strong. Again similar drivers, it's healthy volume growth and healthy solution mix and growth in EMEA was more modest, again, relating back to some of these delays. We believe in reimbursement increases and reimbursement approvals impacting revenue a little bit. Underlying operations remain healthy and patient visits continue to grow. Sales in APAC were somewhat soft on the Patient Care side, but we -- work in progress is healthy and outlook remains strong. This concludes the overview of top line performance. And if I can hand it over to you, Arna, to go through the financials in more detail, please.
Thank you, Sveinn. Reported growth was 9%, where we now have a positive currency impact on our net sales. We also have a positive contribution to our sales after acquiring Naked Prosthetics in the fall of 2022. The gross profit margin was 62% compared to 63% last quarter when excluding special items. During the quarter, we had higher unit costs. We had time lag in reimbursement in Patient Care and costs associated with investments in our Össur Leg manufacturing site, impacting the gross profit margin, although partly offset by lower freight cost, even though we had higher cost -- higher total unit cost during the quarter, we are seeing our unit cost improving in our key manufacturing sites during the year.
EBITDA amounted to $36 million or 19% of sales. And despite the currency headwinds and inflation-related OpEx growth, we are seeing increase in our EBITDA. In line with inflation, OpEx grew mainly due to higher labor costs and other cost increases. But this was partly offset by the cost savings initiatives we announced last fall, part of which we have, however, already invested in emerging markets and digital investments. The effective tax rate was 23%, in line with our guidance. And I am pleased to see that we grew our net profit by over 100% in the quarter, although I should note that the comparable period is impacted by expense of special items.
If we can go to next slide, please. So now I would like to turn our attention to the cash flow and leverage. Cash flow was strong. However, we remain overinvested in inventory mainly to secure Bionics production in line with strong sales performance in Bionics. But also due to buildup 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 a new silver high in the quarter due to investments in scaling our Össur Leg concept and expansion of key locations, impacting our free cash flow generation. Net interest-bearing debt amounted to $387 million at quarter end, and the net interest-bearing debt to EBITDA was 2.9x or within the range of 2 to 3x EBITDA. All else equal, we expect the leverage ratio to stay within the range, but while the ratio in that brand offering, we will continue to pause our share back program. Then over to you again, Sveinn.
Thank you, Arna. Just a few words on our guidance. Organic growth has been strong in the first 9 months of the year, but we are now comparing to stronger comparable quarters in quarter 3 and quarter 4 of this year. Therefore, our guidance remains unchanged at 7% to 8% organic growth. EBITDA margin in the first 9 months of the year was 18% same as in the comparable period in '22. EBITDA margin has been positively impacted by strong organic growth, positive solution mix, operating leverage and lower freight costs. Although on the other side of the coin, impacted by higher unit cost which is still up of normalized levels, inflationary cost, reimbursement dynamics in some of our Patient Care markets and a little bit currency headwinds. The net result is that our guidance for EBITDA margin before special items is unchanged for the year, 17% to 20%. But all else equal, given the current outlook, the expectation is to be around the middle of the range. Other guidance parameters are unchanged. That concludes the review of the quarter, and let's go to the Q&A session, please.
[Operator Instructions] The questions come from the line of Christian Ryom from Danske Bank.
I have 3, please, and I'll take them one at a time. So first is on, say, the composition of growth here in the third quarter. So I think in the previous 2 quarters, you've commented that price contributed roughly 3 to 4 percentage point to group organic growth for the quarter. Can you confirm that, that was around the same level in Q3 or whether there were any changes in either up or down direction to that number? That's the first question.
Christian, thanks for stepping in. I can confirm that what we've said is that 3% to 4% price increases on the product side of the business for Prosthetics and Bracing & Supports. While we've had -- let's say, when it comes to the Patient Care business, we have price increases or reimbursement increases in the U.S., largely in line with inflation, while lower in some of the European markets. So I would say that our -- the pricing component is consistent with what it's been in previous quarters.
Okay. Great. And then next question is so on the reimbursement development in Patient Care, so you mentioned a couple of times both in the report and on the call here that you have some temporary reimbursement delays in Patient Care, particularly impacting the EMEA region as far as I understand and you also speak about a time lag in reimbursement. Can you elaborate a bit on the dynamics here? And whether what you're suggesting is that we should expect an increase in reimbursement a few quarters out or how to think about this?
Yes. Thanks for clarifying this. What we see in some of our Patient Care markets is that reimbursement rates have not been adjusted to the underlying inflation. What that means is that short term, that will put some pressure on profitability because we have labor cost increases in line with inflation in the relative -- or let's say, in these respective markets, same with all our input costs. However, we do expect reimbursement rates in those markets that are not cut up to gradually take these inflationary development over the last 8 -- 12 to 18 months into consideration. So that has had an impact -- well, a little bit of growth impact but also some margin impact here during the year. There's also in some markets where we've seen some delays from government payers basically in approving project that we have already delivered on and not recognized revenue on that's maybe a couple of million dollars in sales which -- but within margin.
Okay. Great. And just to be sure that I understand this outlook for reimbursement correctly. How much of these reimbursement improvements do you have visibility on already? So how much are the health care systems where you know already that you will see an increase from, say, January 1, for instance.
There's nothing confirmed on that, but I will not say that we expect to continue to deliver good volume growth and positive, let's say, solution mix as we have seen this year. So in the absence of high, let's say, inflationary cost increases, which we don't expect going into the new year, we will see let's say, normal margin development in this part of our business. So I think that is the fundamental part. So still in the absence of price increases from reimbursement or from payers, we will still see a more positive margin development for our Patient Care business as a whole.
Great. Great. And final question is somewhat related to that. And it's a question on where margins are in Patient Care and in external product sales now relative to a pre-COVID level. So whether you can comment on whether there is a larger gap on the Patient Care side than on the external product side. And how close essentially you are to pre-COVID with levels on those 2 businesses? Because the business mix has, of course, changed since pre-COVID.
Yes. Well, what we did see during COVID is that because of lower activity levels within Patient Care because of patient absence and more volatile demand side, the profit was impacted because of the fixed cost nature of that business. What we do see here in 2022 is -- or '23, sorry, is that the volumes are back. Patient volumes are healthy across our whole Patient Care business as such. So -- but you're right, during the COVID period, we did see proportionately more impact on our patient care margins than on the product side of the business if that answers your question.
Yes, it does to some extent. So the question was really relative to, say, '19 levels where the margin discrepancy relative to '19 levels is larger on the patient care side on the external product sales side at the moment?
Yes. So it's good to clarify a little bit because compared to '19, which was our last, let's say, year before going into the COVID period, there's a few things that have changed and which is important to mention. One thing is obviously the Russia business, which was $7 million to $8 million of sales and having a reasonably high impact on profit and the DOD business which are both things that have changed and are now obviously outside of the comparison figures, but it had quite a big profit impact as such. But I will say that for our Patient Care business, we are largely back to pre-COVID levels on profitability.
[Operator Instructions] And the questions come from the line of Martin Brenoe from Nordea.
So I have 3 questions, if I may, and I'll also just take them one by one. First of all, maybe just starting on the organic growth guidance. You write in the report and you also say that you expect to land in the middle of your organic growth guidance. And when I look at the implicit Q4 guidance, it looks like you have something in between 2% to 5% organic growth implicitly in Q4, even if I take into account the tough comps that you have in Q4, you are expecting a sequential slowdown in Q4. Can you maybe elaborate a little bit what's the composition here in terms of products versus the patient care? And from a geographical point of view, is this a China thing? Or is this a global slowdown that you are seeing? I'll start with that question, please.
Martin, just to clarify, we have -- on our guidance, we have maintained our sales guidance, 7% to 8% organic growth rates. However, we have also said that, let's say, the trends that we see in our business from a top line standpoint, we expect them to be consistent going into quarter 4 as such. We don't see any material change in our environment and in the development in our business. But of course, we need to take into consideration stronger comparable quarters. What we have now said on the EBITDA margin side is that we -- that's where we have communicated that now sort of with what we see, we expect to be in the middle of the EBITDA guidance range. That is our best estimate.
And the EBITDA implicit guidance is something like 15% to 25%. So that's a quite broad range if you expect to land in the middle. Why not narrow it a little bit down to, let's say, 18% to 19% with just 3 months left here?
Well, what we -- we've done different things in the past. We've often kept our guidance just fixed but guide sort of indicated where we are within the range. So that's what we've done here. We have -- we just kept the range consistent and been very specific in terms of where we expect to land within the range.
Okay. That's very clear. Make sense. And then the second question, that would be for the e-commerce changes in the Americas business. Can you maybe elaborate a little bit of what that means and when you expect the impact to be normalized or maybe even if you expect to see an improvement on the other side of these changes, please?
Yes. This is -- e-commerce is a very -- is a relatively small part of our U.S. Bracing business, and we did not expect the changes that we've done with regards to our e-commerce vendor to have the impact that we did see here in quarter 3. We don't expect any material impact of this going forward and expect decent growth in Bracing & Supports here going forward. So it's a couple of million dollars that was an unforeseen impact. But we don't expect any material -- maybe a little bit in quarter 4, but nothing material going forward.
Okay. Make sense, very clear. And just the last question for now, and then I'll jump back in the queue. The net financials were quite higher compared to what consensus were looking for and also a step-up from Q2 to Q3. You're having a lower leverage and you're slowly eating up of debt. So what's the driver behind the financials and how should we expect it to move from here, please?
So we have -- in our loan portfolio, we have basically approximately 50% or a bit over that is on floating rates in euro dollars and in U.S. dollars, and that is basically affecting our interest rates in the quarter. The other part of our loan book is basically -- is in favorable fixed rate. So that is part of it. That's basically explaining this change, and we expect that just to change with the interest rate in the market.
Martin, just to add, just one additional comment on that. I mean what -- let's say, on a net financials, it's -- I would say that interest rate as such is consistent from prior quarters. What sometimes can be volatile on that line is our exchange rate adjustments, which is both through the financial lines, which is related to some intercompany positions. And it's a little bit of a technical item, but you see very detailed reporting on it in our release.
[Operator Instructions] And the questions come from the line of Niels Granholm-Leth from Carnegie.
A couple of questions here from me as well. Could you talk about how we should look at the organic growth in the Bracing & Supports division in quarter 4? It seems like you're up against easy comparatives to last year. But you're also referring to a continued slight negative effect from e-commerce business. Secondly, for the Prosthetics division, are you still expecting to launch the new version of the Rheo Knee in quarter 4? And should we expect any revenue impact from this launch? I'll stop there and get back with a few more questions.
Niels, thanks for your questions. On the bracing business, we expect a little bit of impact from this e-commerce topic in quarter 4. But yes, the comps are good, and we should see growth in Bracing & Supports in quarter 4. That's our best estimate. On the Prosthetics side, we are launching our new version of Rheo Knee here in the beginning -- a limited launch during the beginning of quarter 1 next year. So we should not expect anything here in quarter 4.
Great. And then turning to internal sales, which has shown pretty high growth in the past few quarters. 29% growth in quarter 3. Is that a reflection of your -- of a push to basically increase the internal supply ratio to your existing clinics? And should we expect this to continue for several more quarters at this pace? And then secondly, on acquisitions, so there was no effect from acquisitions in your Patient Care business in quarter 3. Would that also be the case in quarter 4? And what are your plans in terms of M&A?
Yes. Niels, yes we seen more, let's say, internal sales on the Prosthetics side. That is driven by, amongst other things, the Power Knee and Bionics that we've had a special push around that and nothing else in particular as such. And there's -- and we are largely -- if we look at our patient care platform where we -- where it's normal for us to be in terms of share of wallet, I would say. On the M&A side, we have some impact from -- pro forma impact from the acquisition of Naked Prosthetics, which continues to deliver in line with our expectations here in quarter 3. We do have an M&A pipeline, both in terms of product and patient care. And as usual, we don't comment on timing as such, but we do have an active pipe of potential targets.
But would you expect a return to an M&A contribution of -- I guess, you have a target of 2% to 3% in the long term. And it was very minor in quarter 3 should return to 2% to 3% in quarter 4.
No, not in quarter 4, but let's say, we expect the overall a slightly longer period that the 2% to 3% average will hold. That is still our goal.
So given the phasing in of Naked it would be then 0% contribution in quarter 4?
Yes, largely, yes.
And the questions come from the line Martin Brenoe from Nordea.
Again guys, just one question that is actually not related to your actual report, but I guess that we have also followed the latest development with Novo Nordisk GLP-1 studies with the SELECT and everything. And we also know that there is a trial running, probably reading out in Q1 2024, studying how semaglutide works in people suffering from obesity and knee osteoarthritis -- I'm sorry, I don't know how to pronounce that correctly. I'm just curious how you see the impact of GLP-1 and if this study turns out to be positive, if that could have any impact long term on your part of the business would be quite interesting to hear your thoughts on that.
Yes, Martin again and thanks for the question. I mean first of all, it's great news that around GLP-1 as such and -- but it's really early days how it will impact the health care systems, I would say, in a very broad context. And if we look back in our business, there's been consistent improvement in diabetic care always leading to fewer, let's say, dysvascular entities as such. But unfortunately, dysvascular entities have very low tilting rates of prosthetic solutions, even in a very well-developed health care systems to say, only -- unfortunately, a small part of let's say, diabetic-related amputations are ultimately receiving proper prosthetic solutions is something we've been working on for years to change. And most of the patient population that is served by our customers and in our own Patient Care systems are entities that have suffered limb loss as a result of other problems than dysvascular complications.
So yes, it will most likely have an impact, but -- in some shape or form. But but we expect still the main -- when it comes to how we grow the business, it has -- it will still be around getting more amputees using faster mobility solutions. That remains our -- will remain our agenda. On the osteoarthritis side, most of or a very big part of the patient population that uses our osteoarthritis bracing are individuals that have suffered ligament injuries at an early stage in their lives. And therefore, the only -- brace as an alternative to new replacement surgeries is a particularly valuable option as it pushes replacement or a knee replacement surgery is further out. So without having proper statistics on it, I would -- or our estimates are that a very big portion of those individuals that use osteoarthritis are always bracing are not necessarily that group that will be mostly impacted by the GLP-1 initiative. But again, I'll caveat all my comments with that it is early stage, and this is just our perspective at the moment.
And the question comes from the line of Yiwei Zhou, SEB.
Can you hear me?
Yes, loud and clear. Yes.
Perfect. I have 2 questions here left. Firstly, on the Prosthetics volume growth, and I know just you have mentioned sort of strong -- sort of indicated strong volume growth for several quarters. And if you compare to the historic growth was flat or moderate single digit growth. And I was just wondering if you could comment on the -- what is the driver here? Is it still driven by the pent-up demand or you are getting market share with the launch of Össur Leg solution? Any comment would be appreciated.
Yes, Yiwei, thanks for the question. It is a combination of both. We believe that we're taking some market share, but at the same time, the market is also strong. It's been a few years where demand has been impacted by COVID-19, all sorts of disruption in relation to lack of staffing throughout the whole channel. So our feeling is that -- or what -- from our customers and observing the industry as such that, that volume growth is too strong in the market, and there's definitely some, let's say, patients that are being served that should have been served in the prior year. So there's some element of pent-up demand, but how much is hard to say exactly.
Okay. So yes, but it's actually you just answered my next question. So you have no idea how long the market strength will continue?
No. It's -- I'm not going to try and be too scientific around that. It is -- I mean, if you look at our organic growth rate in Prosthetics, strong double-digit growth rate it is. Obviously, there's a bigger pricing component compared to usual. There's -- Bionics are doing exceptionally well. We have the addition of the Power Knee, which we did have, of course, last year, but not in the years prior. So we have a lot of things moving with us. And at the same time, let's say, loosening up of the market. We don't have some of these things that have held back the demand side as we've had in the last couple of years due to the COVID-19 complications.
Okay. Is it possible to give us an indication on the volume growth?
About the volume growth.
Yes.
No, we don't break that up as such. I mean if you look at it is the pricing component, we've communicated that to be 3% to 4%, and it remains, there is mix and volume.
Okay. Fair enough. And my next question is regarding this Össur Leg manufacturing side. And you mentioned that it had an impact on the gross margin. And how long should we expect the continuing impact here? If possible, could you also quantify a bit on the margin impact?
Yes. Just as a reminder, the Össur Leg concept is an offering towards our customers basically to offer an option to -- for them to outsource certain parts of the fabrication process to Össur. And we have had good traction with this concept, mainly -- well, mainly in the U.S. market where we started, and we have moved into a bigger facility which can absorb future growth. And we -- and yes, we are still not at full capacity utilization in that facility, which means that compared to the same period last year, we have a little bit higher cost, which is one of those things that puts marginal pressure on the gross profit margin, just when we compare year-over-year. But we'll -- as we move into next year, this impact will be minimal.
Okay. Just want to clarify. The margin impact currently, that's due to the underutilized capacity -- production capacity and not the upfront investment?
Yes, unutilized, yes, capacity, absolutely.
We have no further questions at this time. I will now hand back to Mr. Sveinn Solvason for closing remarks.
Yes. Thank you. Thank you very much for your participation and for your questions. Please reach out to our Investor Relations team if you would like to have a meeting with us or if you have any questions after this call. And yes, thanks a lot, and I wish you all a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.