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Ladies and gentlemen, welcome to the Össur presentation for the interim report Q4 2017 and consolidated financial statements for FY 2017.Today, I am pleased to present Mr. Jón Sigurdsson, President and CEO; and Mr. Sveinn Sölvason, CFO.[Operator Instructions] Speakers, please begin your meeting.
Yes, thanks for that. As already mentioned, my name is Jón Sigurdsson.And we will begin by going through the highlights for the full year of 2017, followed by a more detailed review of the fourth quarter and end with our guidance for 2018. And as already mentioned, the question-and-answer session will then follow.Sales in 2017 amounted to $569 million, corresponding to 8% growth and 5% organic growth, both measured in local currency. Growth during the year was primarily driven by excellent performance in our prosthetics segment, which grew above estimate market growth or 9% organically. The bracing and supports segment had slow year where our own distribution companies negatively impacted growth in bracing and support by 140 basis points. Even so, we are pleased to see our high-end, innovative products performing well across our portfolio in both prosthetics and bracing and supports.Gross profit amounted to $355 million or 62% of sales.EBITDA before special items grew by 10% in local currency and amounted to $103 million or 18% of sales. Positive trends in product mix and good sales growth resulted in EBITDA growing faster than sales.Currency movements impacted the EBITDA margin negatively by about 70 basis points, net of hedge.Due to changes in our tax environment in the U.S., the effective tax rate was impacted in the quarter and for the full year. Sveinn will elaborate on this a bit later.We have included this slide to highlight some of the progress we have made in our strategic focus areas during the year. This slide and further information on our major milestones in 2017 can be found in our annual report which we published yesterday evening along with our quarter 4 and full year financials.Starting with innovation, on the left. We continued to develop new product for both the prosthetics and bracing and supports segment during the year. In the second half of 2017, we entered into a partnership with IUVO and Comau to develop wearable bionic bracing for workers in the industrial fields and patient in need of improved mobility. We were granted over 100 patents, have over 30 collaborative research studies ongoing and have 16 peer-reviewed publications by our research partners.In terms of growth, we closed the year with 5% organic growth. Over the course of the year, we launched over 40 new product solutions to the market with key products such as our highly regarded RHEO KNEE and a new light version of Unloader One. The acquisitions we made in 2016 are now full part of our product offering. And we saw good progress in China with our direct sales model.Within efficiency, we successfully integrated the companies acquired [ into ] 2016 and launched efficiency initiatives in September. The initiatives are progressing well, with preparations begun to move part of the [ feet ] manufacturing and assembly from Iceland to Mexico. And we plan to move our West Coast distribution center into (sic) [ in ] the U.S. to our Mexico manufacturing plant in 2018. Lastly, we finalized the restructuring of our own distribution companies by the end -- year-end 2017.Next slide, please. Sales amounted to $569 million compared to $521 million in 2016. To bridge the difference, I will begin with organic development, where total organic growth was 5%. The prosthetics segment grew by 9% organically, which correspond to a 4 percentage points contribution to total growth. In prosthetics, we continued to see a good performance with growth above estimates for market growth. High-end product performed well in the year, which includes the recently launched upgrade of the RHEO KNEE. Bracing support grew 1% organically, with 1 percentage point growth contribution to total growth. The direct sales part of the bracing and supports segment continues to grow, while we still have a negative impact from our own distribution companies in the U.S. With the restructuring efforts finalized, we expect a limited impact on growth in 2018.Total local currency growth was 8%. The prosthetics segment grew 17% in local currency with the addition of Touch Bionics and Medi Prosthetics we -- which we acquired in 2016. The additions correspond to a 3 percentage point contribution to total growth. Total growth in U.S. dollars terms was 9% due to the appreciation of a few major operational currencies against the dollar, mainly the euro. Currency movements in the last year impacted sales growth positively in the amount of $4 million. This corresponds to a positive 80 basis points contribution to total growth.Having said that, over to you, Sveinn.
Thank you, Jón.As Jón already covered, local currency growth amounted to 8% and organic sales growth amounted to 5%. Gross profit margin was 62% compared to 63% in 2016, and I will elaborate on the difference on the next slide. EBITDA margin amounted to 18% when adjusted for onetime costs in relation to the Medi Prosthetics acquisition and the efficiency initiatives announced in September. As with previous years, we have an impact on our profits with change in currency rates, which I will also elaborate on a bit further on the next slide.Net profit grew by 13% and was about $58 million or 10% of sales. Good growth in profit can be attributed to strong sales growth in the year but also due to a $6 million onetime tax benefit, which is primarily related to the changes in the tax environment in the U.S. but also some impacts from changes in France. The onetime impact is related to a reevaluation (sic) [ revaluation ] of deferred tax assets and liabilities, and as a result, the tax rate for the year was 16%. And it should be noted that onetime benefits sort of from reevaluating (sic) [ revaluating ] assets and liabilities has no cash flow impact.If you go to the next slide, please. EBITDA before special items amounted to $103 million, which corresponds to a 18% EBITDA margin compared to 19% in 2016. The key items affecting the EBITDA margin between the 2 years are starting from the left side on the slide. Positive product mix contribution from both business segments were offset by temporary cost increases in some of our smaller manufacturing locations. Sales and marketing expenses grew less than sales. We have, during the year, made some additional investments in EMEA and emerging markets, but we also benefit from integration synergies. There was a step-up in R&D investment in the year mainly driven by the acquisitions and investments in R&D projects for high-end products such as bionic bracing. G&A expenses also grew less than sales. Synergies and scalability impacted G&A costs positively.Currency impacted the EBITDA margin negatively by about 70 basis points, which is net of the positive impact we have on the partial hedge on Icelandic króna costs.We will now have a look at the, yes, quarter 4 financials in more details. If you can go ahead with that, Jón, please.
Yes. Thank you, Sveinn.So this concludes the highlights for the full year, and we will now concentrate on the quarter 4 2017.Sales in the fourth quarter of the year amounted to $154 million, corresponding to 7% organic growth. Local currency growth and organic growth are now equal, as the acquisitions made in 2016 are now fully incorporated in the comparable figures. Prosthetics grew 11% organically in the quarter with an excellent contribution from the recently launched upgrades of the RHEO KNEE. Growth in bracing and support was 3% in the quarter.Gross profit margin in the quarter was good, 63% of sales. EBITDA amounted to $30 million in the quarter or 20% of sales. EBITDA growth was strong and amounted to 15% in local currency. Positive trend in the product mix and good sales growth positively contributed to increased profitability in the quarter. The EBITDA margin was negatively impacted by about 20 basis points due to currency.As previously mentioned, the change in the U.S. tax environment impacted the tax effective rate in the quarter.If we look at the growth by segments and geography, we see an excellent 11% organic growth in prosthetics and 3% organic growth in bracing and supports. Sales of bionic products in the quarter amounted to 24% of prosthetics component sales. We have good sales growth in all regions, where Americas grew by 5%, EMEA grew by 8% and APAC grew an excellent 16%.I will know -- I will now further elaborate on sales by business segments and geography, beginning with the business segments.Sales in the fourth quarter amounted to $154 million compared to $138 million in the fourth quarter of 2016. To bridge the difference, I will begin with organic development, where total organic growth in the quarter was 7%. The prosthetics segment grew by 11% organically, which correspond to a 5 percentage point contribution to total growth. In prosthetics, we continue to see a good performance, where our recently launched upgrades of the RHEO KNEE are driving growth. Bracing and supports grew by 3% organically, with a 2 percentage point growth contribution to total growth. As for the full year, the direct sales part of the bracing and supports segment continues to grow, while the own distribution companies in the U.S. negatively impacted bracing and support growth. We expect the first quarter of 2018 also to be slightly impacted, but for the full year 2018, we expect a limited impact on growth.Local currency growth is now equal to organic growth, as the acquisitions made in 2016 are now fully incorporated in the comparable figures. Total growth in U.S. dollar term in the quarter was 11%. Due to the appreciation of a few major operational currencies against the dollar, mainly the euro, currency movement in the quarter impacted sales growth positively in the amount of $6 million. This corresponds to a positively 140 basis point contribution to total growth.Now let's look further at each geographic region, starting with Americas. Americas sales growth was 5% in the quarter, with the prosthetics segment driving growth there. The performance in EMEA was good in the quarter with 8% organic growth. In both prosthetics and bracing and supports, we saw our high-end innovative products growing well. We furthermore saw growth across all major regions in both segments. APAC sales were excellent in the quarter and grew by 16% in both prosthetics and bracing and supports. We are seeing strong growth, with all major regions performing well. We are also pleased to see excellent performance in China after we'd recently changed to a direct sales model.So over to you, Sveinn.
Thank you, Jón.Organic sales growth amounted to 7% in the quarter, and as previously mentioned, local currency growth now equals organic growth.Gross profit margin was 63%, same as in the comparable quarter last year. The gross profit margin is furthermore comparable to the average of 2016. EBITDA margin was strong and amounted to 20% compared to 19% in Q4 2016, and I will bridge the margin difference on the next slide.Net profit was about $23 million or 15% of sales. The increase in net profits in the quarter can be attributed to strong sales growth and an increase in profitability but also, as already discussed, the changes in the tax environment in the U.S.If we go to the next slide, please. EBITDA, $30 million in the quarter, 20% margin compared to 19% in the same quarter last year. And bridging the difference, starting on the left side of the slide, positive effect from gross profit margin driven by product mix, scalability and efficiency in our manufacturing locations. Sales and marketing expenses grew less than sales or 3%. R&D expenses decreased. The costs are below, I, we could say, normalized run rate. And we expect the R&D costs to be higher in the next few quarters. G&A expenses grew in line with sales.And finally, currency impacted the EBITDA margin negatively about 20 basis points, which is net of the slightly positive impact we have on the partial hedge on our Icelandic króna costs.Go to next slide, please. Here we have a high-level status on the efficiency initiatives announced in September last year. To recap: The efficiency initiatives are in the areas of manufacturing, distribution and sourcing; and are initiated to further increase scalability and profitability in our business. The program is on track, as previously communicated. The main update is regarding our West Coast distribution center in the U.S. which will be moved to the manufacturing location in Mexico during 2018. And this will result in a simplification and increased efficiency in our global distribution process, and this we have communicated now internally in the beginning of the year.And next slide, please. Cash generated by operations was excellent in the fourth quarter and amounted to $34 million or 22% of sales, which is slightly higher than in the same period last year. And cash generation is, however, usually -- or seasonally strong in the fourth quarter.Capital expenditures amounted to $7 million or 4% of sales. CapEx in the quarter was relatively high due to investments related to the efficiency initiatives in addition to, I will say, above-average investments in computer equipment and software in the quarter.Net interest-bearing debt was about $121 million at the end of the year, which corresponds to a 1.2x net interest-bearing debt-to-EBITDA.And if you could finish off with the guidance, Jón, please.
Yes. Thank you, Sveinn.Organic sales growth is expected to be in the range of 4% to 5%. In prosthetics, we expect to see a continued good performance in key markets and high-end products, with growth or at (sic) [ at or ] above estimated market growth. In the bracing and support, growth in the EMEA and APAC regions is expected to be good. And the same goes for the expected growth contribution for the high-end bracing and supports products. Direct bracing and supports sales in the Americas are expected to grow in line with the market, as with previous years.With the restructuring of our own distribution companies in the U.S. finalized in 2017, we expect the distribution companies to have a limited impact on growth in 2018. Bracing and supports sales are therefore expected to grow in the -- line with the market in 2018.EBITDA margin before special items is expected to be around 19% of sales. The EBITDA margin is expected to increase compared to 2017 due to favorable developments in product mix, scalability in the underlying business, savings from efficiency initiatives and synergies from the integration of Touch Bionics and Medi Prosthetics. It should be noted that the quarter 1 is seasonally the weakest quarter of the year in terms of sales and profitability.Capital expenditures are expected to be around 4% of sales.The change in the tax environment in the U.S. will have a favorable impact of (sic) [ on ] Össur's effective tax rate going forward. Based on the current mix of taxable income, the expectation is that our 2018 effective tax rate will be in the range of 23% to 24%, down from historically normalized tax rate in the range of 25% to 26%. The ultimate impact of the tax changes in the U.S. is, however, subject to various provisions, with further guidance and clarifications expected to be issued by the U.S. tax authorities during 2018.So that concludes our presentation. Thank you all for listening. We will now go to the question-and-answer session.
[Operator Instructions] And the first question comes from the line of Niels Leth from Carnegie.
First question, on your new RHEO KNEEs. Could you just talk about to what extent there has been any stock filling among customers of your 2 new RHEO KNEE versions and to what extent that would result in a slower growth in the next few quarters from your prosthetics division? And also, could you just talk about what -- which technologies that you have added to your RHEO KNEEs? And secondly, on your restructuring costs, is it still, I mean, valid that you will incur USD 6 million of restructuring costs in, is it, quarter 3 this year?
So let me start. Thanks for that, Niels. Generally, stock filling is a very limited amount of our sales, Niels, so I suspect that stock filling is a very, very -- has a very little impact. That's at least if you go through history. Regarding the new technology, it's -- it can be categorized as more stability and more stability and more adaptability. Now there are -- I don't want to be too technological here, but there is a 2 kind of -- the technology which the RHEO KNEE is based on is a real magnetic fluid. And while it's really adaptable to the bearer that -- until now, the stability has been concealed, like, by the user as a little bit less than the hydro-based technology. And now we are completely up to standard there, so we saw the stability as good as the knees that are based on hydrology. I think that covers it.
And yes, on the restructuring costs, we still stick to the estimated $6 million in quarter 3.
And next question is from the line of Christian Ryom from Nordea.
I have a couple of questions. First, on the competitive environment in prosthetics, can you comment on whether you've seen any disruption in the market from the announced merger of Freedom Innovations and Otto Bock and recently the FTC probe into that merger? And then secondly, on your new tax rate guidance, can you give an -- give us an idea of what we should think about the tax rate beyond 2018? Will you -- should we extrapolate the new tax rate guidance that you have given us? Or should we expect the tax rate to go even lower given that the statutory rates in both Iceland and the U.S. are lower than what you're currently guiding?
Yes, thanks for that. Let me take the competitive environment, and Sveinn can take the tax rate going forward. The answer to your question is, yes, of course, this is something that we have been scratching our head here within Össur, but I think the consensus here within the company is that so far it hasn't have any impact on the competitive environment. Basically, I mean, they're selling -- I mean FTC -- there is basically a standstill agreement between FTC and Otto Bock. So Freedom is run as an independent company now. And we haven't seen any change in the business environments as of yet.
On the tax rate, Christian, with what we know now regarding the changes in the U.S. tax environment, we would expect our guidance for 2018 to be extrapolated going forward. And the tax rate, let's say, is ultimately sort of a -- planned based on the different countries we do business. We pay tax in all the countries where we have some business, virtually, and we will -- and it might change down the road as the business mix changes, but with the current mix we have today, this is what I would expect beyond 2018 as well.
[Operator Instructions] And we do have a question from the line of Yiwei Zhou from SEB.Okay. And the next question comes from the line of Morten Larsen from ABG.
Two questions from my side. First of all, at the Capital Markets Day, you also highlighted this new study that came out of the studying advanced prosthetics. And I was just wondering whether you have seen any impact from this study in the market out there in terms of demand. And second, on your gross margin, given the high growth and especially your mix, I'm -- had expected a little bit more on your gross margin. Can you tell me whether you see any changes to your pricing environment out there?
Yes, Morten, thanks for that. In the advanced study you are referring to, Morten, I don't think we will see any short-term effect, but however, I believe we will see an effect. But as of short term -- it takes longer time. And it's a study which we are using and the industry is using -- is increasingly using towards the payers. And it's used as such and very, very effective and will have an impact. And there are more studies being done on behalf of the industry, but as of now, I think it would be very optimistic to say it has any impact so far, but it will. And it's -- as we mentioned in the Capital Market Day, it's very, very important to see it kind of black on white, how much positive effect this new technology. And it is a technology [ tradeoff gain ] and to be able to prove the efficacy of that new technology is and extremely important. But to conclude this has something to do with a quarter of the year, that would be too optimistic, but I think on the long term it has absolutely a very positive effect.
Maybe if I can just follow up on that, Jón. Do you feel that the market and the payers are accepting the premises from that study? Usually health economics studies are taken with a little bit of a grain of salt given that it's very reliant on the assumptions you make. Do you feel that the assumption is being accepted in the market, [ a number of your ] payers?
Well, I think it's there's a lot of realism around it. And you're pointing at exactly right thing, Morten, because, I mean, everybody in the market are able to prove that their product and medicine and equipment, that they are saving a lot of costs for the health care system. And the health care cost continues to rise, so I mean this is not -- this is always taken with a grain of salt, but this is -- I mean this is a very respectable -- this is something that you can't brush aside because this is a third-party independent study which is not done on behalf of the industry per se. So the -- I think it will help, but of course, I mean, all those studies are taken with a grain of salt, yes. I mean I -- you are absolutely right.
Just briefly on the gross profit margin. We do have a healthy sort of impact in the quarter from, let's say, product mix. And the big picture on the product mix is that -- all else equal with our prosthetics division growing faster than the bracing division, that helps us on the mix. And also, if you look into the bracing and support division itself, there we have the -- what we usually refer to as our high-end products growing faster than the rest of the portfolio also sort of having a positive impact and sort of mix impact. But what we've also said is that, let's say, although we have high growth on the high-end products in bracing and support, there is some marginal price erosion in the -- in some pockets, in the more commoditized product part, but that has not -- the environment there has not changed. There is no change as such that we've observed in the last few quarters, and don't expect that as such either going forward.
And the next question is a follow-up from the line of Niels Leth from Carnegie.
Yes, just a couple more questions. First one, could you talk about your bracing and support growth for 2018? And also, to what extend do you expend -- do you expect that division to contribute with in the profit margins in the year to come? And my second question would be about your launch plans for your mind-controlled prosthetic and your bionic brace. Any news on those 2 products?
Yes, [ let's take this ].
I'll take the first one. If we look at the bracing and support growth in 2018, I mean, what -- we are coming out of a year with 1% organic growth rate in bracing and support. And what has been holding us back to some -- yes, well, has been the development for what we call our own distribution companies in the U.S. In the absence of that impact, we are growing roughly in line with the market, so -- and what we've said is that we expect these difficulties with -- that has resulted from our restructuring efforts of these distribution companies to be out of the system sort of after first half of quarter 1. So our expectations are that we'll grow the bracing and support division sort of in line with market in 2018. On the profit side in bracing and support, I'll refer back to my earlier comment on, let's say, the main theme there is product mix. I mean we have -- let's say our OA business is growing very nicely somewhat above the average growth rate for the overall company, and those products typically carry a higher profit margin than the rest of the portfolio. So that is the main lever there. And I think you need to sort of first create some assumptions on the relative split of that business versus the rest of our bracing business to extrapolate those trends, but I think that is the big picture.
Yes. On the mind-controlled prosthesis, we are now -- as before, we are working on the regulatory aspect of the mind-controlled prosthesis. And I must say that I wished it would go faster. It's kind of out of our control. And there is -- there are some hurdles we have to -- some regulatory hurdles we have to pass. And I wish I could give you any guidelines on the -- or time line or that line of sight, but I can't. And still we are very bullish on the technology we have. We feel that we have that pretty much under control. The regulatory side, we don't have that under our control because it's not under our control at all, but we are working on it. On the bionic bracing, that bionic bracing is in working prototype stage still. And we have quite numerous milestone to go. We -- but the -- I -- very cautiously, I will say we might be seeing something in next year, 2019, but it's a shoot in the dark. It's we are cautiously [indiscernible] 2019.
And next question is another follow-up from the line of Christian Ryom from Nordea.
Yes. So a follow-up on the -- on your R&D investment profile. So you have, of course, said that the investment level this quarter has been below trend. Can you give us an idea of whether we should expect sort of the level that we saw back into Q3, so around this 5.5%, or even higher when we go into '18? And specifically, if we talk about the first quarter, you sort of alluded to in your Q4 release that some of the R&D costs have been shifted into this first quarter, so should we expect sort of a spike in R&D investment in the first quarter?
Yes, well -- yes, we are sort of somewhat lower than what, I think, is a reasonable or what is a reasonable run rate or where we are with our R&D investment at the moment. And sort of we expect to grow our R&D costs in 2018 close to double digit. And I think this is in line with what we communicated at the Capital Markets Day, that we are sort of increasing our investment on the R&D front. So yes, we -- you should model sort of R&D costs more in line with quarter 3 or even slightly above into 2018.
Okay. And on Q1 specifically: So if we see it jump a lot in the first quarter, should we then expect that run rate? Or is that then...
Yes, yes, yes.
Yes, okay. Great.
And the next question is from the line of Yiwei Zhou from SEB.
Can you hear me now?
Yes.
Yes, we can.
I have one question regarding the integration of acquired companies. And how much cost synergies do you expect to realize in 2018? And I remember you expected in the beginning to bring the profitability of acquired companies to the preacquisition level of Össur. Is that still your expectation?
Yes, that is still our expectation. We have, let's say, with the integration of both of these companies have sort of developed largely in line with our plans. And we do have, let's say, the impact in, let's say, the second half of 2017 from Medi; and partly -- no, from, sorry, Touch; and then partly also some Medi. And we do expect some positive impact also, particularly sort of in the first 2 quarters of the year, from these acquisition -- or from the integration of these acquisitions. But yes, it's largely in line with what we've communicated previously.
And next question is from the line of Felix Wienen from SFO.
And just following up on the question on the acquisitions, can you just remind us qualitatively what you are doing in terms of the operating actions you are taking at these companies now as we move into 2018? Or is the majority of the integration already done now?
Well, the majority of the integration specifically regard to the -- well, which regards to the integration of the companies are done. And so that is in the operational works of the company completely, but then there are some changes we are doing on the operational side of the company that are more on the general company and will affect the acquisition companies as well. But integration as such is done. Both those company are completely integrated part of Össur and have been consolidated completely.
Excellent. And maybe just as a follow-up: How is the cultural fit of the 2 companies? How is the mood among Touch Bionics and Medi? Are they happy to be part of the bigger group that gives them more firepower in terms of R&D, in terms of a broader product range? How is the mood, if you could describe that?
Excellent question, yes. I mean we -- I mean don't get me started, but I think it's extremely important. And we follow it very extensively and try to monitor and steer the cultural fit and the values into our main, being part of the bigger company, because very often this is the most sore point in the integrations. And it -- to answer your question: I think it's going excellent. And it's partly because of it's kind of a sweet spot in the size of those acquisitions. And I think our assessment, and we do a lot about those assessment, indicates that, our colleagues in those companies, they are very happy to be part of Össur.
And next question is from the line of Morten Larsen from ABG.
Just a housekeeping and a clarification question. First of all, you provided the corporate tax. Is this also the cash tax rates we should expect? Or do you see that changing? Second, can you provide us some guidance for net financials for the full year 2018, please?
Yes, the cash tax rate is -- I will expect that to be similar, yes, Morten, from 2019 onwards. It'll -- the cash tax rate will be a little bit lower in 2018 but, yes, largely the same. And for the net financials, yes. If you look at our net financials we have, you need to look at the notes. And there's a few $3 million, if I remember correctly, from exchange rate differences, which is just an impact we recognize over our P&L, as of -- sort of regulating foreign exchange rate impact on some of working capital items. So I would not necessarily model that but just model the interest cost to be similar as in 2017.
Our next question, it's from the line of Thomas Bowers from Danske Bank.
Just a follow-up on the margin development quite strong here in Q4 and moving into 2018 and so looking at your EBITDA outlook. So with some positive integration impacts from Touch, I guess, and also continued positive mix effects, some efficiency impact and also continued scale. So I'm just wondering here. Aren't you somewhat overly cautious for [ '18 at 19% ]? Or anything that we should be aware of maybe aside from maybe some continued price erosion?
Thanks, Thomas. Well, I mean we are guiding based on what we think is the most realistic scenario given the information we have today. Yes, you're right. We will have some positive impact from the integrations. That's correct. We will have -- we expect to realize benefits from the efficiency initiatives, especially towards the latter half of the year. And if we grow our business within our guidance range and manage costs properly, we will -- all of these will help us on the margin side. However, referring back to what I said earlier, we have taken a decision to invest more in R&D. And I'm guiding sort of you on and modeling at least double-digit growth on that -- on those costs. So if you add it all up with what we -- the way we see it today is we're most likely to end up at around 19%, which is a full percentage point increase in our operating margin.
And there are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.
Okay, thank you. And thanks for all of you for the participation, questions and interest. Thank you very much.
And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.