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Ladies and gentlemen, welcome to the Össur Q4 and Financial Year 2021 Results. [Operator Instructions]Today, I am pleased to present CEO and President, Jon Sigurdsson; and CFO, Sveinn Solvason. Speakers, please begin.
Yes. Thanks for that. And I would like to welcome you to the Össur investor conference call where we will cover the results for the fourth quarter and full year of 2021, as previously mentioned. My name is Jon Sigurdsson. 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, followed by the highlights of the year and ending with the guidance for 2022. A question-and-answer session will then follow.The next slide, please. Sales for the fourth quarter of 2021 amounted to $188 million, which corresponds to 5% organic growth compared to $170 million in the same quarter last year and 4% decline organic in the quarter.Prosthetics sales increased by 6% organic, and we were strong in all regions with the exception of Australia. Sales of bionic products were also strong in all regions and accounted for 23% of Prosthetics component sales, which is in line with pre-COVID levels and indicate that bionics are gradually back on track after COVID.Bracing and Supports sales increased by 3% organically and is still somewhat affected by the pandemic in Americas due to the lower injury levels and levels of elective surgeries, while EMEA and APAC performed quite well.EBITDA amount to $41 million or 22% of sales. Sveinn will later elaborate further on the financials.Next slide, please. Sales varied by geography. Sales in EMEA and APAC continued to be strong with organic growth of 7% and 12%, respectively, although Australia is still impacted by the COVID-19 pandemic. Sales in Americas were moderate on average in quarter 4 with strong growth in the second half of the quarter.Now over to you, Sveinn.
Thank you, Jon.The gross profit margin was 64% in the quarter, mainly affected by, we would say, variable freight cost increases and inflation and raw material prices as well as related negative impact on productivity. But this was partly offset by sort of a revaluation of inventories, which amounted to about $2 million here in quarter 4.Our operating expenses increased roughly in line with the organic sales growth in the quarter when excluding extraordinary costs in the comparable quarter last year. As in prior quarters, the main driver for OpEx growth is variable sales and marketing cost, which is increasing in line with higher end market activities as well as costs in relation to further investments in our emerging markets platform.EBITDA amounted to $41 million or 22% of sales compared to $24 million or 14% of sales in quarter 4 last year, which was, again, impacted by extraordinary costs. And now here in quarter 4, we are -- profitability is largely on par with the profitability in quarter 4 '19, which was the last quarter before we entered into this period impacted by the pandemic.The effective tax rate was 25% here in quarter 4. Net profit amounted to $18 million or 9% of sales compared to $4 million in quarter 4 last year.If you go to the next slide, please. Here, you have an overview of sales and EBITDA trend for the last 12 quarters. Now what we see here in quarter 4 is that our sales levels are above our pre-COVID levels in organic terms. And for the full year, we're ending at the 10% organic growth, which is in line with our guidance.And a similar story on the profitability side. Profit was reasonably strong here in quarter 4, again, as I mentioned earlier, above pre-COVID levels for quarter 4 '19, which is, all else equal, a good result, especially considering the supply chain cost increases that we've seen material last year in the second half of 2021.If you go to the next slide, please. Free cash flow was strong in quarter 4 and amounted to $31 million. The cash flow was positively impacted by favorable movements in net working capital items and timing of tax payments. Free cash flow for '21 amounted to 10% of sales.Now net interest-bearing debt amounted to $363 million at the end of the year. And the net interest-bearing debt over EBITDA was 2.4x, which is in line with our target range of 2 to 3x.Now we've decided to restart our share buyback program, and we will that commence shortly. Now with our primary emphasis being on growing the company, value-adding investments and acquisitions, we've decided to discontinue dividend payments and focus on returning excess capital to shareholders via purchasing of own shares, which is now in line with the company's updated capital structure and capital allocation policy.Now that concludes the review for the fourth quarter. And if you could please go ahead, Jon, for the full year summary.
Yes. Thank you, Sveinn.Sales for the full year amounted to $719 million, corresponding to 11% increase in local currency and 10% organic increase in line with guidance for the year. We are satisfied with the results for 2021 considering the continued impact from COVID-19 throughout the year and the related supply chain challenges, increase in freight costs and inflation in raw material prices.We have managed to maintain our product supply and continued our investment in our global growth platform as well as in research and development with focus on technology trade-up and further growth opportunities. In 2022, we will launch a new product, and we are making good progress for our external growth strategy with several acquisitions.EBITDA amounted to $149 million or 21% of sales, in line with guidance. Sveinn will later elaborate further on the financial for the full year.Next slide, please. As previously mentioned, sales amounted to $719 million compared to $630 million last year. Prosthetics sales increased by 11% organic and made up 63% of our sales in 2021, driven by strong sales in all regions besides Australia. Americas, EMEA and APAC all contributed to organic sales growth of 8% in Bracing and Supports in 2021 with especially strong growth in APAC apart from Australia. Reported sales increased by 14%. Net impact from acquisitions and divestments was positive by 1% point for the year. With challenging currency rates, sales were positively impacted, corresponding to a 3% point impact on the reported growth.Next slide, please. Sales continued to normalize in Americas despite headwinds caused by pandemic, while EMEA and APAC both showed strong growth in 2021, considering the extended COVID-19 impact in Australia that makes up around 1/3 of APAC sales. Össur has invested in growing the emerging market platform, and those markets continued to deliver strong growth. In 2021, we were direct in 7 new markets in Eastern part of Europe.Now over to you, Sveinn.
Thank you, Jon.As Jon already covered, organic sales growth was 10% for the full year. The gross profit margin was 63% compared to 62% last year. Supply chain challenges had a $10 million adverse effect on cost of goods sold on a full year basis compared to the -- yes, we had estimated $9 million to $11 million, which we communicated end of quarter 3. And our prediction is that these costs will vastly normalize as the COVID-19-related impact on global supply chains diminishes.Now the full year EBITDA amounted to $149 million or 21% of sales, again, in line with guidance compared to 15% last year and 22% in 2019. Now as sales will continue to normalize from the 2019 levels into '22, the EBITDA margin is, consequently, sort of marginally lower than pre-pandemic levels here for the full year '21, which is, again, mainly due to lack of operating leverage as over these 2 years, our organic growth has been, in essence, been flat. In addition, we have continued to invest in research and development and made further investments in digitalization initiatives and growing our infrastructure in emerging markets throughout this period, as Jon also mentioned, going direct in several new markets here in 2021.The effective tax rate was 24% for the full year, also in line with guidance. Net profit amounted to $66 million or 9% of sales compared to, yes, $8 million or 1% of sales last year, which was very much impacted by, again, COVID-19 and several onetime events.Now panning over to you, Jon, again, on the guidance, please.
Yes. Thank you, Sveinn.Our expectation is that our business will be largely unaffected by COVID-19 except for the beginning of the year. The organic sales growth outlook for 2022 is expected to be in the range of 6% to 9%. The key factors impacting sales growth will be effect from COVID-19, impact from new product launches, pent-up demand, successful execution in emerging markets and stability in product supply.The EBITDA margin before special items is expected to be in the range of 20% to 21% for the full year of 2022. Underlying gradual increase in profitability is expected as sales continue to normalize, supported by new product launches, growth in higher-margin products and scalability in core operations. The higher freight cost and inflation in raw material prices had an adverse effect on the EBITDA margin in 2021. Össur has introduced sales price increases that take effect in quarter 1 2022, and that will largely cover the short-term cost increase in dollar terms. However, some unpredictability can be expected in terms of sales prices increase covering the future inflation.CapEx is expected to be in the range of 3% to 4% of sales. Based on the current mix of taxable income, the expectation is that 2021 effective tax rate will be in the range of 23% to 24%.That concludes the review of the quarter 4 and the full year of 2021, and we are ready to go to the Q&A session.
[Operator Instructions] Our first question comes from Felix Wienen with SFO.
First of all, Sveinn, congratulations on the promotion and good luck with everything going forward. And then Jon, obviously, great time with the company. And I hope we continue to speak in the future. And then a couple of questions, please, and then I'll put in 2, and then I'll go back into the line.The first one is regarding the '22 guidance, the organic growth guidance. Does this relate to the 2021 revenue of $719 million? Or does that apply to $719 million minus the revenues that you lose from the Department of Defense customer, so roughly $710 million? And that's the first question, please.
Yes, and thanks for the kind words. Yes, the organic growth includes -- on our guidance includes the expected impact of the change in business around Department of Defense, yes.
So just to be completely clear, the base is $719 million.
Yes, the base is $719 million. Yes, that's correct. That's our base for full year '19. But as -- but just to reiterate, the way we sort of -- when we look at organic growth, we will have made acquisitions over the year. And we will sort of -- and you need to just take that into consideration as to the pro forma impact. And we've been, I think, hopefully, clear on sort of when these acquisitions are coming in. So just be mindful of that when you put in new growth estimates.
But just because, Sveinn, if the organic growth will then obviously be stronger by around $7 million, so roughly 1%, which is...
Yes. So just another way of answering your question is in the absence of this impact from the DOD, we, all else equal, we would have guided for 1 percentage point higher organic growth rate, both on the lower and upper range.
Okay. Perfect. And what makes you so confident in achieving that high growth rate? Is that largely the revenue normalization program? Or is this also due to planned new product launches probably? Or is it due to bionics coming back in terms of mix? Just some more flavor in terms of visibility and what gives you the confidence.
Yes, that's a good question. All else equal, we are, I mean, going into '22 sort of, as other businesses, with some more volatility around inflation. And we are assuming price increases somewhat above what we would see in a normal year. And that -- and those expected price increases, they will -- are yes, between 2% and 3% of the top -- of the growth that we are predicting. Then in addition to that, yes, we are coming out of 2 years where the organic growth has been flattish.Just to refresh our memories, we had a 10% organic decline for 2020 and are now growing 10% or rebounding here in '21. So on average, organic growth has been flat throughout this period. And yes, our underlying assumption is that there will be some level of pent-up demand and some sort of, yes, impact from, let's say, comparing to a period which was somewhat affected by the pandemic. But this is, again, just our assumptions. When we set the guidance, we have to make assumptions around what we think will happen in the external environment. And our prediction is that 2022 will be largely unaffected by the pandemic, except for here in the initial months.And just to add to that, our experience has also been that with every new wave, somehow the impact on our operating environment and our customers has become -- is less with every new wave. But with that said, it's also different. Like now, with this Omicron variant, it's more, let's say, yes, staffing issues with our customers and delays related there, too. So -- but anyway, we've also tried to be transparent about the assumptions we've made in the section on guidance in our release.
Perfect. That's very helpful. And the other question would be around pricing indeed and how your discussions are with customers, whether you already had the discussion or whether they're still coming up. Just given that you've got some large, very regulated customers, whether you can actually -- or whether you're successful in passing pricing.
The pricing is a very big topic for us now. And we've worked with our customers in the different regions and with the aim of, let's say, finding a solution that works for both parties. And the regional differences are quite significant. In some countries, our customers are bound to contracts that they've made for over several years with the government or private payers and, therefore, do not have any ability to absorb higher prices. And while in other countries, there is more flexibility. In the U.S., for example, Medicare has stated that they will increase prices in 2022. So it's very much a country-by-country, reimbursement system by reimbursement system approach. And our answer to price increases is that we expect, on average, to realize something around 2.5% increase in prices across our portfolio but, again, with high variances between regions and different countries.
Our next question comes from Christian Ryom with Nordea Markets.
And I would, of course, also like to add my congratulations to the both of you. A couple of questions from me as well. First, you reported that in the second half of Q4, you've seen, as I understand it, a marked improvement in the U.S. or in the Americas region in general. Can you elaborate a bit on how that has developed in here to the early part of 2022? And maybe also expand a little bit on the development in the Australian market, which seems to have been quite poor during the fourth quarter. That's my first question, and I'll come back with the second one.
Yes. If I can take the first one, and Jon, you can maybe step in on the Australia question. Yes, in the U.S., we did see sort of -- as we talked about after quarter 3, which was impacted by the Delta variant more than we had anticipated, we've seen business come back in the U.S. And our customers are having higher activity levels. And we also noted a change in -- or a positive change in our bionics business in the U.S. also, which then is -- let's say, confirms our previous assumptions that the bionics business would pick up as the mechanical side but a little bit later. So now we have good progress in bionics basically across all our regions. And yes, we -- it's early days for 2022, but we've had a decent start in the U.S. also. But just to caveat that, that the impact of Omicron is still a bit unsecure how exactly that will impact the business.
Yes. On the Australia, as you've seen through the last years, Australia has been a darling of ours. It has been contributing very nicely to our growth and has grown tremendously well and been very successful. We've seen, however, that the COVID impact in Austria has been -- Australia has been quite strong, and that's just due to very heavy-handed COVID regulations from time to time. There's basically 2 of them, and Australia has been in basically lockdown twice, and that has impacted the sales. There's nothing, however, that indicates that post-COVID, Australia will not contribute as positively as before. So we are very bullish about Australia, continuation there. And Australia will provide positive growth in the future as well. And we see all signs indicating that's been the case.
Is it fair to say that you haven't seen much improvement in the Australian market yet? My impression is that we have seen a bit of lifting of restrictions in recent months. Has that had an impact on the...
Yes, yes. I mean we see there are very clear connection between the COVID restrictions and sales development in Australia. We see -- wherever the authorities ease the restructuring, as is the case now, we see sales growth coming in right away. And there's no -- nothing that indicate that, that's not the case in the future.
Great. And then just sort of a quick follow-up, additional question really. Just to clarify on your guidance on the supply chain costs for 2022. As I understand it, you're guiding for, say, extra costs of around USD 9 million relative to pre-pandemic levels, whereas you had $10 million here in 2021. So the conclusion is that you have lower supply chain costs in 2022. Is that correctly understood?
That's correct. We've assumed, let's say -- and the key assumption there is principally that we will -- we had to rely less on expedited airfreight and some of these expensive means that we've had to put to use here in the second half of 2022 and a little bit easening of the pricing here in the second half of 2022. But again, these are assumptions that we've made based on what we believe is some sort of consensus around these aspects in the market. But good that you highlighted that this is one of the key assumptions going into 2022.And just maybe to add a little bit on that because we've absorbed these price increases here in '21, this $10 million. But going into '22, we are increasing our pricing, which will largely cover this change on the unit cost side as such. But -- so the margin impact we've taken here in 2021, and there will be a little bit less margin impact in '22, if that makes sense.
That makes sense.
Our next question comes from Niels Leth with Carnegie.
And I would also like to say congratulations with your retirement, Jon. It's been an amazing 26 years for you, and also congratulations to you, Sveinn, for your promotion. So my first question would be on the Department of Defense order or contract or whatever we kind of call it. So the announced numbers that you have provided today, would that be a worst-case effect? And I presume that you will still be supplying DOD but just in a different way.
This is our base case estimate, Niels, the impact on the top line and the impact on profit. And the summary here is that the DOD has simply decided that they will not offer these types of services through this -- or outsource these services as in servicing veterans in this way anymore. They will rely on sort of the general reimbursement system, the VA system going forward. So this is not basically -- this is not to be interpreted as a loss of customer or anything like that. It's simply a change on behalf of the DOD to offer these services in a different manner. However, these individuals that have received service through this entity will continue to sort of seek service. But where exactly, that remains to be seen. And again, the financial impact is just our best estimate today.
So will your revenue through the VA not increase?
Well, it could be. Jon?
Yes. It's -- what has been decided is that Department of Defense will step out of the -- providing the prosthetic service for wounded individuals and revert everything to VA. So that means that instead of those wounded veterans would not go and seek and get their prosthetic service in Walter Reed in Washington, D.C., they will now go to their local VA, hundreds of them, and go under the same rules as the VA, which will -- which put quite a lot of more restrictions on their ability to get the high-tech solutions.Now the question, there will be a tremendous pressure for them, for those people that will -- to get the same service level, but that remains to be seen how fast that will ramp up. We just don't know. And they will, and they will -- they might even spill out. There might be a positive effect on the long term where others will receive more similar service than they have done now, but it's a very fluid situation that we just don't know. But there will be a short-term impact.
So you have not baked into your guidance any increase to your sales through the VA system?
No.
Great. And then could you just specify the effect from raw materials and freight in quarter 4 isolated?
The -- if I'm correct, raw material is about -- let me get back to you, Niels, on that. I just want to make sure I confirm the numbers. I'll step in later in the call with those details.
Our next question comes from Benjamin Silverstone with ABG Sundal Collier.
I have just one quick question for your guidance for next year. I was wondering if you could please specify a little bit about how you see the underlying growth from both Prosthetics and B&S is going to develop in the year to reach the 6-point -- 6% to 9% organic growth.
Benjamin, thanks for that. If we go back to pre-pandemic levels, our Prosthetics division had been growing sort of -- in the 5 years preceding COVID, we had organic growth rate in Prosthetics of between 6% and 8%; and in Bracing, low single digit. And we believe that sort of going into the year here, we are -- we aim to be growing at the upper end of the market growth rate for both Prosthetics and Bracing.As we've talked about previously, we don't expect any pent-up demand on the Bracing side. But there is -- we believe that we have a little bit of pent-up demand on the bionics side in Prosthetics as the bionics business is recovering a little bit slower than -- I mean, the mechanical business has been largely unaffected through COVID. So that's -- and how that pent-up demand will be released would maybe be one of the deciding factors on where we'll end up in the range. I hope that gives you a little bit of color because we don't really guide on a specific number for Bracing and Prosthetics. But I would expect it to follow a similar pattern as in, let's say, a more normalized year.
Completely understand. Just a quick follow-up in terms of the EBITDA margin guidance then. Could you just give some nuance as to why it should not be possible to reach what we saw here in Q4, given the fact that we might see some pent-up demand in bionics, which is higher margin and also the price increases which should also help in 2022?
Yes, yes. There's some, again, some seasonality in our underlying profitability. Quarter 4 is typically strong. Quarter 2, typically strong. While quarter 1 will be seasonally weak on the profitability side. We're guiding for here 20% to 21%. We're entering the year at 20.7%. All else equal, we still see the underlying same dynamics when it comes to the profit development in the business. Our Prosthetics business is growing faster than the Bracing and Supports business. We have had good sort of momentum on improving unit cost year-over-year, although that has not been as easy here in the last couple of years given the turbulence around the supply chain side and then having some operating leverage through the OpEx side of the business now.And we still see these factors playing in our advantage. And in the absence of this change on the DOD side, we would have guided for 21% to 22%. So that is important to keep that in mind that there's sort of a onetime event as such. So the picture remains intact on how we look at the underlying profitability development in the business. But also always keep in mind that on the acquisition side, typically, when we acquire companies, well, those are other manufacturers or companies that are focusing on the provision of service in the industry. These are typically companies that have lower margins. So that needs to be taken into account as well.
And just to conclude, congratulations to Jon and to yourself.
Thanks, Benjamin. Niels, just to get back to your question, Niels, on the COGS side, it is about sort of the increase in -- is about $2 million on the raw materials side and about $3 million on freight in quarter 4.
[Operator Instructions] We now have a follow-up question from Felix Wienen with SFO.
Perfect. Yes. A couple more questions, please. The first one would be on your decision for the capital structure, in particular, preferring share buybacks over dividends. Just your thoughts around that, why you think that's the decision and why you did not go for dividend or 50-50. And I'm sure that links into M&A prospects as well, so if you can combine the 2, makes it more interesting.
Yes. Good that we got a chance to comment on that as well. We -- as we look at things going forward, we see opportunities to, well, both invest in growing the business organically like we've been doing last year, investing into establishing our presence in new markets and then also on the M&A side, sort of both opportunities with regards to acquisition of technology and product that fit into our ecosystem and opportunities to invest at the front end of the value chain as well as investing into market access in new markets. So we believe that those opportunities are there.And where we are today on sort of that, when it comes to financial leverage, we're at 2.4 here at the end of the year. So we're at sort of the upper end of where we -- compared to where we've been over the last many years. And that was our conclusion that we prefer the flexibility of the share buybacks to calibrate our capital structure and use our free cash flow to, yes, acquire companies that strengthen our business and strengthen our ability to execute and then have the flexibility around the share buybacks and not being, yes, tied to a fixed [indiscernible]. That was our rationale.
And I'd like to add that the feedback we've been getting from a lot of our investors is that they prefer share buyback rather than dividend both from capital allocation point of view and also tax point of view.
Okay. Yes. And the other question, 2 more, if I may. The first one, in the last year, you had a -- I think it was last year, you had a negative effect by a large U.S. customer of yours reducing the share of wallet from you. Is that something that you're seeing again on the horizon? Or is it quiet on that front? Is that a risk that we should factor in?
Felix, no, that's not a risk you should factor in. That is not something that is having an impact on the bigger picture, no, no, no.
Perfect. And then my last question, I promise. If you could give a bit more color on the forward integration strategy or, in particular, how that side of the corporate term has performed over the last quarter. What -- just in general, what kind of effects you're seeing there and whether that's still all hits the targets that you had and the expectations you had in mind with the clinics.
Overall, we are evaluating opportunities in different parts of our global business. And there still remains opportunities to make good acquisitions in important markets. However, we are taking a sort of step by step. And we've made a few acquisitions last year which are smaller than in prior years. And the answer here is that we continue to evaluate these types of opportunities. And that, I would -- just to refresh, I would say that we have 3 main M&A themes. One would be exactly what you're mentioning. And all others are also -- there are some opportunities for acquisitions of products and technology that fits into our ecosystem. And then finally, on market access, like we've done historically acquiring companies that are well set up to service customers in regions where we don't have adequate presence.
Our next question comes from Yiwei Zhou with SEB.
Jon and Sveinn, firstly, congratulations to both of you. And I have one question left here. It's on the cash conversion. I realize in Q4 this year looks a bit soft compared to the normal years. Is there any particular reason for this?
Cash flow was actually -- in quarter 4, our cash flow for the year was quite back-end loaded here. And we had reasonably strong free cash flow here in quarter 4, stronger than what we did in quarter 4 2020, and this is again a more timing than anything else.If you look at the full year compared to prior years, free cash flow is definitely in line with prior year patterns and even slightly higher. So we don't see any fundamental change here. Cash flow is quite strong for the year and the quarter.
Okay. Great. And maybe a follow-up question here on the acquisition. I realized you bought a USD 4 million business in Q4. Could you maybe elaborate a bit in which region? And is it also a distributor or clinical chain you're buying?
This is a company that is servicing the uses of our products, yes, and it's both in the U.S. and Europe.
Next up, we have a follow-up question from Niels Leth with Carnegie.
Yes. A quick follow-up. So what would be the M&A effect on sales in 2022 with the already known acquisitions that you have made?
So we announced, Niels, that we acquired companies in quarter 1 that have full year sales of $11 million. In quarter 2, we announced again acquisitions that will contribute on a full year basis of $11 million. And then here, nothing in quarter 3, and then $4 million in quarter 4, and so $26 million on a pro forma basis. And we have disclosed the timing, let's say, within each of these quarters roughly when you start to calculate the effect from these acquisitions.
At this time, there are no further questions. I hand back to our speakers.
Yes. Thank you for your questions. And as mentioned here on the call, I will step down as the CEO at the end of the first quarter of this year. And besides this being my last conference call and due to COVID regulations, I will not be able to meet you in person today. I'm sorry about that. And therefore, I would like to thank you all for the very good cooperation overall this time. And I will -- believe you or not, I will miss you guys. So farewell to all of you, and over and out. Thank you.