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Good day, and thank you for standing by. Welcome to the Össur Q4 and Full Year Results for 2022. [Operator Instructions] Please note that today's conference is being recorded. I would now like to hand over to your first speaker, Mr. Sveinn Solvason, President and CEO. Please go ahead, sir.
Thank you very much. I would like to welcome you all to the Össur Investor Conference Call where we will cover the results for the fourth quarter and full year 2022. My name is Sveinn Solvason, and I am the President and CEO, and with me here today is Arna Sveinsdottir, our CFO.
We will begin by going through the main topics that impacted the performance in '22, then move into highlights for the quarter and the year, ending with our guidance and a Q&A session.
Can we go to the next slide, please? Despite a challenging external environment, we grew the business in all our regions and business segments. And we'll cover the growth in more detail as we go through the presentation.
We remain focused on growth through innovation and have continued our investments in research and development. In 2022, growth in R&D investments outpaced our organic sales growth. We were proud to launch the Power Knee at the beginning of the year and have been very pleased with how positively it has been received in the market.
We continue to focus on growing the business through acquisitions. And in August, we announced the acquisition of Naked Prosthetics, which strengthens our position in the market for upper limb prosthetics. We continue to manage supply chain challenges, including shortages of certain raw materials and components that has also affected our productivity and cost of goods sold when we look at the year 2022, also a topic that we'll touch on later in this presentation.
In quarter 3, we made organizational changes and initiated cost savings to support further growth and profitability and simplified operations to better leverage some of our key locations. Total annual cost savings amounted to about $15 million, of which we plan to reinvest around 1/3 into our growth initiatives.
In '22, the dollar strengthened against the euro and other key functional currencies, which resulted in adverse effect on reported sales of about $50 million, which led to the flat reported growth year-over-year in U.S. dollars.
Can we go to the next slide, please? The last 3 years have been impacted by various external factors. And here, you can see the development in sales from '20 to '22, as well as organic and local currency growth. In the period 2015 to '19, we had a fairly stable organic growth of around 5%.
However, in 2020, sales declined due to the impact of COVID-19. And in '21, we rebounded well and grew organically 10%. Now if we look at the last couple of years, '21 and '22, the prosthetics segment has demonstrated solid growth, especially bionics, which we'll go into more detail with on the next slide, while demand for Bracing & Supports products and activity in our clinics has been impacted over certain periods by lower patient volumes on the Bracing side and some capacity constraints due to lack of staffing impacting both Bracing and our clinics.
In '22, there are also 2 specific topics that have impacted organic growth. The discontinuation of the outsourcing contracts for the Department of Defense in the U.S., which we announced in the beginning of '22, and the continued suspension of sales to Russia. These 2 events have impacted organic growth by about 2 percentage points negatively here in 2022.
If we go to the next slide, bionics remains a very important growth driver for us. Only a small part of the amputee population today has access to bionics, and we remain committed to improving that access. Over the last decade, bionics as a percentage of prosthetic component sales has increased by about 10 percentage points. And quarter 4 was the largest quarter in sales of bionics that we've had. The Power Knee contributed well this year. The Power Knee has been on the market for years. And this year, we, however, launched an improved version. And despite being challenged with supply chain complications for sale, sales of Power Knee in '22 contributed to a full percentage point on organic growth, and we are optimistic on the potential of power of the prosthetics. And going into 2023, the Power Knee will be one of our key focus areas as well as other product launches in bionics that we expect in the second half of '23.
Now supply chain has been a bit tough in the last couple of years. And here, we have an illustrative picture to review some of the main items that are impacting our unit costs, which have been freight, raw material prices, productivity, and now labor cost inflation. Freight rates have been the main contributor. However, freight rates have already come down. So we foresee freight cost to decrease in '23, although we are still using more expensive means of freight for some raw materials. Inflation in raw material prices has increased here in '22, which we expect to ease up somewhat in '23.
Labor cost increases were moderate in '22. However, it will be higher here in '23, and labor costs represents about 30% of our unit cost.
Finally, due to mainly sporadic delivery of certain raw materials and components, we have operated with some overcapacity in our manufacturing setup, an estimated impact of 50 to 100 basis points on the gross profit margin.
The net impact of all of this is that our unit cost has increased or grown about 10% here in '22, of which the majority is temporary in nature. We will see stable to moderate growth in unit cost here in '23, principally driven by labor cost inflation, however, outweighed by lowering freight costs and increased productivity as supply chain regains balance.
Now moving on to the details around the quarter performance. Here is an overview of the growth in our 3 regions and product segments for the quarter. Sales were strong here in quarter 4, amounting to $191 million, which corresponds to 6% organic growth. And sales in '22 amounted to $719 million, corresponding to 4% organic growth in line with our guidance for the year.
Sales were strong here in Americas and EMEA, driven by prosthetics. Australia also contributed to the strong organic growth in the quarter, while China was again affected by some of the COVID-19 related restrictions.
Prosthetics sales increased by 7% organic. Bionics were particularly strong accounting for 25% of prosthetic component sales here in quarter 4 compared to 23% in the same quarter last year.
Bracing & Supports sales increased by 5% organically. Patient volumes recovered somewhat towards the end of the quarter in Americas, and hospitals were claiming less impact from lack of staffing.
With that, over to you, Arna, on the P&L, please.
Thank you, and good morning. I will go through the P&L highlights for quarter 4. Organic growth was 6%, as previously stated, and reported growth was 2% in the quarter. Reported sales were negatively impacted by $14 million due to currency movements, which corresponds to around 18 percentage points negative effect on the reported growth rate.
The adverse FX impact is primarily due to the strengthening of the U.S. dollars against euro and other key currencies. The gross profit margin was 61% in the quarter. Cost of goods sold was adversely affected by the before mentioned supply chain challenges, causing higher costs, adverse impact on productivity and product availability.
Operating profit was [ $21 million ]. EBITDA amounted to $34 million or 18% of sales. The effective tax rate was 21%. Net profit amounted to $13 million or 7% of sales.
Next slide. Here we have historical trends for the last 8 quarters. This was a very unusual year with regards to cash generation, which is generally one of our strong points. Cash flow has been adversely affected by increase in receivables and supply chain challenges resulting in higher inventory, largely our safety stocks due to long lead time, delay in raw material delivery, and uncertainty in the supply chain.
The net interest-bearing debt amounted to $404 million at year-end '22, and the net interest-bearing debt-to-EBITDA was 3.2x, which is above target of 2x to 3x. Net interest-bearing debt increased by $22 million from quarter 3 to quarter 4, mainly due to renewals of lease contracts leading to an increase in lease liabilities and contributing to higher leverage ratio.
We expect the leverage to be within our target range in '23. In line with our capital structure and capital allowance policy, we continue to pause share buybacks. There is an overview of the growth in the 3 regions and product segments for '22. Prosthetics sales increased by 4% organic, mainly driven by EMEA, Americas and Australia.
Sales of bionic products amounted to [ 20% ] of prosthetic component sales in '22. Bracing & Supports sales increased by 3% organically.
Can we go to the next slide? Now we see P&L highlights for the year. Organic growth was 4%, and reported growth was flat in '22. Reported sales were negatively impacted by $47 million due to currency movements. This corresponds to around 7 percentage points negative effect on the reported growth rate as we showed earlier.
The gross profit margin was 61% for the year, with 62% excluding special items, mainly in connection to cost saving initiatives announced in quarter 3. Cost of goods sold was affected by $13 million in '22 due to higher freight costs and inflation in raw material prices compared to prepandemic levels, thereof higher freight cost was $10 million.
Operating profit was $60 million. EBITDA adjusted to net special items amounted to $128 million or 18% of sales, in line with guidance. Net special items costs amounted to $14 million, mainly due to the cost saving initiatives.
The effective tax rate was 23% for the full year. Net profit amounted to $43 million or 6% of sales. And that closed the P&L review. Over to you, Sveinn.
Thank you very much, Arna. Now on our guidance. The organic sales growth outlook for '23 is expected to be in the range of 4% to 8%. The key factors impacting sales growth will be impact from price increases, stability in product supply, impact from new product launches, and successful execution in emerging markets.
The EBITDA margin before special items is expected to be in the range of 17% to 20% for the full year '23. An underlying increase in profitability is expected, supported by sales growth, and by improved sourcing of raw materials and components as well as growth in higher margin products and scalability in core operations.
Freight cost, which has been the main contributor to higher supply chain cost, is expected to decline, while other input cost is expected to be stable or grow moderately. Inflation is estimated to affect cost of goods sold as well as OpEx during the year, but cost savings related to the restructuring activities made in quarter 3 in '22 are expected to partly offset this effect. By applying current FX rates, the EBITDA margin is expected to be positively impacted by about 30 basis points in '23. CapEx in the range of 3% to 4% of sales, and based on the current mix of taxable income, we expect that the effective tax rate is in the range of 23% to 24%.
Now that concludes the review for the quarter and the full year. We can now go to the Q&A session.
[Operator Instructions] The first question comes from the line of Benjamin Silverstone from ABG.
My first question is regarding price increases for 2023. You did mention it, but could you just reiterate how you see it on a group level for 2023? I do know that you mentioned that some areas will be close to 0, while some will be full inflation price increase.
So just a good idea of what we should expect on a group level, that will be much appreciated. And also, how you expect the salary cost component for 2023 to develop. That will also be helpful.
My second question is regarding the CMD for March. Could you just elaborate a little bit on what we should expect to hear about here? And also in terms of the current gearing, are there any -- so is there anything holding you back when you look at any strategic reviews for 2023 or for the CMD given the current gearing, or is the gearing just something that is still being worked on, but not having an impact per se?
Thanks for your questions. On the price increases, this is a major topic for us, let's say. What we did see in '22 with that average price increases on the product side were between 2% to 2.5%, something along those lines. And what we look at when thinking about and evaluating our potential to increase prices is what the reimbursement systems are doing, because that's what our own clinics and what our customers are faced with in terms of ability to pass on to the optimal payer.
So we see price increases in some of the systems that we operate in, while some systems have not done any price increases. And what we have done is we've approached price increases on a regional basis. And what I can say now is that we expect price increases on average for us to be north of what we achieved in '22. So on average, higher price increases to the tune of, yes, maybe 1 to 2 percentage points, something like that above the '22 increases, that would be my guidance on that.
Salary increases, we expect the salaries to increase around on average 5%, again depending on regional variances and inflation, but that's sort of what we have implemented across most of our regions, and is going to affect the increase in labor cost going into 2023.
On the Capital Markets Day, we will hold the Capital Markets Day here towards the end of the quarter on the 30th of March. What you will hear about there is a combination of continuity and a new piece. And we will go into more detail with that on the Capital Markets Day itself, and I'm not going to go, sort of, in much more detail here.
But at the end of the day, it will be about growing access for mobility solutions for more individuals across the whole portfolio that we are operating in and we'll get more into details with that in the Capital Markets Day.
On the gearing, finally, yes, gearing is above our target range, mainly because we have been implementing or signing new lease contracts here in our real estate portfolio that has pushed our gearing a little bit above the target range, but we expect to be well within the range here in 2023. And I don't expect this to have any impact on our ability to pursue our strategic objectives. Thank you.
We are now going to proceed with our next question, and the question comes from the line of Christian Ryom from Danske Bank.
Yes. I have 3 questions as well. The first is on the gross margin. Can you elaborate a bit more on, say, the specific drivers here in Q4, and in particular, the supply chain challenges that you are alluding to? What specifically is that? And maybe tacked on to that, a question of what the gross margin impact is of the higher bionics sales that we've seen in this quarter? That's the first question.
The second question is, you previously talked about order backlog and supply constraints for particularly the Power Knee. I don't see any mentioning of that in the report out this morning. Is that to be understood that, that backlog has now been cleared?
And then final question is on, any comments you can add around the phasing of growth here for '23? Whether we should expect growth to accelerate during the year or of, say, any other dynamic?
Thank you, Christian. On the gross profit margin, the main themes around our gross profit margin has been freight cost increase in raw material prices, although that remains somewhat volatile. We've seen some easing off of that here towards the end of the quarter or end of the year for some, but not for others.
And then there's been the productivity/labor cost component. Now we do expect freight to come down significantly here in 2023, but our supply chain challenges has been around electrical components on the bionics side. Again, our volumes are low. We're often dependent on single source supplier. So our supply chain has been a bit stretched. And we've had to also spend efforts and resources and time on reengineering or changing some of the protocols around some of our high-end more complicated products. And also going back to productivity, because of sporadic delivery on certain raw materials, we've had to operate with some level of overcapacity in our manufacturing organization.
So it has been several factors that have impacted the gross profit margin. But simply most importantly, our unit cost has simply outgrown or grown at a faster rate than we have been able to implement price increases. So going into '23, you will see some of those points easing off in terms of pressure on the unit cost, and we will see higher price increases than in '22. So ultimately, this will find -- or we will regain our balance here.
Now on your second point regarding the backlog on the Power Knee. Yes, we are not mentioning any backlog on the Power Knee, but it's important to note that we have scaled back our commercial efforts earlier in the year because of our inability to supply to demand. So yes, we don't have a backlog, but if we would have been able to keep up, let's say, supply all as equal, we would have sold more units in last year. So we are cautiously optimistic on -- or Power Knee will be a growth driver for us here going into 2023.
Now regarding the growth phasing, we did -- the first part of last year, especially quarter 2, was weak. And then remember, quarter 1 was also some COVID-related impact. So we should have easier comparison here in the first half of the year when it comes to growth year-over-year comparison. I hope that addresses your point.
Yes, it does. Just maybe a quick follow-up on the, say, commercial support for the Power Knee. Where are you today? Have you sort of scaled commercial efforts back up or are they still at a reduced level?
We are -- let's say, the Power Knee has been mostly available -- or most of the sales we had on the Power Knee in '22 were in the U.S. market, and we have -- yes, I mean, our commercial effort there on the Power Knee will be in full force here in 2023, and we will selectively push the Power Knee in European markets where we will have access or where we will have reimbursement support for that product, which is in selective European markets. So we will continue to emphasize the Power Knee here going into '23, yes, for sure.
[Operator Instructions] We are now going to proceed with our next question, and the questions come from the line of Niels Granholm-Leth from Carnegie.
First question on your net working capital, which is a little higher than normal. How quickly would you be able to normalize your net working capital? Secondly, a question on freight costs. Given the current freight rates, which have obviously come down quite a bit, how quickly would you expect the current freight rates to be fully replicated into your freight costs? And then lastly, are you experiencing any effect from hospital strikes or staff shortages as to the number of new patients that you treat?
Thanks for your questions. On the net working capital side, we are very much overinvested on inventory and that relates both to our finished goods on the Bracing side, where we work with vendors mainly in Asia. And that goes back to the COVID period where we suppressed demand from these vendors. But then again had to scale up quite quickly here in the beginning of '22.
So yes, we are very much overinvested on inventories, and this has also impacted our freight cost, because we've been building inventory at a time where freight costs have been high. So we've been bringing in more volumes at an average unit cost per container shipped at a much higher rate than the average rates are going into 2023.
So our cautious estimate is that freight cost in '23 over '22 will be around at least $7 million lower, to give you a firm number on our expectations there. So I hope that -- yes, and to maybe add a bit more concrete on the net working capital as well. I mean we expect that we will release in '23 up to $20 million from inventory into our free cash flow. And accounts receivables are also on the higher side. There's nothing structurally changing there, but we ended the year with very strong sales. So there's some cash absorption also on the AR side. So we do expect these things to contribute to a more normal, let's say, cash flow year going into 2023.
Now finally, on the staffing. No, we've not had any feedback from the field in terms of this having a particular impact on our business. I mean, staffing levels have been a challenge, especially we feel on the U.S. side throughout 2022, impacting elective procedures, impacting patient volumes, but our feeling is that this is easing up somewhat going into the year. But -- yes, I'm sorry, I don't have more details on that.
[Operator Instructions] We are now going to take our next question and it's from the line of Christian Ryom from Danske Bank.
Just a quick follow-up, if I may. Can you elaborate a bit on your expectations for your net financial costs? So particularly how, say, higher interest rates will impact that line here for '23?
Yes, Christian, I think we have an estimate of around $3 million to $4 million higher finance cost going into -- for full year '23, just reflecting higher base rate on our debt. About half of our debt is fixed rate contracts that were signed, let's say, well before we saw the changes in the financial environment. So on our floating rate debt, we will see higher interest rates, yes, impacting net financial cost probably to a tune of $3 million to $4 million for '23.
And we are now going to proceed to our next question and it's again from the line of Christian Ryom from Danske Bank.
That's probably a mistake. I'll lower the hand here. Thank you.
We have no further questions at this time. I will now hand back the conference to you for closing remarks.
Thank you very much. Just a repetition of what was earlier mentioned that we are hosting a Capital Markets Day on Thursday, the 30th of March in Copenhagen. There, we will go through our strategy outlook and we'll send out a stated date at the beginning of February with all the details and look very much forward to seeing you all there.
Thanks for your questions. Thanks for your participation. Please reach out to our Investor Relations if you would like a meeting or have any follow-up questions after this call. Thank you very much, and have a nice day.
This concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.