Ossur hf
CSE:OSSR
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Earnings Call Analysis
Q4-2023 Analysis
Ossur hf
Under the Growth'27 strategy introduced in March 2023, Ossur aims to enhance the lives of those requiring mobility solutions, targeting an average local currency growth of 7% to 10% within five years. The recent acquisition of FIOR & GENTZ, a leader in neuro-orthotics, signifies a strategic move into new orthotics markets and is anticipated to fuel organic sales growth, aligning with Ossur's long-term expansion goals.
Ossur reported a robust sales performance in Q4 with 9% organic growth, largely driven by volume increases in Prosthetics and Patient Care segments, and price adjustments in Prosthetics and Bracing & Supports. The full-year sales in 2023 totaled $786 million, reflecting a consistent 9% organic growth■.
The Medicare draft proposal unveiled in January 2024 is set to expand coverage to lower mobility patients, enabling broader access to prosthetic knees and feet. While the timeline for finalization remains uncertain, this policy change could significantly reshape the reimbursement landscape in Ossur's key market—potentially escalating demand for mobility solutions and bolstering company sales.
With an EBITDA margin maintaining at 18%, Ossur's profitability remained stable despite inflation and currency fluctuations. The company's net profit surged by 49% in the quarter, benefitting from the performance of associated entities and favorable exchange rates. Inventories remain elevated due to supply chain strategies and are expected to normalize into 2024. Capital expenditures peaked during the year but are projected to stabilize in the following year, contributing to a healthier balance sheet.
Looking ahead, Ossur anticipates organic sales growth ranging from 5% to 8% for 2024. Factors such as volume growth across business segments and an advantageous product mix are likely to influence this outlook. Moreover, due to the FIOR & GENTZ acquisition and existing leverage, Ossur is pausing its share buyback program, expecting leverage ratios to normalize within its target range across 2024.
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Good day, and thank you for standing by. Welcome to the Ossur Q4 and Full Year 2023 Investor Presentation Conference 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 first speaker, Sveinn Solvason, President and CEO. Please go ahead, sir.
Thank you, and good morning, everyone. Thanks for joining our call this morning. With me here today also is Arna, our CFO. I will start with a few highlights, then a review of the quarter and the year and conclude with our guidance for 2024. A Q&A session will then follow.This has been the last full year, and I would like to start with a few milestones and key highlights. In March, we introduced our Growth'27 strategy, a 5-year strategy focusing on reaching more people in need of mobility solutions with the ultimate goal of achieving 7% to 10% average local currency growth over this period. Also at the same time, to increase transparency in our financial reporting, we implemented a new sales segmentation, Prosthetics, Bracing & Supports and Patient Care. And I'm very pleased to report that we're off to a good start with strong growth across all our business segments in 2023.EBITDA grew in line with sales and was positively impacted by strong growth, positive product mix and lower freight costs. Inflation, however, impacted cost levels during the year and productivity in manufacturing was below a normalized level. Our product pipeline is strong, and we expect new bionic launches here, as we go into 2024.I would also like to highlight some events that occurred here early in 2024 on January 16th, Ossur acquired FIOR & GENTZ, a market leader in lower limb neuro orthotic solutions. This is an important milestone for us, as it marks our entry into the highly synergistic new orthotics market. The addition of FIOR & GENTZ will be accretive to organic sales growth and aligns seamlessly with our Growth'27 strategy.On January 18th, Medicare published a draft proposal that would give patients with low mobility levels, access to prosthetic knees and feet previously limited to patients considered high active, while the proposal is still in a draft format represents a significant shift in reimbursement coverage, potentially opening access to high-quality mobility solutions to a much larger part of the amputee population. However, we don't know at this point when the proposal will be finalized, but this obviously represents a very big potential change in the overall reimbursement landscape in what is our largest market.Go to the next slide, please. I'm very pleased to report continued strong sales performance with 9% organic growth here in quarter 4. The growth is largely attributed to strong volume growth in Prosthetics and our Patient Care business, favorable solution mix with strong performance in our high-end solutions, in addition to, as for previous quarter, some price increases in Prosthetics and Bracing and Supports.EBITDA margin was 18% same as in the comparable quarter last year. Cash generation and free cash flow were strong in the quarter. Arna will cover that later. And our leverage ratio is still an upper trend of our target range, and therefore, we continue to pause our share buyback program.To the next slide, please. Here, we have an overview of growth across our geographical and business segments for the year. Total sales amounted to $210 million in the quarter. And as I mentioned earlier, organic growth was 9%. And I'll cover the segments in more detail on the following slides.Starting with Prosthetics. Organic growth amounted to 9% driven by strong volume growth, positive solution mix and some price increases and performance was strong in all geographical segments and across our whole product portfolio. Our high-end solutions, especially the Bionics portfolio performed very well in the quarter accounting for 24% of Prosthetic sales.I would also like to highlight that in relation to our acquisition of FIOR & GENTZ, we'll be renaming our Prosthetic sales segment to Prosthetics and Neuro Orthotics to include the sales of FIOR & GENTZ, as of the first quarter of '24.Go to the next slide, please. Organic growth in Bracing and Supports amounted to 1% in the quarter. Growth in APAC was strong. And growth in EMEA was, let's say, modest, mainly driven by good performance in OA solutions and some price increases. Sales in Americas were impacted by changes we are making to our e-commerce channel in the region, as we had also communicated last quarter. These efforts are in line with our Bracing and Simplified strategy, which is aimed at providing our customers and partners with an increasingly simplified and stronger portfolio of bracing solutions.And then if we move on to Patient Care, where organic growth amounted to 12% here in quarter 4. We're seeing strong growth across all our markets driven by growth in patient volumes and positive solution mix. We were very pleased with this performance. I will, however, note that the growth in the quarter was notably strong and all else equal, we should not expect growth in Patient Care at these levels heading into '24.This -- yes, now this concludes the overview of the top line performance. Arna, if you can go through the P&L.
Yes. Thank you. Thank you, Sveinn. In the quarter, we have positive currency impact on our net sales. The reported growth was 10%. The gross profit margin was 61%, same as in the comparable quarter last year. The profit in margin was positively impacted by strong sales growth, favorable product mix and lower freight costs. However, gross profit margin was negatively impacted by unit costs being above normalized levels, partly attributed to change in supply chain and vendors for creating raw materials -- for certain raw materials and components.The investments we are making in scaling up our select manufacturing site have led to some temporary inefficiency that led to some cost increases. And mostly referred to as time-lag in reimbursement, where we have limited reimbursement rate increases in our clinics above inflationary cost growth. Going into 2024, we expect inflationary cost increase to ease, and we have initiated focused initiatives to increase productivity in manufacturing in 2024. The 3 largest cost drivers in manufacturing are labor costs, raw material and finished goods and machinery and housing.EBITDA amounted to $37 million or 18% of sales. Stable margin compared to same quarter last year. And in addition to the items mentioned impacting gross profit, EBITDA was positively impacted by operational efficiency and savings from streamlining announced in the fall of 2022, but negatively impacted by currency of about [ 50 ] basis points and inflationary cost increases.The effective tax rate was 21%. And I'm pleased to see that we grew our net profit by 49% in the quarter, but I should note that net profits were positively impacted by effects from associated companies and lower net exchange rate businesses.We go to the next slide, please. Cash flow was strong in the quarter with positive effect from net working capital. However, inventory remains high, mainly to secure bionic production in line with strong sales performance in Bionics, but also due to a buildup of Bracing and Supports products in the last 2 years due to the global supply chain challenges. Bionics inventory has normalized, and B&S, Bracing and Supports inventory is decreasing. We do expect inventory leverage to further normalize in 2024.Capital expenditures are high in the quarter, as they have been during the year, but CapEx investments are expected to normalize in 2024. The interest-bearing debt to EBITDA was 2.8x at the end of the year with a target ratio of 2x to 3x EBITDA. The ratio is in the upper end of the range, and therefore, we continue to pause our share back program. Also due -- also due to acquisition of FIOR & GENTZ in January 2024, the leverage ratio is expected to be temporarily slightly above the target range. All else equal, we expect to be back within the range in 2024.And that concludes our overview of the quarter and over to you, Sveinn full year discussion.
Thank you, Arna. For the sake of completeness, here, we have an overview of growth across our geographical and business segments for the full year. We ended the year with $786 million in sales and organic growth of 9%, with solid performance in all markets and business segments, and the EBITDA margin was 18%.We go to the next slide, please. Also for the sake of completeness here, you have the full year P&L. Again, reported growth was 9% for the year, same as the organic growth, where we had the positive impact from acquired growth, but negative impact from currency effect. The gross profit margin was 62% and EBITDA margin, 18% of sales, same as in '22 when excluding special items.As Arna went through in the review of the quarter, we had some positive effects from sales and product mix, but negative impact from higher unit cost than what we refer to as the time-lag in reimbursement.We go to the next and final slide on guidance. The organic sales growth outlook for '24 is expected to be in the range of 5% to 8%. The key factors impacting sales growth are expected to be contribution from -- yes, strong volume growth in all our segments, positive impact from product mix, impact from new product launches and some price increases in Prosthetics and Bracing and Supports. We expect minimal reimbursement rate increases for '24 and no impact has been assumed from the recent Medicare reimbursement coverage proposal due to uncertainty around timelines.The guidance includes estimated organic growth for FIOR & GENTZ, in addition of FIOR & GENTZ -- the addition of FIOR & GENTZ is expected to be accretive to our organic sales growth, which was also the case for Naked Prosthetics, which we acquired in '22, and therefore, both these companies are, you could say, accretive for our average organic growth profile.The EBITDA margin before special items is expected to be in the range of 19% to 20%. We expect positive impact from sales growth, positive product mix and also impact from focused initiatives to increase productivity in manufacturing, resulting in further normalization of unit costs, as well as accretive impact from the acquisition of FIOR & GENTZ.We do expect similar payroll increases in '24 as in '23, but less, you could say, inflationary cost increases across other input items. By applying the current FX rates, the EBITDA margin is expected to be negatively impacted by about 10 basis points in '24. We expect to also expand $1 million in special items in the first quarter of '24 due to the acquisition of FIOR & GENTZ. CapEx is expected to be in the range of 3% to 4% of sales and effective tax rate, 23% to 24%.Now that concludes the review of the quarter and the full year, and if we can go onwards to the Q&A session, please.
[Operator Instructions] And the questions come from the line of Christian Ryom from Danske Bank.
I have 3, please. So I think I'll take them one by one. So the first is on the sales development here in Q4 in the Patient Care division, whether there is any impact on [ phasing ] of sales in the number that we see here in the fourth quarter? I recall that after Q3, you were talking about that there were some markets in which you were experiencing delays in claims approvals. Have you seen those coming through here in the fourth quarter? That's my first question.
Yes. That's impacting our Patient Care sales probably about $2 million in the quarter.
Okay. And then second question is looking at the EBITDA margin for Q4, it's down by around 1 percentage point relative to Q3 despite a higher top line. Can you help us a little bit with what has been the sequential -- or the drivers in the sequential margin development?
Yes. Despite sort of a very strong top line here in quarter 4, our margin was a little bit below our expectations, as -- when compared to where we were as we closed quarter 3. And the main reason is, again, higher unit cost and higher production costs also in our Patient Care -- on the Patient Care side of the business. We -- and these are themes that have also been prevalent for most of 2024, where we are still catching up from the turbulence around the supply chain and changes that we have had to do on our -- in our manufacturing setup.So we are not as far as what we anticipated in the beginning of the year in terms of getting back on track with regards to our efficiency in manufacturing and cost -- on the production cost on the Patient Care side was also higher than what we had anticipated. And these are both, as we go into '24, we always equally expect this inflationary pressure to ease as well as going into sort of focused initiatives on our unit cost to improve efficiency.
Okay. And that probably leads well into my third and final question. So the margin outlook that you're providing for '24 and the margin expansion that is embedded within the assumptions there. To what extent do you expect that to be driven by gross margin recovery versus OpEx or increased leverage on OpEx?
Well, we expect -- I expect contribution on both sides, definitely improvement in gross profit margin, but also scalability on our OpEx side. On inflation, let's say, there is some spill or spill, or you could say that we still have above what is, let's say, normalized labor cost increases going into '24 sort of inflationary related. But sort of our margin guidance, obviously, assumes that we'll have a good top line, but that we will see progress on gross profit margin and some scalability on the OpEx side as well.
[Operator Instructions] We are now going to proceed with your next question. And the questions come from the line of Martin Brenoe from Nordea.
I also have 3, if I may. I'll take them one by one. The first question would be this Medicare draft proposal. Could you maybe just give us a bit more of your reflections of how much this could turn into in terms of market expansion and potential sales upside without specifying any dates or how much of it you actually expect to realize. Just to give an idea of that, what seems to be a breakthrough in that regard?
Martin, thanks for the question. Yes. This is a very big change in the industry if this goes through, and this would be the biggest change in access for amputees in terms of better or access to better mobility solutions that we've seen in decades. We are cautious with regards to commenting on, let's say, what is -- what impact this will have on market size and growth until we know more about the details and time lines, et cetera. But what I can though say is we just look at Medicare data today, and Medicare is the -- we estimate to be the biggest, let's say, ultimate payer or when it comes to Prosthetic solutions in the U.S. market, single pay area.And if you look at the total value of -- let's say, in terms of volumes of claims, the K3 patients are about half of all volumes, but constitute 80% to 90% of all payments made. So if we are assuming that the K2 or the lower active part of the population has similar access, as the higher active part of the population, we should see quite a significant expansion in the overall size of the market. But again, we are cautious in terms of being too specific until we know more details.
Okay. I'll jump to the next question. In terms of the margin development that we've seen over the past few quarters, it seems that there's a bit of a trend that there are some bumps on the road that's making it difficult to predict the margin development. Can you maybe give me some feedback on whether that's improving in terms of the visibility or if it's the same that you are able to see out there in terms of the supply chain disruption, the unit cost that you have all these things combined would be quite interesting to understand from my perspective.
Yes. I would say that our transparency and predictability is there. However, we've gone through a year with unprecedented inflation levels. And the 2 biggest items that have -- or let's say, the main themes that have been prevalent on the gross profit margin side throughout the year have been unit cost in our product manufacturing side. And then also on the Patient Care side, we have seen both labor cost inflation and inflation in all input prices exceeding increases in reimbursement levels in most of our markets. So these have been 2 topics that have obviously impacted our cost here in 2023.And -- but it's also important to take into consideration the cost or the streamlining initiatives that we executed end of '22 that have sort of contributed to us protecting our margins here in '23. And ultimately, the root cause for the inefficiency on the manufacturing side has been pre-COVID, we used to have a lot of single supplier relationships with critical vendors that, if you remember, caused some of these delays in us launching some of our flagship products in '22.And we have been working through those changes, onboarding new suppliers, which has impacted our operating rhythm on the manufacturing side, and we have a big job to do to get back on track here in '24. And we are confident that we will do that as well as we'll see inflationary pressure ease. And assuming we have good volume growth or continue to have volume growth in our Patient Care business, we should see more scalability and more leverage on our overall cost base, which is part of the underlying assumptions for how we [ positioned guidance ].
Okay. That's very clear. Sveinn, and just the last question, and then, I promise I'll jump back in the line. When you say that you expect some moderate price increases in 2024 how -- what does moderate mean in terms of a more quantitative measure? And how confident are you that you are able to increase prices during a time, where we actually see that the inflation is coming down and the whole system seems to be more pressured compared to 2 years back, where it seemed to be more easy to get through with the price increases with...
You're absolutely right. I mean, price increases now compared to the beginning of last year, it's a different environment and inflation is [ going ] down rapidly in all of our major markets. And in each and every country, it's always -- the point of departure is what is the underlying reimbursement system doing. For example, in the U.S., the way we understand price increases there is that Medicare will increase prices maybe 1%. In some of our markets in Europe, there is -- there will still -- no price increases have been communicated. So we expect modest price increases on the product side, maybe around [ 2-ish percent ] is what is our -- is our baseline assumption higher in some markets, lower in some other markets.
We are now going to proceed with our next question. And the questions come from [ Yiwei Zhou ] from SEB.
I have 2 questions left here. I'll do one at a time. Firstly, can you just want to follow up on this profitability in the Patient Care. I recall that in previous quarters, you also mentioned that this time-lag increase in the reimbursement. What is your expectation now? Could you give an update on this? And yes, I do next question later.
Yes. What we have said around reimbursement increases, we did see some reasonable increases, for example, in the U.S. in '23 in some of the European markets. But in markets, where we have quite extensive patient care operations, we've not yet seen an adjustment in line with the underlying inflation, which has put some temporary pressure on, let's say, the margin that we generate in that part of our business. We do expect, although nothing has been confirmed yet, we do expect some price increases in some of the big European markets, but as this will become clear, as we get a little bit further into the year.So what we mean with this time-lag is basically ultimately, we expect some alignment on the pricing side from public payers. But in the meantime, obviously, this will and has impacted our gross profit margin on the Patient Care side. The fact that we are having to absorb both labor cost increases and increases in pricing on all our inputs and are not able to pass that on. But again, as we go into an environment with less inflationary pressure, again, assuming continued strong patient volumes, we will, just from the scalability we have in the underlying business see margins gradually get back on track.
And can I just follow up here. So while looking at the 2024 margin guidance and how much of the margin improvement were dependent on the -- this increase in the reimbursement?
Well, we've guided in the range of 19% to 20%. We have not assumed any significant price increases from public payers into these numbers, not at all. I mean, it is -- the underlying assumption for the margin guidance is principally that we deliver a solid top line and deliver underlying productivity increasing and principally our production setup, as well as scalability on the OpEx side.
Okay. And the next question is regarding the freight rate. It has been quite a volatile in Q1 than actually the last 25 days. What do you see -- I mean, any impact in the short term?
No. I mean, yes, you're right. I mean, the freight rates have increased short term. This is not -- we have not factored any significant change in freight rates into our forecast, no.
And you haven't seen any -- you haven't seen much impact as in previous years, just wanted to clarify?
Well, we've just observed the increase here in the short term in the spot rates, yes. But due to the turbulence around freight -- [ freights ] in general. But no, we haven't assumed any change, let's say, from average '23 levels for our '24 forecast. No, any material change.
We are now going to proceed with our next question. And the questions come from the line of Niels Granholm-Leth from Carnegie.
Could you firstly talk about the contribution on your organic growth of [ '23 ] from Naked Prosthetics? And secondly, could you talk about your anticipated contribution on margins, growth for that matter from FIOR & GENTZ in '24. I'm sure, we can do the backward calculations ourselves. I just wanted to hear where you would arrive on this? And then lastly, could you briefly comment on your M&A pipeline?
Yes. Niels, thanks for those questions. I mean, Naked prosthetics was an acquisition similar in nature as FIOR & GENTZ a solid or a great product that we aim to bring to market through our global infrastructure and the expectation was that this business would grow strong double-digit, and that's what it's done here in '23, therefore, contributing positively to the overall picture.And the same, let's say, with regard to our expectations for FIOR & GENTZ, we communicated that business -- the turnover was expected to be around $23 million for '23, and we expect that business to grow strong double-digit growth rates in line with historical growth rates over the last couple of years, which has been around 14%. And that's what we baked into our guidance for 2024 that this will be accretive for both our organic growth profile around 30 basis points, and actually the same for margin, approximately accretive around 30 basis points. The FIOR & GENTZ business has an EBITDA margin of around 30%.Does that...
Yes. Great. And then, perhaps just to follow up on FIOR & GENTZ, when would you expect to bring the company's products outside of Germany?
We are in the process of prioritizing, let's say, that -- I mean, at the end of the day, we have relationships with O&P clinics in a global context that serve patients with neuromuscular complications when it comes to mobility levels. So we will focus on our biggest European markets, that's the focus in 2024, and that work is well underway.
And will this encounter additional buildup of sales capacity in new markets that will -- I guess, that would be included in your margin guidance already. But...
Yes. Yes, that's included in our margin guidance already, and there will be some investment in focused commercial capacity to, let's say, make sure we address the large opportunity that we think we have to bring these solutions to more patients.
And then lastly, on your M&A pipeline.
Yes, sorry. We do continue to have a pipeline. Obviously, we are -- we will now with the -- as we have funded the FIOR & GENTZ acquisition, we will temporarily again go above the upper end of our guidance range when it comes to net debt to EBITDA. But we continue to manage our pipeline, which is a combination of, you could say, product companies that strengthen our portfolio and also on the Patient Care side. But we are -- yes, I mean, we -- for now, and we were above the range, and we would most likely not go much higher until maybe later part of the year, as cash flow contributes to the decline ratio.
We are now going to proceed with our next question. And the questions come from the line of Martin Brenoe from Nordea. Hello, Martin, your line is open. Go ahead with your question.
Sorry, I think I was muted here. But thank you very much for taking my question. I just wanted to follow up on the last pipeline -- M&A pipeline question here. With the leverage being around the high end of your target range, you are a bit constrained in terms of how much you can execute on? Are you looking to raise capital in the case that you see a good target that you want to execute on? Or do you exclude that completely?
We have not -- we have no plans of -- around that. And we have been clear in terms of just our overall approach to M&A. We expect to -- as we communicated around our Capital Markets Day last year, we expect to generate 5% to 7% organic growth and on top of 2% to 3% M&A driven growth and that's on average over these 5 years. So we'll continue to manage and build our pipeline in terms of potential acquisition targets that strengthen our ability to execute.But at the same time, we need to pace ourselves with regards to ability to integrate and all these aspects and maintain our capital structure within the parameters that we have defined. But, of course, I mean -- and we've always been, I think, [ clearer ] on that as well that if -- that we can temporarily go above the range. But that is also -- I mean, we want -- we don't want to stay permanently above the range. So we expect strong cash flow this year that will bring us within the 2x to 3x range, and we should have ample cash flow to be able to do the deals that we want to do.
We have no further questions at this time, please continue.
Excellent. Thanks a lot for your participation here this morning. And if there's any follow-up, please reach out to our Investor Relations team if you have any questions or follow-up or a request for a meeting. But otherwise, I'd like to thank you for participation this morning, and have a nice day.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now all disconnect your lines. Thank you, and have a good day.