Embla Medical hf. (EMBLA) Earnings Call Transcript & Summary

Yes, thank you and good afternoon. Thank you for joining, all, us on this conference call where we will cover the revised guidance for 2019 based on the preliminary figures for the fourth quarter of 2019. My name is Jón Sigurdsson. And with me here today is Sveinn Sölvason, our CFO. We will begin with a short overview, after which we will have a question-and-answer session. We are today revising our financial guiding for the full year of 2019 due to the lower-than-expected prosthetics sales in the fourth quarter. Preliminary results suggest that sales in the fourth quarter of 2019 amounted to $180 million, corresponding to 1% organic growth and 10% local currency growth. Sales for the full year of 2019 therefore amounted to $686 million, corresponding to 5% organic growth and 16% local currency growth. EBITDA before special items for the fourth quarter of 2019 amounted to $37 million or 21% of sales. EBITDA before special items for the full year 2019 amounted to $150 million or 22% of sales. It should be noted that these results have not been audited. Based on preliminary result, we now expect organic growth about 5% for 2019 and EBITDA margin before special items about 22%. Other guidance parameters remain unchanged. The reasons for the soft sales in the fourth quarter are mainly due to lower-than-expected sales to a large customer in Americas region and soft sales in some of our key markets. We would like to highlight that we consider the soft sales performance in Q4 to be of a temporary nature. In sum, the preliminary results for the quarter are disappointing. However, sales for the full year are strong with a growth of 16% in local currency; and 5% organic growth, which is at the upper end of our range for estimated market growth of 3% to 5%. Furthermore, despite a temporary slowdown in prosthetics sales in the fourth quarter, our market position continues to be strong, and we expect continued organic growth in 2020 in line with or above estimated market growth. Profitability was lower than we expected in 2019, which can largely be attributed to lower-than-expected sales in fourth quarter. In 2020, we do however expect continued gradual increase in underlying profitability with boost in product mix, scalability and savings from our ongoing efficiency initiatives. And having said that, we will provide more details on the financial guidance for 2020 when we publish our annual report as schedules on the 4th of February 2020. Now let's go to the question-and-answer session.

[Operator Instructions] And our first question is from Thomas Schultz Bowers from Danske Bank.

Just a couple of questions here from me. So in regards to the impact here going into 2020 and given that you see sort of a temporary nature with this U.S. customer, should we still, first of all, expect orders from this customer? I guess should we expect the relationship to be -- to maintain? So what's the reason for this? Is it just delays, some inventory stuff? So even could this become a boost to your Q1 sales potentially? And then maybe -- you highlighted it to be sort of a mix between EMEA, APAC softness and then this U.S. customer, so I'm just trying to figure out here the split. So how much impact from the U.S. customer? And how much is EMEA and APAC? And then maybe finally, just could you add on some colors on to any -- is it related to any specific products to -- within prosthetics that you have seen some -- both again in regards to the U.S. customer and also in rest of world? So maybe, yes, any emerging competition here that has impact somewhat in Q4?

Okay. This is basically you have 3 questions, okay. So let's start with the customer. Obviously, we don't want to go too much into detail in specific customers, but having said that: You asked specifically whether this would carry into 2020 or maybe this will be compensated somehow in 2020. We believe -- we don't believe so. We believe that this will be -- this will carry into 2020. And we would -- we think about $2 million per quarter for 2 or 3 quarters, but then it's -- then we don't expect that to have any effect anymore. On -- you asked about EMEA and rest of the world, and what's specific there is just that there's the overall softness. And we have no reasons to think that there is any shifts in the market, but this is just one of those quarters that everything goes against us. And you mentioned whether this was a one product or was -- if that was product related. The answer to that is no.

And our next question is from Christian Ryom from Nordea Markets.

Just a couple of questions from me. So first is just whether you can clarify whether -- the impact with your U.S. customer, whether that's only related to the prosthetics business; and also, this $2 million per quarter that you are talking about in adverse impact for the coming quarters, whether that will only be prosthetics or whether there is also some impact on your bracing and support business. And then as a secondary question to that, this softness that you've seen in the APAC and EMEA regions and how that splits between the 2 business areas? And then finally, my -- a question to your commentary on the 2020 outlook. You say that you anticipate to grow in line with the market or slightly faster. Can you just confirm that your expectation is still market growth of 3% to 5%?

Yes. Christian, thanks for this. Yes, the $2 million that we expect to carry into the first 2 to 3 quarters of the year is on the prosthetics side. The softness, sort of the general softness across our key markets is obviously with EMEA weighing or being a proportionately bigger part of our portfolio that has a bigger, bigger impact. We have growth in emerging markets, decent growth in emerging markets, in the quarter, so it's mostly across the main EMEA markets that has perhaps the biggest proportional impact. On the 2020 outlook, what was the question exactly? I can't...

[ He asked ]...

Yes, the -- yes, yes. [Audio Gap] the number is still 3% to 5%. That is our view on the average market growth rate for our current portfolio. So our -- we -- our specific comment in the announcement is that we expect our organic growth rate to be within that range or slightly above.

And our next question is from Benjamin Silverstone from ABG Sundal Collier.

So my first question is regarding the EBITDA. And just how come the downgrade in EBITDA is quite material compared to downgrade in the top line? And the second one is regarding -- I know you don't mention the names for the customer in the U.S., but if it's one big customer's, there is not that many of them, yes. And we do have [ Hanger ], for example, who is public traded. And we can see that their sales of prosthetics have been quite steady, so how -- do -- are you guys certain that this might be a one-off? Or is this maybe a scenario where competitors have taken market from [ Hanger ] -- or the large customer in the U.S.? I'm sorry.

Well, let me start with the last one. We do not say this is a one-off. We say that this will continue into the next year, but of course, we don't know. And we don't want to comment on specific customers. That's your guess and -- but as I said, we do not think that this is a one-off. We said that this will...

Yes, $2 million...

$2 million approximately per quarter over the next 2 to 3 quarters.

And just to add to that. I mean fundamentally there is no change in the market. The demand is -- for our products is unchanged, pricing, reimbursement. There are no changes in that regard. So just -- so we all keep this in perspective. On the EBITDA comment, yes, you're right. I mean the shortfall in EBITDA is largely due to slow, let's say, growth in quarter 4. We're only growing 1% organically. And what we're missing on sales -- its sales drops straight down to our bottom line, so that is -- so all else equal, I mean, we -- yes, we're slightly more off on the EBITDA margin than on the sales guidance, but it is pretty much due to just the drop in top line.

[Operator Instructions] Our next question is from Niels Granholm-Leth from Carnegie.

Getting back to the question about the effect on sales and EBITDA. Since the EBITDA effect is bigger than the sales effects, I presume there must be some kind of cost overrun in the business. And so I mean, how is the profitability in the service clinics that you have recently acquired? How is that performing?

Yes, you're right, Niels. I mean cost is [ slightly ] higher than -- let's say, than our expectations, but that is not the big picture. Big picture is the top line. And again, because -- and like we've communicated before, prosthetics is, all equal -- all else equal, more profitable -- is the more profitable part of our business, so the proportional impact is perhaps higher. And some slight negative impact on gross profit margins as a result of that, but -- and again -- and on the clinical sites, those companies are performing in line with our expectations. That is not the sort of the variance.

So when it comes to the EBITDA margin guidance for 2020, and since this will continue into next year, should we interpretate this in a way where the 22% run rate will continue into '22 -- into 2020?

Let's say, when it comes to margin, we've been pretty -- let's say, our -- we expect continued improvement in our underlying profitability. Where we'll end up for 2020 will largely depend on, let's say, our M&A pipeline because, all else equal, the companies that we are acquiring have a lower EBITDA margin than Össur's. But what we see for 2019 is that the -- let's say there is this continued gradual margin expansion that has, however, been neutralized by the impact from acquiring companies with a lower operating margin. So we continue to expect, let's say, underlying improvement in our margins, but let's say the end result will largely depend on the development of our M&A pipeline.

Yes, but if I remember correctly, you did consolidate more of your service clinics into your P&L in quarter 4, so your -- the contribution from service will be bigger in 2020 compared to 2019.

Yes, but that -- sort of let's say the impact in quarter 4 is maybe less. That's about -- yes, we'll go into more details with this in the full year when we release the full year numbers, but that's not of the magnitude that that's going to fundamentally change our trajectory.

Okay. And then just finally, any update on the acquisition process of College Park?

No, we don't have any -- I mean we are cautiously optimistic that we can bring that to conclusion within, well, let's say, a few weeks. I don't -- but we are cautiously optimistic.

And our last question is from Yiwei Zhou from SEB.

I have 2. Firstly, is it possible for you to give us the indication on the Q4 gross margin? And secondly and just come back to the question on the one customer in the U.S., could you confirm that the pricing with this customer has been stable? And also, could you also give indication about the U.S. market and prosthetics business?

No. Okay. So we are not prepared to give you our gross profit margin for Q4 now. I mean we will do that in due time...

But it would largely be in line with market, with no material...

Yes, yes. It's in line with market. Not a material difference. Stable price on -- we do not want to go into that. And your -- the third question was then the general market in U.S. There is nothing in the market in U.S. -- I mean the reimbursement is the same. The demand for our products is the same. I mean we don't see any fundamental change in the U.S. market.

And as there are no further questions, I will hand the word back to the speakers for any final comments.

Okay. Thank you very much for participating. And we'll hear again at February 4. Thank you very much.