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

Good day, and thank you for standing by. Welcome to the Össur Q2 Results 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sveinn Solvason, President and CEO. Please go ahead, sir.

Thank you very much. I would like to welcome you to the Össur investor conference call where we will cover the results for the second quarter of 2022. My name is Sveinn Solvason, and I am the President and CEO. We will go through the highlights for the quarter and a question-and-answer session will then follow. Now sales amounted to $181 million, which corresponds to a negative 1% organic growth. Sales growth continues in EMEA and all key markets in APAC, except for China. And it's good to see that Australia is now back on track in the quarter. As projected, China was impacted by the COVID-19-related lockdowns, and we continue also to suspend our sales to Russia due to the ongoing war. Sales in Americas were slower than expected. Net sales were affected by the -- sort of the supply chain challenges that we'll elaborate on later and as well as some capacity constraints in the market overall due to mainly labor shortages. We foresee that the supply chain cost inflation will further increase cost of goods sold then for the full year than what we estimated at the end of last quarter, an additional $2 million. Now we implemented sales price increases in quarter 1 and seek to increase prices further in '22 and mainly in '23 which are eventually estimated to absorb the increases we see in our unit costs. EBITDA amounted to $33 million or 18% of sales. Now as per our announcement on Monday, 18th of July, we revised our organic growth guidance and EBITDA margin before special items for the full year, and we will go through that here towards the end. Now if you go to the next slide, please. Looking at sort of the sales by geographies and product segments. Prosthetics sales declined 1% organic, and again mainly due to the softer sales in America and some of the supply chain complications. However, sales were quite strong in most of our key markets in EMEA or continue to be strong in our key markets in EMEA and APAC besides, as previously mentioned, China. Now sales of bionic products accounted for 18% of Prosthetics component sales in the quarter compared to 19% in the comparable quarter last year. The Power Knee continues to receive outstanding feedback and is in -- and is in high demand. But again, due to shortages of certain electrical components, we have experienced or experience back orders on the Power Knee and this has affected our bionic sales here in quarter 2. Bracing & Supports sales declined by 1% organically. Sales of Bracing & Supports products were good in EMEA and APAC, while the macro environment in America seems to have negatively impacted volumes of elective procedures which, yes, ultimately has impacted volumes in the Bracing & Supports market. Now going to the next slide, please. A few comments on the P&L. As previously stated, 1% negative organic growth, and reported growth in dollars, down 5%. And there are major changes in FX rates impacting our reported dollar sales amounting -- or the impact is about $12 million compared to same quarter last year, which corresponds to around 6 percentage points effect from currency changes and is again mainly due to a stronger dollar versus the euro and other key operating currencies for Össur. The gross profit margin reflects the sort of environment on the supply chain, mainly affected by increase in unit costs due to higher freight costs and inflation and raw material prices. It's, as in previous quarters, high ocean and air freight rates as well as our increased use of expedited freight, both sea and air, to support production and demand. These are the main drivers. Then we have also now experienced some softness of certain components which has also had some -- raw materials which has also had some negative impact on our productivity. But we are working hard to optimize the situation. OpEx is rather flat in the quarter. Effective tax rate, 24%, around the level we have guided for. Net profit, impacted in dollar terms by the previously mentioned items, amounts to $14 million or 8% of sales. Now if we go to the next slide, please. Here, we have some trends for the last 6 quarters. I want to highlight particularly the cash flow, which was -- free cash flow was very low here in the quarter in all comparison. The main reason here is we do have some -- some -- a little bit higher AR than normal. Normally, AR is high after the month of June, which is a big sales month for us. But the DSOs have come up a little bit, but this is something we expect to normalize. Now the main reason for the -- for the sort of low cash flow is that we are -- have been building inventories, and both raw materials and finished goods, as a means of building up higher safety stock due to uncertain environment around the supply chain. And it's also worth mentioning that during the COVID time, we did reduce capacity also with some of our finished good vendors and it has taken time to build that up again. And we have -- and we are sitting on some high inventories now for particularly finished goods around Bracing & Supports that we sourced from finished goods vendors. Now net interest-bearing debt amounted to $367 million at the end of the quarter and net interest-bearing debt or EBITDA was 2.7x, which is within the target range of 2 to 3x. We go to the next slide, please. The financial guidance for 2022 has been revised, as previously stated, due to now lower-than expected sales and higher-than-expected supply chain costs for the full year. The financial guidance for 2022 is 4% to 6% organic sales growth, previously 6% to 9%; and 18% to 20% EBITDA margin before special items, previously 20% to 21%. Currently, it is our estimate that organic sales growth and EBITDA margin before special items for the full year would be around the middle of the new guidance range. The revised financial guidance assumes that quarter 3 and quarter 4 will be largely unaffected by any, yes, further disruptions as a result of COVID-19. In addition, at current FX rate, sales are estimated to be negatively affected by around -- or let's say the U.S. dollar reported sales are estimated to be negatively affected by around 6 percentage points for the full year. And also by applying the current FX rates, the EBITDA margin is expected to be, yes, negatively impacted by about 40 basis points when we compare to full year '21. Other items of the guidance are unchanged. CapEx is expected to be in the range of 3% to 4% of sales. And based on the current mix of taxable income, the expectation is that the 2022 effective tax rate will be in the range of 23% to 24%. Now that concludes the review of the second quarter. And if we could, yes, open up for Q&A, please.

[Operator Instructions] Your first question comes from Yiwei Zhou from SEB.

Can you hear me?

Yes, we hear you.

Great. Just a quick question here on China. Could you elaborate a bit more on the Q2 performance? And maybe also, what is the assumption for China for the beginning of the year? And we can see there are still some regional lockdowns. And do you expect the same level of impact in the second half as you have seen in Q2?

Thanks, Yiwei, for that. China was more impacted in quarter 2 than we anticipated in the beginning of the quarter. We did expect to come back or the business to come back earlier, but we only opened our warehouse in the first of June which is situated in Shanghai and was closed for -- up to 2 months. And we are very sort of cautious about quarter 3. As you mentioned, there are some uncertainty around potential lockdowns. So yes, we are uncertain about that. And our assumption is that we will be more closer to normal in quarter 4. But again, I think the -- what we're mainly focused on here is that -- is that we believe the business will normalize. And we've seen that, for example, in Australia, where we were very hard hit by COVID and now we seem to be back on track full year. So yes, we're cautious around quarter 3 for China.

Okay. Okay. And if I'm allowed, my second question here is regarding the second half, if we look into different business units. And so the first half, you delivered only 2%. And now you are guiding for 6% for the full year. That sort of imply you would need to deliver a very strong second half. So how should we look at different -- the contribution from different units in Q3 and Q4? Could you maybe comment a bit more and just give us more indication on your assumption?

Yes. Yes. Absolutely. One thing to keep in mind is that quarter 3 and quarter 4 were quite a lot impacted last year by COVID, with the Delta variant impacting sales quite significantly in quarter 3 in all markets, but also somewhat quarter 4. So that's one thing to keep in mind on the comparison. And also keep in mind that quarter 2 last year was sort of a pause from COVID. So we're somewhat up against a little bit tougher comparison here in quarter 2. But other things to look out for is, for example, our ability to solve the supply chain complications around the Power Knee. We have sold the Power Knee for a few million dollars here in the first half of the year and have a strong pipeline of demand for that product. We estimate the Power Knee to be in the market towards the end of August. So this doesn't -- let's say, I think these are some of the things to keep in mind. And sort of -- and given our best estimate of how we look at the business today, we will end the year within this guidance range.

Okay. Just want to follow up on the Power Knee. Could you remind us what is -- just given the back orders, what is your assumption for the sales contribution from the new products for this year?

Our original assumption was that the Power Knee could contribute, yes, $4 million to $5 million in sales for the year. But best case scenario is higher than that given sort of how the demand side has developed, so -- but it could be sort of somewhat above that if we are able to solve the situation around the missing components.

[Operator Instructions] And your next question comes from Thomas Bowers from Danske Bank.

Yes. I hope you can hear me, my line is breaking up a little bit here, so -- but I just have a question regarding the U.S. So just on second half, how do you see the outlook now for elective procedures? Have you seen some early improvements here in late Q2, early Q3? And then secondly, just on -- I mean, what is it actually that you don't see -- why you don't see a positive or at least sort of a neutral impact in Bracing & Supports in the U.S. from elective procedure delays? Because I know, of course, you have -- that's both pre-op and post-op products. So I also would assume that delays in elective procedures also would maybe have some sort of positive impact on the pre-op products. So can you maybe just give us a little color on how to understand the impact for B&S here.

Thomas, you came through clearly. Yes, on the elective procedures and volumes in Bracing & Supports, I mean what we see in our data is that volumes came down from approximately middle of quarter 2. And our, let's say, read on that situation is sort of tied back to the overall macro environment where -- because, let's say, the user of a bracing product -- as the reimbursement system is structured in the U.S. to -- let's say, it has a cost impact for people if they don't sort of -- it depends on how their overall health care cost will look like for a year. So as you get closer to year-end, people have more visibility on their overall health care cost. Hence, there's an assumption that, let's say, with people having more visibility, that could sort of have some impact on volumes or positive impact on volumes here towards the second half. But I want to -- this is a little bit anecdotal and just the feedback that we get from the market. Now bracing volumes just -- or again a reminder, as I sort of said on the previous question, that volumes were also impacted quite a bit in quarter 3 and quarter 4 last year from COVID. So we -- we are sort of -- yes, we're cautiously optimistic that we'll see more positive trends in bracing volumes here towards the latter half of the year.

[Operator Instructions] And your next question comes from the line of Benjamin Silverstone from ABG SC.

Sveinn, Edda, I have a question in terms of the sales for Q2. We do know that the American and APAC markets were dragging the overall group down. But could you give us some nuances as to how the emerging markets has been doing? And then the same question is regarding the cash flow for the rest of the year. Are there any sort of elements we should be extra focused on going into H2?

Benjamin, thanks for that. On the emerging markets, we have sort of -- our emerging market, sales are approximately 10% of overall sales if we just pull out what we consider as emerging markets from the 3 reporting segments that we are working with. Now our emerging market sales are doing very well. We have very solid growth in every market, except China, which we categorize as part of that segment, has held things back for obvious reasons. It is -- but it is also worth noting that we have, in some of these markets, like we have very, very high inflation and are pacing our unit cost at the same rate as these inflation rates. But I would say we're very happy with the progress in the emerging markets and we went direct in 6 new markets last year and this is contributing in line with plans. Now with regards to the cash flow situation, what I would say here is if we look at the year as a whole, I wouldn't expect any structural changes around payables or AR, but I assume a step-up in inventories which -- we could go a little higher on inventories. But for other items, I would not assume any structural change. So that should give you something to work with.

[Operator Instructions] There are currently no further questions, sir. I will hand the call back to you.

Thank you very much. And thanks to everyone who called in and for your participation and look forward to talk to you next time after quarter 3. And if there are any questions come up, please don't hesitate to reach out to our IR team. And have a nice summer. Bye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.