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Good day, and thank you for standing by. Welcome to the Össur Q3 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 and Gudny Arna. Sveinn, please go ahead.
Thank you very much. I would like to welcome you to the Össur investor conference call where we will cover the results for the third quarter of 2022. My name is Sveinn Solvason, and I'm the President and CEO. And with me here today is Arna Sveinsdottir, our CFO.
We will go through the highlights for the quarter and a question-and-answer session will then follow. If we go to the next slide, please. Sales amounted to $177 million, which corresponds to 4% organic growth. Sales were strong in APAC, both in China after lockdowns in quarter 2 and in Australia, which is retaining ground. Sales growth in Americas was driven by strong prosthetic sales, while after many quarters of strong growth sales in EMEA were softer than we had anticipated.
We were very pleased to announce that we closed the acquisition of Naked Prosthetics in August. Naked Prosthetics is a market leader in mechanical finger prosthesis and the acquisition strengthens our position in the upper limb area and allows us to address a broader group of individuals that need prosthetic solutions. Last year, Naked Prosthetics sales amounted to $9 million. [ Supply chain challenges continue to have a short-term negative effect on our productivity and product supply as well as we're still facing shortages of certain raw materials and components. We continue to see some inflation in raw material prices, while trade cost is gradually declining. We implemented sales price increases during the year and will increase prices further in 2023.
To support further growth and profitability, we made organizational changes and initiated cost savings in the quarter as well as specifying our operations to better leverage key strategic locations. The early cost savings are estimated to be around $15 million. We proceed to reinvest around 1/3 of the cost savings into our -- mainly into our emerging markets platform and our digital turn.
EBITDA before special items amounted to $35 million or 20% of sales, and Arna will later elaborate a little bit more on finance. Price increases, normalization of supply chain cost, cost inflation and the cost savings initiatives are key focus areas. Our view remains that underlying profitability will remain intact, but subject to some fluctuations as we've seen this year.
If you go to the next slide please. Here is an overview of the growth in our 3 regions and product segments. Prosthetics sales increased by 4% organic, driven by sales growth in Americas and APAC. The Power Knee continues to be in good demand, although we face raw material and component challenges to keep up the manufacturing or unit manufacturing that we would like to. Sales growth in Americas and EMEA was particularly affected by the discontinuation of the outsourcing contract with the Department of Defense in the U.S., which we announced in the beginning of the year and the continuous suspension of sales to Russia due to the ongoing war in Ukraine.
Adjusting our geographic segment for this extraordinary topics, organic growth in Americas would have seen 6% and mechanic growth in EMEA would have been 5% and total organic growth 7% compared to the reported 4% organic growth rate. Sales of bionic products accounted for 22% of prosthetics component sales in the quarter compared to 20% in the comparable quarter.
Operating and support sales increased by 2% organically. Patient volumes have fluctuated, adversely affecting mainly the demand for Bracing & Supports products in our Americas segment.
Over to you, Arna.
I will go through the P&L highlights. Organic growth was 4%, as previously stated, and reported growth was negative 2% in the quarter. The profit sales were negatively impacted by $14 million due to the currency movements, which corresponds to around 8 percentage points negative effect on the reported growth rate. The adverse FX impact is primarily due to strengthening of the U.S. against euro and other key currencies.
The gross profit margin was 61% in the quarter, but 63% excluding special items, mainly due to the aforementioned cost initiatives. Cost of goods sold is estimated to be affected by $14 million in 2022 due to higher freight costs and inflation in raw material prices compared to the pre-pandemic levels. We saw freight rates coming down this quarter but later than we had anticipated. We are also still making use of expedited means of freight as we are emphasizing supplying our products and solutions. In addition, productivity in our manufacturing operation has also been impacted negatively by the supply chain turbulence. However, we expect this to normalize as supply chain challenges subside.
Operating profit was $21 million. EBIT adjusted for net special items amounted to $35 million or 20% of sales. Net special items cost amounted to our USD 40 million, mainly due to the cost saving initiatives. The effective tax rate was 22%. Net profit amounted to $7 million or 4% for sales.
Go to the next slide, please. We have historical trends for the last 7 quarters. Cash flow has been impacted during the year by the supply chain situation. Buildup of inventory, both for outsourcing finished goods of Bracing & Supports products as well as buildup of safety stock and delayed raw material delivery. Free cash flow amounted to $12 million or 7% of sales. The net interest-bearing debt amounted to $382 million at the end of the quarter and the net interest-bearing debt to EBITDA was $2.8 million, which is within the target range of 2 to 3.
In line with our capital structure and capital allocation policy, we have temporarily paused share buybacks as we are at the upper end of the target leverage range. Over to you, Sveinn.
Thank you, Arna. The financial guidance for the full year 2022 remains 4% to 6% organic sales growth and 18% to 20% EBITDA margin before special items. Currently, we estimate that our organic sales growth and EBITDA margin before special items will be around the lower end of the guidance range.
By applying the current FX rate, the EBITDA margin is expected to be negatively impacted by about 50 basis points for full year '22. CapEx is expected to be in the range of 3% to 4% of sales. And based on the current mix of taxable income expectation is that for 2022, effective tax rate will be in the range of 23% to 24%.
That concludes the review of the third quarter. Let's go to the Q&A session, please.
[Operator Instructions] And it comes from the line of Yiwei Zhou from SEB.
I have 2 here. And firstly, on the component shortage. Sveinn, could you please indicate the impact from this? And could you also elaborate a bit on the back orders? So when do you expect it to be delivered? And I'll do one at a time.
All right. Yes, on, let's say, the main issues we have faced on the component shortage on the electronics side, chips, batteries and circuit board, our estimated -- if we would have able to produce to demand on the bionic side, our cost base in the quarter would have been [indiscernible] from $2 million to $4 million. Higher in a normalized situation, let's say. I will though also say that, in general, the supply chain is a bit tighter. And I would say the situation is not faster than it was 3 months ago. But we have -- we're still able to keep producing to demand across the [four] market with the exception of [indiscernible].
Can I just follow up here. Last quarter, you also mentioned there was back orders. Could you indicate if back orders have been increasing at the same level?
It's pretty stable.
Okay. And my next question is regarding the freight cost, because we have seen a big ease in the global freight market. But why haven't you seen this benefit? And I can see your estimate on your cost headwinds here in the report, you estimate in Q3 actually increasing compared to last quarter on this freight cost. Could you elaborate it here?
Yes. Freight costs have come down and are going down, let's say. And we had anticipated to see a slightly bigger impact. We are -- there is some delay in the spot rates you see and the rates that we secure on a 1- to 2-month forward basis. That is one thing. The other thing is that we are bringing in much more volumes than we will bring in the comparable period last year. Last year, we were still ramping up, especially our vendors, Asian vendors for finished goods in Bracing & Supports. So the units were much lower. So we're bringing in much more volume today after having ramped up manufacturing.
You can also see that in our inventory numbers, that inventory has gone up significantly just for you to cross reference that argument. But we expect to see a benefit on the freight side. What is also having a negative effect on our freight cost is that we are having to use expedited airfreight to bring in raw materials into our manufacturing locations using expensive air and expedited sea freight as well. So this all ties back to the tight supply chain.
[Operator Instructions] There are no further questions at this time. Please continue.
Operator, can you give us a few seconds to record further questions.
We have one further question now. And it comes from the line of Christian Ryom from Danske Bank.
Yes. This is Christian Ryom from Danske Bank. Just a question on how to interpret the cost savings that you are now implementing. So net of reinvestment, I understand that you expect to be realizing cost savings of around USD 10 million for next year or roughly 1.5 percentage point on the EBITDA margin. So what should we use from -- as a starting point, should we basically expect that to be incremental to where you expect the margin to end this year? Or how should we think about the impact of these cost savings?
Christian, that's a good -- that's a key question. And I'll give sort of thank you about the big picture over here. I need to tie it back to both, let's say, pricing and unit cost and then ultimately what we expect in inflation on our labor cost. So going into '23, I will not be able. Let's say, expectation on margin in '23, you will have to wait until we guide for next full year. But we will -- we expect to realize price changes north of the price changes that we have implemented here in '22.
Then on the unit cost side, we do expect unit cost to taper off somewhat from having peaked earlier this year, where freight is expected to decline. And also as we -- as, let's say, the supply situation normalizes, we expect our productivity to go back to, let's say, previous levels. Then we get to the labor cost side. We have about $300 million of labor cost. And we have, with these changes that we've done here in quarter 3, reduced our labor cost. However, we will see labor cost inflation in all of our markets above -- somewhat above average increases going into next year.
So you need to, I think, look at all of these factors combined and fine, but our underlying assumption is that we will come -- let's say that we will navigate through this turbulence around inflation and supply chain complications with the underlying profitability and the business impact. So I know this is not a very scientific answer, but I think these are the main components that you need to work with in order to make up your assumption for next year or on the margin going forward.
Okay. Great. That's very helpful. And so the sort of rough understanding is that the cost savings that you are implementing is [indiscernible] in part to address the rising labor costs from inflation, whereas price increases [indiscernible] and a lever you pull [indiscernible] high unit cost.
Yes, exactly. And the cost -- let's say, reduction in cost now is both to give us some headroom to invest in -- or another way to look at this, we're reallocating cost of our cost base towards areas where we see more growth opportunity. But then cost of fee -- decrease in cost will fund the increase we see in our labor cost going into the next year. Yes, absolutely.
And the next question comes from Niels Granholm-Leth from Carnegie.
Yes. So a question on your temporary stop for your share buyback. Could you give a little bit more color on the reason for stopping your share buybacks? Is it because that you're seeing a stronger and a larger pipeline of M&A opportunities? And secondly, could you remind us of the debt profile expiries and how we should think of your net financing costs going into next year and the year after, basically?
Yes, on the sale buybacks, it's such that we are now in the very upper end of the range or let's say our net debt-to-EBITDA ratio has increased here in the last couple of quarters, both because we've done -- made an acquisition of Naked Prosthetics here in August, but also we see free cash flow being unusually low because of the supply chain situation and mainly the absorption of cash and inventory. So we are at the upper end of the range.
And our M&A pipeline is there. It's not more or less active than what it has been in the recent quarters, but we are pausing share buybacks to maintain flexibility, to do M&A as we are in the very upper end of the range and we will evaluate on a quarterly basis to when we will we start the program. We will restart the share buyback program. But as we are now in the upper end of the range, it's our option to, let's say, preserve some flexibility for M&A.
On the financing cost, we are currently in the process of refinancing part of our long-term debt. We expect to see an increase in net financing costs to the tune of $300,000 to $400,000 on a full year basis from 2023 onwards approximately.
Great. So would you say that for next year, you would expect your net working capital to be reduced as a percentage of sales?
Yes, I would expect that. Let's say going back to, yes, the pandemic, let's say, when we reduced heavily especially our volumes from our finished goods suppliers in Asia, which we had to ramp up quite rapidly from mid last year and we are seeing that impacting our working capital situation and also just the fact that we are having much more safety stock on a large range of our raw material needs. So absolutely, as we have much higher inventories that we would need in a more normalized situation. So yes, I would expect somewhat of a reversal, but I'm cautious on timing just given the situation on the supply chain side remains quite tight.
Great. And then finally, just a question on your freight cost. Given the most recent freight contracts that you have insured, would you say that it's fair to mention that a major part of the $10 million of extraordinary freight costs that you're experiencing this year will be eliminated next year?
I would expect a substantial part of that trade cost to go down, yes. But remember that we passed up the increased freight cost, it's also using expedited air and sea freight. But yes, I would expect this to gradually normalize. I'm not going to speculate on whether it will go down to pre-pandemic levels, but it will absolutely be one of the levers working with us going into '23.
[Operator Instructions]
If there are no further questions, operator, we can go ahead and close the call. If I can just close, thank you very much for listening in and for the questions and please reach out to our Investor Relations if you would like to have a meeting or if there are any follow-up questions after this call. Thank you very much.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect?