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Hello, and welcome to the Össur Q4 Results 2020. Today, I'm pleased to present Mr. Jón Sigurdsson, President and CEO; Mr. Sölvason, CFO. [Operator Instructions] Speakers, please begin.
Yes. Thank you. Yes. And I would like to welcome you to the Össur investor conference call where we will cover the results for the fourth quarter and the full year of 2020. My name is Jón Sigurdsson, and I'm the President and CEO. And with me here today is Sveinn Sölvason, our CFO.As said before, we will beginning by going through the highlights for the quarter followed by the highlights for the year and ending with our guidance for 2021. A question-and-answer session will then follow.Sales in the fourth quarter are in line with the mid-range of our guidance announced in October. Sales in the fourth quarter of 2020 amounted to $170 million, which correspond to about 4% organic decline. We saw a continued sales recovery in October and November, but due to the lockdowns in key markets towards the end of November and December, we experienced a slowdown in sales towards the end of the year. Even though our markets were impacted by COVID-19 in the quarter, we saw a positive organic sales growth of 1% in the prosthetics segment of the business.EBITDA amounted to $24 million in Q4 or 14% of sales. EBITDA was significantly impacted by extraordinary items, which we'll elaborate further on. We completed the divestment of bracing and support entities in the U.S. at the end of December. As a result of product rationalization and changes in reimbursement, the focus of these sales entities have gradually shifted away from selling products to manufacturing products here.In addition, Össur has in recent years increased its focus on the O&P channel. Therefore, the decision was made to divest the entities. Next slide, please.In Americas, sales were impacted by COVID-19 in the U.S. and consequent restrictive measures implemented by local governments. Even so, sales are gradually recovering. Prosthetics sales grew in the U.S. However, bracing and supports sales remain soft due to general lower activity level.In EMEA, sales continued to recover, with some pent-up demand realized in some markets. Sales in the region remain volatile due to the recent surge in COVID-19 cases and new lockdowns.In APAC, sales in China, Australia were strong with some pent-up demand, while sales in the emerging markets were still slightly below last year's sales.Over to you, Sveinn.
Thank you, Jón. The P&L is impacted by lower sales as a result of COVID-19 and extraordinary items from divestments. Gross profit margin was strong in the quarter compared to same quarter last year, 64%, mainly due to manufacturing being largely -- or being close to normal capacity utilization.Now regarding operational costs, divestments, acquisitions and other extraordinary items are blurring the picture. But if we adjust for these items, our operating cost was flat in the quarter compared to same quarter last year. The extraordinary items amounted to $11 million, of which around $9 million are noncash expenses.The effective tax rate was impacted also by these extraordinary items related to divestments. Excluding this impact, the effective tax rate would have been around 25% in the quarter. Net profit amounted to $4 million or 2% of sales.Go to the next slide, please. Here, we have a 5-quarter sales and EBITDA trend. Reported EBITDA amounted to $24 million. And as a result, the EBITDA margin was 14% in the quarter. Excluding extraordinary costs from divestments, EBITDA would have amounted to $33 million or 19% of sales. Profitability is recovering, and we are confident that we will return to pre-COVID levels as sales normalize.Now this concludes the review of the fourth quarter. If you would please go ahead, Jón, with full year highlights.
Yes. Thank you, Sveinn. Now we will cover the year. And we are satisfied with the results of 2020, considering this unprecedented year. We have seen a strong recovery in sales, with prosthetics reporting positive organic sales growth in the last quarter of the year.The cash flow was strong in 2020 with focus on managing working capital and capital expenditures. We expected the impact from the pandemic to be short term and that the long-term prospect and underlying fundamental drivers of the business are unchanged.Our business mix has changed during the year where we sharpened our sales strategy in the bracing and supports market with the divestment of Gibaud and entities focused on bracing and supports sales in the U.S. We are making good progress with our external growth strategy with several acquisitions.Sales for the full year amounted to $630 million, corresponding to 8% decline in local currency and 10% organic decline.As previously mentioned, sales amounted to $630 million in 2020 compared to $686 million in 2019. The prosthetics segment declined by 7% organic, while the bracing and supports segment declined by 15%. The COVID-19 pandemic has impacted prosthetics and bracing and support differently. Throughout the pandemic, prosthetic sales have been more resilient than bracing and supports.The demand for prosthetic solutions is for the markets that also generate the majority of the sales, mostly driven by servicing the existing amputee population with maintenance, renewals and upgrades of the prosthetics.Sales of mechanical prosthetics product is stable in 2020 compared to 2019, while bionics, which require more time for fitting and training, have declined in sales more than the average for prosthetics. It is expected that there will be some pent-up demand in prosthetic for both mechanical and bionic products.On the other hand, the demand for bracing and support products is largely driven by injuries, surgeries and prevalence of osteoarthritis. The COVID-19 pandemic and the associated lockdowns have had a significant impact on amateur sports and activity levels that have resulted in fewer injuries. Recent data from hospital system in Europe showed double-digit decline for various types of injuries to joint and ligaments.It is not expected that there will be pent-up demand for injury solutions. COVID-19 has impacted volume of elective surgery such as knee replacement surgeries that drive demand for post-operative bracing solutions. OA bracing sales have been impacted primarily due to limitations to physician access. Some pent-up demand is expected for the post-op and osteoarthritis patients.Over to you, Sveinn.
Thank you, Jón. As Jón already covered, sales were impacted by COVID-19 and further by acquisitions and divestments, with reported organic sales decline of 10% and local currency decline of 8%. The gross profit margin was 62% compared to 64% last year. The decrease in gross profit margin can mainly be attributed to temporary lower productivity in manufacturing.OpEx is impacted, again, by extraordinary items related to acquisitions, divestments, litigation, some severance and government grants amounting to net $29 million for the year. When these extraordinary costs are excluded, OpEx declined by around 2% compared to 2019.EBITDA amounted to $93 million or 15% of sales. Excluding extraordinary items, EBITDA would have amounted to $104 million or 17% of sales.Also, the effective tax rate was impacted by various items related to divestments. When we normalize for this, the effective tax rate would have been around 25%. It should be noted also that the tax rate is further impacted to -- as a result of COVID-19 temporarily changing our mix of taxable earnings. And we expect this to normalize as sales normalize.Net profit was $8 million or 1% of sales.If you go to the next slide, please. Cash flow was very strong in 2020 with a lot of focus on inventory management, and we also had lower CapEx compared to prior year. Cash flow from operations amounted to $119 million or 19% of sales compared to $120 million or 17% of sales in 2019, and free cash flow amounted to $68 million.Our financing and liquidity position was strong throughout the year, with bank balances and undrawn facilities amounting to $275 million at the end of 2020.Net interest-bearing debt was $381 million at the end of the year, which corresponds to a 4.1x net interest-bearing debt to EBITDA. The ratio is temporarily -- or therefore, temporarily exceeding the target range of 1.5 to 2.5x, and we expect to get back to target range during the year.If you go to the next slide, please. We've made several acquisitions and divestments in the last 2 years, which have changed the business mix of the company. Using 2019 as a reference year as it is not impacted by COVID-19 and normalizing for pro forma figures of acquired and divested companies, the organic growth would have been positively impacted by about 100 basis points or 6% organic growth compared to 5% organic growth reported in 2019. And positive impact on organic growth in 2020 would have been around 60 basis points.EBITDA margin before special items would have been positively impacted by around 100 basis points in both 2019 and 2020.Bracing and supports sales as a percentage of total sales would have been 38% in 2019 compared to reported 45% and 36% in 2020 compared to reported 41%.Now over to you, Jón, on the guidance.
Yes, thank you, Sveinn. Our -- the financial guidance assumes continued impact from COVID-19 in the first half of 2021, mainly in quarter 1, and gradually subsiding in the quarter 2, while quarters 3 and 4 are expected to be largely unaffected with some realized pent-up demand.It is emphasized that the outlook for 2021 is more uncertain than usual as changes in measures to control the COVID-19 pandemic in Össur's main markets can have significant implications for financial performance in 2021.Acquisitions and divestment in 2019 and 2020 have impacted us through business mix, as already reviewed by Sveinn.Given the current situation in Össur's key market, the organic sales growth outlook for 2021 is expected to be in the range of 10% to 15%. Higher end of the guidance assumes continued recovery in sales during the first half of 2021 and a strong recovery in the second half with some realized pent-up demand, while the lower end assumes a slower recovery in the first half and slower realization of pent-up demand.EBITDA margin before special items is expected to be in the range of 21% to 23%, underlying gradual increase in profitability expected as sales recover, supported by growth in the high-margin products, divestment and scalability in core operations.Acquisitions are expected to have a slightly negative impact on the EBITDA margin. It should not -- it should be noted that the quarter 1 is and has been historically seasonally weakest quarter of the year in terms of sales and profitability.CapEx is expected to be in the range of 3% to 4% of sales. Based on the current mix of taxable income, the expectations is that 2021 effective tax rate will be in the range of 23% to 24%.Now that concludes the review of the quarter 4 and the full year, and we can now go over to the question-and-answer session.
[Operator Instructions] Our first question comes from Christian Ryom from Nordea.
I have 3 questions, please. The first is to the -- whether you can give us some insight into the current level of activity that you are seeing. I noticed that in the report you say that the last few months of 2020 saw activity in the range of 90% to 100% of 2019 levels. Are we -- have we trended back down to closer to the 90% level here at the start of 2021? Or where are you seeing activity now?My second question is to the OpEx base in Q4, excluding special items, were there any savings from furloughs or government support in your cost base in Q4?And then my third question is to the new acquisitions that you've announced here in the Q4 report. How much of these $38 million that you mentioned have you realized already here during the fourth quarter?
Yes. Thank you, Christian. Let me take the first one. The current level of activity we saw -- if we saw -- we saw October, November, very good development. And then we saw December level off quite a bit. So we are now in the range of 90% to 100%.
And on the -- your second question, Christian, on -- there's no government support or let's say -- or anything like that in quarter 4. This is just our clean OpEx. No positive contribution from any area as such.And on the acquisitions, these acquisitions were completed towards the end of the year, so we don't have any sales from these acquired companies in our sales figures for the quarter.
Our next question comes from Thomas Bowers from Danske Bank.
I just want to get back to just -- in regards to your OpEx and what you would say the profitability. So in Q3, you surprised us a bit with some very strong earnings numbers. And now in Q4, for me, it seems like that you still see some COVID impact sort of. Can you maybe just describe on what's the difference between the strong Q3 numbers and what you see in Q4 in particular?And then maybe just on M&A, can you maybe add a little bit of color on the divestments you made here in the B&S sales? So is this something that will continue throughout '21? Is there more to come here that you're looking at to divest? Or was this basically it?
Maybe I can take the first question on OpEx. I think the short answer, Thomas, is that we had -- let's say, on our cost side, we had expected, at least in -- towards the end -- in November, beginning of December, we had expected somewhat higher utilization and somewhat higher sales. And therefore, our cost structure, to some extent, geared up for that. So I think it's fair to say that the shortfall in sales towards the end of the year was somewhat surprising. And I think that is what explains the shortfall in underlying profitability in quarter 4.
And on the divestment, I mean, what we have been doing for the last year is we've been concentrating our strategy toward, firstly, our own products. So of the reselling entities we have, we have disposed of both. And secondly, we are concentrating our O&P more in our -- in the O&P channel. And some of the bracing and support companies we have in U.S., in particular, and in France, to some extent, has been changing that -- the sales development there has been ever-increasing in the non-O&P market. And we've disposed of those. And you can -- and those of -- the companies that are lowest in profitability and growth as well.On -- so that's the companies we've been divesting. On the -- on whether we are planning to divest any more, the answer to that, I wouldn't deny it, but there are no plans as of now to do that.
Okay. So you can maybe conclude that you -- with the USD 20 million sales you have divested in -- now in U.S., that would be maybe considered the lion's share potentially. Is that sort of how I can see it? Or...
As of now, yes.
Our next question comes from Benjamin Silverstone from ABG.
My first question is in regards to this competitive bidding. Could you just please explain how the impact on operating profits can be mitigated by about to 50%? I know you mentioned that securing lower-cost components will help. But if this is possible, would that then also mean that you could do this for all of the other products basically and then save money? That's just a quick question there.And then secondly, Jón, you mentioned that you're currently around index 90% to 100%. Just for our understanding, could you please help us understand how that corresponds to -- in the report, we see that manufacturing sites are gradually increasing operational capacity. So is that because you are now expecting that to grow very soon? So in Q3, you say you're going to be around normal, and then you have to start now increasing the capacity? Or how does that go together?And then lastly, I was wondering if you could share some feedback from your customers in clinics in cities and countries currently under some sort of lockdown as I was wondering how they are -- their patients are acting this time round. So we know that in the last lockdown you mentioned that patients were very happy to come back whenever it was possible, so whenever they got this freedom of movement back. Are we seeing the same thing this time around? I think that will be quite helpful.
Yes. Regarding the -- let me take the competitive bidding. The -- what we have seen is that because of the drastic decline in the prices of our customers, because this -- you have to remember, this is our customers, their service to -- for their customers have changed quite a bit, and they are selling much lower and more simply products to those that have -- that they are servicing.So I mean this is a choose of products rather than -- a part of it is a product selection rather than cost saving, if you understand what I mean. So whether we could change that in all the other products, no, that's not -- that would not be possible.
On your second question, Benjamin, let's say, the main adjustment in our manufacturing output was done in the initial phases of the pandemic where we decided to drastically adjust our manufacturing capacity, and this has been -- you also see this in our gross profit margin development for the year and also in our inventories. We've decreased inventories quite significantly. We were high on inventories going into 2020, but inventories have come down quite a bit. So we've taken this adjustment in capacity in some shape or form through the P&L.Now I mean we are -- even though we're not sort of -- I mean the pandemic is causing some turbulence in our top line. And as Jón mentioned, we were -- when we reported quarter 3, we were largely on par with -- or at index 100%, if you will, compared to prior year. And we see some slowdown here towards the end of the year and also here in the beginning of the year due to these lockdowns in some of our key markets.With that being said, though, we are growing. I think we should not forget that we are still growing in prosthetics in -- here in quarter 4. And I think that's a strong sign going into the year.So even though we have this turbulence, we are largely back at full utilization in our manufacturing organization as we expect demand to get back online during the year, as we explained in our commentary around guidance.
And regarding to patient behavior during the lockdown and during the waves of lockdowns -- because we have had that. This is probably the third wave we see. And there are quite a bit -- well, first of all, we learned more how to react, of course. And we learn -- and our customers know much more how to react. And there are some -- I mean even it sounds a little bit strange, there are -- some sort of normality have creeped in. And we could see in March, March went down. I mean there were weeks where sales went down 50%, and there was a wide-range lockdown of clinics.Now in this wave, that has not happened. And as I pointed out, I mean, in prosthetics, there are not a decline. There is a 1% growth. So there is some kind of a normality taking place, even though that there are in some instances -- for example, in England, there are still requirements that they can only have -- I believe it's 3 patient at a time in their facility. So the capacity is down, even though they continue to serve customers.Now -- and almost everyone, I believe, prosthetic services and our services has been categorized as essential, so they have not been forced to lock -- to turn the key and go home. I don't know whether it's helped you, but this is what we have learned in our patient behavior.
It was very helpful.
Our next question comes from Niels Leth from Carnegie.
This is Niels from Carnegie. I don't know if it was my name that was called upon. I couldn't hear the operator.Anyway, my first question would be, can you just briefly talk about what is actually left in your B&S division? Would it mostly be knee braces in your U.S. and European businesses? So please provide a few comments on that.Secondly, which kind of activities have you acquired? And what would be the margin level of those acquired activities? And then thirdly, could you provide an estimate of the net effect of your M&A on revenue in 2021?
What is left in bracing and support to me is -- there are very few products that have been closed down because of it because we have -- on the product side, we have pretty much the same product as before. But the French -- the bracing and support products that were exclusively made for the French market are out, but the rest is there.I mean we -- there are some proprietary products. There are halo stabilization that has been discontinued. But apart from that, we have the same product before. Knee braces would be the biggest part of the bracing and support portfolio.
On the acquisitions, Niels, the -- we have acquired, let's say, O&P operators. That is what we've done here in quarter 4, and the margins are similar as what we've discussed previously. The average margins of O&P operators is around 10%. So these are slightly dilutive to our average margins.
But slightly accretive to those we have sold.
Yes, obviously, yes. That's right. On the net impact of M&A, what I would advise to you just to get a feeling for the net impact of all of these movements is that we have quite detailed disclosures in our announcement here around the pro forma numbers for 2019 and 2020. So we are providing a full pro forma, let's say, both sales and gross profit margins and EBITDA margins for 2019 and 2020 in our disclosure. So you should be able to get a good feel for how this is all developing.And if we look at 2021, our local currency growth will be largely similar to our organic growth rate, taking into account, let's say, sale of assets and addition of assets. I hope that makes sense.
And then perhaps just finally, can you talk about your acquisition pipeline for the time being?
No. I don't think -- I mean, I would say we have a pretty similar pipeline than before. I mean -- but I don't want to go into that in more detail.
Our next question comes from Yiwei Zhou from SEB. Apologies. It appears that Yiwei Zhou has withdrawn his questions.Our next question comes from Christian Ryom from Nordea.
Just a quick follow-up from me and basically a clarification on the -- on competitive bidding. Can you just clarify what -- how you see the time line from here? So the $8 million to $9 million impact that you talk about, is that all assumed to materialize in -- here in 2021, so included in guidance? Or when do you expect this to hit your P&L?
Yes. This is -- we expect this to materialize here during '21, and this has been incorporated into our guidance, yes.
The bidding is in place at the beginning of the year. How fast it will go is somewhat uncertain, but we have baked it into our guidance.
Our next question comes from Felix Wienen from SFO.
Just a quick question on the acquisitions on the clinics in Q4. How long have you been in discussion with these targets? And in the end, was it driven by your desire to go ahead? Or was it them looking for cash basically because the clients had shied away over the last couple of months and quarters and then you were able to catch a good multiple on these deals? Just some more color, please, around the acquisitions on the clinic.
Yes. The acquisitions on the clinic, as previously explained, the acquisition pipeline is quite full, and that -- and we believe that is a result from -- partly results from the pandemic. However, all of our customers are in very good standing and where you can see that, in the accounts receivables.So we have not seen any of our customers that -- we haven't seen any fire sales. And we have not seen any -- we have seen more willingness to sell probably because of a macro trend and their willingness to belong to a bigger entity, but we don't think that has reflected on the pricing or multiples.
Our next question comes from Yiwei Zhou from SEB.
I have 2 left here. Firstly, considering the extended lockdown in the first half and for you to deliver 10% to 15% organic growth, there must be a lot of pent-up demand in the second half. Do you see any constraints from the capacity of the clinics here to realize those pent-up demand?
I mean, I think that's a very fair point. And yes, there will be some constraints in delivering potential pent-up demand. And we'll have to see how that develops. And that is also, to some degree, reflected in the wide range that we are guiding on top line. I think you're spot on. I think the answer is, yes, there is -- will be some constraints.
And the truth of the answer is we don't know, but we've seen -- through those lockdowns, we've seen that our customers, they kind of pick and choose the -- can you call it best customers? I'm not sure whether you can. But we've seen that there are -- yes, their ability to pick and choose is there.
Okay. And then my second question here is just to follow up on divestments here. I understand it's positive to your margins. Is it possible to quantify the impact here like you did last time for the French B&S business?
I can -- Wei, I would sort of refer back to the explanations that we have around just the consolidated impact of all of these movements from divestments and acquisitions. But the short answer, though, is that the divestment of these entities in the U.S. is, again, accretive, slightly accretive, but it's obviously small, but slightly accretive for both growth and profitability.
And the reason being we are obviously not selling our best entities, and you can also see that -- and that is reflected on the price we got for them.
[Operator Instructions] Our next question comes from Niels Leth from Carnegie.
Just a quick follow-up question on your M&A activity and the effect on your willingness to do share buybacks. So with the full M&A pipeline, should we exclude any share buybacks for 2021?
I mean we are currently sort of -- our net debt-to-EBITDA ratio is temporarily above the target range because we are dragging with us the low profitability in quarter 2 2020 primarily. So if we look at some sort of normalized EBITDA, we are -- we will still move within the range.And yes, you're right. If there is some M&A this year, there is not likely to be much capacity for share buybacks. But I wouldn't exclude it, though. It all depends on whether we are successful in finding the right opportunities on the M&A side and how fast we'll trend back to what is a -- what we look at normalized net debt-to-EBITDA ratio.
Our temporary halt of the share buyback program is because of the debt level rather than the acquisitions at the moment.
There appears to be no further questions, so I will hand back to the speakers for any other remarks.
Yes. Thank you very much for your questions, and please reach out to our Investor Relations team if you would like to have a call with us and if you have any questions after this call. And thank you for listening, and have a good day, and good luck with the other -- this rather complicated reporting period. Thank you.
Thanks a lot.
This now concludes our conference call. Thank you for attending. You may now disconnect your lines.