„We delivered on all our guidance parameters for the year with strong organic growth of 5% and increased profitability.“

Five-year overview


Five-year overview
USD million 2018 2017 2016 2015 2014
Net sales 613 569 521 483 509
Gross profit 387 355 328 303 323
Operating expenses (excl. other income) 304 280 256 226 237
EBITDA 107 97 94 97 104
EBITDA adjusted 115 103 98 99 104
EBIT 79 75 72 77 86
Net profit 80 58 51 51 59
Sales growth
Sales growth USD % 8 9 8 (5) 17
- Organic growth in LCY % 5 5 4 5 5
- Currency effect % 1 0 (1) (11) (1)
- Acquired/divested business % 2 4 5 1 13
Balance Sheet
Total assets 914 793 746 653 678
Equity 538 500 467 463 442
Net interest-bearing debt (NIBD) 180 121 119 58 93
Cash Flow
Cash generated by operations 92 90 88 84 98
Free cash flow 39 55 42 42 68
Key ratios
Gross profit margin % 63 62 63 63 63
EBIT margin % 13 13 14 16 17
EBITDA margin % 18 17 18 20 20
EBITDA margin before special items % 19 18 19 20 20
Equity ratio % 59 63 63 71 65
Net debt to EBITDA 1.6 1.2 1.2 0.6 0.9
Effective tax rate % 18 16 25 25 24
Return on equity % 15 12 11 11 13
CAPEX / Net sales % 5.0 3.4 4.7 4.9 3.3
Full time employees on average 2,775 2,948 2,710 2,420 2,214
Market
Market value of equity 2,055 1,871 1582 1,546 1,311
Number of shares in Millions 431 437 443 446 454
Diluted EPS in US cents 18.7 13.3 11.6 11.5 13.1

Performance in 2018


Highlights

  • Sales growth of 7% in local currency, organic sales growth of 5% and reported growth of 8%.
  • Prosthetics segment grew 7% organically and above estimated market growth with an excellent contribution from high-end innovative solutions. Growth in the B&S segment was 2% organic with a good contribution from high-end innovative products.
  • Gross profit margin was 63% in 2018 compared to 62% in 2017. The increase is driven by positive impact from changes in product mix, stable unit cost and savings from the ongoing efficiency initiatives.
  • EBITDA margin before special items was 19% compared to an EBITDA margin before special items of 18% in 2017. The increase in EBITDA margin is driven by positive impact from changes in product mix, scalability in operations, savings from the ongoing efficiency initiatives, and currency movements.
  • In 2017, Össur announced efficiency initiatives in the areas of Manufacturing, Distribution, and Sourcing with estimated savings of USD 10 million by year-end 2020. Savings began to materialize in 2018 and various investments were made to reach savings targets in 2019 and 2020.
  • Össur made four acquisitions in 2018. Three of the acquisitions were made in Q4 2018, of which two acquisitions had no impact on operating income in Q4 2018. The combined full-year sales of the four acquisitions amount to about USD 70 million. The acquisitions resulted in a revaluation of previously acquired shares, impacting effects from associates positively by USD 21 million in 2018.
  • Net profit grew by 38% and amounted to 13% of sales in 2018 compared to 10% of sales in 2017. Growth in diluted EPS amounted to 40%.
  • Cash generated by operations amounted to 15% of sales in 2018 compared to 16% of sales in 2017.
  • Össur acquired 5,430,259 of own shares for approximately USD 26 million during the year.
  • The financial guidance for the full year 2019 is 4-5% organic sales growth, ~23% EBITDA margin before special items*, 4-5% CAPEX of sales, and an effective tax rate of 23-24%.

Key financials and guidance
USD million FY 2018 FY 2017 Guidance 2019
Net sales 613 569  
Sales growth, organic 5% 5% 4-5%
EBITDA margin, before special items 19% 18% ~23%*
CAPEX as % of sales 5% 3% 4-5%
Effective tax rate** 24% 26% 23-24%

* Guidance for EBITDA margin before special items includes the expected impact of IFRS 16. Excluding the impact of IFRS 16, the EBITDA margin is expected to be ~20%. See further information in the section on financial guidance for 2019.

** The effective tax rate has been normalized for one-time benefits impacting the rate in both 2017 and 2018.

Sales performance

Sales in 2018 amounted to USD 613 million compared to USD 569 million in 2017, corresponding to 5% organic growth and 8% reported growth.

Currency movements impacted sales growth positively compared to 2017 by USD 7 million which corresponds to a positive 1% points effect on USD growth rate.

Össur made four acquisitions in 2018. Further information can be found in the section “Acquisitions”.


Sales by Regions
USD million FY 2018 Organic growth Acq. / div. Curr. effect USD growth
EMEA 299 4% - +2% 6%
Americas 266 3% +5% - 8%
APAC 48 18% - -1% 17%
Total 613 5% +2% +1% 8%
Sales by Segments
USD million FY 2018 Organic growth Acq. / div. Curr. effect USD growth
Prosthetics 316 7% +4% +1% 12%
Bracing and supports 296 2% +1% +1% 4%
Other 1 - - - -
Total 613 5% +2% +1% 8%

Commentary on sales by segments can be found in Chapter 2.1. “Sales by segments”.

Gross profit

Gross profit in 2018 amounted to USD 387 million or 63% of sales compared to USD 355 million or 62% of sales in 2017. Items impacting gross profit margin in the year were:

  • Positive impact from changes in product mix, driven by strong growth in high-end innovative products in both prosthetics and bracing & supports
  • Stable unit cost in manufacturing
  • Savings from the ongoing efficiency initiatives
  • Positive impact from currency movements of about 10 basis points net of hedge

Operational expenses

Excluding special items, operating expenses amounted to USD 296 million or 48% of sales compared to USD 274 million or 48% of sales in 2017.

  • Sales & marketing (S&M) expenses increased by 8% and amounted to 33% of sales. Growth is mainly due to acquisitions and investments in sales efforts in new business development and emerging markets.
  • Research & development (R&D) expenses increased by 8% and amounted to 5% of sales. Investments were made in R&D projects for high-end products such as bionic prosthetics and bracing.
  • General & administrative (G&A) expenses increased by 8% when excluding special items and amounted to 10% of sales. The increase is related to acquisitions and investments in functions to support a growing business. It should be noted that excluding impact from special items and acquisitions, G&A cost grew at a slower rate than sales.

Efficiency initiatives

In September 2017, Össur announced efficiency initiatives in the areas of 1) distribution, 2) manufacturing, and 3) sourcing, to further increase scalability and profitability.

  1. During the year, the distribution facility on the west coast in the US was closed and the operations were moved to the Mexico manufacturing facility, where savings began to materialize in the second half of the year.
  2. Within manufacturing, investments were made in various equipment in the Mexico manufacturing facility to grow the operations and to prepare the facility to manufacture specific prosthetic components. Consequently, a part of the prosthetics manufacturing was moved from Iceland to Mexico late in the year, with savings expected in 2019.
  3. Within the strategic sourcing initiative, good progress was made in several spend categories.

Good progress was made within all areas of the efficiency initiatives although with some delayed impact of the manufacturing move. Hence, realized savings where slightly lower than the target of USD 3 million for the year. It is still expected that the savings target of USD 6 million in 2019 will be reached.

Special items

Össur expensed USD 7.5 million in one-time expenses related to the ongoing efficiency initiatives and the four acquisitions made in 2018. In the comparable period in 2017, Össur expensed USD 5.6 million in one-time expenses related to the ongoing efficiency initiatives and the integration of Medi Prosthetics. It should be noted that the expenses in relation to the efficiency initiatives were expected as they had already been communicated when the efficiency initiatives were first introduced in September 2017.

Össur recognized USD 4.2 million in goodwill impairment in 2018. The impairment is related to a discontinued product with minimal sales, acquired in 2012.

EBITDA

EBITDA before special items amounted to USD 115 million or 19% of sales compared to an EBITDA before special items of USD 103 million or 18% of sales in 2017. Currency movements affected the EBITDA margin in FY 2018 positively by about 20 basis points.

Financial items, income, tax and net profit

Net financial expenses in 2018 amounted to USD 6 million compared to USD 6 million in 2017, where the net exchange rate difference was negative by USD 2 million in 2018 compared to a negative USD 3 million in 2017.

Effects of investments in associated companies in 2018 amounted to USD 24 million compared to USD 0 million in 2017. During the year and in relation to the recent acquisitions, a revaluation of previously acquired shares impacted Effects of investments in associated companies by USD 21 million. It should be noted that in 2018, Össur recognized approx. USD 1 million per quarter in share in net profit from minority holdings. Due to the recent acquisitions, it is expected that the profit will decrease in 2019 and return to levels comparable with 2017.

Income tax in 2018 amounted to USD 17 million, corresponding to 18% effective tax rate, compared to USD 11 million or 16% effective tax rate in 2017. Lower effective tax rate in 2017 and 2018 is due to a lower federal tax rate in the US after the Tax Cuts & Jobs Act was signed in the US in December 2017. Further information on the impact of the Tax Cut and Jobs Act can be found in the Q4 2017 Company Announcement. The income tax in 2018 is furthermore impacted by the revaluation of previously acquired shares which impacted Effects of investments in associated companies. Excluding the impact due to the revaluation of previously acquired shares, the normalized effective tax rate in 2018 would have been 24%, compared to a normalized rate in 2017 of 26%. The lower effective income tax rate in 2018 is in line with expectations due to a lower income tax rate following tax reform in the United States, where Össur derives a significant part of its sales.

Net profit in 2018 amounted to USD 80 million or 13% of sales, compared to USD 58 million or 10% of sales in 2017, an increase of 38% in the period. Diluted earnings per share in 2018 amounted to 18.7 US cents compared to 13.3 US cents in 2017, an increase of 40% in the period.

Cash Flow

Cash generated by operations amounted to USD 92 million or 15% of sales, compared to USD 90 million or 16% of sales in 2017. Cash generated by operations was negatively impacted by NWC investments and a higher income tax paid than in the comparable year.

Capital expenditure in 2018 amounted to USD 31 million or 5% of sales, compared to USD 19 million or 3% of sales in 2017. Capital expenditures were relatively high due to investments related to the ongoing efficiency initiatives in addition to various investments in leasehold improvements and integration of a new CRM software.

Capital structure, share buybacks and dividends

Net interest-bearing debt at the end of 2018 amounted to USD 180 million compared to USD 121 million at year-end 2017. Changes in debt levels are mostly due to recent acquisitions, share buyback program, dividends, and changes in currency rates. Net interest-bearing debt to EBITDA corresponded to 1.6x at year-end 2018 compared to 1.2x at year-end 2017. The ratio is in line with the Company‘s Capital Structure and Dividend policy to maintain a healthy balance sheet and a level of net interest-bearing debt of 1-2x EBITDA.

Össur purchased 5,430,259 of own shares for approximately USD 26 million in 2018 as part of its share buyback programs. The purpose of the share buybacks is to reduce the Company’s share capital and adjust the capital structure by distributing capital to shareholders in line with the Company’s Capital Structure and Dividend Policy. At year-end 2018, Össur held 6,705,259 treasury shares.

In 2018, Össur paid a cash dividend of 0.13 per share, equivalent to USD 9 million or 16% of the net profit in 2017, compared to DKK 0.12 per share for 2016, which was paid out in 2017.

Acquisitions

Össur made four acquisitions in 2018. The impact of the acquisitions is fully included in the balance sheet at year-end 2018 but only two of the acquisitions contributed to operating income in Q4 2018. Sales in the four acquired companies on a full year basis amount to around USD 70 million combined. The acquired companies are expected to have a slightly negative impact on Össur’s EBITDA margin in 2019 but they have greater seasonality in their operations, where the first quarter of the year is seasonally the weakest and the fourth quarter the strongest. Hence, the seasonality of Össur is expected to slightly increase in 2019.

Sales
613 USD m
EBITDA
115 USD m
Net Profit
80 USD m

Outlook for 2019


Financial guidance for 2019
Guidance FY 2019 Actual FY 2018 Guidance FY 2018
Sales growth, organic 4-5% 5% 4-5%
EBITDA margin (before special items) ~23% 19% ~19%
CAPEX as % of sales 4-5% 5% ~5%
Effective tax rate 23-24% 24%* 23-24%

* Tax rate has been normalized for the revaluation of previously acquired shares, increasing effects from associates by USD 21 million in 2018, and impacting net profit. The reported effective tax rate is 18%.

The financial guidance assumes the prevailing economic outlook in key markets and no major fluctuations of major operating currencies.

Össur made four acquisitions in 2018. The combined full-year sales of the four acquisitions amount to about USD 70 million. The acquisitions are expected to have a slightly negative impact on the EBITDA margin in 2019.

Organic sales growth is expected to be in the range of 4-5%. In prosthetics, we expect to see a continued good performance in key markets and high-end products, supported by recent product launches such as the Pro-Flex® LP Align and the bionic PROPRIO FOOT®. Growth in prosthetics is estimated to be at or above estimated market growth in 2019. In bracing & supports, we expect to see a continued good performance in high-end products, such as the Unloader One® solutions and Rebound® Post-Op Knee. The product rationalization in selected markets and lower sales to a few large distributors which impacted growth in 2018 are expected to have a minimal impact on growth in 2019. However, as in 2018, we expect the competitive market environment in France and the United States to prevail. Continued good performance is expected in other key markets. Growth in bracing & supports is estimated to be in line with estimated market growth in 2019.

As of January 2019, Össur implemented the new IFRS 16 Leasing accounting standard which will affect the reporting of the financial performance. The standard will not be applied retrospectively and therefore the 2018 comparative figures will not be adjusted. However, Össur will throughout 2019 continue to report on key financial metrics as they would have been without the implementation of the new IFRS 16 standard. In sum, the implementation is expected to increase EBITDA by approx. USD 19 million and depreciation by approx. USD 17 million resulting in an increase in EBIT of approx. USD 2 million. Furthermore, interest expenses are expected to increase by approx. USD 3 million and net profit is expected to decrease by approx. USD 1 million. For further information on the standard and its impact on the consolidated financial statements, see note 33.2 in the full year 2018 consolidated financial statements.

EBITDA margin before special items is expected to be ~23% of sales. Excluding the impact of the new IFRS 16 Leasing account standard, the EBITDA margin before special items is expected to be ~20% of sales. The EBITDA margin is expected to increase compared to 2018 due to favorable developments in product mix, scalability in the underlying business, and savings from the efficiency initiatives. The recent acquisitions are expected to have a slightly negative impact on the EBITDA margin. At current foreign exchange rates, keeping all other factors constant, the EBITDA margin is expected to be positively impacted by about 40-50 basis points net of hedge in 2019 when compared to 2018.

It should be noted that quarter one is, and has been historically, seasonally the weakest quarter of the year in terms of sales and profitability. The recent acquisitions have a greater seasonality in their operations compared to the pre-acquisition Össur business, where the first quarter of the year is also seasonally the weakest and the fourth quarter the strongest. Consequently, the seasonality in Össur’s sales and profit is expected to slightly increase in 2019.

CAPEX is expected to be above the historical normalized level of 3-4% of sales and amount to 4-5% of sales in 2019. The main reason for the higher CAPEX level is due to expected CAPEX investments in relation to the ongoing efficiency initiatives. Other main CAPEX items include maintenance CAPEX in manufacturing, continuation of the implementation of a new CRM software, investments in computer equipment, software, leasehold improvements, and fixtures.

Based on the current mix of taxable income, the expectation is that the 2019 effective tax rate will be in the range of 23-24%.


Össur 2018 Annual Report