Ottobock SE & Co. KGaA (OBCK) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and a warm welcome to Ottobock's conference call following the publication of our financial results for the first half of 2026. Today's speakers are Oliver Jakobi, CEO; and Dr. Arne Kreitz, CFO of Ottobock. Before we start the presentation, please note that the call will be recorded. [Operator Instructions] And with that, I hand over to you, Oliver.

Yes. Thank you. And also from my side, a warm welcome from Duderstadt. And yes, let me start with the headline. So, strategically and operationally, we are fully on track. So, in the second quarter, we have seen a strong demand in our key markets. And yes, so the timing effects we have seen beginning of the year are normalized now. Second key message we want to deliver is our organic core revenue. So we grew with 6.7% in the first half year with 8% in the second quarter. So this is driven by EMEA on a broad base, so as well in B2B as well as in B2C. The underlying EBITDA margin improved even more strong than the revenue. So we are now on 25.3%. In Q2, 27.9%. On the M&A side, we also fulfilled our plan. So we acquired one technology company, so FES, Functional Electrical Stimulation company from Spain. We acquired a leading patient care company in Norway, and the signed Human Mobility divestment also took place. So that what we already had discussed during our meetings earlier. So everything well on track. With this, we decided to narrow our guidance. So we are lifting the lower end from 5% to 6% growth and keeping the upper end with 8%. And we are increasing our EBITDA margin guidance from above 26.5% to above 27%. If we have a look into the regions. So, I would start then probably with the left side with the Americas. So here, the key message is that the main market, the U.S. market is actually on a positive side. So we have -- on the B2B side in the U.S., the 1% growth in the first half of the year with 4% in the second half of the year. B2C is still with a good growth momentum in H1 in the U.S. A little bit different situation in Canada and especially in Latin America. So in Canada, we had last year so-called War Amps program, which in the moment is on hold. That's why the Canadian numbers are below prior year. And we do have timing effects in Latin America, so in the main market, Brazil, there are elections ahead. Therefore, there's a blackout period and no tenders are performed. So we do expect here also better development from the third and fourth quarter especially. EMEA, now accounting for 75% of our revenue, performed very strong. We had a very strong B2B business, so double-digit growth in the first half of the year, which was driven, first of all, by many different markets, so Western Europe, but also export and the EMEA markets, Russia and Ukraine, but also really important to note are the innovations. The Patient Care business in Western Europe had a very good momentum in the second quarter, so with 6.3%, 6.4% growth. We are back on track, so growing above -- slightly above the market in the second quarter. APAC saw 3.6% growth in the first half of the year. There are 2 factors important to mention. First of all, we had a very strong comparative year -- comparative period last year with high growth momentum. Then we have this year, some timing effects. So with a relatively small sales in this region, a tender which is postponed like, for example, now in India, or a reimbursement gap which we have seen now for 1, 2 months in Australia have a direct impact. But these are timing effects. So the catch-up will follow. And therefore, we are confident also to overperform there in the second half of the year. So regarding the acquisitions. So I mentioned already, we acquired Blatchford in Norway. So Norway was white spot on our patient care landscape. Norway is a very attractive market for patient care, very profitable. And we have a unique chance to acquire the market leader. So this has happened in May, and integration is already going forward. And so far, very good momentum we can see there. With Fesia, we acquired a company which is leading in the electro stimulation. So we are already in this business. So we have a distribution business in this field. But what we were missing was the possibility to influence also the innovation path, then the regional expansion. And of course, what we do have here now is the higher margin. So when you're coming from the distribution business towards your own business, you also have of course the higher margin. So we are very much looking forward with this business. So definitely a growth driver for the coming years. And the divestment of our wheelchair business. So we spoke about this. We had the signing with DHCare in June and the closing is expected to be at the end of the year. So we are in the moment in the operational separation of the business. We are very happy to have a partner who is a strategic buyer. So that means the business will continue, and it's going very well forward, so for us as a management team, but also for the organization, it is really good to focus even more now on our core business, so prosthetics and neuro-orthotics because the wheelchair business anyhow, we had a lot of projects running there and was a bit of distraction from the core business. So this is now gone, therefore, we will focus on the core business and also report from next year on only the core business, so this core and non-core will be not there anymore. And now I'm handing over to Arne, who will guide you through the financials.

Thank you, Oliver. I'm happy to take you through a bit more of the details of the financials. Again, starting with the big picture we are looking very positively on. So we've reached our plans for Q2, which means strong organic growth of 8% in Q2, leading to an H1 growth of 6.7%. So exactly the acceleration that we also highlighted in our previous call. In our previous call, we had been discussing 5.1% in the first quarter. I think it's good to see that we now have reached the 8%. So being on a very good track on the top line development. Same was true for the underlying EBITDA side. We arrived at EUR 207 million in the first half of 2026, which means a 25.3% margin. And what is always important is the comparison to the comparator year or half year last year. And here, we can see a 2.2% increase. When I'm looking specifically into the second quarter, we're talking about a 2.8% increase to 27.9%. So I want to say the pattern that if we're growing strong on the top line side, then we can immediately see this also in the strong EBITDA performance that we've been seeing in Q2, 8% on the top line translating into a strong margin of 27.9%. Free cash flow and the cash conversion actually strong. So good operational performance, but we have a special effect on the tax side. So we have a bit of timing effects, which will normalize in the course of the year. So, all in all, we can see in Q2 a special effect of EUR 35 million, EUR 25 million of that will normalize in the course of the year. It's the timing of the pretax payments, which last year happened at Q3 and now this year in Q2, but that will normalize. And there's a second effect also on the income tax, which is that some of the tax refunding that we're expecting will move into the next year. So, also a timing effect, but most likely only happening next year. And if I'm normalizing for the tax effect, we would actually see also a strong performance on the free cash flow development. Going a bit deeper into the revenue development. If we're looking into the development in B2B and B2C, we see an 8.7% increase in the first half year with 11.7% in Q2. So very strong development on the B2B side. And please keep in mind that we're looking into a strong comparator quarter also last year. So we are actually happy with the 11.7% and think it's showing really the strong momentum that we're continuing to see on the B2B side. On the Patient Care side, we're looking at 4.2% of year-to-date performance. In the first quarter, we have been at 4.7%. So a bit slower on the second quarter. When looking a bit more into the details, then we can actually see that the core regions in Western Europe and North America actually have been performing very well with beyond 6% growth in the first half of the year, and we had a bit of special effects and timing in the smaller regions, specifically in APAC and LatAm. And that is a little bit mixing up the picture. But from our point of view, that will also normalize in the course of the second half of the year. So if we're looking into the core regions, which is clearly Western Europe and North America, and we're also looking into a strong top line development on the B2C side. Moving on to the regions, 9% in EMEA, already explained by Oliver. So continued strong momentum, broad-based. And we also, again, have been seeing some momentum in Russia, Ukraine. I know that there are questions around that. So we can see 1% to 2% of a spike event impact if we're looking into the numbers. But if you look into that, you can see that the majority of the growth is really broad-based and not spike event driven. And from that end, we're looking into a strong performance all in all in EMEA. Americas, a bit mixed. Actually, good recovery on the U.S. side with -- we have been a bit lighter on the first quarter. Now we're seeing a catch-up, arriving at 4% on the B2B side, even stronger on the B2C side. So we think a good momentum on the U.S. side, which is a bit mixed up by Canada and LatAm by the facts that Oliver already explained. So again, bit of a mix of effects. But the key message is that in the most important market in the U.S., we think we have seen in Q2 the positive development that we also have been foreseeing when we talked about Q1. On APAC, 3.6% and a bit slower growth in the second quarter. And here, you just need to keep in mind that -- I mean, if I'm looking into Q2, and we're talking about EUR 26 million of revenue, if we then have some tender business moving into the third quarter that already has a relevant impact on the relative growth rate. So nothing structural. No change in the general market condition. This is a bit of timing, which we will see recovering in the second half of the year. Underlying core EBITDA set up by 2.2%. If we're looking into the regional split and that we can see again that all regions have improved in their profitability with the good growth that we've been seeing in EMEA, of course, we can also see the strongest impact then on the top line side was reaching 26% in the EMEA region. But all in all, you can see that our efficiency measures are really broad-based across the organization. And that's why we keep seeing this positive margin development basically across the entire organization. Underlying net income, we're also seeing continued good momentum. And keeping the big picture, top line, we have been growing by 6.7%. EBITDA have been growing by 18%. Now looking into the underlying net income, we're growing at 24%. And that's, again, the typical logic in our P&L. When we're growing strongly on the top line side, this translates into lower proportionate growth on the EBITDA side. And everything which is coming below the EBITDA is pretty stable. So depreciation is stable. Financing costs have been lower because of the lower debt level that we saw in H1 and also lower interest rates that we've been facing. And then the tax rate has also slightly improved compared to last year. So I want to say if the top line is growing well, if the EBITDA is performing, and this translates nicely into a strong net income development. Free cash flow, already described, again, not an operative topic, seeing that the cash conversion continues to be strong and improving. If you take the tax effect into consideration, then this normalizes and there's a little bit of working capital effect also in the first half year, specifically on the receivables side, which had been a bit up, but that is more like also now a bit of timing. So on the specific date of when H1 ended, we see this been bit up, but that is a timing effect, which will normalize also in the second half of the year. So really impact that you need to understand for the free cash flow is the tax effect, and that's what I already explained earlier. Net debt and leverage, you can nicely see the trend that we have been on now for a long time. In Q2, we see a slight increase towards 2.5 turns, which is driven by the acquisition, but also the dividend payments, which had happened in May. We're expecting for the full year that we are going below 2 turns. And if you recall, that's exactly our capital allocation policy. We always said during the IPO, our target is to go below 2. And despite the large amount of acquisitions and dividend payments that we have been doing this year, we will see that we're continuing to move into our targeted below 2 range. That brings me to the guidance, which with all the positive developments that we've been seeing in Q2, we decided to narrow. So we are foreseeing on the top line, a 6% to 8% increase in the course of the year. So as you recall, the way we're setting the guidance, we always want to have a good chance to end up in the upper half of the guidance. And that's why looking into the 6% to 8% and also into the narrowing of the guidance, we're actually looking very positively into the second half of the year. On the EBITDA side, we've raised from beyond 26.5% to beyond 27%. And also to put this into context, last year, we had been arriving at 26%. We've always said for the midterm guidance that we're expecting a 1 percentage point increase per year so that we're now putting the guidance to go beyond 27% is clearly indicating that we are on a good track regarding the EBITDA margin development.

Yes. So to sum it up, I think the second quarter, we saw the growth and improved profitability as we said it would. And as Arne said, we are very positive for the second half of the year. The innovations are coming to the market. So the demand is continuously high. So therefore, we narrowed our guidance, still keeping in mind that we want to be reliable and, of course, deliver to our promises. And with this, I think we open up the session for questions.

[Operator Instructions] We'll take our first question from Hugo Solvet with BNP Paribas.

Congrats on the [ prelims ]. Just a few, please. On the guide range. So thank you, Arne, for already pointing to the top end of that new 6% to 8% guide. But just want to understand, why you guys put the low end at 6%, which would imply a significant deceleration into H2. What -- in other words, what needs to go wrong here for us to start thinking about the low end? And second on M&A, EUR 112 million deployed year-to-date, your guide was EUR 40 million to EUR 50 million. Should we assume that you will pause here into H2 and possibly also into 2027, if you can update us on what the funnel for acquisitions look like? And you mentioned Norway being a very attractive market. Can you expand a bit on that? And lastly, if I may, just in terms of directionally the margin between B2B and B2C. Obviously strong uptake in H1, but can you help us understand if you have also seen an increase in Q1 and in Q2? I'm not sure that we've been provided with the details back in the Q1 interim statement.

Yes. So, I mean, the guidance, so 6% to 8%, as I said in my last words, so we want to promise to -- we want to deliver to our promise. And of course, we would like to end up in the upper half of the range we are giving. So that's why we do not foresee any major hurdles. But I mean, as we said before, so we have to deliver. We have to show that we are reliable, and that's why we picked up the 6% to 8%. If something is clear more towards end of Q3, then of course, we will change the guidance accordingly. Second question regarding M&A. So we always gave a range. But we also said if there are good opportunities, then this range might exceed. So we do have the financial flexibility that was from the very beginning also important for us to note. So if we can see that there are good targets on the market, then we also would react accordingly. That doesn't mean that now we exceeded our M&A budget and we have to stop. So we are still looking. And if there are good opportunities on the market, we also would continue. So it doesn't mean that we put it on hold for the second half of this year or maybe even '27. Therefore, everything is fine there. And on margin.

Yes, on the third one, B2B B2C margin, I can share that we are continuing to see the improvement both on the B2B and on the B2C side. So, I mean, along the same logic that we said when B2B is running well, we see typically good mix effect and a bit more scalability on the B2B side. That's why good development on the B2B side. And B2C is continuing to show the step-by-step improvement on the margin side. So from that end, that is well on track and margin improvement is coming from both businesses.

And on what makes Norway attractive market?

What makes Norway -- so the reimbursement system. So you know that normally, our B2C business has a lower EBITDA margin than the B2B business. In this case, the B2C margin is similar to the B2B business. So it's very attractive. And it also -- so this -- the point is there that we have a very good reimbursement in neuro-orthotics. And in the moment, there was no one really covering this area. So now we have the opportunity with acquiring the market leader really to set the standard and grow in the field of neuro-orthotics in Norway.

Our next question comes from Oliver Reinberg with Kepler Chevreux.

Two questions from my side. One on this kind of spike events. Thanks for clarifying. I think you mentioned there was a kind of 1% to 2% contribution from that year-on-year. But I think this is a year-on-year comparison. Can you just give us a flavor like what kind of contribution from Russian Ukrainian sales you now see versus the pre-war baseline, just to get a flavor there. And can you just talk to -- I think, a large part of this is funded by Europe. Is there any kind of development? And also, I think you mentioned or it sounded like there's upside to this scenario. I mean, so far, you have not incorporated any kind of more spike events into your guidance. But now we are seeing some contributions coming in. Have you now incorporated with the kind of top line change or not yet? That would be question number one. And secondly, also on the Norway deal, it looks still like a reasonably full price for the assets. Can you just give us a bit of flavor when you expect to earn your cost of capital on this kind of acquisition and whether we should expect any kind of similar deals going forward of that kind of magnitude?

Okay. So I would take the spike topic. So I mean, the pre-war and now very difficult to assess. So we didn't have an infrastructure in Ukraine at all. So therefore -- and it was a relatively small market for us, we have to admit. So therefore, here, we definitely have seen a major uplift, but from a very low base. So we normally do not provide any market details, but here, we have seen quite a huge impact. On the Russian side, so we were there already. We had quite a valid business there. And I think we are growing there with the reimbursement in the civilian market. So I think the overall information, which is important to note is that basically nothing has changed in Russia in terms of market participants' competition. So everybody who was there before is still there. But also in Russia, the reimbursement grew which doesn't mean necessarily that a lot of new patients are served in the civilian sector, but the level of reimbursement per patient grew quite significantly. So this we have seen. So there's an upselling effect more than a quantitative effect. We said already several times, so we are not taking part in any military tender or whatever. So this is more a part which is closed for foreign companies. So it's more served by Russian companies. And therefore, for us, we do not see really more and more of this spike impact in Russia, while we do see it in Ukraine. So there definitely, we have this increased patient base. So to give you maybe an overview, so we had a pre-war quantity of 8,000 to 10,000 prosthetic fittings per year. And we have now -- since the beginning of the war, we have roughly 150,000 new amputees, so additional to the pre-war number. And you're right, in the moment, due to infrastructure constraints, they are not all yet fitted. So if we're talking about 4 or 4.5 years now time period, there is quite a backlog plus additional now we are coming into the refitting phase. It means besides those who are not fitted yet, the ones who were fitted in the very early stage of the war, they already due to a new fitting. So there, we do expect a further acceleration and yes, even increasingly as long as the war continues. And Norway?

Norway, happy to talk a bit about it. So first of all, the mechanics of the Norway deal. First of all, it's a strategic deal. As Oliver said, was a white spot on the landscape where we have not been present. So following our invest in the best strategy and looking for the market-leading players in order to further evolve on our integrated B2B and B2C business, I think this is a deal which is really spot on and where we've been looking for a longer time. So it's clearly following a strategic rationale. Regarding the financial parameters, I would consider it to be a good deal. You need to understand that the stand-alone margin of the Patient Care business in Norway is already very high. It's probably the highest that we have in the network and it's the highest that we have in the network. And then you need to understand that the pre-owner has been Blatchford. So you can understand that they have penetrated the products into the channel. So we see a good opportunity to bring our high-margin products better into the market and keep that share up. And as Oliver said, this whole field of neuro-orthotics, which is the clear future growth field for us and where reimbursement has been established also for the high-end solutions, that is a completely, I would always say, untapped field that we can now penetrate into Norway. So it has a lot of good parameters on the profitability of the business and the synergies and upsides associated to it. And regarding the capital cost, we clearly will be earning our capital cost with that deal. So if you take the, I don't know, 8.5%, 9% of WACC, and we're clearly expecting that we're going beyond the capital cost. So it's a strategic sound deal and will give us a good upside on the top line, but also on the margin side, B2B and B2C, and it will also earn its capital cost.