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Half year results 2008: Progress on track - guidance re-confirmed
- Revenue growth at constant exchange rates (CER) flat at EUR 323.8 million
- Improving sales in US (NA Q2: +3.7%) and NobelActive launch compensated 2007 World Conference sales
- Leading gross profit margin of 83.0%; including NobelActive ramp up production cost
- Profit from operations (EBIT) EUR 92.7 million; reported margin 28.6%
- Basic earnings per share of EUR 0.47
- Operating cash flow up at EUR 59.1 million
- Successful launch of NobelActive with ~60'000 implants sold in 2008
- Successful World Tour; ~60% non-customer participation
- Going direct: acquisition of Taiwanese distributor completed
- Outlook for 2008 re-confirmed: low single-digit growth at CER; EBIT margin roughly at 2007 level (CER)
Domenico Scala, CEO: "Revenues in the second quarter were as previously indicated and have compensated for the significant sales impact from the 2007 World Conference. Although our revenue growth was still flat, we are seeing some encouraging initial signs that our initiatives are gradually starting to pay off. In the US, improving sales are the result of our initiatives to strengthen the management team and the sales force and improving our go-to-market with an increased customer focus. In Europe, our Q2 revenues were still disappointing. However, several ongoing country-specific measures, including the filling of all vacant management positions should improve our performance in the quarters to come. Asia, on the whole, continues to grow. In Japan, we are awaiting approval for NobelSpeedy and Groovy, which should lead to improving sales. In all regions, we continue to expand our customer base and, thanks to a successful NobelActive launch, we are seeing an increasing number of customer conversions. The progress in reinforcing our sales organization, the improvements in our operations, and the rebuilding of trust with our customers are on track. This confirms the management team's conviction of improved top line performance for the second half, which, combined with an increased leverage underpins our guidance for the full year."
For the first half of 2008, revenues (CER) were down 0.2%. Reported revenue decreased by 5.2% versus the prior-year period to EUR 323.8 million. The difference between CER and reported revenue growth is mainly attributable to the weakness of the US dollar.
Revenue growth (CER) remained flat in the second quarter. Reported revenue for the quarter decreased by 5.6%, Q2 sales performance should be seen against the background of a strong prior-year performance that was positively influenced by the World Conference as well as some phasing of revenues in Europe.
In Europe, Middle East and Africa (EMEA), revenue (CER) for the first half year declined by 5.0% to 160.3 million. Revenue (CER) in the second quarter declined by 4.8%. Markets such as Russia, the Baltic States, Poland, the Netherlands, Austria and Finland showed continuing growth. Management issues in Germany/Switzerland and the UK continued to have an adverse impact on the Q2 results, however these issues were addressed during the course of the second quarter and should result in improved performance in the second half of the year. In Sweden, anticipation of a reimbursement change, which took place on 1 July, had a particularly negative impact on the second quarter. Also thanks to NobelActive, the trend in new customer acquisition throughout the region made further progress and partially compensated for the continued cautious ordering volume of the existing customer base.
In North America, revenues (CER) increased by 1.9% to EUR 100.4 million for the first half year and edged up 3.7% in the second quarter. Management was strengthened through the addition of two new key positions, and the sales force was reinforced, both in terms of numbers of individuals and level of experience. Demand for large-case and higher-end treatments remained somewhat soft, however the postponed reordering pattern of customers was confirmed by the number of orders placed during the second quarter. NobelActive continued to enjoy a high degree of acceptance throughout the market, with strong demand for courses and a large uptake for the new prosthetic platform coming from both existing and new customers.
In the Asia/Pacific region, revenue (CER) rose by 12.6% (CER) to EUR 52.4 million for the first half year. Revenue (CER) grew by 9.0% in the second quarter. This solid performance was achieved against the backdrop of a strong prior-year quarter, with its high share of revenues from the 2007 World Conference. The ordering pattern in Japan was temporarily softer due to the delay in market approval for NobelSpeedy and Groovy. In Taiwan, growth slowed due to de-stocking prior to Nobel Biocare taking over the distributors' activities. Strong interest was witnessed during the World Tour meetings in Mumbai, Shanghai and Singapore held in the second quarter; a high non-customer proportion of ~60% attended the conferences.
In Latin America / Rest of the world, revenue growth for the first half year was flat. Revenue (CER) during the second quarter eased by 1.3%. This quarterly decline has to be seen in the context of a high share of revenues from the 2007 World Conference. In addition, during the second quarter, Nobel Biocare temporarily stopped the shipment of individualized products and NobelGuide templates to Brazil due to non-conforming import declarations. The products have since been re-registered and the importation has been resumed in July after a two-month interruption.
Gross profit for the first half of 2008 was EUR 268.7 million, equivalent to a reported margin of 83.0% (2007: EUR 289.0 million). On a CER basis, this amounted to a decline of 2.1% when compared to the prior-year period. The 2007 gross profit margin was inflated due to the significant stock up of high margin implants, which occurred at the end of the second quarter. Gross profit for the second quarter was EUR 137.8 million, resulting in a gross margin of 81.9%. In addition to the 2007 stock up effect, the gross profit margin declined mainly due to the consolidation of AlphaBioTec, ramp-up production costs and a temporary launch offer for NobelActive. Higher pricing discipline in the US was diluted by Europe.
Profit from operations (EBIT) for the first half-year was lower at EUR 92.7 million (2007: EUR 109.4 million) as a result of lower reported sales and a decline in the gross profit margin. Q2 operating profit amounted to EUR 43.9 million. During the second quarter, the absence of a World Conference (as in 2007) was offset by costs associated with four World Tour events, the NobelActive launch, the increased sales forces in all regions, as well as investments aimed at improving the organization. Measures to ensure efficiency gains are underway and should ensure that improving second half-year sales performance yields a higher operating margin. At CER the operating profit margin for the first half year would be approx. 50 bps higher, thus slightly above 29%.
Currencies - Mainly due to the weaker US Dollar, reported revenues decreased (-5%). The Group's main cost currencies (Swiss Franc, Swedish Krona) remained strong, which had an additional small negative impact on the operating margin. New hedging procedures to protect margins from major currency fluctuations will be implemented for 2009.
Net financial expense was EUR 19.7 million for the first half of 2008 (2007: EUR 0.1 million) and EUR 12.8 million for the second quarter. The increase was attributable to higher interest expense resulting from the funding of higher shareholder return (late 2007 and second quarter 2008), the AlphaBioTec acquisition and buyback related tax payments. Unrealized currency losses incurred in the first quarter of 2008 were fully recovered in the second quarter. Inversely, the company incurred realized and unrealized losses of EUR 14.3 million from the monetization and revaluation of various financial assets. The only remaining exposure from a financial asset at the end of June was an equity markets related investment of approx EUR 14.5 million.
Net profit in the first half year amounted to EUR 57.2 million (2007: EUR 85.6 million) and to EUR 24.3 million for the second quarter. The decline was attributable to lower operating profit and higher financial expense.
Cash flow from operating activities in the first half year increased to EUR 59.1 million. Excluding one-off effects from the acquisition of AlphaBioTec (additional working capital), cash flow for the first half year would have been EUR 63.7 million.
Cash and cash equivalents amounted to EUR 109.2 million for the first half of 2008 versus EUR 188.1 million at year-end 2007 and EUR 70.1 million at the end of June 2007. While one-off payments for taxes (related to the 2007 buyback), the acquisition of AlphaBioTec and the shareholder return in 2008 have led to large cash outflows, the sustainable generation of cash from operating activities as well as the partial monetization of the financial portfolio have strengthened the balance sheet.
Share repurchase program - Following the approval from the 2008 AGM, Nobel Biocare launched a new share repurchase program via a second trading line at SWX Europe. A maximum repurchase volume of CHF 750 million over a period of two years was approved in May 2008 by the Swiss Takeover Board. Since approval, Nobel Biocare has bought back 357,000 NOBN shares for a total cost of EUR 8.3 million. The repurchase will be resumed after the expiration of the blackout period associated with the publication of the half-year report.
The NobelActive launch in Q2 exceeded the company's expectations. With around 60'000 implants sold since the beginning of the year this is the most successful new launch ever in implant dentistry. NobelActive, positioned for experienced users, was developed to satisfy both surgical and restorative clinicians' requirements with maximum flexibility for implant placement and restorability. Due to its unique design, NobelActive expands treatment options and achieves high initial stability even in limited or compromised bone situations, has redirecting capability for optimal placement, dual-function prosthetic connections both for internally connected abutments and externally connected bridges and built-in platform shifting with more surface for a better esthetic result. NobelActive is supported by solid scientific evidence such as 12-month results from a 5-year prospective multi-center study and eight-month pre-launch activity involving experienced users worldwide. This rigorous introduction of NobelActive has contributed to Nobel Biocare regaining trust with the clinician community and has built a solid foundation for the continued success of this innovative product.
Strong interest in World Tour 2008 - The World Tour was kicked off with successful stops in Mumbai, Shanghai, Dublin and Singapore. This new program, with its stronger focus on customers' needs and science, was very well received and has served to showcase the company to a new audience in the world's fastest growing markets. Almost 60% of the attendees at the conferences were non-customers of Nobel Biocare [prior to the events]. Further stops in Asia, Latin America and selected European countries will follow in the second half of 2008.
Increased global presence - In the second quarter, Nobel Biocare announced the signing of an agreement to take over the operations related to its field of activities from its distributor in Taiwan. These activities will be combined into a newly established subsidiary, thereby expanding the company's activities in this very important Asian market.
Organizational development well underway - The organizational measures initiated to emphasize quality, customer orientation, science and innovation as well as to increase operational efficiency in order to support future growth are progressing according to plan. In addition, management capabilities have been added in key areas in order to further professionalize the organization. In North America, these organizational changes are now completed. In Europe similar initiatives and several country-specific measures are in progress and should be completed by the end of the year. In order to improve customer relations, the company has initiated a successful dialogue with customers throughout the world and developed programs to reach out to new customers. These activities are supported by new processes for going to market, creating corporate advisory boards composed of leading clinicians and researchers in the field of restorative and esthetic dentistry, as well as re-emphasizing scientific leadership. Group wide, during the first half of 2008, the workforce was increased by 299 individuals and amounted to a total of 2,541 employees at the end of the period. This represents a 12% increase in headcount, with the majority of the increase being related to the sales force.
Managememt change - Alexander Ochsner has been appointed Vice President Sales Europe, Middle East and Africa (EMEA) and Member of the Executive Committee. Alexander Ochsner has extensive experience in the medical device industry. He has held various international sales, marketing and executive management positions with increasing responsibilities at Medela AG, Medtronic Europe SA and most recently Zimmer Dental where he acted as Vice President Europe and Asia Pacific. Alexander Ochsner earned a Master's of Science at the Swiss Federal Institute of Technology in Zurich and a Ph.D. in Natural Sciences at the same institution. He succeeds Jacques Gutedel who decided to leave the company.
Outlook - Barring further economic deterioration and unforeseen events, Nobel Biocare expects organic revenue growth for the full year 2008 in the low single digits (CER) and an EBIT margin roughly at 2007 levels (CER). Therefore, Nobel Biocare expects to slightly underperform the market average this year due to its business mix, which is weighted toward large-case treatments, as well as several country-specific issues.
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