Nobel Biocare reports improved profits in a declining market

Nobel Biocare has reported improved profits in a declining market with revenue for the first nine months of 2012 up 3.1% to EUR 427.5 million versus the previous year and down 2.4% at CER.

Revenue in Q3 was also up 2.2% to EUR 131.0 million versus prior year and down 5.1% at CER owing to further revenue declines in Japan from Q2 to Q3. Revenue excluding Japan was flat in Q3 (-0.1% at CER) tracing to sequential quarter to quarter improvements in implant system revenue, offsetting declines in individualized copings and small-unit bridges. Operating profit (EBIT) increased 10.8% to EUR 54.4 million (9M 2011 EUR 49.1 million). Costs were strictly managed in line with revenue development and expenses were shifted from administration to R&D and selling and marketing.

Table 1: Selected key figures in EUR million

Richard Laube, CEO, said: "For the first nine months we see clear evidence that our strategy is working. We are performing on par with our peers for the first time in four years. Our implant systems revenue is growing quarter to quarter, excluding Japan, and our individualized components revenue has been redirected toward implant-based precision components where we have a competitive advantage. For the first time in 5 years operating expenses in relation to sales are declining through improvement programs and we have invested in innovation by increasing R&D expenses by over 15%. We have an exciting pipeline for 2013, and we are adding meaningful value to our customers' practice. Simultaneously, we are becoming systematically more efficient and leaner in conducting our business. We are laying the foundation to perform in all market conditions, which we are confident, will eventually improve."

Business performance update

Table 2: Revenue by region

* A new segment "Americas", which reflects realigned management structures, has been reported since 1 January 2012. As previously announced, the revenue of LatAm/RoW has now been included into other regions, mainly North America. For better comparison, prior year figures have been reclassified to reflect the new regional segment definition.

In Europe, Middle East and Africa (EMEA), revenue (CER) in the nine months declined by 3.9% to EUR 168.0 million (Q3 2012: -3.7% CER). Revenue remained weak throughout the year. The trading pattern in this region was consistent with market-driven declines in Sweden, Spain, Italy and persistent challenges in the Netherlands and Germany. France, Russia, both benefiting from the Nobel Biocare symposia, and the UK continued to report healthy growth.

In the Americas, revenue (CER) in the first nine months of 2012 increased by 1.5% to EUR 167.5 million (Q3 2012: 0.3%). Despite a sequentially improving performance in Canada, overall growth in North America slowed following a softening market and a consequently more competitive landscape. Growth in the company's direct Latin American markets continued at a double digit rate compensating the decline in the distributor markets.

In the Asia/Pacific region, revenue (CER) in the nine months was down 6.1% to EUR 92.0 million (Q3 2012: -15.5%). This was driven by a 13.8% decline in Japan in the first nine months (Q3: -29.6%) mainly due to adverse media reporting on implant treatments. Japan generates about 60% of this region's revenue in this market. APAC excluding Japan was up 7.4% (Q3 2012: +15.8%) driven by continued strong performance in China, India and improving trends in Australia and Taiwan.

As previously reported, patient visits for implant treatment have slowed in Japan by about 20% as a result of adverse media coverage on implant treatments which reached its peak in Q2. Nobel Biocare is the leader in Japan and has the majority share of restorations for edentulous patients. These were heavily affected due to the adverse coverage and the expense of treatment. Subsequently, the Individualized components for edentulous treatments declined sharply in Q3. The media coverage is diminishing but short term patient flow remains depressed.

Alpha-Bio Tec (ABT), which operates independently and separately in targeting customer groups with larger price sensitivity and simpler product and solutions needs, continued to grow at double-digit rates through organic growth and expansion into new markets.

Implant systems were down year-to-date 1.2% (CER) while individualized declined 8.0% (CER). Growth momentum in implant systems picked up in Q3 excluding Japan. NobelActive continued to grow at unchanged double-digit rates while revenue decline for NobelReplace slowed. Revenue development from the other implant brands and standardized abutments followed recent market trends. Regarding Individualized products growth in high-end implant-retained solutions was offset by a strong decline in traditional tooth-based components and scanners - a pattern observed throughout the year.

Financial performance update

Gross profit in the reporting period was EUR 322.7 million (9M 2011: EUR 315.3 million), reflecting a gross margin of 75.5% slightly down from the previous year (9M 2011: 76.1%). A positive impact from business mix (implants versus individualized) and currencies was offset by an unfavorable product mix and valueadded initiatives for customers related to implants. The gross margin in NobelProcera was almost unchanged from a year ago.

Operating expenses in the first nine months were EUR 268.3 million (9M 2011: EUR 266.2 million or EUR 262.3 excluding exceptionals). An unfavorable currency impact and planned investments to improve competitiveness and customer proximity were largely compensated by increasing benefits from ongoing systematic cost management processes. Overall, operating expenses were 62.8% of sales compared with 64.2%, or 63.3% excluding exceptionals, one year ago.

Operating profit (EBIT) for the nine months of the year was EUR 54.4 million (9M 2011: EUR 49.1 million or EUR 53.3 million excluding exceptionals), reflecting an EBIT margin of 12.7% (9M 2011: 11.8% or 12.9%, respectively). Besides favorable currency translation impacts, proactive cost management in all areas kept the EBIT margin in line with the objective for the full year.

Currencies - The impact from currencies was favorable on revenue (5.5 pp), the gross margin (0.2 pp) and the EBIT margin (1.1 pp), as mainly the US dollar and the Japanese yen strengthened against the EUR.

The net financial result for the reporting period was EUR -7.2 million (9M 2011: EUR -12.3 million). A reduction of interest expenses and a favorable hedging result drove this improvement.

Taxes - Tax expenses in the first nine months amounted to EUR 12.5 million versus EUR 10.3 million a year ago. Based on the revised full-year profit expectations, this reflects a base tax rate of 26.5%.

Net profit for the first nine months was EUR 34.7 million (9M 2011: EUR 26.5 million), reflecting a slightly higher net profit margin of 8.1% (9M 2011: 6.4%). This improvement was attributable to both higher operating profit and the net financial result.

Cash flow from operating activities for the first nine months totaled EUR 66.4 million (9M 2011: EUR 50.9 million). This higher cash flow was primarily due to exceptional taxes paid last year. Cash & cash equivalents at the end of September 2012 were at EUR 124.2 million, compared with EUR 188.7 million a year ago, prior to the refinancing of the maturing convertible bond. Net cash amounted to EUR 10.5 million compared with net debt position of EUR 83.3 million a year ago.

Strategy progress update

Nobel Biocare's strategy is guided by the company mission "Designing for Life". This aims to help customers treat more patients better for improved quality of life with superior products and solutions designed to last the life of the patient. This mission is realized and business performance is achieved through four strategic pillars:

Innovative products and solutions - The new implant launches, NobelReplace Platform Shift (PS), Nobel- Replace Conical Connection (CC) and NobelActive 3.0 have been well executed and are on track. Nobel- Replace CC, in particular, is attracting new users. The recently launched NobelClinician treatment planning software, also uniquely available on Mac OS, is improving treatment safety and gaining new subscribers. This tool has sold disproportionally well in Japan since the media events. The new drill-motor, OsseoCareTMPro, operated by a uniquely programmed iPad has received excellent customer feedback and shipments began in October. OsseoCareTMPro represents another innovation, aiding treatment workflow and patient safety through the use of digital technology. Lastly, the new NobelProcera Scan and Design Center began initial beta testing in early October and will offer customers a convenient way to access precision individualized components needed to treat edentulous patients. Pipeline projects scheduled for launch in 2013 are on track.

Customer value add -The Sales Academy sales force training has been rolled out globally since the beginning of this year, significantly increasing and improving sales force training in time and quality. Additional sales representatives have been added in markets where the company is growing such as the US, China and Brazil while reducing and reallocating resources from European markets in decline. The new online store went live in the US in August achieving early increases in order count and value. Further market rollout is on track for 2013.

Training and education - The Company experienced strong attendance and interest in its symposia and forums, with over 500 customers attending the Toronto symposium in October and over a 1,000 customers attending the symposium in Rimini, Italy. 400 participants followed the successful corporate forum at the EAO in Copenhagen. The local T&E programs continue to take shape as our smaller more hands-on approach is helping customers to improve their quality of treatment care and safety.

Operating efficiency and effectiveness - The continuous improvement programs are showing clear signs of progress as Nobel Biocare is systematically reshaping into a fitter performance oriented organization. The objective is continuous improvement on the operational expense to revenue ratio, while simultaneously reallocating resources to the three growth drivers above. Headcount has been redeployed to R&D, sales and production, where volume has increased.

Executive Committee update - Effective 1 January 2013, Mr. Walter Ritter, currently Global Head of Human Resources, will be appointed to the Nobel Biocare Executive Committee as Senior Vice President Global Human Resources. This appointment underscores Nobel Biocare's deep commitment to our people and team development and continual improvement of the organization's effectiveness and efficiency.

Outlook

Based on the first nine months Nobel Biocare anticipates the market to decline modestly for the full year. Barring any unforeseen events, in particular a further deterioration in Japan, Nobel Biocare foresees decline of its revenue at CER in line with the market of modest single-digit percentage. The operating profit (EBIT) for the full year is expected to be about EUR 67 to 70 million.