Innovation supports revenue growth acceleration in Q3; significantly improved underlying EBIT margin for the first nine months

Table 1: Selected key figures in EUR million

1 Figures for 2014 include EUR 4.3 million non-recurring costs for the NobelProcera realignment initiative.

2 Figures for 2013 include EUR 6.2 million non-recurring costs for headquarter realignment.

Richard Laube, CEO: "We have experienced our highest quarterly growth rate in six years, led by our recent innovations. These include clinically relevant products and solutions such as NobelClinician, a new NobelProcera scanner and components and conical connection implants. Our pipeline of innovation now positions us for sustainable long-term and profitable growth in both implants and CAD/CAM components. Our profits are simultaneously improving through both a leverage effect of our high gross margins and efficiency programs initiated during the past two years that are now delivering visible results."

Business performance update

Table 2: Revenue by region

Revenue grew 5.5% at CER to EUR 133.6 million in the third quarter (4.4% in euro due to adverse currency impacts). This marks the sixth consecutive quarter with revenue growth at CER and was achieved over a mid single-digit percentage growth in Q3 last year. Revenue performance improved in Implant Systems, Individualized and in all regions in the third quarter. This lifted revenue for the first nine months to EUR 416.7 million, up 3.4% at CER (down 0.1% in euro).

In Europe, Middle East and Africa (EMEA), revenue for the nine months was up by 1.5% (CER) at EUR 170.5 million (Q3: 3.2% CER). Growth was achieved in the first nine months in, among others, Sweden, Belgium, the Netherlands, Spain, Portugal, UK and Russia. In the major markets France and Italy, performance improved for two sequential quarters (Q3 vs. Q2 vs. Q1), but remained negative year-to-date.

In the Americas, revenue for the first nine months rose by 4.7% (CER) to EUR 170.7 million (Q3: 7.9% CER). In the US, revenue growth further accelerated in the third quarter to a high single-digit percentage, resulting in a mid single-digit increase for the first nine months. Mexico continued to grow at double-digit rates in the first nine months compared with the same period a year ago, while Brazil was flat. After several quarters with decline, Q3 revenue in Canada was slightly ahead of prior year's level.

In the Asia/Pacific region, revenue for the first nine months was up 4.8% (CER) to EUR 75.5 million (Q3: 4.4% CER). Japan recorded modest growth for the first nine months. Revenue in the region, excluding Japan, was up 6.4% in the first nine months (Q3: 6.8%) driven by continued strong growth in China and India and an improving performance in Australia, achieving growth in Q3.

Alpha-Bio Tec(ABT) achieved solid growth at a mid single-digit percentage for the first nine months. This performance is impacted by adverse currency development. Excluding this impact, growth was in the high single digits.

Implant Systems (85% of Group revenue) revenue growth accelerated to 6.1% (CER) in the third quarter, lifting growth to 4.0% (CER) in the first nine months. The innovations in implant systems such as the advanced conical connections that enable superior treatment solutions (NobelActive, NobelReplace CC and NobelReplace PMC) and the recently introduced regenerative solutions continued to drive growth. Revenue from Individualized solutions (15% of Group revenue) was up 2.0% (CER) in the third quarter and flat for the first nine months. Growth in high-precision implant-based components and equipment balanced the decline in tooth-based restorative components.

Financial performance update

To facilitate a comparable performance assessment, in the figures below the current year is shown excluding EUR 4.3 million non-recurring restructuring costs for NobelProcera, and the prior year is shown excluding EUR 6.2 million non-recurring headquarter realignment costs, unless otherwise stated.

Gross profit for the reporting period was EUR 314.0 million (9M 2013: EUR 318.6 million), reflecting a gross margin of 75.4% compared with 76.4% in the previous year. The gross margin declined due to a negative sales mix shift towards products with lower margins. The average selling price (ASP) for dental implants was higher than a year ago. In the third quarter 2014 EUR 3.3 million non-recurring costs were recognized for the NobelProcera realignment in cost of goods sold. Reported gross profit for the first nine months was EUR 310.7 million versus EUR 317.5 million a year ago, reflecting gross margins of 74.6% and 76.1%, respectively.

In the first nine months operating expenses declined to EUR 264.5 million (CER) compared with EUR 267.1 million in the previous year thanks to the cost savings and efficiency improvement initiatives. This reduction of 1.0% versus last year at CER was achieved despite continued significant investments in innovation, customer value-add activities and training and education. Research and development (R&D) expenses were EUR 47.0 million, up 6.3% at CER versus last year (excluding non-recurring costs) and represented 11.3% of revenue. While selling and marketing (S&M) expenses were overall flat compared to last year (0.3%), general and administrative (G&A) expenses were reduced by 9.4%, both at CER. Total operating expenses were further lowered to 62.1% of revenue for the first nine months. Excluding currency impact, this ratio is 61.3% compared to 64.0% a year ago.

Profit from operations (EBIT) for the first nine months was EUR 60.8 million (CER) compared to EUR 51.5 million a year ago, reflecting an EBIT margin of 14.1% versus 12.3% a year ago. Reported profit from operations for the nine months was EUR 51.8 million compared to EUR 45.3 million a year ago, reflecting a margin of 12.4% this year compared with 10.9% in 2013.

Currencies - The currency translation impact in the third quarter 2014 eased somewhat and resulted in the following adverse impact for the first nine months: -3.5pp on revenue, 0.0pp on gross margin and -0.6pp on the EBIT margin. Major negative impacts came from the weak US, Canadian and Australian dollars, Japanese yen and Russian ruble.

The net financial result in the first nine months was EUR -7.4 million (9M 2013: EUR -4.2 million as reported). The lower result was driven by a less favorable net foreign exchange result in response to adverse currency effects on EBIT compared to the prior year and some currencies that were not hedged due to the high economic cost of hedging. Interest expense remained broadly unchanged compared with last year.

Tax expenses for the first nine months were EUR 3.5 million compared to EUR 10.9 million a year ago. The lower expense is primarily due to a non-recurring item in Q3. Based on the resolution of a tax dispute in favor of Nobel Biocare, a tax provision of EUR 9.1 million was released. However, also excluding this one-time impact, the estimated tax rate was lowered to 22.7% versus 25.4% reported for the full year 2013.

Net profit as reported for the first nine months was EUR 40.9 million compared to EUR 30.2 million a year ago. The net profit margin went up to 9.8% compared with 7.2% as reported after nine months in 2013. Excluding currency impacts and the non-recurring realignment costs in both years, net profit rose to EUR 50.1 million from EUR 34.7 million a year ago (net profit margin to 11.6% from 8.3%). Reported earnings per share (EPS) were EUR 0.33 (9M 2013: EUR 0.25 as reported).

Net cash from operating activities for the first nine months was EUR 47.1 million compared with EUR 45.4 million last year. At the end of September 2014, the cash position was EUR 199.1 million compared to EUR 180.8 million at the end of 2013. Net cash was EUR 70.0 million compared to EUR 66.5 million at the end of 2013.

Danaher Corporation offering Nobel Biocare to join its dental platform

On September 15, 2014, Danaher announced a public tender offer for all publicly held registered shares of Nobel Biocare Holding AG. The all-cash offer price represented a 7% premium to the 60-day volume-weighted average share price ("VWAP") at the time of the announcement and a 28% premium to the undisturbed 60-day VWAP before July 29, 2014, when Nobel Biocare confirmed early-stage discussions with potential bidders. The Board of Directors of Nobel Biocare reviewed the offer in detail and determined that the all-cash offer is in the best interests of Nobel Biocare, its shareholders, employees, customers and suppliers and has unanimously decided (with one member not participating) to recommend that Nobel Biocare's shareholders accept the offer from Danaher. The offer period lasts until November 14, 2014. The offer prospectus and the fairness opinion can be accessed at http://www.nobelbiocare.com/international/en/home/company/investors/offering.html?redirect=true.

Outlook

Nobel Biocare expects the global dental implant market to grow at a low single-digit rate in 2014. While it is quite stable in most countries and regions, there is volatility from time to time in certain areas such as economic challenges and political developments.

Based on this market assumption and results for the first nine months in 2014, Nobel Biocare expects revenue to grow around 3% to 4% (CER) for the full year 2014 and to improve the EBIT margin excluding any non-recurring realignment costs by about 150 to 200 bps (CER) from 12.1% in 2013.

Assuming modest low to mid single-digit growth for the market over the next 3 to 5 years, and given the progress of the company, the EBIT margin improvement outlook is at 100 to150 bps at CER per year.