Nobel Biocare Holding Earnings Call NUGGETS: Value-Based Offers, EBIT Guidance

On Wednesday, Nobel Biocare Holding AG (NOBN) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Value-Based Offers

Tom Jones – Berenberg Bank: The first question I had was just, I would like you to elaborate a little bit on the comment you made in the release about increasingly competitive value-based offers in the Americas. Just be interested to hear what you are seeing is probably the first of (micro member) premium based company actually admitting that the value based segment is posing a capacitive threat and taking share away. Then the second question was just related to your Procera business, be interested to hear some more long term strategic thoughts about that business. Basically we have been doing okay but basically we have been struggling for some time now and the world is moving on rapidly in CAD/CAM and the Procera business is effectively very similar to how it was a few years ago. So be interested just to hear how you – what you intend to do to try and restore growth in the Procera business?

Richard T. Laube – CEO: The first question on value-based offers is not necessarily value players or low-price producers. But what we see in hindsight especially in the first quarter in North America is offers from competitors including premium competitors that are bundling items such as (in or all) scanners with the number of implants. We are seeing quite a bit of this promotional activity taking place and I think that’s the meaning of value-based offers. Specifically, in the Americas, the U.S., the landscape around premium players and lower cost players is not changing dramatically. I think there is some evidence that lower cost players are in fact having a tough time in North America. So, I hope that clarifies what that set of work means. The second question around Procera; we have a business that has been operating since about 1982. We acquired it in I believe 1992. And when you have a going concern, you want to be able to make intelligent improvements; continuous improvements, and the way we’ve looked at it, if we were to do anything disruptive like discontinued copings and small unit bridges and move to where our strengths are in screw-retained solution, that would be extremely disruptive to our customer base, our business, our team and we don’t think it would create value. Our pipeline is geared to the screw-retained components which are integrated with the implant-based treatments. This is working. We see rapid growth on overdenture bars. We see excellent growth on individualized abutments. This is going as well as we can foresee it. We will be introducing towards the end of the year a series of components which are screw-retained, which are implant-based around abutments and other designs. So, the development program is going in this direction. We remain in the screw – in the copings and small unit bridges because that technology in milling and designing is necessary to create, for example, full-contour, implant bridges of 12 units. If you master the technology, in particular the CAD software, which has extremely complex algorithms, you are able to design screw-retained solutions better. So there is a need to be in that business. We do acknowledge that the competitive landscape has changed dramatically. There is more chair-side milling, labs are installing more small milling machines; these were all former customers of these components and now they have become de facto competitors. There isn’t a simple solution, and I think we’re navigating our way through this in the right direction for maximizing value in the mid, longer term. We’re stuck with this problem on cement-retained solutions, and these are across the bare short-term.

Tom Jones – Berenberg Bank: Maybe just one quick follow-up if I may. You mentioned in the release, your gross margin was slightly impacted by price, and in previous calls you’ve elaborated how you’re giving your country managers more flexibility on promotional activities and price. I was just wondering if you might be able to – prepare to make some quantitative statement as regarding the price trends that you’re currently seeing across your business.

Richard T. Laube – CEO: Yeah. When we look at the gross margin, I think it’s 75.4% versus 76.5% last year, and we break that down, we are seeing modest improvements on Procera gross margins; good sign. We are seeing a slight mix improvement to implant systems; that’s fine. We have within the implant systems I think you will see in the chart about 1.8% decline. In there, there are several one-off royalty payments that we’ve made in the half that should not be repeating and we have had some material write-offs. That represents about half of that a little bit more than half of that 1.8% decline. We have analyzed the balance of that relatively small the majority I would say under 20% of that 1.8 million is a price discount related, cash related and that traces to some very specific country where our pricing was out of line relative to the premium sector that we have made some adjustments to. The other portion of that is selling activities related to things like NobelClinician, the Mac version that we introduced in the fall. We have used this to build activities with customers, study clubs, strategic alliances and when you work with that kind of product in that manner it gets added as a discount. So, we’re not seeing a dramatic change in cash discount and if we are we’re very conscious that we know exactly where that is going and for what reason.

EBIT Guidance

Yi-Dan Wang – Deutsche Bank: I have two questions. I noticed that in your cash flow you have released 8 million of provisions which would have helped your operating profit. Can you give us a breakdown of that amount and what that relates to, and how you would expect your provision line to move in the rest of the year? Then the second question is on your EBIT guidance, somewhat surprising that given the, I would say, a fairy significant shortfall in revenues largely because the market itself is weaker that you’ve decided to maintain your constant currency EBIT guidance. How much of that relates to the provision that has been released and how much of that relates to maybe some self-help activities that you are planning to implement? If you could give us some sense, so that we can get comfort on that guidance, that would be great?

Richard T. Laube – CEO: Yi-Dan, I will pause for a second on the provision. I don’t have the data right in front of me, but we are getting the answers for you. So we’ll get back to that question specifically. On the EBIT guidance, what we have commented on was EBIT in absolute in line with last year’s at constant exchange rate. We gave very precise number on that. We feel that as we see the market develop and soften, but we see our organization behave and as we get greater visibility on the programs that we are trying to put into place, we do feel given the four and half months we have remaining in the year that we can manage our business to deliver that outlook. We have been putting in place our program in innovation. Our pipeline is forming. We have been putting in our value-added activities in our selling organization. I think if you look at the consolidated statements and you look at the operating expenses, you will see a shift away from administration into research and development and into selling and marketing. Some of that – and you will see fairly significant decreases in the administration line. We are shifting resources properly. We are trying to form our organization with good cholesterol in selling and research and development and we are trying to minimize – some people are going to be upset with me here, but we are minimize our administrative expense which customers don’t yield. So, we’re finding that we’re able to make the adjustments necessary without disruption or offsetting the investments and programs that we want to be putting into place, but we aren’t able to make the adjustment given the tougher market conditions that we see. I am sure there is a question lurking that say you know what have you spent for that money, what are you going to spend, and I think we indicated at the full year that this is planned business certainly not spent and we will be extremely judicious about how we go forward. We also have to learn. We’ve put investment plans in place that we have not put in place before in a long-long time, and some instances we’re finding it simply taking us longer to put some research and development programs into place, the higher the people to put the teams together and so there is a natural delay in the organization on these investments. So, all in all we think despite the challenging market environment, we can deliver this avid outlook.

Yi-Dan Wang – Deutsche Bank: Just a follow-up on that. So, at the beginning of the year, you said that you would invest an additional €20 million to €25 million into the business during 2012, given how the market has progressed or that the speed at which you are able to place that investment. Can you give us a sense of how much you would have – you expect to place in the rest of – for the whole actually relative to the original €20 million, €25 million plan?

Richard T. Laube – CEO: I think, first if you look at the first half consolidated statements you will see an increase in selling and R&D, which is pretty material. I’m not going to give you a number off the top of my head. But that’s already an indication of what we are investing in this area and I think the run rate for that will be similar slightly increasing going into the second half. I – we are not going to be spending the full €20 million to €25 million. We will be in the lower teens I think. That isn’t because we are slashing programs. We are just finding it more difficult to get these programs running and the teams in place. What happens under this dynamic is the program doesn’t get canceled. If we are working on a new implant or any other program it doesn’t get canceled, it just gets sequenced and delayed in the pipeline until we do have the resources to put it into place. So it’s the day-to-day running of the business.

Suha Demokan – Head, IR: With regard to the provisions with respect to the accrued expenses that’s the simple one. The maturity is actually coming from lower accruals for bonus (based) at this stage. As we are comparing half year numbers to full year numbers and as you know you are building accruals for provisions throughout the year and as we are comparing half year to the full year irrespectively the end of last calendar year, we have sort of a lower number very naturally. So there is no reversal or dissolution of any accruals or provisions that would actually help the profit line, and there is also some FX impact in it, but the majority actually is coming from these bonus accruals.

Yi-Dan Wang – Deutsche Bank: Right. But if I may follow-up on that, if I look at your provision line, I mean that’s been increasing over the last four years, while the market and also your business have delivered less than originally anticipated. So, how would I reconcile the situation now where that seems to be quite lot of relief relative to what we’re seeing in the prior years when you have increases actually?

Richard T. Laube – CEO: The bonuses are always the function of – that’s a generic (indiscernible) on this, but bonuses are function of the difference between (indiscernible) and actuals and sometimes it quotes on region certainly with regard to a field sales force and such things. So you cannot one-to-one compare and just they like the level of bonuses or bonus accrual actually is a (heath) for the next year how much exactly it has to be. So, there is always a building up in general throughout the year and therefore the half year number is naturally lower than the number at the end of the calendar year. But this may also vary over time. That’s natural in any company.

Yi-Dan Wang – Deutsche Bank: Should you not be comparing half with half rather than half with full given that your second half provision probably would increase…?

Richard T. Laube – CEO: Yi-Dan, we’re not going to handle that question. It’s not going to – we’d like to give question to someone else. It’s an accounting question, and I don’t want to dismiss; it’s just not going to give us – it’s not going to give you information to get a better handle of how the business is running.

Yi-Dan Wang – Deutsche Bank: So your EBIT guidance; that doesn’t – how the provision will change in the second half with no impact to your underlying EBIT guidance?

Richard T. Laube – CEO: We don’t think its material. We’ve given the best outlook guidance that we can.