Kurt Anker Nielsen - Financial performance and outlook for 1996
Now we hope that this has given you a good understanding of what we have achieved business-wise in 1995 and where our core business are going in the years to come. I will now briefly elaborate on the financial performance of the Novo Nordisk Group during 1995 and outline our expectations for the current year.
Slide 35 - Net turnover by business area
Overall sales grew by 1%. The main reasons for this limited sales growth are the negative effect from an adverse development in Novo Nordisk's invoicing currencies in addition to the impact on sales of the divestiture of non-core businesses.
The currency development alone had an adverse effect on sales of approximately 6%.
Adjusted for currency changes the sales growth for the continuing businesses was 11%, which indicates a healthy underlying volume growth in Novo Nordisk's core business areas.
Sales growth in the Health Care Business was 8%, and 14% if the negative effect from currencies is disregarded. The sales development in the Enzyme Business showed a 2% drop, but a growth of 6% had the currency levels remained stable. The effect of price changes was neutral in the Health Care Business, but negative in the Enzyme Business to the effect of approximately 2%.
License fees and other operating income increased by 11%, although the growth from 1994 to 1995 was limited by the reduced value of GBP vis-a-vis DKK of 9%. The growth is primarily attributable to the continued increase in license fees from SmithKline Beecham's sales of the anti-depressant drug, Seroxat®/Paxil®.
The growth in operating profit was 1%. Adjusted for once-off restructuring costs in 1994 and 1995 the increase was 3%. However, if we adjust for the adverse effect of the development in Novo Nordisk's invoicing currencies, then the growth in the operating profit generated by the underlying business was around 20%.
The financial items developed positively for Novo Nordisk during 1995, primarily driven by the gains from commercial currency hedging activities as well as gains on our marketable securities. As a result of this, income before tax increased by 12% compared to 1994, thereby meeting Novo Nordisk's own expectations for 1995.
Since the effective tax rate increased from 26% to 27.5%, the growth in net income and earnings per share was 9%. Net income was DKK 1,563 million or USD 282 million, and earnings per share came out at DKK 41.66 (USD 7.52).
Slide 37 - Capital expenditures 1995
Capital expenditures for property, plant and equipment (net) totalled DKK 1,212 million in 1995. The projects were undertaken in as well as outside Denmark and are mainly aimed at enhancing Novo Nordisk's overall production capacity, necessitated by the increasing demand for our products. The insulin filling and packaging facility in the U.S.A. is now ready to start production contingent on FDA approval of this new facility, whereas the projects in Japan and China are still in the start-up phase.
Slide 38 - Development in cash flow
Cash flow from operations was higher and the investment level lower in 1995 than in 1994, and this spurred a significant improvement in the free cash flow.
Based on the improved cash flow and the establishment in 1995 of major committed credit lines, the company's strategy is to gradually reduce its portfolio of marketable securities by repaying part of the debt without jeopardizing the financial flexibility. Following this strategy Novo Nordisk in 1995 repaid debt to an amount of DKK 1.5 billion, which partly resulted in a reduction of the bond portfolio from DKK 3.1 billion at the end of 1994 to DKK 2.2 billion at the end of 1995.
Slide 39 - Capital expenditures 1996
The main investment projects in 1996 encompass a continuation of the world-wide capacity expansion programme in addition to the start-up of projects aimed at bringing to the market some of Novo Nordisk's coming pharmaceutical products like NovoNormTM, The large investment project in China will continue and so will the projects in Japan and France. In 1996, we expect to see an investment level of up to DKK 2 billion, and despite the fact that this represents an increase over the investment level in 1995, we do expect a positive free cash flow also in 1996, however, not of the same magnitude as in 1995.
We believe that we will all be able to continue the positive trend started in 1995. Consolidated sales are expected to increase in 1996 despite the divestiture of businesses in 1995. Both in Health Care Businesses and in Enzyme Business the growth will primarily be driven by volume increases and product mix improvements. The increase in the Group's total costs is expected to be lower than the sales increase.
Based on this and assuming stable currency exchange rates at the current levels, Novo Nordisk expects for 1996 an increase in operating income of 10 to 15%. If the currency and interest rates do not change significantly, the rate of increase in operating income will be reflected in a corresponding increase in income before tax and the effective tax rate is expected to be at the level of 29%.
