Zapf Creation - Setting free a childrens imagination.

07 Nov 2008

Zapf Creation AG reports nine months of solid business performance in 2008

•  Consolidated sales up 9.3% in the first three quarters
•  Group EBIT after nine months clearly positive at € 3.5 million
•  Economic slowdown and financial crisis dampen consumer demand
  

Roedental, November 7, 2008– Zapf Creation AG, Europe’s leading manufacturer of play and functional dolls, today announced that its operating business improved considerably compared to the previous year and developed in line with expectations in the first nine months of 2008. Although the economy slowed down in key European countries, Zapf Creation’s consolidated sales rose by 9.3% year on year. This growth was essentially the result of the encouraging demand for BABY born® products and the renewed efficiency of sales and marketing activities in core European markets and growth markets such as Eastern Europe.

In Germany, the market share of the Zapf Creation Group in the segment of play and functional dolls in the first nine months of 2008 increased to 55.2%, up 2.6 percentage points year on year (52.6%).

Consolidated earnings continued to improve in the first three quarters. The Group managed to reduce important cost items such as administrative expenses, some of them considerably. After nine months, the Group reports clearly positive earnings before interest and taxes (EBIT) of € 3.5 million (Q1-Q3/2007: € -0.4 million). At € -0.9 million, the net result for the period was only slightly negative, which is a significant improvement compared to the previous year (Q1-Q3/2007: € -4.3 million).

Business in the final quarter of 2008 will determine whether the Zapf Creation Group, and the toy industry as a whole, can achieve its goals for the year. A number of partially contradictory factors will influence this development. Retailers apparently are placing a larger number of Christmas orders later in the fourth quarter this year than they did last year in order to minimize their sales risk toward the end of the year. The popularity of Zapf Creation’s branded play concepts among retailers and consumers and greatly improved product availability have a positive effect in this context. However, the economies in many important sales markets are continuing to lose momentum in the wake of the worldwide financial crisis. This has made economic conditions significantly more difficult for the toy industry in what is by far the most important sales period of the year. Regardless of this, the Management Board of the Zapf Creation Group will continue to strive to meet the goals for 2008 which were set out in the half-year report. The Management Board expects consolidated sales to increase slightly. Group EBIT should continue to improve year on year. Furthermore, the Group's aim is to report positive consolidated after-tax earnings.

Stephan F. Brune, CEO of Zapf Creation AG: “Over the past two years, the Zapf Creation Group has laid foundations which will enable it to perform well even in difficult market conditions, as can be demonstrated by our key figures for the first nine months of 2008. Despite the currently difficult economic environment, we are optimistic about the future and determined to push forward the Group’s development through innovative products and the expansion of our international business. These are two key strategic tasks for the coming years.”

Development of the Group in the first nine months of 2008

• The consolidated sales of Zapf Creation increased 9.3% to € 63.0 million in the first nine months of 2008 (Q1-Q3 2007: € 57.6 million). The high euro exchange rate versus other currencies that are relevant for the business of the Zapf Creation Group had a dampening effect on sales. Adjusted for currency effects, revenues were up 21.0%.
• The gross profit margin was 41.8%. Among others, the decline compared to the prior-year period (44.8%) is due to structural effects such as the increase in freight costs as well as to higher prices on procurement markets, particularly for wages, raw materials and energy.
• At € 3.5 million, consolidated EBIT for the first nine months was clearly positive. This compares to EBIT of € -0.4 million in the same period of the previous year.
• The increase in finance costs to € 4.9 million (Q1-Q3/2007: € 3.8 million) is primarily the result of interest paid on subordinated shareholder loans, which were fully converted into equity in the first half of 2008.
• Consolidated earnings before taxes (EBT) from continuing operations were € -0.8 million compared with € -3.7 million in the previous year.
• Nine-month earnings after taxes from continuing operations were € -0.8 million (Q1-Q3/2007: € -4.4 million).
• Consolidated earnings from discontinued operations of € -0.1 million are due to the closing-date measurement of a loan granted by Zapf Creation AG to its US subsidiary, which is no longer operating. Zapf Creation AG has fully written off this loan, which served to repay a previous loan. The Zapf Creation Group discontinued its US operations as of December 31, 2006.
• The net loss of the Zapf Creation Group for the first nine months was € 0.9 million. This compares to a net loss of € 4.3 million in the same period of the previous year. Earnings per share were € -0.05 compared to € -0.53 in the previous year. The significant increase in the average number of shares outstanding from 8.23 million shares to 16.58 million shares has to be taken into account in this context.

Development of the Group in the third quarter of 2008

• At € 34.6 million, consolidated sales in the third quarter of 2008 reached the previous year's level (Q3/2007: € 34.5 million).
• EBIT for the quarter came in at € 7.6 million, which was slightly lower than the previous year (Q3/2007: € 8.1 million).
• Net profit for the third quarter was € 4.8 million (Q3/2007: € 4.3 million).

Development of the balance sheet

• The total assets of the Zapf Creation Group as of September 30, 2008, were € 104.0 million. This compares to total assets of € 115.1 million as of December 31, 2007, and € 96.6 million at the close of the third quarter of 2007.
• The successful restructuring of the Group's financing in 2007 and the first half of 2008 lifted equity to € 29.9 million as of September 30, 2008 (December 31, 2007: € 14.4 million; September 30, 2007: € -0.8 million). The equity ratio rose to a solid 28.7% as of the end of September. This compares to an equity ratio of 12.5% at the end of 2007.
• The net liabilities of the Zapf Creation Group at the end of the third quarter of 2008 totaled € 21.9 million. This compares to net liabilities (including shareholder loans) of € 32.9 million at the end of 2007 and € 39.5 million as of September 30, 2007.

Outlook for 2008 overall

Business development in the current financial year shows that Zapf Creation Group has established a solid foundation from which to consolidate its competitive position and utilize additional growth opportunities in the medium term. However, macroeconomic developments pose some heightened risks. The crisis in the financial markets still threatens to spill over to the real economy, and continued widespread uncertainty among consumers is currently dampening demand for the play concepts of the Zapf Creation Group.

Regardless of this environment, the Management Board continues to strive to meet the goals for the current financial year. Consolidated sales are expected to increase slightly in 2008. Group EBIT should continue to improve year on year. The Zapf Creation Group expects earnings after taxes to return to the black in the 2008 financial year.

Further information regarding the Group's development in the first nine months
of 2008

Consolidated sales by region

• In Central Europe (Germany, Austria, Switzerland, the Netherlands and Luxembourg), consolidated sales for the first nine months of 2008 increased by 8.4% to € 21.3 million (Q1-Q3/2007: € 19.7 million).
• In contrast, revenue in Northern Europe, which comprises the UK, Ireland and Scandinavia, declined by 8.6% to € 15.1 million (Q1-Q3/2007: € 16.6 million).
• In Southern Europe (Spain, France, Belgium and Italy), the Group boosted its consolidated sales by 17.6% to € 8.3 million in the first nine months of 2008 following the realignment of its French and Spanish sales operations.
• Business showed a positive development in the future markets of Eastern Europe and Asia/Australia. In Eastern Europe, revenue increased considerably by 25% to € 15.9 million (Q1-Q3/2007: € 12.7 million). In Asia/Australia, consolidated sales came in at € 2.4 million after € 1.6 million in the previous year.

Consolidated sales by product line

• The largest increase after nine months was recorded by the BABY born® product line, which lifted sales by 16.7% to € 38.2 million (Q1-Q3/2007: € 32.7 million). Significant momentum was provided not only by the new BABY born® doll but also by this year's product innovations, "my little BABY born® Mummy, Look I Can Swim" and "my little BABY born® Interactive Twins."
• The Zapf Creation Group generated sales of € 10.8 million with its Baby Annabell® doll concept (previous year: € 14.9 million). This concept is in its second year of production, which usually produces weaker sales than the first year. The successor model to Baby Annabell® will be launched in the second half of 2009.
• Sales of the CHOU CHOU line increased by 15.5% to € 7.6 million in the first nine months of 2008. This compares to revenue of € 6.6 million in the previous year.

For further information:
Frank Elsner/Jens Heinen
Frank Elsner Kommunikation für Unternehmen GmbH
Tel.: +49 (0) 54 04 – 91 92 0
Fax: + 49 (0) 54 04 91 92 29 

Zapf Creation AG is Europe's leading manufacturer of play and functional dolls with accessories. Among Zapf Creation's best known brands are Germany's best-selling functional doll BABY born®, 15 million of which have been sold worldwide since 1991, plus Baby Annabell® and CHOU CHOU. All these branded toys have in common the highest standards of design, quality, safety and play value. Headquartered in Roedental, Germany, Zapf Creation was founded by Max Zapf in 1932 and went public in April 1999 (ISIN 0007806002).


At a glance: Key figures for the Zapf Creation Group (IFRS)

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