Ladies and gentlemen, welcome to the Straumann Group 2023 half-year results conference call and live webcast. I'm Vicky, the call's call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Guillaume Daniellot, CEO. Please go ahead, sir.
Thank you, good morning, everyone. Thank you for joining this conference call about Straumann Group's first half-year report for 2023. We are happy to present our results and are looking forward to the questions and answer session at the end of the presentation. Please take note of the disclaimer in our press release and on slide 2. During this conference, we are going to refer to the presentation slides that were published on our website this morning. As usual, the presentation and discussion will include some forward-looking statements. As shown on the agenda on slide 3, I will give you an overview of where we stand, and then our Head of Investor Relations, Marcel Kellerhals, will share details about the financials. After that, I will provide you with an update on key strategic initiatives and our outlook.
Let's start with our highlights and move directly to slide 5. A very solid half-year is behind us. Straumann Group revenue reached CHF 1.2 billion in the first 6 months and CHF 621 million in the second quarter. Overall, organic sales increased by 7.5% in the first half and 11.7% in the second quarter. One of the highlights of the second quarter is the large volume growth from China. It was heavily influenced by dynamic patient flow compared to last year's second quarter, which, as you remember, was affected by local lockdown due to COVID-19. EBIT margin amounted to a solid 26%, thanks to a healthy business growth combined with efficiency gains, and this despite significant currency headwinds.
For the strong half-year performance, I would like to congratulate the entire team around the globe for their dedication and focus on delivering our solutions to customers. Another highlight of our second quarter was our recent acquisition of GalvoSurge, a technology enabling us to meet the increasing demand for peri-implantitis treatment, which can now protect patients from implant loss. I will provide you with more details later in the presentation.
Given the solid first half of 2023, and despite some localized consumer weaknesses, we are confirming our full year guidance of high single-digit growth, together with profitability at around 25%. Moving to slide 6, the patient flow, which remained favorable in most countries, led to a dynamic good growth rate in all regions. The largest region, EMEA, organically grew at a strong rate of 8.8% compared to the great second quarter in 2022.
Growth was primarily fueled by markets such as Germany, Turkey, and the UK. Revenue from the North American region led to a 7% organic growth in the second quarter, to which both the U.S. and Canada contributed. This is a great result in the current market environment, where we have seen some localized weakness in the larger construction procedures. Latin America achieved once again, a remarkable 20% organic revenue growth. Brazil maintained its role as the primary contributor to revenue, showing robust demand for Neodent solutions. The region's market presence expanded, thanks to the attraction of new clinicians by via nationwide educational events. Chile and Argentina also showed strong growth, contributing to the overall success of the region.
The Asia Pacific region achieved an excellent 23% organic revenue growth compared to the same period in 2022, which, as already mentioned, was impacted by COVID-19 lockdowns in China. Countries such as Japan, Australia, and India also performed strongly, the major driver was the accelerated patient flow, and thus volume growth in China usually influenced the regional result. On slide 7, I would like to dive a bit deeper into the three positive effects that influenced patient flow and accelerated the business dynamic in China. The first effect was COVID-19, which was still present in January and February. The second factor was the implementation of the volume-based procurement process during the first half of the year. Those combined two factors resulted in the release of the pent-up demand and increased patient flow seen during the second quarter.
In addition, the third factor was how quickly the team in China responded to the new opportunities offered by this new market dynamic, resulting in a strong performance during Q2. Slide eight leads us to our performance overview by businesses. Implantology kept its strong growth pace in the second quarter, with double-digit growth in the premium as well as challenger segment, boosted by customer acquisition.
Premium implantology was predominantly driven by our immediacy portfolio. From a challenger brand perspective, Anthogyr, which is more than 20 years established in China, benefited from the volume increase, while Neodent keeps a strong growth momentum in all other regions. Looking at orthodontics, where we continuously work on enhancing our value proposition by elevating the offering and service quality, we saw double-digit growth on our ClearCorrect clinician brand. This B2B business keeps on establishing its presence in the existing market and launching new solutions.
On the direct-to-consumer marketing business side, DrSmile has seen slower growth, mainly because its core target group prioritized spending on vacations during the pre-summer months. Adding to last year's strong comparison quarter, our digital solutions business continued to show strong growth, driven by intraoral scanners. In particular, the dynamic development of our Straumann Virtuo Vivo scanner was a highlight.
IOS are the entry point of the digital workflow for clinicians and critical for generating clinical quality and efficiency. As a consequence, IOS market penetration is continuing to gain substantial traction in many markets, which eventually leads to a broad installed global customer base, which is an important element of our digital strategy. With this, I will hand over to Marcel to provide additional details on the financials.
Thank you, Guillaume, and good morning, everyone. I would like to start by speaking about our revenue on slide 10. As Guillaume also mentioned, Straumann Group's second quarter results reached CHF 621 million, with an organic growth of 11.7%. At 2022 exchange rate, our 2023 second quarter would have been CHF 42 million higher. The unfavorable currency effects were mostly related to the depreciation of the euro, the U.S. dollar, the Chinese renminbi, the Turkish lira, and the Japanese yen. The M&A effect in the second quarter, which is mainly attributed to PlusDental, added CHF 8 million to our adjusted revenue of CHF 556 million .
The strong regional performance was supported by our existing portfolio and by the favorable patient flow in most of the countries, as well as the Chinese market dynamics, despite global inflation. Asia Pacific contributed the largest share of the group's revenue growth in absolute numbers, followed by EMEA, North America, and a strong contribution by Latin America with 9 million Swiss francs. Looking at gross profit development on slide 11, our gross margin for both core and reported amounted to 75.2% in the past first half of 2023. Currency adjusted, this represents a margin increase of 20 basis points.
High utilization rates in our production facilities, combined with continued efficiency improvements to contain increases, offset the higher exposure to additional equipment. Let's move to slide 12. Historically, the core EBIT margin has been stronger in the first half of the year. Following this pattern, the core EBIT margin reached 26%, which is a currency-adjusted margin reduction of 10 basis points below the same period in the prior year, despite currency headwinds that had a strong negative impact of 180 basis points.
On slide 13, you can see the free cash flow generation is at CHF 112 million, which is CHF 34 million higher compared to the same period in 2022. Overall, the free cash flow margin increased from 6.6 to 9.2%. Capital expenditure in the first six months remained at a high level, with CHF 86 million spent, demonstrating the group's commitment to production expansion and digital-related initiatives. The cash position at the end of the first half of the year remained strong at CHF 603 million.
Let's continue with slide 14, where I would like to show you an overview of our core financials. Core gross profit rose to CHF 915 million, and core EBIT rose to CHF 317 million Swiss francs, which represent respective margins reaching 75.2 and 26% in the first half of 2023. The gross margin improved by 20 basis points, while the EBIT margin contracted 10 basis points, despite the currency headwinds, which took 100 basis points off the gross margin and 180 basis points off the EBIT margin. Core net profit increased by 18.8% to reach CHF 229 million Swiss francs, and the margin increased by 220 basis points. This primarily reflects unrealized negative currency valuation impact, mainly in emerging markets.
Higher interest rates led to extended currency hedging costs and adjustment in derivatives, while interest income on cash balances slightly increased. As a result, core basic earnings per share decreased from CHF 1.69 to CHF 1.43. For clarity, you will find the comparison on a reported IFRS basis, as well as the core reconciliation table in the appendix of this presentation, and even more details can be found in the appendix of the press release. The main difference between the core and reported numbers is the restructuring costs in the APAC and LATAM regions of CHF 19 million. With this, I will give back to Guillaume.
Thank you very much, Marcel. Let's move on to slide 16 to talk about recent achievements and strategic updates. To keep the strong growth pace of our implantology business, we are building up on our strong innovations that are fulfilling the high expectations of clinicians about immediate treatments such as BLX, TLX, and our Zygoma implant lines, while investing further in manufacturing to cater to the global demand. As an example, our China country's manufacturing site project is developing well. We should be able to start producing commercial products by the very end of 2024. The second critical pillar of our implantology strategy is the education side, which is bringing me to slide 17. I'm very proud to announce that we have renewed our partnership with the ITI, therefore reinforced our link between industry, science, and practice.
With more than 22,000 members, the ITI is the world's largest education community in implant dentistry. The ITI has always been a very strong partner and key player in shaping industry guidelines for global treatment protocols. With the aim of providing solutions that are clinician and patient-centric, we are committed to evidence-based dentistry. For more than 40 years, we have enjoyed a close and fruitful partnership with the ITI as our independent scientific partner, and we look forward to the continuing collaboration in the years to come. Moving to slide 18, on the challenger side, education is also crucial for market access and clinical excellence. As an example, Neodent recently held a global congress in Brazil with more than 3,000 international attendees, which was a huge success.
Our global education efforts also supported recent launches, such as our Neodent Zi ceramic implant and Anthogyr X3 solution for immediacy to keep expanding our challenger brand presence on a global scale. Moving to slide 19. As part of our relentless efforts to add strategic innovations to our product portfolio, I would like to highlight our recent acquisition of GalvoSurge. With this acquisition, we are offering a unique medical device that helps to treat peri-implantitis and thus protects patients from implant loss.
The GalvoSurge standard implant cleaning system can effectively treat cases from different implant systems. By removing biofilm, the device is designed to support clinicians in eliminating bacteria from the surface of the implants without harming healthy, soft, and hard tissue. This new addition to our portfolio is offering a great opportunity to partner with new customers in the months to come.
Let's move to our recent orthodontics advancement on slide 20. On our road to offer a very competitive orthodontic software, we have done further progress in the second quarter. The ClearPilot update includes features to improve the user experience and streamline dental treatments. ClearPilot now offers enhanced visualization of posterior bite ramps, a new clinical feature allowing doctors to treat patients with crossbites.
It improves aesthetics, optimizes patient comfort, and increases the effectiveness of the ramps for successful treatment outcomes. The bite ramps feature is currently in the limited market release phase, and a full release is planned for the third quarter of 2023. This ClearPilot enhancement brings us to slide 21. The software update can be seen in the planning phase. In addition, all our recent launches enhanced our value proposition and form a seamless, integrated digital workflow for the treatment of orthodontic cases.
Our offering supports customers during their treatment journey to facilitate fast and accurate diagnosis, and accelerate treatment planning for simple to advanced cases. Looking at our efforts to implement a full digital workflow in implantology, as shown on slide 22, our investments are starting to take ground. We are very pleased with the continued progress of our IOS sales. Those internal scans are seamlessly integrated into our new Straumann AXS digital platform, which is delivering an improved customer experience in North America, which is the only region where it has been launched so far. Currently, Straumann AXS is powering the Smile in a Box workflow and will soon be able to simplify also the prosthetic workflow. With this, I would like to move on to slide 23.
As published in our press release, we announced that Yang Xu will join the group as Chief Financial Officer and member of the Executive Management Board at the end of August. Yang joins from The Kraft Heinz Company, a publicly listed U.S. American food company, where she was a member of the executive committee. Yang brings a wealth of experience in corporate finance, strategy, commercial, and business development. She's a very successful leader with a passion for developing talents and building high-performance organization.
We are looking forward to having her on board by the end of August. I would like to take the opportunity also to thank Marc-Alain for leading our finance organization since early January. His strong expertise has been very valuable for the Straumann Group during the past month. He will ensure a smooth and efficient transition with Yang and complete his mission by September this year. In addition, another organizational development has been announced during the second quarter. Rahma Samow, head of our dental service organization, has decided to leave the group, joining one of our main business partners.
The hiring process for a new DSO head is ongoing. Moving on to slide 24, I would like to announce that the Science Based Targets initiative has approved our group's net zero target. We have committed to care for the planet and society and set ourselves ambitious emissions reduction targets in line with climate science and a trajectory that limits global warming to 1.5 degrees Celsius. By the year 2030, we plan to decrease our Scope 1 and 2 emissions, meaning the emissions caused by our own operations and the ones caused by purchased electricity and heating by 42%.
For Scope 3 emissions, which are the indirect emissions that occur in the value chain, we are aiming for a 25% reduction. By 2040, the goal is to achieve net zero carbon emissions across all scopes. These targets have been evaluated and approved by the SBTi. That brings us to slide 25, where I will share our thoughts about the outlook. Despite some isolated consumer weaknesses, we believe that the patient flow seen in the first half of the year is expected to remain at a dynamic level in most geographies. Thanks to the differentiated value proposition within our strategic segments, combined with a strong quality of execution from all our team members worldwide, the group remains confident that it will continue to gain market share within its estimated globally addressable market of 19 billion Swiss francs.
In the meantime, we will continue to invest in growth and transformation to keep our competitive edge in the coming future. As a result, the group confirms its full year outlook and expects organic revenue growth to be in the high single-digit percentage range and profitability at around 25%, including growth investments. Now, I would like to open the Q&A session. If you have a question, please press star and one on your phone to join the queue. As usual, we kindly ask you to limit the number of your questions to two in order to give other participants a chance to ask their questions within the available time. Chorus Call , can we have the first question, please?
Thank you. The first question is from Daniel Buchta, ZKB. Please go ahead, sir.
Yes, thank you very much. maybe the first question starting on, on the basically the patient flow trends you see in EMEA and North America. I mean, the numbers you reported today were a notch weaker than, than basically consensus was expecting, and also there was a clearly lower comp base. Is there any signs of, of a slowdown, anything you would expect towards the end of this year or maybe into early next year, that this is worrying you, here, that consumers are willing to spend less on, on dental implants?
Then on your margin progression, I mean, obviously you're guiding for around 25% this year. Your 2030 guidance is for 25%-30%, and we see how painful the FX was for you again. I mean, what are basically the drivers then in the next years for you to move up from this very low end of your margin range towards, yeah, wherever it can go until 2030? Thank you very much.
Yeah. Thank you, Daniel. When it comes to patient flow in EMEA and North America, we are not seeing, I would say, a major change versus what we have seen on the first half. In EMEA, it still remain dynamic with a really good patient flow, good perspective also, when we are talking with our customers, we feel pretty confident here, so far.
When it comes to North America, as we have highlighted, already, in the full year 2022 call and our Q1, the only specific segment when we have seen some slowdown has been in the very large reconstruction, the full large cases, as we are saying, in North America, because we all know that for those cases that are in between $25,000-$30,000, then Health consumer very often are also selling stock to get there, which is a very typical for North America.
As the stock market has not been very, let's say, stable, and, and, and, let's say, interesting, so far, we have seen some of the patients rescheduling or postponing, meaning that we don't see a, a significant weakness, because it's postponing cases. But, yeah, this is the thing that we're looking at, and we think it's going to continue for the remaining of the year. All in all, we expect a quite a dynamic patient flow stable versus what we have seen during the first half. When it comes to margin on the 25% side, yeah, we have done a significant efficiency gain here, in order to offset, then the, this, you know, strong FX headwinds, that we are not seeing that easing up in the second half.
We are, of course, doing a lot of operational leverage, thanks to our great growth, and we are going to continue doing this. We are also doing significant investment, as we said, in digital transformation and in our manufacturing capacity. We believe that step-by-step, we'll be able to grow this EBIT range as we have expressed on the more higher side of the spectrum. That's really our objective, and we think that thanks to a healthy growth, we'll be able to deliver on those ones and be very cautious on our efficiency gain if the FX situation is staying the same.
Very clear. Thank you very much, Guillaume.
The next question is from Chris Gretler, Credit Suisse. Please go ahead, sir.
Thank you, operator. Good morning, Guillaume, Marcel, thanks for taking the question. Maybe two, you know, first on China. Maybe could you talk about, you know, the specific growth dynamic in Q2? I guess, you know, that was quite a surprise to many of us, you know. If you could be a bit, you know, specific, that would be fantastic. Also, you know, what does that mean for your guidance? Essentially, kind of what second half, you know, assumption have you baked into your full year guidance? That would be great because it's obviously a very dynamic region at the moment.
Thank you, Chris. Yes, thanks, Chris. Again, that's obviously a critical question right now, and we have been then very pleased with the China results. Also, we have to be honest, not expecting this dynamic, which is really the as expressed a little bit before, the combined effect of those three different factors about having the significant pent-up demand coming from the fact that January and mid-February was completely closed. If you, if you, you know, sometimes we, you know, the time flies, and we don't even remember, it was all practices were closed in the Tier 1 city in the first quarter. There is a significant effect of pent-up demand.
There is a significant effect now, and we see that of new patient flow coming from those more affordable prices, where I think it has created some great opportunity. And the third factor, when we were saying that our team has been very agile and dynamic, is also that effect of market share gain that we are realizing as we speak, thanks to the price gap being much narrower than in between the Korean brands and, for example, those common brands. And patients are also willing to upsell their treatment as the price gap is much lower than it was pre-VBP.
Those three factors are really supporting this very dynamic growth rate, and we are all hands on deck to make sure that we can cater for this demand, from both local organization service standpoint and, of course, global manufacturing standpoint. When it comes to the guidance, and I think this is a fair question as well, what is tricky right now is that our second quarter growth rate is still difficult to analyze analytically in between the pent-up demand and this VBP effect. The true remaining effect of the VBP volume growth when the pent-up demand effect will fade down, it's well not clear yet to us.
What we have baked in our guidance is that we will see this pent-up demand fading down and having a still dynamic growth rate, thanks to the VBP effect, but not at the same level than Q2 that has been, of course, combining everything. That's where we stand today, and I believe that by September or October, when the pent-up demand would have disappeared, we will have a pretty good idea of what will be the remaining growth rate coming from market share gain plus VBP dynamic growth.
Okay, that's very clear. Thanks for this explanation. You know, my second question, it would just be on this restructuring that, you know, you initiated. Is there a bit more information you can share, you know, is there any cost savings that, you know, we should expect on the back of that? Is this really kind of a one-time event, you know, or is there something else, you know, we should be expecting, you know, in the second half, no?
Restructuring, you mean from, from the China organization?
Yes, essentially the charge, the CHF 19 million you took, which I guess is most, mostly China related.
It, it, it has been mostly China related and, and, a little bit in non-core activity in, in, in LATAM. But there is nothing to expect that much moving forward. As you see, with regard to the dynamic that is there, there are a lot of areas that we are planning to, let's say, to support also in China locally. No, I think there is no special effect now or continuing, continue. Yeah, continuous effect of this restructuring in the zone area.
Okay, thanks. let me step back, you know, into the queue. Thank you.
The next question is from Maja Pataki, Kepler Cheuvreux . Please go ahead.
Yes, good morning, and thank you for taking my question. Again, I would like to just follow up on Chris's question on China. I'm, I'm, I'm trying to understand whether you have changed your outlook on China, which I believe in the beginning of the year was for negative growth in China. Whether you're now anticipating positive growth or whether we're at the point where you say, like, "Look, visibility is so low, we're not changing our assumption, we need another quarter." Could you clarify that, please?
Yes, Maja, of course. I think it's a very good question because, yes, indeed, when we have seen those prices decrease by, you know, minus 40%-45% ASP, we have been clearly planning negative net revenue growth scenario. When we are seeing this Q2 volume effect, then, which is better than we would, we were expecting, we are looking at potential more positive scenario, at least optimistic scenario, if the growth remain.
We are contemplating for year-end as a possible scenario, if we are growth rate, which is really good enough, then we should be reaching, let's say, the same level of net revenue or plus or minus than 2022. This would be already a great achievement than somewhat better than we would have planned at the beginning of the year.
Okay, great. Thanks. That's, that's a great clarification. Is it fair to say that, at this stage, because some questions were coming up, at this stage, in fact, that you're reiterating your guidance, despite the fact that the momentum is stable or in line with what you anticipated and your comparison basis is getting softer in the second half of the year, is mainly due to the fact that you need another quarter to understand what is really happening in China? Would that be a fair statement?
Yeah, that, that's a fair statement on the China side. Saying again, we cannot analytically see what's the effect of the pent-up demand and the effect of the, of the, of the VBP. You know, we are using just the experience that we had with COVID-19. When we have been in, in the second quarter of COVID in 2020, we had a very, very significant impact. Immediately on the third quarter of 2020, we almost, you know, completely the pent-up demand entirely, and that it has been a very strong growth. Afterwards, on the following quarters, that has been just a new dynamic that came in.
We believe that, when we are going to have this third quarter, then behind us, then we will be able to have a better visibility, and this is what we want to see. Something also not to be underestimated is what is going to be the evolution of the consumer sentiment and the, the, the, the, the health consumer willingness to spend in North America for large cases.
It's also an area which is, which is important for us, as we have large partners that are focusing on this. This is a segment which is important for our growth in the future. I would say those two areas, are going to, help us to have a clearer visibility for year-end, when the, the third quarter is over.
Oh, great! Could you just remind us or give us an indication how big those large treatments are as a revenue contributor?
Well, it's, it's not always to know, exactly how many implants are used for those procedures, but we are evaluating that this is 10%-15% of overall market segment would be, than the, the, the, the full large case.
Great. Thank you so much.
The next question is from Veronika Dubajova, Citi. Please go ahead.
Hi, good morning, and thank you for taking my questions, please. I have two. Obviously, Guillaume, you spent a lot of time talking about the high-end markets in the U.S.. Just wondering if you're seeing any signs of soft softness or changed consumer behavior in any other markets outside of the U.S. that you're watching at this point in time. I have a follow-up on margin, but maybe we just get the revenue bit out of the way first.
Veronika, no, honestly, U.S. has been the only one on those large cases that were creating some question mark. There is another, but I, I expressed that already in Q1, if you remember, you know, the situation in South Korea, where with the high interest rate pushed by inflation, then it has significantly slowed down also the demand from health consumer, because, you know, they have been tricked by the fact that they have higher reimbursement to do because they are leaving a lot of credit, in South Korea. That's the two major geographies where we have seen this kind of effect. To be, to be honest, nothing anywhere else is sparking some, some, some, some worries.
Okay. That's very clear. Thank you. Then if I can just ask about the margin. Obviously, very strong performance in, in the first half of the year. I know seasonally, you always have a softer margin in the back half of the year. Just curious, is what you see as the big moving parts that would take the margin from the 26% in H1 to, let's say, 24% in H2? You know, what are sort of some of the things we should bear in mind?
Yeah, we, as, as you, rightly, recap, is our second half is always lower than our first half from an EBIT standpoint, for the reason that the second half is a much heavier period for marketing and sales activities. This is where you have all the major congresses, this is where we have, the major, large meetings that we're having with our own customers or with the industry congresses. It has been always the same, and we are also in order to continue to push our top line and our different solutions and innovations, going to significantly invest, from a marketing, and sales standpoint.
This is also the second half where we are starting to review our go-to market and potentially increase also some of our headcounts, to make sure we prepare immediately the beginning of the year, and it will remain the same. That, that, that's one of the major reason why historically, and it's going to be the same in our plan for 2023, we are going to have a lower EBIT margin, and that's why we believe we will be around 25%, as we are predicting for the time being.
Very clear. Thank you.
The next question from Susannah Ludwig, Bernstein. Please go ahead.
Great. Good morning, and thanks for taking my questions. First on orthodontics, I guess recently you had talked about wanting to improve profitability in the business, particularly in DrSmile. I was just wondering if the slower growth this quarter DrSmile has also been driven by lower marketing as you switch to focus on profitability? Then, I guess second, on orthodontics, where do you think EBIT margins can be in that business long term, and do you see any structural difference between potential margins in the DTC business versus the dentist-led business?
Yes. Thank you, Susannah, for the question. When it comes to DrSmile and orthodontics, we have clearly expressed by the beginning of the year that we are pursuing now not a top line strategy, but we are also pivoting to driving now profitability within the current size of the business that has been established. Yes, there are, let's say, less pursuit of this top line growth, growth from marketing investment and trying to drive more this, this, this bottom line. For the second quarter, to be even more specific to your question, there have been two effects. The first one is this not pushing top line at any cost and being wise in our marketing spending, while still driving growth.
The second aspect has been the fact that in this second quarter we have seen significant interest by the core target group of DrSmile, being on travel and holidays, you know, that versus the past years. There have been a lot of, you know, article on this about the travel revenge. That was something that we have felt also with all our different marketing initiatives. But all in all, we are still pleased with the development DrSmile on this kind of top line and bottom line profile, and we are going to continue doing this strategy in the second half.
When it comes to the overall orthodontics in between, our expectations of profitability, we believe that orthodontics is a, is a very, promising segment from a profitability standpoint as well, in line with our initial expectations. For this, we need to drive the critical mass, where we are not there yet. Then, that's a midterm approach. We are still in an investment phase on our orthodontics business, and we need to invest in all the different segments, being technology and being go-to market. That's what we are going to continue doing, in order to, then, harvest the fruit from a profitability standpoint, in the mid-term.
Okay, great. Thanks. I guess just a quick follow-up is, do you see any difference in terms of the midterm margins in this, the DTC business versus the ClearCorrect business?
Yeah. We believe that the B2B business should be delivering higher profitability than the D2C business. One of the specific specificity of the direct-to-consumer business is its lower predictability than your B2B. That's why, you know, you think that from an average standpoint, then the EBIT will be higher on the B2B side.
Okay, great. Thanks. Very helpful.
The next question from Graham Doyle , UBS. Please go ahead.
My questions. Just two, two, this is more financial-focused ones, and just I, I wasn't quite sure, obviously, on the net financial is a little bit worse than expected. Just be good to get a slightly better understanding of what you mean when you refer to these adjusted earn-outs within that net financials line, just to understand how we, we think about for the rest of the year. Then one other area of note was just sort of on the working capital side. Obviously, we've seen this creep up for the last couple of years in Europe's great growth, but we've seen building inventory and receivables again.
It'd be good to get a sense as to what specific businesses and regions are driving that, so we can kind of think about that on a sort of three, four, five-year view. We understand, you know, if it's things like DSOs that drive higher, receivables inventory, if it's things like LATAM that do it, it'd be good to get a sense to, to why that's happening and, and how much of that is just business requirement versus, say, like, competitive edge in certain areas or, or, or just the cycle. Thank you very much.
Yeah. I can take the second one, if you want to take the, the, the first one, Marcel. On the, on the, on the working capital, it's obviously then different here, factors are also at play. The first one is when it comes to trade receivables, and as you said, DSO are having, you know, different payment terms. You, you start to see this in the different maturity of those trade receivables. Our long-term trade receivable actually did not increase because we are really looking at this very carefully, and we are continuing to have even more discipline about this one. The short-term receivables are going to increase from structural standpoint because, of course, the DSOs are wanting to have a bit more flexibility here.
The second side on the day of inventory, as you can imagine with what's happening in China, we are all hands on deck to have a lot of products that are going to be available. We have a lot of semi-finished products at this moment in time. We have a lot of products in different parts of the warehouses that we're trying to play with. That's also one of this situation that will improve in the months and the years to come. That's a little bit the overall perspective. We believe we will be able to improve our working capital moving forward because we have some effects that are really related to what is happening right now. Obviously it's still at a really decent % versus our top- total top line, and that we would like to keep it this way.
Hi, Graham, this is, this is Marcel. Thanks for the question on the earn-out. I mean, as you know, whenever we acquire a company, we do that over a couple of years, usually 3-5 years, where earn-outs with certain targets are in there, but there's nothing to be really worried about. Usually, if we adjust the earn-out, that's usually a good thing because that means that the top line is rather the higher end than what we have expected. This is nothing, we, we just wanted to highlight that and also to give full transparency, as you know, that we try to be as transparent as possible. Here we're talking low, low single digit million amounts. It's, it's, it's not the biggest driver of, of the, of the finance line at that side. It's just also we wanted to give the transparency here.
That's perfect. Okay, we should assume that earn-out is, is sort of a, the one-time effect and, and not worry about it. Just maybe a quick follow-up on the, on the inventory point. It's, it's maybe something I, I just, I was kind of wondered. Is there an advantage, like a sort of competitive advantage, by you guys holding more inventory in that presumably it allows you to get product to, to the GPs in particular, more quickly, and I suppose more cheaply, in a way, on a cash terms for them? Like, is that a competitive edge that you guys specifically target?
Well, Graham, that, that's actually a very good question. Because, when you are adding a, yeah, 75% gross margin product, it's worse to lose a sale than to carry a lot of inventory, of course, at reasonable level. As a, as a, as a premium company, we are obviously then guaranteeing very fast delivery to all our customers, and this is really one of the satisfaction factors for the clinicians that are working with us. Yes, indeed, I think this is part of our value proposition, and this is also delivering one of the, the, the differentiation that we want to have versus other competitors.
Obviously, there are still some, a really, good balance to find in between, you know, maintaining a lot of different warehouses and having the most optimized way to be doing it. We are currently looking at our supply chain, and we've increased digitalization. We think we can keep delivering the same, high perceived value from a supply chain standpoint, and also, making sure that we can, decrease some of our networking capital cost in the future. Great. Thank you very much for your time, guys.
Thank you.
Next question from Robert Davies, Morgan Stanley. Please go ahead, sir.
Yes, thanks for taking my questions. My first one was just around, some of the implementation of your digital strategy. I'd just be curious if there had been any impact from, customers' appetite to take up those, products, particularly in the North American market, I guess, where you've kind of highlighted some of the, macro headwinds. The other one was just a bit of clarification around the FX impact on EBIT through the second half of the year. Can you just reconfirm what your current assumptions are and what the rates you, you're assuming through the back half of the year? Thank you.
Yeah, when, when it comes to the digital strategy, we are really pleased so far with with the the the implementation and development on on both sides, I would say. On the one side, it's about the progress of the implementation and the the the development of the platform and its different components, and especially the different associated services that are going to be available.
We have started within North America for the Straumann AXS platform, where you can have a seamlessly connected workflow for the Smile in a Box, meaning that you have an entire end-to-end implant case, from diagnosis, to treatment planning, to guided surgery pack being available for you at the same place with having all the different support for you and in a la carte offering, where you can really decide to use whatever service you want. When it comes to the digital equipment necessary to conduct or to access this platform, we have seen still double-digit growth on our different equipment sales, including North America.
So far on this one, we have not seen any weakness in the demand for the digital services and the digital equipment. For FX, when it comes to FX, Rob, it's our assumption now for full year on the EBIT level is 230 basis points, more or less. If the FX rates stay more or less where they are as we, as we speak. That increased from something like 150, that we talked about with full year, so it increased to 230 on the core EBIT. On the top line-
Understood. Thank you.
Top line is something around, around 8%, actually, for full clarity.
Okay. Okay, great. Thank you.
The next question is from David Adlington, JP Morgan. Please go ahead, sir.
Thanks, guys. Just 1st, maybe just on your guidance again. Obviously, China, it doesn't sound like you've changed your underlying assumptions, and sounds like some upside pressure there. I just wondered if there was any sort of, opposing downside pressure you're seeing anywhere else? It doesn't sound like you are. Then 2nd, just in terms of net financials, again, obviously a lot higher in the 1st half than expected. Just wonder what your thoughts were at this point in the 2nd half. Thanks.
David, can I ask you to, to precise your first question? I, I'm, I'm not sure I'm, I'm able to answer it, precisely enough, and I, I would appreciate to make sure I can give you the, the expected answer.
I'll try again. For China, it doesn't sound like you've changed your assumptions since the start of the year. It sounds like that obviously Q2, Q2 has been better, and so there's potentially for some upside to your Chinese. Your assumptions for China. I just wondered if there was any offset anywhere else, in any other markets, that might be an offset to that potential China tailwind?
Okay, got it. Thank you. We, we, we slightly changed our assumption on China already, but not to the extent that it can, in a just 6 months period, being able to affect entirely the guidance for the full year. I, I will phrase it more precisely like this, because high single digits could move to a, you know, again, a much higher than the 7.5% where we are today. If we are improving our scenario for China, I think there are some potential upside, but for the time being, it does not reach even, you know, a higher potential outcome.
We want to make sure that we can see that the current growth rate will remain as we are seeing in Q2, or not too much different, in order to be able to have a more, let's say, confidence for being able to share a rise, a rise or improve expectations. We don't honestly see any further weakness from any other part of the world that would push us to be more, let's say, worried versus the initial expectations that we have for the year on all the different geographies. Second question. David, this is Marcel. Obviously, we don't have the crystal ball, so it's hard to guess. I mean, a large part of the finance, of the finance line was related to FX hedging.
I mean, there are two aspects. One is the, the result on the unrealized, unrealized, losses on, on the open hedges and the positions that we have. That most probably will not have the same effect in the second half. Net, the National Bank, the Swiss National Bank, only increased rates to a lower extent this, this, this year, while the Fed and the ECB did more. There is a bigger interest differential, so there is going to be more. If I have to make a guess, probably it's half of what we have seen in the first half, we could expect for the second half, but that's just a guess. It's, it's hard to say, but it should not be the, the same extent if currencies stay more or less stable against the Swiss franc for the second half.
Okay. That's great. Thank you.
Thank you.
The next question from Daniel Jelovcan, Stifel. Please go ahead.
Yeah, good morning, as well. just on the UK and Germany, you mentioned that, those two countries had good growth in, in basically, apologize, all segments. I'm a bit puzzled that when you talk about the weakness in other areas that, in those two countries, which, you hear quite a lot of negative consumer sentiment, why you are still so, doing so well? Can you shed a bit more light on, on those two countries, please?
Yes, in the I think in the UK, something which is, which is, for example, important has been that the different strategies are really developing well. That's one of the reason why I think the results are very positive in the UK. I think the implant franchise is keeping gaining shares, and one of the reason is our innovations and the capability, again, of our team to demonstrate the benefits of using those innovation versus the other solution in the marketplace, but also the service level.
You know that, with the Brexit, having, coming back to the topic we have alluded before, having a local warehouse has been a pretty good advantage because we have been able to deliver with the same speed, the different products for the different clinicians, which has not been the same for some of our competitors that were having more European supply chain strategy. Where during quite some time, it has been difficult to have a predictable, then, delivery date. That has been just focusing on, customer, then, satisfaction, one of the way where the UK has been doing well.
The second factor is that the orthodontic franchise has been also doing well with the team really taking ownership of growing the small franchise for then the satisfaction of the clinicians that have been using ClearCorrect. Last but not least, the DSO activities is also positive. We have a very good relationship with our DSO partners that we value also very much. We are able to put a partnership in place in order to help them reaching their own objectives, and as soon as they are being successful, we are of course, successful too. The U.K. has been a really good example of how to execute on the global strategy compass that we have set up for the entire organization.
When it comes to Germany, I would express the same perspective. I think the quality of the team has been also supporting then the clinician very well. Germany has been focusing a lot also on education, a lot of high-quality education from not only the clinical side, but also how to support clinicians to develop their practice in a economical time, which is maybe a little bit more challenging or softer. This is where the team has been doing a great job. That's transforming market share gain also within Germany, which is to be put to the credit of the local team.
Thank you. It's, I guess, it's still not only market share gains, it's also, I mean, is the market still growing in, in those two?
Yes, yes.
countries?
Yes, I think we still have a positive market development in those two countries, definitely, definitely. It's not only related to market share gain, and it's also related to, you know, the new technology that we are developing on the digital side.
Okay, thanks. Second question, you mentioned before, B2B in clear aligners is, is grew double digit. Is that at the group level, or it was that more in, in, in EMEA? I guess in North America, it's probably not double digit anymore, right? Yeah.
Yeah, I mean, you summarized it. I think EMEA is double-digit. The other regions are double-digit. It has been softer in North America during the 1st half, where we have seen again this consumer confidence that has been a little bit waiting on the demand. It still has been positive for us on the, on the, on the 1st half, but not at the same speed of the other regions.
Also positive in the second quarter. Sorry to be a bit.
Correct.
In North America.
Yes.
Okay.
Like low, low single digits, let's put it this way.
Okay. Thank you.
The next question is from Hugo Solvet, BNP Paribas Exane. Please go ahead, sir.
Hi. Hello, thanks for taking my questions. I have two. One follow-up on, growth in China. Looking on the slide seven, since that, VBP growth, is plateauing, I want to make sure, we don't miss anything here. Okay, can you maybe discuss the, the, the, the trend in July and the first week of August, as well as for patient flow, and if you're seeing any, let's say, extra capacity, spare capacity, potentially capping growth, in the second half of the year? In terms of, second question on, launch date, when we think about GalvoSurge, are we talking about, a global rollout here? When it comes to IOS, is, when are you expecting to launch outside of the U.S.? Thank you.
Okay, Hugo, then on China, again, we'll try to make it clear. We don't see VBP plateauing, but we are going to see the pent-up demand for the COVID-19 then fading down. That's what we are going to see in the second half, because, of course, the patients that were having their treatment canceled and postponed in January, February, would have been done by that time. We still expect and wanting to see more visibility on the VBP effect and what will be actually the growth rate, the, on, on, on, on their, on each single effect. What we are seeing, to answer your questions precisely on July or in August, is that those growth rates have been still significant.
I think in July there is still a part of the pent-up demand, but in August, I think it will be less and less so. So far, we are seeing really positive trend. That's why we would see the situation still from a quite optimistic perspective. When it comes at launch date for the GalvoSurge, GalvoSurge is a new technology, they're not registered everywhere. It has the possibility to be launched and sold in Europe, which is already the case. That has just been started. That was on the market before the acquisition, and we are now adding it on our portfolio and starting to do a significant promotion in the months to come.
I think the next sales window being a, you know, September to December, where we have all sales meeting in Europe everywhere by end of August and early September. In North America, there is still, there is still the FDA approval to reach, and there is a lot of work done on this to ensure that this opportunity will also open up in North America. Our goal will be in the, you know, we hope by the beginning of the second half, 2024. When it comes to IOS, IOS, it's available everywhere. We are selling, IOS beats, our own Virtuo Vivo, or being partner, our partner IOS, 3Shape technology. It's available in almost all geographies to a few exceptions.
What is only available in the U.S. is our Straumann AXS platform that has been launched in U.S. and Canada, and this is going to be released in the second half of 2024 in Europe. That's the services that are not available the same way, but the digital equipment like IOS are widely available.
Thank you for the clarification.
The last question comes from Oliver Metzger, Oddo. Please go ahead.
Yes, good morning. Thanks a lot for taking my questions. The first one is on China, and very, it's a quite general question. Currently, we see very weak economic data, and we also observed some meaningful headroom for other medical procedures with a higher co-payment. Right now, for you, it looks pretty good and, if you get a feedback from your local partners, is there any sign that the weak economic data might have a negative impact, which is right now just overlapped due to VBP and the pent-up demand?
Second question on your direct-to-consumer business at Orthodontics, it's more European focused. You reported some slow growth. You mentioned the holiday season, and I get the point that people traveled less during COVID, but now we enter normalization. Could this normalization mean that we might potentially see even more sustainable deterioration of the growth prospects versus the last years? It, it would be great, also to get your view here on, on this. Thank you.
Yeah, thank you, Oliver. I think your comment on China are totally relevant. We see the weaker economic performance or economic numbers that have been published by China in the past weeks, and it will have, of course, some impact on the overall consumption. So far, at least, it happens that it did not have any effect on the demand on the implant side, just because obviously, you know, the pricing being down by 45% has still opened up a very, a much larger target group, which is here driving those significant volume.
It could have an impact on the growth rate or the, the absolute number willing to pursue a treatment, but versus the base from which we are coming from, we think it's not going to be significant, at least for the end of the year. However, this being said, where you are right, it's one of the factor we are considering to not contemplate the fact that our Q2 growth rate are going to be the true growth rate to take into consideration for the full year. Once again, the normalization of the growth rate in China will come, then after Q2, Q3, and we'll have much more data points, to share in the next call. When it comes to DTC Europe, you are talking about normalization of the situation. Yes and no.
I think, you know, in 2022, it was pretty normal as well. I think it's just as we said, we're we would use not the word normalization, but we would use the word predictability. There is less predictability on the direct-to-consumer business here than the B2B, because the core target group as having diverse interests that could switch from one month to the other. This is what we have to take this into consideration. I don't look at further and further deterioration, is much more being able to plan and structure the business model in line with this very different dynamic than what a stable B2B would be.
Okay, great. Thank you very much.
Thank you. I would like to thank you for your questions and for joining us today. We look forward to seeing you again soon and wish you a good rest of the summer. Have a nice day, and goodbye from Basel.
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