Ladies and gentlemen, welcome to the Straumann Group Full Year 2019 results conference call and live webcast. I'm Andre, the Chorus 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. You will be now joining to the conference room. Thank you.
Okay. We'll get started. Good morning, everyone, and thank you for joining us for this conference on Straumann 2019 full year results. My name is Guillaume Daniellot, and as the new CEO of the Straumann Group, it's my privilege to present the results of another exceptional year. It is also my pleasure to tell you about our recent achievements and our ambition to go beyond the continuity that we have achieved over the past five years. As usual, this conference will include forward-looking statements, please take note of the disclaimer on slide two in our press release. I will begin with a brief overview, after which Peter Hackel, our CFO, will share the business performance and financial details with you. After that, I will bring you up to date on recent key events, strategic initiatives, and our full year guidance. We look forward to answering your questions.
Beginning with slide five. In 2019, we delivered a fifth consecutive year of double digits growth, with organic revenue rising in the mid-teens. This was in line with our guidance, which as you know, we raised twice during the year. Based on reported results and market intelligence, we believe that we outpaced the global implant market again by a factor of three. Organic growth over 12 months and in Q4 amounted to 17%, lifting full year revenue to CHF 1.6 billion, despite stiff currency headwind. Driven by the strong top-line performance, core operating profit rose 18%, expanding the core EBIT margin to 27.1%. We launched a number of innovative product and solutions, most notably the Straumann BLX, which has been very well received and is attracting many new customers.
We added new skills and experience to our workforce in general, and in our leadership team in particular, and we invested heavily in sustaining and growing our business in the future. This includes a number of strategic additions to our portfolio, which strengthen our position in the value implant segment and enable us to offer customers and their patients a broader range of affordable solutions. In Q4, we entered the orthodontic materials business and gained access to high performance thermoplastics for clear aligners. At the same time, we invested significantly in production capacity around the world to support new product launches and to ensure that we can meet growing demand in the future. With all the essentials in place, we will sharpen our focus on executing our strategy.
Based on our current momentum and our attractive rollout program, we are confident that we will continue to gain significant market share in 2020. Looking at slide six and our sequential performance. In 2018, we achieved our highest growth in 30 years, and the final quarter was the strongest. This set a very high baseline for 2019, which is why organic growth of 17% in Q4 is a remarkable achievement. Our biggest and most mature region, EMEA, posted growth in the low teens, lifted by emerging markets like Russia and Turkey. North America came very close to the 20% growth it achieved in the prior year, while Latin America delivered an exceptional performance in a very unstable environment. Obviously momentum will dip this quarter as treatments are postponed in China due to the coronavirus. I'll say more about this later.
The strong revenue growth through 2019 is reflected through the P&L, as you can see in slide seven. Our core EBIT margin expanded 20 basis points, or 80 basis points excluding the currency impact, while core earnings per share grew 17%. Looking at the wider context in slide eight, we have succeeded in increasing organic revenue at an average of 15% over the past five years, in comparison with middle single-digit growth in the market. This has driven progressive improvements in our profit margins over the same period. Moving on to slide nine. We estimate that the global market for implant dentistry is worth CHF 4.6 billion, having grown at 4%-5% in 2019, driven almost entirely by volume expansion. The Straumann Group has outperformed for several years and is clear market leader with a share of 26%.
As you can see, the overall dentistry market is worth between CHF 27 billion and CHF 29 billion, and we have built a competitive portfolio that enables us to address half of it. To support sales growth, production expansion, and our increasing customer base, we created more than 830 new jobs worldwide, which together with acquisitions, increased our global workforce by approximately 1,600 to 7,590. Most of the new positions were in sales related functions in high growth markets, but also in production. Now, for the business performance and financial details, I will hand over to Peter.
Thank you, Guillaume, and good morning, everyone. Before we look at the numbers, I would like to remind you that in 2019, we implemented the IFRS 16 lease standard, as well as the sixth regulation regarding the disclosure of alternative performance measures. We began to report core numbers in H1, which exclude acquisition-related asset amortizations as well as exceptionals. To assist you with like-for-like comparisons, we have provided reconciliation tables in slide 19 as well as further details in slide 43. Let me begin with our top line development in slide 12. At 2019 exchange rates and adjusted for M&A effects in 2019, our full year revenue in 2018 would coincidentally have been the same as in 2019. The negative currency effect was due to the strength of the Swiss franc, mainly against the euro and the Brazilian real.
As you can see in the middle of the chart, all our regions continued to post double digit increases, bringing organic growth to 17%. More than 70% of growth was generated by North America and EMEA, as you can see on the right. Based on external data, we believe that we gained market share in all regions. As you can see in slide 14, our largest region, EMEA, achieved double digit growth despite increasing baselines throughout the year. The performance in Q4 was particularly impressive. The continuing success of Straumann's BLT and the group's value brands were the main drivers, boosted by the launch of Straumann BLX. In Q4, Germany was solid, while Italy, the Middle East, Russia, Spain, and Turkey all posted strong increases. In North America, organic growth topped 19% in Q4, driven by BLX, which was launched in Q3, as well as Neodent GM and ClearCorrect.
Emdogain and the introduction of Jason membrane by Botiss fueled strong growth in biomaterials. There was also a notable contribution from the clear aligner business, which continued to grow dynamically. Finally, the region made further gains in the DSO segment, which accounts now for 10% of its sales. Moving to slide 14 and Asia Pacific. Organic growth was just short of 25% in Q4, driven by premium implants and lifted by the value brands as Anthogyr grew strongly in China and Neodent was rolled out in Japan and Thailand. Strong scanner sales in China added to the good performance. Finally, as Guillaume mentioned, Latin America delivered an exceptional performance in an unstable environment as organic revenue rose 17%. All countries in the region reported revenue increases in Q4, when organic growth reached 13% in the shadow of an exceptional fourth quarter in 2018, when revenue surged 27%.a
The performance was driven by Neodent and Straumann, as well as the continuing success of biomaterials. Turning to the next slide and looking at our performance by business. Implant systems continued to grow at a solid double-digit rate and were the main growth drivers. Straumann BLX attracted customers from competitors and sold more than 100,000 units. Restoratives, which include abutments and CAD/CAM prosthetics, also delivered strong double-digit growth. Digital equipment sales increased thanks to a very strong fourth quarter, which made up for soft sales in the first nine months. Biomaterials, which benefited from international rollouts and portfolio additions, was the second fastest-growing business in 2019. In orthodontics, the number of clear aligner case starts rose more than 60%. Before we look now at the financial statements, let me take you through slide 16, which lists the non-core items of the past two years.
The main effects in 2019 were the settlement of a longstanding dispute between ClearCorrect and Align Technology, and the fire damage at Dental Wings, which was covered by insurance. The amortization of acquisition-related intangible assets and consolidation gains amounted to CHF 25 million. If you need further information about any of the exceptionals, I will gladly provide it when we get to the Q&A. Slide 17 provides an overview of the core financials. Core gross profit rose 17.4%, while core EBIT climbed 17.6%, with the respective margins reaching 75.6% and 27.1%. We achieved further gross profit improvements despite significant investments in innovative technologies and production capacity expansion. The core gross and EBIT margins both improved 20 basis points despite adverse FX effects. Core net profit rose 15.5% to CHF 338 million.
For completeness, you will find a year-on-year comparison on a reported IFRS basis in slide 18, followed by the core reconciliation tables in slide 19. You can also find them on page 139 of the annual report. Looking at gross profit development in slide 20, our gross margin in 2018 amounted to 74.7% on a reported basis, or 75% adjusted for currencies and non-core items. The improvement this year was mainly due to top-line leverage and efficiency gains, which added 50 basis points. A further 10 basis points were due to the more favorable product mix, resulting from softer sales of lower margin digital equipment. As a result, this year's core gross profit margin increased 60 basis points to 75.6%. Without FX headwind, the margin would have increased 40 basis points.
As shown in slide 21, our core EBIT margin expanded 80 basis points to 27.1%, due mainly to operational gearing. Higher OpEx expenses reflect our investments in R&D, new markets, and new segments. Unfavorable currency movements cut the margin improvement by 60 basis points, while the adoption of IFRS 16 improved it by 30 basis points as part of the lease expenses, which were transferred from the OpEx line to the financial result. As you can see in slide 22, the combination of the aforementioned operational factors contributed 17 million CHF to core net profit, which increased 15.5% to 338 million CHF. The net financial expenses increased by 8.4 million CHF, of which 6.6 million CHF were due to the effect of IFRS 16. Higher hedging costs and currency exchange losses in emerging markets again added to our finance costs.
Our core share of results from associates was in line with the prior year. The increase in income tax is due to the increase in operating profit. The group's tax rate remains stable at around 15%. Without the one-time IFRS 16 effect, net profit margin would have been 20 basis points higher at 21.4%. Slide 23 provides a breakdown of our cash flow statement. Operating cash flow increased 37% to CHF 379 million, including CHF 23 million due to IFRS 16. Free cash flow increased 36% to CHF 230 million, despite higher CapEx investments of CHF 41 million. Excluding IFRS 16, free cash flow increased 22%, resulting in a margin of 12.8%, 40 basis points higher than in the previous year. The change in net working capital contributed CHF 12 million to the increase in free cash flow.
Days of sales outstanding increased by one to 57, while days of supplies increased to 175. Interest and tax payments increased by CHF 2.5 million. Slide 24 shows the impressive expansion of our global production capabilities. To cater for future growth, we continue to invest heavily in capacity expansion at our existing and new facilities in Curitiba, Villeret, Andover, Markkleeberg, Oberreichenbach, and Round Rock. In 2019, we invested CHF 120 million in this project and expect the investments to increase further in 2020. Based on our strong performance, the board is proposing to increase the dividend for a fifth consecutive year to CHF 5.75, which is an increase of CHF 0.50. The share will trade ex-dividend as of April 9th. Going forward, the board confirms its intention to increase the dividend, subject to further good performance. With that, I will hand back to Guillaume.
Thank you very much, Peter. The continued good performance and strong results confirm that we are working on the right things and that our strategy is relevant and appropriate. We are convinced that culture is a key driver of our performance, which is why it continues to be our first strategic priority. We gave you an update on our culture journey last quarter. I would like to confirm it by adding that with the rapid growth of our organization, we have been investing significantly in people development and management. Digital transformation is a key here. We have been using digital platforms for some time to recruit talented people who fit well with our culture. In addition, we are investing in digital tools to support our staff in their career development. With regards to the two other priorities, there are four key areas in high opportunity and leverage.
Premium and value implants, orthodontics, and digital, as you can see in slide 28. The premium implant segment is worth CHF 2.2 billion, and we have a strong share of 44%. However, we have only just begun to unlock the premium fully tapered segment, where at the beginning of 2019, our share was zero. In the value implant segment, which is worth CHF 2.4 billion, our share is comparatively small and is predominantly in Brazil. However, we have added brands to cover all price points and have the tools, resources, and reach to penetrate this segment further. Our share of orthodontic market is still very modest and there are many new entrants. Nevertheless, the market is big and is growing rapidly. Here, too, we have all the elements, the resources, and the global footprint to succeed.
Digital is the fourth area in which we see significant potential, both in prosthetics and equipment. We believe that intraoral scanners are a strategic key, which is why we are working hard to gain access to the broadest possible base of installed scanners in order to drive our consumable business going forward. Looking at the premium implant segment on slide 32, Straumann BLX is our main launch priority. Full releases started in EMEA and Brazil in Q2, and I personally took part in the North American launch in Q3. BLX is highly innovative and has been designed for immediacy protocols in particular. This was uncharted territory for Straumann. We are now well positioned to lead this field. The feedback we have received from customers has been very positive, strengthening our aspiration of gaining significant share in this segment.
We are still waiting for certain regulatory approvals, but all going well, we expect to launch BLX in five big markets this year, including China and Russia to follow in 2021. With regard to the value segment, we have some exciting news today about a completely new brand that will increase access to implant treatment, particularly in markets where affordability is a key issue. As you can see on slide 30, NUVO is an attractively priced range of implant designed for simplicity and versatility. It uses one tapered design with a variety of connection options to match a wide range of customer preferences. Produced at our new factory in Brazil, it will help us to address and expand the lower value segment. The initial launch is planned in Latin America this quarter. Moving on to orthodontics on slide 31.
In view of the strategic importance and high potential of aesthetic dentistry, we have organized our orthodontics franchise into a separate dedicated business unit. It incorporates our clear aligner brands and the Bay Materials business we acquired in Q4. It also includes the important digital planning service company that we also acquired earlier in 2019. The ortho business unit currently has a team of 800 colleagues around the world, and we have appointed Camila Finzi to lead it. Her business acumen, operational experience, and commercial expertise in medical devices and pharmaceutical will be a key to expand this business and driving dynamic growth. Camila joins us from Alcon and previously worked for Novartis and Pfizer. As you can see in slide 32, the global clear aligner market is now estimated to be worth CHF 3.2 billion and is growing at more than 20% annually.
Our customer base also expanded by more than 20% in 2019, and case growth exceeded 60%. With ClearCorrect entering new markets, we're rapidly building up sales, distribution, and production infrastructure. Until now, production capacity has been absorbed by the strong growth in North America, which has held back the full rollouts in new markets. Turning to slide 33. Our digital business also has high potential and strategic importance. In parallel to orthodontics, we have organized it into a separate dedicated business unit. This includes CAD/CAM, scanners, milling equipment, 3D printers, materials, guided surgery software, planning, and prosthetic design services. We are very pleased to welcome Dirk Reznik to Straumann as Head of the new business unit. He is an experienced executive with a proven track record in electronic consumer products, digital technology, and digital ecosystems.
He joins us from the German Vorwerk Group, where he built up and led its largest division, Thermomix. Our Smile in a Box service is an excellent example of how we can create differentiated solutions by combining implant, prosthetics, design services, and workflows into a single package. The concept provides easy access to digital dentistry and is particularly appealing to clinicians who want to increase simplicity and efficiency in their processes. Let me briefly explain the workflow. The customer sends digital scans and the patient to us and receives a detailed treatment plan for approval. After this, we produce and supply all the components needed, including surgical guides, implants, drills, and prosthetic, which are all delivered in one box prior to surgery. This means that the complete treatment can be performed in one session, saving time and increasing accuracy, predictability, and productivity. The benefit for the patient are significant.
They receive fixed, functioning aesthetic teeth immediately, with self-esteem and confidence restored. Smile in a Box provides an opportunity for us to grow the market and our customers to grow their business. Moving on to the updated organizational chart on slide 35. We have added leadership experience and strategic skills to support our growth trajectory. In addition to Camila Finzi and Dirk Reznik, there were three other newcomers to the executive management team in January, all of which were announced last year. Holger Haderer succeeded Frank Hemm as Head Marketing and Education. Andreas Meier joined the EMB as Chief Legal Officer and Head Business Development. Rob Woolley took over my previous role as Head Sales North America. Holger and Andreas have both been with Straumann for more than 10 years, so we have a great combination of internal continuity with external experience to challenge and broaden our thinking.
We are also preparing for the future on the operational side. A few weeks ago, we announced the succession plan for Head of Research, Development & Operations, Gerhard Bauer, who is retiring at the end of June after serving our company for 10 years. Gerhard and his team have built up a first-class production organization and a strong R&D function that are well prepared for sustainable growth, including readiness for the new Medical Device Regulation. We are deeply grateful for his tremendous contribution to our success over the years. At the same time, we are glad to have found a highly experienced successor with a strong track record in production in the medical device industry. Mark Johnson comes from Epredia, where he was responsible for global operation, including 10 sites in six countries.
His career includes 10 years at Medtronic and three years at Philips Oral Healthcare, where he was responsible also for R&D. Mark is a Six Sigma Green Belt, a certified Lean expert, and has degrees in mechanical engineering and business management. We are looking forward to having him on board. That brings me to our outlook, which as always, carries a disclaimer for unforeseen events and circumstances. Just two months ago, the coronavirus was off the radar. Today, it is causing a major impact on many businesses, including dentistry. As you know, public hospitals in China, including dental clinics, are treating emergency cases only. Private dental practices are closed. As a result, non-essential treatments will be postponed, but not canceled altogether.
Slide 38 provides an overview of the situation. Based on current information, we believe that the impact of the virus could reduce our revenue in Q1 2020 by CHF 30 million or more. As I indicated, we expect this business to be postponed, not canceled. It goes without saying that the safety and well-being to our staff, customers, and patients are paramount. We have issued precautionary instructions, including travel restrictions to our staff, and we are relieved that none of our colleagues has been infected. Looking at slide 39 and our guidance for 2020, we expect the dental implant market to continue growing at about 4%-5%. We are confident that we can continue to gain share by achieving organic growth revenue in the low double-digit percentage range.
As we continue to invest in sales and marketing, and research and development, we expect the core EBIT margin to be stable, excluding the impact of currency fluctuations and the coronavirus. Now, I would like to open the question and answer session. As usual, we will begin with our guests here in Basel before opening the lines to webcast participants. If you have questions, please enter your question in the webcast feature or press star and one on your phone to join the queue. Kindly limit yourself to two questions. This will give all participants a chance to ask a question within the available time. Please, can we have the first question from the room?
Yep.
Hello. Thank you very much. It's Falko Friedrichs from Deutsche Bank. Two questions, please. Firstly, on China, on this CHF 30 million impact in the first quarter of this year, what are your specific assumptions behind that? Do you think that 100% of that business can be recovered later this year? Secondly, on BLX, what is your placement target for 2020, and how worried are you about launches from competitors this year?
When it comes to China, our estimation for Q1 is based on the fact that all the hospitals and clinic have been closed, then there is obviously almost no business that will come until end of March. For the end of the year, it's still too early to predict because it will depend how the pandemic can be controlled and how the patient confidence will come back within the domestic market. When it comes to the second question on BLX, we are very confident about our future growth with this new line within our product portfolio. The product acceptance has been very strong among new customers, we don't see today any really adverse, even from competition, that will slow down this growth rate.
Thank you very much, Danny Walker from Vontobel. The first question may be on the U.S. clear aligner market. It's the region where you're coming from. We have seen several new entrants, recently also SmileDirectClub announced to offer a wholesale product. Can you maybe say a little bit how all these entrants are changing the market? How price disciplined are they? How are the orthodontists, GPs, DSO behaving in that regard, as they have now the opportunity for a much broader offering? Maybe on BLT, I would assume you have achieved maybe 35%-40% market share in that area now after five years of launch. How much more market share gains are still possible, how is competition maybe picking up here in that regard? Thank you very much.
Yeah, thank you for the question. When it comes to North America clear aligner market, as you said, there is a lot of activities going on with new entrants, with direct-to-consumer activities, which is pushing significantly the market by very strong advertising. So far, when you look at the market penetration, it's a very under-penetrated market when you look at the overall potential. Every entrance and every DTC activity is supporting market growth, which is very good for us and very good for clinicians. When it comes to competition and pricing, we have seen with the DTC rivals some pressure on ASPs, but which had almost no impact for us because we have still a very modest market penetration.
We believe also that innovation is going to support us to keep ASP high enough, and this is why we have done the acquisition of Bay Materials earlier in the year, to make sure that we can deliver new raw material, advanced technology in order to differentiate our value proposition. When it comes to your second question of the apically tapered implant, we are, and you're right, around 35% market share to 40% on the apically tapered market. We do believe there is still room to grow here. That means it's 2/3 of the market that we still have to gain. The BLX is supporting us to gain a significant part also of the apically tapered market. A very interesting insight we discovered this year is that a lot of customers that are using our fully tapered implant are also using apically tapered implant in other procedures.
Meaning that our conversion of fully tapered implant will help us to gain this apically tapered implant part of their business as well.
Hi, it's Oliver Metzger from Commerzbank. My first question is on your guidance. Last years you mentioned always some risk factors. Now you mentioned coronavirus as one potentially major risk factor. Could you elaborate also on further risk factors, which are the reason for your guidance? The second question is on orthodontics. You clearly have gained some tractions. Comments in the past suggested that you need to upgrade your portfolio to be able to fully compete with the market leader. How are you in the strategic part in upgrading your work portfolio?
Yeah, I will propose to Peter to ask the first one, and I will answer the second one. I can start with this one right now. Yes, we have said, and it is still correct, that our value proposition for the time being is more targeting GP than orthodontist, because we still have some indications that we are not covering with our clear aligner value proposition today. We are making significant investment for this. The first one has been then the acquisition of Bay Materials for having a better thermoplastic material with three layers. The second one is developing our software on both the front end and back end of the procedure to support a better end user interface.
The first one is also investing in new technology like new treatment protocol, which we have done with Geniova, which is another way to do clear aligner treatment, increasing efficiency and speed of treatment.
Let me address your first question, Oliver, on the guidance. As usual, our guidance is a balanced view on risk and opportunities for the coming year, 2020. If I look back at the last four years with double-digit growth rates where we achieved considerable market share gains, I think issuing a low double-digit organic growth rate for 2020 is a very ambitious target, because it would be the fifth year in a row with double-digit growth. If you address specific risk factors, I probably would quote the same that I have quoted in the past conferences and 12 months ago. We still face a certain difficult economic and political environment in Latin America. We have still the ongoing trade discussions between the U.S. and China, which are currently overshadowed by the coronavirus, the trade discussions are not yet solved.
We also have some political turmoil in the Middle East region. I would see more on the macro and political side, some risk factors there as in the past.
We can also say maybe that already with this low double-digit growth, we would be two times more than the market. Market is going to be seen at 4%-5%, which would mean really significant market growth still with a low double-digit growth.
Yes. Maja Pataki from Kepler Cheuvreux. I have questions regarding China as well. It's very helpful to get a CHF 30 million indication of what you can see right now. Could you just clarify, this is based on the assumption that your current business is down but also including the growth opportunity that you obviously cannot materialize in Q1? The second question would be, are you seeing some spillover effects already in neighboring countries in Asia where you see no treatments happening that could potentially worsen, or is that not part of your guidance?
When it comes to the first quarter and the CHF 30 millions of more, it's just on all the activity we have and the opportunity we have seen. When you have all the normal hospitals that are closed, then this is obviously then making a stop to all the different opportunities we're having as well. On the second part of the question, we don't actually see any significant effect on the neighboring countries. The Japan situation, Korean situation, Australia, New Zealand situation is really fine, and we see really significant growth in those countries.
Okay, understood. Maybe just to follow up. When listening to the Align conference call, when they were giving the indication on their expected impact in Q1, there was an interesting statement made saying, well, they expect the majority of the cases to come back fairly quickly, but they also do expect some dropouts because for some people it will just move into the background, and they don't anticipate this to happen. Do you think that based on the fact that the implant treatment is a different kind of category, we shouldn't see those dropouts, or is it something that it's too early to tell?
We believe that this is too early to tell. I think it will depend a lot about the consumer confidence to go back to the normal practices. We still believe that everything that has been planned will be executed, because this is, generally speaking, something which is going to help you functionally to restore a better oral health. We don't expect any significant dropout, but it still remains to be seen.
A bit explaining a bit more to an outsider. What enables you really to grow so strongly in a rather difficult economic environments, like in Italy or in the Middle East or in Latin America or Turkey or Russia at the moment? What is really driving your business so fast there? My second question would be, you have obviously taken over a very successful organization. What could go wrong now, I mean, in your view? Where do you see the greatest risks? I'm especially thinking of the integration of all these people you have added. It's a 25%, I think, increase in staff. This is a lot. Just please, if you could explain that.
Yeah. Thank you for the question. We believe that in those regions that you have been mentioning, but also I think it's valid for all geographies. I will come back to culture. The big shift that we have done in our culture has been to replace the customer at the center of our organization, meaning that we really decided to be agile and adapt to the different customer and the different markets. The success we are seeing in countries like Russia or Middle East is that with all the different elements of our product portfolio, we can really adapt the exact offering, which is corresponding to the local situation. This is one of the very strong strength that we are having now with our organization. We are covering every price point and every implant design possible.
With a very experienced sales team, we can really advise the customer what to use and when to use it, which is going to correspond exactly to the goal he would like to achieve. When it comes to risk and people, I will say it's also about culture. Integrating all those new people, it's obviously a challenge as far as you are not really explaining how work is done here. We have developed a very strong culture in order to help everyone to be supported at their onboarding and try to have a clear view on where we go, how we would like to get there, and being supported in the skill set in order to do this. We believe that adding those 1,600 people, but 800 organically and 800 coming from different organization, will be done very efficiently, thanks to the whole infrastructure we put in place.
What I recognize is that the currency effects are getting stronger. Could you give us any hint about the influence on 2020 sales and EBIT if they would remain as they are? Because I expect quite a negative impact. Secondly, could you give us any information about CapEx 2020? What are you going to invest, and about your expected tax rate, please?
Yes. Let me start with probably the easiest one, the CapEx question. As we said, we have invested more than CHF 120 million into the expansion project in last year, and I expect that going up in 2020 because all of these projects are still ongoing. We'll be starting operations only at the beginning of 2021. For 2020, I would expect the CapEx level in the order of CHF 140 million-CHF 150 million, mainly into further capacity expansion, implant production, as well as ortho production. The second question on the tax rate. We all know there are currently going on certain discussions in the OECD on the so-called digital tax. What the outcome will be is still to be seen. I think I cannot really comment on that because it's quite unclear.
Apart from that, I expect a stable tax rate also in 2020 around the current tax rate of 15%. The last question, the FX rate. You have some backup charts at the very end of the presentation where you see our exposure to the different FX, and especially also see the year, the 2019 average rate. You see that we closed 2019 with CHF 1.11 versus the euro. If you look at the current spot rate, it's around CHF 1.06. It's very early in the year, of course, and I don't have the crystal ball to predict the further FX changes. If it stays as it is right now, I would expect on the EBIT margin a negative impact of 60 to 80 basis points in 2020, on the margin.
Chris at Credit Suisse. I have two questions actually. First, just on your guidance on margin. I think last year you guided for also at the beginning, double-digit, low teens, no growth, and then basically kind of no margin, at least at previous year's level. This year is basically the same kind of underlying growth guidance. Margins are guided to be stable. Is there anything to read into that? From where would the incremental margin pressure come relative to last year? The second question relates to the value implant segment. Could you actually disclose what kind of growth rate approximately you achieved last year in that business on an organic basis? Maybe if you can separate Brazil or not, just to see how the business is actually growing outside Brazil then. Thank you.
Peter, do you want to take the first one?
Yes. Let me address the question with the margin guidance. I usually said in the past that our target is to push expansion and to push revenue, but it must be profitable revenue, and we also want to incrementally increase the margin on average over a certain period. If you look at 2019, we were able to increase our EBIT margin by 50 basis points if I exclude currency and the positive IFRS 16 impact. 2020, we guided a flat margin. That is, I still believe we have potential to incrementally increase our margin over a certain period of time. In 2020, we will invest significantly in the growth pillars that Guillaume has shown in his presentation, further penetration of the apically and fully tapered premium market, further rollout of our value portfolio brands, the launch of NUVO in the regions, also and digital equipment.
If I look at the expansion of the margin in 2019, and if I take 2019 and 2020 together, then it's on average, if we are stable in 2020, 25 basis points increase, and that's in line what we said, on the long-term margin development.
Chris, when it comes to value, as you have seen in the number, obviously this is a critical part of our strategy here. We have 44% of the premium segment on the implant, and we are only reaching 10% on the value side. When we look at our growth, and we are not disclosing the precise number, what we can see is that value is significantly over proportionally growing in terms of growth rate than the premium side. This is also in line with what we discussed in the different geographies, where there are a lot of very dynamic geographies that we have in a lot of different regions, where the fastest growing part of our product portfolio is value.
Value is definitely growing very fast, in line with our expectations, even though from an absolute value number, it's still lower than the premium business because of our base of business, of course, on the premium segment.
[Non-English content].
This is why NUVO is critical for us. To the last part of the question saying, what is different with regard to the GM line, there is a very significant difference, which is the connection. GM has a proprietary connection, which means that you need to be trained, and you need to find the prosthetic abutment, which is going to go with the GM line. When you look at NUVO, this is a very strong trend in the third-tier segment, the customers want to be able to use any abutment, which I would say would be public knowledge. This is the External Hex, as an example, or this is the Internal Hex, as an example. As you will see, the NUVO product portfolio, it all supports the kind of generally used abutment on the low-tier segment.
They want to have the opportunity to choose their abutment for any kind of sources, which is around them. This is a big part also of our NUVO offering. When it comes to DSO, and you are totally right, it is a very important segment, today and moving forward. We are playing very significantly on the DSO side, and the growth rate that we have been presenting is proving that we have very significant successes in this segment. This in all the different geographies. We have won a lot of significant DSOs within Europe, but are having also very significant wins within North America. We are the provider of choice of ClearChoice, as you know. We have also been able to be selected as main supplier for what we call ACI or Affordable Dental, which is the second largest implant user in North America.
This is a very strong focus of ours, and our team is confident that they will continue to grow in this very critical segment.
Competition in DSO?
You have competition in DSO. You have competition in the specialist segment. You have competition on the GP segment. We don't see more competition on the DSO that we see on the other segments of our business.
Okay. The price point of NUVO relative to Neodent, roughly?
Price point of NUVO will be lower than the one from Neodent, but the price difference will be depending from market to market.
Okay.
We cannot have a general statement about this now.
Very clear. Thanks.
Last question before we move to the webcast questions.
Okay. Thank you. Isabel Strassheim, I'm working with Tamedia Papers. I'm wondering with the end of my trade agreement with the European Union is ending, how do you prepare for that? What do we expect then?
Would you like to take this one?
I'm not sure which trade agreement you mean. You mean the regulation that Switzerland might be excluded from regulatory approval in the European Union? Well, we are an international group, and we have legal entities and subsidiaries in the respective market, so we don't see any major risk for our business in that respect because we have the respective processes and activities to cope with that. It might lead to a certain administrative burden and effort, but we will efficiently cope with that.
Corisco, can we have the first question on the line now, please?
The first question from the phone comes from the line of Michael Jüngling from Morgan Stanley. Please go ahead.
Thank you. I have a few questions, please. Firstly, on China. I think you mentioned in the annual report that you have a business of around close to CHF 170 million. If you divide this by four, it's probably running around CHF 40 million-CHF 45 million per quarter, which would suggest that your CHF 30 million guidance is that China is down 70% year-over-year in the first quarter. Is that correct? Can you please confirm that level of contraction? Question number two is on the first half 2020 EBIT, EBITR or EBITDA margin. If I assume a certain margin, it seems to me that the CHF 30 million in lost sales could take maybe 150 basis points off the EBITDA margin in the first half. Is that a reasonable calculation as we approach in the first half consensus? Thank you.
Thank you, Michael. This is Peter speaking. You might have or you have seen that in the annual report, we disclosed the revenue that we generated in China, which was in the order of CHF 166 million for 2019. Your assumptions are, if you look at the ballpark figures, I will confirm your assumptions for the first quarter. How that will develop in the second quarter, that needs to be seen if we progress more and if we have more visibility in that respect. Obviously, that CHF 30 million will also have a certain impact on the margin. Of course, we have taken certain actions to mitigate some of the impact there, but we believe in the long-term growth potential in China, and we do not want to compromise our good position, market position, and long-term growth potential in China by cutting too aggressively costs at this point in time.
Right. Is it correct, if I take the CHF 30 million and assume that the fixed cost base will be reasonably stable, that it will have 150 basis points of impact on your first half EBITDA margin year-over-year?
By 150. If you look at now for the first three months, then 150 might be a bit high, but the ballpark figure might be correct. Yes. I would probably say 100 to 150.
Okay. A brief question on ClearCorrect. What assumption are you making with respect to gross margins going forward? When you bought the business, it was about over time building in value and expanding gross margin. If I look at your annual report on page 164, when you value the intangible assets, the goodwill of ClearCorrect, you're actually taking now the gross margin down from last year from sort of almost 72% down to 66%. Why would you do that when the guide was for the margins over time to go up as you build in more value? Thank you.
Well, when it comes to ClearCorrect, the gross margin, we're expecting to be able to develop that moving forward. Obviously, at the moment, we are doing a lot of investment in order to do that. We need to automate production, which is what we are doing significantly. We also have to secure our raw material, which is going to decrease COGS because it's going to be now internal. We have to bring innovations to be able to keep ASP stable. I think all in all, moving forward, we expect to have an improvement of our gross margin. The effect of the activities that we are running right now still have to be seen.
Okay. When your annual report says your margins are going down, that's not actually what you mean. Over time, you still believe that the gross margin of ClearCorrect have an opportunity to increase?
That's correct.
Okay. Thank you.
The next question comes from the line of Veronika Dubajova from Goldman Sachs. Please go ahead.
Good morning, gentlemen. Thank you for taking my questions. I will keep it to two. Just curious, looking at BLX, it sounds like you might have exceeded that 100,000 unit target that you had communicated to us earlier last year. Just curious if your sort of assessment of how quickly you get to that 30% market share has changed at all. If you can kind of help us think through the impact from BLX on the growth rate in 2020 and beyond with a little bit more detail, that would be helpful. My second question is on clear aligners. Would love to hear your updated thoughts on the DTC segment of the market and your own ambitions in there to the extent that you can comment on that. Thank you.
Thank you for the question. Yes, on the BLX side, we have been very pleased with the growth rate. The plan that we're having for 2020 is that more than doubling the sales that we have achieved in 2019. When it comes to achieving a 30% market share on the fully tapered segment, what we said when we launched BLX is that we are taking the next three to four years to get there, and we believe that we are well on track in order to achieve this overall objective. When it comes to DTC, well, we see a lot of activities on DTC, and especially things that are supporting the fact that we see the different go-to market channels somewhat converging.
We see some of the DTC raising prices now, especially then following up the guidance of, if you look at North America, the ruling that took place in California for having a panoramic X-ray before doing a treatment. There is one of the DTC who decided to implement in all its studio a panoramic X-ray in order to start a treatment. We see also other DTC trying to go on the regular GP customers or clinicians and trying to develop also this alternative channel. What we are seeing is that the cost of the treatment for patients will go somewhat a bit down to increase affordability, but we will then, thanks to all those DTC, seeing a very strong increase in the market growth for treatment acceptance.
All in all, we believe that the DTC are supporting the treatment right now and are going to go more to clinician-supported diagnostic before getting a patient started.
Guillaume, your desire to participate in this market, I know you had said, I think at Q3, you were still considering how to participate in this. Are these developments sort of maybe making you pause and rethink whether you should be a DTC player?
Well, when we see, we believe in DTC, as soon as you are involving the clinicians in the workflow. We do believe that a patient has to be seen by a clinician, and that the diagnostic has to be clearly done in order to know if you can start or not start a clear aligner case or doing any procedure done before. We are evaluating what kind of activity we can run or partnership we can do with this DTC activity that would respect those guidelines. As we see this going forward, that would potentially open opportunities, but it's still very early at this point.
That's great. Thank you.
The next question from the phone comes from the line of Patrick Wood from Bank of America. Please go ahead.
Perfect. Thank you. I have two questions, please. The first would be just what are you guys seeing in the premium implant market on the like-to-like pricing side? How did BLX pricing land relative to where you expected it? Just some sense on what you're seeing on the implant pricing side within premium would be very helpful, please. On the second question, I guess a little bit more conceptual. I understand why you guys are sort of looking to add a little bit to margins, flat to slightly up each year. Given the state of some of your competitors, are you not tempted to put more OpEx into the business even faster to try and put pressure on your competitors? I guess if not, why not? When you're planning each year, is it a issue of trying to deploy OpEx that quickly?
Is that the challenge or is the worry that if the macro cycle changes, you couldn't take it back out again? I'm just curious as to how you guys come conceptually to the idea that the right investment rate is what it currently is. Thank you.
Thank you, Patrick, for the question. When it comes to BLX pricing, BLX is really delivering a superior value with regard to everything we see on the marketplace, being our existing product line or seeing competitors offering. We really decided to go with a higher ASP, and we have been able to execute on it in 2019. We have a significant increase in ASP versus our existing line, which is really supporting the increasing value that you can see here in our results. When it comes to competition, while it's going to be very depending from market to market, we can say that generally speaking, we are with BLX on the highest side of the ASP in the marketplace, maximizing the value that we are adding with this unique innovation.
When it comes to OpEx, I think that's always the question that we are considering very carefully every time we are looking at budgeting. We believe that we are doing very significant investment to fuel growth. At the same time, you want to stay nimble, to make sure that you have the capability to have the agility to react to any of the adverse events that would be coming. When we look at our existing investment side, and especially the CapEx, we have been investing more than CHF 100 million CapEx in the past four years, when it come especially to production development, but we have done also significant promotion OpEx development. We believe that we are on the right spot looking at the fact that we have been outperforming the market by three times again in 2019.
Helpful. Thank you very much.
The next question from the phone comes from the line of Tom Jones from Berenberg. Please go ahead.
Good morning, thank you for taking my questions. I have two. The first one is for Peter, just a clarification on the margin guidance. You've guided to flat core EBIT margins. The reading of the text suggests that's in constant currency. If I had to put a number on what guidance implies with currency, would 26.5% be roughly in the right ballpark? Are there any other factors that would affect the reported core EBIT margin implied by the current guidance and current FX rates? The second question is just on the NUVO launch, more specifically, the timing. Guillaume, some of your predecessors kind of had the view that hell would freeze over before Straumann entered this end of the dental implant market.
There seems to have been an admission within the company that this is a segment you need to be in. I fully understand why, it's a big segment. My two questions are why now rather than at any point in the last five, six, seven years while you've been in value implants? Is this an acceptance that the value strategy hasn't quite played out as well as you would have liked? Or is this because this third-tier segment has grown quicker than expected? Just some clarity about not necessarily why, but why now.
Thank you, Tom, for the two questions. I think Peter will take the first one, and I will be happy to answer the second one.
Yeah, good morning. Good morning, Tom. If I understood your question right, your assumption was a 26.5% core EBIT margin at current FX rates. Is that correct?
Correct. I just wanted to check that was what your guidance implies.
Yeah
Nothing else missing from the math.
Yes. Our guidance is with constant currencies. There you are correct, yes. As I said previously, if currencies would stay around the current level, which we don't know, and it's early in the year, then I would expect a negative impact of something like 60 to 80 basis points. Yes.
Okay, that's perfect. I just wanted to compare it to, because the current consensus is around 27% and a bit. It would seem a little optimistic at this stage.
When it comes to your second question, Tom, why now, when it comes to the third tier segment, just because we have started very aggressively our value strategy, starting in 2013 or even 2014. Not so long ago, with especially adding new, driving the expansion internationally. Afterwards being able to add Anthogyr in some geography, having added MEDENTika in some geographies. We have also done different experiences with the Equinox brand in India, also the T-Plus in Taiwan. We see that there is no way you can be successful in the lower value segment with some upper value segment brand like Neodent, Anthogyr and MEDENTika. We would like to make sure we keep creating value for the shareholders and for our organization by really having coverage of all the different price points.
We have been very busy with already driving significant market share on our value segment on the upper side of it. I think it's just the right time to go there in order of priority. We see the third tier segment developing fast, especially now with those countries where access to care is increasing somewhat with education of clinicians. India is a very good example. We really need to be playing a role now.
Okay. Maybe just a quick follow-up question. Down in the third tier segment, compared to the first and second tiers, it is generally believed that you can make roughly the same margins at the upper end of the value spectrum that you do in the premium. It is only in percentage terms, not in absolute terms, obviously. Is that also your expectation down at the very low end of the price points? Can you make a similar mid-20s EBIT margin at maturity in this business? Or does the lower price point and perhaps the lower likely implant-abutment ratio down at that price point effectively put a lid on what kind of level of profitability you can achieve down at that end of the market, even with your synergies, scale, operating leverage, et cetera?
Yeah, I think that's a very relevant question. I believe first it's too early to say, but in the plan, we are looking at achieving a very similar relative margin by changing a key element in the mix. Obviously, you would like to make sure when you are going the third tier segment to adapt your go-to-market channel, and make sure that you are creating efficiencies in everything you do. That's the way we are looking at the third tier segment. It should not be highly diluting with regard to what we are doing right now.
Okay, that's perfect. I'll jump back in the queue.
The next question comes from the line of Sebastian Walker from UBS. Please go ahead.
Hi there. Thanks for taking the questions too, please, from my side. One, just on China, do you have any indication in terms of timelines for dental practices opening and public hospitals resuming normal activity? I just wanted to understand, from a profitability impact, you mentioned coronavirus as a risk for the EBIT margin guidance. If you're assuming to recoup the lost sales from Q1 over the course of the rest of the year, what's driving that risk to the margin? Is it more supply chain or is there something else we're missing? Thanks.
Yeah. Thank you. I will take the first question, and Peter will elaborate on the second one. Honestly, I think we just have to recognize today that we have no view on how the market will recover when it comes to when the practices will reopen again. We just need to listen to the latest information as we are doing and be ready to support our customers to resume activities as we are obviously leveraging this time in order to build our plans to support them to get up to speed as soon as they will have the green light to reopen their dental practices. There is nothing more than we can say today, but we will obviously communicate as soon as we know more from the local situation.
I'm not sure if I understood your second question. Obviously if you will be able, in the remaining quarters after the first quarter, to regain the respective CHF 30 million sales loss that we forecast for the first quarter, then obviously that would have basically no margin impact. What is the current situation? Sales are down, but our fixed costs are more or less stable. The question is when and if the business will regain momentum after the crisis in China. That's the key question. We said it's way too early to comment on that outlook yet.
Understood. It's just the potential for lost sales if they're not fully recouped. A separate question, if I could, just on clear aligners. Should we expect, in 2020, a material acceleration in the case growth rate, given that capacity constraints are going to be easing throughout the year?
Well, as the base is getting higher, obviously, step by step, if we can keep this case start growth, we will be happy with this. I think you have seen we have 60%, and we have been obviously planning for capacity expansion to make sure we can serve the market. Having the ability to continue on this on a higher baseline will be already a positive result for us.
Great. Thank you.
Next two questions now from the line.
The next question comes from the line of David Adlington from JP Morgan. Please go ahead.
Morning, guys. Most of my questions have been answered, just a point of clarification on slide 39, your guidance slide. You've indicated that on the top line growth of low double digits and make no reference to coronavirus, whereas your EBIT margin does. Can I just clarify that both your top line and your EBIT margin guidance excludes the impact of corona, and therefore the CHF 30 million is on top of both of those guidance lines? Thank you.
I'm not sure if I understood correctly, but you said that the guidance is excluding the coronavirus on the EBIT margin as well as the growth? Yes, the guidance is excluding the impact of the coronavirus.
Great. Thank you very much. Very clear. Thank you.
The last question for today is a follow-up questions from Michael Jüngling from Morgan Stanley. Please go ahead.
Great. Thank you. Two more. First, when it comes to the internal connection that you've got on the BLX implant, can you comment on whether the European Patent Office has already granted you the patent? If not, when do you expect the patent communication to take place? Secondly, on ClearCorrect, can you please highlight what actually was the capacity utilization of your ClearCorrect facility, the factories that you have, was it 85, 90, or what was the capacity utilization, please? Thank you.
When it comes to the first question, Michael, the internal connection of our BLX is patented in a way that we submitted the patent to the European Patent Office. It has not been granted yet, and it takes quite some time to do this because there is a lot of prior art. As there is a lot of prior art, it takes a long time for the patent office to give you an answer. We don't have a fixed visibility here, when it comes to when we are going to have an answer, but we are obviously carefully monitoring this, because this would be very important for us to get that patent granted.
When it comes to ClearCorrect, and you were asking about the capacity utilization, I think as we said in the last quarter that a large part of our growth was maxed out by also our manufacturing side, then we are using very significantly or close to the max on manufacturing capability.
Great. When it comes to the internal connection, can you talk about the abutment to implant ratio for BLX? Is it close to 100 despite there's no patent granted, meaning competitors are cautious of not trying to replicate an abutment that fits the connection?
Michael, this question is also very important, obviously, for making sure that we can sell an abutment every time we are selling an implant. Our abutment to implant ratio right now is close to 100. It is not there yet, of course, because we have sold a lot of implants that are not placed yet, then we still have to restore them. We don't see many alternatives for clinicians because this connection is, let's say, significantly engineered for not being immediately replicable. Now we will start to see, I'm sure, some first copies in the marketplace, but this has not been mainstream for the time being. Our abutment to implant ratio is very high, and we expect that to be still very high in the next 12 to 18 months.
Afterwards, it will obviously depend on the two sides, either a granted patent or also the speed and willingness for competitors to imitate this new BLX connection.
Thank you.
Thank you for your questions. If you need further information, you will probably find it in our annual report, which is published today. Of course, you are welcome to contact our colleagues in investor relations and corporate communication. I would like to thank you all again for joining us today. We look forward to seeing you at one of the upcoming investor events, which are listed on slide 42. For now, we wish you a great day. Thank you.
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