So good morning, everyone, and welcome to this conference on Straumann's 2017 first half results. Thank you for taking time to be with us today. We will be referring to the presentation slides that were published on our website early this morning. And before we begin, I have to inform you that our discussion will include forward looking statements. So please take careful note of the disclaimer on Slide 2 of the presentation and at the end of our press release.
As usual, I will run through the highlights, and then Peter Hackel, our CFO, will share the performance and financial details with you. After that, I will tell you about our strategic expansion in aesthetic dentistry and the way we are organizing ourselves to unlock the exciting opportunities that our existing and new businesses offer. Then we will be happy to answer your questions. We have a lot of news to share with you today, but I want to begin by highlighting our revenue and profit numbers, which show that our underlying business is growing strongly and continues to outperform the market. Excluding acquisition and currency effects, our organic revenue grew 14% in the first half of twenty seventeen, driven by double digit increases in all businesses.
In Swiss francs, the increase amounted to 18%. In Q2, organic revenue rose also 14%, making this the 9th consecutive quarter of double digit growth. Strong volume growth lifted our underlying EBIT margin by 90 basis points to 25.7 percent, while underlying net profit increased by 24%. One of the keys to our growth has been the ability to offer comprehensive solutions in both the premium and nonpremium segments. Our Straumann bone level tapered implant range continues to drive growth in the premium Straumann brand, while Neodent and the addition of Medentika, which we consolidated earlier this year, boosted our nonpremium business.
To create additional growth opportunities, we have decided to enter the field of orthodontics, which complements our current business very well. I am delighted to announce today that we are investing into 2 companies that provide us with a strong base in the fastest growing segment of the orthodontics market. ClearCorrect is a well established provider of clear aligners based in Texas, and Genovia is a young pioneer of hybrid aligners based in Madrid. The clear aligner business relies on digital workflows and equipment, which are also becoming essential in modern tooth replacement procedures. For this reason, we have decided to increase our stake in our digital partner Dental Wings from 55% to 100%.
Together with our investment in RapidShape, a leader in 3 d printing technology and our strategic partners, we now have a strong digital platform to support our implant, restorative and orthodontic businesses. These additions, together with our full pipeline of growth projects, position us well for future success. Based on our first half performance, we are on track to deliver the underlying revenue and profitability increases stated in the raised guidance we shared with you in April. I mentioned that our ability to offer comprehensive solutions has been an important growth driver. This chart shows you our key product launches and the geographic rollout of our premium and nonpremium businesses, which collectively have boosted our growth over the past 5 years.
And we are confident that our latest additions will support the trend going forward. Looking at this year, we followed a record first quarter with strong growth rates in Q2. In our 2 largest regions, Europe and North America, we keep the pace up. And also, it eased slightly elsewhere. We still performed exceptionally well, especially in Latin America, given the difficult economic climate.
Our first half organic growth of 14% is reflected through the P and L with mass margin expansions of 130 and 120 basis points at the EBITDA and EBIT levels, respectively. Excluding onetime exceptionals, neither of which were cash relevant, earnings per share increased by no less than 26% to CHF7.0.77. Looking at the historic context again, our revenue has risen 10% on a reported or 8% on an organic base each year over the past 5 years. At present, we estimate that the premium market is growing at 3% to 4%, which includes our own growth. Since 2012, our EBIT margin has increased from 15% to 26%, and our earnings per share has expanded 26% per annum.
And now for the details, let me hand over to
Pito.
Thank you, Marco, and good morning, everyone. As you can see in Chart 10, at this year's exchange rate, our half year revenue in 2016 would have been CHF3 1,000,000 higher. The acquisition effects of Medentica and Equinox in the 1st 6 months of 2016 added a further CHF11 1,000,000 to the reported net revenue of CHF 543,000,000. In the center of the chart, you can see the regional growth rates, while the regional contributions to overall growth are shown on the right. From a regional perspective, our largest regions, North America and EMEA, each contributed about a third of our growth.
Asia Pacific continued to be our fastest growing region and notched up a revenue increase of nearly 23%. Latin America achieved growth of 14% despite the challenging environment in parts of the region. Now let me add a few comments on the regional performances in Q2 for each region. EMEA maintained its pace in Q2 and delivered organic growth of 10% despite 2 fewer selling days because of the early Easter last year. Expectedly, implant volumes were softer than in Q1, but growth did not slip, thanks to strong demand for our nonpremium solutions as well as higher sales in our CADCAM equipment business following the presentation of new digital solutions at the IDS.
The strongest increases were in Belgium, the UK and most of the Eastern European countries. We enjoyed growth in the Middle East and our young subsidiary in Russia posted dynamic growth in Q2. North America increased momentum as Q2 revenue reached 76,000,000 corresponding to 17% organic growth. The performance was driven by strong demand across all businesses and in the premium and non premium implant segments. Many new customers were attracted by RockSolid.
Straumann's new 2.9 millimeter BLT implant and Neodense range of tapered implants. Growth in Asia Pacific eased slightly from 26% in Q1 to 19% in Q2, reflecting the very strong comparative period last year in Japan, which benefited from various new product launches and the large ITI Congress in Tokyo. Most of the growth was generated in China, driven by the dynamic premium market and benefiting from the rollout of the Ontogere value brand. The fact that all our subsidiaries delivered good growth was particularly pleasing. The newly acquired Equinox business in India added 3% to reported growth.
And finally, Latin America achieved organic growth of 13% in Q2, driven mainly by Straumann BLT and Neodent Aqua Implants. Particularly strong demand in Mexico, together with growth in Colombia, Argentina and Chile helped to sustain the region's double digit growth. Strong implant volume growth was the main business driver throughout the first half. The key contributors were the high performance implant material, Rock Solid, and the continuing success of our BLT implants, which accounted for more than a quarter of all Straumann premium implants sold in H1. This product category has not yet reached its full potential, considering that more than 50% of all implants placed are apically tapered and roughly 70% have a conical shelf.
Particularly noteworthy was the contribution from our innovative 2.9 millimeter small diameter tapered implant for the Aesthetic Zone, which was fully launched in Europe and in the U. S. In March. Our intense efforts to become a total solution provider for tooth replacement have led to a sustained double digit growth in the restorative business. Following launches at the IDS, Straumann booked initial sales from its new intraoral scanner and milling solutions.
The sales contribution of digital equipment is expected to increase in the future as we are building a dedicated support and service organization worldwide. Biomaterials continued to be the smallest but fastest growing segment and was driven by the international rollout of the Botis range and guided bone regeneration solutions within licensed products. We are working hard to make a comprehensive biomaterials portfolio available in Brazil, China, Japan and the U. S. Moving on to the Kari financial statements.
Slide number 14 provides you with an overview of the most important figures in the first half of twenty seventeen and the same period a year earlier. Having obtained control of Medentika in Germany at the outset of the year, we have fully consolidated the business in our financial statements. The agreement with the founding shareholders enables us to direct all relevant activities of Medentika with the unchanged participation of 51%. Last year, the business was still reported in the associates line below EBIT. This business combination and to a lesser extent the acquisition of Equinox in India led to several one time effects, which include inventory revaluation expenses of €2,000,000 in the cost of goods sold and a one time gain of €25,000,000 below the EBIT line.
The latter is split between the revaluation of the fair value of the investment in Medentika of €30,000,000 and the related currency translation losses of €5,000,000 which were reclassified from the comprehensive income to the income statement. Both effects are shown in a separate line in the income statement on the gain on consolidation of Medentika. All these onetime effects and the related tax impact are defined as exceptional. To facilitate the performance comparison, the key financial figures are shown both on a reported and a pre exceptional basis. Despite significant further investments in new markets and segments, geographic expansion, research and development and production capacity, we have further improved our underlying profitability.
EBITDA and EBIT both rose 20% with the respective margins reaching 29% 26%. At €141,000,000 reported net profit exceeded operating profit by €3,000,000 due to the business combination exceptionals mentioned earlier. Our reported gross margin in H1 twenty 16 was 78.3%. Currency fluctuations only had a minor impact this time. Strong volume growth in premium and value implant solutions lifted gross profit in H1 2017 by 16% to €418,000,000 The corresponding margin declined 1 percentage points to 77.2 percent and reflects the higher share of non premium and third party products, which have lower gross margins.
On top of that, we have stepped up our capacity investments and increased the manufacturing personnel in all our implant facilities, and this led to higher production costs. We currently have a high degree of capacity utilization and want to create additional output for future innovation projects. Some of the ramp up costs in manufacturing in Coritiba, you can see that EBITDA increased 120 basis points from 27.8% in 2016 to 29% this year. This is remarkable as the gross margin is lower than last year and despite investment in high growth markets and our non premium offering. Distribution expenses in the 1st 6 months increased by €17,000,000 to €119,000,000 Thanks to our strong top line growth, the distribution costs as a percentage of sales were 60 basis points lower than a year ago.
Administrative expenses rose in absolute terms from €146,000,000 in H1 twenty sixteen to €162,000,000 in H1 2017. This includes overhead and marketing costs for the newly added Medentika and Equinox businesses. Relative to sales, administrative expenses decreased 170 basis points to 30%, which contributed to the improvement in EBITDA margin. The change in the other income line had no impact on the margin development. On the next slide, you'll see the same picture as before, but on operating profit level with additional information on the acquisition related amortizations, which we include in our underlying comparison.
Slide 18 shows you how the combination of these factors affected the bottom line. Our underlying net profit improved by 24% to CHF 117,000,000 driven mainly by our operational progress, which amounted to CHF 25,000,000 The financial result was €1,000,000 lower than in the prior year and the result from our associated companies decreased by €2,000,000 mainly reflecting the business combination of the highly profitable Medentica business. Income tax expenses in the first half of twenty seventeen amounted to CHF 17,000,000 in contrast to a tax credit in the prior year when the group benefited from a one time tax gain in Brazil. This year, the aforementioned revaluation gain of Medentica lowered the effective tax rate to 11%. Our normalized tax rate remains unchanged at approximately 15%.
In summary, net profit increased by CHF 23,000,000 and the margin amounted to 21.6%, excluding exceptionals. On the next slide, you see the details of our cash flow statement. Thanks to the aforementioned profitability improvements, our EBITDA increased by €27,000,000 As mentioned at the beginning of the year, we are investing heavily into future growth by expanding all our implant manufacturing facilities, which lifted CapEx by CHF 19,000,000 to CHF 33,000,000 in the first half. CapEx is expected to remain around this level for the next 2 years as we are just about to begin the construction of a new production building in Villeret. This is essential as our capacity is now fully utilized to absorb volume expansion.
In addition, we have added specialized production machinery to manufacture innovative products that are currently in development. In both cases, we are investing in the future. The result was further constrained by higher net working capital requirements due mainly to the opening of new subsidiaries and the extension of the group's product range, including digital equipment. Over the past 2 years, we have brought a number of innovative solutions and range extensions to customers, which have led to a marked increase in the number of SKUs and ultimately the days of supplies. The dynamic sales growth in emerging and distributor markets with higher payment terms further led to an increase in accounts receivable.
However, day sales outstanding were one day lower than in the same period a year ago. The combination of these effects meant that free cash flow reached €45,000,000 bringing the respective margin to 8%. And with this, I'd like to hand back to Marco.
Thank you, Peter. I'd now like to tell you more about our entry into new businesses and segments with the goal of expanding our addressable market. In recent years, our strategy has focused on 3 priorities. The first relates to culture, which is the way to get things done in an organization. The others are to target unexploited growth markets and segments and to become a total solution provider in 2's replacement.
Having come close to achieving the latter objective, we began to look into attractive complementary fields to see if we could create opportunities for further growth and synergies. Exactly a year ago, we held an off-site workshop with internal and external experts to discuss trends and opportunities. Based on the outcome, we decided to broaden our scope to become a total solution provider for aesthetic dentistry. We are already executing this strategy expediently as the acquisitions and other initiatives we are announcing today show. The acquisition of ClearCorrect and the partnership with Genovia give us access to market worth CHF1.5 billion annually.
As a result of this and other initiatives like expansion in biomaterials and digital, the total value of the global markets we now address is approximately CHF 8,000,000,000 in contrast to CHF 4,000,000,000 just 3 years ago and less than €1,000,000,000 in 2012 when we basically offered premium parallel walled implants and a very restricted biomaterial portfolio. In the next few slides, I would like to show you why orthodontics and the clear aligner business in particular is such an attractive market. Estimates suggest that 75% of the teenage and adult population have misaligned teeth and require orthodontic treatment. In 15%, the condition is slight, and the need for correction is purely aesthetic. 45% have mild to severe malocclusion and are increasingly addressed, while the remaining 15% required treatment and are fully addressed in developed countries.
This next slide compares the market for traditional brackets and braces with the market for aligners. Despite the fact that clear aligners account for only 10% of procedure volume, the market is estimated at $1,500,000,000 annually and is almost double the conventional market where most of the value is generated by the orthodontist rather than the manufacturer. While the conventional market is growing in the low single digits, the clear aligner market is expanding at double digit rate. Due to the high market potential and low penetration rates, the clear aligner business is particularly appealing to us. In addition, substitution technologies have been a key to Straumann's success over the years.
In contrast to conventional brackets, which are fixed to individual tees and connected by wire, clear aligners are practically invisible and can be removed conveniently, for example, for eating or cleaning. The treatment costs are comparable to conventional options, and the popularity of aligners among teenagers is growing. This slide compares the penetration rate of our traditional implant business with the clear aligner market in North America. We have shown in the past that the North American implant market is underpenetrated. If you look at the numbers on this slide, you can see that the clear aligner market is even less penetrated.
Of the 200,000,000 people in North America affected by malocclusion, only 500,000 currently use aligners, which corresponds to a penetration rate of only 12%. More than 50% of the clear aligner market is in North America, where the penetration is 3x higher than elsewhere. This underscores the high potential for growth in other regions. I would like to mention that most aligner cases are still performed by orthodontists, and we believe that increased adoption by general dentists will be a key driver of further growth, together with the factors listed on the right of the chart. General practitioners offer an even more significant opportunity to the Straumann Group as the global sales force can be leveraged for cross selling.
As you can see in the chart, 50% of Straumann's customer base are general practitioners. In addition to an overlapping customer base, there are other commonalities in our businesses. The patient scanning and the CADCAM processes are very similar in the restorative and clear aligner workflow. Having given you an overview of the market, let me tell you about the partners who will help us to unlock this potential. Established 10 years ago, ClearCorrect develops and produces high quality, attractively priced clear aligner solutions that are used typically to treat minor to medium malocclusions.
The company is growing quickly and generated sales of $32,000,000 last year with a staff of almost 200. The majority of its customers are general dentists who are served directly in North America or through sales agents. We are purchasing all outstanding shares in ClearCorrect for a total consideration of approximately USD 150,000,000 And I am pleased to add that the leadership team will stay with us to grow the business further. We have put a short video clip on our website to give you some idea of the energy and passion for creating smiles, which you can watch through the link on this page. Our 2 companies fit together extremely well in terms of business and culture.
ClearCorrect provides us with expertise in orthodontics and a strong foothold in the clear aligner market. In return, we offer them a global distribution and marketing network, brand leverage, potential additional production locations and a digital technology platform that includes Dental Wings, RapidShape, 3Shape and other partners. Genova Technologies is a great complement to ClearCorrect. It is a dynamic, young company in Spain that has pioneered an innovative hybrid aligner solution. To support the expansion, we have provided a capital injection of CHF3 1,000,000 in return for a 38% stake and the right to become their exclusive distributor.
Genoa's fast aligner system combines the strengths of fixed orthodontic appliances with the flexibility of removable clear aligners. It produces movement only in the teeth that need correction and can be removed easily when required. It covers a broad range of treatment cases and is already available in some initial markets. Digital technology and workflows are central to modern orthodontic treatment and tooth replacement, which brings me to our other investments in this area. Dental Wings is a leading provider of digital technologies, and its solutions cover the full digital workflow from treatment planning to final restoration, including implant planning, dental scanning, prosthetic design and manufacturing.
Based in Montreal, Dental Wings has offices in Germany, France and China, and its products are available in 45 countries. Last year, it generated revenues of CAD28 1,000,000 Straumann first invested in the company in 2011 and expanded its stake to 55% 2 years ago. We are now increasing to full ownership for approximately CAD50 1,000,000 I am pleased to add that we have just closed the deal to acquire a 35% stake in RapidShape, which we announced last quarter. RapidShape is a leader in 3 d printing technology and is supplying us with a Straumann branded series of printers, which will enter full market release before year end. To coordinate and drive growth in our digital businesses, we are creating a dedicated digital business unit under the leadership of Mike Reinerson, former CEO of Dental Wings, who has rejoined Straumann as a member of the executive management board.
The new BU combines our existing CADCAM development and production teams with Dental Wings and ClearCorrect. With a staff of 500 skilled employees, it will be one of the world's most powerful digital teams in our industry.
Another
important trend that demands close attention is the rapid increase in corporate dentistry. Growing at 17% annually, this segment already represents more than 10% of the dental implant market, and it is projected to double by 2020. Not only is it driving implant penetration, it is expanding the market and transforming the delivery of dental care and treatment. With our portfolio and reach, we are well positioned to lead this segment on now creating a special unit dedicated to dental service organizations under the leadership of Petra Rumph as Executive Vice President, DSOs and member of the Executive Management Board. With a dedicated team of high profile managers in all key countries, it will offer our full range of products and services, both premium and nonpremium, in tailored and packaged solutions.
In addition to creating new business units, we are making some organizational adjustments to bring the Straumann and Instagram brands closer together under the Straumann Group umbrella. Our goal is to leverage synergies between our premium and nonpremium activities and to create further growth opportunities. One initiative is to simplify internal processes and to make ordering, delivery and invoicing more efficient. At the same time, we want to enable our premium and non premium sales teams to offer broader range of solutions, for instance, enabling our nonpremium sales teams to sell biomaterials and CADCAM solutions. In future, we will coordinate our instrument activities in the regions rather than centrally, allowing us to capture further commercial synergies.
As a result of all the initiatives we are announcing today, our group setup has changed significantly. With regard to implant systems, we have our flagship Straumann premium brands, 2 international nonpremium brands, Neodent and Medentica and several regional brands, which are either fully or partially owned. Underneath, we have our new orthodontics range, our digital solutions and biomaterials, all of which are sold to customers irrespective of whether they use premium or nonpremium implant systems. And finally, we have a platform of other technology partners that support and create opportunities for our various businesses. As you can see in this slide, we have a very broad range of products and solutions that very few competitors can match.
Furthermore, we have plenty of potential to unlock in all our businesses, even in implants where we are already the market leader. In fact, in some fields, we have only begun to scratch the surface. And before I come to the outlook, I would like to mention the recent changes to our executive leadership team that reflect our added focus on digital and corporate dentistry as well as people management. At the beginning of the Q2, Alexander Ochsner transitioned to his current role in Global People Management and Development. At the same time, Patrick Law joined Straumann to take over from Alexander as Executive Vice President of our Asia Pacific region.
And as I mentioned a moment ago, Petra Rumph will lead our new DSO unit, and Mike Reinerson joins the team as Executive Vice President of our new digital business unit. Both these units will be fully operational on January 1, 2018. In brief, we expect the global implant market to grow at approximately 3% to 4% this year, and we are confident that we will continue to outperform this organic growth in the low double digit range. This, together with operational leverage, should lead to further improvements in the underlying operating profit margin, assuming that currency exchange rates remain fairly stable and barring any unforeseen circumstances. And now I would like to open the question and answer session.
As usual, we will give our guests here in Basel the opportunity to put their questions before we open the lines to our webcast participants. If you are dialing in by phone, please make sure you have a good phone connection. Web cast participants who wish to ask questions anonymously can use the tool in the audio webcast, which you can find in the bottom right corner. So please, can we have the first question now?
Karl Benz Sickerbunk, Vontobel. I have a question related to Slide 22, where you actually state that the new addressable market is €8,300,000,000 and before it was €7,500,000,000 So which part of the clear aligners market are you not addressing? Because in theory, it should be 9%.
As pointed out, the ClearCorrect portfolio, as it stands today, is actually addressing mild and mild to strong malocclusion cases. The leader in the clear aligner segment, which we all know who it is, has actually today still a larger portfolio. So they can actually address more cases, more indications than the ClearCorrect portfolio currently is able to. Now with the addition of Geniora, we believe that we have a position to over the next couple of years to catch up and to actually increase the range of cases we can address with our portfolio.
And can you maybe update us on the IP situation and the issue with Align?
Yes. To be here open and transparent, there are several legal cases against ClearCorrect, obviously initiated by the industry leader. You mentioned the name before. Fact is also that actually in October of this year, many of the very strong patents of this company will expire. So it's also from this point of view, in our opinion, an ideal point in time to actually enter this segment.
But as you pointed out, there are several cases ongoing as we speak.
Chris Gretlovich, Credit Suisse. Can I actually continue on this topic? What kind of precautionary measures did you take to basically eliminate the risk associated with this past litigation? And the second thing on ClearedCorrect, could you discuss margin trends and what kind of investments you are looking to do into this business going forward? And maybe also kind of the growth trends, the very recent growth trends, mean, we've seen 2016 numbers, but just to see kind of what growth trajectory they are on right now.
Now I can assure you that we have taken cautious measures in terms of assessing the risk associated with these legal cases. And there is a structure in place, which protects the company through corresponding escrow mechanisms. So we are we believe that we are very well protected against the exposure which we see related to the cases we just talked about. When it comes to the margin question, you know the gross margins of Align. Their margins are even better than ours.
So we are talking here gross margins of 80% and more. Obviously, they have more volume today. So their efficiency when it comes to producing aligners is at another level compared to ClearCorrect. We have identified several opportunities to bring the gross margin of ClearCorrect up over the period of time, over the next couple of years. And obviously, this is one of the first priorities we will be working on.
In terms of growth, I can just refer again to the growth rates of Align and to the potential, which we highlighted in the presentation. I would actually like to wait until the Q3 call. By then, we will also have, I would say, not more transparency. We have good transparency. Otherwise, we will have not entered into the transaction.
But we are also now aligning together with ClearCorrect Management what is possible, what are actually first international expansion pilots. And during the course of the Q3 call, we will be able to comment more on this and then also give you a little bit more color in terms of what can be expected in terms of revenue growth and margin improvements. So bear with us, please, for a couple of months.
Jelvjan, Mirabeau. And first a normal question to the EMEA development. I mean in the Q2, you had the 10% organic growth and adjusting for the Easter effect probably adds 2%, 3% more. So despite the highest base amongst all quarters, you had very high growth. Can you put a bit more granularity on that?
Was it because of the IDS effect? Or I mean, it's astonishing that this growth in EMEA. And the second question, I mean, when the Align patents expire, I guess all the other big guys are also ready. Do you have any idea how much of a competitive advantage you have with ClearCorrect relative to the other bigger guys up next to Align, of course?
You want to take the yes, I think it's a right observation that you made, Danny. It's an extraordinary achievement, the EMEA growth in the 2nd quarter based on the high growth base that we had in 2016. I'm not sure if we can expect a double digit growth rate for the remainder of the year in that region. I think there are two factors that also contributed to that. On the one hand, we see a very dynamic development in the Eastern European part of that region and in the Middle East in that region.
And the other positive contribution was also that we were able to book initial CAT cam and digital sales after the IDS when we presented our new digital solutions that also came then into the Q2 in this year.
Just one add on to Peter's comments. When it comes to the digital side of the business, yes, we had some initial sales, but far from having fully ramped up. So during the second half of twenty seventeen, we expect that we will, for the first time, see really an impact of our complete digital offering, talking about intraoral scanners, also what RapidShave will bring to the table, the Trios 3. So that's still to come. Now to your second question,
can I add my can I make one additional comment to EMEA? And of course, the voltage range and the further growth of the voltage range, especially in the European countries that also contributes to the good result in EMEA because it's the fastest growing segment that we have. Also, it's the smallest one.
Now to the advantage compared to other potential competitors or other potential little bit more holistically, there are already hundreds of providers of clear aligners. However, these providers are typically relatively small outfits. So these are more lap kind of setups. So from an efficiency point of view, they are not able to actually manufacture and distribute clear aligners at big scale, like Align is able to do and like ClearCorrect is able to do too. So this differentiates ClearCorrect for many of the smaller and medium sized companies.
It's the scaling up capability of the production side. It's the production technology. And this is actually why ClearCorrect for us was such an interesting target. The big guys, yes, they also are now trying to actually establish something like this. We believe that with ClearCorrect, we are really in a position in a very competitive position when it comes to efficiently manufactured clear aligners and not only the manufacturing of the product itself, but also the treatment planning because you need to have a very strong base of people who are able to actually provide the treatment planning to the dentist.
Dentist is just sending the digital impression. And then you have this service center with specialized people trained in actually then doing the treatment plan and sending this then back to the general practitioners. And also there, ClearCorrect is extremely well positioned.
Holger Blum, Bittshead Bank. Two longer term questions. You alluded that you expanded the addressable market from €1,000,000,000 to €8,000,000,000 within 5 years. How would you see the potential over the next 5 years? How big could your addressable market become by further expansion of your footprint?
And second question then aligned with that would be what kind of market shares you think you can achieve in your territories, again, on a long term horizon?
The mid- and long term perspective and priority is now to make sure that in this SEK 8,000,000,000 addressable market, we increase our market shares considerably. We have a 23% share when it comes to dental implant systems. We have, I would say, a very decent share on the premium side of dental implant systems. When it comes to non premium outside of Brazil, our share is still close to 5%. So there, we still have a lot of potential to increase share.
If you look at the total CATKAM, the digital segment, we are talking here a €3,000,000,000 market. Our share there is below 2%, So we have tremendous potential there to increase our share. And also in Biomaterials, roughly CHF 500,000,000 to CHF 600,000,000 market. Our share is not even 5%. And on Orthodontics, you have seen ClearCorrect sold CHF 32,000,000 in a CHF 1,500,000,000 market.
So the share there is 2%, 2% to 3%. So the priority for us over the next couple of years is to actually expand our share in these segments and to actually to grow through expanding the share. Obviously, we are continuing to look at potential adjacent segments we could actually enter with our strong brand, the Straumann brand and which would obviously could potentially offer opportunities for further profitable growth and to exploit further synergies. But the first priority over the next couple of years will be to actually make sure what we have today at hand that we exploit it to the maximum and actually we increase our corresponding shares in the different subsegments.
Before we now move on to the Chorus Call line, we have a couple of questions here from our webcast participants. I'd like to start with a financial question for Peter. The person here wants to know if the Corigiba, our Brazilian manufacturing site, ramp up cost impacted gross margin in H1, as you explained. Can you tell us how much that was and when it goes away?
Thank you for that question. Let me start probably with answering that question with a comment on our colleagues in production and logistics. I think we are extremely satisfied with the performance. They do a terrific job to manage the double digit volume growth that we have on the premium side as well as on the nonpremium side. If you look at the decline of the gross margin by roughly 1 percentage points, I would say there are 3 different impacts or effects.
1 are the ramp up costs in Curitiba. I would say that's around 20 to 30 basis points. That was mainly in the first half year of this year as we started to build and extend the capacity in last quarter 2016 with the new with the extension of the production building and the new logistics center. The second impact that I will quote is another decline of the gross margin, temporary decline because we are running at full capacity and we need to outsource some auxiliary and some side products currently to focus our own production on the production of the core volumes and the core implants. That's around another 20 basis points.
And then we have a negative impact of about 40 basis points due to the continuous addition of 3rd party products. But as I have already commented earlier, despite the fact that they are decreasing the gross margin, they have positive incremental impact on the absolute EBIT as well as on the EBIT margin.
Thank you, Peter. The next question is more related to the digital business. Marco, you showed us or explained us that we're going to have a new business unit as of January 2018 with the digital business. The person would like to know what services and function solution are integrated into that digital business unit.
So what's incorporated in this business unit is everything that's related to CATKAM and digital. So our CATKAM Milling Centers are part of this business unit, and we have 4 CATKA milling centers currently running, 1 in Markleberg to serve our European customers, the 1 in Arlington for North America, Creativa for Latin America and then in Japan for the Japanese market and the surrounding markets. So this is part of it. Then all the R and D efforts, so our development research and development setup in Gretelting is part of the digital business unit. Our R and D colleagues here as well as all the product management resources related to our digital business, There were partnerships, so Dental Wings, ClearCorrect and also the management of partnerships when it comes to RapidShape, ReShape, among Gjebak, etcetera.
So this is all part of the digital business unit.
Okay. Another person would like to know would like to have an update on the ceramic implants. We introduced at the IDS that we're going to have a 2 piece ceramic implants on both on the premium and value side. Could you give us an update on that as well?
We have, in the meantime, received very positive results on the injection molded ceramic implant, which we, as announced, we're going to launch under the Neodem plant during the course of 2018. The Pure 2P ceramic implant is actually in a market acceptance test. So we are actually testing that implant with selected customers. And during the first half of twenty eighteen, we will actually go into market release for that implant. So we are continuing to invest into building a top notch ceramic implant franchise.
Good. And maybe the last one before we move on to our guest on the telephone line. Can you outline the revenue synergies drivers between being a total solution provider on the restorative side and now being also present in the orthodontic field?
I can just give you one number, which I think explains why we are so excited about now entering the orthodontic segment. Between 30% 40% of implant treatments before actually the implant treatment can be done, the teeth have to be moved into the right in the correct position. So there is a close link between moving teeth first before you actually can do the implant treatment. And I think this number alone already shows you the synergies and how close these two segments are together. And we are now able actually to go after GPs, also after certain DSOs, for example, and we can actually come with comprehensive solutions, starting with the digital workflow, so intraoral scanning treatment planning and then offering to that same customer what he or she needs to actually move the keys into the right position and then removing or restoring the missing tools.
And this is a, we believe, a competitive advantage not many of our competitors are able to offer.
Thank you. We'll move on to the Chorus Call line. As a question of courtesy, please limit your questions to 2 so to give all the participant a chance to ask a question within the available time.
The first question from the phone is from Michael Jungling, Morgan Stanley. Please go ahead.
Yes, hi. Thanks and good morning. I have two questions on ClearCorrect. Would appreciate if you can give more clarity on the profitability of ClearCorrect. Is it profitable today?
Or is it still loss making? And then the second and also the geographic distribution, it seems to me it's mostly in the United States. But on the ClearChoice website, it also has images for Australia and Europe. And question number 2 is on the Clear aligners investment that may be required. Conceptually, will you be selling these products through your existing implantologist sales force?
Or do you have to create a separate one? And how does distribution look like with respect to the investments of clear aligners?
Now on your first question on the profitability, yes, the company has been profitable in 2016, obviously not at the levels of the largest competitor, but it's a profitable company. To your second question, yes, outside of the U. S, they have some distribution partnerships already in place, namely in Australia and in the U. K. So these are their 2, I would say, larger distributors they are already dealing with as we speak today.
And then on your third question, do we have to build up a separate sales force? No. The idea is actually to leverage our existing sales force, and that's why it's so important that we have this overlapping customer base. We are currently in the process of gathering internal data to actually assess how many of our existing customers today are actually already dealing with orthodontic treatments and specifically with clear aligners. And obviously, this would then be our first target group to go after.
What we obviously need is we need to have specialists, field specialists on the orthodontics side. In the U. S, for example, it's already kind of a very positive situation in so far that ClearCorrect started to have own people in the field during 2016. And our view when it comes to the U. S.
Market is that we can actually deploy our Straumann U. S. Sales force and Insulin U. S. Sales force to generate leads, and then we have specialists following up, doing the training and then actually converting the customers to ClearCorrect.
Thank you. Very helpful. And kind of clarify one thing in your press release. Did you purchase Clear Choice? I wasn't aware that you did.
We purchased Clear Choice. It's that in the press release. That's a significant mistake. No, we didn't.
Because on Page 8, it says in the bottom, Existing Acquisitions, Clear Choice.
Clear Choice.
Okay.
But probably meant to be clear correct, I suspect.
It's footnote
number 6. It refers to clear choice.
No, that Mike, that's a mistake. It should state clear correct.
Okay, great. Thank
you. I hope that clear choice it's U. S, though. They are still asleep. So Any other questions?
The next question is from Tom Jones, Berenberg. Please go ahead.
Good morning. I had two questions. The first was just on your branding and the beginning and the pulling of the 2 businesses together. I noticed the old green of Straumann and blue of Nintroden has kind of disappeared and everything's gone sort of black color.
I mean, one
of the reasons why you initially set out to have 2 separate brands was to avoid cannibalization. Do you not increase the risk of that happening with the 2 brands coming closer together? And if so, why do you think that risk is now much less than it once was and why it makes more sense to put everything under one brand? But just a little bit unclear about the sort of path that those two brands are taking into 1. So a bit more color there would be helpful.
And then the second question was that you said in the release that you'll use some treasury stock as part of the acquisition consideration. Was that your choice or the vendor's choice? Because it just seems to me slightly odd when you can basically get money for free or in fact you can be paid to get money in Switzerland at the moment, why you would be using or issuing equity at this point?
To your first question, just to clarify probably what this could potentially be misleading, we still will deploy 2 different sales forces. So there will still be a premium and a nonpremium sales force. So the phase to the customer, there we still have the segregation between premium and nonpremium. What we're going to change is the management of these sales forces. In the past, we had one central organization managing all our nonpremium businesses.
What we have seen over the last couple of years is, on one hand, that the overlapping customer base is very small. We are talking 2% to 3%. And then even digging into more of the detail, most of these customers who buy from us premium and non premium brands, they are starting to buy non premium products from us by throwing out another non premium supplier in their practice. So cannibalization proved to be extremely low. However, what we have also seen is that actually between 50% 60% of our customers, they use more than one system in their practice.
And the majority of them, they use a premium and a nonpremium system in their practice. And through actually these very strong Chinese walls, which we have established and also through the fact that we actually up to now we are managing the businesses completely separately, we have left many potential commercial synergies on the table. And that's why we've decided that we actually change the management of our nonpremium business that actually our regional heads, our EMB members, they will now be in charge of managing within their corresponding region the premium and the nonpremium business. And we believe that AXIS, we're doing this, we will be able to leverage much more of the commercial synergies which we have left on the table so far.
Perfect. So it sounds like I'm a
To your second question on the treasury shares, also here probably a little bit misleading. The clear correct transaction, we haven't paid the money yet, okay? So there has the money is not yet out of the company. We also like actually the cash on hand we have. So we will actually obviously think about what is the best way of settling the transactions we just talked about, the SEK150 1,000,000 roughly for ClearCorrect, approximately SEK50 1,000,000 for Dental Wings.
The next question is from Veronika Dubajova, Goldman Sachs. Please go ahead.
Good morning, gentlemen, and thank you for taking my questions. I have 2. I'm just wondering, I know it's probably a little difficult to speculate at this stage, but I'd love to get your thoughts on what you think will happen in the market once we have more competitors in to clear aligners post the patent expiry at the end of this year. It just has seemed to me for a while that maybe the pricing that you see in the business, going forward. And then my that as you've modeled the business going forward.
And then my second question is a financial one for Peter in terms of currencies. Looking at the move in the Swiss francs, can you give us a sense for how we should be thinking about the currency impact for the second half of the year, specifically for margins? Thank you.
To your first question, Veronica, as you pointed out, it's pure speculation because we obviously have no insights into the strategies of the Dhanaros, dent supplies, etcetera, of this world. The only thing we can state is that this market is extremely attractive. High margins, underpenetrated, especially outside of the U. S, more and more GPs actually entering this segment, which will actually grow the market by itself. A lot of synergies also with other businesses we already have in place today.
So it's an extremely attractive market. And obviously, attractive markets also attract competitors. It's in the nature of the game. And I'm convinced that we will not be the only ones trying to grab a piece of this very attractive and tasty cake. However, again, we don't have insights into the strategic planning of our competitors.
We are prepared that we will not be the only ones trying to actually enter this very attractive segment. However, as pointed out before, with 2% market share, with the Straumann Power behind it, with our global distribution and sales force network, with our digital capabilities, we are convinced that we can actually do better than 2%. Maybe you want to take the
It's on the second question concerning the financial impact due to the currency development. You see on the chart number 56 in our presentation, you see on the one hand the sensitivity to our 4 most important currencies, the euro, the U. S. Dollar, the Brazilian real and the Japanese yen. You also see there our assumptions or our calculated half year average rates for the first half twenty sixteen and first half twenty seventeen.
So that definitely will help you for your modeling. If we look at the development in the first half year, then I think we also saw rather diverse developments. The beginning of the year, euro was weaker than the comparative period. And since the end of July, we saw a rather big increase in the euro with the peak at €1.50 Now it comes a little bit down. So it's very difficult to make the forecast.
But I think chart number 56 and the sensitivities in our assumptions will help you for your models that you can enter the respective data. If it states at the current level, then we definitely will have a positive impact on the margin side as well as on the top line, mainly driven by the euro and to a lesser extent, driven by the Brazilian real in the second half.
That's great. Thank you. And Marco, if I can just follow-up on the clear aligners outside of the U. S, what are the sort of short near term markets that you want to expand into?
Some European markets. And honestly, we have identified the markets, but I'm not sure if I should actually disclose this at this point in time. I don't want to actually our competitors to get some insights into our strategy. But obviously, some of the European markets we feel are potentially very attractive.
The next question is from Maja Pataki, Kepler Cheuvreux. Please go ahead. Yes.
Thanks for taking my questions. 2 quickly. 1, H1 results are again a confirmation that you have you found a very balanced way to grow growth, but also to improve your margins. And I would like to understand if there is any way to to tell us already how should we think about margin progression going forward with all the announcements you did today? Will you follow the same mindset that you will invest into growth and therefore margin progression might be not as strong as it could be?
Can you confirm that there will be margin improvement also in the coming 3 years? And then the last question is, could you shed a bit light on incident growth? Have you seen the same strong growth momentum continue that we've seen in 2016? Thank you.
Yes, Meyer, thank you for your question on the I think there's no reason why we should change our very successful strategy to reinvest part of the incremental margin into the expansion of the business. I probably would compare the current situation with clear, correct a little bit with our entry into the non premium market with the business franchise, InstroDent. I mean, at the beginning, it was more loss making. Now it's a profitable business. And as the profitability of this business is increasing, we can afford to invest part of the incremental margin into the extension of the Orthodontics business.
But there's no change in the underlying strategy that we had in the past. The second one was the Insulin question.
Yes. The Insulin Insulin is continuing to grow high double digit digitally in all the markets where we have our insulin franchises. Obviously, the growth rate in the 1st year is from 0 to indefinite, and then you have extremely high growth rates in year 2. So the growth rates are tendentially coming down, but they are still extremely positive and, as I pointed out, high double digit, close to even triple digit growth.
We have a follow-up question from Michael Junglin. Please go ahead.
Thank you. I just want to follow-up on the margin progression for the coming years. If I assume that ClearCorrect only has a couple of million of profits, that is pretty much an instantaneous sort of 70, 80, 90 basis points of dilution. Plus, you also will, I guess, have to make some significant investments around the globe. So should we expect a meaningful, if you like, one time step down in margins before margins recover?
Or is that an incorrect assumption? And question number 2 is, you mentioned that in EMEA, you introduced in some more countries the non premium implant brands. Could you clarify which other European or EMEA markets that has happened in, please?
No, you shouldn't expect that. As Peter pointed out before, our nonpremium business is actually growing significantly, not only on the top line, but also on the margin side. And this actually will help to compensate for some potential dilution when it comes to the start up of the Orthodontics business. So don't be worried. Don't expect any dip in the development of the margins.
To your second question, especially pleasing is the development of the nonpremium business, as Peter pointed out, in the Middle East. In Europe, very pleasing, the development in Iberia, still continuing to be extremely positive development there. Turkey is a very important nonpremium market for us as we speak with a very nice development over the recent past. And we are now also in Russia with a nonpremium franchise. We have started the U.
K. Approximately 12 months ago, so also this business is taking off. Germany is growing very, very fast and very successfully. There, we are actually selling the Medentica implant range, not the Neodent implant range, together with the Medentica MPS offering. So I cannot highlight one specific market.
Overall, the nonpremium business is developing very, very nicely.
Mark, I was sort of more interested in which new geographical markets have you recently introduced the non premium segment? Because if I read Page 4 of the press release, it talks about
that
you've expanded into more geographical markets and therefore I was more curious into what these markets were.
Okay. Now I get your question. It's actually on the presentation. If you look at Slide number what is it? Slide number 5, you see the markets we entered in, in 2017.
So most of them are outside of Europe. So you see here Canada, we entered Chile, we entered Russia, We entered Colombia last year. We have just recently entered also Iran. Turkey, we will be present with our own subsidiary. So these are, I would say, the most important markets to mention.
But nothing in Europe because the same was under EMEA heading, right? So, it was under the EMEA heading entering into new direct markets.
Okay. Good point. EMEA is Europe, Middle East, Africa, okay? So the majority of the new setups when it comes to non premium was actually in the EMEA, Middle East Africa part and less on the European part. That's probably where the confusion is coming from.
Okay. And is there any intention of moving into some of the main European markets in which you're not in today?
For example?
Well, I don't know all the geographic regions that you're in, but the market
Okay. I just mentioned Germany. I mentioned Spain. Italy, we are in. So these are the U.
K. We are about to enter France, too. Scandinavia is not yet really a nonpremium market. Switzerland, neither. So these are not these ones are not in our on our focus right now.
But I would say the larger markets we are already in or about to enter. Okay. In closing, I'd like to draw your attention to the Investor Relations calendar, which you can find on Slide 54 and on our website and thank you again for your questions. If you have further questions, you are welcome to contact our colleagues in Investor Relations and Corporate Communications. Thank you for your interest, and have a good day, and goodbye.
Thank you.