Ladies and gentlemen, good morning. Welcome to this German 20 16 Half Year Results Presentation. I am Maria, the conference call operator. I would like to remind you that all participants will be in a listen only mode And the conference is being recorded. After the presentation, there will be a Q and A session.
The conference is not being recorded for communication and broadcast. At this time, it's my pleasure to hand over to Mr. Marco Fedola, CEO. Please go ahead, sir.
Good morning, everyone, and thank you for joining us for our 2016 1st half results conference here in Basel. We are using the presentation that was published on our website this morning. And as usual, I would like to point out that our presentation and discussion will include forward looking statements. So please take note of the disclaimer on Slide 2. With customary, I will start with the highlights, and then our CFO, Peter Hochke, will share the details of our performance and financials with you.
I will then take you through some of our exciting strategic initiatives to unlock further growth opportunities. After sharing our full year guidance with you, we will then be glad to answer your questions. Participants listening online can ask questions anonymously by using the webcast feature in the bottom left corner. In a nutshell, today's story is that we have achieved double digit growth across all businesses and regions and have posted our best quarter in 8 years with a record first half, both in terms of revenue and earnings per share. Excluding the effect of acquisition and currencies, organic revenue grew 14%.
However, throughout the year, we have enjoyed a positive currency effect, lifting our revenue growth to 16%. Driven by strong volume increases, our EBIT margin expanded 80 basis points to almost 25%. It has been a good order and performance. But if I have to take out one main driver, it would be the success of our bone level tapered implants. In markets, the tapered implants are particularly popular, for example, the U.
S, Brazil, Japan and Spain, more than 1 in 3 Straumann implants sold at midyear was a BLT. We sold more units in the first half of this year than we did in the whole of 2016. We have also made further strategic progress, expanding into the value segment and creating exciting growth opportunities in China and India. These and other initiatives, together with the strong performance to date, have prompted us to raise our full year guidance again. Looking very briefly at the Q2, organic revenue reached 15% as momentum increased everywhere except in Asia Pacific, where growth still exceeded 20%.
The strong top line development lifted our underlying profitability with EBIT margin expanding 30 basis points despite further investments in sales, R and D and our value platform. Underlying earnings per share increased by CHF1.40 to almost CHF6. Slide 7 shows our revenue and operating profit development since 2012. After new disclosures early on, we revitalized our top line and outpaced the market. Our current pace is the past that we have seen since the financial crisis dropped in 2,008.
More importantly, we have translated this accelerated growth dynamic into continuous margin expansion. And now for the details, let me hand over to Tito.
Thank you, Marco, and good morning, everyone. Before starting, I would like to point out that we are presenting the key figures for 2015, and there were several business combination of fractionals related to NAREIT, those on the reported and a 3 exceptional basis in order to show the underlying financial performance of the business. Besides these expressionals, which we covered in detail last year, there was onetime tax claim in the first half of this year related to the merger of Straumann Brazil into NereDent. As a result, NereDent will benefit from future tax savings and has recognized the deferred tax assets, leading to a noncash gain of CHF 41,000,000. With this conclusion, net profit actually is EBITDA.
Slide 9 provides you with all the reconciliation details. It also shows the first positive benefits on our results for a very long time as we benefited from the appreciation of the dollar, the euro and the yen. In the 1st 6 months of last year, our reported gross margin was 75.8%. At 2016 exchange rates, excluding the business combination exceptional, Wukla has been 79.3%. As you might recall, last year's gross margin benefited from high utilization of manufacturing capacity to support the global rollout of our bone level paper in China.
In the first half of this year, the combination of strong volume growth and stable average selling prices in our core business lifted gross margin by 190 basis points. Capacity utilization levels were high but lower than last year, and we worked an extra shift for most of the period. As a result, the gross margin contracted by 60 basis points. Increased manufacturing staff, the greater share of value and third party products as well as ramp up costs for capital reduced the margin by 230 basis points or 78.3%. Moving on to the operating income.
Our reported margin in the first half of last year was 20.7%. 2016 FX rates and excluding the aforementioned exceptionals, it would have been 3.80 basis points higher. Investment in our worldwide sales channel increased distribution costs by €30,000,000 Relative to revenue, distribution costs increased by 30 basis points to 22%. Charges for administration and R and D, which now include near than for the full 6 months compared with 4 months last year, increased €50,000,000 to €146,000,000 but decreased as a percentage of revenue by 1 percentage point to 32%. The change in other income line was negligible.
Taking everything into account, the underlying EBIT margin in the first half of twenty 15 was just short of 25%. Moving on to Slide 12. Let's look at the combined effect of these factors on the bottom line. The underlying net profit margin improved from 18.2% to 20.5%. This was thanks to the operational progress, which added €19,000,000 and an improved financial and facilitated results, which contributed €37,000,000 to net profit.
As a reminder, the associated line in 2015 included near than for 2 months and was reduced by provisions related to local distributor agreement and an ongoing litigation. This explains the main difference between these periods. The tax gain I mentioned earlier turns the income tax line into a tax credit and this net profit to €135,000,000 Without this noncash effect, net profit amounted to €95,000,000 and the underlying tax rate came to 60%, which is in line with the normalized net. At 21%, the corresponding net profit margin was 3 margin points higher than last year. Slide 13 shows the cash flow development in comparison with last year.
The increase in EBITDA had a positive effect of €31,000,000 on our cash generation this year. At €14,000,000 capital expenditure was €4,000,000 lower than last year when we expanded our €500,000,000 in the U. S. And invested in a new center in Japan. To meet increasing demand for our premium solutions and in our value business, we began to expand production capacity.
This will require investment in the rest of the year and in the first half of next year. We therefore expect CapEx to stay at the 2015 full year level for the time being. Following the usual seasonal pattern and the strong top line growth, net working capital increased in absolute terms, while the pace of supplies and base of sales outstanding both improved on relative terms. Sales were strong towards the end of the quarter, and so not all of the outstanding quarter, and so not all of the outstanding receivables were due at quarter end. This situation reversed in July.
In addition, we build initial stocks for our new instrument organizations, and we equipped NIRG and SOR and distribution products in Brazil with Straumann products following the merger. Differences in share based payments, provisions, tax and interest payments made up the rest. The combination of these effects meant that free cash flow increased by 22% to CHF 55,000,000 and the respective margin reached a robust 5%. Our cash position at the end of June amounted to CHF 305 1,000,000, 100,000,000 higher than a year previously. With net cash at €102,000,000 and an equity ratio of 51%, we remain solidly financed.
Now moving on to the regional performances. At 6 years' exchange rate, our first half revenue in 2015 would have to be €2,000,000 higher. The near end acquisition effect for the period from January to February 2015 added 1.4 percentage points to growth. In the center of this chart, you can see how strong growth was in each region. And on the far right, you can see how much the individual regions contributed to the overall organic growth of 13.5%.
Once again, Asia Pacific grew up with the strongest organic growth. Our largest pension, Europe, Middle East and Africa, grew 10% organically and contributed 37% of overall growth. North America posted another strong performance. Climbing Systems were spent well in excess of total. Latin America continued to picture with growth of 16%.
Now let me add a few comments on the quarterly performance. In EMEA, organic growth in Q2 accelerated to 11% despite the tougher sequential baseline. Italy, Spain, France and Sweden were the fastest growing subsidiaries. In addition to the business expansion, Germany and Switzerland benefited from additional working days due to the early Easter holiday break this year. Demand is also healthy in distributor markets and in Russia, where our new subsidiary has made a good start with our big former distribution at the end.
South America posted 17% in the quarter. The performance was driven by the acquisition of new customers, strong bone level table sales and the notable improvement in the implant adjustment ratio. Moving on to Asia Pacific. All our subsidiaries went to double digit growth in Q2. The continuing rollout of our solid and phone deliveries across the region except in China fueled organic growth of 20%.
More than half the regional growth was generated in the dynamic Chinese market. At the end of June, the end of the fast growing value segment is on per year. In Japan, rock solid bone level traces helped to win further market share, and the Selective had a positive effect on the average selling price. Straumann signed ticket forum event in Tokyo at the end of Q2 added in pieces. With 1800 pensioners attending, it was our largest congress based in Asia.
Furthermore, a quarter of the participants were new customers. And finally, Latin America. The organic growth accelerated to 17%, driven by Brazil, which also benefited from a large MereVen Congress that attracted more than 2,000 plenty of professionals. MereVen further increased the share of its higher value implant products featuring internal connections in the hydrophilic aqua surface. Apart from Brazil, growth was especially strong in Mexico.
By business, double digit volume expansion in implants was the main source of growth across all regions, led by bone level treatment implants. This enables us to address the large clinical implant movements where high primary stability is important, especially in accelerated treatment protocols. The restorative business posted growth in the low teens, both in Q2 and H1. Strong demand continued for serum and diary based debottleneck and uptime 8.1% And finally, our smallest biomass of biomass here is posted to sharp increase driven by bond regeneration products in Europe and North America. And that concludes my prepared remarks, and I will hand back to Markus.
Thank you very much, Dieter. Let me continue by telling you about our key strategic initiatives, which you can see in Slide 19. 2 years ago, we started a project to challenge and adapt the mindset in our organization with the aim of creating a high performance culture. Culture is the way to get things done. We drive strategy and drive results.
We are very pleased that our customers, partners and employees are beginning to see the fruits of our cultural journey. Our latest internal survey shows that more than 80% of our employees' staff has positive effects. We are convinced that the excellent performance we have recorded today is also related to the motivation and dynamism that our cultural journey has inspired. In Q1, we gave you an update on our products, launches, education activities and other initiatives in our strategy to become a total solution provider. And in Q3, I hope to be in a position to share some more news on our technology platform.
Today, however, we will focus on targeting unexplored in those markets and segments. In July, we exercised our conversion rights and call option to acquire controlling stake in MegaChain, one of SAES Korea's leading implant manufacturers. The auction was obtained in 2014 when we purchased convertible bonds from MegaGen for a total of $30,000,000 MegaChain is a leading value payer in Korea, and the brand is well established in several international markets. It fits very well in our value platform and will strengthen our range of attractively priced implant options. Unfortunately, the transaction will take longer to complete than we have hoped because MegaChain has not decreased the conversion rate and purchase price.
This will now be settled by an arbitration process on ITC rules, which can take up to 2 years. In Q1, we acquired a 30% stake in the French value impact company, Entrophil. A key feature of this deal was immediate access to fast growing value segments in China. As part of the agreement, oncology and pathology business activities in China were transferred to Straumann at the end of June. Since then, we have sold more than 5,000 Anthropocene plants in China.
Perhaps the most exciting news today is our agreement to acquire Equinox, which will close in the coming months. Also Equinox is still a relatively small company. It is growing rapidly and constantly and has already established itself as a leading player in the Indian market with an overall share of 15% to the growing international business. India is a huge has a huge need for tooth replacement, but it is one of the least penetrated markets with just 2 implants placed per 10,000 population. Few international companies have been able to address the market effectively without local business expertise, distribution channels, networks and a product offering tailored to local needs.
18ox, on the other hand, has successfully built the customer network in more than 180 cities, thanks to its exclusive partnership with an integrated logistics provider. We saw benefits from the company's networks, its experience and a combination to establish Straumann in a multi brand approach. We will also benefit from their founding CEO, who will manage our value and premium businesses in India. And here are some facts. Entinox develops, manufactures and sells its own cost effective implant system, which is based on proven concepts with innovative enhancements.
The 75 employees achieved revenue of approximately CHF 3,000,000 in 2015, most of which was generated in India. It's a small growing contribution of distributor markets in Asia, Africa and the Middle East. This slide shows you how Equinox, Concussion and MegaChain fit in our value platform alongside Finavent, which is the other addition we have made this year. At the same time, we continue to develop and strengthen our common technology platform. The BOTIS Biomaterials is a key partner.
A few weeks ago, we signed an agreement with BOTIS to take over the exclusive distribution of our products in Germany, the largest market in the 3rd quarter. We will also control the German sales team, enabling BOTC to focus on development and innovation. Our growing portfolio of implant systems covering multiple price levels, with biomaterials and digital technology across the entire workflow illustrate the progress we have made towards our 3rd strategic goal, namely to become a total solution provider. The acquired businesses and our various growth initiatives have sold new people to our team, which expanded by 128 in the 1st 6 months. Majority of the new positions are in international status.
In May, we communicated some movements within Board of Directors due to the departure of Supermeister. Today, we are announcing that Mrs. Regula Valiman has agreed to stand for election to report at the AGM in April 2017. As you can see on Slide 31, she has a very impressive background from Multinational Group auditing and Financial Advisory and has been a global lead partner at KPMG for many years. And that brings me to the outcome.
On the basis of the strong first half progression in general, we have lifted our expectations for fully revenue growth to the low digit percentage range. If the global implant market estimated to grow in the low- to middle single digits in 2016, we have confidence that we can continue to outperform. We will further invest in strategic growth initiatives, both geographically and in market segments. Operational leverage will further lead to improvements in the underlying full year EBIT margin, which we remember was 83.3% in 2015. And now I'd like to open the question and answer session.
Kindly limit yourself to Timmy question and the follow-up before returning to the queue. This will provide the opportunity for as many participants as possible to ask your questions within the available time. As usual, we will give our guests here in Basel the opportunity to put some questions before we open the lines to our webcast participants. And finally, if you're dialing in by phone, please make sure you have a good phone connection.
Via Property Capersheller. I was wondering if you could help us how we should think about the investments in H2 and maybe also more importantly going into 2017. I understand you can't have
much data plan, but as a
percentage of not on the market. But with 128 gigabit that is higher than H1, how much are you about planning to hire in H2? How long do you think it's going to take them to be fully operation efficient in generating revenues? Are you going to slow down your investment process in 2017? Or do you think you need to keep the same investment levels in 2017 to keep the revenues up?
Thank you.
And Maja, just understand your question clearly? Investments was not in relation to CapEx, it was in relation to operations of 20 pieces of CapEx. Hold upon in the second half of this in relation to our continuing geographic expansion and the expansion in the value segment as well as the strengthening of our R and D activities here in Basel. And we always see that margin development is a combination between the investment part of the growth into the expansion of the business and we will also do that in the second half year. If you look historically at the margin trends in the second half year, given the fact that we historically have slightly lower revenue in the that's been around the current margin for the full year that we have.
Usually, it takes a couple of a few months until you reconvene the shift that we add. And out of the 100 and 20 days FTEs that we add, the majority is in the sales regions, especially in the regions where we are expanding such as in Russia, in China where we are in terms of the value business And the value we compete in the Latin America countries as well as the U. S. Is usually complete for 3 months until the sales is productive. 2017, I think we are coming to 2017 once we are released in our full year fiscal 16th, and I'm happy to talk about the guidance for 'seventeen and from 'twenty.
Let me ask one or two words to this. We already have these questions and this conversation that we presented our Q1 results. Obviously, we could actually show a much higher EBIT margin despite showing R and D investments into future growth. But that's actually not our strategy. We actually are aiming at continuing to substantially outperform the market by actually taking advantage of still today's weekly business of certain contributors and by actually making sure that those opportunities we see in particularly carefully between the back people that we actually make sure that we go after these opportunities and through that actually make sure that also in the future we can actually outperform the market and continue our growth story.
Just a follow-up question on your add on. So if we ask the other way around, how fast could you actually reduce your costs if you see growth crashing? Obviously, you're at very, very high growth levels. You're investing in future growth. What is the growth that can come through?
Can you take that cost?
I think it improved very well in Q1 and Q2 of 2013 that we can react extremely fast. And obviously, if we see that the business at hand does not actually correspond any normal to the operating expense base, then we will actually continue and we can take costs. Again, if you look back at what we did in 2013 and also what we did after the euro price in 2016, I think you should be confident that we are not reluctant in terms of taking the adequate measures to see if we've got profitability. But again, in today's environment, there are still that many opportunities we see in all geographies. If you look at the regions, all regions were actually growing publicly digitally, and all treatment segments were growing publicly.
So I think it would not stabilize strategies and also not in the bank interest of all stakeholders if it would slow down.
On the other side, and that means you're increasing your guidance now for the second time this year and quite substantially. Could you actually elaborate now both drivers now of the results and much better than your Asian resource
You're all capable of making the math. If we would actually speak to our former guidance of high single digit growth, that would mean that in the second half, we would only grow between 5% 6%. And this would be the wrong strategic market because we truly believe that also during the second half of this year, the growth momentum will continue. And with the new guidance, we are just adjusting the guidance to the reality we have coming through in the 1st 6 months. But what is going to
be nice is more market related and what is company's view?
I think it's a combination of both. On one hand, I think that's very positive for everybody. We see a recovery when it comes to our industry. The companies that are benefiting from this are not necessarily the ones which were actually the big ones in the past, like the Sigma and 3i combination. But we see that, for example, certain value pairs, they are actually growing relatively fast.
And the second one clearly is that with PLC, we are now tapping into a segment which is more than 50% of the market, which we didn't have any stake in on 3 years ago. So with CLT, we are actually gaining quite significant share.
And then maybe if I have a follow-up question. For the first time, you mentioned that you can't do about comp ratio has been a driver in the U. S. Could you maybe elaborate on what the reason you're talking about? I think all the company are gaining more adoptions.
A big contributor to the graph is our value based range. I guess you remember that we started with just a single value base 2.5 years ago, and we have now a rather complete range of value based solutions, including solutions for bridges. We have different
chimney heights. We have a solution for
milling, so for storage users. And this is actually has proven to be a solution which is actually in the interest of labs and dentists. And this has been a very important driver of our business over the last 18, 24 months. This is only or no, this is not only U. S.
But actually at the global level? So including NailDent, it's clearly below 10%. NailDent, obviously, is a very tropical business, margin accretive, whereas the rest, which is growing cost, is still highly margin dilutive. And as Peter pointed out, we will not stop in actually expanding our footprint in the value segment, also outside of our home turf, put it that way, Brazil. I also mentioned during the Q1 conference call that we anticipate that we enter into a new market that it takes roughly 3 years until we actually make money and then another 2 years, 2 to 3 years until actually we see accretive margins coming out of that business.
So the value segment will still be an investment case for a couple
of years. Yes, on India, it's now a new market for strong on the outlook for you.
Not being threatened in that market yet? And how will it go faster? How have you seen? No, India, we actually start from scratch. We have so far 0 net sales in India.
We have our COVID strategies, which is from the COVID crisis in India for many years, but we never started to actually distribute aerosol from and from India. The Indian market is still a relatively small market. There's a little bit more than 200,000
implants. However,
based on the market data, which you received on a similar basis, the DI and DC data, we see that this market has been growing almost 50% over the last 2 years, year on year. So this is a fast developing market. It's growing even faster than the Chinese market. There are more than 1,200,000,000 people living in India. So we clearly believe that this will be one of the key growth markets of the future.
And now with the fact that with Equinox, we have 100% participation in one of the leaders in the value segment. And we also have to face reality here. India is a value low cost market. India will never be a premium market. But through the fact that now we're checking out we have one of the leading value players available to expand our footprint in India.
We believe that this will be an interesting growth contributor to the future.
Current Chinese business? I mean, is that you have even a growth exploration
in that which is already
13% for them in the first half or just to get a feeling on that?
OncoCF deal, obviously, contributes to the growth in the Asia Pacific region in the second half, but we are not talking here substantial contribution growth. We're talking a couple of millions of net sales. It's I think it's been diluted to margins still in 2016 because we are investing quite significantly in consultancy, in training and education. The OncoShift brand has been so only distributed in 2 provinces in China. And I will objectively do that just to keep the brand and to make sure the brand will be distributed in all major provinces in China in both segments, the public sector and the private sector.
So for the time being, this will continue an investment case. It did help us to contribute to revenue growth. But when it comes to the bottom line, it did in 2016 and most probably also still in the first half of twenty seventeen, it will be a detailed investment.
And then on Slide 10, to
the cost margin, which is
is dilution from 2 30 bps dilution from material percent and rate on mix. I mean, I guess most of the dilution is so mixed with the higher part of the to explain that it was lower than last year, because last year was extra 1 with extra shifts. So I think you recently have expanded capacity massively. So So as the business was growing in the first half, too. So why
is the capacity on that forecast?
Thank you for that question. As we talked about higher, these increasing costs for Nativa and the A, but that also needs to be in line with the very first part of the bridge to the higher volume. Especially related to the higher volume that we have and that we see. The important fact is that despite the decrease in gross margin that we saw in the first half, we see that we were able to increase our operating margin. And it's a question what you said earlier that the addition of 3rd party trading goods into our portfolio is slightly decreasing to the gross margin, but we see that the operating margin level that has an accretive even a margin accretive effect that is the case.
And the first part is also not in relation to certain measures that we took in 2015, where we have after January some selling or some transportation cuts in 'fifteen, and also in 2015, we paid out the fee on an on cap basis. So that's also having relation to its restructuring results here in the first half year.
Story. What is your aim there in India? Issue as well to develop the optimal technology? I think it's an interesting question. Aetnaq, first of all, looks to start with the Indian market there, which is still a widespread to us.
And as I pointed out before, we believe that actually India is one of the key growth markets in the future in our industry. Secondly, the system itself is very comprehensive and well thought through and relatively easy to apply for Vist. Manufacturing is in India. So we could also imagine that we actually take the Equinox brand, and we use the Equinox brand to go off the lower cost, lower value segment in some of the surrounding markets, but potentially also into markets in Africa. So far, we have been focusing obviously on the premium segment and on the value segment.
But we should also note, in terms of consideration that base is good. I mean, I mean, we still just low value, low cost segment, especially in countries where income levels are still relatively low. India is an example, the surrounding markets, Pakistan, Bangladesh, but also African markets. If you look at, for example, last year, it's 180,000,000 people living here. And this will never be a premium market.
It will most of it will also never be a high value market. We will more be a lower value, low cost product than the Ethinox. And we also now have Sinopant and we have the Plus. We have now also a range of implant plans available, which will allow us to actually think about going more broadly also after the low cost, lower value market. Heute Brum, Mr.
Frank.
A question on organic growth. Maybe you could elaborate on the fiber speed innovation, regional expansion? And maybe with that, if you can give it loudly about the reasons why that organic growth can even accelerate from here or must come down in the coming quarters? I will. It will also be the first.
So it's again,
it's a combination of, obviously, geographic expansion. If I look, for example, into Russia, Russia has been, for us, a market which has been neglected. Our former distributor, he has never done the investments into the Russian market, which is an important market. So there we have now the best in our own hands. We have been investing significantly.
And here in 2016 in sales force in Russia. India will be the same case. In China, we have taken over from our former distributor in 2014, and we have invested also heavily into the Chinese market. We have actually now our own subsidiary in Colombia, also market where we haven't sold anything before. So we have some impact, obviously, of expanding the geographical footprint.
On the premium side, it's very obvious that on the value side, where we have now a full range of instrument companies in the largest footprint markets worldwide. And secondly, it's I would not call them innovations. I would call them also filling gaps in a way. Low level takeout allows us to go up to 50% of the rental income market. We were not able to go up before, just as a power vault solutions.
Biomaterials, we never had really a competitive range of Biomaterials. Now together with Spotless, we have most complete Biomaterials range in the industry. And the impact we can see coming through in our P and L. BarrierBase has been a contract which has first been launched by value players. Premium players always were a little bit reluctant to launch a value based concept because you still disclosed it at a lower price than the standard prospective products.
We have launched the variable based back in 2014, and now we see the impact, the volumes coming through. There is still a non cap segment for us, clearly, which is the fully tapered implant segment, which is also roughly 25% of the total market. This is actually something we are working on. And I personally and more and more people also in the Windstorm, we believe that ceramic plants could be potentially game changer. It's not a secret that we are working on the 2P solution, ceramic implant solution, which we will actually present at IDS in 2017.
And then there are Q3 auto exciting initiatives, which we still have in the pipeline. And as Peter pointed out, we will actually be in a position to talk about these more concrete during Q3 and then even more in detail when it comes to IDS in March of 2017.
Is there something changed in the second quarter? Could the market grow faster now? And if
in which markets was the SKU accelerating?
We don't have the second quarter DINDC data on Portugal yet, so I cannot give you an objective view, just to give you a little bit of stomach feeling. The second quarter, that's my view on how the industry has developed, has been more or less in line with Q1, probably with the exception of, I would say, the Southern European markets. We have seen a very strong recovery of the Spanish income and the income market. Q1 was already very strong, but Q2 was even strong. The same applies to Italy.
So obviously, that helped. Is it more than 4%? Was mark post more than 4%? And this
is why I don't have
the data yet. I can tell you more when you need the B2C conference because back then we should have the
second
Our first question from the phone comes from Karin Bensicker, Antoine Topel. Please go ahead. Yes, good morning. Can you maybe elaborate a bit on your production capacities and whether you're seeing to invest in production price apart from the 1 in 3Q? And maybe related to that, give us the CapEx guidance for full year 6 because it was relatively low in the first half?
Thanks.
So let me start with the second part of your question, Paola, with the CapEx guidance for 2016 that really remained for the full year around 2015 level in the similar order of magnitude. The reason for that is mainly an investment into the expansion of our production capacity. And as you mentioned, that investment will be mainly done in Curitiba, but we are also investing slightly into the expansion of Endover for the premium segment. This investment is mainly in the addition of new machine and not in the small part in Colgina, but will also be for the enlargement of the current building and health and the current site. But the main part of the investment really recently, addition of new CNC machines for the implants and the bottlenecks production.
The next question comes from Chris Cooper, Jefferies. Please go ahead.
Good morning. Thanks. Just specifically on the U. S. Market, please.
Can you just comment on the commentary around the mix of premium versus value as it stands today for you and for the wider market? And I guess just how you expect that to trend over the next few years given that the especially if you see working rather well up there and accelerating?
The U. S. The U. S. Market is still predominantly a premium market.
However, also in the U. S, the value segment is has and is still growing over proportionate compared to the premium part. Our estimate is that in terms of value, it's roughly twothree is in premium and onethree is value. However, as pointed out, the value segment is growing faster than the premium segment. We have as you're aware, we have actually 2 companies in the U.
S. We have the Straumann U. S, obviously, focusing on the Premium segment and we have in U. S. Focusing on the value segment.
Thanks. Just a follow-up. And Should
we expect that
given that the value segment is above the group level over in the U. S. And its tax margin is growing steeply strongly. Should we expect gross margin phasing this year is more stern perhaps than it was last year? What I mean by that is the sequential change between first half and second half in Q1 is larger this year than it was in 'fifteen?
So I'm not sure if I understood your question, but I understand that you are asking about the gross margin development for the second half year given the portfolio mix. Usually, we are not guiding at the gross margin level, but we are guiding at the operating margin level as you might see there. However, for the second half year, I would expect the gross margin trading around the level of the first half year.
Okay. Thanks a lot.
The next question comes from Veronika Vayova, Goldman Sachs. Please go ahead.
Good morning, thanks, Sven, and thank you for taking my questions. I'd like to start off with the U. S. We heard a couple of distributors and consumable manufacturers comments on the market slowing down, the U. S.
Market slowing down in June and then this business continuing into July August as well. And I was wondering if you can share your experiences on the implant side and whether this is something you've seen yourselves as well from a broader market perspective? Or do you think that the premium prestige category, I. E, plans remain unaffected at this level at this stage?
I can just tell you what we see coming through when it comes to our numbers. We don't see any reason why all of a sudden, the dental businesses in the U. S. Should slow down in July August. There is no indication that this is the case.
And there are also no kind of macroeconomic shocks. We are aware of which happened in the U. S, which would actually justify this. So I would actually be interested to learn more about this. And if you could share new sources and why since this is the case, we would obviously be interested in.
But by looking at other numbers, we cannot confirm this trend.
Yes. Okay. I think Henry Schein and Ken's slides on how we looked at that in their calls around here this month, which is why I was asking the question. That's very good to hear. And my second question is just one on the operating margin for the second half.
And I think historically, what we've seen in your business is that second half margin is always weaker than the first half. And Peter, I don't know if you can comment. Is there anything unusual this year, which would mean that trend doesn't hold? Or should we be thinking about second half margin being somewhat weaker than the first half simply because of the phasing of expenses and revenues? Thank you very much.
Thank you for that question, Veronika. Yes, you're right. Historically, we always have a slightly weaker margin in the second half. And here from 20 I would not see a significant change between the first half and the second half in terms of margin development.
That's fantastic. Thank you very much.
Next question comes from Ines Silva, Bank of America Merrill Lynch. Please go ahead.
Hi. Thank you so much for taking my question. I was just wondering if you could give us a bit more clarity on the underlying market in Brazil, how it's evolving? And how much the market is growing and how much you're offsetting the market? And how do you see it into the second half of the year?
Julien, Brazil remains to be a little smart. Overall, our assessment is that the dental implant industry has not grown. It's plus 90 compared to last year for the 1st 6 months, which means that we have again significantly gained market share in the Brazilian market. Part of that is due
to the fact that we
have the most sophisticated logistics concept of all dental implant players in Brazil. I guess you're aware that we are actually operating through a network of almost 20 stores in Brazil. In times of economic uncertainty in a way, that tends to not keep a lot of inventory in the past. And the fact that we can actually get melting products at relatively short term is actually a key competitive advantage in these times. And we have seen many new customers switching from other Brazilian companies to Mailbank.
But overall, the Brazilian economy is in a draw, and the situation remains difficult. We have and we have just been able to actually gain share on behalf of the rest.
Thank you, sir. Just a
quick follow-up. When we look at the organic growth in Latin America, is that driven by market shares in Brazil and is there any other drivers you would
like to highlight? It's also Mexico. Mexico
has probably been the fastest growing country in the 1st 6 months. So we have launched NailDent in Mexico at the end of 2015. So we are now operating in Mexico with 2 brands, with the Straumann brand for the premium segment and the Neodent brand for the value segment. And obviously, we are making quite significant inroads into the value segment in Mexico. We started our subsidiary in Colombia in Q4 of last year.
And also here, we see now more and more traction, more and more business generated in Colombia. But the Brazilian business itself has also been extremely robust. And as I pointed out before, we have been actually gaining quite considerable share on behalf of our competitors.
Thanks so much.
The next
question comes from Tom Jones, Berenberg. Please go ahead.
Good morning and thanks for taking the question. I wanted to get back to this topic of operating leverage versus reinvestment. I think your gross margin, pretty much all the operating leverage you saw through by volume and price was offset by raw material, making costs and adverse mix. That's not really what one would call reinvestment, that's just underlying cost. The next question is the gross margin of it.
Is this the new norm where your volume and price mix are going to be offset by underlying cost drivers? And then if I go one step further down the P and L and look at the EBIT level, where one would expect more operating leverage from the growth in your value business as we find the revenue builds. In H1, you had, I guess, expansion of distribution and R and D marketing and administration were positive, 130 basis points of margin. So actually margin drivers, I guess that's a net number. So the operating leverage less than reinvestment.
That would help us, I think, if we
could get some feel for what the kind of the gross margin expansion for most of the things that have been had you not made all the reinvestments. And I'm just trying to get a feel for, one, what the gross margin progression is likely to look like over the next couple of years as your business builds. And then at the moment, get a feel for trying to get a feel for how much incremental operating leverage between gross profit and EBIT you're reinvesting and how much your loan dropped through the bottom line? That would be helpful.
I think coming to the first part of your question is the gross margin that I think you need to in mind also that we are expanding our portfolio with trading 3rd party products. And obviously, these trading 3rd party products have lower gross margin in the above and beyond. And we also see that here increased margins and increased cost for the cost book that we have there. I think overall, we were also able over the past couple of years where we had a significant net basis impact, especially on the gross margin. We were able to keep our gross margin around 78%, 79% €79 percent -ish.
So that shows that we could mitigate the decreasing of the negative FX impact by increasing the efficiency in our production plants. And when we look at the franchises, and I explained that the Biomaterials franchise has had a kind of a fast growth rate. And Marc explained that mainly our Biomaterials portfolio is the bookings portfolio, which is a very comprehensive and complete portfolio. And that shows also that and naturally, that comes with a lower gross margin in the other business. That shows that we have a certain pressure on the gross margin, but I'm confident that we are also trying to keep the gross margin around that area by increasing the further efficiency in our production plans.
When it comes down to the EBIT margin, then I think we followed exactly our strategy as we are reinvesting part of our incremental growth into the expansion. Now coming to the question how much of our incremental growth we did invest into the expansion, I think that's a very difficult question. So the question is always where do you cut off the process to make for the simulations and complete certain assumptions where we would not invest. But at the end, for me, that would be a certain theoretical result. I think going forward, we have shown a pattern in the first half year what our opinion is of incrementally increasing the margin and reinvesting part of the operational leverage into the expansion of our business.
Just to clarify, on the gross margin level, one, we shouldn't expect any of the significant change in gross margin unless the product mix or the mix of growth shifts. Is that comfortable you're steering
towards? Yes, yes. Exactly, yes.
Yes. So far, we will Straumann have no exclusive distribution rights in Germany. So we have, in a way, completely
the most important sales force.
So Kopi has 9 salespeople in Germany, just exclusively distributing the business range. And we have seen that this was not a good situation because our sales reps in Germany, they were not really pushing business because, to say, we generate in the lead. And then both these people come in and they undercar prices. And so we are not interested in investing really into pushing boxes in the German market. And that's the reason that we tried to find an agreement with Barclays by buying them out of the German market.
Now from Q3 onwards, now from the 2010 onwards, we have full control over the German market. So all sales, all bottoms sales in the German market and the corresponding gross margins the lag should be reflected in our opinion. Thanks. So there is no final question.
I will hand back to Marc de da Gola
attention to the investor event calendar, which you find on Slide 35 and on our website, and we look forward to meeting you at one of these events. But for now, I would like to thank you again for your interest and wish you a pleasant day. Goodbye. Thank you.