Ladies and gentlemen, good morning. Welcome to the Straumann 2016 half year results presentation. I am Maria, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Marco Gadola, CEO. Please go ahead, sir.
Okay. Good morning, everyone, and thank you for joining us for our 2016 first half results conference here in Basel. We are using the presentation that was published on our website this morning. As usual, I would like to point out that our presentation and discussion will include forward-looking statements. Please take note of the disclaimer on slide seven. As customary, I will start with the highlights, and then our CFO, Peter Hackel, will share the details of our performance and financials with you. I will take you through some of our exciting strategic initiatives to unlock further growth opportunities. After sharing our full-year guidance with you, we will 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 eight 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 all-around performance. If I had to pick out one main driver, it would be the success of our bone-level tapered implants. In markets where tapered implants are particularly popular, for example, the U.S., Brazil, Japan, and Spain, more than one in three Straumann implants sold at mid-year 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 second quarter, organic revenue reached 15% as momentum increased everywhere except in Asia Pacific, where growth still exceeded 20%. A strong top-line development lifted our underlying profitability with EBIT margin expanding 30 basis points despite further investments in sales, R&D, and our value platform. Underlying earnings per share increased by CHF 1.40 to almost CHF 6. Slide seven shows our revenue and operating profit development since 2010. After muted growth early on, we revitalized our top line and outpaced the market.
Our current pace is the fastest we have seen since the financial crisis struck in 2008. More importantly, we have translated this accelerated growth dynamic into continuous margin expansion. Now for the details, let me hand over to Peter.
Thank you, Marco, and good morning, everyone. Before starting, I would like to point out that we are presenting the key figures for 2016. There were several business combination exceptionals related to Neodent, both on a reported and a pre-exceptional basis in order to show the underlying financial performance of the business. Besides these exceptionals, which we covered in detail last year, there was a one-time tax gain in the first half of this year related to the merger of Straumann Brazil into Neodent. As a result, Neodent will benefit from future tax savings and has recognized the deferred tax asset, leading to a non-cash gain of CHF 41 million. With this inclusion, net profit actually exceeded earnings. Slide nine provides you with all the reconciliation details.
It also shows the first positive effect on our results for a very long time, as we benefited from the appreciation of the dollar, the euro, and the yen. In the first six months of last year, our reported gross margin was 75.8%. At 2016 exchange rates, excluding the business combination exceptionals, it would have 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 Tapered implants. In the first half of this year, the combination of strong volume growth and stable average selling prices in our core business lifted the gross margin by 190 basis points. Capacity utilization levels were high but lower than last year, when 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 the ramp-up costs for CARES milling centers collectively reduced the margin by 230 basis points to 78.3%. Moving on to the operating income. Our reported margin in the first half of last year was 20.7%. At 2016 FX rates and excluding the aforementioned exceptionals, it would have been 380 basis points higher. Investment in our worldwide sales channel increased distribution costs by CHF 30 million. Relative to revenue, distribution costs increased by 30 basis points to 22%. Charges to administration and R&D, which now include Neodent for the full six months compared with four months last year, increased CHF 15 million to CHF 146 million, but decreased as a percentage of revenue by one 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 2016 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 CHF 19 million, and an improved financial and associated result, which contributed a further CHF 12 million to net profit. As a reminder, the associated line in 2016 included Neodent for 4 months and was reduced by provisions related to low distributor agreements and an ongoing litigation. This explains the main difference between these periods. The tax gain I mentioned earlier turned the income tax line into a tax credit, and this net profit to CHF 135 million.
Without this non-cash effect, net profit amounted to CHF 95 million, and the underlying tax rate came to 16%, which is in line with the normalized rate. At 21%, the corresponding net profit margin was three 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 CHF 31 million on our cash generation this year. At CHF 14 million, capital expenditure was CHF 4 million lower than last year, when we expanded our CARES milling center 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 its 2015 full-year level for the time being. Following the usual seasonal pattern of the strong top-line growth, net working capital increased in absolute terms, while days of supplies and days of sales outstanding both improved in relative terms. Sales were particularly strong towards the end of the second quarter, and so not all of the outstanding receivables were due at quarter end. This situation reversed in July. In addition, we built initial stocks for our new instrument configurations, and we equipped Neodent's core and distribution premises in Basel 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 million, and the respective margin reached a robust 5%.
Our cash position at the end of June amounted to CHF 305 million, CHF 100 million higher than the year previously. With net cash at CHF 102 million and an equity ratio of 61%, we remain solidly financed. Now moving on to the regional performances. At this year's exchange rate, our first half revenue in 2015 would have to be CHF 2 million higher. Neodent 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 reported the strongest organic growth. Our largest region, Europe, the Middle East and Africa grew 10% organically and contributed 37% of overall growth.
North America posted another strong performance, climbing 15%, well in excess of total. Latin America completed the picture with growth of 16%. 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 week this year. Demand has been healthy in distributor markets and in Russia, where our new subsidiary has made a good start with our former distributor, Asihem. North America posted growth of 17% in the quarter. The performance was driven by the acquisition of new customers, strong Bone Level Tapered sales, and a notable improvement in the implant abutment ratio. Moving on to Asia Pacific. All our subsidiaries posted double-digit growth in Q2.
The continuing rollout of Roxolid and Bone Level Tapered 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, we entered the fast-growing value segment with Anthogyr. In Japan, Roxolid Bone Level Tapered helped to win further market share, and the SLActive had a positive effect on the average selling price. Straumann Scientific Forum event in Tokyo at the end of Q2 added impetus. With 1,800 dental professionals attending, it was our largest congress to date in Asia. A quarter of the participants were new customers. Finally, Latin America, where organic growth accelerated to 17%, driven by Brazil, which also benefited from a large Neodent congress that attracted more than 2,000 dental professionals.
Neodent further increased the share of its higher value implant products featuring internal connections and the hydrophilic Acqua 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 Tapered implants. This enables us to address the large conical implant segment, 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 Straumann titanium-based abutments and CADCAM implant components. Finally, our smallest business biomaterials posted the sharpest increase, driven by bone regeneration products in Europe and North America. That concludes my prepared remarks, and I will hand back to Marco.
Thank you very much, Peter. Let me continue by telling you about our key strategic initiatives, which you can see in slide 19. Two 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. It drives strategy, which drives results. We're 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 global staff see its positive effects. We are convinced that the excellent performance we have reported 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.
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 unexploited growth markets and segments. In July, we exercised our conversion rights and call option to acquire a controlling stake in MegaGen, one of South Korea's leading implant manufacturers. The option was obtained in 2014 when we purchased convertible bonds for MegaGen for a total of $30 million. MegaGen is the leading value player 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 longer to complete than we had hoped because MegaGen has not agreed to the conversion rate and purchase price.
This will now be settled by an arbitration process under ICC rules, which could take up to 2 years. In Q1, we acquired a 30% stake in the French value implant company, Anthogyr. The key feature of this deal was immediate access to a fast-growing value segment in China. As part of the agreement, Anthogyr's implantology business activities in China were transferred to Straumann at the end of June. Since then, we have sold more than 5,000 Anthogyr implants in China. Perhaps the most exciting news today is our agreement to acquire Equinox, which will close in the coming months. Although Equinox is still a relatively small company, it is growing rapidly and profitably, and has already established itself as a leading player in the Indian market, with an overall share of 15% in the growing international business.
India has a huge need for tooth replacement, but it is one of the least penetrated markets, with just two 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. Equinox, on the other hand, has successfully built a customer network in more than 180 cities, thanks to its exclusive partnership with an integrated logistics provider. We shall benefit from the company's networks, its experience, and its organization 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. Here are some facts. Equinox 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 million in 2015, most of which was generated in India, with a small growing contribution of distributed markets in Asia, Africa, and the Middle East. This slide shows you how Equinox, Anthogyr, and MegaGen fit in our value platform alongside Sinodent, which is the other addition we have made this year. At the same time, we continue to develop and strengthen our common technology platform where botiss biomaterials is a key partner. A few weeks ago, we signed an agreement with botiss to take over the exclusive distribution of the products in Germany, our largest market, in the third quarter. We will also take over the German sales team, enabling botiss to focus on development and innovation.
Our growing portfolio of implant systems covering multiple price levels, together with biomaterials and digital technology across the entire workflow, illustrates the progress we have made towards our third strategic goal, namely to become a total solution provider. The acquired businesses and our various growth initiatives have brought new people to our team, which expanded by 128 in the first six months. The majority of the new positions are in international sales. In May, we communicated some movements within the board of directors due to the departure of Stefan Meister. Today, we are announcing that Mrs. Regula Wallimann has agreed to stand for election to the board at the AGM in April 2017. As you can see on slide 31, she has a very impressive background of multinational group auditing and financial advisory and has been a global lead partner at KPMG for many years.
That brings me to the outlook. On the basis of a strong first half progression in general, we have lifted our expectation for full-year revenue growth to the low to mid double-digit % range. With 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 improvement in the underlying full-year EBIT margin, which you remember was at 23.3% in 2015. Now I'd like to open the question and answer session. Kindly limit yourself to three questions and a follow-up before returning to the queue. This will provide the opportunity for as many participants as possible to ask a question 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. Finally, if you are dialing in by phone, please make sure you have a good phone connection.
Please press star one for questions.
Okay. Maya from . I was wondering if you could help us, how we should think about the investment in H2 and maybe also more importantly, going into 2017. I understand you can't say that much in advance because you can't put a lot on the market, but with the 128 people that you've hired in 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.
Maya, just that I understand your question clear, investment was not in relation to CapEx, it was in relation to operational people that do it. You refer to the 128 FTE that we have added in the first half. There's no reason why we should slow that down in the second half. That is in relation to our continuing geographic expansion and the expansion in the value segment as well as the strengthening of our R&D activities here in Basel. We always see that margin development is a combination between reinvesting 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 typically have slightly lower revenue in the second half year, we also have a slightly lower margin in the second half year. Now we expect that to change this year so that we can trail around the current margin for the full year that we have. It usually takes a few months until new representatives that we add, and out of the 128 FTE that we added, the majority is in the sales regions, especially in the regions where we are expanding, such as in Russia and China, where we added in the value business. In the value business in the Latin American countries as well as the U.S., it usually takes 2 to 3 months until the salesperson is productive.
2017, I think we are coming to 2017 once we are releasing the full year figures for 2016, and I'm happy to talk about the guidance for 2017 at some point in time then.
Let me add one or two words to this. We already had these questions and this conversation when we presented our first quarter results. Obviously, we could actually show a much higher EBITDA margin by slowing down the investments into future growth. 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 weaknesses of certain competitors, and by actually making sure that those opportunities we see in carefully explained by Dieter, that we actually make sure that we go after these opportunities. 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. If we ask at any rate, how fast could you actually reduce your costs if you see growth crashing? Obviously, you're at very high growth levels and you're investing in the future growth. What if the growth doesn't come through? Can you take that cost?
As we proved very well in Q1 and Q2 of 2013, that we can react extremely fast. Obviously, if we see that the business at hand does not actually correspond any longer to the operating expense base, then we will actually step in and we reduce our costs. Again, if you look back at what we did in 2013, but also what we did after the Euro crisis in 2016, I think you should be confident that we are not reluctant in terms of taking the adequate measures to safeguard profitability. 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 double-digitly and all segments were growing double-digitally.
I think it would not be the right strategy and also not in the best interest of all stakeholders if we would slow down.
Actually talking about slowdown, on the other side, you're increasing your guidance now for the second time this year, and quite substantially. Could you actually elaborate what drivers are doing much better than you originally thought? Maybe it is actually one bad product that had a substantial uplift in guidance. Obviously, we like that.
You are capable of making the math. If we would actually stick to our former guidance of high single-digit growth, that would mean that in the second half, we would only grow between 5% and 6%. This would be the wrong signal to the market, because we truly believe that also during the second half this year, the growth momentum will continue. With the new guidance, we are just adjusting the guidance to the reality we have been coming through in the first six months.
What is driving it? Is it more market-related, and what is the company specifically?
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 which are benefiting from this recovery are not necessarily the ones which were actually the big ones in the past, like the Zimmer and 3i combination. We see that, for example, certain value players, they are actually growing relatively fast. The second one clearly is that, with BLT, we are now tapping into a segment which is more than 50% of the current market, which we didn't have any stake in until two years ago. With BLT, we are actually gaining quite significant share.
Maybe I have a follow-up question. For the first time, you mentioned an implant to abutment ratio as now has been a driver in the U.S. Could you maybe elaborate on what the reason is for that now you're able to, but now you're gaining more abutments?
A big contributor to that is our Variobase range. As you remember that we started this trusted single Variobase 2 and a half years ago, and we have now a broad complete range of Variobase solutions, including the solutions for bridges. We have different chimney heights. We have a solution for chairside milling, so for ceramic uses. This 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 U.S. or is it-
No, this is not only U.S. This is actually at the global level.
Continuing that, how is now with all the additions, the value platform size-wise in the Group and how does it look with the profitability?
Still clearly below 10%, including Maildent. Including Maildent, it's clearly below 10%. Maildent obviously is a very profitable business, margin-accretive, whereas the rest, which is growing fast, is still highly margin dilutive. As Peter pointed out, we do 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 in the entering to a new market, that it takes roughly three years until we actually make money, and then another two years, two to three years until actually we see accretive margins coming out of that business. The value segment will still be an investment case for a couple of years.
Based on India, it's now a new market for Straumann. How does it look for you? Have you been present in that market yet, and how big or how small has it been?
No, India, we actually start from scratch. We have from zero net sales in India. We had our product registers with Straumann products registered in India for many years, but we never started to actually distribute our Straumann products in 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 we receive on a quarterly basis, the BIMDC market data, we see that this market has been growing almost 50% over the last two years year-on-year. This is a fast-developing market. It's growing even faster than the Chinese market. There are more than 1.2 billion people living in India. We clearly believe that this will be one of the key growth markets of the future.
Now, with the fact that with Equinox, we have 100% participation in one of the leaders in the value segment. We also have to face reality here. India is a value-focused market. India will never be a premium market. Through the fact that now with Equinox, 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 in the future.
Daniel from Daily. A small question first is, do you have a feeling of on-the-year impact you have in fourth quarter? If you don't hear it significant to your current Chinese business or is that we have even a growth acceleration in that region, which is already 30% for them in the first half, or just to get a feeling on that.
[audio distortion] will obviously contribute to the growth in the Asia Pacific region in the second half. We are not talking here substantial contribution to growth. We're talking a couple of CHF million of net sales. This will be dilutive to margins still in 2016, because we are investing quite considerably into consultative resources, into training and education. The Anthogyr brand has been so far only distributed in two provinces in China. Our objective is actually to take 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. For the time being, this will still be an investment case. It will help us to contribute to revenue growth.
When it comes to the bottom line, it will in 2016, most probably also still in the first half of 2017, it will be an investment case.
Thanks. On slide 10, to the gross margin bridge, if Peter could elaborate a bit on the two important pieces, which is the dilution from 230 basis points dilution from material content and labor mix. Most of the dilution is from mix with the higher part of the value. Is that correct assumption? On capacity utilization, I was a bit surprised. It explained that it was lower than last year. Last year was strong with extra shifts. I think you easily have expanded capacity massively. Capacity was strong in the first half too. Why is capacity not that utilized?
Thank you for that question. These increasing costs of material and labor, that also needs to be in line with the very first part of the bridge, the higher volume. It is basically related to the higher volume that we have and that we see. The important fact is that despite a decrease in gross margin that we saw in the first half, we were able to increase our operating margin. It is exactly what you said, Daniel, that the addition of third-party trading goods into our portfolio is slightly decreasing to the gross margin. We see that at the operating margin level, that has an accretive effect. That is the case.
The third part is also not in relation to certain measures that we took in 2015, where we had after January some value and some compensation cuts in Switzerland, also in 2015, we paid out the free results on an uncut basis. That is also not in relation to it. We saw a reversal here in the first half year.
Jean-Philippe from [audio distortion] . I would like to come back to the Equinox story. What is your aim there in India? Is this more on a sales phase as an issue, or is it a technology issue as well to develop the Equinox technology?
I think that was an interesting question. Equinox, first of all, gives us access to the Indian market, which is still a white spot to us. 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 dentists. Manufacturing is in India. We could also imagine that we actually take the Equinox brand, and we use the Equinox brand to go after the lower cost, lower value segment in some surrounding markets, but potentially also into markets in Africa. Far, we have been focusing obviously on the premium segment and on the value segment.
We should also note in that consideration, that there is a third segment in our industry, which is the lower 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, Nigeria, there are 180 million people living there. This will never be a premium market. Most probably also never be a high value market. It will more be a lower value, low cost market. With Equinox, and we also now have Sinodent, and we have the costs. We have now also a range of implant brands available, which will allow us to actually think about going more probably also after the low cost, lower value market.
Holger Blum, Deutsche Bank. A question on organic growth. Maybe you could elaborate on the drivers, be it innovation, regional expansion, and maybe with that, I think a bit loudly about the reasons why that organic growth can even accelerate from here or must come down in the coming quarters.
I will. I'll be the first in taking that. 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 adequate investments into the Russian market, which is an important market. There we have now the destiny in our own hands. We have been investing significantly during 2016 in expanding the 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 a market where we haven't sold anything before. We have some impact, obviously, of expanding the geographical footprint.
On the premium side, it's very obvious that on the value side, we have now a full range of implant companies in the largest of implant markets worldwide. Secondly, I would not call them innovations. I would call them filling gaps in a way. Bone Level Tapered allows us to go after 50% of the dental implant market we were not able to go after before, just because of parallel solutions. Biomaterials, we never had really a competitive range of biomaterials. Now, compared with botiss, we have the most complete biomaterials range in the industry, and the impact we can see coming through in our P&L. Value-based has been a concept which was first launched by value players. Premium players always were a little bit reluctant to launch a Variobase® concept because you sell these products at a lower price than the standard prosthetic components.
We have launched the Variobase® back in 2014, now we see the impact, the volumes coming through. There is still an untapped segment for us, really, which is the fully tapered implant segment, which is also roughly 25% of the total market. This is actually something we are working on. I personally, and more and more people also within Straumann, we believe that ceramic implants could be potentially the game changer. It's no secret that we are working on a two-piece solution, a ceramic implant solution, which we will actually present at IDS in 2017. Then there are two or three other exciting initiatives which we still have in the pipeline. As Peter pointed out, we will actually be in a position to talk about these more completely in Q3, then even more in detail when it comes to IDS in March of 2017.
Maybe we should start with that, maybe. Probably in May at the global market was growing by around 3% to 4%. Did something change in the second quarter? Did the markets grow faster now? If, in which markets was the shift accelerating?
We don't have the second quarter BIMDC data unfortunately, I cannot give you an objective view. Just 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 implant market. Q1 was already very strong. Q2 was even stronger. The same applies for Italy. Obviously that helped. Was market growth more than 4%? I don't have the data yet. I can tell you more when we meet during the Q3 conference, because by then we should have the second quarter data available.
We've taken the first couple of questions here in the room. Cole, we are now ready for questions from the telephone line. Can you please connect the first person, please?
Our first question from the phone comes from Karla Enzinger, Deutsche Bank. Please go ahead.
Yes, good morning. Can you maybe elaborate a bit on your production capacities and whether you see a need to invest in production sites apart from the one in Curitiba? Maybe related to that, give us the CapEx guidance for full year 2016, because it was relatively low in the first half. Thanks.
Let me start with the second part of your question, Karla, with the CapEx guidance for 2016. That will remain for the full year around the 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. We are also investing slightly into the expansion of Andover for the premium segment. This investment is mainly in the addition of new machine, a small part in Curitiba will also be for the enlargement of the current building and the current site. The main part of the investment will be the addition of new CNC machines for the implants and abutment production.
Okay, thanks.
The next question comes from Chris Cooper, Jefferies. Please go ahead.
Morning, thanks. Just specifically on the U.S. market, please, can you just provide some more commentary around the mix of premium versus value as it stands today, both for you and for the wide market? I guess just how you expect that to trend over the next few years, given that the strategy seems to be working rather well over there and accelerating.
The U.S. market is still predominantly a premium market. However, also in the U.S., the value segment has and is still growing overproportionate compared to the premium market. Our estimate is that in terms of value, it's roughly two-thirds is still premium and one-third is value. However, as pointed out, this value segment is growing faster than the premium segment. We have, as you're aware, we have actually two companies in the U.S. We have the Straumann US, obviously, focusing on the premium segment, and we have Instradent USA focusing on the value segment.
Thanks. Just a follow-up. Should we expect, given that the value segment is above the group level over in the U.S. and its patch market is growing particularly strongly, should we expect the 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 is larger this year than it was in 2015.
I'm not sure if I understood your question. 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. We are guiding at the operating margin level. As you might be aware, 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 Dubajova, Goldman Sachs. Please go ahead.
Good morning, gentlemen. 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 comment on the U.S. market slowing down in June, then this weakness continuing into July and August as well. I was wondering if you can share your experiences on the implant side and whether this is something you're seeing yourselves as well from a broader market perspective, or do you think that the premium procedure category, i.e., implants, remain unaffected at this stage? Thank you.
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 and August. There is no indication that this is the case. There are also no macroeconomic shocks we are aware of which happened in the U.S., which would actually justify this. I would actually be interested to learn more about this, and if you can share your sources and why people think this is the case, we would obviously be interested in. By looking at our numbers, we cannot confirm this trend.
Yes. Okay. I think Henry Schein, in his slide, also alluded to that in their calls earlier this month, which was why I was asking the question. Thank you. That's very clear. My second question is just one on the operating margins in the second half. I think historically, what we've seen in your business is that second half margin is always weaker than the first half. 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 margins 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. Compared to 2016, 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 both very much.
The next question comes from Ines Silvestro, Bank of America Merrill Lynch. Please go ahead.
Hi. Thank you so much for taking my question. I just wondered 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 out pacing the market, and how do you see it into the second half of the year? Thank you.
In Brazil, it remains to be a difficult market. Overall, our assessment is that the dental implant industry has not grown. It's plus/minus zero compared to last year for the first six 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, they tend to not keep a lot of inventory in the factories. The fact that we can actually get Neodent products at relatively short term is actually a key competitive advantage in these times. We have seen many new customers switching from other Brazilian companies to Neodent.
Overall, the Brazilian economy is in a doldrum, and the situation remains difficult. 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 your 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 first six months. We have launched Neodent in Mexico at the end of 2015. We are now operating in Mexico with these two brands, with the Straumann brand for the premium segment and the Neodent brand for the value segment. 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. 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.
Thank you very much. The next question comes from Tom Jones, Berenberg. Please go ahead.
Good morning, and thanks for taking the question. I want to come back to this topic of operating leverage versus reinvestment. If I look at your gross margin, pretty much all the operating leverage you saw through higher volume and price was offset by biomaterial labor costs and adverse mix. That was really what one would call reinvestment, that is just higher underlying cost. I guess the question on the gross margin level is this the new norm where your volume and price mix are going to be offset by underlying cost drivers? If I go one step further down the chain and look at the EBIT level, where one would expect more operating leverage from the growth in your value business, with time the business builds. In H1 you had, I guess, expansion contribution and R&D marketing administration were a positive 130 basis points of margin.
Actually margin drives, I guess that is a net number, so it is the operating leverage less the reinvestment. It would help us, I think, if we could get some feel for what the gross margin expansion from those two things would have been, had you not made all the reinvestments. I am just kind of 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. At the moment, can I get a feel for how much incremental operating leverage between gross profit and EBIT you are reinvesting and how much you are letting drop through the bottom line? That would be helpful. Thanks.
I think coming to the first part of your question, the gross margin bit, I think you need to keep in mind also that we are expanding our portfolio with trading third-party products. Obviously these trading third-party products have lower gross margin than the abutment implant business, and we also see that here in increased margins and increased costs for that cross-border work that we have there. I think overall, we were also able, over the past couple of years, where we had a significant negative FX impact, especially on the gross margin, we were able to keep our gross margin around 78, 79 percentage points. That shows that we could mitigate the decreasing of the negative FX impact by increasing the efficiency in our production plants.
When we look at the franchises, I explained that the biomaterials franchise has a kind of a faster growth rate, Marco explained that mainly our biomaterials portfolio is the Dentsply portfolio, which is a very comprehensive and complete portfolio. That shows also that naturally that comes with a lower gross margin than the other business. That shows that we have a certain pressure on the gross margin. I am confident that we also can keep the gross margin around that level by increasing the further efficiency in our production plants. When it comes down to the EBIT margin, I think we followed exactly our strategy that 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, because the question is always where do you cut off? Of course, we could make further simulations and 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 exactly in the first half year our opinion is of incrementally increase 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 other significant change in gross margin unless the product mix or the mix of growth shifts. Is that kind of what you're steering us towards?
Yes. Exactly, yeah.
Anton, there are no more questions from the phone.
German sales force going global. Could you elaborate on that, maybe?
Yes. So far, Straumann had not exclusive distribution rights in Germany. We have, in a way, competing against the Dentsply sales force. Dentsply has nine salespeople in Germany, just exclusively distributing the Dentsply range. We have seen that this was not a good situation because our sales reps in Germany, they were not really pushing Dentsply. They said, "We generate them the lead, and then Dentsply people come in, and they undercut the prices. We are not interested in investing really into pushing Dentsply in the German market." That was the reason that we tried to sign an agreement with Dentsply by buying them out of the German market. Now from Q3 onwards, no, from September onwards, we have full control over the German market.
All sales, all Dentsply sales in the German market and the corresponding gross margins will actually be reflected in our P&L.
Thanks. There is no final question. I will hand back to Marco Gadola for the closing remarks, please.
Yes. Thank you for your questions, and should you have any follow-up questions, please contact Fabian. In closing, I'd like to draw your 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. For now, I would like to thank you again for your interest and wish you a pleasant day. Goodbye. Thank you.
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