So good morning, everyone, and thank you for joining us for our 2015 First Half Results Conference here in Basel. We will be referring to the presentation slides that were 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. I will begin with the highlights and then our CFO, Peter Hochul, will share the business performance and regional details with you.
After that, I will give you an update on our strategy to unlock further growth opportunities. I will conclude with the outlook and then 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. As you know, we have just completed the biggest acquisition in Straumann's history underpinning our global leadership in implant dentistry. Having acquired 49% of Neodent in 2012, we were able to increase our stake to full ownership in the first half of this year.
The combination has a significant impact. And throughout the presentation this morning, we will be looking at the numbers from 2 perspectives: the reported results and the underlying organic performance, which excludes the impact of the business combination as well as the currency exchange rates. Peter will give you all the details in a moment. The good news is that whichever perspective you take, you see growth in revenue and operating profit. In the 1st 6 months of 2015, our reported revenue grew 11% to CHF 399,000,000 of which CHF28,000,000 came from Neodent.
Excluding this and the currency effect, group revenue grew 9% organically. In the 2nd quarter, organic growth reached 10%, making it the strongest quarter since the economic recession shook the dental markets in 2,008. The result affirms our conviction that we outperformed our main competitors again and strengthened our leading position. Including Neodent, group revenue rose as much as 17%. Geographically, Latin America and Asia Pacific both grew in the mid teens and were our best performing regions.
But more significantly, EMEA, which is our largest region, actually built on the recovery achieved in recent quarters and showed the strongest sequential improvement. Business wise, implants were the main source of growth across all regions, driven by our high performance material rock solid and our new bone level tapered or BLT implant range. We also succeeded in improving profitability and lifting our underlying EBIT margin to 24%. This was thanks to the top line growth, a robust operating performance, accretive income from Neodent and the benefits of our cost saving measures to mitigate the negative currency shock. Our underlying net profit amounted to CHF72,600,000 However, the Neodent business combination resulted in exceptional charges of €73,200,000 which led to a reported net loss of just less than €1,000,000 I would like to emphasize that none of these charges are cash relevant and none are recurring.
Overall, the performance was very robust and better than we had anticipated. We have therefore raised our full year targets and barring unforeseen circumstances, we aim to achieve organic revenue growth in the mid to higher single digits with an underlying EBIT margin in the low 20s. Before Peter takes you through the financial details, let me draw your attention to Slide 5. Last year, we succeeded in increasing top line momentum and restoring our EBIT margin to more than 20%. The decision by the Swiss National Bank in January to stop underpinning the euro at CHF1.20 threatened to set us back 2 years.
However, thanks to incremental growth in the first half as well as measures to caution the currency headwind, our profitability has not fallen, but has improved substantially on all levels. At the same exchange rates, our gross and EBIT margins increased by 120 and 540 basis points, respectively, and the underlying earnings per share rose 25 percent to CHF 4.59 This increase was on top of some FX losses in the financial result. Near end has not only contributed to our business and profitability, it has also added a new family of employees, 9.30 to be precise, which means that 30% of our workforce is now in Latin America. They will contribute 10% of our revenues and will sell more than 1,000,000 implants in 2015. And now the detailed first half numbers, I'd like to hand over to Peter.
Thank you, Marco, and good morning, everyone. Before I take you through the details of our margin and cash flow development, let me give you an overview of the acquisition effects that impact our result. Up to the end of February, Straumann's 49% share in Neodent was reported using the equity method and appeared below the EBIT line as share of results of associates. Following the consolidation on March 1, NielDent contributed to group revenue and all other levels of the group's financial statements. The purchase price for the remaining 51% amounted to CHF 225,000,000.
The business combination also resulted in several noncash relevant effects and exceptional bookings, which we foresaw in our Q1 conference call and have listed in Slide 8. And I should add that all the exceptionals have been recognized in the first half. Firstly, Neodent's inventory was adjusted to fair value in line with IFRS and the difference was fully written down to production costs in H1. This onetime inventory adjustment amounted to €13,000,000 and was booked under cost of goods sold. Secondly, there was a onetime accumulated foreign exchange loss of €85,000,000 on the initial 49% participation in Neodent due to the depreciation of the Brazilian real between 2012 2015.
And thirdly, there was a revaluation gain of €21,000,000 on the same 49% stake. These two latter effects are shown in the income statement in a separate line labeled loss on consolidation of Neodent. In addition, there are 2 other effects which are either recurring or part of the usual business and are therefore not classified as exceptionals. Firstly, amortization expenses of CHF2 1,000,000 for related intangible assets, which are booked in distribution costs. This reflects the amount for just 4 months and will be amortized over 7 years.
Secondly, the share of results of associates was probably lower than most of you had expected. The reasons for this negative year on year deviation were provisions for a local distributor agreement and ongoing litigation case, which were booked in February prior to the business combination. Together, these amounted to €7,000,000 To facilitate a true comparison of the underlying business, we have excluded the exceptional effects of the neardent combination as shown in Slide 9 in the second column, you can see our 2014 profit corrected for currencies by applying this year's FX rates. I will be referring to these values throughout the following slides. The good message today is that we have improved our underlying operational margins despite adverse currency developments, which reduced sales by €19,000,000 and operating profit by €12,000,000 Strong revenue growth and tight cost control were the main drivers of profitability improvements.
And despite investments in our value platform, sales organization and growth projects, we succeeded in lifting our underlying EBIT margin by more than 500 basis points to 24%. Nieldend also contributed to this pleasing result, which I will discuss shortly. In the 1st 6 months of last year, our reported gross margin was 78.9%. At 2015 exchange rates, it would have been 100 basis points lower. From that level, we achieved an expansion of 130 basis points to more than 70 9 Neodent had a slightly negative effect as average selling prices and country mix vary from Straumann's premium business.
On the right, you can see the effect of the aforementioned onetime inventory revaluation and on our gross margin. Moving on to the operating income. Our reported EBIT margin in the first half of last year was 20.9%. But at 2015 FX rates, it would have been 230 basis points lower. This year's gross margin improvement contributed 70 basis points to the EBIT margin.
Reduced OpEx intensity added another 310 basis points, which together with a minor contribution of other income brought the underlying EBIT margin to 22.3%. After ordinary depreciation and amortization charges of €14,000,000 and an additional amortization charge of €2,000,000 for customer related intangible assets of Neodent. Underlying operating profit amounted to €96,000,000 with the respective margin reaching 24%. As you can see on the right of this chart, Neodent is accretive to our margins. But let me add that its international distribution business, which we operate under the InstaDent umbrella, is included in the Straumann figures in this overview.
Moving on to the next slide. Let's look at the effect of all these factors on the bottom line. The main impact was due to the derecognition of the initial 49% investment in Neodent, which led to a consolidation loss of €64,000,000 Collectively, all the exceptional acquisition effects amounted to €73,000,000 and are shown on the right net of tax. You will notice that the operational improvements lifted our underlying net profit by €21,000,000 Both our results from associate and the financial results had a negative impact on net profit. The negative financial result was due mainly to FX losses after the sudden appreciation of the Swiss francs in January.
The share of results from was driven by the onetime effect that I mentioned previously and the fact that Nielent contributed for just 2 months compared with 6 in 2014. The adjusted tax result had a smaller impact on net profit, and we expect a normalized tax rate to remain at approximately 16%. Consequently, underlying group net profit reached CHF73 1,000,000 bringing the respective margin to 18%. Slide 13 looks at the cash flow development in the 1st 6 months of 2015 and compares it with last year. The profitability improvement lifted EBITDA by £10,000,000 and lower cash generation was positively influenced by the trade working capital progression.
Capital expenditures on the other hand rose almost €11,000,000 to €17,000,000 mainly due to investments in our CATKA milling centers in the U. S. And Japan. The difference in noncash OpEx was due to a provision booked in 2014 related to the free cash flow increased by 19% to €45,000,000 and the respective margin came to 11%. Now moving on to the regional performances.
At this year's exchange rates, first half revenue in 2014 would have been €19,000,000 lower, mainly because of the depreciation of the euro. The Neodent acquisition effect was €25,000,000 or 7 percentage points. And let me add here that there was no noticeable difference in the number of trading days in the 1st two quarters at group level. Throughout the first half, all businesses and regions contributed to the pleasing top line development with the strongest organic growth coming from Asia and Latin America. We are also pleased with the encouraging developments in Europe, especially in the Q2.
While market conditions, they have been difficult for some time, the region contributed nicely to our top line in 2015 despite price concessions for distributors in response to the sharp appreciation of the Swiss francs early in the year. In EMEA, our largest region, organic growth accelerated to 8% in Q2, reflecting a pickup in the economy and in dental procedures in most European markets. We also benefited from a rich launch pipeline and the positive effects of our implant pricing campaign, which started early in 2014 and has helped to accelerate volume growth to gain new customers and to retain existing ones. At the country level, Spain, France, the U. K, Sweden and Germany performed well.
The Middle Eastern distributor markets also showed better results, while the Netherlands and Switzerland posted sales declines. In North America, growth eased slightly to 9% in Q2 after a very strong first quarter, which was boosted by the full market release of BLT. We also launched our Pro Arch Edentialist solution, which addresses the all on-four market segment and for which we have organized initial training courses. Moving on to Asia Pacific. As we explained in our Q1 presentation, we are in the process of establishing our own distributor network in China and stocking by the new dealers inflated growth there.
Following the boost, we expect softer growth in the second half similar to Q2 as our former distributor sells its existing inventory. Apart from this transition effect, sales have progressed well, especially in our other major regional market Japan, which returned to double digit growth. And finally, to Latin America, where organic growth was accelerated to 16% driven by Brazil, which benefited from more trading days due to the Soccer World Cup last year and driven by Mexico. Neodent also benefited from this and its domestic business grew in the low double digits. By business, implants were the main source of growth across all regions.
Our high performance material RockSolid was the key driver with additional lift from the full market release of BLT in the U. S. And initial markets in Europe. Marco will give you more details on this in a few minutes. The Restorative business, which includes standard abutments, CADCAM prosthetics and digital equipment posted solid growth.
Demand was especially strong for Straumann barrier based abutments, which have doubled in volume over the past 12 months. And for uses of the CEREC chairside system. And for users of the CEREC chairside system. And finally, our regenerative business posted double digit growth driven by the Brutus range, which we launched in Europe in Q4 last year as well as our new solutions for guided bone regeneration in the U. S.
And Asia. And that concludes my prepared remarks, and I will hand back to Marco. Thank you.
Thank you, Peter. Let me continue by telling you about our key strategic initiatives, which you can see in Slide 19. We have pointed out on previous occasions that growth is shifting from our traditional markets to emerging economies. We have also communicated that customers are changing and our industry is consolidating. To sustain our success and to drive future growth, our strategy is to target unexploited growth markets and segments and to provide comprehensive solutions.
To continue outperforming and to drive rather than react to change requires a different company culture and mindset. 1 of our key priorities is therefore to drive a high performance culture and organization. A year ago, we initiated a program to understand, challenge and adapt our culture and mindset. Through leadership assessments and multiple workshops throughout the organization, we have defined the types of behavior that will help us to succeed as a company in the long term. Also some may seem simplistic, they are significant, challenged, challenges for Straumann and we are working hard to adopt them quickly.
With regards to targeting unexploited growth markets, our major achievements so far in 2015 have been in China and Latin America, which I will tell you about in a moment. We have completed the groundwork to address the Russian market directly and will open our own subsidiary in Moscow in the coming months. Likewise, in Latin America, where we are preparing to open subsidiaries in Colombia and Argentina in Q3 and Q4, respectively. We have also gained greater control of our business in Thailand through a new agreement with our agent, which provides us with a dedicated local sales force. However, biggest expansion project to date has been in China and is almost complete.
Having taken over distribution last year, we have established a network of 20 distributors to cover a much broader geographic spread and to address both the private and public clinic sectors. This is essential as the Chinese market is underpenetrated and is expected to more than triple in the next 5 years. Just to give you some idea of the potential. Last year, an estimated 600,000 implants were placed in China compared with approximately 2,500,000 in Brazil. Neodent is an important component in our strategy to address unexploited growth markets and segments.
Because of its similarities to other systems, NeoDent is helping us to win competitive customers and complement Straumann's premium solutions. By the end of this year, Neodent implants will be available in nearly 30 countries through our InstaDent platform and distributor network. We have also made good progress with our 3rd strategic priority, which is to become a total solution provider in tooth replacement. Until recently, there has been a gap in our implant portfolio because we did not offer a tapered implant, even though tapered implants now account for approximately 60% of the global market. Starting in Q2, we began the full market release of our BLT implant range, first in the U.
S. And then in Europe. Despite its limited availability, BLT already accounts for 9% of the implants we currently sell, and there are three reasons for this. 1st, the tapered design gives it excellent primary stability, which is important for 1 stage procedures. 2nd, our fast sealing SL Active Surface accelerates secondary stability, shortening the time to file a restoration.
And third, we offer BLT in high strengths rock solid, which makes it possible to use smaller, less invasive implants. The combination of these three features makes this a new generation implant. As far as Asia and Latin America are concerned, BLT is not yet on the map as you can see in this chart. The good news is that we have just received approvals in Japan and Brazil and are preparing to launch there in the coming months. BLT is an important component of our Pro Arch range of edentulous solutions, which we began to roll out in quarter 2 together with a number of prosthetic solutions that are shown in this slide.
Peter has already told you about the success of our VarioBase family, which like our new pre phased abutments offers very attractive options to dental labs. They also support our original campaign to underpin our restorative business. To cater for the expected growth in the Pro Arch system, we have expanded our Edcon milling facility in Arlington and have increased its level of automation. Across the world in Tokyo, we are on the verge of opening a new milling center to offer CAT customers in Japan and surrounding markets. And we have also opened a CADCAM milling service in Brazil to serve both Neodent and Straumann customers.
As you can see in this familiar chart, Edcom is part of the common technology platform we are building to serve both our premium and value businesses. We have also invested in other technology partners like Valoc, an innovative supplier of prosthetic fixtures and in Dental Wings, our partner for digital technology. I will tell you a little bit more about that and our partnership with Amang Gjebak in a minute. Our other notable investments in the first half were, of course, in Neodent and in T Plus, the low cost implant manufacturer in Taiwan, which we told you about in Q1. In June, we increased our stake in Dental Wings from 44% to 55% with an option for a stepped increase to full ownership in 2020.
This deal secures our access to leading technology and people because the founding shareholders have retained a controlling interest and will remain with the company together with top management. Dental Wings is a leading provider of digital dentistry technologies and recently unveiled a revolutionary chairside mill, which uses laser technology to mill ceramic prosthetic crowns either in the lab or in the dental practice. In addition, they introduced a new intraoral scanner with an exceptionally small tip making it easier to handle and more comfortable for patients. Bose's innovative products add to the company's well established range of in lab scanners and dental software solutions. To complement our central milling activities and services, we are working in partnership with Dental Wings and Amangirbach to offer chairside and in lab solutions in selected markets.
The key hardware components are intraoral and desktop scanners from Dental Wings and state of the art compact milling machines developed with Amangirbagh. Our K. A. E. A.
S. Visual software brings everything together and enables customers to produce prosthetics in house or through a Straumann milling center for example for complex restorations. It goes without saying that the in lab and chairside solutions will be supported with a broad range of high performance materials, which will be sold through the Straumann sales force to dental labs and practice customers. That brings me to the 3rd pillar of our total solution concept regeneratives. Apart from the continued introduction of the BOTIS range in Europe and our oncology membrane and xenograft in North America, the main recent highlight was the 20th anniversary of Emdogain, which we celebrated at Europerio in London.
Next year, we hope to extend its indications to include oral wound healing and flapless treatment in periodontitis. You can see more about Emdogain and our activities at Europerio on YouTube at the link on this slide. And that's this brings me to the outlook. We expect the global implant market to continue to grow in 2015 and assume that our full year revenue will grow organically, e. G.
Without the Neotend acquisition effect in the mid- to higher single digit range. Assuming that the currencies remain more or less at their H1 levels, we further aim to achieve an EBIT margin in the low 20s before business combination exceptionals. So what has changed? In a nutshell, we are more optimistic about our top line and our margin outlook. Refers to the group EBIT margin including Neodent, but excluding the exceptionals that Peter defined in Slide 8.
The comparison value in H1 is therefore 24% and the anticipated low second half margin reflects the fact that our profitability is traditionally low in the second half. And now I'd like to the This will provide the opportunity for as many participants as possible to ask a question within the time we have allotted. As usual, we will give our guests here in Basel the opportunity to put their questions before we open the lines to our webcast participants. Online participants can use the tool in the bottom left corner of the webcast frame. And finally, if you are dialing in by phone, please make sure you have a good phone connection.
So can we have the first question, please?
Yes. Thank you. It's Chris Gvardlad, Credit Suisse. Good morning. I have a question on your U.
S. Business. It looks like it came in at least slightly short relative to consensus expectation. Could you update us on your strategic initiatives there, in particular, also on Patterson, on Clear Choice, etcetera? And my follow-up question would go into a similar direction on the Instradent business.
How your achievement so far and your experience in these markets like Spain, particularly now where I think it's on the market for the longest period of time now the value in plants?
Yes. We tend to agree that despite the fact that we grew our business in North America by 9.3% and took again share from our competitors that this has probably been a little bit of the weak point in our half year results of this year. We should actually grow double digit in North America, given the fact that we have now is the bone level tapered implant a new weapon, which we didn't have before. On top of that, we are not making progress as fast as we originally anticipated with penetrating the Clear Choice clinics. To be honest, there are still some clinics which are continuing to use noble implants.
However, we are actually making steady progress to actually bring this the number of clinics not using our systems down. And we expect that latest by the end of Q1 of next year, we will have converted all ClearChoice clinics to either Naledent or Straumann. So what you are pointing at, Chris, is correct. When it comes to ClearChoice, we are not yet where we actually anticipate it to be. The same applies to Paterson.
Also when it comes to our cooperation with Paterson, we haven't made the progress we were actually originally anticipating. On the other hand, looking at our instrument business, there we are extremely optimistic. We have extremely good customer feedback, not only in the U. S, but in all markets where we have launched through InstaDent, the Neodent range. We are gaining month by month significant amount of new customers converting competitive accounts to Neodent.
So when it comes to the rollout of Neodent through our insulin platform, we are actually very much on track, not only in the U. S, but actually everywhere we have where we have launched Neodense through the insulin platform.
I have a question regarding the VLT launch in Europe. You mentioned in the press release that in the U. S, that was also reason for the Q2 to be a bit lower because you had a lot of orders in the Q1. Now you have, as far as I know, launched BLT in Germany in Q2, and you also state that the growth in Germany was very high. So is there a relation to BLT?
And if so, should we expect Q3 to be somewhat weaker in Europe based on this effect?
I'm not sure that your assumption that the growth in the U. S. Was lower. Did you say that, no? Because we implemented BLT in Q1.
On the contrary, we see actually a constant pickup in terms of sales of BLT also in North America. We have now in the U. S. Already almost one out of 7 implants sold in the U. S.
Are bone level tapered implants. We actually decided consciously to launch BLT First in North America because we had some concerns regarding capacity at our Willebrand plant and our Arlington our Andover factory. So we were very cautious in terms of fully rolling out BLT. We have now a new equipment in place, specifically when it comes to tooling, when it comes to instruments. And that's why we've decided that now in Q3, we go into the full rollout of BLT also in the European countries.
So we anticipate that during the second half of this year, we will actually see a considerable pickup when it comes to sales of BLT in Europe. Specifically, on Germany, one point of caution might be that holidays in Germany are kind of sometimes people take more holidays in July August, sometimes it's more in June. Tendentially this year, we had less dentists taking vacation in Germany in June, so in the Q2 and more probably in the Q3. So this might have an impact on our growth rates in Q3 in Germany. But it's obviously too early to make any statement or to give you any indication on that.
Holger Blum, Bittshead Bank. Just a question on Neodent and the market in Brazil. Macro trends are rather slowing. And it seems that you have there a 46% EBIT margin. Do you think that is sustainable going forward?
And maybe you can say a word there on the outlook.
No. During the Q2, what we've done when it comes to the Neodem business, we
have actually integrated that business from a reporting point
of view and from a management point of point of view and from a management point of view. That was actually, obviously, the first priority to bring them in line with our reporting structure. We also actually have now a solid management team in place, a good mix between locals and people we know from the past, so who have experience within the Straumann Group. What we are doing now until the end of the year, we are actually starting to exploit synergies which we have in Brazil between the Straumann business and the Neodem business. This will actually yield quite significant savings on the operating expense side.
On the other hand, what you are pointing at, the macroeconomic climate in Brazil is kind of not really stable. Good news is that despite this fact, we were actually able to continue to gain share despite our already very high market share in the Brazilian market. But it obviously remains to be seen if actually the economy in the second half will recover or will actually stay sluggish as it is in this point at this point in time and what this will have in terms of an impact on our business. So what we have seen so far also when looking at Q3 has been actually sustainable compared to what we've seen during the 1st 6 months. However, in case that there will be a recession in the Brazilian economy, this might potentially also affect our business.
Marco, if you allow me one addition or one comment. You mentioned the margin of Neodent. We always communicated that Neodent is achieving an EBIT margin above 35% and that is also true going forward. We also show on Page 11 or Chart 11, accretive margin contribution of 170 basis points. We need to be aware that this is only for 4 months and these were 4 strong sales months.
So I would be cautious and not take that as a base to extrapolate the margin contribution of Neodent in the second half year.
But what we can say with conviction is that the business is accretive to our EBIT margin.
Definitely, definitely, yes.
Ed of Jean Bok, Hamburg, LOUIS. Question to China. You nicely mentioned I mean, you gave us the base to calculate your market share 16%, 17%. What is your assumption when you say the market is going to triple that you have the same market share when it has tripled? Or I guess, with your very nice setup now, which is probably better than competition, that you can even say that you will have a much higher market share in that time frame?
And also on China, when you can remind me on the product set up in China, what are the key products there? I tend to have forgotten it right now.
What we anticipate to see in the Chinese market is all proportionate growth in the value segment and the low cost segment. The low cost segment is still extremely low. It's a very small part of the market. We already see today or have seen over the last couple of years that the value segment has been growing over proportionally to the premium segment. Obviously, with Straumann brand, we are market leaders overall in the market and especially when it comes to the premium segment.
So what we will have to do to actually maintain share, overall share in the market or to even grow our market share is we also need to have an offering in the value segment. And this is actually a project we are working on right now. Unfortunately, we have not yet Neodent registered in China And the ones who have been following our industry for many years, you know how difficult it is, especially these days, to register products in China. That's a multiyear exercise. So we are still looking at different options when it comes to penetrating the value segment.
We need both to further grow our market share. We need to actually continue to penetrate the premium segment where we are especially strong on the public side. We are less strong when it comes to private clinics. This is a potential for us, and that's also one of the focus points of the new setup to actually put more focus on the private clinics part in the premium segment. And the second thing we need to do is actually we need to penetrate the value segment.
And we need to prepare ourselves that at one point in time, we will also be able to enter the low cost segment. For that one, we have already, I think, done a significant step by acquiring a stake in T Plus, which has registration in China. But the first priorities right now are private clinics, premium segment and to enter the value segment.
You have The premium segment is covered by SL Active
or SL
Active? We have now SL Active registration in China. We don't have RockSolid yet. We don't have bone level tapered yet. So it's mainly bone level and tissue level SLA and SL Active.
Thanks.
Titanium.
Yes, thanks. Could you give us a bit of an update on your already now old initiated strategy in Germany and Austrian Switzerland where you kind of have initiated the Straumann Value segment. It appears that this has maybe not created as much growth as hoped, but the new premium products have created more traction?
I would not say so. What we call the so called big bang, which we initiated at the beginning of 2014, which had actually as an objective, as you pointed out, to get closer to pricing levels of, for example, Camlok in Germany, has been proven to be a big success. Since we've done that, we've seen positive growth rates in our German business. Obviously, BLT helps to complement the range despite the fact that the German and the Swiss markets are not the strongest tapered implant markets. That's also a reason why, for example, you know Nobel, which has obviously mainly tapered range or only tapered range.
They are not that strong in these two markets. But obviously, it has helped to accelerate growth in Germany. And on top of that, we are also selling the bot this regenerative range in Germany. So this also helped a lot to actually come back to growth parts in Germany. But the big bang, so the repositioning of our titanium SLA implant to be more aggressive and actually to compete against the Camlox in the German market and other competitors, this has been has proven to be a success.
Okay. And then a cost question. Apart from the seasonality on margins that we see between first half, second half, are there any except not exceptional, but any project costs or like the subsidiaries in Latin America that will create additional costs that we should be thinking of in H2?
I think we communicated that we see a softer margin in the second half here because of basically, I would say, three reasons. One is the difference in sales seasonality that Marco has already mentioned. If you look at the cost, then you see in our employee numbers that we have ramped up and invested in additional resources mainly in our growth markets, I. E, China and South America. And these people will be there for the full 6 months in the second half whereas they phased in, in the first half.
So we will face based on that. We will face a higher cost base in the second half year. And if you look at the gross margin, then you see also that the gross margin benefited from an inventory increase in the first half year, which is linked to the BOT launch in the European countries and the U. S. As well.
And we won't see that beneficial effect in the second half in the gross margin as well.
Okay. And then my last question. You've managed to achieve a significant and a very attractive improvement in the underlying margin of the Straumann business. How are you thinking about it going forward? Do you believe that there is still room for improvement on the margin side?
Or do you think that the margin improvement on the group level will come from the additional businesses that are now starting to ramp up, like the incident platform contributing? How shall we think about it?
Our platform is not yet fully levered. So every dollar or Swiss francs which we add on the top line is margin accretive. So it's a question of how much more can we grow.
So before we move on to the questions from the Internet or the telephone line, there are 2 questions for you gentlemen on that came through e mail. The first question is that person wants to know if we if our first half results bear benefiting from distraction of our competitors, I. E, that were involved in merger or takeout projects?
I don't think we can comment on that. Honestly, it's that question has to go to the corresponding companies. Sorry, I have to pass on this one. Okay.
And the other person wants to know if you could remind us about the margin profile of the different regions. So we basically, she wants to know because we had excessive growth in Asia and North America, they're growing faster than the rest of the group. Is that helping the margins? And the second question related to that, if we have seen a positive mix effect on our ASP in the first half?
Tendentially, and obviously, we will not disclose precise numbers here, Asia Pacific is a very attractive business in terms of margins because you have relatively low OpEx, especially in markets like China and relatively high prices. North America is relatively lower margin business as well as Latin America, and I would say Europe is more or less in between.
And then on the ASP, if that has helped our the mix have helped our ASP?
ASPs have honestly, we are manufacturing in Switzerland. So, because of the euro situation. We actually maintained our prices. Some of our competitors have even increased prices in certain markets like in Germany. So we actually we didn't increase prices, so our ASP stayed more or less the same.
So the growth you have seen is mainly volume is not mainly is volume driven, is not price driven.
The first question comes from Michael Junglin, Morgan Stanley. Please go ahead.
Great. Thank you for the time. The first question is on the staff compensation cuts that you've made earlier this year to adjust to the unpegging of the Swiss francs. Now that you've got a fantastic margin, your share price has done very well. Are you seeing pressure to reverse those cost savings that you implemented as we go into the year 2016?
And question number 2 is on the EBIT margin guidance. If I look at the EBIT margin seasonality first half, second half before the financial crisis where there was stability, there seems to be about 100 basis point difference in seasonality. Is that still the right number to think about for 2015? That is all.
So coming back and taking your first question concerning the saving package and the cost cuts that we defined beginning of the year beginning of this year including the salary cuts in Switzerland. Let me start with the salary cuts. We have already beginning of the year when we communicated these measures committed ourselves that we will review these measures on an annual basis, which means in early 2016, we will assess the situation based on the currency exchange environment, based on the company performance and we will see what we will do based on the situation in early 20 16. And we have committed that to our employees and communicated and we will do that with all the other measures for the savings that we have defined. We are still implementing them and they are part of our profitability improvement as well.
And also in the second half, there's no need to go away from this saving package and from this plan and we are fully on track with the implementation of all these measures. Concerning the second question that you have asked on the EBIT margin development in the second half. I mean, you see that we have underlying EBIT margin of 24% communicated without the exceptionals and you have seen our guidance, which is in the low mid in the low 20s without the exceptionals. So you can see then the difference what we would expect how the second half is going to develop.
I appreciate that, but purely based on the I mean, you mentioned three reasons why the margin will be lower in the second half and one was seasonality. I just wanted to make sure I understand the seasonality impact because we've had a lot of changes since the financial crisis to understand what the seasonality may be. If you go pre-two 1000 and 7, those 5, 6 years showed a margin difference as a result of seasonality of 100 basis points. Is that still a reasonable number to accept for seasonality in 2015?
I think that is still a reasonable number, especially if I look also at the top line development that then I see the same seasonality over the last couple of years between the first and second half year. And that is essentially driving also the margin development, yes.
Okay. Thank you very much.
Next question comes from Ian Douglas Pennant from UBS. Please go ahead.
Hi. Thanks very much for having me on. So I just I wanted to talk about cash flow if we could and specifically around your working Inventory days rising, you've spoken about this before, but is it fair to say that this is now the right level as a percentage of sales for the future? And then on receivables, you said in the past this is due to changes in the country mix, but I noticed a significant increase this quarter as well. Is there any effect from Neodent in here?
And could you elaborate on which countries have or which regions have the worst payment terms? And then my second question is the you mentioned in the press release some tenders in emerging Europe. I wonder if you could comment on the magnitude of those tenders roughly just to give us an idea. Thanks very much.
If I start with your question concerning the working capital, the inventory, what we need to be aware of that the working capital increase that we see is mainly driven by the consolidation of Neodent on the one hand. In the inventory, we see a certain increase in inventory, which is due to the launch of our new products, be it the VarioBase, be it the VLT family in the different markets. That is increasing the inventory. If we look at the days on hand, then we saw a positive development over the last couple of years, which we see now a slight increase of the last couple of months due to this effect of increasing the inventory to prepare the launch and the respective account receivables, then the increase in accounts receivables and the change in days of accounts receivables then that is mainly driven by or only driven by Neodent, which traditionally has a higher days of sales outstanding than the group average of Straumann. What we need to be aware of, if we look at our growth rates, then we see that we generate high growth rates in Asia Pacific as well as in the Latin American countries, which are traditional areas with longer days sales outstanding compared to our traditional markets in Europe or in North America.
So we see a certain slightly worsening in the days sales outstanding, the structural worsening in the days sales outstanding there. Concerning the Middle East distributor business then, I think we need to be aware that the distributor business was very difficult in the 1st year and we communicated in the Q1 results that it impacted the European growth rate by roughly 2 to 3 basis points negatively in the Q1. In the Q2, the distributor business, we were able to turn around also based on price concessions that we had to make to share the burden of the strong Swiss franc between the distributors and ourselves. The distributor business was growing nicely in the second half year. Also it did not really boost the EMEA growth rate.
And also the tenders that we saw in Middle East, we need to see in relation to the very soft business in the first half year. Overall, in the first half year, distributor business was more or less in line with the overall EMEA growth rate.
Thanks very much.
Next question comes from Richard Lutz from HSBC. Please go ahead.
Yes. Hi. Thanks for taking my questions. I have 2. First question is could you quantify how much of the EUR 20,000,000 cost savings are actually already included in the first half year?
And second question, on a reported basis, what kind of tax rate could we or can we expect for the entire year?
Concerning the cost savings that you have mentioned, obviously, all the salary cuts that we implemented, they were affected as of March. So there's not the full 6 months attributed to the first half year and only a majority part is coming then in the second half year. If you look at the overall, we communicated we will generate cost savings of 20,000,000 around €20,000,000 However, if you look at our OpEx, you will not see that the OpEx are going down by €20,000,000 because we also communicated and committed ourselves to further invest in our growth projects, be it R and D projects, be it the instrument value example. I would say that a bit more than 50% is coming in the second half of the cost savings compared to the first half. If you look at the underlying tax rate and I communicated in my presentation that we don't see a change in the underlying tax rate of around 16%.
Okay. Thanks.
Next question comes from Mr. Oliver Metzger, Commerzbank. Please go ahead.
Yes, hi. Thanks a lot for taking my questions. The first one is, Marco, you mentioned that the BRT implants were now 9% of your implants sold. So can you give us some feeling which part of this 9% was just cannibalization of your own other implants and which part were really new customers? And my second question is just on the recent economic development in China.
So have you made any experience that potential slowdown might also affect you?
On the first question, PLT implants we've sold are actually incremental business. On China, I personally and that's also the opinion of my colleagues in the Asia Pacific region, we don't believe that actually the growth of our industry in China will be negatively affected by what we have seen in terms of occurrences recently coming out of China. Obviously, on the exchange rate side, this is a different story. If the renminbi continues to weaken against the Swiss francs, this will have an impact on our consolidated results in Swiss francs. But how much that is and if it continues to weaken or it will rebound or whatever, this is actually beyond us to actually have a clear opinion on.
So we see more an impact on the exchange rates than on the growth of the industry.
Next question comes from Mr. Tom Jones, Berenberg Bank.
Hello, good morning. I had a couple
of questions on the capital side of the equation. The first one was just wondered if you could tell us what stake the additional convertible bond you acquired in MegaGen entitles you to? And therefore, what the total between the 2 bonds if you if they converted to stock, what stake will you end up in with MegaGen? And then on Dental Wings, just going to counter question really, will you now fully consolidate this and then move up from the associates line into the rest of the P and L? And if so, kind of what impact question really is, you've done an awful lot of acquisitions in the last 2 or 3 years, but you seem to have, I guess, largely built out the portfolio.
Now all the major boxes seem to have been ticked going forward, further inward investment on the CapEx side, perhaps a buyback or perhaps a commitment to a bigger dividend, just some general thoughts on what we should be thinking about over the next 2 or 3 years from a capital deployment perspective would be helpful.
Okay. Your first question on mega chain, we have now $30,000,000 in convertible bonds outstanding, which are fully secured against securities. So this is the bond is secured. So in case that we will not convert the bond into shares in MegaChain, we could actually ask them to pay us the bond back, and they have securities against this amount. It will actually allow us to acquire up to 60%, so we can convert the $30,000,000 in up to 60% of MegaChain shares.
However, again, it's important to understand that this is not an obligation. So the bond actually can be executed or can be converted into shares starting in March of 2016. And obviously, over the next months, we will actually form our opinion if we want to actually convert the bond or we are asking Mega Chem to pay us the money back. In terms of Dental Wings, yes, we have 55% of the shares belong to us now. However, management control is still in the hands of the founders and some of the management.
That's the reason like for Medentica. Medentica, we also hold 51% of the share capital, but control is also there still in the of the founders and of management. That's the reason why we are not yet consolidating NITOMEDENTICA, No Dental Wings. The results of these two investments are reflected in our associates results line. We will actually start to have control over the Dental Wings business in 2018.
And from then onwards, we will obviously also reflect all the numbers in our consolidated financial statements.
Perfect. And then on the capital deployment angle?
We think that we have everything we need right now to actually fulfill our ambitions on one hand when it comes to become a total solution provider for tooth replacement. We mentioned Armangebak, with Bodies. Potentially, there are 1 or the other minor acquisition to round up our portfolio there. But in general, to fulfill 1 out of our 3 strategic ambitions to become a total solution replacement, we believe that we have for that is needed. And the same applies when it comes to actually become one of the top players in the global value segment.
Also there, with the Neodem brand, with the Medentika brand, I think we are very well positioned to actually continue to expand our footprint in the Global Value segment. So we don't necessarily have to do additional acquisitions, But that does not mean that if something would come up, which is attractive and would help us to actually generate value for our shareholders that we would not look at it. But it's not a real necessity or a need to actually fulfill our strategic targets.
Cool. And then given that you're generating decent cash flows, then the next question is what you're going to do with it if it's not being held back for M and A?
Yes. But we still have a bond of €199,500,000 out there, which at one point in time we will pay back or have to pay back, want to pay back. And once this is actually digested, obviously, we are not a bank. On the other hand, we feel very comfortable with a solid balance sheet, which proved to be actually a very valuable asset in difficult times. But at the end, we also realize that we are actually in the dental industry and not in the banking industry.
So don't be worried if we don't have enough ideas to spend the money wisely. And within the interest of our shareholders, we will obviously give it back.
Okay, great.
So we passed the 1 hour mark. We would like to take 2 additional questions from the telephone and then finish the call.
Next question from the phone comes from Ms. Veronika Dubajova, Goldman Sachs. Please go ahead, madam.
Good morning, gentlemen, and thank you for taking my questions. I have 2, please. The first one is just thinking about the top line growth for the second half of the year. I appreciate your guidance range is pretty wide. But if you can talk us through what you think might go better in the second half of the year than the first half of the year and vice versa where you might see some headwinds either business by business or geography by geography That would be helpful in terms of helping us think where you're going to end up in that range of growth for the full year.
And my second question is just a follow-up on Tom's question. If you were to return more cash to shareholders, what would be your preferred method of doing so? Thank you so much.
Both what we need to be aware of in the growth that we also have a higher comparative base in the second half year as the growth rates in 2014 H2 was higher than in H1 2014. So we faced a more challenging second half year than H1. Where I see where we could see potential risk is, we don't know what the situation in China will develop and how that will develop and how that will impact the global economy. We also don't see the situation in Brazil, Brazil, how it is going forward, the difficult economical and political environment. So far, we don't see any impact on our sales development in Latin America.
Also Q3, we had a good start into the quarter. Q4, we need to see how the situation is going to develop. Then I look at the upside in the second half, then we definitely have the bone level tapered launches in the different European countries that Marco has already mentioned. Definitely, I see there a potential upside and opportunity for the second half year. Concerning your questions on the capital, I think as Marco has mentioned, we are currently not in this situation where we are actively thinking about that.
And I think once we are in a situation where we don't see how we can spend the capital wisely for business purposes, then we make our mind up and come up with the respective strategy. And we'll answer that question when the time would come to that.
Understood. If I can just quickly follow-up on the top line question. I mean, excluding the comparison base, would you say the business in the second half should grow faster because you will be running with the BLT on a more global basis than the first half of the year?
ELT for sure will help, as Peter pointed out. On the other hand, Peter also mentioned the higher comparative base in H2 compared to H1. What is also positive in H2, we will actually start to do business in countries where we don't have any business right now, like in Colombia. We will actually start to run our own business in Russia. So this will also help on the top line.
So there are pros on one hand. On the other hand, again, the higher comparative base and the uncertainties when it comes to the economy overall, the global economy driven by the Chinese and the Brazilian situation might have some negative impact. But there are pros and there are cons. So there are upsides and there are potential downsides.
Understood. Thank you very much.
The last question comes from Mr. Michael Young Lin. Please go ahead, sir.
Thank you. I had 2 follow-up questions. The first question would be, could you give us the organic constant currency growth rates for EMEA and North America excluding the InstaDent benefit? And then question number 2 is on guidance again. Is it fair to say that or rather if you were to have a strong second half and you were running ahead of your guidance, would you choose to let the upside would you release the upside to the financials for the year?
Or would you decide to reinvest in the second half year to be more in line with your guidance? It's a question about willingness to invest or let profits go.
Concerning the growth rates for the respective regions that you have mentioned, I mean, we have and will not disclose different growth rates for the different market segments we are working in, but we have communicated that the INSTROADENT business is will contribute a single 1,000,000 digit number in revenues for this year. So the growth rate, excluding the INSTROADANT business, will be slightly lower than the organic growth rate for the regions overall.
And on your question in terms of investment, we have a long term still great opportunities to take share and to grow our business in growth markets like China, like in some of the Latin American countries, like in other Asian countries. So we will actually not sacrifice long term growth and long term opportunities just to make the guidance in the second half of the year. So we are very long term oriented.
Mark, I'll follow-up on that. So it's in a sense that if you have a good second half and it looks like you could be doing better than your guidance, it seems to me from your comments you would choose to reinvest to make sure that the long term business is in good shape. Is that a fair summary?
If the opportunities are sustainable and actually merit investments, obviously, yes. But we will also not just invest to actually bring our result artificially down. That would be stupid. Okay. Thank you.
Okay. So in closing, I'd like to draw your attention to the Investor Relations calendar, which you can find on Slide 37 and on our Web site. 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.