Ladies and gentlemen, good morning. Welcome to the Straumann 2014 Full Year Results Presentation. I'm Alice, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session.
The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Marco da Dola, CEO. He will now be joined into the conference room.
So I'd like to welcome those of you who are joining us via the audio webcast. As usual, I would like to ask you to take careful note of the disclaimer on slide 2 regarding forward looking statements. I'd like to begin by briefly introducing Doctor. Peter Huckel, our new Chief Financial Officer, who rejoined Straumann at the beginning of December. For the past 4.5 years, he was at Oerlikon where he was CFO of the Drive Systems division.
Before that, he was at Straumann for 6 years in various managerial roles, including Head of Group Controlling and Member of the Executive Management Group. Prior to Straumann, Peter spent 2 years at Geistlich, our main competitor for regeneratives. He has a PhD in biochemistry and molecular biology, which together with financial and leadership skills make him a valuable all rounder and we are very pleased to have him back. After I have shared the highlights with you, Peter will take you through the financial details and the business performance. Then I will review our strategic progress and the outlook.
And after that, we will be glad to answer your questions. In 2014, group revenue reached CHF710,000,000. Excluding the effects of currencies, acquisitions and divestments, our underlying organic growth was more than 6%. Building further on the turnaround achieved in 2013, we gained momentum as the year progressed and posted a strong 4th quarter with growth of 9%. Over the full year, our best performers were Asia Pacific and the Rest of the World, which both grew at 14%.
We made good strategic progress enlarging our footprint in high growth markets and segments. Geographically, we extended our reach in China and Latin America with the result that 16% of our revenue now comes from emerging markets. We continue to build our platform to penetrate the value segment by investing in value brands like Mega Chen and by opening subsidiaries in Spain, the U. S. And Italy.
To drive growth in our core premium business, we broadened our innovation process and introduced new products and solutions. We partnered with companies like Bottis to complete our portfolio. We invested in people and began work on creating a high performance culture to sustain our success. These are just a few of the milestones we passed in 2014. Unfortunately, our achievements were overshadowed by the recent currency turbulence, but we have not been blown off course.
On the contrary, we have responded quickly with several initiatives that will help us to meet shareholder expectations over the full year, but more about that later. As I mentioned, our momentum increased in the second half, culminating in 9% growth in quarter 4. As a result, we have outperformed the market for 7 consecutive quarters and have extended our lead nicely. Perhaps our biggest achievement in 2014 was to lift the EBIT margin beyond our 20% target. Excluding currencies and exceptionals, adjusted gross margin improved 20 basis points.
On top of this, tight cost control and restructuring benefits lifted the EBIT margin by 3.30 basis points. Adjusted earnings per share rose 20% to CHF8.40 which excludes a one time benefit from the capitalization of deferred taxes. On a reported basis, earnings per share actually reached CHF10.15. Before I hand over to Peter, let me put our profitability into context. In 2013, our midterm goal was to restore the EBIT margin to more than 20%.
Over the last 2 years, we have achieved substantial improvements and have reached that ambition. Furthermore, as you can see in this chart, we have outperformed our peers not just in terms of top line growth, but also with regards to profitability. And on that positive note, I would like to hand over to Peter.
Thank you, Marco, and good morning, everyone, from my side. Before we go into the details, let's have a quick look at the key figures on Slide 10. To facilitate a true comparison of the underlying business, we again provided you with the numbers adjusted for exceptionals and currencies. In 2013, we carved out exceptionals of CHF 8,000,000 related to restructuring. Thanks to strong top line growth and cost optimization in recent years, we were able to improve our underlying margins across the board.
Gross profit grew by 20 basis points, EBITDA by 230,000,000 and EBIT by 330,000,000. It is striking that our reported net profit margin of 22% exceeded the EBIT margin of 21%. This is because of the onetime effect in our income from our associates that Marco mentioned. The non cash effect contributed €27,000,000 to the results from associates and arose when our initial acquisition entity was merged with Neodent, leading to tax deductible goodwill and the capitalization of a deferred tax asset in Neodent's financial statements. The reported contributions from Neodent and our other associates amounted to CHF 36,000,000.
Excluding this onetime effect, the contribution would have amounted to CHF 9,000,000, which is still €6,000,000 higher than a year earlier. Looking at the gross profit in detail now. You can see here that our reported gross margin amounted to 78.8% in 2013. Adjusted for the currency headwind of 30 basis points, the comparison baseline would be 78.5%. Strong volume expansion and high capacity utilization in our Villeret and Andover production sites compensated for investments in manufacturing staff, slightly negative pricing and an unfavorable mix effect.
The latter was due to the increase in 3rd party products from Neodent and our regenerative partners. With gross profit amounting to €559,000,000 the respective margin rose by a modest 20 basis points to almost 79%. And now moving on to the operating income on Slide 12. You can see that last year's EBIT margin adjusted for currencies and exception levels would have been 17.6%. Together with the gross margin effect we saw before, the main driver was the reduction in operating expenses, which was our main priority last year.
As a reminder, the main reductions were in general administration, back office and marketing functions. At the same time, we added sales staff in underpenetrated gross margins like the U. S. And certain emerging markets. Year on year, we added 170 people, most of whom were in growth areas or sales support functions like manufacturing and logistics.
As a consequence, our OpEx intensity decreased by roughly 3 percentage points to 58 percent of sales. This improvement contributed 320 basis points to our EBIT margin improvement as you can see on this chart. Let me add here that the provisions related to the agreement to take over the activities of our distributor in China, which were recognized in 20132014, already occurred in the first half. And the difference year on year was a minor €1,500,000 Turning to the cash flow on the next slide now. The profitability improvement meant that our EBITDA increased by €28,000,000 but our cash generation was negatively affected by an increase in working capital.
This was due to a 2 day increase in trade days outstanding, which was mainly due to growth in markets where payment terms are longer a rise in inventories in preparation for the full launch of our bone level tapered implant and initial stocking for our distribution of 3rd party products. As a result, net cash from operating activities reached CHF 146,000,000 more or less in line with prior year. With CapEx rising almost €6,000,000 to €19,000,000 higher tax payments and increased share based payments, cash flow amounted to EUR 128,000,000 and the respective margin stood at 18%. Now moving on to the regional performances. This slide gives you more details on the revenue drivers.
Currency fluctuations took €13,000,000 off the prior year revenue, mainly because of the sharp decline of the yen and the slightly softer euro. North America added EUR 14,000,000 to our overall result, closely followed by Asia Pacific. Each contributed more than 30% to our growth. The countries in Latin America and Asia showed the highest growth rates. But we were also pleased by the encouraging developments in Europe.
During the Q4, Europe grew 8%, its highest quarterly increase since 2,008. The UK, Spain, Austria and the Nordic countries all achieved double digit revenue growth. Germany, a traditional stronghold for the group, returned to growth in a contested market, while Italy and Switzerland were unable to match previous year's sales level. Q4 revenues in North America grew 9% organically on top of a double digit baseline in the prior year. All business franchises contributed to this increase, but the star performance were rock solid and they're selective.
Based on available data, we believe that we outperformed our main peers again in 2014. Another highlight in Q4 was our excellent performance in Asia Pacific. The region makes up 15% of group revenue and achieved organic growth of 15%, driven mainly by China as well as Japan, which grew at a double digit rate. This brought us a big step closer to our goal of leadership in Japan, which is still the region's largest market. The introduction of SL Active, which finally obtained regulatory approval in 2014, was a key to this performance.
In the rest of the world, we returned to double digit growth in Q4, driven by very strong growth in Brazil. Mexico and the Middle East added nicely to growth. Our partner Neodent posted full year growth in the low teens. I would like to add some more color on how the various segments contributed to our top plan performance. Implants were the main growth driver.
Increased sales of RockSolid and SIR Active were the principal contributors supported by a differentiated pricing approach in Europe, the success of our reduced invasiveness campaign with RockSolid and the introduction of a Selective in Japan. Revenue from the Restorative business was mixed but was sustained our prior year level. Declines in 2 Swan prosthetic elements and lower scanner prices were offset by growth in standard prosthetics. The regenerative business achieved solid single digit growth led by Emdugain and Straumann Allograft. Additional revenue came from the launches in Q4 of the Brutus range in Europe and licensed regenerative products in North America.
But Marco will tell you more about this in a few minutes. Let me now say a few words on the FX situation and the measures we were taking to tackle it. On the left side of this slide, you can see how the Swiss franc developed after the initial shock in mid January when the Swiss National Bank suddenly dropped its euro cap. On the right side, you can see what the adjustment effect on our 20 At the FX rates of January 16, our 2014 revenue decreases by roughly €75,000,000 and our EBIT by €40,000,000 Using the average rate since January 16, our revenue decrease is roughly €55,000,000 or 8% and our EBIT €31,000,000 or 20%. And this is the basis we were using for our guidance.
If you want to apply your own currency assumptions in the current volatile environment, we have attached a detailed sensitivity table at the end of the presentation. As for many Swiss companies, the impact is significant. And our reported key figures in Swiss francs will be heavily influenced by the FX turbulence. As Markus said, we took quick and decisive steps to address the new situation, including compensation reductions for the Board of Directors, management and staff in Switzerland, a hiring freeze for non business critical positions and travel restrictions. We are also renegotiating contracts with suppliers.
In total, we expect this set of measures to yield savings of at least CHF 20,000,000. I'm very grateful to our staff for engaging in an open, constructive dialogue and for their solidarity in helping us to protect our profitability going forward. In the medium term, we will look into further possibilities for optimizing costs and further streamlining internal processes. And of course, we have to look at improving our natural hedge to reduce our exposure against currency fluctuations. But the key message is that we will not compromise our long term growth potential and we will invest further in growth markets, our value platform and other strategic projects.
We are committed to Switzerland as a location for our Swiss headquarters and main manufacturing site. Even if the Swiss label comes at the price, it adds value to our premium brand. With that, I will hand back to Marco for the overview on our strategic process and outlook.
Thank you, Peter. The strong Swiss franc is one of several challenges we are tackling. The pressure on margins makes it all the more important for us to create a high performance culture with the agility to adapt to our changing environment and market. The dynamics are illustrated by the trends listed in this slide. The number of general dentists performing implant surgery is growing fast.
Europe is no longer the powerhouse of our industry as our own results show. The increase in discounters claiming compatibility is another challenge, but also an opportunity as we engage in the value sector. Dental chains have been a challenge in the past, but 2014 has shown them to be an opportunity. And finally, the trend in innovation is shifting from technological breakthroughs to sales processes, holistic approaches and incremental improvements in products. Change in corporate culture takes time, and we believe it has to start at the top of the company.
In the first half of twenty fourteen, we mapped our culture on the basis of common behaviors and defined the ideal we want to achieve. We then began a cultural journey to encourage behavior styles that predominate in high performance organizations, for example, delegation, empowerment, taking responsibility and risks, challenging the status quo and thinking creatively. As I mentioned earlier, the changing environment makes it essential for Straumann to develop a high performance culture in order to sustain the progress we have made over the past 2 years and to succeed in the future. The world's largest market in value terms is the U. S, but it is still comparatively underpenetrated, which is why we have invested over proportionately there in recent years.
As a result, North America is a key growth generator for Straumann. In the past, our focus in the region has been on surgeons rather than on generalists, which is reflected in our comparatively low share of this very attractive segment. The rapid increase in general practitioners placing implants has brought challenges to patient care and a recent article in the Journal of the American Dental Association drew considerable attention to the lower success rates seen in General Practice. As a responsible manufacturer, we cannot ignore this development and we have started the collaboration with Patterson Dental and Spear Education to improve implant treatment outcomes in general practice. Patterson is one of the largest dental distributors in North America and will help us to reach GPs beyond our own referral network.
Patterson will distribute Straumann Smart 1, our all in one package designed to help GPs perform straightforward indications. At the same time, SPEER will provide comprehensive education. This will be through an interdisciplinary curriculum developed and taught by specialists. During and after the curriculum, a surgical specialist is required to be present to support general practitioners participating. The partnership will foster the relationship between specialists, GPs and labs to improve collaboration in referring patients and in coordinating treatment plans.
This approach is intended to increase implant opportunities. Straumann Smart will be available exclusively through patents in the U. S. Together with the SPEAR curriculum. With regards to the growth of lower priced competitors, we are continuing to build a separate portfolio of value brands, which we expanded in 2014 by investing in MegaChain and T Plus which provide access to the fast growing value segment in Asia.
To drive the international commercialization of portfolio brands, we created the Insulin business platform, which has established sales subsidiaries in Iberia, Italy, the U. S. And most recently in Germany. Our strategic goal is to become a total solution provider for labs and dental practices, which is why we are investing in a shared stock technology platform. Two additions to this in 2014 were BOTIS and Rodo Medical, a start up company with innovative technology for prosthetic fixtures.
The latest addition to our INSTROADENT platform is T Plus, a leading local implant company in Taiwan. We have signed an agreement to acquire approximately 43% of the company with the option of increasing up to 90% in 2020. T Plus addresses our need for an established low cost partner in Asia with access to the fast growing value segment in China. It also has product registrations in several other markets including the U. S.
China is one of the most exciting markets for Straumann and we have established a leading position there. However, the market is evolving rapidly and we need to address the fast growing private practice sector as well as the value segment more effectively in addition to broadening our reach and controlling our customer base. To do this, we have taken over our distributors business and are establishing a hybrid model with multiple distributors and our own sales, marketing and education teams. Latin America is another source of growth and we are in the process of creating distribution hubs in Argentina, Colombia and Mexico to gain direct access to customers and grow our market share. And finally, we have been investing in our CAT Can production in the U.
S. To cater for Clear Choice and in Japan, where we are establishing our own milling center. A Straumann survey in the U. S, Brazil and Germany has shown that more than a quarter of people who have passed middle age have lost half their natural teeth. So there is considerable demand.
Until fairly recently, Edentures patients expected little more than suction retained plastic dentures with suboptimal function and unrealistic aesthetics. Implant Solutions have changed those expectations completely. Today's patients expect significant functional improvements and natural looking restorations. They want minimal discomfort, affordable prices, shorter times to tease and even immediate solutions. Whatever the needs and priorities, the overriding desire is for an improvement in the quality of life with no compromises on enjoying food and looking good.
But more than this, patients are actually looking for a changed life that comes from restored confidence, which underlines our purpose statement of more than creating smiles, restoring confidence. By the year 2020, 38,000,000 adults in the U. S. Will be in need of 1 or 2 complete dentures. 1 of the best positioned companies to address this need is ClearChoice, which is a large chain of dental centers in the U.
S. Not only are they the leaders in full arch dental restorations, they also perform more implant procedures than any other U. S. Network. Straumann and InstaDent have just become their preferred supplier and we have already equipped more than 90% of their centers in preparation for a switch to our implants by the end of this quarter.
It is estimated that up to 1 in 2 implant procedures requires guided bone regeneration, which is why we also offer regenerative products. To expand our offering, we joined forces with Botis, Europe's 2nd largest supplier of oral regeneratives. Together, we offer an unparalleled range, which we began distributing in Europe in quarter 4 2014. As regulatory approvals for Bottice still have to be obtained in some markets, including the U. S, we have licensed the collagen membrane and exenograft bone augmentation material, which we have already launched in the U.
S. Together with our existing BoneGraft products and Emdogain, we now offer a full competitive range of solutions on both sides of the Atlantic. We are also excited about the launch of our new bone level tapered implant, which entered the controlled market release in September and will advance to a full launch in Europe and North America in a few months' time. BLT enables us to compete head to head with other tapered designs, which make up 60% of all implants sold today. One reason for this is their good primary stability, which makes them popular for accelerated tooth replacement procedures, for instance, in full arch procedures.
With the advantages of RockSolid and SL Active, bone level tapered was instrumental in winning our status as a preferred supplier of ClearChoice. And that brings me to our outlook for 2015. The progress we achieved in 2014 confirms that we are addressing the key issues and are working on the right things. As a result, we will continue to focus on our 3 strategic priorities, namely driving a high performance culture and organization, targeting unexploited growth markets and becoming a total solution provider for tooth replacements. And in our guidance, we expect the global implant market to improve further in 2015 and our own revenue to grow organically in the mid single digit range.
We will balance our investments and cost reduction measures to ensure that our ability to grow is not compromised. And our target in 2015 is to deliver an organic EBIT margin of at least 20% based on the assumption that the exchange rates remain more or less at their recent levels. I want to add the term organic in our outlook means that Neodent is not included. This is important because with effect of March 1, we will consolidate Neodent fully in our financial statements. As you can see in this chart, we purchased 49% of Neodent in May 2012 and we have the option to increase our ownership to 75% starting in March 2015.
Hence, the need to consolidate in accordance with IFRS. The financial consolidation is irrespective of whether or when we might exercise the step up option, which has not yet been decided. Furthermore, it will trigger a formal purchase price allocation process with one time and recurring effects as mentioned on Slide 36. We will let you know more about these when the process is complete. That brings me to the end of the presentation.
Before we take your question, I would also like to add personal note of thanks to our employees not just for their hard work in 2014, but especially for agreeing to the compensation reductions in 2015, which will help us tackle the severe currency impact. And now I would like to open the question and answer session. And 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. As an additional feature, participants who wish to ask questions anonymously can use the tool in the audio webcast, which you find in the bottom left corner. If you are dialing in by phone, please make sure you have a good phone connection.
In this case, you may press star and 1 to join the queue. Let's now take the first
questions.
Marco, it's Chris. I got the microphone, so I guess it's me. I have now three questions. The first is on Neodent. Could you help me understand the margin decline from 13% to 14% on that operation?
That's what would be the first question. The second question with respect to your value brand, Neodent in Spain, could you mention and discuss how that has been going so far and what kind of experience you had made? And the third question kind of goes the same direction on the bone level tapered implant since now that launch. What has been the responses and experience you have seen with that launch so far? And has it triggered any reconsideration of your full market launch?
I will take your second and third question, and then Peter will give you an answer on the Neodent question. In Spain, we have been quite successful in converting competitive accounts, especially the ones who have similar designs like the Neodent product range is offering. We have still a couple of shortcomings in our range, mainly CATcam offering. So we are not yet able to offer our customers CATcam solutions, which is in a way negatively impacting the conversion of some of the accounts to Neodent in Spain. We are working on this, and we will actually be able, latest by July of this year, to offer rather complete range of CAT CAN solutions to our customers, not only in Instro and Iberia, but also in Italy and in the U.
S, which will obviously make the Neodent portfolio range even more attractive. Your third question on BLT. As pointed out in the presentation, we are still in a limited market release. So we are not yet fully rolling out the BLT offering in all our major markets. The fastest and the furthest advance we are in the U.
S, where we have seen very promising initial reaction, not only from existing customers who have a second or a third system in their practice and are now switching these systems to us because we are now also able to offer them a tapered implant, but we also have been able to convert quite a significant amount of competitive accounts to Straumann due to the fact that we are now able not just to offer another bone level tapered implant, but a bone level tapered implant, which is with the rock solid material and has an SL Active surface, which in the U. S. Is of particular interest.
Pete on Neodent? The margin decline that you see in Neodent in 2014 is not to be seen together with the operational ongoing business at Neodent. It's a onetime impact that we had in 2014, which is linked to some tax optimization projects that were done at Neodent.
How does this affect the above the line results? I mean and could you disclose is the profitability of that operation basically stable or declining or improving?
As I said, that impact is not to be seen with the continuing ongoing operational business. So I would not expect the same impact in 2014. It was a onetime impact that we had due to some projects on optimization in 2014.
In other words, the 2014 profitability is a more to put it that way, a more realistic view on what the profitability of Neodent is than the 2013 profitability. Except for the tax impact.
Karl Bernstein, Bonn Toebl. I have a question regarding your growth guidance. I mean, you have shown very nice results in your implant business that volume growth actually was above 10% this year. Obviously, you had some ASP impact there as well. Can you explain and you have now the Bone Devil tapered launch in 2015.
Can you explain why you were, in my view, conservatively guiding only for mid single digit growth in 2015?
We don't think that this is conservative. We think that's realistic, the guidance we are giving. Obviously, the comparatives are becoming tougher and tougher. On top of that, we had in 20 14 some onetime positive impacts like the SL Active launch in Japan, for example. So the growth rates which we enjoyed in 2014 in Japan, we do not expect to see again in 2015.
So I can just reiterate, we believe that the guidance we are giving is realistic. It's not overly ambitious, I agree, but it's also not overly cautious.
And then a second question is also regarding Neodent. And can you maybe give a bit more flavor to the impact Neodent will have on your reported numbers in 2015? I mean, will it be accretive or
There will be some onetime one offs as Peter showed in or as we have shown in the slide before, the inventory step up. Then we also have due to IFRS, the FX losses, which are now parked in equity, they have to be rewound through the P and L and then be parked back into equity, which is kind of an interesting IFRS standard, but we have to do it like this. So there will be some negative onetime impacts. We are still working on the purchase price allocation. So a lot depends there how much of the intangibles will be allocated to the customer list, to the brand and how much will be goodwill because at the end, customer list, we will have to amortize.
So it will have a negative impact on EBIT. But on the ongoing business, so if you take the one offs off, the Neodem business will be accretive. So the EBIT margin also after amortization for intangibles will be more than the guided more than 20%. So it will be accretive. By how much, we will be able to give you once we have done our homework.
Book. Question. Why have you decided to remain the dividend unchanged despite a sharp increase in profits? And how dangerous is this situation in the U. S?
I mean, could you the industry as a whole expect something similar, which it has experienced in Japan, but also that the perception all of a sudden worsens a great deal for implants. How do you see that?
On the dividend, if you look back, we have actually always paid the same dividend over the last 10 years probably. In good times, in worse times, in bad times, in excellent times, we always maintain the same dividend. So it's obviously a valid question, why do we not pay out the dividends based on our results. So increase 1 year, take it down. The other year, our philosophy is we want to give our shareholders security and confidence that actually they can count with a stable dividend, irrespectively of fluctuations from 1 year to the other.
So that's our philosophy when it comes to defining the dividends. On your second question, yes, obviously, phalos with implant treatments are not positive for the development of that industry in whatever country it may happen. In Japan, obviously, we had a couple of years ago some very bad incidences with even patients dying during implant procedures. In the U. S, we have the challenge that failure rates of implant procedures undertaken by general practitioners are much higher than done by specialists.
On the other hand, the trend is clearly there that actually the percentage of implants placed by GPs is increasing year by year. So today, our estimate is that already more than 50% of the implants placed in the U. S. Are placed by general practitioners. And we talk here roughly 1,200,000, 1,300,000 implants per year, 50% of the 2,500,000 implant market in the U.
S. So, so far, we have not actively actually tried to gain share in that segment. And you have seen the slides where we showed our market share in the Specialist segment versus the GP segment. However, we can also not ignore more than 50% of the market. So our ambition is now to also step up and to gain share in the GP segment.
However, we want to do this in a responsible and in a cautious way. That's why we are actually working together with Paterson and with Spiele to make sure that we offer to the general practitioners in the U. S. A very safe way to get started with implants. So we have a very limited offering, the Straumann's Ward 1, which gives them the opportunity just to do very simple, less critical indications.
And we actually asked the GPs who buy the first package of Strymon Smart-1s to attend a training course, which is conducted by Spiele. And on top of that, for every GP, we also have a mentor, which is a specialist who is there to actually train the GP further and to make sure that actually the indication these GP do are safe and are in the best interest of the patients. So we believe we take a very responsible and a very cautious approach to actually enter the GP segment.
I'm a bit puzzled by the EUR 20,000,000 cost savings because when you announced it some months ago, very productive by the way, I think you were more talked about high single digit million impact. So what's that just yes, why this difference? Where do you
Yes. The high single digit was related to the personnel expenses, so the impact of the compensation cuts. But as Peter pointed out, we are not only working on the personnel expenses, we are obviously also working on other expenses like renegotiating contracts. We obviously also have some positive impact on contracts which are in euros on operating expenses, which have a positive impact on the OpEx line. So the €20,000,000 is everything together and the number you mentioned is just related to the measurements we announced a couple of weeks ago.
Okay. So roughly half is tough and the rest is half the other points you mentioned?
Half and half, yes.
Okay. But I think in that respect, you also need to keep in mind that we still further invest in growth projects, as I have mentioned, such as emerging growth markets such as the value platform, such as other strategic projects, the bone level tapered implant rollout and so on and so forth, that will also increase in our cost base in 2014. 50. Okay. Thanks.
And maybe I have overlooked it, but have you indicated the purchase price of the T Plus? Already? Or is it similar like in the past, high single digit million, a bit not double digit, something like that?
It's not high single digit. It's yes, low single digit.
For the 43%.
For the 43%.
Yes. Excellent. And last question, can you give us some update on the value strategy in the repositioning of SLA and so on in markets like Germany, you haven't really mentioned?
Yes. The Big Bang we launched last year in Q1 with the positioning of RockSolid at the price of SLA. And by actually taking the SLA, the titanium SLA more as a weapon to enter the higher end of the value segment. And this strategy is continuing in Germany, in the rest of Europe. And now that we have EstelActive also registered in Japan, we are also thinking about doing the same approach in Asia Pacific, so in the markets where we have SL Active registered.
Okay. No questions in the room. We would like to shift to the telephone lines. Corie's call operator, could we have the first question from the telephone, please?
Yes. The first question from the phone comes from Lisa Clive, Sanford Bernstein. Please go ahead madam.
Hi, good morning. A few questions on your Neodent strategy in the U. S. You've been talking a lot about shifting dynamics in the U. S, the agreement with Patterson to sort of refocus and focus in a different way on general practice dentists.
This seems somewhat at odds with your previous stated strategy of pushing the Neodent brand into the U. S. Market. Could you just give an update on what your thoughts are in Neodent and whether you really want to be a value player in the U. S.
Market? And related to that, if you could give any information on what your investments have been in that business?
Yes. With the Neodent brand in the U. S, we are as we speak, so in the 1st year, we are targeting mainly specialists. And we have seen increasing interest in the Neodent offering since we were able to announce that actually ClearChoice will actually use the Neogen products together with Straumann products in their clinics. So we are now we have quite some positive headwinds there.
And due to the fact that ClearChoice made a pretty strong statement by actually going with the Neodent products. This created a lot of confidence actually in the U. S. Market for the Neodent products. So as we speak, we see we have quite some positive headwind there.
In terms of investments, yes, obviously, 2014, the Neodend or the InstroDent platform launch has been an investment case. It has it's EBIT dilutive clearly. Also in 2015, this will still be the case. And only in 2016 from 2016 onwards, we are actually anticipating in our business plans that the INSTROADM business overall will actually positively contribute to the EBIT. Obviously, also in 2016, still EBIT margin dilutive, but at least a positive EBIT contribution, absolute EBIT contribution.
Okay, great. So it sounds like things are moving in the right direction. But just one follow-up question is, if you do see slower growth in that channel than you would like, Is there a point in time at which you would just redouble your efforts on the branded ceramic business in the U. S? Or do you think that this is something that even if it is still loss making in 3 years' time, you really need to stick with?
Yes. We are committed to We are committed to actually become one of the global leaders in the value segment, and the U. S. Market is the largest dental implant market worldwide. So also, if in 2016, we would still not breakeven at an EBIT level, we would obviously continue.
But I'm very confident that actually this will not be the case, that we will actually be EBIT positive from 2016 onwards.
Okay. Thanks. And then one follow-up question related to your relationship with Patterson. Clearly, you're one of the few large implant businesses or really the only large implant business that's still standalone. Patterson, that relationship gives you a bit more of an integration with a broader dentistry platform.
Is that a business model you may have to replicate in other markets? Or do you think it is a disadvantage not being part of a broader dental business today?
No. To the contrary, we believe it's actually an advantage because at the end, the only pure play still remaining or global pure play is strong. And this is very important also for our customers. As I pointed out in the presentation, what our ambition is over the next couple of years is to become a true total solution provider for tooth replacement for the dentists and for the labs. And there, we still have some gaps to fill, like, for example, an intraoral scanner and a chairside mill on the lab side and in lab mill.
We're obviously not yet in the material side of the business. So there are still some gaps we have to fill to live up to this ambition. But our ambition is not to mirror a Danaher offering or Henry Schein offering. Our ambition really is to become the provider of choice when it comes to tooth replacement solutions.
Okay. Thanks very much. Next question from the phone comes from Michael Jungling, Morgan Stanley. Please go ahead.
Thank you and good morning. I have three questions. Firstly on Neovident. When will you exercise the option to take ownership to 70 5% and actually physically pay cash out? And question number 2 is on provisions.
Sales were provisions for China. You mentioned I think in previous calls that maybe you've over provided. What is the probability that you can write back some provisions for sales letter costs in China in 2015? And then question 3 is on Swiss staff costs. I mean since you made the announcement of reducing salaries, the Swiss franc has improved by 5% against the euros, 7% against the dollar.
At what point do you reverse the decision for staff cuts for sort of Swiss related people? Thank you.
Okay. I take the first and the third question. And Peter, I'll leave you the question on the Chinese provision. Actually, we have a 12 months window to exercise the option, the step up option to 75%. And as pointed out, the window starts on March 1.
So we have still time to think over it. We will actually take a decision within the next couple of months. So I'm pretty positive that when we will have our Q1 results call that by then we can also already give you some more details and some more information when it comes to exercising the option or not. On the staff cuts, just to make sure we talk the same language, Mike, we have not cut staff. We have cut compensation.
So we actually reduced the variable part of the compensation package of the Swiss based employees from 5% for staff to up to 35%. We will actually reevaluate this every year. So next time in January, February of 2016 when we will have the 2015 results available. And based on the development, obviously, of the currencies and the overall result of the company, we might reconsider to actually abolish these measures and to reestablish the old compensation scheme. So we will do that on a yearly basis depending on the development of the environment and the company's performance.
For the second question concerning the provisions that we have recognized in relation with the take over of our Chinese business. We have recognized these provisions at the end of 2013 and first half of twenty fourteen. These provisions are linked on the one hand to certain milestone payments and on the other hand to underlying business plan and business case that we developed and agreed upon. So far, we are fully on track with the milestones and with our business case and therefore, I will not expect that we would reverse some of these provisions that we have over provided. And on top of that, we need to make provisions in line with our business assumptions and they are reflected in the business case.
Thank you. Also a follow-up question on Neodent. If I I mean, if you currently have lots of cash there to make the acquisition of Neodent, Is it fair to assume that Neodent will be or the option will be exercised and cash very much early in the process rather than towards the end of the process, meaning the window for the option. It's very much going to work out how much minorities does one take out or take in depending on the timing of you exercising the option. So is it fair to say it's going to be early on in the process?
Obviously, we believe in this business. And if you look at the growth rates of the last couple of years, the longer we wait with exercising the options the more expensive the business will be to be acquired. So I think that should give you a little bit of a hint in terms of what our current thinking is.
Okay. And then finally on Neodent, the constant currency growth numbers that you are giving for Neodent, can you just give the constant currency growth rates for Brazil? Because I suspect in 2014, you also got sales from making sales into other regions that will be useful? And also the EBITDA margin development for Neodent 20142013,2013, I can't really work it out from sort of page 36 of the financial report. There's not enough details there.
That would be helpful as well. Thank you. You
want to say something?
We if I refer to the first part of your question concerning the gross margin, the growth rates of the Neodent business, I have presented that Neodent posted a low teens growth rates overall. If we split that into the international business and the domestic Brazilian business, the domestic Brazilian business grew in the high single digit growth rates. If I come to the second part of the EBITDA part of your question, Then I refer to our financial notes in the annual report. In that note, we have disclosed the respective profitability figures. You just need to take into account that these figures are adjusted to IFRS with certain IFRS standards, so they are reflected what we would reflect in our P and L then.
I understand, but you can't work out the EBITDA margin, only net income adjusted for some of tax things. So I was wondering if you could see the underlying operational margin EBITDA.
Yes. But I don't think that we have disclosed I'm sorry that we have disclosed that margin in the past. And I think what we have disclosed in that business is reflected in our financial notes of the annual report there.
Okay. Thank you.
Next question comes from Thomas Jones from Berenberg Bank. Please go ahead, sir.
Good morning. I have one just clarification question and then one more general one. Just wanted to be clear, the €20,000,000 in cost savings that you're targeting for 2015, is that an absolute achievement target for the full year? Or is that a run rate exit rate for the full year? Or so should we be expecting sort of gradual progression?
That was a clarification question. And then the more general one. I mean, I think it's clear to us that you're managing the financial impact of this Swiss franc unpeg reasonably well and reasonably presently. But I just wondered how you're managing the sort of softer side of that equation. It's all well and good, cutting people's compensation, having travel bans, but having hiring freezes that saves you money.
But there's all the kind of things that serve to motivate employees and create a forward thinking organization. So I was just wondering what you're doing on the softer side to offset some of the perhaps psychological impact of the Swiss francs, rather than just the financial side of the equation.
You want to say something to the €20,000,000 and
If part of your question concerning the EUR 20,000,000 savings, then I think we have reacted very early in the year and very shortly after the announcement. So the EUR 20,000,000 are our target for this year to save EUR 20,000,000 in 2015. However, going forward then, I think in 2016, we will see how the situation is. Marco just mentioned that we will also revise the respective compensation topic. And we are continuing to invest in our growth projects, as I have mentioned before.
Question, obviously, the whole situation is actually not adding positively to the motivation of the colleagues here in Switzerland, but that was also not expected. What we've done is we actually did a survey asking all our colleagues in Switzerland, so our colleagues here in Basel as well as the colleagues at our manufacturing site in Villarev, we are talking here roughly 800 people. So we had roughly 800 people in Switzerland. In this survey, if they would actually support the corresponding compensation cuts we have actually outlined, We got 97% of the employees participating in this survey And 96% of the participants said, yes, they support this measure. So it was not just that we actually went out there and said everybody has to actually take a compensation cut.
We sounded this. And actually the reaction was extremely positive. Obviously, the alternative would have been to actually look again at our staffing levels and to actually embark on another job reduction program. And through actually the fact that we got this buy in from all our colleagues in Switzerland, we were actually able to avoid this. And this, in a way, was positive from a motivational point of view.
But overall, honestly, the whole situation with the euro, the crisis in Switzerland, this is not adding positively to the motivational level of not only I think in Straumann, but overall in Switzerland to the workforce in Switzerland.
Sure. And then maybe one follow-up question on Neoten. When this transaction was initially announced, I think most people assumed in the communication we had from the company, I know it predated your time, but was sort of pretty much that the option was more or less guaranteed to be exercised going on the March date when it was due. And it sounds like you're just a little more caution and you are at least thinking about it rather than just exercise your option? And then as a follow-up to that, if you don't exercise the first option, does the second option to expire more at a later date expire?
Or can you then still come back and go up to 100% in 20 eighteen-twenty 19 time frame, even if you don't go up to 75% this year?
Look, as pointed out before, the probability rather higher. However, we also have to do our homework, okay? So we need to go in and we need to assess the business in detail. We have been 49% shareholders so far, so we had not yet had the opportunity to look into every detail of how sustainable is the financial performance. And so in other words, what we're going to do is the due diligence.
And based on this, we then will decide if we actually exercise the option or not. So far, there are no indications that actually anything is not running as it should. We actually obviously already did a full due diligence when we acquired the first 49%, but that was 3 years ago, almost 3 years ago. And since then, we haven't done that. We received regular monthly financial information.
However, again, because it's quite a significant amount of money, which we will invest, we have to do our homework. But that will not take us years. We are talking here more months until we have complete security and complete transparency on the
business. Okay, perfect. So it sounds like it's just more tidying up details rather than anything significant has changed in that regard. So I think that's clear.
We'll take the last question from the telephone and then return back to the remaining questions here in the room.
The last The last question from the phone comes from Yidan Wang, Deutsche Bank. Please go ahead madam. Thank you very much. I have three questions. The first question relates to your performance in Europe.
There's been a substantial step up in the performance of that region in Q4. I know you mentioned a factor that drove that and I just wonder what whether there are other factors that we should consider and how mature those drivers are? And then the second question is on the operating leverage that is now possible in your business relative to the different channels that you're growing in. So if you were to if some of your initiatives were to end up better and deliver more than 5% revenue growth in 2015. How should we think about the benefit of operating leverage that come from that incremental revenue?
Would you increase the investments that you have in your current programs, for example, really to accelerate them? Or would you let some of those through the P and L? And then the last question is more maintenance on the net financials. If current rates persist, what would be the hedging losses in 2015? Thank you.
You want to take the questions, Pete? The questions on the hedging losses.
Maybe you can start with that one if you want.
So let me start with the last question, the question on the hedging losses. I mean if I could predict how much hedging losses or gains we would make in the current months, then I probably would not be sitting here. We probably have something else to do. I think that's given in the current situation with the volatility of the currencies that that's very difficult to predict and I would not dare to make a commitment or a prediction going forward in that respect.
So the question sorry, the question was actually if rates were to remain as they are. So I'm not asking you to predict what the eventual hedging losses would be, but what it would be based on current rates?
If you look at that based on current rates, I would not I would need to go into more details to give you some more flavor around that topic. And we probably can take that off line together later then.
Perfect. Thank you.
To the second question, you are asking about the operating leverage. I think it's always a balance. When top line would grow more than our 5%, you basically have 2 options. On the one option, you can increase your profitability and take every dollar or every Swiss francs that you generate on the top line down to the EBIT. Or on the other hand, you could also increase your investments and build up your business, expand your business and guarantee a sustainable performance of the business and expansion of the business going forward.
And I think we would choose the second option to invest more into the expansion of our business because I think there are enough opportunities that we can capture out there in the market in the different growth markets and also invest in our R and D product portfolio. Europe. I think if you look at the performance in Europe in the last quarter 2014, then we have mentioned that was the highest growth rate since 2,008 in Europe. So I think it was an exceptional performance in Europe driven by different factors. One of the factors was also a very good performance in Spain, where it was anticipated that the VAT would increase beginning of 2015.
So we had a sales increase at the year end in Spain. That was definitely one of the factors driving the good performance in Europe in the last quarter. However, going forward and looking in 2015, I would not be sure if that high growth rate would be sustainable also because the comparative base 2014 is rather high now with that good performance in 2014.
Thank you.
Actually, it's almost answered. I had a similar question related to Europe. If you exclude now Spain, I mean, also UK was very strong and the Nordic countries and Austria. I mean, there must be a reason why suddenly there is such a big acceleration of growth to double digit growth rates, whereas before they were certainly much lower. Do you have an explanation for that?
For sure, the bone level tapered helped. So the LMR, limited mark also it was only an LMR that this helped, bodies helped. So we actually started to sell bodies in Europe in Q4. So this also had a nice base effect. Incremental sales we didn't have before.
And if you look at the countries where actually we really successfully started with spotless, this was, among others, the U. K. We also started to sell Creotech, high end screw retained bars and bridges in Q4. We pushed that, and that's particularly relevant for the Nordics markets. So there were, I would say, also impacts from product launches, which generated incremental revenue, which we didn't have before.
I have one more question on the restoratives business actually. I was surprised to see that you were opening up CATKEM milling production in Japan. I guess, one of your colleagues, competitors now has some difficulties getting a reasonable capacity utilization out there. So I know it's an important business now in Japan. But can you help us understand what you have been considering when coming up to that decision?
And I also see that you're expanding in Arlington, etcetera. So what is the basically the business case for CAT Chem at Straumann at the moment? And what are actually the CapEx requirement for this expansion for this next year maybe? Thanks.
I will talk about the business rationale and then Peter can actually give you some numbers on the related CapEx. Japan is still an underdeveloped market when it comes to CAT CAN. So Japan is anyway a very traditional market. So things take longer in Japan to actually until they adjust and accept new ideas. So we believe that there is a lot of potential for CAT come in Japan.
We see also more and more demand from our customers. We are actually now starting to sell also dental wing scanners under the Straumann brand in Japan. And many of our customers told us, we would really like you to be present in Japan so that we can actually order customized prosthetic parts from you directly in Japan, and we don't have to get it out of Marc Lebergh from Leipzig because this is hindering us to do business with us. We did a relatively conservative business plan on this. And despite quite some conservatism in the business plan, we believe that this is actually an attractive business and it's worth to invest into an old milling center.
Besides that, we can also use the Japanese milling center for surrounding countries. So the idea is then to also give access to CAPTCHA manufacturing to customers in other countries in surrounding countries. And in the U. S, it's quite straightforward. We have not been a player yet in the fully edentulous immediacy market, so the all in 4 type solutions.
If you want to be a player in that segment, which is a highly attractive segment, you have to be able to not only offer a tapered implant, which we have, and the corresponding prosthetic parts or the angulated abutments, you also have to be able to actually provide the corresponding final and the temporary and final prosthetics around it. And that's what we are actually going to be able to do out of Arlington once we have done the necessary investments. So this will allow us to actually tap into the fully edentulous immediacy market in the U. S, which is, in our view, a highly attractive segment of the U. S.
Market.
Concerning the second part of your question, concerning the CapEx, I assume with that question you want to get a better feeling on the gross margin impact of this investment. And therefore, let me put that in a bit a broader context and answer that question a bit broader. And we have been talking about the FX impact on our 2014 numbers and what we would expect in 2015. So you can assume that the FX impact that we see is going to the gross margin 90% to 95 percent of the FX impact is going to the gross margin. So that means due to the FX impact, our gross margin will face some headwind in 2015 in the order of 1 to 2 percentage points.
On top of that, we are increasing further our 3rd party business, which will also erode slightly our gross margin. And then coming to the packet CapEx question for the CAT Chem investments in Arlington and in Japan. I mean, in Arlington, we already have a CATKEM facility. So there's just an expansion of the facility and the investment in new machines and new capacity there basically. Overall, both investments are in the single million digit number.
Okay. So thank you for your questions. Obviously, we cannot go into all the details this morning, but you can find most of them in the preprint of our annual report, which is now available on our website. And the hard copies will be sent to subscribers in 2 to 3 weeks' time. In closing, I would also like to thank those of you who participated in our IR perception survey in December.
You can actually find a summary of the results at the end of the presentation. And finally, I would like to remind you we are hosting an analyst and investor breakfast at the International Dental Show in Cologne on March 12. And Peter and myself, together with some of our executive management colleagues, will be there. I think with that, we would like to thank you again for your interest and your participation, and we wish you all a good remainder of the day. Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.