Ladies and gentlemen, good morning. Welcome to the Straumann 2014 full-year results presentation. I'm Alice, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Marco Gadola, CEO. You will now be joined into the conference room.
Also like to welcome those of you who are joining us via the audio webcast. Sorry. As usual, I would like to ask you to take careful note of the disclaimer on slide two regarding forward-looking statements. I'd like to begin by briefly introducing Dr. Peter Hackel, our new Chief Financial Officer, who re-joined Straumann at the beginning of December. For the past four and a half years, he was at Oerlikon, where he was CFO of the Drive Systems division. Before that, he was at Straumann for six years in various managerial roles, including head of group controlling and member of the executive management group. Prior to Straumann, Peter spent two 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. 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 CHF 710 million. 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 fourth 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 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 continued to build our instrument platform to penetrate the value segment by investing in value brands like MegaGen 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 Dentsply 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. 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. More about that later. As I mentioned, our momentum increased in the second half, culminating in 9% growth in quarter four.
As a result, we have outperformed the market for seven 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 330 basis points. Adjusted earnings per share rose 20% to CHF 8.40, which excludes a one-time benefit from the capitalization of deferred taxes. On a reported basis, earnings per share actually reached CHF 10.15. 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 two years, we have achieved substantial improvements and have reached that ambition.
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. On that positive note, I would like to hand over to Peter.
Thank you, Marco, 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 million 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 basis points, and EBIT by 330 basis points. It is striking that our reported net profit margin of 22% exceeded the EBIT margin of 21%. This is because of the one-time effect in our income from our associates that Marco mentioned.
The non-cash effect contributed CHF 27 million 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 million. Excluding this one-time effect, the contribution would have amounted to CHF 9 million, which is still CHF 6 million 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 third-party products from Neodent and our regenerative partners. With gross profit amounting to CHF 559 million, the respective margin rose by a modest 20 basis points to almost 79%. Now moving on to the operating income on slide 12. You can see that last year's EBIT margin, adjusted for currencies and exceptionals, 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 under-penetrated growth 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 three percentage points to 58% 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 2013 and 2014, already occurred in the first half, and the difference year-on-year was a minor CHF 1.5 million. Turning to the cash flow on the next slide now. The profitability improvement meant that our EBITDA increased by CHF 28 million, our cash generation was negatively affected by an increase in working capital.
This was due to a two-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 third-party products. As a result, net cash from operating activities reached CHF 146 million, more or less in line with prior year. With CapEx rising almost CHF 6 million to CHF 19 million, higher tax payments, and increased share-based payments, cash flow amounted to CHF 128 million, 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 CHF 13 million off the prior year revenue, mainly because of the sharp decline of the JPY and the slight lift of the EUR.
North America added CHF 14 million 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. We were also pleased by the encouraging developments in Europe. During the fourth quarter, Europe grew 8%, its highest quarterly increase since 2008. The U.K., 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 performers were Roxolid and SLActive. 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 SLActive, 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-line performance. Implants were the main growth driver.
Increased sales of Roxolid and SLActive were the principal contributors, supported by a differentiated pricing approach in Europe, the success of our reduced invasiveness campaign with Roxolid, and the introduction of SLActive in Japan. Revenue from the restorative business was mixed but sustained our prior year level. Declines in tooth-borne prosthetic elements and lower scanner prices were offset by growth in standard prosthetics. The regenerative business achieved solid single-digit growth led by Emdogain and Straumann AlloGraft. Additional revenue came from the launches in Q4 of the botiss range in Europe and licensed regenerative products in North America. 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 EUR cap. On the right side, you can see what the adjustment effect on our 2014 organic revenue and EBIT will be if the respective rates persist for the remainder of the year. At the FX rates of January 16th, our 2014 revenue decreases by roughly CHF 75 million and our EBIT by CHF 40 million. Using the average rate since January 16th, our revenue decreases roughly CHF 55 million or 8%, and our EBIT CHF 31 million or 20%. 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 Marco 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 million. 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. Of course, we have to look at improving our natural hedge to reduce our exposure against currency fluctuations.
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 a 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. Finally, the trend in innovation is shifting from technological breakthroughs to sales processes, holistic approaches, and incremental improvements in products.
Changing corporate culture takes time, and we believe it has to start at the top of the company. In the first half of 2014, we mapped our culture on the basis of common behaviors and defined the ideal we want to achieve. We then began the 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 two years and to succeed in the future. The world's largest market in value terms is the U.S., but it is still comparatively under-penetrated, 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, Spear 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 Patterson in the U.S., together with the Spear curriculum. With regard 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 MegaGen 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 Instradent 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 technology platform. Two additions to this in 2014 were botiss and RODO Medical, a start-up company with innovative technology for prosthetic fixtures. The latest addition to our Instradent 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.
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. Finally, we have been investing in our CAD/CAM production in the U.S. to cater for ClearChoice, 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. There is considerable demand. Until fairly recently, edentulous 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 teeth, 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. 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 million adults in the U.S. will be in need of one or two complete dentures. One 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 Instradent have just become their preferred supplier. 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 one in two implant procedures requires guided bone regeneration, which is why we also offer regenerative products. To expand our offering, we joined forces with botiss, Europe's second-largest supplier of oral regeneratives.
Together, we offer an unparalleled range, which we began distributing in Europe in quarter four 2014. As regulatory approvals for botiss still have to be obtained in some markets, including the U.S., we have licensed the collagen membrane and xenograft bone augmentation material, which we have already launched in the U.S. Together with our existing bone graft 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 Roxolid and SLActive, Bone Level Tapered was instrumental in winning our status as a preferred supplier of ClearChoice. 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 three strategic priorities, namely driving a high-performance culture and organization, targeting unexploited growth markets, and becoming a total solution provider for tooth replacement. 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. 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 the 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 1st, 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 a 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. I would like to open the question-and-answer session. As usual, we will give our guests here in Basel the opportunity to put their questions before we open the lines to our webcast participants. 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 one to join the queue. You can leave the queue by pressing star and two. Let's now take the first questions.
Hi, 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 2013 to 2014 on that operation? That 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? 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? 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 a CAD/CAM offering, so we are not yet able to offer our customers CAD/CAM 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 a rather complete range of CAD/CAM solutions to our customers, not only in Israel 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. We are not yet fully rolling out the BLT offering in all our major markets. The furthest advanced 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. 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 [its] Roxolid material and has an SLActive surface, which in the U.S. is of particular interest. Peter 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 is a one-time 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 result? 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. I would not expect the same impact in 2014. It was a one-time impact that we had due to some projects on optimization in 2014.
In other words, the 2014 profitability is, let's put it that way, a more realistic view on what the profitability of Neodent is than the 2013 profitability. Except for the tax impact.
Carla Bänziger, Bank Vontobel. I have a question regarding your growth guidance. 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. You have now the Bone Level Tapered launch in 2015. Can you explain why you were, in my view, relatively 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 have in 2014, some one-time positive impacts, like, the SLActive launch in Japan, for example. The growth rates which we enjoyed in 2014 in Japan, we do not expect to see again in 2015. 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.
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? Will it be accretive or
There will be some one-offs as Peter showed 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&L and then be parked back into equity, which is kind of an interesting IFRS standard, but we have to do it like this. There will be some negative one-time impacts. We are still working on the purchase price allocation. 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. On the ongoing business, so if you take the one-offs off, the Neodent business will be accretive.
The EBIT margin also after amortization for intangibles will be more than the guided, more than 20%. It will be accretive. By how much we will be able to give you, once we have done our homework.
A question. Why have you decided to remain the dividend unchanged, despite a sharp increase in profits? How dangerous is this situation in the U.S.? Could the industry as a whole expect something similar, which it has experienced in Japan, Waterloo, 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, huh?
Yeah.
In good times, in worse times, in bad times, in excellent times, we always maintain the same dividend. It's obviously a valid question. Why do we not pay out the dividends based on our results? Increase one 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 one year to the other. That's our philosophy when it comes to defining the dividends. On your second question, yes, obviously, failures 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. 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 1.2, 1.3 million implants per year. 50% of a 2.5 million implant market in the U.S. Far, we have not actively actually tried to gain share in that segment. 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.
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 Patterson and with Spear to make sure that we offer to the general practitioners in the U.S. a very safe way to get started with implants. We have a very limited offering, the Straumann Smart 1, which gives them the opportunity just to do very simple, less critical indications. And we actually ask the GPs who buy the first package of Straumann Smart 1s to attend a training course, which is conducted by Spear.
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. 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 CHF 20 million cost savings, because when you announced it some months ago, very proactive by the way, I think you were more talking about high single-digit million impact. Why this difference?
The high single digit was related to the personnel expenses, so the impact of the compensation cuts. 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 EUR, on operating expenses, which have a positive impact on the OpEx line. The CHF 20 million is everything together, and the number you mentioned is just related to the measurements we actually announced a couple of weeks ago.
Okay. Roughly half is stuff.
Yeah
just other points you mentioned.
Half and half. Yeah.
Okay.
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. 2015.
2015. Okay, thanks. Maybe I have overlooked it, have you indicated the purchase price of the T-Plus-
No
already, or is it similar like in the past, the high single digit million, a bit not double digit or something like that?
It's not high single digit. It's low single digit.
For the 43%?
For the 43%, yeah.
Excellent. Last question, can you give us some update on the value strategy in repositioning of SLA and so on in markets like Germany? You haven't really mentioned a lot.
Yeah. The big bang we launched last year in Q1 with the positioning of Roxolid at the price of SLA, by actually taking the SLA, the titanium SLA, more as a weapon to enter the higher end of the value segment. This strategy is continuing in Germany, in the rest of Europe. Now that we have SLActive also registered in Japan, we are also thinking about doing the same approach in Asia Pacific. In the markets where we have SLActive registered.
Okay, no questions in the room. We would like to shift to the telephone lines. Chorus Call operator, could we have the first question from the telephone, please?
Yes, the first question from the phone comes from Lisa Clive, Sanford C. 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? Related to that, if you could give any information on what your investments have been in that business.
With the Neodent brand in the U.S., as we speak, in the first year, we are targeting mainly specialists. We have seen increasing interest in the Neodent offering since we were able to announce that actually, ClearChoice will actually use the Neodent products together with the Straumann products in their clinics. We have quite some positive headwinds there. 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. As we speak, we see we have quite some positive headwind there. In terms of investments, obviously, 2014, the Neodent or the Instradent platform launch has been an investment case. It's EBIT dilutive, clearly. Also in 2015, this will still be the case.
Only from 2016 onwards, we are actually anticipating in our business plans that the Instradent business overall will actually positively contribute to the EBIT. Obviously, also in 2016, still EBIT margin dilutive, but at least a positive absolute EBIT contribution.
Okay, great. It sounds like things are moving in the right direction. 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 Straumann business in the U.S.? Do you think that this is something that even if it is still loss-making in three years' time, you really need to stick with?
We are committed to actually become one of the global leaders in the value segment, the U.S. market is the largest dental implant market worldwide. Also if in 2016 we would still not break even at an EBIT level, we would obviously continue. I'm very confident that actually this will not be the case, that we will actually be EBIT positive from 2016 onwards.
Okay, thanks. 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 a 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 Straumann. 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 dentist and for the labs. There we still have some gaps to fill. Like for example, an intraoral scanner and a chairside mill. On the lab side, an in-lab mill. We are obviously not yet in the material side of the business. There are still some gaps we have to fill to live up to this ambition. Our ambition is not to mirror a Danaher offering or a 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 Jüngling., Morgan Stanley. Please go ahead.
Thank you, and good morning. I have three questions. Firstly, on Neodent. When will you exercise the option to take ownership to 75% and actually physically pay cash out? Question number two is on provisions. Sales-related 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-related costs in China in 2015? Question three is on Swiss staff costs. Since you made the announcement of reducing salaries, the Swiss franc has improved by 5% against the euro, 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, Peter, I 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%. As pointed out, the window starts on March the 1st. We have still time to think over it. We will actually take a decision within the next couple of months. I'm pretty positive that when we will have our first quarter 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.
We actually reduced the variable part of the compensation package of the Swiss-based employees From five for staff to up to 35%. We will actually reevaluate this every year. Next time in January, February of 2016, when we will have the 2015 results available. 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. 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 takeover of our Chinese business. We have recognized these provisions at the end of 2013 and first half of 2014. 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. Far, we are fully on track with the milestones and with our business case, and therefore, I would not expect that we would reverse some of these provisions and that we have over-provided. On top of that, we need to make the provisions in line with our business assumptions, and they are reflected in the business case.
Thank you. A follow-up question on Neodent. 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. 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 option, the more expensive the business will be to be acquired. I think that should give you a little bit of a hint in terms of what our current thinking is.
Okay. 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? I suspect in 2014, you also got sales from making sales into other regions. That would be useful. Also the EBITDA margin development for Neodent 2014 and 2013. I can't really work it out from 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?
If I refer to the first part of your question concerning the growth margin, the growth rates of the Neodent business. I have presented that Neodent posted a low teens growth rates overall. If you split that into the international business and the domestic Brazilian business, then 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&L then.
I understand, you can't work out the EBITDA margin, only net income adjusted for some of these tax things. I was wondering, is it in the underlying operational margin, EBITDA?
I don't think that we have disclosed, I'm sorry, that we have disclosed that margin in the past. 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 Tom Jones with Berenberg Bank. Please go ahead, sir.
Good morning. I have one just clarification question, then one more general one. Just wanted to be clear, the CHF 20 million 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 the clarification question. The more general one. 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, having hiring freezes, that saves you money. Those aren't the kind of things that serve to motivate employees and create a forward-thinking organization.
I was just wondering what you're doing on the softer side to offset some of the perhaps psychological impact of the Swiss franc unpeg rather than just the financial side of the equation.
You want to say something to the CHF 20 million.
The part of your question concerning the CHF 20 million savings, I think we have reacted very early in the year and very shortly after the announcement. The CHF 20 million are our target for this year to save CHF 20 million in 2015. However, going forward, 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 Villeret. We are talking here roughly 800 people. We employ 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. 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. Through the fact that we got this buy-in from all our colleagues in Switzerland, we were actually able to avoid this. This, in a way, was positive from a motivational point of view. 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. Then maybe one follow-up question on Neodent. 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. It sounds like you're just a little more cautious now, and you are at least thinking about it rather than just automatically pushing the button. What are the factors at play that would cause you to not exercise your option?
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 2018-19 timeframe, even if you don't go up to 75% this year?
Look, as pointed out before, the probability that we're going to exercise the option is rather high. However, we also have to do our homework. Okay? We need to go in, and we need to assess the business in detail. We have been 49% shareholder so far, so we had not yet had the opportunity to look into every detail of how sustainable is the financial performance. In other words, what we're going to do is a due diligence. 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 three years ago, almost three years ago. Since then we haven't done that. We receive 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. 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. It sounds like it's just more tidying up details rather than anything significant has changed in that regard. I think that's clear.
Take the last question from the telephone and then return back to the remaining questions here in the room.
The last question from the phone comes from Yi-Dan 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 the fourth quarter. I know you mentioned a factor that drove that, and I just wonder whether there are other factors that we should consider and how mature those drivers are. 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. 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? Would you let some of those through the P&L?
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, Peter?
The questions on the hedging losses.
Maybe you can start with that one if you want.
Yeah. Let me start with the last question, the question on the hedging losses. If I could predict how much hedging losses or gains we would make in the current month, then I probably would not be sitting here. I would probably have something else to do. I think that given in the current situation with the volatility of the currencies, that's very difficult to predict, and I would not dare to make a commitment or a prediction going forward in that respect.
Sorry. The question was actually if rates were to remain as they are. 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 need to go into more details to give you some more flavor around that topic, we probably can take that offline 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 two options. On the one option, you can increase your profitability and take every dollar or every Swiss franc 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. 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&D product portfolio.
Europe, I think if you look at the performance in Europe in the last quarter 2014, we have mentioned that was the highest growth rate since 2008 in Europe. 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. We had a sales rush and a big 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, also U.K. was very strong and the Nordics countries and Austria. 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. The LMR, the limited mark. Also, it was only an LMR. This helped. botiss helped. We actually started to sell botiss in Europe in Q4. This also had a nice base effect. Incremental sales we didn't have before. If you look at the countries where actually we successfully started with botiss, this was among others, the U.K. We also started to sell Createch high-end screw retained bars and bridges in Q4. We pushed that, and that's particularly relevant for the Nordics markets. 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 restorative business, actually. I was surprised to see that you were opening up a CAD/CAM milling production in Japan. I guess now one of your colleagues, competitors now has some difficulties getting a reasonable capacity utilization out there. I know it's an important business now in Japan. Can you help us understand what you have been considering when coming up to that decision? I also see that you're expanding in Arlington, et cetera. What is basically the business case for CAD/CAM now at Straumann at the moment? 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 CAD/CAM. Japan is anyway a very traditional market. Things take longer in Japan to actually, until they adjust and accept new ideas. We believe that there is a lot of potential for CAD/CAM in Japan. We see also more and more demand from our customers. We are actually now starting to sell also Dental Wings scanners under the Straumann brand in Japan.
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 Markkleeberg 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 own milling center. Besides that, we can also use the Japanese milling center for surrounding countries. The idea is then to also give access to CAD/CAM manufacturing to customers in other countries, in surrounding countries. In the U.S., it's quite straightforward. We have not been a player yet in the fully edentulous immediacy market, so the All-on-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, so the angulated abutments, you also have to be able to actually provide the corresponding temporary and final prosthetics around it. That's what we are actually going to be able to do out of Arlington once we have done the necessary investments. 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 broader context and answer that question a bit broader. We have been talking about the FX impact on our 2014 numbers and what we would expect in 2015. You can assume that the FX impact that we see is going to the gross margin, 90%-95% of the FX impact is going to the gross margin. That means due to the FX impact, our gross margin will face some headwind in 2015 in the order of one to two percentage points. On top of that, we are increasing further our third-party business, which will also erode slightly our gross margin.
Coming to the CapEx question for the CAD/CAM investments in Arlington and in Japan. In Arlington, we already have a CAD/CAM facility, so that'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. 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 two to three 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. Finally, I would like to remind you that we are hosting an analyst and investor breakfast at the International Dental Show in Cologne on March 12th, 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.