So good morning, everyone, and thank you for joining us for our 2014 First Half Results Conference. We will be referring to the presentation slides that were published on our website earlier this morning. And before we begin, I would like to point out that our presentation and discussion will include forward looking statements. So please take note of the disclaimer on Slide 2 and in our press release. I will begin with the highlights and then our CFO, Thomas Dresendorf will share the business performance and regional details with you.
After that, I will tell you about the progress we have made to address the dynamically changing market and to unlock further growth opportunities. I will conclude with the outlook and then we will be glad to answer your questions. In the 1st 6 months of 2014, we continued to make good progress both in financial and strategic terms. Group revenue reached CHF359 1,000,000 driven by organic growth of 5%, which means excluding the effects of acquisitions, divestments and currencies, as you can see in the footnote to this slide. All regions posted growth with the best performances in Asia Pacific and the rest of the world, both achieving double digit increases.
Strong volume increases, product mix and further optimization in production helped us to raise the gross margin by 160 basis points. Together with reduced operating expenses, this carried our operating profit margin over the 20% threshold to almost 21%. Net profit rose 28% to €69,000,000 lifting basic earnings per share by approximately CHF 1 to CHF 4.42. Following a number of product launches early in the year, we introduced a range of prosthetic components in Q2. In combination with our new generation tapered implant, we can now offer state of the art immediate solutions for edentulous patients.
And thanks to our recent agreement with Spottis, we can now also offer the broadest range of regenerative products. These initiatives, together with other partnerships, strengthen Straumann's position as a total solution provider and as the premium partner of choice in tooth replacement. From a geographical point of view, we also made further progress to increase our share in fast growing regional markets and segments. I will share the details of these and other projects with you in a moment. Looking briefly at the quarterly performance in context, you can see in Slide 5 that the Q1 was considerably stronger than the 2nd, not just for Straumann, but also for our main competitors.
This is mainly due to the fact that Easter was in Q1 last year and in Q2 this year. In spite of this, we still achieved organic growth of 3% in Q2, making it the 5th consecutive quarter in which Straumann has grown ahead of its main competitors. Having adapted our strategy and delivered the profitability improvements we promised, we have won back the confidence of investors. This is reflected in the share price development over the past 2 years and year to date total shareholder return of 36% compared with an improvement in the Swiss market index of just 9%. At this point, I would like to hand over to Thomas for the regional and business details.
Thank you, Marco, and good morning, everybody. Before we go into the details, let's look briefly at the key figures on Slide 8. To facilitate a true comparison of the underlying business, we have, as usual, provided you with both the reported numbers and the numbers excluding exceptionals and exchange rate fluctuations. The good message today is that we have substantially improved our underlying margins at all levels despite an unfavorable currency effect, which reduced sales and gross profit by €11,000,000 and operating profit by €5,000,000 Good revenue growth and considerable OpEx reductions were the main drivers of profitability improvements, which lifted the underlying EBIT margin by more than 400 basis points to 20.9%. The contributions from Neodent and our other associates amounted to CHF5 1,000,000 after tax and are disclosed below the EBIT line in the income statement as share of results of associates.
Reported net profit grew 42% or £20,000,000 to £69,000,000 lifting basic earnings per share to CHF4.42 as Marco mentioned. Free cash flow amounted to CHF38,000,000 and the respective margin was 11%. Looking at the gross profit in detail. You can see in Slide 9 that our reported gross margins stood at 77.8 percent in the 1st 6 months of last year. At 2014 exchange rates, it would have been 50 basis points lower at 77.3%.
This year, our gross profit amounted to €283,000,000 and the margin expanded 160 basis points to 78.9%. We achieved this thanks to strong implant volume increases, greater utilization of manufacturing capacity and successful implementation of efficiency measures, including the in sourcing of certain processes. Moving on to the operating income. Our reported EBIT margin in the first half year of last year was 16%. At 2014 FX rates and excluding exceptional restructuring costs of €6,000,000 it would have been 16.7%.
This year's gross margin improvement contributed 160 basis points to the EBIT margin. Thanks to cost saving measures over the past 2 years, we have reduced operating expenses substantially, which contributed another 2 60 basis points to the EBIT margin. To sustain an innovation pipeline that will further drive growth in our premium business, we continued to invest 5% to 6% of our sales in true R and D, which is in line with historic levels. Other income had no effect on the EBIT margin. After depreciation and amortization charges of nearly CHF40 1,000,000 operating profit amounted to CHF75 1,000,000 with the respective margin reaching 20.9%.
Looking at the cash flow on Slide 11. The combination of improved gross profit of €7,000,000 and a reduction of €27,000,000 in operating expenses improved cash flow by €34,000,000 compared to the 1st 6 months of last year. Working capital increased due to higher sales, accrued severance payables last year related to restructuring, an increase in inventories for new product rollouts and an increase in DSO as a result of a shift in country mix. Without these charges, the cash flow improvement would have been considerably higher, which once again demonstrates Straumann's ability to generate an attractive level of cash. At CHF6 1,000,000 or 2% of revenue, capital expenditure was more or less in line with last year.
The higher interest paid is due to CHF200 1,000,000 bond, which we issued last April and carries a coupon of 1.63%. At the bottom line, free cash flow amounted to €38,000,000 and the respective margin was 11%. Slide 12 outlines the regional contributions to growth. As I said before, currency fluctuation took €11,000,000 away from first half year revenue mainly due to sharp declines in the yen and the Brazilian real as well as the softening of the U. S.
Dollar. In spite of this, we still achieved an increase of €16,000,000 or 4.6%. All regions posted 1st half year increases in local currencies with Asia Pacific and North America contributing almost twothree to the overall growth. Our largest region, Europe, made the smallest contribution, while both APAC and rest of the world achieved double digit increases. As we explained in April, strong growth in Europe in Q1 reflected the increased number of working days in dental practices due to Easter being early.
Consequently, sales development was slower in Q2, especially in Central Europe. By contrast, France, Belgium and the U. K. Continued to post good results. Iberia was also positive, confirming the continued momentum of the Spanish market.
In addition, our 2 most important distributor markets, Russia and Turkey, showed a disappointing performance. In our 2nd largest region, North America, sales grew by 5% in local currencies in both quarters. Factoring in last year's baseline into the equation, we found that momentum increased sequentially. The depreciation of the dollar against the Swiss franc reduced sales by 6 percentage points in the 2nd quarter. In Asia, STAHLMAN benefited from the continued market recovery in Japan, the region's largest market.
The hangover from advanced purchases ahead of VAT increase in April was visible in the Japanese performance. Nevertheless, we posted double digit growth to the credit of new product launches and the great work of our local management team. We gained market share, thanks to the launch of Ethel tissue level implants. Ethellects at bone level implants received regulatory clearance and will contribute initial sales in Q3. Elsewhere in the region, sales growth was most pronounced in China.
In the rest of the world, where distributor ordering patterns are often erratic, net revenue rose 9%. The major countries continued to grow strongly, although Mexico and the distributor markets in Middle East were unable to match the exceptionally strong growth achieved in the Q1. In Brazil, STAHLMAN delivered another strong performance, and NereDent posted solid high single digit growth. Looking at the growth contributions by business. Implants expanded strongly across all regions, driven by the increased share of RockSolid and Insolactiv.
Key developments in this were a differentiated pricing approach in Europe, the success of our reduced invasiveness campaign with Droxolid and the introduction of Ethelactiv in Japan. We maintained our level of restorative sales despite declines in Tubebon prosthetics and in lab scanners. These were offset by growth in implant prosthetics fueled by our new VARU BASE abutment, patient specific cut cam abutments and the launch of our new low profile abutments for SKU retained solutions. The regenerative business achieved solid single digit growth led by Emdogain. And with that, I will hand back to Marco.
Thank you very much, Thomas. I would now like to tell you about the progress we have achieved with our strategic initiatives and where our journey is going. We shared this slide with you back in February to give some insight into Straumann's key priorities. And today, I'd like to give you an update. We are now benefiting from the full impact of the substantial cost reduction measures we implemented last year.
The increased customer focus of our new organization has helped us to retain existing accounts and to win new customers. And the proof of our continuing cost discipline is in the EBIT margin improvement we reported today. As you can see, these three terms all have green ticks, but that does not give us any reason to sit back. We still have quite some work to do in order to create a truly high performance organization. With regards to the other priorities of addressing changed market dynamics and targeting unexploited growth markets, we have brought a number of new customer driven solutions to market.
We have also made several strategic investments to increase our presence in growth markets and to penetrate the value segment in geographies where we have not yet been present. This is another update to a slide we have shared with you previously in 2014. In 2014 alone, we have covered 5 of the remaining white spots, bringing new implants and prosthetics to specialists and creating convenient package solutions to address the GP market. In the bottom left quadrant, our VarioBase abutment is an important addition and offers a cost effective original on original solution that helps protect Straumann's abutment business against copies. In combination with our newly priced titanium SLA implant, the Vario base enables dentists to offer options with original components that are less expensive than some copycat competitors.
As you can see from the size of the respective bubble in the upper right quadrant, fixed immediate solutions for edentulous patients have substantial market volume potential, but Straumann has not been able to compete effectively with the segment leader. Now we have a full solution that is differentiated and very attractive. It includes the range of low profile screw retained abutments we launched early in Q2. These are available with 17 degree and 30 degree angulations for challenging situations where the posterior implant has to be tilted. They can be used both in single and multiple tooth restorations, including full arch edentulous indications.
For the latter, we now also offer custom built frameworks that can be embedded in fixed full arch prosthesis. The 3rd component in this immediate fixed denture solution is a new bone level tapered implant. The combination of these items enables dentists to perform a wide range of treatments, including all on-four type procedures with Straumann products. The addition of a tapered implant design to our portfolio is important because it is estimated that tapered implants now account for more than 50% of the global implant market. Our unique high strength material ROXOLID and our fast healing SL Active surface make this a new generation tapered implant.
High primary stability and rapid osseointegration will make it an important implant of choice for immediate restoration indications. It has marketing clearances in Europe and North America, and we are looking at the full market release in Q1 next year. The bone level tapered implant and our new abutments enabled us to support a 3 day charitable event in France involving total immediate restorations in 14 patients. In the space of just one day, the patients had all their remaining compromised teeth extracted. They received 6 to 8 implants in each jaw as well as a full arch screw retained denture.
And they went home with new fully functional teeth, all free of charge. Straumann could not have been able to support this initiative without the new tapered bone level implant. At the ITI World Symposium in April, we launched Straumann Pure, our first ceramic implant with a diameter of 4.1 millimeters. Since then, we have completed the development of a smaller diameter for narrow spaces. Like its larger companion, the 3.3 millimeter version is 2 colored and has our innovative ZLA surface for enhanced osseointegration.
Each implant undergoes a 360 degree stability test, making this an extremely reliable, highly aesthetic option and one for patients who want metal free solutions. Since last October, we have completed our implant portfolio with a full range of minimally invasive rock solid SL active implants, including the 4 millimeter short implant and we have added the ceramic and the bone level tapered implants in various sizes. I am convinced that no other company offers such an innovative and comprehensive portfolio of dental implants. All these new additions have come from our own research and development, reflecting Straumann's 6 year heritage of scientific innovation, of which we are very proud. But to stay at the leading edge, we also need to look outside for novel ideas and technologies.
Rodo Medical's SmileLock system for anchoring implant prosthetics is a good example. It uses an ingenious shape memory clip mechanism to secure prosthetic crowns in place without cement or screws. This avoids the problem of cement residues and saves time to mention just 2 advantages. Furthermore, the prosthetics can be removed and replaced conveniently without damage. Also, Smilog is still at an early stage.
We believe that the concept could change current paradigms, which is why we have acquired a 12% stake in the company. Our collaboration with Spottis is another example of the mindset change at Straumann that is bringing us away from the conviction that we have to develop everything ourselves. BOTIS provides us with a broadest range of proven regenerative solutions for membranes, fleeces and bone augmentation materials to bone rings and CADCAM milled bone grafts. The logistics of including such a large range in our portfolio are huge. Nevertheless, we expect to start selling BOTIS products in Europe in Q4 with other regions to follow pending regulatory clearances.
As part of our agreement, we have a call option to acquire up to 30% of BOTIS in 2017. That brings you up to date on the product and technology side. I would now like to tell you briefly about some key initiatives to increase our share in fast growing geographies and segments. Also Straumann is the market leader in China, we have not been able to fully capture the significant growth opportunities with our current distributor setup. Until now, our Chinese business has come predominantly from the public hospital segment.
But we have to make inroads into the private hospital and practice segment, which is growing faster and we have to broaden our geographic reach. We have therefore come to an agreement to take over the distribution activities in China from Beijing Focus Medical, our current partner and exclusive distributor. The deal involves fixed and variable considerations of up to CHF 27,000,000 depending on business performance up to 2016. It gives us greater control of the business and access to distribution networks, customers and market data. Going forward, we will use a multi distributor hybrid model with a consultative sales force and a local training and education organization, which will obviously require substantial investments, but it will also generate corresponding returns in the gross market in our industry.
The Asia Pacific region now sells 1 in 5 implants worldwide. The region will continue to deliver above average growth in the midterm. Apart from China, we have made a number of investments in the region this year, mainly to address the rapidly growing value segment with 2 replacement solutions. In Q2, we invested CHF 80,000,000 in a convertible bond in MegaGen, a market leading and fast growing dental implant company based in Korea. MegaGen offers a broad range of value implant systems and supporting products and is active in key global markets.
The convertible bond and a share purchase option could provide us with a majority stake in early 2016. We also invested in BioDenta, a provider of comprehensive solutions for dentists and dental laboratories. The company focuses on emerging markets where we need an established partner to offer a full solution. Here again, we have invested in a convertible bond. And finally, to gain leads to attractive technology and business opportunities in Asia, we have participated in a fund managed by DM Capital, which is devoted to investments in dental related opportunities in public and private companies in China.
Let me add a few words about our multi brand strategy to penetrate the Global Value segment. Slide 30 shows our portfolio of brands, where the companies are located and what our stake is. The schematic wall in the chart denotes the clear separation between Straumann and the value brands with regard to our Phase 2 customers. Bodies, Createch, Dental Wings, Etcon and Rodor form a common platform for technology and production that might serve both the premium and the value business. To drive and manage the distribution and internationalization of our value portfolio, we have established a business platform under the brand name InstaRend.
With a small, but dedicated team in Basel, Insadent has started to set up subsidiaries to build certain brands in specific countries like Spain and the U. S. And soon in Italy. InstroDent will also work on creating further value by linking the brands to create full solution providers. Slide 32 illustrates the distribution and sales flow.
Neodent, for example, sells both directly to customers in its home market Brazil and through its own distributors in Latin America. InstroDent has exclusive distribution rights for Neotend products elsewhere and has established fully owned local subsidiaries in Spain and the U. S. To sell Neotem products in those markets. For clarity and consistency, these shall be renamed Insulin U.
S. A. And Insulin Spain with a view to possibly selling other value brands through the insulin platform in those countries. And finally, Slide 33 shows you how far we have come in reaching the Global Value segment with regional and international players in value implants and abutments. Here too, there are still many white spots, but we have gained footholds and are pushing ahead to fill them.
That brings me to the outlook, which has not changed. We expect our revenue to grow in the low single digit range in local currencies. We will continue to invest in gross markets and our nonpremium offering. We will deliver an expanded EBIT margin in 2014. And in the midterm, we aim to achieve solid growth with further EBIT margin improvements.
Slide 36 traces our EBIT development over the past 6 years. Our recent goal has been to restore the level of profitability we had in 2,008. Taking currency effects into account, we have achieved this target in the first half of this year, earlier than expected. And now I'd like to open the question and answer session.
This is Karl Johan Siegel Bank, Vontobel. Given the fact that you had this €12,500,000 provision, which was negatively impacting EBIT, so margin would have been considerably higher in the first half. What however, the guidance is unchanged. What kind of costs do you see in the second half that leads to the conclusion that probably EBIT margin will be in the low 20s?
We have benefited in the first half year definitely from, let's say, lower expenses. We had a very good sales one. So the proportion expenses and sales is not sustainable over time. If we want to reinvest, we will reinvest in back into the business, for example, China. So we have to build up a consultative sales force.
We're going to add people in other regions to build to further continue the growth. So you will have incremental costs. And with a lag, you will have also the sales increase over time. What we've always said, we think that on a going basis, our EBIT margin should be around 20%, 21%. That's sustainable for the green world, for pre investment into the orange world, in value world.
So can you maybe comment a bit about China? What kind of investments and in which range you expect it to be?
Without telling numbers, Nadi, the concept, I think we briefly described that. Currently, we have 1 distributor. We're fully dependent on him. We have no access to the end customer, China being the biggest market gold market for the next couple of years. It is crucial to have the contact to the end customer.
So we are rebuilding our whole sales approach in China, adding training, education, people, adding consultants to sales force, going out to the customers, getting contact to the customers. So you have an initial investment, which will be big because we're talking about not about 10 or 20 people, we're talking about 100 people plus adding that to the OpEx line. And then you will see the pickup on the sales side because with having contact to the end customer will benefit and grow in the future years.
Let me add 1 or 2 sentences to what Thomas just commented. If you look historically at our revenue, first half of the year, we normally generate roughly 53% of the total revenue of the year and the second half, 47%. So normally in the second half of the year, we have obviously less revenue. If you look at our cost base, our OpEx base is more or less fixed. COGS are more or less fixed, but also the other operating expenses are more or less fixed.
So normally in the second half of the year, you have a lower EBIT margin. But that's not only this year that has been the case except for 2013 where we actually already enjoyed in the second half of twenty thirteen the impact of the heavy cost reductions, which we implemented in Q2 of 2013. But the years before 2012, 2011, 2010, €9,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 53%, 47% is more or less the ratio. When it comes to China, just to put this in perspective, so we will not throw 1,000,000 of OpEx at building up the Chinese business. Obviously, what we get through buying out the distributor is more top line.
So we get actually look at the gross margin and the EBIT margin that the distributor has generated on one hand, but we also will get more OpEx on our P and L because we will take over the resources the distributor needed to actually work in the Chinese market. And on top of that, we believe, as Thomas pointed out, that we have to add certain resources to make sure that we increase penetration geographically and that we will be able to actually enter into the 2 segments I mentioned, the private hospitals and the private practices. But again, we are not talking here double digit millions. We are talking a couple of 1,000,000 of additional OpEx. What you also have to consider and that's also why we are a little bit cautious when it comes to the outlook in terms of revenue growth is the fact that obviously the distributor is still seeking good inventory.
So the inventory will be sold off to the customers in the certain Q4 of this year, which means that our sales to the distributor will tendentially come down. So we anticipate that in the second half of twenty 14, we will have relatively weak sales out to the distributor, because he will sell off his inventory. But then in 2015, obviously, we will start again with a clean plate and we'll then actually not only generate again sales into the market, but we will also capture the difference between the selling price of the distributor and what we have sold to him in the past.
Okay. And maybe another question related to Europe. Do you have a figure how much the sales days adjusted growth was or also the volumes how the volume growth was in Europe in the first half?
So I mean the shift of Easter. Yes. If you take the methodology approach, you have, let's say, you have the Easter Friday off, but usually you have the dental practice will close the whole week. So it's basically 1 week you're shifting, which is 25% over month sales. So there's a huge impact with Easter shifting between March April.
It's not the single day. It's basically the week where the practice is closed.
And in terms of volumes, I mean, in the at least in the DACH region, you have lowered some prices. Can you comment about how volume growth was in
Just I think this is a misconception. If you look at our margin, the gross margin increased quite considerably. So we have not really lowered prices. What we have done is we are giving our customers for the same price a better product. And in Germany, we have lowered the price of our most economic implant, the Titanium SLA.
But on the other hand, what we have taken away from our customers is the so called Troye bonus. So yes, we lowered the list price and we lowered the ASPs. But in exchange for that, we actually have taken away certain rebates, certain year end rebates. So I think it's still a little bit of a misconception that have we've gone out and we have heavily discounted our prices and have taken down our prices.
I see this point, but I'm interested to see whether there was a pickup in volumes.
Oh, yes. Oh, yes. How
much it was. That's what I'm interested in.
Yes. We are growing at first half 5% organically. So obviously
Volumes have been higher. Yes, but we don't disclose the numbers.
Just to get back to Germany and on the change of portfolio that you had there, could you tell us whether you have to manage whether you manage to gain back some or to gain some market share in Germany again based on your offering? And then on the you give us an indication what was the particular driver behind the pickup in momentum in Q2? Was that due to the near end introduction or any specific product intro?
Yes. Germany, we believe we have based on the DIMDC data, so this is actually the panel of premium players, so there we have pretty solid data we get on a quarterly basis. We believe we have gained share, mainly on behalf of Astra, which is a little bit struggling as we speak with the implementation, introduction of the new system. In the U. S, obviously, we've also gained share.
If you look at the numbers reported by our peers and the U. S. Is still predominantly a premium market. And there it's a combination of several factors. First of all, we have invested as pointed out to you, several times into the sales force.
So we have actually covered some white spots geographically. We have put resources into these areas and that's now starting to pay back. And on top of that, we also had a couple of interesting new launches in the U. S. Neodent is still marginal.
And you didn't get any traction that kind of you were able to benefit on the Straumann side from the Neodent?
No, to the contrary.
Okay. So
you We also see a little bit of cannibalization. The main business we gain in with Neodent in the U. S. Is obviously from noble customers because it's the same concept, it's the same philosophy, but we've also had some strong customers now also placing in addition to stronger Neodent. So 100% cannibalization non cannibalization you cannot get.
Okay. And then the last question. You were quoted today on Bloomberg that you would be interested in 3i and Zimmer Dental if they were in the market.
That's not exactly correct. The question was if you would look at 3i and Zimmer if they would come to the market. And the answer was, yes, obviously, we would look at it like we also did in the case of Nobel. I can be open and frank and honest here. We looked at Nobel, but internally came to the conclusion that this is not something we are interested in.
I think we wouldn't do our homework if we would just say, no, we don't look at it. But at the end being interested needs some more. You need to be convinced that actually the price tag is reasonable and that you can actually generate value by acquiring such an asset.
Richard Lutz from MainFirst Bank. The first question is regarding Neodent. Actually, in Brazil, in your presentation, you state high single digit growth in Brazil for Neodent. It seems to be a little bit lower than what we have seen in the past. Maybe you can provide some more information regarding the performance there.
You may have noticed that they had world championships down there. And the rules are very simple over there. Every day where Brazil played, it was a public holiday. And in every state where another team played was also public holiday in that state. So it was difficult and thank God, Germany won, so we had some good news at least that it was difficult to maintain the momentum, but we're not worried at all.
We have a very good feeling in Brazil that this momentum will continue and be double digit.
Okay. That second question is regarding, again, regarding the provisions of regarding the buildup of your distributor activities in China. Now overall, you have provisions of €27,000,000 Roughly €12,000,000 are set up in the first half of twenty fourteen. I'm just wondering how much of this is actually fixed variable and how much is like onetime costs, which how much is recurring? Yes.
We have reflected this as OpEx because we think it's based on the IFRS rules, it's not a business combination. It's actually we're building up a new business. So we have to, let's say, reflect this as the majority of that as OpEx. We, however, will look at the details and see what we can capitalize. We've mentioned in the chart that part of let's say, we have several milestones, some are fixed, some are business driven.
So depending on the performance, we will pay up to €27,000,000 The number can also be lower. This is the maximum amount we think we'll hit, but this assumes excellent performance of the country. So we're happy to pay this amount if the performance is that way.
Well, in other words, we have taken a very conservative approach. We actually have expensed everything as you noticed, NOK 27,000,000 a part of that in 2013, the other part in 2014. And we've actually assumed that we will pay the maximum, the CHF 27,000,000.
And the important news is really it's linked to business performance. It's not an upfront payment and then we have to take care of the development of this new concept. They are tied into the performance, which I think is a very good contract for us.
The downloads and
fixed. Sorry.
Well, just Nobel Biocare obviously takes great pride in this market of the NANDOs. What's your ambition there then? What do you want to gain us in terms of market share there or the white spot?
Rightfully, Noble is proud of dominating these specs as we speak. They have been the pioneers to create this type of solutions. And we are playing catch up here. You have to be honest. It's what we believe is that now with the combination of not only a tapered implant, but also with a hydrophilic surface, so DSL active surface and the fact that with rock solid we have a stronger material that we are now able to really compete seriously against Noble in this space.
So we will be able to compete seriously from Q1 2015 onwards. But it will be an uphill battle. Noble is the dominating company when it comes to this indication and we have to try to gain some share on behalf of them. Now we would like to go over to the phone lines and take some questions from there before returning to the room here in Basel. Chorus Call operator, would you please connect the first question?
Yes. The first question comes from Tom Jones from Berenberg. Please go ahead, sir.
Good morning and thank you for taking my questions. I have a couple. The first I just want to clarify something on the Chinese distributor provision. Just so I'm clear, if the Chinese business does very well, obviously, you'll use up that entire provision. But if it doesn't, I guess some of that provision will be able to come back through the P and L.
So have you not in a way sort of created a win win situation in that if the business does well great the P and L looks nice. If it doesn't you get to bring the provisions back. I just want to make sure I understand that mechanistically correctly. The second question I had was on Instradent. I'm not entirely clear how this is going to sit in with the business.
Is this going to be a new brand that you're going to go out there with the market with that's going to pull all the value brands together? Or is this just more of an internal infrastructure type arrangement? And then the 3rd sort of more strategic question really is on your expansion strategy. You've taken an awful lot of minority stakes in a number of different businesses and sort of stuck your fingers in all sorts of pies all around the world. On one hand, I can see the rationale for that.
It gives you I'm certainly seeing the strategic rationale for it. But my question
is, if these opportunities
are all Is it because they're not for sale? Or is it because you Is it because they're not for sale? Or is it because you just want to keep the margin dilution out of sight and keep it down below on the other line? Or is there another reason why you've only taken minority stakes in a lot of these businesses?
Just I'll pick up the first question and Mark will take up the 2 other ones. China, I think you described it very well. It's a win win situation. If performance doesn't work out, we'll pay maximum of 40%. If performance turns out to be excellent, we'll be up at 100% and we'll benefit from the sales increase.
So you brought it to the point.
On InstroGen, I think it's obviously necessary to clarify 1 or 2 points here. Instradent, you can compare in a way like a little bit like Henry Schein. So it's a distribution platform. And this distribution platform is actually expanding the pillar brands, which are normally focused on their whole market like Neodent in Brazil is taking these pillar brands and expanding them internationally. So the example again is Neodent.
Neodent home market very strong in Brazil, strong also in Latin America, but not present or has not been present before the establishment of INSTRADENT in markets outside of Latin America. So we are now through Nail Dent, we are internationalizing the Nail Dent business. However, we have not only Nail Dent, we also have Medentica, we have Biodenta, we have other brands. So to give you an example, in Italy, we decided that we will launch not only NailDent but also Medentica at the same point in time. Because we believe that this is a strong offering to our customer base or our potential future customer base in Italy to be able to offer MPS, so multi platform prosthetics on one hand and a strong implant portfolio on the other hand.
Now how do you want to call that? That's it's neither Neodent nor it's Medentica, okay? You're actually acting like a distributor, like a Henry Schein. You're actually distributing different brands in the Italian market. On top of that, we also came to the conclusion that traditional ways of selling are too expensive in the value segment.
Obviously, we also have a small sales force, but we need to apply other more economic sales channels in the future like a strong e shop, like direct marketing, like outbound calling, telemarketing, these type of activities. Now to build up an e shop, a strong e shop for each one of the brands will not make any sense. So we are now in the process of building an instant e shop. And through that e shop, our customers can actually order the different brands in the different markets. On top of that, we also believe there are synergies in terms of rolling out new technologies through this platform.
So this is a little bit of background and a little bit also of detail when it comes to the InstaDent platform. Sure.
So when I go to the EIA meeting in a couple of weeks' time, am I going to see an InstaDent stand with all the different brands on it? Or are you going to continue to sort of market each brand separately?
No. You will never see an instrument as boost. It's like Henry Schein. Okay, Henry Schein has boost, Henry Schein and then supply also has boost then supply. But you will never see an instant boost.
What you will see also in the future is you will see a nail dent boost, you will see a medentica boost, you will see your denta boost. So the brands will actually put money behind building up the brands. InstaDent is a distribution platform.
Sure. Okay. That's fair. And minorities?
The second question, yes, minorities. It's a little bit a game between risk and opportunity. That's also why Mega Chain, BioDenta, our approach there is convertible bonds. And these convertible bonds are secured. So in the case of Mega Chain, we have substantial assets secured behind that bond.
Because at the end, we believe that we also owe it to our shareholders that we are actually getting the best opportunity risk proposition for them. And with this approach, we believe this is the case. In the case of Rodo, honestly, we just did not have an other parties, current shareholders, who other parties, current shareholders, who are not really willing to be diluted. So in the rotor case, clearly, we could not acquire more than 12%.
Okay. So would it be fair for us to conclude that you view a lot of these opportunities as really quite high risk and therefore we shouldn't be factoring too much in into our models and valuation in the future and that we should expect at least some of these to just turn into straightforward bonds and you just get your money back and that's the end of that. Is that fair? Or do you think all of these will crystallize into something meaningful?
I think besides Neodent and Medentica, your comment is very fair.
Fair enough. And then a very quick follow-up on Neodent. Obviously, we're approaching or getting closer to the point where you can take that from a minority to a majority stake. Two questions on that. I wonder if you could just give us a bit more color on the timing of when that might happen?
And secondly, does the ongoing IP dispute in North America have any influence on your willingness to move from a minority to a majority position with Nederland?
I think we've disclosed that already several times. We have a call option to increase our currently 49% stake to 75% during the period of March 2015 to March 2016. As long as this option is valid, we will have to consolidate anyway. If we actually call the option or not, from March 2015 onwards, you will see actually the Neodent business consolidated in our books, okay? And then if we decide at the end not to actually call the option, which at this point in time, there is no kind of hint that this will be the case, then it will actually disappear again from the books.
The Naledence legal case in the U. S, this has to be put into perspective. First of all, we don't believe that we infringe noble patents that we did our homework before launching the Neodent portfolio in the U. S. Very diligently as we are doing always before we launch a new business.
Just to give you a little bit of background on this one, even before we launched Neodent in Spain, we modified 2 of the Neodent products because during the evaluation phase, we came to the conclusion that we might potentially infringe to pet patents. So before we launched the products, we modified the products completely and only then we launched the products in Spain. And we did the same in the U. S, okay? So very important first point, we don't believe that we infringe noble patents in the U.
S. Secondly, the Centimeters implant, which is the cause for the claim of Nobel, is just one of several implants we are marketing in the U. S. We have a whole range of implants, which we are marketing in the U. S, we are marketing in Spain and we will market in Italy.
So it's one implant out of several. And thirdly, Neodent is actually improving its products on a constant basis. So the Centimeters implant, which we have currently we are currently selling in the U. S. Is already an antiquated version of what is sold in Brazil, okay?
So we are not concerned at all that due to this legal case with Nobel, our efforts to actually penetrate the value segment in the U. S. Will come to a halt.
Perfect. That's all right, Claire. I'll get back in the queue.
Next question from the phone comes from Chris Grattler from Credit Suisse. Please go ahead.
Yes. Hi, good morning. I have two questions now. 1 with respect to the differentiated pricing strategy. Could you share some experience here and particularly relative to your original expectations, how that did?
And whether you have already taken a decision to replicate that strategy in other markets in Europe outside the DACH countries? And the second question relates to Neodent in Spain. Also there, could you share your experience in that market with the brand and how well it's developed? And maybe if you could quantify some of that that would be fantastic. To your first question, the results of our so called Big Bang initiative and just to make sure everybody has clarity on this, this was not only launched in the DACH region, okay?
So Big Bang has been launched throughout Europe. The difference in Germany was that we actually reduced the list price on the titanium SLA implant, which we did not do in all the other countries in Europe. The results are above expectations. On one hand, our ASP is higher than we expected, mainly due to a higher share of SL Active implants compared to our original assumptions. Secondly, we are selling much more Oxolid implants than we initially thought, which is putting quite some stress on our operations colleagues, our factories and plants.
But so far, we have been able to manage that extremely well with only very little stock out situations. And in terms of making new customers, acquiring new customers through these initiatives there, we're also in line with what we've planned. So we've decided now that we take this concept further, one step further, and we will also roll it out in some of our distributor markets. And we're also looking at rolling it out in Asia Pacific and potentially in the U. S.
Your second question on Neodent Spain. We are actually happy with the development of Neodent in Spain. However, it's still from a net revenue contribution to the total group, it's still insignificant. We are close to a couple of percentage points of market share, let's put it that way, gaining every month new customers, growing the business steadily. So the Spanish Neodent launch so far has been up to expectations.
To be honest, that's not yet the case in the U. S. So the sales of our NailDent implant in the U. S, yes, we're also seeing there month by month a stronger pickup, but we have expected much more out of the U. S.
Launch. And the numbers so far are still below expectations.
Great. Thank you.
Next question comes from Veronika Dova from Goldman Sachs. Please go ahead, Madam. Good morning, gentlemen, and thank you for taking my questions. I have 2 and they're both very financial, so hopefully straightforward. The first one is on gross margin.
And I'm just wondering, Thomas, if you could comment on your expectations for the full year given the impacts of the inventory reversal in the first half, how we should be thinking about gross margin for 2014 and then beyond 2014? And the second one is if you have any guidance on the associate income line just because there's been a huge amount of volatility And obviously, you've consolidated some new business in there. Thank you so much.
Okay. And Josh, we said before the sales split is usually 53% in the first half year, 47% in the second half year. We also said that the majority of our costs in the plants are fixed. So there's just a material basically, which is variable. So you would have to expect a small decline in the gross margin.
I will not quantify at stage because we're still calculating the details. On the associates, I would assume the same results as in the first half here. We're not expecting any major change.
Terrific. Thank you very much. Next question comes from Martin Bruylinger from Jefferies. Please go ahead, sir.
Hi. Thanks for taking my question. I just have a couple of questions on market shares. Could you give us your expectations on what you would target with Neotend in terms of market share in the directly competing similar brands and market share gain in the already value segments? That would be great.
And maybe you can specify the Livent or North America? Thank you.
It's a market where you don't really have market shares.
We don't want to give you the impression that you don't want to answer your question, but it's difficult insofar that what is the base, okay? Is it I assume you're asking volume market share.
Absolutely, yes. No volume market share, of course, yes.
So what is really the volume worldwide? So market share these days, it's a little bit difficult to answer that. If you look at MRG, they still believe the dental implant market worldwide is below 10,000,000 implants a year. If we actually take our internal intelligence and we just add up the top data, we come to the conclusion that the worldwide market market is rather 18,000,000 to 19,000,000 implants per year. So that's why it's a little bit difficult to give you an answer.
We have obviously clear targets in terms of volumes we want to achieve and value. And as I mentioned before, in Spain, we are on track to achieve that. In the U. S, we are clearly behind.
Any comment on ClearChoice? Is there an important customer for you? Will you try to get the competitive products from Novolin? Or is there some can you maybe give some colors on the dynamic how you approach market share gain in the U. S.
And how you play that value and brand segment together? Firstly, you have a bit of an understanding how quickly you can catch up with market share?
No sales to Kitra.
So we have no commercial relationship with ClearChoice yet. Our key competitor last week commented on the Clear Choice topic that they are going through a kind of an offering quotation process regularly. And obviously, when they go through this process, they are inviting besides the incumbent Nobel also other providers of dental implants. And yes, to be honest, we have also been invited to submit products. That's the status.
And the Noble Active is a product that you presented there as well?
Excuse me?
And Noble Active is a product that you would present there as well?
Noble Active?
We don't have Noble Active. We only have Straumann or Neovent.
When they compare it, it's a equivalent product, obviously, that Noble is trying to sue you for patent infringement.
Yes. I think we commented on the infringement story before, so I don't want to repeat myself. Obviously, again, ClearChoice wants to have a product that works because they are very happy with the current solution, with the Noble Active 1. So to really get into this account, you have to come up with something which is at least as good as the Noble solution. If Neodent the Neodent products are as good as the Noble products, yes, they are for sure cheaper.
We have now also the alternative with the bone level tapered. We have clearance marketing clearance in the U. S. And in Europe. But as I mentioned, the only thing we've done, we have actually submitted product for ClearChoice because they asked us if we want to actually also come up with our idea how to serve them.
And when do they make a decision you think on this?
Sorry, I don't know if
they are available. Okay.
What we know is that there is still a contract in place, obviously, and Noble can tell you much more, but we believe there is still a contract in place, which lasts at least until the end of Q1 of next year. So but details, we are not the right party to ask for.
No, that's very clear. Thanks very much for the answers. Very helpful. Thank you.
Next question comes from Ms. Yudan Wang from Deutsche Bank. Please go ahead. Yes. Thank you very much.
I have let me see, 3 questions. Yes. So the first question relates to the China distributor purchase the €27,000,000 Is that just the cost of you sort of taking over the operations of the distributorship? Or is that also the does that also include the cost of buying that distributorship? The amount seems to be lower than what I thought it would cost you if you were purchasing the distributorship outright.
And then secondly on Nioden's expansion outside of Brazil, Can you give us some sense of the level of revenues that you need for that to breakeven on average for the countries that you're entering? And then also why U. S. Has ended up being below your expectations? And then finally on the tax rate that's ended being a bit lower.
If you could give us an update on your guidance for the year that would be helpful. Thank you.
I'll start with China, euros 27,000,000 We have as I said before, we have one distributor who's going to help us over the next 3 years to build up our own business. Also, it's a hybrid model with distributors with a consultant in the sales force. He's going to join this journey for the next 3 years, and he's linked to the performance of the market. So the €27,000,000 is the maximum amount assuming a certain percentage of growth, and this percentage of growth is rather high. But if we have this growth and he's supporting us on the development and getting the context of passing on the customer data, the customers to us.
I think the €27,000,000 is very wisely spent because we'll get the equivalent on the sales side. On near end breakeven discussion, we have like always, you just saw the business. You have to have some certain you're going to have some certain incremental investments, which are usually not covered in year 1 and in year 2 with the necessary sales. We assume that as of 3 years as of the year 3, we're going to have the breakeven situation. There just a side note, the interesting thing about these nearland launches is that these new subsidiaries are fully benefiting from the Straumann infrastructure, be it accounting, be it IT, be it HR, be it all the other departments, regulatory, for instance.
So it's a rather lower cost setup compared to any other startup company you would see. On the tax rates, there's actually no change. If you a small change, it's due to the mix of the profits in the various countries because we have our tax rate in Switzerland, which is basically fixed. And depending on how the money is spread in each of the subsidiaries, you get a different mix on the in the countries, obviously, you have higher tax rates up to 34%. So the number you see at the model is just mixed.
On the tax rate, there's no change in principle. I hope that answers all the questions.
Why is U. S. Near than below expectations?
They have started later. We had a business plan saying as of 1st February, midwinter Chicago, they're going to start launching. We had some delays in the whole setup. So actually, we only started selling as of 1st April, 1st May really. So that's the key reason for being below the budget.
And we're still trying to identify the most efficient way to get our products across to the customers. So it's like always, you start with a new brand, with a new concept. It's a certain trial and error approach. You have something in mind, which you have baked into the business plan, but things change and you get new learnings and you have to adapt to that. But we're confident that we'll pick up this and by end of next year, we'll catch up to that what we've promised in the business plan.
And finally clarification on the China distributor purchase. So the $27,000,000 that you're potentially going to pay out that doesn't include the cost of purchasing the customer list and the customer relationship, is that right?
That's the total number. That's the total amount. That's the maximum amount we'll pay for everything we'll get from Focus Medical. They have customer data. They're let's say, they're we're going to take over part of the distributors.
We're going take over the network, what they have, and they're going to support us building up this business. So it's different. It's not a normal asset purchase deal or something where you just take over data and we have to build up the business on ourselves. We're basically getting their support, their full support, their network for the next 3 years, supporting us building up this new business model.
Okay. Okay. Thank you. I just said that the amount seems rather on the Voe side.
It's a conservative assumption.
Okay. So I think we have now probably still some questions in the room.
You continue to invest into R and D and mentioned the true R and D costs as 5% to 6% of sales. Will you continue to invest about this level?
Absolutely. Absolutely. Yes. That's a premium company. You have to invest into R and D because if not at one point in time, you're dead.
So we are fully committed to continue to invest at least 5% to 6%. If we see that we have to invest more, we would even invest more. And I think what you have seen over the last couple of quarters in terms of new products which came out of the pipeline, it also pays off to invest into R and D.
Thank you.
Okay. Fine. Then thank you for your questions. In closing, I'd like to draw your attention to the IR calendar, which you can find on Slide 38 and on our website. And thank you again for joining us.
Have a good day, and we look forward to seeing you again soon. Goodbye. Thank you.