Ladies and gentlemen, good morning. Welcome to the Full Year Results 2013 conference call. I'm Edith, 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. He will now be joining to the conference room.
Good morning, everybody, and welcome to Straumann's 2013 Full Year Results Conference. It's a pleasure to have you with us this morning, and thank you for taking the time to join us here in Basel. I would also like to welcome those of you who are joining us via the audio webcast. Before we begin, I'd like to remind you that our discussion during this call will include forward-looking statements, and I must ask you to read the disclaimer on slide two of the presentation or at the end of our press release. For the benefit of those of you who are not familiar with Straumann, this slide explains the terms that we use to make like-for-like comparisons easier and to give a clear picture of our underlying performance.
In addition to the reported growth in Swiss francs and in local currencies, we refer to organic growth, which excludes the effects of currencies and discontinued business activities. As in previous years, we have stated the key profit and loss figures, with and without exceptionals, and the exceptionals are explained here on this slide. Apart from that, we adopted the revised IAS 19 standard in 2013, and our 2012 figures have been restated for comparison purposes. I will begin this morning with the highlights, and then Thomas Straumann, our CFO, will give you the financial details and business performances. After that, I'll tell you about our strategic progress and our outlook, and then we will be glad to answer your questions. 2013 was one of the tougher years that the Straumann Group has experienced. It began with disappointment, frustration, and uncertainty.
Our first quarter sales declined at 6% in a sluggish market, and we faced continuing pressure from low-price competition. Costs were rising, and our level of staffing was no longer sustainable. Thanks to the sense of urgency, hard work, flexibility, and commitment of our staff, we succeeded in turning things around. We significantly reduced our costs, mainly through reducing headcount. We reorganized to become more sales and marketing-oriented, and we set about changing our culture and mindset. At the end of the year, we were growing organically at a quarterly rate of 4%. Our profitability had increased significantly, and our lead in innovation had been restored by the introduction of differentiated solutions that add value for customers and patients. Furthermore, we strengthened our foothold in the value segment, enabling us to return the competitive pressure.
In the fourth quarter, we kept momentum thanks to double-digit growth both in North America and Asia Pacific, which made up for the sluggishness in Europe. At the EAO, we introduced two innovations with the potential to change paradigms in implant dentistry, and we launched our answer to the increasing threat from copycat prosthetics on Ti-Base Abutments. We expanded our portfolio by acquiring stakes in Createch Medical and Medentika. The latter strengthens the foothold we have in the value segment with Neodent, which performed well in Brazil and expanded into Spain. Our achievements have inspired confidence, and the positive development of our share price in 2013 has made up for the disappointing losses in 2012. Here are the key facts. Group revenue grew 1% organically over the full year to reach CHF 680 million.
Our best performers of the full year were North America and the rest-of-the-world region, which both grew 8%. Efficiencies and mix leveled our gross margin to almost 79%, while cost savings contributed to a three-percentage-point increase in EBIT margin. Most importantly, our total business has now grown above the top end of the market for three consecutive quarters, as you can see in the chart on the left. Bottom-up market data for implants and abutments give us good reason to believe that we have underpinned our market share, as you can see on the right. This is encouraging because it indicates that our restructuring initiatives have not impaired our ability to drive sales and to win market share. Our success and confidence comes from being in a highly attractive market, which is still under-penetrated, as you can see in the bottom chart. There is also a significant medical need.
As you can see from these statistics, 50%-60% of the adult population in the U.S. has lost at least one tooth, and more than 1 million people need replacements for existing conventional restorations, such as three-unit bridges or dentures. There is plenty of opportunity and potential for us to unlock. On that note, I hand over to Thomas for the financials and business performance.
Thank you, Marco, and good morning, everybody. Looking at the big picture on slide 10, our top line reached CHF 680 million, as Marco mentioned. Organically, we grew 1.2%, which is modest, but a distinct improvement on the previous year. We were able to improve our underlying margins across the board. Efficiency gains and mix lifted the gross margin by 93 basis points, while the EBITDA and EBIT margins both improved by more than 300 basis points. In constant currencies, the improvement would have been even more impressive. The increase in gross profit and substantial OpEx reductions were the main drivers of our significant profitability improvement. The contributions from Neodent and our other associated partners amounted to CHF 6 million. This is disclosed as share of results of associates in the income statement below the EBIT line and includes intangible amortization charges and taxes.
Reported net profit grew from CHF 38 million to CHF 101 million, lifting basic earnings per share to CHF 6.55. As Marco mentioned, our level of staffing became unsustainable because the organization had been built on rather bullish expectations which failed to materialize. We therefore reduced headcount to our pre-economic crisis levels when revenues were similar to our present levels. Downsizing, reorganization, and natural attrition reduced our workforce by 300 to approximately 2,220 at year-end. Redundancies were handled with due regard for our social responsibilities as an employer. A large portion of the cuts were here in Basel. Thanks to outplacement support, more than 80% of our leavers had found new jobs by year-end. The reductions focused mainly on support activities to ensure that quality, innovation, and services were not compromised and that our sales force was undiminished.
Despite resizing, we believe that we still have the strongest team of professionals in our industry. The restructuring cost in 2013 amounted to CHF 17 million. One consequence of the reduction is that we no longer have certain pension obligations for staff who left the company. The corresponding adjustment for the pension obligation resulted into a curtailment gain of CHF 9 million, bringing the net cost to CHF 8 million. The sequential development is impressive. With a second half year margin of 90%, you can see what kind of margins our organization is capable of delivering if all works in our favor. Before you get too excited, I should add that revenue and margins in the second half year were elevated by a shift in the number of trading days. In production and logistics, we introduced lean manufacturing principles three years ago.
At the same time, we began in-sourcing various production steps, for example, packaging. These initiatives continued in 2013, and together with process re-engineering designed to cut initiatives and improve utilization, they contributed to significant efficiency gains and a third year of gross margin expansion. Looking at the gross profit in detail. You can see here that our reported gross margin amounted to 77.5% in 2012. Adjusted for the currency headwind of 30 basis points and the exceptional of 40 basis points, the true comparison baseline would be more or less the same at 77.6%. The aforementioned efficiency gains, which you can see on the right side of this waterfall chart, were the main drivers of the gross profit increase. Slightly negative pricing, higher volumes, and a better product mix collectively had a positive impact on the margin.
The discontinuation of our lower margin intraoral scanner business in Q4 2012 also contributed to the expansion. With gross profit amounting to CHF 536 million, the respective margin rose 127 basis points to almost 79%. Before exceptional, the expansion was 90 basis points. Moving on to the operating income. In this slide, you can see that our adjusted EBIT margin last year would have been 14.4%. This year, our gross profit improvement contributed 160 basis points to EBIT margin. In line with accounting standards, IAS 1, we have decided to disclose operating expenses as distribution costs and administrative expenses in the income statement. The former comprises sales force and sales activities, while the latter comprises marketing, R&D, and general administration. Thanks to the cost reduction measures and tighter cost control, we were able to reduce total operating expenses on a like-for-like basis by CHF 19 million to CHF 450 million.
Despite cost reductions, our drive to innovate remains undiminished, and we aim to maintain our historic levels of true R&D investments at around 6%-7%. The main reductions were in general administration, back office, and marketing support functions. We added sales staff in under-penetrated growth markets like the U.S. and certain emerging markets, as you can see in the waterfall charts. This meant that our 2013 EBIT margin reached 18.2%, excluding the non-recurring restructuring cost of CHF 8 million. Turning to the cash flow on the next slide. The combination of improved gross profit, significantly lower operating expenses, higher working capital, lower tax payments meant that cash from operating cash flow increased by over 30% year-on-year. Gross profit contributed CHF 11 million to cash flow and OpEx reduction contributed a further CHF 33 million. This includes restructuring charges, most of which are cash relevant.
At CHF 30 million or 2% of revenue, capital expenditures was almost CHF 7 million lower than last year, reflecting our continued effort to fully leverage our existing production setup. At the bottom line, free cash flow amounted to CHF 139 million and the respective margin was above 20%, demonstrating Straumann's high cash conversion. We continue to generate solid cash flows, which, together with the proceeds from our bond placement in April, brought cash and cash equivalents to CHF 384 million at year-end, despite the investments in Medentika and Createch Medical and the ordinary dividend payment of CHF 58 million. With a conservative gearing, we have the financial capability to pursue further strategic acquisitions and investments. Moving on to the regional performances. This slide gives you some more details about the revenue drivers.
Currency fluctuation took CHF 9 million off full-year revenue, mainly because of the sharp decline of the Japanese yen and the softening of the U.S. dollar. The discontinuation of our intraoral scanner distribution business affected growth by 80 basis points. North America continued to be our key growth contributor, complemented by first signs of a turnaround in Japan and strong growth in China and Latin America. The overall result was still held back by sluggish sales in Europe, where Straumann is the market leader. Let's have a closer look at the regional performances. In the face of challenging conditions in Europe, the market has become increasingly competitive, especially in prosthetics. Less well-penetrated markets like France and the U.K. showed the strongest performances over the year. Elsewhere, demand was soft. In Q4, Italy, Germany, and the Benelux contracted.
Spain and Sweden, who both suffered badly from the economic environment and structural changes in the market, reported considerable improvements, suggesting a return to growth. The trends in Q4 was positive and market data are a little more encouraging, we remain cautious about a significant improvement in the near term. In North America, which accounts for a quarter of our revenues, we outperformed the market with growth of 11% in Q4. This indicates that last year's strategy of investment in our regional sales force was appropriate. Growth was generated across all businesses. Demand for our high-performance material Roxolid and our bone-level implant range were the main drivers. Our implant growth was a combination of robust volumes, intelligent pricing, and mix as we introduced Roxolid on all diameters and design in the course of the year.
The Asia region made further progress in Q4 and closed the year very strongly, achieving growth of 16%, its highest quarterly increase in five years. All subsidiaries reported growth. Exceptionally strong orders came in from distributor markets. The key growth contributor was Japan, where Straumann regained market share. It has taken one and a half years to restore growth and public perception of implant industry in Japan, which was tarnished by the media. Exceptionally strong orders in China and other distributor markets in Southeast Asia lifted the region to double-digit growth. In the rest of the world, our smallest region, Q4 revenue rose just 2%. This is due to the erratic distributor ordering pattern in the Middle East. Brazil, which is now the world's largest implant market in volume terms, was a source of good growth both for Straumann and for Neodent.
Before I hand back to Marco, I would like to add some color on the various parts of our business contributed to our top-line performance. Our implant business expanded consistently as the year progressed to post solid growth overall. The restorative business was mixed. Sales of CAD/CAM custom abutments grew strongly, but not enough to compensate for the shortfalls in the standard prosthetics and simple tooth-borne restorations due to competition from in-lab and chairside milling. The contribution from digital equipment and software was smaller than in 2012 due to the transfer of our guided surgery to Dental Wings and the discontinued distribution of intraoral scanners in October 2012. The regenerative business achieved modest growth, led by the periodontal tissue regeneration product, Emdogain. That completes the financial and business review, and I would like to hand back to Marco.
Thank you, Thomas. While the fundamentals of our strategy and vision were intact, it was clear at the end of Q1 that we needed to sharpen the strategic focus on three priorities. Building a high-performance culture and organization, targeting unexploited growth markets, and addressing the changed dynamics of our core markets. With regards to the first, our cost reduction plan has been implemented, and the reorganization has enabled us to focus more on customer and market needs and to initiate a culture change. With regard to the other two priorities, I would like to give you a few examples of our progress, starting with initiatives to address the changing market dynamics related to pricing and competition. Our top-priced premium implants are made of Roxolid and have the SLActive surface for improved osseointegration.
The big advantages of Roxolid are that enables our customers to use slim and short implants in narrow spaces and to avoid invasive bone graft procedures, which saves trauma and costs. Small implants also can make treatment possible for patients with insufficient bone for conventional implants. To make the benefits of this remarkable material available to more customers, we extended Roxolid to our entire implant range in Q4. On January the 1st, we began to offer Roxolid together with our new Loxim transfer piece in certain markets for the same price as the titanium equivalents with the old transfer piece. On top of this, we reduced the price of our basic titanium SLA implant in selected German-speaking countries to compete against the value players more effectively. This is a bold step which is designed to increase market share.
Obviously, we don't have the full picture yet. The first results are promising. Towards the end of 2013, we launched a new e-shop with state-of-the-art functionality, navigation, and design, adding value and convenience to our customers. It also offers possibilities for cross-selling and efficiency gains. The pilot has been completed. We are proceeding to further market launches with the goal of more than doubling our online business in 2014. This is just one of several customer and market-driven solutions that are in the rollout phase. Here are some more. I have just mentioned the advantages of small Roxolid implants. Our new four-millimeter short implant is now available in Europe, Australia, and New Zealand, with other launches to follow, pending regulatory clearances.
This implant is backed by five-year clinical data. It may offer a valuable, less invasive alternative to long angled implants, for instance, in All-on-4 edentulous treatments. The controlled market release of our ceramic implant is going well. We are on track for full market release later this year. This is the first clinically validated ceramic dental implant to reach the market. It is also the first ceramic implant with an SLA-type surface for enhanced osseointegration. It demonstrates Straumann's expertise in materials and precision manufacturing and our leadership in innovation. Ceramics are highly aesthetic and provide a very good biocompatible alternative for patients who ask for metal-free implants. Personally, I'm very excited about this technology, which may lead to a paradigm shift. I don't want to fuel expectations because we are currently addressing only a niche market.
As part of our strategy to provide complete solutions, we have developed a concept called Straumann One, which we have just introduced in pilot markets. This makes it easy for GPs to order everything they need for a straightforward single-tooth replacement case in one smart package at the bundle price. Our Variobase hybrid abutment is an important response to copycat prosthetics that substitute conventional abutments. It enables dental technicians to produce their own customized abutments with original Straumann connections, which is important for guaranteed precision and reflects the Straumann philosophy of original on original. The potential of these products and the segments they target are shown on this slide, which we have shared with you on previous occasions. It shows some of the exciting growth opportunities we are pursuing across a wide range of indications and with various levels of sophistication.
Some are groundbreaking. Others seek to take share from competitors. As you can see, there are still some white spots. We are working on all of them. One white spot that we have been addressing for several years is the introduction of our SLActive surface in Japan. I am delighted to say that we have received regulatory approval. We have now launched, which means that Straumann is the first company to bring this proven surface technology to market in Japan. In 2013, we made progress in a number of areas. We need to focus further on adapting our organization to the fast-changing dynamic environment. This requires a culture change to become more agile as an organization. We want to signal this change also to the outside world, as you can see in the emotive branding and fresh corporate design that we launched on January 1st.
Among the key target groups are young and female dentists. Our aim is to promote Straumann as a professional, dynamic, reliable, and emotionally engaged partner. The attractiveness of implant dentistry has stimulated a sharp increase in regional and local value players. Many are copycats with limited offerings. Few offer the same high levels of service, training, support, experience, innovation, and long-term assurance that are inherent to the Straumann brand. The value segment now accounts for more than a third of the global implant market in value terms, reflecting a shift from technological and scientific differentiation towards a good enough mentality. We therefore took a strategic decision to build a portfolio of value companies that will operate as separate brands with their own value proposition.
In 2012, we acquired 49% of Neodent, the market leader in Brazil. In the fourth quarter of 2013, we acquired 51% of Medentika in Germany, a rapidly expanding provider of cost-effective implants and attractively priced prosthetics for multiple implant systems. Medentika will have an important role alongside Neodent in our value platform. At the same time, we acquired 30% of Createch in Spain, which specializes in high-quality CAD/CAM prosthetics for multiple implant systems and will support both our premium and value businesses. We also hold 44% of Dental Wings, our partner in digital dentistry, which addresses both segments. This chart shows the positioning of each of these companies and how they help us to cover a broad spectrum of market needs. As you can see on this slide, with Neodent as our partner, we are able to cover the entire premium and value price range.
This slide shows how dynamic and attractive Neodent is. It has a strong value proposition and a broad range of implants covering all indications. In Q4, Neodent expanded successfully into Spain. Tomorrow the company will announce its market entry in the U.S. In 2013, Neodent achieved high single-digit growth in Latin America and net profit margin of more than 30%. Neodent and Medentika are strong partners to address the value segments in the Americas and Europe. We have been looking for further partners in Asia-Pacific. Biodenta specializes in comprehensive solutions for dentists and dental labs around the world. The company offers four implant systems, intraoral scanning, chairside, and CAD/CAM milling. With regional hubs in Taiwan, the U.S., and Switzerland, their main focus is on emerging markets like China, India, Russia, Turkey, and the Middle East.
Our two companies have agreed to collaborate to capture synergies in these and other markets. Biodenta is pursuing a growth strategy and is working towards an IPO in the near future. We are impressed with their potential and have therefore purchased a convertible bond for approximately CHF 6 million which can be converted into Biodenta common shares in the future. This means that we have a friendly entrepreneurial foot in the door of another promising partner in the value segment. This brings me to the outlook for 2014. Despite the positive news, we are still cautious, mainly because of Europe, where we expect our performance to be constrained by consumer sentiment and increasing competition. On the other hand, Asia has improved. There is much potential in North America and emerging markets, which are growing nicely.
Overall, we expect the global implant markets to develop positively in 2014 and our revenue to grow in the low single-digit range in local currencies. We will continue to invest in growth markets, and we will extend the reach of both our premium and non-premium offerings. Thanks to the full impact of the cost reduction measures, we aim to expand EBIT margin in 2014. Looking a little further, our goal is to achieve solid growth with further operating margin improvements in the midterm. Of course, we want to outperform our competitors. I'm confident we can do this based on all the factors in this slide, which I can summarize briefly. In a nutshell, Straumann has leading innovation, differentiated solutions, an exceptional range of options, a strategy to address key segments and the capability to do it, a unique network of partners.
We are confident that we are on the right track. Our goal is to restore historic profit levels. If you look back to 2008, our EBIT margin at today's currency rates was in the low 20s. In 2013, we reached 18% and came a big step closer to our ambition of exceeding 20% in the midterm. 2014 is the 60th anniversary of our company, the 40th anniversary of our pioneering entry into implant dentistry, the 25th anniversary of Straumann Netherlands and Straumann U.S., and the 10th anniversary of our charitable partnership with the National Foundation for Ectodermal Dysplasias. This longevity speaks volumes about our sustainable business approach, not just to patients and customers who expect lifelong reliability, but also to other long-term stakeholders. Over the past six decades, Straumann has changed paradigms and brought significant improvements in the quality of life to millions of people.
It's a great privilege and a responsibility for us to continue simply doing more with Straumann in the future. Now I'd 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.
For questions, please press star one.
You said that the pricing had a negative impact on top-line growth. Can you just give us a bit of split of how pricing developed? I understand that in the U.S. we had the positive price increase, which contributed some 2% growth. What was the negative impact on pricing in Europe?
What we're trying to do is an intelligent approach on pricing. You can play with the price and the volume. The message what we're giving back to you is that we have significantly overcompensated in the volume as we have it on the prices. There's an adjustment of the price elasticity in the market, which we're making use of. There's a small decline in some of the products, which is by far compensated by the volume increase what we have.
Can you confirm, please, that you had a pure positive price impact from the U.S. or not?
No, we cannot confirm.
No, we can't. No. We can confirm that we have a significant volume overperformance with price elasticity for certain implants.
Okay.
To put the things on the table, we actually were pursuing a much more aggressive strategy starting in the second quarter and throughout the whole world, not only in Europe, but also in the U.S., to actually gain back volume share.
Okay. In that case, I must have misunderstood Fabian, who said that we had a 2.5% price increase last year in the U.S.
Yeah, list price.
Yes, we had, because we had the Medical tax, we passed on the Medical tax to the customers.
Okay, good.
Yeah.
On the midterm guidance, when you say return to solid growth.
Yeah
That's probably somewhere mid-single digits, 4%-6%, 7% growth. Could you give us a bit of your personal view, how you think that is going to be split or differentiated on the premium and value segment?
We're only talking here premium segment.
the solid market growth-
Yes.
Sorry.
All the guidance relates 100% to the premium segment.
Okay. Last question on the timing-
Of course, just to make sure that everybody understands, we are not consolidating any one of these companies in our financial statements.
Yep.
All the top line you see actually coming through in our financial, except for Neodent in Spain and now the launch in the U.S., is Straumann brand, is premium segment.
Okay. Just the last question on the Neodent integration as of 2015. When can we expect that you will give us a bit more information and guidance on how we should be integrating that in our models?
Actually, in the annual report, you have quite some, I would say, some good information when it comes to the Neodent business.
Okay.
You have numbers, you have sales numbers, you have profit numbers. You basically have everything.
Okay. On the stakes, how the plan is, how to step it up, that will be announced next year?
I think it's public knowledge that we have actually options to go in the first step to 75%.
To 100.
Option has to be executed in March of 2015.
There is a second put call option structure in place for us to go to 100% if we want to, or the remaining shareholders to put the remaining 25% to us by 2017.
Okay, thanks.
Yeah, great one.
Thanks. I have now two question actually, they relate to Asia. First of all, I think you mentioned in your press release that you're looking to change your distribution structure in China. Could you elaborate a bit on that and what basically are the key factors for you to decide on that? Secondly on Biodenta. Is this now the entry into the Asian market? Or does it prevent you from actually now adding another line, or is this basically the line you intend to use now in Asia? You indicated at some stage. I was just wondering, I think I met them once, and it looked to me fairly a small company at this stage and with a very low price strategy. I was wondering how you think, in practical terms now, how such a collaboration with Straumann would work in various markets.
Basically the synergies you mentioned, how would that work now in practical terms?
Currently we are actually doing business in China through a distributor. That distributor is actually employing or deploying himself a network of other distributors. That is how typically you do business in China. The problem we currently have is that we don't have any transparency who are the end customers. To whom is our distributor really selling? Into which geographies, into which customer groups? Where is our business really growing? Where is it not growing? Where are we gaining share? Where are we not gaining share? With the new setup, we are actually intending to actually have direct information in terms of who our end customers are. This will be the big change. To actually achieve that, obviously, we have to buy out our current distributor. This is a project we are pursuing as we speak.
In future, the big change will be that we have full transparency on our business in China. We will know who actually is buying our product. We will know by geography, where are we underrepresented, overrepresented. We will know by customer, with which customer groups are we growing, where are we not growing, so that we can actually manage the business in China in future in a much more professional and also strategic way. On Biodenta. Biodenta is not the last step we will take to address the growing value segment in Asia Pacific. We believe Biodenta has potential to grow. You are right, Christoph, it is still a relatively small company. The strategy now in our view is interesting because it is focused on emerging markets, and they are actually offering a full integrated portfolio to dentists and labs. These two aspects are appealing to us.
We made the decision to actually invest CHF 6 million into this company and to see what potential does it bring to actually together develop certain of the markets. One opportunity for sure is on the CAD/CAM side. They have quite extensive network of milling centers throughout Asia, but also in Russia and in Turkey. We think that this may also be something we could leverage to actually enhance our CAD/CAM offering when it comes to value players, which we might acquire in the future in this region.
Hans.
Yes. Can you please elaborate a bit on the Neodent U.S. launch? Do you target existing GPs or new GPs or a combination? I just wonder about because the U.S. market typically is a premium market, at least to my knowledge. The second question is about the German market. What do you assess for market growth last year and the future as well?
If you look at actually the Neodent portfolio, it's very similar. The products are pretty similar to another large dental implant company you are all familiar with. The range is actually covering almost every of the offerings these other companies offer. Clearly, one of the key focus customer groups are customers who are used to work with these other companies' products. We are able to actually offer, we believe, a similar type product with good quality, high quality, at a much more attractive price. This has also been our strategy to actually launch Neodent in Spain. The first results are actually pretty promising. We will start with 12 sales reps. They are already hired. They are ready to go. They have been trained over the last couple of months. They're actually eager to go out there and to grab business.
In Spain?
No, in the U.S.
US.
In Spain, we have 6. We will add another 6 during the first half of this year. In the U.S., we start with 12 sales reps. The German market is obviously a little bit our, how to say that, our [Foreign language]. I don't know what it is in English. We have more than 20% of our business in Germany. Last year, the German market declined by more than 5%, according to the data which we have available. We were actually performing slightly better than the market. The outlook for 2014 is actually not much better, to be honest. The German business is, let's put it that way, is a little bit, I learned this morning, a lucky dip. [Foreign language]. Let's put it that way. If Germany performs well, okay, also our group growth rates may actually come in positively, with a positive surprise.
If the German market actually declines even more than what we have seen in 2013, obviously, this would actually pose a problem for us. Germany is the big question mark.
It's Oliver from Commerzbank with one question, basically, on your strategy. For a long period of time, you and your competitor from Zurich have pursued basically the same strategy on the premium segment, mainly on the premium segment. Now it seems that it changed slightly. One company is investing heavily in R&D and focus mainly on the premium segment, while my perception of Straumann is that you expand to a strong extent towards the value segment, which basically is the segment which grows faster. How will you circumvent the risk that in the relative perception of customers, your competitor will get a higher awareness and probably within the premium market might develop better?
At the end, results is what counts. If you look at actually the innovations which we brought to the marketplace in the fourth quarter, if you look at what we actually launched in January with, we believe, interesting concepts like Straumann One, like the Big Bang campaign. These are innovations customers see and feel. I don't think that customers are that much worried about communication in terms of R&D expenses or whatever. You know as well as we do that you can show in R&D under the new IAS guidelines, you can show almost whatever you want. We could also show 10%, 11% or 12% R&D expenses. At the end, I think reality is the proof to the pudding. Customers will realize, okay, this company is really bringing meaningful innovations to the marketplace, which actually bring a benefit to myself and to the patients.
We are still fully committed, and this will be not something which we will stop. We are fully committed to continue to heavily invest into R&D as Nobel is committed. We are not actually compromising on R&D and in building the Straumann brand and the Straumann business. If this is the impression which came across through, I don't know, maybe statements which were made or whatever, I would like to actually confirm that this impression is wrong. We are fully committed to continue to invest heavily into R&D and to invest into the Straumann brand. We believe you can actually do both. You can continue to build your premium business and to invest into your premium business, and at the same time, actually also have a foothold in the growing value segment.
By the way, Nobel was the first company, actually was before us, investing into the value segment with Alpha-Bio Tec. They are now rolling out Alpha-Bio Tec also into markets like China, et cetera. They are also in this segment, and they are also investing in building this segment.
Just to add it, to let some numbers speak. If you take big markets like the U.S. and Japan, I think we clearly outperformed the competitors in the premium segment really significantly. If you take another big market like Germany, which is in decline, in relative terms, we have also significantly outperformed the competitors. This is only possible if you have excellent product, if you continue to invest into R&D. We are relaxed now. We on stage, we pick numbers, we deliver, and we show the results.
I have two questions. Can you elaborate a bit on the premium market, as I understand it now, for 2014 overall, how much it will grow to your expectation? Then maybe a bit more midterm or longer term, how much could the value segment then, in the case of Straumann, account for the whole total revenue, let's say maybe in five years' time?
On your first question, if you look at page seven of the presentation, the growth rates you see there, these are actually, you can say, are the growth rates of the premium segment because it's the accumulated average growth of the five large premium companies. This is actually representing the premium market. On your second question, our ambition in the value segment is actually not just to play a little bit in that segment. Our ambition is to be among the top three in this market. If you look at the first two companies, number one in the value segment is now Henry Schein. If you take BioHorizons and Camlog together, their turnover is a little bit over CHF 200 million. Number two is Osstem, the Korean company. They have a turnover of roughly CHF 140 million, CHF 150 million.
Our ambition is to be among the top three, which means we don't want to just sell CHF 10 million, CHF 20 million in this segment. We want to actually generate a turnover which is significantly above the CHF 100 million mark. If you look at the numbers of Neodent in the annual report, you can see that Neodent by itself is actually already scratching at that number.
Could you tell us something about the margins in the value segment? Are they, I guess they are lower?
Depends.
Depends. Okay.
In the value segment, you have highly successful companies with incredible margins. On the other hand, you have a lot of companies who are plus minus zero or even in the reds.
Yeah. Let me guess. You are focusing high margin.
That's the answer.
Sure.
If you look through the annual report, you'll see some numbers on Neodent. They're really impressive.
Okay.
They have very good margins.
Could you elaborate something about this Neodent? Are they producing as well or are they just selling across?
It's a mix. They are manufacturing their implants and their abutments. Partially, the implant production is outsourced. Part of the implants they manufacture themselves, the abutments they manufacture themselves, the [inaudible] , the CAD/CAM equipment they are actually insourcing from a third party. It's a mixture between own production and purchased products.
Yes. What is the mix of those?
Most of it is purchased.
Okay. Could you tell us something about the margins in their business?
That is one of the You mentioned it, from a financial point of view, profitability point of view, it's not yet a success story, to be honest. They are still in the startup phase, in the investing phase. Just to put a little bit, how to say that, spin on this one. We are investing CHF 6 million. Okay? We are not taking over the company. The company is actually pre-listed on the Taiwan Stock Exchange, their market capitalization today is at roughly CHF 70 million-CHF 80 million. We are actually putting a foot into the door because we want to keep certain strategic options open for us.
Thanks. Can you elaborate on Japan? I know it looks like you had another great Q4. What's the potential for SLActive in Japan in your view?
Ooh. It is big. It is difficult to actually give you a number on this one. In Japan we also had some management changes, to be honest. We have now a Japanese country manager. We changed quite some key positions in the organization. We believe that we have now a much stronger organization in place than six, nine months ago. This is one of the key reasons that actually our business in Japan was performing very much up to our satisfaction, especially in the fourth quarter. Obviously SLActive now helps to even grow more in this year.
Can you share some feedback that you got from Germany with regards to your new pricing strategy? I guess it is too early to see what impact it has on sales, but you can probably see how the excitement is, right?
Do you want to say something?
No.
No, go ahead.
I think the push we're taking with the implant product position, our Roxolid, which is an outstanding material versus the competition, who only have titanium, nothing else. There's a big differentiation from the marketing point of view. What we're offering is a Roxolid implant for a very attractive price, and we can hopefully switch a lot of the customers who have only titan to the much better material, Roxolid. What we've seen now from the first six, seven weeks, there is a big response, very interesting. It is still very early. We still need some time so as we get the full feedback and see the impact. So far it's working very promising. Like the long way, in total we have, company-wide, 120,000 customers. In Germany, we have also a couple to switch them.
It will take some time, so we can't say at the moment it's done or it's complete, but it's on the right way.
With regards to Germany, is the feedback that you get on the enlarged, on the broad Roxolid portfolio more important or stronger than the fact that you have lowered your prices on the SLA titanium implant? Is that secondary or
The interesting point about, we call this Big Bang internally, this whole initiative, is that actually the ASP has shown a slightly positive tendency because the mix is changing. We get more SLActive volumes, and we are changing to more SLActive. We can actually overcompensate the reduction on the discounts we are giving.
Okay.
Okay? These are the first indications.
Okay. Is it the fact that you have tried to match a bit expectations that is giving you that kind of feedback, and then it just plays out as a positive? Or do you think it is really just the broad product portfolio that is driving that excitement?
No, there are several factors why so far, and it is now six weeks, it is still much too early to celebrate. It is six weeks into the launch. There are a couple of factors which customers like, and the feedback we got from customers. One is that, obviously with Roxolid, you can actually use a smaller diameter implant now, where you actually had to use a larger diameter implant in the past. You can use a 3.3 instead of a 4.1, which in certain cases avoids bone augmentation, which is good for the dentist as well as for the patient. Secondly, they like the new transfer piece. A lot of them like the new transfer piece. There is this Loxim transfer piece, so you do not have to actually use an instrument to actually remove the transfer piece.
To be honest, there are also some who do not like the new transfer piece, who were used to the old one, and they could actually change the axis and the transfer piece did not break, which you cannot do with the new one. There are also some customers who like the old thing. This is the second thing, the transfer piece. Obviously, what they also like is that they have now an option to actually buy a high-value implant at a very attractive price, with EUR 179 for the titanium SLA, which is very close to the Camlog pricing. Yep.
Thank you for allowing me a second question. What about acquisitions? We've heard from Nobel Biocare that they have been looking at a lot of acquisitions, but nothing really was to their satisfaction, not as nice as Alpha-Bio Tec. You are obviously still looking, I believe, for further acquisitions. What picture are you getting?
It's obviously hard to find pearls. To buy a successful, highly profitable company at a low price. Everybody wants to do this, so actually you don't come across these type of potential acquisitions every day. With Medentika, for example, we think we came across a pearl. Profitability levels are-
Very interesting.
Very interesting. Growth of that company is great.
Yeah.
Medentika, we believe, is such a pearl. Neodent, we believe we also acquired a company which gives us a lot of options to play into the value segment. We are currently looking at one or two other, I would say, interesting companies. We also abandoned projects, to be honest. After due diligence, we came to the conclusion, no, the price expectation does not actually justify the value we can generate with a potential acquisition. In a way, I agree with the statements of Nobel Biocare's management. It's not easy to find these pearls and then to get them at a reasonable price. That's also why we placed a lot of focus on actually growing organically in a way through taking Neodent outside of Latin America and launching Neodent in markets like Spain, now in the U.S.
Obviously, we are also planning for further roll-outs in countries where we believe that the brand of Neodent is appealing to the local customer base.
Arnd, on the telephone.
Okay. Should we now switch to the participants on the line? Maybe there are some questions
The first question from the telephone comes from Ian Douglas-Pennant from UBS. Please go ahead, sir.
Oh, hi. Thanks very much. A lot of my questions have actually been answered already, but just one. Just on your future direction of acquisitions, is it fair to say that you're keen to move more into the true discount segments? I'm just looking at one of the cartoons on page 18 of your annual report. It seems to make that implication. I just want to make sure I'm making that read through appropriately. Thanks.
Page 18 of the annual report, you're referring to?
Yeah, I did.
What did you say there?
Oh, no, sorry. Well, anyway, sorry, I can't see it now exactly, but I think that there is a cartoon that it seems to imply that you're planning on moving more into the value end, yeah, page 18, exactly, at the annual report.
Value. Value, yes.
Sorry, the.
We don't have the intention to actually go into the so-called discount segment. The really very low priced, lower quality segments of the market. This one we pass on. We don't want to actually deal with that part of the market, which is, we estimate roughly 10%-15% of the total market. Our focus with Neodent and the other value players is really the value market. It's the mid-tier of the dental implant market.
Okay. That's very clear. Thanks very much.
The next question from telephone comes from Yi-Dan Wang, from Deutsche Bank. Please go ahead.
Thank you very much. I have three questions. On the white spots that you highlighted, can you give us some sense of the sizes of the market segments that were white spots for Straumann that you filled in 2013? If you can't give us the absolute size of the market, then relative to what Straumann already addressed would be helpful. How big are the market segments that are still white spots for Straumann, and some timing on the filling of that would also help. The second question is regarding the local currency sales guidance that you've given, just some additional color on that. Specifically, how fast do you expect Straumann to perform relative to its market in 2014? How much of this difference would be from Straumann's premium brand versus value brand? That would be the second question.
The third question is really regarding the reclassification. Quite surprised that Straumann decided to reclassify R&D under admin expenses, which is very unconventional in the med tech space. All of the companies we cover tend to show their R&D line. It doesn't seem that, from what you say, that you're de-emphasizing R&D, and you don't really see there to be much scope to innovate. Some color on your decision in that area would be helpful. Thank you.
Okay. I'll start with the last question, then I'll pass back to Marco. What we did is just basically applied one to one the IAS 1 standard, we've taken the example, which has been shown there. We're fully in line with what has been expected from the IFRS standards. On the definition of R&D, I think you take the many ways of presenting that, what we're trying to do is not come up with some accounting gimmicks and blow up the number. I'll just bring you an example. We have a very close cooperation with the ITI, where we do research projects and all these things. This has not been, in the past, part of our R&D expenses, they're also not going to be in the future way we're doing.
We're trying to come up with true expenses, we would have had the flexibility to add that, we're not doing these things. We're just trying to be very straightforward, very transparent on these things, we believe that our R&D expenses, if we sum up the numbers, they are between 6%-7%, they would represent the view how we see that, we don't add the accounting point of view to these numbers. I understand your frustration because this is important information, I think stating that where we are should give you sufficient comfort on the numbers. On your second question on how much of the outperformance is coming from the premium segment and how much is coming from the value segment. Again, all these companies we mentioned today, Neodent, Medentika, Createch Medical, Dental Wings, we are not consolidating in our numbers.
We show them actually as part of the financial results. The only numbers which will actually be reflected on the top line in 2014 are the sales of Neodent Spain and of Neodent US. The vast majority of the outperformance is actually coming from the premium segment.
How much of an outperformance should we expect of you versus the market?
Yi-Dan, you know us for many, many years, you've never received a clear answer on this question, and that will also not change today. Okay? We say we will outperform the market, but we never give actually a percentage in terms of how much we will grow next year or this year. We are committed to outperform the market in the premium segment with the Straumann brand. If the market grows 3%, we will actually grow more. If the market only grows 1%, we will grow more than 1%.
Okay, the first question?
You're referring to slide 28, I guess, of the investor presentation. You can see actually that some of the bubbles, the ones in light green, there we've already actually implemented solutions to address these bubbles. Like for example, the bubble for small or less invasive treatments and implants with the Roxolid SLA and SLActive range, and with the four-millimeter implants. We believe that we have now solutions available to go after this part of the market. If you look at the standard implant solutions, low-tech standard implant solutions, this one we addressed with the Straumann One. Also there we have something now available to address this part of the market. High-end single tooth restorations or indications, the new ceramic implant we launched will actually give us possibilities to play in this part of the market.
You see some white spots, like the fixed immediate edentulous solution spot, that's actually All-on-4 type solutions. High-end screw-retained dentures, similar to All-on-4, this is for us still a white spot. We are actually working on this spot. The simple edentulous solution, these are actually simple edentulous solution as it is mentioned here. Also here we have already certain, let's say, solutions or products that can actually fill this white spot, but it's not yet complete. Also here we are working on a complete range. The implants for narrow spaces, these are small diameter implants, below three millimeters. This is also something we're obviously working on. The fourth one, the aesthetic fast implant solutions with single crown or small bridges. This is also something we are looking at as we speak with several projects. Some of these bubbles we've already addressed.
We already have solutions launched to actually address these parts of the market. Other ones, we are still in the project phase.
Okay. Can you give us some sense of the sizes of these opportunities relative to what Straumann addressed already? For example, if Straumann's current addressable market is, say, 100, how much would you expect this 100 to expand by as you have filled these white spots? Do you see what I mean?
Yeah.
Are these just tiny, modest niche opportunities, or they are actually far more significant ones that we should be aware of?
Yeah. If you take the space of all these bubbles together, you can see light green is probably 55%, I would guess. The white ones, we are not fully white. Some of the white ones we are already covering, I would say maybe 50% of the white ones. That gives you another 25. We are rough estimate 80%. Rough estimate.
What you're saying is that if your existing market is 100, I should add another 80 to that. This could expand your existing market by 80%. Or are you saying that out of the-
Interesting spin, probably. More than 60% of all implants placed are tapered implants. We don't have a tapered implant yet.
That's not on your chart.
It's spread all over the place. It's actually
Okay
part of all the white bubbles.
Right. I'll take this offline. Thank you.
The next question comes from Tom Jones from Berenberg. Please go ahead, sir.
Good morning, Thanks for taking my questions. I have a couple on Neodent and then one on the Variobase abutment. On Neodent, there's two questions. One, when you bought this business, or at least bought this 49% stake in it a year and a half or so ago, at the time, you were somewhat circumspect about whether you would ever take this product into the U.S. I'm just interested from your perspective to see what's changed in your thinking over the last 12 to 18 months that's made you want to push that product into the U.S. The second question, also related to Neodent is, I know it's early days because you've only had this pricing strategy. Sorry, it's not really related to Neodent, it's more related to your Straumann brand.
I know you've only had this new pricing strategy for just under two months. I am intrigued to know where you're picking up the volume from. With the more attractively priced Straumann products, are you seeing other premium customers thinking, "Oh, good, I can get a Straumann product for 30% less?" Or are you actually seeing value customers coming back from value brands onto the Straumann platform?
Okay. On Neodent U.S., honestly, I was not here 12 months ago. When actually, the statement was made that Neodent is not suitable for the U.S. market. We obviously came to the conclusion that it is, otherwise we would not launch it March 1st. If you look at the U.S. market, the type of designs and the implant shapes Neodent offers is actually a perfect fit to what U.S. customers want. We came to the conclusion, yes, it is actually an appealing proposition for potential U.S. customers. Are we right? The future will tell. We haven't launched yet. We haven't sold one implant yet in the U.S. I can tell you actually more in hopefully three to six months, if actually our view also is the right one or not.
Okay.
Based on the Spain experience, we believe that also the U.S. launch will be successful.
Just to add on that one with the U.S., Tom, we are always very cautious because we need bigger reference patterns. It's a huge country, you need much more sales reps, you need a bigger organization. Based on the first experiences what we have in Iberia, we think we can go big with the Neodent brand.
Sure. Are you likely to price it in a similar way that you have in Spain? Or is this more about just getting a tapered implant into the U.S. market as quickly as possible rather than, actively pushing the products at the value price end of the market in the U.S.?
No, it's obviously going for the value segment. To come up with an answer to your second question, our first experience in Spain, where did we actually get customers from? Where did we get switchers from? It's actually from both. It's on one side from customers who already are actually using a value implant, but they are not happy with the performance. For example, with the quality.
Yeah.
I don't have to name the Spanish players in that segment. I guess you are familiar with them. We get actually switchers from value brands to Neodent, but we also have quite some customers, new customers to Neodent, who are formal premium users. Yeah?
Sure.
Honestly, we also already had some Straumann customers switching to Neodent.
Sure. Okay, I think that's fair enough. Just lastly, on the VarioBase coping. I'm just kind of wondering if you'd give us some qualitative comments about your pricing strategy for that product. Clearly we're seeing a lot of customers switching over to copycat abutments, and the issue there is simply price. Given that it's a Straumann fit, unless you price it at a lower price point, those customers are still going to be interested in price. I'm just intrigued to see how you're thinking about your pricing strategy for that product. I appreciate it does have the features of that it's same on same and all that that entails, but if a customer's not bothered about same on same, and only price sensitive, then clearly price has to come into it. Just some qualitative commentary there would be helpful.
Obviously our intention is, and that's also what we did, to place the VarioBase at a reasonable price so that actually the price difference to a Medentika copycat VarioBase is actually not excessive. If you take, for example, the German market, our VarioBase, our Straumann VarioBase, we sell at roughly 70 EUR.
Sure.
The Medentika copycat Straumann VarioBase is at roughly 50 EUR.
Yeah.
Obviously here the customer has to decide, do you actually want to pay 20 EUR more for an original-original connection, or do I actually save on the 20 EUR? Original-original, we have a lot of data, and actually also studies which we can demonstrate to our customers, which clearly shows that original-original is the better long-term solution for the dentist and the patient. 20 EUR is not really a huge price difference.
We actually, on one hand, we are trying to get back some business from former Medentika users. We on one hand we are competing against our own value brand, but that's actually the name of the game. On the other hand, we obviously are also preventing for further customers of ours to switch from our higher end abutments to, for example, a Medentika or Medentis VarioBase.
Okay. I think that makes sense. Thanks for that. That's very helpful.
The next question. The next question comes from Michael Jungling from Morgan Stanley. Please go ahead, sir.
Hello, good morning. I have three brief questions. Firstly, on the United States, has the fairly strong winter had an impact on your business starting in 2014, or effectively, has it impacted your business in the first quarter? Secondly, on the EBIT margin guidance, can you provide a bit more clarity as what you mean by further expansion? Are we talking here up to 50 basis points, up to 100, up to 150? Some sort of upper limit would be kind of useful. Within the EBIT margin question, can you comment on what the foreign exchange implications are on margins? I suspect they're going to be a headwind for you in 2014. The last question is on the ceramic implant. Can you comment on the controlled market release? For what indications are people using this?
Primarily only for people who've got a metal allergy, or are you seeing that it's actually being used much more broadly than perhaps you expected? That's all. Thank you.
The first question, yes, we've actually seen the impact of the severe weather conditions in the U.S. in January. It's a fact. There were less working days and less people who are actually seeking treatment. It had an impact. When it comes to our EBIT margin guidance, what we want to achieve is at least the margins which we achieved in 2008, excluding the foreign exchange impact. On your third question on the ceramic implants. The ceramic monotype implant, which we have launched in a limited market release, is actually an implant for specialists. It's an implant which needs quite some skills to place the implant. We want to make sure before we actually go into a full market release that we understand the potential complications by actually placing this implant.
Only after we have certainty and we have clarity in terms of what do we actually have to do in terms of making sure that we also advise our customers in the right way, that we have the right material, the right step-by-step procedures ready, then we actually will go into a full market release. This implant is not for a simple dentist. It's an implant which is really geared towards the specialists.
Just to add to Michael's question on the FX impact, there's a nice analysis in our annual report at the end where we try to highlight the various foreign currencies that we have and how big the impact will be on sales and on EBIT. I think that's very helpful to understand how the Swiss franc strengthening will impact, for instance, our business.
Maybe you can help us a little bit on the margins, though. What would be the margin impact today on EBIT if the current FX rates would hold for the rest of the year? Would it be a 30 basis point headwind, 50 basis points? Any sort of guidance?
That's difficult. If the currencies stay as they are today?
Correct.
I didn't get the question, Michael.
If we use the current spot rate right now, what would be the margin headwind, the EBIT margin headwind for fiscal year 2014?
With the levels that we have, we will meet our targets. I don't fully get the question.
Well, you have some transactional impact, I suspect.
We will have to come back to you on this question, Michael.
Okay. Then on the Straumann implant, Okay.
Thank you for your questions. Obviously, we don't have time to go into all the details this morning, but you can find the most of them in the preprint version of our annual report, which is now also available on our website. In addition, we have introduced an investor relations Twitter service, which will promptly and briefly inform you about investor-specific information going forward. In closing, we would like to thank you again for your interest, and we'd also like to draw your attention to the investor relations calendar, which you can find at the end of the presentation and on our website. Thank you again for joining us. Have a good day, and goodbye.
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