Ladies and gentlemen, good morning. Welcome to the Full Year Results 2013 Conference Call. I'm Edus, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session.
The conference must now be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Marco da Dola, CEO. He will now be turning to the conference room.
So 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 2 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 Streisendorfer, 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 Q1 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.
But 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 Furthermore, we strengthened our foothold in the value segment, enabling us to return the competitive pressure.
In the Q4, 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 2 innovations with the potential to change paradigms in implant dentistry, and we launched our answer to the increasing threat from Copycat Prosthetics on tie based abutments. We expanded our portfolio by acquiring stakes in ClearTech and Medentica. 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.
So here are the key facts. Group revenue grew 1% organically over the full year to reach CHF 680,000,000. Our best performers of the full year were North America and the Rest of the World region, which both grew 8%. Efficiencies and mix levered our gross margin to almost 79% while cost savings contributed to a 3 percentage point increase in EBIT margin. But most importantly, our total business has now grown above the top end of the market for 3 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 underpenetrated as you can see in the bottom chart. There is also a significant medical need. As you can see from these statistics, 50% to 60% of the adult population in the U.
S. Has lost at least one tooth and more than 1,000,000 people need replacements for existing conventional restorations such as 3 unit bridges or dentures. So there is plenty of opportunity and potential for us to unlock. And 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 €680,000,000 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 improvements. The contributions from Neodent and our other associated partners amounted to CHF 6,000,000. 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 $38,000,000 to $101,000,000 lifting basic earnings per share to CHF 6 point 55. As Marco mentioned, our level of staffing became unsustainable. Because the organization has been built on rather bullish expectations, which failed to materialize. We therefore reduced headcount to our preeconomic 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.
We've done these for handle with due regard for our social responsibilities as an employer. A large portion of the cuts were here in Basel. Thanks to outpacing 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 $17,000,000 One consequence of the reduction company. The corresponding adjustment for the pension obligation resulted into a petroleum gain of €9,000,000 bringing the net cost to €8,000,000 The sequential development is impressive. For the 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. Now before you get too excited, I should add that revenue and margins in the second half year were elevated by a shift in number of trading days. In production and logistics, we introduced lean manufacturing principles 3 years ago.
At the same time, we began insourcing various production steps, for example, packaging. These initiatives continued in 2013. And together with process reengineering, design to cost initiatives and improved utilization, they contributed to significant efficiency gains and a 3rd 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 exceptionals of 40 basis points, the true comparison baseline would be more or less the same at 77.6%. The formation efficiency gains, which you can see on the right hand 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 into our scanner business in Q4 2012 also contributed to the expansion. With gross profit amounting to €536,000,000 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 compromises sales force and sales activities, while the latter compromises marketing, R and 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 €90,000,000 to €415,000,000 Despite cost reductions, our drive to innovate remains undiminished, and we aim to retain our historic levels of 2 R and D investments at around 6% to 7%. The main reductions were in general administration, back office and marketing support functions. At the same time, we added underpenetrated 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 nonrecurring restructuring cost of €8,000,000 Turning to the cash flow on the next slide. The combination of improved gross profit, significantly lower operating expenses, higher working capital and lower tax payments meant that cash from operating cash flow increased by over 30% year on year. Gross profit contributed €11,000,000 to cash flow and OpEx reduction contributed €33,000,000 However, this includes restructuring charges, most of which are cash relevant. At CHF13 1,000,000 or 2% of revenue, capital expenditures was almost CHF 7,000,000 lower than last year, reflecting our continued effort to fully leverage our existing production setup.
At the bottom line, free cash flow amounted to €139,000,000 and the respective margin was above 20%, demonstrating Starman'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 €384,000,000 at year end despite the investments in Identica and Triadtech and the ordinary dividend payment of 58,000,000 euros With the conservative gearing, we have the financial capability to pursue further strategic acquisitions and investments. Now moving on to the regional performances. This slide gives you some more details about the revenue drivers. Currency fluctuation took €9,000,000 off full year revenue, mainly because of the sharp decline of the 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. Unfortunately, the overall result was still held back by sluggish sales in Europe, where Straumann is the market leader.
Now 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. On the other hand, Spain and Sweden both suffered badly from the economic environment and structural changes in the market reported considerable improvements, suggesting a return to growth. I thought the trend 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 rock solid 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 rock solid on all diameters and designs in the course of the year.
The APA region made further progress in Q4 and closed the year very strongly, achieving growth of 16%, its highest quarterly increase in 5 years. All subsidiaries posted growth. Exceptionally strong orders came in from distributor markets. The key growth contributor was Japan, which started and regained market share. It has taken 1.5 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. 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 NERLYNX. Before I hand back to Marco, I would like to add some color on 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 CAT can customer bottoms grew strongly, but not enough to compensate for the shortfalls in the standard prosthetics and simple tool borne restorations due to competition from in lab and share side 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, Emlugane.
So 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 3 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 RockSolid and have the SL Active Surface for improved ulcer integration. The big advantages of RockSolid 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 1, we began to offer rock solid together with our new locks in 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 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, but 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, and 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've just mentioned the advantages of small rock solid implants. Our new 4 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 5 year clinical data, and it may offer a valuable less invasive alternative to long angled implants for instance in All on-four eventualist treatments. The controlled market release of our ceramic implant is going well and we're on track for full market release later this year.
This is the 1st clinically validated ceramic dental implant to reach the market. It is also the 1st 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, But 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 1, 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 Vario based 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, that we are working on all of them. One white spot that we have been addressing for several years is the introduction of our SL Active Surface in Japan. I am delighted to say that we have received regulatory approval and have now launched, which means that Straumann is the 1st company to bring this proven surface technology to market in Japan.
In 2013, we made progress in a number of areas. Nevertheless, 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 1. Among the key target groups are young and female dentists, and 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 of the same high levels of service, training, support, experience, innovation and long term assurance that are inherent to the Straumann brand. Nevertheless, 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. And in the Q4 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. Medentica will have an important role alongside Neotend in our value platform. At the same time, we acquired 30% of Caretech in Spain, which specializes in high quality CAT scan prosthetics for multiple implant business and will support both our premium and value businesses. We also hold 44 percent 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.
And 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%. By Neodent and Medentica 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 4 implant systems: intraoral scanning, chairside and CATKAM 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 2 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 6,000,000, which can be converted into Diodenta 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 and 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 improvement 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 2,008, 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 anniversaries of Straumann Netherlands and Straumann U. S. And the 10th anniversary of our charitable partnership with the National Foundation For Ectodermal Dysplasia.
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 6 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. And 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.
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 develops? I understand that in the U. S, we had a positive price increase, which contributed some 2% growth. What was the negative impact on pricing in Europe?
We I think what we're trying to do is the intelligent approach from pricing. You can play with the price and the volume. And the message we're giving back to the team is that we more than we have significantly overcompensated in the volume as we have on the prices. So it's adjustment of it's a price elasticity in the market, which we're making use of. So there's a small decline in some of the products, which is by far compensated by the volume increase we hope we have.
So can you confirm please that you had a positive pure positive price impact from the U. S. Or not?
No. We can't confirm that
we have a significant volume overperformance with price elasticity for certain implants.
Okay.
So to put the things on the table, we actually were pursuing a much more aggressive strategy starting in the Q2 and throughout the whole world, not only in Europe, also in the U. S, to actually gain back volume share.
Okay. I just in that case, I'm not submitting to Mr. Fabian who said that we had a 2.5% price increase last year in the U. S, which
Yes, at least price.
This year we had because the medical tax, we passed on the medical tax to the customers. Okay.
And then on the midterm guidance, when you say return to solid growth, that's probably somewhere mid single digits, 4% to 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?
You're only talking here Premium segment.
So the solid market growth? Yes. That
all the guidance relates 100% to the premium segment.
Okay. And then 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. So 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. And then 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.
We have numbers, we have sales numbers, we have profit numbers, we basically have everything.
Okay. And 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%. That's 400. It has to be executed in March of 2015. And then 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.
Thanks. I have now two questions. 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? And secondly, on Biodenta, is this now the entry into the Asian market? And or does it prevent you from actually now adding another line? Or is this basically the line you intend to use now in Asia indicated at some stage? And I was just wondering, I mean, I think I met them once, and it looks to me fairly a small company at this stage and with a very low price strategy.
And I was wondering how you think in practical terms, how such a collaboration with Straumann would work in various markets. So basically, the synergies you mentioned, how would that work in practical terms?
Currently, we are actually doing business in China through a distributor. And that distributor is actually employing or deploying himself a network of other distributors. That's 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. So 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. So this will be the big change.
Now to actually achieve that, obviously, we have to buy out our current distributor. And this is a project we are pursuing as we speak. So 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 we are underrepresented, overrepresented.
We will know by customer with which customer groups are we growing, where we're 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. It's we believe BioDenta has potential to grow. You are right, Christoph. It's still a relatively small company.
But the strategy now in our view is interesting are appealing to us. And are appealing to us. And we made the decision to actually invest CHF 6,000,000 into this company and to see what does what potential does it bring to actually together develop certain of the markets. One opportunity for sure is on the CAT can side. They have quite extensive network of milling centers throughout Asia, but also in Russia and in Turkey.
And we think that this may also be something we could leverage to actually enhance our CAT scan offering when it comes to value players, which we might acquire in the future in this region.
Yes. Can you please elaborate a bit on the near end U. S. Launch? I mean, do your targets existing GPs or new GPs or combination?
Just wonder about because the U. S. Market typically is a pretty market, at least to my knowledge. And the second question is about the German market. What do you assess for market growth last year and about the future as well?
Now 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. It's the range is actually covering almost every of the offerings these other companies offering. So 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. And 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, and they're actually eager to go out there and to grab business. No, in the U. S. In Spain, we have 6. We will add another 6 during the first half of this year.
And in the U. S, we start with 12 sales reps. The German market is obviously a little bit our how to say that, our I don't know what it is in German 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. And the outlook for 2014 is actually not much better, to be honest. So the German business is, let's put it that way, is a little bit, I learned this morning, a lucky bit, I never want to tell, let's put it that way. So 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.
So 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 processed basically the same strategy on the premium segment. Now it seems that it changed slightly. One company is investing heavily in R and D and focus mainly on the premium segment, while my perception of strong is that you expand to a stronger extent towards the value segment, which basically is the segment which grows faster. So how will you circumvent 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 Q4, if you look at what we actually launched in January with we believe, interesting concepts like Straumann 1, 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 and D expenses or whatever. You know as well as we do that you can show in R and D under the new IIS guidelines, you can show almost whatever you want. We could also show 10%, 11% or 12% R and D expenses.
So 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 and D as Noble is committed. So we are not actually compromising on R and D and in building the Straumann brand and the Straumann business.
So 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 and 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, Noble was the 1st company actually was before us investing into the value segment with Alfa Bio.
And they are now rolling out Alfa Bio also into markets like China, etcetera. So they are also in this segment, and they are also investing in building this segment.
And just to add 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 evolved to significantly outperform the competitive. And this is only possible if we have excellent product, if we continue to invest into R and D.
So we are relaxed. We don't state big numbers. We deliver, and we show the results.
Two questions. Can you elaborate a bit on the market as a premium market, as I understand it now? For 2014, overall, how much it will grow into your expectation? And then maybe a bit more midterm or longer term. I mean, how much could the value segment then in the case of Straumann account for the total revenue, let's say, maybe in 5 years' time?
On your first question, if you look at Page 7 of the presentation, the growth rates you see there, these are you can say all the growth rates of the premium segment because it's the accumulated growth average growth of the 5 large premium companies. Okay? So 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 3 in this market.
Now if you look at the first two companies, number 1 is now in the value segment is now Henry Schein. If you take BioHorizons and Camelot together, their turnover is a little bit over CHF 200,000,000. Number 2 is AUSTEN, the Korean company. They have a turnover of roughly CHF 140,000,000 CHF 150,000,000. And our ambition is among the top to be among the top 3, which means we don't want to just sell CHF 10,000,000, CHF 20,000,000 in this segment.
We want to actually generate a turnover which is significantly above the CHF 100,000,000,000 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 or not? Depends. Depends. Okay.
In the Value segment, you have highly successful companies with incredible margins. And on the other hand, you have a lot of companies who are plusminus0 or even in the rates.
So yes, let me guess. So you are focusing on it.
That's the answer. Yes, sure. If you look through the annual report, you'll see some numbers on there, then they're really impressive. Okay. They have very good margins.
And could you elaborate something about this Viordent? 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 intraoral scanners, the CAT cam equipment, they are actually insourcing from a 3rd party. So it's a mixture between own production and purchased products.
Yes. What is the mix
of those? Yes. Most of it is purchased.
Okay. And could you tell us something about the margins in their business?
That is one of the you mentioned it. It's not yet 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? A spin on this one.
We are investing CHF 6,000,000, okay? So we are not taking over the company. The company is actually pre listed on the Taipei Stock Exchange, and their market capitalization today is at roughly CHF 70,000,000 to CHF 80,000,000. So 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. And what's the potential for SLA Active in Japan in your view?
It's big. Well, it's 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 did we changed quite some key positions in the organization.
So we believe that we have now a much stronger organization in place than 6, 9 months ago. And this is one of the key reasons that actually our business in Japan was performing very much up to our satisfaction, especially in the 4th quarter. And obviously, SL Active 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? It was like I guess it's too early to see what impact it has on sales, but you can probably kind of see how the excitement is, right?
You want to say that?
No, go ahead. I think the push we're taking is the triangle as we position our rock solid, which is an outstanding material versus the competition, only after titanium, nothing else. So there's a big differentiation from the marketing point of view. And what we're offering is rock solid in plants for a very attractive price, and we can hopefully switch a lot of, I think, customers who have only TETAN to the much better material, oxalate. So far what we see now for the 1st 6, 7 weeks, there's been a big response, very interesting.
It is still very early. We still need some time to get the full feedback and see the impact. But so far, it's working very promising. That's a long way. We have a couple of in total, we have a company wide, 120,000 customers.
And in Germany, we have also a couple to switch them. It 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.
And with regards to Germany, is the feedback that get on the enlarged on the broad rock solid portfolio like more important or stronger than the fact that you have lowered your prices on the SLA titanium implant? Is that kind of like secondary or
The interesting point about we call this big bang in total, this whole initiative, is that actually the ASP has shown a slightly positive tendency because the mix is changing. We get more SL Active volumes and we are changing through more SL Active, we can actually overcompensate the reduction on the discounts we are giving so far, okay? So these are the first indications.
Okay. But 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's really just the broad product portfolio that is driving that excitement?
No. There are several factors why so far it's the next 6 weeks, so it's still much too early to celebrate, right? It's 6 weeks into the launch. But there are a couple of factors which customers like. And the feedback we got from customers, one is that obviously with RockSolid, you can actually use a smaller diameter implant now where you actually have to use a larger diameter implant in the past.
So you can use a 3.3 instead of a 4.1, which in certain cases avoid 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. This locks in transfer piece, so you don't have to actually use an instrument to actually remove the transfer piece. To be honest, there are also some who don't like the new transfer piece, okay, 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.
So there are also some customers who like the old thing. But this is the second thing, so the transfer piece. And obviously, what they also like is that they have now an option to actually buy kind of a high value implant at a very attractive price. It's €179 for the titanium SLA, which is very close to the cambered pricing.
Thank you for allowing me a second question. But what about acquisitions? And we've heard from Nobel Biocare that they have been looking at a lot of acquisitions, but nothing really was to their satisfaction, biotech. I mean, you are obviously still looking, I believe, for further acquisitions. What's the what picture are you getting?
Yes. It's obviously hard to find pearls. And to buy a successful, highly profitable company at a low price, that's highly profited company at a low price. That's everybody wants to do this. So this is actually, you don't come across these type of potential acquisitions every day.
But with Medentika, for example, we think we came across the pearl. Profitability levels are
very interesting.
Growth of that company is great. So Medentica, 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. And we are currently looking at 1 or 2 other, I would say, interesting 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. So in a way, I agree with the statements of Noble Biocares Management. It's not easy to find these pearls and then to get them at a reasonable price. That's also why we actually 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.
And obviously, we're also planning for further rollouts in countries where we believe that the brand of Neodent is appealing to the local customer base. Okay. Should we now switch to the participants on the line. Maybe there are some questions coming from these participants.
The first question from the telephone comes from Ian Gagossian from UBS. Please go ahead, sir.
Hi. Thanks very much. A lot of my questions discount to move more into the kind of 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 you appropriately. Thanks.
Page 18 of the annual report you're referring to.
Yes, I did.
Can you say that?
Well, anyway, sorry, I can't say now exactly. I think that there is a cartoon that it seems to imply that you're planning on moving more into the sort of value impact. Yes, yes, page 18 exactly at the annual report.
Value, yes. So value is correct, but we are actually we don't have the intention to actually go into the so called discount segment. So the really very low priced, lower quality segments of the market. So this one, we pass on. We don't want to actually deal with that part of the market, which is we estimate roughly 10% to 15% of the total market.
So our focus with Neodent and the other value players is really the value market. It's the mid tier of the dental implant market.
The next question from telephone comes from Yudan Wang from Deutsche Bank. Please go ahead.
Thank you very much. I have three questions. First of all, 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, but 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. And then how big are the market segments that are still white spots for Straumann and some timing on that on the filling of that would also help? And then 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? And how much of this difference would be from Straumann's premium brand versus value brand? That would be the second question. And then the third question is really regarding the reclassification. I'm quite surprised that Straumann's decided to reclassify R and D under admin expenses, which is very unconventional in the medtech space.
All of the companies we cover tend to show their R and D line. So it doesn't seem that from what you say that you're deemphasizing R and D and you don't really see there to be much scope to innovate. So some color on your decision in that area would be helpful. Thank you.
Okay. I'll start with the last question, and then I'll pass back to Marco. What we did is just basically applied 1 to 1 the IAS 1 standards, and we've taken the example, which has been shown there. So we're fully in line with what has been expected from the IFRS standards. On the definition of R and D, I think you take the many ways of presenting that.
And then what we're trying to do is not come up with some accounting mix and blow up the number. I'll just give you an example. We have a very close cooperation with the ICI where we do research projects and all these things. This has not been, in the past, part of our R and D expenses, and they're also not going to be in the future way we're doing. We're trying to come up with true expenses, but we would have been we would have had the flexibility to add that.
And we're not doing these things. We're just trying to be very straightforward and then very transparent on these things. And we believe that our R and D expenses, as we sum up the numbers, they are between 60% and 70%, and they represent the view how we see that. And we don't add the accounting point of view to these numbers. I understand your frustration because this is an important information, but 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, Medentica, Krayotec, Dental Wings, we are not consolidating in our numbers. We show them actually as part of the financial results. So the only numbers which will actually be reflected on the top line in 2014 are the sales of Neodent Spain and of Neodent U. S.
So the vast majority of the outperformance is actually coming from the Premium segment.
And how much of an outperformance should we expect of you versus the market?
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. So 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%, You go
on you're referring
to Slide
28, I guess, of the
You go on 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, where we've already actually implemented solutions to address these bubbles, like for example, the bubble for smaller, less invasive treatments and implants with the rock solid SLA and SL Active range and with the 4 millimeter implant. So 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 1. So 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 You see some white spots like the fixed immediate edentural solution spot. That's actually all on 4 type solutions. So 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 edentural solution, these are actually simple Edential 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. So also here, we are working on a complete range. And then the implants for narrow spaces, these are small diameter implants, so below 3 millimeters. This is also something we obviously are working on. And then the 4th one, the aesthetic fast implant crown or small bridges.
This is also something we are looking at as we speak with several projects. So 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 a project phase.
Okay. Can you give us some sense of the sizes of these opportunities relative to what Straumann addressed already? So 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? I mean, are these just like tiny modest niche opportunities or they are actually far more significant that ones that we should be aware of?
Yes. So if you take the space of all these bubbles together, you can see light green is probably 50%, 55%, I would guess. The white ones, we are not fully white. So some of the white ones we are already covering. I would say maybe 50% of the white ones.
So that gives you another 25%. So we are rough estimate 80%, rough estimate.
So what you're saying is that if your existing market is 100%, I should add another 80% to that, so 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 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 and thanks for taking my questions. I have a couple on Nearden and then one on the Vero Bras apartment. On Nearden, two questions. 1, 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? And then 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 NIDA, it's more related to your Straumann brand. I know you've only had this new pricing strategy for just under 2 months, but I'm 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 brands onto the Straumann platform?
Okay. On the Neodent U. S, honestly, I don't I was not here 12 months ago. So when actually the statement was made that now the end is not suitable for the U. S.
Market. We obviously came to the conclusion that it is. Otherwise, we will not launch it March 1. If you look at the U. S.
Market, the type of designs and implant shapes Neodent offers is actually a perfect fit to what U. S. Customers want. So we came to the conclusion, yes, it is actually an appealing proposition for potential U. S.
Customers. Are we right? The future will tell. So we haven't launched it. We haven't sold one implant yet in the U.
S. I can tell you actually more in hopefully 3 to 6 months if actually our view was is the right one or not. Based on the Spain experience, we believe that also the U. S. Launch will be successful.
Just to add on that one with U. S, Tom, we're always very cautious because we need bigger investments. That is a huge country. You need much more sales reps. You need a bigger organization.
But based on the first experiences, what we have in Iberia, we think we can go big with the near than brand.
Sure. And 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. But to come up with an answer to your second question, where our first experience in Spain, where did we actually get customers from? Where did we get switches from? It's actually from both.
It's from 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, I don't have to name the Spanish players in that segment. I guess you are familiar with them. So we get actually switches from value brands to Neodent, but we also have quite some customers, new customers to Neodent who are formal premium users. And honestly, we also already had some strong customers switching to Naledent.
Okay. I think that's fair enough. And then just lastly on the very base coping. I just kind of wonder if you could give us some qualitative comments about your pricing strategy for that product. Clearly, we've seen a lot of customers switching over to copycat abutments and the issue there is simply price.
So I mean 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. So I'm just intrigued just to see how you're thinking about your pricing strategy for that product. Because I appreciate it does have the features of that is same on same and all that that entails. But if a customer is not bothered about same on same then and only price sensitive, then clearly, price has to come into it. So just some qualitative commentary there would be helpful.
Yes. Obviously, we our intention is, and that's also what we did, to place the Vario base at a reasonable price. So that actually the price difference to a Medentika copycat, the Vario base is actually not excessive. So if you take, for example, the German market, our Vario base, our Straumann Vario base, we sell at roughly €70. The Medentica copycat Straumann Barrier Base is at roughly €50 So obviously, here, the customer has to decide.
Do you actually want to pay €20 more for an original or original connection? Or do I actually save on the €20? Originally, originally, 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. So €20 is not really a huge price difference, right? So we actually on one hand, we are trying to get back some business from more identical users.
So we on one hand, we are competing against our own value brand, but that's actually the name of the game. And on the other hand, we obviously are also preventing for further actually further customers of ours to switch from our higher end abutments to, for example, a Medentigo or Medentis Valio base. 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 Q1?
Secondly, on the EBIT margin guidance, can you provide a bit more clarity as you what you mean by further expansion? Are we talking here up to 50 basis points, up to 100
basis points, up to
100 basis points, up to 100 basis points,
up to 150 basis points, some sort
of upper limit would be kind of useful. And 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. And the last question is on the ceramic implant. Can you comment on the controlled market release?
For what indications is 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.
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 were actually seeking treatment. So 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 2,008, excluding the foreign exchange impact. And on your third question, on the ceramic implants. The ceramic implants, the mono type 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. So 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. And 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 to step on step procedures ready, then the action will go into a full market release because 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 impacts, there's a nice analysis in our annual report at the end where we try to highlight our, let's say, the various currencies, what we have and how big the impact would be on sales and on EBIT. I think that's very helpful to understand how this Swiss franc strengthening will impact, for instance, our business.
Maybe you can help us
a little bit on the margins, though. Is 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. Is the currency state as they are today? Correct.
I mean, if you if we use the current spot rate right now, what would be the margin headwind, the EBIT margin headwind for fiscal year 2014?
That is what we have. We will meet our targets. I don't fully get the question, but Well,
I mean, you have some transactional impact, I suspect, on
We will have to come back to you on this question, Michael.
Okay. And then on the ceramic implant,
So thank you for your questions. Obviously, we don't have time to go into all the details this morning, but you can find that most of them in the preprint version of our annual report, which is now also available on our website. And 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. So thank you again for joining us.
Have a good day and goodbye.
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