Good morning, everyone, and welcome to this conference on Straumann's 2013 First Half Results. It's a pleasure to have you with us this morning and thank you for joining us here in Basel. 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. I'll begin with the highlights and market trends. And then our Chief Financial Officer, Thomas Dresend, therefore, will take you through the numbers and the regional performances.
After that, I will share some of our aspirations with you as well as the outlook. And then we will be glad to answer your questions. So let me give you an update on the general environment, and I will start with a brief look at our markets from a geographical perspective. In Europe, the most well established and largest market, we have seen little change. The macroeconomic situation and high unemployment have done little to stimulate consumer confidence, which remains fragile.
The picture across the Atlantic is rather different. Also consumer industries report a drop in consumer spending due to microeconomic factors. The North American market for tooth replacement has improved, especially in the second quarter. And dental practice activity indicators show recovery from the downward trend in 2012. Across the Pacific, in Asia, the picture is still patchy.
China continues to perform well, while the largest regional market, Japan, is still receding mainly because of the negative public perception of implant dentistry. Fundamentally, our markets are intact, but they are changing and we are seeing several shifts, some of which are related to the economic environment, while others are technologically driven. There is a trend towards cheaper implant alternatives. Competition has increased in the prosthetic sector, compelling dental labs to balance efficiency and quality as well as in house production and outsourcing. Another shift we observe is the increasing role of general practitioners in implant dentistry, and I will say a little more about this in a second.
On the technology side, digitalization and material science are having the greatest impact. Reports of scientists growing teas in cell cultures hit the trade press headlines again in recent weeks as researchers seek funding through publicity. But as yet, there are no visible threats of this becoming a viable substitution technology. Coming back to the growing importance of general practitioners in implant dentistry, this chart shows how proportion of implants placed by generalists has risen strongly in the United States. In a few years' time, more implants may be placed collectively by which is particularly remarkable in view of the fact that this has always been considered a referral market.
This trend means that we need to cater for a different group of customers with different needs, preferences and skills. So now how has Straumann fared in this challenging dynamic environment? With the market struggling to achieve stable sales, our first half net revenue declined slightly to CHF355 1,000,000. Once again, North America was our key performer, achieving double digit organic growth in the 2nd quarter. The main news this morning is that we are on track to deliver the profitability improvements we promised.
And at the same time, we were able to improve our top line in quarter 2. Efficiency gains lifted our gross profit margin to 78 percent by the EBIT margin expanded to almost 18%. With our headcount and cost reduction initiatives nearing completion, we will now focus more on strategies to drive sales, for example, by providing additional customer driven solutions. Well, those are the highlights and Thomas will now give you the details of our business and financial performance.
Thank you, Marco, and good morning, everybody. Before we go into the details, let's have a quick look at the key figures on Slide 9. To facilitate the true comparison of the underlying business, we have provided you with the FX adjusted numbers. But I should also add that currency had particularly no impact. I also need to explain that we incurred exceptional expenses in the first half of this year related to our restructuring and cost saving measures.
These expenses amounted to CHF13 1,000,000, the majority of which related to severance costs. This is slightly lower than the forecast we gave you in April because a further charge of approximately €3,000,000 to €5,000,000 will follow due to employment contracts that ended after June 30th. The headcount reductions also led to a onetime P and L and non cash gain of €7,000,000 from Curtail pension obligations. Throughout this morning's presentation, we will be referring to the reported numbers excluding these exceptionals, which, as I mentioned, facilitates a true comparison. Looking at the big picture, our top line reached €355,000,000 dollars 1.7 down from last year's adjusted for currencies.
Despite the shortfall, we are able to improve our underlying margins at all levels. Efficiency gains lifted gross margins by 90 basis points, and our EBITDA and EBIT margins improved by 2902 60 basis points, respectively. This was thanks to initial savings from our various cost reduction initiatives. The contributions from Neodent and Dental Rings before intangible amortization charges amounted to CHF8 1,000,000, which is disclosed in the income statement below the EBIT line on the share of results of associates. Reported net profit grew 21% to €54,000,000 leveraging basic earnings per share to CHF3.48.
If you want to approximate an adjusted EPS corrected for the Neodent amortization in the group restructuring charges, you would have to add roughly CHF 7,500,000 translating into an EPS of CHF 4. Looking at gross profit, there were hardly any currency effects as the strengthening of the U. S. Dollar and the euro more or less offset the weakening of the Japanese yen. Pricing, volume, product mix collectively had a very slightly negative effect on the margin.
In contrast, the discontinuation of the iTero intraoral scanner sales last year had a positive effect on this year's margin. However, the main contribution to gross margin expansion came through efficiency gains and in sourcing of production processes. With gross profits reaching €276,000,000 the gross margin reached almost 78%. Now before you get too excited, I should add that our gross margin is traditionally lower in the second half and manufacturing capacity is underutilized because of summer holidays. Our reported EBIT margin in the first half of last year was 15% and included project costs of €5,000,000 This year, our gross profit improvement contributed 90 basis points to EBIT margin.
Thanks to the various cost saving measures initiated last October, reported SG and A expenses went down to $195,000,000 or 55 percent of sales. The decrease translates into a margin contribution of 220 basis points, excluding exceptional charges for restructuring. And this was obviously the main driver of our EBIT margin expansion. Our investments in research and development increased to 7% of sales, partly because of the top line contraction and partly due to the portion of restructuring costs related to R and D staff and functions. The latter amounted to €2,000,000 bringing R and D expenses to 26,000,000 euros Our level of investments in R and D reflects the high volume Starmen attaches to research and clinical documentation.
A good example of this is the recent publication of 2 large clinical trials with over 1,000 Straumann implants in multiple centers around the world. Very few implant companies perform clinical studies and certainly not in the scale. The results are compelling and provide clear reasons why patients and dentists should insist on Straumann rather than undocumented alternatives. Taking this and the other aforementioned items into account, our underlying EBIT improved to by 14% to €62,000,000 euros corresponding to an EBIT margin of 17.6%. Turning to cash flow.
The combination of improved profitability, reduced working capital, lower tax payments meant that net cash from operating activities went up 37% to €35,000,000 The improvement in operating expenses is masked in this comparison by restructuring charges, which are obviously cash relevant. Without these charges, the improvement in cash flow would have been considerably higher, which underlines our ability to generate high levels of cash. One consequence of our headcount reductions is that we no longer have certain pension obligations for staff who have left the company. The corresponding adjustment of the pension obligations are obviously non cash relevant and resulted into a reduction of CHF 7,000,000 in the line provisions, pensions and other non current liabilities in the cash flow statement. At CHF7 million or 2 percent of revenue, capital expenditure was almost CHF4 million lower than in the same period last year.
And the bottom line, free cash flow amounted to €35,000,000 and the respective margin was 10%. In April, we successfully placed a €2,000,000 domestic bond. After the payment of €58,000,000 for the ordinary dividend, net cash from financing activities came to $140,000,000 Consequently, cash and cash equivalents at the end of June 2013 amounted to CHF317 1,000,000 and the equity ratio stood at 63%. And now I would like to add some color on how various parts of our business contributed to our top line performance. In organic terms, the decline in group revenue was actually less than 1% if we adjust for the currency effect and exclude the sales of arterial scanners in 2012.
Difficult market conditions in Europe, where Straumann is the market leader, continue to be the main reason for a soft performance. European revenue declined 4% and the short fall could not be offset by the good performance in North America, which grew 6%. Sequentially, the top line recovered from a 5% decline in Q1 to 3% organic growth in Q2. This was helped by the number of selling days and a comparatively low prior year baseline. Nevertheless, the improvement is encouraging because it indicates that our restructuring initiatives have not impaired our ability to drive sales and defend our market share.
From a business perspective, implant sales grew in the first half, lifted by solid growth in Q2. The largest increase were achieved by our high performance implant material, Roxulut, and our bone level range. Our restorative business with cut common elements and standard prosthetics was slower, reflecting the tough competitive landscape. New solutions to rekindle growth were introduced in the Q1, including our Scan and Shape prosthetics service and KS8.0 software, which opens Stallman's CATcam system to a broader range of customers. And we launched an important software plug in tool in Q2 to draw external businesses into our care system.
Regeneratives, our smallest franchise, have been stable in spite of considerable sales force restructuring. Moving forward, this franchise will have an increased role in integrated customer solutions, especially in the GP segment. Now let's have a closer look at the regional performances. There was a sequential improvement in Europe as 2nd quarter sales benefited from the shift in selling days. Year on year, Q2 sales were stable.
The disappointing situation in Europe is linked to the prevailing economic conditions, especially in Southern Europe. Large markets like Spain and Italy continue to recede at low price competitors make further inroads. By contrast, less well penetrated markets like France and U. K. Returned to growth in the Q2 as did Switzerland.
Germany, the largest regional market, improved sequentially but still was still below prior year levels. North America, which accounts for a quarter of our total revenues, showed the most impressive quarterly acceleration. In Q2, it posted organic growth of 11%, driven by increases in all businesses and boosted by strong demand for implant solutions. The good performance in general suggests that recent investments in our regional sales force are beginning to pay off. Moving over to Asia Pacific and the Rest of the World.
Our 2nd quarter performance improved considerably from a 4% decline in Q1 to a positive 1% in Q2. There has been little change in Japan, which makes up roughly half the APAC market. Public perception wind plant industry is low and will take time to restore sentiment. China, Korea and Australia all reported stable to solid performances in Q2, but this was not enough to compensate for the shortfalls in Japan and certain distributor markets. In the Rest of the World, the 4% increase in sales was driven by strong growth in Mexico and a gradual recovery in the Middle East.
So that completes the financial and business review, and I would like to hand back to Marco.
Thank you, Thomas. Clearly, the top message this morning is the improvement in profitability. Also, our headcount reduction program has been completed to a large extent. We are only beginning to see the benefits. Historically, when the marketplace for implant dentistry was less crowded and less complex, high growth rates and a simple product mix enabled us to achieve EBIT margins in excess of 25%.
When recession struck, the strategy of anti cyclical expansion left Straumann with an unsustainable cost structure when the market failed to recover as anticipated. This and the significant currency impact due to the strengths of the Swiss franc squeezed our pre exceptional margins. Our ambition is to return to an EBIT margin of more than 20% in the midterm. Our first half results in 2013 show that we are making progress, and I would like to thank all our colleagues and staff for the considerable efforts they have made in this respect. Prior to 2012, we were unwilling to look outside the premium segment.
We were driven by technological innovation and did not put enough emphasis on our restorative franchise. In addition, we neglected the GP segment. Moving forward, we need to focus on 3 key priorities: to create and maintain a lean, high performance organization, to target unexploited growth markets and to address the changed dynamics of our markets. With regards to the first of these, we have successfully trimmed back and reduced our cost base over the past 10 months. Having reduced our headcount by more than 300, we have adopted to the current market reality and have created a new structure to focus on customer needs.
Going forward, we don't foresee further staff reductions, but we know we have to change our culture and maintain cost discipline. Our second priority means that we have a strategy to address the value segment through partners like Neodent and other initiatives. Apart from this, we want to pursue opportunities to strengthen our presence in fast growing underpenetrated markets. And finally, the changes in our markets mean that we have to provide even more solutions that are driven by customer needs. We are working on a number of new projects, the first of which are expected to launch later this year.
This chart shows some examples of exciting growth opportunities that we are pursuing in implant dentistry. As you can see, they cover a broad range of indications and levels of sophistication. Some are groundbreaking, others seek to take share from competitors who have already stepped into the relevant space. In each case, the size of the bubble indicates the market volume potential. And here you can see the same chart, but with various targeted segments laid on top.
The high-tech projects for demanding indications address surgeons rather than GPs who require standard packages and simple solutions. The latter are aimed more at the value segment. Local market conditions will determine the rollout focus. For instance, in Spain, where affordability is a key issue and where the value segment is growing considerably faster than premium, competitive convenient packages and solutions have priority over premium products for high end treatments. The exciting thing is that Straumann has differentiated projects at advanced stages of development that address all of these considerations.
Looking a little closer to the present, let me now share our outlook for the current year with you. While positive developments are expected to continue in North America and other underpenetrated markets, we expect the weak economy and consumer sentiment to continue in Europe, constraining overall revenue development in 2013. Despite the foreseeable shortfall in full year revenue, the successful outcome of our cost reduction initiatives will drive sustainable profitability improvements as anticipated with the main savings beginning to have an impact in Q3. As mentioned earlier, we still expect restructuring charges of CHF 3,000,000 to CHF 5,000,000 related to staff contracts that will end in the second half. In the midterm, we aim to return to solid growth and a higher operating margin compared to 2013 full year margins.
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. If you have a bad phone connection, please don't ask a question now, but call Investor Relations later and we'll be glad to give you an answer. This is in the interest of everyone else listening in. If you are calling in by phone, you may press star and 1 to join the queue.
If someone else asks you a question, you can leave the queue by pressing star and 2. For those in the room, please wait until you have received the microphone and then please say your name and the name of the institution you represent. And finally, I would kindly ask you to limit the number of your questions to 2. So can we have the first question from the room please?
Thank you. This is Maja Pataki from Kepler Cheuvreux. Thanks for sharing some views on the medium term guidance, margin level and also on how you're seeing the market develop on the various brands. Just for understanding, once we have seen the major cost restructuring coming through, will the EBIT margin improvement be somewhere between 0% to 50% if growth doesn't return significantly? Or how should we think about after 2014 margin improvement potential without any significant cost pickup?
And then the second question would relate to your chart where you've shown like the different needs in the markets and also different geographies. Would you be willing to give us a bit more of a feeling on how you're going to address those, whether it's going to be with SLA or with Neodent and what the timing is? Or should we wait for an Investor Day where you will shed full light on that? Thank you.
I suggest that Thomas you take the first question and I will actually then give some on the second one.
Okay. I'll try my best. On the I'll try to give you a different answer hopefully addressing your point. We have said we want to increase margins 18% up to 20%, and we'll adjust the cost base depending on the sales what we have. We assume the sales will go up continuously, which will happen eventually.
This is our assumption. You will see the uplift. If we're going to have a continuous recession over the next years, we will work on managing a margin between 18% to 20%. So the answer is not straight, but it's what is our objective is the bottom line we want
to go for. Maybe we can add 1 or 2 pieces of information to that. We anticipate this year to see OpEx savings coming through of roughly CHF 26,000,000 related to the cost reduction initiatives already launched back in 2012 and the one which we launched in the Q2 of this year. And for next year, the total impact of these initiatives will be €36,000,000 So, €10,000,000 more OpEx savings we are anticipating in €240,000,000 compared to 230,000,000 You already had your 2 questions.
I know, but You
have this on sale on top, 2a, 2b. No, go ahead. I'm sorry.
I appreciate your answer, but I'm just trying to understand whether there are going to be smaller tweaks that you can adjust in the organization longer term even if growth is going to stick around 3% maybe or whether the more than 20% is going to be 20.5% and that could be flat going forward or how much you foresee that there is always going to be a bit that you can take out on the cost side. That's just more the
If you're assuming a flat revenue over years, it's not you can always adjust and take up costs, but at the same time, you have, let's say, cost of living increase, all things, inflation. So it's going to be a trade off. The assumption is clearly we want to grow. We have the ability. We've just tried to present that.
We are working on solutions, which will generate further growth potential. And accordingly, we will adjust our cost base to that. But the objective is to go for 18%, twenty plus percent on the EBIT margin.
So we will not embark on another personnel reduction program. That's not foreseen for the time being. What we obviously will do is we will actually look at all other expenses continuously and in detail. I'm talking about consulting expenses, services, fees, travel expenses, etcetera. And there, obviously, we still have some potential to improve.
So the €10,000,000 additional OpEx coming through in 2014 are related to the personnel reduction programs. Now on your second question on the value segment, obviously, Neodent will not do the trick throughout the globe. I can give you a little bit of a glimpse what we are actually trying to do with Neodent or doing with Neodent. We will actually launch in the Q4 Neodent in Spain. That project is on track.
We believe that Neodend also has the potential to be successful in other Southern European markets. However, when it comes, for example, to Asia, when it comes to Central European markets, we are still analyzing if really with Neodent, we could be successful. And I have, at this point in time, my doubts, which means that if we want really to be successful with our strategy to also become the global leader in the value segment, we need to look at other alternatives. Now just betting on SLA to be able with SLA to take the value segment in a storm and would be kind of naive, That will not be the case. We can tap into the upper part of the value segment potentially with our SLA and through the Straumann brand, but to become the global leader in the value segment, it needs more.
Or in other words, we are looking at different options for different markets when it comes to actually increase our footprint in the value segment.
Peter Bachmann, Basel Titan, can you guys now start in Bath? Which alternatives or options you're looking at to become the leader in the value segment?
There are established players in the value segment with strong positions in certain markets on the implant as well as on the prosthetics side. And our business development team, I can just tell you this, has been very busy over the last couple of months in screening potential targets in establishing contact. And I hope that until the end of the year, we will be able to give you some more information on this or the other project. More I cannot disclose at this point in time.
Oliver Medtica Commerce Bank. Two questions, if I may. First one's regarding your mid- to long term Vision 2020 guidance. You guided for €1,500,000,000 sales in 2020. And now you speak about a more changing market environment.
You gave the guidance for this year. And the more we or the closer we go towards 2020, the more ambitious the guidance appears. So probably 1 or 2 comments on this. The second question is for the market share of you on the GPs in the U. S, which already insert implants and the specialists, which obviously use your implants right now?
To your first question, the strategy 2020 is actually not an operational strategy. It has more been a vision in terms of how will the markets develop over the next 7 to 8 years. That was actually the purpose of establishing the strategy the Vision 2020. And that vision is still valid. So we still believe that actually what we highlighted in Vision 2020 is also still relevant today.
When looking at the financial targets you mentioned, the SEK1.5 billion net sales. Actually, when this target was established, the protection in terms of market growth was between 6% 9%. I have my doubts that over the next 6, 7 years, we will actually see year by year 6% to 9% market growth. When it comes to the underlying profitability assumptions in terms of EBIT margin and gross profit margin, I think the was spelled out when Vision 2020 was presented is ambitious, but I would say not completely out of reach. The gross profit margin of between 78% 80%, I think is doable.
So I put honestly today, I put the question mark behind the feasibility of achieving the SEK1.5 billion and obviously 25 percent of SEK1.5 billion, the SEK375 1,000,000 of EBIT. Should the markets turn around and grow again 10%, 12%, situation would be different. On your second question on can you repeat again? I'm sorry on the The share of the U. S.
People.
This is the chart is short, but our market
Okay. Our market share traditionally with the GPs in the U. S. Is relatively low. We have not actually embarked on a GP strategy like Noble has done already many years ago.
So we took a much more cautious approach in terms of going after the GP segment. I think it's also important to highlight that we are not claiming that actually GPs can complete the substitute specialists. That's not the message which we are actually giving to the marketplace. What we believe is that simple indications, 12s, for example, back in the mouse indications, that these type of indications can also be done by GPs, that actually by having more GPs placing implants and becoming familiar with implantology, the overall implant treatment ratio will increase and at the end this will be a win win situation not only for the GPs, but also for the specialists because the specialists potentially will then refer more of the more complex cases to the specialists. So I will share in the GP segment today in the S.
Is very low. We are very strong with periodontists, who in the U. S. Also place implants, different to, for example, in Germany, and we have also a decent market share when it comes to the OMS, so the oral surgeons.
Chris, quite a lot of credit, Suisse. I have two questions. I think the 2 items that surprised me were first now your manufacturing efficiency in your gross margin. Could you elaborate on this 100 basis point improvement? I mean, you had now flat volume kind of and what is further room for any improvement and was that predominantly in Vilarie or also in Andover?
So that would be the first question. And the second question, the second surprise to me at least was now your good revenue growth already in Q2. And here I have A and the B question. So A, more strategically, the Restorative business doesn't seem to grow for a while now. And I was just wondering how you think about that business strategically, whether that is something you want to hold on to it longer term.
And the B question is more short term. And Q2 in Europe, did the implant business grow at all?
Okay. I'll pick up the first, Marco will pick up the second one. On the first, and I'll try
to combine it with the one of
the first questions of the levy over there. This company historically has we've never focused on costs. And what's happening now for the last 2 years, we're heavily focusing on costs, trying to get efficiency gains, what every other company does actually in the world. This also applies for the production area where we have a plant in Millary, which has been growing historically, efficiency gain where it was never important. It was always about producing, getting the volumes out.
We have a very good production team in place who has been looking at these things. This is production is always a long term process. You need 1, 2, 3 years to change these things. And then just to give you a feeling, we had a big packaging outsourcing company doing all our packaging. We've decided to do that in source in house in Villery.
We saved a huge amount of that, really significant volumes. We have, I don't know the English word, El Cerro now. We have 2 plants, Villeroy and Andover on the implant side. We have come up with a perfect plan how to really get into volumes to get the synergies out of the plants and then many, many other small projects where we really work on the cost savings. Going forward, we'll continue to work on cost savings.
You will see improvements. Don't forget there are pricing impacts coming in. There's some other mix effects coming in. So you may not see the full effect of the savings because they will need they are possibly offset by some other impacts. And this also applies to answer the previous question.
We've just started on the cost savings. You can be so efficient in this company, so one would expect ongoing cost savings compensating for steady increases in Western's back engine business for other things. Does that answer your gross margin question? Okay.
Yes. On the Q2, we obviously were also pleased with the development in Q2 when it comes to the top line. 1 should, however, also consider that we have one trading day more in Q2 compared to Q2 of 2012, which obviously helped. The implant business also in Europe developed positively. Where we have an issue is on the in the restorative side.
Our abutment implant ratio is continuously declining. There were several reasons for that, substitution of standard abutments through so called tie bases. And as you know, we have not yet a tie base in our product offering. This is something we are working on. Secondly, the copycats and standard buttons, you know, the companies like Medenticom, Medentis, etcetera, or the death of this world.
Originally is what we are preaching. However, not everybody hears us yet. We are actually communicating this loudly and clearly, but at the end, let's say, it's the decision of the dentist and the lab if they want to compromise price for quality and long term success. And then the third one is the whole customized abutments, which are actually replacing standard abutments. There we have an offering obviously in the market.
We are also very positively growing our customized abutment business. However, we are not getting every standard department that is replaced by customized departments built in our own facility. So implant business, we are happy with the development. Where we have an issue is on the restorative side. Regenerative.
And the regenerative side is plusminus0. We see nice growth on Emdogain where we believe in terms of indications, Emdogain indications, we have still a lot of potential to be exploited, thinking about the whole wound healing, pain relief management topics, which can be addressed with Emlogain. Bone ceramic, I would say, has not yet been the success story we probably want it to be. So we have to work on As I mentioned, there are actually 3 issues we have to address. 1 is change in technology, so the means to replacement standard apartments through cheap alternatives like tie bases.
We are now coming out with our own original Straumann tie base during the Q4 of this year. I think that's something we can already disclose, which helps us to get hopefully some of that business we lost, did some of that back. The whole copycat topic, we cannot address with Straumann because we are firm believers into original, original and we will never sell under the Straumann brand copycat abutments on other systems. We rule this out under the Straumann brand. And so there we have an issue if this actually trend continues.
So far we don't have a solution and we are also not under the Straumann brand have a solution going forward. And finally, the third one, the customized department topic we have actually addressed. We have a holistic offering, a digital workflow for everybody who wants to have a customized development in the Straumann implant. And we just have to make sure that we put enough focus on this. So the issue is actually the second one.
It's the copycat behavior of labs and therapies. But we are not the only premium player facing this issue, obviously.
You go down as far as much down to less than €60 per implant? Is that your target? And second question, what is happening in Brazil? I mean, did you refinance either by Neodent there at the top of the market? And do we maybe do we have to brace ourselves now for in German, Apshaiit, BOMEN?
Impairment. Those are some tough questions never. Straumann stays for premium. So and we will never dilute our brands down to pricing and to be able to compete with the low cost or the low range or mid range value pairs, that will never happen. We may be able with SLA, this positioning SLA a little bit more competitively to grab certain share at the high end of the value sector, but there we are also still talking €150, €160 So the answer is clear with Straumann, you will never see Straumann implant on the marketplace for €60 However, that doesn't mean that when we embark on this value strategy, and for example, we launch Neodent in markets like Spain or in other potential markets going forward that we place the Neodent implant at very attractive prices even below €100 However, important to actually take into consideration, we will actually also not mingle the Neodent and the Straumann brand within the same sales organization or within the same organization.
We will keep our value proposition and our Straumann premium proposition completely a known sales force, a known customer service, own general management, own legal entities, just to have clarity that on one hand with Straumann, we speak premium, we speak high prices, clinical research, everything that is associated to a premium player. And on the value segment, we can be a little bit more aggressive on the pricing, but it will be actually handled by a complete separate organization. Your second question on Brazil, maybe Thomas. That was part
of the deal. The valuations is always subjective. You think it's too expensive. We think it's a fair price. And at the end, it's a combination of a couple of things, it's revenue growth and what really counts is the cash flow you can get out of the company.
And this company is highly profitable, huge cash generation. And if we're able and there are some possibilities to further optimize the cash flow. The company currently is high single digits, so very close to 10% growth rate, very good profits, and we do expect ongoing that this will continue. You've heard about plans where we want to possibly expand near and outside of South America. So next to the South American growth possibilities, which are not limited to Brazil, but to all the other South American companies, we have other plans to grow.
So at the moment, I'm very relaxed about the impairment because it's growing and it's generating cash and that's the key. Feel free to answer.
No, that's all. Any other questions in the room?
You had to already. Now you get 2 more, don't worry.
I saw your R and D expenses increased a little. Where do you see that going forward?
I've mentioned in my chart a couple of, let's say, launches we had beginning of the year and that's basically the key driver we've been for the cost increase. Plus, of course, we are continuously investing into R and D. Being a premium player, we need to have the innovative edge and this is part of it.
Yes, but we will see a lower percentage of R and D costs going forward.
And I will limit it to one question, but
I'm just
wondering, now that you're so explicit about your value strategy and that you also say that with Neodent you might consider having prices below €100, How do you see the margin of Neodent developing going forward? And how do you believe you can keep your group margins above 20% if every other value player in Europe have margins that are in the mid teens?
I think that's a very good question. First of all, the 20% is related to Straumann, to the green world. Okay. Now obviously, if we start to embark on the value strategy, it will take time to actually build that business up to 20 or even higher margins. It will take time.
So initially this will have a dilutive impact on the margins without any doubt. Now as we speak today, besides the 49% participation in Neodent, we don't have any other investment in the value segment. So this is all still very theoretical on paper. These are ambitions we have and we are working on different projects, but none of them has really come through yet. I think it's one point is also important when we talk about implant prices below 100%.
If you look at markets like Spain and Italy, where you have a large part of these market are external HEX markets, which are very cost effective solutions. And there to be in this market, you also need to actually offer something similar. Straumann, we don't have an external hex about implant in our offering. With Neodent, we will be able to offer that. However, the market price for external HEX is around €60 to €70 max in Spain.
So to be successful there, we have to offer it below €100 to tap into this market. Okay. So then I suggest that we start with questions outside of the room.
The first question from the phone is from Mr. Ed Rizzoide from Bank of America Merrill Lynch. Please go ahead. Good morning. Thank you very much.
Firstly, on Neodent, you gave some color on the growth rate. Can you give us any color on the margins at Neodent which drove your associated income line in the quarter? And can you confirm the amortization charge and Neodent in the first half?
We actually don't disclose these details also because the company is just a little minority stake, but I can say that all the margins we have mentioned for the Stalmann Group, Nielent is beating them. So they have better margins than we have. So adding to the comment margin dilutive, yes, for sure. On an ongoing basis, no, we may have we may be fortunate to even, let's say, add some value to the company. Just the second part, I didn't fully understand acoustically.
Could you repeat that question once more? That was related to the charge?
Sorry, firstly just a quick follow-up on the margin at near dent. Could we say that the net income margin at neardent is better than it was running out in 2012?
That's very similar. It's on track on what we have on the budgets, very similar. Of course, there are small deviations. You all know that Brazil is not in a fantastic economic shape and there are some small dips. But as I said before, they have much better margins than we have, and we are happy with them.
No, very good. No, my second question was regarding the amortization adjustment at Neodent. If you could confirm what that was in the first half?
Yes. We had basically the standard amortization charge we have and we had, let's say, a smaller help for tax adjustments, which is okay. This will not be on a continuous basis.
Okay. Thank you. And just a quick follow-up. You may have I may have missed this, but could you lay out the number of extra days in the quarter in Europe and in North America?
The extra days, you could make a simple calculation. It's Easter, what we're talking about, which moved from April into March and Easter is usually the Friday, the Monday or in some countries, it's certainly the Friday. So we're talking about 2 days, which are impacting. And then you can make your own assumptions around that. It's effectively, we've done that one day, which is changing.
Okay. Thank you. Yes.
But what you don't know is, if a dentist makes a weak holiday or not or how these things happen. I don't know the impact on these things. But mathematically, it's one day and easier what we're talking about.
The next question is from Mrs. Lisa Cliffe from Bernstein. Please go ahead, madam.
Good morning. Just a few questions on your CADCAM business. How should we think about that business strategically over the next few years? 1, has the business benefited from moving to open source? It still seems to be performing below your implant business, if I'm not mistaken, what sort of growth rate can we expect out of this business in the next 2 to 3 years?
Now as you are pointing at correctly, you know that the key to growth on the CAT Chem side is connectivity to scanner basis. We are, as we speak, placing so called plug ins on the Dental Links scanner base throughout the globe. We're also working with 2 other large scanning scan providers to have our plug in on their scanner base. Hopefully, in Jan, February of Nextiva, we can announce connectivity to 1 of the 2. And this is actually at the end the key.
If you connect it to the scanner basis, then actually the labs, they are able to use your digital workflow and they are able to actually order elements and customize the abutments from you through your centralized milling centers. So this is obviously key to drive growth on the CAT camp side. As I pointed out when I talked about our prosthetics strategy, we are very happy with the development of our CATKAM business. We are talking there significant growth rates. However, that's also necessary to make up for the substitution of actually standard abutments through CADCAM abutments.
Then I guess a follow-up question on that. If we look at your CADCAM business today, what proportion of your sales are coming from any residual scanner sales? And also if we look at the consumables, how is that split between customized abutments and actual prosthetic teeth or is that really now just a very, very small proportion of the CADCAM business?
We've never disclosed this type of information. What I can tell you is that there is obviously a trend in the market that actually lapse, especially larger lapse. They go into an in house milling approach, which means they actually manufacture the parts in house through a system of, for example, Armang Gearpark, Otzi Konstan is providing, which obviously kind of has an impact on our business. So this is clearly a trend, which also means that actually large lab scanners connected to centralized milling centers that this business is tendentially declining. So we have not sold as many lab scanners this year as we've sold last year or 2 or 3 years ago.
So this is a trend. As I mentioned, our CADCAM business is continuously increasing. I'm not talking about the equipment here, I'm talking about the elements, so the 2 spawn elements as well as the customized abutments, prosthetic elements. However, it's still a relatively small part of our overall business.
And then last question. You mentioned the declining implant abutment ratio. Could you give us a rough sense of where that ratio is now? And really what I'm trying to figure out is how much further it could decline from here?
Unfortunately, I cannot give you a number. I can just tell you that the declining trend is continuous, okay. Now we hope that now by launching the tie base in Q4 that we actually will be able to regain some momentum and to actually at least stabilize this trend. As mentioned before, by being able to have our plug in on a more scanner basis to actually even more significantly grow our CADCAM manufactured customized apartment business. And on the third one, as the copycat, the standard prosthetics, honestly, at this point in time, we don't have a solution.
But through the other two initiatives, we believe that we at least we can slow down the trend or even stop the trend.
Okay, thanks.
The next question is from Mr. Jonathan Beek from Citi. Please go ahead, sir. Hi, there. Thanks for taking my question.
Most of them have been answered, but I I just wondered if you could talk to me a bit about Germany. We've seen another quarter of contraction despite poor performance at Dentsply. And
I was just wondering if
you can help me out with any insight into what's going on in the market. Is it a question of just a very weak German market? Or are you seeing success possibly maybe from one of your competitors such as catalog with the sort of lower end entry? Any sort of further detail on that would be very useful.
Useful. Germany is a kind of an interesting market. The economy is still running pretty well in Germany. Everybody knows that. GDP is still growing.
However, on the dental implant side and we have quarterly market information also in Germany, that's not reflected. So that positive trend of the overall economy in Germany is not reflected in the development of the dental implant market in Germany. So in a way, these 2 are a little bit decoupled. On the other hand, one has to admit that the value players in Germany are making big inroads and are actually taking significant share from players like Straumann and Noble, no, not Noble Necessary, but they will fly for example. So this is a fact.
Companies like Medentis with their follix implant part, they have a certain success and they are actually growing quite considerably. We have to admit that. We don't like it, but it's a fact. Camlog, we have certain information on Camlok. Camlok is also not growing as much anymore as they used to grow over the last couple of years.
So they are also facing more and more competition from these low cost or lower end of the value segment players. The Camlok implant is not it's actually not really a value implant. Camlok sells the implants also for €150,000,000 160 compared to a Poelx implant art which you can actually buy for €50, €60. So this is a fact and we need to find ways to actually compete against that.
The next question is from Mr. Tom Jones from Berenberg Bank. Please go ahead. Good morning. I had one strategic question and one just very quick housekeeping one.
On the strategic side, with your intention to launch near that effectively through a completely separate corporate entity, perhaps you could your thoughts on how you might mitigate the risk of cannibalization in that market. Clearly, if you're selling them through the same organization, you can do everything you can to minimize cannibalization. But if you're operating through a separate structure with separately incentivized sales force and separately incentivized management, then perhaps the risk is higher. So, just wondering how you might address that risk of cannibalization or as far as Spain goes with these, is it something we should not worry about because there's probably not a lot left to cannibalize in Spain? And then the second housekeeping question, I
was just wondering if you
could confirm, were there any restructuring charges in the COGS line or was it all in the SG and A and R and D lines as described in the release?
To answer your first question, I would like to state something Steve Chope said many, many years ago. He actually said, better cannibalize yourself before somebody else is doing it. Okay. So, you know, if we don't do it, somebody else will do it. The trend is inevitable.
So we better actually are the ones who are cannibalizing ourselves than anybody else will cannibalize us. That's actually what we strongly believe in. Obviously, we will try to mitigate that cannibalization as much as possible as for long as possible, but at the end, it will not be possible to completely avoid it. That would just be painting rosy pictures, which actually doesn't really help. On the second question on restructuring on COGS?
That's rather simple. We have exactly
CHF 331,000 restructuring charge in the COGS. I have not changed just the numbers in the chart because it's just immaterial. So that's it's a very small number.
Are you disclosing a lot? Yes. And just
a quick follow-up on cannibalization. I mean, it's interesting to hear you talk in the GP segment a little bit more aggressively in the U. S. But in part, dental implant companies have tried this. They've managed to annoy their specialist customers more than they've gained from improving their GP relationships, effectively shopping sales in the foot.
How do you or Straumann intend to avoid falling into that pitfall?
I already mentioned it at when Maja Pataki was asking more or less the same question. We will not indications. That would be a big mistake. What we believe in again is that actually GPs can, if they are willing to learn it, they can actually be trained on easy indications, 1, 2, 3 placements, not in the anterior, more in the posterior part. And actually, by making more GPs believers of implantology that through that we will be able to increase the implant treatment ratio, which at the end will help the total market, will not only help ourselves, but will help competition, will help the specialists.
At the end, this will create a win win situation for everybody. So we will not actually repeat mistakes of certain of our competitors committed many years ago by going out into the marketplace and actually kind of hinting at the fact that GPs can do whatever type of indication with a training course over a weekend. So we will not fall into this trap.
Okay. Good. That's very helpful. Thanks. The next question is from Mrs.
Veronika Dubajra from Goldman Sachs. Please go ahead,
And that's the margin in the second half of the year. I do appreciate you have the savings taken in, but am I right in thinking that with the lower revenues and currency working against you, your profitability actually will be lower in the second half of the year than the first half? And then just to confirm that your 20% plus EBIT margin assumes that you consolidate Neovent or not? And then my sort of big picture question is very similar to Tom's or along similar lines. As you think about David Deckel becoming a leader in the value segment market.
How can you do that in a quick time scale?
Okay. Maybe you take the first two questions.
I'll take the first two questions. So next to the savings coming out of the restructuring, we as mentioned before, we're going to have further savings coming out of normal efficiency gains, be it consulting fees, promotional expenses, all these things. We're looking at that. We have a lot of 3rd party contracts, which you can optimize. Currently, with the sales prediction, what we have for the rest of the year and the OpEx and the cost of what I have, I do expect further slight improvement of the EBITDA margin in the second half here.
On the second one on NielDent, we're trying to as Markus said before, we're talking about the green world, about Straumann only. So we do expect EBIT margins, 18%, 20%, 20%, 20% plus margins for the green world. We will then have the consolidation impact. And like you all know, IFRS is how you call that, both it's even sigilant sometimes. We will have to see what the impacts are and there's a lot of movements on all these things and we'll see what results will be when it is signed, that's 2015 earliest.
Maybe to add to the first question, a couple of words, Thomas. Obviously, 2013, the second half will be kind of not representative for what normally happens with the margins in the second half of the year. Of course, we will have the additional OpEx savings coming through, which will actually make the cutoff some of the volume shortfalls in the second half of the year. Normally, if you look at our business, historically, we have roughly 52%, 53% of net revenues in the first half and roughly 47%, 48% in the second half. Most of our costs are fixed, also at the production side, which normally leads to lower margins in the second half of the year.
And for 2014 going forward, we actually anticipate to have that split again. Now to your question on how fast will we be able to build up the value segment, that's actually not really fully in our control. Obviously, to build this up, you need on one hand organic efforts like the ones I mentioned with launching Neodent in different markets outside of Brazil. But on the other hand, you also need to have a lucky hand, let's put it that way, when it comes to M and A transactions. And M and A always needs to dance tango.
So it's a little bit unpredictable what is actually coming when. I can just repeat what I said at the very beginning. We are working on several projects with full steam. However, I also pointed out that up to now everything is still on paper and we haven't actually concluded any transaction with the exception of Neodent. Okay.
Good. Then one last question.
The last question is from Mr. Chris Cooper from Jefferies. Please go ahead.
Hi there. Good morning. Thanks for taking my questions. I just have 2 on the regional growth drivers, please. Firstly, it seems that the tone in Europe is still very cautious despite what seems to be quite a decent sequential improvement in the quarter.
I guess, therefore, you're expecting the improvement in France and the U. K. To be more than offset by the sort of headwinds in headwinds in Southern Europe for the foreseeable future? And just quickly on this, do you think we're returning to more normalized levels of growth in the U. K.
And France? And if so, how much of this do you put down to an improvement in market conditions? And how much more to the positioning relative My second question please is more specifically on the Asia Pacific region. Is it fair to say that the situation in Japan has dropped? Or can we expect to see a continuation of the headwinds there?
And also, can you give a bit more specific, please, on the measures you're implementing to improve the sentiment? And also, I guess, an update on what sort of progress you're seeing so far? Lastly, going forward in Asia, it seems like China is picking up steam, but the contribution of Asia in the half year sales at least is all in that is being outplayed by North America. What is your thinking here? Are you looking to sort of shift a greater proportion of the group resource to the region or are you happy with where you are at the moment?
Thank you.
Okay. These are the 4 questions actually. So let us try to answer them as diligently as possible. On Europe, Europe is actually how to say that, it's not a homogeneous situation in Europe. You pointed at the Southern European markets.
We believe that actually the situation in Spain will improve. There are first signs that actually the worst is over. We cannot tell you the same when it comes to Italy. Italy is still a very, very difficult situation. We talked about Germany.
I don't think I have to repeat on what I mentioned when it comes to Germany. Obviously, the U. K. And France are still growing markets. There we have to put much more emphasis also from Straumann's side on it to make sure that we can actually also exploit these opportunities.
The Nordics and the Bene markets are difficult markets because they were traditionally kind of driven by fully edentulous restorations. And actually the people who need fully edentulous restorations, these people are becoming less and less. So these markets are still in quite a difficult situation, which leaves us with what else do we have, Eastern Europe, etcetera, which is still growing. So overall, Europe is very heterogeneous and overall, you have actually some bright spots. I mentioned Spain.
We have still growing markets like the U. K. And France, but we also have markets where the situation still is very difficult. I mentioned the Nordics, I mentioned the Netherlands and I mentioned Italy. On the Asia Pacific side, clearly China will be the big, let's put it that way, the big dinosaur going forward.
And there are projections out there by institutions who predict that by 2020, the implant dentistry market in China will be over 2,000,000 implants a year, We're off a large part in the value segment. And clearly, we at Straumann, we are looking at this. We are premium segment still despite the fact that we are getting to certain limitations as our distributor model there. And obviously, also when it comes to the value segment, we are looking at how can we participate in this big growing market going forward. So yes, to answer your question there, yes, we are actually looking at putting more resources into Asia Pacific because that's the region where we expect the most significant growth to come from in the foreseeable and the midterm future.
Okay. So thank you again for having attended our half year conference. In closing, we'd 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. And again, thanks for joining you. Have a good day and bye.