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. I must ask you to read the disclaimer on slide two of the presentation or at the end of our press release. I'll begin with the highlights and market trends. Our Chief Financial Officer, Thomas Dressendörfer , 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. We will be glad to answer your questions.
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. 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.
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 teeth in cell cultures hit the trade press headlines again in recent weeks as researchers seek funding through publicity. 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 U.S. In a few years' time, more implants may be placed collectively by GPs in the U.S. than by specialists, 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. 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 CHF 355 million. Once again, North America was our key performer, achieving double-digit organic growth in the second quarter.
The main news this morning is that we are on track to deliver the profitability improvements we promised. At the same time, we were able to improve our top line in quarter two. Efficiency gains lifted our gross profit margin to 78%, while 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 nine. To facilitate the true comparison of the underlying business, we have provided you with the FX-adjusted numbers. 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 CHF 13 million, 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 CHF 3 million-CHF 5 million will follow due to employment contracts that ended after June 30th. The headcount reductions also led to a one-time P&L non-cash gain of CHF 7 million from curtailed 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 CHF 355 million, 1.7% down from last year's adjusted for currencies. Despite the shortfall, we were 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 290 basis points and 260 basis points respectively. This was thanks to initial savings from our various cost reduction initiatives. The contributions from Neodent and Dental Wings before intangible amortization charges amounted to CHF 8 million, which is disclosed in the income statement below the EBIT line under share of results of associates. Reported net profit grew 21% to CHF 54 million, leveraging basic earnings per share to CHF 3.48.
If you want to approximate an adjusted EPS corrected for the Neodent amortization and the group restructuring charges, you would have to add roughly CHF 7.5 million 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 insourcing of certain production processes. With gross profits reaching CHF 276 million, the gross margin reached almost 78%.
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 CHF 5 million. 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&A expenses went down to CHF 195 million or 55% 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&D staff and functions.
The net amount to CHF 2 million, bringing R&D expenses to CHF 26 million. Our level of investments in R&D reflects the high value Straumann attaches to research and clinical documentation. A good example of this is the recent publication of two 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 on this 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 by 14% to CHF 62 million, 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 CHF 35 million.
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 reduction 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 in a reduction of CHF 7 million underlying provisions, pensions, and other non-current liabilities in the cash flow statement. At CHF 7 million or 2% of revenue, capital expenditure was almost CHF 4 million lower than in the same period last year. At the bottom line, free cash flow amounted to CHF 35 million, and the respective margin was 10%. In April, we successfully placed a CHF 200 million domestic bond.
After the payment of CHF 58 million for the ordinary dividend, the net cash from financing activities came to CHF 140 million. Consequently, cash and cash equivalents at the end of June 2013 amounted to CHF 317 million, and the equity ratio stood at 63%. 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 iTero scanners in 2012. Difficult market conditions in Europe, where Straumann is the market leader, continue to be the main reason for our soft performance. European revenue declined 4%, and the shortfall 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 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, Roxolid, and our Bone Level range. Our restorative business with CAD/CAM elements and standard prosthetics was slower, reflecting the tough competitive landscape. New solutions to rekindle growth were introduced in the first quarter, including our Scan & Shape prosthetic service and CARES 8.0 software, which opens Straumann's CAD/CAM system to a broader range of customers.
We launched an important software plug-in tool in Q2 to draw external businesses into our CARES system. Regeneratives, our smallest franchise, remained 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. Let's have a close look at the regional performances. There was a sequential improvement in Europe, as second quarter sales benefited from a shift in selling days. Year-over-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 as low-price competitors make further inroads. By contrast, less well-penetrated markets like France and the U.K. returned to growth in the second quarter, as did Switzerland. Germany, the largest regional market, improved sequentially but was still below prior 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 second 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 of implant dentistry is still 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 shortfall 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. 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 simpler 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 strength 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 three 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 adapted 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, under-penetrated markets. 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. 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 under-penetrated 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 million-CHF 5 million 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. 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 1 to join the queue. If someone else asks your question, you can leave the queue by pressing star 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. Finally, I would kindly ask you to limit the number of your questions to two. 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%-50% if growth doesn't return significantly? How should we think about After 2014 margin improvement potential without any significant cost pickup. Then the second question would relate to your charts where you've shown 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?
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. I will actually then give some-
Okay.
On the second one.
Okay, I'll try my best. 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%. We'll adjust the cost base depending on the sales that we have. If 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%-20%. That is our objective, it's the bottom line we want to go for.
Maybe we can add one or two pieces of information to that. We anticipate this year to see OpEx savings coming through of roughly CHF 26 million related to the cost reduction initiatives already launched back in 2012 and the one which we launched in the second quarter of this year. For next year, the total impact of these initiatives will be CHF 36 million. CHF 10 million more OpEx savings we are anticipating in 2014 compared to 2013. You already had your two questions?
I know.
You have this on sale, 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's going to be flat going forward. How much you foresee that there's always going to be a bit that you can take out on the cost side.
If you're assuming a flat revenue over years, you can always adjust and take out cost. At the same time, you have the cost of living increase, all these things, inflation. 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. Accordingly, we will adjust our cost base to that. That objective is to go for 18%, 20-plus percent on the EBIT margin.
We will not embark on another personnel reduction program. That is 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 am talking about consulting expenses, services, fees, travel expenses, et cetera. There, obviously, we still have some potential to improve. The CHF 10 million additional OpEx coming through in 2014 are related to the personnel reduction programs. 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 at what we are actually trying to do with Neodent or doing with Neodent. We will actually launch in the fourth quarter Neodent in Spain. That project is on track. We believe that Neodent also has the potential to be successful in other Southern European markets.
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. 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. Just betting on SLA to be able with SLA to take the value segment in a storm, that 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. To become the global leader in the value segment, it needs more.
In other words, we are looking at different options for different markets when it comes to actually increase our footprint in the value segment.
Which alternatives or options you are 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 prosthetic side. 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. 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 Metzger, Commerzbank. Two questions from me. First one's regarding your mid to long-term Vision 2020 guidance. You guided for CHF 1.5 billion sales in 2020, now you speak about a more changing market environment. You gave a guidance for this year, the closer we go towards 2020, the more ambitious the guidance appears. Probably one or two 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 seven to eight years. That was actually the purpose of establishing the Vision 2020, that vision is still valid. 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 CHF 1.5 billion net sales. Actually, when this target was established, the projection in terms of market growth was between 6%-9%. I have my doubts that, over the next six, seven years, we will actually see, year by year, 6%-9% market growth.
When it comes to the underlying profitability assumptions in terms of EBIT margin and gross profit margin, I think the EBIT margin target of 25%, which was spelled out, when Vision 2020 was presented, is ambitious, I would say not completely out of reach. The gross profit margin of between 78%-80%, I think is doable. Honestly, today, I put the question mark behind the feasibility of achieving the CHF 1.5 billion, obviously 25% of CHF 1.5 billion, the CHF 375 million of EBIT. Should the markets turn around and grow again 10%-12%, situation would be different. On your second question, can you repeat again?
The share of the U.S. GPs specialists, obviously. This is a tiny share from our market share.
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 Nobel has done already many years ago. 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 completely substitute specialists. That's not the message which we are actually giving to the marketplace. What we believe is that simple indications, one tooth, for example, back in the mouth 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. 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. I would say, in the GP segment today in the U.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. Okay.
Hi. Christoph Gretler, Credit Suisse. I have two question. I think the two items that surprised me were, first, your manufacturing efficiency and your gross margin. Could you elaborate on this 100-basis-point improvement? You had no flat, no volume kind of, what is now the further room for any improvement, and was that predominantly in Villeret or also in Andover? That would be the first question. The second question, the second surprise to me, at least, was your good revenue growth already in Q2. Here, I have A and a B question. A, more strategically, the restorative business doesn't seem to grow for a while now. I was just wondering, how you think about that business strategically, whether that is something you want to hold on to it longer-term. The B question is more short-term.
In Q2 in Europe, did the implant business grow at all?
Yeah. Okay. I'll pick up the first. Marco will pick up the second one. On the first, I'll try to combine it with one of the first questions of Maja over there. This company historically has never focused on costs. What's happening now for the last two years, we're heavily focusing on cost, 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 Villeret, which has been growing historically. Efficiency gain were never important. It was always about producing, getting the volumes out. We have a very good production team in place who's been looking at these things. Production is always a long-term process. You need one, two, three years to change these things. Just to give you a feeling-
We had a big packaging outsourcing company doing all our packaging. We've decided to do that in-house. In Villeret, we saved a huge amount of that, really significant volumes. We have, I don't know the English word. In Saarland, we have two plants, Villeret 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, 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 are some other mix effects coming in. You may not see the full effect of the savings because they are possibly offset by some other impacts. This also applies to answer the previous question.
We've just started on the cost savings. You can be so efficient in this company, one would expect ongoing cost savings compensating for salary increases or investments back into the business for other things. Does that answer your gross margin question? Okay.
Yeah, on the Q2, we obviously were also pleased with the development in Q2 when it comes to the top line. One 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 in the restorative side. Our abutment-implant ratio is continuously declining. Several reasons for that. Substitution of standard abutments through so-called Ti-Bases. As you know, we have not yet a Ti-Base in our product offering. This is something we are working on. Secondly, the copycats on standard abutments. The companies like Medentika, Medentis, et cetera, or the Dents of this world. Original is what we are preaching. Not everybody hears us yet.
We are actually communicating this loudly and clearly, at the end, it's the decision of the dentist and the lab if they want to compromise price for quality and long-term success. 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. We are not getting every standard abutment that is replaced by customized abutments milled in our own facility. Implant business, we are happy with the development. Where we have an issue is on the restorative side.
Regenerative.
The regenerative side is plus/minus zero. 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 Emdogain. BoneCeramic, I would say, has not yet been the success story we probably want it to be. We have to work on this.
Just a specific question about the non-repeat business. As you know, in category path.
As I mentioned, there are actually three issues we have to address. One is change in technology. That means the replacement of standard abutments through cheap alternatives like Ti-Bases. We are now coming out with our own original Straumann Ti-Base during the first quarter of this year. I think that's something we can already disclose.
I think we can do it, yeah.
Which helps us to get, hopefully, some of that business we lost, get some of that back. The whole copycat topic, we cannot address with Straumann because we are firm believers into original. We will never sell under the Straumann brand copycat abutments on other systems. We rule this out under the Straumann brand. There we have an issue. If this actually trend continues, so far, we don't have a solution, and we will also not under the Straumann brand have a solution going forward. Finally, the third one, the customized abutment topic we have actually addressed. We have a holistic offering, a digital workflow for everybody who wants to have a customized abutment on the Straumann implant. We just have to make sure that we put enough focus on this so that the issue is actually the second one.
It's the copycat behavior of labs and dentists. We are not the only premium player facing this issue, obviously.
Emmaus from Finanz und Wirtschaft. As you now want to become a leading player in the value segment as well, as I understand, how far do you want to go in pricing? Will you go as much down to less than €60 per implant? Is that your target? Second question, what is happening in Brazil? Did you, with hindsight, buy Neodent there at the top of the market? Maybe do we have to brace ourselves now for, in German, Wertberichtigungen.
Impairment.
Impairment. Thank you.
Those are some tough questions you're asking here. Let me try to give you an answer. First of all, you will never see a Straumann implant for €60 in the market. Never. Straumann stays for premium. We will never dilute our brand down to pricing and to be able to compete with the low cost or the low range or mid-range value players. That will never happen. We may be able with SLA, with positioning SLA a little bit more competitively to grab certain share at the high end of the value segment, but there we also still talking CHF 150, €160. The answer is clear with Straumann, you will never see a Straumann implant on the marketplace for €60.
However, that doesn't mean that when we embark on this value strategy, 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 separately. With an own sales force and own 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.
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 valuation is always subjective. You think it's too expensive, we think it's a fair price. At the end, it's a combination of a couple things. There's revenue growth, and what really counts is the cash what you can get out of a company. This company is highly profitable, huge cash generation, and there's 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 beyond South America. Beyond our growth possibilities, which are not limited to Brazil, but to all the other South American countries. We have other plans to grow.
At the moment, I'm very relaxed about an impairment because it's growing and it's generating cash, and that's the key. Feel free to answer.
Any other questions in the room?
You had two already. You get two more, don't worry.
I saw your R&D expenses increased a little. Where do you see that going forward?
I mentioned in my chart, a couple of, let's say, launches we had beginning of the year, that's basically the key driver for the cost increase. Of course, we are continuously investing into R&D. Being a premium player, we need to have the innovative edge, and this is part of it.
Yes, we will see a lower % of R&D costs going forward.
I will limit it to one question.
Yes
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 EUR 100, how do you see the margin of Neodent developing going forward? 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 field.
Oh, okay.
Okay. Obviously, if we start to embark on a value strategy, it will take time to actually build that business up to 20 or even higher margins. It will take time. Initially, this will have a dilutive impact on the margins, without any doubt. As we speak today, besides the 49% participation in Neodent, we don't have any other investment in the value segment. 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 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.
There, to be in this market, you also need to actually offer something similar. Straumann, we don't have an external hex implant in our offering. With Neodent, we will be able to offer that. However, the market price for external hex is around EUR 60-EUR 70 max in Spain. To be successful there, we have to offer it below EUR 100 to tap into this market. I suggest that we start with questions outside of the room.
The first question from the phone is from Mr. Ed Ridley-Day 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 any color on the margins at Neodent, which drove your associated income line in the quarter? The amortization charge at Neodent in the first half.
We-
Almost.
We actually don't disclose these details, also because the company's just a minority stake. I can say that all the margins we have mentioned for the Straumann Group, Neodent is beating them. They have better margins than we have. Also adding to the comment, margin alluded, yes, for sure. On an ongoing basis, 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
Sorry, firstly, just a quick follow-up on the margin at Neodent. Could we say that the net income margin at Neodent is better than it was running out in 2012?
It's very similar. It's on track on what we have on the budgets, very similar. Of course, there's small deviations. You all know that Brazil is not in a fantastic economic shape, there are some small dips, as I said before, they have much better margins than we have. We are happy with them.
Very good. My second question was regarding the amortization adjustment at Neodent. If you could confirm what that was in the first half.
Yeah. It's basically the standard amortization charge we have. 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. Just a quick follow-up. I may have missed this, but can 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. Easter is usually the Friday or the Monday, or in some countries, it's the Thursday and the Friday. We're talking about two days which are impacting. Then you can make your own assumptions around that. It's effectively, we've done that one day, which is changing.
Oh, okay. Thank you.
Yeah. What you don't know is if a dentist makes a week holiday or not, or how these things happen. I don't know the impact on these things. Mathematically, it's one day, and it's basically Easter, what we're talking about.
Thank you. Understood.
The next question is from Mrs. Lisa Clive from Bernstein. Please go ahead, madam.
Good morning. Just a few questions on your CAD/CAM business. How should we think about that business strategically over the next few years? One, 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 two to three years?
Mm-hmm. As you are pointing out correctly, the key to growth on the CAD/CAM side is connectivity to scanner bases. As we speak, placing so-called plugins on the Dental Wings scanner base throughout the globe. We are also working with two other large scan providers to have our plugin on their scanner base. Hopefully, in February of next year, we can announce connectivity to one of the two. This is actually, at the end, the key. If you are connected to the scanner bases, actually the labs, they are able to use your digital workflow, and they are able to actually order elements and customized abutments from you through your centralized milling center. This is obviously key to drive growth on the CAD/CAM side. As I pointed out when I talked about our prosthetic strategy, we are very happy with the development of our CAD/CAM business.
We are talking there significant growth rates. However, that is also necessary to make up for the substitution of actually standard abutments through CAD/CAM abutments.
I guess a follow-up question on that. If we look at your CAD/CAM business today, what proportion of your sales are coming from any residual scanner sales? 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 small proportion of the CAD/CAM business?
We have never disclosed this type of information. What I can tell you is that there is obviously a trend in the market that actually labs, especially larger labs, they go into an in-house milling approach, which means they actually manufacture the parts in-house through a system of, for example, Amann Girrbach, what your Sitron is providing, which obviously has an impact on our business. This is clearly a trend, which also means that actually large lab scanners connected to centralized milling centers, that this business is tendentially declining. We have not sold as many lab scanners this year as we have sold last year or two or three years ago. This is a trend. As I mentioned, our CAD/CAM business is continuously increasing. I am not talking about the equipment here, I am talking about the elements. The tooth-borne elements, as well as the customized abutments, prosthetic elements.
However, it's still a relatively small part of our overall business.
Last question, you mentioned the declining implant abutment ratio. Could you give us a rough sense of where that ratio is now? 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 by launching the Ti-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 plugin on a more scanner basis to actually even more significantly grow our CAD/CAM manufactured customized abutment business. On the third one, the copycat, the standard prosthetics, honestly, at this point in time, we don't have a solution. Through the other two initiatives, we believe that we at least can slow down the trend or even stop the trend.
Okay, thanks.
The next question is from Mr. Jonathan Beake from Citi. Please go ahead, sir.
Hi there. Thanks for taking my question. Most of them have been answered, but I just wondered if you could talk to me a bit about Germany. We've seen another quarter of a contraction despite poor performance at Dentsply. I was just wondering if you could 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 Camlog with their sort of lower-end entry? Any sort of further detail on that would be very 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 on Germany, that's not reflected. That positive trend of the overall economy in Germany is not reflected in the development of the dental implant market in Germany. In a way, these two 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 Nobel. Not Nobel necessarily, but Dentsply, for example. This is a fact. Companies like Medentis, with their Volksimplantat, 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 Camlog. Camlog is also not growing as much anymore as they used to grow over the last couple of years. They are also facing more and more competition from these low-cost or lower-end of the value segment players. The Camlog implant is actually not really a value implant. Camlog sells the implants also for EUR 150 and EUR 160, compared to a Volksimplantat, which you can actually buy for EUR 50, EUR 60. 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 Neodent effectively through a completely separate corporate entity, perhaps you could share 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. If you're operating through a separate structure with separately incentivized sales force and separately incentivized management, then perhaps the risk is higher. Just wondering how you might address that risk of cannibalization. As far as Spain goes with this, is it something we should not worry about because there's probably not a lot left to cannibalize in Spain?
The second housekeeping question, I'm just wondering if you can confirm, were there any restructuring charges in the COGS line, was it all in the SG&A and R&D lines as described in the release?
To answer your first question, I would like to state something Steve Jobs said many, many years ago. He actually said, "Better cannibalize yourself before somebody else is doing it." Okay. If we don't do it, somebody else will do it. The trend is inevitable. 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 and for as 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 is rather simple. We have exactly CHF 331,000 restructuring charge in the COGS. I have not changed, adjusted the numbers in the chart because it is just immaterial. That is a very small number.
Are you disclosing a lot, huh?
Yeah.
A quick follow-up on cannibalization. I mean, it is interesting to hear you targeting the GP segment a little bit more aggressively in the U.S., in the past, dental implant companies have tried this. They have managed to annoy their specialist customers more than they have gained from improving their GP relationships and effectively shot themselves in the foot.
How do you at Straumann intend to avoid falling into that pitfall?
I already mentioned it when Maja Pataki was asking more or less the same question. We will not actually go out and tell the market, we will be able to train all GPs to do all kind of 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. One tooth replacements, not in the anterior, more in the posterior part. 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. We not only help ourselves, but we'll help competition, we'll help the specialists. At the end, this will create a win-win situation for everybody.
We will not actually repeat mistakes of certain of our competitors committed many years ago by going out into the marketplace and actually hinting at the fact that GPs can do whatever type of indication with a training course over a weekend. We will not fall into this trap.
Okay, good. That's very helpful. Thanks.
The next question is from Mrs. Veronika Dubajova from Goldman Sachs. Please go ahead, madam.
Goldman Sachs.
Thinking about your margin in the second half of the year. I do appreciate you have the savings kicking 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? Just to confirm that your 20% plus EBIT margin assumes that you consolidate Neodent or not. My sort of big picture question is very similar to Tom's or along similar lines. As you think about, as you stated this goal of becoming a leader in the value segment market, how can you do that in a quick timescale?
Okay. Maybe you take the first two questions.
I'll take the first two questions. 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 into that. We have a lot of third-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 costs and what I have, I do expect a further slight improvement of the EBIT margin in the second half year. On the second one, on Neodent, we're trying to, as Marco said before, we're talking about the green world, about Straumann only. We do expect EBIT margins 18%, 20%, 20% plus margins for the green world. We will have the consolidation impact.
Like you all know, IFRS is, 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 the results will be when it is time. That's 2015 earliest.
Maybe to add to the first question, a couple of words, Thomas. Obviously 2013, the second half will be not representative for what normally happens with the margins in the second half of the year, because we will have the additional OpEx savings coming through, which will actually make-
Off
off 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 sites, which normally leads to lower margins in the second half of the year. From 2014 going forward, we actually anticipate to have that split again. 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&A transactions. M&A always needs two 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's still on paper, and we haven't actually concluded any transaction, with the exception of Neodent. Okay. Good. 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 two 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 sort of headwinds in Southern Europe for the foreseeable future? Just quickly on this, do you think we're returning to more normalized levels of growth in the U.K. and France? If so, how much of this do you put down to an improvement in market conditions, and how much more to the positioning relative to competitors? 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? Also, can you be a bit more specific please on the measures you're implementing to improve the sentiment? Also, if I can get an update on what sort of progress you're seeing so far. Lastly, going forward in Asia, it seems like China's picking up steam, the contribution of Asia, in the half-year sales at least, has fallen as it's being outpaced by North America. What is your thinking here? Are you looking to shift a greater proportion of the resource to the region, or are you happy with where you are at the moment? Thank you.
Okay. These are the four questions, actually. Let us try to answer them as diligently as possible. On 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 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 side on it to actually make sure that we can actually also exploit these opportunities.
The Nordics and the BeNe markets are difficult markets because they were traditionally driven by fully edentulous restorations. Actually, the people who need fully edentulous restorations, these people are becoming less and less. These markets are still in quite a difficult situation, which leaves us with, what else do we have? Eastern Europe, et cetera. still growing. 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, let's put it that way, the big dinosaur going forward.
There are projections out there by institutions who predict that by 2020, the implant industry market in China will be over 2 million implants a year. Whereof a large part in the value segment. Clearly, we at Straumann, we are looking at this. We are actually putting a corresponding emphasis on this, and we want to make sure that we don't miss the train. We are market leaders in the premium segment still, despite the fact that we are getting to certain limitations with our distributor model there. Obviously also when it comes to the value segment, we are looking at how can we participate in this big growing market going forward.
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, 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. Again, thanks for joining. You have a good day, and bye.