The Straumann Group today reported first-half net revenues of CHF 362 million, matching the prior year's comparative level in local currencies. In Swiss francs, net revenue dipped slightly less than 2%, reflecting a moderate currency impact, which reduced net revenue by CHF 5 million. The Group achieved double-digit growth in local currencies in North America and emerging markets, but these good performances were not enough to offset the shortfall in Europe, which is Straumann's largest region.
Following a positive first quarter, the tooth replacement market - like other sectors that rely on patient financing - came under further pressure from the weak economic environment, particularly in Europe, where austerity measures have further impaired consumer confidence. The US market also relinquished some of its first-quarter momentum but the fundamental growth drivers remain intact.
Straumann stayed ahead of certain key competitors in the second quarter but was unable to reach the revenue level achieved in the comparative period of 2011, which benefitted from an additional selling day, as well as from significant product roll-outs and the biennial IDS trade fair. The softer top line, together with costs related to important strategic initiatives in Q2 - including sales-force expansion, global reorganization, and the Neodent stake - constrained net profit to CHF 44 million, squeezing the overall margin to 12%.
"Our environment has been disappointing and the gradual market improvement that we were expecting has not materialized. Furthermore, the market slowdown has coincided with a several cost-intensive strategic initiatives, including our new organizational structure and the addition of sales power in North America", explained Beat Spalinger, President & CEO. "Thanks to efficient cost management, we have been able to offset some of the additional costs by savings elsewhere. Operationally and strategically we have made very good progress, redesigning our organization for the future and investing in attractive emerging markets like Brazil. At the same time, we have expanded in North America and have maintained our commitment to research and education. These initiatives are important for future growth but have obviously weighed heavily on profits. To protect margins in 2012 and to improve them going forward in what we anticipate will be a challenging environment, we have started a project to optimize our cost structure."
BUSINESS & REGIONAL PERFORMANCES
Straumann's core implant business remained stable in the first half, while CADCAM/digital sales were expectedly lower than in the comparative period of 2011, which was boosted by the introduction of a new in-lab CADCAM scanner and the roll-out of Straumann's intra-oral scanning business.
The Regeneratives business achieved solid growth in the first six months of 2012, lifted by a successful Europerio congress event, where Straumann introduced a new convenient size of Emdogain designed to promote use in daily practice.
Double-digit growth in North America
North America posted double-digit growth over the first half, driven by an exceptionally strong first quarter (+14%), followed by an increase of 7% in the second quarter. With the implant and regenerative businesses performing consistently, the apparent reduction in momentum was due to the softer market and the fact that the comparative quarter of 2011 benefitted from the launch of Straumann's intra-oral scanning business in the region. The recent appreciation of the US dollar meant that first-half net revenues rose 13% in Swiss francs to CHF 89 million. As a result, North America now contributes roughly a quarter of Group net revenue.
Challenging economy in Europe
Europe contracted 5% in local currencies in the first half of 2012 to CHF 202 million, or 56% of Group net revenue. The region was dragged down by slowing economic activity, especially in Italy and Iberia, where conditions are not expected to improve in the near term. Germany was slightly behind the prior year period, while France and the UK continued to outperform. The weakness of the Euro against the Swiss franc resulted in a negative currency impact of approximately 3 percentage points.
The comparative softness of European revenues in the second quarter this year also reflects the IDS effect and the strong scanner sales in the comparative period of 2011.
APAC benefits from continued strong growth in China
First-half revenue in the Asia/Pacific region grew a modest 1% in local currencies to CHF 54 million (15% of the Group), reflecting the prevailing tough conditions in the largest regional market, Japan. In spite of this, Straumann Japan succeeded in generating the same level of first-half revenue as last year, when sales were boosted by the launch of the Bone Level Implant range. Both Korea and Australia contracted, but this was offset by another strong performance in China, where disposable income continues to increase, as does the awareness of dental care and facial esthetics.
Rest of the World driven by strong growth in Latin America
The Rest of the World region was driven by continuing strong growth in Brazil and Mexico. In contrast, the uncertainty in the Middle East led to the postponement of some tender business. Furthermore, in certain distributor markets, pricing adjustments were unavoidable due to the exceptional strength of the Swiss franc. These factors and the exceptional growth of 37% in the first half of 2011 meant that the region contracted 2% in local currencies and 6% in Swiss francs.
With net revenue reaching CHF 17 million, the region contributed 5% to the Group total.
BUILDING FOR THE FUTURE
Neodent transaction completed
To gain access to a much larger segment of the world's second largest market for implant dentistry and to enhance its access to additional Latin American markets, Straumann has acquired an initial 49% stake in Neodent, the leading dental implant company in Brazil. The transaction was completed in May (see financial details below) and provides Straumann with options to increase its stake to 100% over the next six years.
Reorganization to increase efficiency and leverage growth
The scope of Straumann's business has expanded considerably in recent years, adding complexity - particularly at the sales level. To address this, the Group initiated a global reorganization project in December, including the transformation of its sales team to focus on specific customer and product groups. The primary goals are to improve efficiency, leverage growth and shorten time to market. The new corporate structure and sales-force transitions have been completed on schedule. The scale of this undertaking suggests that some business disruption is inevitable, but thanks to staff engagement and the expediency of the project, this appears to have been kept to a minimum so far.
Sales force strengthened in selective markets
The new organization and sales-team configuration has created a number of new positions. In addition, the Group has continued to strengthen its marketing & sales team in selected markets, especially in countries which have been identified as key growth opportunities, like the US. As a result, the global workforce increased by 103 in the first half of 2012 to 2555 at the end of June.
New global logistics center
Since its inauguration in 2005, Straumann's headquarters in Basel has gradually reached full capacity. To free up space for expansion, the Group's global distribution center has been moved to larger premises nearby. The new center became operational in July.
Sustained commitment to innovation and reliability
Straumann's investment in Research & Development increased to 6% of sales in the first half of 2012. With 16 clinical studies tracking more than 1200 patients, the Group continues to support one of the largest research and development programs in the industry, much of which is devoted to documenting long-term clinical performance. Further 10-year data were presented on Straumann® Emdogain at Europerio, while 10-year survival and success rates of 511 SLA implants were submitted for publication. Nine more studies are in preparation for 2012/13.
The Group also maintained its commitment to fostering independent research, exemplified by the IADR/Straumann Award for Periodontal Regenerative Medicine, which was presented in the second quarter.
A road map for long-term sustainability
The global reorganization, regional expansion and innovation initiatives are important elements in Straumann's growth strategy. The Group is well positioned to provide superior solutions over the next few years, and has broadened its horizon to address longer-term sustainability in its Vision 2020 project, which was presented at Capital Markets Day in May. The Vision is based on how dentistry, demographics, markets, technology etc. will evolve in the coming years and provides a valuable roadmap for the future. While current economic outlooks are somewhat bleak, Straumann is convinced that implant dentistry will remain a growth industry in the mid to long term. The Group is well positioned to capture growth potential and has started a project to optimize its cost structure in order to protect margins in 2012 and to improve them going forward.
OPERATIONS AND FINANCES
Inventory optimization
Thanks to the Group's initiative to optimize inventories, days of supply (DOS) were successfully reduced from 180 days in 2011 to 130 in 2012. However, as volumes remained more or less stable, manufacturing capacity was not fully/optimally utilized, reducing the gross margin.
These items, together with a modest currency effect, as well as the aforementioned distributor pricing adjustments, resulted in a CHF-12-million reduction in gross profit to CHF 278 million. As a result, the first-half gross margin contracted to 77%, 180 base points off the comparative currency-corrected margin in 2011.
Selling & Administrative costs (SG&A) amounted to CHF 204 million, of which CHF 5 million were related to the reorganization project and the Neodent transaction. Excluding both, SG&A would have remained at the 2011 level adjusted for one-time effects (impairment charge of CHF 40 million and the release of provisions of CHF 5 million).
Further investment in R&D
At CHF 23 million, R&D investments amounted to 6% of sales and were CHF 4 million higher than in the comparative period of 2011, reflecting the Group's commitment to leadership in innovation and long-term clinical excellence.
Due to the abovementioned items, earnings before tax, depreciation and amortization (EBITDA) declined CHF 29 million to CHF 70 million, or 19% of sales. Adjusted for currencies and the abovementioned one-time effects, the decline would have been CHF 16 million.
After ordinary amortization and depreciation charges of approximately CHF 16 million, operating profit (EBIT) amounted to CHF 53 million, with the corresponding EBIT margin reaching 15%.
The net financial result was a positive CHF 1 million, which is an improvement of CHF 2 million over the prior year. After amortization charges, Straumann's investments in Dental Wings and Neodent resulted in a negative contribution of CHF 2 million (disclosed in a separate line in the Income Statement).
With the effective tax rate at 16%, income tax expenses amounted to CHF 9 million compared to an extraordinary tax income of CHF 1 million in the previous year owing to a reduction of deferred tax liabilities. Going forward, the underlying tax rate is expected to remain at 16-17%.
Taking all the aforementioned factors into account, first-half net profit amounted to CHF 44 million and basic earnings were CHF 2.83 per share, compared with CHF 2.45 in the first half of 2011.
Operating cash flow squeezed by lower profitability
The combination of lower earnings and increased tax payments reduced net cash from operating activities by almost half to CHF 30 million. With capital expenditure remaining more or less constant, free cash flow amounted to CHF 20 million and the respective margin was 6%.
The purchase consideration for the 49% stake in Neodent amounted to CHF 261 million, of which CHF 218 million were paid in June. The balance is expected to be settled in the third quarter.
Net cash used for financing activities totaled CHF 59 million after the payment of CHF 58 million for the ordinary dividend. Consequently, cash and cash equivalents on 30 June 2012 amounted to CHF 117 million.
Treasury share purchase program concluded
The Neodent transaction has substantially reduced Straumann's high cash position, such that the Group has decided not to extend its Treasury Share purchase initiative. In total the Group purchased roughly 204 000 shares in the program for a total of CHF 29 million.
OUTLOOK (barring unforeseen circumstances)
The Group continues to expect challenging developments especially in parts of Europe and Asia, while the outlook for North America and emerging markets is more optimistic. Current macroeconomic indicators suggest that the aggregated global market for tooth replacement may remain soft and thus flat, at best, over the full year.
Straumann is strategically well positioned to deliver above-market performance and is therefore confident that it can achieve full-year revenues (excluding currency effects) at least in line with the 2011 level.
Assuming that the euro will not drop below CHF 1.20, Straumann expects a slightly positive currency effect overall in 2012. Despite cost optimization measures, it will not be possible to fully offset the combined impact of slower growth and costs related to reorganization, acquisition and salesforce expansion. As a result, the full-year reported EBIT margin is expected to be similar to the H1 level.
About Straumann
Headquartered in Basel, Switzerland, the Straumann Group (SIX: STMN) is a global leader in implant and restorative dentistry and oral tissue regeneration. In collaboration with leading clinics, research institutes and universities, Straumann researches, develops and manufactures dental implants, instruments, prosthetics and tissue regeneration products for use in tooth replacement and restoration solutions or to prevent tooth loss. Straumann currently employs more than 2500 people worldwide and its products and services are available in more than 70 countries through its broad network of distribution subsidiaries and partners.
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Wednesday, 22 January, 2025