The Straumann Group reported a record performance in the first half of 2016 as revenue grew 16% in Swiss francs to CHF 461 million. Fuelled by double-digit increases across all businesses and regions, revenue climbed 15% in local currencies or 14% in organic terms. Building on an excellent start to the year, Straumann reported its strongest quarterly growth in eight years as organic revenue climbed 15% in Q2.
Despite investments in growth opportunities, new products and people, the Group achieved further improvements in underlying profitability, as gross, operating and net profit rose 15%, 19% and 30%, respectively, with the corresponding margins reaching 78%, 25% and 21%. Exceptionally, net profit (CHF 135 million) exceeded operating profit (CHF 114 million) due to a one-time deferred tax asset gain of CHF 41 million resulting from the merger of Straumann Brazil with Neodent.
On the basis of the strong first-half progression in general, Straumann has lifted its expectation for full-year revenue growth from the high-single-digit to the low-double-digit percent range and confirms that it is well on the way to deliver its existing profitability targets.
Marco Gadola, Chief Executive Officer, commented: "Our exceptional progress is the result of an all-round performance rather than just one or two factors. We have won customers from our competitors with our new BLT implant, our Pro Arch solution, our comprehensive range of biomaterials, and by offering attractively-priced high-quality alternatives through Instradent. We have forged new partnerships and deepened existing collaborations to enter new geographies and segments. We have invested in innovation and future growth projects and the people to drive them. At the same time, we have further improved operating and net profit margins. All of these achievements are evidence of the cultural change in our organization, which will sustain our success going forward".
The Implant business continued to be the key growth driver across all regions, led by the new Bone Level Tapered (BLT) implant range. This enables Straumann to address the large conical implant segment, where high primary stability is important especially in accelerated treatment protocols. BLT is differentiated by its prosthetic range, the high strength material Roxolid®, the fast-healing SLActive® surface and the Life Time Plus Guarantee – all of which are offered exclusively by Straumann. In markets where tapered implants are particularly popular, e.g. the US, Brazil, Japan and Spain, more than one in three Straumann implants sold at the mid-year point was a BLT.
The Restorative business, which comprises abutments, CADCAM prosthetics and digital equipment, posted low-teen growth both for Q2 and H1. Strong demand continued for Straumann Variobase® abutments and CADCAM implant-borne prosthetics (abutments, bars and bridges). The CADCAM elements business progressed well in general, reflecting a further increase in the number of installed in-lab scanners supplied by Straumann's partner Dental Wings. Straumann's own sales of in-lab scanners continued at a similar pace to 2015, when the new scanners were launched at the IDS.
The Group's smallest business, Biomaterials, posted the sharpest increase, driven by bone regeneration products in Europe and North America. Straumann has enjoyed exclusive distribution rights for botiss biomaterials in most – but not all – countries since the two companies became partners in 2014. Under an agreement signed in July, Straumann will take over exclusive distribution in the important German market from the third quarter of 2016. This will enhance Straumann's position as a leading provider of dental biomaterials in Europe.
Straumann's periodontal-tissue-regeneration product Emdogain®also contributed to first-half growth and gained clearance for a new indication (wound healing) in Europe with regulatory clearance pending in other regions. Straumann is the first tooth-replacement company to launch a biologic for wound healing in oral surgery and implant procedures.
For the first time in eight years double-digit growth was achieved across all regions. While North America and the EMEA region were the main contributors, Asia Pacific continued to be the fastest-growing region and will be a key source of future growth.
EMEA crosses threshold to double-digit growth
Straumann's largest region EMEA, which contributes 47% of Group revenue, grew 10% in the first six months, thanks to improved market conditions in most European markets. Favorable currency developments added two percentage-points to growth in Swiss francs, bringing revenue to CHF 216 million. Strong growth in Iberia and Italy was complemented by good performances in Germany and France. Instradent, Straumann's value platform, continued to expand and win accounts in Iberia and Italy, contributing to the overall growth.
In Q2, organic growth accelerated to 11%, reflecting a pick-up in momentum. Italy, Spain, France and Sweden were the fastest-growing subsidiaries. In addition to business expansion, Germany and Switzerland benefitted from additional working days in Q2 due to the early Easter holiday break this year. Demand was healthy in distributor markets like Turkey, Iran and the UAE. At the same time, Straumann's new subsidiary in Russia made a good start.
North America posts another quarter of double-digit growth
Under new leadership, North America posted first-half revenue growth of nearly 15% in local currencies, which rose to 18% in Swiss francs thanks to the appreciation of the dollar. As a result, regional revenue climbed to CHF 127 million, or 27% of the Group total. The performance was driven by new customers, strong demand across all businesses, and a pleasing improvement in the implant-abutment ratio.
In Q2, growth climbed to 17%, lifted by sales of BLT and the Pro Arch solution for edentulous patients. At the same time, Instradent launched the Medentika brand of cost-effective prosthetic solutions complementing its value range of Neodent implants.
APAC outpaces other regions thanks to dynamic performance in China
With dynamic growth in the largest regional market China and with Straumann outperforming the market in Japan, first-half revenue in Asia/Pacific (APAC) climbed 21% organically. Foreign exchange rates developed favorably lifting growth in Swiss francs to 25% and bringing regional revenue to CHF 75 million or 16% of the Group.
Strong first-quarter growth of +21% (organic) was almost matched in Q2 (+20%) as all subsidiaries posted strong results. More than half of the regional growth was contributed in the dynamic Chinese market. Straumann entered the fast-growing value segment and booked initial sales of Anthogyr implants and prosthetic components towards the end of June.
In Japan, Roxolid and BLT helped to win further market share and SLActive had a positive effect on the average selling price. Straumann benefitted from a large scientific forum in Tokyo at the end of Q2, which was attended by 1800 dental professionals – a quarter of whom were new customers.
Resilience in Latin America
Despite the economic challenges in several Latin American countries, the Group increased its first-half revenues by 36% in local currencies or 16% in organic terms. Unfavorable currency developments trimmed growth in Swiss francs to 14%, bringing revenue to CHF 43 million. Both the Straumann and Neodent brands performed impressively in the largest regional market, Brazil, in view of the current market stagnation there.
In Q2, organic growth reached 17% and was especially strong in Mexico. Straumann's BLT and PURE ceramic implants were well received and Neodent further increased the share of its higher value implant products featuring internal connections and the Acqua surface. The triennial Neodent congress in Curitiba (Brazil) was held in June and attracted more than 2000 dental professionals and 40 exhibitors. The company also recorded its first sales of Amann Girrbach in-lab milling machines.
STRATEGIC PROGRESS / NEWS HIGHLIGHTS
The Group has made good progress with its strategy to target unexploited growth markets and segments.
Anthogyr opens door to value segment in dynamic Chinese market
Following Straumann's acquisition of a 30% stake in Anthogyr in March, the latter's implantology business activities in China were transferred to Straumann in June, providing access to the fast-growing local value segment.
Entry into the fast growing Indian market
Similarly, the acquisition of Equinox – which was announced in a separate release today, provides entry into in the fast-growing value segment of the significantly underpenetrated implant market in India. Straumann's investment and resources will help to sustain Equinox' dynamic growth. At the same time, the local networks, infrastructure, business experience and sales organization of Equinox will help Straumann to build its premium brand in India. The deal is due to close in the coming months.
MegaGen bond conversion and options exercised
The Group's ambition to obtain a controlling stake in MegaGen, one of South Korea's leading implant manufacturers, is taking longer to realize than originally expected. Straumann has converted its USD-30-million bonds into MegaGen shares and has exercised its additional call option to acquire a controlling stake. As the two companies have not been able to agree on the conversion rate and price, MegaGen has initiated arbitration under ICC rules, which could take up to two years to conclude. Straumann is working to expedite the process in the interest of all MegaGen's stakeholders.
Global team expands as Straumann incorporates new businesses and invests in future growth
Over the first six months, Straumann's global team increased by 128 to 3599 employees, reflecting the incorporation of new businesses and the Group's investment into growth markets/projects as well as to cater for increased volumes. Consequently, the bulk of the new positions were in sales, R&D, and manufacturing. 28 new jobs were created in Switzerland to drive the Group's strong development pipeline and to cope with increasing sales volumes.
New Board Member proposed
As announced in May, Stefan Meister was released from his responsibilities as a Member of the Board and Chairman of the Compensation Committee, owing to a family illness. To fill the gap created by his resignation – and in accordance with the statutes – the Board appointed Ulrich Looser as Chairman of the Compensation Committee and Dr h.c. Thomas Straumann as the third member of the Committee alongside Beat Luethi.
Looking ahead, the Board is pleased to announce that Mrs Regula Wallimann has agreed to stand for election to the Board at the next Annual General Meeting of the shareholders on 7 April 2017.
Regula Wallimann is an expert in multinational group auditing and financial advisory, having been with KPMG since 1993. For the past 13 years, she has been a Global Lead Partner with responsibility for several global companies and has led audit teams specializing in tax, IT, treasury, compliance, litigation, environmental matters, pensions, international accounting and reporting, covering the US, China, LATAM and other regions. She was a member of the strategic partners committee of KPMG Switzerland from 2012 to 2014. As of April 2017, Regula Wallimann will start a new career as an independent financial expert and professional board member.
A graduate of HSG, University of St. Gallen, Switzerland, Regula Wallimann has studied at INSEAD and is a Certified Public Accountant both in the US and Switzerland. She is 49, Swiss, married and has two young sons. Further information will be sent to the shareholders prior to the AGM.
OPERATIONS AND FINANCES
In the first-half of 2016, Straumann Brasil Ltda was merged into Neodent. Because of this, Neodent will benefit from future tax savings and has recognized a deferred tax asset, leading to a non-cash-relevant profit of CHF 41 million in 2016. In the prior-year period, the combination with the Neodent business resulted in several one-time effects, which reduced gross/operating income by CHF 13 million and net profit by CHF 73 million respectively. All these effects are defined as exceptionals. The key financial figures are therefore shown on a reported and an 'underlying' (i.e. excluding exceptional) basis in order to facilitate the performance comparison.
Gross profit up 20%
Strong topline improvement fuelled a 20% rise in first-half gross profit, which amounted to CHF 361 million and a margin of 78%. The comparative margin in 2015 excluding exceptionals was 79%, benefiting from high manufacturing capacity utilization for the global rollout of the BLT implant system. This together with the increased share of value and third-party products in 2016 as well as ramp-up costs for Straumann's CADCAM milling centers explain this year's margin contraction.
EBIT margin expands to 25%
Distribution costs, which comprise sales force and directly-related sales activities, increased by CHF 13 million to CHF 102 million as the company continued to invest in high-growth markets and projects. This includes amortization expenses of CHF 3 million for customer-related intangible assets of Neodent. Relative to revenue, distribution costs decreased slightly to 22%.
Administrative expenses, which include Marketing, Research & Development, General Management and Support functions, rose CHF 15 million to CHF 146 million but decreased as a percentage of revenue by 1 percentage point to 32%. The amount includes the acquired Neodent business over the full six-month period (vs. two months in 2015). To support the promising flow of R&D projects and to provide clinical documentation to support its products, Straumann intends to further invest significantly in R&D.
Thanks to the improvements in operating income, earnings before interest, tax, depreciation, amortization (EBITDA) and exceptionals increased CHF 18 million to CHF 129 million, with the underlying margin reaching 28%.
After amortization and depreciation charges of CHF 15 million, operating profit amounted to CHF 114 million compared with CHF 83 million (CHF 96 million underlying) last year. The underlying EBIT margin increased from 24% in 2015 to almost 25% this year.
Net profit rises and further benefits from one-time gain
The financial result improved from a negative CHF 7 million in the prior year period to a negative CHF 1 million this year. Interest received from loans and from the outstanding MegaGen convertible bond partly offset interest payments related to the 2020 corporate bond. Straumann's share of results from its associate partners (Dental Wings, Medentika, Createch, Anthogyr, T-Plus, Valoc), which is shown net of tax and amortization of intangible assets, was only slightly negative in contrast to a negative CHF 7 million last year. This was because the share of results from associates in 2015 included the contribution from Neodent4, which was reduced by provisions related to a local distributor agreement and ongoing litigation.
Income taxes in the first-half of 2016 reached a positive CHF 22 million. Adjusted for the one-time tax gain, income taxes amounted to CHF 18 million bringing the normal underlying tax rate to 16%.
Taking everything into account, the Group generated first-half net profit of CHF 135 million, which would have amounted to 95 million (margin: 21%) excluding the one-time tax effect. Adjusted basic earnings per share increased to CHF 5.99 from CHF 4.59 a year previously.
Free cash flow increases 22%
Net cash from operating activities increased 11% to CHF 68 million, thanks to profitability improvements. Following the usual seasonal pattern and the strong topline growth, net working capital increased in absolute terms while 'Days of Supplies' (DOS) and 'Days of Sales Outstanding' (DSO) both improved in relative terms.
Capital expenditure was slightly lower than usual and reached CHF 14 million (2015: CHF 17 million). To meet increasing demand in the domestic and international markets, Neodent has begun to expand production capacity in Curitiba, Brazil, which will require investment in the remainder of this year.
The combination of these effects meant that free cash flow increased by 22% to CHF 55 million and the respective margin reached 12%.
Increased dividend and further investments in the value segment
A portion of the free cash flow was used to acquire a minority stake in Anthogyr as part of Straumann's strategy to invest in the value segment. As a result, investments in associated companies amounted to CHF 15 million compared with CHF 13 million in the prior year period. Total cash used in investing activities reached CHF 26 million.
In April, the shareholders' AGM approved a dividend increase to CHF 4.00 per share (CHF 3.75 in 2015) resulting in total payout of CHF 63 million. This and the net change in Treasury shares of CHF 8 million, as well as proceeds of CHF 14 million from the last two outstanding management option programs were the main components of the cashflow from financing activities, which totaled CHF 57 million.
As a result, cash and cash equivalents at the end of June amounted to CHF 305 million, CHF 100 million higher than a year previously. With a net cash position of CHF 102 million and an equity ratio of 61%, the Group remains solidly financed.
OUTLOOK 2016 (barring unforeseen circumstances)
Straumann expects the global implant market to grow solidly in 2016 and is confident that it can continue to outperform and can achieve full-year organic growth in the low-double-digit range. Despite further investments in strategic growth initiatives, the expected revenue growth and operational leverage should lead to further improvements in the underlying full-year EBIT margin5.
Headquartered in Basel, Switzerland, Straumann (SIX: STMN) is a global leader in implant, restorative and regenerative dentistry. In collaboration with leading clinics, research institutes and universities, Straumann researches, develops and manufactures dental implants, instruments, prosthetics and biomaterials for use in tooth replacement and restoration solutions or to prevent tooth loss. Straumann currently employs approximately 3600 people worldwide and its products and services are available in more than 100 countries through its broad network of distribution subsidiaries and partners.