Straumann improves profitability as operating margin approaches 18%

  • First-half revenue reaches CHF 355 million, as sales pick up in Q2 after a soft start to the year
  • Organic1 revenue rises 3% in Q2 (l.c.) driven by strong performance in North America
  • Efficiency gains lift gross profit margin to almost 78% and initial cost savings drive EBIT margin to almost 18% excluding exceptionals
  • Main impact of cost-reduction initiatives expected to begin in Q3

 

 

KEY FIGURES

 

 

 

 

 

 

 

 (in CHF million)

H1 2013

H1 2013

H1 2012

 

reported

excluding

exceptionals2

restated3

Revenue

354.8

 

361.7

   Change in CHF%

(1.9)

 

(1.5)

   Change in l.c.%

(1.7)

 

(0.2)

   Change in l.c. % (excl. iTero1)

(0.9)

 

 

 

 

 

 

Gross profit

276.2

 

278.4

   Margin in %

77.8

 

77.0

   Change in %

(0.8)

 

(4.1)

 

 

 

 

EBITDA

74.5

80.0

71.0

   Margin in %

21.0

22.5

19.6

   Change in %

5.0

12.7

(27.8)

 

 

 

 

Operating profit (EBIT)

56.8

62.3

54.6

   Margin in %

16.0

17.6

15.1

   Change in %

4.1

14.1

40.2

 

 

 

 

Net profit

53.7

 

44.6

   Margin in %

15.1

 

12.3

   Change in %

20.5

 

15.9

 

 

 

 

Basic EPS (in CHF)

3.48

 

2.88

 

 

 

 

Free cash flow4

34.7

 

19.9

    Margin in %

9.8

 

5.5

 

 

 

 

Number of employees (30 June)

2313

22435

2555

 

 

Basel, 20 August 2013: Despite a slight contraction in revenue, the Straumann Group achieved notable margin improvements in the first-half of 2013, thanks to efficiency gains in manufacturing and the initial results of the Group’s cost-reduction initiatives.

 

First-half revenue reached CHF 355 million, slightly less than 1% off the prior year period in local currencies (l.c.) on a comparable basis. After a soft start to the year, organic revenue picked up 3% (l.c.) in the second quarter, benefitting from an additional selling day6 and driven by a strong performance in North America, with stable results in Europe and Asia Pacific.

 

The gross margin expanded 80 base points to 78%, contributing to an improvement of 250 base points in the underlying EBIT margin, which climbed to almost 18%. After exceptionals related to cost-reduction initiatives (see page 1 note 2), reported operating income reached CHF 57 million, corresponding to a margin of 16%. Reported net profit grew 21% to CHF 54 million, lifting basic earnings per share by 21% to CHF 3.48.

 

Marco Gadola, Chief Executive Officer, commented: “We are beginning to reap the benefits of our resolute measures to reduce our cost base. The top line improvement in the second quarter is also encouraging, because it shows that our restructuring initiatives have not impaired our ability to drive sales.

 

In view of the soft first quarter and the likelihood of Europe receding further, we don’t expect full-year revenue to exceed last year’s level, but I am very confident that we will deliver the profitability improvements to which we have committed ourselves. We know where the battles are and have defined clear initiatives to win them. Strategically we are addressing the changed dynamics in our core market, and we are increasing our efforts to target unexploited growth markets – including the value segment. We have also maintained our strategy of differentiation through innovation, placing greater emphasis on customer-driven solutions, a number of which will be launched in the coming quarters.”

 

 

BUSINESS AND REGIONAL PERFORMANCES

 

Implant sales progressed positively in the first half of 2013, lifted by solid growth in Q2. Straumann’s high performance implant material Roxolid and Bone-level implant range posted the strongest increases.

 

The restorative business – comprising digital products, CADCAM milled elements and standard prosthetics – was generally slower, reflecting the competitive landscape. New solutions to rekindle and support future growth were introduced in the first quarter including the ‘Scan & Shape’ prosthetics service and CARES Visual 8.0 software. The former offers access to CARES CADCAM prosthetics to customers who do not have the required scanning capabilities; the latter opens Straumann’s CADCAM system to a broader range of customers. To draw external business into the CARES open workflow, Straumann launched a new plug-in software application tool in Q2.

 

The smallest franchise, regeneratives, remained stable in spite of sales force restructuring. Moving forward, regeneratives will have an increasing role in integrated customer solutions especially in the general practitioner segment.

 

 

REVENUE BY REGION

 

 

 

 

 

 

 

 

 

 (in CHF million)

Q2 2013

Q2 2012

H1 2013

H1 2012

Europe

97.4

95.6

195.9

202.2

   Change in CHF in %

1.8

(9.2)

(3.1)

(7.8)

   Change in local currencies in %

(0.1)

(7.0)

(4.4)

(4.5)

 

 

 

 

 

North America

47.3

43.8

92.6

88.5

   Change in CHF in %

8.2

15.6

4.7

13.4

   Change in local currencies in %

8.1

7.0

4.1

10.4

 

 

 

 

 

Asia / Pacific

26.8

28.9

49.5

53.9

   Change in CHF in %

(7.2)

10.2

(8.2)

4.2

   Change in local currencies in %

0.7

4.2

(1.7)

1.0

 

 

 

 

 

Rest of the World (ROW)

8.5

8.3

16.8

17.2

   Change in CHF in %

1.6

(11.9)

(2.6)

(6.0)

   Change in local currencies in %

4.1

(7.4)

0.7

(1.7)

 

 

 

 

 

GROUP

180.0

176.6

354.8

361.7

   Change in CHF in %

1.9

(1.2)

(1.9)

(1.5)

   Change in local currencies in %

2.3

(2.1)

(1.7)

(0.2)

   Change in local currencies in % (excl. iTero1)

3.1

 

(0.9)

 

 

 

European markets still in decline

First-half revenues in Europe contracted 4% (organic, l.c.). After a slightly positive currency effect of just over one percentage point, revenue reached CHF 196 million or 55% of the Group total. Second-quarter sales showed a sequential improvement – due partly to the number of selling days – and were stable year on year.

 

The dull performance in Europe is linked to prevailing difficult economic conditions and continuing austerity, especially in Southern Europe. Large markets like Spain and Italy, which are also constrained by low-price competitors, continued to suffer the biggest declines. In contrast, less-well-penetrated markets like France and the UK returned to growth in Q2 – as did Switzerland. The largest market in the region, Germany, improved sequentially but was unable to match the prior-year’s revenue levels.

 

Sequential acceleration in North America

Straumann’s second largest region, North America, grew 4% in local currencies or 5% in Swiss francs, reflecting a slightly positive currency effect and bringing regional revenue to CHF 93 million or 26% of the Group. Excluding sales of intraoral scanners, which discontinued in October 2012, first-half organic revenue grew 6% (l.c.), on the back of an acceleration to 11% in Q2, driven across all businesses and boosted by strong demand for implant solutions.

 

China helps compensate for difficult market conditions in Japan

CHF 50 million or 14% of Group revenue was generated in Asia/Pacific. This was 2% (l.c.) less than in the first half of 2012. The weakening of the Japanese Yen contributed to a significant negative currency impact, which meant that revenue contracted 8% in Swiss francs. Negative public perception of implant dentistry continued to depress Japan but this and sluggish distributor markets were more than offset in Q2 by good growth in China and stable sales in Korea.

 

Rest of the World (RoW) turning around

The region referred to as the ‘Rest of the World’ contributes approximately 5% of Group revenue, most of which is generated in Brazil, Mexico and the Middle East. In the first half of 2013, regional revenue increased by 1% in l.c. but contracted 3% in Swiss francs, to CHF 17 million.

 

In the region’s largest market, Brazil, first-half sales were in line with the prior-year, reflecting the increasingly challenging economic conditions. Straumann’s partner Neodent, which leads the Brazilian market, posted high-single-digit growth.

 

In the Middle East, the majority of the Group’s distributor markets are gradually recovering from last year’s declines related to socio-political upheaval and embargoes.

 

 

OPERATIONS AND FINANCES

 

Gross margin expands 80 base points to 78%

Efficiency gains, the insourcing of certain processes, and a more profitable business mix (decreased proportion of scanner sales) more than compensated for the top-line shortfall and a negative currency impact of 10 base points. With gross profit reaching CHF 276 million, the gross margin expanded 80 base-points to almost 78%.

 

Operating profit reaches almost 18% excluding exceptionals

In response to the prolonged absence of market recovery, the Group initiated further restructuring and cost-saving measures in April, including the reduction of approximately 200 jobs in 2013. By the end of June, these reductions had been completed to a large extent.

 

The initiatives resulted in first-half restructuring charges of CHF 13 million, the majority of which is related to severance compensation costs. On the other hand, the measures also led to a one-time gain of CHF 7 million from curtailed pension obligations. Going forward, the company expects a further charge of CHF 3–5 million related to staff contracts that will end in the second half of the current year.

 

Thanks to cost-saving measures initiated last October, reported Selling, General & Administrative (SG&A) expenses decreased to CHF 195 million or 55% of sales. Excluding the aforementioned restructuring charges the improvement would have amounted to CHF 11 million. Additional savings from initiatives started in May this year are expected to kick in from Q3 onwards.

 

Reported Research & Development costs increased to CHF 26 million (CHF 2 million of which was due to the aforementioned restructuring charges), reflecting the Group’s commitment to customer-driven innovation and the further development of digital solutions. 

 

Reported earnings before interest, tax, depreciation and amortization (EBITDA) grew 5% to CHF 75 million or 21% of sales. This resulted in a 4% increase in reported operating income (EBIT), which reached CHF 57 million or 16% of sales. Excluding the restructuring charges, the underlying EBITDA and EBIT margins expanded by 290 and 250 base points respectively, bringing the respective margins to almost 23% and 18%.

 

Net profit constrained by impact of exceptionals

The net financial result was a positive CHF 1 million compared to zero in the comparative period of last year. The contributions from Neodent and Dental Wings (of which Straumann holds 49% and 44% respectively), amounted to CHF 5 million and are disclosed in the income statement under ‘share of result of associates’. Before intangible amortization charges, the share of profit from the two entities would have been CHF 8 million.

 

Income taxes came to CHF 9 million, almost matching the prior year level and corresponding to a tax rate of 15%.

 

Reported first-half net profit grew 21% to CHF 54 million, representing a margin of 15%. Basic earnings per share amounted to CHF 3.48.

 

Free cash flow lifted by improved profitability

The combination of improved profitability, reduced working capital and lower tax payments meant that net cash from operating activities rose 37% to CHF 41 million. The decline in “provisions, pensions and other non-current liabilities” was driven by the reduction in retirement benefit obligations as a consequence of the cost-reduction program. At CHF 7 million, capital expenditure was approximately 4 million less than in the comparative prior year period. Altogether, free cash flow amounted to CHF 35 million and the respective margin was 10%.

 

In April, the Group successfully placed a domestic straight bond issue yielding proceeds of CHF 199 million. After the payment of CHF 58 million for the ordinary dividend, 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%.

 

 

OUTLOOK 2013 (barring unforeseen circumstances)

While positive developments are expected to continue in North America and other under-penetrated markets, Straumann expects the effects of the weak economy and consumer sentiment to continue in Europe, constraining overall revenue development in 2013.

 

Despite a shortfall in full-year revenue, the successful outcome of cost reduction initiatives will drive sustainable profitability improvements as anticipated, with the main savings beginning to have an impact in Q3.

 

In the mid term, Straumann aims to return to solid growth and a higher operating margin.

 

 

About Straumann

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 tissue regeneration products for use in tooth replacement and restoration solutions or to prevent tooth loss. Straumann currently employs approximately 2300 people worldwide and its products and services are available in more than 70 countries through its broad network of distribution subsidiaries and partners.