¹ In this release ‘exceptionals’ refers to the impairment of intangible assets of CHF 40 million and corresponding deferred tax effects of CHF 13 million in the second quarter 2011. 

² Compared with reported 2010 figures.

SUMMARY

Basel, 16 August 2011: The Straumann Group today reported organic top-line growth of 5% (l.c.) in the first six months of 2011, bringing net revenue to CHF 367 million. Growth accelerated slightly to more than 5% (l.c.) in the second quarter and was driven by volume expansion in implants and scanning equipment sales. A further strengthening of the Swiss franc against Straumann’s major currencies exacerbated the unprecedented negative currency effect, squeezing top-line growth by CHF 42 million or 11% points. Consequently, first-half net revenue declined 6% in Swiss francs.

In light of recent events in Japan, Straumann signaled at the end of April that it would review the ‘value-in-use’ of intangible assets related to the 2007 acquisition of its Japanese distributor. Based on a cautious prediction of market developments in Japan over the next five to ten years, the Group considers that the assets in question are fully impaired and has therefore recognized an impairment charge of CHF 40 million in its first-half financial statements (see page 18, note 3). Excluding this charge, first-half operating profit (EBIT) was slightly above the comparative level of 2010 on a currency-corrected basis, confirming that operational performance is in line with the Group’s expectations. Excluding the impairment effect, net profit for the period amounted to CHF 65 million, CHF 6 million higher than the currency-corrected level of last year. The underlying margin thus expanded by one percentage point to 18%, but was reduced by the impairment to 11%.

In its outlook, the Group maintained its expectation to outperform the market again over the full year. While operating performance is on track, margins are under increasing pressure from the additional strength of the Swiss franc. As a result, the operating margin excluding the impairment charge is expected to be in the high teens.

Beat Spalinger, President & CEO commented: “With a solid performance lifted by a slight acceleration in the second quarter, Straumann has once again outpaced the market. At the same time, we have continued the rollout of new products and solutions – mainly in digital dentistry but also in regeneratives and implants. We have also invested in digital technologies that are shaping the future of dentistry – for instance our recently acquired stake in Dental Wings. These initiatives will support our efforts to outperform our competitors going forward. Further progress on the operations side has allowed us to invest further in sales, marketing and innovation to drive growth. However, the operational improvements we have achieved are masked by the impairment charge and negative currency effects, which together have cost us more than CHF 80 million”.

BECOMING THE PARTNER OF CHOICE IN DIGITAL DENTISTRY

Digitalization: shaping the future

Digital technologies are becoming widespread in dentistry and cover many applications – from general practice management to treatment planning, imaging, guided surgery, digital impression taking, right through to computer-aided prosthetic design and manufacture. The spread has brought an increase in the number of different systems and a pressing need for standardization.

Advancing standardization

In June, Straumann acquired a 30% stake in Dental Wings Inc., a leading developer in digital dentistry. Headquartered in Montreal, the company is privately owned and specializes in software for design and manufacturing, in addition to producing 3D scanners.

The investment underscores Straumann’s commitment to advancing standardization across the industry. Earlier in the year, the two companies announced a collaborative partnership with 3M ESPE to create an open standard software platform for use in a range of dental applications. This will considerably simplify processes for dental labs and practices, saving time and costs. Dental Wings is ideally positioned to spearhead this initiative because its DWOS platform offers functionality and ease-of-use. It also provides the common platform that manufacturers need in order to open their systems and attract new business.

ORGANIZATION STRENGTHENED

New positions to support sales growth

Straumann reduced its hiring rate in the first half of the year, selectively strengthening its global team through the addition of 52 new jobs, most of which were in Marketing & Sales. On 30 June 2011, the global workforce comprised 2413.

New CFO

In the second quarter, Straumann announced the appointment of Thomas Dressendörfer as Chief Financial Officer and Member of the Executive Management Board. Mr Dressendörfer is a highly experienced finance executive with an international background. Having worked in the Healthcare, Consumer Products, Personnel Services, Market Intelligence, and Mechanical Engineering sectors, he joins Straumann from Uster Technologies Ltd, a Swiss public company with many similarities to Straumann. He will assume his new role at the end of the current quarter.

LONG-TERM COMMITMENT TO INNOVATION AND EVIDENCE-BASED DENTISTRY

The Group’s high level of investment in Research and Development was maintained above 5% of sales. With 17 clinical studies tracking more than 1300 patients, Straumann has one of the largest research and development programs in the industry, much of which is devoted to documenting the long-term performance of the unique Straumann^® Dental Implant System, which covers all indications and preferences. Five clinical studies were completed in the first six months of 2011 and six more are in preparation for 2011/12. Furthermore, two papers on 10-year results with the Straumann^® Soft Tissue Level implant system were submitted for publication, as well as 10-year data on Straumann^® Emdogain. These are typical examples of an extensive clinical program designed to differentiate Straumann and to provide peace of mind for customers through long-term performance.

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.

REGIONAL PERFORMANCE

In general, revenue growth was driven by implant volumes and lifted by the continuing rollout of scanning equipment, especially the iTero^® intraoral system. A further contribution came from Straumann’s regenerative franchise.

All regions reported continuing growth in the second quarter with the leading contribution coming again from North America, where revenue expanded in the high-single-digit range. Europe and Asia/Pacific reported comparatively modest increases. 30% of the overall growth was generated by the ‘Rest of the World’ region, which continued to grow dynamically.

North America on the verge of double-digit growth

In North America, growth increased from 8% in the first quarter to almost 10% (l.c.) in the second. This was driven by implants, the rollout of digital solutions and the sustained momentum of Straumann^® Allograft. The substantial depreciation of the US dollar cut regional growth in Swiss francs by 17% points and net revenue eased slightly to CHF 78 million.

Modest growth in Europe

Straumann’s largest region, Europe, continued to contend with subdued consumer confidence, unemployment and sovereign debt issues in important markets like Spain, Portugal, the UK and Italy. In spite of this, the Group achieved modest growth of 1% (l.c.), lifted by scanning equipment sales.

On a country level, the performance was mixed: the Netherlands and France continued to post good results; Germany was slightly ahead of the previous first half; Spain and Sweden contracted somewhat.

The weakness of the euro and the British pound against the Swiss franc resulted in a negative currency effect of more than 10 percentage points. Regional net revenue amounted to CHF 219 million.

Improvement in Asia/Pacific

Revenue in the Asia/Pacific region climbed 6% (l.c.) to CHF 52 million, or 14% of Group net revenue. Growth increased to 9% in the second quarter, despite disruptions in the region’s largest market, Japan. The performance was driven by growth in China and Japan as well as positive developments in Korea and Australia.

Over the past six months, Straumann’s team in Japan has exhibited courage, determination and an undiminished commitment to ‘simply doing more’. Despite the extraordinary circumstances in the second quarter, it successfully launched the Straumann^® Bone Level range, which is a key element in the Group’s strategy to outpace local market growth. Boosted by the launch, Japanese sales returned to solid growth for the first time in more than two years.

Although the impact of the tsunami appears to be less severe than originally feared, reduced consumer confidence and constrained economic development make Straumann cautious in predicting when the dental markets in Japan will return to sustainable strong growth. In view of the size and long-term attractiveness of the market, the Group is fully committed to Japan and intends to invest further there in the future. As an expression of its solidarity and sympathy, the Group has contributed more than CHF 500 000 to disaster relief in Japan.

Strong growth in the Rest of the World

In the ‘Rest of the World’, net revenue soared 37% in l.c. and 32% in Swiss francs, due to dynamic growth in the Middle East, Brazil and other emerging markets. Growth jumped to 49% (l.c.) in the second quarter. With net revenue reaching CHF 18 million, the Rest of the World region contributed 5% to the Group total.

OPERATIONS AND FINANCES

Business improvements partially offset currency effect

Volume growth and the increased contribution from higher margin products (e.g. Roxolid) provided a modest cushion to the strong negative currency effect of CHF 40 million (180 base points). As a result, the Group achieved a gross margin of 79%, 60 base points higher than the currency-corrected margin in the first half of last year.

Straumann is implementing a number of measures to mitigate currency exposure, such as increasing the contribution of the US to global production, and re-negotiating supplier contracts in euros or US dollars rather than Swiss francs.

Selling & Administrative costs rose considerably, due mainly to the impairment charge of CHF 40 million. In addition, the Group continued to invest in sales personnel, as well as in new product rollouts. These additional expenses were partly offset by a favorable foreign exchange effect, due the fact that most of Straumann’s sales costs are in currencies that depreciated against the Swiss franc. Excluding the impairment charge, SG&A expenses remained more or less stable at CHF 193 million.

At CHF 19 million, R&D investments were slightly lower than the record level of the comparative period in 2010, but were maintained above 5% of net revenue, reflecting the Group’s commitment to innovation and long-term clinical excellence.

EBITDA remains stable on a currency-corrected basis

Earnings before tax, depreciation and amortization (EBITDA) declined by 25 million to CHF 98 million, but remained stable on a currency-corrected basis. The corresponding EBITDA margin was 27%. The successful resolution of litigation issues with business partners led to the release of provisions, which added CHF 5 million to operating income.

After ordinary amortization and depreciation charges of CHF 19 million and the impairment charge of CHF 40 million, operating profit (EBIT) amounted to CHF 39 million. Excluding currency effects and the impairment charge, operating profit would have grown modestly by CHF 4 million, corresponding to a flat EBIT margin of more than 21%.

The net financial result was a negative CHF 2 million due mainly to transactional currency losses. Owing to a reduction of deferred tax liabilities in relation to the impaired intangible assets, income taxes were a positive CHF 1 million (CHF 14 million less than in the first six months of 2010). Going forward, the underlying tax rate is expected to be around 17%.

Taking all the aforementioned factors into account, first-half net profit amounted to CHF 38 million and basic earnings per share were CHF 2.45 or CHF 4.16, excluding the impairment and related deferred tax effects.

Operating cash flow squeezed by higher net working capital

Net cash from operating activities decreased 36% to CHF 58 million. This was almost entirely due to the negative currency effect. Changes in trade working capital remained at a similar level to 2010.

Despite a slight increase of CHF 1 million, capital expenditure remained comparatively low at CHF 11 million, reflecting the fact that implant production was expanded in previous years and no major investments were required in the period under review.

Free cash flow amounted to CHF 47 million and the respective margin was 13%.

The purchase consideration for the minority stake in Dental Wings amounted to CHF 6 million. Net cash used for financing activities totaled CHF 61 million after the payment of CHF 59 million for the ordinary dividend. Consequently, cash and cash equivalents on 30 June 2011 amounted to CHF 325 million, which is more than 10% of the Group’s market capitalization.

Group considers Treasury share purchase for up to CHF 100 million

The Group is considering purchasing Straumann shares on the open market for up to CHF 100 million, over an unspecified period and depending on the further development of the share price. These shares will be Treasury shares and their purchase will reduce the Group’s high cash position, without reducing its ability to take advantage of strategic opportunities.

OUTLOOK (barring unforeseen circumstances)

Straumann estimates that the current macro-economic uncertainty will constrain recovery in its main markets. As a result, the Group expects the market to grow in the low-to-mid-single digit range over the full year – slightly lower than the previous projection of mid-single digit growth.

With its clinically-proven products, organizational strength, differentiated services, the stream of products launched in 2010, and its investments in Sales personnel, the Group is convinced that it can again deliver above-market performance over the full year.

During the second quarter Straumann’s major trading currencies, the euro and the US dollar, weakened further against the Swiss franc and continued to unforeseeable historic lows in July. This puts further pressure on profits. Although the Group’s underlying operating performance is fully in line with the guidance given in April, it is unlikely that the increased currency headwind can be offset.

Bearing the aforementioned growth estimate and additional currency effects in mind, the full-year operating margin excluding the impairment charge related to Japan is expected to be in the high teens.