Basel, 26 August 2014: In the first six months of 2014, the Straumann Group posted solid revenue growth in local currencies. Despite currency headwind, profitability increased significantly, thanks to operational leverage and the full benefit of cost-reduction initiatives implemented last year. Strong demand for dental implants spurred growth in local currencies to 5% but unfavorable exchange rates reduced the increase in Swiss francs by 3 percentage-points, bringing revenue to CHF 359 million.  

All regions posted first-half increases in l.c., with Asia/Pacific and North America delivering almost two thirds of the overall growth. After a strong first quarter, revenue growth slowed expectedly in Q2, reflecting the Easter effect.

The gross margin expanded 110 base points to 79%, while the EBIT margin improved 490 base points to 21%. Excluding currency effects and exceptionals in 2013, the improvement was 420 base points. Net profit rose 28% to CHF 69 million, lifting basic earnings per share by 94 centimes to CHF 4.42.

Marco Gadola, Chief Executive Officer, commented: “New marketing approaches and innovative solutions have enabled us to win customers and to grow ahead of the market for a fifth consecutive quarter. The single most impressive revenue driver has been our unique range of Roxolid^® SLActive^® implants which set the bar for true premium products and offer clear advantages to customers and patients. With strong volume expansions and the full impact of our cost-saving initiatives, we are clearly delivering the profitability improvements we promised. We have also made progress towards our strategic goals of penetrating the value segment and maintaining a lead in innovation. Nevertheless, we still need to achieve and invest more in order to reach our mid-term growth ambitions”.

BUSINESS PERFORMANCE

Straumann’s implant business expanded strongly across all regions, driven by the increased shares of Roxolid, the high-performance implant material, and SLActive, the fast-healing surface technology. Key elements in this were a differentiated pricing approach in Europe, the success of Straumann’s reduced invasiveness campaign with Roxolid and the introduction of SLActive Tissue Level implants in Japan.

The Group maintained its level of restorative sales, as declines in tooth-borne prosthetic elements and in-lab scanners were offset by growth in implant prosthetics, fuelled by the new Variobase^TM abutment, patient-specific CADCAM abutments and the launch of a new comprehensive range of low-profile, abutments for screw-retained solutions for single-tooth to full-arch restorations.

The Regeneratives business achieved solid single-digit growth, led by Emdogain^® and Straumann^® Allograft.

Neodent, the value brand launched by Straumann in Iberia (fall 2013) and in the US (spring 2014), made an initial but still modest contribution to sales.

Modest growth in competitive European market

In Europe first-half revenues rose 1% (both in l.c. and CHF) amid stiff competition. Thanks to the intervention of the Swiss National Bank to stabilize the Euro exchange rate, the overall negative currency effect was modest, and revenue reached CHF 198 million or 55% of the Group total.

Sales decelerated in Q2, mainly due to the Easter effect, which reduced the number of working days in dental-practices. Individual country performances were mixed. In central Europe, where Straumann has a leading market position, revenues dipped. In contrast, France, Belgium and the UK continued to post good results and the contribution from Iberia was also positive.

Underlying momentum increases in North America

Straumann’s second largest region, North America, grew 5% (l.c.) driven by strong demand for implant solutions, share-of-wallet gains, and further impetus from regenerative products. Due to a depreciation of the US dollar, revenue in Swiss francs was only in line with the previous year and reached CHF 92 million (26% of the Group).

Although quarterly sales grew 5% (l.c.) in both quarters, momentum increased in the second quarter, based on a comparison with the corresponding quarters of 2013. In addition to the positive underlying trend, the region has a number of growth initiatives planned and product launches pending, which should fuel sales going forward.

Strong growth in key Asian countries

On the back of strong growth in Japan and China, first-half revenues in Asia/Pacific (APAC) climbed 12% (l.c.), with increases in both quarters. The pronounced currency effect cut growth by 9% points, leaving revenue in Swiss francs up just 3% at CHF 51 million, or 14% of the Group.

Straumann benefited from the continuing general market recovery in Japan, the region’s largest market. Led by a strengthened local management team, the Group gained market share, thanks to a strong Q2 and exceptional growth in Q1, which was boosted by the launch of SLActive Tissue Level implants and increased purchases ahead of tax increases in April. SLActive Bone Level implants received regulatory clearance and will contribute initial sales later in Q3.

Sales accelerated in China, where Straumann has recently taken a significant step to broaden its footprint and increase its business. Since 2003, the Group has operated through a single distributor, Beijing Finest Medical Group (BJFM), which had an important role in establishing Straumann as a market leader, particularly in the public hospital segment. However, with the private-practice segment growing rapidly and the market expanding geographically, a broader approach is needed.

In July, the Group signed an agreement to take over distribution activities from BJFM and to establish a ‘hybrid’ model, in which Straumann China will market directly and sell through multiple distributors. This will bring Straumann closer to customers and will enable it to penetrate new segments. Under the agreement, Straumann is to pay BJFM a fixed consideration of CHF 9 million and a variable consideration of up to approximately CHF 18 million, depending on the development of the business. Moving forward, Straumann will invest significantly in China to build a consultative sales force and a local training-and-education organization to capture opportunities in this dynamic market.

Strong expansion in Rest of the World (RoW)

In the Rest of the World, where distributor ordering patterns are often erratic, net revenue rose 19% to CHF 19 million, or 5% of the Group total. The favorable trend reflects a positive underlying demand for Straumann solutions, particularly in Brazil and Mexico. Regional currency exchange rates cut growth in Swiss francs to 10%. Straumann’s partner Neodent, which leads the Brazilian market, posted good growth.

In the second quarter, all main countries continued to grow strongly, although Mexico and the Middle-East distributor markets were unable to match the exceptionally strong growth they achieved in the first quarter.

STRATEGIC PROGRESS

In addition to pursuing a strategy to extend its global leadership in the premium segment, Straumann has taken several initiatives to penetrate the value segment of the global tooth replacement market through a multi-brand approach.

Under the name ‘Instradent’, it has established a business platform to drive and manage the distribution and internationalization of the brands in its portfolio. With a dedicated team in Basel, Instradent has started to plant subsidiaries to build the brands in various countries.

Substantial investments in dynamic Asia

One in every five dental implants is sold in the APAC region and, having some of the world’s fastest growing local markets, the region is forecast to deliver above-average growth in the mid-term.

In addition to the aforementioned initiative to expand in China, Straumann has made a number of investments in the region this year, mainly to address the rapidly emerging value segment with tooth replacement solutions. They are as follows:

In Q2, the Group invested in MegaGen, one of Korea’s fastest-growing dental implant companies. MegaGen is also active in key global markets, offering a broad range of value implant systems, supplemented by digital and regenerative tools and products to support implant procedures. The investment – in the form of convertible bonds and an option to purchase further shares – could provide the Group with a majority stake in MegaGen in 2016.

Straumann has also invested in Biodenta, a provider of comprehensive solutions for dentists and dental laboratories. Based in Taiwan and Switzerland, Biodenta focuses on emerging markets, where Straumann needs an established partner to offer a full solution. The investments are in convertible bonds which – if converted – could provide Straumann with a stake of approximately 12% in Biodenta by 2019.

With the aim of gaining leads to attractive technology/business opportunities in Asia, the Group participated in a fund, managed by DM Capital, which is devoted solely to investments in dental-related opportunities in public and private companies in China.

Portfolio expansion and innovation leadership

Apart from these initiatives, Straumann and botiss, Europe’s second largest supplier of oral tissue regeneration products, agreed to combine strengths to provide complete oral tissue regeneration solutions worldwide. The agreement includes distribution rights and a call option for Straumann to obtain up to 30% of botiss in 2017. The collaboration will provide Straumann with a strong portfolio to compete against the regenerative market leader.

More recently, Straumann acquired a 12% stake in RODO Medical, Inc. a California-based, privately-held developer of innovative fixture devices that could revolutionize the way in which dental prosthetics are attached to implants.

The financial details and terms of all these agreements are summarized in the notes at the end of this release.

With regard to its advanced innovation pipeline, the Group launched a number of new products at the ITI World Symposium in April, including the Straumann^® PURE Ceramic Implant, the aforementioned range of prosthetic components for screw-retained solutions, and broader CADCAM options offering efficiency and productivity gains.

One exciting first-half highlight was the start of the clinical program with Straumann’s Bone Level Tapered (BLT) implant. It is estimated that tapered designs account for more than 50% of the global implant market – a segment that Straumann’s current range does not address.  However, the Group is in the process of bringing to market a new-generation BLT implant made of Roxolid and featuring the SLActive surface. The initial feedback from the trial program has been very positive.

OPERATIONS AND FINANCES

Gross margin expands to 79%

Despite a negative currency impact of CHF 11 million (or 50 base-points), gross profit rose 3% to CHF 283 million. The increase was slightly more than revenue growth and was achieved through strong volume increases, greater utilization of manufacturing capacity, successful implementation of efficiency measures – including the insourcing of certain processes, and a more profitable business mix. Accordingly, the gross margin expanded 110 base points to 79%.

Underlying operating profit (EBIT) jumps more than 20%

‘Distribution costs’, which comprise salesforce and directly-related sales activities, increased by CHF 6 million to CHF 88 million or 25% of sales (compared with 23% in 2013).

Administrative expenses decreased CHF 17 million to CHF 122 million or 34% of sales (39% in 2013). Excluding exceptionals of close to CHF 6 million (net) related to restructuring in 2013, the reduction amounted to CHF 11 million and was due to the combined benefit of cost-reduction measures and tighter cost control. To sustain an industry-leading portfolio, Straumann continues to invest 5-6% of its sales in R&D, which is in-line with historic levels.

As a result, operating expenses went down CHF 11 million on a reported basis or CHF 6 million excluding exceptionals.

Thanks to gross-profit improvements and the abovementioned items, earnings before interest, tax, depreciation, amortization (EBITDA) and exceptionals rose CHF 14 million to CHF 89 million. The corresponding margin expanded 370 base points to nearly 25%.

After amortization and depreciation charges of approximately CHF 14 million, operating profit amounted to CHF 75 million, compared with the previous year’s level of CHF 57 million, or CHF 62 million excluding exceptionals. With the respective margin reaching 21%, profitability improved 490 base points, or 420 base points excluding the exceptional restructuring charges in 2013 and currency effects.

Net profit benefits from Neodent contribution

The net financial result was flat in contrast to a positive CHF 1 million in the prior-year period. Fair value gains from the company’s financial assets helped to offset interest expenses related to the CHF-200-million bond launched at the end of April 2013.

Contributions from the associated partners Neodent, Dental Wings, Medentika and Createch, which are accounted for under the ‘equity method’, amounted to CHF 5 million with the major portion coming from Neodent.

Income taxes amounted to CHF 12 million, translating into a tax rate of 15%.

Taking the abovementioned factors into account, reported net profit amounted to CHF 69 million, with the corresponding margin reaching 19%, compared with 15% in the same period last year. Basic earnings per share amounted to CHF 4.42.

Profitability improvements drive cash flow

Net cash from operating activities increased 6% year-on-year to CHF 44 million, as improved profitability compensated for the increase in working capital. The latter was driven mainly by higher sales and accrued severance payables last year related to the restructuring. With capital expenditure (CAPEX) down slightly to CHF 6 million, free cash flow amounted to CHF 38 million and the respective margin was 11%.

Cash used for investing activities reached CHF 32 million, of which CHF 28 million was due to the purchase considerations for MegaGen, Biodenta and other financial assets. Net cash used in financing activities totaled CHF 55 million after the dividend payment of CHF 58 million. Consequently, cash and cash equivalents at June 2014 amounted to CHF 339 million, down from CHF 384 million at the end of 2013. The equity ratio remained at a solid level of 63% at the end of the period.

OUTLOOK 2014 (barring unforeseen circumstances)

Straumann expects the global implant market to develop positively in 2014 and its revenue to grow in the low-single-digit range (l.c.). The Group will continue to invest in growth markets and its non-premium offering. Despite this, and thanks to last year’s cost-reduction measures, Straumann will deliver an expanded operating profit margin in 2014. In the mid-term, it aims to achieve solid growth with further operating margin improvements.

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 2280 people worldwide and its products and services are available in more than 70 countries through its broad network of distribution subsidiaries and partners.