Straumann’s operating profit margin reaches 21% in 2014
Thanks to strong volume expansions and recent cost optimization measures, the reported EBIT margin improved from 17% to 21%. Net profit rose 56% to CHF 158 million, lifting basic earnings per share by CHF 3.60 to CHF 10.15.
Marco Gadola, Chief Executive Officer, commented: “Despite the shadow thrown by the recent currency developments, we can look back at 2014 with the assurance that we are working on the right things. We have used differentiating technologies like Roxolid and SLActive, as well as new products like our new Bone Level Tapered implant, to drive sales and win customers. In addition we have continued our focus on improving efficiency resulting in improved margins”.
Straumann’s revenue growth in 2014 was entirely organic and driven by its core implant business, where volumes expanded strongly across all regions. Increased sales of Roxolid® and SLActive® were the principal contributors, supported by a differentiated pricing approach in Europe, the success of Straumann’s ‘reduced-invasiveness’ campaign with Roxolid, and the introduction of SLActive implants in Japan.
Revenue from the restorative business was sustained, as declines in tooth-borne prosthetic elements and in-lab scanners were offset by growth in standard prosthetics, fuelled by the new Variobase® abutment, customized CADCAM abutments and a new comprehensive range of low-profile abutments for screw-retained solutions for single-tooth to full-arch restorations.
The Regenerative business achieved solid single-digit growth, led by Emdogain® and Straumann® Allograft. To offer a complete range of regenerative solutions, Straumann entered a strategic partnership with botiss and began distributing their range of products in most European markets in Q4.Europe: solid growth amid strong competition
With the economy still weak in parts of Europe, there was little improvement in demand for elective dental procedures in 2014. Straumann achieved 3% organic growth (2% in CHF) in Europe, its largest region, which is an improvement on previous years but still behind the growth rates in other regions.
In Q4, regional revenue reached CHF 98 million, corresponding to strong organic growth of 8%. The performance was led by the UK, Spain, Austria and the Nordic countries, which all achieved double-digit increases.
North America: continued market-share gains
Revenue in North America grew 8% organically, or 6% in Swiss francs to CHF 193 million. Based on available data, Straumann outperformed the North American market again. All business franchises contributed to the increase, but the star performers were Roxolid and SLActive. In Q4, organic growth reached 9%, with revenue reaching CHF 53 million.
Asia/Pacific: strong growth driven by China and Japan
Good progress through the year fuelled a 14% organic rise in revenue in Asia/Pacific. The APAC region makes up 15% of the Group total revenue and contributed more than 30% to overall growth. Straumann’s business developed very positively in China, reflecting the dynamism of the market and the company’s successful transition to a hybrid distribution model using multiple distributors and its own consultative salesforce, marketing, training and education teams. In Japan, Straumann edged closer to market leadership, thanks to the introduction of SLActive, which finally obtained regulatory approval in 2014.
In Q4, the region made further progress, achieving organic growth of 15%, driven predominantly by China and a substantial contribution from Japan.
Rest of the World: Double-digit growth driven by Brazil and Mexico
Full-year revenue in the ‘Rest of the World’ (RoW) region rose 14% and reached CHF 34 million. Growth was reduced to 9% in Swiss francs due mainly to the depreciation of the Brazilian real.
Demand for Straumann products was strong, particularly in Latin America, where Brazil continued to be a source of good growth both for Straumann and Neodent, the local market leader, whose results are reported under ‘Share of result of associates’. Mexico also posted strong results. The RoW region also generates significant business through distributors in the Middle East. Here too, sales developed positively, although quarterly ordering patterns are often erratic.
In Q4, RoW revenues climbed 18% (organic), driven by Straumann’s very strong growth in Brazil.
OPERATIONS AND FINANCES
Gross profit rises 4%; margin maintained at 79%
Gross profit rose 4% to CHF 559 million, with the respective margin maintained at 79%. As revenue and manufacturing costs increased at a similar pace, profitability remained more or less at the prior year’s level. Strong volume expansion and improved use of manufacturing capacity compensated for: the negative currency impact (CHF 12 million or 30 base-points of the gross margin), investments in manufacturing staff, and a less favorable product mix. The latter was due to the increase in third-party products (e.g. Neodent, botiss etc.).
Operating income grows 28%; EBIT margin jumps 390 base points to 21%
Overall, operating expenses (OPEX) were reduced thanks to tighter cost control and benefits from cost-reduction measures in prior years. Excluding restructuring charges of CHF 8 million in 2013, operating expenses decreased by CHF 2 million year-on-year, while top line grew over CHF 40 million or 6% in local currencies. As a consequence, the OPEX intensity decreased by nearly 3% points to 58% of sales, underlining Straumann’s favorable operational gearing.
Selling (salesforce and related activities) costs, which are included under ‘Distribution costs’, remained steady at CHF 168 million (24% of sales), while administrative expenses (including Marketing, R&D and headquarters costs) decreased CHF 10 million to CHF 244 million (34% of sales). Straumann aims to continue investing around 5% of sales in R&D to maintain the flow of product innovations and to provide clinical documentation to support its products.
Improved fixed-cost absorption and higher sales lifted earnings before interest, tax, depreciation, amortization (EBITDA) by CHF 28 million to CHF 176 million, with the corresponding margin expanding 300 base points to nearly 25%.
After amortization and depreciation charges of CHF 28 million, operating profit amounted to CHF 148 million compared with last year’s CHF 116 million, or CHF 124 million excluding exceptionals. With the respective margin reaching 21%, profitability jumped 390 base points (270 excluding exceptionals), more than compensating for the negative currency effect of 60 base points.
Net profit benefits from one-time tax effect related to Neodent
In contrast to the negative CHF 2 million in the prior year, the net financial result was a negative CHF 7 million in 2014, which was due to hedging losses and higher interest expenses reflecting the timing of the launch (April 2013) of Straumann’s CHF-200-million bond.
Contributions from the associated partners Neodent, Dental Wings, Medentika and Createch, which are accounted for under the ‘equity method’, reached CHF 36 million and benefitted from a capitalization of deferred tax assets amounting to CHF 27 million related to Neodent. As a result of this benefit and the generally improved profitability, the effective tax rate in 2014 amounted to just 11% as income taxes amounted to CHF 20 million.
Taking the abovementioned factors into account, reported net profit amounted to CHF 158 million, with the corresponding margin reaching 22%, compared with 15% in the same period last year. Basic earnings per share amounted to CHF 10.15. Stripping out the one-time benefit for Neodent, net profit would have reached CHF 131 million with a respective margin of 18%.
Cash generation impacted by increase in working capital
Although profitability improved significantly the cash generated was negatively affected by an increase in working capital, which was due to an expansion of the trade days outstanding (+2 days to 51 days), a rise in inventories in preparation for the full launch of BLT in spring 2015, and the increase of third-party products (e.g. Neodent and Medentika). As a result, net cash from operating activities amounted to CHF 146 million compared with CHF 151 million in the prior-year period.
With capital expenditure (CAPEX) rising to CHF 19 million, free cash flow amounted to CHF 128 million and the respective margin was 18%.
Cash used for investing activities reached CHF 26 million, and was used mainly for the aforementioned CAPEX expenditures, as well as financial investments of CHF 32 million in MegaGen and Biodenta collectively. In addition to dividends of CHF 16 million from Neodent there were also proceeds of CHF 21 million from the sale of financial assets.
The annual dividend payment of CHF 58 million was the main element in cash used in financing. Cash and cash equivalents grew CHF 76 million to CHF 459 million at year-end. With net cash at CHF 260 million and the equity ratio at 64%, the company is solidly financed.
The Board of Directors will propose to the shareholders at the Annual General Meeting on 10 April 2015 a dividend of CHF 3.75 per share, maintaining the payout of the prior year. The ex-dividend date is on 14 April.
OUTLOOK 2015 (barring unforeseen circumstances)
Straumann expects the global implant market to show further improvements in 2015 and its revenue to grow organically in the mid-single-digit range. Reported revenues in Swiss francs will be influenced by the recent exchange rate turbulence. The Group will seek to balance investments between growth markets and other strategic projects, while taking decisive steps to mitigate the consequences of the appreciation of the Swiss franc. These measures include compensation reductions in Switzerland as well as strict hiring and travel restrictions, and will help Straumann to achieve its 2015 EBIT margin target of at least 20% (organic), assuming exchange rates remain more or less at recent levels5.
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 2400 people worldwide and its products and services are available in more than 70 countries through its broad network of distribution subsidiaries and partners.