Straumann Holding AG (STMN) Earnings Call Transcript & Summary

Thank you and good morning, everyone. Thanks for joining for this short conference call on our announcement of further measures to adapt to new realities resulting from the COVID-19 pandemic. I'm joined by Peter Hackel, our CFO. And we very much hope that you, your families, your colleagues are healthy and coping again with these constraints and challenges of this difficult situation. We will be referring to the presentation that was published on our website this morning. And as usual, we ask you to take careful note of the disclaimer on Slide 2 regarding the forward-looking statements. Well, in brief today, we are announcing plans to reduce our cost base further in response to the impact of COVID-19 and the emerging economic recession, which will prolong the recovery toward pre-crisis growth. As mentioned in our first quarter conference at the end of April, we are already implementing substantial cost reduction initiatives, but unfortunately, this will not be enough according to the scenarios we have been evaluating. We, therefore, intend to reduce our global workforce by roughly 9% across all countries and functions. This corresponds to potentially 660 people, of which approximately 60 will be at our headquarters here in Basel. We are very conscious of our social responsibility and are committed to managing the reduction process in a responsible, fair and respectful manner. It will also be in accordance with local customs and regulations. Our goal is to complete the resizing quickly in order to minimize uncertainty for our colleagues and to focus fully on accelerating our business. I would like to emphasize that the fundamentals of our markets, namely replacements, restorative, regenerative and aesthetic dentistry remain valid and very solid for as like basis of our business. The resizing initiative will not derail our strategic project and will protect our ability to innovate, manufacture, supply and sales winning solutions. We are maintaining flexibility in production and are confident that we will bounce back quickly and strongly as soon as demand picks up. To give you the context for our decision, please turn to Slide 4, which is an update of the slide we showed you 2 weeks ago. As you can see in almost all of our key markets, especially Europe and North America, a large proportion of dental practices are either closed or are handling essential treatments only. The impact on our revenues is shown on the left of the Slide 5. Sales began to drop sharply around mid-March and continued to decline in April, where revenue decreased by 70%. We shared this information with you 2 weeks ago, and it is too early to say anything about May, although we do expect some improvement as the quarter continues. Please understand that the chart is, of course, for illustrative purposes only and is not drawn precisely. We have recently shared our concern about the economic issues resulting from COVID-19. As GDP figures show, the pandemic is causing a global economic recession. In almost all of our key markets, consumer confidence and disposable income have declined significantly. And according to feedback from markets that are now open, a large proportion of elective dental treatments are being posted. Taking these factors into consideration, the scenario, we think, is the most likely is between a U and an L recovery shape. Actually, Slide 6 shows the 3 phases that characterize this journey. At present, we believe that the economic activity is entering the restart phase as lockdown are easing and will improve once things start up again. But there is still some way to go until full recovery is reached. As you can see in Slide 7, the group has been gearing for continuation of the very strong growth trend seen in these recent years. As a result, our present organization has been built on and for sustained double-digit growth, doubling its headcount over the past 3 years. Consequently, in today's new reality, our cost level is too high relative to sales, and we must bring it in line quickly. Moving to Slide 8. Resizing is painful but essential to protect our future as a market leader and to answer that we remain fully in control of our destiny. This is why we are acting quickly and not waiting until it is too late. Our goal is to achieve high double-digit million savings in 2020, including the personnel reductions and restructuring costs of approximately CHF 15 million. In 2021, the expected savings from personnel reductions are approximately CHF 30 million. Our efforts to adapt rapidly, in combination with our culture of agility, embracing change and creating opportunities will help us to navigate through these challenging times successfully. We are convinced that we can get back to strong growth when surgery activities, patient traffic and treatments assume a new normal. We're also confident of gaining further share for the following reason. We have our geographical coverage and a wide product range. Our implant portfolio is unparalleled and covers all price levels in all our key markets. We have a strong rollout pipeline, including state-of-the-art digital solutions, BLX, Virtuo Vivo, Smile in a Box, ClearCorrect and more to come. We have everything we need to lead and drive immediately in implant dentistry, which will going to continue to be a major trend. We are maintaining key initiatives, such as our innovation projects, enabling us to stay focused on tomorrow's customer needs. We have been using the lockdown to gain and educate customers. Our online initiatives have been very successful, attracting more than 200,000 visits and over 20,000 customer leads. With a resized team of 7,000, and I would even say a talented team of 7,000, we will still be the driving force of our field, with one of the strongest dedicated sales team covering all key geographies globally. I would like to add a word of sincere appreciation and respect for everyone in our global team. They have acted responsibly, creatively and diligently to make the best out of this situation and to ensure that we will continue to be the global partner of choice in aesthetic dentistry. And now we would be glad to take your questions, bearing in mind, of course, that we will not be able to give you a guidance on revenue or profits for the full year. So Chorus Call, can we have the first question, please?

The first question comes from Veronika Dubajova from Goldman Sachs.

Yes. If I can start with one, please. Just curious what has changed. I mean obviously, we heard from you fairly recently. And I think at that point in time, you said the option of significant cost cuts was on the table, obviously, but it didn't seem necessary. So I'd love to understand, Guillaume, from you, what has changed in the last 3 weeks, where -- kind of what has informed your thinking? What are you seeing on the ground? And then I'll follow up after that, if that's okay.

Yes. Of course, yes. Thanks for the question. I would not say that something has changed, but something has been confirmed. We were then looking at different scenarios and, of course, evaluating those different shape of recovery. And we were really, really precisely looking at rebound in Asia Pacific and especially how the lockdown will continue or not in our key geographies, such as Europe and North America. What we have seen in the past 3 weeks has been an almost completely at own market in U.S., still completely close in Canada. Very, very, very huge progress in Italy, Spain, France, U.K., and with information from a lot of government that they will not ease anything before June. And when we look at the information from Asia Pacific where news are positive, like bouncing back is getting there, the capability to get back to double-digit growth very quickly really did not materialize because of not only the fact that customer confidence needs still to grow, but also the PPE réglementation are really slowing down operations in a lot of the different practices. And for us, we just got the confirmation that the V shape will be out of scope. And being out of scope for us, then it's necessary to adapt our structure to the new reality.

That's very helpful. And I think when you spoke at the first quarter update, you expressed some optimism based on things you were seeing in Germany, for instance. Are you able to share an update on that recovery at all?

Yes. The good news in the countries are, well, still continuing, and we can share that countries -- Germany but also what we call DACH, then Switzerland, Austria, but also Nordics are getting back well in shape, then that's still very positive for us. And that's why we are positive instead of -- in terms of bouncing back. But obviously, being able to very quickly go back to double-digit growth in comparison with 2019 within the next 3 to 6 months are heavily depending on the fact that big-growth regions like the Americas are also getting back on track, which is not going to be the case for the next, well, 4 to 6 weeks.

Understood. Okay. That's very helpful. And then to the extent that you are able to, if you can comment on the planned personnel reduction. Just give us a little bit of flavor which geographic markets and maybe areas of the business you're targeting specifically to the extent that you're able to talk about it. And that's my final question.

We are going to have a reduction in all the different geographies and all the different functions, but it's very depending from all the local legal situations. And we are not able to disclose more data as we speak right now.

The next question comes from Tom Jones from Berenberg.

I had 2. The first, I just wanted to clarify the second bullet point on Slide 8, where you talked about high double-digit million savings in 2020 and then CHF 30 million from personnel in 2021. Just to clarify, that high double-digit million number this year, does that include all the stuff that you talked about on the conference call, plus some personnel savings from your -- this effort to reduce the headcount? Or is that high double-digit million number what you expect from this current initiative to reduce headcount, and then there's more behind that based on what you announced on the Q1 call? Just some clarification of that would be helpful.

Yes. Thanks, Tom. Peter, do you want to comment?

Yes. Yes. Thank you for the question, Tom. I mean the high double-digit million includes, on the one hand, the reduction of the personnel in 2020. On the other hand, I also do not expect a lot of savings in 2020. And we do that basically to resize our cost structure mainly also for '21, and we expect the CHF 30 million savings in '21. And why the reason I do not expect a lot of savings in 2020? On the one hand, we have certain notice periods. We are going through a certain process. Also, we want to come over that situation as fast as possible so that everybody has also a clear picture if its position is affected or not. And on the other hand, as we have laid out, we are also expecting restructuring costs this year in the order of CHF 15 million. So for 2020, I would not expect a big saving impact due to that restructuring.

Okay. So I'm still a bit unclear as to why you expect a high double-digit number this year and then only CHF 30 million next year.

Because, I mean, the high double-digit million numbers are the different savings initiatives that we have initiated. You can imagine that also in the past 8 weeks where business activities was very low, we also did spend not a lot of money for promotional activities, marketing activities or for travel, for example.

Okay. Now that's clear. Now that makes sense. Perfect. And then the second question that I wanted to ask was just, why now? I mean there's an awful lot of uncertainty about how the recovery might pan out. This is a novel experience for all of us. This isn't a new -- a type of economic slowdown that we've seen before. And given that various government support schemes and furlough schemes are supporting salaries of workers in many, many countries, given, as you pointed out, we're only just at the restart of the economy, at the very beginning of the restart in the economy phase. Why do this today? Why not wait just 1, 2 months and get a firmer idea of how the recovery is going? Because if you get surprised, and we do end up with a V-shaped recovery, this move would then look somewhat premature, particularly as the cost of keeping those employees for another couple of months, well, in many cases, can be covered by government support programs. So I'm just intrigued as to why you've done so earlier. I know there are maybe some lessons to be learned from '07, '08, and '11 and '12 when Straumann was slow to address its cost base, but those are both financial market-driven slowdowns. This is a virus-driven slowdown, so a completely different beat. So I'm now just intrigued as to why you've decided to pull the trigger today and not just hang on another month or 2 to get a clearer idea about how the recovery might pan out.

Yes. Well, I think that's a good question. The answer is rather clear is that as an organization, we have been geared up to a very strong double-digit growth. And our -- once again, our structure has been built because of in order to support that growth and also in order to continue it. Then what we are sure is that whether the rebound is coming, it will take some time in order to get the same speed that we were knowing just precrisis. Then for us, this is also an opportunity to be able to adapt to the new reality and potentially to reinvest in different areas of the business based on the different learning that we are going to make from the crisis.

The next question comes from Michael Jungling from Morgan Stanley.

Great. I have 2 questions. Firstly, the response of others -- quick response to the crisis versus 2 to 3 weeks ago, is this a decision that the management board and the supervisory board fully agree on? Or could you perhaps comment on whether there were some disagreements as to whether this is the right thing to do today? And then question number two is, if I look at your earlier press release, you talked about the demand for cheaper solutions. Could you please explain what you're observing now? Are you talking about a transition from dental implants to crowns and bridges? Are you referring to premium implants going towards value-based implants?

Yes. Thanks for the question. Then, yes, we have been fully aligned with such decisions. This is -- those are part of the most difficult decisions leadership can make. Therefore, a full buy-in from our Board and the full buy-in of our Executive Committee is critical in order to have a very strong execution and especially being able to have afterwards a very common way to look at what needs to be done short and midterm. Then I can really tell you that we have been debating very quickly, and very quickly, everyone have been rallying to that decision and are fully aligned to execute on it. The second thing is also then with regard to your second question there, that's based on the past, I would say. We have seen after the financial crisis that, first, the general practitioner were keeping the business in-house, meaning not referring patients to specialists for implant placement because they were wanting, of course, to generate cash for their practice, but then that means avoiding implant treatment and favoring in-house for the bridges. But we don't think this trend will be strong this time because implant penetration has increased very significantly, and we believe that a lot of GPs, and we know a lot of GPs are placing implant themselves. Then we will not see, we think, a huge resurgence of free unit bridges instead of implant. On the other hand, what the other crisis told us as well is that because dentists are running for cash and are looking for -- then making sure that they could increase their financial position or improve their financial position, they are looking at trying to do savings on, well, everything they can and especially their purchase. And this is where we have seen that general practitioners and implant placers are looking at cheaper solutions still in the implant field, but potentially being to change brand in case we don't have any solution. The good news for us this time is that we have alternatives to propose to customers, which was not the case before, then we would not lose customer, but we would potentially have a lower ASP mix based on the different value or premium brands that we would be selling.

Okay. Great. And then please check up on a previous question I asked on the last earnings call. Is it still reasonable to assume that Straumann will have an EBITA profit in the first half? Is that still something that the organization feels comfortable with?

Peter speaking, Michael. Yes, I feel comfortable with that decision. Also, obviously, we don't have visibility -- full visibility on May and June yet, but I feel comfortable with that assumption. Yes.

And what we can say with what we have seen with mid-May, yes, it has confirmed that trend.

The next question comes from Sebastian Walker from UBS.

Two as well for me. So maybe, first, in the geographies -- so that slide where you show the different countries and clinic openings, could you maybe comment on in the countries where you do have clinics open, what do the volumes look like within those clinics? And then I'll follow up on the second one.

Yes. It's obviously a very dynamic situation. But I would say, as of the first 2 weeks of May, we can see that -- we see activities in the Asia Pacific clinic as getting back to normal, doing a lot of elective procedure. That's the case in China. That's the case in South Korea. Japan has been impacted, as we discussed in the last call then in the 2 last week of April, and it's still in a recovery phase in the area where they have implemented this localized lockdown. In the practices in Europe, again, Germany, Austria, Switzerland, are now almost getting back to normal with that caveat about the PPE and the fact that they have to operate on a 15% lower productivity than what they have used to. That's what we can say, which is exactly the same that we have in Nordics. For the rest of the countries where we have some [ 50% ] opening, we see a lot of activity still being limited to classic dentistry and not doing too much surgery yet. And I would take, as an example, again, France has reopened at the beginning of the week, but it's still cautious in term of activities done. Same for Italy. Spain is very limited as well. And U.S.A., as, I guess, most of you know, is Central U.S. is active and are starting, again, like before, but all West Coast, California and also then the Seattle state are not active at all. It's still complete lockdown. And on the East Coast, it's the same. New England is still rather closed, and all the different area of New York and all the New York space and around are also completely closed. And those geographies, Canada, U.S., Brazil are still very difficult.

Got it. That's helpful. Sorry, just to confirm, when you say the lower efficiency in Europe, did you say 15, 1-5 or 50, 5-0?

No, no. 15, 1-5.

1-5. Got you. Okay. Great. And then the second question is on the kind of the recovery scenario. So when we think about 2020 volumes, should we really be using then 2020 as the base to go off from rather than kind of using 2019 or thinking that we could even get back to 2019 levels in 2021?

On this, it's very difficult to give an answer. That's where we will see moving forward. We believe that, yes, by the end of -- we will not be able to recover by the end of 2020, the '19 level, obviously. We will see Q4 where we are going to end up. But to be honest, nobody know right now because it will a lot depend on regions where we have very low visibility like the Americas.

The next question comes from Daniel Jelovcan from Mirabaud.

Yes. Just also to understand why the decision now and not wait for another 1 to 2 months until you have better visibilities. Can you give me the details about all the government schemes? How long they are in place? And I think in even some countries, I think they are debating even to extend the incentive -- sorry, incentive -- the scheme for short-time work and so on. Can you give us an update about that situation?

Well, yes, we don't have the details here about every single country. But the reason again for doing that now is to adapt the organization to the reality, which is going to be, and we are convinced about this, it's going to be growth and we are going to get growth back. But getting the double-digit growth that we were planning as our 2020 budget and the next 3 years, we don't think that the recovery will allow us to be able to get back on double-digit growth at the level that we were expecting in terms of net revenues for affording the current structure we are having right now. If you see our numbers in the past 3 years, we have doubled our workforce. We went from 3,700 team members in early 2017 to 7,690 (sic) [ 7,680 ] at the moment. Then this has been built because of the very strong growth we have been able to achieve, but especially with the very strong double-digit growth we were planning to do. Then those level of earnings are not going to be -- are not to be achieved then in line with our expectations, then this is why we need to resize the team now. We don't believe that it will impact our capability to bounce back short term. That's what is very important in the way we are conducting this job reduction. We are looking at keeping all our innovation project, most of our feet in the ground. Then we are -- we don't think that we are significantly weakening our organization, we are just readjusting it based on the new growth rate and the new potential revenues. When it comes to a short-time work, and we have used the short-time work to absorb the big dip that we are having right now, which is obviously very important due to that total practice closed. But it will not allow us to adapt our overall cost structure to lower revenue that are not going to come versus our plans. That's the reason why we are taking the decision now. When it comes to government subsidies, I think most in Europe, there are government subsidies in the -- until July, August. I think Switzerland, in most of case, is September, at least the information we have been having. And yet, we don't have any confirmation of the fact that this will be prolongated. But for us, this is not really the issue because this is, again, for adapting to the short-term shock we're having right now. But long-term view, we need to make sure that we have still our capability to generate the profitability that is necessary for our development and being able to reinvest also significantly in the growth in the future. Maybe another thing because you are talking about subsidies. We are, as an international company, having a workforce which is very developed in the whole different part of the world. We have a huge workforce in U.S. We have a huge workforce in Brazil. And in none of those countries, for example, there is 0 subsidies from government that we can play with, which is also a very important factor to notice.

Next question comes from Daniel Buchta from Vontobel.

Two questions. And the first one maybe on Page 5 where you show the recovery on the macro side, and you assume U and an L scenario being the most likely one. I mean if I look back at what you said for 2019, the global implant market was roughly 25 million, premium a bit more than 6 million. I mean based on these 2 scenarios, it's difficult to say it probably, but your best guess. What would you say about how volumes may develop in 2020 and then maybe 2021 and thereafter? Is the pace of growth 4% to 5%, which you were saying before, still realistic afterwards based on these 2 scenarios? And then the second one, I mean, we have seen a couple of reportings now from your peers, Envista, Dentsply, Henry Schein and Zimmer Biomet and all these guys. They -- I mean not everyone is as transparent as you. But I mean my read-through is that maybe with the exception of Dentsply, numbers were much weaker at your competitors. Which measures do you see them implementing? How do you think this could change your competitive positioning? Because probably I assume pressure to save cost there is much higher. Could you say a little bit on this?

Yes, Daniel. Good question. Again, it's still, and we have to admit, it's still very difficult to know what's going to be the trend in '20 and '21, honestly. But if you ask me my personal view, then I believe that when you look at the Slide 6, actually, then I believe that the -- where we are going to start from a lower base in 2021, I believe that as the fundamental of our markets are still valid, there are still a significant need for tooth replacement. Implant is still the golden standard. Implant penetration has still been low, and there are more and more dentists capable to do this. I see the market being able to continue to grow 5% to 6% when the major shock of the COVID-19 crisis will have been passed through. Then we still believe that the whole fundamental of our business remain valid. Now it will come from a lower base, and we will see a little bump when all the different geographies would have been restarted. Again, when all Europe will be active and when all Americas will be active, I think we'll see also a significant effect here. I'm convinced about this. Then yes, we should be able to get back the growth rate starting by, we hope, by Q4 this year, or otherwise, at least early Q1 2021. When it comes -- I'm not sure I understood your -- the sense of your second question, Daniel. Could you -- can we ask you to rephrase it?

I mean yes, basically, if you say what all your -- see what all competitors are doing on your side at the moment, and they are probably -- I mean not everyone is as transparent as Straumann is, but probably maybe with the exception of Dentsply, all of them are performing far worse than you did in the first quarter. I mean how do you think this can affect the longer-term competitiveness of these players?

Yes. I think this -- if you have to ask them, Daniel, it's difficult for me to say. But obviously, what we are convinced about is that when you're entering a crisis strong, then if you do things well, you get back stronger. Because, of course, when you are in a weak position before financial crisis, and you need to save costs, and it's a tough call about the decision of cuts that you have to do. We have been very lucky in the fact that -- or we think that we are in a -- and it was not about luck but about performance of the company before. But we have been in a very fortunate situation to have a very strong innovation pipeline while entering into the crisis. We just are continuing what we do. We have had good results so far for what we have faced, allowing us to continue our development and making sure that we can be, after the crisis, with still a very strong way to innovate in the marketplace. And in this sense, we don't know if our competitors will have the same capability, but that's more a question mark than anything else. It has to be proven afterwards elsewhere. We focus on what we do. We focus on trying to be efficient on the field and on our execution and continue to invest where it's necessary.

The last question comes from Michael Jungling from Morgan Stanley.

Great. I have 2 more. And the first one is really -- I still don't understand quite the other scenarios. The question is for the scenario planning of the minus 9% in the workforce, which scenario does this relate to? Is it, a, 2021 is going to be a flattish growth year for you? Or b, 2021 is a modest growth year? Or even, c, that you're planning that 2021 could be a reduction in overall sales? And then question number two is, in your workforce reduction of 600 people ex head office, can you give me a sense of what proportion of salespeople? And do you foresee a change in the sales model where the salesperson may not be the one that drives the sales growth because you may not be permitted on a 12-month view or so to actively participate in someone's sales -- someone's dental practice?

A lot of questions. Interesting one. Fully agree. Well, first, this is -- I will -- maybe we have not been clear enough, but I will try to then to explain that. Basically, we expect a strong 2021 growth, of course, but versus 2020, okay, because 2020 would have been low, then there is no doubt that we are expecting 2021 to be a strong growth year versus 2020. But it will not be a strong growth year versus 2019 because, again, of the dip that we are going to take this year. What does it mean? That means that because of the fact that our 2020 budget and year was also based on a double-digit growth versus very strong year before, our structure is way too high versus that new reality and that new base of what 2020 is going to be. Then we still believe that 2021 is going to be a very good year, in line with what we think of the recovery. Now once again, we have to take that with a lot of caution. Nobody will know what 2021 is going to be, if there is another strong surge of COVID-19 during the fall 2020 or the winter 2021. And again, everyone has to be mindful about the fact that this is all scenarios, and nobody knows. But the way we plan this with our 9% workforce reduction is still including our capability force to have a very strong 2021 year growth if circumstances around us allow this. When it comes to the -- our -- the kind of positions, I have said before, we are not in a position to disclose detail of which is affected, who is affected, where, because this is still under discussion. We have some legal frame that we have to respect. But obviously, there is some area that are going to be impacted a little bit more than others. And of course, our strength in the field is not foreseen to be reduced significantly in any way. And for the third question, which is, I think, an interesting one. Yes, we are looking at model on how to do different customer interaction. Just for you to know, our eShop has been obviously exploding, and we are still conducting a lot of sales through our eShop right now. And the way to interact with customers are also significantly changed during the crisis, especially with all the example we gave you with the online education. Then are we considering that and having plans on continuing or leveraging that experience forward? The answer is yes. There are some plans that we are doing in order to evaluate how we can help our customer to gain efficiency and us as well within the different relation or contact points that we're having with them. Too early to talk about this in detail, but that's one of the very important learning from that crisis, that there is a kind of other go-to-market model that needs to be evaluated.

Great. But short term, you don't see a reason why you would not be permitted to go into a dental office to sell dental implants. That is maybe in 2 months' time, the idea is that you would not be restricted in the way that you can approach the customer physically.

We -- well, for the time being, we don't see this. We have seen that in some geographies, but we have to respect, of course, the different réglementation. We have already planned everything from our sales team, depending on which kind of customers you are visiting also. Is it a GP not doing surgery? Is it a surgical-oriented practice? Then we have different rules of interactions with customers with also retail and also wearing of gloves or wearing glasses in some areas and meeting them in some different places. And we have to adapt to the different réglementation and different also expectations from customers. But we don't see today a major obstacle for us to keep adding physical contact with dentists. Is it the way we want to do that, again, in the future? This is an interesting question that we're evaluating as the major way to interact. But short term, yes, we believe that we can interact with customers the way we have been interacting with precautious measures that we have to put in place. Thank you all for your interest and questions. If you need further assistance, please get in touch with our Investor Relations and our Corporate Communication teams. The challenges of adapting to new norms, a new reality affect us all, of course. And I would like also to finish by wishing you all the best with your own work, business and sales organization. Have a great day. Stay healthy, and goodbye.