Straumann Holding AG (STMN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Straumann Group Q2 2021 Results Conference Call and live webcast. I'm Myra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Guillaume Daniellot, CEO. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining this conference call about Straumann Group's first half year results for 2021. I very much hope that you, your families and your colleagues are doing well. Although the restrictions are being lifted in many countries, the numbers of COVID-19 cases remain high and are rising again in many areas. We are continuing to take action to keep our people safe and support the fight against COVID-19. And in this period, we are pleased to see that vaccination programs are moving forward in many places. As a company, we strongly support vaccination as we believe that it is the only way out of the current situation. Please take note of the disclaimer in our press release and on Slide 2. During this conference, we are going to refer to the presentation slides that were published on our website this morning. As usual, the presentation and discussion will include some forward-looking statements. The conference will follow the usual format, as shown on the agenda on Slide 3. I will give you an overview of where we stand. And our CFO, Peter Hackel, will share details about the business performance across all regions. After that, I'll provide you with an update on key strategic initiatives and our outlook for the future. Of course, we'll both be available to answer your questions at the end of the presentation. Let's start with our highlights and move directly to Slide 5. Please keep in mind that pandemic-related disruptions significantly impacted our second quarter 2020 results. And this should be considered when making comparisons to our second quarter 2021 results. Straumann Group revenue reached CHF 986 million in the first 6 months of 2021. This was driven by continued growth in the second quarter with revenue of CHF 560 million. This result was only possible because of our entire team, did a tremendous job of focusing on customer needs and delivering on the high level of demand. Organic sales increased by 63% in the first half of the year and by 103% in the second quarter. Profitability significantly improved, and we achieved a core EBIT margin of 28.8%. Straumann Group continued to invest in innovative technologies, go-to-market opportunities and production capacity expansion. Our immediacy portfolio definitely continues to be a highlight and our innovative fully tapered BLX implant system is further growing its position in the immediacy market. To support our continued market share gains, the new TLX implant, which we have already successfully pre-launched, will be fully launched in the third quarter of this year. On the clear aligner front, we strengthened our doctor-led direct-to-consumer business by acquiring the Brazilian company, Smilink. Similar to DrSmile, Smilink combines direct-to-consumer marketing expertise with high-quality doctor-led treatment, further complementing Straumann's existing clear aligner business. Given the strong first half of 2021, we have raised our guidance to full year organic revenue growth of above 30%, and we expect profitability to nearly reach the 2019 level, assuming the pandemic does not negatively impact the patient flow. On Slide 6, you can see our strong growth continue in all regions in the second quarter of 2021. It is important to keep in mind that the comparison quarter in 2021 was heavily impacted by the pandemic. And overall, the patient flow remain healthy around the world and a tailwind for specialty dental treatments that already supported the first quarter continue. We expect this tailwind to continuously soften during the second half of the year, even though our customers are currently reporting that their appointment calendars are solidly booked. EMEA and North America reporting organic growth increases of 102% and 135%, respectively. Latin America and Asia Pacific performed also strongly with 164% and 63% growth, respectively. In Asia Pacific, the recovery began in the second quarter of last year. So the comparative pace for this year growth rate is higher than for the other regions. Overall, this leads to a very solid 2-year average growth rate of 16% for the group. With this, I will hand over to Peter to provide you additional details.

Thank you, Guillaume, and good morning, everyone. I would like to start by talking about our revenue and operating profit on Slide 8. As Guillaume mentioned, the group's revenue reached CHF 986 million in the first 6 months of 2021, which is a record for the first half of the year. This is in contrast to the first half of 2020 when revenue decreased by 22% to CHF 605 million because of lockdowns. This result was supported by the strong performance of our existing portfolio. And as Guillaume mentioned, thanks to the healthy patient flows around the world as well as the ongoing tailwind for specialty dental treatments. The second quarter revenue reached CHF 516 million in 2021 with a corresponding growth of 108% compared to CHF 248 million in the second quarter of 2020 when revenue dropped almost 40% in Swiss francs due to the pandemic. To put this into perspective, in the second quarter of 2019, revenue rose by 14% in Swiss francs to CHF 408 million. Looking at Slide 9, you can see more details about the revenue development. At 21 exchange rates, our 2020 first half revenue would have been CHF 15 million lower because of unfavorable currency effects that were mostly related to the depreciation of the U.S. dollar, the Turkish lira and the Japanese yen. The favorable development of the euro only partially offset this negative currency effect. However, as you might remember, in previous years, currency headwinds were considerably higher. The M&A effect this year added CHF 14 million to our adjusted revenue of CHF 604 million. This was largely related to DrSmile. In the middle of the chart, you can see that all of our regions reported double-digit growth in the first half of '21. The absolute organic growth of CHF 381 million was mainly driven by EMEA and North America, which are our biggest regions. Let's move on to Slide 10 and have a closer look at the regions. EMEA and North America contributed CHF 230 million and CHF 152 million group revenue. Given last year's low base, they reported triple-digit organic growth of 102% and 135%, respectively. The EMEA region remained the group's largest revenue contributor. Premium implants are picking up fast with strong sales across the entire premium immediacy portfolio. The challenger implant brands are also performing well, with Neodent now established as a brand in the region. The orthodontics business is strongly supporting growth in EMEA with DrSmile and ClearCorrect, which recently launched its ClearQuartz material. Overall, growth in this region was driven by Germany, Iberia, Russia and the U.K. North America only began to recover at the beginning of June last year when knockdown started to ease. This led to an organic decline of 42% in the second quarter of 2020. In the second quarter of '21, the North America region returned to strong growth, thanks to the implant business, which is being driven by the Straumann and Neodent brands. Some large wins with dental service organizations in the first half of the year propelled the business to higher growth rates. Digital solutions are growing very quickly and the orthodontics business was supported by the recent software improvements. Overall, our Canadian business, which is significantly smaller than the U.S. business, is growing almost twice as quickly as the U.S. due to the continuous penetration, the increase of the challenger brands and digital solutions. Slide 11 focuses on our performance in the Latin America and Asia Pacific regions. Asia Pacific saw organic revenue increase to CHF 103 million in the second quarter, which is a 63% increase compared to the same period in 2020, when most countries in the region started to rebound in June. From the first to the second quarter of '21, our business accelerated throughout the region by growing the existing business and increasing market share led by China, Japan and Taiwan. Premium and challenger implant brands are driving growth, while challenger brands are growing faster than premium brands. Latin America reported revenue of CHF 31 million in the second quarter of '21 and grew 164% organically. This is a significant improvement compared to the same quarter of 2020 when we reported a decline of 60% to CHF 11 million in revenue. Brazil is by far the biggest revenue contributor in this region and managed to continue the strong growth performance seen in the first quarter of '21. This was followed by strong growth in Argentina and in Chile. Neodent continues to be the strongest brand in the region, while the premium implant brand is establishing its position further. Digital solutions are growing very well with the Virtuo Vivo intraoral scanner gaining momentum. The orthodontics business is increasingly contributing to the regional performance and the acquisition of Smilink will help to further establish the group's doctor-led direct-to-consumer portfolio. The 2 regions, LATAM and Asia Pacific contributed CHF 134 million to overall group revenue. Turning to Slide 12. We can take a look at our performance by business. Implant sales more than doubled and once again contributed the largest share of our growth. The group's premium immediacy solutions continue to be an important growth driver. You will hear more about this exciting development from Guillaume later. Our challenger implant franchise outpaced the premium business again. We almost doubled sales of Neodent in North America, while Anthogyr showed fast growth in Asia and almost doubled its European business compared to 2020. Our digital and restorative business saw high double-digit growth with a particularly impressive contribution from North America. The trend for digital is continuing and supports our intraoral scanner sales. Our biomaterials business has rebounded and sales more than doubled, which was driven by all regions. Sales in orthodontics almost tripled in the second quarter. This was driven by the new material ClearQuartz, the updated software ClearPilot 2.0 and further software enhancements, fueled by high demand for doctor-led direct-to-consumer clear aligner solutions. The next slide shows an overview of our core financials. Core gross profit rose to CHF 752 million, and core EBIT rose to CHF 284 million, with the respective margins reaching 76% and 29% in the first half of 2021. The gross margin improved by 530 basis points, while the EBIT margin gained 1,220 basis points. The respective currency headwinds took 30 basis points of the growth as well as the EBIT margin. Core net profit increased by more than 200% to reach CHF 227 million, and the margin improved by 1,090 basis points to just above 23%. As a result, basic earnings per share increased from CHF 4.49 to CHF 14.19. For full clarity, you will find the year-on-year comparison on a reported IFRS basis on Slide 14, followed by the alternative performance measures, reconciliation table on Slide 15. Our reported net profit rose to CHF 175 million. The increased estimate of contingent consideration payable due to the very strong sales performance of DrSmile, represents the majority of the difference related to core net profit. As per definition, amortization of acquired intangibles are excluded from the core net profit. Looking at gross profit development on Slide 16. Our gross margin for both core and reported amounted to 76% in the first half of 2021. This improvement was mainly due to top line leverage and efficiency gains, which added 560 basis points and brought our margin close to the level achieved in 2019. As a consequence of our strategy, the more dynamic growth in digital and value implants caused the change in our portfolio mix, which led to a decrease of 110 basis points. Without the currency headwind, our margin would have increased by 30 basis points. As shown on Slide 17, our core EBIT margin expanded by 12.5 percentage points to 28.8%. This was mainly due to the operational gearing and lower OpEx expenses in distribution and administration because of fewer on-site activities such as customer and education events as well as related business travel. Unfavorable currency movements cut the improvement of margin by 0.3 percentage points. As you can see on Slide 18, the combination of the previously mentioned operational factors contributed CHF 154 million to core net profit, which tripled to CHF 227 million. As discussed earlier, the increased estimate of contingent consideration payable to the sellers of DrSmile led the reported net profit to CHF 175 million. Slide 19 provides a breakdown of our cash flow statement. The operating cash flow increased more than 400% to CHF 257 million, while the free cash flow increased from CHF 11.5 million to CHF 210 million. Income tax charges minus the data in income tax payments increased by CHF 22 million. Changes in CapEx and net working capital were rather small. The half year free cash flow margin increased to a historically high level of 21.3%. With the cash position of CHF 725 million, the group is CHF 217 million cash positive considering all debts. And with that, I'll hand back to Guillaume.

Thank you very much, Peter. And let's move on to Slide 21 and look at the recent achievements and strategic update. To put everything into perspective, let's focus on the premium implant portfolio first. Now according to estimates, in 2020, the global dental implants market was worth about CHF 4 billion, with premium implants accounting for approximately half of the market in value terms. This market is divided into segments according to implant designs and related treatment options. Parallel walled implant make up 1/4 of premium implants and support a more traditional treatment approach. Tapered implants represent above half, while fully tapered implant represent about 1/4 of the premium market. Tapered and fully tapered implants are designed for immediacy approaches that offer shorter time to teeth or treatment options for health consumers. They also enable clinicians to reduce chair time for patients, so they can treat more patients and grow their practices. Worldwide, more than 80% of all implants and more than 2/3 of premium implants sold in 2020 were tapered. Our Straumann premium brand entered this market segment in 2014 with the apically tapered BLT. And we estimate that we have gained more than 40% market share in this segment since then. In 2019, the launch of BLX followed with tap into the fully tapered market segment. Another differentiating factor between implant designs is the level where the top of the implant is set in a patient's mouth, either at bone level or at tissue level. Now BL, BLT and BLX implant lines are set to end at bone level. Now tissue level and TLX implants, on the other hand, are designed to be placed with micro-gap at the tissue level, which offers advantages of simplicity for the prosthetic procedure. With the Straumann TLX, we are bringing a unique solution to the market that combines the advantages of the fully tapered design for immediacy with tissue-level design for periodontal performance. This will continue to grow the fully tapered segment. Initially, customer surveys show that TLX can persuade clinicians who currently prefer traditional treatments to switch to immediacy treatment. TLX can also help us to win new customers who have used bone level immediacy implants from our competitors and who appreciate the added value of the tissue level concept. This brings us to Slide 22. And immediacy is driving growth in the premium implant business. This continuing success confirms that these solutions also serve as an entry point for converting new customers and leveraging our entire product portfolio, including BLT. In June 2021, roughly 1/4 of BLX users were new Straumann customers and more than 2/3 of them also purchased other Straumann implants, confirming the pool effect of BLX on higher premium implant franchise. BLX is now available in 67 countries, and the global rollout is continuing. The most recent major launch was in Russia in June, making China the only remaining major market without BLX available. And we are looking forward to bringing BLX to China in 2022. In addition, feedback shows that customers are seeing big potential for TLX to simplify the treatment of edentulous patients, while also benefiting from the predictability of the tissue level design. For this reason, we expect TLX to drive growth for the edentulous segment. This was one of the key topics discussed at the TLX online symposium in June, which attracted almost 1,000 participants from 89 countries. We also are on track for a full launch of TLX at the upcoming online ITI Wall Symposium in September, for which we have already received almost 4,000 registrations. On Slide 23, you can see that the value market, which represents the other half of the CHF 4 billion implant dentistry market, also offers great potential. We estimate that we have a 10% market share in the value segment as we speak. About half of this related -- about half of this is related to Neodent implants, which were sold in Brazil. All of the regions still offer huge market potential, and our expansion in this segment worldwide is progressing very well. Slide 24 summarizes our position in the value segment. Our decision to enter the non-premium market in 2012 has significantly expanded our addressable market. Until then, Straumann was a premium brand only. Our Neodent, Medentika, Anthogyr and Nuvo brands now enable us to compete in the non-premium segment by offering implant systems at different price levels in different regions as well as by offering attractively priced abutment for third-party systems. On top of this, our geographic footprint has grown. Neodent is now a global brand that is available in more than 80 countries. Consequently, we are continuously investing in ramping up our production activity. Anthogyr has also expanded its presence in key countries. This includes its home country friends where Anthogyr is one of the top 4 players in the value segment. The brand is also expanding in Russia and China. And in fact, Anthogyr celebrate its 20th anniversary in China this year. Let's move to Slide 25 and our orthodontics business, which continues to grow well. The global market for clear aligners is one of the fastest-growing areas in dentistry, and we continue to expect growth in orthodontics and implant dentistry to outpace the general dental market. With the introduction of ClearQuartz, the new material of ClearCorrect aligners, we have made a huge step forward in further establishing our position in this segment by improving comfort for patients. In a recent survey we conducted, more than 3/4 of patients said that ClearQuartz aligners are more comfortable and have a better fit than aligners made from the previous incision. More than half of the doctors stated that they will increase the number of cases they treat with ClearCorrect because of this new material. As mentioned previously, it was launched in Europe in the first quarter of 2021 and is now available in all markets, except China. Likewise, the new software, Collaborator, has been very well received in all markets. This new feature within the ClearCorrect digital customer portal that we launched at the beginning of this year, supports collaboration on clear aligner patient cases by enabling doctors to share individual cases with staff, other clinicians and treatment planning services. In this way, we are able to exchange expertise and seek advance. The global launch of the ClearPilot 2.0 software update with additional features that improve visualization of treatment planning and immense communication of patients has received an excellent feedback. The update also includes a view that is optimized for mobile devices like tablet computers, which are widely used in many practices. With Slide 26, I would like to speak about our direct-to-consumer brands for doctor led clear aligner treatments. Our DrSmile brand is expanding its network of partner practices in Europe, establishing its solution in Austria, France, Germany and Spain with recent rollout in the Netherlands, Poland and Sweden. Recently, we acquired Smilink in Brazil, which is one of the fastest-growing providers of orthodontic solutions in Latin America. Similar to DrSmile, Smilink combines direct-to-consumer marketing expertise with a doctor led treatment, and it complements from an existing clear aligner business. This acquisition will offer further growth opportunities with partner dentists, and it strengthens the group's portfolio of convenience, clinician-based aligner treatment solutions for patients. With this acquisition, we have now set the foundation to further establish orthodontics in the doctor-led direct-to-consumer segments in more markets around the globe. On Slide 27, we can see the development of our workforce globally. Our global team did an amazing job to make this year's first half results possible. In particular, I would like to mention our colleagues in supply chain, production and operations, who make sure we always have the raw materials we need, and we're able to meet high demand for products despite the challenges of the global pandemic. We are constantly investing in people as part of our efforts to capture new growth opportunities and welcomed more than 800 new joiners to our global team in the first half of 2021. These colleagues are mostly employed in positions that support manufacturing of our challenger and premium implants as well as our orthodontics business and production. With Slide 28, I would like to introduce Christian Ullrich, who will join Straumann Group's Executive Management Board as our new Chief Information Officer in October. Digital transformation is the key part of our growth strategy and will have a critical impact on all our businesses, regions and activities. In his new role, Christian is going to drive and lead the acceleration of this transformation. Christian has an impressive track record in this field. He has successfully developed digital strategy and go-to-market models that are driven by platform approaches to increase product sales and create a positive experience for customers and health consumers. He also has outstanding leadership skills and will be a really great addition to our team. We are excited to welcome Christian to the Straumann Group and look forward to working together with him to shape our digital future. That brings us to Slide 30, where I will share my thoughts about our outlook. As mentioned, dental practices we're operating through the first half of 2021 and practice agendas are currently well booked. The ongoing growth in the second quarter was supported by the strong performance of our existing portfolio and the continuing tailwind. Based on the assumption that this tailwind will become gradually softer on the one hand, and that the pandemic will not negatively impact the patient workflow during the second half of the year on the other hand, we are raising our guidance to full year organic revenue growth of above 30%, with the profitability nearly reaching the 2019 level. This outlook also reflects our continuous investments in future growth opportunities, our strong innovation pipeline and our talented team that demonstrate its passion, resilience and ability to outperform the market every day. Now I would like to open the question-and-answer session. [Operator Instructions] Chorus Call, can we have the first question, please?

Yes, sir. The first question is from Patrick Wood from Bank of America.

Two, please. The first is on the aligner side of things, obviously, very strong growth there. I'm just curious how capacity constrained do you guys feel at this point within the aligner business? And what impact did that have on the second quarter? And also, within aligners, where do you think we're up to in terms of total malocclusion treatment now with your current system relative to brackets and wires? That's the first question. Second question, please. I'm just curious how you're thinking about the second half, and you've got a lot of puts and pulls. You've got delta moving through, but equally, at the same time, outpatient clinics, probably dental offices probably likely to remain open, but then people need a holiday. I mean there's a lot of pluses and minuses. Is that why you gave quite an open-ended guidance range on the top line just because there are so many moving parts? And how are you thinking about those aspects in general?

Yes. Thanks a lot for the question. Then on the capacity constraint with regard to clear aligners, no, we did not face, fortunately, any constraint. We have been able to deliver in line with our customer expectations. It has been sometimes really close to a maximum leveraging of our production capacity during that first half. But we have continued to expand our manufacturing capacity in the different sites that we are having. And as you know, we have now our manufacturing in Brazil, Curitiba, which is fully operational and working. We are currently continuing to expand our manufacturing in Europe, which is in Germany and working very well, but keep expanding and doing CapEx investments. Then so far, so good. And our capacity in manufacturing is really supporting our very strong growth momentum. When it comes to our system on malocclusion coverage, I would say that we are still in the 60% range that from simple to moderate. We are working hard to be able to develop our, especially software capabilities, to bring more of those complex cases. And we believe that by 2022, we will once again increase very significantly this percentage with another version of our software. And step-by-step, we'll be able to reach the specialty segment for which we are not really active there and focusing more on GPs due to those 60% coverage. But this is a big part of our investment and future development for our clear aligner performance. When it comes to second half, yes, I think we are still pretty positive about the second half. We have an open guided -- an open-ended guidance because we believe we can deliver double-digit growth in our second quarter and more so depending on the sanitary environment. We have done quite a good second half last year, with 8% growth versus '19. We had the pent-up demand tailwind. We had a really strong digital sales, and we believe that being already above double digits of the second half 2020 will be a good performance. And if the tailwind continues, we may expect even better. But this is still very difficult to evaluate what would be the highest level of this open end, as you said, because of the delta variants, which are quite increasing in some regions and still seeing some low vaccination rate in some of the countries where the delta variance is active. But all in all, despite a plus and minus, we see the second half in a very confident manner, taking into consideration that the dentists we are discussing with are still their agenda solidly booked for the coming months.

The next question is from Michael Jungling from Morgan Stanley.

I want to ask 2 questions, please. Firstly, on the gross margin. For the first half, you showed this waterfall chart showing a negative mix effect of minus 1.1%. Can you explain what is driving this? And what do you think this will look like over the next 3 years? Is this negative portfolio mix perhaps from clear aligners and capital equipment driving this progression on for the next couple of years? And then secondly, on distribution cost to sales, where do you think this will pan out? Pre-COVID you ran around 21% of sales in the first half on very strong numbers EBIT '19. Are we going to stay at '19? Or do we go back to '21?

Yes. This is Peter speaking. Michael, thank you for your questions. On the first question, the negative -- the impact of the negative product mix on the gross margin. I think if you compare first half '21 with first half '22, then we have obviously a very different comparative periods, and we have a mixture of very different impact. So I would not take that as a proxy to extrapolate the impact of the negative gross margin development over the next couple of years. I previously always commented, I would expect a slight decrease in our gross margin due to that negative product mix in the order of 30 basis points. I think that's more a normalized figure than the 1 percentage points that we saw in the first half '21. And this is mainly driven by the digital equipment business in that period. Then on the second question with the distribution and sales expenses in relation to sales. I would say there is not a significant change going forward compared to the pre-pandemic situation. And please be aware that if you compare that also with the '19 EBIT to '20 level, in '20 level, obviously, due to the lower sales performance, we also had a lower bonus payment cost in there. And that's always a significant part of our personnel costs in the distribution and sales pocket there.

And maybe I can follow up on the sort of accounting. You changed your accounting some years ago with respect to how you disclosed certain financial items, including research and development. Can you just comment on whether R&D to sales for Straumann is going up or whether the ratio is going down?

No, the ratio on the R&D expense stays pretty stable over the last couple of years. And given the growth that we experienced, obviously, the absolute amount of spending is increasing significantly.

The next question is from Chris Gretler from Credit Suisse.

Just wanted to come back on 2 things. First, this morning, on Bloomberg, you were quoted saying that you're looking for potentially larger transaction. Maybe could you elaborate a bit more on kind of key areas in particular? And what does larger mean in the overall context of your company? And the second question is just with respect to your capacity expansion in Mansfield. Is this basically kind of a completely new site? And is it -- it wasn't completely clear also for the implant business? Or is it kind of fully dedicated to the aligner business?

Yes. Thank you, Chris, for the question. When it comes to M&A, I think that we are always -- there's nothing changing when it comes to our M&A view. We are still looking at any opportunities that are in line in developing our strategic directions. We are not specifically having a very large M&A deal in mind at this moment in time. I think that the insistence of the journalist, let's put it this way, on this topic that might want it to see more than we have to say. And we believe that this M&A is still very active on our side. And if, be it small or large, it's all about being able to continue to either develop our market penetration or integrate new technology or services with regard to what we need in our strategic direction. But thanks for asking the question, which allow us to clarify. The second part on the capacity expansion, in Mansfield, yes, it's a completely new side, but it's a new site which -- because our current manufacturing facility for customized prosthetics that are done in North America is at full capacity right now, and we have no capability to expand in this location, still in Texas. Then it will allow us also then to have new technology that we can bring in on our customized prosthetics that are allowing us to bring the additional benefits to customers from then an instant restoration standpoint. It will allow us also to be able to decrease cost moving forward and add those kinds of digital capabilities from an operation standpoint. Then we are very pleased with that opportunity being very supported by the Texas state when it comes to this investment.

And on the clear aligner capacity, by how much would it enlarge your footprint relative to Arlington?

This is first dedicated to the customized prosthetic area than more for the implant franchise business. When it comes to our clear aligner manufacturing capacity, this is still in Round Rock. We have still expanded very significantly. Then we had space for this. We are not constrained in Round Rock from a capacity standpoint with regard to the demand we are serving as we speak. But as you said, there are significant capacity expansion in this new site, and we have taken it in this regard, meaning that if we were wanting also to increase in the future our manufacturing capacity of clear aligner, we would be able to leverage this site as well.

The next question is from David Adlington from JPMorgan.

Maybe just on guidance, on the margin of this side, obviously, the second half implied margin, I mean, you always see a bit of a dip. Given the seasonality this year, are you expecting a lot bigger dip? Just wondering, obviously, some big investment going in. Just wondering if you could just pull out a little bit more detail into the way you're planning to put that investment? And then secondly, just on DrSmile, interesting to see that you've set aside some additional consideration. Just wondering what the trigger for that was, was that revenue? Or are there some other metrics that you were looking at there?

So thank you for the questions, David. The first one on the margin. First of all, please be aware, if you compare the margin of the full year '21 with our guidance and compare that to 2019, we will face a significant negative FX impact so that that means if I would take the margin from 2019, the core EBIT margin, which was 27.1% and would adjust that with FX, then this year, it would be -- we would significantly overachieve that margin if we reach the same level with about 2 percentage points. So that's the first remark I want to make. The second one is, and we said that already, after the first quarter, we expect a significant higher business activity in the second half compared to the first half this year because many restrictions are lifted. So we are able to do training and educational events. Again, there are some smaller congresses. There are much more promotional activities. And we also increased our FTE base in the first half, as you have seen in the figure, which will be fully cost-effective in the second half. So I would see that also as a pre-investment this year already to prepare the growth for '22 basically. So all of these factors are leading to a higher cost base in the second half, which leads to a lower margin in the second half compared to the exceptional high margin in the first half of this year. And please don't forget our significant investing also in building up our doctor-led aligner treatment in the direct consumer sales channel. That's also a significant investment that contributes to that lower margin in the second half of this year. Taking then the second question, our increase of the contingent estimation for the DrSmile earn-out, that simply because the DrSmile business is performing above our original expectations. And so that we were able or we could increase our provision for the total earn-out. So it's simply driven by the great performance of DrSmile.

And is that a revenue performance or profitability performance or all of the above?

It's a certain mix with -- but the majority is revenue performance.

Next question is from Maja Pataki from Kepler Cheuvreux.

I would also like to start with the second half of the year and how you see the market and your revenues performing. And maybe specifically focusing on one statement or possibility that you discussed with full year results where you said, like, it could well be that there is some pull forward of dental treatment due to the fact that people are saving money, they can't really do much, sitting in home office. Therefore, it's a really good time to do dental treatment. Have you started to see a negative impact on demand based on the fact that things are opening up? That will be first part of that question. And then obviously, saying like if delta gets a bit worse and people are stuck at home again, that could actually translate to be a positive for you rather than a negative. And then the second question would really be, if you could give us a bit more of an insight. You mentioned that you've managed to gain some meaningful DSO contracts during the first half of 2021. I was wondering if you could just elaborate a bit on that.

Yes. Thanks, Maja, for the questions. And second half has been, I would say we, as expressed before, we are positive or very positive about the second half with regard to what we see at this moment in time. Are we seeing any negative impact of people potentially doing something else than focusing on their oral care or oral health? No. We are not seeing any of those sign as we speak, because all the clinicians who I have been fortunately talk to are all very positive and reporting agenda being booked and being fully booked, and which means that the delay that we can see any effect on this would not be before the fourth quarter. And that's why we still believe that the tailwind will potentially soften on a step-by-step basis, but we don't see yet any immediate effect. If there is a surge in the COVID-19 and if people would be staying at home, would that impact or improve our potential performance? Actually, we have seen that it has not been so much that, which is related to our performance, but much more the fact that the clinics are open or not. And it seems that as most of the countries and government in place want to ensure business activity still remaining active. We don't believe that practices will be closed unless there are some very, very sanitary problem. And we still believe that there is some small spike of the delta volumes, the impact on our business would be relatively insignificant. And the last one was about DSO, yes, thank you, Peter. Yes, we have done some very significant DSO win in the first half. In Europe, when it comes, especially on the digital business, with implementing our digital workflow in different DSO in Europe, in Northern Europe, but also in Southern Europe, in Italy, with DentalPro as an example. And we have won an important DSO also in North America when it comes to the influence side with Neodent, which is called Western Dental. There has been a press release on Western Dental on this. And we are still working on major opportunities moving forward. And our DSO activity is doing well. Growth is very, very solid, and we believe we are currently actually gaining market share on this DSO segment.

Can I just double check on -- with your statement about the second half. So from your comments, it appears that visibility on Q3 is very strong from the anecdotal feedback that you have. So is it really that momentum is expected to remain strong and potentially slow down in Q4? Is that what you're trying? What we should read out from your comments?

That's what we -- once again, I think I will express it differently. We have always -- and that was a key question during the COVID crisis, how much visibility do we have in our business? I would say it's always between 8 to 10 weeks. This is what -- the way surgeons are working and booking their agenda. Then in the next 8 to 10 weeks, we are very strong evidence that the growth is going to be still solid, thanks to the planning we are seeing. Besides that, then that's where we still have some question mark about, is it going to be the same trend? Or do we see that tailwind softening. But taking into consideration that we strongly believe in our capability to keep gaining market shares and keep developing our both implant and clear aligner side, I believe that, again, our Q4 will not be disappointing. Is it going to be in the same mood that our first half, and that's still the question mark that remain.

Next question is from Veronika Dubajova from Goldman Sachs.