Straumann Holding AG (STMN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Straumann Group Q1 2023 Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Guillaume Daniellot, CEO. Please go ahead, sir.

Thank you very much, and Good morning or good afternoon to you all. Thank you for joining this conference call about Straumann Group's first quarter results for 2023. Please take note of the disclaimer in our media release 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, we will first give you an overview of our group Q1 performance and then Marcel Kellerhals, our Head of Investor Relations, will share details about the financials. After that, I'll provide you with an update on strategic initiatives and our outlook for the future. As always, we will answer your questions at the end of the presentation. Then let's start with our highlights and move directly to Slide 5. An exciting first quarter lies behind us, considering the anticipated challenges. In the first quarter, the group's revenue reached CHF 596 million, building upon a very strong comparative basis from the previous year. Patient flow remained good in most countries, leading to a dynamic growth rate in all regions and an overall organic revenue growth of 3.4% for the group. As expected, the developments in China had an impact on the overall Asia-Pacific performances driven by both the volume-based procurement process, VBP and the COVID-19 lockdown, which I will come back to later. A special first quarter highlight was that we presented our new digital solutions, which we have invested in over the last 2 years to build a unique customer experience. This includes Smilecloud, a smile design collaborative platform and Straumann Falcon dynamic navigation system. In addition, ClearCorrect launched another important software upgrade, ClearPilot 6.0 to give providers a more intuitive and user-friendly treatment planning experience amongst a series of new developments, allowing clinicians to treat more advanced cases. Finally, we confirm our full year outlook. We expect organic revenue growth to be in the high single-digit percentage range and profitability at around 25%, including growth investments. Moving on to Slide 6. You can see the regional organic revenue growth rate for the first quarter as well as the percentage of the regional contribution to the overall revenue of the group. As mentioned, patient flow remained good in most countries and especially EMEA, the group's largest region, had a particularly strong first quarter. EMEA grew organically by 9.2% compared to the first quarter of 2022, accounting for CHF 287 million. All segments contributed to the regional growth, including our core implantology business, which was complemented by a strong contribution from orthodontics. Intraoral scanner continued to show high revenue growth, particularly in the Eastern and Southern Europe as well as in the Middle East. Germany, being the largest country, drove revenue in absolute terms, while Turkey continued to show a very strong growth rate. The North American region reached 7.2% organic growth in the first quarter with revenue reaching CHF 182 million. The region delivered excellent growth on top of last year's extremely high baseline. Growth was driven by immediate implant solutions, the challenger brand Neodent and [indiscernible] scanners. Orthodontics pursued its development and showed solid growth in the first quarter. The performance of the Latin American region is a continuous highlight. The region grew 20% organically with a revenue of CHF 47 million in the first quarter. All segments contributed strongly with Latin America own brand Neodent, complemented by the Straumann premium implantology segment. In addition, the Virtuo Vivo intraoral scanner market penetration contributed to the strong revenue growth. While still at a low base, the orthodontics business grew very rapidly in the first quarter across the whole region. Overall, the region's largest market, Brazil grew strongly, while Mexico, Argentina and Colombia also showed very good growth rate. From a general perspective, the Asia-Pacific region performed well in the first quarter. Among the standout successes was the growth achieved in Japan, in Australia, Thailand and India. Also newly established countries such as Vietnam and Malaysia are accelerating growth. However, due to the expected strong negative headwind coming from China, which hampered the region's results, the Asia-Pacific performance reported negative organic revenue growth of 23.5% and accounted for CHF 80 million in revenue. Moving on to Slide 7. You can see the different dynamics that affected the business in China during the first quarter. At the beginning of the year, COVID-19 significantly limited the patient flow in the country. This effect tapered off towards Chinese New Year in the middle of February. Meanwhile, the impact of the volume-based procurement process gradually became stronger. The new pricing has been quickly implemented both in the public and private segments, driving average selling prices to a much lower level. As expected, the pent-up demand generated in the past few months, combined with the lower average selling prices, resulted in a significant acceleration of the patient flow, which led to import increase in implant volumes towards the end of the quarter. And with this, I will hand over to Marcel to provide additional details on the business and regional performances.

Thank you, Guillaume. Good morning, and good afternoon, everyone. Let's move to Slide 9, where we can see the breakdown of the revenue development. There is no doubt that this was a solid quarter given the strong comparative base from last year. The currency effect in the first quarter was impacted by a negative development mainly related to the euro, the Turkish lira, the Japanese yen and the Chinese renminbi. The impact amount to CHF 21 million on our first quarter revenue. The effect of mergers and acquisition, which comes from PlusDental and Nihon added CHF 8 million, bringing the adjusted revenue base to CHF 576 million. In the center of the chart, you can see how the different regions contributed to overall growth. EMEA offset the negative result in Asia-Pacific, which was due to China, as Guillaume explained. North America and Latin America both contributed to a solid growth, which leads to a 1.1% at Swiss franc or 3.4% organic growth in group revenue. And with this, I will give back to Gil.

Thank you, Marcel. Let's talk about our numerous achievements and strategy and move directly to Slide 11. With a clear ambition to become a digitally powered oral care company, we have defined an investment road map for digital transformation, which we talked about in February. We are very pleased that in the first quarter of this year, we were able to present software solutions that will contribute to delivering a unique customer experience across all digital touch points. On Slide 12, you can see the summary of the several new digital solutions we have presented at the International Dental Show in Cologne in March. All those launches are the results of the continuous investments we are making in this area. Looking at the clinician journey, digital impression taking with intraoral scanners is the major entry point to the digital workflow. Offering intraoral scanners at 3 different price levels, Straumann introduced a new software solution for its entry-level Virtuo Vivo and intraoral scanner, which improves the speed and accuracy of digital impression taking delivering benefits such as precision and efficiency during clinician's daily practice. In addition to Virtuo Vivo, the sales development of the new 305 intraoral scanner from 3Shape launched during the last quarter is participating in our overall digital dynamics. The intraoral scans are connected to the Straumann AXS digital platform, which is providing a seamless integration to the different Straumann solutions, eliminating the need for entering patient data manually in different applications along the treatment journey. Moreover, we have been very excited to launch Smilecloud, a smile design and centralized collaboration platform for clinicians during the International Dental Show in Cologne last month. Available in Europe for the time being, Smilecloud will also be integrated within the Straumann AXS platform, together with our coDiagnostiX implant software to create a seamlessly integrated implant treatment software suite. All this will help drive our Smile in a Box service in the future, which is already available on the Straumann AXS platform in North America. We plan to launch Straumann AXS in Europe by the end of this year. To dive a little deeper into Smilecloud, let's move on to Slide 13. In October 2022, we have entered a partnership with Smilecloud to help doctors with patient acquisition, treatment planning and increased patient conversion rate. This platform was designed to address 3 common challenges in dentistry. Firstly, the problem of fragmented data is making the collaboration between all dental professionals difficult along the patient journey. Secondly, in dentistry, design follows a nonlinear process, which creates unpredictability for the end reason. And the third challenge is the disconnected workflow and the habit of specialists tending to work in silos, which also hampers collaboration. Smilecloud was created to solve those challenges by streamlining the process towards optimal treatment outcomes. The platform provides a centralized space for data that is accessible anytime and on any device. With the ability to create a virtual patient, Smilecloud helps bring a more holistic view to the clinical stakeholders. Moreover, the design process has become more intuitive and less time-consuming by adding automation to it. The platform uses AI, photo realism and also biometrics to engage patients better, resulting in faster processes and more realistic visualization. Smilecloud also fosters collaboration by combining outputs from different software, allowing specialists to connect and work seamlessly together towards the same treatment goal to deliver the best potential results. On Slide 14, I would like to talk about Straumann Falcon, our first dynamic navigation system which we have developed in partnership with Navigant. It's a powerful tool to help dentists monitor their surgical activity in real-time during surgery. With 3D visualization of the instrument in real-time, it allows the use of freehand technique and give surgeons the flexibility to adapt their approach during surgery. It combines CBCT and iOS scans to planned treatments and its smart glasses allow clinicians to see physically and digital information simultaneously. Furthermore, it is compact and portable, which is significantly increasing the ease of use in different surgical operatories. Straumann Falcon is also changing how dentists approach surgery by documenting their procedures. This allows clinicians to make more informed decisions when treating complex cases, while keeping patients engaged and reassured during every step of the treatment. At the end, Straumann Falcon is designed to increase efficiency within practices, ultimately leading to better oral care outcomes. Let's continue with Slide 15, where I would like to highlight that our digital transformation across all our brands as we are continuing to invest in digitalization to leverage our core businesses. This enables us to integrate our digital solutions such as clear aligner treatment planning and Smile in a Box, which will boost efficiency when it comes to patient treatment. Our digital solutions are available across all implant brands, which is driving the right synergy for technology investments. Let's turn now to our orthodontics business on Slide 16. During the first quarter, we launched a series of new developments addressing our customers' needs and supporting them to improve the revenue stream and profitability of their practices. On the one hand, these new features allow doctors to treat more advanced cases, enlarging their group of potential patients and lifting their revenue stream. On the other hand, they are designed to make treatment planning with ClearCorrect more efficient, helping the profitability of practice. As you can see on Slide 17, we have added new clinical features to the aligners, making it easier to treat patients who are missing or growing teeth. Pontics, bars and eruption guides are different shapes of placeholders or missing or growing teeth, which can be built into the aligners to accommodate patients of different age groups and orthodontic conditions. It complements a series of important clinical improvements we have made over the last few years. On the software side, the new upgrade of our ClearPilot treatment planning software with its 6.0 version as shown on Slide 18 is one of the ways we are making treatment planning easier for clinicians who work with us. The interface of the software has been redesigned to be cleaner, simpler and at the same time provide additional features needed to plan complex cases. Point-to-point measurement helps to make treatment plans more predictable, improve tangible morphing as well as collision and space editing helped to visualize the outcome of a treatment plan. Those features are designed to make the planning process intuitive and efficient for clinicians while improving the predictability of the treatment plan for the benefit of the patients. The same is true for the improvements we have made to the Doctor Portal, which you can see on Slide 19. The enhanced dynamic prescription form is a digital decision tree which guides the clinicians towards optimal treatment protocols during the case set up. The collaborator suite now enables doctors to order treatment planning services directly through the portal and easily get support and assistant on their cases as wished. Finally, Slide 20 shows how all these new launches are coming together to improve our value proposition and form a seamlessly integrated digital workload for orthodontics cases. Our devices, services and software support customers during their treatment journey to facilitate fast and accurate diagnosis, speed up treatment planning and support doctors in treating cases from simple to advanced. As you can see on Slide 21, we already executed on our new brand strategy at the IDS in Cologne to continue building upon our strong and globally recognized brand. Although IDS was one of the largest shows, we have also implemented a new branding strategy at several events globally during this first quarter. On Slide 23, you can see the market potential as a reminder. While we are well underway with our growth strategy, our addressable market is still huge and constantly growing. The CHF 19 billion market potential leaves us with massive growth opportunities in all the different business areas. To ensure we keep capturing a significant share of this market potential, we will continue to invest in future growth and innovation. And this takes us to our outlook on Slide 25. Macroeconomic uncertainties remain and geopolitical tensions did not ease up during the first quarter. However, we have seen that the patient flow remains stable. With an estimated globally addressable market of CHF 19 billion, we remain confident that we will continue to gain market share and progress in all our strategic priority. Despite the impact of the Chinese volume-based procurement process, which will require a year of transition and readjustment in China, we will continue to invest in our growth and transformation. As a result, we confirm our full year outlook and expect organic revenue growth to be in the high single-digit percentage range and profitability at around 25%, including growth investments. And with this, I would like to open the Question-and-Answer Session. [Operator Instructions] As usual, we kindly ask you to limit the number of your questions to in order to give other participants a chance to ask their questions within the available time. Chorus Call, can we have the first question now, please?

Our first question comes from the line of Maja Pataki with Kepler Cheuvreux.

You have mentioned during your presentation that the patient flow remains dynamic in most markets. And I was wondering if you could give us a bit more color on what you're really referring to. Are you talking about a slowdown in implant patient volume in some markets? Or are you referring to China? So that would be my first question. And my second question on China specifically. Now at the end of the quarter or actually May already, has anything surprised you with regards to China? Or have the development been broadly in line with what you were expecting in February?

Yes, thanks for the question. No, when it comes to patients who is actually quite dynamic in most geographies, when I was seeing most geographies, I was expecting -- I was excluding China for the beginning of the quarter. That was only the kind of twist here, but we have seen a very good patient flow in Europe, all EMEA. We have seen a good patient flow in North America, even though, again, like a little bit Q4, still some questions to doctor on the treatment plan and trying to negotiate a little bit more prices than in the past. But still, we have seen that at the end patients are really taking the treatment and we don't see any down-trading at all from a brand standpoint. Latin America has been very dynamic. And all countries in Asia-Pacific, except China have been also very dynamic. I would say only Korea because of the very strong inflation versus the fact that the population is leaving quite a lot of credit, then we have seen some slowdown in Korea, then that's why. But for the rest, it's a pretty healthy dynamic as we speak. When it comes to China in specifically, I spent the whole week, the past week actually in China, which was also very interesting and important to realize what's going on directly on the field. Actually, the thing we're unfolding so far as we have planned, we have seen an implementation of the VBP pricing very quickly done on the private side, while the public is implementing as we speak. It's a little bit longer because of the administrative side of it in the public area. And the patient flow then got very dynamic in the second half of March, thanks to, of course, the pent-up demand and the fact that those prices are now attractive for a larger part of the population. Then I would say the forecast or the expectations we're having from a patient flow and volume growth on the China market when we discussed in February are intact on our side. We do believe that we will see that very strong dynamic in implant volume in the remaining part of the year.

The next question comes from the line of Chris Gretler with Credit Suisse.

I also have another 2 questions. First, would you be able to rank the growth by business lines? I think in the past, you had some good charts showing kind of implant, ortho, digital and biomaterials. So that may get a bit of a better sense about the relative growth of these 4 businesses. That would be my first question.

Yes, Chris, that's right. Yes, we were talking -- we were using some pluses or then -- that's a good point, Chris. Thanks for the reminder and I could use that actually. And I would say for our approach on implant, it would be, I would say, 2 pluses or 3 pluses for ortho, it would be 2 pluses. And for digital, it would be 3 pluses. And biomaterial is following the influence. I think it's pretty dynamic as well.

And then just on China, I wanted to ask, could you maybe discuss what happened on the private side more specifically and particularly on pricing after the VBP now?

Yes. I think on this side, the private side has been very reactive as planned. Actually, we were really clear saying that we were seeing private that would implement that all across the board. And this is actually what has happened. Then all the prices on the mainly DSO side that are a large part of the private side in China as implementing those new prices and are obviously trying to find a way to benefit from this very large volume gain that they are going to have. And they are working a lot on efficiency. That's why we are helping them out a lot on education and trying to also put processes in place that they can answer the demand that they are having right now on their side. Then we see the private side are going to drive volume also and that's why we want to be a strong partner of those customers in the very short future in China.

The pricing was more or less what you expected to happen on the private side?

Yes. Prices -- yes, they immediately applied the VBP pricing, some try to bargain a little bit and even go a little bit lower because in China, it was more on the public side that we were having much higher prices because of the fact that the doctors were the best educated than the trust of the population in China for health in general dental, in particular, were more into the public side. And then the private were always wanting to attract patients with lower prices. Then they were trying to implement a little bit this, but they don't -- they see that they don't need to implement lower prices for the time being than public because the patient flow is very dynamic as we speak.

The next question comes from the line of David Adlington with JPMorgan.

Again, my question is again on China. I just wondered, given the dynamics between volumes and pricing, I just wondered if you were able to point towards a point and time-wise where you might return to revenue growth, either in China or in wider Asia-Pacific? And then secondly, just in terms of the size of the price cuts, just wondering how you're feeling about margins within the Chinese business?

Yes, I think we see obviously a price cut being very important and exactly in alignment with what we just -- we said also in February. I think it's all unfold again on this side also as planned. It's a 40% to 45% down in ASPs. And we were planning, again, a volume growth for 2023 around something like 25%. Our expectation were, I think we might have some upside on the volume side, which would be really good news in order to absorb a little bit the overall effect of the margin cut. And now we have also, of course, restructured China in order to be able to face a little bit those new market dynamics and being able to serve customers in a more efficient manner, which is what we have already executed during Q1. And I think I'm very pleased with how the team has reacted and with the speed with which we have been able to implement our approach here. That was -- that means that for the 2023, we are not there to say that China is going to grow for the total year. I don't think it's going to be the case. But let's say, the effect of the VBP could potentially be a bit lower than plan if we continue on this trend. Still to be seen on the patient flow side, obviously, because there is a big part coming from the pent-up demand than what's going to be the regular flow in the months to come. I think we will start to have a kind of an idea when we will see June, July, where it will give a little bit of a better perspective of what would be the potential growth rate volume-wise. Because, as you know, Q2 has been also impacted by some COVID-19 lockdown in April. Then the real information from patient flow dynamic and volume gain will be June, July, August. I think endorsement, we'll be able really to realize what is the new situation in China from a patient flow standpoint.

The next question comes from the line of Veronika Dubajova with Citi.

I have 2, please. The first one is just if you can remind us how you're thinking about the phasing of growth from here through the remainder of the year, both from a group perspective and also specifically for APAC, that would be helpful as we think about modeling? And then I think on the prior call, you had talked about margin progression or margins being very much second half weighted. Just curious, given the performance that you've seen in the first quarter, whether you're still comfortable with that assumption?

As explained in February, we have seen, yes, our, let's say, planning for 2023 back-end loaded. Then this is what we are still very much planning. We are actually very much in line with what we were planning and what you guys were seeing as well. I think that's coming from a comparative period that are going to be easing as we move along the year. You know that Q1 was very, very high with a 27% growth there. And we are going to have the better comp on -- as we go in Q2, Q3, Q4. For China and Asia-Pacific, Q4 was also very much impacted by the strong lockdown that we had in China in November, December. Then we are really expecting to have a higher growth rate as we go. I think a higher growth rate in Q2, Q3, even higher in Q4 and we think that we are going to land as planned on our guidance, which is going to be high single-digit. Then for the time being, all is very much in line from a top line perspective and with the guidance we have provided. On the margin side, yes, we are also still in line with our expectations so far. We are balancing, of course, those lower growth rate, but still wanting to keep investments at the necessary level when it comes to both our digital transformation, as you have seen some first outcome at the IDS, but also still planning for expansion in our manufacturing side because you can imagine that being able to embrace 30%, 35% potentially higher volume growth from China is also putting a lot of the pressure we're seeing in operations that we need to cope with. Then we have our investment plan that are in line and at the moment, as top line is in line, we are managing the margin as we were expecting from the beginning of the year. And we are pretty confident here.

And then my second question is just around the digital solutions that you've introduced at IDS. Obviously quite differentiated. Just curious how you're thinking -- what's the traction that you have seen so far? And what's been the feedback from dentists?

We have been really, really pleased with the feedback from IDS. A lot of our customers and partners have really noticed significant progress on digital solutions and really differentiated solutions. We have, as I answered earlier, we have a 3 plus on our digital solutions I would say for Q1, stronger market penetration of iOS still, thanks to our 3 different price points. Vivo is working very well. Partnership with 3Shape is going very well. Their technology is also very welcome. And now we are ready to guide all our clinicians start using those tools to the Straumann environment where they can get then the digital solution on the ortho side or the implant side. And this is just the beginning for us, I would say, in driving this kind of Straumann environment and platform. But the feedback from the clinicians with regard to their experience has been really, really positive. Our Straumann AXS platform has been launched in the U.S. for the time being and we have seen that, thanks to the customer experience, all our cases have been -- our Smile in a Box has been moving to the new platform immediately because they have seen a huge benefit of this. So far, we are really happy with the fact that clinicians have been not only pleased with the outcome, but already adopting a lot of the new capabilities we gave them for gaining efficiency.

The next question comes from the line of Oliver Metzger with ODDO.