Straumann Holding AG

Thank you very much for joining us today for this conference call on Stroman's 2020 first half results. It's good to see that almost all our regular followers have registered, which we very much hope that is a confirmation that you are all safe and well. I'm sorry that we can't welcome you physically here in Basel today, but we decided to hold this conference online as a protective precaution and hope very much to see you in person as soon as the situation allows. As usual, this morning's presentation and discussion will include some forward-looking statements, so please take note of the disclaimer in our press release and on slideshow. As a summary, I will give you a brief overview and Peter Hackle, our CFO, will share the business performance and financial details with you. After that, I'll bring you up to speed on recent key events and strategic initiatives. And of course, we will look forward to answering your questions afterwards. When we held our last media conference three months ago, our industry was in lockdown. COVID-19 had cut our monthly revenue by 70%, and we were initiating measures to reduce our headcount and cost base in preparation for the economic recession that the pandemic is expected to trigger. As you can see on slide five, the message today is more positive. With the exception of Latin America, which is still in the eye of the storm, All of our regions report that more than 85% of dental practices are open. Correspondingly, between 85% and 100% of our facilities are open, and our sales teams are operating at similar levels. In short, both we and our customers are back to business. On the right of slide six, you see that we responded quickly to the crisis, ensuring safety and continuity, adapting capacity, securing supply, and maintaining service and support functions. We moved quickly to mitigate the financial impact and to secure liquidity. We adjusted the size and priorities of our organization, and we worked hard remotely to get ready for a strong bounce back. In Q2, we began to see an improvement as restrictions started to ease. Obviously, the big question is how sustainable is the improvement? Will the pandemic hit once or will new outbreaks force us to close down again in a double-hit scenario? In both cases, we have to be ready for the impact of economic recession on discretionary spending, which will determine the intensity and the sustainability of recovery. Looking at the highlights on slide 7, our first half revenue came to 605 million francs, or nearly 80% of the corresponding level last year. With dental clinics around the world closed or limited to emergency cases, ourselves plummeted in mid-March to a trough in April, dragging our Q2 revenue down 39%. Fortunately, business improved in May and even further in June as practices in most regions reopened and began to catch up with the backlog of patients who were unable to get treatment during lockdown. Obviously, the top-line contractions weighed heavily on profitability, although immediate cost reduction measures helped to soften the blow, underpinning the core EBITDA, EBIT and net profit margins are 23%, 17%, and 12% respectively. However, due to the crisis, we have had to write down the value of certain recent acquisitions. The impairment, together with amortization and restructuring charges, resulted in a reported net loss of 43 million pounds. I'm glad to say that neither the disappointment nor the constraints of lockdown have diminished our passion for creating opportunities. We more than compensated for the physical restrictions by going online. To keep close contact with customers and to attract new accounts, we ran large online campaigns and symposia, offering free education and editing practices to reopen quickly. Having secured additional liquidity, we were able to take advantage of a unique opportunity to acquire one of Europe's fastest-growing providers of clear-liner solutions, which will support our growth strategy going forward. One example of our efforts to prepare for new realities ahead is the restructuring initiatives that we announced in May and have now completed without compromising the pace of innovation or our ability to produce, market and sell winning products and solutions. Of course, none of this would be possible without the flexibility, engagement and strong support of our employees through these very difficult periods of lockdown and restructuring. I am deeply grateful to them. Because of the uncertainty fueled by COVID-19 and its impact on the economy, we are not offering guidance on our full-year revenue and profitability, and we thank you for your understanding in this respect. Looking at slide eight, as the sequential figures show, APAC was the first region to suffer and is now leading the recovery, followed gradually by most of Europe and parts of North America. Latin America is still at an earlier stage. Thanks to the good performance up to mid-March, our revenue in Q1 was just 1% down from the prior year, as growth in the Americas almost made up for flat revenues in EMEA and a sharp decline in APAC. All regions declined significantly in Q2, but APAC much less than in Q1. Europe and North America also began to improve around the middle of Q2. But overall, revenue did 36%. For more details on the performance, I will now hand over to Peter.

Thank you, Guillaume, and good morning, everyone. As usual, I would like to begin with our revenue development at the group level and then look at our core regions. on slide 10, you can see that at 2020 exchange rates, our first half revenue in 2019 would have been 51 million francs lower, mainly because the Euro, the US dollar, the Brazilian real, and the Chinese won all weakened against the Swiss franc. The M&A effect this year added 20 million to our adjusted revenue of 749 million francs, and was mainly related to the consolidation of entre-years. In the middle of the chart, you can see that all our regions reported double-digit contractions, taking group revenue down 19%. This was mainly driven by EMEA and North America, which collectively contributed almost 75% of the reduction, as you can see to the right of the main chart. As you mentioned, revenue declined 1% in Q1 and 36% in Q2, with the steepest fall in April. In June, we regained the prior year level, but this was mainly thanks to pent-up demand and should not be seen as the new normal. As you can see in slide 11, our largest region EMEA was hit hard in the second quarter. The extent and timing of the pandemic and lockdown varied from country to country. However, as Q2 drew to a close, all subsidiaries in the region were starting to recover, with the exception of Hungary, Iberia, Russia, Sweden and the UK. Our new subsidiary in Romania made a good start, while the Balkan hub, South Africa and and Turkey rebounded strongly. The region's largest country, Germany, also benefited from a strong pickup in June. In general, we believe the improvements were mainly driven by pent-up demand, and many practices have remained open through the holiday period in order to reduce backlogs. There were also positive signs from our original distributors, who began to reorder after reducing stops during two months of lockdown. In North America, organic revenue contracted more than 40%. After a good start to the year, sales declined rapidly in March as COVID-19 spread through the region. In addition to the complete business interruption, customers reduced inventories in order to maintain their liquidity. The extent of disease and restrictions also varied widely, but business began to recover in some areas in June as restrictions eased. As parts of the US and Canada began to reopen, revenues picked up less by restorative sales and non-premium implants. Digital sales were encouraging throughout, reflecting increased adoption of new technology especially intraoral scanning. Moving on to slide 12 and Asia Pacific, where we saw organic revenue improve from minus 22% in Q1 to minus 12% in Q2. First half revenue reached 117 million or 78% of the comparative period last year. Going into Q2, Business decreased throughout the region, except in Korea, Taiwan and China, where sequential monthly sales almost doubled. Most other countries in the region began to rebound in June. Premium and non-premium implant sales picked up as Neonet continued to perform well in Japan and Australia, contributing to market share gains. Our team in China launched Warrant Tech implants to strengthen our foothold in the lower value segment alongside T+. After the successful launch of Neodent in India, which offers cost-effectiveness, simplicity, broad prosthetic options and stickable workflows, the region decided to discontinue the Equinox implant brand and to close its production unit near Mumbai. And finally, in Latin America, the pandemic reduced organic revenues in the second quarter by 60%. The Brazilian market for aesthetic dentistry contracted as major cities shut down. However, thanks to our network of stores and distribution centers around the country, customers were able to purchase and obtain products for treatment on the same day, an advantage that drew new customers. Against the trend elsewhere, Argentina posted a first-half improvement on the prior year. In the biomaterials, the company specializing in 3D printing resins that joined the group in 2019 also posted significant growth and international expansion. In the meantime, Brazil has been gradually reopening region by region while other countries remained closed until late July. Turning to the next slide and our performance by business. Hardly surprisingly, all our business were negative, with the exception of digital equipment, which grew throughout the first half. This is not evident in the chart, because it is combined the cut-term restorative sales, which were negative. In addition to the trend towards digitalization, there was a base effect due to soft sales in the run-up to last year's international dental show IDS in Cologne. Before commenting on our financial statements, let me give you a brief overview of the major effects in our first half-year figures. Subsidies to compensate for reduced working hours in the second quarter totaled 12 million francs, which is recorded under other income. The restructuring costs for the reduction of our global workforce amounted to 30 million francs. Only some minor costs related to this are expected in the second half. COVID-19 triggered impairment tests of financial and non-financial assets, including career tests dental things, Equinox and others, resulting in a total charge of 150 million after tax. You can find further details of this on pages 19 to 21 of the press release. The difference in impairment at the EBDA level is related to adjustments in the inventories and account receivables related to the Equinox discontinuation. To refinance the maturing bond and to secure liquidity throughout the period of uncertainty that is unfolding, we successfully placed two straight bonds, the first in April amounting to 280 million francs and the second in June amounting to 200 million, which was paid in July. In addition to this, we secured permitted credit lines. Our cash position at the end of June was 381 million francs. The next slide presents the core financials in a nutshell. We quickly implemented measures to adapt capacity, reducing operating expenses and postponed investments, which helped to soften the top-line impact on profitability. In spite of this, First half, core gross profit dropped 173 million, squeezing the margin by 628 points to 71%. Cost reductions also helped to push an impact on earnings. Core distribution expenses, which comprised sales force salaries, commissions and logistics costs, were reduced by 19 million to 141 million francs. while core administrative expenses, which include research, development, marketing and general overhead costs, were reduced by 28 million to 203 million. The combination of these efforts helps to underpin our core operating results at 100 million. The core EBIT margin contracted 1,090 base points to 16.6%. 150 base points of the contraction were due to currency hatred. Core net profit dropped 44% to 74 million francs, with the respective margin contracting 950 base points to 12.2%. For completeness, you will find the year-on-year comparison on a reported IFRS basis on slide 16, followed by the IFRS through core reconciliation tables on slide 17. Looking at the gross profit development on slide 18, our gross margin in the first half of 2020 amounted to 69.6% on a reported basis, or 71% adjusted for currencies and non-core items. Excluding the current impact of 90 base points, the contraction of the core gross margin amounted to 530 base points. Sales of lower margin digital equipment and adjustments in inventories contributed 140 base points to the aforementioned decline in margin. As shown in slide 19, the core EBIT margin contracted 940 base points to 60.6%. Cost reductions in administration and distribution helped to soften the impact, but combined made up for 670 base points of the aforementioned margin contraption. Government grants, which are recognized under other income, could only partly offset the impact of the margin erosion. The impairment triggered by COVID-19 pushed the reported EBIT margin to minus 12.2%. As you can see in slide 20, the combination of all these factors led to a decline in core net profit of 57% to 74 million francs and a corresponding margin of 12.2%. Including all non-core items and tax income of 4 million, the reported net result for the first six months of 2020 was a negative 94 million francs. Slide 21 provides a breakdown of our first half cash flow statement. Free cash flow plunked 80% from 58 million to 12 million francs. Approximately half of the 99 million shortfall in EBITDA was offset by postponement of some capital purchases, improved net working capital and the tax benefits of the impenders. Our cash position at the end of June was 380 million francs, 93 million less than our financial liabilities, in contrast to the net cash position of 20 million at the beginning of the year. And with that, I will hand back to Georg.

Thank you very much, Peter. As I mentioned earlier, we lost no time in reaching out to customers online. both existing and prospects. We shared some of these initiatives with you in April, and some more recent examples are listed in slide 23. Importantly, these activities generate follow-up leads for our sales teams, and I'm convinced that together with our partners and the ITI, we have set a benchmark in terms of online content and education which we believe will translate into a strong rebound and market share gains. Turning now to our strategic initiatives. The key building blocks on which we are focusing are shown in slide 25, and I would like to highlight some of the main initiatives, beginning with our effort to push implant solutions and to lead the field of immediacy, which are illustrated on slide 26. Following initial launches just over a year ago, Stroman BLX continues to be our most important rollout initiative in England and is now available in more than 30 countries. As you know, one of the key advantages of BLX is high primary stability, making it very suitable for immediacy protocols. We orchestrated two symposia and a number of other virtual events devoted to immediacy, where we aim to build a leading position, not just with Bialyst, but also with fully tapered options from Neodense and Anthrogeer, supported by seamless digital workflows. InEDIUS limits increasing patient expectations by shortening time to teeth and saving costs. In addition, it reduces surgical interventions and clinic visits, which is an advantage when precautions against infection are correct. Thanks to its unique selling points, Bielix has continued to show great progress this year and will further benefit from forthcoming launches in APAC and LATAM, which were postponed by lockdown. Our new Stroman zygomatic imprint system, which has just received FDA clearance in the USA, is a great complement to BLX and our immediate e-portfolio. Not least because it is a strategic door-opener to specialists who use large volumes of implant in addition to zygomatics, usually all from the same provider. In orthodontics, ClearPREC has accelerated the development of clear liners made with our new high-performance in-field from Bay Materials. As you can see on slide 27, the new material comprises three layers and exerts constant forces even after seven days. It shortens treatment, enhances comfort, and is more resistant to stains. We are very excited about it because it will strengthen our value proposition and will launch this month ahead of schedule. We are also excited about the performance of the materials in general as its international business continues to expand. In addition, we are introducing ClearCorrect One, which is designed to make life easy for GPs and patients by offering a single price level for one-year post-treatment, including one revision and one free retainer set. I would also like to highlight that our first clear aligner production unit in Europe will go into operation this quarter. Located at our Markleber site in Germany, it is highly automated, has an initial capacity of 10,000 aligners per day, and can be replicated in other locations. The global market for clear aligners continues to offer strong growth opportunities and is driven increasingly by direct-to-consumer marketing and online service providers who offer treatment packages. Last month, we signed an agreement to acquire a majority stake in Dr. Smile, one of the fastest-growing providers of orthodontic solutions in Europe. Dr. Smile combines doctor-led treatments with direct-to-consumer marketing expertise and complements our existing CleoLiner business. Although it's still young, the company has already built up a broad network of partner practices across Germany and is expanding in Austria and Spain. The network is open to qualified dentists and offers them opportunity to grow their business by channeling patients to their practices. In addition, it offers convenient, clinician-based aligner treatment solutions to patients. Slide 29 illustrates the patient acquisition and treatment workflow. Dr. Smile attracts people who are seeking aesthetic dental treatment to its website through targeting advertising on conventional, social, and other media channels. Based on the patient's situation, expectations, and location, the company arranges treatments in collaboration with a local partner dentist. It provides the digital workflow, aligners, and materials needed for the treatment, in addition to education for the dentist. Moving ahead to slide 30, we have already mentioned that first-hand sales of digital equipment developed positively, mainly driven by our high-end Roman Brandi Trios infraloral scanners, which are becoming increasingly attractive as we work together with our partner FreeShape to offer fully integrated, seamless workflows for CAD-CAM prosthetics, computer-guided implant surgery, and ClearCorrect ClearLight. We have also made progress with our attractively-priced VirtuoVivo intramural scanner, resolving initial issues and assuring the assembly life. And finally, to slide 31, where you can see a further example of our continued investment in highly innovative businesses. The growing importance of digital technology has prompted us to invest in Chromaton, a startup software company based in the Netherlands that is working on artificial intelligence applications to support diagnosis and treatment planning. The investment includes the option to increase up to full ownership in 2023. And that brings me to slide 33 and some thoughts about the outlook. It is difficult to determine the extent to which the present improvement in our market is driven by pent-up demand or whether it will continue, bearing in mind the possibility of further waves of COVID-19. In view of the current uncertainties caused by the pandemic and its economic consequences, we are not providing guidance for full-year revenue and earnings. Our underlying business fundamentals are intact, and we are confident that when the general economy and consumer confidence returns to normal levels, we will emerge as an even stronger brand and partner of choice for our customers. And now, I would like to open the question and answer session. If you have a question, please press star and one on your phone to join the queue. As usual, we kindly ask you to limit the number of your questions to two in order to give other participants a chance to ask their questions within the available time.

Can we have the first question, please? The first question comes from Chris from CS. Please go ahead.

Yes, thank you, operator. Good morning, Peter. And Marcel, I have two questions. The first relates to pricing. Could you describe the pricing environment, particularly on the premium implant side you're currently facing? Is it due to the downturn we've seen in the last few months? Has that become any more severe and aggressive by competition? That would be my first question. And the second question, respect to new product launches, I think you indicated that the BLX in APAC and LATAM was postponed and that you're looking to launch that in second half. And you also showed that, for example, LATAM is not yet, the dentists at least are not open. So how do you think about launching new products in this current environment? Is this very successful, or are you expecting more incremental here and maybe a bit of a wait-and-see approach?

Thanks, Rudi. I appreciate the question. When it comes to AST pressure, if it's kind of translating the first part of your question, we haven't seen any of this so far. the focus of our customers that we have done has been a lot into bringing patients back. And when all the treatment planning has been presented, there have not been any significant challenges to get those through, like it was the case pre-COVID. Which means that most of existing customers are looking into maximizing right now their agenda with appointments and surgeries. and are not putting pressure on us, at least, when it comes to a price level of our implants. When it comes to product launches, yeah, you're right. We are evaluating that very carefully, and we are going to launch the BLX and all other products. innovations in market where we believe then the investment will generate the right return on investment, then APAC is getting much better. And we see a really good opportunity to now launch VLX. And we are planning VLX launch in Q4 in Japan, especially October, as we have gained registration. We are still planning to have a VLX in Brazil, which is obviously the biggest part of LATAM, as soon as the situation improves. If it would stay the same, meaning that you have only 50% to 60% of the dentists open at this moment in time, it's not wise to launch such a critical innovation for us at this moment in time.

Okay. Maybe if I can, one follow-up question, just basically on the current trading. I mean, You know, nicely mentioned that, you know, kind of end of Q2, you know, it was basically up year over year in some markets. Is this, you know, kind of the same pattern you've seen, you know, kind of in Q3 so far, you know, in July and, you know, half August? I know, you know, it's holiday season in some of these countries, you know, but, you know, is this basically kind of, you know, a consistent, you know, recovery trend you've seen, you know, over these couple of weeks, you know?

Well, again, we have seen a better June than May. We have seen July being also rather positive. But I think very quickly the question is, do we believe that June, July could be a proxy for what's going up next? And for this, this is why we are not providing guidance, is because we see still two very big questions. The first question is, and the pandemic is not controlled, and when this pandemic could be controlled, we see still LATAM, as we discussed, and it's really a big reality for us. This is still Brazil, and especially when you see Colombia, Peru, Ecuador are still in the eye of the storm right now. which means that this pandemic is still very active and can come back anytime somewhere else. We see also in the US, having not a very controlled situation, then we were talking about a WCA if we have a new hit in Europe with a second wave, nobody knows. Our guess is that it will not have the same impact than the first one, because we believe we are more prepared for this. As governments know a little bit the rules to take, and they will take the decision earlier because they have seen what is the kind of impact this virus can have, I think organizations are also much better prepared for this, and we would be much prepared for this, especially by also the right sizing that we have done. then we have more people for this, but it does not mean that it will not impact our lives. The second thing which is important that we will see happening by the end of Q3 and Q4 is what is the impact of the recession which is going to obviously come after this pandemic. We know that some significant layoffs are also planned after summer. How much this will impact the demand by the patients in the practices, this is still a major question mark. then we are saying that we are cautiously optimistic. We are seeing signs, well, good signs of recovery. Is this guaranteeing the fact that we are out of the problem? No, we don't think so.

Okay. I appreciate your comments. Thank you.

The next question comes from Tom Jones from Barenberg. Please go ahead.

Thanks for taking my two questions. The first one, I just wanted to follow up on Chris's question really about July and August trends and wondered specifically maybe whether you could talk about what's going on in Spain. Not that I'm particularly interested in Spain per se, but that it might serve as a useful proxy for a market that had a very bad COVID impact, got better, and then it's got worse again. So just some clarity on that would be helpful. And then the second question I had, you know, clearly revenues are generally recovering once COVID goes away. But the question I was wrestling with is to what is the kind of new normal? I guess I ask is, you know, a lot of dentists have enhanced cleaning protocols. They're having to space patients out a lot more. Where do you think, talking to your dentist customers, as a percentage of their previous capacity to do dental implants, where do you think they can get back to? Can they get back to doing the same levels as they were before, or do you think they're going to be restricted in some way by the additional protocols they have to put in place to deal with COVID?

Thanks, Tom, for the question. When it comes to Spain, and to be honest... It's too early to say. As you know, Spain in August, it's like the holiday month. Nobody's there and nobody's working. Then it's very difficult to have a proxy here in those European Latin countries, and Spain especially. Spain and Italy, you can go in August, you will find nothing open. then I would say that they have bounced back. All Europe bounced back very well, actually, and even better than expected. We can say that. Be it the countries that have been very strongly hit and the countries that have, you know, a limited impact like Germany, then we are not seeing that significantly hit countries are bouncing back less than or to a lesser intensity than the other countries, which is important because it demonstrates that patients are not fearing so much to come back to dental practices. And this is something that we are seeing across the board. When it comes to the new normal, I expressed this in the last call. We have seen that Protocols or new protocols to ensure that the virus is not, of course, expanding through dental practices has been significantly respected and implemented in Asia-Pacific and especially China because they were the first one to recover and they have been the most cautious. When we look at what's happening in the other regions, most of the practices are... now operating at 95% of their pre-COVID level for the time being, which means that they are almost getting back to normal. And despite the fact that they are using more PPEs, the productivity did not drop as initially planned, which has been good news for what we were initially expecting. forecasting that we might have a significantly drop in productivity, and we don't see that happening. That's a little bit what we can say as we speak, looking at the recovery in the different regions. I hope this is answering your questions, Tom.

It did. It did very much. I'll jump back in the queue. I've got some more. I'll come back later if there's time. Okay.

The next question comes from Michael Jungling from Morgan Stanley. Please go ahead.

Thank you. Good morning, everyone. I have two questions. Firstly, on the government assistance programs, the $12 million that you booked in the first half, what is available to you on a similar basis? for the second half of the current fiscal year. And then question number two is on capital equipment. Do you expect to continue to be able to grow in the second half your capital equipment?

Thank you. Peter, if you want to take the first one about

The first question relating to the government in the second half. Given the strong bounce back that we saw in the last two months and given also the situation that most of the countries are out of the lockdown, we are currently basically in all the countries are not in short-term mode anymore. Depending on the further development of the pandemic with the potential second wave, that could change. But I would expect the positive impact on governance subsidies in the second half to be significantly less than in the first half, which is mainly coming from the second quarter. So based on today's planning, I would not expect a substantial positive contribution in the second half.

The capital equipment, we have done a really good first half, especially based on intradural scanners, and this for two reasons. Two reasons. I think the first one is first because the comparative period was weak. It was a pre-IDS period, especially Q1. and then this is always freezing capital equipment sales, then in this year post-IDS, then we have, generally speaking, better results. Now, could we believe we will continue some growth on this one? Yes, we believe so, because we have seen that the pandemic is – a growth factor for not capital equipment in general, but iOS, intraoral scanner in particular. The fact that intraoral scanner is allowing dentists to be much less in contact with patients' saliva is obviously then a strong driver for poor taste consideration. And that's why we believe that the market will continue to be positive for intraoral scanner cells. We are going to have our virtual vivo, which is going to be also fully available in the second half. And we are continuing to strengthen our development and link with FreeShape in order to help us to get a really good value proposition.

Very, very helpful. And maybe I can just follow up on your comment in your press release about You mentioned pent-up demand several times and also in your presentation this morning. Do you actually have a good grip on what the share of pent-up demand was in June, July, and August? Was it half of the demand of the customers that you experienced? Can you give some guidance as to what maybe the share is between you and pent-up? Thank you.

I think this is a very good question, but this is a very difficult question to answer because we cannot evaluate that from a global basis because we have a lot of different perspectives coming from different places. Then you have some customers that have been able, or some clinicians that have been able to get a lot of new customers. That's why they have worked extra hours, actually. And you have some customers and clinicians that focus only on the postponements of the cases that they were having in the backup. You know, it would be very difficult to give a number here because I think the spread is way too large. Okay.

Thank you. Very helpful. Thank you.

The next question comes from Maya Pataki from Capital Chevrolet. Please go ahead.

Good morning. Also two questions to start with. From my side, please. Could you please elaborate a bit on the impairment that you have taken in H1? If I look at the split of the various businesses, I'm just trying to understand. To me, it doesn't really seem to be that obvious that the discontinuation of Equinox in India is COVID-19 related. Also, the impairment of dental wings. is that really COVID-19 related or was that just, okay, you started to do the impairment work and realized that it's something that, irrespective of COVID-19, you would have had to do? And the second question is a bit close to what Michael was asking with regards to pent-up demand. Again, in the impairment footnote, you paint a rather gloomy picture of substitute growth over the next two to five years. I guess your assessment that you've taken for the impairment is probably based on something that you are seeing in the market. So can you please help me connect the current happening in the market with pent-up demand or new customers or what you think is going to happen with your statements in the impairment footnote? Thank you very much.

So Maya, Peter speaking. I will take up the first part of your question, the impairment. Obviously, the pandemic and COVID-19 is a trigger event which forces you to do respective impairment tests and review all your underlying business cases that you have. And so the impairment is really triggered by the COVID-19 pandemic. And most probably without that pandemic, we would not have been forced to do these respective impairments. But you're right, in India also, the decision to discontinue the Equinox, which was also triggered by the pandemic, is also a factor in that respect. I think Denzel Wings is a certain special situation. You might be aware that Denzel Wings was a stepwise acquisition, so we increased our stakes several times. And with the increase of the last state, which was also the most expensive one, we had to value the whole acquisition of dental wings with that purchase price for the last state. You might remember that in 2017, we reported also a one-time gain due to that revaluation of roughly 40 million Swiss francs. And that revaluation basically made or came to a situation where the headroom is significantly lower in that acquisition compared to the other acquisitions. That's also the reason why NeoDent, ClearCorrect, or OntoGem Identica were not impacted by these impairments. So there's a certain technical... technical explanation also why we were forced to impair dental wings, but that has nothing to do with our further commitment to develop and invest into the dental wings products and the intraoral scans we are developing in that respect.

Yeah, maybe I can give even some additional colors to what the what Peter just said. When it comes to Equinox, it's rather straightforward. And it's why this is triggered by COVID-19. As you have seen, we are looking at trying to decrease costs without impacting our growth capabilities. And what we have been done in 2019, we have launched Neodems in India. And we have seen that the sales of Neodent in India have picked up significantly well, and the product is really, really well perceived. And the fact that we have also then developed Nuvo, which is in the low-cost segment, is allowing us then finally to offer this solution in India as well. Then if you look at our capability to develop our market share value and try to reduce complexity, which is at the same time than reducing costs, then we had an opportunity to say, well, we don't think Equinox has the same development capabilities that we thought, and that's why we decided then to stop the activity and to impair Equinox as a whole. Then it's much more about how we can grow our value business in the Indian market and beyond with a different strategy that has also triggered this decision and also reducing costs from a COVID-19 standpoint. With TotalWings, besides the explanation from Peter, if you remember, we had the fire at the end of last year, which has impaired or, let's say, significantly impacted the development of our new generation of in-lab scanner, which was called Harmony, and we decided then not doing it because it has destroyed a lot of the things that we would have developed at that time. and to focus on intraoral scanners. And the fact that while intraoral scanners have still capability to grow, we are in a less market potential or in a less important or less wide market potential for data wings. And with the COVID-19 stress test, then we have not been going through. But this has nothing to see with the pent-up demand or anything else that we can observe on the market right now.

Thank you.

The next question comes from Daniel Jelovkan from Mirapol. Please go ahead.

Good morning as well. Just on the Kalira line of business, I mean, we saw yesterday night Smile Direct Club with minus 50% sales in the second quarter. I know it's not directly comparable, of course, to yours, but is it fair to assume that in your second quarter the Kalira line of business was probably down as well some 40% like the group and the second question is you talked about distributors market with restocking I mean I guess it was all an intra-quarter event so destocking maybe in April May and then restocking again in June or is more to come for restocking in Q3 Those are two questions. Thanks.

Yeah, well, when it comes to our clear-liners, obviously we have been impacted also in Q2 significantly, but not at all at this level of the one you mentioned with SmileDirect Club. as our auto and clear liners business is still young and we are still looking at market penetration and with some of the strategic initiatives that we have taken, then we are not as impacted than the overall total business. Now, when you talk only about case start, We are going to be close to the Q2 of our overall company because obviously clear aligners have been impacted the same way than implants. And we have seen that in Q1 and we are seeing the same in Q2. Those two market segments are behaving very closely. When it comes to stocking or destocking, yeah, I think it was just mentioned that distributors have an increased confidence about the future. That's why they have been able to take more stock. But you're right, they were destocking in the March, April, May period, and they have been restocking in June, looking at how the situation was improving. And we are not expecting any... let's say, major impact of stocking, de-stocking in the coming quarters.

And just one additional comment from my side. I'm sure you're also aware that the distributive business is only a small percentage of our total business, less than 5% of the total revenue.

Okay.

Great.

Thanks. The next question comes from Veronica Dubajova from Goldman Sachs. Please go ahead.

Hi, gentlemen. Good morning, and thank you for taking my questions. I have two, please, as well. One, just curious to get your updated thoughts on how you're thinking about 2021 in relation to 2019. I appreciate there's still a lot of uncertainty, but I guess, you know, if you can give us a little bit of an update on how your thoughts have evolved and do you think 2021 – is going to be a year that's bigger than your 2019 revenues or smaller or about the same, kind of based on everything that you've seen, how you're thinking about that. And then I did want to follow up on the clear aligners as well and ask about the clear correct one and just if you can maybe give us a sense, do you think this closes some of the competitive gaps that you have versus Align in particular in the sort of more complex cases be great to understand that. Thank you.

Yes. Well, honestly, giving, again, an idea of 2021 is very difficult because it depends about what we will have, what will happen in Q4. But as we are seeing, if... Looking at what's happening right now, and we can be cautiously optimistic, we still believe that 2021 can help some opportunity for developing our market penetration. And if the market remains in good conditions, there is no reason that we are not gaining share with all the opportunities that we are looking at and that we are creating for ourselves and our customers. It will all depend about how the pandemic will be controlled or not and how much about this impact of the economic recession. But we are still rather positive about 2021 when we look at the current things that we are seeing in the marketplace and the confidence level of our clinicians. Now, when we look at the clear correct and our clear correct one, yes, I think you are right. This is closing one of the gaps we were having with Align, not with regard to complex cases because it's much more here a software topic that we are actually working significantly on. but it has to see with much more the product offering and the portfolio that we are offering for GPs to keep their life simple. And very often a GP wants to know how much the treatment will cost in order that he can calculate very easily his margin and how much he's going to earn from the case based on his pricing. And as there are a lot of different price levels and number of aligners included and the number of options, What GPs are asking is clarity. I want to know exactly what I have, how much it costs, and if I can, you know, support 80% of my cases that are simple to moderate. And this is the simplicity, clarity that we are providing with the GPs, with the clear correct one, where we have some competitors having the same kind of simplicity offer who are getting traction on the marketplace.

Understood. Thank you, Guillaume. If I can just follow up on the 2021 question. I guess you're right. I appreciate that you're cautiously optimistic, which is great to hear, but looking at the sort of GDP chart that you have in the slide deck, that does paint quite a different picture. And is your thought process here that, you know, GDP is one thing, but what really matters is consumer confidence? And here you've seen the government step in and provide support. And I guess how you're thinking about is that governmental support rolls off in some of these markets. What's the risk to the growth from that, if you can share your thoughts on that? And that will be it for me. Thank you.

You know, I'm with you on this one. That's why the big question is what kind of proxy can you take from a number perspective looking at 2021? And that's why we look at the GDP as one of those, because obviously they are somewhat also defining what will be the discretionary revenues that people are going to have in order to finance their lives and their projects. We are also a bit cautiously optimistic because what we see so far is that dental and also healthcare in general, we know that the rank in parity for household spending for healthcare is getting higher and higher. And we all know that when you are doing an implant or a rather large implant treatment, then you have some trade-offs to be done. Then either you go on holidays or you do your implant case or you buy your car or you change your car and you do your large implant treatment. Or for a more younger and active person, you want to do your clear liner treatment or you are not going to pay yourself another treatment. It's all about how much now health consumers are going to select oral health as one of their key priorities. And we believe that oral health is increasing significantly in priority spending. That's why we can expect a better outcome than just a GDP number.

Understood. Thank you both very much.

The next question comes from David Edlington from J.P. Morgan. Please go ahead.

Thank you, guys. Thanks for taking the questions. Just one really. I just wanted to get your thoughts around how we should be thinking about the evil issue of the cost base through the second half. Obviously, we've had some discretionary cuts in spending in the first half that have helped the margin. You've already talked about the government support, but maybe as the business pre-improves again, you see Jamal come through, how are you thinking about reaping costs into the business? Thanks.

Yeah, I think the most important topic for us in the second half is also to be agile in that respect, depending on the top-line development. And obviously, if the top-line is developing favorable, then this is also the opportunity to increase our expense level a little bit, to run probably more events or to spend more on the promotion side. Because what we definitely want to do is also take that opportunity as a take that situation as an opportunity to strengthen our market position and capture further market share. And we also already mentioned that we plan certain launches in the second half, which will also increase a little bit the cost level. But you also need to be aware that the very low cost level in the second quarter was also caused a little bit by very low business activity. So the sales force stayed at home. They were not traveling. There's no international travel. There were no courses running. There were no other events. So hopefully that's a situation that we won't face in the second half, so that the spend level definitely will be higher in the second half than the average of the second quarter. However, if you probably take the advantage, the average of the first half, the monthly average, then that might not be a bad proxy for the second half.

That's helpful. Thank you so much.

The next question comes from Sibyl Bischofsberger from ZKB. Please go ahead.

Good morning and thank you. I have two questions too. If the trend looks good, but when I look at the impairment you had to do, what has to happen that you had to make more impairment? And the second question is about restructuring cost. As I understood, it was only for the first half. Do you expect more for the second half? And are capex increasing in the second half as you have had very low capex in the first half? Thank you.

Michelle, I addressed the first question. I think for me, the pandemic 19 was the trigger event. So we made all the impairment tests for all the different acquisitions that we have. And given the current situation, I would not expect any further impairments in the second half. As I have also mentioned, if I look at the current headroom from the other bigger acquisitions, then there's a very different situation than with Dental Wings. The headroom is much bigger than for the Dental Wings acquisition due to the surprise acquisition and purchase that we have in that respect. However, we also don't know what happens in the second half. But based on today's situation, I would definitely not expect that in the second half. On the capex level, yes, I mean, where we did not really decrease our capex or postpone major projects that was in the capacity expansion projects that were running, they are probably delayed by a month or a few weeks due to that temporary situation in the second quarter. But I would expect the capex level in the second quarter to be higher than in the second half, to be higher than in the first half. And the main reason is also that as we delay, stop some minor projects and some minor investments, especially in the second quarter. And currently, as we see the situation developing, we also increase our spend level in that respect. And I'm not sure if I understood the second question, Sibyl. Maybe you could repeat the second question, please.

So you had this 13 million restructuring costs mainly due to the staff reduction. Do you expect more restructuring costs or in different areas in the second half?

Okay, thank you for the repetition. Good question, Sibyl. The whole resizing of the organization that has basically been done until the end of June There are very, very few exceptions due to some legal situations where it's not fully implemented, but I expect not a significant increase in restructuring. It might be a million or one and a half million or whatever, but not more.

Thanks.

Thank you very much.

The next question comes from Kit Lee from Jefferies. Please go ahead.

Thank you. how you plan to, you know, do digital marketing going forward and what the mix of that is going to be. And then, you know, just on the cost of digital marketing versus physical marketing, you know, what are some of the differences in cost? If you can just give some color on that, that would be great. And the second question is just on your non-premium implant and premium implant performance in Q2. what the difference in run rate different than what you have seen in the past or, you know, the performance in these two franchises is pretty much mirror what you have had before COVID.

Thank you. When it comes to the Marketing spend. Obviously, we are at that trend anyway to significantly develop the digital marketing aspect and having less and less, I would say, traditional marketing or printed marketing. And that's where we have done our major investment in developing not only our initiatives towards customers on this side, but especially developing expertise within our marketing organization. And we have some actually very specific program to increase our expertise of even our existing people and doing a lot of internal education. When it comes to the share of cost, of course, in the first half, and especially Q2, the biggest part of our marketing costs have been digital. We have done mainly online activities. be it Congress, be it sharing documents, or be it also doing all our promotional campaigns. And what we are looking at is that we would like to continue significantly on this side and continue to invest much more on the digital side than on the traditional side. I think this is also what COVID-19 is bringing as an opportunity. That means clinicians and customers are also very much open now to digital marketing activity, digital education that they were in the past, and helping us to switch a large part of our remaining traditional marketing into digital marketing. For the second question, I'm not sure, can I ask you also to repeat the question to make sure I'm going to answer properly?

Yeah, so I'm just wondering if you have seen non-premium implants growing much faster than premium implants in Q2, or maybe the differences are similar to what you have had before COVID-19?

Yeah, I think also a very good question. Actually, we have seen, well, different trends in different countries, but I would say that in general, the trends have been the same. Now, what we have seen, especially when it comes to value, value is very much also weighted on the LATAM side and Brazilian side, and we have seen that there are specific distribution models have helped the value side to behave sometimes better than premium because of their distribution approach. That means you know in Brazil they have shops that you can just buy one implant at a time, which is making sure that you don't suffer from any cash or treasury problem. then we have seen a very regular purchase of value influence in Brazil, which is one of our biggest areas. But still, when I look at the bounce back, be it in Europe, be it in North America, and also in Asia Pacific, the bounce back is the same on both segments.

That's great. Thank you. The next question comes from Falco Friedrich from Deutsche Bank. Please go ahead.

Thanks very much. I have two questions, please. Firstly, have you noticed meaningful market share shifts in the first half of the year? And have you been able to gain some market share? Would be quite helpful to get some color here. And then secondly, on your online offering, which looks like it has been used quite a lot, how would you say this offering compares to the offering of your competitors? And where do you see your edge here?

Yeah, thanks for the question, Michael. Well, for market share, as you know, as you may know, we have two ways to evaluate market share gains. The first one is there is a clear registry of premium implants where every premium company is sharing its numbers. And we know exactly how we are doing. And we can confirm that. But we have the data one quarter later. That means for Q1, we have the results in June. And that means that for Q1, we can confirm that we gain market share on the premium side. That was our expectation, but it was great to get that confirmation. And we believe also that we have gained market here also on the value side because of the growth we have been able to post, especially in North America, but also in Asia-Pacific with really good behavior of neodymium in Japan, as an example. When it comes to our online offering with regards to competition, on this, honestly, we are not really comparing competition in what they do. We are really trying to answer especially customer needs. Then our development of online offering is based really on customer expectations. Then I believe we have an online offering which has been – in line with the expectation and we have also some really good insights from their side to continue delivering such specific service online mainly or even continuing distribution of products online only and this is one of the opportunities that we see with COVID-19 If clinicians are ready to have an extended relationship online versus the past, and we believe that we would like to leverage this opportunity in front of us.

Perfect. Thank you. We will take two follow-up questions before closing the call. The first follow-up comes from Tom Jones from Berenberg. Please go ahead.

Oh, thank you for taking my follow-ups. I wanted to follow up on two things, really, both of them related. Dr. Smile, if I look at the purchase price of this asset, including the earnouts or the mid-range of the earnouts that you've given in the release, which totaled to 110 million Swiss francs, I appreciate that can go up or down based on the performance of Dr. Smile, but when I look at that number, it's not too dissimilar to the $150 million that you paid for ClearCorrect, which one kind of makes me wonder whether you think you might have backed the wrong horse with ClearCorrect and, you know, Dr. Smile is actually a better business. And then the second question I had was really, what is it that Dr. Smile has or has the capability to do that you yourself couldn't build internally for considerably less than 110 million Swiss francs? So that was kind of the first question. And then the second question, sort of more broadly on M&A. I mean, if I look across some of the assets that you've bought over the years, you know, Dental Wings, you've just written down. ClearTech, you've written down. Equinox, you've shut down. You know, NearDent, it's probably worth about half of what it was when you bought it in Swiss franc terms. You know, how are these sort of, these developments kind of affecting your overall view of using M&A as a way to grow the business. And I appreciate fully that a lot of these were decisions made by your predecessors, but, you know, the company went on a very significant spurt of acquisitions over a kind of five, six-year period. You know, if you could turn back the clock, do you think, you know, being as aggressive on the M&A front was the right way to go, or do you think doing it organically might have been a better approach?

Yeah, thanks, Tom. I think a very relevant question, then, Dr. Smile, first, I think to make sure that we have a good understanding of Dr. Smile versus ClearCorrect is actually completely different. We are not purchasing Dr. Smile or we are not acquiring Dr. Smile because we believe that ClearCorrect has not been in line with our expectations. Actually, the combination of Dr. Smile and ClearCorrect is something that we believe is very powerful. ClearCorrect is our capability to develop, design, manufacture, and deliver clear lines, and making sure that we can offer this as a product in our therapeutic arsenal. And this is also opening up this very important growing segment of clear liners, which is, well, again, growing very significantly, and where market penetration versus the potential market is still very low. Then we know that this clear liner market is going to continue to grow very significantly, and we see a lot of great growth potential for ClearCred as such. Now, within the clear liners market overall, there is the specific D2C segment, which is already representing something like, we believe, 20% of the total market volume, and where this is the fastest growing segment as a kind of go-to-market patient in the overall clear liner market. And for us, looking at already the size that this segment is representing and looking at the growth rate of those direct-to-consumer activities, For us, it was very, very important that we can play in this arena. We believe that with Dr. Smythe, and we can play on that B2C2B model, if I can express this way, which is we contact the customers, we sell the treatment to customers, and we bring them back to clinicians, which is creating two very interesting benefits for us. then we are capturing patients and we are increasing the market potential. And secondly, we are creating, you know, patient traffic in our customer practices, which is very much what they are expecting at this moment in time, not only because of COVID and the need, obviously, to increase their practice, but also in a any time where they always see as growing their patient pool is a way to increase the value of their practice. The second thing that we believe Dr. Smile is offering is that it's creating a patient brand, which is very important for the future because we believe that patients have become now health consumers, as I said before, and they are really taking control of their oral health. then making sure that we can create here and generate demand and learn how to generate demand, that means getting this expertise, is really critical for the short term, but also for the long term. And last but not least, I think this is very specific to Dr. Smile, as said before, it's a clinician-led treatment. in opposition to the Smile Direct Club or all those kind of organizations which are removing the clinician from the loop. We think this is the only way to go from our perspective for ensuring quality and making sure that we can still create synergy with our existing business. Now to the question, can we do that ourselves or would it be better to make instead of buy? We believe right now the speed of this DTC market is so important that if you try to develop such capabilities, With all this kind of new economy where, honestly, we had no experience, no expertise, it will take us something like 18 months to two years, and we believe that the market leadership would have already been taken by someone when we see the number of companies that are investing significantly in this arena. That was for the first part of the question. For the second part of the question, do we believe that this aggressive M&A that has been conducted before, that we have some question mark about what has been done? The answer would be no for one really clear reason. We are very often looking at what does not work well, and that's, of course, the things that we are reporting. But when I look at what is working really well, which are coming also from this aggressive M&A, we have all the value business that we have built, and especially Antogia, which is doing very well, that we have just finalized last year. We have Medendica that has been done at the – At the beginning of the period of this M&A period, which has been done in 2014, if I remember well, for the first step, and which is actually growing as we speak, Medentica as a franchise. We see Ben Matillon that we acquired last year, who is very, very successful, and we are growing the business internationally. And another example would be Iler Matillon, which is with the resin business. This is giving us the capability to own the resin for clear correct manufacturing, but also we are starting internationalization of direct sales, which is giving us opportunities. All in all, an aggressive M&A strategy is obviously bearing risks, but we are always trying to take calculated risks, and some did work, some didn't. But all in all, when we look at the overall perspective, It has been positioning us as a much more successful company, opening up our addressable market and growth opportunities than where we were in 2013.

Okay, that's very helpful. And just maybe a follow-up back on Dr. Smile. You know, the B2C2B model as you described it, you know, various models exist around the world, you know, the sort of click-reqs, a line model, which is very much the traditional one, but then the other end of the spectrum, where regulations allow you have a direct DTC model. Is the B2C2B model really just not more a reflection of local regulation rather than that being the best strategy for this type of business? And I guess the following question is, in those markets which do allow direct DTC and disintermediation of the dentists, How do the other models defend in those markets against being undercut quite significantly by DTC models, if indeed, as you say, the B2C2B model or the direct dentist model is the best model?

First, well, I think it's another good question, Tom. But first, Dr. Smile is doing the B2C2B model not because of regulation. You can do direct to patient in Germany if you want to. And you can do that in Europe too. There are a lot of companies doing this in the UK, in Spain, in Austria, in Switzerland, everywhere. Even in Europe, you can do D2C, direct-to-consumer D2C without any problem. And this is a clear strategic choice to do the B2C2B. The reason is that first, as an organization, we have always, always focused on quality and reliability. And there is no way we want potentially to treat a patient without being sure that if he does need an X-ray, because it's a question mark on the situation of an implant, he will have one. Then we don't want to take any risk on the way we are treating patients. And for us, patient satisfaction is the number one reason why the company is going to be successful long term. Secondly, is DTC going to be there to stay? Yes, I think it's going to be an entry price still for DTC without going to oral specialists or clinicians. Is regulation going to stop this? No, I don't think so. But it will give potentially some additional guidelines. And as you have seen, maybe in the U.S., California has ruled in order to include the patients, you need to have an X-ray. And it's still a battle in the U.S. by small director, but we believe this is also where the market is going. You still need to have a decent diagnosis before conducting any oral care treatment.

Okay, perfect. That's very, very helpful. Thank you very much.

The last follow-up question from Daniel Jelovkan from Mirabeau. Please go ahead.

Thanks. Just two quick ones on countries. Why was Sweden down? I mean, it's the only prominent country with no official lockdown. So just curious why the business in Sweden was soft. The second question in China, you mentioned sequential nearly doubling of And in Q1, you said that the corona impact was probably 30 million negative in China. So was the second quarter a pure pent-up demand, or are there other things to consider? Thanks.

For China, I think we have seen a... a really good bounce back, but it was, again, it was timid at the beginning. That's why we have seen a significant improvement when we have discussed at our calls when we announced the restructuring plan or the right-sizing activities. We discussed significantly about China, seeing that they were applying a very cautious approach to bounce back, and they were really implementing all the new processes and procedures and having a 15-minute time difference at least in between patients, and that's where we saw that productivity could be down 20%. I think they are still applying some of those rules but taking a little bit more flexibility with them, and that's where we are seeing that the China business has recovered significantly. step by step with pent-up demand, and we believe more lately with a kind of organic growth. Now, how sustainable is it going to be? That's still a question mark that we're having. I think on this one, nobody knows if the last, again, two months could be a prophecy for the future. But what we see with China is that a part of the growth is not coming from pent-up demand. That's for sure. First question, Sweden. Yeah, Peter, if you want to.

Maybe I can share some thoughts on Sweden. You are right, Daniel. Sweden chose a very different approach to handle and manage the pandemic than the other countries. What we have seen in the second quarter is a higher level of business activities throughout the quarter. However, at the end of the quarter, in June, for example, we saw also a less weaker bounce back or not really a bounce back compared to the other countries. where at the beginning of the second quarter, business activity and sales were very low, but June we saw very strong and much bigger bounce back than the other countries. That's probably the explanation why Sweden was overall a bit weaker than the other countries, and that also shows that part of the good sales performance in June is driven by pent-up demand.

Okay, thanks.

Okay. Thanks for everyone for your questions and for joining us today. We look forward very much to seeing you again soon and wish you together with your colleagues and families the best of health and a restful summer break. Have a nice day and goodbye from Basel.