Straumann Holding AG

Good morning, everyone. Thank you for joining this conference call about Stroman Group's first half-year report for 2023. We are happy to present our results and are looking forward to the questions and answers session at the end of the presentation. Please take note of the disclaimer in our press release and on slide 2. During this conference, we are going to refer to the presentation slides that were published on our website this morning. As usual, the presentation and discussion will include some forward-looking statements. As shown on the agenda on slide three, I will give you an overview of where we stand, and then our head of investor relations, Marcel Kellerhans, will share details about the financials. After that, I will provide you with an update on key strategic initiatives and our outlook. Let's start with our highlights and move directly to slide five. A very solid half year is behind us. Tromain Group revenue reached 1.2 billion Swiss francs in the first six months and 621 million in the second quarter. Overall, organic sales increased by 7.5% in the first half and 11.7% in the second quarter. One of the highlights of the second quarter is the large volume growth from China. It was heavily influenced by dynamic patient flow compared to last year's second quarter, which, as you remember, was affected by local lockdown due to COVID-19. EBIT margin amounted to a solid 26% thanks to healthy business growth combined with efficiency gains, and this despite significant currency headwinds. For this strong, healthier performance, I would like to congratulate the entire team around the globe for their dedication and focus on delivering our solutions to customers. Another highlight of our second quarter was our recent acquisition of GalvoSearch, a technology enabling us to meet the increasing demand for peri-implantitis treatment, which can now protect patients from implant loss. I will provide you with more details later in the presentation. Given the solid first half of 2023, and despite some localized consumer weaknesses, we are confirming our full year guidance of high single-digit growth, together with profitability at around 25%. Moving to slide six, the patient flow, which remained favorable in most countries, led to a dynamic good growth rate in all regions. The largest region, EMEA, organically grew at a strong rate of 8.8% compared to the great second quarter in 2022. Growth was primarily fueled by markets such as Germany, Turkey, and the U.K. Revenue from the North American region led to a 7% organic growth in the second quarter to which both the U.S. and Canada contributed. This is a great result in the current market environment where we have seen some localized weakness in the large reconstruction procedures. Latin America achieved once again a remarkable 20% organic revenue growth. Brazil maintained its role as the primary contributor to revenue, showing robust demand for neoderm solutions. The region's market presence expanded thanks to the attraction of new clinicians via nationwide educational events. Chile and Argentina also showed strong growth, contributing to the overall success of the region. The Asia-Pacific region achieved an excellent 23% organic revenue growth compared to the same period in 2022, which, as already mentioned, was impacted by COVID-19 lockdowns in China. Countries such as Japan, Australia, and India also performed strongly, but the major driver was the accelerated patient flow, and this volume growth in China usually influenced the return response. On slide seven, I would like to dive a bit deeper into the three positive effects that influenced patient flow and accelerated the business dynamic in China. The first effect was COVID-19, which was still present in January and February. The second factor was the implementation of the volume-based procurement process during the first half of the year. Those combined two factors resulted in the release of the pent-up demand and increased patient flow seen during the second quarter. The first factor was how quickly the team in China responded to the new opportunities offered by this new market dynamic, resulting in a strong performance during Q2. Slide 8 leads us to our performance overview by businesses. Implantology kept its strong growth pace in the second quarter, with double-digit growth in the premium as well as challenger segment boosted by customer acquisition. premium implantology was predominantly driven by our emergency portfolio. From a challenger brand perspective, Entogyre, which is more than 20 years established in China, benefited from the volume increase, while Neodent keeps a strong growth momentum in all other regions. Looking at orthodontics, where we continuously work on enhancing our value proposition by elevating the offering and service quality, We saw double-digit growth on our ClearCorrect clinician brand. This B2B business keeps on establishing its presence in the existing market and launching new solutions. On the direct-to-consumer marketing business side, Dr. Smile has seen slower growth, mainly because its core target group prioritized spending on vacations during the pre-summonment. Adding to last year's strong comparison quarter, our digital solutions business continues to show strong growth, driven by intraoral scanners. In particular, the dynamic development of our virtual vivo scanner was a highlight. iOS are the entry point of the digital workflow for clinicians and critical for generating clinical quality and efficiency. As a consequence, iOS market penetration is continuing to gain substantial traction in many markets, which eventually leads to a broad installed global customer base, which is an important element of our digital strategy. And with this, I will hand over to Marcel to provide additional details on the financials.

Thank you, Guillaume, and good morning, everyone. I would like to start by speaking about our revenue on slide 10. As Guillaume also mentioned, Strommen Group's second quarter results reached 621 million Swiss francs with an organic growth of 11.7%. At 2022 exchange rate, our 2023 second quarter would have been 42 million Swiss francs higher. The unfavorable currency effects were mostly related to the depreciation of the euro, the US dollar, the Chinese renminbi, the Turkish lira, and the Japanese yen. The M&A effect in the second quarter, which is mainly attributed to plus dental, added $8 million to our adjusted revenue of $556 million. This strong regional performance was supported by our existing portfolio and by the favorable patient flow in most of the countries, as well as the Chinese market dynamics despite global inflation. Asia-Pacific contributed the largest share of the group's revenue growth in absolute numbers, followed by EMEA, North America, and a strong contribution by Latin America with 9 million Swiss francs. Looking at gross profit development on slide 11, our gross margin for both core and reported amounted to 75.2% in the first half of 2023. Currency adjusted represents a margin increase of 20 basis points. High utilization rates in our production facilities, combined with continued efficiency improvements to contain increases, offset the higher exposure to additional equipment. Let's move to slide 12. Historically, the core EBIT margin has been stronger in the first half of the year. Following this pattern, the core EBIT margin reached 26%, which is a currency-adjusted margin reduction of 10 basis points below the same period in the prior year, despite currency headwinds that had a strong negative impact of 180 basis points. On slide 13, you can see that free cash flow generation is at 112 million Swiss francs, which is 34 million higher compared to the same period in 2022. Overall, the free cash flow margin increased from 6.6% to 9.2%. Capital expenditure in the first six months remained at a high level with 86 million Swiss francs spent, demonstrating the group's commitment to production expansion and digital-related initiatives. The cash position at the end of the first half of the year remained strong at 603 million Swiss francs. Let's continue with slide 14, where I would like to show you an overview of our core financials. Core gross profit rose to 915 million, and core EBIT rose to 317 million Swiss francs, with respective margins reaching 75.2 and 26% in the first half of 2023. The gross margin improved by 20 basis points, while the EBIT margin contracted 10 basis points despite the currency headwinds, which took 100 basis points of the gross margin and 180 basis points of the EBIT margin. Core net profit increased by 18.8% to reach 229 million Swiss francs, and the margin increased by 220 basis points. This primarily reflects unrealized negative currency valuation impact, mainly in emerging markets. Higher interest rates led to extended currency hedging costs and adjustment in their amounts, while interest income on cash balances slightly increased. As a result, core basic earnings per share decreased from one Swiss franc and 69 cents to one Swiss franc and 43 cents. For full clarity, you will find the comparison on a reported IFRS basis as well as the core reconciliation table in the appendix of this presentation, and even more details can be found in the appendix of the press release. The main difference between the current reported numbers is the restructuring costs in the APEC and LATAM regions of 19 million Swiss francs.

And with this, I will give back to Guillaume. Thank you very much, Marcel. And let's move on to slide 16, to talk about recent achievements and strategic updates. To keep the strong growth pace of our implantology business, we are building up on our strong innovations that are fulfilling the high expectations of clinicians about immediate treatments, such as BLX, TLX, and our Zygoma implant lines, while investing further in manufacturing to cater to the global demand. As an example, Our China campus manufacturing site project is developing well, and we should be able to start producing commercial products by the very end of 2024. And a second critical pillar of our implantology strategy is the education side, which is bringing me to slide 17. I'm very proud to announce that we have renewed our partnership with the ITI and therefore reinforced our link between industry, science, and practice. With more than 22,000 members, the ITI is the world's largest education community in implant dentistry. The ITI has always been a very strong partner and key player in shaping industry guidelines for global treatment protocols. With the aim of providing solutions that are clinician and patient-centric, we are committed to evidence-based dentistry. For more than 40 years, we have enjoyed a close and fruitful partnership with the ITI as our independent scientific partner, and we look forward to the continuing collaboration in the years to come. Moving to slide 18, on the challenger side, Education is also crucial for market access and clinical excellence. As an example, Neodent recently held a global congress in Brazil with more than 3,000 international attendees, which was a huge success. Our global education efforts also supported recent launches, such as our Neodent Z ceramic implants and Ontogea X3 solution for immediacy, to keep expanding our challenger brand presence on a global scale. Moving to slide 19, as part of our relentless effort to add strategic innovations to our product portfolio, I would like to highlight our recent acquisition of GalvoSearch. With this acquisition, we are offering a unique medical device that helps to treat peri-implantitis and thus protects patients from implant loss. The Galvo Surge Standard Implant Cleaning System can effectively treat cases from different implant systems. By removing biofilm, the device is designed to support clinicians in eliminating bacteria from the surface of the implants without harming healthy soft and hard tissue. This new addition to our portfolio is offering a great opportunity to partner with new customers in the months to come. Let's move to our recent orthodontics advancement on slide 20. On our road to offer a very competitive orthodontic software, we have done further progress in the second quarter. The ClearPilot update includes features to improve the user experience and streamline dental treatment. ClearPilot now offers enhanced visualization of posterior bite ramps, a new clinical feature allowing doctors to treat patients with cross bites. It improves aesthetics, optimizes patient comfort, and increases the effectiveness of the ramps for successful treatment outcomes. The bite ramps feature is currently in the limited market release phase, and a full release is planned for the first quarter of 2023. This ClearPilot enhancement brings us to slide 21. The software updates can be seen in the planning phase. In addition, all our recent launches enhance our value proposition and form a seamless integrated digital workflow for the treatment of orthodontic cases. Our offering supports customers during their treatment journey to facilitate fast and accurate diagnosis and accelerate treatment planning for simple to advanced cases. Looking at our efforts to implement a full digital workflow in implantology as shown on slide 22, our investments are starting to take ground. We are very pleased with the continued progress of our iOS sales. Those intramural scans are seamlessly integrated into our new Stroman Access digital platform, which is delivering an improved customer experience in North America. which is the only region where it has been launched so far. Currently, Stroman Access is powering the mine-in-a-box workflow and will soon be able to simplify also the prosthetic workflow. With this, I would like to move on to slide 23. As published in our press release, we announced that Young, too, will join the group as Chief Financial Officer and member of the Executive Management Board at the end of August. Young joins from the Kraft Heinz Company, a publicly listed U.S.-American food company, where she was a member of the Executive Committee. Young brings a wealth of experience in corporate finance, strategy, commercial, and business development. She's a very successful leader with a passion for developing talents and building high-performance organizations. We are looking forward to having her on board by the end of August. I would like to take the opportunity also to thank Marc-Alain for leading our finance organization since early January. His strong expertise has been very valuable for the Stroman Group during the past month. He will ensure a smooth and efficient transition with Young and complete his mission by September this year. In addition, another organizational development has been announced during the second quarter. Rama Samo, head of our dental service organization, has decided to lead the group, joining one of our main business partners. The hiring process for a new DSO head is ongoing. Moving on to slide 24, I would like to announce that the science-based targets initiative has approved our group's net zero target. We have committed to care for the planet and society and set ourselves ambitious emissions reduction targets in line with climate science and a trajectory that limits global warming to 1.5 degrees Celsius. By the year 2030, we plan to decrease on scope 1 and 2 emissions, meaning the emissions caused by our own operations, and the ones caused by purchase electricity and heating by 42%. For scope 3 emissions, which are the indirect emissions that occur in the value chain, we are aiming for a 25% reduction. By 2014, the goal is to achieve net zero carbon emissions across all scores. These targets have been evaluated and approved by the SBTI. And that brings us to slide 25, where I will share our thoughts about the outcome. Despite some isolated consumer weaknesses, we believe that the patient flow seen in the first half of the year is expected to remain at a dynamic level in most geographies. Thanks to the differentiated value proposition within our strategic segments, combined with a strong quality of execution from all our team members worldwide, the group remains confident that it will continue to gain market share within its estimated globally addressable market of 19 billion Swiss francs. In the meantime, we will continue to invest in growth and transformation to keep our competitive edge in the coming future. As a result, The group confirms its full-year outlook and expects organic revenue growth to be in the high single-digit percentage range and profitability at around 25%, including growth investments. Now, I would like to open the question-and-answer session.

Thank you. The first question is from Daniel Buchta, ZKB. Please go ahead, sir.

Yes, thank you very much. Maybe the first question, starting on basically the patient flow trends you see in EMEA and North America. the numbers you reported today were a notch weaker than what basically consensus was expecting, and also there was a clearly lower comp base. Is there any signs of a slowdown, anything you would expect towards the end of this year or maybe into early next year that this is worrying you here that consumers are willing to spend less on dental implants? And then on your margins, I mean, obviously you're guiding for around 25% this year. Your 2030 guidance is for 25 to 30%, and we see how painful the FX was for you again. I mean, what are basically the drivers then in the next years for you to move up from this very low end of your margin range towards wherever it can go until 2030? Thank you very much.

Yeah, thank you, Daniel. When it comes to patient flow in EMEA and North America, we are not seeing, I would say, a major change versus what we have seen on the first half. In EMEA, it still remains dynamic with a really good patient flow, good perspective also when we are talking with our customers, then we feel pretty confident here so far. When it comes to North America, as we have highlighted already in the full year 2022 call and our Q1, the only specific segment when we have seen some slowdown has been in the very large reconstruction. The full-arch cases, as we are saying, In North America, because we all know that for those cases that are in between $25,000 to $30,000, then health consumers very often are also selling stock to get there, which is very typical for North America. And as the stock market has not been very, let's say, stable and stable, let's say, interesting so far than we have seen some of the patients rescheduling or postponing, meaning that we don't see a significant weakness because it's postponing cases. But yeah, this is the thing that we're looking at, and we think it's going to continue for the remaining of the year. Then all in all, we expect quite a dynamic patient flow, stable versus what we have seen during the first time. When it comes to margin on the 25% side, yeah, we have done a significant efficiency gain here in order to offset then these strong ethics headwinds that we are not seeing that easing up in the second half. Then we are, of course, doing a lot of operational leverage thanks to then our – Yeah, great growth, and we are going to continue doing this. We are also then doing significant investment, then, as we said, in digital transformation and in our manufacturing capacity. And we believe that step by step, we'll be able to grow this EBIT range, as we have expressed. on the more higher side of the spectrum. And that's really our objective. And we think that thanks to a healthy growth, we'll be able to deliver on those ones and be very cautious in our efficiency gain if the ethics situation is staying the same.

Thank you. Thank you very much, Guillaume.

The next question is from Chris Greitler, Credit Suisse. Please go ahead, sir.

Thank you, operator. Good morning, Guillaume, Marcel. Thanks for taking the question. Maybe two, first on China. Maybe could you talk about the specific growth dynamic in Q2? I guess that was quite a surprise to many of us. If you could be a bit specific, that would be fantastic. Also, what does that mean for your guidance? Essentially, what second half assumption have you baked into your full year guidance? That would be great because it's obviously a very dynamic region at the moment.

Thank you. And again, yeah, that's obviously a critical question right now. And we have been very pleased with the China results. And also, we have, to be honest, not expecting this dynamic, which is really the... As expressed a little bit before, the combined effect of those three different factors about having the significant pent-up demand coming from the fact that January and mid-February was completely closed. Sometimes the time flies and we don't even remember, but it was all practices were closed. in the q1 city in the first quarter then there is a significant effect of pent-up demand there is a significant effect now and we see that of new patient flow coming from those more affordable prices where I think it has created some great opportunity. And the third factor, when we were saying that our team has been very agile and dynamic, is also that effect of market share gain that we are realizing as we speak. thanks to the price gap being much narrower than in between Korean brands and, for example, the Stroman brands, and patients are also willing to upsell their treatments as the price gap is much lower than it was pre-VVP. Then those three factors are really supporting this very dynamic growth rate, and we are all hands on deck to make sure that we can cater for this demand from both local organization service standpoint and, of course, global manufacturing standpoint. When it comes to the guidance, and I think this is a fair question as well, what is tricky right now is that our second quarter growth rate, it's still difficult to analyze analytically in between the pent-up demand and this VVP effect. then the true remaining effect of the VBP volume growth when the pent-up demand effect will fade down, it's, well, not clear yet to us. And what we have baked in our guidance is that we will see this pent-up demand then fading down and having a a still dynamic growth rate thanks to the VBP effect, but not at the same level than Q2 that has been, of course, combining everything. And that's where we stand today. And I believe that by September, October, when the pent-up demand would have disappeared, we will have a pretty good idea of what will be the remaining growth rate coming from market share gain plus VBP dynamic growth.

Okay, that's very clear. Thanks for this explanation. And then my second question would just be on this restructuring that you initiated. Is there a bit more information you can share? Is there any cost savings that we should expect on the back of that? And is this really kind of a one-time event or is there something else we should be expecting in the second half? No.

Restructuring, you mean from the China organization?

Yes, essentially the charge, the 19 million you took, which I guess is mostly China-related.

It has been mostly China-related and a little bit in non-core activity in LATAM. And there is nothing to expect that much moving forward because, as you see, with regard to the dynamic that is there, there are a lot of areas that we are planning to – let's say, to support also in China locally, then no, I think there is no special effect now or continuous effect of this restructuring in the second half.

Okay, thanks. Let me step back into the queue. Thank you.

The next question is from Maya Pataki. Please go ahead.

Yes, good morning, and thank you for taking my question. Guillaume, I would like to just follow up on Chris's question on China. I'm trying to understand whether you have changed your outlook on China, which I believe in the beginning of the year was for negative growth in China, whether you're now anticipating positive growth or whether we're at the point where you say, like, look, visibility is so low, we're not changing our assumption, we need another quarter. Could you clarify that, please?

Yes, Maya, of course, and I think it's a very good question because, yes, indeed, when we have seen those price decrease by, you know, minus 40%, 45% ASP, we have been clearly planning negative net revenue growth scenario. When we are seeing this Q2 volume effect, which is better than we would expect, we were expecting, we are looking at potential more positive scenario, at least an optimistic scenario if the growth remains. Then we are contemplating for year-end as a possible scenario if we are growth rate, which is really good enough, then we should be reaching, let's say, the same level of net revenue or plus or minus than 2022. And this would be already a great achievement, then somewhat better than we would have planned at the beginning of the year.

Okay, great. Thanks. That's a great clarification. So is it fair to say that At this stage, because some questions were coming up, at this stage, in fact, that you're reiterating your guidance, despite the fact that the momentum is stable or in line with what you anticipated and your comparison basis is getting softer in the second half of the year, is mainly due to the fact that you need another quarter to understand what is really happening in China. Would that be a fair statement?

Yeah, that's a fair statement on the China side, saying, again, we cannot analytically see what's the effect of the pent-up demand and the effect of the VDT. And, you know, we are using just the experience that we had with COVID-19. Then when we have been in the second quarter of COVID in 2020, we had a very, very significant impact. And immediately on the third quarter of 2020, we almost, you know, completely pent up demand entirely. And that's It has been a very strong growth and afterwards on the following quarters that has been just a new dynamic that came in. And we believe that when we are going to have this third quarter behind us, then we will be able to have a better visibility and this is what we want to see. Something also not to be underestimated is what is going to be the evolution of the consumer sentiment and the health consumer willingness to spend in North America for large cases. It's also an area which is important for us as we have large partners that are focusing on this, and this is a segment which is important for growth in the future. And I would say those two areas are going to – help us to have a clear visibility for year-end when the third quarter is over.

Great. Could you just remind us or give us an indication how big those large treatments are as a revenue contributor?

Well, it's not always to know. exactly how many implants are used for those procedures, but we are evaluating that this is 10 to 15% of overall market segment would be then the full arch case.

Great. Thank you so much.

The next question is from Veronica Dubajova, Citi. Please go ahead.

Hi, good morning, and thank you for taking my questions, please. I have... Two, obviously, Guillaume, you spent a lot of time talking about the high-end markets in the U.S. Just wondering if you're seeing any signs of softness or changed consumer behavior in any other markets outside of the U.S. that you're watching at this point in time. And then I have a follow-up on margin, but maybe we just get the revenue bit out of the way first.

Yeah, Veronica, honestly, the U.S. has been the only one on those large cases that we're creating some question mark. There is another, but I expressed that already in Q1, if you remember, you know, the situation in South Korea where with the high interest rates, pushed by inflation, then it has significantly slowed down also the demand from health consumers because they have been tricked by the fact that they have higher reimbursement to do because they are needing a lot of credit. in South Korea. But that's the two major geographies where we have seen this kind of effect. But to be honest, nothing anywhere else is sparking some worries.

That's very clear. Thank you. And then if I can just ask about the margin, obviously, very strong performance in the first half of the year. I know seasonally you always have a softer margin in the back half of the year, but Just curious as what you see as the big moving parts that would take the margin from the 26 in H1 to, let's say, 24 in H2. What are sort of some of the things we should bear in mind?

Yeah, as you rightly recapped, our second half is always lower than our first half from an EBIT standpoint for the reason that the second half is much lower. heavier period for marketing and sales activities. This is where you have all the major congresses. This is where we have the major launch meetings that we're having with our own customers or with the industry congresses. And it has been always the same. And we are also, in order to continue to push our top line and our different solutions and innovations, going to significantly invest from a marketing and sales standpoint. This is also the second half where we are starting to review our go-to-market and potentially increase also some of our headcounts to make sure we prefer immediately the beginning of the year and it will remain the same. And that's one of the major reasons why historically, and it's going to be the same in our plan, for 2023, we are going to have a lower EBIT margin, and that's why we believe we will be around 25% as we are predicting for the time being.

Very clear. Thank you.

The next question from Susanna Ludwig Bernstein. Please go ahead. Great.

Good morning, and thanks for taking my questions. First on orthodontics, I guess recently you had talked about wanting to improve profitability in the business, particularly in Dr. Smile. So I was just wondering if the slower growth this quarter in Dr. Smile has also been driven by lower marketing as you switch to focus on profitability. And then I guess second on orthodontics, where do you think EBIT margins can be in that business long term? And do you see any structural difference between potential margins in the DTC business versus the dentist-led business?

Yes. Thank you, Susanna, for the question. When it comes to then Dr. Smile and Autonautics, we clearly expressed by the beginning of the year that we are pursuing now not a top-line strategy, but we are also pivoting to driving now profitability within the current size of the business that has been established. Yes, there are, let's say, less pursuit of this top-line growth from marketing investment and trying to drive more this bottom line. Then for the second quarter, to be even more specific to your question, there have been two effects. The first one is this, not pushing top-line growth. at any cost and being wise in our marketing spending while still driving growth. And the second aspect has been the fact that in the second quarter we have seen significant interest by the core target group of Dr. Smile being on travel and holidays versus the past years. There have been a lot of articles on this about the travel revenge. That was something that we have felt also with all our different marketing initiatives. But all in all, we are still pleased with the development of Dr. Smile on this kind of top-line and bottom-line profile, and we are going to continue doing this strategy in the second half. When it comes to the overall orthodontics in between our expectations of profitability, we believe that orthodontics is a very promising segment from a profitability standpoint as well, in line with our initial expectations. But for this, we need to drive the critical mass where we are not there yet. then that's a mid-term approach. We are still in an investment phase on our orthodontics business, and we need to invest in all the different segments, being technology and being go-to-market. And that's what we're going to continue doing in order to then harvest the fruit from a profitability standpoint in the mid-term.

Okay, great. Thanks. And I guess just a quick follow-up is, Do you see any difference in terms of the midterm margins in the DTC business versus the ClearCorrect business?

Yeah, we believe that the B2B business should be delivering higher profitability than the D2C business. One of the specificity of the direct to consumer businesses, it's lower predictability than your B2B. That's why, you know, you think that from an average standpoint, then the EBIT will be higher on the B2B side.

Okay, great. Thanks. Very helpful. The next question from Doyle Graham, UBS. Please go ahead.

Just two more financial-focused ones. I wasn't quite sure, obviously, on the net financials, which is a little bit worse than expected. It would just be good to get a slightly better understanding of what you mean when you refer to these adjusted earn-outs within that net financials line, just to understand how we think about the rest of the year. And then one other area of note was just sort of on the working capital side. Obviously, we've seen this creep up for the last couple of years, and Europe's great growth. but we've seen building inventory and receivables again. It'd be good to get a sense as to what specific businesses and regions are driving that so we can kind of think about that on a sort of three-, four-, five-year view so we understand if it's things like DSOs that drive higher receivables inventory, if it's things like LATAM that do it. It'd just be good to get a sense to why that's happening and how much that is just business requirement versus, say, like competitive edge in certain areas or... or adjust the cycle. Thank you very much.

Yeah. I can take the second one if you want to take the first one, Marcel. On the working capital, it's obviously then different here factors are also at play. The first one is when it comes to trade receivables. And as you said, DSO are having different payment terms, and you start to see this in the different maturity of those trade receivables. Our long-term trade receivables actually did not increase because we are really looking at this very carefully, and we are continuing to have even more discipline about this one. the short-term uh receivables are going to increase from a structural standpoint because of course the dsos are wanting to have a bit more flexibility here the second side on the day of inventory as you can imagine with what's happening in china we are all hands on deck to have a lot of products that are going to be available. Then we have a lot of semi-finished products at this moment in time. We have a lot of products in different parts of the warehouses that we're trying to play with. And that's also one of these situations that will improve in the months and the years to come. And that's a little bit the overall perspective. And we believe we will be able to improve our working capital moving forward because we have some effects that are really related to what is happening right now. But obviously, it's still at a really decent percentage versus our total top line, and that we would like to keep it this way.

Hi, Graham. This is Marcel. Thanks for the question on the earn out. I mean, as you know, whenever we acquire a company, we do that over a couple of years, usually three to five years, where earn outs with certain targets are in there. But there's nothing to be really worried about. Usually, if we adjust the earn outs, that's usually a good thing, because that means that the top line is rather the higher end than what we have expected. So this is nothing – we just wanted to highlight that also to give full transparency, as you know, that we try to be as transparent as possible. But here we're talking low-single-digit million amounts. It's not the biggest driver of the finance line at that time. It's just also that we wanted to give the transparency here.

That's perfect. So we should assume that earn-out is sort of the one-time effect and not worry about it. Just maybe a quick follow-up on the inventory point. It's maybe – Something I just always kind of wondered, is there an advantage, like a sort of competitive advantage by you guys holding more inventory in that presumably it allows you to get product to the GPs in particular more quickly and I suppose more cheaply in a way on a cash terms for them? Like is that a competitive edge that you guys specifically target?

Well, Graham, that's actually a very good question because when you are adding a 75% gross margin product, it's worse to lose a sale than to carry a lot of inventory, of course, at a reasonable level. Then, as a premium company, we are obviously then guaranteeing very fast delivery to all our customers, and this is really one of the satisfaction factors for the clinicians that are working with us. Then, yes, indeed, I think this is part of our value proposition, and this is also delivering one of the differentiation that we want to have versus other competitors. Obviously, there are still some really good balance to find in between, you know, maintaining a lot of different warehouses and having the most optimized way to be doing it. And we are currently looking at our supply chain, and with increased digitalization, we think we can keep delivering the same high perceived value from a supply chain standpoint and also making sure that we can decrease some of our networking capital costs in the future.

Great. Thank you very much for your time, guys.

Next question from Robert Davies, Morgan Stanley. Please go ahead, sir.

Yes, thanks for taking my questions. My first one was just around some of the implementation of your digital strategy. I'd just be curious if there'd been any impact from customers' appetite to take up those products, particularly in the North American market, I guess, where you've kind of highlighted some of the macro headwinds. And then the other one was just a bit of clarification around the FX impact on EBIT through the second half of the year. Could you just reconfirm what your current assumptions are and what the rates you're assuming through the back half of the year? Thank you.

Yeah, when it comes to the digital strategy, we are... uh really pleased so far with uh with uh the the implementation and development on on both sides i would say on the one side it's about the progress of the implementation and the the development of the platform and its different components and especially the different associated services that are going to be available then we have started within North America for the Stroman Access platform where you can have a seamlessly connected workflow for the smile in a box, meaning that you have an entire end-to-end implantage from Diagnosis to treatment planning to guided surgery pack being available for you at the same place with having all the different support for you in a card offering where you can really decide to use whatever service you want. And when it comes to the digital equipment necessary to conduct or to access this platform, we have seen still double-digit growth on our different equipment sales, including North America. So far on this one, we have not seen any weakness in the demand for the digital services and the digital equipment.

For ethics... When it comes to ethics, Rob, our assumption now for full year on the EBIT level is 230 basis points, more or less, if ethics rates stay more or less where they are as we speak. That increased from something like 150 that we talked about with full year. So it increased to 230 on the core EBIT. And on the top line, the top line is something around 8%, actually, for full clarity.

Okay. Okay, great. Thank you.

The next question is from David Edlington, JP Morgan. Please go ahead, sir.

Thanks, guys. Just firstly, maybe just on your guidance again, obviously China, it doesn't sound like you've changed your underlying assumptions and sound like some upside pressure there. I just wondered if there was any sort of opposing downside pressure you're seeing anywhere else. It doesn't sound like you are. And then secondly, just in terms of net financials again, obviously a lot higher in the first half than expected. Just wondering what your thoughts were at this point into the second half. Thanks.

David, can I ask you to precise your first question? I'm not sure I'm able to answer it precisely enough, and I would appreciate to make sure I can give you the expected answer.

I'll try, Guillaume. So for China, it doesn't sound like you've changed your assumptions since the start of the year. It sounds like Q2 has been better, and so there's potentially some upside to your Chinese assumptions for China. I just wondered if there was any offset anywhere else in any other markets that might be an offset to that potential China tailwind? Okay, got it.

Thank you. We slightly changed our assumption on China already, but not to the extent that it can, in just six months' period, being able to affect entirely the guidance for the full year. Then I will phrase it more precisely like this. because a high single digit could move to, again, much higher than the 7.5% where we are today. And if we are improving our scenario for China, I think there are some potential upside. But for the time being, it does not reach even a higher potential outcome. And we want to make sure that we can see that the current growth rate will remain as we are seeing in Q2 or not too much different in order to be able to have a more, let's say, confidence for being able to share a rise or improve expectations. We don't honestly see any further weakness from any other part of the world that would push us to be more, let's say, worried versus the initial expectations that we have for the year on all the different geographies.

Second question. David, this is Marcel. Obviously, we don't have the crystal ball, so it's hard to guess. I mean, a large part of the finance line was related to ethics hedging. I mean, there are two aspects. One is the results on the unrealized losses on the open hedges and the positions that we have. That most probably will not have the same effect in the second half. But net The Swiss National Bank only increased rates to a lower extent this year, while the Fed and the ECB did more. So there is a bigger interest differential, so there is going to be more. If I have to make a guess, probably it's half of what we have seen in the first half. We could expect for the second half, but that's just a guess. It's hard to say, but it should not be to the same extent. If currencies stay more or less stable against the Swiss francs for the second half. That's great. Thank you.

Thank you.

The next question from Daniel Yellowscan. Stifel, please go ahead.

Good morning as well. Just on the UK and Germany, you mentioned that those two countries have good growth in basically all segments. So I'm a bit puzzled that when you talk about the weakness in other areas that in those two countries, which you hear quite a lot of negative consumer sentiment, why you are still doing so well. Can you shed a bit more light on those two countries?

Yes. I think in the UK, something which is, for example, important has been that the different strategies are really developing well and that's one of the reasons why I think that the reasons are very positive in the UK. I think the implant franchise is keeping gaining shares and one of the reasons is our innovations and the capability again of our team to demonstrate the benefits of using those innovations versus the other solution in the marketplace, but also the service level. You know that with the Brexit, coming back to the topic we have alluded before, having a local warehouse has been a pretty good advantage because we have been able to deliver with the same speed the different products for the different clinicians, which has not been the same for some of our competitors that were having more European products supply chain strategy, and where during quite some time it has been difficult to have a predictable delivery date. And that has been just focusing on customer satisfaction, one of the ways where the UK has been doing well. The second factor is that the orthodontics franchise has been also doing well, with a team really taking ownership of growing this small franchise for then the the satisfaction of the clinicians that have been using ClearCorrect. And last but not least, the DSO activities is also positive. We have a very good relationship with our DSO partners that we value also very much. We are able to put a partnership in place in order to help them reaching their own objectives. And as soon as they are uh being successful we are of course uh successful too then the uk has been a really good example of how to execute on the global strategy compass that we have set up for the entire organization when it comes to germany i would express the same perspective. I think the quality of the team has been also supporting the patients very well. Germany has been focusing a lot also on education, a lot of high-quality education from not only the clinical side, but also how to support clinicians to develop their practice. in economical time, which is maybe a little bit more challenging or softer. And this is where the team has been doing a great job. And that's transforming market share gain also within Germany, which is to be put to the credit of the local team.

Thank you. But I guess it's still not only market share gains. It's also I mean, is the market still growing in those two countries?

Yes, yes, yes. I think we still have a positive market development in those two countries, definitely. And it's not only related to market share gain, and it's also related to, you know, the new technology that we are developing on the digital side.

Okay, thanks. And second question, you mentioned before B2B in Cleveland grew double digit. Is that At the group level, or was that more in India? I guess in North America, it's probably not double digit anymore, right? Or, yeah.

Darren, you summarized it. I think EMEA is double-digit. The other regions are double-digit. It has been softer in North America during the first half, where we have seen, again, this consumer confidence that has been a little bit waiting on the demand. Then it still has been positive for us on the first half, but not at the same speed of the other regions.

And also positive in the second quarter, sorry, to be a bit correct, in North America. Yes. Okay. Low single digits. Okay. Thanks.

The next question is from Hugo Solveig, BNP Paribas, Exxon. Please go ahead, sir.

Hi, hello. Thanks for taking my questions. I have two. One's follow-up on growth in China. Looking on slide seven, it seems that uh vbp growth uh is plateauing i want to make sure uh uh we don't miss anything here okay can you maybe discuss the the the trend in july in the first week of august as well as for patient flow and if you're seeing any uh let's say extra capacity spare capacity potentially cutting growth uh in uh the second half of the year and in terms of uh second question on launch date uh When we think about Galvo Surge, are we talking about a global rollout here? And when it comes to iOS, when are you expecting to launch outside of the US? Thank you.

Okay. Hugo, then... On China, again, we'll try to make it clear. We don't see VBP plateauing, but we are going to see the pent-up demand for the COVID-19 then fading down. That's what we are going to see in the second half because, of course, the patients that were having their treatment consulted and postponed in January, February would have been done by that time. then we still expect and wanting to see more visibility on the VBP effect and what will be actually the growth rate on the earth, on each single effect. What we are seeing, to answer your questions precisely on July or in August, is that those growth rates have been still significant. I think in July there is still a part of the pent-up demand, but in August I think it will be less and less so. And so far we are seeing really positive trends. And that's why we would see the situation still from a quite optimistic perspective. When it comes at launch date for the Galvo Surge, Galvo Surge is a new technology that's not registered everywhere. It has the possibility to be launched and sold in Europe, which is already the case. That has just been started. on the market before the acquisition, then we are now having it on our portfolio and starting to do a significant promotion in the months to come. I think the next sales window being, you know, September to December, where we have all sales meetings in Europe everywhere by end of August and early September. And in North America, there is still the FDA approval to reach, and there is a lot of work done on this to ensure that this opportunity will also open up in North America. The goal will be, we hope, by the beginning of the second half of 2024. When it comes to iOS, it's available everywhere. We are selling iOS, be it our own virtual vivo or being our partner iOS free-shape technology. It's available in almost all geographies, with a few exceptions. What is only available in the U.S. is our Stroman Access platform that has been launched in the U.S. and Canada. And this is going to be released in the second half of 2024 in Europe. And that's the services that are not available in the same way, but the digital equipment like iOS are widely available.

Thank you for the clarification.

The last question comes from Oliver Metzger. Odo, please go ahead.

Yes, good morning. Thanks a lot for taking my questions. The first one is on China, and it's a quite general question. So currently we see very weak economic data, and we also observed some meaningful advent for other medical procedures with a higher co-payment. So right now for you, it looks pretty good. But if you get feedback from your local partners, is there any sign that the weak economic data might have a negative impact, which is right now just overlapped due to MVP and the pent-up demand? Second question on your direct-to-consumer business at Orthodontics. It's more European-focused. You mentioned the holiday season, and I get the point that people traveled less during COVID, but now we enter normalization. But could this normalization mean that we might potentially see even more sustainable deterioration of the growth prospects versus the last years? So it would be great also to get your view here on this. Thank you.

Yeah, thank you, Oliver. I think your comments on China are totally relevant. We see weaker economic performance or economic numbers that have been published by China in the past weeks. And it will have, of course, some impact on the overall consumption. So far, at least, it happens that it did not have any effect on the demand on the imprint side, just because, obviously, you know, the pricing being down by 45%, as suggested, still open up a very much larger target group which is here driving those significant volume then it could have an impact on the growth rate or the the absolute number willing to pursue a treatment but versus the base from which we are coming from, we think it's not going to be significant at least for the end of the year. However, this being said, where you are right, it's one of the factors we are considering to not contemplate the fact that our Q2 growth rate are going to be the true growth rate to take into consideration for the full year. Once again, the normalization of the growth rate in China will come then after Q3, and we'll have much more data points to share in the next call. When it comes to DTC Europe, you are talking about normalization of the situation. yes no i think uh uh you know in 2022 it was a pretty normal as well and i think it's uh just as we said where uh um we would use not the word uh normalization but we would use the word predictability there is less predictability on a direct to consumer business uh here than the B2B because the core target group is having diverse interests that could switch from one month to the other. And this is what we have to take this into consideration. But I don't look at further and further deterioration. It's much more being able to plan and structure the business model in line with this very different dynamic than what a stable B2B would be.

Okay, great. Thank you very much.

Thank you. Then I would like to thank you for your questions and for joining us today. We look forward to seeing you again soon and wish you a good rest of the summer. Have a nice day and goodbye from Basel.