Straumann Holding AG

SIX:STMN

Earnings Call Transcript 2023-Q2

[Guillaume Daniellot, CEO]

Good morning, everyone. Thank you for joining this conference call about Straumann Group's first half year report for 2023. We are happy to present our results and are looking forward to the question-and-answer 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 3, I will give you an overview of where we stand and then our Head of Investor Relations, Marcel Kellerhals, 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 5. A very solid half year is behind us. Straumann Group revenue reached CHF 1.2 billion in the first 6 months and CHF 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 a 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 26%, thanks to a healthy business growth, combined with efficiency gains, and this despite significant currency headwinds. For this strong half year 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 GalvoSurge, 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 6. 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 2. 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 Neodent solutions. The region's market presence expanded, thanks to the attraction of new clinicians by our 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 the volume growth in China, usually influence the regional repo.

On Slide 7, I would like to dive a bit deeper into the 3 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 2 factors resulted in the release of the pent-up demand and increased patient flow seen during the second quarter.

In addition, the third 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 immediacy portfolio. From a challenger brand perspective, DenToGo , 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 [indiscernible] brand. This B2B business keeps on establishing its presence in the existing markets and launching new solutions. On the direct-to-consumer marketing business side, DrSmile has seen slower growth, mainly because its core target group parities spending on vacations during the pre-summer months. Adding to last year's strong comparison quarter, our digital solutions business continued to show strong growth, driven by intraoral scanner. In particular, the dynamic development of our Virtuo Vivo scanner was a highlight, IOS or 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.

[Marcel Kellerhals, CFO]

Thank you, Guillaume, and good morning, everyone. I would like to start by speaking about our revenue on Slide 10. As Guillaume also mentioned, Straumann Group's second quarter results reached CHF 621 million, with an organic growth of 11.7%. At 2022 exchange rate, our 2023 second quarter would have been CHF 42 million higher. The unfavorable currency effects were mostly related to the depreciation of the euro, the U.S. 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 CHF 8 million to our adjusted revenue of CHF 556 million. 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 CHF 9 million. 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, this 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 its digital 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 CHF 112 million, which is CHF 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 6 months remained at a high level with CHF 86 million spend, 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 CHF 603 million. Let's continue with Slide 14, where I would like to show you an overview of our core financials.

Core gross profit rose to CHF 915 million and core EBIT rose to CHF 317 million, which represent 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 headwind, 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 CHF 229 million, 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 the rents, while interest income on cash balances slightly increased. As a result, core basic earnings per share decreased from CHF 1.69 to CHF 1.43.

For 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 core and reported numbers is the restructuring costs in the APAC and LATAM regions of CHF 19 million.

And with this, I will give back to Guillaume.

[Guillaume Daniellot, CEO]

Thank you very much, Martin. And let's move on to Slide 16 to talk about recent achievements and strategic update. 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 zygomatic 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 the 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 reinforce 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 a 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 Zi ceramic implants and Anthogyr X3 solution for immediacy to keep expanding our challenger brand presence on a global scale. Moving to Slide 19. As part of our relentless efforts to add strategic innovations to our product portfolio, I would like to highlight our recent acquisition of GalvoSurge. With this acquisition, we are offering a unique medical device that helps to treat peri-implantitis and thus protect patients from implant loss. The GalvoSurge dental 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 implant 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 treatments. ClearPilot now offers enhanced visualization of posterior bite ramps, a new clinical feature allowing doctors to treat patients with crossbite. 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 space and a full release is planned for the third quarter of 2023. This ClearPilot enhancement brings us to Slide 21. The software update can be seen in the planning phase. In addition, all our recent launches enhanced 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 ramp. We are very pleased with the continued progress of our IOS sales. Those intraoral scans are seamlessly integrated into our new Straumann AXS 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, Straumann AXS is powering the Smile 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 Yang Xu will join the group as Chief Financial Officer and member of the Executive Management Board at the end of August. Yang joins from the Kraft Heinz Company, a publicly listed U.S. American food company, where she was a member of the Executive Committee. Yang brings a wealth of experience in corporate finance, strategy, commercial and business development.

She's a very successful leader with a passion for developing talent and building high-performance organization. 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 Kellerhals for leading our finance organization since early January. A strong expertise has been very valuable for the Straumann Group during the past month. It will ensure a smooth and efficient transition with Yang and complete this mission by September this year.

In addition, another organizational development has been announced during the second quarter. Rahma Samow, Head of our Dental Service Organization has decided to leave 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 targets.

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 purchased 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 2040, the goal is to achieve net zero carbon emissions across all scopes. 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 outlook. 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 CHF 19 billion. 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 expect 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. [Operator Instructions] Chorus Call, can we have the first question, please?

[Operator]

The first question is from Daniel Buchta, ZKB.

[Daniel Buchta, ZKB]

Maybe the first question, starting on basically the patient flow trends you see in EMEA and North America. I mean the numbers you reported today were much weaker than what you -- 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 margin progression, 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?

[Guillaume Daniellot, CEO]

Yes, 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 in our Q1, the only specific segment when we have seen some slowdown has been in the very large reconstruction, the large 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 consumer 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, 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 yes, this is the thing that we are 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 half. When it comes to margin on the 25% side, yes, we have done a significant efficiency gain here in order to offset then these strong FX headwinds that we are not seeing that are easing up in the second half. Then we are, of course, doing a lot of operational leverage, thanks to then our -- then the great growth, and we are going to continue doing this.

We are also then doing significant investments than 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 on our efficiency gain if the FX situation is staying the same.

[Operator]

The next question is from Chris Gretler, Credit Suisse.

[Chris Gretler, Credit Suisse]

Maybe 2 now. 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. And also, what does that mean for your guidance essentially kind of what second half assumption do you -- have you baked into your full year guidance that will be great because it's obviously a very dynamic region at the moment?

[Guillaume Daniellot, CEO]

Thanks, Chris. And again, yes, that's obviously, a critical question right now, and we have been then 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 3 different factors about adding the significant pent-up demand coming from the fact that January and mid-February was completely closed. If you -- sometimes we -- the time flies and we don't even remember. But it was all practices were closed in the Q1 city in the first quarter.

And 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 gains that we are realizing as we speak, thanks to the price gap being much narrower than in between the Korean brands and, for example, the Straumann brands. And patients are also willing to upsell their treatment as the price gap is much lower than it was pre-VBP. Then those 3 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, a 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 is still difficult to analyze analytically in between the pent-up demand and this VBP effect, then the true remaining effect of the VBP volume growth when the pent-up demand effect will fade down. It's 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 still dynamic growth rate, thanks to the VBP effect but not at the same level in 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 been -- 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.

[Chris Gretler, Credit Suisse]

Okay. That's very clear. Then my second question was 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 onetime event?

Or is there something else we should be expecting in the second half?

[Guillaume Daniellot, CEO]

Restructuring, you mean from the China organization?

[Chris Gretler, Credit Suisse]

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

[Guillaume Daniellot, CEO]

It has been mostly China related and a little bit in noncore 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, 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.

[Operator]

The next question is from Maja Pataki, Kepler Cheuvreux.

[Maja Pataki, Kepler Cheuvreux]

Guillaume, I would like to just follow up on Chris' 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 and 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?

[Guillaume Daniellot, CEO]

Yes, Maja, of course, and I think it's a very good question because, yes, indeed, when we have seen those prime decrease by minus 40%, 45% ASP, we have been clearly planning negative net revenue growth scenario. When we are seeing this Q2 volume effect, then which is better than we would -- we were expecting, we are looking at potential more positive scenario, at least an optimistic scenario if the growth remain. 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 than -- somewhat better than we would have planned at the beginning of the year.

[Maja Pataki, Kepler Cheuvreux]

Okay. Great. 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 base 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?

[Guillaume Daniellot, CEO]

Yes, that's a fair statement on the China side. And again, we cannot analytically see what's the effect of the pent-up demand and the effect of the of the VBP. And we are using just the experience that we had with COVID-19. Then 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 completed the pent-up demand entirely.

And that it has been a very strong growth. And afterwards on the following quarters that has been just the new dynamic that came in. 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 2 areas are going to help us to have a clear visibility for year-end when the third quarter is over.

[Maja Pataki, Kepler Cheuvreux]

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

[Guillaume Daniellot, CEO]

But 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 large case.

[Operator]

The next question is from Veronika Dubajova, Citi.

[Veronika Dubajova, Citi]

I have 2. Obviously, Guillaume, you spent a lot of time talking about the high end market 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.

[Guillaume Daniellot, CEO]

Yes, Veronika. Honestly, U.S. has been the only one on those large cases that were creating some question mark. There is another, but I expressed that already in Q1. If you remember, the situation in South Korea, where with a high interest rate pushed by inflation, then it has significantly slowed down also the demand from health consumer because they have been tricked by the fact that they have higher reimbursement to do because they are leaving 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.

[Veronika Dubajova, Citi]

Okay. That's very clear. 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?

[Guillaume Daniellot, CEO]

Yes. As you rightly recapped is our second half is always lower than our first half from an EBIT standpoint for the reason that the second half is a much 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 headcount to make sure we prepare immediately at 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.

[Operator]

The next question is from Susannah Ludwig, Bernstein.

[Susannah Ludwig, Bernstein]

Great. First on orthodontics. I guess, recently, you had talked about wanting to improve profitability in the business particularly in DrSmile. So I was just wondering if the slower growth this quarter in DrSmile has also been driven by lower marketing as you switch the 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?

[Guillaume Daniellot, CEO]

Yes. Thank you, Susannah, for the question. When it comes to DrSmile and orthodontics, 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. And yes, there are, let's say, less pursuit of this top line growth from marketing investments and trying to drive more this bottom line. Then for second quarter to be even more specific to your question, there have been 2 effects.

The first one is this, not pushing top line 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 DrSmile being on travel and holidays versus the past years. There have been a lot of article 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 DrSmile 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 midterm 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 midterm.

[Susannah Ludwig, Bernstein]

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?

[Guillaume Daniellot, CEO]

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

[Operator]

The next question from Doyle, Graham, UBS.

[Doyle Graham, UBS]

Just 2 more financial-focused ones. I wasn't quite sure, obviously, on the net financial is a little bit worse than expected. It'd 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 obviously 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 3-, 4-, 5-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 of that is just business requirement versus, say, like competitive edge in certain areas or just the cycle.

[Guillaume Daniellot, CEO]

Yes. I can take the second one. If you want to take the first one, Marcel. On the working capital, it's obviously the different here factors are also at play. The first one is when it comes to trade receivables.

And as you said, DSOs are having different payment terms. And you start to see this in the different maturity of those trade receivables. Our long-term trade receivable 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 receivables are going to increase from 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. We have a lot of products that are going to be available. Then we have a lot of semifinished products at this moment in time. We have a lot of products in different parts of the warehouses that we are trying to play with. And that's also one of the situation that will improve in the months and the years to come.

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.

[Marcel Kellerhals, CFO]

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 3 to 5 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-out, that's usually a good thing because that means that the top line is rather the higher range 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 amount. It's not the biggest driver of the finance line of that side. It's just also that we wanted to give the transparency here.

[Doyle Graham, UBS]

That's perfect. And so we should assume that earn-out is sort of the onetime effect and not worry about it. Just maybe a quick follow-up on the inventory point. It's maybe something I just was kind of wondering. Is there an advantage like sort of a competitive advantage by you guys holding more inventory in that presumably it allows you to get product to the GPs, in particular, more quickly, I suppose, more cheaply in a way on the cash terms for them?

Like is that a competitive edge that you guys specifically target?

[Guillaume Daniellot, CEO]

Well, Graham, that's actually a very good question because when you are adding a, yes, 75% gross margin product, it's worth 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. And 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 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 net working capital costs in the future.

[Operator]

Next question from Robert Davies, Morgan Stanley.

[Robert Davies, Morgan Stanley]

My first one was just around some of the implementation of your digital strategy. I'd just be curious if there's 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?

[Guillaume Daniellot, CEO]

Yes. When it comes to the digital strategy, we are really pleased so far with the implementation and development on both sides, I would say. On the one side, it's about the progress of the implementation and 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 Straumann AXS platform, where you can have a seamlessly connected workflow for the Smile in a Box, meaning that you have an entire end-to-end implant case from diagnosis to treatment planning to guided surgery pack being available for you at the same place with having all the different support you in a la carte offering, where you can really decide to use whatever service you want. And when it comes to the digital equipment necessary to conduct 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 FX?

[Marcel Kellerhals, CFO]

When it comes to FX, Rob, our assumption now for full year on the EBIT level is 230 basis points, more or less, if FX rates stay more or less where they are as we 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 the top line is something around 8%, actually.

[Operator]

The next question is from David Adlington, JPMorgan.

[David Adlington, JPMorgan]

Just firstly, maybe just on your guidance again. Obviously, China, it doesn't sound like you've changed your underlying assumptions and it sounds 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.

I just wondered what your thoughts were at this point into the second half.

[Guillaume Daniellot, CEO]

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

[David Adlington, JPMorgan]

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, obviously, Q2 has been better. And so there's potentially some upside to your Chinese -- your 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?

[Guillaume Daniellot, CEO]

Okay. Got it. Thank you. We slightly changed our assumption on China already, but not to the extent that it can in just 6 months period being able to affect entirely the guidance for the full year. Then I will phrase it more precisely like this because high single digit would 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.

[Marcel Kellerhals, CFO]

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 FX hedging.

I mean there are 2 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 National Bank -- 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. I would -- 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 currency stay more or less stable against the Swiss francs for the second half.

[Operator]

The next question from Daniel Jelovcan, Stifel.

[Daniel Jelovcan, Stifel]

Good morning as well. Just on the U.K. and Germany, you mentioned that those 2 companies 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 2 countries, which there is quite a lot of negative consumer sentiment, why you are still so -- doing so well. Can you shed a bit more light on those 2 countries, please?

[Guillaume Daniellot, CEO]

Yes. I think in the U.K., 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 the reasons are very positive in the U.K. I think the implant franchise is keeping gaining shares. And one of the reason is our innovations and capability, again, of our team to demonstrate the benefits of using those innovation versus the other solution in the marketplace, but also the service level, you know that with the Brexit having -- 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 we're adding more European supply chain strategy, and we're -- during quite some time, it has been difficult to have a predictable than delivery dates. And that has been just focusing on customer than satisfaction, one of the way where the U.K. has been doing well.

The second factor is that the orthodontic franchise has been also doing well with the team really taking ownership of growing the small franchise for then 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 being successful, we are, of course, successful too. The U.K. 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 clinicians 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.

That's transforming market share gain also within Germany, which is to be put to the credit of the local team.

[Daniel Jelovcan, Stifel]

So -- but it's -- I guess it's still not only market share gains. It's also -- I mean, is the market still growing in those 2 countries?

[Guillaume Daniellot, CEO]

Yes, yes, yes. We still have. I think we still have a positive market development in those 2 countries. Definitely. And it's not only related to market share gain, and it's also related to the new technology that we are developing on the digital side.

[Daniel Jelovcan, Stifel]

Okay. And second question, you mentioned before, B2B in clear-aligners grew double digit. Is that at the group level or was that more in EMEA? I guess, in North America, it's probably not double-digit anymore, right?

[Guillaume Daniellot, CEO]

Dan, you summarized it. I think EMEA is double digit. The other regions are double digits. 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.

[Daniel Jelovcan, Stifel]

And also positive in the second quarter. Sorry to be a bit -- in North America.

[Guillaume Daniellot, CEO]

Yes, low single digit, let's put it this way.

[Operator]

The next question is from Hugo Solvet, BNP Paribas Exane.

[Hugo Solvet, BNP Paribas Exane]

I have two. One is follow-up on growth in China. Looking on Slide 7 seems that VBP growth is plateauing. I want to make sure we don't miss anything here. Okay.

Can you maybe discuss the trend in July in the first week of August as well as for patient flow? And if you're seeing any, let's say, extra capacity potentially capping growth in the second half of the year? And in terms of second question on launch date, when we think about GalvoSurge, are we talking about a global rollout here? And when it comes to IOS, when are you expecting to launch outside of the U.S.?

[Guillaume Daniellot, CEO]

Okay, Hugo. 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 fading down. That's what we are going to see in the second half because, of course, the patients that were having their treatment canceled 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 its 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 trend. Then that's why we would see the situation still from a quite optimistic perspective.

When it comes at launch date for the GalvoSurge, GalvoSurge is a new technology. They're not registered everywhere. It has the possibility to be launched and sold in Europe, which is already the case that has just been started. That was on the market before the acquisition, and we are now adding it on our portfolio and starting to do a significant promotion in the months to come.

I think the next sales window being September to December, where we have all sales meeting 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. Goal will be in the -- we hope by the beginning of the second half 2024.

When it comes to IOS, it's available everywhere. We are selling IOS, be it our own Virtuo Vivo or being partner IOS 3Shape technology, it's available in almost all geographies to a few exceptions. What is only available in the U.S. is our Straumann AXS 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. That's the services that are not available in the same way, but the digital equipment like IOS are widely available.

[Operator]

The last question comes from Oliver Metzger, ODDO.

[Oliver Metzger, ODDO]

Yes. The first one is on China and there it's a quite general question. So currently, we see very weak economic data and we also observed some meaningful headwind for other medical procedures with a higher co-payment. So right now for you, it looks pretty good. And -- but if you get a 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 NBP and the pent-up demand?

Second question on your direct-to-consumer business at orthodontics. It's more European-focused. You reported some slower growth, 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 year?

So it would be great also to get your view here on this.

[Guillaume Daniellot, CEO]

Yes. Thank you, Oliver. Then I think your comment on China are then totally relevant. We see then a 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 implants side just because, obviously, the pricing being down by 45% has still opened up a very -- a much larger target group, which is here driving those significant volume. Then it could have an impact on the growth rate or 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 and no. I think in 2022, it was pretty normal as well. And I think it's -- just as we said, we're -- we would use not the word normalization, but we would use the word predictability. There is less predictability on the direct-to-consumer business here than the B2B because the core target group is having diverse interest 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 is 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.

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.