Straumann Holding AG (OTCPK:SAUHF) Q2 2022 Results Conference Call August 16, 2022 4:30 AM ET
Company Participants
Guillaume Daniellot – Chief Executive Officer
Peter Hackel – Chief Financial Officer
Conference Call Participants
Patrick Wood – Bank of America
Chris Gretler – Crédit Suisse
Daniel Buchta – ZKB
Julien Dormois – BNP
Veronika Dubajova – Citi
Oliver Metzger – ODDO
Maja Pataki – Kepler Cheuvreux
Graham Doyle – UBS
Grace Lee – Jefferies
Falko Friedrichs – Deutsche Bank
Holger Frisch – Zürcher Kantonalbank
Guillaume Daniellot
Good morning, everyone. Thank you for joining this conference call about Straumann Group’s First Half Year Report for 2022. 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. The conference will follow the usual format. As shown on the agenda on Slide 3, I will give you an overview of where we stand. Then our CFO, Peter Hackel, will share details about the business performance across all regions. 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. Straumann Group revenue reached CHF589 million in the second quarter and almost CHF1.2 billion in the first six months of 2022. I would like to congratulate the entire team, especially in these times of uncertainty. All colleagues have done a tremendous job of focusing on customer needs and delivering on the high level of demand.
Overall, organic sales increased by 15.1% in the second quarter or 20.8% in the first half of the year. The negative currency impact on revenue increased mainly due to the weakening of the euro. The EBIT margin remained high at 27.9%, which is a consequence of the very strong revenue growth as well as fewer expenses due to COVID in some regions at the beginning of the year and in China during the second quarter. In addition, the demand for our products remained strong. And although some delays in the delivery of machinery posed a challenge, running the manufacturing sites at full capacity helped to ease the situation.
The implantology business continued its strong momentum, supported by the recently launched immediacy implant solutions, which contribute to customer conversions. As a highlight, physical events started to take place again, such as the second largest European dental congress, EuroPerio, which was exceptionally well attended.
On the orthodontics side, we further developed the doctor-led clear aligner treatment Solutions business in Europe by acquiring PlusDental. Similar to DrSmile, PlusDental combines unique expertise of direct-to-consumer marketing with doctor-led treatment to ensure quality of the procedure, which is in line with our strategic approach to increase consumer presence.
Given the strong first half of 2022, we feel confident to confirm our full year guidance despite the current macroeconomic uncertainties.
On Slide 6, you can see our strong growth continued in the second quarter of 2022, with some differences in the regions. As an example, patient flow in China was affected by COVID lockdowns, which heavily impacted the performance in Asia Pacific. The strong inflation in North America had some effect on patient flow towards the end of the second quarter, while patient flow in Europe and LATAM remained very healthy. In the second quarter, EMEA and North America reported organic growth increases of 21% and 8%, respectively. Latin America and Asia Pacific reported 5.9% and 40.3% organic growth. This brings us to a first half year organic growth rate of 15.1% for the group.
Let’s switch to Slide 7. In the first half of the year, economic challenges and COVID had some limited impact on growth at the end of the period. Current inflation has an influence on consumer behavior. However, our activities are rather linked to the unemployment rates, which are still very low.
I would like to move on to Slide 8 and demonstrate how the Straumann Group is now much more resilient than it was years ago. Today, our company profile is very different compared to during the great financial crisis which began in 2007. The pie chart on the left on each box show the situation in 2007, and on the right-hand side the situation in 2022. Our geographical revenue growth is much more balanced. And our implantology offering covers all price points and is not fully dependent on the premium implant business as before. A growing trend is also the fact that health consumers are much better informed and pay much more attention to their well-being and aesthetics than before.
Although we are naturally affected by macro economical developments, we feel confident that we are much stronger positioned and diversified today, which will help us navigate through more challenging times. On top of the diversified business, we strongly believe in our culture, as the people make really the difference for our success. Today, our market position, balance sheet and business model are strong. And even if we face uncertainty in the short and medium term, the Company is well positioned to achieve its short- and long-term goals.
With this, I will hand over to Peter to elaborate further on the financial performance.
Peter Hackel
Thank you, Guillaume. And good morning, everyone.
I would like to start by talking about our revenue on Slide 10. As Guillaume mentioned, Straumann Group’s first half year revenue exceeded the CHF1 billion mark for the first time, reaching CHF1.78 billion, which represents an organic revenue growth of 20.8%. At ’22 exchange rates, our ’21 first half revenue would have been CHF17 million lower because of unfavorable currency effects that were mostly related to the depreciation of the euro. However, as you might remember, in previous years, currency headwinds were considerably higher.
The M&A effect this year added CHF6 million to our adjusted revenue of CHF975 million, which was largely related to the acquisition of Nihon Implant in Japan. This result was supported by the strong performance of our existing portfolio and, as Guillaume mentioned, by the healthy patient flows in most of the countries despite the still ongoing pandemic and macroeconomic challenges.
All regions contributed to double-digit growth in the first half, with EMEA providing the lion’s share of the group’s growth, followed by North America, Latin America and Asia Pacific. The second quarter reached CHF589 million in ’22, which happens to be exactly the same revenue as in the first three months of this year. However, organic growth was 15.1% in the second quarter and 27.2% in the first quarter, indicating a softening of the growth rate.
Let’s move on to Slide 11 and have a closer look at the regions. EMEA and North America contributed CHF259 million and CHF172 million to group revenue, which represents an organic growth of 21% and 8%, respectively. The EMEA region remained the group’s largest revenue contributor; and overall growth was driven by Germany, Turkey and Iberia. Premium and challenger implant sales remained high. And the digital business, mainly driven by intraoral scanners, which — was remarkably successful. In addition, the fast-growing dental service organization business helped increase revenues in the region. And DrSmile as well as the ClearCorrect orthodontics business strongly contributed to growth.
The North America region reported a solid growth in the second quarter. This is in contrast to the exceptionally high growth rate we saw last year due to the COVID-19 comparison effect. Macroeconomic effects such as inflation started to have an impact on patient flow and the demand for clear aligners. The implant business continues to be the main growth driver, led by Straumann and Neodent brands. The digital solutions business grew strongly, with intraoral scanners remaining the largest growth contributor. In the second quarter, Straumann Group successfully introduced the new Straumann AXS digital customer platform, which aims to unite existing and new digital service solutions under one roof. Guillaume will provide you with more information about this exciting launch letter.
Slide 12 focuses on our performance in Asia Pacific and in the Latin American region. APAC achieved revenue of CHF112 million or 6% organic revenue growth compared to the same period in ’21. Japan and Australia performed strongly, while India doubled its business. The pandemic lockdowns heavily impacted growth in China. However, pent-up demand resulted in an increased performance in June following the bounce back when restrictions were lifted. The further delay of the volume-based procurement initiative in China also had an effect on patient flow. Digital solutions and implantology, premium as well as challenger, grew successfully. The Anthogyr challenger brand has been successfully launched in South Korea. A new subsidiary has been established in Vietnam, and the opening of the office in Malaysia as well as a second office in India were highlights of the second quarter.
In the second quarter of ’22, the business in Latin America grew to CHF47 million, which is 40% up on the base quarter in ’21. Brazil remains the biggest revenue contributor and showed a strong growth performance similar to the preceding quarter. Robust demand, notably for Neodent, helped to gain market share. And onboarding new customers through nationwide education events as well as patient marketing activities supported further growth. The youngest subsidiary, Peru, grew strongly; as well as Mexico, which is leading with its growth in the established markets. Digital solutions are performing very well, with the Virtuo Vivo intraoral scanner gaining momentum. The orthodontics business is contributing well to the regional performance. The two regions LATAM and APAC contributed CHF158 million to overall group revenue in the second quarter.
Slide 13 will lead us to our performance-by-business overview. The implantology business performed very strongly, predominantly in the EMEA and North American region. Adapted go-to-market strategies, especially in the EMEA region, are showing momentum. And customer conversions to the entire product portfolio also accelerated our BLT implant sales. In the second quarter, the intraoral scanners such as TRIOS, Medit and Virtuo Vivo have shown very strong growth. They are the entry point of the digital workflow for clinicians; and critical for generating clinical, quality and efficiency gains. With the increased use of intraoral scanners, the demand for 3D printed models in dental laboratories is also on the rise. And therefore, the recent launch of the Rapid Shape P50 3D printer, a high-volume, high-intensity printing device, started well.
The orthodontics business also delivered double-digit revenue increase, while the direct-to-consumer marketing brands grows. Macroeconomic effects such as inflation started to have an impact on patient demand for clear aligners. However, ClearCorrect is further expanding its global footprint by establishing its brand in countries where we are already present; and entered into new ones such as Turkey, Chile, Colombia and Romania.
The next slide shows an overview of our core financials. Core gross profit rose to CHF896 million and core EBIT rose to CHF329 million, with the respective margins reaching 76% in and 28% in the first half of ’22. The gross margin improved by 20 basis points, while the EBIT margin contracted 30 basis points. The respective FX headwinds took 50 basis points off the gross and 60 basis points off the EBIT margin.
Core net profit increased by 18% to reach CHF269 million, and the margin decreased by 30 basis points to just short of 23%, as a result, core basic earnings per share increased from CHF1.42 to CHF1.69. For full clarity, you will find the year-on-year comparison on a reported IFRS basis on Slide 15, followed by the alternative performance measures reconciliation table on Slide 16.
Looking at gross profit development on Slide 17. Our gross margin for both core and reported amounted to 76% in the first half of ’22. At constant exchange rates, this represents an increase of 20 basis points. This improvement is thanks to the very strong revenue growth, efficiency gains and running manufacturing at full capacity. All this combined made up for the negative change in portfolio mix.
As shown on Slide 18, our core EBIT margin reached 27.9%, which is 90 basis points below the same period in the prior year. Compared to pre-pandemic margins in the first half of 2019, this represents a 50 basis points increase. Currency fluctuations mainly driven by the weakening of the euro had a negative impact of 60 basis points on the core EBIT margin. Core distribution expenses rose by CHF24 million to CHF210 million in ’22. This reflects direct sales force expenses and logistics costs. Core administrative expenses increased by CHF74 million to CHF358 million. This includes research, development, general overhead and marketing costs, especially from the direct-to-consumer business.
On Slide 19, you can see that the core net profit margin remained stable. Core net financial expenses decreased by CHF3 million to CHF7 million. This mainly reflects a favorable currency valuation result, which compensated for higher interest expenses. income taxes amounted to CHF52 million, which represents an increase of CHF6 million at a stable tax rate. Core net profit reached CHF269 million, resulting in a margin of 23%.
Slide 20 provides a breakdown of our cash flow statement. Operating cash flow contracted by about 1/3 to CHF165 million. And subsequently, the free cash flow decreased from CHF210 million to CHF78 million. The main drivers were, on the one hand, the further geographical expansion, which increased the days of sales outstanding by 10 to 58 days compared to the end of ’21 or four days higher compared to last year’s first half. On a positive note, long-term receivables have been reduced. On the other hand, days of supplies increased by 12 to 179 since the beginning of the year, which was at the same level as in the first half ’21.
The group’s CapEx initiatives required investment of CHF88 million, which is almost 50% higher compared to the first half of last year. On Slide 21, you can see some of our ongoing manufacturing expansion projects. To achieve our 2030 strategic aspiration to impact 10 million smiles per year, we heavily invest in building up our production capacity to ensure we can cater for future growth in all our franchises and regions. Given the already high investment in the first half of the year of CHF88 million, we expect CapEx to be around CHF200 million by the end of this year.
And with that, I will hand back to Guillaume.
Guillaume Daniellot
Thank you very much, Peter. Let’s move on to Slide 23 to talk about recent achievements and strategic updates. Immediacy is still driving growth in the premium implant business, which as you know involves fewer surgical interventions and clinic visits, offering “shorter time to teeth” treatment options and enabling clinicians to reduce chair time per patient.
Our comprehensive portfolio, which includes the Straumann BLX, TLX and zygomatic implant lines, increases our addressable market for implant-based restoration as we are now tapping into the edentulous market. This continuing success confirms that the solutions still serve as an entry point for converting new customers; and leveraging our entire full product portfolio, including BLT. Our comprehensive portfolio drives overall market share gains, and launches are still ongoing in existing and additional countries.
To further promote these solutions and demonstrate their unique benefit, we started to engage in large physical congresses again. As a highlight, more than 8,500 attendees traveled to Copenhagen for the EuroPerio Congress. And more than 800 participants joined our corporate forum and hands-on sessions, which was a record.
On Slide 24, you can see that the group’s range of challenger implant brands such as Neodent and Anthogyr continue to establish their presence in countries where they are already available and at the same time further expand their global footprint. We are continuously investing in our go-to-market approach and sales capabilities in the challenger segment, which is showing positive returns. The Anthogyr X3 implant was successfully launched in several European countries. And the education-based launch of the Neodent Zi ceramic implant has been well received by professionals around the world. Medentika, the third challenger brand, showed a very strong growth in Europe in the second quarter, although on a smaller basis.
On Slide 25, I would like to share the continuous progress we have made with our digital transformation journey, specifically when it comes to our products, services and solution priority. We further developed our digital approach to support the clinician and patient treatment journey, which you can see on the right-hand side of the slide. As a starting point, we launched the Straumann AXS practice module, which will be the main platform for all our professional customers.
In a second step, we will further develop the applications from clinicians. To capture the patient journey, the first step is to build a patient app which will be connected to that old professional platform. This overall customer-centric platform will then provide best-in-class functionalities for optimal user experience and treatment guidance based on one core infrastructure.
On Slide 26, I would like to take a closer look at the clinician treatment journey and the way our Straumann AXS platform is supporting it. The intraoral scan is the entry point for digital workflows, which is automatically connected to the platform and our various services. This is supporting a seamless integration between the different solutions, eliminating the need for entering patient data manually in different systems along their treatment journey.
This will include first patient engagement, to diagnosis during pretreatment, planning, treatment and monitoring of the post-treatment phase. I’m excited to share that we have launched Straumann AXS in our North America region in the second quarter of this year. To start with, the platform supports our Smile in a Box offering. And as of today already, more than 95% of the cases are going through Straumann AXS, demonstrating the very high adoption rate.
Let’s talk about our orthodontic business on Slide 27, where we have made great progress in further developing our offering. In July, the ClearPilot 4.0 treatment planning software was released. This new version enhances the creation of more effective and customized treatment plans with new tools such as augmented 3D controls for aligner customization, giving doctors the ability to precisely place engagers, cutouts and bite ramps directly on the virtual 3D model; as well as in-app translations of comments for improved technician-to-doctor communication.
Additionally, this release further expands the clinical features portfolio with the introduction of bite ramps. Now doctors can feel confident treating deep bites and cross bites; in addition to a wide variety of other clinical cases with ClearCorrect aligners, including class II malocclusions. The ClearCorrect Clinic App has also launched in July. This new guided tool was designed to reduce chair time and increase patient conversion. Available in 11 different languages, the app includes a case assessment function, malocclusion education, patient educational videos and a guided in-app tutorial for patients. Another highlight in the second quarter was the first global orthodontics medical advisory board we hosted, which will help to strengthen our medical network and expertise in this field.
Let’s move on to Slide 28. As you know, in the second quarter of this year, we announced the acquisition of PlusDental to accelerate the international expansions and launch our footprint in the doctor-led direct-to-consumer clear aligner segment in Europe. In the meantime, we closed the deal in July. Following the review of the future brand strategy, the group concluded it will run its direct-to-consumer clear aligner business in Europe exclusively under the DrSmile brand.
Moving on to Slide 29, I would like to give an update on our progress in sustainability. In 2021, an ESG task force has been created to define the group’s sustainability framework; set goals for the various commitments; and sign the Science Based Targets initiative, known as SBTi, to reduce emissions in line with climate science. We decided to set ourselves an ambitious goal to achieve net zero carbon emissions by 2040, which includes scope one, two and three. And we’ll submit the target for validation to SBTi. This is a significant step to become a sustainability role model in our industry.
On Slide 30, I would like to announce a change in our Executive Management Board. Peter Hackel has decided to leave the Company by January next year to pursue other career opportunities. I would like to highlight that Straumann Group has benefited significantly over the past years from his expertise and his skills. Since Peter rejoined the organization, Straumann has expanded its position as the global leader in implant dentistry, diversified into orthodontics and entered into the field of consumer presence. During his eight-year tenure as CFO of the Straumann Group, Peter has also been a strong ambassador for culture and sustainability. We would like to thank Peter already today for his commitment and significant contributions and wish him every success for the future. The search for a new CFO is also underway.
That brings us to Slide 32, where I will share our thoughts about the outlook. Thanks to the strong performance of the first half of the year, we are confident to face the uncertainties and COVID in the second half and confirm the full year guidance. We are well positioned to anticipate and to mitigate the potential impacts of the inflationary environment and uncertain political development. Thanks to our clear strategy and high-performing team, full year organic revenue growth is expected in the low double-digit percentage range. And profitability is expected around 26%, including major growth investments.
Now I would like to open the question-and-answer session. [Operator Instructions] Chorus Call, can we have the first question, please?
Question-and-Answer Session
Operator
The first question comes from the line of Patrick Wood with Bank of America.
Patrick Wood
Obviously I’ll keep it to two. I guess, on the first one, you touched on it a little bit in the prepared remarks, but maybe if you guys could put a little bit more detail out there on the sort of, let’s say, implied growth in the second half by guidance because it implies a pretty dramatic slowdown. Even adjusting for comps or looking at absolutes, it’s a pretty aggressive slowdown. And given the commentary that, maybe with the exception of North American aligners, the consumer seems to be, from your perspective, in good shape, just curious as to what that bridge is and what’s driving you to think of such a slowdown in the second half. So that’s the first question. And then second question, just on aligners, I’d love any more details you could give around whether it’s the cadence of how growth slowed in North America or how North America looks relative to EMEA or the other regions, just a little bit more details in terms of the kind of growth you’re seeing in aligners and how that’s changed.
Guillaume Daniellot
Thank you, Patrick, yes. I think, from a guidance standpoint, well, what we are — factored in is much more kind of the risks we have expressed from the gray clouds that we have, let’s say, on top of us. We have the inflation, obviously, which we see has created some slight impact in North America, but we see no effect for the time being in Europe. But we know that — in the second half, when people will come from holidays and they will start to see the invoice from the energy prices, I think we might see some different behavior. Then the — we would like to take this into consideration.
We are taking also the — into consideration the risk from a growth rate in Asia Pacific because China represent more than half of our overall Asia Pacific business. And COVID is not under control yet. We are hearing here and there still some spike of COVID. And we don’t know exactly what will be the situation when the weather will be then going to, let’s say, lower temperature where we know that COVID is developing much more significantly there. And we hope not to see the lockdown that we have seen in April, but this has pretty impacted our business during Q2, as you are seeing from the number in Asia Pacific.
And finally obviously, the VBP in China, which is still, let’s say, unclear from a date standpoint, but it seems now that this is going to take place then in September with an application a couple of weeks afterwards. And we still think it may impact Q4 significantly. Then it’s based on those, the different gray clouds that we have on top of us, that we have decided not to increase the guidance for the time being. This being said, we don’t have any immediate kind of a translation of those risks that we’re seeing on a day-to-day basis, I will say.
When it comes to the aligner side. The aligner side, we have a very — we have growth very significant on the direct to consumer, which is really good news. And all the plan we had are really unfolding very well. That’s why we are continuing to invest in this area with the acquisition of PlusDental. And on the B2B side, we have also double-digit growth, where we have been very pleased with all the development in all the different regions actually, except North America where we have seen then the impacts of then the inflation and we have seen some lower results based on our expectations. Then I will say that’s why orthodontics is doing well, but we have here in North America some effect of the inflation, we believe, that hopefully will resume by the end of the year.
Patrick Wood
Peter, thank you. And I hope everything goes well in whatever you end up doing.
Peter Hackel
Thank you, Patrick.
Operator
The next question comes from the line of Chris Gretler with Crédit Suisse.
Chris Gretler
Maybe, first, could you indicate how the sales trends kind of was during Q2 and basically what you’ve seen so far in the summer? And maybe also I think you mentioned in the past that you had something like six to eight months in visibility. What do you see going into the back-to-school season? So that will be my first question.
Guillaume Daniellot
Yes. Chris, I would love to have six to eight months of visibility, but we have six to eight weeks. I guess this is what you were wanting to say, which I understand. Yes, I think the sales trend has been still, I would say, positive from our side during summer. Once again, we are saying that what has been impacted most during the crisis has been the unemployment rate rising, that we don’t see that right now. And the consumer confidence dropping has been once again impacting more the demand on the clear aligners side more than the implant side. When it comes — we have since still had some then a lot of conversation with clinicians.
Some of them are saying that obviously there are some patients rescheduling, that there are some discussion on treatment planning that are longer but not any really significant trends that we have been worried about. We just believe that September will be really an important — September and October will be important months because this is where especially the major European region will come back to work and get back to school as well, and this is where some of the invoices will come then to the household ways. That may change the consumer behavior, at least potentially paying attention to spending.
So far, so good, I would say, but we are very vigilant on this one. But as a proof that we have been still rather positive despite the significant uncertainties that we see around us, we have continued our investment cycle, as you can see on the CapEx side but also on the head count side because we have added 9% more head count in the first half versus where we were in December. Then we are still kind of positive of what’s coming, especially thanks to how we are structured and the profile of the Company, but we are also well aware that situation can change quickly in case you have this inflation that will change significantly consumer behavior in regions where we are strong.
Chris Gretler
Okay, of course. And of course, I hate to think in weeks but more in months and quarters. But two other question I had maybe quickly: On the pricing side, could you indicate what kind of mitigating measures you’ve taken on the pricing side to cope with inflation? And then just on FX, I think your guidance on margin is actually excluding FX effect. And I guess H1 was already negative; and second half will look even more challenged, I guess, given current rates. Maybe if you could update us on what you expect for — at current rates on the FX impact on margins. That will be great.
Guillaume Daniellot
Yes. On the pricing side, Chris, we have increased price at the beginning of the year. We were looking at and we have been always very ready to react if we were needing to increase price during the year in case we would have seen much higher pressure on our costs side, which has not been the case or not then as high as that would have required us to take action on the pricing side, but obviously we are going to continue our pricing strategy and increase more in 2023. Then we’ll plan another price increase in January 2023 to reflect a little bit the new situation from our cost base in this inflationary time. On the FX rate then, Peter will give you some details here.
Peter Hackel
Yes. Thank you very much for that question, Chris, on the FX side. And obviously we all don’t know how the development will look like in the coming months on the FX side. If I look at the absolute top line, then I would expect the similar impact in the second half as we have seen in the first half on the absolute Swiss franc side. If I look at the margin impact, then I would expect also there a slightly bigger impact in the second half because the euro especially declined at the beginning of this year. So that means that average growth rates are coming down in the second half as well the longer it stays at that level. However, I would still — I am very confident that we stay within our guidance on the margin side despite the current FX development.
Operator
The next question comes from the line of Daniel Buchta with ZKB.
Daniel Buchta
Two questions from my side, please. The first one, you just mentioned the topic already a little bit, Peter, on the core EBIT margin guidance. I mean you had a very pleasing first half, cost base still a little bit below normal, but for me at least, it was a bit surprising that you didn’t raise the guidance here to at least, say, 26.5% or maybe around 27% because with the 27.9% in the first half you could basically go down to 24% in the second.
And if I combine that with what Guillaume just said that, at least for the next six to eight weeks, the picture doesn’t look so bad, so — why not a little bit more confident here on that side that it’s more than just around 26%? And then the second question, maybe to you Guillaume, on the volume-based pricing in China. I mean you indicated that there is the release to come in September and this could clearly negatively affect the fourth quarter. I mean, based on what you get at least indications for, I mean, how will the regulation look like? And how would you as Straumann respond to that?
Unidentified Company Representative
Guillaume…
Peter Hackel
Thank you for that question on the margin development for the second half and the full year. I mean we stick to our strategy that we invest a considerable part of the incremental margin and profit into the growth of the Company also in these times of uncertainty, be it the growth in further rollout, our orthodontics offering on the B2B as well as the direct-to-consumer side; be it the further buildup of our value portfolio; investments in R&D; and geographical expansion also in the second half. So we stick to that strategy.
Second — the second point is, in the second half year, we usually have a lower margin compared to the first half year because we also partly generate a bit lower absolute amount of sales in the second half year due to the summer break and the short month in December. And on top of that, people who are joining us in the first half are not on the — full time on the payroll in the first months, but they are fully on the payroll in the second half, which also leads to slightly higher OpEx in the second half. And then at the beginning of this year, due to the COVID situation, we were rather restrictive with investments, especially in the first quarter.
And we see a higher business activity rate, respectively, in the second quarter of this year. And if you compare the margin development and margin profile with last year, then we had also a first half year where we generated a slightly higher margin than this year, even with 28.3%. And we ended up the year exactly within our guidance of 27%, so we also see the analogy of the development compared to first half year. That’s the reason why we are sticking to our guidance of around 26% for the EBIT margin for the full year.
Guillaume Daniellot
Yes. When it comes to the VBP, I think there are then the — a couple of things to consider. The first one is that the China authorities took much more time because they decided to include now all the different universities, hospital — and national hospitals, which is different than what was announced in the beginning because they were wanting to take 10 provinces. Now they want to take all provinces and all the different national hospitals and university hospitals, meaning that it’s going to be the total hospital business and public business that is going to be affected. We were disclosing last time, when we talk about VBP, that it was around 15% to 20% of our total business.
Now that we include the entire national hospital in all provinces, it’s going to play with 30%, 35% of our total business, which is what we are doing with public hospitals. The expectation is obviously that ASP in those national hospitals and on this part of the business will go then significantly down. This is when we look at other industries like orthopedics. Or then it’s going to be a decrease around 50%, as an example, 50% to 60%, which is very significant. And obviously there is a way to — then to absorb some of these costs or to, I would say, mitigate the effect. The first one is to apply this to only a part of our portfolio. And this is too early to say at the moment because there is not the document specifying exactly how the VBP is going to be structured then the what kind of implant category, how we are going to be able to bid. Then this is unknown and we should have that information in the — well, in the very beginning of September. It’s planned to be.
The second also mitigation is the fact that distributor were taking a significant part of the margin. And distributor will be much less important afterwards in that bidding process. Then a part of this ASP impact is going to be absorbed by the distributor side. And the third approach is that volume will — obviously going up very significantly because the goal of this VBP by the Chinese authorities is obviously to increase accessibility of implant treatment which is pretty expensive in China. I think pricing in China is still rather high when it comes to the patient. And then we believe that volume will go significantly higher.
And last but not least which is a good news for us, we just got then this month the approval of our latest implant line that we have developed then with T-PLUS, which is our Taiwanese partner and subsidiary in China, which is the star line, which is the one which is with the internal connection exactly mimicking what is very much used in China on the challenger segment, which is the — like the Korean brands. That will give us another option also to bid on the VBP; and leveraging a lot of our challenger brands and potentially not having the Straumann brand, at least not all the part of the portfolio, affected. Then this is all the different playing points that we are going to manage in order to have the lowest potential impact from an ASP standpoint and being able to drive growth overall, thanks to volume gain.
Daniel Buchta
Okay, well, pretty complex and probably not an easy topic.
Operator
The next question comes from the line of Julien Dormois with BNP.
Julien Dormois
The first ones, it’s just a follow-up on China. Just curious if you know what was the growth rate in China or the decline rate maybe in China in Q2 because of the lockdowns, because I would suspect this also implies some pent-up demand. So I would be also curious to know what you have budgeted in the second half because obviously VBP will prove a headwind, but you could have some pent-up demand and, as you highlighted, maybe some volume uplift in the region. So all in all, are you planning for growth in China in the second half, or are you planning for a decline in the local business?
And the second question relates to clear aligners. You’ve provided a nice update on your slides and notably highlighted that you have just launched the ClearPilot 4.0 software. I think in the past you referred to as — your clear aligner business being potentially addressing around 70% of cases, if I recollect well. Could you just update us on where you stand at the moment and whether the launch of the new software allows you to target a broader base of cases?
Guillaume Daniellot
Yes, thank you, Julien. When it comes to China in the second quarter, obviously — well, then the lockdown had some significant impact. We had a significant number down in April and May because, as you know then, both Shanghai, yes, and Beijing have been then impacted, which is 70% almost of our business. And the industry, also, activity is down there, but June has been actually pretty strong with a lot of the pent-up demand being absorbed, meaning that, let’s say, it has been almost kind of flat when you look at the overall Q2 perspectives.
Then on this side, I think it has been a kind of a wash in between the different months. And when we look at what’s coming during summertime, I think there is growth back not to the extent of what we knew in 2021 but still something which is positive, showing that activities are still there. And demand is obviously very important in this part of the world. And I would say, yes, that’s where when you — to your question is about how do we plan China in the second half, then that’s where it’s obviously very difficult. We have seen up and down during the whole first year — first half and we believe it’s going to be the same in the second half.
We still expect to see potentially some growth in China if COVID is obviously not impacting the business, but VBP will have some effect in the fourth quarter. But from our perspective, the biggest threat is COVID. If COVID is coming down and they are doing lockdown as they have done in second quarter, then this is an immediate sanction to what we can be doing. We will see. Let’s say the biggest effect of VBP will be 2023 but with some potential impact in Q4, but honestly, with the VBP, I think we will still be able to grow. And we can have a decent growth in China if COVID is not hurting the region during, let’s say, wintertime.
When it comes to ClearCorrect. ClearCorrect, yes, I think we have done — we are very pleased with the development of the software. This is rather fast how the team has been able to develop that. We have added a lot of the things that were requested by advanced clinicians, the capability to keep, let’s say, the control in the hands and being able to manipulate the software that they would — the way they want to have the treatment, which was not at all the case before.
Then with 4.0, we are giving a part of these flexibility and capabilities to clinicians, which has been very well accepted, on the 4.0. Then this is not about increasing our coverage on this one. This is just making sure that clinicians can keep control of the treatment. And the — let’s say the progress is very significant in this side. And our 5.0, which is going to come then during the end of our Q1 2023, will have then the capability for clinician to do the entire treatment by themselves. Then the — good progress on this end.
And the second side is, of course, bringing the capability to do more indications. This is what has been the case with then the adding, for example, the bite brands which are helping then to do cross bite and deep bites and obviously trying to go to class II malocclusions. And this is also here another progress of additional indications and on our road to be able to tackle the speciality orthodontist. We always said that we are significantly investing there because we want to play also in the specialist segment and not only in GP and direct to consumer. We think we are going to be there by the second half 2023. And we are, for the time being, in line with our expectations when it’s based on the software development.
Julien Dormois
Peter, special thanks for all the help throughout the years and wish you all the best in your new endeavors.
Peter Hackel
Thank you very much, Julien.
Operator
The next question comes from the line of Veronika Dubajova with Citi.
Veronika Dubajova
I will keep it to two, please. One is — and I apologize. This is slightly pedantic, but I’m just curious, Peter or Guillaume, if you can comment a bit on the exit growth rate at the end of Q2 and how that’s kind of translated into Q3 in terms of what you’ve seen quarter-to-date. Relative to the 15% that you reported in Q2, what was actually the June number? And has July kept pace? Was it accelerated or decelerated? So that’s my first question. And my second question is just kind of conceptual. Congratulations on the PlusDental acquisition. Just curious what drove the decision to rebrand everything under the DrSmile brand and what your appetite is for further M&A in the aligner space in particular. My two questions.
Guillaume Daniellot
Veronika, yes, I think, first off, on the Q2 side then, we are obviously not really commenting, let’s say, the last week or the last month’s kind of growth rate. What again you have to — and I’m sure you understand that there is a lot of up and down based on all those regional effect. Then on one side, you are going to have a COVID impact, and on the other side, you are going to have the pent-up demand kicking in. Then I would say in — if I look at China based on the last month of Q2, I will tell you, wow, we are going to have a — really a very strong second half, but we know that there is a lot of local effect and regional effects, which has been the case also and — then in North America.
Then I think, as I said just before, we have not seen any significant impact yet of the inflation, except in North America on clear aligner mainly, but the rest, you have of course some input here and there about some of the clinicians saying that they see that a bit more difficult and some rescheduling but, honestly, nothing that would then let us think that the Q3 would be a disaster. Let’s put it this way. Then we need to have more visibility again in the period where Europe will get back on to work because, I think, this is where we see also some inflection points in the past. Then that, I think, will be some time. We will be able to say much more, I am sure, when we will develop and present our Q3 number.
When it comes to the direct to consumer, yes, I think DrSmile is yet a much bigger brand than PlusDental already, when we have done the acquisition. And as you know, developing a brand in the consumer side is very, very costly. Then from then that marketing standpoint, it was very important that we are defining one brand to focus on. We have done a lot of analysis on the brand perception in the different European market in between PlusDental and DrSmile, and it was a clear decision in further nurturing the DrSmile brand for the future and then applying that and all our direct-to-consumer clear aligner activities all across Europe. Then this is actually work in progress. Execution is rather fast. We are pleased with the progress of the integration of PlusDental and, I think, a combined operations which are really going to continue the very strong achievement that this team is doing in this field.
Veronika Dubajova
And any appetite to do more M&A in the space, or are you happy now with the footprint that you have?
Guillaume Daniellot
No. We are, anyway, very active on the M&A side. We have a — different targets in different fields. Consumer presence is, as we said, one of the fields that we are looking at. There are always some opportunistic approach, especially in those uncertain times. We are seeing, of course, some interesting opportunities, but obviously consumer presence is not the only area where we are looking at. We have done then a very, very exciting acquisition and partnership with CareStack, as you know, then the — during the first half. And when it comes to clinician experience, digital workflow and all our digital transformation, there are also ways there where we are looking at opportunities. Then our M&A is still trying to look at a different strategic asset that will help us to deliver on our strategic compass to get to our Go5’s target.
Veronika Dubajova
Peter, all the best.
Peter Hackel
Thank you, Veronika.
Operator
The next question comes from the line of Oliver Metzger with ODDO.
Oliver Metzger
Yes. The first one is a very quick follow-up just because it helps for my next question. So have I understood you correctly that orthodontics in North America were already in the negative territory in Q2?
Guillaume Daniellot
Well, no. This is not what I said. Overall, if you look at — because we have not — we have ortho, where we are doing also our B2B side with Bay material and so on, but I think, if we look at our clear — just then ClearCorrect, because you said clear aligner, then it — we have ortho as a franchise. And we have then ClearCorrect as a brand. Then the brand ClearCorrect, yes, has not behaved on the positive side during the second quarter.
Oliver Metzger
Okay, okay, great. Then the question on the actually end-of-Q2 performance in North America. As you commented, it was a slowdown, and the vast majority comes from the clear aligners. If you look for the implants, have you perceived any shift — or first, any shifts between the — between premium and the challenger brands that you have seen higher growth at challengers which looks different to your previous dynamics? That’s number one. Number two is on orthodontics presence in North America. So many quarters ago, you have basically more or less ruled out that you have a direct-to-consumer offering in North America. Just we said, okay, acquisition prices are much too high.
And also, if you do it organically, the lead costs are much too high that you can make any profit. So if you think now the dynamics have changed, I mean let’s say, multiples might have come down just because we are facing a different phase. If we look on your business also over some decades, you have acquired in the past more countercyclical as prices were a little bit more attractive even in harsher times. So if you look now on potential targets or also the organic entry, do you think it has become more attractive than some quarters ago?
Guillaume Daniellot
Oliver, when it comes to your first question, about shifts in between then the premium and challenger, we do not see that at the moment, clearly. We see significant growth on premium, growth on challenger, but we have not felt kind of a change in clinician behavior to try to switch from premium to challenger. Then that’s not something that we are seeing at the moment. When it comes to the direct-to-consumer clear aligner space, there is — in North America there is something that is still very important for us to reiterate. We are always keeping the clinician in-between. Then we are — having acquired DrSmile and PlusDental and because they were doing doctor-led treatment.
And there is not so much such asset in North America because — you know that SmileDirectClub is doing everything direct without having a clinician in the loop. They are changing a little bit or trying to pivot in some of the SmileDirectClub pro. Or some other competitors are doing so, but this is not really the way they are structured. Then that means that for us this is not in line with the way we see clear aligner being done, where we absolutely think that you need to have a doctor visit in order to validate your eligibility for the treatment, meaning that we are still evaluating always the direct-to-consumer doctor-led capability in North America.
We still believe that it’s still a very expensive approach to implement and that the B2B side is for the time being a better way to create value for our shareholders than to starting investing into a direct to consumer in this part of the world, but obviously, as you said, I think there could be change in this macro economical environment that is making it better. But we have seen that at this moment in time the demand for clear aligner in North America, especially for simple case, have been quite challenged by the inflation, when you look at the different companies results for the second quarter in this field.
Operator
The next question comes from the line of Maja Pataki with Kepler Cheuvreux.
Maja Pataki
Also two questions from my side. Guillaume, just apologies. I am trying to really understand the development in North America. And understandable, you’ve been talking about the clear aligners side. You’ve talked about negative growth for ClearCorrect, but can you tell us whether you’ve seen a meaningful feedback — or deceleration from — in the feedback from dentists when it comes to the implant side? That’s just my first question. And I’m going to give it another shot, trying to get out of you what Veronika didn’t succeed, but can you tell us whether you’ve seen a meaningful deceleration in group growth going into July, August? And you have been kind enough with Q2 results, after Q1 results, kind of giving a bit of an understanding where growth has been moving to, so maybe to make it easier for you, can you tell us whether over the last six weeks growth remains in the double digits for the group or whether we have entered single-digit growth territory?
Guillaume Daniellot
Thank you, Maja. On the implant side for North America, no. We have not seen, let’s say, enough noise from clinicians to let us think that there is a deceleration in implant cases. At least we don’t see that in the booking yet. It’s not, again, as packed as it has been during the first half. I would say it like this, but this is still healthy when it comes to patient flow for implant. And once again, I think, if you look at our North America numbers, you have to look at absolute value for 2021. I think we have been growing 135% in the second quarter 2021, obviously versus COVID-affected Q2 2020, but our second quarter has been the largest in absolute value in all 2021 in North America, which is pretty unusual because, generally speaking, the second quarter is at the same level than the first quarter and the Q4 is the strongest one.
Then Q2 is a very, very high comparison base for North America — and 8% as pretty solid. When it comes to the growth rate, and of course, we are not disclosing our growth rate from a month standpoint. And I think I’m sure that you guys then will be excited to know what Q3 will be when we will announce that in October, but I can tell you that we have not seen an overall significant, let’s say, negative changes in our growth rate on the group side even though being impacted from a very local situation and regional situation, which is making of course quite some up and down in the different regions. That’s what we are seeing, but once again as I expressed, we don’t — we are not worried for the third quarter for the time being, with the numbers that we are seeing coming.
Maja Pataki
Okay, that’s fine, but would — it would be helpful to understand when you would start to be worried. Is it when you would drop to single-digit range? Would it be when you start to drop into the negative territory? Just to get an understanding of your tolerance when it comes to growth.
Guillaume Daniellot
Low to mid-single-digit growth, we would start to be worried, I would say, low single-digit growth with — not the lowest. We have the same investment capabilities, no — in the negative side, I would be more than extremely worried because we don’t have the structural cost which is done for this. I think you — that’s the way then if I want to help everyone then to see our reasoning. We are still believing into our capability to grow strongly. And we have kept our investment cycle, meaning that we are rather confident if we’re able to deliver in the months to come. Then not being worried means, as soon as we can finance our investment cycle and being able to still deliver bottom line that would make everyone happy.
Even though we want potentially to reinvest some of our growth; into some significant development on the digital transformation side, on the CapEx side for manufacturing, as Peter presented, then in the way we are creating value for our shareholder midterm, we are really happy about what we are doing and with the performance we are delivering. If we start to go in the area where growth rates are starting to be very low and not allowing us to do our significant investment the way we are doing that to achieve our Go5, then obviously we will have to revise the way we are investing. And that would be then a very different ball game here. Then being worried means not being able to finance the current investment we are doing. And as soon as we are in the growth rate which will — allowing us to do this, then we are fine.
Operator
The next question comes from the line of Graham Doyle with UBS.
Graham Doyle
Firstly, just on Latin America. We obviously had a very strong quarter. And I had a very similar comparison to the U.S., so I was just wondering and slightly different. Were there any one-offs within that, that we should be thinking about that maybe unwind through the second half? Or maybe, could you point to what was particularly strong? And then I know it’s a slightly tricky question, but around 2023, and it kind of follows up from what Maja was just saying there, we can see some of the clear headwinds around China VBP. You’ve got pressures on clear aligners, maybe pressures elsewhere on premium implants. What are the areas that you’re confident on that help us to have tangible visibility that you think are drivers to sort of outstrip those headwinds for next year at this point?
Guillaume Daniellot
Yes. I think, Latin America, very strong. We are really, really excited by what the team is doing there. They are continuously winning share in Brazil despite the very high market share that they are having. Secondly speaking, we are also benefiting significantly from all the investments we have done in creating subsidiary in all Latin America. As you know, we have subsidiary now in almost all the different Latin American countries. Then Chile — and the latest one were Peru, Colombia. Then we are having our destiny in our hands and are really bearing some of the fruits there as well. Thirdly, during the second half of 2021, we had also done some very high demand for Neodent worldwide.
And we have been also trying to push very significantly to high-price countries such as Western Europe or such as North America, which means that some of the supply went there. And Brazil was also really needing to support its internal demand with more stock, which is exactly what’s happening now there since the second quarter as well. We have a manufacturing capacity which is allowing us now to fulfill all the different needs, including the domestic market. When it comes to 2023, yes, I think there are, of course, some pressures that we are all seeing in the China side with VBP.
And well, the clear aligners side is the inflation growth rate is continuing, but we know that some forecasts of inflation are planning some decrease, especially, for example, in North America for 2023. Then I think the — we hope that the inflationary pressure is going to be lower. And at the end, we are very confident on our capability to grow for the same strengths that we are benefiting and developing right now. The first one is all about innovation and adding a differentiated value proposition. We have nothing comparing on the premium side on our immediacy side. And we are taking the benefit every day; and still investing in promoting our BLX, TLX, zygoma. And we will come with additional innovation on the premium side by the second half of 2023. Then we will continue to nurture the growth on this side.
On the challenger side, this is a very, very strongly business, thanks to the investment we are doing not only on product innovation but especially on the go-to-market side. We are — keep investing with new feet on the ground as we speak, meaning that we are still planting the seeds for future growth. And we are very confident and I am personally very confident of the future growth of challenger in all the different geographies. And when it comes to clear aligner, I think we are going to then get in the weeks to come then our registration in China, meaning that we will have another area to develop.
And the different innovation that we have just launched with ClearPilot 4.0 and the ClearPilot 5.0 that we are developing for next year will allow us to tap much more into the clear aligners segment. Then honestly, I think — without mentioning, sorry, the digital side and having some also very good plan there to further expand our intraoral scanner but also specific services which will help us to continue gaining DSOs. Then honestly, when we look at our strategic compass, we are making strategic progress in all the different fields. Then we are, if — of course, some of the macro economical environment will be headwinds, but we believe that the engine of the boat is very strong and will allow us to keep delivering growth, from our perspective.
Operator
The next question comes from the line of Grace Lee with Jefferies.
Grace Lee
2 questions, please, one on China. Could I just confirm you — well, first of all, could I just confirm? Do you now expect, I mean, 30% to 35% of total business is expected versus previous 15% to 20%? And then with that, could you also comment a little bit about these, some treatment deferrals that you’d mentioned at Q1 in regards to the private dentists that you highlighted? How is that sort of — I mean, how is that developing in Q2 and in summer? And then my second question is just on general on implant downtrading across the region. I think someone asked the question earlier, but I missed it — or I couldn’t quite hear, but is there a sort of implant downtrading that you are seeing either in NA or other regions?
Guillaume Daniellot
Yes, yes. As expressed, indeed the VBP will now include all the different provinces and all the different national and university hospitals, which is taking the entire then the — public business of implant in China. Then it’s going to be, yes, 30% to 35% of our total business will be then affected by the VBP. And we have seen treatment deferrals when the VBP has been announced because patients were wanting to benefit from that lower treatment cost. However, seeing the delay in implementation and some of the different days that have been pushed back, we have seen less of that treatment deferral that we have seen during the second quarter.
At least at the moment, we see treatment that are more ongoing than patient-waitings, but we’ll see what’s going to happen when the official documentation of the VBP will be presented. Because I think there will be more formal date. That might drive a little bit of that frozen demand, but we will see that in the first two weeks of September. When it comes to implant downtrading, we have not seen that in any geographies yet. We have a significant growth on premium, significant growth on challengers. And we have not seen any effect of cannibalization of challenger for premiums in the last months and the last weeks.
Grace Lee
But could I just quickly follow up on — then? Are you expecting that downtrading, to sort of observe that behavior into sort of second half as we see that macro headwind that you highlighted?
Guillaume Daniellot
Well, we are — again, we are not expecting that to come if the inflation is still controlled. If we were having a strong recession coming, then obviously it would be a different perspective, but for the time being, we don’t believe it will have a severe impact as it had in the previous crisis because we don’t see unemployment rate increasing. And when you are unemployed, that’s where we have seen a lot of pressure on price on the implants side. That — we are not seeing that at this moment in time.
Operator
The next question comes from the line of Falko Friedrichs with Deutsche Bank.
Falko Friedrichs
The first question would be on general market share developments in the first half of this year; and how those developed for you, especially in dental implants. Any update there would be much appreciated. And then secondly, on competition in dental implants. Is there anything on the innovation side of your competitors that you’re watching very closely at the moment because it could potentially be a threat to those market shares that you currently have?
Guillaume Daniellot
Yes, we have — then we have gained market share on the premium side. And we have also, we believe, on the challenger side even though challenger side is more difficult to evaluate because there is not an official, let’s say, combination of volumes that are sold by the different manufacturers. Because you have a lot of small local players that are not sharing numbers, then the — then this is — in that sense, it’s a little bit more difficult to say, but with the win we had on the DSO side in different geographies, we also believe that we gained share.
And finally, when you look also overall at some of the numbers that have been displayed by some of the companies in our field, I think we can also evaluate that market share have been gained on the implants side. When it comes to innovation from competition, we are, well, obviously monitoring that carefully. We don’t see, as of today, something that would prevent us to continue gaining market share and expand our leadership from any of the premium or challenger that we are playing with. Then that’s why we are still confident that we are going to be able to grow then with the market together with additional market share gain within the period to come.
Falko Friedrichs
Perfect. And Peter, all the best to you.
Peter Hackel
Thank you, Falko.
Operator
The next question comes from the line of Holger Frisch with Zürcher Kantonalbank.
Holger Frisch
I have two. First one would be on working capital and cash flow from operations. What are your thoughts for the full year? Will there be additional investments in — especially in working capital in order to drive growth in H2? Or will we see a significant improvement or even reversal in the working capital area? And then second one would be regarding the acquisition of PlusDental and the purchase price of CHF135 million. So will it be fully paid in 2022, or is there a contingent consideration that you agreed on? And have you already done the PPA? And so could you maybe give an indication on the goodwill and the intangibles and the yearly PPA amortization that we can expect?
Peter Hackel
Thank you for that question on the net working capital. Let me share some thoughts on the cash flow development, first. Usually we generate or we have a much stronger operating cash flow in the second half, compared to the first half, due to various reasons. If you compare cash flow in the first half ’22 with ’21, in ’21, we had a very strong operating cash flow, in the first half. And we were benefiting also from the reduction of some elevated receivables at the end of 2020, which were still due to the lockdowns and the pandemic in that year, so we were able to reduce the days of sales outstanding in the first half of ’21. If I compare now the net working capital half year ’22 with half year ’21, then I think we are pretty much in-line.
We have a little bit higher days sales outstanding, which does not come from unfavorable development in the country itself. It’s more a mixed effect that some countries with longer outstandings are growing overproportionately faster than some countries with shorter outstandings. That’s the main reason for the nonfavorable development, but I would expect a stable development in the second half in terms of relative net working capital and respective days of net working capital versus half year ’22. On the acquisition cost for PlusDental: That will be fully paid in this year. And the PPA is still ongoing and it’s too early to really disclose some aspects of the PPA at that point in time.
Guillaume Daniellot
Then with this, I would like to thank all of you for your questions and for joining us today. We look forward to seeing you again soon; and wish you, your colleagues and families the best of health and a good start after the summer break. Have a nice day and goodbye from Basel.
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