OPERATIONS AND FINANCES
The business combinations of Medentika and Dental Wings led to the following non-cash-relevant effects in 2017:

• On 1 January, we consolidated Medentika. Our 51% stake was previously reported as ‘share of results of associates’, but now contributes to the financial statements at all levels. This business combination led to several one-time effects, which include inventory revaluation expenses of CHF 2 million under ‘costs of goods sold’ and a one-time gain of CHF 25 million below the EBIT line. In connection with this transaction, we further recognized a financial liability of CHF 55 million in the balance sheet to reflect the present value of the put option granted to the founding shareholders.
• In October 2017, we increased our stake in Dental Wings from 55% to 100% and consolidated the business. This led to a consolidation gain of CHF 44 million below the EBIT line.

DOUBLE-DIGIT VOLUME EXPANSION LIFTS GROSS PROFIT
Strong volume growth in premium and value implant solutions lifted reported gross profit by 17% to CHF 841 million. Excluding the exceptional inventory-adjustment charge, underlying gross profit was CHF 842 million and the respective margin reached 76%. This is 270 basis points lower than in the prior year period, reflecting the strong demand for digital equipment, the Medentika integration costs, a higher share of third-party products, the integration of acquired businesses, and ramp-up costs in the expanded facilities. 

To cater for strong volume growth and to meet future demand, we invested significantly in production capabilities and capacity expansion in Brazil, the US and Switzerland, resulting in higher production costs.

OPERATING PROFIT (EBIT) MARGIN EXCEEDS 25%
Distribution costs, which comprise sales-force salaries and commissions, as well as logistics expenses rose by CHF 39 million to CHF 250 million as we incorporated the aforementioned businesses, invested further in our direct distribution network in underpenetrated markets, and expanded our non-premium franchise internationally. This figure includes amortization expenses of CHF 10 million mainly for customer-related intangible assets of acquired companies. 

Administrative expenses increased from CHF 283 million in 2016 to CHF 311 million in 2017, which includes overheads, R&D and marketing costs for the newly-added businesses. Relative to sales, administrative expenses decreased 290 base points to 28%, which was the key driver of profit margin improvement.

Earnings before interest, tax, depreciation and amortization (EBITDA), and exceptionals increased 25% to CHF 326 million, lifting the respective margin 170 base points to 29%. 

After depreciation and amortization charges of CHF 40 million, our underlying operating profit amounted to CHF 286 million (CHF 284 million reported) compared with CHF 227 million in 2016. The underlying EBIT increased 90 base points to reach 26%.

NET PROFIT INCREASES 20%
Excluding exceptionals, the net financial result remained stable at a negative CHF 3 million, largely reflecting coupon payments for the outstanding CHF 200-million corporate bond. We recognized cumulative consolidation gains of CHF 69 million, mainly because the fair value of the investment in Medentika and Dental Wings exceeded the respective carrying amount. This exceptional effect is both cash and tax-neutral and is shown in a separate line in the income statement under ‘Gain on consolidation of Medentika and Dental Wings’.

The share of results from associate partners¹ was a negative CHF 10 million compared with a negative CHF 2 million in 2016. The decrease mainly reflects this year’s business combination of Medentika.

Income tax expenses amounted to CHF 48 million in contrast to the exceptional tax income of CHF 7 million in 2016. The sale of treasury shares in September in the amount of CHF 260 million resulted in a one-time tax expense of CHF 8 million. Going forward, the tax rate is expected to be approximately 15%.

The combination of these effects meant that net profit increased 20% to CHF 276 million, with the corresponding margin amounting to 25%. Basic earnings per share increased by nearly CHF 3 to CHF 17.61. Return on equity (ROE) amounted to 32%, and the company is (net) debt-free.

FREE CASH FLOW CLIMBS TO CHF 145 MILLION
Cash flow from operations increased 18% to CHF 217 million, reflecting a strong cash conversion rate of 79%². Cash generation was constrained by higher inventory levels due to our newly-created subsidiaries, extension of the product portfolio and the product range. The dynamic topline growth in emerging and distributor markets led to an increase in accounts receivable. Days of sales outstanding increased by one to 56. We invested heavily in capacity expansion at various production sites, increasing CAPEX by CHF 27 million to CHF 73 million. The combination of these effects resulted in a free cash flow of CHF 145 million and a respective margin of 13%. 

Due to the expansion of our business volume, production capacity, distribution network and acquisition activities, the balance sheet total increased 54% to CHF 1.7 billion by year-end.