Ladies and gentlemen, good morning. Welcome to the third quarter 2017 results conference call and live webcast. I'm Sally, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star 1 on your telephone. Webcast viewers may submit their questions in writing by the relative field. Should you need assistance, please press star 0 to reach an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Marco Gadola, CEO. Please go ahead, sir.
Thank you, good morning, ladies and gentlemen, and thanks for joining us for this conference call on Straumann's 2017 nine months results. We will be referring to the presentation slides that we published on our website earlier this morning. Before we begin, I should inform you that our discussion will include forward-looking statements. Please take careful note of the disclaimer on slide two of the presentation and at the end of our press release. As usual, I will take you through the highlights and then Peter Hackel will share the performance and financial details with you. After that, I would like to tell you about some recent expansion initiatives and our progress in bringing key products to high-growth markets. I will conclude the presentation with our outlook, after which we will be happy to take your questions.
First, let me begin with the highlights on slide four. Excluding acquisition and currency effects, our organic revenue grew 15% in the first nine months of 2017, driven by double-digit expansion throughout. In Swiss francs, the increase amounted to 19%. With organic growth raising to 16%, Q3 was our strongest quarter in nine years. North America was the main contributor and kept pace with organic growth in the high teens. Asia Pacific is another star performer and remains our fastest-growing region, with nine months organic growth of no less than 24%. Our ability to offer comprehensive solutions in both the premium and non-premium segments has been a key to our success. The Straumann BLT implant range continues to drive growth in our premium brand. BioHorizons implant and Medentika prosthetics both fueled our non-premium business.
With regard to geographical expansion, we have opened a subsidiary in Iran, and we are well on the way to setting up further subsidiaries in Turkey and South Africa. I am pleased to report that we have completed the acquisitions of ClearCorrect and Dental Wings, taking us into the orthodontics field and strengthening our position in digital dentistry. We also have some very good product news. Neodent launched a new implant system that will succeed its Cone Morse flagship line and Straumann obtained key product approvals in China, Russia, and India. These additions and our full pipeline position us well for future success. Based on the continued strong performance, we are confident that our full-year underlying revenue growth will reach 13%-15%. As you can see in slide five, we sustained our momentum in North America and EMEA in Q3 and accelerated in Asia Pacific and Latin America.
The result in North America with continued strong growth of 17% is particularly pleasing because it is a very tough market, we are competing against the biggest conglomerates in our industry on their home turf. Slide six shows how our top line has increased over the past five years, we are currently outperforming the global market by a factor of more than three. The outperformance is even more impressive when you exclude Straumann's contribution to the global market growth. This success has come from double-digit growth in implants in recent years and throughout 2017, fueled by our premium BLT implant range and the success of Neodent in the non-premium segment. Our restorative business has also sustained double-digit growth, driven by implant-born prosthetics, including Capta attachments, the cost-effective Novaloc and Variobase families, and our ProArch solutions.
Our highly successful digital solutions campaign at the IDS early in the year stimulated demand for our intraoral scanners and milling equipment, which also contributed to growth in Q3. Biomaterials is the group's smallest franchise, but it continues to be the fastest growing, albeit from a relatively low base. With that, I will hand over to Peter.
Thank you, Marco, good morning, everyone. As you can see in slide eight, our reported nine-month revenue in 2016 amounted to CHF 675 million and would have been CHF 6 million higher at this year's currency exchange rate. The acquisition effects of Medentika and Equinox over the same period add a further CHF 17 million, bringing the adjusted revenue base in 2016 to CHF 698 million. In the center of slide eight, you can see the regional organic growth rates, while the regional contributions to the overall growth of 15% are shown on the right. From a regional perspective, our largest regions, North America and EMEA, each contributed 31% of our growth. Asia Pacific was the key performer and notched up a revenue increase of 24%. Latin America also developed positively and achieved growth of 16%. Slides nine and 10 provide more insight into the individual regional performances.
Europe, Middle East, and Africa performed consistently throughout the last three quarters and again posted growth of 10% in Q3. All businesses contributed to the positive result, fueled by BLT and prosthetic solutions. Germany was the main absolute contributor, with Iberia, France, Belgium, and the U.K. delivering the strongest increases. Our young subsidiary in Russia performed dynamically and benefited from the large Moscow dental salon, where our premium and non-premium brands appeared together for the first time. North America held its pace in Q3 and again delivered organic growth of 17%. The performance was led by double-digit growth in the premium and non-premium implant businesses and lifted by our prosthetic franchise, bone graft materials, and membranes. Many new customers were attracted by our new small diameter BLT implants. The heavy hurricanes in Florida and Texas brought disruption to many local dental practices.
Fortunately, there was no direct damage to our Andover production center and our ClearCorrect facility, which are both in Texas. As a result, there was little impact on the group's Q3 results. Organic growth in Asia Pacific picked up from 19% in Q2 to 28% in Q3. The newly acquired Equinox business in India added 3% to reported growth. China, Australia, South Korea, and Japan all posted double-digit increases. Thanks to good demand for intraoral scanners, Japan accelerated sequentially in Q3 and was the strongest quarter year to date. Growth also accelerated in Latin America in Q3 from a comparatively lower baseline in the prior year. The non-premium business was boosted by the launch of new GMs and a very effective direct-to-patient marketing campaign in the large Brazilian market. On top of this, our younger subsidiaries in Argentina, Colombia, and Chile performed well.
These high-growth markets have also added nicely to our regional growth. Mexico has been enjoying a wave of strong growth driven by substantial customer acquisitions. The severe earthquake in September has interrupted life and business in general. While our staff and facilities were not harmed, many dental practices were heavily affected, and it may take time to regain the dynamic expansion seen previously. To meet the increasing demand for current products and to cater for portfolio additions, we need more manufacturing capacity. As you can see on slide 11, we have increased our production space at Neodent in Curitiba by 50%. That is 50%. Over the next 18 months, we will expand milling capacity gradually by a third to cope with anticipated demand, and this is on top of the first expansion phase that we just completed in Q3.
In Villeret, we are about to start construction of an impressive new building on our existing site. As a bridge, until the end of 2019, we have rented additional space nearby, and once the new building is finished, we will move those activities into it. These measures will provide the space to increase output by an estimated 70%. Across the Atlantic in Andover, we have leased additional space at our existing facility, which will enable us to increase capacity by up to 60% as needed. With that, I will hand back to Marco.
Thank you, Peter. As you know, our strategy has three main pillars. The first is to foster a culture and an organization that drives high performance going forward. Our global workforce is another area of rapid expansion. Slide 14 shows that we have added almost 1,000 new members of staff this year, of which roughly half have come through the acquisitions of ClearCorrect, Dental Wings, and Equinox, and the consolidation of Medentika. Over the past five years, the number of our fully owned subsidiaries has risen from 29 to 46, reflecting our strategy to target unexploited growth markets and segments. A few weeks ago, we opened a new subsidiary in Iran and are in the process of establishing two more, one in Turkey and the other in South Africa. These three markets are highly attractive.
Collectively, they account for more than 1 million implants annually, and despite a great need for tooth replacement, they are all under-penetrated. Straumann products have been available in each one of these markets for many years through local distributors. I am pleased to say that the latter have all agreed to join us, which will add more than 200 trained professionals to the Straumann Group and direct access to the existing customer base. With control over the distribution channel, we will implement a multi-brand strategy to broaden the availability of affordable implant options for the very large number of people who need tooth replacement. Looking further east, our team in China yesterday initiated what is probably our biggest launch event to date, which they call Big Bang.
Having received some key approvals in Q3, we are now launching a number of important products and solutions in China, including BLT, which has been a key growth engine in other markets. It is available in high-strength Roxolid and with the SLActive surface, both of which we can now offer throughout the Straumann implant range. In addition, we are launching the Anthogyr fully tapered Axiom PX implant, which extends our non-premium offering. Our full-arch restoration solution, ProArch, is also now available, and we are introducing a CAD/CAM prosthetic service with a Straumann milling center in Shenzhen that will start operating during Q2 2018. The Big Bang launch event spanned 3 days and includes parallel congresses in 4 cities, which are expected a large number of participants. Yesterday, we had 1,600 on-site and 13,000 online.
In addition, we have received regulatory clearances for BLT in Russia as well as in India, where all our Straumann soft tissue and bone-level implants are now registered. We will launch the Straumann brand officially in a few weeks' time, and will offer a broad range of premium and attractively priced options under the Straumann and Equinox brands. The most significant addition to our non-premium portfolio in Q3 was Neodent's Grand Morse implant system, which you can see in slide 18. This is a new system which features a new connection and offers greater flexibility and simplicity, especially with regard to prosthetics. GM is Neodent's most significant development to date. The 1-year clinical data are excellent, and GM attracted 200 new customers in its first month on the Brazilian market. Preparations are underway for the international rollout, which is scheduled for the second half of 2018. Moving on to slide 19.
Just over 6 months ago, we launched a large number of new products and solutions at the IDS. In spite of this, we were still able to present several further additions at the recent EAO in Madrid, a powder-free upgrade for the Dental Wings intra-oral scanner, a portable intra-oral scanner pod, and a surgical drill motor. All of these are Straumann-validated and branded. As customary, we used the EAO as a platform for experts to present their experience with our products. Our scientific symposium drew a large audience and focused on edentulous solutions, ProArch, Novaloc, and BLT with immediate restoration. Recordings of the symposium are available through our website. In addition to the clinical evidence presented at the EAO, we have some exciting new data on our SLActive surface.
Research now explains the mechanism behind the faster osseointegration and high success rate that have been reported in clinical practice over the past 10 years. In brief, researchers have discovered the presence of nanostructures on the surface of SLActive implants that do not occur on SLA equivalents, as you can see in slide 20. The nanostructures increase the surface area by 50%. Together with wettability, they enhance fibrin network formation, cell adhesion, and osseointegration, which would explain the enhanced healing that we see in the clinic. These findings relate specifically to SLActive implants, which are unique to Straumann. Since we introduced SLActive, other companies have attempted to imitate it. Several claim that their implants are also hydrophilic and active. None have proven this mechanism, and none have published 10-year clinical data on the surface. We have.
All of these activities reflect our strategy of providing total solutions, which we have expanded to cover aesthetic dentistry following our decision to enter orthodontics. As you can see in slide 22, we have completed the acquisitions of ClearCorrect and Dental Wings and have consolidated them as of October 1st. We have also closed the deal to acquire 35% of RapidShape, and the Geniova transaction was completed earlier in the year. The illustration in slide 23 shows the similarities in the digital workflows for prosthetics and orthodontics. Both workflows start with impression-taking, followed by a design phase, and completed with a customized manufacturing process. With Dental Wings, RapidShape, and other partners, we can provide the technology, materials, and services to cover both workflows completely, all from one source. That brings me to our full-year outlook, which we have updated this morning.
In brief, we expect the global implant market to grow at a similar rate to 2016, and we are confident that we will continue to outperform with organic revenue growth of between 13% and 15%. Now I would like to open the question and answer session. If you are dialing in by phone, please make sure you have a good phone connection. Kindly limit yourself to two questions in order to give everyone the chance to ask a question. Webcast participants who wish to ask questions anonymously can use the tool in the audio webcast. Operator, can we please have the first question?
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands to ask a question Anyone who has a question may press star. None at this time. The first question is from Michael Jüngling, Morgan Stanley. Please go ahead.
Thank you. Good morning. I have two questions. Firstly, on organic sales growth guidance for 2017. It sort of implies a very wide range of 9%-15%. Why do you need such a wide range for the fourth quarter? Why would you even consider a growth rate in the fourth quarter that may be 9, 10 or 11% given your current run rate? Question number 2 is on operating leverage. In the second half, should we be thinking that you were caught positively by surprise as to the strong organic sales growth, meaning that you've got plenty of scope to show better margin expansion, EBIT than you did in the first half versus the second half? The stronger second half margin expansion than the first half. Thank you.
Thank you, Michael, for the questions. 2 questions. Yes, you're right. At 30%, we would have to achieve a 9% organic growth in the fourth quarter. We believe strongly that we can actually deliver at least the 9% growth. That's why we say 30% is actually what we are extremely confident to achieve. If we achieve 50% organic growth, obviously in Q3 or 4, then the full year growth would be 15%. What we wanted to indicate with the raise of the outlook is that we are extremely confident that we will actually achieve at least 30% organic growth for 2017. On your 2nd question, when you look at absolute growth, for first half versus second half, there is not a lot of difference. It's more or less the same, even a little bit lower in the second half.
Obviously, depending on the growth rate in Q4, as you indicated before. However, you have to take into consideration that we actually grant salary increases normally effective April 1st. We have in the first half year only 50% of salary increases compared to 100% in the second half of the year. We also have increased our FTEs during the course of the years quite significantly to obviously cope with the business at hand and to make sure that we continue to grow over proportionally the years to come. We will have more FTEs on average in the second half of the year compared to the first half. Taking this into consideration, I don't think it's a wise approach to actually estimate that the EBIT margin in the second half year will be considerably higher than during the first half.
Okay. Marco, on the 1st question about organic sales growth implied for the fourth quarter. Should we be concerned that maybe you've had a slower fourth quarter start, and as a result, the 9%-10% on the bottom of the range is perhaps appropriate or applicable?
I didn't say that, no.
Okay. You're starting Q4 with a fairly good growth rate?
I think also 9% is a good growth rate. If you consider that the market is growing at 3%, that's still outperforming the market by a factor of three.
Well, Marco, I recognize this, for your share price, a 9% would be a bit of a challenge, right? The question is: Are you starting the fourth quarter at a similar organic growth rate as we've seen for the first nine months?
What I can tell you is that actually the starting to do fourth quarter was up to expectations.
Okay. Thank you.
Next question is from Julien Dormois from Exane. Please go ahead.
Hello. Good morning, Marco. Good morning, Peter. Two questions on my side. The first one relates to your geographic expansion. You have entered another set of new countries with a direct presence. I think you mentioned that you are now in 46 countries. Are there still sort of countries where you don't have a direct presence and which show a big potential and obviously just a ballpark number would be enough, but just to get a sense on what you can do more. The second question is that you indicated during the Q2 call that you would come up with more precise guidance or estimates regarding ClearCorrect now that you have closed the acquisition. Any indication on how you see revenue growth and margin development at ClearCorrect will be very helpful. Thank you.
On your first question, looking at our geographic coverage through owned subsidiaries. The last markets we have covered now, with the three, obviously projects which we have announced today. Speaking about Iran, Turkey, and South Africa. We still have not a very strong direct presence in the former Eastern European countries. For example, Poland, we are still working with distributors. Romania, we are working with distributors. These are interesting markets, interesting implant markets also, especially Poland are fast-growing. We are not yet fully where we want to be, but I would say over 90% of the direct presence we wanted to have when we actually launched the strategic initiative to actually further explore growth markets. We are where we wanted to be. In terms of ClearCorrect, we will give you a more detailed update during the full year presentation in February of 2018.
We are currently looking at which markets we want to enter first outside, obviously, of the U.S. ClearCorrect, as you all know, as of today, is mainly a U.S. business. We are in the process of defining pilots. We are in the process of actually also defining the working model or the operating model between ClearCorrect and our sales force organizations in the corresponding countries. I would just ask you to stay tuned and to wait until February of next year, then we will give you much more color on this business.
Okay, thank you. If I may just follow up, just on the U.S. business or the one this company has been in for so many years, can you just give us an indication on how growth has fared in 2017? Is it more or less in line with Align, or is it faster, or any indication would help us for modeling purpose?
If you look at the U.S. business, the branded U.S. business, or the U.S. business sold under the ClearCorrect brand in 2017, it has been developing up to expectations and in line with market growth. Let's put it that way. If you look at the market, it's mainly Align. To be honest, 2017, the ClearCorrect franchise, they lost one significant OEM business, which has been taken over by Align. I don't think I have to mention the name. You can all imagine which business this is. This was obviously kind of, how to say, negatively impacting top-line development. The organic growth with ClearCorrect brand, the products in the U.S. market was actually in line with market development.
Thank you very much.
Next question is from Patrick Wood from Citi. Please go ahead.
Perfect. Thank you. Morning, Marco, Peter, and Fabian. I have two, if I may, please. The first would be just on the implant market. I'm curious, rather than just for yourselves, if you think of the market overall, do you think the parallel walled implant systems are still growing, or have we gotten to a point where pretty much all the global growth is on the tapered side this year? I'm just curious as to how you see the growth rates stacked up between globally parallel walled and tapered. The second question would be, if you think about the clear aligner business, if you sort of cast your mind forward, I don't know, five years, whatever timeframe you'd like, I'm curious as to what proportion of malocclusions you think you could treat with a hybrid device between ClearCorrect and Geniova over that timeframe.
Are things like class 3 out of the question, or long term, do you think you can treat the majority of malocclusions? Thank you.
On your first question, if you look at the market share we have in the premium implant space, when it comes to parallel walled implants, we are talking here roughly 80%. With such a high share, your growth rates are kind of limited. That doesn't mean that we didn't grow our parallel walled franchise during the course of 2017. It's obviously clearly below the growth rates which we have seen coming out of our BLT franchise, because there, our market shares in the apically tapered segment, in the premium segment, is still relatively low. We have been able to grow our parallel walled franchise during the course of 2017. On your second question, also here, I would actually like you to stay tuned until February of next year.
We are looking at positioning Geniova in a way that it's fulfilling what you just said before, kind of between traditional braces and brackets and clear aligners. That was also the reason why we've invested into this company. It's still too early to actually make detailed comments on the exact strategy, the exact positioning. I would like you to stay tuned until February of next year when we will actually share much more information on the orthodontics business with you.
That's very helpful. If I could just do one quick follow-up, please, on the parallel walled and tapered side. I'm curious, what do you think has accelerated the shift towards tapered? Not for yourselves, obviously, but for the total market. It's unclear to me, reading trade magazines, exactly why that shift seems to, and correct me if I'm wrong, accelerated in the last, let's call it two or three years. What's driving that?
It's a philosophy question, the market itself has been there since many, many years. Fact has been that Straumann has not been playing in the apically tapered dental implant market. That's not a new segment. If you look at the Nobels or the 3Is of this world, they have been focusing exactly on this segment in the past, while Straumann was focusing more on the parallel walled side of the business. It's not like this is a new segment. We just, as Straumann, we were actually not playing in this segment.
Of course. I understand that. I guess my question is for the total market, in total, do you think there is a shift towards parallel walled? Not for you guys, just for the total market. Sorry, tapered rather than parallel walled. Is the total market shaped, moving over towards tapered and away from parallel walled?
What I can tell you is if I look at the growth rates of our parallel walled premium implants, and we only have parallel walled implants on the premium side. We don't sell parallel walled implants under the Neodent brand or the Medentika implant brand or Ankylos or whatever. We only have it on the premium side. I look at actually the growth rate of our tissue and bone level parallel walled implants, and I compare that to market growth, obviously excluding Straumann. Then we are still growing above market with our parallel-walled franchise. In other words, we are also with the parallel-walled franchise, we are gaining share on behalf of the other premium brands.
That's helpful, comment. Thank you, Marco.
Next question is from Lisa Clive, Sanford C. Bernstein. Please go ahead.
Hi. Just a few questions about use of cash on the business. This year you've done several acquisitions, and it sounds like CapEx is going to be a bit higher on the back of needed capacity expansion. Could you just give us a bit more firm guidance on how to think about CapEx in the next two to three years? Also on M&A, should we just continue to expect some more distributor acquisitions? You have said you're direct pretty much in most of the markets, is that really where any M&A spends could go, perhaps also selective local brands like what you did with Medentika. Lastly, on the ClearCorrect, could you just specify the mention of the loss of the OEM business, had that actually happened before you announced the purchase of ClearCorrect?
Can you repeat the last question?
On the ClearCorrect, you mentioned a sort of customer loss there, was that something that had happened before you announced the acquisition of ClearCorrect?
Let me take the second question, Peter can actually comment on the CapEx. No, we were obviously aware that this business has been lost. That's why the growth rates of the ClearCorrect business in 2017 will not be spectacular. Again, having said that, the U.S. business, the ClearCorrect branded business, is actually growing very strongly in line with the other key competitor in the U.S. market. The other one was an OEM deal, that business was actually taken away from ClearCorrect and was shifted to the other big player in the segment. If you do a little bit of research, you will find out which business we are talking about.
On the CapEx side, Lisa, as you have noticed through my presentation, we are going through an intense phase of capacity expansion at all the different sites that we have. We have just completed the first phase of expansion in Curitiba, and we are embarking on the second phase of expansion there. We will expand until the end of 2019, our production space in Villeret by 70%, that we can then gradually fill with respective machines. For this year, my assumption for full year CapEx is around CHF 65 million, and in 2018, I would assume at least the same level of CapEx then. It might even go up by another CHF 10 million in 2018, and stay at a similar level at the beginning of 2019 once we have then finalized all these expansion phases in all the manufacturing sites that we have around the globe.
Okay, that's very clear. On M&A, is it really just distributors that make the most sense at this stage?
It's on one hand, it's distributors in the markets I described before. On the other hand, we are obviously targeting at becoming a global player also on the orthodontic side. If you look at some of the markets, for example, China or if you look at also Brazil, registration hurdles are relatively high. Just to give you an example, we would like to actually go into the Chinese market with ClearCorrect. It will take us two and a half years to register the product there. We don't want to wait two and a half years, obviously. It might be that we also do some bolt-on acquisitions to actually build the global orthodontic business.
Great. Thanks very much.
Next question is from Christoph Gretler, Credit Suisse. Please go ahead.
Yes, hi, good morning. Hi, Marco, Peter. I just have a quick question on the new products coming up, and the ceramic implant in particular now. Could you update us on where we stand on those projects and maybe the initial reaction and market update now on the ceramic side and on the CapEx side now, whether all things are on track for a 2018 launch?
On the fully CapEx side, we will go into a limited market release in Q4 of next year. We are now with the first in-man trials that is on the way. We will actually do the full market release at IDS 2019. On the ceramic side, we are going to launch our two-piece ceramic implants, the premium implants, which we call PURE, during the second quarter of 2018. Our injection molded ceramic implant target date is LMR as a limited market release Q4, then full market release Q1 2019.
On the Neodent side?
That's the injection molded ceramic implants.
That's the injection molded. Okay.
Yeah.
Maybe China also. Yeah.
The GM line, so the new Neodent Grand Morse Implant line we have already launched in Brazil, and we're going to launch outside of Brazil end of Q1, beginning of Q2 2018.
Okay. Just one clarification question, I think one was to Michael's now on the operating profit margin. Did I understand you correctly that you stated that you would expect a substantially higher margin in the second half compared to the first half?
No, the opposite. Tendentially, we have more OpEx in the second half due to salary increases, equity build-up throughout the year. From a top-line point of view, it's more or less the same between first six months and second six months. I wanted to, how to say that? Put in relation the statement of Michael on pointing out these two facts, actually alluding that to anticipate a substantial improvement of EBITDA margins in the second half versus the first half is not really realistic.
Okay. I got that correct in that case now. Thanks for all the clarification.
Next question is from David Adlington, J.P. Morgan. Please go ahead.
Hi, guys. Don't have questions, just one from me. You are clearly strongly outgrowing the markets, and you are clearly executing very well there. Also your competition has clearly been losing share. I just wondered if you are seeing or we are seeing some changes within the competition. I always wondered how you expect those changes to maybe pull through and how you expect the competition to respond. Thanks.
Not all our competitors are not performing well. If you look at, for example, the Koreans, they are actually performing very strongly too. They are also gaining share like we are gaining share. There are some of the larger players, obviously, with some internal issues. I guess you are all aware of them. If you look at Dentsply or also Nobel is obviously still in a phase of actually getting back on track. We have seen some interesting movements on Nobel side with the entry into the ceramic implant field through the distribution of Dentsply implants. They are also working on a couple of other projects. I expect competition, yes, to come back. At the end, I think we have a lot of exciting initiatives still in the pipeline. We talked before about the product portfolio. We talked about geographic expansion. We talked about the orthodontic segment.
Digital, we are just starting to scratch the surface. We still have a lot of exciting growth projects, which will allow us to stay ahead of competition also in the years to come.
That's great. Thank you very much.
Next question is from Daniel Jelovcan, Mirabaud. Please go ahead.
Yes, hello, also from my side. Just the product and the comp question. The product question is more, is the Neodent Grand Morse cannibalizing the Cone Morse or is it targeting different customers, or is even the product quite different, or is it just a successor? That is my first question. The second question is, you mentioned some countries which are more mature, like Japan, Australia, where you recorded all the double-digit growth. Why exactly was that? The other country, Germany, you mentioned that is the key driver in Europe, which is quite astonishing considering also the mature market. What was exactly the driver or the drivers in Germany? Thanks.
Okay. Grand Morse versus Cone Morse line. Obviously, our objective is down the road to replace Cone Morse with Grand Morse. There is obviously, cannibalization, I don't know if it's the right word. It's actually phasing out Cone Morse and phasing in Grand Morse. The big thing about the Grand Morse line is that the prosthetic part of the system is much more user-friendly, especially for general practitioners. We have so far quite some problems with converting referral networks to Neodent because of the, I would say the shortcomings of the prosthetic system. We have corrected that with the Grand Morse line. The Grand Morse line will now give us much more opportunities to go after referral networks, to go after specialty businesses, especially in countries like the U.S. That is why we are extremely excited about the launch of the Grand Morse line. Your second question: Australia and Japan.
To be honest, in Australia, we have for many years underperformed compared to competition. We have now obviously BLT also in the Australian market. We have CARES coming in the Australian market. We are about also to launch a full and complete range of Biomet 3i in Australia. In Australia, we are catching up, let's put it that way. Japan, also there, we are playing the digital card. We have our CARES milling center in Narita, which is actually now starting to perform very well. We are seeing quite some exciting growth rates coming out of customized prosthetic hubs in Japan. That is driving the development in Japan. It was not mainly in Germany. Germany had a very good third quarter, but we also know that the German market is not a fast-growing market. It is actually a market which is relatively flat.
Main contributors to growth in Q3 were the Southern European countries, I would like to mention especially Spain. We have seen very nice growth coming out of our Spanish business.
Okay. Just to follow up on the GM product, the 200 customer wins were mostly GPs, I guess.
The CM today.
The GPs.
mainly a GP product. These are actually dentists who do everything in their practice. They place the implant, and they do the prosthetic work. What we have, some problems, I wouldn't say that it's a problem, but we really didn't see such a lot of success was actually in converting referral networks, where actually the specialist place the implant and the GP, they do the prosthetic restoration. This has been due to the fact that actually, the prosthetic components of the CM system are not as intuitive as many of the GPs restoring implants would have wished to be. We have addressed it with the GM right now.
I meant the 200 new customers you won in the first month.
That's Brazil.
That's Brazil. That was GPs, I guess then, mostly.
Well, Brazil is mainly a GP market.
Yes. Anyway, okay.
That's why the CM in Brazil was not really an issue, because Brazil-
Okay.
is mainly a GP market. You have the U.S., which is obviously a specialty market. You have.
Obviously Europe, which are specialty markets. There, with the GM, we believe that we will have quite an impact when it comes to rebuild.
Yeah, I got it. Excellent. Super. Thanks.
Next question is from Maja Pataki, Kepler Cheuvreux . Please go ahead. Mrs. Pataki, your line is open.
Yes, good morning. Hi. I'd like to follow up on Michael's question with regards to Q4 growth. Looking at what you reported in Q3, on the one side, you've been talking about the earthquake, about the hurricanes that had a minimal impact, but that's clearly out of the way in Q4, and you had quite some new countries and new product launches. I'm trying to understand whether the 9% implied is actually an option at all, or whether that is just a number that you've given as a caution margin. If it is a real realistic number, it would be very helpful to understand where potential risks would come from. Just a second question quickly. You stated that the implant growth accounts for two-thirds of the Q3 or nine-month growth. Could you give us a feeling for how the premium versus the instruments have grown?
Thank you.
9% growth in Q4. Again, if you look at the total market development, even 9% would not be a bad development overall. I agree with you, that it would probably be slightly disappointing. If you look back at how we guide, how we give outlooks in terms of performance, what we say we're going to deliver, we normally deliver. That's also our objective for full year 2017. Now to your second question.
Question of growth between premium and premium.
Yeah, of course. If you look at our business, we still have close to 90% of our turnover generated with premium branded Straumann products. The non-premium business is slightly more than 10% already, and is obviously growing over proportionally to the premium business. Our premium business has been also in the third quarter growing double-digitally.
Thank you.
There's a question from the web call coming in from a listener. The person would like to know what kind of interest would be in a PEEK material for the PEEK abutment model. Could you share your review on that, please?
What?
On the PEEK material for prosthetics, maybe implants going forward.
Daniel, obviously, PEEK is an exciting material. It's making inroads into many segments of the MedTech industry. We are, as we speak, looking at PEEK as a potential material, obviously for prosthetic components. The problem with PEEK today is it's still relatively expensive as a material. It's more expensive, for example, than zirconia or titanium or cobalt chrome on one hand, and it's difficult to mill. Also from a milling point of view, it's actually relatively difficult to mill. These are the two shortcomings which we see today. Obviously, if these shortcomings at one point in time will be overcome, it is lighter than zirconia, obviously. How to say that? It's attractive also for the patient because the zirconia bridges are quite heavy. It's not metal, it's metal-free. There might be some clear advantages of PEEK compared to other materials.
As pointed out, there are still some shortcomings.
The next question from the phone is from Oliver Metzger, Commerzbank. Please go ahead.
Yeah, hi. Thanks for taking my questions. Two are left. The first question is a follow-up on my question regarding the double-digit growth at your premium business in the first nine months. Is it correct that that means even an acceleration to the full year 2016, just from the pure premium business side? My second question is on the growth contribution as biomaterials. Could you clarify whether you had a strong contribution from your franchise [authorities] or from your existing portfolio of that business?
Your first question, have we been growing more in 2017 compared to 2016? We can say yes.
Yes.
Yes, that's the case. Your second question on the biomaterials. I'm not sure what the question is really hinting at, because both we obviously already have in our portfolio. We have been selling both since 2014. It's part of our biomaterials portfolio.
Even if you look within your biomaterials portfolio and you separate between your, how to say, traditional biomaterial portfolio and the-
Oh, okay
franchise, which came in this quarters, which were a stronger growth contributor.
Okay, you're talking about Emdogain versus?
Yes, exactly.
Okay, cool. Now I understand. Now, Emdogain is obviously not growing at the same pace like the other biomaterials. It's growing in the, I would say, in the low single-digit range. Whereas the bone regeneration products, so the membranes and the synthetic bone filling materials, XenoGraft and Allograft, they are growing much faster than Emdogain.
Yeah. Okay. That's helpful. Thank you.
Next question is from Tom Jones, Berenberg. Please go ahead.
Good morning. I had a couple of questions. Mainly for Peter, I think. On the margins, the guidance explicitly excludes the effects of FX and acquisitions. We have to come up with an absolute number, so it would be helpful if you could give us some color on where you think or what impact you think FX is going to have on the margin this year, assuming rates stay where they are for the rest of the year. What kind of dilution or expansion from the margin do you expect from the acquisitions that you've made of ClearCorrect and Dental Wings and Medentika? That'll be my first question. The second one, I'd just be intrigued to know what kind of effects on your P&L the buyout of all the distributors has had.
You said you've opened 17 subsidiaries in recent years, most of those have been distributor buyouts. The reason I ask is clearly when you buy a distributor, you get an immediate uplift, stocking issues aside, in revenue growth because you're effectively booking the full end user price rather than the sale price to the distributor. Where this comes from, a positive effect on gross margins, they tend to be dilutive to EBIT margins. It'd be useful to know what impact all those distributor acquisitions have had on both revenue growth and margins over the last maybe one to two years.
Thank you for this question, Tom. Let's start with the first one on the margins and the FX. You have seen on the top line we had a positive FX impact of roughly CHF 6 million for the first nine months. If you look at the details of this FX impact, we saw that in the beginning of the year, the positive impact mainly came from the Brazilian real, whereas for the second half of the year, if the EUR stays at the current level where they are, around 1.16 versus the Swiss franc, I would expect a similar impact from the EUR in the second half year, whereas the impact from the Brazilian real of the first half year goes considerably down as the Brazilian real appreciated in the second half 2016.
I would expect for the full year, similar FX impact as for the first half year, but the distribution between the different currencies, that would be different in the second half year. When it comes to the distributor question that you had, for 2017, we have not really integrated any distributors. I do not quite understand what you are referring to in terms of margin development for this year.
I was more interested on the distributor side, on the revenue impact that that's had over the last two or three years, because clearly you're outgrowing the market. When you buy a distributor, you're not really gaining share per se in volume terms. You're just booking the same volumes that you ultimately sell to customers at a higher price because you're cutting the distributor out. Yes, you get some additional cost to that. I was just trying to get a feel for what of the very impressive revenue growth you've delivered has come from just the mathematical effect of consolidating distributors, because clearly the price you sell to distributor is lower than the price a distributor sells to the customer. You may still sell the same number of implants, but you get to book more revenue if you own the distributor or cut the distributor out.
Well, there are obviously two effects. One is that we have in our top line, we have the difference between the selling price to the distributor and the market price really. What's even more important is, and if you look at Russia, that's a nice example. When we take the business over, okay, we have much more focus. We can actually invest behind the business. We can actually make sure that, for example, from a geographic coverage point of view, we have the full country covered, which for example, in Russia, we didn't have. We were only focusing on Moscow. We had one rep in St. Petersburg. Since we've taken the business over in Russia, we have been growing far above market. It's not only a mathematical game in terms of internalizing the difference between in market price and selling price to the distributor.
Much more important is that we normally see when taking over distributors that actually volume growth just goes through the roof. I can give you the example of Iran. Yes, in Iran, we have a distributor that's more than 10 years. The Iranian market is over 600,000 implants. Our market share in Iran today is far below 5%. Okay. This is because the distributor was never actually ready to invest into the market and to make sure that it's a strong franchise, gets its fair share of this, for example, very attractive Iranian market. It's not only a mathematical equation. It's really also, and we know that based on recent experience, it's also that once we manage the business, we see actually a significant volume increase.
Yeah. Okay. That's fine. I understand that. Just to circle back to Peter on the margin question, I kind of have a fairly good idea of what revenue currency is going to do to the top line. What I was really asking was kind of what impact, maybe you might be prepared to quantify it, currency movements are likely to have on the EBIT margin in 2017 versus 2016. I don't think we covered the impact of acquisitions on margins, so whether that's going to be a positive or a negative effect for the full year as a whole.
Well, on the EBIT side, Tom, I think I said that I would expect a similar impact in terms of basis points for the full year as for the first half year.
Okay. Got it.
For the EBIT margin.
I'm sorry if I have not been clear there. If we look at the acquisitions, we will consolidate them for the last quarter. Given the size of the business, I do not expect a significant impact on the EBIT margin, on the operating EBIT margin before the amortization of the intangibles. When it comes to the amortization of the acquired intangibles, I will give you more color with the full year results 2017 and with the guidance 2018 on that question then.
Okay. I'll wait till February.
Next question is from Veronika Dubajova, Goldman Sachs. Please go ahead.
Good morning, gentlemen, and thank you for taking my questions. My first question is just on the impressive growth that you've delivered in the third quarter. I noticed that in your prepared remarks, you sort of listed Neodent as first, and then listed BLT after that. Can you maybe help us understand if you kind of think about the growth in developed markets, so the U.S. and European business, to what extent the contribution to growth from Neodent has increased in the third quarter versus what you were tracking at in the first half of the year? Am I just reading too much into how the press release was structured? Some color or correction to my impression would be helpful on that. My second question is just a housekeeping question.
In the press release today, you said that Dental Wings and ClearCorrect were annualizing CHF 46 million of revenues in 2016. If I look at the disclosure that you gave at first half, the number was actually a bit higher than that. It was CHF 54 million. Have I just misunderstood something, or have you, as you've integrated the businesses, has your view of the revenue base changed versus where it was a quarter ago? Thank you.
Your first question, Veronika, thank you for pointing this out, and it's a good piece of advice how we structure press releases in the future. The largest part of growth over in Q3 came from BLT. BLT is still the key growth driver of the overall business. Number 2 is our own premium business, and BLT is obviously premium. On your second question on the numbers, Dental Wings, ClearCorrect, I hand over to Peter.
Yes. I think probably the number that we provided in the press release today, that's the number of the third party revenue in terms of roughly CHF 45 million. When you're referring to the other numbers in the half year and press release, that was the total revenue. Please be aware that part of the Dental Wings revenue is already generated through our own sales organization already today. Going forward, that is basically then intercompany revenue of Dental Wings. That's the only difference between these two numbers. There's nothing in terms of change in the underlying, in the numbers or whatever.
Okay. That is very clear on that. Thank you for that, Peter. Marco, can I just follow up on the BLT? I think a couple quarters ago, you gave us some statistic on kind of what your market share was in the bone level tapered implant. Can you maybe give us an update on where you are, either sort of in terms of absolute implant sales now for BLT or from a market share perspective? That would be helpful. Thank you.
I am very reluctant to actually disclose this, obviously, this is the information which our competitors are very much looking to get. I am reluctant to disclose this. Obviously, our share is increasing because we are, with BLT, increasing faster than market growth, and we are gaining share in the actively plated implant segment, premium actively plated implant segment. Market share is obviously still significantly below our parallel walled franchise, that really doesn't come as a surprise, taking into consideration that we have around the same share there. I don't want to disclose concrete numbers here. Please, have some understanding for that. Obviously, some of our competitors might listen to the call, and I don't want to give this information out.
Okay, understood. I will pick that up with Fabian afterwards then. Thank you very much.
Next question is from Markus Gola, MainFirst Bank. Please go ahead.
Hi, and thank you for taking my question. There's only one left, actually, and it's with regard to working days. My question is whether you will have less working days in any of your regions in Q4 compared to Q4 last year.
I will take that question. For the Q4, the number of the working days, it's basically stable that there's less than one working day less in this year compared to last year for the last quarter overall.
Okay, thank you.
The last question is from Carla Bänziger from Vontobel. Please go ahead.
Good morning, gentlemen. Just a quick one on the chairside solutions. Can you maybe give us an update how this launch now went since the IDS, and maybe also give a little indication how you see demand between Dental Wings and the 3Shape scanner? Thanks.
We are obviously selling both intraoral scanners, Dental Wings, and 3Shape. For the more developed markets, I'm talking here markets like Germany, for example, but also certainly the U.S., 3Shape is still the more attractive offering because Dental Wings, for example, they don't have a color scanner yet. We have now launched at the EAO the powder-free Dental Wings handpiece, so that's available now. The color is not available now, there are many customers in more developed markets, they like to have color intraoral scanner options. From a workflow point of view, we are about ready to actually launch the fully integrated workflow on the Dental Wings through the C series chairside mill, so that's coming. That's actually ready to be launched. For two-stage and implantology, while we are still working with 3Shape on a fully integrated workflow, 3Shape intraoral scanner to C series chairside mill.
Obviously we started even later with that project compared to the Dental Wings integration into the C series chairside mill.
Okay, thanks. That's clear.
I think that was the last question. In closing, I'd like to draw your attention to the investor relations calendar, which you can find on slide 27 and on our website. Thank you for your questions. If you have further questions, you are welcome to contact our colleagues in investor relations and corporate communications. Thank you for your interest, and have a good day. Thank you.
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