Ladies and gentlemen, good morning. Welcome to the Straumann 2015 First Quarter Results Conference Call. I'm Selena, the Chorus 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 and A session.
The conference must now 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, everyone, and thank you for joining this conference call on Straumann's 2015 Q1 revenue. We appreciate that you have taken the time to connect to the webcast as we are aware that this is a busy day for many of you with multiple reporting events. We will be referring to the presentation slides that were published on our website earlier this morning. And before we begin, I have to inform you that our discussion will include forward looking statements.
So please take careful note of the disclaimer on Slide 2 of the presentation and at the end of our press release. I will begin with the highlights and then Peter Hochul, our CFO will share the business and regional performances with you. After that, I will tell you about our strategic progress, our rollout program of new solutions and our outlook. Then we will be glad to answer your questions. The key message this morning is that we have considerably strengthened our global leadership position through solid organic growth across our existing business and through the full acquisition of Neodent, which has already been completed.
As you can see in slide 4, group revenue reached CHF 193,000,000 of which CHF7 1,000,000 were contributed by Neodent in March only. Organic growth, which means excluding currency and acquisition effects amounted to 8%, which is the 2nd highest quarterly increase in more than 3 years. If we include the acquisition effect revenue actually grew as much as 12%. The good performance reflects our investment strategy in growth segments and markets. Regionally North America, Asia Pacific Latin America were the key growth drivers and all achieved double digit increases.
This more than offset the Europe, Middle East and Africa region, which delivered a solid underlying performance, but was softened by price reductions in certain distributor markets, which were necessary to mitigate the strong currency impact. We introduced a number of new products and solutions bringing us a step closer to our goal of becoming a total solution provider. The most significant is our new bone level tapered implant or BLT, which received a positive response in its controlled market release and has now entered the full release in North America and initial European markets with other regions to follow. We took swift action to mitigate the acute currency impact, which together with our good progress so far enable us to maintain our full year guidance for organic revenue growth in the mid single digit range and an EBIT margin above 20% excluding one time acquisition effects and bearing any unforeseen circumstances. Before I hand over to Peter, let me say a few words about Neodent and why we have spent CHF 210,000,000 to acquire the remaining 51%, 3 years earlier than originally planned.
As you can see on slide 5, Neodent is the undisputed market leader in Brazil with a share of roughly 40%. Over 22 years, the company has built a strong reputation for customer service and education with more than 2,000 dentists attending Neodent courses each year. Its success is also built on its philosophy of making test and implant solutions affordable for a broad population. Slide 6 shows you Neodent's impressive range of implants, which are very attractive cost effective alternatives to rival leading brands. This slide also gives you an impression of the company's highly efficient state of the art production facility and one of its 15 retail branches in Brazil.
Prior to our initial investment, Neodent's activities were mainly focused on Brazil, which I should add is the world's 2nd largest market consuming more than 2,300,000 implants each year. NeoDent operated 2 small foreign subsidiaries and also sold products through distributors in selected markets. Driven by our InstaDent platform, the brand has expanded in Europe and the Americas with an exciting rollout program still to come. Our acquisition is one of several deals that have reshaped our industry. Slide 8 shows you the latest global ranking by market share based on 2014 data.
Including Neodent on a pro form a basis, Straumann's global share has increased from approximately 20% to 24%. With the other top 4 players, we collectively control roughly 3 quarters of the global market, which is estimated to be worth CHF 3,000,000,000. And with that, I would like to hand over to Peter for the numbers in detail.
Thank you, Marco, and good morning, everyone. Looking at Slide 10 and the performance by business. Implants continued to be our growth engine as volumes again expanded nicely across most regions. The share of our premium implant material, Revsolid, increased and we saw initial contributions from the new BLT implant. We are also encouraged by the developments in our restorative and digital business, where the negative trend was halted by an increase in abutment and scanner sales, more than offsetting the decrease in 2 strong prosthetics.
Dental labs are sensitive to stanza's abutment prices and may have switched to digital workflows using external milling sensors or purchasing their own in house equipment. Marco will tell you more about a number of new lab solutions, which make us confident about future growth in the restorative business. Regeneratives was our fastest growing business led by Guidepone regeneration products in the Bortus range, which we began distributing in Europe 6 months ago. Moving on to Slide 11. Group revenue rose 7.4 percent in Swiss francs to €193,200,000 At this year's exchange rate, our 2014 Q1 revenue would have been approximately CHF 7,800,000 lower, mainly due to the euro and the yen.
Taking this and the positive acquisition effect of €6,700,000 into account, our adjusted 2014 Q1 revenue would have been €1,000,000 less than reported. As a result, our revenue growth amounted to 8.2% in organic terms. Due to the incorporation of Neodent and planned regional expansion, we are now treating Latin America as a separate region. Previously, it was included in the Rest of the World region together with other markets, which are now clustered with Europe, in EMEA or Europe, Middle East and Africa. The respective annual sales shift from rest of the world to EMEA is approximately CHF 13,000,000.
For comparison purposes, we have included a slide in the appendix showing the corresponding regional breakdown including Neodent in 2014. As Marco mentioned, we have achieved double digit growth in all regions except EMEA. Asia Pacific posted an exceptionally strong increase and contributed 50% of the group's organic growth. North America grew 12% and contributed almost €6,000,000 to our top line growth. EMEA achieved a solid underlying performance in general, but this was overshadowed by unavoidable price reductions to mitigate the accrued currency impact in most distributor markets reached by products in Swiss francs.
The decline in the EMEA distributor markets reduced regional growth by roughly 2 percent to 3 percentage points. The next two slides provide some more regional color. In EMEA, our largest regions, revenue was more or less in line with the previous year. When NILDENT is fully integrated on a 12 month phase, the EMEA region will account for just under 50% of group revenue. In the Q1, France, the U.
K, Sweden and Austria performed especially well, while sales dipped in the Netherlands and Switzerland. Sales grew solidly in the region's largest implant market Germany, where Straumann has a leading position. Russia is an attractive market in the mid to long term, but Straumann is underrepresented there and investment is needed to expand our business. We are working closely with our Russian distributor to establish a sales subsidiary in Moscow this year, which will enable us to invest and have greater control over the business. The new setup is to include the existing distributor team complemented by additional sales personnel.
North America achieved another strong quarter with double digit growth both in Canada and the U. S. Voxolid and the rollout of our BLT implant range were the main performance drivers. BLT was well received in the controlled launch and transitioned to a full market release by the end of the quarter. Asia Pacific posted the strongest increase with revenue climbing 35% in organic terms.
This was driven mainly by exceptional growth in the dynamic Chinese market due to stocking effect. As you know, we are transitioning to a hybrid distribution model in China with new dealers who have had to build inventories before they are start selling. Apart from this, Korea and Australia both achieved good growth, while Japan, our largest regional market, was expectedly below the very strong prior year performance when sales benefited from the introduction of vessel active and customer purchases ahead of the national VAT increase. And finally, let me add a comment on Latin America, where revenue climbed 12% in local currencies, led by a strong increase in Mexico and complemented by in Brazil. The next three slides give you more details on Neodent and the way in which we will account for the acquisition.
Founded in 1993, Neodent generated sales of CHF100 1,000,000 in 2014. Its business grew 8% domestically and 12% worldwide, including sales through distributors and our insulin platform in the U. S. And parts of Europe. Over the Neodent has sold more than 5,000,000 implants and is expected to sell more than 1,000,000 in 2015, which ranks it among the top 5 globally.
Profitability is very impressive as you can see on Slide 15 where the numbers speak sequentially. Has consolidated Neodent fully as of 1st March 2015 and Slide 16 shows you how it has catapulted the small LatAm region almost to the level of Asia Pacific. The IFRS treatment of the Neodent consolidation triggers a purchase price allocation that includes fair value adjustments, which will affect our reported EBIT and net profit margins. The figures in Slide 17 are not final and will depend on the exchange rate of the Brazilian real to the Swiss francs. Nevertheless, they should give you a base for adjusting your financial models.
The capitalized customer list will be amortized over the next 7 years and lead to charges of roughly CHF 7,000,000 annually. There will also be several one time effects. Firstly, we will have to adjust the acquired inventories to fair value and write them up. This will increase our cost of goods sold by €15,000,000 in our first half results. Secondly, the accounting standard requires that the accumulated foreign exchange differences of the initial 49% stake has to be reclassified from equity into the P and L, which will have a negative impact of roughly €85,000,000 on the financial results.
And thirdly, the derecognition of our 49% stake triggers a revaluation of this initial stake, which will lift the financial result by €15,000,000 The overall impact on the financial result will therefore be a negative €70,000,000 And due to this one time effect, we will likely report a net loss in our first half financial results. And with this, I would like to hand back to Marc Andre.
Thank you, Peter. As you can see in slide 19, Neodent is the flagship in our insulin platform and makes us a leading company in the global value segment. The Taiwan based implant company T Plus is another new addition. We have also extended our common production and technology platform by acquiring 44 percent of Valoc and by partnering with Amangirbagh, which I will tell you about in a minute or 2. Penetrating the fast growing value segment is a strategic priority for Straumann and I am delighted that Petra Rump has agreed to join our executive management team as Head of InstroLent and Strategic Alliances.
Petra has a broad experience of our industry having spent the past 7 years at Noble Biocare. In particular, she has a deep knowledge of the value segment having led Noble's Biotech Value Business. So we are very glad and privileged to have her with us. Moving on to Slide 22, I would like to tell you about our initiatives to invigorate the restorative business and to become a partner of choice for Dental Labs. In Q1, we launched a holistic prosthetics campaign including products, materials, improved digital workflows, enhanced software and new digital equipment all geared to broaden options and increase efficiency.
This was our main focus at the Midwinter meeting in Chicago, the AO in San Francisco and the IDS in Cologne, 3 major events which collectively attracted more than 160,000 participants from around the world. If you weren't able to join us at the IDS, you can find videos, presentations and further information from the event at the link shown in slide 24. This morning, I would like to briefly highlight some of the new product solutions and innovations starting with Slide 25. Building on the success of our simple Vario based abutments, we have created an entire family of highly flexible, cost efficient barrier based solutions, including new heights for larger crowns, options for screw or cement retained bar and bridge restorations and strong and original barrier based components for the CEREC chairside workflow. We have also launched pre milled abutment blanks enabling labs to make their own 1 piece customized titanium abutments with original strong collections.
Our Cares Extreme service now includes spas and bridges and streamlines the prosthetic workflow so that all the components can be manufactured from a single scan and design procedure. And needless to say, the prosthetics are available in the latest high performance materials including 3 ms SB's LABA plus I have already mentioned our investment in Valoc, which gives us an innovative retention system for removable overdentures, which you can see in the lower picture on the right. 2 key attractions at the IDS were innovations by our partner Dental Links, which are shown in the next slide. 1 is a high performance intraoral scanner with a very small scanning probe and the other is a revolutionary milling machine for labs and dental practices, which uses laser technology to mill crowns and other prosthetic components. The picture on the right shows our new Cares Emissaries in lab milling machine produced by Armangearbach, which we will start selling in Central Europe in Q4.
Together with our new 3 and 7 Series desktop scanners, this offers a complete in house CAT scan solution for labs and marks our entry into the lab milling segment. By prosthetics solutions are of key importance, the main growth driver in our pipeline is BLT, mainly because more than 60% of implants sold have tapered designs and we're only just entering this segment. With RockSolid and SL Active, we have a highly competitive new generation product, which has been well received. As I mentioned previously, 4% of the implants we sold in Q1 were BLT, even though their availability was through controlled releases in North America and parts of Europe. We are now initiating full market releases and you can see the global rollout plan in slide 27.
Slide 28 shows how all these products add to Straumann's position as a total solution provider for dentists and laboratories. And I should add that this chart only covers the new launches. There would not be enough room on this slide for our entire existing range. That brings me to Slide 29 and the outlook which has not changed, thanks to the solid performance so far this year. The global implant market should improve further in 2015 and we expect our revenue to grow organically in the mid single digits.
Obviously, revenue in Swiss francs will be influenced by the recent exchange rate turbulence. We aim to balance investments between growth markets and other strategic projects, while taking decisive steps to mitigate the consequences of the appreciation of the Swiss franc. These measures will help us to achieve our organic EBIT margin target of at least 20%, assuming exchange rates remain more or less at their February levels. Neodent will accretive to our reported EBIT margin before acquisition related one time effects. And now I would like to open the question and answer As usual, I would kindly ask you to limit the number of your questions to 2, including sub questions and follow ups.
Then kindly rejoin the queue in order to give everyone else a chance to put their questions. Webcast participants who wish to ask questions anonymously can use the tool in the audio webcast, which you can find in the bottom left corner. So operator, can we have the first question please?
The first question comes from Mr. Ed Ridley Day from Bank of America. Please go ahead.
Good morning. Thank you. Firstly, just a couple of questions around your guidance. Obviously, a very strong start to the year. I do understand the Chinese stocking has been significant.
But I guess in not raising your guidance for revenue growth, are there other things that we should be worried about later in the year? Or are you just being conservative?
It's the second. The Q1 obviously has been strong, somehow positively impacted by as you mentioned the stocking effect in China. We also have obviously some tougher comparisons for the rest of the year. So we are taking the position that we should wait for the Q2 to see how the Q2 develops before we actually change our guidance.
Fair enough. And just on I mean just to take one of the areas where perhaps you don't have that issue is Japan. I mean clearly a tough comp this quarter, but presumably you would be can you give us any color on the what you feel the underlying demand growth in Japan is at the moment?
Yes. It's in the high single digits. As you mentioned, obviously, last year Q1 was extremely strong in Japan due to the SL Active launch and also due to the fact that customers have anticipated purchases due to the VAT increase effective April 1. But to take all these apart and to come up with what has been the normalized growth rates in Q1 is rather difficult. But the business is very solid and we expect 2015 to be another strong year for our Japanese business.
Very good. And just a second question really relating to your to Neodend. You haven't really spoken today about synergies from the integration. Could you talk a little bit about potential cost synergies from the Neodent integration?
Peter, I hand this question over to Peter because he's leading this project.
Yes. Thank you. There will be obviously certain synergies between the 2 Brazilian organizations, our Straumann organization and the Neodent organization in the back office. However, as we have just acquired the Neodent stake less than 3 weeks ago during April, we started that project and that will be ongoing, but we will not be able at that moment to really quantify the synergies in the back office that we are going to achieve during 2015 and in the years later.
Yes. Understood. We believe that actually they are quite, quite important synergies on the cost side, as Peter mentioned, and potentially also when it comes to certain tax charges, sales tax charges where Neolent is enjoying due to its local status certain benefits over Straumann. We are working on a project under the I think maybe in Q3, we should have full transparency in terms of how much synergies we could really take realize and then we will actually obviously update you accordingly.
Very good. That's very helpful. Thank you.
The next question comes from Mrs. Lisa Clive from Bernstein. Please go ahead.
Good morning. Could you give us an update on your progress NeoDent into the U. S? How is it going relative to your initial expectations? And maybe if you have a target date roughly for when the business could become profitable?
Second question in China, the significant growth that you had even excluding the destocking effect, is this your premium brand or is this related to the JV of sorts that you have with MegaGen?
In terms of Neodent, we are actually happy with the development. As you know, that has been communicated in earlier calls and at the full year conference. We have won the ClearChoice account, which as we speak today is still predominantly served with Neodent products. So this is actually gave the Neodent franchise in the U. S.
Quite a boost. So we are actually now seeing a lot of interest from other specialists who are demanding for this product. And we always said it will take us 3 years to become breakeven to achieve a breakeven situation in the U. S. And that's still our target.
In terms of China, just to correct probably impression or a statement we made earlier, we do not have a JV with MegaGen in China. MegaGen has a JV in China with a 3rd party, not with Straumann. So the distributor effect we talked about is due to the change from a single distributor model to a hybrid distributor model. As you remember, we took over the business from our distributor former distributor in China last year. And we are now reorganizing the business in China by actually assigning, allocating different regions, provinces to different distributors.
And these new distributors, they obviously have started to purchase products from us to build the stock and inventory and are now selling these products in the Chinese market.
Thanks. Very clear.
The next question is from Ms. Carla Benziger from Bank Vontobel. Please go ahead. Good morning. My question would be related to the BLT launch.
Can you give us maybe a more detailed update on where you're now fully launching BLT and where you do the limited launch? And the second question would be to the Russian market. You stated that you want to enter this market. Can you maybe elaborate a bit why now? And what prospects you see there?
Your first question Carla on Slide 27, we are trying to illustrate where we stand when it comes to our bone level tapered launch. So you can see that actually we have fully launched the product in North America since January of this year. We are still in what we call limited market releases, so selling products just to selected customers in Central Europe and Western Europe and also in the distributor markets. We are anticipating full launch in Q2 in Germany, Austria, Switzerland, rest of Europe in Q3, Japan in Q3, the distributor markets in Q3 and the latest Q1 2016 also in Brazil. So fully launched, full market release as we speak only in North America, U.
S. And Canada. And second question on Russia. The problem in Russia is similar to what we have experienced in China. Our Russian distributor in terms of investment capacity, for example, to build full coverage throughout the whole country is limited.
So we have seen declining market shares in the Russian market, which we anticipate to be one of the growth engines in our industry in the coming years. And that's why we have decided that we have to take our destiny in Russia in our own hands and to make sure that we are getting back on track in terms of gaining share and being among the top players of the industry also in the Russian market.
Okay. Thanks. The next question is from Mr. Michael Jungling from Morgan Stanley. Please go ahead.
Thank you and good morning. Two questions. Firstly on sales growth. For North America, how much did Clear Choice add to Q1 growth? And for Europe, how much did IDS add to growth in Q1?
And the second question is about profitability. With a strong Q1 in terms of growth, did you already achieve an EBIT margin of 20% in the Q1, excluding any Neodent impact.
On the ClearChoice impact, Michael, we have sold less than 2,000 implants in Q1 to ClearChoice. And as I pointed out, all of them have been nailed and implants. So the impact has been relatively, let's put it that way, small. And so not yet nor do we really expect clear choices is 30,000 implant account. So on average, we should see roughly 2,500 implants per month.
The IDS impact, as you know IDS has been mid of March. So we haven't seen in the second half of March an increase in the pace of growth. So we do not yet have seen a really substantial impact of IDS in our numbers in the Q1. And to your third question, yes, maybe you can say something on the profitability. Yes.
The third question concerning the profitability, as you are probably well aware, we are just disclosing the profitability figures with the half year, but we have also maintained and reconfirmed our guidance. So there's no reason to believe that we are not on track to achieve our guidance. And if we come to the savings that we have announced after the Swiss franc increase in beginning of February with the announcement, we are fully on track with our savings program and with the measures that we have announced there, which we are currently implementing or already have implemented.
Okay. On the first question on growth, is it fair to say then that the majority of the benefit of Clear Choice and IDS will hit Q2 in terms of growth. Is that a fair assumption?
From Q2 onwards, yes.
Great. Thank you.
The next question comes from Mr. Daniel Gevaudan from Bank and Belgium. Please go ahead.
Yes. Hello, also from my side. Follow-up question on China. Is the stopping effect by the new dealers now done, so kind of a one off? Or do you expect more new dealers in different provinces to come on stream with similar stocking effects in the next few quarters?
This I don't really understand. And also to China, if you might not provide the details, but I still try in China now. Can you give us a rough indication how much is now achieved with the own subsidiary of sales and how much with the new dealers? That's just one question to China.
Okay. Roughly 60% of the distributors we have reassigned from our old distributor, but we still have, for example, Beijing, where we are still dealing through the old distributor. So there is still some additional stocking impact to be anticipated over the next couple of quarters. Okay. In terms of how much we sell through our distributor network and how much we sell through our own subsidiary, we sell 100% through our distributor net.
In our own subsidiary, we do the whole logistics handling. We do training and education. We do what we call consultative sales force, which are kind of field trainers. So training the distributor sales forces and making sure that we have contact to the end consumers. But we do not anticipate at least in the foreseeable future to distribute the last mile through our own subsidiary.
This will actually continue to be done through our distributor network.
Okay. That was very clear. Thank you. And the second question is to Peter maybe on slide 17 all these new end accounting details. I guess all of these effects are non cash, right?
That is correct, yes.
Yes. Okay. Thank you very much.
The next question is from Mrs. Veronika Dubajova from Goldman Sachs. Please go ahead.
Good morning, gentlemen, and thank you for taking my questions. My first one is just on your entry into the lab based CAT cam market. And Marco, maybe you can talk about how you feel about the market opportunity there and your positioning? And do you think you can succeed with the assets that you now have under your umbrella? Or is there maybe more M and A that you need to do on that front?
And my second question is just a bit of a housekeeping for Peter is just any expectations or any guidance you can give us on what happens to the tax rate post the Neovent transaction? I seem to recall that at the time of doing the deal, your guidance is that tax rate would go up, but I just would like to get a little bit more of a clearer guidance on that. Thank you very much.
On your first question, Veronika, on the lab market, we have always been a partner to the labs. And obviously, the lab market has always been a focus for us and an important part of our business. However, we have been restricted in terms of what we have been able to offer to the labs. So in the past, we have been able to offer our Straumann prosthetic range, standard prosthetics and the Vario base, plus the dental wing scanners. Now with everything new we have launched at IDS, we will actually be able to be really very relevant for the labs because we will be able to offer a full range of products starting with an in lab scanner and an in lab milling machine.
We will actually launch the in lab milling machine together with a range of materials from zirconia down to PMMA. We also will potentially launch an NPS range for prosthetic elements to the labs. And we have now with the pre phase range and the extended VarioBase range and the new retention system from Valor, we have now exciting other products which we can offer to the labs. So we strengthened our product portfolio and our offering to the labs quite meaningfully with the launches at IDS. And Pieter, second question.
Yes. Your question concerning the tax rate after or the impact of the Nielsen acquisition on the tax rate, Your assumption that the tax rate the underlying tax rate for the group will slightly go up is correct. The question is how much that will be. That's currently still difficult to say. As you know, we have now 100% ownership over Neovent and therefore we have some more freedom to operate in terms of changing transfer prices and so on.
And we don't need to negotiate with a minority shareholder anymore. The tax rate will go up. I would assume it is in the low single digit percentage points.
That's very clear. And Marco, I mean, any view because the milling market on the CADCAM side, obviously, you're going up against a very big player there. So how do you think you can differentiate your offering on the milling side for the CAT can market for labs?
Yes. We believe that this the new 3 and 7 series dental wings canals and the KAES M system which we obviously source from among gearbox, we have a combination of a top notch scanner and these state of the art milling machine and together we believe that we are highly competitive against other players in the market, especially given the price points these players are actually selling their products right now.
Excellent. Thank you very much for that.
The next question is from Mr. Christoph Greitler from Credit Suisse. Please go ahead.
Yes. Hi, good morning, Marco. Hi, Peter.
Good morning.
Good morning.
Good morning. I have essentially now 2, 3 questions. First, on the Southern European market development. Could you elaborate a bit now how you see that performing at the moment? I missed that in your press release.
And then secondly on Patterson, could you give us how that project has been doing so far? And the last question is on Pro Arch in the U. S. With the BLT launch now fully up and running. What's the success of that product solution you've seen?
Did you take the first one on Southern Europe?
I mean, if you look at the Southern Europe market and if you look at Italy, I think we already mentioned that at the full year conference, we still see a very difficult environment in Chile for this year, and I would not expect a significant change compared to 2014 in the Italian market in during the coming year. If we look at Spain, then we had a very successful year in Spain. I would expect also a good year in Spain also not at the same high level We're not reporting anymore.
So it's staying good. Italy is still kind of not a clear tendency to market growth. And we also have to consider that in 2014, the Q1 in Spain, we had the Expo Dental, which obviously helped quite significantly to drive the Spanish numbers. And in terms of the questions related to the U. S, let's start with ProArch.
Yes, as you are right, we have actually launched BLT. ProArge will take a little bit longer because ProArge is not something you just have in your sales pack, you go to customers and you sell ProArge. There we are actually in the process of establishing training centers. So we are working with experienced all on 4 surgeons. We are converting them to actually our solution, the ProArts solution.
And then we take these surgeons to actually train colleagues in the corresponding regions. So this is actually more a project which will have midlonger term positive impact on our sales numbers. Whereas the BLP you can sell into a single tooth, multiple tooth indications by the way. On the Paterson question, we are still in the process of fine tuning the model with Paterson. To be honest, the initial model which we have developed has proven to not be 100% the right one.
So we are as we speak, we are readapting the model, how we work together with Paterson. And also to be honest, the impact on our Q1 revenue due to the cooperation with Paterson has been close to 0. So the North American numbers, the U. S. Numbers which we have generated in Q1, there is a close to 0 impact of the Paterson Corporation in it.
Got you. Thank you.
The next question is from Mr. Tom Jones from Berenberg. Please go ahead.
Good morning and thanks for taking my questions. I have 2 about your subsidiaries or not near then's case anymore. The first for near then, I mean, for those of us that have followed the dental implant industry for a while, when we see 35 percent EBITDA margins, we tend to think that they can only head in one direction. Now that you've fully owned that business, I was wondering if you could perhaps give us some color as to how you see the sustainability of those margins for Nearden. Give us some color on quite why Nearden has got those margins?
Where is it coming from COGS, SG and A, low R and D? That will be helpful. And then the second is just on MegaGen. You made your investment in them a year ago now. I think at the time when you did, Korea was a pretty tough place to do business, but it seems from these results that Korea is picking up a little bit.
How has that influenced your thinking about whether you might convert your convertible bond into equity when that becomes a possibility next year?
You want to take the first?
Shall I take the first question concerning the Neodent margin? Then you rightfully said Neodent is a very profitable business and company. I think there's a certain difference that in the past and you have seen that also on Chart 16, Neodent is mainly focused on the Brazilian market and has a strong leadership position within the Brazilian market. We are going to internationalize the business, which comes at a certain investment, at a certain cost, also for regulatory affairs in that business. However, the goal is clearly to keep a high profitability of the Neodent company or of the Neodent branch within the next years.
Also we need to invest into the internationalization for the business. And of course, I'm that is the ongoing margin I'm talking about. That is not related to the one time impact that we will face in 2015 due to the acquisition accounting, which will considerably dilute the respective margin.
And maybe to add 1 or 2 points to Pieter's answer. The internationalization, obviously, this will allow us to leverage our factory in Curitiba even more. We have we don't have to build a new factory just because we are now taking the business internationally. So every incremental cost on every additional implant, the Neodent manufacturers and we sell through our insulin network is actually over proportionately profitable. And then on top of that, we mentioned that we are actually in the process of combining the anticipating quite significant positive impact on the cost structure.
And then one last point, I think, we need to keep in mind is that in Brazil, Neodent is actually not seen as a value or low cost manufacturer. Neodent in Brazil has the reputation of a premium company, an innovative premium company, which is actually coming out with new products almost every year, significant innovations. And as long as Neosend is able to actually be innovative, like for example just recently with the launch of CATcam in Brazil, they are actually they will be able to capture price premium compared to the other players in the marketplace. Your second question related to megachan. The Korean market continues to be a tough market with declining ASPs.
So this is a cutthroat competition in Korea. We have now 2014, we have these numbers, which we are in the process of analyzing. As you know, the formula in terms of how much stake we can actually get to our convertible bond in MegaGen depends on the 20 14 and 2015 EBITDA. We are watching the development of the business during the course of 2015 and we will make our decision in the second half of twenty fifteen.
Okay. That makes sense. I mean, if I may just circle back to near I mean, I'm just intrigued to know why every other market, every other dental implant business we've seen where margins have been that high have seen them eroded through competitive effects. Why that's not going to be the case for Neerden? Do you think they've just achieved such a significant scale that that's given them a sustainable competitive advantage?
Or is it more of a case that you think the synergies, the internationalization of that business can offset the standard margin pressures that we're used to seeing in the dental implant industry?
It's a combination of both, Tom. Obviously, with 40% market share in a market like Brazil, with the fact that you have a distribution push network of 15 branches, which allows NelDent to be very close to its customer base, to deliver the product the same day. These are advantages nobody else in this market can actually offer. And Brazilian dentists, have to say that, I don't want to say here that they are not organized, but they really appreciate you have inventory close to their practice. Other companies, we see it with our business, with the Straumann business in Brazil, on average, it takes 4 days to actually deliver the product from the central warehouse to the dentist office.
And this is an incredible advantage Neodent has over its competitors. And as I mentioned before, on top of that Neodent has a proven track record of actually bringing meaningful innovation to marketplace.
Sure. Okay. That's clear. I'll get back in the queue. Thanks.
The next question is from Mrs. Anatsuye Sarma from JPMorgan. Please go ahead.
Good morning. So I've got two questions. Firstly, how much exactly was the contribution from the stocking effects in China to Asia Pacific growth? I may have missed that if it was mentioned before. And secondly, I believe you will be operating InstaDent and Neodent as a separate brand compared to the Straumann brand.
Would there not be a benefit from putting the Straumann brand and guarantee on the NeoDent, InstoDent products? Thanks.
You want to take the first question on China, Tito? Concerning the stocking effect in China, I mean, it's always very difficult to really separate these effects from the underlying normalized growth in such situation. I would expect that the underlying growth in Asia Pacific would be without the stocking impact of China would be around 20%, which would mean for the group level it's between 7% 8 percent at group level if we would eliminate the stocking impact in China. Yes,
great. Thanks.
To your second question, no, we strongly believe that we need to keep the brand separated when it comes customer facing activities like sales force, like customer service, like marketing. Because at the end, it's not only the product which is different. Obviously, if you look at the success rates of Straumann products and you compare these success rates to Neodent or other value products, there is a significant difference. On top of that, the Straumann brand, we are committed to long term clinical research and clinical data. We are committed to stellar customer service when it comes to the support of our sales force.
And this actually differentiates a premium brand for a value brand. And we will continue to do this. So we will strictly separate the 2 brands or several brands we have. And customer facing we will have a premium service, we will have a premium product, which we sell through the Straumann channels. And then on the to tap into the value segment, we have our other brands like the Neodex.
Okay. That's great. Thanks.
The next question is from yes, just go ahead.
Yes, that's the last question we can or the last two questions. Yes, let's say the last two ones. Okay.
The next question is from Mr. Martin Brueninger from Jefferies. Please go ahead.
Thanks very much for taking my questions. I have 3 more broader questions. On the digital workflow, you have discontinued your distribution agreement with Cadent on iTero, Intraros, Kenna, I think about 2.5 years ago because you thought committing to only one brand limits your addressable market. Did you see a significant improvement in expanding the market for digital solutions since then? And do you see any kind of gaps in your digital workflow that you could close?
And secondly, on milling, you have a very strong focus historically on milling. And I wonder, is pure milling really the future? Do you see more opportunities maybe for laser sintering or even combined with milling? And as always, possibly offering better and more sophisticated products, I would like to see your opinion on that one. And thirdly on Neotend.
In prices in Brazil, I know that they are very low and very competitive. I also wonder where you drive your high margins from. You mentioned innovations. Maybe you can shed some light on where the innovation comes from. Is it on workflows or on implants or on other things?
Thanks.
On your first question, just to make sure we have all the same understanding here. We don't sell iTRO intraoral scanners anymore. We stopped that a couple of years ago. What we still do is manufacturing the models for the aligned customers. We also should actually keep take into consideration that actually the iTros panel which we distributed in the past, they only had 2 spawn indication.
They were only covering 2 spawn indications. Now with the intraoral scan of the dental links, the indications are much broader. So you have obviously 2 spawn, but you also have implant borne indications you can cover. Your second question in terms of milling strategy, yes fully agreed, laser sintering is a trend, especially when it comes to cheaper materials like cobalt chrome and crowns and bridges. And obviously, we are also looking into this technology.
So yes, I agree with you that these are technologies we have to consider. And your third question on Neodent, again, I can just repeat what I said before. It's actually a combination of several factors. It's the fact that we have a branch network, a distribution network, which is very close to the customers. It's the fact that we are offering a complete solution range including CATKAN.
We also started for example to distribute the Dental Links cameras through the Neodent Organization. When it comes to innovation and it's actually reflected on the picture in the presentation, if you look at the implant range, nobody else can actually cater to all the needs customers have with such a complete range of implants like Naledent. You have a noble active type implant. You have more conservative implants like the tighter max implants, you have something in between with the other implant, you have short implants, you have small diameter implants, you have external hex implants, you have state of the art connection. So in general, if you look at the product portfolio of Nailband, it's actually a premium portfolio.
Again, in the U. S, not in the U. S, in Brazil, Neodent is considered to be a premium company. They are not considered to be at the same level of like the titanium fixes of the Connexals of the Brazilian world.
And then maybe on the first question, you maybe you haven't heard the part of the first question where I thought asked whether you see any gaps in your digital work flow that you are looking to fill? And maybe generally, what do you think is the future of Intra Rose Canada? Because at the moment, market penetration is only 1%. What's your what's kind of your expectations? How much you think can the intros kind of penetrate the market?
Because clearly that would be benefiting you and your digital workflow offering to the dentist as well I assume.
Yes. We strongly believe that intraoral scanning is the trend in the industry. And that actually the intraoral scanner growth will be considerable in the years to come. And that's why we are actually anticipating to start selling the Dental Links Intra World canal together with the chairside mill starting from Q2 of 2016 latest. So we strongly believe in this market and we are actually preparing ourselves to take part of this market.
Okay. Thanks very much.
Okay. So no more questions as I see. No. So thank you for your questions. In closing, I'd like to draw your attention to the Investor Relations calendar, which you can find on slide 32 and on our website.
And I would like to thank you again for joining us. Have a good day and goodbye now. Thank you.
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