Ladies and gentlemen, good morning. Welcome to the Straumann 2015 first quarter results conference call. I'm Selene, 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 and one on your telephone. Should you need assistance, please press star and zero to call 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, everyone, and thank you for joining this conference call on Straumann's 2015 first quarter 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. Before we begin, I have to 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. I will begin with the highlights and Peter Hackel, 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.
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 four, group revenue reached CHF 193 million, of which CHF 7 million were contributed by Neodent in March only. Organic growth, which means excluding currency and acquisition effects, amounted to 8%, which is the second-highest quarterly increase in more than three years. If you 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, and 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 barring any unforeseen circumstances.
Before I hand over to Peter, let me say a few words about Neodent and why we have spent CHF 210 million to acquire the remaining 51%, three years earlier than originally planned. As you can see on slide five, 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 tested implant solutions affordable for a broad population. Slide six 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 second-largest market, consuming more than 2.3 million implants each year. Neodent operated two small foreign subsidiaries and also sold products through distributors in selected markets. Driven by our Instradent 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 eight shows you the latest global ranking by market share based on 2014 data. Including Neodent on a pro forma basis, Straumann's global share has increased from approximately 20%-24%. With the other top four players, we collectively control roughly three-quarters of the global market, which is estimated to be worth CHF 3 billion.
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, Roxolid, 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 tooth-borne prosthetics. Dental labs are sensitive to standard abutment prices and may have switched to digital workflows using external milling centers 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 guided bone regeneration products in the Botiss range, which we began distributing in Europe six months ago. Moving on to slide 11. Group revenue rose 7.4% in CHF to CHF 193.2 million. At this year's exchange rate, our 2014 first quarter revenue would have been approximately CHF 7.8 million lower, mainly due to the EUR and the JPY. Taking this and the positive acquisition effect of CHF 6.7 million into account, our adjusted 2014 first quarter revenue would have been CHF 1 million 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 30 million. 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 CHF 6 million to our top-line growth. EMEA achieved a solid underlying performance in January, but this was overshadowed by unavoidable price reductions to mitigate the acute currency impact in most distributor markets, which buy products in CHF.
The decline in the EMEA distributor market reduced regional growth by roughly 2 to 3 percentage points. The next two slides provide some more regional color. In EMEA, our largest region's revenue was more or less in line with the previous year. When Neodent is fully integrated on a 12-month base, the EMEA region will account for just under 50% of group revenue. In the first quarter, 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. Roxolid 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 effects. As you know, we are transitioning to a hybrid distribution model in China with new dealers who have had to build inventories before they 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 NobelActive and customer purchases ahead of the national VAT increase. 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 Neodent, which grew 10% 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 CHF 100 million in 2014. Its business grew 8% domestically and 12% worldwide, including sales through distributors and our Instradent platform in the U.S. and parts of Europe.
Over the past 10 years, Neodent has sold more than 5 million implants and is expected to sell more than 1 million in 2015, which ranks it among the top five globally. Profitability is very impressive, as you can see on slide 15, where the numbers speak for themselves. Straumann has consolidated Neodent fully as of March 1, 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 BRL to the CHF. Nevertheless, they should give you a base for adjusting your financial models.
The capitalized customer list will be amortized over the next seven years and lead to charges of roughly CHF 7 million annually. There will also be several one-time effects. Firstly, we will have to adjust the acquired inventories to fair value and write them off. This will increase our cost of goods sold by CHF 15 million in our first half results. Secondly, the accounting standard requires that the accumulated foreign exchange differences of the initial 49% stake have to be reclassified from equity into the P&L, which will have a negative impact of roughly CHF 85 million on the financial results. Thirdly, the derecognition of our 49% stake triggers a revaluation of this initial stake, which will lift the financial result by CHF 15 million.
The overall impact on the financial result will therefore be a negative CHF 70 million. Due to these one-time effects, we will likely report a net loss in our first half financial results. With this, I would like to hand back to Marco.
Thank you, Peter. As you can see in slide 19, Neodent is the flagship in our Instradent 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% of Valoc and by partnering with Amann Girrbach, which I will tell you about in a minute or two. Penetrating the fast-growing value segment is a strategic priority for Straumann, and I am delighted that Petra Rumpf has agreed to join our executive management team as head of Instradent and Strategic Alliances. Petra has a broad experience of our industry, having spent the past seven years at Nobel Biocare. In particular, she has a deep knowledge of the value segment, having led Nobel's biotech value business. 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, three 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 links 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 Variobase abutment, we have created an entire family of highly flexible, cost-efficient Variobase solutions, including new heights for larger crowns, options for screw or cement-retained bar and bridge restorations, and Straumann original Variobase components for the CEREC chair-side workflow. We have also launched premilled abutment blanks, enabling labs to make their own one-piece customized titanium abutments with original Straumann connections. Our CARES Extreme service now includes bars and bridges and streamlines the prosthetic workflow so that all the components can be manufactured from a single scan and design procedure. Needless to say, the prosthetics are available in the latest high-performance materials, including 3M ESPE's Lava 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.
Two key attractions at the IDS were innovations by our partner, Dental Wings, which are shown in the next slide. One 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 M series in-lab milling machine produced by Amann Girrbach, which we will start selling in Central Europe in Q4. Together with our new three and seven series desktop scanners, this offers a complete in-house CAD/CAM solution for labs and marks our entry into the lab milling segment. While prosthetic 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, we are only just entering this segment.
With Roxolid and SLActive, 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 BLTs, even though their availability was through controlled releases in North America and parts of Europe. We are now initiating full market releases. 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. 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. We expect our revenue to grow organically in the mid-single digits. Obviously, revenue in CHF 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 CHF. 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. Now I would like to open the question and answer session. If you have a question, please press star and one to join the queue. You can leave the queue by pressing star and two.
As usual, I would kindly ask you to limit the number of your questions to two, including sub-questions and follow-ups. 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. 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, I guess in not raising your guidance for revenue growth, are there things that we should be worried about later in the year, or are you just being conservative?
It's the second. The first quarter 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. We are taking the position that we should wait for the second quarter to see how the second quarter develops before we actually change our guidance.
Fair enough. Just to take one of the areas where perhaps you don't have a lot of issues is Japan. I think clearly a tough comp this quarter, presumably, can you give us any color on what you feel the underlying demand growth in Japan is at the moment?
Yeah, it's in the high single digits. As you mentioned, obviously last year, Q1 was extremely strong in Japan due to the SLActive launch and also due to the fact that customers have anticipated purchases due to the VAT increase effective April the 1st. To take all these apart and to come up with what has been the normalized growth rate in Q1 is rather difficult. The business is very solid, and we expect 2015 to be another strong year for our Japanese business.
Very good. Just a second question, really relating to Neodent. 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 two Brazilian organizations, our Straumann organization and the Neodent organization in the back office. However, as we have just acquired the Neodent stake less than three 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.
Yeah. In general, we believe that actually there are quite important synergies on the cost side, as Peter mentioned, and potentially also when it comes to certain tax charges, sales tax charges, where Neodent 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 and realize, and then we will actually obviously update you accordingly.
Very good. That's very helpful. Thank you.
The next question comes from Lisa Clive from Bernstein. Please go ahead.
Good morning. Could you give us an update on your progress in bringing Neodent into the U.S.? How is it going relative to your initial expectations? 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 stocking 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 actually won the ClearChoice account, which as we speak today is still predominantly served with Neodent products. This actually gave the Neodent franchise in the U.S. quite a boost. We are actually now seeing a lot of interest from other specialists who are demanding for this product. We always said it will take us three years to achieve a break-even situation in the U.S., that's still our target. In terms of China, just to correct probably an 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 third party, not with Straumann.
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, we are now reorganizing the business in China by actually assigning, allocating different regions, provinces to different distributors. These new distributors, they obviously have started to purchase products from us to build a stock and inventory and are now selling these products in the Chinese market.
Thanks. Very clear.
Thank you.
The next question is from Mrs. Carla Bänziger 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? 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?
To your first question, Carla Bänziger, on slide 27, we are trying to illustrate where we stand when it comes to our bone level tapered launch. 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 latest Q1 2016, also in Brazil. Fully launched, full market release as we speak only in North America, U.S., and Canada. The 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. We have seen a decline in market shares in the Russian market, which we anticipate to be one of the growth engines in our industry in the coming years. 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 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 ClearChoice add to Q1 growth? For Europe, how much did IDS add to growth in Q1? 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 first quarter? Excluding any Neodent impact
On the ClearChoice impact, Michael, we have sold less than 2,000 implants in Q1 to ClearChoice. As I pointed out, all of them have been Neodent implants. The impact has been relatively, let's put it that way, small, and so not yet what we really expect. ClearChoice is a 30,000 implant account. On average, we should see roughly 2,500 implants per month. The IDS impact, as you know, IDS has been middle of March. We haven't seen in the second half of March, an increase in the pace of growth. We do not yet have seen a really substantial impact of IDS in our numbers in the first quarter. To your third question, maybe you can say something, Peter.
Yeah
On the profitability.
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 that there's no reason to believe that we are not on track to achieve our guidance. 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 ClearChoice 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 Jelovcan from Bank am Bellevue. Please go ahead.
Yeah. Hello, also from my side. A follow-up question on China. Is the stocking 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? I don't really understand. Also to China, you might not provide the details, but actually 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 is just one question to China.
Okay. Roughly 60% of the distributors we have reassign from our old distributor.
We still have, for example, Beijing, where we are still dealing through the old distributor. 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 network. 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. 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.
Oh, okay. Yeah. That was very clear. Thank you. The second question is to Peter, maybe on slide 17, all these Neodent 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 CAD/CAM market. Marco, maybe you can talk about how you feel about the market opportunity there and your positioning, do you think you can succeed with the assets that you now have under your umbrella, or is there maybe more M&A that you need to do on that front? 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 Neodent transaction? I seem to recall that at the time of doing the deal, your guidance was that tax rate would go up, 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, 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. In the past, we have been able to offer our Straumann prosthetic range, standard prosthetics and the Variobase, plus the Dental Wings scanners.
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 MPS range for prosthetic elements to the labs. We have now, with the PreFace range and the extended Variobase range and the new retention system from Valoc, we have now exciting other products which we can offer to the labs. We strengthened our product portfolio and our offering to the labs quite meaningfully with the launches at IDS. Peter, second question.
Yeah. Your question concerning the tax rate after, or the impact of the Neodent 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 Neodent, therefore, we have some more freedom to operate in terms of changing transfer prices and so on, we don't need to negotiate with the 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. Marco, any view, because the milling market on the CAD/CAM side, obviously, you're going up against a very big player there. How do you think you can differentiate your offering on the milling side for the CAD/CAM market for labs?
Yeah. We believe that the new 3 and 7 series Dental Wings scanners and the CARES M series, which we obviously source from Amann Girrbach, we have a combination of a top-notch scanner and the state-of-the-art milling machine. Together, we believe that we are highly competitive against other players in the market, especially given the price point these players are actually selling their products right now.
Excellent. Thank you very much for that.
The next question is from Mr. Christoph Gredler from Credit Suisse. Please go ahead.
Yes. Hi, good morning, Marco. Hi, Peter.
Good morning.
Good morning.
Morning. I have essentially now two, three questions. First on the Southern European market development, could you elaborate a bit on how you see that performing at the moment? I missed that in your press release. Secondly, on Patterson. Could you give us how that project has been doing so far? The last question is on ProArch in the U.S., with the BLT launch now fully up and running. What's the success of that product solution you've seen?
Peter, you take the first one on Southern Europe.
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 Italy for this year, and I would not expect a significant change compared to 2014 in the Italian market during the coming year. If we look at Spain, we had a very successful year in Spain. I would expect also a good year in 2015 in Spain, also not at the same high level as 2014 anymore.
Spain good. Italy is still kind of not a clear tendency to market growth. We also have to consider that in 2014, the first quarter in Spain, we had the Expodental, which obviously helped quite significantly to drive the Spanish numbers. In terms of the questions related to the U.S., let's start with ProArch. Yes, you are right. We have actually launched BLT. ProArch will take a little bit longer because ProArch is not something you just have in your sales pack. You go to customers, and you sell ProArch. There, we are actually in the process of establishing training centers. We are working with experienced All-on-4 surgeons. We are converting them to actually our solution, the ProArch solution, and we take the surgeons to actually train colleagues in the corresponding region.
This is actually more a project which will have mid, longer-term positive impact on our sales numbers. Whereas the BLT, you can sell into a single-tooth, multiple-tooth indication, by the way. On the Patterson question, we are still in the process of fine-tuning the model with Patterson. To be honest, the initial model which we have developed has proven to not be 100% the right one. As we speak, we are readapting the model, how we work together with Patterson. Also, to be honest, the impact on our Q1 revenue due to the cooperation with Patterson has been close to zero. The North American numbers, the U.S. numbers which we have generated in Q1, there is a close to zero impact of the Patterson cooperation in it.
Got you. Thank you.
The next question is from Mr. Tom Jones from Berenberg. Please go ahead.
Hello. Good morning, thanks for taking my questions. I have two about your subsidiaries, or not Neodent's case anymore. The first one, Neodent. For those of us that have followed the dental implant industry for a while, when we see 35% EBITDA margins, we tend to think that they can only head in one direction. Now that you fully own that business, I was wondering if you could perhaps give us some color as to how you see the sustainability of those margins for Neodent. Give us some color on quite why Neodent has got those margins. Where is it coming from? COGS, SG&A, low R&D? That would be helpful. The second question 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. 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?
Yeah.
You rightfully said Neodent is a very profitable business and company. I think there's a certain difference that in the past, 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. Of course, 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.
Maybe to add one or two points to Peter's answer. The internationalization, obviously, this will allow us to leverage our factory in Curitiba even more. We don't have to build a new factory just because we are now taking the business internationally. Every incremental cost on every additional implant that Neodent manufactures and we sell through our Instradent network is actually over-proportionately profitable. On top of that, we mentioned that we are actually in the process of combining the businesses we have in Brazil. Also there, we are anticipating quite significant positive impact on the cost structure. 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.
The innovative premium company, which is actually coming out with new products almost every year, significant innovations. As long as Neodent is able to actually be innovative, like for example, just recently with the launch of CAD/CAM in Brazil, they will be able to capture price premium compared to the other players in the marketplace. Your second question related to MegaGen. The Korean market continues to be a tough market with declining ASPs. 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 for our convertible bond in MegaGen depends on the 2014 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 2015.
Yeah. Okay. That makes sense. If I may just circle back to Neodent. 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 Neodent. 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 network of 15 branches, which allows Neodent 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. Brazilian dentists, how to say that? I don't want to say here that they are not organized, but they really appreciate to have inventory close to their practice. Other companies, we see it with our business, with the Straumann business in Brazil, on average, it takes four days to actually deliver the product from the central warehouse to the dentist office. This is an incredible advantage Neodent has over its competitors.
As I mentioned before, on top of that, Neodent has a proven track record of actually bringing meaningful innovation to the marketplace.
Sure. Okay, that's clear. I'll get back in the queue. Thanks.
The next question is from Mrs. Anasuya Sarma from JP Morgan. Please go ahead.
Good morning. 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. Secondly, I believe you will be operating Instradent 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, Instradent products? Thanks.
You want to take the first question on China, Peter?
Concerning the stocking effect in China, it's always very difficult to really separate these effects from the underlying normalized growth in such a 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 then mean for the group level, it's between 7% and 8% at group level, if we would eliminate the stocking impact in China-
Okay
the organic growth.
Yeah. Great, thanks.
To your second question, no, we strongly believe that we need to keep the brands separated, when it comes to customer-facing activities like sales force, like customer service, like marketing. Because at the end, it is 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. This actually differentiates a premium brand from a value brand. We will continue to do this. We will strictly separate the two brands, or several brands we have.
Customer-facing, we will have a premium service, we will have a premium product, which we sell through the Straumann channels. To tap into the value segment, we have our other brands like the Neodent.
Okay. That is great. Thanks.
The next question is.
No.
Yeah, just go ahead.
Yeah. That's the last question. The last two questions. Yeah, let's say the last two ones. Okay.
The next question is from Martin Brunninger from Jefferies. Please go ahead.
Thanks very much for taking my question. I have three more broader questions. On the digital workflow, you have discontinued your distribution agreement with Cadent on iTero intraoral scanner, I think about two and a half years ago because you thought committing to only one brand limits your addressable market. Do you see a significant improvement in expanding the market for digital solutions since then? Secondly, on milling, you have a very strong focus historically on milling. I wonder, is pure milling really the future? Do you see more opportunities maybe for laser sintering or even combined with milling? I thought if possibly offering better and more sophisticated products. I would like to see your opinion on that one. Thirdly, on Neodent.
Prices in Brazil are known that they are very low and very competitive. I also wonder where you derive 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.
Good. On your first question, just to make sure we have all the same understanding here. We don't sell iTero intraoral scanners anymore. We stopped that a couple of years ago.
Yeah, I know
is manufacturing the models for the aligned customers. We also should actually take into consideration that actually the iTero scanner, which we distributed in the past, they only had tooth-borne indication. They were only covering tooth-borne indications. Now with the intraoral scanner from Dental Wings, the indications are much broader, though you have obviously tooth-borne but you also have implant-borne indications you can cover. To 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. Obviously we are also looking into this technology. Yes, I agree with you that these are technologies we have to consider. 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 CAD/CAM. We also started, for example, to distribute Dental Wings scanners 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 Neodent. You have a NobelActive type implant. You have a more conservative implant like the Titamax implants. You have something in between with the All-In implant. You have short implants, you have small diameter implants, you have external hex implants. You have a state-of-the-art connection.
In general, if you look at the product portfolio of Neodent, it's actually a premium portfolio. Again, in Brazil, Neodent is considered to be a premium company. They are not considered to be at the same level of the Titaniumfixs or the Conexãos of the Brazilian world.
Maybe on the first question, you maybe hadn't heard the part of the first question where I asked whether you see any gaps in your digital workflow that you are looking to fill, maybe generally, what do you think is the future of intraoral scanner, because at the moment, market penetration is only 1%. What's your expectations? How much you think can the intraoral scanner penetrate the market? Clearly that would be benefiting you and your digital workflow offering to the dentist as well, I assume.
Yeah. We strongly believe that intraoral scanning is the trend in the industry, the intraoral scanner growth will be considerable in the years to come, we are actually anticipating to start selling the Dental Wings intraoral scanner together with the chairside mill, starting from Q2 of 2016 latest. We strongly believe in this market, we are actually preparing ourselves to take part of this market.
Okay, thanks very much.
Okay, no more questions as I see, no? 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. I would like to thank you again for joining us. Have a good day, and goodbye now. Thank you.
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