Ladies and gentlemen, good morning or good afternoon. Welcome to the Straumann 2013 third quarter results analyst and media conference call. I am Alice, 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 is my pleasure to hand over to Mr. Marco Gadola, CEO. Please go ahead, sir.
Thank you. Good afternoon, ladies and gentlemen, and thank you for joining this conference call on Straumann's 2013 nine months results. With other companies also reporting today, we have moved our call forward by 30 minutes to avoid any conflict. I know that many of you have a busy program with other companies to cover. Thank you for joining this call. We will be referring to the presentation slides that were published on our website this morning, and I would like to draw your attention to the disclaimer regarding forward-looking statements on Slide two. I will begin with the key highlights. Then our CFO, Thomas Dressendörfer, will take us through the quarterly numbers and the business performance before I conclude with a summary of our recent initiatives to open up new business opportunities and to drive the Straumann brand.
After that, the lines will be open, and we will be glad to take your questions. Let us start with the highlights on Slide four. The good news this morning is that we have sustained our growth over two quarters and have made up for the disappointing start for the year. As a result, our nine-month revenue reached CHF 510 million, slightly above the comparative level of last year in organic terms. Before we go any further, let me explain what we mean by the term organic. For a true comparison of the underlying business, we have to exclude the effects of currencies and the discontinuation of the intraoral scanner business in North America and Europe last October.
Taking this into account, we achieved organic growth of 3% in the third quarter, which was driven by a continuing strong performance in North America, a return to growth in Japan, and a strong acceleration in the region we refer to as the rest of the world. This was mainly thanks to a recovery in the Middle East and strong sales in Brazil. Apart from the sales performance, we have made good progress with our strategy to address the value segment through a platform of separate brands. Early this month, we announced the acquisition of stakes in Medentika and Createch, and we launched a comprehensive range of Neodent products in Spain. We have also accelerated momentum in our pipeline and have introduced innovative solutions that make treatment possible for a broader range of patients.
I will tell you more about these initiatives in a moment, but first, let me hand over to Thomas for the details of our business performance.
Thank you, and hello, everybody. As you can see on Slide six, our net revenue in the first nine months actually improved slightly in organic terms. Reported revenue in CHF was 1.6% lower, this is because the effect of currency and the material business amounts to CHF 10 million in the comparative period of last year, as you can see on the left of the chart. Currency effect was mainly due to a depreciation of the yen and the dollar against the Swiss franc. On the right, you can see that North America, Asia Pacific, and the rest of the world all posted growth and collectively offset the shortfall in our largest region, Europe. Moving on to Slide seven, the market performance picture is incomplete because one of the largest players still has to report.
Nevertheless, the market is in better shape than last year, and we believe that our performance was above average. This reflects the fact that we have adapted our organization and strategy appropriately and are well-positioned for 2014, especially in the view of the growth initiatives Marco will share with you in a moment. Looking at the next slide and the performance by business. Implants posted solid nine-month growth with an acceleration quarter by quarter. Our high-strength material, Roxolid, and our bone-level implant range were the main drivers again. Since its introduction in 2009, the latter has become the group's best seller in the U.S. and the U.K.
The CAD/CAM digital business, which compromises digital hardware and software as well as CAD/CAM prosthetic elements, was expectedly smaller than in the comparative period of 2012 due to the discontinued intraoral scanner distribution business and, to a lesser extent, the transfer of certain digital activities to Dental Wings. Our business with regenerative products remained stable over the first nine months. While sales of Emdogain increased, the guided bone regeneration products were less impressive. Moving forward, regenerative products will have an increasing role in integrated customer solutions, especially in the GP segment. With this in mind, we are developing a new synthetic bone substitute and presented encouraging preclinical results at the EAO Turning now to the regions. The picture in Europe and North America has not changed much in the recent months. Market conditions remain difficult in Europe, while North America continues to be in good shape.
Europe showed no improvement in quarter three and continues to suffer from the economic situation and lower price competition. The region contracted 3% organically in Q3 and 4% over the nine-month period and now constitutes 54% of group revenue. Q3 was constrained by Italy, Germany, the Netherlands, and Iberia. In contrast, France, the U.K. and most distributor markets continue to report positive performances. North America contributed slightly more than a quarter of group revenues and reported another strong quarter. Implants and regeneratives posted double-digit rises and demand for prosthetics was robust. As a result, the region achieved organic growth of 9% in Q3, reflecting our continuous investments in marketing and sales, also the intact market environment, which is thought to be growing in the mid-single-digit range.
The next slide reveals that the Asia Pacific region has improved steadily throughout the year to deliver growth of 8% in the third quarter. Japan seems to be clawing its way back from the market decline that has strangled it for the past year and a half. Our Q3 revenue grew for the first time in six quarters, although I have to add that the baseline was lower this quarter. Being the region's largest market, Japan thus made an important contribution, which was complemented by dynamic expansion in the distributor market, as well as solid growth in China, Australia, and Korea. In the rest of the world, which constitutes 5% of the group total, dynamic growth of 35% was spread evenly across the Middle East and Latin America. As reported previously, we are pleased to see a gradual recovery in the distributor market in the Middle East.
With that, I'll hand back to Marco.
Thank you, Thomas. Please turn now on to slide number 12. As you know, our intention is to remain the global leader in implant dentistry by offering innovative premium solutions supported by documented clinical evidence, education, and service excellence. Being in a highly attractive business, we have to contend with an increasing number of local and regional value players who offer lookalike products for a lower price. None of them offer the same level of innovation, quality, support, experience, and peace of mind as Straumann does. Nevertheless, we have to accept that they appeal to a large number of customers who are reluctant to pay for the proven added value offered by premium brands like Straumann, particularly when it comes to restorative products.
To address these customers and to capture the significant business opportunity, we have decided to build a platform of value companies, the foundations of which were laid with the 49% acquisition of Neodent last year. Three weeks ago, we announced the acquisition of stakes in Medentika and Createch as further additions to the platform. Despite the price tags, we have chosen to acquire established brands rather than building up a second lower priced brand from scratch because it is quicker, simpler, and involves less risk. The companies in our value platform will operate as separate brands with their own philosophy, sales force, and value proposition, offering cost-effective solutions tailored to local needs. This approach does not mean that Straumann will reduce its focus on the premium segments.
On the contrary, the premium segment remains attractive even in emerging markets where it may be small in absolute terms but is expected to gain as purchasing power and disposable income increase. Slide 13 illustrates our separate brand strategy and our goal to offer both implant and prosthetic solutions in the value segment. This is where companies like Medentika fit in, and as you can see, we may add further companies over time. Createch and Dental Wings will also play a part in our premium offering, which is why they are connected with a dotted line. Let's look at the latest acquisitions starting with Medentika on slide 14. This company is a fast-growing provider of cost-effective prosthetics that are compatible with most leading implant and CAD/CAM systems. Medentika also supplies a range of titanium implants and instruments.
Having grown at more than 30% over the past three years, the company achieved revenues of EUR 11 million last year, most of which came from the prosthetics business in their domestic market, although the company is expanding internationally through distributors in several countries. Medentika is well-run, profitable, and entrepreneurial, and we want to keep it like this. In view of the company's strong track record, its expansion potential, and its strategic relevance for Straumann, we believe that the price of EUR 32 million for a 51% stake is justified. I should perhaps note that the deal is still subject to clearance from the German antitrust authority, but we don't expect any objections. Moving to slide 15. Createch is smaller and a little younger than Medentika. It specializes in the research, development, and manufacture of high-quality, innovative implant prosthetics, including CAD/CAM bridges, bars, and abutments.
These are designed for a variety of implant systems, including Straumann. Createch's high-end bar and bridge solutions actually complement our portfolio, it will also support our premium business. The company is based in Spain and has begun to expand in Germany and other European markets. We have acquired a 30% stake and have options to increase up to 100% by 2020. Here too, our intention is to preserve the company's own character, dynamism, and entrepreneurial flexibility. Moving on to the next slide. As I mentioned earlier, Neodent is a cornerstone of our value platform and will help us in areas where affordability is a key issue, and where the value segment is growing considerably faster than premium.
Spain is an example of this, I'm pleased to say that we have now established the Neodent brand in Spain with a dedicated sales organization offering a comprehensive product range tailored to local needs. Slide 17 gives you the big picture of how the various brands address different businesses and segments. Moving on to the product news. The chart on slide 19 is one that we shared with you in August. It shows examples of exciting growth opportunities we are pursuing across a wide range of indications and with various levels of sophistication. Some are groundbreaking. Others seek to take share from competitors. In each case, the size of the bubble indicates the market volume potential. In the third quarter, we introduced two innovative high-tech solutions that address two of those opportunities.
The first is on slide 20, concerns the extension of Roxolid SLActive to our entire range of implants. The key aim of this is to offer smaller, higher-strength implants that reduce invasiveness by avoiding bone augmentation procedures. The additional strengths of Roxolid has not only enabled us to make small-diameter implants, it has also paved the way for a new 4-millimeter short implant, which we launched at the EAO. This is the shortest implant Straumann has ever sold, it is also the shortest, narrowest tissue-level implant available. It is designed to avoid augmentation procedures in patients with insufficient vertical bone for conventional implants and could provide a simpler, considerably less invasive alternative to heavily angulated implants in edentulous solutions. It is backed by 5-year clinical data, like all other Roxolid SLActive implants, it comes with our Loxim transfer piece for improved handling convenience.
The other innovation we announced at the EAO is our new ceramic implant, which you can see on the next slide. This is the first clinically validated ceramic implant to reach the market. It is also the first ceramic implant with an SLA-like surface for enhanced osseointegration. It has a natural ivory-tooth color, it is the product of an innovative manufacturing process that ensures exceptional reliability. All these features make it an excellent solution for patients who ask for metal-free implants. The availability of highly aesthetic ceramic implants with similar performance, flexibility, and predictability to conventional metal implants could well change implant dentistry. The final piece of news from the third quarter is our collaboration agreement with 3Shape, a leading player in CAD/CAM. This makes it possible for their customers to produce customized restorations for our implants with an original Straumann connection.
The key to this, our Straumann library, which is integrated in 3Shape software and the Straumann Variobase abutment to which technicians can attach a customized restoration. That brings me to the outlook, which is, of course, barring any unforeseen circumstances. We expect the positive developments in North America and other under-penetrated markets to continue, we also expect the effects of the weak economy and consumer sentiment to continue in Europe. Based on the 9-month performance, we expect our full-year organic revenue to be at least in line with last year. The successful outcome of cost reduction initiatives will drive sustainable profitability improvements as anticipated with the main savings in the second half. In the midterm, we aim to return to solid growth and further improve operating margins. That concludes our presentation and brings me to the Q&A.
I would ask you kindly to limit the number of your questions and sub-questions to two, then to rejoin the queue. Operator, can we have the first question, please?
We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the 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 handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Carla Bänziger of Bank Vontobel. Please go ahead, madam.
Yes, good afternoon. I have two questions. The first one is on your strategy now moving into the value segment. I think that's very interesting. Can you maybe comment a bit where you see Straumann in about five years? How much is premium, how much is value? The other question I have is regarding rest of the world, where you showed very strong growth. Was this related to specific tenders, or do you expect this to also continue in Q4 to be that strong?
On your first question, Carla, where do we see Straumann in five years? In five years, we see Straumann as the overall leader in the overall dental implant market and with a global leading position in the premium as well as in the value segment. This is actually our target. When you look at the distribution of our business between premium and value, clearly premium is and will remain the key focus area. That's where we will actually focus most of our activities. Also in five years from now, we anticipate that our revenue percentage, which we achieve with Straumann, with the premium brand, will be larger than what we will achieve with the different value brands. On your second question, rest of the world, we've seen a strong growth coming out of Brazil in the third quarter. This is not related to any tender business.
This is actually a trend which we've seen already during summer of 2013. At this point in time, there is no signal out there that would actually make us feel that trend is not sustainable. The other part of the rest of the world growth is coming more from the Middle East business. In the Middle East, we are actually acting through distributors, and some of the business in the Middle East is also heavily impacted by tenders. Part of the growth has been impacted by tenders.
Okay, thanks a lot. That's clear.
The next question comes from Christoph Gretler from Credit Suisse. Please go ahead, sir.
Yes. Hi, good morning, still probably. Just one question for the sake of time. Basically, could you elaborate on what's going on in the German market? Basically, the economy is not so bad, but the market seems to continue to be bad in general in dental implants. Could you elaborate, first of all, whether you think that's an economic issue in Germany or whether there is now a migration to more lower-end implants going on there, hurting particularly the premium players. I was just wondering your thoughts on that, maybe. Thank you.
Yeah, that's an excellent question, Chris. With the German market, the numbers we see when we look at our business and also at the overall dental implant market, they don't really tie with the overall economic situation of Germany. Germany's economy, we all know, is actually performing rather well. However, when looking at, for example, the latest BDIZ EDI data, these data clearly indicate that the dental implant volumes were decreasing during the first nine months of 2013 quite substantially by more than 3%. Here, the development of the overall economy and the development of our industry, they don't really tie. Reasons for that: one reason which we see is actually that certain insurance companies, they are actually favoring reimbursement of conventional treatments compared to dental implant treatments, which actually shifts certain procedures away from dental implants to conventional treatment. This is actually obviously something which hurts the whole industry.
This is one of the reasons why the development of the German market is actually not in line with the overall economic development of Germany.
Okay, thank you.
The next question comes from Maja Pataki from Kepler Cheuvreux. Please go ahead, madam.
Yes, good afternoon. Also two questions from my side. The first would be, could you just give us a bit more details about the entry of Neodent in Spain? When did it kick off, and what are the initial feedbacks you get? Maybe also on how have you positioned Neodent pricing compared to value competitors in Spain? Then the second question was about Japan. You are stating, or you said also on the conference call, that Japan is improving. Is it that we're actually seeing an increase in volumes, which is significant, or is it just that we're feeling that the market isn't that negative anymore, and hence there is a gradual and slow improvement in market growth? Thanks.
Thank you for your questions, Maja. In terms of Neodent in Spain, we've actually started to sell Neodent to Spanish customers effective October the 1st.
Okay.
We have a sales force of six in place. We have six salespeople in Spain, distributed throughout the whole country. The first feedbacks which we received from customers and potential customers is very positive. They actually appreciate the price-value proposition, which we are bringing to the Spanish market through Neodent. We have two lines promoting as we speak. We have an internal and an external connection line. The internal connection line, we price at roughly EUR 100 per implant. The external connection line is placed at roughly EUR 70 per implant. From a pricing point of view, we are positioning Neodent at the middle lower range of the value segment in Spain. Actually through that, we are able to offer an exceptional price-value proposition to Spanish dentists. On your second question on Japan, we believe that the worst is over in Japan.
We also don't see negative press comments or press articles coming through anymore. It looks like the market has calmed down in terms of negative reputation and negative press. Based on that, we've seen a rather positive development in the third quarter. Is this development sustainable? We will actually see, and we will be able to give you obviously some more information when we talk about the fourth quarter and the full year in February.
Thank you.
The next question comes from Henrik Verfuß from HSBC. Please go ahead, sir.
Yes, good afternoon. Thanks for taking my questions. First one would be on your value strategy. Looking at slide 13 in your presentation, it seems that you will also in the future pursue to operate the brands separately to each other. I'm asking myself, where is the added value Straumann can bring to that business, or are we just acquiring whatever is available on the market? A second question would be, looking at the minor guidance upgrade, which is implied in the wording. Is it anything specifically that drove you to this new wording, or is it just the overall development of certain regions? That would be it. Thanks.
Okay. On your first question, where do we actually see added value by managing two different platforms, a premium platform and a value platform? I can give you the example of Neodent in Spain. What did we do in Spain? We were actually obviously separating a completely different segregated commercial organization with Neodent, so completely separated from the Straumann Spain commercial organization. However, what we've also done, we've actually leveraged the back-office functions. Or in other words, Straumann Iberia is providing finance, logistics, HR services on behalf of Neodent through a service level agreement. There we actually gain certain synergies. We don't have to actually start from scratch when it comes to systems, when it comes to setting up a warehouse, when it comes to establish reporting systems, et cetera.
There are certain synergies by actually running two different entities in the same country, and Spain is a nice example to that. We are obviously not just buying what is available out there. We have a clear strategy. Our strategy and our objective is to become the global leader in the value segment, which means we want to have a presence in the value segment in the largest markets. When it comes to our industry, Brazil, we are already present with Neodent. When you look at other large markets, the U.S., we are actually looking at also entering this market, potentially with the Neodent brand. Germany is a large market, obviously. Italy, also there, potentially Neodent may fit to actually tap into the value segment in that market. We don't just go out there and buy what is available. We have a clear strategy and a clear plan.
On your second question, the change of outlook, that is actually due to a stronger than initially expected third quarter, and especially when it comes to the development in Asia-Pacific. When we talk Asia-Pacific, especially the development of our Japanese business has been very pleasing and has been better than what we initially had thought. That made us slightly revise our full-year outlook.
All right, thanks.
The next question comes from Lisa Clive from Sanford C. Bernstein . Please go ahead, madam.
Two questions just on the last point that you mentioned. What exactly was your growth rate in Japan in the quarter? Second, can you talk about the trends you're seeing in the U.S. market? How is your growth split between new customers, new to implant dentistry? Where do you think you're actually winning share from other players? Also whether you're seeing an uptick from existing customers who are perhaps seeing higher implant volumes due to the recovery in consumer spending.
Okay. On your first question, you may appreciate that we don't communicate growth rates by country. The only hint I can give you is that actually we had a positive growth in the third quarter in Japan. Compared to many quarters before that, there is a significant negative growth. In terms of the development of the U.S. business, it's actually at the end, it's a mixture of all what you just mentioned. We actually were able to increase share of wallet within our existing customer range. We've gained significant new accounts in the specialist segments, but also in the GP segment. At the end, it's a combination of all you just mentioned.
Perhaps one follow-up.
On top of that, we also had a positive mix impact because we are selling in the U.S. a large part of our implants with the SLActive surface and the Roxolid material.
Actually, on that point, I was just about to ask a follow-up specifically on that. You mentioned both pricing and product mix contribution. Is the U.S. less price sensitive? Is the sort of threat from discount players not as much of an issue in the U.S. because it seems like a very different scenario than what's going on in Europe if you can actually put up pricing and if everyone's moving towards SLActive, despite that being on the high end of your cost structure or pricing structure.
The U.S., if you look at the implants placed per 10,000 inhabitants and also the implant treatment ratio, the U.S. is still kind of an underdeveloped market when comparing to the larger European markets like, for example, Germany or Italy or even Spain. The potential for implants is significantly higher still in the U.S. compared to the large European countries. This is one of the reasons for the market growth in the U.S. Price sensitivity, value segment. Yes, this is also true what you are hinting at. The value segment is not yet that strong in the U.S. like, for example, in countries like Italy or Spain or more and more also in Germany. However, we are also seeing a tendency of value players gaining more and more share. I'm thinking about companies like Implant Direct or like BioHorizons, et cetera.
The trend which we have seen in many European markets over the last couple of years, we see that trend more and more also in the U.S.
The next question comes from Martin Wales from UBS. Please go ahead, sir.
Sorry, could you just elaborate on that last comment about value players in the U.S. versus Europe? I just want to be clear on what you're saying here.
Do you want me to repeat?
Start by repeating it then perhaps elaborate a little bit on what impact you expect the value players to have in the U.S. market in the longer term, clearly it's been the big premium growth market in recent quarters, presumably that's something you'd like to see continue as long as possible. Maybe just talk a bit about the development of the U.S. market.
As I try to hint at, the U.S. dental implant market is not yet at the same maturity stage like, for example the Italian market or the Spanish market or the Korean market or the German market, which means that actually most of the market is obviously still dominated by the premium players. What we've seen over the last years is that actually with the tendency of maturing, that also the share of value players starts to increase. Obviously we anticipate that the same might happen in the U.S.
Any idea what sort of timeframe that might start to happen? When do you see?
It already happens. It's already happening. You look at some of the value players in the U.S. and you look at their growth rates, they are very impressive.
What implications does that have for your value strategy as you think of bringing it to the U.S. at some point?
That's what I mentioned before, that actually when we look at into which countries we can actually leverage Neodent, we started in Spain. I mentioned also that potentially we would actually also go into the U.S. with Neodent and some other countries. Yes, we are watching the situation, and we are actually preparing ourselves to tackle the value segment also in the U.S.
Okay. Just coming back to your comments on Germany earlier very quickly. What can you do to try and reverse the trend of insurance companies reimbursing conventional treatments? What data do you have? Are you trying to convince them to reverse that trend? Do you have data that would support the use of implants over conventional treatments? Presumably, yes.
Obviously, we have that. That's clear. It's more a question of cost. What we are doing as we speak together with our competitors in the marketplace, we are obviously trying to take influence when it comes to the insurance companies and the bodies who at the end decide about reimbursement behaviors and habits in the German markets. Yes, we are obviously trying to take as much influence as possible within the boundaries and limits we have.
Okay. Thank you very much.
The next question comes from Michael Jüngling from Morgan Stanley. Please go ahead, sir.
Thank you for taking my questions. I have two. Firstly, on Neodent, can you explain how the financials will work in Spain and also in other countries in which you may introduce Neodent? As far as I understand, you have the flexibility on the transfer price between Neodent and Straumann. You can choose to, I guess, effectively lock in more profits in Straumann for a better margin, or you can allocate it to Neodent. Can you explain how that will work going forward? Secondly, on the value segment, you mentioned several times before that you want to become the industry leader, I think with Neodent alone, you probably can't do this. The question I have is how much more capital do you think you will need to spend in the value segment?
How much dilution to ROIC do you think you're willing to go, sort of the bottom threshold for Straumann as a whole, the ROIC with acquisitions? That's all. Thank you.
You want this one?
Yeah, go ahead.
Okay. I'll pick up the first question, and I'll pass it back to Marco on the second one. On the Neodent financials, obviously, you know we just have a 49% stake, so we can't really work on these transfer prices the way you described. It's going to be on an arm's length principle, and the way we set up the business is that we, of course, want to make profits in a decent time. We're going to have a startup phase, but it's going to be a profitable business going forward.
Yes, and you-- Yep.
As you sell Neodent in Spain, can I assume then that the transfer price is going to be at a price where it is going to be dilutive or enhancing to Straumann's current group margins?
It's going to be enhancing. On the first year, you're going to have a startup phase, obviously. You have to invest into sales force, into people. It will take some time until the sales come. We assume the second year it could be accretive.
Yes, to the overall absolute margin. Not to the relative gross margin. Obviously, Michael, we are acting like a distributor in Spain, and obviously as a distributor, you never have the same gross margins like in a situation you manufacture yourself the product. On a gross profit margin point of view, obviously the Neodent business in Spain will have a dilutive impact, clear. Also on an EBIT margin point of view, this business is not accretive from a margin point of view, the Neodent Spain business, at least not in the first couple of years. That's actually overall the case, to come now to your third question, that will be the case for the whole value segment for the next couple of years. I understand your concern that there may be a dilutive impact on the overall financial picture of Straumann, yes.
We are conscious about that, but that will be a fact of life for the next couple of years.
Okay, great. In terms of the capital that you think you will need to spend to become the biggest value player?
We mentioned that we have roughly CHF 300 million available to invest into this segment. We've now invested EUR 32 million into the 51% stake of Medentika and roughly EUR 3 million for Createch. We have spent a little bit more than CHF 40 million so far. Neodent Spain, there is no money which we had to bring up when it comes to acquiring the company. There, we obviously have startup costs with hiring the sales force, et cetera. There is still a lot of the CHF 300 million which we mentioned, which we have not spent yet.
Okay. Thank you very much.
The next question comes from Tom Jones from Berenberg Bank. Please go ahead, sir.
Good morning. Thanks for taking the questions. I had two as well. The first is just wondering if you could expand on your comments about the ceramic implant potentially being a game changer. Aside from the obvious aesthetic advantage, what advantage does a ceramic implant have over a titanium one? Looking at the one you've got, it's a tissue-level implant, and I just wondered how things sit from that perspective in the debate versus bone-level versus tissue-level, and how the ceramic implant fits into that debate and trends in that dynamic within the dental implant market. The second question was just on the end game for the value strategy, really.
If I step back from Straumann for a minute and just look at the value segment as a standalone market, what effectively is happening is a very big, very well-capitalized, potentially quite aggressive player is stepping into that market, i.e., Straumann. How do you see that market panning out? If I was looking at a standalone base, I think this big behemoth is coming into that market with products that are good but don't have huge differentiation from what's out there already. This is clearly very bad for price in the value market. In that context, what's the end game here? Is it just trying to build huge scale as quickly as possible and end up having the competitive advantage of simply being the biggest in that market and out-competing everyone else through that channel?
Are there some longer-term competitive advantages you think you will have as a value player over anybody else that might be operating in the value segment? Just really thinking long term, three, five years out, what's the end game for this push into the value space?
Okay. Let's start with your first question on the ceramic implant. What's the advantage of the ceramic implant versus titanium? Honestly, besides the fact that it's metal-free, there is no real advantage right now. It's more an emotional advantage you have, and people out there who want a metal-free implant, and they would never put something out of metal into their body. In other words, they would not undergo a dental implant treatment if the implant is not ceramic. This is something which we found out during the different market research studies we've done. May there be other advantages from a clinical point of view of ceramic implants compared to titanium implants? Yes.
Potentially there might be advantages from an aesthetic point of view, from a soft tissue management point of view, potentially even from a peri-implantitis management point of view, there might be some advantages, but we don't actually claim this as we speak because we don't have the clinical data at this point in time. I also would like to point out that actually the Monotype implant which we've launched at the EAO is actually the first step. We are obviously working on a two-piece implant, which will bring much more versatility also, to the dentist to place this implant to the range of indications which we'll be able to cover with the ceramic implant. In other words, this is actually the first step into the ceramic world.
On your second question on the value segment, I assume that you appreciate that at this point in time, we will not disclose our full strategy when it comes to what we intend to do with the value segment. At the end, I think everybody agrees, and if you look at the numbers, it's also very well supported, that the value segment has grown much more than the premium segments over the last years, and that the value players have taken share from the premium players. Now, will this trend continue for the next 20 to 30 years? We don't know. Has it stopped already? We don't believe.
We believe that over the next years, this trend will continue and that at one point in time, the part of the market in the hands of the value players will be larger than the market share, which is in the hands of the premium players.
Yeah.
Our ambition clearly is to stay the overall leader in the overall dental implant markets. To achieve that, we decided that we have to actually enter also the second segment, the value segment.
Maybe I'll just ask this a slightly different way and on a slightly more short-term basis. Is the short-term strategy more to try and pick up some of the share that's falling down from the premium end of the market, or is it to go into the existing value end of the market, and try and aggressively take share back off the people that are already there? Or will you just take it whichever way it comes?
With the Straumann brand, we obviously also have the potential to tap into the upper range of the value segment. With our SLA titanium implant, we should be able to tap into parts of the value segment if this is actually a part of the question you had in mind. With the value brand, I give you one example. We also know that in the marketplace, dental chains are actually becoming more and more important. Our experience, when dealing with these chains, is that they like to have different systems. They want to have a premium system for premium treatments, and they also want to have a value system for value treatment, more economic treatments.
This is one example which gives you a little bit of a feeling that actually by having different brands in different segments, it will also open us up the opportunity to go after part of the market we have not been really be able to go after. At the end, these chains, they want to have one supplier, and if that supplier is actually able to provide them with a premium offering and a value offering, they obviously like that.
Okay. That's very helpful. I'll jump back in the queue.
The next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead, madam.
Good afternoon, gentlemen. Thank you very much for taking my questions. I have one which is rather short-term, and one which is a bit more strategic and long-term. My short-term question just relates to the U.S., clearly the market there has been doing rather well. Given some of the more disappointing macroeconomic data that we've gotten over the last month, have you noticed any change in foot patterns? Are you hearing anything from your dentists which might suggest maybe there is a slowdown around the corner, or are you still confident in maintaining this sort of high single-digit type of growth for yourselves and presumably, a little less for the market, but not far from where you are?
My second question, which is a more strategic question, is, Marco, I think your strategy moving into the value segment is something that we've all been wondering and looking for for a while. As you think about what Straumann looks like under that proposition, do you actually think you can ever achieve the type of margins that the premium business have today in the value segment in the medium term? What type of scale do you think you need to get to for this business to be, whether it's 20%, which is the margin goal that you have stated for the company, or around that range? How big does your value business have to be before you can achieve that type of profitability, or can you never get there? Thank you so much.
Your first question is a rather easy one. Your second question, obviously a slightly difficult one. The third quarter has been over for one month. The third quarter, and also if I look at the last month of the third quarter in the U.S., it's not like in September the sales were falling all at the sudden in the U.S. off the cliff to the contrary. Also when looking at the development of the October business, there is no indication that in the U.S. we've actually lost some growth dynamics. We have not seen any impact on our numbers of the turbulences in the U.S. which we all obviously are aware of.
Thanks.
On the value segment, on the margins, honestly, this is a little bit a difficult question to answer right now because, on one hand, you have to differentiate between underlying margins and reported margins. To give you an example, Neodent. Once we're going to acquire Neodent and consolidate Neodent 100%, we have quite some immaterial assets, intangible assets, which we have to amortize, which obviously will have an impact on the EBIT margins. This will have a dilutive impact. If you look at companies like Medentika just standalone, their margins, their EBIT margins are actually extremely well in line with what we achieve with our premium business. There is no dilutive impact just standalone. However, by acquiring Medentika, we obviously also acquire quite a considerable part of intangible assets which have to be amortized.
If you also take the amortization in consideration, the impact will be dilutive. It's not a question which I can answer you straightforward. What I can tell you is that we are committed, obviously, when we report on our numbers going forward on a quarterly basis, that we clearly split what is actually the Straumann, the premium business, how is that developing in terms of top-line growth, in terms of margin development, and what is actually the value segment business in terms of performance. Where do we grow there? What are the margins on that business? That you can actually judge how is Straumann standalone development, and what is actually the development of the value business standalone.
Okay. If I just may follow up on that. Given that you've clearly stated that you're interested in acquiring some of these assets out there, have you seen a sort of growing competition in terms of the types of multiples that you'd have to pay for these assets since you've made that statement three, six months ago?
I'm not sure if I should give you an answer to that. I don't want to drive the prices up, okay? The only comment I can make is that we are not the only ones looking at some of the attractive value assets which are out there.
Okay. Thank you very much. I'll drop back into the queue.
The next question comes from Ingeborg Øie from Jefferies. Please go ahead.
Hi, thanks for taking my question. I'll limit myself to one, please. In the Straumann brand of products, you mentioned that, for example, Titanium SLA could tap into the top end of the value segment. If you look at the overall Straumann brand at present, what share of that portfolio could fall into that category? What is the ratio between what you would consider differentiated premium products and what could be in the high end of the value segment? Thank you.
Just I have to make one correction here. Also our Titanium SLA implant is a differentiated product. Okay? I didn't say that because we are able, with a product of that quality, to actually get close to the pricing of some of our value competitors, that this product is not differentiated anymore. Just to make sure that we don't leave here an impression which is not correct. If you look at our Titanium SLA implant, this is still our most important product in the whole product range. If I say we will be able to tap into the upper part of the value segment, I want to give you one example, and it's Germany. In Germany, Camlog, they are selling their implants on an average selling price of roughly EUR 160.
We, as we speak, have an average selling price of our Titanium SLA implant of 15%-20% above that, which we believe is not a huge gap. In other words, we may well think about even slightly adjusting downwards the pricing of our Titanium SLA to get really close to the value segment. That's actually what I meant when I talked about tapping these parts of the Straumann range into the upper range of the value segment.
Okay. Thank you for the clarification. That's helpful.
We have the last question now. We have to stop.
The last question for today is a follow-up question from Lisa Clive from Sanford C. Bernstein. Please go ahead, madam.
Hi. Two final questions. Number one, you mentioned that the U.S. was not seeing a lot of discount competition yet, perhaps that's just because it's an immature market. Do you think there's any structural differences in the U.S. that could make it less susceptible to discount competition? Clearly, legal liability is a huge issue in the U.S. Also, it seems that the smaller players who have gained a decent foothold in the U.S., like Implant Direct and BioHorizons, certainly do spend money on sales support, so the reps are important. Is the nature of discount competition in the U.S. potentially going to be different from what we see in Europe? I'll follow up with a second question afterwards.
Okay. What you mentioned before, the characteristics of the U.S. market when it comes to litigation risk, et cetera, obviously, this drives into the hands of premium players like Straumann, like Nobel, et cetera. Clearly this is an advantage to the premium players. I also want to make one correction. I didn't say that the U.S. is an immature market. What I wanted to hint at is the fact that if you look at the penetration with implants in the U.S. market, it's still at a considerably lower level compared to some of the large markets in Europe or in Asia, specifically, Korea. There is still some more potential in the U.S. to actually drive up the implant treatment ratio compared to other markets in Europe or in Asia.
Okay, the second question. You mentioned in Germany that there's been an issue around, I guess, favorable treatment for bridges instead of implants, and you're currently trying to influence the insurance companies to improve that. My understanding is this is exactly part of the problem for the low penetration in the U.S. It's also an issue in the U.K. with the NHS not covering implants. I believe as well, some French insurance companies don't cover implants. If you're doing this lobbying in Germany, have you thought about doing the same in those three countries that potentially could be much larger than they are today?
Absolutely. Yes. At the end, to drive up the implant treatment ratio will help everybody in the industry, and that's actually still the most important growth potential for the whole industry, to bring up the implant treatment ratio and to bring down the ratio of treatments which are done conventionally. That's not only something we as Straumann are working on. Also our colleagues or peers and competitors in the marketplace, obviously through their channels, they are trying to do the same.
Do you think you're making any progress, particularly with an organization like the NHS?
I'm not sure if I should actually answer that. We obviously have to do that within the limits and boundaries we have. One big leverage which we have is actually the patient marketing and to educate the patients, and educate them that for them, from a long-term medical point of view, it's better that they get treated with implants than the conventional way. Obviously, these are programs which we run, so direct-to-patient marketing, but also our competitors, they are doing the same.
Okay, thanks for that.
Thank you once again for your interest and participation in this call. You can find our reporting calendar at the end of the presentation. We look forward to speaking with you again at the full-year results on February 25, 2014. If we were not able to answer all your questions, please contact our investor relations department. Until we meet again, I wish you a pleasant day and goodbye. Thank you.
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