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Executives

Jost Fischer – Chairman, Chief Executive Officer

Jeffrey Slovin - President

Simone Blank – Executive Vice President, Chief Financial Officer

Joshua Zable – Vice President, Investor Relations

Analysts

Ross Taylor – CL King

Robert Jones – Goldman Sachs

John Kreger – William Blair

Jeff Johnson – Robert Baird

John Baugh – Stifel Nicolaus

Scott Green – Bank of America Merrill Lynch

Tycho Peterson – JP Morgan

Jon Wood – Jefferies

Steve Beuchaw – Morgan Stanley

Jonathan Beake – Citigroup

Sirona Dental Systems Inc. (SIRO) Q4 2012 Earnings Call November 16, 2012 9:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Sirona Dental Fourth Quarter and Full Year 2012 Earnings conference call. At this time, all participants are in a listen-only mode. Later on, we will conduct a question and answer session, and if at any time you require operator assistance please press star, zero and an operator will be happy to assist you. As a reminder, today’s conference is being recorded for replay purposes.

And with that, I’d now like to turn the conference over to your host for today, Mr. Joshua Zable, Vice President, Investor Relations. Please go ahead, sir.

Joshua Zable

Thank you and good morning everyone. Welcome to our fourth quarter and full year fiscal 2012 conference call. I would like to remind you that an earnings slide deck presentation relating to this call is available on our website at www.sirona.com.

Before we begin, please take a moment to read the forward-looking statement on Slide of our earnings slide presentation. During today’s conference call, we’ll make certain predictive statements that reflect our current views about our future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Our most recent Form 10-K lists some of our most important risk factors that could cause actual results to differ from our predictions.

And with that, I’ll now turn the program over to Jost Fischer, Chairman and CEO of Sirona Dental Systems. Jost?

Jost Fischer

Thanks, Josh. It is my pleasure to welcome all of you to our fourth quarter and full year 2012 conference call. Joining me today are Jeffrey Slovin, President, and Simone Blank, Executive Vice President and Chief Financial Officer. I am delighted to report that fiscal 2012 was a year with many accomplishments for Sirona. We ended the year on a high note with Q4 constant currency revenue growth of 23.4% and operating income plus amortization growth of 25.5%. Each one of our four business segments delivered double-digit constant currency revenue growth in the fourth quarter.

In August, we launched our revolutionary Omnicam, a product with no equal, at the largest digital dentistry event ever, CEREC 27.5. For the full year, Sirona achieved constant currency revenue growth of 12.6%. This was particularly noteworthy compared to our record-setting fiscal 2011 where Sirona grew over 16% constant currency. We continue to take market share. Keep in mind, we did all of this while continuing to invest in our sales and service infrastructure.

2012 was a very productive year for Sirona. Let me reiterate the key pillars of our successful strategy. To expand our outstanding portfolio of high tech dental products through continuous innovation, we have invested over $290 million in the past six years, creating new and enhanced products and solutions for better dentistry. To grow and leverage our world-class global sales and service infrastructure, we are active in over 135 countries around the globe. We continue to execute on our strategy, giving Sirona a clear competitive advantage and enabling us to deliver consistent, robust organic growth.

We’ve also built a solid foundation that will allow Sirona to keep growing for years to come. This year, we strengthened our go-to-market strategy in the U.S. by expanding our exclusive relationship with Patterson. In Europe, we continue to take market share and support key distributors like our largest European partner, Henry Schein. In addition to strengthening these geographies, we’ve continued to invest in our sales and service infrastructure around the world, creating a world-class global distribution network.

We also continued our market-leading investment in research and development, spending more than 52 million in fiscal 2012. You have already seen the latest fruits of our pipeline with the launch of the revolutionary new Omnicam and the industry-leading intraoral sensor, Schick 33. It is important to note that these products contributed very little to Q4 and fiscal 2012, so we expect to see the full benefit of these products this year.

Treatment centers showed the highest revenue growth for the year, up 15.1% constant currency. This segment benefited from the expansion of our sales and service infrastructure and was bolstered by the success of our newest platform, Sinius. CAD/CAM increased 13.9% constant currency for the year, also benefiting from the continuous international build-out of our sales and service infrastructure. In the year, Q4 showed the strongest growth across all geographies. Imaging grew 11.5% constant currency in fiscal 2012 with strong growth in non-European international markets and the U.S. Our expanded agreement with Patterson is already paying dividends.

Instruments grew 7.5% constant currency for the year, benefiting from our expanded sales and service infrastructure. International revenues increased 13.2% constant currency, led by strong double-digit growth in Asia Pacific. We are pleased to highlight that our non-European international markets now account for about 37% of sales. Germany was down but entirely due to a difficult comp. We had our second best year ever in Deutschland. The rest of Europe was up both for the quarter and the year, and that includes France and Italy being up. The U.S. grew 11.4% and gained momentum throughout the year. We are very pleased with our growth here.

All of our hard work translated into solid free cash flow, a total of 154.2 million. We used this cash to strengthen our balance sheet and ended the year with 75.6 million net cash. In just over a year, we have bought over $68 million out of our 100 million share buyback authorization. Overall, 2012 was a year with many impressive highlights.

I will now turn the call to Simone who will review our fourth quarter financials.

Simone Blank

Thank you, Jost. In the fourth quarter, our revenues increased 28.6 million to 247.4 million, up 13.1% or up 23.4% on a constant currency basis. The U.S. was up an outstanding 34.1% on previous year comp. Revenues outside the U.S. increased 19.2% constant currency with particularly robust performance in Asia Pacific. Sirona’s operating income plus amortization increased 25.5% to 57.1 million.

Moving on to a review of our business segment, revenues in our CAD/CAM segment increased 25.6% to 79.3 million or up 36.5% on a constant currency basis. CAD/CAM revenues benefited from strong growth across all geographies but was particularly strong in the U.S. thanks to a very successful Bluecam trade-up program. The impact from Omnicam on the quarter was not material as we started shipping only in September. Keep in mind that we are in the process of ramping up our manufacturing capacity for Omnicam. We expect to be up to speed in February.

Our CAD/CAM segment margin was 68.9%, down 60 basis points compared to the prior year period. The decrease in the quarter was mainly due to a strong trade-up program in the U.S. Imaging segment revenues increased 6.9% to 92.1 million or up 14% on a constant currency basis. Growth was strongest in the U.S. as we benefited from a good showing at CEREC 27.5 and our exclusive agreement with Patterson. Outside the U.S., growth was robust across the board, excluding Germany which faced a particularly difficult comp due to the successful launch of the XG 3D last year.

We continue to see solid interest in our Orthophos 2D and 3D product lines. Imaging segment gross profit margin was 59.7%, 250 basis points higher than the prior year period. Margins improved sequentially and continued to be influenced by product mix. Treatment center segment revenues were 50.7 million, up 13.2% or up 28% in constant currency. Growth in the quarter was driven by our Comfort and (inaudible) product lines. We continue to be excited about the market’s enthusiastic reception of Sinius, our mid to high range product. We continue to take market share.

Treatment center gross profit margins increased 450 basis points to 40.1%. The quarterly development was driven by product mix. Instrument revenues of 24.6 million were up 1% and up 14% on a constant currency basis. Growth was led by non-European international markets and Germany. Instrument segment gross profit margin was 45.4%, down 240 basis points over last year but in line with our expected 45 instrument segment margin. Please note that product mix can create significant variations in margin from quarter to quarter.

Moving on to a review of the P&L, gross profit margin was 53.4%, up 280 basis points compared to 50.6% in the prior year. Gross profit margin benefited from better segment gross profit margins and lower amortization. Cost of sales included deal-related amortization and depreciation expense of 10.7 million versus 12.7 million in the prior year. SG&A expense was 76.9 million, up 2.3 million. This increase was due to the continued planned investments in our sales and service infrastructure to capitalize on opportunities to gain share around the world. R&D was 12.6 million, 0.9 million below prior year.

Between June 30, 2012 and September 30, 2012, we experienced a strengthening of the euro relative to the dollar from 1.26 to 1.29. Foreign currency gain amounted to 0.4 million in the fourth quarter. When you strip out the 1.4 million gain on the revaluation of the Patterson exclusivity payment and the 2.2 million gain on the revaluation of short-term intra-group loans, we are left with a loss due to the currency revaluation of short-term assets of 3.2 million. Partially offsetting that loss was a 2.1 million gain on currency derivatives due to the strengthening of the euro versus the dollar in the quarter. The net impact of these foreign currency fluctuations on adjusted EPS amounts to a loss of $0.013. Net interest expense was a million, unchanged from last year.

The income tax provision for the fourth quarter of fiscal 2012 was 12.6 million. The effective tax rate for the quarter and the year was 26.6% and 24% respectively. This exceeded our estimated effective tax rate for the year of 23% mainly as a result of the effect from a tax audit in Germany covering fiscal years 2005 until 2009. Net income was 34.7 million, up from 13.8 million in the prior year period.

Fourth quarter 2012 diluted debt EPS was $0.62 compared to $0.24 in the prior year. On a non-GAAP basis, that is excluding deal-related amortization and depreciation and the currency revaluation of the Patterson exclusivity fee and short-term intra-group loans, non-GAAP earnings per share was $0.71, up from $0.68 in the prior year. At September 30, 2012, the company had cash and cash equivalents of 151.1 million and total debt of 75.5 million, resulting in net cash of 75.6 million. This compares to net debt of 22.5 million at September 30, 2011.

Now moving on to guidance, for fiscal 2013 we are projecting our constant currency revenue growth to be in the range of 9 to 11%. The quarterly progression in fiscal 2012 would be impacted by the IDS in March and the ramp-up of our manufacturing capacity of Omnicam, which we expect will be up to speed in February. We are very pleased with the demand for Omnicam. We expect the second half of the year to grow faster than the first half.

For the full year, we anticipate segment gross profit margins to be similar to prior year’s level. Reported gross profit margin is expected to be higher than the prior year due to the step-down in amortization expense. SG&A as a percentage of sales is anticipated to be between 29 and 30% for fiscal 2013. R&D expenses are anticipated to be between 5 to 6% of sales. We estimate our effective tax rate for fiscal 2013 to be 24%.

After taking into account feedback from investors, we are now providing adjusted non-GAAP EPS guidance, which we believe will provide investors a more standard metric to measure our performance. For fiscal 2013, we are expecting adjusted non-GAAP EPS in the range of $3.33 to $3.43. This represents approximately 10 to 13% growth compared to a fiscal 2012 non-GAAP adjusted EPS calculated on the same basis.

We’ve previously commented on the non-GAAP EPS in a slightly different format. Predicting the impact of the foreign currency revaluation of assets and liabilities has made it difficult to forecast this EPS metric in the past. In the interests of transparency and assisting the investment community in understanding our business, we are adjusting this metric.

Now adjusted non-GAAP EPS excludes amortization and depreciation expense resulting from the step-up to fair values of intangible and tangible assets related to past business combinations, gain and loss on foreign currency transactions, gain and loss on derivative instruments, any other cash or non-cash items that management does not view as indicative of its ongoing operating performance, and any related tax effects. For a reconciliation of historical non-GAAP EPS, please see the earnings press release. As always, I suggest our investors evaluate our business on an annual basis as our quarterly progression can vary significantly.

I will now turn the call back to Jost.

Jost Fischer

Thank you, Simone. As we have said many times, we continued investing in Sirona in 2012, and I’m very pleased that our investments over the last few years have been without question a great success that will yield benefits in the years to come. Our top line growth was broad-based but the substantial contribution came from those countries that we continue to invest in. Our strategy is be the first mover, provide innovative products to the market, leverage our infrastructure to support our customers, and drive short and long-term growth.

Sirona’s top line has never been more diversified. In addition to our broad market-leading product portfolio, we are more balanced in terms of geography than ever before. As of year-end, our non-U.S., non-European markets represent around 37% of our sales and even within Europe we are more diversified than ever before.

In August, we launched Omnicam, a revolutionary new CAD/CAM camera. Omnicam is lightweight for easy handling, powder-free for convenience, and the first color screening camera. Once again, Sirona is first to market, introducing a game-changing technology.

With our best-in-class sales and service infrastructure, we will bring this technology around the world and continue to strengthen Sirona’s global brand as the innovator in the industry. When we launched Omnicam at our CEREC 27.5 event, we were overwhelmed by the emotional standing ovation we received from thousands of dental professionals. After speaking with many customers, we heard the same message over and over again – it was a thank you to Sirona for creating powerful technology that enables better dentistry. Dentists understand that Sirona is defining the market for digital dentistry. We have the know-how, the commitment and the resources to be the market leader and we will continue investing to increase our market leadership position.

There is strong demand in the CAD/CAM space where Sirona is the undisputed worldwide market leader. In the U.S., Patterson and in Europe, Henry Schein are our most committed supporters of CEREC. In addition, we work with over 300 qualified distributors around the world who acknowledge our CAD/CAM offerings are the best and only seamless solution for chairside dentistry. Let me say this – Omnicam and Bluecam are the two best intraoral cameras on the market, period. This interest in CAD/CAM and our Omnicam in particular is translating into orders. We believe this will be the best-selling camera ever. Omnicam will further increase penetration of CAD/CAM in the dental office. Keep in mind, as we discussed earlier, we have manufacturing constraints at the moment and cannot at this point manufacture enough product to meet demand.

Innovation continues to be the hallmark of Sirona, and Omnicam is just one more example of our technology capabilities. We will look to expand the application range of our technologies to make CEREC the centerpiece of a dental practice. By enhancing current technology and developing new products, Sirona will cement its leadership in dentistry for years to come.

We ended this past year with double-digit top line growth and expect fiscal ’13 to be a year of strong top and bottom line growth. With new innovations like Omnicam and Schick 33 just rolling out and the strong pipeline of new products soon to come, Sirona is well positioned for future growth. We have an outstanding technology platform that has consistently delivered best-in-class dental products over the course of decades. As markets develop, Sirona has the resources to deliver those products around the world.

Let me remind you, the penetration rates for most of our ground-breaking products are still relatively low. Sirona’s technology enables dentists to be more efficient, more productive, and do better dentistry. It is a combination of our innovation, integration of our technologies, reach and support for the customer that drives our growth.

As we near the end of our prepared remarks, let me talk about the announcement of my pending retirement this morning. I am very proud about what we’ve built over the course of over a decade and excited to observe Sirona’s future growth. Sirona has never been better positioned in its history and I want to thank all of our employees, our leadership team, and the dental community. As you also saw, Jeffrey Slovin will take my place in what I expect to be an absolutely seamless transition.

Jeff is the ideal candidate to succeed me as Sirona’s CEO. He has the necessary experience and stellar reputation within the dental community to take Sirona into the future. Before joining our company in 2006, Jeff was CEO of publicly-traded Schick Technologies where he built a reputation as an innovator and operator and delivered significant shareholder value. Since joining Sirona, he has consistently demonstrated excellent judgment and played a major role in improving our operations, targeting our research and development efforts, and leading growth initiatives. Jeff’s appointment is part of a leadership succession process that was methodically developed over the past several years in preparation for this very day. Jeff has the full support of myself and the Board.

During my 11 years as CEO of Sirona, we have built the company from a primarily German-oriented company to a truly global leader in dental technology. Sirona is well positioned for the future with a powerful sales and service infrastructure, a strong management team, and an outstanding product portfolio. I am excited to watch as Jeff takes Sirona to new heights. I am also happy to announce that Sirona will be ringing the closing bell on NASDAQ today to celebrate our achievements.

So in closing, I’m very pleased with how our team is executing. We have built this company for balanced and sustainable growth and we are accomplishing that goal. I would like to thank our outstanding employees and distribution partners who we believe both are unparalleled in the industry.

Simone, Jeffrey and I will now address your questions. Operator, please proceed.

Question and Answer Session

Operator

Thank you. [Operator instructions]

Our first question is from the line of Ross Taylor from CL King. Please go ahead.

Ross Taylor – CL King

Yes, hi. First maybe I’ll make a comment – congratulations, Jost, and congratulations Jeff as well. Jost, I think you’ll definitely be missed on this side.

Jost Fischer

Thank you.

Ross Taylor – CL King

My question relates to how you might balance CEREC Omnicam upgrades versus new placements over the next few quarters. I just wondered if you could remind us how you expect to approach the market with upgrades versus new placements.

Jost Fischer

All right, thank you Ross. First of all, we had a very strong quarter in Q4 with 36.5% growth and that was 99% Bluecam. As you’ve seen, the demand for our product is very strong. On top of that, as I said in my prepared remarks, we have a lot of orders for upgrades for the Omnicam, more than we will be able to fulfill within the next six months. So from that perspective, we will be moving into the Omnicam deliveries as we ramp up our manufacturing, and as you know from our past experience, it usually takes something around six months to move up to full capacity for our production, which will be February 2013.

On top of the upgrades, we have a lot of demand for new users that have been sitting on the sidelines for years with this technical innovation being very, very interested or already have placed orders for that. Omnicam will certainly help to drive penetration of CEREC worldwide.

Ross Taylor – CL King

Okay, that’s helpful. And just a very quick follow-up related to that, some of the recent Bluecam upgrades, do you expect most of them are probably planning to upgrade to Omnicam when they’re able to, or do you think it’s going to be a more gradual occurrence?

Jost Fischer

First of all, you see Bluecam is a camera that we will have in our product portfolio also into the future. It’s one of the two best cameras out there existing in the market. Certainly there will be customers that want to upgrade to Omnicam too, but at the end of the day it’s the decision of the dentist. We have enough orders that we don’t need to upgrade those.

Ross Taylor – CL King

Okay, great. Thank you very much.

Operator

Thank you. The next question is from the line of Robert Jones from Goldman Sachs. Please go ahead.

Robert Jones – Goldman Sachs

Thanks. I’ll also offer my congratulations to Jost on his retirement. Definitely been a pleasure working with you. Jeff, I thought since we had you on the line, I was wondering if you’d like to take this opportunity to share with us your vision for Sirona and maybe any specific areas you’re thinking about differently as you move the company forward.

Jeff Slovin

Sure, Rob. First of all, I want to tell you I’m very excited about the opportunity to become the next CEO of Sirona. It’s a proud day for me to be a part of the best company in dental. Secondly, I truly appreciate the confidence and the trust that Jost and the Board has shown in me.

Look, when you think about it, we’ve been together for seven years as a management team, seven years where we’ve had challenging economic environments and brought out revolutionary products, and we’ve spent a lot of time together crafting our strategy and objectives. I think one of the reasons that we’ve been so successful is because we work so well together and we have this similar approach to business. As you guys know, we’re all about execution and we all have a passion for excellence and a 24/7 work ethic. I think that Simone and I will continue to follow through on what we’ve helped build using the same principals and operating philosophy as before.

With Sirona so well positioned thanks to Jost and our team, I’m confident that I can lead us to the next level, and I think it’s about following our pillars that Jost talked about today and our strategy. I don’t think there’s a need to change; it’s to continue on doing what we do best.

Robert Jones – Goldman Sachs

Appreciate that. And then if I could just ask one specific one around the guidance, and specifically on the leverage, I think the two ranges in and of themselves – you know, the revenue and the EPS ranges – are encouraging, but putting them together I guess maybe we were looking for a little bit more leverage in ’13. So I was just wondering if you could maybe walk us through some of the moving pieces for the ’13 guidance, if there’s any incremental spending outside of the IDS costs that we should be thinking about in fiscal ’13. Thanks.

Simone Blank

You know, we think the 9 to 11% top line and 10 to 13% bottom line guidance that we gave growth is pretty good, just as another comment again clearly about market growth – we shouldn’t forget that. We’re all excited about the Omnicam launch; at the same time, there are some manufacturing constraints as Jost had elaborated on earlier. We have the IDS, so all of these things go into our guidance. All of that comes together, and maybe just as a reminder, you know that we’ve invested materially into certain service infrastructure over the last years and obviously that also impacts this year, so not all of them have been fully invested at the end of last year, so we continue a little bit of it. You remember we always talked about 18 months that we need on average before we see the full leverage, so—and we clearly continue to invest and to balance short and long-term returns to our shareholders.

Robert Jones – Goldman Sachs

Great, thanks.

Operator

Thank you. Our next question is from the line of John Kreger from William Blair. Please go ahead, John.

John Kreger – William Blair

Hi, thanks very much. A follow-up question on the CAD/CAM segment. Jost, could you just remind us what your global install base at this point, and what’s the rough mix between Bluecam and Redcam installs at this point?

Jost Fischer

Install base worldwide is over 34,000 units out there chairside, and the mix is about 60% Bluecam and 40% Redcam roughly.

John Kreger – William Blair

Great, thank you. And then a quick follow-up – Simone, any kind of key changes that you’ve assumed in the macro landscape in your revenue guidance for the coming year?

Simone Blank

No, we assumed a stable environment.

John Kreger – William Blair

Great, thank you.

Operator

Thank you. Our next question is from the line of Jeff Johnson from Robert Baird. Please go ahead, Jeff.

Jeff Johnson – Robert Baird

Thank you. Can you hear me okay?

Jost Fischer

Yes.

Jeff Johnson – Robert Baird

Hey Jost. I don’t want to make this a love-in or anything, but I can honestly tell you that your entrance at CEREC 27.5 a few months ago was probably one of my top memories that I have here doing this job for the last 10 years, so congrats on a great career. We’ll miss working with you.

Jost Fischer

Thank you. Thank you!

Jeff Johnson – Robert Baird

Just moving on, a couple questions here – so on Omnicam, Jost, you say quite a few orders there on that. Wondering if ASPs are holding very close to that 129.9. I think that’s a key towards CEREC growth over the next year do those ASPs hold in that range. Are they, and if they are, Simone, just wondering on the manufacturing side as you scale up, are you still thinking that gross margin dollars for Omnicam will hold about similar to old Bluecam margin dollars? Our math would suggest that’s kind of low 60% then gross margins for the segment for Omnicam sales, which is quite a bit below where the segment margin is. So just wondering where that’s shaking out at this point.

Simone Blank

Yeah, okay. Maybe I’ll take that second part of the question. As we mentioned, obviously the sales price, as you elaborated on, is higher. The manufacturing costs are higher and what we said was that we’ll be about the same absolute gross profit, right? It can be a little bit more than that, but about the same; so the relative margin will give in a little bit. That’s our current assumption.

Jost Fischer

And when you look at our past experience, it’s once we have delivered something in the range of 2,000 cameras, we will work down the manufacturing costs over time and make it more efficient, so that’s not the end of the story, it’s just the beginning. So we will see some cost leverage as we move through next year.

Jeff Johnson – Robert Baird

All right, great. And Jeff, I meant to throw in a congratulations to you there as well, so apologies for not doing that. But just out of curiosity, are you going to stay over in Germany or are you going to move back to the States then?

Jeff Slovin

I’ll continue in Europe for a little while, absolutely.

Jeff Johnson – Robert Baird

All right, great. Thanks, guys.

Operator

Thank you. Next question is from the line of John Baugh from Stifel Nicolaus. Please go ahead, John.

John Baugh – Stifel Nicolaus

Great, thanks. Good morning to everyone. The first one, maybe if I can just touch on imaging. The gross margin was solid, I think maybe the best in almost eight quarters. I know mix always matters, but maybe if you can just speak broadly to what you’re seeing there. Is there some stability that’s starting to seep in from a pricing perspective? Any color on the gross margins? Thanks.

Jost Fischer

All right, thank you. From a gross margin perspective, mix was the point absolutely, and we’re pretty happy with that as we’ve seen the mix changing here and there. The U.S. was the strongest performer in imaging, so our recent expanded exclusivity with Patterson is paying dividends in imaging for us. So from our point of view generally, the perspective is that the category is a double-digit grower and the potential is unchanged. We have some variations in the gross margins here and there, but just to remind you we just launched Schick 33 which also had almost no impact in the past year.

John Baugh – Stifel Nicolaus

Okay, great. And maybe just a quick second question – Jeff, this might fall in your hands. Just from capital allocation, any thoughts going forward? Obviously the balance sheet continues to strengthen and the cash flow is great. Stock buybacks, acquisitions – just when we look out maybe over the next 12 to 24 months, the direction that Sirona is going to head in.

Jeff Slovin

I think we’re going to continue what we’ve been doing. We already have a buyback program in place. We’ve been also reinvesting in our company on a CAPEX standpoint. If you look at our buyback, we’ve done 68 million of the 100 million in just over one year, and I think we all share a similar view on acquisitions. We’re methodical, we look at everything; but we’re not in a rush to change.

John Baugh – Stifel Nicolaus

Thank you, guys.

Operator

Thank you. Next question is from the line of Scott Green of Bank of America Merrill Lynch. Please go ahead, Scott.

Scott Green – Bank of America

Hi. Thanks for the questions. Congratulations, Jost. We’ll miss you at our Vegas conference; and congratulations to you too, Jeff. First a question on the Patterson exclusivity agreement – if you could just remind us, I think the non-exclusive dealers could still order and receive product until September 1, and so if that’s the case, could you elaborate on how much of that lost revenue on previously non-exclusive products you pick back up in the form of higher sales with the Patterson reps?

Jost Fischer

So first of all, yes, the exclusivity was extended to 2017 with Patterson and everything was included, all the product lines. Secondly, yes, our other distribution partners were able to buy product into September. The transition was seamless. We see the first fruits of that change already. It’s positive for us, so we’re pretty excited about the opportunity going forward here.

Jeff Slovin

Yeah, I mean, with 34% up, I don’t want you to think that this was a one-time buying opportunity from our old dealers. This was really showing the magnitude of our new relationship and the possibilities; but again, don’t get carried away. This was on a weaker comp, so.

Scott Green – Bank of America

Okay, okay, but at this point you think you’re kind of at least back to even on the lost revenues that you would have had from the non-exclusive dealers on a run rate go-forward basis?

Jeff Slovin

We’re pleased with our decision and where the partnership is going.

Scott Green – Bank of America

Okay. Next question, maybe for Simone – the CAPEX as a percent of sales, can you just talk about how you see that trending next year?

Simone Blank

Yeah, absolutely. We see that trending a little bit higher than in the past. We were more around 3 to 4%. I would assume 5 to 6% for this year.

Scott Green – Bank of American

Okay, and what’s the driver of that step-up?

Simone Blank

The driver is obviously investment into the business. It’s into our manufacturing facilities, ramping that up for all the nice growth that we are expecting going forward.

Scott Green – Bank of America

Okay, all right. And once you get ramped up with the new manufacturing, do you think that would trend back down to 3 to 4, or do you think this is a new level on a go-forward basis?

Simone Blank

Oh, I think it can trend back lower going forward.

Scott Green – Bank of America

Okay. That’s helpful. And then a question on CAD/CAM upgrades. You did an international upgrade in Germany last year for Bluecam, and just curious – now that you’ve invested a lot in infrastructure in other emerging markets, in other non-Europe markets, what’s the capacity to do upgrades in some of those countries to the new Omnicam?

Jost Fischer

First of all when we look at the upgrades opportunities and the upgrades that are actually happening, the U.S. is the largest market for upgrades here, and we’ve had a program out there. We will have upgrade programs also for other geographies; but don’t forget in some of these countries, like Japan or China, we will not be able to deliver the Omnicam early next year because of (a) we need to have 510Ks for those respective countries – that usually takes, like, a year or so; and secondly, we will be manufacturing constrained to fulfill all the orders early on.

Scott Green – Bank of America

Okay, and lastly maybe just any commentary or feedback you could share with us that sales reps might be reporting back to you about some new scanners that are on the market. Do they see any disruption there, or just curious what the feedback is generally?

Jost Fischer

Yeah, the feedback is we see no change in the competitive marketplace. We’ve seen some competitive products before, and I said in my prepared remarks – and that is shared with our dealers and that is shared with our reps out there – we are confident we have the two best cameras out in the market, Bluecam and Omnicam. So in fact, our competitive position has improved with this launch. Omnicam puts us way ahead of any competition. We are the market leader with the highest install base. We have been doing it for over 27 years and from our point of view, the only company with a seamless integration. Others are even moving away from integration.

We welcome competition because more people talking about CAD/CAM, the more they do, the better for us as we welcome the comparison.

Scott Green – Bank of America

Okay, thank you very much.

Operator

Thank you. Before we put the next question through, a quick reminder ladies and gentlemen, please limit yourself to one question. There will be a chance to ask a follow-on question.

Next question is from the line of Tycho Peterson from JP Morgan. Please go ahead.

Tycho Peterson – JP Morgan

Hey, thanks for taking the question, and congrats to Jost and Jeff. Maybe Jeff, just to clarify your comment earlier on the Patterson agreement, are you saying that there were no dynamics in there that are not sustainable? I’m just wondering to the extent there were things in there—

Jeff Slovin

Yeah, I think the question was is this bump because it was a last buy from our other distributors, and I was saying very differently- this was about seeing the beginnings of our exclusive relationship taking shape. And I also just cautioned that 34% is a big number. We’re very pleased with the fact that we did 11% in the U.S. and that it was a relative—

Jost Fischer

Full year.

Jeff Slovin

--for the full year, and it was a relatively weak fourth quarter the prior year. That’s all.

Tycho Peterson – JP Morgan

Okay. And then just to understand the guidance, I understand obviously there’s some margin pressure from Omnicam, but as we think about imaging overall, are you expecting margins there to improve with Orthophos and maybe some of those 2D sites starting to upgrade?

Simone Blank

No, I would say if you look at our blended segment gross profit margins for our fiscal ’13, we expect it to be flat. Obviously there are gives and takes in there. We talked a little bit about the CAD/CAM margin driven by the Omnicam, but I wouldn’t assume a major change here on the imaging margin.

Tycho Peterson – JP Morgan

And then for SG&A, are you still making investments in Asia? Is that kind of the priority from an SG&A perspective?

Simone Blank

You know, we obviously continue the investments that we’d started last year, so those have some tails, as you can imagine. But Asia Pacific clearly is one of the regions, as we’ve discussed about, but we also said that we’ve hit most of the countries last year already and so these are probably a little bit more of the tails now.

Jost Fischer

Tycho, let me just reiterate where we stand in total of our geographic mix. We are for last year 29% of our sales in the U.S. Europe is 34%, which half of it roughly is Germany, and the rest of the world now moved up to 37%, and that tells you a little bit (a) where our growth is; and (b) how positive the reaction to our build-out has been in the countries. I told you about Japan, I told you about China in the last call, and I think it is really, really positive because these markets are still—not Japan, but the other markets are still underserved with dental care for many years to come.

Tycho Peterson – JP Morgan

Okay, that’s helpful, and congrats again.

Operator

Thank you. Next question is from the line Brandon Couillard from Jefferies. Please go ahead.

Jon Wood – Jefferies

Hey Jost, it’s Jon Wood.

Jost Fischer

Hi Jon! Man, it’s been a while.

Jon Wood – Jefferies

It’s been a while. I figured I needed to get on and tell you congratulations and hope we get an invitation to the retirement party.

Jost Fischer

Well! Certainly, certainly.

Jon Wood – Jefferies

I appreciate it. Just would like you to talk through – you and Jeff – how you’ve looked at the geographies. I think you alluded to that in the last question, but vis-à-vis that 9 to 11% growth outlook, can you just talk about what regions above, what regions below you’ve assumed in your plan?

Jost Fischer

Yeah. When we look at the growth rates, as you know, we don’t qualify our guidance; but certainly the trend that we have seen in 2012 will continue in 2013, and we have IDS. I think that’s the two qualifiers for next year.

Jon Wood – Jefferies

Appreciate it.

Operator

Thank you. Next question is from the line of Steve Beuchaw, Morgan Stanley. Please go ahead.

Steve Beuchaw – Morgan Stanley

Hi, good morning. Thanks for taking the questions. Jost, congratulations, an incredible run. Jeff, good luck, big shoes to fill there. My first question, though, is actually for Simone. I wonder going into next year, now that we have the bottom line outlook, if you could give us a sense for the margin trends in the emerging markets piece of the business, or if you want to define it as non-European international. Can you give us a sense for how that’s evolving and what the emerging markets are as a contributor on the operating profit line next year?

Simone Blank

Maybe as a clarification, these are not only emerging markets, right? If we look at that, it includes countries like Japan, which is clearly far away from being Australia, from being a Korea being in emerging markets. So we’ve always said that these non-European international markets are a mix of emerging markets like China and others that are very established.

Now we’ve also said many times, and I’m going to repeat this today, that if we sell a CEREC to one of those markets, we sell a CEREC to those markets, right, so there’s no difference in gross profit margin. Where the difference can come from is the difference in mix. If we send a lower entry, then obviously that has a different gross profit margin or a lower end 2D Orthophos unit has a different gross profit margin. But the products themselves are the same, so from all of these countries we expect similar margins than we’ve seen in other countries if we sell those products.

Steve Beuchaw – Morgan Stanley

I’m sorry, just a clarification though – are we now at a point where for these markets, China is one, Korea is one, there are parts of South America where they are at a run rate where they are at a fully leveraged status?

Simone Blank

Yeah, some of them are, some of them aren’t, depending on when we started investing.

Jost Fischer

Lots of runway left.

Steve Beuchaw – Morgan Stanley

And then my second question, maybe more for Jost and Jeff, is given how strong the quarter was, I wonder if you could speak to whether there’s any signal of preliminary halo effect from Omnicam and what your expectations are there. Are you seeing increases traffic through Sirona showrooms as a function of Omnicam? Is that driving market share more broadly? Thank you.

Jost Fischer

Yeah, first of all absolutely – this is something that’s a game-changer, and dentists understand that is a game-changer. So we have a lot of interest and orders from this product, so I think that will help Sirona also with the other product lines. As you know, we integrate our technology. It’s a big thing going forward, right Jeff?

Jeff Slovin

Absolutely right. I don’t think this is a halo effect. I think actually we have a situation where we have more dentists wanting to see and get a demo, and I think this is going to go on for a while. And Jost said it perfectly – coming out of CEREC 27.5, it really was a great opportunity to see all of the technologies that Sirona brings to market, and I think it may be odd to hear this but Omnicam is going to help treatment centers, there’s no question about it. We have a great install base around the world of customers who don’t yet have CAD/CAM and now are excited about this new product. So I think there’s a lot of runway and this is going to help us in all of our business going forward.

Steve Beuchaw – Morgan Stanley

Thanks so much, and again, congratulations Jost.

Operator

Thank you. Next question is from the line of Jonathan Beake from Citigroup. Please go ahead.

Jonathan Beake – Citigroup

Hi there guys. Thanks very much for taking my question. I just had one question, which is essentially just looking at that strong growth in CAD/CAM over the last quarter, could you give us as much detail as possible about what exactly contributed from it. I understood that you said it was Bluecam, but why were we seeing such a strong growth in Bluecam all of a sudden when we know that there’s Omnicam coming, and if you could give me as much detail as possible on that growth, that would be great.

Jost Fischer

Yeah. First of all, we are not replacing Bluecam with Omnicam. It is one of the two best cameras out in the market, and dentists understand that, a. B, we have markets where Omnicam won’t be available for the next year, so these people in those countries, dentists are buying Bluecam and will continue to buy Bluecam. Of course, we had an easier comp – I won’t hide that, and from our point of view our winner was the trade-up program, the last one that we had with Patterson on the Bluecam in July/August. So it is impressive, I have to admit, with this Omnicam contributing so little into Q4.

Jonathan Beake – Citigroup

Yeah. And actually I’ve got one other question, which is straight out of—a completely different track from the others, but here in Europe we’ve seen the share prices of the two dental implant manufacturers over here falling, and a question that often comes up is M&A and can either of them be taken out. And I’m just wondering whether you guys saw any advantages, any synergies from potentially acquiring an implant manufacturer or whether you prefer to go down the—

Jost Fischer

Jonathan, good question to ask. My answer is, do we need an implant player to grow? The answer is no. Could we have something? The answer is yes. So we see implant and implantology being a major contributor to growth in the future, and we have the technologies to integrate and help dentists to make it faster and easier to do so. But we are very disciplined in our acquisition strategy, and I think we have been right when you look back.

Jonathan Beake – Citigroup

Yeah, okay. Thank you.

Operator

Thank you. Next question is from the line of Jeff Johnson with Robert Baird. Please go ahead, Jeff.

Jeff Johnson – Robert Baird

Thank you. Simone, I just had one follow-up question. As I work through your quarter here, 26% growth in operating income ex-amortization. When I get down to EPS, it looks like to me tax rate was about $0.03 or $0.04 of a headwind. Currency, as you said, netted to about just over a penny headwind, so that would foot to maybe about 13% EPS growth on an adjusted basis. Where am I losing the difference between 25% operating income growth and even adjusting out some of the below the line noise, getting to maybe low teens EPS growth, where do I lose that other 10 points of operating income growth down to the EPS line?

Simone Blank

I think the major driver of having a lower growth in the EPS line is the tax rate, as I explained in the prepared remarks, where we estimated 23% for the full year and we ended with 24% because we had a one-off, so to say, tax audit in Germany that contributed to that higher percentage. Now in the fourth quarter, obviously, there is this catch-up for the full year which brought it to 26.6% in the quarter effective tax rate. I think that’s it. But we’re happy to take you through after the call, Josh and I, and go through the details.

Jeff Johnson – Robert Baird

Okay, we’ll do it offline. Thank you so much.

Operator

Thank you. We have no further questions. I will now turn the call over to Jost Fischer for any closing comments.

Jost Fischer

Thank you. It was extremely gratifying that you joined us today, and I look forward – me personally – to update you on the next, my final conference call in February. You all have a good day and thank you very much.

Operator

Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.

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