Sirona Dental Systems, Inc. F2Q09 (Qtr End 03/31/09) Earnings Call Transcript

Sirona Dental Systems, Inc. (SIRO)

F2Q09 (Qtr End 03/31/09) Earnings Call Transcript

May 5, 2009 8:30 am ET

Executives

John Sweeney – Director, IR

Jost Fischer – Chairman, President & CEO

Sirona Blank – EVP & CFO

Jeffrey Slovin – EVP & COO of US Operations

Analysts

Brendan [ph] – Banc of America Securities

Tycho Peterson – JP Morgan

Ross Taylor – CL King

Jeff Johnson – Robert Baird

Greg Brash – Sidoti and Company

John Kreger – William Blair and Company

Adam Pusard – Barclays Capital

Presentation

Operator

Welcome to the second quarter earnings conference call. My name is Kamitia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator instructions)

I would now turn the call over to your host for today’s call, Mr. John Sweeney, Vice President of Investor Relations. Please proceed, sir.

John Sweeney

Thank you and good morning everyone. Before I turn the call over to Jost Fischer, Chairman, President, and CEO, Sirona Dental Systems, I need to inform you that information in this conference call contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are information of a non-historical nature and are subject to risks and uncertainties that are beyond the company’s ability to control. The matters discussed in this conference call are subject to various factors which could cause actual events and results to differ materially from such statements. Such factors include uncertainties as to future sales volumes of the company's products; the possibility of changing economic, market, and competitive conditions; dependence on product, dependence on key personnel, technological developments, intense competition, market uncertainties, dependence on distributors’ ability to manage growth, dependence on key suppliers; and other risks and uncertainties including those detailed in the company's filings with the Securities and Exchange Commission.

The company undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this conference call. You are cautioned not to place undue reliance on these forward-looking statements which speaks only as of the date of this conference call.

Please note that in today’s conference call you’ll be presented with additional financial information, including non-GAAP financial measures under Section 101 of Reg G of the 1934 Exchange Act. In addition, during today's conference call, management will comment on guidance for fiscal year 2009. Please note that all statements made in connection with the guidance are based on current expectations, and actual results could differ materially from such forward-looking statements.

Now, I’d like to turn the call over to Jost Fischer, Chairman, President, and CEO, Sirona Dental Systems.

Jost Fischer

Thanks, John. It is my pleasure to welcome all of you to our second quarter 2009 conference call. Joining me today are Simone Blank, Executive Vice President and CFO and Jeffrey Slovin, Executive Vice President and COO of US Operation.

Despite the global recession, we have made good progress towards achieving our goal. Our new digital impression unit, the CEREC AC, is progressing well. The AC coupled with our CEREC Connect functionality are at the forefront of digital dentistry and illustrate Sirona’s continuing leadership in CAD/CAM. At the 2009 International Dental Show in Cologne in March, we showcased our innovation capabilities. We launched a considerable number of new products and product enhancements, including the integration of CEREC and GALILEOS.

The (inaudible) of CAD/CAM and GALILEOS’ 3D combines the diagnostic capabilities of GALILEOS with a high quality aesthetic respiration solution offered by our CEREC system. This technology enables dental practitioners to plan and create customized dental implant solutions more easily with a substantially lower level of risk. Importantly, no other company has a research and development capabilities or product portfolio to integrate these two advanced dental technologies.

Our CEREC AC was ranked by the Association of German Dental Manufacturers as one of the most important innovations at the IDS.

Still we face a difficult global economy and many dentists are postponing purchases. Notwithstanding, Sirona is highly competitive in each of our four business divisions. We have taken the necessary steps to compete and succeed in the market.

Before, I discuss these topics in more detail, I would turn the call over to Sirona for a review of our results.

Sirona Blank

Thank you, Jost. Second quarter revenues were $164.8 million, down 13% compared to prior year or down 4.5% constant currency. As we anticipated, our second quarter revenues were impacted by the difficult economic environment and the timing of the biennial International Dental Show in Cologne. In addition, last year’s MC XL trade-in program had a significant positive impact on our results.

Now I would like to highlight the quarter's regional development. US revenues declined 1%; last year’s revenues benefited substantially from the MC XL upgrade program. If we exclude the impact of this program, our US and CAD/CAM revenues would have shown significant growth.

Our CAD/CAM business has held up well even in this difficult economy.

US sales of our 2D and 3D digital panoramic units posted positive growth and we believe Sirona increased its market share in digital radiography during the quarter. Financing programs the dentist offered to our distributors were a key contributor to our sales success in the US.

International revenues declined 18%, down 6% on a constant currency basis. This decline was the result of the weak global economy, the IDS, and the timing of our international project business. We were pleased to see positive revenue growth in the German market after a weak first quarter. We are cautiously optimistic that this positive trend will continue for Sirona. Our business in other European markets declined in the face of strong economic headwind.

Our non-US, non-European revenues had continued strong performance in Japan and Australia. Some markets like Korea had a very challenging quarter, a reflection of the economy and also the unfavorable exchange rate.

Moving on to a review of our business segment’s performance. Revenues in our CAD/CAM segment declined 6% flat constant currency. If you bet out the impact of last year’s MC XL upgrade program in the US, CAD/CAM revenues would have shown good growth. We are very pleased with the interest we are seeing for the new AC globally, and believe that this acquisition unit will make a significant contribution to our revenues as move through the second half of the year.

CAD/CAM segment gross profit margin improved 380 basis points to 69.6%, up from 65.8%. The absence of MC XL trade-in units and favorable exchange rates drove margin expansion.

Treatment Center revenues declined 16% or down 4% on a constant currency basis. Despite the IDS Germany performed very well with positive growth driven by the market acceptance of our TENEO. We believe that we outperformed the market in the quarter.

Segment gross profit margin was 37.3%, down 1.3 percentage points. The margin decline was due to product and regional mix.

Instrument revenues declined 16% or 4% constant currency again with positive growth in Germany. Instrument segment's gross profit margin was 45.1%, up slightly compared to prior year.

Imaging segment revenues declined 18%, down 10% constant currency. The US had positive growth, benefitting from strong performance of our GALILEOS 3D imaging system and building momentum in our US intraoral sensor business. Our US performance was more than offset by the result of our other markets. The development of the non-US market was particularly impacted by the weak economy, the lead up to the IDS, and pricing pressure.

However, we believe that we have gained market share in many markets. Imaging segment’s gross profit margin was 69%, down slightly compared to the prior year period unfavorable product mix more than offset by pricing pressure for panoramic units.

Cost of sales was $84.5 million for the quarter, a decrease of $18.6 million or 18%. Gross profit margin was 48.7%, up from 45.6% in the prior year. Cost of sales included deal-related amortization and depreciation expense of $16.1 million versus $21.2 million for the same period last year. Excluding deal-related amortization and depreciation expense, gross profit margin in the second quarter was 58.5%, up 1.6 percentage points.

Moving onto operating expenses. SG&A expense was $56 million, down $4.6 million. As a percentage of sales, SG&A expense increased to 34%, up from 32%. Our SG&A includes expense related to the IDS.

R&D was $10 million, down $2 million. The decrease in R&D was mainly due to exchange rate fluctuations and the timing of our new product introduction. In 2009, R&D is expected to remain at historical levels of 6% to 7% of revenues.

Operating income plus amortization expense was $31.3 million, down 19.7%, and includes a $2.8 million restructuring charge. Excluding this charge, OI plus amortization was $34.1 million, down 12.6%. In December 2008, we announced certain actions to reduce our operation costs and thereby to improve the efficiency of our organization. These actions predominately relates to overhead functions in Germany, including increased automation of processes, the optimization of the supply chain, as well as increased efficiency of our administrative functions. In the second quarter, we incurred restructuring costs of $2.8 million, consisting of employee severance paid and outside consultant fees directly related to the restructuring plan.

We expect to record remaining costs for the plan of approximately $7.5 million in the second half of fiscal 2009, and annual pretax savings of about $10 million, starting in fiscal 2010. Our short term cost savings and deferred programs are progressing as planned and we expect to realize about $10 million in lower costs as a result of these initiatives.

Foreign currency loss amounted to $7.1 million in the quarter comprised mainly of $4 million non-cash unrealized loss on the revaluation of the Patterson exclusivity payment and $2.5 million loss on the revaluation of short-term intragroup loans.

Net interest expense was $5.6 million compared to $6.7 million with a reduction due to lower interest rates and favorable exchange rates. The income tax provision for the second quarter of fiscal 2009 was $0.4 million compared to $4.6 million for the prior year period. As we previously communicated, we expect the 2009 fiscal year effective tax rate to be 28% compared to 24% in 2008. The 2009 rate is forecasted to be higher than last year due to a variety of factors including the estimated distribution of profits across the different countries.

The company’s net income was $0.6 million compared to net income of $10.9 million in the prior year. On a GAAP basis, second quarter 2009 EPS was $0.01 compared to $0.20 in the prior year. Second quarter 2009 GAAP EPS included a $0.23 expense for deal-related amortization and depreciation, a loss of $0.05 related to the revaluation of the Patterson exclusivity fee, a loss of $0.03 related to the revaluation of intragroup loans, and a $0.04 charge related to our restructuring initiatives. In the prior year quarter, GAAP EPS included $0.28 of deal-related amortization and depreciation, $0.085 gain from the revaluation of the Patterson exclusivity fee, and $0.055 gain related to the revaluation of short-term intragroup loans. Excluding these items in both periods, second quarter diluted earnings per share was $0.36, up 5% compared to $0.34 per share in the second quarter of 2008.

Moving onto cash flow; operating cash flow was $23.6 million and investing cash flow, negative $5.4 million. At March 31, 2009, the company had cash and cash equivalents of $157.5 million and total debt of $520 million resulting in net debt of $362.5 million. This compares to net debt of $403.8 million at September 30, 2008. The decrease in net debt was the result of positive cash flow from operations and a stronger US dollar relative to the Euro as the majority of Sirona’s debt is Euro denominated.

This morning we reaffirmed our fiscal 2009 guidance. The second quarter of 2009 was a challenging environment for selling equipment. Having said that, our business is tracking in line with our expectations this fiscal year, and we believe that both revenues on a constant currency basis and operating income excluding amortization to be flat in fiscal 2009 as compared to prior year.

We would like to remind our investors to evaluate our business on an annual basis as our quarterly progression can vary significantly. This is particularly true given that 2009 is an IDS year and the quarterly progression is shaped by our product launches.

And lastly, one housekeeping item. As you may have seen the company has updated the registration statement it filed last August on behalf its largest shareholder. As the filing has not yet been declared effective, the SEC requested that we (inaudible) level.

I will now turn the call back to Jost.

Jost Fischer

Thank you, Simone. I would now like to review our performance at the IDS show in March.

I am delighted to report that the show was a success. A record number of visitors, more than 100,000 attended the show. This was up 7%, compared to the 2007 IDS. So we’re close to 2,000 exhibitors, which also was a record. I believe it is a very encouraging sign for the industry that the show was so busy and we are pleased with the level of orders and leads generated, which surpassed the 2007 show.

In Cologne, we introduced a large number of innovative new products that clearly showcased Sirona’s ongoing investment in research and development. I am very proud of the performance of our employees at the IDS. Their professionalism, dedication and motivation, big [ph] credit to our company and their efforts were a major reason for our success.

The Association of German Dental Manufacturers highlighted three main trends at the show. First, natural teeth are being kept for as long as possible to improve diagnostics and minimally invasive treatment methods. Second, a trend towards more natural-looking dental restoration. Third, increased utilization and networking between practice and laboratory, which results in increased efficiency and better economics.

These three trends are all favorable for Sirona. As the technology leader in the dental industry, our products help keep teeth longer, create aesthetically pleasing restorations, and improve the dentist’s workflow and profitability.

Our new products were well received at the show, and in particular the CEREC AC unit. Our extensive list of new products also included a new software tool that combines CEREC and GALILEOS data. This groundbreaking combination creates clear efficiency for surgical and prostatic implant procedures. A new soft tissue laser that combines state-of-the-art laser technology with a user-friendly design. The color touch screen, clearly structured menus, and self explanatory symbols provide significantly improved workflow and ease of use. The new HELIODENT Plus state-of-the-art intraoral X-ray system. Sirona’s proprietary new LED, which features a maximum light intensity of 30,000 lux. This product ensures that the dentist obtains an optimum view of the entire treatment area. Several enhancements for our panoramic units, including a newer global Bite block for enhanced patient positioning.

New functionality for our hygiene system, blocks for implant, and software for our inLab system, and larger blocks that facilitates stack milling, more efficiency for our inLab owners. Now inLab users can mill up to 25 restorations from a single jumbo block.

I would also like to highlight the positive reactions we received for our awarded winning TENEO Treatment Center. TENEO is the true centerpiece of the digital dental practice combining patient communication, optimized workflow with implant and endodermic systems integrated directly into one unit. I would encourage you to visit our Web site at www.sirona.com for additional details on all of these products.

Our new product launches particularly strengthen our leadership position in the dental CAD/CAM market. We continue to define the category and remain at the cutting edge of this technology’s development, far ahead of anybody else.

The dental care chair [ph] market, which has excellent potential for growth has four main components. Chairsize, laboratory, centralized milling centers, and restorative materials. Chairside. CEREC is a largest part of the CAD/CAM market with over 5 million CEREC restorations created each year and represents the highest potential going forward. CEREC has defined and dominated the category for over 20 years and we now have an installed base of about 25,000 systems around the world. CEREC allows dentists to create long-lasting biocompatible single visit restorations in their dental offices.

The dental laboratories conversion to CAD/CAM is well underway as labs are looking for a way to automate their manufacturing. Labs have a choice between outsourcing their production with a scanner or purchasing a full system with manufacturing capability. They generally want to retain their means of production and keep their position in the value chain. As a result, we believe we will see continued solid growth for inLab systems. Sirona is a clear market leader in this category with over 4,000 units placed in the lab. We estimate that there are about 5 million CAD/CAM restorations manufactured in laboratories each year.

Centralized milling facilities represent a smaller segment of the dental CAD/CAM market. Our infiniDent service supports lab owners with a full range of material and restorative options. We believe that this will be a lower growth area for the dental CAD/CAM market as lab owners do not want to fully remove themselves from the manufacturing value chain. We estimate that less than 2 million centralized milling CAD/CAM restorations are created each year.

The next component of the CAD/CAM market is materials. In conjunction with our partners, we offer a broad range of CAD/CAM materials and we are also participating in the growth of this market with our own CEREC branded products. One future driver of the CAD/CAM industry will be the digital connection between the dentist and the laboratory. With our CEREC Connect system, dentist can easily connect to the Sirona inLab [ph] laboratory of their choice. CEREC Connect enhances the entire process and results in higher quality restorations, improved turnaround time, and increased patient comfort. With our technologically leadership position across the entire dental CAD/CAM market, Sirona is poised to benefit as the market expands.

Moving on to our financial performance. Sirona is clearly making progress towards its financial goals. Our net debt level was $480 million in March of 2008. At the end of the second quarter 2009, our net debt has declined to $363 million, a decrease of over $100 million. This reduction was the result of positive cash flow and favorable exchange rates. Sirona now has $157 million of cash on its balance sheet and we will use some of that cash to retire debt. Later this month, we will pay down approximately $80 million, six months ahead of schedule.

In addition, we note that we are suspending our share repurchase program. Moving on, our guidance assumes a down first half followed by positive growth in the second half of the year. We had a successful IDS show, our AC launch is progressing as planned and we have the opportunity to sell AC units to the current CEREC user base.

A positive trend we saw in our imaging division towards the end of the second quarter has continued into April. Our cost saving and deferral measures are underway. These factors led us to be cautiously optimistic about the balance of the year.

Our underlying business trends are positive right now. But we have to acknowledge the weakened state of the global economy. When reaffirming our guidance, we made the assumption that our current business momentum will continue and that there will not be a further deterioration of the economy. So as we move forward with our continuing investment in research and development, best in class technology, robust relationships with our key distribution partners, and strong financial performance, we are well positioned to successfully compete in the market.

Looking forward, I am confident that we are taking the right steps for the benefit of our company and our shareholders.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jon Wood from Bank of America. Please proceed.

Brendan – Bank of America Securities

Hi, good morning. This is actually Brendan [ph] in for Jon this morning. On CEREC, can you give us a sense of whether growth was stronger in the US or internationally? And then secondly, what percent of the US installed base do you view as upgradable to the CEREC AC in 2009? And is it reasonable in your view to assume the new CEREC AC experiences an upgrade cycle similar to that of the MC XL?

Jost Fischer

Brendan, good morning. This is Jost. As evidenced by our results, you’ve seen that we had a relative better performance in the US in the second quarter that has certainly something to do with the good feedback of our AC unit in the market. Secondly, the IDS has more impact in the European markets than it has in the US market. So the US market was a little bit ahead when we talk about our CEREC launches.

Secondly, the AC upgrade, do we think there is a significant opportunity going forward? Yes, we think there is a significant opportunity selling our AC units into the current CEREC user base. At this point in time, we cannot quantify how much it is going to be. There are some estimates out there from analysts that may help you in understanding what the opportunity is. But from a general point of view, of course we think every CEREC owner would do himself a favor if he would upgrade.

Jeffrey Slovin

I would just add, it was just recently launched in May and will run through August and we are pleased with the excitement we see in the field. So, we look forward to a strong trade up program.

Brendan – Bank of America Securities

Thanks. And should we continue to anticipate operating cash flow to remain flattish year over year? It seems like as if you would suggest notable improvement in the working capital metrics in the second half.

Simone Blank

Yes, we should still assume that as we said in our earlier calls, cash flow for us, also to certain seasonality, tends to be stronger in the second half.

Brendan – Bank of America Securities

Thanks. And the Treatment Center revenue experience was pretty solid in light of the tougher comparison. How was the initial uptake of TENEO, I guess, tracking relative to your expectations? And can you give us a sense of what that product may have contributed to sales or revenue growth there in the period?

Jost Fischer

Brendan, if you look back at our last earnings call when we talked about a weak German performance in the first quarter, this has totally reversed in the second quarter to a very positive growth driven by our Treatment Center performance, and within the Treatment Center performance we had a very strong TENEO product [ph]. As you know, this is a new launch and it was pickup gradually. But now, especially with the response at the IDS show, this is a major contributor to our growth. The reason why our Treatment Center and our German performance was strong in the second quarter had to do with those tax-in [ph] centers – the absence of tax-in centers at the end of ’08 driving purchases into ’09, which then actually happened. And that on top we will see further growth in Germany after the IDS.

Brendan – Bank of America Securities

Great. Thanks so much.

Simone Blank

Thank you.

Operator

And your next question comes from the line of Tycho Peterson from JP Morgan. Please proceed.

Tycho Peterson – JP Morgan

Hi, good morning.

Simone Blank

Good morning.

Jost Fischer

Good morning, Tycho.

Tycho Peterson – JP Morgan

Just provide a little bit more color on some of the underlying market trends for imaging, both 2D and 3D? And I guess, in particular, whether there is any competitive shift happening on the 2D front? And then maybe also just on the 3D side, a little bit more color on the uptake of GALILEOS Compact would be helpful.

Jeffrey Slovin

Sure. I think we stated with a very positive trend with our 3D in the first quarter as you know, and that’s continued through our second quarter. The Compact addition has really expanded the audience for 3D and as we talked about the long term, we believe the GP [ph] will get involved in 3D and we are starting to see that. So, the Compact shift, I think, is more significant with closers to a 50/50 between our Comfort and our Compact. So that’s been very positive for us.

On the 2D, we have seen that dentist – and you know we go from the high end to the low end have had some shift to the lower end of the 2D and the panoramic has been not performing as strongly as our 3D, which has been very robust.

Tycho Peterson – JP Morgan

Okay. That’s helpful. And then on CEREC, can you just comment on how you’re viewing opportunity for CEREC Connect –?

Jost Fischer

When you look at the installed base of Sirona with 25,000 CEREC systems placed chairside and over 4,000 in the labs, this will be a significant opportunity for our customers to enhance their quality, to save on costs, and to enhance the patient experience with that. And therefore, we will see a major shift towards digital impression in the next year.

Certainly, let me reinvigorate, make more money (inaudible). It’s a superior treatment because we have better pickup on the digital impression. We have long lasting and biocompatible treatment there. And I think that’s certainly the trend that we see in our industry.

Tycho Peterson – JP Morgan

Okay. And then just one last one, any pick up in service in this environment, given equipment is generally probably being run a little bit longer?

Jost Fischer

We have a slight pickup in service when we look at our instrument center, where we have a repair business, and that has been picking up slightly in some countries. But not to a very significant edge, but it’s notable.

Tycho Peterson – JP Morgan

Terrific. Thank you very much.

Simone Blank

Thank you.

Jost Fischer

Thank you, Tycho.

Operator

And your next question comes from the line of Ross Taylor from CL King. Please proceed.

Ross Taylor – CL King

I was disconnected for a minute. So, I apologize if some of these questions were already covered. But just two quick ones. It sounds like Germany had good performance in the quarter, and I just wondered if you expect that market to continue to have positive trends for the balance of this fiscal year?

Jost Fischer

Tycho – I am sorry, Ross, we just answered this question, but let be reinvigorate for a second. We saw some shifts in Germany from the first into the second quarter due to the absence of tax incentives in 2008 and an accelerated depreciation opportunity for 2009 and that actually happened in the German market. So, we saw a good pick up there. On the other hand, we had to run up to the IDS, which was a factor for a slow down certainly in the last month. But as we had a very good response from our dentist in this show, we have a very good order backlog leads into this. So we expect that trend to be positive also for the third and fourth quarter for Sirona.

Ross Taylor – CL King

Okay, good. And I don’t know if you can comment on the performance of some of the emerging markets here [ph] at all also in the second quarter. And how there you are holding up relative to the rest of your business or whether there really haven’t been much material impact all on your overall performance?

Jost Fischer

Well, certainly. We have invested largely into the sales and service infrastructure in some of the countries that we were talking about, and it’s kind of a little mix back. We have strong performance in Australia. We have strong performance in Japan. These are the highlights in the area. But we also have some countries with more difficult environment these days evidenced by Korea were certainly besides a difficult environment has an exchange rate problem that makes it a difficult for the moment there to perform.

But as you know, there’s some project business that we have and that can vary over the quarters. We expect some of that project business to hit Sirona’s sales in the second half of the year.

Ross Taylor – CL King

Okay, good. And let’s see – last question is, is there anything specific that’s prompting your early repayment of debt that you mentioned on the call?

Simone Blank

Yes, Ross. As you have seen we have a relatively high amount of cash on our balance sheet, and so we looked at that. And we also have a prepayment that is due in November 2009. And we think it makes sense to pay it back early because we have interest savings and that basically drove the decision.

Ross Taylor – CL King

Okay. All right, great. Thanks very much.

Simone Blank

Thank you.

Operator

And your next question comes from the line of Jeff Johnson from Robert Baird. Please proceed.

Jeff Johnson – Robert Baird

Thank you. Good morning all.

Jost Fischer

Good morning.

Jeff Johnson – Robert Baird

Jost, I was wondering if we could (inaudible) on the CAD/CAM, the AC upgrade cycle. Was there any load in this quarter into your distributors ahead of that upgrade cycle? And I guess just from a higher level, I am wondering if you could talk about managing that cycle with the XL upgrade – sorry about that – with the XL upgrade, a year and a half, two years ago, we went through a couple quarters of hyper growth, but then it seemed to hit and was gone. I guess I am wondering if – are you going to try to manage that cycle and extent it a little bit more this time around so we get, maybe a three, four, five quarter run on the upgrades or how are you thinking about that?

Jost Fischer

Jeff, it’s a very good question that you post. First of all, when we talked about the MC XL launch, this was like more a manufacturing challenge that we had to go many parts and stuff. Here we are talking about a new technology and unlike the MC XL – MC we have suspended our old unit. So this will be a replacement. And from that point of view we have two factors that we see. A, with this new AC, we think we can try penetration because it makes it easier, better for dentists to decide to go into the CAD/CAM market, especially chairside. But they are not limited to a chairside solution only, but they also can buy an AC unit alone and then connect with their lab, the lab of their choice, and go the traditional way with digital impression. You know, an improvement in the process as we said on the call. So, that’s the second option or opportunity that we have. The third opportunity which is certainly adding to this is the upgrade cycle. The upgrade cycle is of course planned to get it with our partners. And from that point of view, it is a little early to tell how fast this cycle will move up. We just started that on Monday and from that point of view we will certainly see a larger uptick in the next two to three quarters. Whether we can extend that cycle depends on the reaction of the market that seems to be – and I think you’ve done some research – seems to be very positive. But we need to get the orders and it’s too early to tell. But probably we can give you a better look at after the next quarter when we have some of that stuff in the order –

Jeff Johnson – Robert Baird

All right. Fair enough. Maybe a couple clarifying questions if I could. Did I hear you say you are suspending the buyback program, and if so maybe some comments on why? And secondly then, you sound a little maybe as if you might be hedging guidance just a little bit that you need see the rebound in trends you’ve seen maybe over the last month continue for you to hit guidance. Am I misreading that or it just sounded to me like you were maybe a little more cautious around your guidance than I remember your last quarter?

Simone Blank

Hi, Jeff, it’s Simone. On the share buyback, we have recently not been very active on this and we have made the decision to suspend it for the time being. And your question on the guidance, there are lot of parts and we are very encouraged by many things, which is the AC launch and I think Jost has explained that very well, our trade-in potential, the current momentum that we’re seeing in the imaging business, and the success we had at the IDS and also the good performance by the TENEO, and we also have some easing comparisons as you might have seen, and adding that all up we think we are on track. And we reaffirmed guidance this morning. However, we agree with the overall economic situation, the assessment of that.

Jeff Johnson – Robert Baird

Okay. All right. Simone since I got you here, the $10 million in near term cost savings, not the fiscal 10 savings but the near term, can you quantify maybe how much of that you feel like has flowed into the model thus far and how much in the second half?

Simone Blank

This will hit all our functional costs, cost of goods sold, SG&A, and R&D. And we are not giving level of details on what (inaudible) when. But we already positive impact on that and more to come in the second half.

Jost Fischer

Majority, though, will be in the second half.

Jeff Johnson – Robert Baird

Majority in the second half. That’s helpful. Thank you Jost. And Jeff, maybe a question, if I could finish with you. Imaging, it sounds like the trends have picked up, which is encouraging. We do continue to see a decelerating trend over the last five or six quarters, though. Has the pickup we’ve seen over the last month or two, as you guys have described it, does that get us back to flat or even positive over the next couple quarters or how should we think about your qualitative comments with the actual numbers we’ve seen here in the model, the last five, six quarters?

Jeffrey Slovin

I think you are exactly right, we historically have been very strong growth and we have talked about over the last few quarters about the pricing pressures that we have seen and have been encouraged about the receptivity of our Galileo and certainly adding the compact has just continued that trend and we saw a real pickup in margin and continue through April and we also saw digital radiography show better momentum and margin. And I think one of the trend that to just take you back is we had a transition over at Patterson from the PTR to the equipment specialist and we have always said that we would take time and we are seeing the success of that. So, I think it's positive we also believe that our financing promotions in place resulted dentist to go digital and that is continuing.

Jeff Johnson – Robert Baird

Alright, that’s helpful. And I guess just a follow-up there Jeff. It's not just in Patterson that we have heard in the market and I don't want to tide us too much because of the economy and that we have actually heard from a several different sources kind of a late March early April uptick in an equipment demand.

Jeffrey Slovin

No, I think that’s absolutely right, we have seen positive market share growth with a number of our dealers. No question about, I mean digital radiography is been showing better momentum.

Jeff Johnson – Robert Baird

And not just Sirona one I guess I am searching for what may be caused, was it the dentist have put off purchases for a couple of months and then realize maybe their practices aren't getting hit so bad. I am just trying to search for description there.

Jeffrey Slovin

I think that a fair point. I think we have been saying that the best investment a dentist can do is to reinvest in their practice. And I think the dentist are taking a look at the financing programs that are out there and seeing about the efficiency improvement and the return on investment that digital provides to their practice and getting it. We understand that there has been a postponement and I think it takes time for a dentist to get comfortable and getting more and more comfortable.

Jeff Johnson – Robert Baird

Alright, thanks guys I appreciate it.

Jost Fischer

Thank you, Jeff.

Operator

And your next question comes from the line of Greg Brash from Sidoti and Company. Please proceed.

Greg Brash – Sidoti and Company

Good morning. Thanks for taking my call. Just curious on the CEREC side. All of your distributors stocked inventory and is there a way to quantify at all in the quarter how much of that is inventory stocking versus your actual sell-through?

Jost Fischer

I think when we talk about inventory that’s a natural factor of product launches that you got for certainly in the early phase of a product launch. Let me remind you that we launched this product in January. And we have seen some strong sales after that. So, on the other hand when you replace a unit you are going to have to get rid of that as well. So, there is a de-stocking and a stocking element built into that. When you look at showroom equipment that’s absolutely needed before you can sell there is a stocking element but before you can stop that your dealer wants to get rid of your old units and that has happened I think from our point of view we have been exchanging those showroom equipments wherever the product has been launched.

Greg Brash – Sidoti and Company

Just a follow-up, you think some of that destocking was occurring in the prior few quarters in anticipation of the AC launch?

Jost Fischer

Yes.

Greg Brash – Sidoti and Company

Okay. And then just curious, you mentioned on the 3D imaging side, some central practices were opting for some of the lower priced products. Is that occurring at all in any of your other segments?

Jeffrey Slovin

Well I think from the standpoint of the 3D, we now have two options for the dentist. The specialist has continued to view the comfort as the right choice and the GP is taking a harder look at the compact which certainly provides all of the necessary diagnostics for implant. And certainly we have seen some specialist choose the compact as well which is the real value play for the dentist.

Jost Fischer

Greg, on a wider point a pricing pressure, look into our CAD/CAM segment, we have taken up the price of 9% when we launched the AC from 110,000 per unit to 120,000 per unit. So, new product launches always gives the opportunity to either up your prices or up your margin. So, to talk about a trend in imaging where pricing pressure is going on and while you have a widening of your product spectrum is not directly linked with pricing reduction as I might note.

And when you look at our treatment center and instrument section we certainly there is no trend in the market that we serve to a lower option area.

Greg Brash – Sidoti and Company

Great. That’s very helpful. And then just curious maybe Simone, if you can help us out for the next two quarters, currency rate stay at a current levels what sort of impact will that have on Q3 and Q4 at revenues?

Simone Blank

Currency obviously impacts us, as you know 50% of our sales are euro denominated and 75% of our expenses are euro denominated and normally the bottom-line is relatively unimpacted. And I think also if the currency stays where it is, that will continue to be the effect.

Greg Brash – Sidoti and Company

I am just curious I mean it was I guess roughly 8.5% this quarter will it be similar in the third quarter and then much in Q4?

Simone Blank

It probably be a little bit more because of the comparisons that we are going into.

Jost Fischer

Dollar was at 156.

Simone Blank

Third quarter last year.

Jost Fischer

Third quarter last year, and currently it’s at 132, 133.

Greg Brash – Sidoti and Company

Okay. Thank you.

Simone Blank

Thank you.

Jeffrey Slovin

Thank you, Greg.

Operator

And your next question comes from the line of John Kreger from William Blair. Please proceed.

John Kreger – William Blair and Company

Thanks very much. Just a follow-up question on IDS, if we think back to the last show, I recall that SG&A spending fell off the quarter after, should we expect the similar pattern this year and if you think back to past shows would you expect the equipment gone to be or evenly spread between the next couple of quarters?

Jost Fischer

You are talking about the spread between the quarters, it certainly takes some time when you come from the IDS to get the lead through into orders with our distribution partners. So, we expect the third quarter to be impacted but we also expect the fourth quarter to be positively impacted. How about the exact spread, our assumption is a little more in the third and little less in the fourth.

So, when talk about the general discussion about the show versus 2007 certainly this was the best IDS ever. I think on if you would have been there, you would have seen the (inaudible) and the interest the value interest from dentist from the dealers around the world taking to look at what Sirona had to offer and expressing their views on our offerings in this market and that was very-very encouraging. So, from our point of view we are very happy with this show. And when you look at it from an order point of view this is one thing, but you launch a lot of new product that then will spread into the market. So, this is not a one-time bump this is a launching platform for new product that we use to show it to the largest audience possible, and then we think that will result in an long lasting growth opportunity for Sirona.

John Kreger – William Blair and Company

Thanks, Jost. And Simone I think two years ago your SG&A declined in the quarter after IDS, should we assume similar pattern this year?

Simone Blank

Yes, that would certainly be an impact.

John Kreger – William Blair and Company

Great. Thanks. And then a broader question, if you look across your various global markets over the last 2 or 3 months. If you try to separate out the market share that you are clearly gaining. Is that your opinion that the markets themselves are getting better worse or staying the same in this tough environment?

Jost Fischer

As we stated John, I think the industry is not in its best condition when we look back to last five, six years and from that point of view we do not think it’s going to change material. But we are cautiously optimistic that it is not going to deteriorate any further. And we believe with our offerings at that dentists will as Jeff said earlier will take a closer look at investing in to their own profession and will come back for those products that they think and improve their bottom line, and improve their efficiency. When you look at through the world for that, we are certainly see in the positive side, the fifth continent Australia and New Zealand to have a good economy not as much impacted.

But when you look at Europe, US and Asia you have similar patterns, where economy is tough, tougher in some countries that we mentioned like Spain or Libya. And improving in other areas like in the US when we some pick up here. But certainly there is way to go for good economy.

John Kreger – William Blair and Company

Thanks and just a final clarification. You talked a number of times on the call about a pattern of dentists penetrating down the lower price points within a class. Just to clarify, are you seeing any interest in pricing competition among manufacturers in these classes or is it more just a – that the customer trading down.

Jost Fischer

Well there is factors to this, when we look we at imaging we certainly have pricing pressure not only this quarter but for at least full of last year, where manufactures were fighting for market share that’s the one side. And then you have a trading down here and there from the dentist world as we see that in the 2D panoramic world I think that's a pattern. On the other hand when you look at 3D we don't see that we are opening the market to a large audience and with our compact offering. But the compact offering is designed for different audience and also has a lower price point. So we can't exactly see that as a pricing pressure but that has a widening of the audience.

Jeffrey Slovin

And I think John you have to go back to what Jost said which is exactly right when we launch a ground breaking new product like DAC its priced up and you see the traction that we are receiving. So it's really the value proposition that your product brings to the dentists that is making the ultimate decisions.

John Kreger – William Blair and Company

Great, thanks very much.

Simone Blank

Thanks you.

Jost Fischer

Okay John.

Operator

(Operator instructions). And your next question comes from the line of Adam Pusard from Barclays Capital. Please proceed.

Adam Pusard – Barclays Capital

Good morning.

Simone Blank

Good morning. Adam.

Jost Fischer

Good morning, Adam.

Adam Pusard – Barclays Capital

Even with the debt pay down I think you guys are still kind of having good amount of cash are you guys planning to get a little more aggressive on the acquisition front and are there kind of more opportunities out there?

Jost Fischer

Adam its Jost speaking. Certainly we have ample cash left on our balance sheet, even offer an early pay down and we expect to have more with a cash positive cash flow in the second half. With regards to opportunities for acquisitions, yes if there is opportunity presents itself in the right field at the right price we certainly will take a hard look at that. But as evidence from us we have been very disciplined about acquisitions in the past and we intend to stay like that. Certainly, we know cash is king and we want to make sure we are doing the right things for our shareholders and for the Company when we evaluate acquisitions.

Adam Pusard – Barclays Capital

Okay. And then I guess a follow-up, you guys mentioned that you guys a launched a new a laser that's obviously been a market that's been pretty impacted by the economy, I guess what would you guys characterize I guess the growth of that market currently.

Jost Fischer

Yes, the market has been growing in the past, I just want to mention we are not talking about hard tissue laser, we are talking about soft tissue laser. And I think this will be a nice tag on for CEREC owners as we will bring a CEREC addition of this product out to the market. And we see some good growth opportunities here with the way we have structured this program, of the new laser I think I am optimistic that this will be a good growth for Sirona.

Adam Pusard – Barclays Capital

Yes I guess on top of that what would you I guess you characterize the market growth rate as I guess that segment just in general.

Jost Fischer

In that segment I think it has been a double-digit a market growth when you look back over the last five years as it has been a new item. And Sirona was a large participant in that. I think it has slowed down a little bit but I think with innovations you can get that market back to double-digit growth again.

Adam Pusard – Barclays Capital

And lastly a just a follow-up on digital radiography you guys mentioned I think taking share that I guess what would you characterize your share now in that market?

Jeffrey Slovin

I think we don’t break out specific share but we are clearly the market share leader in the US and in many other markets.

Adam Pusard – Barclays Capital

Thanks a lot.

Simone Blank

Thank you.

Jost Fischer

Thank you, Adam.

Operator

At this time there are no questions in queue. I would now turn the call over to Mr. Jost Fischer, CEO for closing remarks.

Jost Fischer

Thank you for joining us today for our second quarter conference call. I look forward to updating you on our next call in August. Thank you very much. And have a nice day.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.

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