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Sirona Dental Systems, Inc. (NASDAQ:SIRO)

F4Q09 Earnings Call

December 4, 2009 8:30 am ET

Executives

John Sweeney - Vice President of Investor Relations

Jost Fischer - Chairman, President, and CEO

Simone Blank - Executive Vice President and CFO

Jeffrey Slovin - Executive Vice President and COO of US Operations

Analysts

Derek Leckow – Barrington Research

Peter Bye – Jefferies & Company

John Kreger – William Blair

Jeff Johnson – Robert Baird

Tycho Peterson – JP Morgan

Larry Marsh – Barclays Capital

Glen Santangelo – Credit Suisse

Operator

(Operator Instructions)  Welcome to the Fourth Quarter and Full Year Sirona Dental Systems Conference Call. I would now like to turn call over to Mr. John Sweeney, Vice President of Investor Relations.

John Sweeney

I’d like to remind you an earnings slide deck presentation relating to this conference call is available on our website at www.Sirona.com. Before I turn the call over to Jost Fischer, Chairman, President, and CEO, Sirona Dental Systems, I need to inform you that the 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 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 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 2010. 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’ll turn the call over to Jost Fischer, Chairman, President, and CEO of Sirona Dental Systems.

Jost Fischer

It is my pleasure to welcome all of you to our fourth quarter and full year 2009 conference call. Joining me today are Simone Blank, Executive Vice President and CFO, and Jeffrey Slovin, Executive Vice President and COO of US Operations.

I’m pleased to report that we had a solid performance in fiscal 2009. Despite the challenging global economic environment we posted over 8% constant currency revenue growth in our fourth quarter. Looking at the performance by segment in fiscal 2009. We saw solid growth in CAD/CAM up 9.3% constant currency. Treatment centers and instruments were both flat on a constant currency basis which was better performance then the industry. Lastly, our imaging business was down 5.4% for the year. This was also better performance then what we saw in the market.

Fiscal 2009 was characterized by strong performance at the IDS which resulted in a significant number of orders both during and after the show. We posted strong cash flow growth with operating cash flow up 26.6% to $120 million. We reduced our net debt by $110 million. Furthermore, we capitalized on our successful product launches. The CEREC AC continues to receive excellent reviews from the dental community. Our GALILEOS compact is now the 3D product of choice with general practitioners. TENEO is quickly becoming the gold standard.

Our International revenues increased 1.8% on a constant currency basis with solid performance in Germany. The US was flat for the year. However, I highlight that we finished with exceptionally strong growth of 32% in the fourth quarter driven by an excellent response to the AC and the successful upgrade program.

The weak global economy is impacting the dental market. However, even in the face of these headwinds we were able to grow revenues due to our innovative product offerings. Our products enabled dental professionals to improve their clinical results and to increase the profitability of their practices. Sirona is a formidable competitor in each of its four business segments. With our history of innovation and investment in research and development our results clearly demonstrate our leadership position in today’s challenging marketplace.

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

Simone Blank

In the fourth quarter our revenue increased to $188.2 million benefiting from exceptionally strong US revenue growth which was up 32.1%. US revenues were positively impacted by demand for CEREC AC and the AC upgrade program. International revenues were down 5% on a reported basis but flat constant currency. We saw mixed results in the various countries with strong performance in Japan, Australia and France, and weak performance in Spain, South Korea, and Russia.

Moving on to a review of our business segment performance. Revenues in our CAD/CAM segment increased 35.3% to $66.1 million or up 40.1% on a constant currency basis, driven by continued strong global demand for CEREC AC and our upgrade program in the US. CAD/CAM segment gross profit margin was 67.2% down 110 basis points compared to prior year. Our year over year margin decline was mainly due to the AC trade in program.

Imaging segment revenues declined 5.5% to $59.8 million down 2.7% constant currency. Imaging revenue declines moderated in the fourth quarter after being down 9.1% constant currency in the third quarter 2009. I would note that our imaging segment continues to gain share in this challenging environment. Imaging segment gross profit margin was 60.5% up 290 basis points compared to the prior year period. Despite the continuing pricing pressure our margins increased in the quarter driven by GALILEOS and [inaudible].

Treatment center segment revenues were $39.2 million down 15% or down 10.4% constant currency. Segment margins declined 220 basis points to 38.2%. Our fourth quarter performance followed very strong results in the fiscal third quarter. In addition, we faced a difficult comparison due to strong project business in the prior year period. The margin decline in treatment center was the result of regional and product mix.

Instrument revenues increased 2.3% to $22.8 million or up 7.7% constant currency benefiting from high volume business. Instrument segment gross profit margin was 46% down 490 basis points compared to prior year due to product and regional mix.

Now I will review some of the P&L details. Cost of sales was $96.1 million for the quarter a decrease of $3.1 million or 3.1%. Gross profit margin was 48.9% up from 45.1% in the prior year. Cost of sales included deal related amortization and depreciation expense of $17.2 million versus $21.3 million for the same period last year. In addition, the gross profit margin expansion was driven by higher CAD/CAM sales and the strengthening of the US dollar relative to the Euro.

SG&A expense was $58.4 million down $3.6 million benefiting from targeted expense control and the strengthening of the US dollar relative to the Euro. As a percentage of sales SG&A expense was 31.1% down from 34.4%. R&D was $9.6 million down $1.6 million. The decrease in R&D was mainly due to exchange rate fluctuations and the timing of product introductions.

In December 2008 we announced certain targeted actions to reduce our operating costs. These actions predominantly relate to overhead functions in Germany including increased automation of processes, the optimization of the supply chain and improved efficiency of our administrative functions. We incurred restructuring costs of $3.7 million in the quarter and a total of $8.2 million fiscal 2009 consisting of employee severance pay and outside consulting fees.

Our short term cost savings and deferral programs progressed as planned during the fourth quarter. The near term cost savings have mainly been deferred and therefore will not flow through into fiscal 2010.

Operating income plus amortization expense was $43.3 million up 30.8% compared to prior year. This quarter’s results include a $3.7 million restructuring charge. Excluding this charge OI plus amortization was $46.9 million up 41.8%.

Foreign currency gain amounted to $6.8 million in the quarter and included a $3 million non-cash gain on the revaluation of the Patterson exclusivity payment and a $2.2 million gain on the re-valuation of short term intra group loans. Net interest expense was $5.5 million compared to $6.7 million with a reduction due to favorable exchange rates, lower interest rates and lower overall debt levels.

The income tax provision for the fourth quarter of fiscal ’09 was $0.3 million. The fiscal 2009 effective tax rate was 14.7%. The fourth quarter tax rate was exceptionally low due to a catch up adjustment to reflect the lower full year rate.

The company’s net income was $26.7 million compared to a loss of $5.2 million in the prior year. Fourth quarter 2009 GAAP EPS was $0.48 compared to a loss of $0.09 in the prior year. Fourth quarter 2009 GAAP EPS included a $0.39 expense for deal related amortization and depreciation a gain of $0.04 related to the re-valuation of the Patterson exclusivity fee, a gain of $0.03 related to re-valuation of intra-group loans, a $0.065 charge related to our restructuring initiative and a $0.03 gain on the release of a reserve related to the sales of a subsidiary.

In the prior year quarter GAAP EPS included $0.38 of deal related amortization and depreciation and $0.11 loss related to the Patterson re-valuation and an $0.08 loss on the re-valuation of intra-group loans. Excluding these items in both periods fourth quarter 2009 fully diluted earnings per share was $0.83, up 74.4% compared to $0.48 per share in the fourth quarter 2008.

Moving on to cash flow. Operating cash flow was $44.5 million and capital expenditures was $6.1 million. At September 30, 2009, the company had cash and cash equivalents of $181.1 million and total debt of $474.9 million resulting in net debt of $293.8 million. This compares to net debt of $403.8 million at September 30, 2008. The reduction of $110 million in net debt was mainly driven by strong cash flow from operations, lower tax and lower interest payments in the 2009 fiscal year.

Moving on to guidance. The fourth quarter 2009 continued to be a challenging economic environment. Having said that, our business development was in line with our expectations and we finished the year with 8.4% constant currency revenue growth in the final quarter. While we remain cautious on the general economic outlook for 2010 we are pleased that our fourth quarter business trends have continued into the first fiscal quarter 2010.

We expect fiscal 2010 to show a different quarterly progression then fiscal 2009 driven by the timing of the bi-annual international dental show and our new product launches. As a result, our constant currency revenue growth is expected to be stronger in the first half of the year with lower growth as we move into the back half.

In fiscal 2010 our guidance anticipates constant currency revenue growth of 4% to 6% and operating income plus amortization in the range of $166 to $176 million. Assuming constant interest rates we expect to see interest expense in Q1 and Q2 at a similar rate to our Q4 results. Our interest rate swaps roll up in March 2010 so we anticipate having savings as we move into the back half of the year. We ended the year with a tax rate of 14.7%. Our current estimate for the fiscal 2010 effective tax rate is approximately 20%.

I would 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

As you can see, Sirona had solid performance in a challenging economy. This was the result of several significant factors. Our commitment to innovation, our strong global sales and service infrastructure, our geographic diversification, our best in class distribution network, and an outstanding effort from our employees. Sirona’s innovative products enabled dental professionals to perform high quality dental treatments and to increase the profitability of their practices. We have a proud tradition of innovation and a long standing commitment to research and development. As recently demonstrated by the successful launches of CEREC AC, GALILEOS Compact and TENEO.

At the Greater New York Dental Show there was considerable appreciation for the GALILEOS, CEREC software integration. This technology combines the diagnostic capabilities of GALILEOS with the high quality aesthetic restoration solutions offered by our CEREC system. This enables dental practitioners to plan and create customized dental implant solutions more easily, with a substantially lower level of risk. We are the only company with the product portfolio to integrate these two technologies and therefore are well positioned to capitalize on this opportunity.

It is becoming apparent that dentists interested in 3D are now looking for CAD/CAM integration capabilities and that is our real differentiating factor for us. Our global sales and service infrastructure gives us a competitive advantage with allows Sirona to grow the business. We continue to drive international expansion with differentiated strategies for individual regional markets. To date these investments have paid dividends and our geographic diversification gives Sirona a more balanced growth profile.

Our performance in fiscal 2009 would not have been possible without strong support from our key distribution partners led by Patterson and Henry Schein, both of whom made a considerable contribution to our CEREC results.

Before concluding my remarks I would like to take a minute to acknowledge the exceptional performance of Sirona’s employees. We are grateful for their dedication, perseverance, and for helping to make this year so successful.

In closing, I am confident that we are well positioned to compete effectively in the markets we serve. We will continue to focus on making best in class innovative dental products that take dentistry to new heights.

With that Simone, Jeffrey, and I will now address your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Derek Leckow – Barrington Research

Derek Leckow – Barrington Research

My first question deals with the distribution of operating expenses next year. You mentioned the fluctuations that could occur due to the fact we had the IDS last year. I’m trying to gauge your comments about the SG&A cost savings that you mentioned as well as perhaps some fluctuation there related to expenses around product launches, etc.

Simone Blank

On the top line we said during our prepared remarks that we expect the first half to show stronger growth and then the second half driven obviously by the fact that last year we had the IDS and also all these major product launches. On the expense side you’ve seen that we always will be impacted by the variation in the exchange rate. We’ve continuously said that we expect to invest in R&D at a long term rate of 6% to 7%. You can assume that this is something we’re looking forward to also here.

Obviously the project that we have in place for the restructuring of our support functions, particularly in Germany is well on its way. We confirmed that we continue to expect a $10 million savings in this fiscal year.

Derek Leckow – Barrington Research

$10 million savings but more heavily weighted toward the back half of the year would that be a way to look at that?

Simone Blank

No I wouldn’t say that.

Derek Leckow – Barrington Research

A question on the integration of GALILEOS and CEREC. Are you seeing new orders coming that are suggesting that people are making the investments in their upgrades to their practices in the United States that would integrate those two items or are you still seeing much higher growth on the CAD/CAM side and less so on GALILEOS?

Jost Fischer

Innovation is the driver of Sirona’s growth, its our hallmark. When I look at what we did with this piece of integration of course we are spurring sales for both categories out there. As said earlier the doctors that have CAD/CAM are looking for an integration of 3D so the CAD/CAM guys are looking for 3D imaging especially when they want to take on implants in their practice. That’s absolutely going both ways and we see a lot of interest in both categories by that. So its not only for CAD/CAM its also for 3D imaging.

Jeffrey Slovin

The greater New York just finished and I think if you were there you saw that there was a lot of interest, a lot of talk about CEREC meets GALILEOS. I can tell you absolutely we are seeing an increase in our GALILEOS sales because of this competitive advantage that the offering of CEREC meets GALILEOS does for the dental practice.

Derek Leckow – Barrington Research

We should probably look at a meaningful increase in your imaging systems sales for next year compared to what they were this year.

Simone Blank

We’re not giving guidance on a segment basis but our overall guidance for the revenue line is 4% to 6% constant currency growth.

Operator

Your next question comes from Peter Bye – Jefferies & Company

Peter Bye – Jefferies & Company

Did I hear you correct to say the cost savings wouldn’t come through from the restructuring from fiscal ’09?

Simone Blank

No, you didn’t hear me correctly. I said we confirmed that we continue $10 million savings.

Peter Bye – Jefferies & Company

On the quarterly gating of expenses if we look at a non-IDS year in fiscal ’08 as well as obviously the currency is more like ’08 then it is ’09 as it runs through the P&L. Within the higher revenue base and SG&A are we looking at similar sort of proportion of percent of sales below the gross profit line for expenses in 2008 is that a fair assessment?

Simone Blank

If we look at the gross margin I think its pretty more evenly split then you’ve seen that historically.

Peter Bye – Jefferies & Company

They’ve been up all year and I assume this is just on the AR front. Its certainly flat sequentially but is that currency driven primarily?

Simone Blank

The accounts receivable you mean?

Peter Bye – Jefferies & Company

Yes, you had a nice step down in fiscal Q4 last year we didn’t really see it this year.

Simone Blank

Yes, the accounts receivable are driven by two things, obviously always foreign currency driven depending on what the level is. Also its sometimes just the timing thing, what region we delivered to when. Those are the two main drivers, the regional split of the sales. The day sales outstanding are basically unchanged.

Peter Bye – Jefferies & Company

On the benefit from the tax to the pro-forma EPS we’re getting something around $0.17 or so relative to what we had before, is that fair?

Simone Blank

If you look at it and compare 24% effective tax rate that we have given you before to the actual effective tax rate now its around $0.22.

Peter Bye – Jefferies & Company

FX rates today what are you thinking on the south line there is that a 5% to 6% benefit to the 4% to 6% that you’re reporting on organic where the rates are today or is it a little higher then that?

Simone Blank

Can you repeat that question.

Peter Bye – Jefferies & Company

The benefit to the top line on foreign exchange where rates are today, are you looking at an additional 5% to 6% benefit from currency on the top line relative to your organic growth or is it a little bit higher then that?

Jost Fischer

Depending on of course the development of the exchange rate its a ballpark number.

Operator

Your next question comes from John Kreger – William Blair

John Kreger – William Blair

Can you talk a bit more about the momentum you saw in your CAD/CAM business. To what degree was that driven by trade-ins and are trade-ins a phenomenon that you really on see in the US or do you see that in European markets as well?

Jost Fischer

First of all our results have been impacted by the trade-up positively as you might expect. So the trade-up was a good success for Sirona. When you look at it, it is about 95% of all that trade-up comes out of the US. Internationally we have some trade-ups but not anywhere close to the magnitude we have here in the US.

John Kreger – William Blair

Should we assume that that is pretty much done at this point or will you have some follow through in the next few quarters?

Jost Fischer

We have some follow through but the majority has been recognized.

John Kreger – William Blair

If you’re willing, what sort of a margin impact is a trade-in sale for CEREC versus a new customer sale. I know you mentioned that was a margin impact in the quarter.

Simone Blank

I think the quarter gives you a good indication on what an impact can be.

John Kreger – William Blair

Can you drill a little bit more into your perspective on the global markets. From your perspective are you seeing stable trends or any signs of improvement and are there particular regions that stand out better or worse as you see them?

Jost Fischer

You have to look at it country by country. In the US we see signs of stabilization, talking to our dealer trends we sense these trends are stabilizing from that point of view. When you look over to Europe you have a different picture. You have good performance in Germany, France, and the neighboring countries but you also see challenges specifically in Spain and Russia these days. When you talk more internationally Australia had an excellent year, South Korea had a bad year. We expect the strong countries to stay solid also in the next years. The countries we have difficulties with the economy will remain a challenge going forward.

There is one thing I would like to add on that, how we see that from a Sirona point of view. We think the economy is not the only factor. We believe innovation can beat the cycle as demonstrated by Sirona this year and we expect that to continue also into next year.

John Kreger – William Blair

Given that point should we think of 2010 as a pretty typical kind of new product introduction year for you or more active or less active? I know you don’t like to really show your hand too much.

Jost Fischer

As we typically do not launch products on earnings calls I would adhere to that also this time. We are in the early stages of our product launches that we just did namely the CEREC AC, our GALILEOS compact and our TENEO but there is a lot of things that go around that like CEREC GALILEOS integration that we just talked to which is only coming through in this following year there will be assuredly enough leeway from what we have to get the growth that we are looking for.

Operator

Your next question comes from Jeff Johnson – Robert Baird

Jeff Johnson – Robert Baird

Following up on some of your geographic comments, how is the Middle East looking for you at this point? I know that’s been an important region for you in the past, especially on some of your treatment center side and what have you. Any issues there to be aware of, good or bad for next year?

Jost Fischer

Middle East has been a good market for us and continues to be a good market for us. If you look at Dubai, Dubai is the smallest of our markets out there so there is a lot of private practice going on there. Our main markets are outside of Dubai and they will not be affected as we assume going forward.

Jeff Johnson – Robert Baird

Option expense has been trending at about $15.5 million the last two years. Should we think of that as similar throughout most of 2010? As we get to that four year anniversary of the Schick deal should we expect late in 2010 to see option expense come down nicely as some of those four year vesting period starts to fall off.

Simone Blank

I think you described it in the right way.

Jeff Johnson – Robert Baird

Interest expense, I want to make sure I’m understanding your comments for the second half of the year. As I look at your hedges it looks like interest rate on almost $400 million in debt could fall by a full 300 basis points or so, we’re talking north of $10 million annualized decline in interest expense if that happens. Is that too aggressive to be thinking from a modeling standpoint?

Simone Blank

No, I think that’s a correct assumption. Obviously that all assumes that the interest rates stay where they are at this point in time and that the FX is kind of where it is at this point in time.

Jeff Johnson – Robert Baird

If interest rates stay around this range you would be more likely to take that entire bolus of debt back to floating?

Simone Blank

Yes.

Jeff Johnson – Robert Baird

On the amortization I’m still trying to back out this quarter’s number to get to that $0.39 as you talked in the press release about. That to me implies almost a $21 million after tax impact from amortization. I think in the call you talked about a pre-tax impact of $17 to $18 million. Where’s my math wrong there?

Simone Blank

The math is a little bit impacted by the fact that we have this catch up for the tax rate settlement and that makes it a little bit odd in the quarter. John and I can take you through that offline if you want. A little bit odd in the quarter. During the year $70 million deal related amortization expense for ’09.

Jeff Johnson – Robert Baird

You talked about the $0.22 benefit. We were getting it closer to maybe $0.10 or $0.15. Was your $0.22 comment for the quarter or for the year tax rate was that big of a benefit?

Simone Blank

That was related to ’09 and the difference between 14.7% and 24%. That is in the quarter and for the year because the catch up is in the quarter.

Operator

Your next question comes from Tycho Peterson – JP Morgan

Tycho Peterson – JP Morgan

On the imaging market, I’m wondering if you can talk a little bit more about some of the dynamics. I’m trying to get a sense as to whether you’re actually starting to see the market turn around here a little bit. You’re obviously pulling some share. If you could comment on how much of what you’re seeing you think is share shift versus market growth that’d be helpful.

Jeffrey Slovin

This has been a challenging environment for selling imaging. If you take a look at our sales, our declines moderated in the fourth quarter down 2.7% compared to 9.1% for the third quarter and down 10.5% for the second quarter. I think this is a positive trend as you alluded to. We still see that deferral taking place where dentists realize that they’re going to go digital its just a matter of when not if.

Within that category we have our GALILEOS which has the compact and the comfort and the compact has been seen extremely positively by general practitioners and we alluded to the CEREC meets GALILEOS connection there which is going to help drive it as well. I think that fundamentally the overall market has shown double digit down and its been our overall product proposition through our sales and service and brand that has allowed us to take share.

Jost Fischer

I think we run the best imaging group out there and that shows. Let me allude that to you not only sales moderated out there but we had actually a margin expansion in the quarter despite the pricing pressure out there.

Tycho Peterson – JP Morgan

Broadly speaking from a mix perspective are you seeing anything, I guess we’ve heard some of the other companies talk about the trade down phenomenon and the migration toward lower end systems. Has there been any difference there in your mix?

Jeffrey Slovin

We’ve seen the trade-up phenomenon as our high end 2D goes instead to buying our compact or comfort. Again, Jost point out absolutely something that we don’t give ourselves enough credit, 60% margin for imaging in this environment is quite good.

Jost Fischer

Doctors buy products that are innovative and bring them a positive ROI. I think the price is only one factor in here.

Tycho Peterson – JP Morgan

On the geographic color, I appreciate the details you provided before. You don’t talk a lot about emerging markets. Can you comment on how you’re viewing China, India, and some of these emerging markets over the next couple years?

Jost Fischer

China is certainly emerging also for Sirona. In the longer perspective and I think the actual number of sales is not impacting our results because its too small. This market is going to come but this is not a matter of quarters here. India is even behind that curve.

Tycho Peterson – JP Morgan

As we think about calendar year end, are you seeing any up-tick from the tax deduction section 179. Its something obviously that’s been around for a couple years but any difference this year?

Jost Fischer

It always has an impact but we would not overextend this one of this season. I think that’s what we heard from our partners, it has been in place, it continues hopefully to be in place. Towards the end of the year accounts and tax advisors discuss that with the dentists. I would not over stretch this impact this year.

Jeffrey Slovin

I’d agree, I think it will help a decision it won’t drive a decision.

Tycho Peterson – JP Morgan

How about from a financing perspective, are you seeing anything different from your dentists?

Jost Fischer

No, what we hear from our dealer partners that its better then 90% of all dentists that applied for credit are being approved. It is in place and we don’t see a change from what we told you last quarter.

Operator

Your next question comes from Larry Marsh – Barclays Capital

Larry Marsh – Barclays Capital

On revenue growth you are saying sort of 5% constant currency at the midpoint and I know you don’t guide to specific categories. Directionally it would seem like you’d still get a benefit first half of this year with the CEREC AC so I would think double digit constant currency on CAD/CAM and maybe the rest of your business low single digit. I know you don’t want to be more specific but am I way off in that assumption?

Jost Fischer

What I can tell you is that certainly our product launches will drive into 2010 and as we mentioned in the call are encouraging business trends have continued into the first quarter of this year.

Larry Marsh – Barclays Capital

I’m anticipating you’ll extend another three years exclusive with Patterson on Schick sometime this month. Would that be a driver to potential acceleration and growth for your overall imaging category here in the next year?

Jeffrey Slovin

We’re entering our 10th year with Patterson with the Schick brand exclusive, its a rock solid relationship built on what they do best and what we do. We expect that to continue. Certainly the issues that we talked about earlier, imaging seeing some deferrals as long as that’s out there that will have some affect but we look forward to continuing to grow with Patterson in the future.

Larry Marsh – Barclays Capital

I know this is presumptuous but I assume we shouldn’t think of any sort of exclusivity fee for this category, I’m not saying like you got with CAD/CAM because obviously there’s an enormous fee. Would there be any thought process of the value of exclusivity given the introduction of CDRLED and such in that category?

Jeffrey Slovin

I appreciate you valuing the Schick brand but we really can’t get into any of that type of commentary on a conference call.

Larry Marsh – Barclays Capital

Tax rate, I want to know if I heard you correctly. You’re suggesting you would anticipate an effective tax rate fiscal ’10 of 20% is that right?

Simone Blank

Yes, that’s correct.

Larry Marsh – Barclays Capital

Certainly a healthy reduction as you had said to the 24% run rate that I’ve been thinking about before. Could you elaborate a little bit on drivers to that important improvement which should obviously help your cash flows here the next year. Should we think of that as a reasonable run rate here for the next couple years?

Simone Blank

The 20% is our best estimate at this point in time for 2010 and as always we’re a global business and so there are many factors that go into this. I think that’s the best thing we know at the moment as the run rate.

Jost Fischer

There’s a lot of tax bonding initiatives that we’ve done to get to this rate which is as you see lower then some other companies are.

Larry Marsh – Barclays Capital

R&D I know innovation is so important to your company and it shows in your results, certainly this year a tough environment. From a reporting standpoint your R&D looked like it was down 15% obviously some of that’s currency related but it still seems like it was down 8% and CapEx was down a certain amount this past year. How do we think of that for the next two years, is there going to be a catch up phenomenon or how do we translate lower R&D expenses with obviously continued innovation in the market?

Simone Blank

Obviously nothing has changed. Innovation continues to be the hallmark for Sirona and we always had that our long term goal and perspective on R&D 6% to 7% of revenue. On the CapEx I make a similar comment we’re always at 3% to 4% so nothing has changed here. What you have seen here in the quarter on the R&D is one of the factors that you just mentioned is the currency exchange rate and the other one is just timing of product launches, don’t forget ’09 has been IDS year and nothing has changed.

Jost Fischer

We have the largest team and the largest budget out there for R&D and at this point in time we’re hiring additional engineers and we will not cut the future, we will go forward with our innovative process bringing out new products.

Larry Marsh – Barclays Capital

Clearly then with currency and everything else we should see a big increase in the reported R&D this year. Finally, I know you always report this in your K and know that’s coming soon but in the last year you reported Patterson being about 27% of your revenues, Schein 15%. Are you in a position to talk about whether those are about the same numbers this past year?

Simone Blank

They are about the same.

Larry Marsh – Barclays Capital

Would you anticipate that changing much if any here in the next two years, again given with all the new initiatives with new team at Patterson and such or do you think that’s going to stay about the same?

Simone Blank

We will continue to work closely with these distributors and they will continue to have a major portion of our revenue.

Jeffrey Slovin

We’ve love to see them both continue to grow much faster.

Operator

Your next question comes from Glen Santangelo – Credit Suisse

Glen Santangelo – Credit Suisse

On your revenues this quarter we saw a pretty big swing in the US and rest of world and I know last quarter you explained that, the softness in the US as you didn’t ship CEREC machines over to the US and that I guess swung around this quarter. Could you give us a sense for what’s going on geographically here given the big swings in the US and the rest of the world this quarter?

Jost Fischer

You hit it on the point, we fulfilled a large number of orders in the third quarter outside of the US and then as we told you Q4 will have the swing and that’s what happened exactly as we planned, the positive note and when you see the growth in the US there is a large factor of CEREC included in there.

Glen Santangelo – Credit Suisse

You would have thought that the IDS benefit would have lasted more then just one quarter and I kind of saw the rest of the world numbers kind of came in, in negative territory this quarter. Is there anything to read into maybe the run off from the IDS show?

Jost Fischer

That’s not true. We see further increases internationally and the impact on the IDS is usually two-fold. You get orders on the show that you fulfill during the next quarters and you get orders deriving from the product launches and the innovations on the more long term basis. From that point we are exactly where we want to be because IDS is the platform for launches. That’s the two factors we got, we got the first factor in the back and we are enjoying the second factor meaning the long term growth rate and penetration rate here and that will continue in 2010.

Simone Blank

As we said earlier the IDS impacts our quarterly progression so we expect a stronger first half and a little bit weaker second half because the comps get tough.

Glen Santangelo – Credit Suisse

I know you don’t like to talk about growth rates of individual product lines but obviously the drop off your treatment centers was about a 30% swing in your growth rate. Is it fair to say that we’ve completely anniversaried now the launch of TENEO and so the growth rate we see starting next quarter should be something a little bit more normalized to what we should expect going forward?

Jost Fischer

First of all I think I’m happy to report that TENEO is now very fastly becoming the gold standard in that category. We’re very pleased with our performance of the treatment center business being flat where others are down in the high teens, low 20s as they report. From that point of view dentists are interested in the Sirona Treatment Centers and we’re gaining market share around the world and that’s a factor for Sirona.

On a general remark though we have a replacement business in here and do not expect us to grow in high double digits. I think this is a mid to high single digit growth for Sirona as it has been in the last years and I think that’s going to continue.

Operator

At this time there are no additional questions. I would now like to turn the call back over to Jost Fischer, President and CEO for closing remarks

Jost Fischer

Thank you for joining us today for our fourth quarter and full year conference call. I look forward to updating you on our first quarter call in 2010. Thank you very much and have all a good day.

Operator

Thank you participating in today’s conference. This concludes the presentation and you may now disconnect.

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Source: Sirona Dental Systems, Inc. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript
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