Sirona Dental Systems Management Discusses Q1 2014 Results - Earnings Call Transcript

Feb. 7.14 | About: Sirona Dental (SIRO)

Sirona Dental Systems (NASDAQ:SIRO)

Q1 2014 Earnings Call

February 07, 2014 8:30 am ET

Executives

Joshua Zable - Vice President of Investor Relations

Jeffrey T. Slovin - Chief Executive Officer, President and Director

Ulrich Michel - Chief Financial Officer, Principal Financial & Accounting Officer and Executive Vice President

Analysts

Ross Taylor - CL King & Associates, Inc., Research Division

Steve Beuchaw - Morgan Stanley, Research Division

S. Brandon Couillard - Jefferies LLC, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Operator

[Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Joshua Zable, Vice President of Investor Relations. Please proceed.

Joshua Zable

Thank you, and good morning, everyone. Welcome to our First Quarter 2014 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 2 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 Jeffrey Slovin, President and CEO of Sirona Dental Systems.

Jeffrey T. Slovin

Thanks, Josh. It is my pleasure to welcome all of you to our First Quarter 2014 Conference Call. Joining me today is Uli Michel, Executive Vice President and Chief Financial Officer.

I am very pleased to report record results for the first quarter of fiscal 2014. Both revenues and earnings are at a record level. Our 6.3% constant currency revenue growth was driven by the U.S. and international markets outside of Germany. As we said on the last call, the German economy remained strong, but growing over 23% last year has created a high hurdle rate for this year.

For the quarter, both Imaging and Instruments posted record revenues. Instruments and CAD/CAM led our growth, up 18.1% and 7.6% respectively on a constant currency basis.

The U.S. was outstanding again, up 12.2%. While we don't expect this level of growth to continue given our exceptional 18% growth last year, we are clearly benefiting from our expanded exclusivity arrangement with Patterson and the adoption of digital dentistry. We experienced strong demand for both our Imaging and CAD/CAM products.

International markets were up 3.4% on a constant currency basis. International markets outside of Germany were up 8.3% on a constant currency basis.

I am pleased that we are already seeing the benefits of our increased capacity of our new, state-of-the-art Instruments facility, supporting 18.1% constant currency growth. Dentistry has entered a new era and Sirona is leading the way. We continue to increase penetration of our digital technologies to benefit patients, dentists and our shareholders.

I'll now turn the call over to Uli, who will review our first quarter results.

Ulrich Michel

Thanks, Jeff, and good morning, everyone. In the first quarter, our revenues increased $26.3 million with $298.7 million, up 9.7% reported or 6.3% on a constant currency basis. As you know, Sirona's constant currency calculation only adjusts for the exchange rate effect between the euro and the U.S. dollar.

However, currently, about 22% of our revenues are generated in currencies other than the euro or the U.S. dollar. The most important ones are the Japanese yen, the Chinese RMB, the Australian dollar and the Brazilian real. This means that our constant currency calculation still includes the impacts of fluctuations in these currencies.

Many of these currencies have fluctuated significantly. In effect, these currency movements have negatively impacted our constant currency growth rate by 370 basis points this quarter. Therefore, when we adjust for all currency fluctuations and look at our growth on a local currency basis, we grew 10% in Q1 2014. As I go through the presentation today, I will highlight the foreign exchange impact from currencies other than the euro on the constant currency growth rate for each of our regions and segments.

Turning to revenues by region. As Jeff already mentioned, the U.S. was up 12.2% and benefited from strong demand for our Imaging and CAD/CAM products. Revenues outside the U.S. increased 3.4% constant currency and 8.9% in local currencies. International markets outside of Germany grew 8.3% on a constant currency basis and 15.8% in local currencies. Growth was broad-based and augmented by increased project business.

Moving on to a review of our business segments. Revenues in our CAD/CAM segment increased 10.7% to $105.8 million, up 7.6% on a constant currency basis. In local currencies, excluding all changes, CAD/CAM grew 12.3%. CAD/CAM segment revenues benefited from strength across the entire portfolio. In chairside, growth was driven by both trade-ups and new user sales. Our CAD/CAM segment margin was 69.3%, down 140 basis points from last year. The gross profit margin development was impacted by product and regional mix, as well as unfavorable foreign exchange. We are pleased with our Q1 gross margin but are maintaining our view that for the full year, we expect CAD/CAM margins to be down 50 to 100 basis points from last year.

Imaging segment revenues increased 9.2% to a record $105.8 million, up 7% on a constant currency basis and 9.6% in local currencies. Sales were particularly strong in the U.S., where we are seeing the benefits from our extended exclusively with Patterson. We continue to experience robust demand for our 2D and 3D products, as well as Schick 33, our best-in-class intraoral sensor. Imaging segment gross profit margin was 58.1%, 210 basis points lower than last year. Margins were mostly impacted by the extraoral product mix and targeted promotions.

Treatment Center revenues were $54.4 million, up 1.7% reported but down 3% on a constant currency basis. In local currencies, Treatment Centers were up 0.6%. Treatment Centers were also faced with a difficult comparison to last year, when we had a strong last-edition sale for our M1+ chair in the first half of the year. Treatment Center gross profit margins decreased 60 basis points to 39%. The quarterly development was mostly driven by product mix and unfavorable foreign exchange.

Instrument revenues were a record $32.7 million, up 23.9% reported or 18.1% on a constant currency basis. In local currencies, Instruments grew 21.9%.

With our new facility up and running, we benefit from strong project business, particularly in developing countries. Instruments segment gross profit margin was 41.3%, down 490 basis points over last year, primarily due to the strong growth in project business and continued costs associated with the ramp-up of the new manufacturing plant. Instrument margins improved sequentially, as expected.

Moving on to review the P&L of the company for the first quarter. U.S. GAAP gross profit margin was 54.5% compared to 55.8% in the prior year. The change in gross profit margin as a percent of sales reflects the development of product and regional sales mix, as well as unfavorable impacts of foreign exchange rate fluctuations.

SG&A expense was $88.1 million, up $2.2 million versus last year. This increase was due to the continued planned investments in our sales and service infrastructure, partially offset by favorable foreign exchange translation and lower cost for management transition.

R&D was $15.1 million, up $1 million above prior year, equally driven by increases in development spending and currency translation. Net interest expense was $780,000, down slightly from last year. Net income tax provision for the first quarter of fiscal 2014 was $13.8 million, representing an effective tax rate of 23.5%.

Q1 U.S. GAAP net income was $44.2 million, up 15.3% from the prior year. First quarter 2014 diluted debt EPS was $0.79 compared to $0.68 in the prior year. Adjusted non-GAAP earnings per share was $0.96, up from $0.94 in the prior year, an increase of 1.8%. Non-GAAP adjusted EPS growth was impacted by unfavorable developments in foreign currency, as well as the difficult comparables resulting from a favorable $4.4 million patent infringement settlement in last year's first quarter.

As a reminder, 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/loss on revaluation of foreign currency monetary assets and liabilities; gain/loss on derivative instruments; any other cash or noncash item that management does not view as indicative of its ongoing operating performance and any related tax effects. For a reconciliation of U.S. GAAP EPS to non-GAAP adjusted EPS, please see the earnings press release.

At December 31, 2013, the company had cash and cash equivalents of $210.9 million and total debt of $75.5 million, resulting in net cash of $135.4 million. This compares to net cash of $166.3 million at September 30, 2013.

Free cash flow, as defined by cash flow from operations less capital expenditures, was a net cash outflow of $32 million in the first quarter. Key drivers of this outflow were: a buildup of working capital as a consequence of seasonal developments and increased business activity; the acquisition of our main administrative building in Bensheim, Germany and the completion of our state-of-the-art Instruments plant.

Now moving on to guidance. We are reiterating our previously provided fiscal 2014 guidance of 4% to 6% constant currency revenue growth and adjusted non-GAAP EPS of $3.60 to $3.70.

This guidance is based on the following key inputs: For the full year, we anticipate the segment gross profit margin to be similar to prior year's level. Reported gross profit margin is expected to be higher than in 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% of sales for fiscal 2014. R&D expenses are anticipated to be between 5% to 6% of sales. The estimated effective tax rate for fiscal 2014 is expected to be in the range of 23% to 24%. All of this has been incorporated and is consistent with our previous guidance.

I would like to remind you that our comps will become more difficult for the remainder of the year as we move into Q2 and Q3. Therefore we continue to expect constant currency revenue growth of 4% to 6% and adjusted non-GAAP EPS in the range of $3.60 to $3.70, which represents approximately 6% to 9% EPS growth. I will now turn the call back to Jeff.

Jeffrey T. Slovin

Thanks, Uli. So before we open the floor up to your questions, I want to share with you how we view the business and our opportunities going forward.

Our focus is to drive increased penetration of our digital technologies and to extend our market-leading position in dental equipment. As many of you know, penetration rates are still relatively low for the majority of the digital technologies. Sirona has been defining digital dentistry since its existence and we are committed to continuously improve and innovate to drive adoption rates higher.

Product innovation is paramount to our success and the ability to continuously innovate is an important competitive advantage. In fiscal 2013, nearly 50% of Sirona's sales were generated from products that had been launched in the last 3 years.

Last year, we continued to add to our product portfolio, introducing a record number of new products at the IDS. We believe these products will help drive our growth in the coming years. Our research and product development capabilities are key differentiators and we are committed to keep investing in developing products and services that make dentistry better, faster and safer.

Another key ingredient of our success is our well-regarded industry reputation for excellent customer service and support. As our customers acquire more technologies and equipment, they need a partner to answer their questions and assist them in a timely fashion. By providing superior customer service, we can cement a lifelong bond between us and the customer. Then when customers need to replace or purchase a new technology, Sirona is their first choice.

We have the best distribution partners in the world who know the value proposition of Sirona products. Our global sales and service infrastructure has been built over many years and is difficult to rival. While the majority of our build-out is behind us, we continue to invest as attractive opportunities present themselves. We have recently opened an office in Singapore, began building out Mexico and bolstered other key countries, like Brazil and Russia.

Sirona is executing in all areas of our strategy. Last year we introduced our CAD/CAM for Everyone strategy. We developed the first segmented product portfolio in dental CAD/CAM. Once again, Sirona defined digital dentistry. Creating segmentation within our product lines is a strategy that we have employed successfully in all of our other segments.

By having a broader and more differentiated product offering, we are attracting the attention of new dentists and reengaging the interest of others. These conversations are leading to sales. More often than not, customers are choosing the more advanced packages of CAD/CAM, even if they come to us looking at the entry-level technology. The higher return on investment, along with additional technical capabilities, are ultimately driving the decision-making.

If you have been following this space, you probably have noticed an uptick in CAD/CAM entrants and offerings. We have not yet seen a system that can rival Sirona's technology. Our Omnicam and Bluecam are the best restorative intraoral cameras on the market. Our mills are the fastest, the most consistent and can use the widest range of materials.

Together, they form the most seamless chairside system in the market. And we are the only company that can offer seamless digital integration of CAD/CAM and 3D imaging. For these reasons, we believe if other companies also highlight the value of CAD/CAM, it will benefit us.

The more the industry talks about the benefits of CAD/CAM, the quicker we expect the pace of global adoption to occur. As the market leader, we clearly stand to benefit from market expansion. All key elements of our growth story are very much intact. We have a great product portfolio, attractive, underpenetrated markets and an unparalleled global sales and service infrastructure.

I'd like to thank our distribution partners, led by Patterson in the U.S. and Henry Schein internationally and our outstanding employees, whose efforts make Sirona's success possible. Uli 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 Ross Taylor at CL King.

Ross Taylor - CL King & Associates, Inc., Research Division

I have just 2 questions. My first one has to do with the foreign currencies other than the euro. And I was just curious why you decided to call out the impact of those other currencies this quarter and whether that's something you expect to continue to do going forward.

Jeffrey T. Slovin

Sure. Let me just start, and I'll hand it over to Uli. I think we felt that it was important to give this transparency to see that the global build-out, being an international company, does have effects when a currency has weakened against you. But we wanted to be able to show the clarity of the demand for our products. And I think we were able to do that today. But Uli, please.

Ulrich Michel

Yes. As I said, we have about 22% of our revenues in currencies other than the U.S. dollar and the euro, which has not been adjusted for historically in this constant currency calculation. Now this is a big basket of many currencies and many times they might offset each other in their movements. But the way things had gone lately, it has had a big impact on the constant currency calculations, so we felt it is appropriate to give you this information and transparency to better assess our sales performance and the success of our products in their local markets.

Jeffrey T. Slovin

And I guess, Ross, you'd ask, will you see this metric again? And the answer is yes.

Ross Taylor - CL King & Associates, Inc., Research Division

Okay, good. That's helpful. And my last question just has to do with your guidance for gross margins. I think you basically said you expect segment gross margins to be similar to last year's level, I think with the exception of CAD/CAM may be down about 100 basis points. But what's going to drive more favorable gross margin comparisons as we go through the year?

Ulrich Michel

Well, what we have said is for the full year, the sum of the segment gross profit margin to be stable with last year, right? And then we said on a gross profit basis for the total company, we would be up slightly, mostly due to the step-down of the amortization. And what's driving it, what is improving is we had, for example, the Instruments factory that is still underutilized. And as we go through the year, we expect that this should improve. And then as some of our more profitable segments grow a little faster than others, this also impacts the average margin of the overall company.

Operator

The next question comes from the line of Steve Beuchaw at Morgan Stanley.

Steve Beuchaw - Morgan Stanley, Research Division

Just a couple of clarifications. One, on the guidance for revenue for this year, it's 4% to 6% constant currency. Can you give us that figure in local currency? Or maybe taking it at a different direction, there's some sense for how much more impact we should expect to see from the non-euro currencies over the balance of the year?

Ulrich Michel

Look, Steve, we kept our guidance metric consistent with the past, so we are guiding to the same constant currency metric, 4% to 6%. When we give this guidance, we take into consideration many different factors. We balance pros and cons. And one of them is the development or the effective rates in this 22% of our revenues in other currency than euros and dollars. And all this is built in, but we've had, as you can see overall, about a 3.7% unfavorable impact in the first quarter. If the exchange rates stay around where they are now, this should diminish as we go through the year. And I would say when we talk about 4% to 6%, it includes for the full year, 1% to 2% headwind from this 22% of our revenues and that related currency translation.

Steve Beuchaw - Morgan Stanley, Research Division

Perfect. And then Jeff, thank you so much for the commentary around how you see the company's CAD/CAM offering stacking up relative to the competition. I wonder, though, if you could comment on what you're seeing in the field. Not just in terms of the technology but in terms of market share, you have a couple of companies out there that have pretty nice digital product lines that are making a big push. Have you seen any impact over the last couple of quarters, and not necessarily on your business directly but on market shares in the market for CAD/CAM chairside as a function of those launches?

Jeffrey T. Slovin

Sure. I think we've heard more noise than we've actually seen it out there in the market. Certainly at the Yankee, we saw some rebranding of the E4D product with Planmeca, but that's too early to say. When I talk to our sales teams, we're not seeing head-to-head. Frankly, we live for head-to-head opportunities because typically that is somebody else bringing us in to make the decision. But with regard to market share, I think we're the only company that's out there giving the information. So as soon as we hear actual figures from others, we'd be able to comment on that. But I don't think -- we're not seeing it out there in the day-to-day.

Operator

[Operator Instructions] Your next question comes from the line of Brandon Couillard at Jefferies.

S. Brandon Couillard - Jefferies LLC, Research Division

Jeff, in the first quarter, the Instruments strength, was there any catch-up demand as a result of the new manufacturing facility? And can you elaborate on exactly what "project business" means?

Jeffrey T. Slovin

Sure. Yes, a good question. And of course, we're excited about our new state-of-the-art facility. Part of the market is a price-volume instrument market. And with that, it's really like a supermarket. You need to be able to deliver the product right away. And there are many parts of the market that have had a real interest in our, I would say, price-volume segment. And unless you have the volume capacity to do it, you cannot offer it. So that's been built up and I think you'll see that to continue. Of course, our traditional business is very important to us and has higher gross profit margins to it. Project business is typically business in a specific country with hospitals or a government that can be all of our products bundled together in one package. And particularly, we saw a significant amount of that in the first quarter. And it's a regular part of our business. It just can be a little bit lumpy. If it comes all in 1 quarter, it can have a greater impact than if it's smoothed out throughout the year. I hope that gives you some clarity.

S. Brandon Couillard - Jefferies LLC, Research Division

Yes, that's helpful. And then a two-part question for Uli. Can you give us the CapEx outlook for the year? And then are you able to quantify the effect of currency on the P&L? If I understood your comments right, it was a net negative to EPS. Are you able to quantify that number?

Ulrich Michel

Yes, okay. Let's start maybe with the FX impact on the P&L. Look, if you look through the disclosure that Sirona has made over the years and also again in the last K and in the Q we will file, you can see that effectively, we are short in euros and we are long in these other currencies where we sell in but effectively not manufacture. And this, of course, has an impact on our P&L. Depending on the development, the 2 different impacts might offset each other, they might not. This quarter, on a year-over-year comparison, our operating income has been impacted unfavorably to the tune of $3.5 million to $4 million, depending if you look at it on a OI Class A or on a U.S. GAAP reported operating income. So if you leave everything else the same and you do the math, after tax, this has an impact of, say, $0.03 to $0.05 a share. And then on the CapEx, I don't think we give specific guidance on CapEx. We also don't give cash flow guidance. But I heard you on the last call, where you people were asking for more transparency on cash flow and that we talk about it, so we've included a little bit this time. And I think we can also say, overall, we expect the cash flow to be similar to this -- to the last 2 years. I don't know if that helps.

Operator

Your next question is from the line of John Kreger at William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Jeff, now that you're getting more experienced with the CAD/CAM for Everyone strategy, can you elaborate a bit more on what products are gaining the most traction? Particularly interested at the lower price point part of the offering.

Jeffrey T. Slovin

Right. I would say, again, early days and still doing our best to educate the market, our teams and our distribution. But the indications really are that dentists around the world, who have the opportunity with it registered, want the Omnicam with our new milling units. So it's typically -- if you think about it from the DI all the way up to the practice lab, it's -- the Omni with the MC X is the package of choice. So there's less interest in the DI than there is on chairside and less interest on the CLASSIC than there is in the Omni and the milling unit.

John Kreger - William Blair & Company L.L.C., Research Division

Great. How is APOLLO doing? Are you seeing any follow-through for that product?

Jeffrey T. Slovin

Yes. I think the APOLLO is having more of an impact outside of the U.S. And I think it's again early days. It's an important part of our product portfolio and our choice to be able to offer to dentists the full range of CAD/CAM choices for their practice. But while it's important to start a conversation with the dentist, chairside again seems to be the overwhelming, compelling opportunity that the dentist sees from the proposition it offers for its practice.

Operator

Your next question is from the line of Glen Santangelo at Crédit Suisse.

Glen J. Santangelo - Crédit Suisse AG, Research Division

Just 2 quick follow-on questions on the margin. Uli, you seem to give some pretty specific, quantifiable guidance with respect to the impact of FX on the top line. Could you do something similar in terms of the gross margins? There seems to be a lot of focus on the margins, and I'm trying to assess maybe how much of the margin might have been impacted by pricing or promotions or mix that you called out versus just FX. Is there a way to think about that at all?

Ulrich Michel

Yes. I can give you a bit of a flavor of the impact of FX on our gross profit margin in the first quarter, and then give you at least a qualitative view on how that might evolve throughout the year if the exchange rate don't change any further. I would say if you go through our income statement and you look at it on a gross profit level, had the exchange rates stayed the same than [ph] last year, our margins would have probably been the same more or less. So this, of course, is all hypothetical. We live in a real world where exchange rates move so the margins did go down. But the biggest driver of the decline is exchange rate overall, right? And now looking forward, this $4 million operating income impact year-over-year I had mentioned, if the exchange rates don't move any further, of course, should gradually decline as you compare it to the previous year because the big impacts come off from, as we said, from yen, real and so on, and to a certain extent, also from the euro, these movements have happened through the course of last year, and we've not moved away that much now from the end of last year. Did that answer your question?

Glen J. Santangelo - Crédit Suisse AG, Research Division

Yes, that's very helpful. Maybe if I could just ask one follow-up question on gross margin. Obviously, you had a probably better-than-expected CAD/CAM gross margin than, I think, most of us were expecting. But yet you're still suggesting that the margins for the full year will be down 50 to 100 bps. And I'm kind of curious as to with such a strong start in fiscal 1Q, why that trend reverses in 2Q, 3Q and 4Q?

Ulrich Michel

Yes. As you said, we are very pleased with our margins in the first quarter for the CAD/CAM business. And I think we've always said that the margins are very dependent on the individual products we sell, to which region we sell it. Part of this is also FX, as we have pointed out. And that these margins can fluctuate quite a bit from month-to-month and quarter-to-quarter, depending exactly which product we sell to which customer in which region. And it's also good to remember that we do not only sell Omnicams and milling units. We have more products. We have lab offerings and a few other offerings for dentist practices. So if we take into account all of these and look at our forecast, where we think we're going to sell which products to, it drives us to the guidance of lower margins in the later part of the year. And this is the best estimate we have at this point in time. But also if you look at it on a full year basis, there is a significant FX impact in the CAD/CAM business.

Operator

Your next question comes from the line of Jon Block at Stifel.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Jeff, I think this one's for you. Maybe just your thoughts on how Sirona is faring with, call it, sort of the incremental U.S. market share of CAD/CAM. And what I'm trying to get is, I believe, you guys might have, at least according to some of our work, 80% or 85% market share of CAD/CAM here in the U.S. But if you sort of isolate 2013 when E4D sort of improved their offering in CAD and Carestream came in the market, how do you think you've been trending over the past 6 to 12 months?

Jeffrey T. Slovin

Yes. Sure, Jon. Yes, I think that our proposition and what we've been doing and what we've established in the U.S. market over the last 15 years has positioned us well for where we are today. I see our growth in the U.S. and I'm very pleased with it. I don't know where the market share is exactly. I think we're the only one out there, again, giving the numbers. I think that it's fair to say that our CAD/CAM sales are distributed amongst not only Patterson customers but other customers out there, as well. I feel that we're doing a very fine job. If we take a look at where we said our growth came from this quarter, we said CAD/CAM in the U.S. at 12% is significant growth in this market. And so I think we're getting the lion's share of the market.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Perfect. And then just to shift here, maybe moving to Imaging. If you can just talk at a high level, maybe the pricing environment within the Imaging division. Gross margins were relatively stable in that 58%, 59% level, which we've seen over the past several quarters. But you did mention some promotions in the slides. So I'm just curious, was that sort of just like a calendar year-end thing to incentivize people with tax promotions? Or can you talk to any pricing pressure you're seeing and maybe which lines that pertains to?

Jeffrey T. Slovin

Right. Sure. I would say pricing in Imaging has always been very competitive. Nothing has really changed. But it's a normal part of our business and we did have some targeted areas on the extraoral and intraoral that we felt made sense but at margins that we feel very good about.

Operator

Your next question comes from the line of Jeff Johnson at Robert Baird.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Uli, I appreciate your full year CAD/CAM margin comment. I want to focus a little bit on the 69.3% gross margin this quarter, obviously a very nice rebound. I had assumed some U.S. seasonality on new system sales kind of dominating in the U.S. at calendar year-end, and maybe the launch in Japan helped that. But any reality check on those assumptions or maybe any more color you could give us on the nice rebound we saw on those gross margins this quarter?

Ulrich Michel

Yes. I think we've said on the last call and you've heard it consistently from Jeff over the years that these margins can fluctuate significantly, depending on what we sell exactly to whom. And the nice growth in the U.S., of course, was favorable. The other assumption of yours also is favorable. And so...

Jeffrey T. Slovin

Let me just jump in. I think you're absolutely right. We had nice new user sales, not only in the U.S. but in the rest of the world market. And certainly, Japan played an important role in that, as well. So I think that's a fair assessment.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

All right. And then just maybe stepping back, looking at bigger-picture question, something we talked about yesterday in a note that you may have seen, but I think -- and it goes towards closed versus open architecture. And I totally agree with what you guys have said over the years that when you look at standalone CAD/CAM, closed versus open isn't really even an argument. Most dentists aren't going to want to pair up one company's scanner and somebody else's milling unit and have to deal with all the hassles and questions that might raise. But when you look at now what Planmeca is doing with E4D or, I guess, the new PlanScan system and you're seeing Romexis software added there and you're seeing now this open communication to any company's imaging system, as you think about the convergence of 2D, 3D imaging and CAD/CAM and you guys being a closed system but a lot of dentists out there having a non-Sirona imaging system, do you think that's going to shift some momentum to PlanScan to where they can now communicate with all these other imaging systems? Are you guys going to have to reevaluate that closed software strategy? Just any thoughts there.

Jeffrey T. Slovin

Yes. I think it's a great question. I think open and closed is one that we think is strategic. We think carefully about it. And I think that we look at what's going on in the market. I think that one of the things that I want to say is there is IP related to that integration, which will certainly play a role. So it's not all companies can open up like Sirona can. I think that there is a good point about the evolution of 3D out there in the market in the installed base. And we're looking at that. And I think that we have not come to a conclusion that did make sense yet, but this is something that we are evaluating and thinking through and what is in the best interest of the company and our customers.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

You're not digging your heels in, though, saying that you would never open that software?

Jeffrey T. Slovin

I'm not digging my heels in, saying that we would never open that software.

Operator

The next question comes from Tycho Peterson at JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Just one follow-up on kind of CAD/CAM here. As we think about what's going in the U.S. market with additional systems coming out, can you just talk about the selling cycle? Is that getting extended? And maybe touch on where it is now versus 6 months ago.

Jeffrey T. Slovin

Yes. I mean, again, we're pleased with the growth. As the CEO of the company, I always want the cycle to be shorter. But there is the case when you have new entrants come on and more awareness out there that, that can lead to extending the cycle. We haven't seen it meaningfully increase. We watch carefully. I think it's something that we would bring up if we felt that was a factor. But again, we're just getting into this situation where we have more entrants in here. But right now, I can [ph] tell you that it's increasing in a meaningful way.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And then if we look back at IDS a year ago, you also introduced some products for the inLab market for CAD/CAM, obviously a smaller market. But can you maybe touch on trends there? And then the other thing, you're starting to highlight some ancillary markets a little bit more, like TMJ and sleep apnea and ortho, so maybe touch on those.

Jeffrey T. Slovin

Sure. Okay, first of all, very pleased with our additions in the lab market. Our inLab X5 is actually -- sorry, our inEos X5 is doing terrific. It's actually lived up to its billing, so we feel very good about that. Our inFire is doing well. We also had some materials. So I think the lab side of the business, while very small for us relative to the dental practice, did well with the offerings. With regard to the ancillary businesses, I think it's early days. I think the dentists really appreciate having additional software that helps them with TMJ and sleep apnea. And certainly, ortho is a market that we've been in a long time on the imaging side, and it's one that we're looking at carefully about what role we can play in on the scanner side of the business.

Operator

Your next question is from the line of Erin Wilson at Bank of America.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Can you elaborate a little bit on the factors attributable to the U.S. improvement? Was there anything specific you can point to? The CAD/CAM for Everyone, is that running ahead of your initial plan? Or has anything surprised you there as well?

Jeffrey T. Slovin

I think we're certainly pleased with the new user sales that have come out. I think that CAD/CAM for Everyone is allowing us to have more conversations, which are leading to sales. I think that we had a belief that the CAD/CAM for Everyone early days would lead to the more advanced systems. And actually, it's proven out there. I think one of the things that is of interest is the APOLLO DI in the U.S. has not been as interesting a sale product. But actually, our Omni DI, which you can go digital impression-only into our Connect, has sold more than we would have thought of. So powder-free and the color in all of the attributes of Omni, whether you're buying it as a chairside or a DI-only, is playing an important role. And of course, when we think about it going off 12% this quarter after growing 18% the whole year makes us feel good about the overall proposition.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay. Yes, great. And on Patterson, on the relationship there, are you caught up now with training for Omnicam? I know that there was some sort of industry -- or inventory build? And is the transition there back on track?

Jeffrey T. Slovin

Yes. I think the process always takes a little bit longer than you want to get people trained up. I think we're fine. I think you're alluding also to trade-up sales. We had trade-up sales in the quarter. I think one of the things is that we realized that some of our Bluecam users need training to go to the Omni. And so that's taken a bit longer than we would have expected.

Operator

Your next question comes from the line of Jeremy Feffer at Cantor Fitzgerald.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Most of them has been answered already. I did have one. You guys discussed the strength you were seeing in some international markets outside of Europe. I was wondering if you could provide some color on where you're seeing particular strength and if any of those markets, you think, over the next couple of years could become more significant growth drivers.

Jeffrey T. Slovin

Well, I mean, I think certainly Brazil, Russia, China, Japan have been important drivers for us and we believe they've got a lot of legs in them. I mean, I think what was interesting from the transparency that Uli provided earlier is that when you exclude Germany from international sales on a local currency basis, we were up 15.8%, which is significant and shows the demand for our products around the globe.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

What kind of barriers do you see in getting dentists adopted or getting them on to this technology? Are seeing some of the similar barriers you see in the developed markets, U.S. and Germany? Or is there an increased willingness? Or is it just that these are such immature markets that you're at the very steep end of the curve?

Jeffrey T. Slovin

Yes. I think it's early days. I think dentists, first of all, have to get confident in changing the way they practice. But at the end of the day, I think once you have a certain level of reference doctors in a country, the way CAD/CAM and digital technologies change the practice is so significant, it's universal. You really have a different way of doing dentistry, which is better for you and better for the patient. So I don't think that is unique. And so it takes time to have the appropriate service and support and infrastructure in a country, and then the key references to have to support the growth. And I think that's what we've been doing over the years. And you'll see the international market continue to be a growth driver for us for years to come.

Operator

Gentlemen, your last question comes from the line of Robert Jones at Goldman Sachs.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Just wanted to go back to the question on Omnicam and the new user versus upgrades. And I know -- I think the initial launch hiccups, I believe, was related to the training, timing of Bluecam users to Omnicam. How has that trend been in fiscal Q1? And then if there's any split you can give us, sort of, directionally, as far as new user versus upgrades to Omnicam in the quarter, that'd be helpful.

Jeffrey T. Slovin

Yes. Certainly, we tried to give a clear direction that we're very pleased with the new user sales. And so that has been dominant. We had a trade-up in the quarter. And I think you said it right, we had some hiccups with the training. I think that we're back on track with that and getting some better confidence within the full infrastructure to take care of that. So I think you'll see that improve throughout the rest of the year.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

All right, great. And I'll just have one follow-up. A weaker Germany in the quarter obviously weighed on international a bit. I'm just curious, was that the type of performance that you guys were contemplating when you gave guidance? Or was that something incremental? And then relative to the balance of the year, how are you thinking about Germany today versus when you first shared guidance with us?

Jeffrey T. Slovin

Right. Yes. I mean, I think again to think about how we were thinking about guidance in Germany, you have to go back to the extraordinary performance that we had last year, up 23%. And that's very significant for us and a very high hurdle. And as you know, Germany is an important part of Europe. And certainly not only did we have the IDS, but we had the last-edition M1, we had the launch really of Omnicam and we had a very large trade-up. So all those factors led us to believe, and that's why we talked about it, that Germany would be down. And so -- and we continue to see that being the case. We've created a high hurdle. But the German economy remains the strongest in Europe. If we're able to do better than we think in Germany moving forward, that would be a plus. But we certainly think that this is going to be a challenge for us.

Operator

Thank you. I would now like to turn the call back to the company for closing remarks.

Jeffrey T. Slovin

Thank you very much for joining us on our first quarter call for 2014. I'm pleased that we were able to show 10% growth on a local currency basis and reiterate our guidance. Look forward to talking to you in May on our second quarterly call.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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