Sirona Dental Systems (SIRO) CEO Jeffrey Slovin on Q2 2014 Results - Earnings Call Transcript

| About: Sirona Dental (SIRO)

Sirona Dental Systems, Inc. (NASDAQ:SIRO)

Q2 2014 Earnings Conference Call

May 9, 2014, 08:00 AM ET

Executives

Joshua Zable - Vice President, Investor Relations

Jeffrey Slovin - President and Chief Executive Officer

Uli Michel - Executive Vice President and Chief Financial Officer

Analysts

Ross Taylor - CL King

Steve Beuchaw - Morgan Stanley

Robert Jones - Goldman Sachs

Glen Santangelo - Credit Suisse

Tycho Peterson - JPMorgan

Jeff Johnson - Baird

Jon Block - Stifel

John Kreger - William Blair

Jeremy Feffer - Cantor Fitzgerald

Erin Wilson - Bank of America Merrill Lynch

Brandon Couillard - Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Sirona Dental Systems Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will facilitate a question-and-answer session. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Joshua Zable, Vice President, Investor Relations. Please proceed.

Joshua Zable

Thank you and good morning, everyone. Welcome to our second 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 Slovin

Thanks, Josh. It is my pleasure to welcome all of you to our second quarter 2014 conference call. Joining me today is Uli Michel, Executive Vice President and Chief Financial Officer.

I'm pleased to report another strong quarter, with revenue growth of 5.7% or 2.9% constant currency, highlighted by record revenues in both CAD/CAM and Treatment Centers. On a local currency basis, Sirona grew 6.9%, particularly impressive given the 16.7% growth in last year's second quarter on that same basis. Our revenue growth was driven by Asia-Pacific, led by Japan. Germany was down. The German economy remains strong, but growing over 23% last year has created a high hurdle for this year.

The US was solid again, up 4.5% versus another double-digit comparable. Last year, the US grew an exceptional 18%. So it's reasonable to say that our comps will be challenging for the entire fiscal year. The US growth was driven by increased new user demand for our CAD/CAM products. Awareness is increasing in the marketplace and we continue to see greater adoption of Sirona's digital dentistry in both Imaging and CAD/CAM.

International markets were up over 2.3% on a constant currency basis. And on a local currency basis, international markets grew 7.7%. Asia-Pacific drove international growth. Japan led the way, as customers sought to act ahead of the tax increase effective April 1. This led to significant pre-buys at the end of Q2.

For the second quarter in a row, Instruments was our fastest growing segment. We continue to increase utilization of our new state-of-the-art instrument facility. Overall, we delivered solid results in Q2.

I'll now turn the call to Uli, who will review our second quarter financials.

Uli Michel

Thanks, Jeff, and good morning, everyone. In the second quarter, our revenues increased $15.4 million to $282.7 million, up 5.7% reported or 2.9% on a constant currency basis. As you know, Sirona's constant currency calculations only adjust for the exchange rate effect between the euro and the US dollar.

However, currently about 23% of our revenues are generated in currencies other than the euro or the US 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 moved significantly. In effect, these currency movements have negatively impacted our constant currency revenue growth by 400 basis points this quarter. Therefore, when we adjust for all currency fluctuations and look at our growth on a local currency basis, we grew 6.9% in Q2 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 for each of our regions and segments.

Turning to revenues by region, as Jeff already mentioned, the US was up 4.5%, driven by new user demand for our CAD/CAM Systems. Revenues outside the US increased 2.3% constant currency and 7.7% in local currencies. International growth was driven primarily by Asia-Pacific led by Japan. Japan's growth was broad-based across our product line and helped by pre-buys ahead of an April 1 consumption tax increase.

Moving on to a review of our business segments. Revenues in our CAD/CAM segment increased 5% to a record $108.8 million, up 2.5% on a constant currency basis. In local currencies, excluding all FX effects, CAD/CAM grew 7.6%. CAD/CAM segment revenues were strong across the entire portfolio. Growth was driven by new user demand. Our CAD/CAM segment margin was 67%, down 40 basis points from last year. The gross profit margin development was impacted by unfavorable foreign exchange impacts, only partially offset by general and product mix improvements. Excluding FX, our margins would have increased.

Imaging segment revenues increased 5% to $87.9 million, up 2.8% on a constant currency basis and 6% in local currencies. Sales growth was driven by strength in intraoral and the ORTHOPHOS XG product line. Imaging segment gross profit margin was 56.6%, 290 basis points lower than last year. Margins were impacted by targeted promotions and price concessions as well as unfavorable foreign exchange.

Treatment Centers revenues were a record $57.1 million, up 4.6% reported and up 0.8% on a constant currency basis. In local currencies, Treatment Centers were up 4.1%. Treatment Centers faced a challenging year-over-year comparison due to the strong revenues from the last edition program for our successful M1+ unit in the prior year and the IDS in Germany. Treatment Centers gross profit margins increased 100 basis points to 41.2%. The increase was due to improved regional and product mix more than offsetting unfavorable foreign exchange.

Instruments revenues were $28.8 million, up 13.4% reported or 9.3% on a constant currency basis. In local currencies, Instruments grew 12.9%. With our new facility up and running, we grew strongly in project business and had solid growth in Germany and in Japan. Instruments segment gross profit margin was 38.7%, down 370 basis points over last year. The gross profit margin decrease was due to foreign exchange, product mix and inefficiencies associated with the ramp-up of our new manufacturing facility.

Moving on to a review of the total company first quarter P&L. US GAAP gross profit margin was 53.6% compared to 54.1% in the prior year. The change in gross profit margin as a percent of sales reflects increased product and regional sales mix more than offset by unfavorable impacts of foreign exchange rate fluctuations due to the weakening of major currencies versus the euro.

SG&A expense was $87.2 million, up $2.6 million versus last year. This increase was due to the continued planned investments in our sales and service infrastructure and cost of management transition, only partially offset by favorable FX translation impacts. Research and development was $16.4 million, up $1.3 million above prior year, driven by the timing of projects and foreign currency translation. Net interest expense was $900,000, up slightly from last year.

The income tax provision for the first quarter of fiscal 2014 was $11.7 million, representing an effective tax rate of 23.5%. Q2 US GAAP net income was $37.3 million, up 18% from the prior year. First quarter 2014 diluted GAAP earnings per share was $0.66 compared to $0.56 in the prior year. Adjusted non-GAAP earnings per share was $0.80, up from $0.75 in the prior year, an increase of 6.3%. 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 non-cash item that management does not view as indicative of its ongoing operating performance, and any related tax effects. For a reconciliation of GAAP EPS to non-GAAP adjusted EPS, please see the earnings press release.

At March 31, 2014, the company had cash and cash equivalents of $255.3 million and total debt of $79.6 million, resulting in net cash of $175.7 million. This compares to net cash of $135.4 million at December 31, 2013. In Q2, we delivered strong free cash flow of $49.7 million compared to net income of $37.9 million during the same period. In Q2, we reviewed our working capital and capital expenditure had no exceptional items.

Now moving on to guidance. We are reiterating our previously provided fiscal 2014 guidance of 46% constant currency revenue growth and adjusted non-GAAP EPS of $3.60 to $3.70, which represents approximately 6% to 9% EPS growth. The 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 the prior year due to the step-down in amortization expense. SG&A as a percentage of sales is anticipated to be between 29% and 30% for fiscal 2014. Research and development 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 remain difficult for the rest of the year.

I will now turn the call back to Jeff.

Jeffrey Slovin

Thank, Uli. As you can see, we delivered another solid quarter. We reiterated our guidance for the full year. While we are executing on our short-term commitments, we remain focused on the long-term growth drivers of our business. As expected, there's currently a lot of attention on CAD/CAM as more competitors have entered the market. As we've said in the past, we think that increasing awareness of CAD/CAM is not only a good thing for Sirona, but also for dentistry in general. Every day, more patients are experiencing the benefits of chairside CAD/CAM and more dentists are learning about the positive impact on their practice.

An independent study published recently in a peer-reviewed journal compared traditional impressions to images taken by our CEREC Omnicam. The study concluded that patients not only preferred the digital impression technique to convention impressions, but the study also highlighted the time saving for (inaudible). While chairside CAD/CAM might seem like old news to many of you, heightened interest in the industry is bringing about more champions to the technology than ever before. These new champions further promote the benefits of chairside CAD/CAM to their peers and help drive further adoption.

While dentists are being pushed by their peers, dental schools and thought leaders to adopt CAD/CAM, patients will pool chairside CAD/CAM into the dental office. When a patient has a restoration done utilizing chairside CAD/CAM, we believe that the experience will be the best testimonial for broad adoption, especially if the patient had the same procedure done with the old fashioned way. As patients become more aware that single visit, high-quality restorations are being performed, they will come to expect that option from their dentist. This is why you've heard me say that CAD/CAM is a matter of when, not if. We believe that the dental industry is coming to the realization as well.

So how does this benefit Sirona and its shareholders? First, as the undisputed market leader, we clearly stand to benefit from market expansion and global adoption. Second, it presents the opportunity for us to change the discussion from why CAD/CAM to why Sirona. It is this discussion that we get a chance to explain the benefits and features of CEREC. Regardless if a dentist is basing his purchase decision on clinical data, user views of this system, speed and efficiency of the process or how to maximize the return on investments of his purchase, Sirona's offerings have strong competitive advantages, which have made us the market leader for nearly 30 years. We welcome (inaudible).

For years, Sirona's technology has been delivering the best single and multitude restorations. This is a function of our scanning, milling, software, service, materials and the integration with digital imaging. Quite simply, our CEREC brand defines the space of chairside CAD/CAM. While others work to catch up with us, we continue to push the envelope of CAD/CAM. Currently, Sirona is the only company with FDA clearance for the full chairside and lapside implant restorative process. This value adds to the implant process significant in terms of return on investment and demand from the dental community.

During the quarter, one of our suppliers released a new CEREC block. The block consists of a widely used well regarded material that was never offered before for chairside custom abutment. Demand was overwhelming for the product at launch. This highlights that how important is our technology to the dentist implant workflow. It is just one more example why dentists will continue to conclude that CEREC is the choice for all things CAD/CAM.

Furthermore in April at the American Association of Orthodontists Annual Meeting, Sirona previewed its new orthodontic software module. The new CEREC ortho software allows orthodontists to prepare a digital model of an entire dental arch using a continuous imaging technique. The data can be easily exploited for the planting of orthodontic treatment planning and the production of appliances. Based on the reaction from orthodontist community, Sirona has again set the standard for digital impressions. The speed, ease of use and intuitive nature of the Omnicam relative to the competition was applauded.

While other cameras may have access to a specific orthodontic solution, our goal is to provide dentists with a tool that enables them to practice any way they want, just like we do with implants. The product is still a work-in-progress, but we expect to launch it by the end of calendar 2014.

Another important area that has benefited from the advancements in digital dentistry is the field of Imaging. We all have seen a continuous evolution of film to digital, which is still ongoing. Another very significant trend is the growing adoption of 3D. Recently a thought leader/clinician published a newsletter entitled Cone Beam is Rapidly Becoming the Standard of Care, in which he not only argued for the need for 3D imaging, but he also pointed out his belief and that of others that 3D imaging will become the standard of care within the next five years. We are encouraged by the success of our ORTHOPHOS XG 3D, which reflects a growing acceptance of this technology in the general [ph] practitioner world. We believe that 3D will become the standard of care.

As the market leader in digital dentistry, you can understand why we're excited about the opportunities ahead of us. With penetration rates relatively low in technology trends pointing to increasing demand for Sirona's products, we're optimistic about a long successful road ahead. Sirona has been defining digital dentistry since its existence and we're now committed to continuously improving and innovating to drive adoption rates higher. Product innovation has been and will continue to be paramount to our success. In fiscal 2013, nearly 50% of Sirona's sales were generated from products that had been launched in the last three years.

Our ability to continuously innovate is an important competitive advantage for a number of reasons. It keeps our products on the leading edge of dentistry and increases the barriers to entry. A competitor simply cannot decide they are now going to be an innovator in dental technology. It takes years to build an exceptional team of scientists and engineers, a vast patent portfolio, a monumental financial commitment and a culture that promotes the spirit to innovate.

In 2012, we unveiled Omnicam and Schick 33, the best intraoral camera and sensor on the market. In 2013, we launched the record number of products at the International Dental Show, including CAD/CAM FOR EVERYONE product portfolio. On the heels of all of these launches, Sirona's product pipeline is still full. I'm very pleased to inform you today that on Monday, we will be launching yet another exciting addition to one of our product families. Details will be shared on Monday, but given the proximity to the call, we wanted to let you know today. Please keep in mind that the financial impact of the new product has already been factored into our previously announced guidance.

We are committed to keeping investing in developing products and services that make dentistry better, faster and safer. To sum it all up, we have an unparalleled product portfolio, attractive and unpenetrated markets and a global sales and service infrastructure second to none. We are very excited at Sirona about the opportunity ahead of us. As always, I'd like to thank our distribution partners, led by Patterson in the US and Henry Schein internationally and of course our outstanding employees.

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

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Ross Taylor with CL King.

Ross Taylor - CL King

I'll just limit it to one question per the instructions. But you just mentioned the new product you expect to announce on Monday, but can you say whether you might actually realize any revenues from that product during fiscal year 2014?

Jeffrey Slovin

We absolutely will recognize some revenues from that product, but it's fully in our guidance that we have given. We think that long-term this product that we'll launch has a lot of legs to it, but in this year it's already been taken care of in our guidance.

Ross Taylor - CL King

And then I just had one question about CAD/CAM. I think you said that in the US you saw strength across all of your CAD/CAM portfolio during the quarter. But can you update us with any thoughts on how you think Omnicam versus Bluecam is going to perform over the next year or two? Is it still the bulk of the interest in the Omnicam? And related to that, I just wondered if digital impression systems were gaining market share within your portfolio as well.

Jeffrey Slovin

Sure. Yeah, I think again the US is a great place to look at CAD/CAM for everyone, because it's been there the longest. It continues to be the case that we're seeing those dentists who take a look at DI or the Bluecam in the compact choosing the Omnicam. So the vast majority continued to be on the Omni. I believe that there is a market opportunity for the Blue as Omni and Blue are still the two best products on the market. But right now, we're pleased with all of the indications that show that the bulk of the interest is in Omni. Of course, we also saw that our portfolio of milling units was across the board. As well as the reason why we talked about (inaudible) did well and our X5 continues to outperform.

Operator

Your next question comes from the line of Steve Beuchaw with Morgan Stanley.

Steve Beuchaw - Morgan Stanley

I'll ask one financial question and then I have a follow-up for Jeff. Uli, there are a number of dynamics in the quarter that were, I suppose, unexpected at least going into the quarter on our side. I mean one was weather. I wonder if you could comment on whether there might have been any impact of weather in the quarter and whether you are contemplating potential lagged impact of weather on the coming quarter. And then around Japan, have you made an attempt to put any figures on that or quantify what the impact of the Japan VAT pull forward might have been?

Uli Michel

I think it's 4.5% for the quarter and on the heels of 12% last year. So it's more of a tough comp issue. But clearly, we heard from our sales reps and from our distributors that weather did play a role and was disruptive, some appointments were canceled. There was closing here in offices. But, Steve, it's difficult to really quantify that. We think that may lead to some postponement, but we would pick up in the following quarter. And then Japan, it's also difficult to quantify exactly how much was pulled forward. But there have been a few million dollars.

Steve Beuchaw - Morgan Stanley

And, Jeff, I wonder if you could spend another minute on the orthodontic software. It was interesting that you opted to go ahead and talk about at the AAO your relationship with ClearCorrect. Could you spend another minute, giving us the vision how you see the orthodontic software platform playing out? What are the core products or appliances that a clinician should think about using? And how should we think about the orthodontic software as a contributor to the growth profile going forward?

Jeffrey Slovin

First of all, we mentioned the number of partners, Dolphin, ClearCorrect, Great Lakes and Dreamgard. And we think that there's many, many possible partners for us in this. I think that the opportunity in ortho are big over the next coming years, because more orthodontists find that they really would like to get digital impression out of the office. And that's part of it. And what we were able to do is show with our Omnicam what's possible from the overall software and being able to do a continuous streaming of the arch. I think the feedback we received from orthodontists was that it was fast, easy to use and excitement for what the possibilities are for that. So the first look came across as clearly the orthodontists who know us from our days in Imaging are excited to be exposed to the Omnicam. And I think that we'll see a lot of opportunities for this in ortho, albeit a much smaller opportunity than the general practitioner, but one that I think could accelerate over the coming years.

Operator

Your next question comes from the line of Robert Jones with Goldman Sachs.

Robert Jones - Goldman Sachs

Jeff, a lot of focus on the competitive landscape in the prepared remarks. I'm just curious, in the US, are you seeing anything different with regards to promotional activity from competitors? Earlier this week, obviously one of the distributors cited 16% growth in equipment in North America. Just wondering what you guys are seeing out there from a competitive perspective as it specifically relates to maybe CAD/CAM and Imaging?

Jeffrey Slovin

I think that there are more competitors out there. The awareness for CAD/CAM is growing. Certainly we're seeing more talk about in the dental community, in publications, more distributors have a DI or CAD/CAM alternative. But I think that if you take a look at it, we're very pleased with our growth. If you remember, we put up 7.6% globally and that's on the heels of 23% last year. And in US, it was led by new user growth. And keep in mind this was a record quarter for us. So I don't think from a standpoint of promotion, that's the case. I think that we're continuing to see that our 30 years of being out there in the marketplace as the leader is paying off. And because of the noise, the reps are certainly getting more questions asked by the dentists, which is taking dentists maybe a little bit longer to make their decisions. But the number of needs are significantly more, which we think is the real positive. And to highlight, this was a record quarter for us in CAD/CAM.

Robert Jones - Goldman Sachs

And I guess just one follow-up specifically around Imaging. Gross margins dipped on the quarter on what sounds like some promotional activity and price concessions. I understand periodically promotions obviously happen. But I was wondering if you could share a little bit more around the price concessions within Imaging? Has there been anything driven from the market landscape or from the end-user, something going on within Imaging just around pricing?

Jeffrey Slovin

I think last quarter, we were 58%; this quarter, 56.6%. We've seen this move around. I don't think this is an indication of where our margins will be in Imaging. I think that it really depends on product and regional mix.

Uli Michel

You referred before promotions are a normal part of this business. They do come in, in many different shapes. I think if you too probably saw a bit more activity than in other quarters, but as we've told you on another occasions, the margins do depend to a large extent on the exact product mix, the geographical mix and the general mix. So overall we do believe that this should be probably the trough of the margins this quarter for the year. And the other thing to keep in mind is although Imaging is a little bit less exposed to FX than our other businesses, because we do manufacture that intraoral part in the US and we have share of sourcing in Japan for the component, there is still impact of FX on the margin that was negative year-over-year.

Operator

Your next question comes from the line of Glen Santangelo with Credit Suisse.

Glen Santangelo - Credit Suisse

Hey, Jeff, I just want to follow up on some of the comments you made with respect to CAD/CAM. I mean you're basically suggesting that the market is experiencing greater recognition of CAD/CAM and you sort of welcome that head-to-head competition. But I'm just kind of curious, could you maybe give us a little bit of an update on the competitive landscape here now that Planmeca is involved and obviously we have our heard a lot from some of the other players about the lower end of the scanner market. Could you give us update on your CAD/CAM FOR EVERYONE strategy and just how we should think about the evolution of that landscape and how it may ultimately impact pricing and margins going forward?

Jeffrey Slovin

I think we need to again put this into perspective of the fact that we've been defining this industry. And I wanted to make it clear that it's a multiple number of features that play into this. And pricing is not the issue. And that's why we started by saying that for many, many years, we've towing the line about why CAD/CAM. And now with the number of other competitors coming in, it's why Sirona, which is terrific for us, because CEREC is the [ph] CleanX. CEREC is chairside CAD/CAM. So everybody has to compete against us. We are the gold standard on restorations. We've got the 10-year data to show that the restoration still is in intact. We provide more clinical data than anybody else. We've got the ease of use of our software, the speed and accuracy of our milling. We fundamentally believe that not only Omni, but Blue are the two best cameras on the market. And we've got multiple options for milling for them, plus you put our service and support and there is nobody that comes close.

Now clearly, the reality Henry Schein has a strong relationship certainly with us internationally, but in the US they have solid relationships. And they have multiple number of CAD/CAM products that they're offering. So that is a plus. But from head-to-head standpoint, we don't worry about that at all, because why would a dentist buy an inferior product when they have an opportunity to have ours.

Glen Santangelo - Credit Suisse

Maybe I'll just ask one follow-up on the Imaging category, still over 30% of your sales. I feel like we talked a disproportionate amount of time about CAD/CAM and not enough about Imaging. And just to kind of follow up on Bob's questions regarding the margins, I mean could you comment on sort of the growth rate there? It's been a little bit slower the past couple of quarters relative to where it had been trending before that. Obviously, the promotional activity, does that speak at all to an increased competitive landscape? I feel like we don't talk about GALILEOS really at all anymore and I'm just kind of curious if you can give us an update, maybe a little bit of a broader update on that division?

Jeffrey Slovin

Absolutely. And I think it is a good point. It's our second largest and it's a very significant and it still has a quite attractive gross profit margin profile. You have to keep in mind that this quarter we were up 6% on a local currency, but that's really following a difficult comp of last year, which is 13.3%. That's almost 20% for the two years, approximately 10% growth. So we still believe that it's sound and we think there is a lot of legs in this area. That's why we wanted to highlight the fact going from film to digital still is intact there. Many countries, including the US, where we're not done with this critical megatrend going on and 3D is still very much in its early stages and we're taking our share of that market and we're pleased with that, both from the XG 3D and the GALILEOS. And the Schick 33 continues to sell extremely well. We don't see a reason why most general practitioners won't want to add 3D to their product portfolio. So, Glen, I think you're right, we need to talk more about Imaging, because it's here to say and it's got a lot of growth opportunities for us in the quarters to come.

Operator

Your next question comes from the line of Tycho Peterson with JPMorgan.

Tycho Peterson - JPMorgan

I just want to follow up on one of Glen's questions earlier about CEREC and in particular on margins. I mean obviously you had a currency headwinds on the margins, but you did call out product mix improvement. Could you maybe just talk a little bit about what that entails? Are you seeing more customers migrate up to the MC XL and kind of higher price configurations?

Uli Michel

You look at the CAD/CAM margins there, 67% this quarter compared to 67.4% same quarter last year and 69% in the first quarter of this year. And we did say before that they can fluctuate significantly depending again on the exact product, regional and general mix. And I think we've also pointed out that since we're manufacturing these products in euro, but it's selling across the world, there is a significant impact on the margins from the foreign exchange, which was a sizeable headwind in this quarter compared to last year. And as I mentioned before, the mix of what we sold was better than last year. This is partially more favorable regional mix. It is a good product mix. And it's also more new user sales versus tradeup. So all this was favorable. And without the exchange rate impact, we would have seen a nice improvement in margins year-over-year.

Tycho Peterson - JPMorgan

And then maybe one for Jeff, I had a few people asked this morning why you didn't raise guidance. I mean you beat this quarter and you are announcing new product on Monday. Understanding of course that there was some pull-forward in demand this quarter and you had already factored the product mix into the original guidance. But are there factors we need to be thinking about in the back half of the year that maybe give you a little more cause of concern.

Jeffrey Slovin

I will just say that last year was a tremendous year and we certainly have pretty tough comps in the third and fourth quarter. And as we look out, we believe that maintaining guidance is the most appropriate thing to do. If we think about it, where do we see growth coming from, it's from the non-US and non-European markets that will drive our growth. And we're positive about where that's going. But you have to keep in mind, we had a tremendous year last year.

Operator

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

Jeff Johnson - Baird

Jeff, let me follow up on Tycho's question there on guidance. I think the last couple of years even if by the second quarter you hadn't changed guidance, you've at least kind of pointed to the upper half of the range or kind of guided us directionally where within that range. And obviously you've still got a big range of both revenue, but especially EPS for the back half of the year now. I mean any thoughts kind of are you feeling more comfortable on the upper half, the lower half, kind of at the midpoint, anything you give us there?

Uli Michel

Well, I think we gave you a range, which we perceive to be reasonable. I have to say I don't know what was done in the past. With our share base of roughly 60 million shares, $0.10 range is really not enough of money. If you look at it as a percent of our income on the second half, we both feel the $0.10 is still a reasonable range. And we feel that the 46% is also a reasonable range. We leave it up like this. We do not want to point to any end of the range.

Jeff Johnson - Baird

And, Jeff, I fully respect your revenue comments and kind of the stacked comp base. If I look at you guys on a local currency basis, up close to double digits here on annualized basis when you take that two-year view. But if I look at margins, kind of Imaging gross margins here have hit their lowest ever. Instrument gross margins I think second lowest ever at least in our model. CAD/CAM down to a point, second lowest we've seen in six years. So there is definitely some gross margin pressures there. And again, fully respect the currency impact that has as well. But when I look at some of the other things going on here, I would assume because you sell direct into Japan and you had the big buy forward there, that had to help offset some of that. You also had at the operating line about $3.5 million less expense this year versus last year, given the IDS stuff in that. So as I normalize through all that even with FX, it feels to me like margins are still trending at best flat, probably down a bit, even FX. So where do you think the trend goes here over the next year or two?

Jeffrey Slovin

I think from a standpoint of when you look at an overall business, it really has a lot to do in the quarter about the product and the regional mix on that. And certainly we've shown the ability to do better. I think we see the Imaging margin, as I pointed out, we were at 58%, probably can be higher than that. This is not a matter of the competition pulling down the pricing. But I think it may be helpful we take them through a little bit of the makeup.

Uli Michel

Yeah, we can talk a bit more about FX, because, Jeff, this quarter and I think he was to say last quarter, we would have been up excluding gross margins and segment margins, excluding the exchange rate impacts. You know that it's been in our K in the last Q, it'll be in the Q again, we've told you that about 42% of our revenues are in euro, 36% in dollars and 23% in a series of other currencies, the most important in that being the Japanese yen, Brazilian real, Australian dollar and Chinese RMB. And that our expenses on the other side are more heavily weighted on euro. 67% of our expenses are in euros, 17% in US dollars and only about 16% in these 23 other currencies.

So there is a significant impact on our gross profit margins and segment margins year-over-year. If I were to exclude this, we would have been up nicely in the tune of, say, 50 basis points or so year-over-year, everything in.

Jeff Johnson - Baird

I guess if you also adjust for the lower IDS spending, the Japanese mix benefit and all that, I mean can you give us kind of a normalized adjusting for all those factors or is that just too messy at this point?

Uli Michel

I can't give it for all of these factors. I've not done this and this suggests adjusting for the Japanese mix. So it is part of our business model, I would say, that we grow in these countries where we go direct, where we've established a presence over the last few years and they do carry of course higher gross profits, because we go direct. On the other hand, they do drive a bit higher SG&A over time or they have driven, because we have to build the infrastructure.

Jeffrey Slovin

It's our third largest market and it'll continue to be a very important market for us.

Uli Michel

It's still an attractive market for us even at these exchange rate levels.

Operator

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

Jon Block - Stifel

Maybe just more a couple of clarifications, some have already been asked. But just, Uli, the first one is for you, if you can just talk to us and maybe how you plan to guide in fiscal year '15 and beyond. And I'm going down this road row, because there just seems to be a lot of self-inflicted noise, and admittedly some of this was your predecessors on constant currency versus local currency. But here we are last year on a 2.9 number when arguably it was closer to 6.7. So can you just tell us your plans as we go into fiscal '15, will you continue to give two different numbers? Will it be one number? Any commentary there would be helpful.

Uli Michel

I believe the way our business has evolved over the last year and what it is today with almost a quarter of our revenues being in currencies other than euro and dollar, going forward, it makes more sense to adjust for all these currency impacts. We've maintained growth measures throughout this year, because we didn't want to give the impression that we want to change the measures in the middle of the game and try to escape some comparison. So that's why we've been giving you both measures throughout this year and we will continue doing so. But I think going forward, it makes more sense to stay with the local currency measure.

Jon Block - Stifel

And maybe part B of that question would be, there was a question earlier on Japan, but can you do a better job of quantifying what that contribution was in the quarter or should we just think it had to be pretty big, because the delta between local and constant was almost 400 basis points and therefore a lot of that had to be driven by Japan. Do you have any comments to that? And then I just have one more.

Uli Michel

The largest part of this is Japan out of this business here by far. I don't want to give precise numbers, because then we would basically give you our revenues in Japan. But if my recollection is right, the average yen euro rate or yen dollar rate versus the same quarter last year close to 20% weaker. The biggest impact is the yen. The next biggest is the Australian dollar, then the Brazilian real and then you have Russian rubles, South African rand, Turkish ira. And then you have the RMB, which was a little bit favorable.

Jon Block - Stifel

And last one, Jeff, this one is for you. We had a chance to look at the new orthodontic software at AAO. And can you just talk about your offering there? And clearly part of the draw would be Omnicam and the ability to quickly take the full arch impression in whatever it may be six or eight minutes. But can you talk about how you're going to shake out from a pricing perspective? In other words, Omnicam has many of the other vendors that you talked about with chairside and implants and abutments, et cetera. But is your solution going to be this $50,000, $60,000 DI system in the ortho channel when arguably you're competing against other standalone systems closer to $20,000 or $22,000 in Cadent and [ph] Mythos.

Jeffrey Slovin

We really haven't disclosed how we're going to price that. I think that would be a nice thing to get to our competitors before we launch. We don't want to be that. What I will tell you is that the DI only may be what excites many of those dentists. And so we will take that into consideration. But keep in mind all of the relationships that are possible for us will play a role in our overall pricing. But I don't want to get ahead of ourselves on that.

Operator

Your next question comes from the line of John Kreger with William Blair.

John Kreger - William Blair

Uli, kind of coming back to the currency issue, using current exchange rates, what would the 4% to 6% revenue guidance that I think you quoted in constant currency translate into in local currency?

Uli Michel

We said last time, I think, that the difference between constant and local is in the magnitude of 1% to 2% for the full year. The impact in the second quarter has been a little bit worse than what it would have been with exchange rates at the beginning. So we would now see the full year impact to maybe closer to 2%, but somewhere between 1% and 2%, but probably maybe closer to 2% at the moment. And somewhere between 1% and 2% to the 4% to 6% and this is our local currency growth.

John Kreger - William Blair

And, Jeff, just to come back to Imaging, as you said, we're in the midst of a long-term trend of moving Imaging towards digital. What is your perception of where we are in the developed regions like the US and Europe in terms of digital adoption? And do you think Imaging can be a double-digit growth segment for you longer term?

Jeffrey Slovin

I think in the more developed like the US, we're over the 50% mark whether it's 60%, 65%, I don't know. And I think in many of the other developed countries, we were over the 50%. Dentistry still remains conservative, but I truly believe and I think so do all of the distributors and the dental schools that we're going fully digital. And so I believe that we can be a double-digit grower, specifically because we have that other trend of wanting to go 3D, which is still less than 10% even in the developed areas. So I think the thesis is still intact. Of course like you've seen with our business, we'll have quarters will be up and down on that, but even if you take this year and last year, we showed the combined growth of about 10%.

Operator

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

Jeremy Feffer - Cantor Fitzgerald

On Omnicam, if you could just go through the mix this quarter between upgrades and new customers? And then of those new customers, could you provide some qualitative commentary on the types of accounts you are hitting? Has there been any change maybe beyond some of the enthusiastic early adopters? Are you starting to see that interest pick up among, let's say, smaller or mid-tier practicers?

Jeffrey Slovin

Absolutely. I think that the growth was primarily new users. Remind you that we had big tradeup last year. So we're very pleased that not only is it new users, but it was a record quarter and we are getting into early mainstream. It's just not you're innovator, your technology that's getting into this. This is mom and pop. And frankly, in many areas where it's remote, you're seeing dentists picking up on the camera against the vast majority is in the Omnicam still grew 7.6% on a local basis. And of that, if you take out the tradeup, clearly the new user component is much higher.

Operator

Your next question comes from the line of Erin Wilson with Bank of America Merrill Lynch.

Erin Wilson - Bank of America Merrill Lynch

I saw that BIOLASE announced a new partnership with Objet, the 3D printing technology. And I understand that it's a different type of a product there, but I thought you already had a partnership with Objet. Is that not an exclusive agreement? And what does your broader relationship there entail? Is there any sort of effort to better leverage that partnership with some sort of collaborative product launch incorporating the 3D printing?

Jeffrey Slovin

We have a relationship with Objet and this is obviously in the lab area. It's not exclusive. We've specifically not looked for an exclusive. I think 3D printing from the standpoint of the chairside is a different story. I think it's a much, much longer-term possibility and not short-term. So we're really talking about relationship with them on the lab side.

Erin Wilson - Bank of America Merrill Lynch

And broadly speaking given the advantages of an increasingly broad portfolio, but sort in light of the competitive landscape here and the puts and takes there, do you think that over the longer term you could become even more reliant or maybe even less reliant on promotional activity and how much is influenced by Schein and Patterson and some of their initiatives?

Jeffrey Slovin

Yeah, I think promotion in equipment and technology is a normal course of business. It's really the relative level of that. And sometimes, promotion come with giving additional training, support with regard to publications and advertising, bonus for activity among reps and communication material supporting financing. I think this is part of the business that we're in. And some quarters, it's more than others. I don't think you'll see that totally go away. But when we take a look at our overall advertising, we don't see that as a concern for us. We think the overwhelming benefit for the dentists from our technologies outweighs the price. So certainly we have to be in lock step with our distributors and the market specifics of what's necessary. So it's very much a part of which market we're dealing with and determining what's necessary.

Operator

Your next question comes from the line of Brandon Couillard with Jefferies.

Brandon Couillard - Jefferies

Jeff, in non-US, non-European markets, could you speak to any volatility you're seeing in some of the tertiary areas like Russia, Latin America, Brazil? How are those developing?

Jeffrey Slovin

We've been fortunate in the emerging markets, specifically in Russia and Brazil, to be doing well. So we have not seen an impact there. Of course, we recognize what's going on and we have taken that into consideration when thinking about how the rest of our year would unfold. But I have to tell you to date, we've been doing well.

Brandon Couillard - Jefferies

And one for Uli. I hate to beat a dead horse here, but last quarter you quantified the currency effect in terms of the dollar amount. Could you do that again for us this period on the OP line? And would it be fair to say that currency, has it actually gotten worse from an EPS perspective relative to your prior view?

Uli Michel

What we see for this quarter, the FX headwind on the operating income level was about $6 million. So we estimate that year-to-date, it's about $9 million to $10 million. We've just gotten a tad worse than what we thought, but mostly because of the stronger euro. The euro was in 139 or so when we last spoke. I think it was 137. So that's about it I would say.

Operator

And at this time, we have no further questions. I would now like to turn the call back over to Mr. Jeffrey Slovin for any closing remarks.

Jeffrey Slovin

Thank you very much for joining us today on our second quarter review. I look forward to updating you on our next quarterly conference call in August. Have a great day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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