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Sirona Dental Systems, Inc. (NASDAQ:SIRO)

Q4 2011 Earnings Call

November 18, 2011 08:30 AM EST

Executives

John Sweeney - VP, IR

Simone Blank - CFO and EVP

Jost Fischer - Chairman & CEO

Jeffrey Slovin - President and Director

Analysts

Glen Santangelo - Credit Suisse

Robert Jones - Goldman Sachs

Brandon Couillard - Jefferies

Steve Beuchaw - Morgan Stanley

Larry Marsh - Barclays Capital

John Kreger - William Blair

Ethan Roth - WJB Capital Group

Jonathan Block - SunTrust

Scott Green - Bank of America Merrill Lynch

Jeff Johnson - Robert W. Baird

Ross Taylor - CL King

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2011 Sirona Dental Systems, Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the presentation over to Mr. John Sweeney, Vice President of Investor Relations to Sirona Dental Systems. Please proceed.

John Sweeney

Thank you. Good morning, everyone. Welcome to our fourth quarter and full year fiscal 2011 conference call. I’d 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 statements on slide two 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. Those statements and certain assumptions and expectations of future events are subject to risks and uncertainties our most recent Form 10-K gives some of the most important risk factors that can cause actual results to differ from our predictions.

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

Jost Fischer

Thanks, John. It is my pleasure to welcome all of you to our fourth quarter and full year 2011 conference call. Joining me today are Jeffery Slovin, President and Simone Blank, Executive Vice President and Chief Financial Officer. I am delighted to report that fiscal 2011 was a year filled with many accomplishments and successes for Sirona.

We posted outstanding financial results, strengthened our balance sheet, introduced exciting new product offerings and had an impressive showing at the International Dental Show in Cologne. The product launch platform for the dental industry. Our success at the IDS helped drive our strong sales performance particularly in the German market where we saw our revenue increase an exceptionally strong 27.4% to $189 million.

Sirona raised its guidance three times over the course of the year and achieved constant currency revenue growth of 16.4%. Our strategy to leverage our financial strength and reinvest it back into targeted areas of the business has proven to be a very wise decision.

We’ve been strong proponents of building a solid foundation that will allow Sirona to keep growing for years to come. The pillars of the strategy are; the continuous development of innovative advancements in dental technology and the expansion of our sales and service infrastructure in attractive markets around the world.

As many of you know, innovation is the hallmark of Sirona. During the year, we invested in industry-leading 56 million in research and development. This investment resulted in multiple new product introductions including Orthophos XG 3D, CEREC 4.0, SINIUS, FaceScan, SIROBoost and a host of others.

We believe strongly in the potential of these innovations and you should expect to see their impact as we move through fiscal 2012 and beyond. We are proud of all of our innovative new products that are poised to once again change the face of dentistry. And we will not rest on our laurels.

In fact, we have further empowered our accomplished R&D team by opening our brand-new, state-of-the-art, center of innovation in Bensheim, Germany. This exceptional facility is a testament to why we think Sirona is ideally positioned to continue our tradition of leading the way with innovation for the dental industry. We are extremely excited to see what will emerge from our newly commissioned facility.

In fiscal 2011, Sirona invested heavily in expanding its global sales and service infrastructure with major initiatives in Japan, Russia and Korea, to name but a few. These investments were a key driver for our strong international growth. Clearly, this strategy is paying substantial dividends. Importantly, the two prong strategy of our commitment to innovation supported by an expanding global sales and service organization is delivering strong results.

Imaging was our best performing segment in fiscal 2011, up 24.8% constant currency. With strong performance from our Orthophos XG 3D and 3D imaging systems.

In 3D imaging, Sirona is the global leader. CAD/CAM increased 15.9%, benefiting from the continuous international build out of our sales and services infrastructure and the successful trading programs in Germany and the U.S.

Treatment centers increased 10.2%; revenue growth was particularly driven by non-European international markets. And instruments increased 5.6%. International revenues increased 20.5% constant currency with Germany, other European markets and other world markets all increasing at solid, double-digit rates. For the U.S., our revenues increased 6.8% with particularly strength in the imaging segment.

In addition to our strong revenue growth, we also made progress in expanding our margin. SG&A as a percent of sales, excluding the one-time charge, declined 100 basis points to 29.6%. In our operating income, excluding amortization as a one-time charge was 222.5 million, up 17.8% compared to 2010.

All of our hard work translated into solid free cash flow, a total of 121.9 million in financial year ‘11. We used this cash to reduce our net debt by 96.4 million, deleveraging our balance sheet and strengthening our financial position for the future.

The company ended the year with net debt of 22.5 million, down from 119 million at the beginning of fiscal 2011. Sirona ended the year with a net debt to EBITDA ratio of less than 0.1 times. In August of this year, we initiated our share repurchase program and in the fourth quarter, we repurchased approximately $20 million worth of stock, or 449,000 shares.

In November, after the close of the quarter, we repaid all of our debt and put the new facility, with up to 340 million in available capacity in place. Our strength and financial position gives us increased flexibility to continue to grow in the effective global dental market. So as you have just heard, Sirona has finished a better year filled with many impressive highlights.

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

Simone Blank

Thank you, Jost. In the fourth quarter, our revenues increased 35.9 million to 218.8 million, up 19.6% or 11.8%, constant currency. Our robust revenue growth was driven by continued strong performance in international markets, which increased 21.9% or 11.3% constant currency, with particularly strong growth in Asia Pacific and the Middle East.

In the United States, revenues increased 13.5%. Excluding the one-time, non-cash compensation charge of 6.6 million, operating income excluding amortization increased 20.1% to 45.5 million, driven by our strong sales performance. The non-cash expense was a cash payment by certain shareholders of Laxco Jost Fischer and Simone Blank in connection with the Laxco participation. This payment was funded entirely by certain shareholders of Laxco and no company cash was utilized. First, into GAAP it was not required to record this payment as a charge to operating expenses.

Moving onto a review of our business segment. Revenues in our CAD/CAM increased 10.9% to 63.2 million or up 3.9% on a constant currency basis. CAD/CAM revenues benefited from solid growth in non-U.S., non-European markets. CAD/CAM segment margins were 69.5% down from 71.6% in the prior year, with the margin compression due to fluctuations in the dollar euro exchange rate and product mix.

Imaging segment revenues increased 42.9% to 86.2 million, up 37.1% on a constant currency basis. We continue to see particularly strong interest in our Orthophos product line with a high level of sales of our XG 2D product and continuing robust demand for our XG 3D unit. We are pleased to see that our positive energy imaging momentum has continued into the first quarter.

Imaging segment gross profit margin was 57.2%, down 150 basis points compared to the prior-year period. This margin compression was mainly driven by dollar euro exchange rate fluctuation. Treatment center segment revenues were 44.8 million, up 2.7% but down 6.4%, constant currency. Treatment center gross profit margins declined 470 basis points, to 35.6%, the result of higher level of sales of our economy treatment centers and larger volume projects.

Instrument revenues of 24.3 million, were up 11.3%, or up 1.6% on a constant currency basis. We experienced strong growth in European markets for our hand piece product lines and good performance for our IGE units. Instrument segment gross profit margin was 47.8%, up 150 basis points due to the higher volume and positive product mix.

Moving on to a review of the P&L. Cost of sales was 108.1 million for the quarter, an increase of 18.3 million, up 20.4%. Gross profit margin was 50.6%, down slightly, compared to 50.9% in the prior year. Cost of sales included deal related amortization and depreciation expense of 12.7 million versus 13.5 million in the fourth quarter of 2010. SG&A expense was 74.6 million, up 13.9 million.

However, excluding the one-time, non-cash compensation charge, SG&A increased by 7.3 million or up 12%. This increase was due to the following factors. A weaker U.S. dollar compared to the euro accounted for about half of the increase. And, continued investments in expanding our sales and services infrastructure to capitalize on opportunities to gain share, and build out our presence in faster growing markets. R&D was 13.5 million, up 1.9 million, with the increase driven by foreign exchange and the timing of new product launches.

Between June 30 and the end of September 2011, we experienced a weakening of the euro, relative to the dollar, from a 1.45 to 1.34. Foreign currency amounted to 2.9 million in the fourth quarter. When you strip out the 4.2 million non-cash loss on the revaluation of the (inaudible) and exclusivity payment and a 5.7 million loss on the revaluation of short-term intra group loan, we are left with a gain due to the currency revaluation of short-term effects of 7 million.

Partially offset in the gain was a 2.1 million loss on currency derivatives, also due to the weakening of the euro versus the dollar during the quarter. Net interest expense was 1 million compared to 0.8 million last year. The income tax provision for the fourth quarter of fiscal 2011 was 4.8 million.

The effective tax rate for 2011 is 22.4%, or 21.5%, excluding the impact of the one-time, non-cash compensation charge. Net income was 13.8 million, down from 24.7 million in the prior-year period.

Fourth quarter 2011 diluted GAAP EPS was $0.24, compared to $0.44 in the prior year.

On a non-GAAP basis, that is excluding deal related amortization and depreciation, the currency evaluation and exclusivity fee and short-term intra-group loans, the release of the crude restructuring expenses in the prior year, and the one-time, non-cash charge of 6.6 million in the fourth quarter of 2011, non-GAAP earnings per share was $0.68, compared to $0.44 in the prior year.

In fiscal 2011, we had operating cash flow of 178.9 million, compared to 175.7 million in the prior year. Capital expenditures was $57 million in fiscal 2011, up from 24 million in fiscal 2010. We completed the construction of the center of innovation in Bensheim accounting for 13.2 million of the increase.

Investing cash flow included a 20.8 million cash outflow for the purchase of a development stage technology company. At September 30, 2011 the company had cash and cash equivalents of 345.9 million, and total debt of 368.4 million, resulting in net debt of 22.5 million. This compares to net debt of 119 million, at September 30, 2010.

Now, moving onto guidance. For the full year 2012, we anticipate constant currency revenue growth in the range of 6% to 8%. This revenue growth is expected to be less but particularly solid performance in our non-U.S., non-European markets. We have been investing in these attractive markets over the past few years and will continue to benefit from expanding our presence in gaining market share.

Turning to the U.S., and Germany. Our distribution partners in these markets are indicating that patient traffic is stable. That said, they have recently started reporting a more cautious sentiment from vendors when it comes to ordering dental equipment.

I would like to remind you that Germany had a very strong year in fiscal 2011, with revenues up 27%, the result of an outstanding ideas in the very successful CEREC XG 3D program.

So our performance in Germany in 2012 will be against a very difficult comparison. In fiscal 2012, reported gross profit margin is expected to be higher than the prior year, due to the step down in amortization expense.

We expect segment gross profit margins to be on par with prior year. SG&A as a percentage of sales is expected to be similar to fiscal 2011. R&D is anticipated to be about 6% of sales. And, we estimate our effective tax rate for fiscal 2012 to be 23%. Based on all of these factors, we now forecast operating income, excluding amortization, estimated at 52 million, to be in the range of 225 million, 234 million.

In terms of quarterly progression we see growth in the first quarter of fiscal 2012 against our record performance in the first quarter last year. The third quarter of fiscal 2012, represents the most difficult comparison for the year, because of the high level of orders from the international vendors.

As always, I suggest our investors evaluate our business on an annual basis, as our quarterly progression can vary significantly. I will now turn the call back to Jost.

Jost Fischer

Thank you, Simone. First, I want to highlight the progress we made in deleveraging our balance sheet over the past few years. As you see on slide 15, we have now gone from about five times debt to EBITDA as of September ‘05, to under 0.1 times as of September 11. The strengthening of our balance sheet allows us greater flexibility to invest in our future growth. In addition, to building out our global sales and service infrastructure we continue to invest in further developing our innovation capabilities.

On slide 16, you can see a picture of the center of innovation that we built and opened in fiscal 2011. The majority of our 250 engineers and scientists have already moved into the center, and are working hard on developing our next generation of new products.

Moving on, I would like to give you some details on two of our new product launches. Schick WiFi, this innovation eliminates the need for a hard wired connections between the computer and sensor. This new product is commissions the capability to move quickly and easily around and between laboratories without having to drag cables in computers along.

The device brings a new level of reliability, freedom and flexibility for wireless, dental digital radiography. The next slide shows SINIUS our new mix or high-end treatment center. This tier is designed with ergonomics and efficiency in mind. This treatment center comes equipped with our award-winning, EasyTouch interface. This allows the petitioner to operate the treatment center hands free with a foot pedal. Thereby enabling a more efficient, ergonomic and hygienic performance.

Sinius fully at work and is easily integrated into a dentist practice. Our HD monitor allows the dentists to view images, x-rays and access the practice management software directly on the treatment center. Sinius can also be equipped with endodontic systems, allowing for more professional and clutter-free operatory environment. We have just begun shipping Sinius and expect this launch to have a positive impact on fiscal 2012 and beyond.

Now, before we take questions, we would like to remind you that we will continue to execute on our successful strategy. Despite the global economic headwinds we are seeing in fiscal 2012, we believe we are up to the challenge, supported by our global sales of service infrastructure, best-in-class distribution orders, solid financial backbone and our employees who we believe are unparalleled in the industry. In the past innovation has helped overcome challenging economic conditions and we expect 2012 to be no exception.

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

Question-and-Answer Session

Operator

(Operator Instructions). And our next question comes from Glen Santangelo with Credit Suisse. Please proceed.

Glen Santangelo - Credit Suisse

Yes, thanks. Simone I just wanted to follow-up on a couple of comments you made regarding the guidance. The revenue guidance is pretty straightforward at 6 to 8% but I had some questions on the operating profit guidance because it looks like you would see some margin pressure based on the growth in operating profit relative to revenue growth. And if I heard you correctly, you sort of suggested that gross margins would be on par and SG&A would be similar and R&D at 6% of sales look similar so I’m trying to figure out why the operating profit growth is lower than the revenue growth next year?

Jost Fischer

Yes, Glen. Good morning. Our guidance anticipates, as you said, the constant currency revenue growth of 6 to 8% and our operating income plus amortization growth is estimated to be 1 and 5%. And, this implied margin compression is mainly the result of expanding our global sales and service infrastructure. If you add up all the numbers and John and I can take you through this later, if you want, if you add this all up you get to the Y plus A growth profile that we have outlined there. We continue to see very attractive opportunities, not only in the sales and service infrastructure expense but also for innovation, and that’s the main driver.

Glen Santangelo - Credit Suisse

Okay, just if I may could ask one follow-up question, could you give us maybe a sense for maybe how much you spent on sales and service infrastructure investments in at ‘11 and maybe what that number may look like in at ‘12, are they comparable or, are you spending more or less?

Jost Fischer

You know this is a continuous program. We started that already a few years before, and so it’s included in our 30% or at 29.6% SG&A percentage as a percent of revenue and that’s included in there. We don’t go to that level of detail, but its part of the SG&A spending.

Glen Santangelo - Credit Suisse

And my last question and then I will jump off, the R&D I think you said you invested $56 million in at F’11, what might that number look like in F’12? Is that higher, is that lower given the new facility opened?

Simone Blank

First of all the R&D is expected to be higher than the year before as I said we continue to invest in innovation and the opening of the new facility from a financial perspective is more included in CapEx than it is in the R&D expense line.

Operator

And our next question comes from the line of Robert Jones with Goldman Sachs. Please proceed.

Robert Jones - Goldman Sachs

Yes, thanks for the questions. Just to follow up on Glenn’s questions it sounds like there’s obviously some internal investment in the global infrastructure but, I was wondering if you could maybe comment on how you are thinking about promotional activity obviously heard some comments from the distributors around promotional activity on equipment. I was just wondering how you are thinking about the impact from promotions in your fiscal ‘12 guidance?

Jost Fischer

On the promotional side, we have currently a promotion going on in our CAD/CAM side Tier side CAD/CAM in the U.S., which is very aggressive promotion from our point of view that we think will be received very well in the market together with our partner here and that comprises of $10,000 manufacturing rebate and a 4.95% financing support, that we, as usual, share with our partner.

I think that is the main promotion that is going on. Of course, promotions are part of our normal business and we have a lot of that ongoing but when you see some analysts who are talking about more discounting in the German market, from our point of view, we are not doing anything in Germany that is unusual.

We know that other manufacturers are discounting heavily in Germany, but this is not Sirona. So, from our perspective, nothing unusual in Germany, Simone, you might get into this side of it and I saw just that Australia was also mentioned. I would say it’s similar to Germany. We have a promotion going on in a very small 3% to 4% range whereas our competitor is going up to 20% plus but, this is a result of our large market share. We have been gaining a lot and from our point of view, business as usual, whereas others might have a little more pressure here. Simone? I will come for the –

Simone Blank

No, I think the only thing we might want to add is that our guidance, as we said for the gross profit margin is slightly over a year on a segment basis so that will include any or all promotional activity that we normally include there.

Robert Jones - Goldman Sachs

Yes. That’s helpful. Just one follow-up on imaging, specifically, obviously it was particularly strong in this quarter. I guess as you look at your order but today, how much of that momentum should we be expecting to continue into 2012? And then Simone, if I could just clarify, I believe you said during your comments, that you did see some of that continued momentum into 1Q, and just curious in your response how much of that is organic market-driven versus some share shift? Thanks.

Simone Blank

Yes, absolutely. You heard that correctly. We said that we see this very positive momentum continuing into the first quarter, on the imaging side, absolutely. And, as Jost said, we’re gaining market share and we’re very proud of that and our innovative products and the sales and service infrastructure, clearly helps us here.

Jost Fischer

I think we’re growing above market, and not 1% or 2%, more.

Operator

And our next question comes from the line of Brandon Couillard with Jefferies. Please proceed.

Brandon Couillard - Jefferies

Hi, good morning. Jost or Simone, can you give us a little more color on what your organic revenue growth outlook contemplates for the US, Europe and rest of world? And then, I know you gave us the German revenue figure, but can you quantify the percent of revenue, how large Europe is versus the rest of world, perhaps Asia-Pac as well?

Simone Blank

May be to frame that again, our constant currency revenue growth guidance for fiscal ‘12 is up 6% to 8% and we said on the call that this is growth as expected to be less, in particular by solid performance in the non-US, non-European market. We also, because there are very sectors and we’ve (inaudible)

Okay. I’ll just continue. We have been investing in these markets over the past years and we’ll expect to continue to benefit from expanding our sales and service infrastructure. We also said that if you look at the U.S. and Germany, that we’re hearing from the market intelligence that these markets are indicating patient traffic is stable.

However, having said that, we very recently have started to hear more about cautious sentiment from dentists when it comes to ordering dental equipment. In general, when you look at our split from a regional perspective, as you look at financial year ‘11 for examples, it's about 20% Germany, about 30% U.S. and the rest is relatively evenly split between Asia Pacific and the other markets and Europe.

Brandon Couillard - Jefferies

Okay. Thanks. And then, can you give us an update, a little more color on the debt refinancing? What type of interest rate should we assume for ‘12? And then, should we expect you to continue to pay down that debt, or would you be more, I guess, active on the share repurchase front in terms of the capital redeployment view for ‘12? Thanks.

Simone Blank

Yes. We just repaid our historical debt in November. And, the new financing gives us an ability to get up to 340 million, that’s the capacity. It consists of a term loan of about 75 million. There will be more details as the (inaudible) comes out into revolving loans, one in euro, and one in US dollar. So we would not fully draw on all of this immediately so the drawing is much slower.

The interest, we’re looking towards, in this facility, is about 1 million to 1.5 million per quarter, so the interest rate’s about 3%. That’s what we are currently looking at. And, on the share buyback we have a program out there of 100 million authorized share buyback program. We did about 20 million in the first quarter, and obviously we’ll continue to evaluate our alternatives as we forward in capital deployment.

Operator

And our next question comes from the line of Steve Beuchaw with Morgan Stanley. Please proceed.

Steve Beuchaw - Morgan Stanley

Good morning. Thanks for taking the questions. Simone, could you spend a bit of time commenting on the assumptions on the macroeconomic operating environment in core Europe, the U.S. and in peripheral Europe that’s embedded in the revenue guidance and how difficult are you assuming that environment is?

Jost Fischer

Steve, I think I will take that question here. I think, first of all, as we said in our guidance we expect a very good growth from our non-European, non-U.S. subsidiaries end market. In the U.S., as much as in Europe, very recently we have seen a little bit to what we call like the headline caution, meaning patient traffic is fine specifically in Germany, also in the U.S., very stable. But our channels report a little bit of this kind of hey, delaying decisions at this point in time. So, the outlook is not very clear from our point of view but, I think we’re pretty positive on our core countries that we will remain in growth territory.

Steve Beuchaw - Morgan Stanley

Okay, thanks. That’s helpful. And then more specifically, could you give us a sense on your outlook into 2012 for the government-backed dental programs in Germany and the core European markets could we see any changes to reimbursement rates there? And of course, on the flipside, could you remind us how you think about those programs in an environment where the European budgets are under some degree of pressure?

Jost Fischer

Yes. I’ll comment on here is they’re not directly government-funded so we expect no change in this environment, specifically in the central European states. As they are run by an independent insurance, that is a state administered, of course, we don’t expect any change here. When you look at Germany, specifically, I just want to add that the gorgeous year of 27% growth on the heels of a very successful IDS and trade in of our Bluecam of course represents a very challenging a comp in 2012.

Operator

And our next question comes from the line of Larry Marsh with Barclays Capital. Please proceed.

Larry Marsh - Barclays Capital

Thanks, and good morning, everyone. Jost if you are reflecting on the headline caution about some delay in ordering patterns in Europe and maybe in the U.S. and that’s incorporated in your guidance, should we assume that you’re reflecting that both in the way you’re thinking of top line growth, constant currency basis and in margins or would it impact one more than the other and if we sort of think about that, in more detail, is there any particular part of your business that it would potentially impact more than others in terms of your expectations?

Jeffrey Slovin

No, I mean in general, our guidance reflects our current perspective on the outlook for fiscal ‘12 so everything that Jost just said and we said before, Larry, fiscal ‘11 was an investment year and our investment our ongoing investments, one of the key reasons for great results. And I am referring to both the innovative products and also the strong sales and service infrastructure. And fiscal ‘12 will be an investment year also we’ll continue this because we continue to see many opportunities out there around the globe in many markets we see good demand for our new products and for our existing products and if we don’t invest into these markets we will leave opportunities out there. And so, that’s basically reflected in our guidance.

Jost Fischer

Larry, we expect to grow in all of our four areas that we are active in. With Imaging being strong.

Larry Marsh - Barclays Capital

Okay. And just as you talk about the real growth opportunity this years in non-U.S., non-European markets, you are communicating you’re supporting that with increased investments in sales and infrastructure. Do you think of the rest of the world is seeing margin expansion this year? Or, is it really going to be steady, double-digit sales growth, offset with double-digit increases in investments to support that growth?

Simone Blank

I think I gave you a little bit of guidance on this when I said that we expect the segment gross profit margin to be flat, year-over-year, so that all reflected in this. And then, obviously we also commented on where we see the SG&A unfolding and the R&D, so the investments we expect will be both in the innovation, or in R&D and in sales and services infrastructure.

Larry Marsh - Barclays Capital

Okay. Just to confirm, I know with the introduction of 4.0 software this quarter, you saw a bit of a tougher comparison in CAD/CAM of off what’s been a really strong year, fiscal ‘11, you have been asked before, you still see that as a double-digit growing category over a longer period of time as you reflect on this year and the coming years. Is that still a category you feel you can grow double-digits?

Jost Fischer

Larry, yes. 4.0 upgrade cycle just went into place and this is a great software in three categories from our point of view. A, it helps penetration because it makes things easier for new dentists to get into this technology to more easily integrate that into their own practice. It will help the existing users with a lot of additional features like simultaneously designing 32 grounds that the old software couldn’t do and for us as it makes it a lot easier to add on additional features for CEREC in the future with this new software platform. And from a perspective of growth story, yes, of course, nothing has changed. We believe this is a double-digit grower from a long-term perspective.

Larry Marsh - Barclays Capital

Okay. And, I guess along with that, I guess do you anticipate the ability to facilitate implantology, and driving down the value proposition around cost of goods of materials, still going to resonate this fiscal year even more than last fiscal year? Or, do you anticipate that to be sort of a three-year process?

Jost Fischer

No, I think we are working on that and that is ongoing. So, from our point of view this will unfold in 2012. As much as it will in the future.

Larry Marsh - Barclays Capital

Okay. And finally just sort of modeling cash flows continue to be very good. Your company has talked about other situations, no debt really to speak of. You spent 20 million for development stage technology company. You talked about buying back 20 million of stock and such, if you think about the landscape over the next two years, Jost, are there opportunities of more sizable acquisitions that we should reflect on in terms of your business? Or is this going to be more technology-based development stage companies?

Jost Fischer

Larry, of course, we’ll look at everything out there and we have been looking at everything out there, but we are and continue to be very disciplined about acquisitions opportunities. If there is anything that will fit into the Sirona culture, will fit into the Sirona product line and we think that is a good addition, we will go for it. On the other hand, we have a stock repurchase program in place and we have delivered on that in the first quarter 20 million and we expect that to continue also over the next quarter.

Operator

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

John Kreger - William Blair

Hi, thanks very much. Simone we’ve talked a lot about the build-out of the global sales and service infrastructure. Can you just give us a little bit more color there? How far along are we in that process? Where is it focused and if you’re willing, how many people have you added along those lines?

Simone Blank

Yeah, no, the process didn’t just start this year or last year, it started already the year before and maybe even before that. So it’s a continued process and program John where we have selected markets where we focus and where we invest and when you do that, you start off, you never have to pull leverage immediately, so that is a continuation of getting the full leverage in the following year and so forth. And we added people and the regions that we have been very successful in I think are reflected in our numbers and we talk about them all along, countries like Japan, countries like Korea, Russia, as Jost has pointed out in his prepared remarks. And so, in particular other world markets, but also to some extent in some of the European countries, it is what we discussed.

Jeffrey Slovin

Yeah, John, I’d just like to add with regard to these investments, we’re setting up long-term, sustainable advantage. These are not small, little things that we’re doing, we’re thinking about a long-term basis in our ability to compete and that’s why we’re doing it now.

John Kreger - William Blair

Thanks, Jeff. And should we assume that therefore, over the longer term that this sort of spending pattern continues or would we expect more of a plateau?

Jeffrey Slovin

We will continue to make investments in this as we see fit. But I don’t think the level will necessarily be the same as we’re doing now.

John Kreger - William Blair

Great. Thanks. And Jost, perhaps now that some distance has passed since IDS could you maybe just quickly kind of review the key product launches that you unveiled then, and which of them have gained the most traction since?

Jost Fischer

Yeah, I’m happy to do so, John. I think the biggest impact that we’ve seen from our IDS lunch was the Orthophos XG 3D, which really is taking on in the market. People like it, superb software, 2D and 3D capabilities at the same time that is taking on very, very well. We just talked about our 4.0 software for CEREC, which will unfold its opportunities, only in the next year once we have installed once our sales organizations can show that to customers. And convince them of getting into chairside CAD/CAM I think that is another highlight. All the feedback that we get from the market as off to date is very, very positive.

Then, we talk about Sinius. Sinius are new mid-to high-end shared that is in the western, central and southern European spaces but also in the Asia-Pacific, a chair that is a little bit more compact and detenial (ph) a little bit below that for the price point of view and we think that has a large volume opportunity out there over the years to come. And, we have just started shipping our first unit here in end of September and October. So, that will have an impact of positively over the next 2 to 3 years as we believe.

Then, we have of course a host of other products, around our CAD/CAM offering as model milling on the MC XL in office. The in-office surgical guides that we can put out there, this is all a situation, will make it a lot more attractive for dentists to get into CAD/CAM but also for labs, combining with dentists into the CAD/CAM space, even if they don’t want to chair side at the beginning. Of course, we also have a number of smaller impacts, SIROBoost for our instruments division, I think is also catching on pretty well and helps us gaining market share. And our latest addition, the Schick WiFi John, don’t forget when you go and sit in your operatory and you have the cables hanging all around connection to your computer this can help you and make you independent much easier when you have a WiFi connection. And, we are the only company that has that and I expect a lot of positive momentum here for small imaging unit.

John Kreger - William Blair

Great, thanks. Just one last one as you speak to your distributors around the world, and particularly Patterson in the U.S. are you feeling like we’ll see a more typical yearend purchasing pattern this year I know last year it didn’t really pan out as well?

Jost Fischer

Yes, I think there’s a pretty normal season to be expected but when you look at the little more cautious headline approach here, that has been taken by some, I don’t know how this is going to pan out. But, there is nothing unusual in here but a little bit of caution in the equipment side, I think is justified. But, Sirona is expecting growth in the first quarter.

Operator

And our next question comes from the line of Ethan Roth with WJB Capital Group. Please proceed.

Ethan Roth - WJB Capital Group

Hey, guys, thanks for taking my questions here and congrats on a really terrific quarter and a great year. I just want to follow-up actually the last question about the imaging business. You mentioned that you are still seeing positive momentum into this quarter, I know your distribution partners have maybe taking a little bit more cautious outlook on spending for equipment, but I’m wondering, with the positive momentum continuing, is that something you are actually seeing customers pullback or, maybe just more of what you’re anticipate will happen?

Jost Fischer

We have to say, I think it’s a little bit of the latter one. There is caution out there, no real impact at this point but, we hear back from the general, this is something that is not transpired 100% into action.

Ethan Roth - WJB Capital Group

Okay. Fair enough and then just one follow-up on that. Imaging, again, really strong for the year and the quarter. You called out specifically the ORTHOPHOS line as being a very strong, so maybe you could a provide an update on some of the other product lines, including Schick and maybe Galileos? Thanks.

Jost Fischer

I think when we look at Schick you saw just another product launch here, the WiFi I think is gaining traction, feedback is very positive and we’ll our sales starting in this quarter. So, from that point of view I think we pretty well set up here as the market leader in the U.S.

When you look at our 3D, only offering the Galileos, Galileos is doing fine, but of course, the 2D 3D offering is a little bit eating into that from the volume part of the situation but there are a lots of countries, specifically also the U.S. where Galileos is doing pretty well.

Operator

And our next question comes from the line of Jonathan Block with SunTrust.

Jonathan Block - SunTrust

Thanks and good morning, guys. First one, I may have missed it but you had a pretty big step up in CapEx in fiscal year ‘11 when you finished your side. Simone, did you provide any guidance for what CapEx should like in fiscal year 2012?

Simone Blank

No, but it is the usual 3% to 4% of sales.

Jonathan Block - SunTrust

Okay. Perfect. And then, just moving over to sort of the standalone into oral market, obviously you've been selling Bluecam as a standalone for several quarters now, there was a new competitor, if you would, from (inaudible) more recently, can you explain the dynamics going on in that market? How do you think you are doing in the standalone and is price intact or is that recently gotten more aggressive?

Jost Fischer

I think we have the best product offering out there in the market. And, from our point of view this is a segment that will grow in the future. We haven’t seen any major price moments out here in the last three to four months, so we feel happy where we are in this place and from that point of view, nothing to add.

Jeffrey Slovin

I would just say that chair side continues to be the overwhelming proposition that dentists wants.

Jost Fischer

Absolutely.

Jonathan Block - SunTrust

Okay. And maybe just a last one, the imaging number was very big, you alluded to continued strength going on into fiscal 1Q of ‘12 and then in terms of CAD/CAM, Jost you mentioned probably still a double-digit grower next year as well.

What I’m just trying to figure out is that still from new placements in Imaging and sort of new placements with CEREC or are you starting to see some of the upgrades already. The guys that bought the 2D going to 3D and the guys that bought the standalone Bluecam adding the milling station or is that still another leg of growth that probably doesn’t start to really kick in for another couple of quarters? Thanks, guys.

Jost Fischer

So when we differentiate between Imaging, in Imaging you have the ongoing move from film to digital. This is where the growth comes from, people are moving into the digital sector and then you have people moving from the digital sector 2D to 3D so from that point of view is replacement of older products, the name of the game. When you look at CEREC, in the CAD/CAM side, you have two ways overwhelmingly new customers that you go after, but also you have the trade-up cycle like we had a very big one last year in Germany and we had a successful one in the U.S. We will not have a trade-up cycle going forward of any significance in there because most of that has been replaced so the majority, vast majority will be new placements.

Operator

And our next question comes from the line of Scott Green with Bank of America Merrill Lynch. Please proceed.

Scott Green - Bank of America Merrill Lynch

Hi, thanks for questions. So, first, have you seen any drop-off in attendance or lower close rates at your high-tech 3D Summits that you’ve hosted?

Jost Fischer

No. No. I think, this is a part of our marketing offerings here and that has been pretty successful and there has been no change there.

Scott Green - Bank of America Merrill Lynch

Okay. And so, feedback from the distributors? Do they sense more caution related to the high-tech categories? Or is it more the basic equipment?

Jost Fischer

I think from what we’re hearing is more like a general headline caution. While patient traffic is fine, more headline caution in the total equipment area.

Scott Green - Bank of America Merrill Lynch

Okay. What are the inventory levels like your sense at your distributor’s? Is there any buildup that they have to work through at this point?

Simone Blank

Normally, we shift to our distributors and we manufacture most of it to order and they managed their inventory and that has not been changed, it’s normal.

Scott Green - Bank of America Merrill Lynch

Okay. So that should all be consistent with more kind of cautionary commentary versus an actual drop-off in orders seen to-date? Is that fair?

Simone Blank

Yes, Jost, also said that we expect growth in the first quarter and I might want to add that last year’s first quarter was a record quarter.

Scott Green - Bank of America Merrill Lynch

Okay. On the operating margin outlook for next year, is there any impact from the mix shift between the category, so maybe a higher growth in imaging? But, not as robust growth in CAD/CAM in 2012? Or is it just incremental increased investments?

Simone Blank

Scott, I said that we expect the segment gross profit margin for the group to be flat year-over-year. We always have mixed impact, right. You see that on every really basis so that can always happen. But our guidance is for the full segment gross profit margin for the company.

Scott Green - Bank of America Merrill Lynch

Okay. And so, just to make sure, I understood so the difference is in the 6% to 8% growth in top line. And thus, the lower growth in the operating margins that’s due to the increased investments. Correct?

Simone Blank

Yes. As I said, that’s driven by increased investments in sales and service infrastructure and R&D.

Scott Green - Bank of America Merrill Lynch

Okay. But not mix shift between the categories having any meaningful impact there?

Simone Blank

We don’t get into that level of detail. We’ll see how it unfolds. There is always a product mix impact on our margins, but for your model, I think it’s fair to assume that the gross profit segment margin will be flat year-over-year.

Scott Green - Bank of America Merrill Lynch

Okay. Sometimes you’ve given us the CEREC penetration rates before in some of these countries that you’re making investments in like Japan, for example?

Jost Fischer

Yes. Japan is very small. We’re talking 2% to 3% level here. Maybe 3.5%, the most penetrated countries that we talk about here is Germany and Switzerland, 14% and 17%, double digits in Australia, Canada and the U.S., those are the countries most penetrated and there’s a couple of smaller central European countries as well. But when we talk about the Asia-Pacific, there is a lot of room there with very low penetrations at this point in time.

Scott Green - Bank of America, Merrill Lynch

Okay, great. And last question, have you seen any market disruption from Kodak given its financial difficulties? Any share gains for them specifically or anything unique you’re seeing?

Jost Fischer

No. First of all, we look at ourselves and evidenced by the numbers in imaging, I think we’ve gained market share. But I wouldn’t contribute that to one specific company.

Operator

And our next question comes from the line of Jeff Johnson with Robert W. Baird. Please proceed.

Jeff Johnson - Robert W. Baird

Thank you. Good morning, guys. Congratulations on a strong year here. Really, all my questions I guess have been asked at this point, but if I could clarify a few things, Jost. Does your guidance for this year contemplate any new product launches at all, your upgrades programs on the Orthophos XG side? I mean if we hear that you’re running an Orthophos XG upgrade program or a CEREC upgrade in Germany or something like that. Should we think of that as being may be incremental to your guidance at this point or are some of those activities kind of contemplated in what you’ve already put out there?

Jost Fischer

Yes. There were some new products in our guidance, as you see, like SINIUS which have been no contributor in the last year. You always have upgrades, but we believe that also in the 2D, 3D cycle upgrade is a very small part of our business. It’s more than new placement that go in there. As you know, we’re growing that fast, it’s more new placements out there.

Jeff Johnson - Robert W. Baird

Okay. So if we would hear of something, come early next year or anything, don’t necessarily think we should just add that to your guidance right away?

Jost Fischer

Our guidance is our guidance and Simone I think has explained today and so from our point, that’s correct.

Jeff Johnson - Robert W. Baird

Okay. And just a little more clarity I guess around the guidance just on the gating of the guidance it sounds like still expecting growth this quarter? Jost, did I hear you say that you would expect the growth across all four of the quarters and would that be true at the EBIT line as well?

Jost Fischer

No. First of all, we expect growth in all of our categories in the year.

Jeff Johnson - Robert W. Baird

Okay.

Jost Fischer

Simone, do you want to get into this more?

Simone Blank

Yeah. When we look at the quarterly progression, that we expect in this year, obviously, we have a very tough comp on the third quarter. This was the quarter at the very, very successful IDS, on the heels of an IDS. And then also, a tough comp in the first quarter but as you rightly quoted, we said that we expect growth in the first quarter, second and fourth quarter (inaudible), so in general, overall, our perspective is for continued growth.

Jeff Johnson - Robert W. Baird

Okay. That’s helpful. And then on the gross margin guidance, Simone, I know, I hear what you’re saying about segment margins being flat. The last couple of quarters, most of the segment gross margins have come down a little bit, some of that due to currency, obviously. Emerging markets sound like they’re going to be your growth drivers next year. So, hard for me to reconcile how we get gross margins flat next year is it more that FX is going to help offset FX is going to be a bit of a positive contributor probably the gross margin and offset some of those other factors?

Jost Fischer

No. Our gross profit margins and I said this for the full company that we expect this to be flat, but that can be variations within the individual segment but we are not going to that level of detail. They assume a certain product mix, they assume certain growth profiles but this has nothing to do with the growth in non-U.S., non-German market. And, but we are holding out everywhere and then not only emerging markets, Japan I wouldn’t consider as an emerging market. So –

Jeff Johnson - Robert W. Baird

Okay, fair. And I guess just so I understand, because I don’t think I do at this point, did you say your gross margins by each segment, so CAD/CAM gross margin and imaging gross margin what have you are going to be each should be flat this year or, when you roll that all together your companywide should be flat I know you have said this five times, I’m still not sure which way you’re saying it?

Jost Fischer

To be very clear, we’re only commenting on the total segment gross profit margin. We are not commenting on individual margins by segment.

Jeffrey Slovin

We’ve never done.

Jost Fischer

We’re not giving guidance.

Jeff Johnson - Robert W. Baird

Okay. Thank you, that’s very helpful. And last question, Jost I guess just for you, and this has already been asked but let me ask in a slightly different way it sounds like you’re dialing back the tone a little bit on Germany and on U.S., and that’s what you’re hearing from your distributor partners and that last quarter you were kind of saying, not seen as it all you’re growing right through is this something that you are dialing back just purely because you’re hearing it from your distributors are you seeing you getting your orders any clarity there would be helpful?

Jost Fischer

Sure. I think, looking at Germany 27.4% growth it was just an exceptional year. I mean, that’s something that is really, really good. But, very recently, and you’ve been privy to conference calls here, we see a little bit of a more cautious tone from our channels and from our distribution partners about we call that headline caution. That hasn’t translated into ops that are significant but we are hearing that more and more and I think that is the development of the recent like 3 to 4 weeks.

Operator

And our next question comes from the line of Ramesh (inaudible) with JPMorgan. Please proceed.

Unidentified Analyst

Hi, guys. Thank you for taking my questions. Just first on the tax rate for next year I think you are expecting 100 basis point increase there?

Jost Fischer

Yes, that’s correct that our current estimate for next year’s effective tax rate. And, our tax rate development is always driven taxes we are a global company taxes are driven by many, many factors, and so influenced by different development.

Unidentified Analyst

Okay. And then just in terms of the treatment centers, the demand that you’re seeing for the economy treatment centers that might be lower margin versus higher priced items, can you talk about just what you’re seeing in the field on relative demand for those couple of different segments within treatment centers?

Jost Fischer

Yes. When you look at that the economy part of that, that’s more developing countries where our CA+ offering with a slightly lower margin and that is doing very well. It’s been doing well over the last year, we expect that to continue. At the more higher margin, or higher end product, we just launched SINIUS at the mid-to high-end share, we expect meaningful contribution here throughout the year, maybe wrapping up over the next quarters and beyond.

Unidentified Analyst

Okay. That’s great. And just a clarification on what you mentioned with FX to gross margins that you expect you’re currently modeling that it should be neutral FX to be neutral to gross margins currently?

Simone Blank

Yes.

Operator

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

Ross Taylor - CL King

Hi, I think just about every one of my questions has been answered but I’ll try one more. You all have had a really robust pipeline in new product introductions over the next year. And I know you don’t like to broadcast new introductions on conference calls. But just any commentaries whether we can expect some major new product introductions at some of the shows this winter? Or over the balance of fiscal year ‘12?

Jost Fischer

Ross, continue with your innovation is the hallmark of Sirona, we’re always working on better products or new products. Having said that, we do not launch products at earnings calls, but from our point of view its continuous what we’re doing. And, you will learn of anything when it becomes due.

Operator

And, ladies and gentleman there will be no further questions. This does conclude the question-and-answer session for today. I would now like to turn the call back over to Mr. Jost Fischer 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 next quarterly conference call in 2012. Thank you and have a good day.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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