Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sirona Dental Systems, Inc. (NASDAQ:SIRO)

F1Q12 Earnings Call

February 3, 2012 8:30 am ET

Executives

John Sweeney - VP, IR

Simone Blank - CFO and EVP

Jost Fischer - Chairman & CEO

Jeffrey Slovin - President and Director

Analysts

Robert Jones - Goldman Sachs Group, Increase

Brandon Couillard - Jefferies & Company

Steve Beuchaw - Morgan Stanley & Co. LLC

Jonathan Block - SunTrust Robinson Humphrey

Beth Rose - William Blair & Company

Scott Green - Bank of America Merrill Lynch

Larry Marsh - Barclays Capital

Ross Taylor - CL King & Associates

Tycho Peterson - J.P. Morgan

Jeff Johnson - Robert W. Baird & Company

Jeffrey Warshauer - Sidoti & Company, LLC

Operator

Good day ladies and gentlemen and welcome to the Sirona Dental Systems’ First Quarter 2012 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

John Sweeney

Thank you and good morning, everyone. Welcome to our first quarter 2012 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 performance and financial results. We make 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 call 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 first quarter 2012 conference call. Joining me today are Jeffery Slovin, President and Simone Blank, Executive Vice President and Chief Financial Officer.

I’m pleased to report solid results for the first quarter of fiscal 2012. We had a very good start to the year with revenues increasing 10.2% on a constant currency basis. This is the third year in a row that we have grown double digits in the first quarter. Sirona has been able to grow strongly even in the phase of tough comparisons. In the quarter, the imaging division was the strongest performer, up 24% constant currency with continued robust sales of our Orthophos 2D and 3D imaging systems.

Sirona’s revenue growth was particularly strong in the Asia Pacific region. This was a direct result of the investments we’ve been making in expanding our sales and service infrastructures in key markets around the world. Our strategy is expected to make a significant contribution to our results in fiscal 2012.

It is important to note that many of the international markets that we’re investing in are growing at materially above the company’s average rate. I’d like to reiterate the two key pillars of our successful strategy at Sirona. One is our portfolio of innovative high-tech dental products that take dentistry to new levels. And the other is our world class global sales and service infrastructure which we continue to expand. We are active in over 135 markets around the globe. These two factors give us a competitive advantage enabling Sirona to deliver consistently strong organic growth.

Before we move to the financials, I note that the “Signs of Caution” in the U.S. and German markets that we commented on in our last conference call have moderated, and we’re feeling incrementally more positive about the rest of the year. As a result, we now expect to achieve revenue growth towards the upper-end of our revenue guidance range of 6% to 8% and today we’re taking up the lower-end of our operating income plus amortization guidance.

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

Simone Blank

Thank you, Jost. In the first quarter our revenues increased $22.5 million to $258.1 million, up 9.5% or up 10.2% on a constant currency basis. Our double-digit revenue growth was driven by continued strong performance in international markets, which increased 12.7% or up 13.6% constant currency. Sales were particularly robust in the Asia Pacific region with continued strong trends in the Japanese market. In the United States we had a record quarter with revenues up 2%.

Sirona’s operating income plus amortization declined 4.1% to $66.6 million. The $8.5 million increase in gross profit was more than offset by a $10.3 million increase in SG&A. In the first quarter of last year SG&A was substantially lower as we ratcheted up our investment as we move through fiscal 2011.

The majority of our year-over-year SG&A increase represents the build out of our global sales and service infrastructure that we've been implementing over the past few years and have accelerated more recently. Our general expectation of SG&A of about 30% of sales for the full-year is unchanged.

Moving on to a review of our business segment. Revenues in our CAD/CAM segment increased 1% to $84.2 million or up 1.5% on a constant currency basis. CAD/CAM revenues benefited from very strong growth in non-U.S., non-European markets. CAD/CAM revenues in Germany declined as a result of the very successful trading program in the prior-year period.

We continue to get excellent feedback from the marketplace on our CEREC 4.0 software. Dentists appreciate the ease of use, the ability to design multiple restorations and the increased processing speed. Our CAD/CAM segment margins were 70.9% roughly on prior year’s level.

Imaging segment revenues increased 23.8% to $94.4 million up 24.3% on a constant currency basis. We saw growth in all major markets in our non-U.S., non-European markets posted by far the strongest growth in the quarter. We continue to see particularly strong interest in our Orthophos product line with the high level of sales of our XG 2D and 3D products.

Imaging segment gross profit margin was 57.3% down 330 basis points compared to the prior-year period, but on par was the fourth quarter of 2011. The margin compression was driven by strong sales of our Orthophos panoramic units.

Treatment Center segment revenues were $51.3 million at a record level up 3% and up 3.8% constant currency. Our Treatment Center business did extremely well last year in treating 23%, so we did face a very tough comparison in this segment.

During the quarter we continue to ramp up shipments of our SINIUS Treatment center. We are excited about the markets positive reaction to this innovative new product and expect SINIUS to be a good contributor going forward. Treatment center gross profit margins declined 420 basis points to 40.1%, the result of a high level of sales of our economy treatment centers and large volume projects.

Just a note on Treatment Center margins. When you look back at our Treatment Center margins over the past five or six years on an annual basis, these margins have been consistently at the 40% level plus or minus 1 percentage point.

This is probably the best way to think about Treatment Center margins. So all reside in the first quarter was a more typical margin versus the above trend margin we booked in the prior-year. As always, I recommend that you look at our performance on an annual basis as the quarterly performance can have some variation.

Instrument revenues of $28 million were up 7.5% or up 8.4% on a constant currency basis. This growth was driven mainly by high volume projects in international markets. Instrument segment gross profit margin was 47.8%, relatively good margin for our instrument, but down 90 basis points compared to prior-year.

Moving on to a review of the P&L. Cost of sales was $119.3 million for the quarter, an increase of $14.1 million or up 13.4%. Gross profit margin was 53.8% down 160 basis points compared to 55.3% in the prior-year. Cost of sales included deal-related amortization and depreciation expense of $11.2 million versus $12.4 million in the prior-year period.

SG&A expense was $73.6 million, up $10.3 million. This increase was due to the continuous planned investments and expanding our sales and service infrastructure to capitalize on opportunities to gain share around the world and build out our presence in faster growing markets. SG&A was lower in the first quarter of last year, as we rent up investments as we progressed through fiscal 2011.

R&D was $13.3 million on prior year’s level. Between September 30 and December 31, 2011, we experienced a weakening of the Euro relative to the Dollar from 135 to 129. Foreign currency loss amounted to $2.2 million in the first quarter. When you strip out the $2.5 million non-cash loss on the revaluation of the Patterson exclusivity payment and $3.3 million loss on the revaluation of short-term intra-group loans, we’re left with a gain due to the currency revaluation of short-term assets of $3.6 million. Partially offsetting the gain was $0.4 million loss of currency-derivates, also due to the weakening of the Euro versus the Dollar in the quarter.

Net interest expense was $0.9 million compared to $1 million last year. The income tax provision for the first quarter of fiscal 2012 was $11.6 million. The estimated effective tax rate for the quarter was 23%. The net income was $38.3 million, down from $42.4 million in the prior-year period.

First quarter 2012 diluted GAAP EPS was $0.67, compared to $0.75 in the prior-year. On a non-GAAP basis, that is excluding deal-related amortization and depreciation and the currency revaluation of the Patterson exclusivity fee and short-term intra-group loans, non-GAAP earnings per share was $0.91 compared to $0.96 in the prior-year.

In the quarter, we had operating cash flow of $16.3 million, compared to $23.3 million in the prior-year. Capital expenditure was $7.9 million down compared to $9 million in the prior-year period. Investing cash flows were impacted by the refinancing and the share buyback program.

In August of 2011, we initiated our 100 million share repurchase authorization. In the first quarter, we repurchased approximately $7 million worth of stock or 168,000 shares. We now have 74 million remaining under this authorization.

In November of 2011, we repaid all of our debt and put a new facility with up to $330 million in available capacity in place. This consists of a $75 million term-loan and two revolving facilities, a 100 million dollar-denominated revolver and a 120 million Euro-denominated revolver.

At December 31, 2011 the company had cash and cash equivalents of $105.7 million and total debt of $130 million, resulting in a net debt of $24.3 million. This compares to net debt of $22.5 million at September 30, 2011.

Now moving on to guidance. For the full-year 2012, we anticipate constant currency revenue growth at the upper-end of our 6% to 8% guidance range. This revenue growth is expected to be led by particularly solid performance in our non-U.S., non-European markets. We’ve been investing in these attractive markets over the past few years and we expect them to continue to produce both near and longer term results that we expand our presence – as we [extend] our presence.

For the full-year, we anticipate segment gross profit margins to be on par with prior-year. 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 about 30% for fiscal 2012. R&D is anticipated to be slightly above 6% of sales. 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 around $50 million to be in the range of $227 million to $234 million, compared to the guidance we gave on our last call of $225 million to $234 million.

In terms of quarterly progression, the first quarter of fiscal 2012 represents the most difficult comparison for the year because of the high level of orders from the International Dental Show. As always, I suggest our investors evaluate our business on an annual basis, as our quarterly progression can vary significantly.

I’ll now turn the call back to Jost.

Jost Fischer

Thank you, Simone. Given the strong performance of our Imaging Division over the past few quarters, I though it would be helpful to revisit some of the factors driving the adoption of digital imaging.

Digital imaging allows the dentist to be more productive and more profitable because the patient does not need to take-up valuable cheer time while the dentist develops their film X-rays. The dentist does not need to spend thousands every year on consumables and film.

Also, remember that the cost of film is tied to the cost of silver and that this commodity has been rising over the past quarters.

Digital imaging substantially increases the productivity and diagnostic capabilities of the dental practice. Additionally, we see a growing global trend to what’s the requirement that healthcare practitioners maintain Electronic Health Records. Since digital images are stored on electronic databases, anticipated EHR should be expected to further accelerate the transition to digital, away from film.

Insurance reimbursement is another catalyst for digital imaging. Insurance companies preserve and may start asking for electronic claim submission. In countries where this has happened, there has been an acceleration in the adoption of digital imaging.

The ALARA principle requires that dentist use a radiation dosage that is as low as reasonably achievable. Digital imaging reduces radiation dosage substantially often by as much as 70% to 80% as compared to film-based imaging. We’re seeing an increasing number of dental students taught exclusively with digital imaging. In addition, 3D offers a whole new dimension, enabling general practitioner to safely and securely perform advanced dental procedures such as the implants or Endodontic treatments.

So without question, the trend towards digital imaging is in place. And there are numerous factors that will continue to drive increased adoption as we move forward and Sirona is paving the way.

Moving on to a couple of our recent imaging innovations, illustrating on our slide deck. Our new ASTRA software is an innovative reconstruction algorithm that generates panoramic and best images with superior clarity, high-contrast and high-edge sharpness. ASTRA provides images with minimal black edges around metal fillings and optimized contrasts for improved diagnosis. The feedback from the dental community has been outstanding.

The next slide demonstrates the Endo mode for the ORTHOPHOS XG 3D. This new feature allows the dentists to take a high definition, [5x5], the smaller volume results in a substantially higher resolution and increased accuracy. Importantly, only the area of interest is scanned, which lowers the overall radiation exposure to the patient.

Switching topics, there has been a lot of discussion on the part of investors about reimbursement in Germany. Let me give you an update. German dental care is funded by an employee and employer based insurance system, relatively independent from state budgetary funding influences. In addition there is a private insurance system, which provides a higher level of coverage.

In January of this year we saw a modest increase in insurance reimbursement. The German department of health estimates that these insurance revisions will positively impact average dentist incomes by about 6% going forward. These changes improve the reimbursement for ceramic based restorations and for the first time provide reimbursement for digital impressions.

But before we take questions, I’d like to remind you that we will continue to execute on our successful strategies supported by our global sales and services restructure, best in class distribution partners, solid financial backbone, and our employees who are unparallel in the industry, Sirona is very well-positioned to continue to compete and win in the years to come. Innovation and expanding our global sales and service infrastructure has powered us to any challenges we have faced in the past, 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

Thank you. (Operator Instructions). And our first question will come from the line of Robert Jones with Goldman Sachs. Please proceed.

Robert Jones - Goldman Sachs Group, Inc

Thanks for the questions. I wanted to start with CAD/CAM. Clearly, a tough year-over-year comp. I was wondering how we should be thinking about the balance of the year especially in light of the timing of the impact to sales from some of the promotional activities going on around CEREC.

Jost Fischer

All right Bob, good morning. On the way to CAD/CAM for us nothing has changed. This business grew at 11% CAGR over the past five years and last year was up 15%. And we have variability in the quarterly growth rates. Therefore we encourage you to look at this business on an annual basis. In comparison to this quarter last year we had a very successful trade-up program in Germany, made it a tough comp. An additional data point is that CAD/CAM revenues benefited from very strong growth in our non-US, non-European markets.

Robert Jones - Goldman Sachs Group, Inc

That makes sense. And then just on the buyback, it doesn’t appear that we did too much in the quarter. I was wondering how we should be thinking about the repos for the rest of the year.

Simone Blank

You know with the authorization is for a 100 million. We have 74 million left and we will continue to work with that program.

Robert Jones - Goldman Sachs Group, Inc

Okay, great. Thanks for the questions.

Simone Blank

Thank you.

Jost Fischer

Thank you, Bob.

Operator

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

Brandon Couillard - Jefferies & Company

Hi, good morning. Jost, could you speak to the source of the moderating signs of caution that you mentioned in the U.S and Germany, I mean, what do you think has really changed in those markets fundamentally over the past several months?

Jost Fischer

Good morning, Brandon. Yes, on our last call we discussed signs of caution that we were hearing from our distribution partners in the U.S and Germany. Since then this caution has moderated and we are feeling incrementally more positive about both of these markets. Overall, our sense is that the patient traffic in the U.S and in Deutschland is doing well. We are hearing from our distribution partners, our people and from the industry that these markets are incrementally more positive and dentists are busy.

Now to the point of Germany, our sales in Germany declined in the first quarter. But this was due to a very successful CAD/CAM trade-up program which is mentioned in the prior-year. All other segments in Germany saw growth in this quarter. In the U.S our revenues were up roughly 2%. We saw a strengthening of our order trends as we move through December. While we are cautiously optimistic about the U.S for the remainder of the year, this market has not yet returned to its full potential.

To cover the other areas of our other European markets including Italy are doing fine for us. No real change from the perspective we gave you during the last year. Some markets like Spain, Portugal, England, Ireland are still weak, but these markets will not make a big difference to us one way or another. Extremely well are doing the markets outside of the U.S and outside of Europe. This was the growth engine for our business in the first quarter. We have good momentum in these markets and we expect our good growth to continue, clearly our investments here are paying dividends.

Brandon Couillard - Jefferies & Company

Thanks. And then Simone, was there any impact on the gross margin line from FX in the period and then given that you paid down most of the debt back in November, what should we expect for net interest expense for the year?

Simone Blank

On the gross margin, this quarter there was no material impact. You have seen us talking about the revenue line where the reporting was 9.5% up in constant currency, 10.2%, so only a minor impact from FX and not material on the gross profit. On the interest, when you look at the interest for the quarter about $900,000, that was still a mix because we refinance in the middle of that period. Our cost now -- our interest is 2%, that’s the refinancing interest. And we also have some amortization of our financing cost in there, but we expect that the interest expense will go down as we move through the rest of the year.

Brandon Couillard - Jefferies & Company

All right, thank you.

Simone Blank

Thanks.

Jost Fischer

Thank you, Brandon.

Operator

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

Steve Beuchaw - Morgan Stanley & Co. LLC

Hi, good morning. Thanks for taking the question. I wonder, as we look at the guidance embedded there and the growth in imaging, can you comment on your expectations from market share gains embedded in your expectations for growth in imaging and how they would compare to what we saw in 2011?

Jost Fischer

Hi, Steve. Sure. We were going at great lengths in our prepared remarks on the trend to digital imaging, which is in place and will continue. Within that trend you also have that trend with 3D more and more coming even to the general practitioner. We believe we gained significant market share over the past year shown by our double-digit growth rates that we had from full last year and also in the last quarter. So, yes, we believe we are market leader here and we gain share.

Steve Beuchaw - Morgan Stanley & Co. LLC

Okay, thanks. That’s helpful. And then one follow-up, I know it’s not a major line for you. But I wonder if you could comment on the dynamics to the end of 2011 in the stand-alone intra-oral scanner market. Is that market getting any more competitive or changing in anyway in Europe or the US? And how do you expect the dynamics in that market to play out over the course of 2012?

Jost Fischer

Yeah, digital impression market, we’re confident that this is a strongly growing market and Sirona is leading the way here. The trend towards digital impression is in place and will continue and we haven’t seen any major changes in the competitive dynamics as of today.

Steve Beuchaw - Morgan Stanley & Co. LLC

Okay, great. Thanks, Jost. Thanks everyone. We look forward to seeing you at Chicago

Jost Fischer

Thank you.

Simone Blank

Thank you.

Operator

And our next question will come from the line of Jonathan Block with SunTrust. Please proceed.

Jonathan Block - SunTrust Robinson Humphrey

Great. Thanks and good morning.

Jost Fischer

Good morning.

Simone Blank

Hi.

Jonathan Block - SunTrust Robinson Humphrey

Simone, maybe the first question is just on the gross margin, down a bit year-over-year, but you did talk to I believe, your belief on a segment basis, it will still be flat year-over-year,’12 versus ’11. So maybe if you can speak to us on how you expect that to play out as we progress throughout 2012 and more specifically what would bring back something along the lines of imaging where you did see some compression year-over-year?

Simone Blank

Yeah, sure. Yes absolutely I confirm that we said and we said it also in the prepared remarks that we expect the segment gross profit margin on average to be on prior year’s level. And as you know I’d like to reiterate, you really have to look at that on an annual basis because the quarter can see variations and fluctuations, but this clearly implies that we will see, that we expect improvement as we move through the rest of the year. And the margins in the individual segments are impacted by product mix. Last year for the imaging segment on average we were at 58.9% on the segment gross profit margin, so yeah, opportunity is depending on the individual mix.

Jonathan Block - SunTrust Robinson Humphrey

Great, so that sounds like you’re working the way back throughout the year. And then the other one, sometimes you give us a U.S. CAD/CAM number, I don’t know if I missed that on your commentary, but can you provide us with a specific U.S. CAD/CAM number for the quarter?

Jost Fischer

No. We don’t give specific guidance on geographies, so from that point of view as CEREC saw good user demand, new user demand actually in the first quarter. So from what we hear, end-user market sales were encouraging and clearly strengthened as we move through the quarter and as always, don’t please look at our business on an annual basis as we've comparisons and variations within each quarter.

Jonathan Block - SunTrust Robinson Humphrey

Absolutely. Thanks for your time guys.

Jost Fischer

Thank you, Jonathan.

Operator

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

Beth Rose - William Blair & Company

Good morning. Hi, this is Beth Rose in for John Kreger. Thanks for taking the questions.

Simone Blank

Hi, Beth.

Jost Fischer

Hello.

Beth Rose - William Blair & Company

We had a quick question on, as you expand into these non-European, non-U.S. markets, are those helping or hurting your margins?

Simone Blank

Helping the margins, obviously. We invest in these markets because we expect good growth from these markets and we’ve seen that in the past very clearly, we’ve done that in the past, it was accretive to our overall margin and we said we’re accelerating these investments in fiscal ’12 and then how -- if you ramp-up, its not the full accretion immediately, but clearly we expect that to happen going forward.

Beth Rose - William Blair & Company

Okay. And then one other quick question on the sales infrastructure build-out, how much more do we have to go on that?

Simone Blank

As we said 2012 is an investment year, so we’re in that, we had an increase in SG&A in the first quarter of about 10% -- sorry about $10 million and, but you also have to bear in mind that last year we were a little bit below the average as we ramped up our investments as we move through fiscal 2011. Our expectation on SG&A for the full-year is unchanged about 30% of sales.

Beth Rose - William Blair & Company

Okay. Thank you very much.

Jost Fischer

Thank you.

Operator

And your next question will come from the line of Scott Green with Bank of America Merrill Lynch. Please proceed.

Scott Green - Bank of America Merrill Lynch

Hi. Thanks for the questions.

Simone Blank

You are welcome.

Scott Green - Bank of America Merrill Lynch

The non-U.S., non-European markets are increasingly larger contributors to your overall results or are more important this year. Could you tell us what the growth rate was in the non-U.S., non-European markets this quarter?

Jost Fischer

Yeah, Scott, its Jost, We in the past had something like 30% U.S., 20% Deutschland, and the rest is split relatively evenly between the other European markets and the rest of the world. Now as we remark, the markets outside of the U.S. and Europe grow at a higher rate, so this mix is changing. When you think about that, we’re more like 30% in those areas and increasing.

Scott Green - Bank of America Merrill Lynch

Okay. And could you tell us what the growth rate was in those areas, this quarter?

Jost Fischer

Clearly above the average growth rate implying if you get a mix shift in here, you have to grow materially above that, and that was true for this quarter as well.

Scott Green - Bank of America Merrill Lynch

Okay. So you’ve disclosed that last year rest of the world grew at 14% and I guess would – should we assume that 2012 is tracking much better than that 14%?

Simone Blank

We don’t give that level of details, but today as you’ll said they’re materially better than the average for the company, so we continue to have high expectations.

Scott Green - Bank of America Merrill Lynch

Okay, All right. Could you just review which new products were being shifted full capacity in the period, so I’m thinking about SINIUS, and then CEREC 4.0 were those contributing during the whole period or you’re still kind of ramping up those?

Jost Fischer

I think CEREC 4.0 was implemented starting September through October, November, so that is being done. The imaging side of the XG 3D is fully in the market and contributing to our growth good times. And as SINIUS as well it’s a slow ramp up and we started off, so in September and this quarter was a contributor and it’s going to be a contributor going forward more.

Scott Green - Bank of America Merrill Lynch

All right. And I see that the world Dental Congress meeting this year is in China, which is one of your investment markets. Should we think of that as an opportunity to sell equipment, is that at all comparable to like a Chicago Midwinter or something like that?

Jost Fischer

No. When you talk about these kind of meeting, it’s more like a meeting of the international dental world with some local participation. You sell some, but it’s not a major mover. You have the local shows, you have three of then in China every year, those are more comparable to a Chicago Midwinter show or a dental – a Yankee Dental show.

Scott Green - Bank of America Merrill Lynch

All right, and then lastly, could you just elaborate a little bit on the decision to host another CEREC anniversary show, two years after the last one, is there anything different on the agenda, or should we assume there might be some new products that are going to attract the same dentist to come out to Vegas again, just curious about your thoughts about hosting another show.

Jost Fischer

Scott, there was an overwhelmingly popular demand among dentist that have participated in the 25th anniversary, so we decided that great event for the CEREC community. We can't wait another five years to do that, so we’ll wait three years to do that. And from that point of view we hope and we expect that to be another success out here, and we invite you back to listen in and take a look at what's going on in the Dental World in August. It is to remind you, it is August 16th to 18th at the Venetian, in Las Vegas.

Scott Green - Bank of America Merrill Lynch

Okay. Thank you very much.

Jost Fischer

Thank you, Scott.

Operator

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

Larry Marsh - Barclays Capital

Thanks and good morning, everyone. Just a couple of quick follow-ups. First, on strong growth in imaging, I know in your prepared remarks, you just talked about the margin compression in imaging due to product mix with ORTHOPHOS pan units. Could you elaborate a little bit on that, is that just due to promoting new product with a 3D or is there something else about that product area that’s slightly less profitable, so do you think that is temporary or just ongoing product mix?

Jost Fischer

Larry, this is Jost. Good morning. First of all, 24% constant currency growth, I mean, this is a great growth rate. I think we’re very happy what was going on right there. Now, within that growth we had a mix into the ORTHOPHOS 2D and 3D units, which carry a lower margin than the average for imaging. So, that is a mixed point, but I want to also point your attention to that most of the 2D units that we sold will be upgradable. So, our doctors will have the opportunity going forward to upgrade their 2D offering to the 2D/3D offer, which will give us additional revenue and margin benefit.

So, from that point of view, it’s a product mix change. Of course, we’ve always as usual going on some promotions, but nothing spectacular in this arena during the first quarter.

Larry Marsh - Barclays Capital

Okay. So the difference in margin is just because of price points or is there -- and is it just modest difference or do we think of this more a significant?

Simone Blank

Yeah. Hi, Larry. Good morning.

Larry Marsh - Barclays Capital

Hi, Simone.

Simone Blank

It’s more on the 2D where the difference is a little bit bigger. It’s only a slight difference for the XG 3D.

Larry Marsh - Barclays Capital

Okay, thank you. Secondly, just to confirm, I know a question is already asked about the data points, but in November you mentioned that the feedback you were getting from calls and other input from your dealers was slight lengthening of the sales cycle, some caution. I think you had said at the time, you weren’t seeing any evidence of that, so today you’ve mentioned that some of that feedback that sign of caution is moderating. So just to confirm, this is coming from the feedback you’re getting from your dealers who were saying they’re seeing less caution both on the U.S. and in Germany or are you saying – you’re seeing a pickup?

Jost Fischer

Oh, I’m sorry. Yeah, we’re hearing that from our dealers, from our own people out in the market and from the other industry partners and their statements recently.

Larry Marsh - Barclays Capital

Okay. So I think you had said, you specifically had not been seeing any real sign of caution, this is just from your dealers, right? So, you’re just confirming that the feedback you’re getting back is better?

Jost Fischer

Yes.

Larry Marsh - Barclays Capital

Okay. One of the things I just wanted to make sure, Germany, I know – you highlighted, I think you call it a gorgeous year of 27% growth last year, I know you call that CAD/CAM down in Q1, you comment -- you anticipate Germany to grow for you this year in revenues or not?

Jost Fischer

No, it will be tough.

Larry Marsh - Barclays Capital

Okay, just because of the overall comp?

Jost Fischer

Yes, exactly.

Larry Marsh - Barclays Capital

And then just, I want to make sure I heard this correctly, you had – you always said 30% of your business is U.S, 20% Germany, today I think you said 30% from the non-U.S., non-European emerging markets. So the other 20% would be categorized as what?

Jost Fischer

No, I’d say, U.S, Germany and rest of Europe are making up the other 70% and when you say that hey, that was 25, we saw the 5 points moved its spread among those other three categories.

Larry Marsh - Barclays Capital

So the 30% you refer to is what?

Jost Fischer

That is outside of Europe, outside of the U.S. business.

Larry Marsh - Barclays Capital

Okay. And then, finally just -- I know you had mentioned in November that you had expected growth in Q1 and I know you talked about full years, but just to confirm, was this quarter consistent with that or you’re referring to revenue growth when you mentioned growth?

Simone Blank

No, when we talked the last time about growth we referred to revenue growth.

Larry Marsh - Barclays Capital

Okay. So when you were saying you expected growth in the first quarter you were saying you expected revenue growth in the first quarter?

Simone Blank

Right.

Larry Marsh - Barclays Capital

Okay.

Simone Blank

Yeah.

Larry Marsh - Barclays Capital

Got it, all right. Okay, pretty good, thanks.

Jost Fischer

One addition, you’ve heard that we moved our guidance to the higher end of our guidance range in revenue. So it was a good quarter from all point when you look at top-line growth of 10.2% constant currency.

Larry Marsh - Barclays Capital

Yeah, I know, I was just making sure it wasn’t as if some of the costs have been shifted from one quarter to the other because I know you always said, be careful about thinking too much about quarters, so …

Jost Fischer

Yeah.

Larry Marsh - Barclays Capital

… the message wasn’t like where costs have been shifted it was just, this is exactly as we thought. So not even from a quarterly standpoint did you say there is any change in expectations?

Jost Fischer

We’re ahead of where we thought we were in November, that’s clear.

Larry Marsh - Barclays Capital

Yeah. Okay. Very good. Thanks.

Jost Fischer

Thank you.

Operator

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

Ross Taylor - CL King & Associates

Hi, I just have two minor questions left. I just wondered some of the international markets, non-U.S./non-Europe where you’re building out your infrastructure now, what does the sales mix for your products look like? Is it similar to your more mature markets and I guess the heart of my question is that CAD/CAM and some of the higher end digital imaging products is prevalent in the mix?

Jost Fischer

Ross, good morning. Yes, absolutely. I think we see an increasing demand for high-tech products out there. And so we’ve a relatively similar breakdown of our sales in those markets.

Ross Taylor - CL King & Associates

Okay. And my last question is, given some of your comments about the reimbursement in Germany, can you update us on where digital radiography penetration is within that market now? I’d expect that it’s at a pretty high level or similar to the U.S?

Jost Fischer

Yeah, I’d say it’s similar to the U.S, maybe even slightly below, when you look at the panoramic side of the business. But yeah, you can from an overall – there is no difference from a strategic point of view.

Ross Taylor - CL King & Associates

Okay, that’s helpful. Thank you very much.

Jost Fischer

Thank you, Ross.

Operator

And our next question will come from the line of Tycho Peterson with J.P. Morgan. Please proceed.

Tycho Peterson - J.P. Morgan

Hey, thanks for taking the questions. I know you had a number of questions on margins, I think we’ve all the pieces here, but just to be clear, I mean, it was largely mix issue and largely on the imaging side, right. I mean the imaging margins down 320 bps, so that was the big difference relative to lighter CEREC growth against the difficult comp?

Simone Blank

Yeah, we discussed a little bit already the imaging margin driven my mix, Jost elaborated on that, what is the driver for that. We’ve seen that before. So, the Treatment Center margin also contributed as we explained in our prepared remarks. Last year and the first quarter we had relatively high Treatment Center imaging margin if we compare to an average 4-year, which is about 40. So, I think those were the two, whereas CAD/CAM was on prior year’s level.

Jost Fischer

Stable.

Simone Blank

Stable.

Tycho Peterson - J.P. Morgan

And you’re able to talk book-to-bill for imaging, where you stand in terms of backlog?

Simone Blank

Yeah, in general we’ve 46-weeks order backlog, and so we’re within that range.

Tycho Peterson - J.P. Morgan

Okay. And then as we think about some of the new products, with CEREC 4.0 I think one of the things coming of IDS last year was that you’re going to be essentially enabling dentist to do more in terms of surgical guides and abutments and things, I mean, are you seeing an expanded use of CEREC with the launch of 4.0 in terms of new capabilities?

Jost Fischer

Yeah, I think our 4.0 had a great reception as you just mentioned, and this is threefold from our perspective. First of all, the new users, this will help drive penetration of CEREC going forward with the extremely ease new dentists can adopt the system into their practice. It’s a lot easier to use that, and that certainly is going to help selling.

Our existing users, they like the additional features we’ve like multiple restorations at the same time, but also it’s faster with that 64-bit computers that we’re using now. And so, they’re happy with this. But from our point of view, Sirona, as we entirely redesign the software, we’ll be faster and easier in the integration of new and additional work for that like a model milling on the MC XL or the things that you just mentioned.

Tycho Peterson - J.P. Morgan

And on the software front you also kind of have talked about some of the soft tissue simulation, face scan and things for GALILEOS. Is that out now?

Jost Fischer

Yes.

Tycho Peterson - J.P. Morgan

Okay. And then last one on capital deployment. I understand the commentary on buybacks. Can you just talk to your thought process on M&A, how you are thinking given the fact that you delevered a lot here. How do you think about M&A in this environment?

Jost Fischer

Yeah, good question, Tycho. We are pretty disciplined in this area -- and from a strategic point if you will look at everything and we are going after those points, but there is no change from what was going on. But don’t forget, we think we have the best R&D team and for us some times the choice is to develop our own rather than buying development out there. So that’s always a factor too that we will look at when we look at acquisitions out there.

Tycho Peterson - J.P. Morgan

And it’s still fair to say that from a capital deployment standpoint that a dividend doesn’t make a lot of sense for you guys or --?

Simone Blank

We are focused in the past on the leveraging as everybody knows and we invest in the business where we can and where it’s accretive and make sense. And we have a share buyback program out there and that’s where we are.

Tycho Peterson - J.P. Morgan

Okay, thank you.

Simone Blank

Thanks.

Jost Fischer

Thank you, Tycho.

Operator

And our next question will come from the line of Jeff Johnson, Robert W. Baird. Please proceed.

Jeff Johnson - Robert W. Baird & Co

Thank you. Good morning all. Simone, a couple of -- I guess just last question here, Simone, starting with you. Just on the imaging side margins sequentially stable now and the gross margin line at 57% the last couple of quarters. But if I look back over the last five years you’ve been close to 59% or 56%. And Jost I heard your comments on some timing of some pans going in that are maybe lower margin and what have you – did the lower pan part does that kind of play out over the next couple of quarters as maybe the 3D side of ORTHOPHOS start taking over or structurally should we be thinking about gross margin on the imaging side maybe staying a couple of 100 basis points below that, 59 to 60 level for the next number of quarters.

Simone Blank

You know Jeff, we always said that we see it at a level of 60, but it can be a little bit above, it could also be a little bit below depending on the mix. And that is what we are currently seeing when we look at last year, the full-year than we were at 58.6% for the whole imaging business, so that was in the range of our expectation mix clearly plays a role. We also said earlier on the call that the XG 3D is slightly – only slightly below, so the more that increases, we can have a positive impact on the gross profit margin. It’s a really mix. Think about it as a level where it can be a little bit below, little bit above depending.

Jeff Johnson - Robert W. Baird & Co

Okay. So it sounds like to me you pick the 57% is more just maybe a timing issue and then its not – wouldn’t be out of the question to get back to that 59% range over a longer term period going forward?

Simone Blank

Not out of the question. As you can remember we have 24% growth also and a lot of it is driven by 2D. Jost, also gave you additional thought on (indiscernible) that.

Jeff Johnson - Robert W. Baird & Co

Yeah, got it. And then Jost just, I guess, one bigger picture question from you, on the pricing side. I don’t know if you do kind of an analysis on like-for-like pricing across all your product lines, but how is pricing been holding and I know you don’t like it when I bring up Australia, New Zealand, it’s a small market, I understand that, but its also a direct market for you guys. Now it looks like just in the last ….

Jost Fischer

The good market for us.

Jeff Johnson - Robert W. Baird & Co

… it is but it looks like also in the last couple of days you just cut prices by maybe 8% to 10% across some of your bigger product lines there. So I’m just trying to feel out are we in a cyclical period of pricing pressure across some product lines here, given competition or macro or something like that or these just isolated kind of point?

Jost Fischer

First of all, do not forget the Australian dollars appreciated really strongly against the U.S dollar, so when we report in U.S dollars you have to take the factor of exchange rate in. On the other hand, normal part of our business is promotions, Australia summer these days and not big selling time and we always have these kind of things going on. Pricing, nothing has changed. From our point of view, you have new products and the pricing are stable. You have some promotions here, you have some promotions there, nothing a worthwhile really taking a look at when you look at the overall picture.

Jeff Johnson - Robert W. Baird & Co

So some bigger picture you think from a technology kind of high-tech dental entire market comment ASPs are pretty stable across the world?

Jost Fischer

Exactly, yes.

Jeff Johnson - Robert W. Baird & Co

Okay. Thanks. Very helpful.

Jost Fischer

Okay. Thank you.

Operator

(Operator Instructions) And our next question will come from the line of Jeffrey Warshauer with Sidoti, Please proceed.

Jeffrey Warshauer - Sidoti & Company, LLC

Good morning. Thanks for taking my call.

Simone Blank

Good morning.

Jost Fischer

Good morning, Jeffrey.

Jeffrey Warshauer - Sidoti & Company, LLC

Just looking at capital expenditures in the first quarter over previous quarters, it looks like they’ve come down – going forward, maybe you can just break out on how much that goes towards growth versus maintenance. Thanks.

Simone Blank

Yeah, on CapEx we always said that 3% to 4% of sales is how you should look at a little bit exceptional because we’ve invested in the center of innovation and so this is more in line with what we’ve seen historically, nothing out of the ordinary.

Jeffrey Warshauer - Sidoti & Company, LLC

That’s it. Thank you.

Simone Blank

Thanks.

Jost Fischer

Thank you, Jeffrey.

Operator

And at this time, we have no further questions in queue. I’d like to turn the call back over to Jost Fischer for closing remarks.

Jost Fischer

So thank you all for joining us today for our first quarter fiscal 2012 conference call. I look forward to updating you on our progress in our next quarterly conference call in May. So you all have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sirona Dental Systems' CEO Discusses F1Q12 Results - Earnings Call Transcript
This Transcript
All Transcripts