Sirona Dental Systems, Inc. (SIRO)

F4Q08 Earnings Call

December 4, 2008 9:00 am ET

Executives

John Sweeney - VP of Investor Relations

Jost Fischer - Chairman, Chief Executive Officer, and President

Simone Blank - Chief Financial Officer, Executive Vice President

Jeffrey T. Slovin - Executive Vice President, Chief Operating Officer of US Operation

Analysts

Tycho Peterson - J.P. Morgan

Jon Wood - Banc Of America

John Kreger - William Blair & Company

Jeff Johnson - Robert W. Baird & Co.

(Adam Palfred) - Barclays Capital

Lawrence Marsh - Barclays Capital

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Sirona Dental Systems fourth and fiscal full year 2008 earnings conference call. My name is Anita, and I will be your operator for today. (Operator Instructions). I would now like to turn the call over to Mr. John Sweeney.

John Sweeney

Good morning everyone. Before I turn the call over to Jost Fischer, Chairman, President, and CEO of Sirona Dental Systems, I need to inform you that information in this conference call contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are information of a non-historical nature and are subject to risks and uncertainties that are beyond the company’s ability to control. The matters discussed in this conference call are subject to various factors which could cause actual events and results to differ materially from such statements. Such factors include uncertainties as to future sales, volumes of the company's products, the possibility of changing economic, market, and competitive conditions, dependence of product dependence on key personnel, technological development, intense competition, market uncertainties, dependence on distributors’ ability to manage growth, dependence on key suppliers, and other risks and uncertainties including those detailed in the company's filings with the Securities and Exchange Commission.

The company undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this conference call. You are cautioned not to place undue reliance on these forward-looking statements which speaks only as of the date of this conference call.

Please note that in today’s conference call you’ll be presented with additional financial information including non-GAAP financial measures under Section 101 of Reg G of the 1934 Exchange Act. In addition, during today's conference call, management will comment on guidance for fiscal year 2009. Please note that all statements made in connection with guidance are based on current expectations, and the actual results could differ materially from such forward-looking statements.

Now, I would like to turn the call over to Jost Fischer, Chairman, President, and CEO of Sirona Dental Systems.

Jost Fischer

It is my pleasure to welcome all of you to our fourth quarter and full year 2008 conference call. Joining me this morning are Simone Blank, Executive Vice President and CFO and Jeffrey Slovin, Executive Vice President and COO of US Operation.

I am pleased to report that 2008 was another successful year in Sirona’s long history as a global leader in the dental equipment market. We posted record revenues of $757 million, at the upper end of guidance. Our operating income including amortization was $155.4 million, above our previous guidance range.

Our business expanded within existing markets and made in-roads into new markets. We introduced two major new products, continued to grow our worldwide presence, and maintained our position as the leading innovator in the dental equipment market.

I will now turn the call over to Simone for a review of our numbers and our outlook for fiscal 2009.

Simone Blank

Fourth quarter revenues reached $180.6 million, up 1.5% compared to prior year or down 5% constant currency. As we have previously communicated, we faced a challenging comparison in the quarter. Let me remind you that in the fourth quarter of 2007, revenues increased 31%, and our CAD/CAM segment revenues increased 68% driven by our new product launches and the MCXL trading program in the US.

I would like to highlight the quarter’s regional development. US revenues declined 12%. It should be noted that growth in the US was positive in all categories except CAD/CAM which faced that very difficult comparison. International revenues increased 7%, down 3% on a constant currency basis.

I will now briefly outline the highlights for each of our business segments. Instruments revenues increased 16% or up 6% constant currency with particular strength in Europe. Instrument segment gross profit margin was 51.1%, up 6.9 percentage points from the prior year quarter primarily resulting from a favorable product mix and a lower level of product business.

Treatment center revenues increased 10%, flat on a constant currency basis. Segment gross profit margin was 40.4%, slightly higher than the prior year quarter due to favorable product mix. Imaging segment revenues increased 6%, up 1% constant currency driven by the adoption of digital radiography and 3D imaging. Imaging segment gross profit margin was 57.6%, down 2 percentage points from prior year on the product mix and pricing pressure on panoramic units.

Revenues in our CAD/CAM segment declined 15% or down 19% constant currency mainly due to the strong MCXL trading program that was held in the prior year quarter. CAD/CAM segment gross profit margin improved 280 basis points to 68.3%, up from 65.5% in the fourth quarter of 2007. Fewer trading units and improved margin performance of our MCXL milling unit drove the CAD/CAM margin.

Cost of sales was $99.2 million for the quarter, an increase of $4 million or 4.2%. Cost of sales included deal-related amortization and depreciation expense of $21.3 million compared with $18.5 million for the same period last year. Excluding deal-related amortization and depreciation expense, gross profit margin in the fourth quarter was flat compared to prior year.

Moving on to operating expenses, SG&A expense was $62.1 million in the quarter, an increase of $8.5 million. As a percentage of sales, SG&A expense increase to 34.4% from 30.1%. About half of the increase in SG&A was due to the weak US dollar in the September quarter as most SG&A expenses are Euro denominated. The remainder of the increase resulted from expenses associated with Sirona’s expanded presence in select markets and product launch costs.

R&D was $11.2 million, down $1.6 million as compared to last year. The decrease in R&D was due to the timing of our new product introduction. Operating income plus amortization expense declined 10.3% to $33.1 million. Foreign currency loss amounted to $6.3 million in the quarter comprised of an $8.8 million non-cash unrealized loss on the revaluation of the Patterson exclusivity payment, a $6 million loss on the revaluation of short-term intra-group loans, and an $8.5 million gain on the revaluation of assets and liabilities due to foreign exchange fluctuation.

The non-cash loss on derivative instruments amounted to $7.6 million. This loss included a $3.2 million unrealized non-cash loss of $0.04 per share on interest rate derivative resulting from weakening LIBOR and EURIBOR rates. Also included was a non-cash loss of foreign currency derivatives in the amount of $4.4 million.

Net interest expense was $6.7 million compared to $7.2 million. The income tax benefit in the fourth quarter of fiscal 2008 was $5.5 million compared to a benefit of $37.4 million for the prior year period. Note that the 2008 fiscal year effective tax rate was 24%. This rate is lower than the one we shared with you in August. In 2008, effective tax rate benefited from tax planning initiatives and the realized distribution of profits across the different countries. We expect the corporate estimated effective tax rate of around 28% in 2009.

The company’s net loss was $5.2 million compared to net income of $51.8 million in the prior year. On the GAAP basis, fourth quarter EPS was a loss of $0.09 compared to a gain of $0.93 in the prior year. Fourth quarter GAAP EPS included a $0.38 expense for deal-related amortization and depreciation, a loss of $0.11 related to the revaluation of the Patterson exclusivity fee, and a loss of $0.08 related to the revaluation of intra-group loans.

In the prior year quarter, GAAP EPS included a $0.82 benefits related to the German tax reduction, $0.23 of deal-related amortization and depreciation, and $0.06 gain from the revaluation of the Patterson exclusivity fee and a $0.05 gain related to the revaluation of short-term intra-group loans. Excluding these items in both periods, fourth quarter diluted earnings per share was $0.48, up 100% as compared to the $0.24 per share in the fourth quarter of 2007.

Moving on to cash flow, operating cash flow during the quarter was $43.7 million, investing cash flow was $9.4 million, mainly capital expenditure. At September 30, 2008, the company had cash and cash equivalents of $149.7 million and total debt of $553.4 million resulting in net debt of $403.8 million. This compares to net debt of $463.3 million at September 30, 2007. The reduction in debt was driven by the cash flow during the year.

This morning we issued our fiscal 2009 guidance. The weakened global economy and great crisis have resulted in a challenging dental market and a difficult environment for selling equipment. For fiscal 2009, we are expecting both revenue on a constant currency basis and operating income excluding amortization will be flat as compared to fiscal 2008. We continue to remind our investors to evaluate our business on an annual basis as our quarterly progression can vary significantly.

Given these uncertain times, our guidance assumes that the global economy remains weak for the full fiscal year 2009. Despite the economic challenges, we expect positive growth in the second half of the year driven by the International Dental Show and new product launches.

That concludes my review for the fourth quarter and guidance, and I will now turn the call back to Jost.

Jost Fischer

Now I would like to take a few minutes to discuss our continuing focus on innovation and some of our accomplishments over the past year.

First, I would like to highlight the July launch of the TENEO treatment center which we started shipping the first unit in October. The TENEO treatment center is the true therapy of the digital dental practice combing patient communication, optimized workflow, with implant and endodontic systems integrated directly into the unit. TENEO provides both the patient and the dentist with the ultimate in convenience and comfort. It features an easy touch display that allows the dentist to focus on the dental procedure at hand resulting in a more efficient workflow. I urge you to visit our website and see why TENEO is the best treatment center available today.

I note that TENEO has been recognized for its design as the recipient of the prestigious International Forum Design Award. The feedback we are getting from distributors and dentists has been outstanding. In addition, we launched a 3D Galileos Compact developed specifically to meet the needs of the general practitioner.

Our decision to segment our 3D product offerings is proving to be a winning proposition. We started shipping the Compact in August. Galileos Compact has excellent image quality, integrated implant planning tools, and the largest field of view in its class. It provides an excellent value for the general practitioner who requires 3D diagnostic capabilities. In addition, the system can be upgraded to the fully equipped Galileos Comfort. The Compact unit has significantly lower radiation dosage requirements than other 3D systems. Both TENEO and Galileos showcase Sirona’s industry leading commitment to advancing dentistry through innovation.

This year, as in the past, Sirona has maintained the largest R&D team and budget in the industry with $49 million in R&D in 2008. Our team of engineers and scientists will ensure that we have a pipeline of innovative new products in years to come.

Our 2008 results demonstrate that Sirona continues to benefit from its geographic diversification. We expanded our sales and service infrastructure in international markets. These investments are paying dividends resulting in strong sales growth in Japan, Australia, Spain, Italy, Russia, and France. It is certainly no surprise that we are experiencing a challenging environment due to the weak global economy. While we remain confident in our ability to achieve our long-term goal, the company is taking action to manage through this period.

Management has initiated two programs to reduce expense. At the same time, we are continuing our important investments in new product and key strategic initiatives. The first of the cost saving initiatives focuses on the near term. This includes reserving expenses until we have better visibility of practitioner demand, reducing trouble expenses, and saving of certain marketing costs. We expect savings of at least $10 million in fiscal 2009.

In addition, we have further initiatives to maximize the efficiency of our organization. These efforts include further automation of our processes, optimizing the supply chain, reviewing and increasing efficiency in our administrative functions. These measures are expected to result in annualized savings of an additional $10 million which will be fully realized in fiscal 2010. We will incur an estimated $10 million charge mainly in the second half of fiscal 2009 to implement these programs. This charge is taken into account in our fiscal year 2009 guidance.

These sales tightening initiatives will help us navigate through the current environment. I am confident that these savings will not affect our industry leading position as the innovator in the dental equipment market.

I am pleased to report that we continue to strengthen our balance sheet in end of the year with a net debt to adjusted EBITDA ratio of 2.1 times and $150 million of cash on our balance sheet as of September 30th.

With our continuing investment in research and development, best-in-class product offerings, and excellent relationships with our dealer partners including Patterson and Henry Schein, we are well positioned to successfully compete in the current environment.

Looking forward, I am confident that we are taking the right steps for the benefit of our company and our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Tycho Peterson with J.P. Morgan.

Tycho Peterson - J.P. Morgan

Jost, may be just starting with some of the efficiency initiatives you were just commenting on, are you doing anything with regards to the manufacturing footprint? You’ve obviously got some manufacturing out at China, are you doing anything that potentially consolidates facilities?

Jost Fischer

We have no plans to consolidate facilities, but what we are willing to do and have already started in the last year, we will combine the opportunities that we have in both of our facilities, Bensheim and China, and that means, producing parts in China for our Bensheim facility and beefing-up of the Chinese facility, which we largely did in order to be competitive additionally to our Bensheim plant, but we have no plans to consolidate.

Tycho Peterson - J.P. Morgan

Simone mentioned a few times in her comments of pricing, can you just talk about the pricing dynamic in the market now, I guess with regards to both 2D and panoramic and what you’re assuming for next year.

Jost Fischer

Let me just take that question on the market and Jeffrey might add for the US side of it. You know the imaging market has always been a competitive market, and we have seen pricing pressures throughout last year, and we expect that to continue in both areas, the panoramic as well as the 3D world. We have reacted to that by segmenting our offers as you see with the Galileos Compact which is offered at a lower price than our Comfort direct to these pricing issues.

Jeffrey T. Slovin

I think, Tycho, you know we’ve talked about the 2D side of that, that we’ve had some pricing wars. They continued relatively stable, but we’re talking about a few percentage points that could continue in promotions throughout ’09 and certainly given the environment. With the Compact, I think that takes care of a lot of the pricing pressure that we were seeing in the overall 3D, but certainly around the world, we have seen 3D prices come down on the top-hand significantly.

Tycho Peterson - J.P. Morgan

Could you just comment a little bit more on the customer base. You’ve seen it, the option of the Compact, is it new users or..?

Jost Fischer

Yes, absolutely new users and I think we feel very good about the offering to the general practitioner, and the orthodontist is certainly getting involved as well in that offering. So, I have to tell you that in the US, I’m very pleased with how we’re moving that product along with our distribution partners.

Tycho Peterson - J.P. Morgan

And then just one last one, your thing about IDS next year, and can you remind us what you’ve spent in the past from a sales and marketing perspective and how we should think about the flow through the year?

Simone Blank

As you know Tycho, the IDS is at the end of March, so you can expect to see the expenses, and we will not give that level of detail on what we’re spending on the IDS.

Jost Fischer

But may be to give you the perspective, of course, you have cost related to the show, but you can expect some product launches from Sirona, and product launch expenses certainly will be in addition to a normal show related expense, so, just wait and see what kind of innovative products Sirona might bring to the market within the next 4, 5 months.

Tycho Peterson - J.P. Morgan

Okay, great, I look forward to it.

Operator

Your next question comes from the line of Jon Wood with Banc Of America.

Jon Wood - Banc Of America

Jost, the guidance, does that reflect the reality that you’re seeing of slower order trends in October/November or is it more just general caution given what we all see in the newspapers?

Jost Fischer

I would say, first of all, the current week economic environment in our mind will continue during the rest of the year. We’re also seeing that the dental market is a more defensive part in this market, and we believe will not be hit as hard as some other parts of that, but what we expect is that certainly the economic weakness will show some in the US, and we also see signs of weakness in Germany. So, we expect that to continue certainly for the remainder of what we see here, but we also see some positive movements and momentum in other markets in that. So, that’s why we are tightening our belt in order to be prepared.

Jon Wood - Banc Of America

And then Simone, can you just give us some parameters on operating cash flow and CapEx in 2009, whatever you’re willing to comment on there?

Simone Blank

Operating cash flow obviously, as we have communicated this morning, we expect our development to be flat. We also expect our operating cash flow to be on similar levels, and on CapEx, historically, we’ve been between 4% and 5%. So, that’s the number, probably a little bit more towards the lower end of that number; that is what to expect also for the financial year 2009.

Jon Wood - Banc Of America

And then Simone, on FX, can you just give us what it looks like at current rates for fiscal ’09?

Simone Blank

Fiscal year 2009, the value would be approximately $690 million at current FX rates.

Jost Fischer

The O plus A of course will remain in the $155 million level.

Jon Wood - Banc Of America

Okay, obviously you got most of your cost in euro, so does FX actually give you a little bit of a margin lift as the dollar strengthens?

Simone Blank

As we said before, approximately 50% of our sales are in euro and approximately 75% of our expenses, and wherever the FX goes, the bottomline remains relatively unimpacted, but most of the margins could get a lift, depending on the mix and everything.

Jon Wood - Banc Of America

One last one, how quickly can you complete the buyback that you announced this morning? Is that something that you’ll look to do within a defined period or be more opportunistic with those purchases?

Jost Fischer

We’re going to act opportunistic on this one and we believe it’s a good source of use of cash in hour and we think it’s going to be accretive and represents an attractive use of our capital given the free cash flow that we have.

Operator

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

John Kreger - William Blair & Company

Just another question about the economy, the impact you are seeing on your business; if you look across your market that are a lot more self pay like the US versus markets that are more government reimbursed, are you seeing any difference in the degree of slowdown?

Jost Fischer

When we just commented on the US being somewhat slow since about 6 months we also see that Germany at this point is not the strongest market that we have in our portfolio and you know that’s a largely reimbursed market. On the other hand, please note that crisis signs are only getting to Europe these days and therefore it’s the beginning of something and in the early signs you always have some kind of a ‘wait and see’ attitude that we are seeing currently in Germany. We expect though the underlying demand to be at a normal level going forward.

John Kreger - William Blair & Company

Okay great. And then, Jost, a second question, the challenging economy change, are you thinking at all about the distribution of your portfolio towards equipment versus consumables; are you happy with your current mix or are you rethinking perhaps moving towards the consumables side?

Jost Fischer

Certainly, we’re happy with our mix. We think our setup is the right one for a dental equipment company. As you know, we have pockets of recurring revenue on the CEREC side as well as the instrument side, which of course are pretty much okay, but from a general point of view, we produce products that enhance the productivity of our dentists with our CAD/CAM system as well as with our digital imaging offering, we save the doctor money. So actually the doctor will look at our products even more when he has more time to think about his own future because he has lower traffic in his office, that’s one thing. The other thing I would like to point out is the geographical diversification that we have as a global company, and that helps us mitigate some weaknesses here and there in markets and we see some very positive signs in countries that we just mentioned that we had last year, we see that to continue like Japan, like the Middle East, and Russia as of today have not been impacted at all.

John Kreger - William Blair & Company

Great. One last question for Simone, if you think about the quarterly distribution of your business, I know we’ve got IDS this year where we didn’t have that in fiscal ’08, any other key things we should be thinking about in terms of the quarterly spread of your revenues?

Simone Blank

Yes. As we said, IBS, obviously new product introductions always influence the quarterly distribution in a given year. And then as we said, we anticipate that we return to positive growth in the second half of the year.

Jost Fischer

We see the second half of the year because of that reason than the first half of the year given the uncertainties that we see at this point in time.

Operator

Your next question comes from the line of Jeff Johnson with Robert W. Baird & Co.

Jeff Johnson - Robert W. Baird & Co.

Simone, just a couple of clarifying questions here if I could, just want to make sure I understood a couple of things; fiscal fourth quarter EPS is $0.48 at below the line noise there, the tax benefit, was that about a dime then if I am doing the math on my model correctly?

Simone Blank

The tax benefit is approximately $0.10.

Jeff Johnson - Robert W. Baird & Co.

Okay. So, if we ax out the benefit and the hedge losses, then what have you, about $0.38 is how we should be thinking about what the EPS was?

Simone Blank

Yes, approximately that level.

Jeff Johnson - Robert W. Baird & Co.

Okay, fair enough. And then, in the guidance, Jost, you mentioned the $20 million in cost that come out on your cost reduction efforts there and then a $10 million; Jost, you made the comment that the $10 million is included in your guidance. So, you won’t be one-timing that charge that will be kind of buried within your flat operating income on a constant currency basis guidance, is that the read?

Jost Fischer

The read is that we have factored the $10 million charge into our guidance. We will take a charge probably towards the end of the year, we don’t know yet whether we will split it between third and fourth quarter, but that’s the plan.

Simone Blank

But one clarification; the $20 million that Jost was talking about, $10 million of that, he said, will be mainly in fiscal year ’10.

Jeff Johnson - Robert W. Baird & Co.

I am sorry, I didn’t catch the fiscal year ’10, that’s helpful. Okay, and that would explain the late charge.

Jost Fischer

We will have the cost incurred this fiscal ’09 and the benefits then will be to the full extent in the year after.

Jeff Johnson - Robert W. Baird & Co.

Okay. The second part of that; the $10 million, Jost, of the $20 million will be a benefit in ’09?

Jost Fischer

Correct, yes.

Jeff Johnson - Robert W. Baird & Co.

Okay. So, the charge and the benefit in ’09 pretty much wash out and that concluded in the operating income guidance

Jost Fischer

Exactly.

Jeff Johnson - Robert W. Baird & Co.

Okay. And then, Simone, one other question, just from a numbers standpoint; if constant currency operating income is flat, and again, given the 50% euro revenue and 70% cost in euro, does that mean on a reported basis operating income could actually be a little above $155 million next year?

Simone Blank

No, the current assumption is that it’s flat on the $155 million level.

Jeff Johnson - Robert W. Baird & Co.

Okay. So, on a reported basis as well, kind of, flat at $155 million. And then, maybe, Jeff, you could address this; on the 3D side of the business, obviously there has been some pricing pressures almost from mix just with the Compacts out of the pricing at the lower price point as you have discussed, could we talk about unit ex price, just units of Compact to Comfort on a combined basis, how you are seeing those combined units selling relative to last year, and maybe, how we should think about units of those two on a combined basis selling versus units this year?

Jeffrey T. Slovin

I don’t think we’re going to go into the detail of units, but I would tell you that we’re seeing double-digit growth certainly in the US and in other selected markets of our 3D. So, we’re feeling very good about how our fourth quarter ended up and how this year is beginning.

Jeff Johnson - Robert W. Baird & Co.

Interesting, and you think that double-digit growth, and I am not even asking for any kind of guidance here, but just generally you think that kind of year-over-year growth in units of the combined two continues in ’09?

Jeffrey T. Slovin

It’s certainly difficult to say given the economic environment that we’re in, but the signs are positive about what we’re seeing in the market today.

Jeff Johnson - Robert W. Baird & Co.

Okay. Interesting. That’s good to hear. And then, Jost, you made some comments on Germany that that market is starting to slow or has slowed at this point; is that a willingness to spend issue on the part of the dentist or are they actually seeing slower traffic given that it is a government reimbursed market, are they starting to see reduced patient traffic to their officer or are they just pulling back on a consumer fear at this point?

Jost Fischer

We don’t see any pullback on the patient flow at this point in time, but more the latter, the doctors just now realized, layoffs in the automotive industry, economic environment is difficult, and they are just evaluating more and pushing forward sales rather than making decisions at this point in time. I also note that there are no specific tax incentives in place at this point in time to change that behavior short term.

Jeff Johnson - Robert W. Baird & Co.

Does that mean that there could be some on the horizon that you’re aware of being discussed in Germany?

Jost Fischer

Yes. There have been some measurements discussed everywhere, but we do not have an election at this point in time. The election in Germany will be in November of next year; so there likely will be some action in spring or summer of 2009.

Jeff Johnson - Robert W. Baird & Co.

Okay, great. And then the last couple of questions; any risk to the Middle East and maybe even Russian growth that has been helping your results here in the last few quarters or last couple of years; any risk there now that oil is cut by 60% to 70%, and are there are any reimbursement reform on the horizon in any of the non-US markets that you are aware of?

Jost Fischer

First, the Middle East, usually these tend to be larger project that are more for time horizons from 2 to 3 years planning and some of them are materializing during that 2009 year, I don’t think they will be impacted, but there are always uncertainties on the timing of these projects, but that has usually nothing to do with the dollar inflow that these countries have because let me remind you, in the Arabian countries, the cost of getting oil is the cheapest worldwide and therefore they will still be very fine at current $40 to $50 levels when it comes down to cash flow. So, the time that the projects that we’re lining up these days that are long-term projects and we are at the backend of these projects because putting in equipment is usually towards the end of such large project hospitals and that will be affected.

Jeff Johnson - Robert W. Baird & Co.

Okay, great. And then on the reimbursement front?

Jost Fischer

On the reimbursement front, we’re not aware of any changes. You know that the Obama regime is thinking about changing something here, but it’s too premature to tell, but outside of that we have no indication of any change.

Operator

Your next question comes from the line of (Adam Palfred) with Barclays Capital.

(Adam Palfred) - Barclays Capital

Just wanted to follow up, recently any changes in how you are thinking of the benefit from Section 179 next quarter, and have you started to see any sales due to that in the month of November?

Jost Fischer

When you look at the quarterly progression of what we hear is certainly November was better than October and we feel that has to do with Section 179 to a certain extent.

(Adam Palfred) - Barclays Capital

Is there any, I guess, color on your expectations for the month of December?

Jost Fischer

I think the November trends likely will continue into December, we see an impact here, but this may be not as big as everybody would have hoped it to be.

(Adam Palfred) - Barclays Capital

Okay. And then do you have any insights into whether that gets renewed next year or is it just too early to tell?

Jost Fischer

I would say, “Talk to Obama.” It’s too early to tell, to be honest, we think that the new President certainly will give it a good look and given the promises he made, there is a likelihood, but it’s too early to tell from our point of view.

(Adam Palfred) - Barclays Capital

And one more quick question to Simone; was there an uptick in the provision for doubtful accounts this quarter, I guess, was that due to any one item, and then how should we think of that for next year?

Simone Blank

No, in general, this is a very minor item for us anyway if you look at the overall numbers; we don’t have any major issues with bad debt or something like that. This number normally comprises of general provisions and then individual ones; this is more an increase in the general ones, so nothing to be concerned about at all.

Operator

Your next question comes from the line of Lawrence Marsh with Barclays Capital.

Lawrence Marsh - Barclays Capital

Just wanted to follow with a couple of things that Adam brought up; first of all, on the tax benefits, Jost, I guess you said that your view that Section 179 won’t be as big of an impact this year in the US as some had hoped, could you elaborate on that?

Jost Fischer

I would think that certainly when you look at our product offerings, it’s an opportunity to capture both, a payback for the dentists because of the realized savings he does, one, and secondly, get it on a tax incentivized way. We feel that this is having an impact, but it would have a better impact if the economic situation would not overshadow that.

Lawrence Marsh - Barclays Capital

Okay. Just to that point, the tone of business in the December quarter because you are communicating that November was better than October; October was weak for a lot of people, you think December would be consistent with November. I know you don’t guide the quarters, but it sounds like the general message is that EBITDA would be down a reasonable amount year over year in the December and then would start to see comparisons improve toward the second half?

Jost Fischer

Certainly, December will be more like November rather than October when you heard the October numbers from our distributors, and I want to comment on your latter sentence, we see the second half being stronger than the first half, yes.

Lawrence Marsh - Barclays Capital

Okay. Other things; R&D expenditure for this year, should we assume that’s going to be roughly flat versus 2008 given everything else or do you think that’s going to continue to grow this year?

Simone Blank

R&D expenses are driven by the individual projects we have and so that is at the same level, but our overall guidance assumes flat development in the topline and bottomline.

Lawrence Marsh - Barclays Capital

Okay. Three things; to Jeff’s question, the $10 million of longer-term efficiency initiatives that you’ll get benefit of for 2010; are you going to get any benefit of that in 2011?

Jost Fischer

Yes, there is a likelihood that we get some, but certainly I can’t give you any percentage. We will start initiating that early, but the benefits as you know will take a while and we have to invest into that. So, likely you would get better clarity on a future conference call.

Lawrence Marsh - Barclays Capital

Okay. A quick question on CEREC, at recent dental shows there has been a lot of focus on other options where people can send their digital imaging to a lab to get it done which raises the question of the milling part of the product versus the digital imaging piece of the business; do you anticipate there to be any response from CEREC based on some of those initiatives CEREC when might that happen?

Jost Fischer

Larry, our vision is that we combine the benefits of digital impression taking with the benefit of milling in the office space; that’s what our CEREC offering is all about, but as you know we have launched our CEREC Connect and this is what we were talking about, taking the digital impression in the mouth of the patient in the dental office and then send it to the lab electronically to do the restorations there which is an offering that we have; we have the largest offering in this space, and because of our largest installed base of our in-lab offering and our in-office offerings, the future of dentistry will center around digital impression and as you know we’re best positioned to take advantage of these trends, and certainly we will follow through on that, Larry, with our R&D folks.

Lawrence Marsh - Barclays Capital

Okay. And then finally, if we sort of fast forward a year, what would have happened in 2009 that would have caused your EBITDA to be below that of 2008; obviously you are guiding to flat, would it mean a much more severe economic downturn, what could happen this year that would cause that to possibly be down?

Jost Fischer

First of all, we think we have taken the appropriate steps to address the current economic environment, and we don’t expect this environment to be materially better than it is at this point in time. So, that’s our assumption. If things turn down for the worse for whatever reason that nobody expects at this point in time, we will have to revisit our two initiatives that I just talked about on the cost side. That’s the way we look at it, but we’re confident that we’ve taken the right steps to address the situation.

Operator

(Operator Instructions). There are no further questions at this moment.

Jost Fischer

Okay. Thank you very much for joining us on our fourth quarter conference call. Looking forward, I am confident that we’re taking the right steps for the benefit of our company and our shareholders. I look forward to updating you on our next call in February. Thank you very much.

Operator

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

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