DENTSPLY INTERNATIONAL, INC.
Moderator: John Miles
April 23, 2003
9:00 am CT
Operator: Good morning, my name is (Shatina) and I will be your conference
facilitator today. At this time I would like to welcome everyone
to the First Quarter Earnings Release conference call.
All lines have been placed on mute to prevent any background
noise. After the speakers' remarks there will be a question and
answer period.
If you would like to ask a question during this time simply press
star then the 1 on your telephone keypad. If you would like to
withdraw your question press the pound key.
I would now like to turn the conference over to Mr. John Miles,
Chairman and Chief Executive Officer. Thank you Mr. Miles, you
may begin your conference.
John Miles: Thank you. Good morning and thank you everyone for joining
Dentsply's First Quarter 2003 conference call. My name is John
Miles, I'm Dentsply's Chairman and Chief Executive Officer.
And with me this morning is Gary Kunkle, Dentsply's President and
Chief Operating Officer and Bret Wise, Senior Vice President and
Chief Financial Officer.
As is our usual format, I'll start by giving some overview
comments concerning our first quarter results as well as the
overall business. Bret will then go through a more detailed
review of the profit and loss statement and the balance sheet.
And finally, we'd collectively be pleased to answer any questions
that you may have.
Before starting, our general counsel says I need to read the
following safe harbor statement. In accordance with the rules of
the Securities and Exchange Commission, information discussed
during this conference call including the Q&A session will be
part of an 8-K filing that will be made by the company after the
call.
To the extent that during this conference call any non-GAAP
financial items are discussed, the additional information
required by the SEC about such non-GAAP financial matters will be
available through our Web site by going to dentsply.com and going
to the investor relations section and clicking on the SEC filings
link which will provide access to the 8-K filed for this
conference call and further information about any non-GAAP items.
This conference call may include forward looking statements and
as such are made in accordance with the safe harbor provisions of
the Securities Litigation Reform Act.
Forward looking statements involve risks and uncertainties which
could materially affect the Company's business and should be
considered in conjunction with the risk factors and uncertainties
described in the Company's most recent Annual Report on Form 10-K.
I'm sure each of you has received a copy of our first quarter
earnings announcement released yesterday after the market close.
I'm extremely pleased to report that Dentsply has again achieved
another quarter of record sales and earnings.
Our reported sales for the first quarter were $396.2 million, an
11.6% increase over the year earlier quarter. On an ex-precious
metal basis, sales increased 11.9%.
Diluted earnings per share were 48 cents, an increase of 14.3%
over the year ago period. You may recall that the first quarter
of 2002 had a favorable restructuring adjustment of 2 cents. So
on an apples to apples basis growth was even higher than the
reported 14.3%.
The 11.9% sales gain ex-precious metals for the quarter broke out
as follows. Our dental base business growth was 5.5%, non dental
base business was negative 0.3%. Foreign exchange was favorable
7.0% and acquisitions, divestitures net were unfavorable 0.3%.
Two factors negatively impacted the base business growth during
the quarter. The heavy snowstorms that hit the U.S. East Coast
in February, closing businesses including dental offices for two
to three days.
And the timing of the IDS, the International Dental Show meeting
which is the huge European trade show held every other year
during the very last days of March.
We believe these two events reduced base business growth in the
quarter by over one full point. Current forecasts for the
balance of the year remain on track with our targeted sales
growth projections.
Base business growth on a geographical basis broke out as
follows, base business growth ex-pm in the United States was
5.6%. Solid growth was achieved by Tulsa Endodontics led by
nickel titanium files, GAC Orthodontics led by In-Ovation-R and
Mystique brackets, as well as excellent success with three
recently launched new products, our Stylus high speed hand-piece,
Eclipse which is a revolutionary prosthetic resin system for
dental labs and of course Cercon, our unique all ceramic crown
and bridge system.
In Europe/CIS, the dental base business growth ex-pm was 4.9%.
European sales continued to be led by substantial growth across
Dentsply's broad consumable lines with notable performances by
endodontics, dental implants, preventive products and again
Cercon.
In Asia, we achieved dental base business growth ex-pm of 17.1%.
Excellent gains were achieved by Dentsply Taiwan, Dentsply Korea
and Dentsply Indonesia.
In Latin America, the dental base business growth ex-pm was
5.1%. I'd say that I'm really pleased that Dentsply was able to
achieve positive growth in a region that continues to experience
numerous economic issues.
And finally, rest of the world was a favorable 2.2% base business
growth ex-pm. Excellent performance by Canada was offset by
weaknesses throughout the Mideast/African region as you might
expect.
Other topics I think would be of interest. First, Dentsply has
had an exceptional first quarter for new product launches. Key
new product launches during the quarter were Aquasil Ultra, a new
polyvinyl siloxane impression material with unsurpassed detail
reproduction coupled with excellent tear strength and good taste.
As indicated in our press release, we have converted 8,000 new
users since the product launch at the beginning of January, A
truly spectacular result.
Cavitron, a swivel hand-piece which really solves the arm fatigue
problem currently experienced by dental hygienists when they're
ultrasonically scaling teeth.
A new executive tooth line launched throughout Europe is a new
premium tooth line that will be sold by Degussa direct in Europe.
Dugavest SR is a new dust free investment material used by dental
labs and it solves the ongoing environmental dust problems that
currently dental labs experience.
We launched the Cercon giant block which is a new Cercon
consumable for the very large bridge spans. And finally we
launched (Quixfil), a new posterior composite that reduces the
dental procedure time when placing that material.
Additionally, Xeno III bonding agent was launched in the U.S.A.
in February at the Chicago meeting. You may recall it had been
launched very successfully in Europe during the fourth quarter of
last year. And the U.S.A. launch was delayed because of capacity
issues which were solved at the beginning of the year. And
Eclipse which we had launched in the fourth quarter in the United
States was launched in Europe during March.
As an aside, several of the products launched in the second half
of 2002 continue to exhibit strong growth. Namely Cercon, our
all ceramic crown and bridge system, (Stylus), our high speed
hand-piece, Eclipse, the prosthetic resin system, Xeno III
bonding agent, as well as In-Ovation-R self-ligating and Mystique
Clear orthodontic brackets.
Finally, numerous new products remain in the R&D pipeline and
will be commercialized as the year progresses. Frankly, I can't
remember a time when we've had a fuller product pipeline.
I want to say a few words about German reimbursement. An analyst
report was issued last Thursday, April 17 dealing with the German
reimbursement which negatively impacted Dentsply's stock price.
Unfortunately, this report contained several inaccuracies. A
revised report was issued by the same firm after the market
closed the same day. The facts are as follows.
First, dental laboratories have a maximum price list under which
they are reimbursed by the government. And that maximum price
list was decreased 5% effective January 1, 2003. This price
rollback affected about half of the German dental labs. The
other half were in fact charging at prices less than the maximum
price list and therefore were not affected.
Secondly, there were no other reimbursement changes and patients
continue to have the same co-pay and benefits that they enjoyed
in 2002.
Finally, there is discussion in Germany about how to deal with
that country's budget deficit as well as any role healthcare
expenses may play in this. This discussion is at its inception
and changes if any, or their timing which may occur sometime in
the future are unknown.
One must realize that this is as much a political issue as an
economic issue and one that has often surfaced during the past
few years. At the very least, one should not expect a rapid
consensus on this particular issue.
Progress continues on target for Dentsply's new sterile filling
plant just outside of Chicago for dental anesthetic production.
The initial media fills are now scheduled to occur during the
third quarter of this year with FDA final approval still targeted
for mid-2004.
New drug applications for (Oraqix), our revolutionary new
anesthetic were filed in the United States and Europe during the
first quarter of last year 2002.
In the U.S. we received what's called an approvable letter from
the FDA at the end of 2002 with the stipulation that the primary
container must be redesigned to eliminate the very remote
possibility (Oraqix) could be injected by accident by the dentist
thinking it was a dental anesthetic.
The redesign had to be such that (Oraqix) will not fit into a
traditional dental syringe. This redesign has been completed and
resubmitted to the FDA. We are now targeting FDA approval for
the latter part of this year. After approval, the applicator
molds will have to be made, indicating a launch date of
approximately mid-2004.
In Europe, we have just received approval from our member
reference state which was Sweden without any changes to the
submitted dossier.
The dossier must now be translated and circulated to the other EC
member states. Approval is targeted for late 2003 with
commercialization throughout Europe targeted for early 2004.
Let me conclude by reaffirming our guidance for 2003. We remain
comfortable with an internal sales growth rate ex-pm of 6%-8% for
the balance of 2003 as well as the very high end of analyst EPS
forecasts currently at $2.04-$2.07.
I'll now turn the conference over to Bret Wise who will take you
through the P&L as well as the balance sheet.
Bret Wise: Thank you John and good morning everyone. Thanks for joining us
in our first quarter conference call. I have a few comments on
each of earnings, the balance sheet and cash flows for the
quarter.
So starting with the income statement, as John mentioned sales
increased in the quarter by 11.6% and 11.9% without precious
metals. I'd like to remind you that we do have approximately $50
million of precious metals that pass through our P&L each quarter
affecting sales and cost of sales in the same amount. We are not
long in the metal on our balance sheet and the metals are sold to
our customers at the same price at which we acquire the metal
which is predominately the market price on the date of the
customer order. As we don't earn a spread on the metal nor are we
exposed to fluctuations in the price of the metal, we report
sales both with metal which is the GAAP basis and without metal
which is a non-GAAP item. And this allows the readers of the
financial statements to look at trends and sales and margins
excluding precious metals which we believe to be the best
indicator of our profitability.
Now back to sales, internal sales growth for dental was 5.5% and
currency added 7% to sales without precious metals.
Obviously the dollar has weakened considerably against many key
currencies including a 23% weakening year over year against the
Euro and a 24% weakening year over year against the Swiss Franc.
Of course we don't have the same currency translation impact on
income as on sales since operating margins are generally lower in
Europe. And a portion of what's sold in Europe is U.S.
manufactured product in which profit is captured in the U.S.
through intercompany transfer pricing.
Gross margins of 55.6% improved from 55.4% in the 2002 quarter.
This improvement was driven by new product introductions and
product mix.
SG&A increased to $128 million from $114.4 million last year.
And as a percentage of sales was roughly the same as the 2002
quarter at 32.3% of sales. The increase in SG&A in dollar terms
is attributable to currency translation which increased SG&A by
$13.7 million versus the 2002 period.
There were no restructuring costs or benefits recorded in the
first quarter of 2003. In the first quarter 2002, you may recall
we did reverse a portion of previously established restructuring
reserve that related to the completion of our consolidation
efforts in Europe, Brazil and North America. And that reversal
boosted pre-tax earnings by $2 million and earnings per share by
approximately 2 cents in the first quarter of 2002.
Operating income grew to $62 million in the 2003 quarter and was
15.7% of sales and 18.1% of sales without precious metals. If we
remove the benefit of the restructuring reserve reversal from the
2002 first quarter, operating margins would have been 18% in 2002
compared to the 18.1% that we earned in 2003.
Interest and other expense are lower in 2002 for two main
reasons. First, interest expense fell by approximately $1
million during the period. And second, the value of our warrants
in Practiceworks rose by approximately $1.2 million during the
first quarter of 2003. And that compares to approximately
$500,000 in preferred dividends we had from Practiceworks in the
first quarter of 2002.
So on a net year over year basis, Practiceworks helped us
$700,000 or about a half cent per share this quarter.
Offsetting the benefit of the lower interest expense and the
Practiceworks gain was higher exchange losses of approximately
$400,000 in the 2003 quarter.
The effective tax rate for the first quarter was approximately
32.5% compared to 33% for all of 2002. This decrease is
consistent with what we were forecasting in our year end 2002
conference call.
And at this point we believe that it's possible that rate may
come down further during the year as we implement further tax
saving strategies.
Net income for the period was $38.3 million, a 15.6% increase
over the first quarter 2002. And diluted earnings per share was
48 cents compared to 42 cents per share in the 2002 first quarter.
Again the 2002 quarter benefited from the 2 cents per share
restructuring reserve reversal. And the 2003 quarter benefited
about a half a share from the valuation that Practice Works
warrants compared to the dividends in the prior year.
So on an apples to apples basis, the growth and earnings would be
higher than the 15.6% reported.
Turning to the balance sheet, we did build approximately $21
million in cash balances this quarter. You may recall that we
have discussed the likelihood of some cash build this year due to
favorable investment rates versus the carrying cost for our debt
and penalties that we would incur in retiring debt at this point.
Accordingly, this is a planned cash build and we would anticipate
that there will be further cash build throughout the year. Late
in the year we do have approximately $20 million of Japanese Yen
borrowings which are maturing which we'll either retire or
rollover depending on the cash position at that time.
In addition, we are anticipating approval of (Oraqix) later this
year which will trigger the final $18 million payment to Astra
Zeneca which is the final piece of that acquisition.
We're also currently in arbitration with Degussa to resolve the
last potential purchase price adjustment of up to $10 million to
close that transaction.
Moving on to working capital, our accounts receivable days were
52 days at the end of the first quarter versus 53 days for the
first quarter of 2002 and 49 days at year end.
Inventory stood at 104 days at the end of the quarter versus 100
days at year end 2002. If you look at the dollar increase in
inventory from the end of 2002, about a third of that's
attributable to currency translation and about two thirds is
attributable to this increase in the days. We are maintaining our
target of 95 days by the end of 2003. And we expect to see that
cash flow benefit come back to us over the balance of this year.
Goodwill rose by $20 million during the quarter. The
contributors there were currency which added $16 million to $17
million. And then a small tuck under acquisition of a supplier
which added about $2 million. And the remainder was the final
balance sheet valuation measures on the Austenal acquisition that
closed in first quarter 2002.
Other assets increased $27 million during the quarter. But the
notable item there was a $22 million increase in the value of our
Euro and interest rate swaps. You see the offsetting effect of
this currency and interest rate movement in the long term debt
line.
Looking at liabilities, long term debt rose by $28 million in the
quarter, $29 million of that is due to the weakening of U.S.
dollars and the interest rate swaps, where we actually reduced
debt by about $2 million on a cash flow basis.
Recall that after reducing debt -we also built cash by $21
million. So on a net debt basis, that being debt less cash
excluding exchange we saw about a $23 million reduction in net
debt this quarter.
The exchange effect on the debt is attributable to a 4%
strengthening in the Euro this quarter that affects both the
principal amount of the Euro debt as well as the Euro U.S. dollar
interest rate swaps, a 2% strengthening in the Swiss Franc and
11% strengthening in the Japanese Yen.
Equity in total rose $61 million during the quarter, that's due
to the $38 million in earnings and roughly the balance is due to
currency translation.
Our debt to total capitalization ratio fell to 47.1% at the end
of the first quarter from 47.9% at year end. And on a net basis,
that being net of cash balances and the value of that Euro swap,
the ratio now stands at 43.2% compared to 45.1% at year end 2002
and 53% at the end of 2001. So we've seen a substantial
improvement in the balance sheet ratios both in this quarter and
over the last year.
You may recall that our long term goal is to maintain debt to
total capitalization of 35%-40%. So at this point net of cash
and the value of the swap, we're approaching the high end of that
range.
From a cash flow perspective, operating cash flows are
approximately $43 million for the 2003 quarter compared to $12.4
million in the first quarter of 2002. So we're off to a much
stronger start in cash flow generation than in 2002.
Depreciation and amortization for the quarter was approximately
$12 million and working capital and other balance sheet movements
consumed approximately $7 million in cash this quarter.
And again, we expect to make progress on inventories during the
balance of this year and thus, we expect some payback of the cash
used before the end of 2003.
Capital expenditures were $18 million for the quarter reflecting
the investment in our new Pharma plant in Chicago that John
mentioned. Absent that investment, cap ex would have been about
$10 million for the quarter, closer to a normal run rate.
And as a reminder, we expect capital expenditures to be in the
$70 million range for all of 2003, again reflecting the
investment in the Pharma plant.
That concludes our prepared remarks. I'd like to now turn the
call back to the operator for questions.
Operator: At this time I would like to remind everyone, in order to ask a
question please press star then the 1 on your telephone keypad.
Your first question comes from Derek Leckow.
Derek Leckow: Thank you, good morning. Congratulations on a nice quarter
here. My first question concerns your comments about inventory.
It seems to me you're doing a pretty good job controlling your
inventory levels there. They seems to be tracking roughly your
internal growth if you adjust for a couple of things.
And it looks like - you said also that you expect inventory to be
lower going forward. And I wondered if you could sort of tie
that into your full pipeline of new products. How would the
inventory improvements look throughout the rest of the year?
Gary Kunkle: Hi Derek, this is Gary, you know, while our ultimate goal is 95
days I'm comfortable we will get to there from 104 days. We have
traditionally increased our inventories in the first quarter to
accommodate just what you're talking about, new product releases.
Additionally, we also moved the European lab distribution from
Nijmegen into Hanau and built additional inventory for that
transition during the first quarter. So it's really the
combination of those two.
In our analysis and plans to get to 95 days, it also includes
those inventory build for new products. But a lot of that has
already been done in the first quarter.
Derek Leckow: So you're saying that you're expecting the year over year
growth actually to kind of go down I guess for the next three
quarters.
Gary Kunkle: I do. You might see some build in dollars but in days it's going
to continue to reduce over the course of the next three quarters.
Derek Leckow: Great. And then your comments on capital investments
expenditures here. It seems like you're expecting that pace to
accelerate in the next couple of quarters and then kind of taper
off in the fourth quarter. Is that about right?
Bret Wise: That's probably the trend you'll see as we try to finish up the
Pharma plant in Chicago. So the next couple of quarters will be
probably heavier than later in the year.
Derek Leckow: What's your expected completion date on that project?
John Miles: The first part of the plant which is really the sterile filling
area will be complete about mid-2003. And then the second part
of the plant, what I call the finishing or packaging end, by the
end of 2003.
But once the sterile part is complete, the first thing you do is
you have to run media trials to prove that you can keep
contaminants out of your product.
Then you have to run stability trials to prove that the formulas
that you're running and your equipment in your plant are in fact
stable.
And then ultimately, you need two FDA approvals, one for products
and formulas and another for CGMP for the plants.
We again expect the plant startup with final approvals for
probably mid-2004. But we'll actually be filling in the plant in
the third quarter of this year as we run our media fills and then
move into stability trials as the year goes on.
Derek Leckow: Okay and then just finally, the comments on the controversy
surrounding the reimbursement issues over in Germany. John could
you remind me what percentage of your sales into Germany are
related to dental laboratories and so forth?
John Miles: Low teens ex-precious metals.
Derek Leckow: And is it true you're expecting pretty flattish results out of
that business in your guidance?
John Miles: I think the dental lab business in Germany is flat to maybe even
a little negative. I think the big plus that we have in Europe
is the launch of Cercon.
Derek Leckow: Okay and then the guidance that you've talked about. It seems
like you're raising it a bit to the upper end of current range of
expectations for the full year. And does that include the 2
cents a share I guess from the one time reversal here?
John Miles: No the 2 cents was actually in 2002 not in 2003. It means that
our results are on an apples to apples basis, even better than
they look. Because 2002 got a 2 cent plus that really was a one
time event.
Derek Leckow: Got it. Okay thanks a lot.
John Miles: Yes you are correct. We are raising our guidance toward the high
end of analyst ranges for 2003 EPS.
Derek Leckow: Thank you very much.
Operator: Your next question comes from Suey Wong.
Suey Wong: Thank you. John could you break out the consumables sales growth
and also the equipment?
John Miles: Yes. Heavy equipment was - and this is ex-currency, so no
currency - 3.6%. Consumables were 5.6% and non-dental was
unfavorable 5.3%.
Suey Wong: Okay. Could you talk about your projections for equipment growth
in the U.S. for this year?
John Miles: Those were worldwide numbers that I just gave you Suey.
Suey Wong: Okay.
John Miles: I think that the equipment market in the U.S. is still darn hot.
And our sales are good in the U.S. and I think they're going to
continue, certainly being led in our case by digital x-ray and
intraoral cameras.
But I think even though we're not heavily involved I think the
whole equipment category is pretty hot in the U.S.
I don't think that's true elsewhere in the world but it's
certainly true in the U.S.
Suey Wong: John do you have a U.S. equipment number?
John Miles: Not that we break out. No.
Suey Wong: But I take it would be higher than the 3.6% for worldwide.
John Miles: You can bet on that.
Suey Wong: Can you talk about the penetration of ceramic in the crowns and
bridges?
John Miles: Yeah, in total, all ceramic is about 15% of all crowns and
bridges. So 85% is still traditional porcelain fused to metal.
Although there's clearly a strong trend from porcelain fused to
metal to all ceramic because, you know, seven or eight years ago
all ceramic was basically zero.
And of course our efforts are to accelerate that trend and at the
same time convince doctors to use Cercon versus other
alternatives. And the big advantage that we have with Cercon is
the bridge hook.
You know, we can make the bridges, we can even make big bridges.
And if you're using the system to make bridges you might as well
use it to make crowns as well.
Suey Wong: Okay. If I remember right the ceramic is typically four to five
times the gross profit margin?
John Miles: Yeah, about four times actually. If you sell both the precious
metal and the veneering ceramic for a porcelain fused to metal
single crown, the manufacturer has a gross margin of about $4.
But in Cercon you have a gross margin of about $18.
Suey Wong: Okay so it's more than four times the gross profit dollar.
John Miles: And if it were a pressable, you know, we have Finesse all ceramic
pressable margins were about $8 or about twice what they would be
for a porcelain fused to metal.
So it's a real advantage to shift the business toward all
ceramic. And of course the patient is getting a significantly
more aesthetic restoration so everybody's winning.
Suey Wong: Good, good. Could you give us an update on the orthodontic
market and also talk about pricing trends there?
John Miles: Yes. We had an absolutely spectacular quarter in orthodontics as
you can tell from my comments. Our two new lead products, the
In-Ovation-R which is the very small self-ligating bracket as
well as Mystique, the clear bracket. Frankly they're on fire.
I think that the market in total is probably growing in the 5%-6%
range and I think pricing is about stable. But you know, for
these self-ligating and clear brackets the pricing is
significantly higher than it would be for a traditional metal
bracket.
Suey Wong: Okay. Just one final question here. If foreign exchange rates
stay the same, what kind of impact do you see on the top line for
this quarter that we're in now?
Bret Wise: Suey it'd be a very strong impact again this quarter and a little
bit less in the third quarter and then the fourth quarter. But
exchange rates were still pretty low in the second quarter of
last year.
Suey Wong: Okay great. Thank you and congrats.
Operator: Your next question comes from (Bob Plezia).
Bob Plezia: Good morning.
John Miles: Good morning.
Bob Plezia: The growth in the U.S. dental market at 5.5% or your growth seems
to be a little below what the trend has been the last couple of
years. Are you seeing some slowdown and in what areas?
John Miles: No I actually think dentists remain very busy, I think the market
is strong. We've indicated that the lab business is pretty
flattish but it's been that way for over a year.
I think what impacted our specific growth rate in the first
quarter was the snowstorms in February. I mean we absolutely saw
it when they hit. Our sales dropped down for the better part of
a week.
Bob Plezia: And you - obviously as you said experienced 11% but you're
forecasting less than that. Is this a conservative estimate or
do you see something slowing in the dental business in the U.S.
and Europe?
John Miles: I'm sorry I didn't understand that question.
Bob Plezia: Your first quarter sales were 11%+, 11.6%.
John Miles: Yes that's correct.
Bob Plezia: Your guidance is for 6% or 8% for the balance of the year
ex-precious metals.
John Miles: Internal sales growth rate, neutral currency.
Bob Plezia: Right.
John Miles: Or if there's currency gains that would be on top of that of
course.
Bob Plezia: So you're forecasting a slight increase then from the first
quarter.
John Miles: That's correct. Yes we believe that our internal growth rate was
artificially low by at least a point. And yes, we expect that to
change in the second quarter and the balance of the year.
If currency stays the same, then yes, I would expect higher sales
in the second quarter. That's true.
Bob Plezia: And looking at your - call it operating earnings, in other words
earnings less all the extraneous additions - other than new
products what are the other reasons why profitability was so
strong in the first quarter?
John Miles: I think it was just a modest improvement in gross margins on
increasing sales because SG&A really stayed the same as a percent
of total sales. A lower tax rate and lower interest were kind of
the factors.
Bob Plezia: Okay thank you.
John Miles: Yes sir.
Operator: Your next question comes from Richard Yett.
Richard Yett: Hi can you give me a better idea - clarify your debt repayment
intentions? Meaning at year end what do you think your debt to
capitalization will be?
Bret Wise: Well again we're targeting to get down to that 35%-40%.
Richard Yett: And you think you'll get it in what time frame?
Bret Wise: I think we'll get that over the next 12 months.
Richard Yett: That's fabulous thank you.
Bret Wise: You know, the factors that could affect that of course are what
happens with the resolution of Astra Zeneca where we hope we get
the FDA approval and pay the $18 million to Astra Zeneca. How
does the Degussa arbitration resolve itself. And then lastly, of
course we are - in the acquisition market, there's always event
risk there, but if we have some transactions that come up we
would consider them at this point.
Richard Yett: And on the Degussa negotiation how much are we talking about?
Bret Wise: Somewhere between zero and $10 million.
Richard Yett: Oh okay that's fine. Will that go through the income
statement?
Bret Wise: No.
Richard Yett: Okay. Terrific quarter, thank you.
Operator: Your next question comes from Boris Fuchik.
Boris Fuchik: Good morning. I just wanted to understand - could you
quantify the EPS impact of currency?
John Miles: I guess we haven't done that but I have to tell you it's not very
much. And it's not very much for the reasons that Bret laid
out. The operating margins in Europe are lower than they are in
the U.S. because SG&A expenses are higher in Europe than they are
in the U.S.
And secondly, a lot of it has to do with where your profit shows
up in intercompany transfer pricing.
Boris Fuchik: Right that's why I wanted to get it quantified because it does
seem like it would be less than the top line but...
John Miles: It's significantly less than the top line.
Boris Fuchik: Okay. What was the growth rate in Europe for the quarter? I
might have missed that in your initial comments.
John Miles: It was 4.9% ex-pm for the dental business.
Boris Fuchik: Great. And then lastly just on your - it sounds like you're
guiding $2.04, $2.07 which is what you guided for at the end of
last quarter. What - do you feel like you pulled in some
profitability into this quarter from the future? Or what kind of
change relative to your expectations at the end of last quarter?
John Miles: No I think we had a very strong quarter and now feel are
comfortable that we'll come in at the high end of that range.
Boris Fuchik: Okay, so you're essentially maintaining the guidance you had
last quarter?
John Miles: I think we're saying instead a range of $2.04 to $2.07, we're
comfortable up near the top of that range.
Boris Fuchik: Okay thank you very much.
Operator: Your next question comes from Walter Landauer.
Walter Landauer: Hello this is Walter Landauer speaking. I certainly am
impressed with the performance. I would like to hear what your
plans - how important some of those large population states are
in Asia are in your scheme of things?
And how you are set to increase your market share possibly in
that field whether you are - say in China for example, the No. 1
factor in your industry. And what your plans are in that area?
I note that for Asia - if I got my right - if I understood you
right, it was 17.1% increase in revenues.
John Miles: That's correct.
Walter Landauer: And that was materially better than in the U.S. and in
Europe, these are more stable markets, more mature markets
probably. It seemed to me that some of these Asian countries
have a lot more growth ahead of them and I'd like to hear your
plans to exploit that.
John Miles: Certainly. First of all, we believe exactly what you believe.
The markets of the future are in Asia, certainly in countries
like India and China which together have 40% of the world's
population.
First of all, we are No. 1 in Asia unquestionably from a market
share standpoint. But the Asian markets are pretty embryonic.
And the level of dental care in Asia is really not good. It's
probably 25-30 years behind the level of dentistry in the West.
And the issue of course is economic in those countries.
But as you look to the future as these countries continue to
progress economically, they're going to spend a portion of their
increase per capita income on better oral health.
What Dentsply has done is we have established our own companies
in virtually every key Asian country today. Historically, the
way to go to market in Asia was a manufacturer to an importer to
a dealer to the dentist.
In essence what we did is we fired the importer and used the
margin that the importer was making to establish our own
company. And also to hire our own sales force that speaks the
local language and have them out calling on the university
professors and the opinion leaders.
But today we have our own company in China and in India. These
are all 100% Dentsply owned companies. In the Philippines, in
Taiwan, in Vietnam, in Indonesia, in Thailand, in Korea. I don't
think I've left any out.
We also have manufacturing facilities in both India and China.
And we couldn't agree more. I mean as you look out 10 years
these are going to be gigantic dental markets because you can't
get away from the demographics. This is where all the people are.
I think we're exceptionally well positioned in Asia and as these
markets evolve we're going to grow rapidly.
Walter Landauer: I see. If you haven't encountered any resistance by the
government in China, for instance. They're very conscious of
wanting to promote their own growth and restrain foreign
companies that - this has been the old picture. The new picture
is probably substantially more favorable. Do you have any
comment on that?
John Miles: Yes. The reason that we've been able to establish 100% Dentsply
owned companies is that we have agreed that we would export a
portion of our factory output to other countries. About 20%-25%
which we in fact do primarily to other Asian countries.
And with that provision we've been able to receive government
approval for a 100% owned venture which is pretty unique because
you're right, in the past you had to have a local partner.
Walter Landauer: Could you make a general statement about your competitive
position? You're No. 1 and you acquired Degussa I guess it was
two years ago or so and they were No. 2, I think worldwide.
Do you feel that the acquisitions will constitute an important
factor in growth that it has in the past? Or is this - is the
industry fairly mature and you can't expect very - as much
contribution to your growth?
John Miles: The industry remains highly fragmented so there are dozens,
hundreds of acquisition targets. Most of them of course are much
smaller family owned business which would be, you know, product
line extensions, tuck under acquisitions for us.
And as we've said in the earlier conference calls, we are
aggressively on the path attempting to do M&A transactions. So I
think there is absolutely lots of opportunities but I would not
look for blockbuster acquisitions like the Degussa transaction.
Walter Landauer: I see. In my recollection that the - your capital
structure is much more heavily in debt now than it had been a
number of years ago and I assume if true, traces to more
acquisition activity and use of cash to implement that. Is that
right?
John Miles: The large acquisitions that were completed in 2001 were all done
for cash and were financed using debt. And as we've indicated,
the debt is decreasing rapidly because of our strong cash flows.
Walter Landauer: And what is your - do you have any idea of the next one
or two years what percentage - how much you could reduce the debt
position as percentage of total?
John Miles: We've indicated that we want debt to cap to be in the 35%-40%
range and as Bret said we believe we'll be in that range within
the next 12 months.
John Miles: I don't mean to cut you off but we need to move on to another
question if we could.
Walter Landauer: Please.
John Miles: Thank you.
Operator: Your next question comes from Mike Carlotti.
Mike Carlotti: Yes hi good morning, I was wondering if you could comment on
what your growth rate was in the U.S. for implants, dental
implants? And what were the market share trends there?
John Miles: We do not break out growth rates by product lines. In total,
implants worldwide grew faster than what I believe the market
rate to be which I think is in the 10%-12% range.
Mike Carlotti: Okay but you can't quantify within the U.S. or rest of the
world?
John Miles: Information that we don't give out because frankly I don't want
to help my competitors.
Mike Carlotti: Okay and then did you see any impact of SARS in Asia during
the quarter? And going forward do you think that might have any
impact on your business in Asia?
John Miles: We did not see any in the first quarter but frankly I expect an
impact in the second quarter. I think that - I mean people are
going crazy over there and my guess is that fewer people are in
fact going to dental practices.
Having said that, I have to say that, you know, all of Asia is
only 4% of our business and only a portion of Asia is affected by
SARS. So I do not expect a material impact on our business in
the second quarter because of that. But I do probably expect
lower growth in Asia until this issue is resolved.
Mike Carlotti: Okay and then just back to the implant question for a second.
You said that your worldwide growth in implants was - sorry I
didn't catch the number.
John Miles: I said it was higher than market growth rate which I estimate to
be 10%-12% worldwide.
Mike Carlotti: Okay, okay thank you.
John Miles: You're welcome.
Operator: You have a follow up question from Bob Plezia.
Bob Plezia: Yes, other than saying the pipeline is filled, any other comments
on where you are with some acquisitions? Will they happen in the
second quarter or the third quarter?
John Miles: I mean I'm never sure when they're going to happen. I think all
I can say about that is that we are actively involved looking for
acquisitions.
We have evaluated some opportunities thus far in 2003 but haven't
completed a transaction for one reason or another, so I'm not
sure when they'll occur. I think it's reasonable they'll be some
transactions before 2003 is over.
Bob Plezia: And another question. Asia as you mentioned is very small but it
had a very excellent quarter. Can you go into some detail there?
John Miles: I think we're really clicking in Asia and I think it's because of
the way we are really structured. It's a tremendous advantage
for Dentsply having its own business and own sales force in
virtually every key Asian country.
And it's an advantage that my competitors do not have. And in my
opinion it's the principle reason that we're growing so much
faster than market.
Bob Plezia: And a minor question, if in the U.S. equipment was so strong and
you did 5.5%, sold consumables were under 5% growth in the first
quarter?
John Miles: No, I said consumables were actually 5.6% worldwide.
Bob Plezia: But in the U.S. you were - 5.5% dental, that was worldwide?
John Miles: No. There's two numbers.
Bob Plezia: No U.S. based...
John Miles: 5.6% was the ex-precious metals, dental business growth in the
U.S. for all product.
Bob Plezia: And that included equipment which was much stronger than the
worldwide.
John Miles: The worldwide was 3.6%.
Bob Plezia: Okay. Thank you.
John Miles: You're welcome.
Operator: Your next question comes from Robert Yaschak.
Robert Yaschak: Yes I was wondering if you could just outline how you think
about capacity for your organization in terms of where it's at,
where it's going? And then I have one follow up.
John Miles: You may recall that we reorganized and really augmented our
senior management team in November of last year and added two
senior vice presidents basically to manage the growth of our
business.
You know, our business has doubled in the last few years and we
really had not augmented our total team. So I'm feeling really
good, not only about the people who are in place but the level of
the supervisory oversight that we have at the level of business
we enjoy today.
Robert Yaschak: So is there a capacity utilization rate that you, you know,
think overall and there are areas where you think it's higher or
lower or areas where you want to add capacity specifically that
you could share with me?
John Miles: I don't think we have any capacity restraint if you're talking
about human resources. If you're talking about manufacturing
plant capacity...
Robert Yaschak: Right manufacturing.
John Miles: I doubt that we're - I don't know the answer but I would doubt
that we're running more than 70% capacity.
So I think there's significant upside capacity and, you know,
frankly capacity increases constantly due to cost reduction
productivity programs. So there certainly is not limiting our
ability to grow.
Robert Yaschak: And is that 70%, you know, what - are you comfortable running
the business at that? Was it at 70% a year ago? Or what - can
you give me some feel for that?
John Miles: I guess I would say probably or approximately our sales grew last
year but our capacity grew due to our process improvements. So,
without having firm numbers my gut reaction to that is yes,
probably about the same.
Robert Yaschak: Thank you.
Operator: At this time there are no further questions. Mr. Miles will
there be any closing remarks?
John Miles: No again, thank you everyone for your support and interest. And
thank you for tuning in.
Operator: Thank you for participating in today's First Quarter Earnings
Release conference call. You may now disconnect.
END