DENTSPLY INTERNATIONAL, INC.
Moderator: Gary Kunkle
October 27, 2004
7:30 am CT
Operator: Good morning. My name is Melanie and I will be your
conference facilitator. At this time, I would like to
welcome everyone to the Dentsply International Third
Quarter 2004 Earnings Release Conference Call. All
lines have been placed on mute to prevent any
background noise.
After the speaker's 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
number 1 on your telephone keypad. If you would like
to withdraw your question, press the pound key.
At this time I would like to introduce Mr. Kunkle,
Vice Chairman and Chief Executive Officer. Thank you
Mr. Kunkle. You may begin your conference.
Gary Kunkle: Thank you Melanie and good morning and thank you all
for joining the Dentsply International Third Quarter
2004 Conference Call. My name is Gary Kunkle and I am
the Vice Chairman and Chief Executive Officer. Also
with me today are Tom Whiting, our President and
Chief Operating Officer, and Bret Wise, Senior Vice
President and Chief Financial Officer.
I'll begin today's call with some comments regarding
our third quarter and our year to date results. I'll
make some additional comments to update you on the
activities that are taking place with our business,
and conclude with some remarks regarding our outlook
for the balance of the year.
Bret will then go through a more detailed review of
the P&L and the balance sheet and finally, all of us
will be pleased to answer any questions that you may
have.
Before we begin, it's important to note that this
conference call may include forward-looking
statements involving risks and uncertainties. These
should be considered in conjunction with the risk
factors and uncertainties described in the company's
most recent annual report on Form 10-K. This
conference, in its entirety, will be part of an 8-K
filing and will be available on our Web site.
As you probably know, we released our announcement of
our third quarter results after the markets closed
yesterday, and we're very pleased to report excellent
quarterly earnings. Our reported sales during the
third quarter were $390.6 million. This represented
an increase of 4% compared to the third quarter of
2003. If you exclude the precious metal content, the
increase was 5.1% for the quarter.
The 5.1% gain for the quarter broke out as follows:
base business was 1.7%, exchange was 3.4% and there
was really no impact from acquisitions or
divestitures.
The geographic base business growth, ex precious
metals was as follows: the United States was 1.6%,
Europe was .4%, Asia was 16%, Latin America was a
minus 2.1%, and the rest of the world was 4%.
Given the low internal growth in our two largest
markets, the United States and Europe, I'll spend
additional time as I review these markets talking
about the contributing factors to the slower growth
and what impact, if any, these factors will have
going forward.
Specifically talking about the United States - as I
mentioned earlier, the internal growth for the U.S.
was 1.6%. This slower growth was primarily affected
by two issues: negative growth in the southeastern
United States during the months of August and
September; and negative growth for the anesthetic
category for the entire quarter.
As with many companies in the U.S., we were adversely
affected by the impact of the multiple hurricanes
that the southeastern United States experienced
during the quarter. We estimate the impacted area to
be approximately 16% to 18% of our U.S. sales. As we
went into August and looking at our direct
businesses, they were running ahead of 2003 in the
mid to high single digits in the Southeast. During
August and September, those sales were below the same
period in 2003 by a negative 4% to 5%.
With respect to our distributor based products - as
you know, our distributors report the sales that they
make of our products to us each month. In going into
August, those reported sales for those products in
the Southeast were ahead of last year by
approximately 5%, and during the months of August and
September, dealers reported a decline in those
products of approximately minus 7%.
With respect to anesthetics, this segment of our
business was down by 24% in the United States in the
third quarter compared to the third quarter of '03.
In that quarter, the third quarter of '03, we shipped
approximately $1.5 million of Polocaine 2%, which is
one of our anesthetic formulations.
And while this amount is not significant as a percent
of our total business, it does represent over one
year's sales for this particular product. This event
was a result of a sizable backorder of this product
going into the quarter while we were awaiting FDA
approval of a change in suppliers of one of its
active ingredients. This accounted for most of the
negative comparison in the category.
The other contributing factor was a competing
anesthetic product. Dentsply Pharmaceutical, along
with all other anesthetic suppliers in the United
States, has been impacted by the introduction of an
Articaine formulation into the U.S. market by
Septodont, which is a global competitor in the
anesthetic sector. This formulation was introduced a
few years ago in the U.S. and has since gained
approximately 30% market share of the U.S. market.
This is not a new formulation. However, it is new to
the U.S. market. Its current market share in the U.S.
is consistent with its share in other markets around
the world. And the more recent market share data
suggest, from a consecutive quarter basis, that we
have now stabilized our share in the U.S.
Today, we sell an Articaine formulation in many
countries in Europe, and we also sell it in Canada.
We're currently in the process of following the
necessary protocol to introduce such a formula in the
U.S. Our expectation is that we'll have a competing
product available for market in 2006.
Going to Europe, our internal growth for Europe in
the third quarter was .4%. The primary deterrent to a
more robust growth rate in Europe was Germany. Each
state in Germany establishes a budget for dental
reimbursement for the year. If the budget is
exhausted during the calendar year, the reimbursement
to the dentist drops by 50% to 60% for any submission
made during the balance of the year after this budget
has been exhausted.
While this historically has not been a problem,
several states began running over budget in the third
quarter and thus began reducing dental reimbursement
to dentists in their respective states. Such a
reduction encourages dentists to postpone certain
procedures until the budget is reinstated and they
can receive the full reimbursement. In this
particular case, that, of course, would be 2005.
While this problem is not prevalent in all states, it
is in many of the major states. This was
unanticipated by most - obviously, unanticipated by
us. However, in hindsight, it was probably triggered
by the high volume of procedures that were performed
during the first quarter.
As you may recall, many patients scheduled procedures
during the fourth quarter of 2003 to be done during
the first quarter of 2004. This allowed them to be
reimbursed according to the 2003 reimbursement
formula as long as the procedure was scheduled before
January 1, 2004.
To put this in perspective as to how this impacts
Europe overall, Germany represents approximately 50%
to 55% of our European business, and Germany was
negative for the quarter by minus 3.6%. Of course,
this means that the balance of Europe was performing
well and was about plus 4.5% above the previous year,
which is compared to a normal market growth of 3.5%.
On a more positive note, Germany has finalized its
dental reimbursement for 2005. Effective January 1,
2005, fixed reimbursement for prosthetic work will
replace the traditional percentage of procedure paid
formula. In making this change, a patient will now be
able to apply that reimbursement towards any
prosthetic procedure. This would include ceramic
bridges and dental implants, two areas that did not
receive any reimbursement under the percentage
reimbursement scheme.
Effective July 1, 2005, prosthetic work will be
reimbursed under a separate insurance program. This
program will be funded by a mandatory salary
deduction of .4% of salary, and will be designated
for prosthetic work only. Also, while each state will
have to forecast their reimbursement expenditures for
planning purposes, there will be no budget that
functions as it does today.
In other words, there will be no time which the
reimbursement will drop as a result of reaching
certain spending levels. We view this change as very
positive by providing reimbursement for both Cercon
based products and dental implants, which are not
reimbursed under the current plan.
Moving to Asia, our Asia business continued to do
well with a 16% internal growth for the quarter. This
represents the third consecutive quarter of double
digit growth implying a return of historical growth
rates into this region. The market growth is
estimated to be 9% for dental products, and we're
obviously pleased with the growth trends. Exceptional
sales were realized in Korea, China and Hong Kong.
As we look at Latin America, our Latin American
businesses continue to be influenced by the economic
uncertainties of the region. This is highlighted by a
negative performance in Mexico versus 2003 and a flat
performance in Brazil. Having said that, in spite of
these depressed business conditions, we're confident
that we're outperforming the market in these key
regions in Latin America.
Looking at the balance of the world, we had internal
growth of 4%. This was really led by strong
performances in the Middle East and Australia.
Just some other items of interest - commenting on the
anesthetic plant in Chicago, the media bills and the
stability batches needed for the plant start up to
supply Australia and the UK markets have been
successfully completed. MHRA, which is the health
authority for Australia and the UK, is scheduled for
an inspection the week of November 8. Assuming a
successful inspection, we're on schedule for
production and shipments to these markets. Also,
Canada and the U.S. stability batches have been run
and progress continues to support Japanese
manufacturing site transfer in early 2006.
Oraqix - as we previously announced - Oraqix, our new
non-injectable anesthetic for scaling and root
planning will be launched this quarter in the United
States. We have signed an exclusive distribution
agreement with OraPharma, which is a division of
Johnson & Johnson, and they will handle the sale of
Oraqix in the U.S. for us.
OraPharma is a well-established dental pharmaceutical
company. Their targeted customer base is identical to
that of the potential Oraqix users. They have over
100 sales representatives and a very limited product
line; in fact, many would say they have a one product
line with Arestin, which coincidentally is an
antibiotic product for periodontal disease. They are
just an ideal partner for us and we look forward to
working with them towards the successful
commercialization of Oraqix.
We expect that they'll be beginning their sales
activities later this month. We also anticipate a
product launch in Sweden in the late fourth quarter
or early '05, and expanding the product throughout
Europe as additional country approvals are granted.
Just some comments on new products - year to date
we've introduced 18 new products in virtually every
category. During the third quarter we introduced five
products, including a new Cercon based shade,
primarily targeted for the U.S. Additional products
were launched in lab, orthodontics, preventatives,
and restoratives.
We anticipate an additional seven product launches
during the fourth quarter. As you look at future new
products, we recently announced an agreement with
Doxa AB, which is a European research company, and
this agreement is to develop and commercialize their
bioactive ceramic technology. This is a technology
platform that has the potential for multiple products
utilizing its ability to create a chemical
integration between certain materials and dentition,
or the bone structure.
We're very excited about this relationship. It truly
mirrors the kind of technology investment that we're
prepared to make in order to meet future needs of
dentistry. And it's very similar to the relationship
we have with Georgia Tech, which continues to expand.
Just some comments on the outlook for the balance of
the year - as we look at the rest of the year from a
sales standpoint, we expect the U.S. will have some
lingering effects from the hurricanes in the
Southeast. We also anticipate that the lack of
available dental budgets in key states in Germany
will affect our growth in that region. We do,
however, see that both of these events as fourth
quarter only with no carryover effect into 2005.
Given these two events, we anticipate internal growth
for the quarter to be in the low single digits.
However, even with the lower sales growth, we
continue to see favorable margins and are improving
our earnings guidance from the current range of $2.28
to $2.33 to a new range of $2.33 to $2.35. Given our
2004 beginning estimates of $2.25 to $2.30, we're
very encouraged by our projected results for the year
and we're very optimistic going into 2005.
That concludes my comments and I will now turn the
call over to Bret Wise for a financial review.
Bret Wise: Thank you Gary. Good morning everyone. Thank you for
joining us on our third quarter conference call. I'd
like to start by highlighting some items from the P&L
for the third quarter and then I'll touch briefly on
some cash flow items and some selected balance sheet
items.
Looking first at the income statement - as Gary
mentioned, net sales for the third quarter grew by 4%
in total, and 5.1% excluding precious metals. The mix
of sales was fairly stable by geography versus the
prior year third quarter with the U.S. representing
45.8% of sales ex pm this year, compared to 47.3% in
the prior year. And Europe represented 34.4% of sales
this year compared to 33.4% in the prior year
quarter. So in total we saw the mix shift about one
percentage point as an increase in Europe and a
decrease in the U.S.
Gross margins for the quarter were 57.6%, that's ex
precious metals and it's up 170 basis points compared
to 55.9% in the third quarter of 2003. There are
really two points to make here. First of all, as you
recall, last year in the third quarter we experienced
a drop of close to one percentage point in our gross
margins due to an unfavorable mix in the third
quarter last year. This quarter we experienced just
the opposite, thus most of the improvement in the
gross margin as a percent of sales is due to the mix.
In addition to that, we did continue to see
improvement on the operational cost side of our
business, which also benefited the margin in the
current period.
SG&A was $128.8 million or 37.3% of sales ex precious
metals this quarter versus 36.5% in the prior year
third quarter. The increasing cost as a percent of
sales, in the current quarter was driven by Oraqix
launch expenses that hit in the third quarter. We'll
have some more of those costs in the fourth quarter.
Uncapitalized costs relating to the new anesthetic
plant in Chicago as we prepare to start up that plant
and additional costs related to our Sarbanes-Oxley
compliance as we prepare for first year of
certification under the new rules. Absent those three
items, SG&A would have been about the same as the
prior year as a percent of sales. As I mentioned,
we'll continue to see higher costs in all three of
these categories in the fourth quarter of 2004 and
then, to some extent, in 2005.
In the current quarter we have a restructuring charge
of $2.1 million, and that's related to the
continuation of the consolidation of our U.S. lab
business, which we first disclosed on our January
2004 call. In addition in the third quarter, we
initiated a restructuring and a consolidation of our
European lab business.
As you'll recall, we acquired the Degussa dental
business in late 2001, and then quickly thereafter
took action to realize the synergies that were
inherent in that transaction. This year our DeguDent
management team - the current name for the Degussa
business is DeguDent - and the local management team
identified additional opportunities to reduce the
cost and further improve the operational
effectiveness in the European lab business and they
have taken steps to realize those savings by early
2005.
The total cost of the program in Europe is
approximately $3 million, of which $1 million was
recorded this quarter, and the remainder will be
recorded in the fourth quarter this year and the
first quarter next year. The payback on this program
is really quite good. It's less than one year, and it
could be substantially better than that. In total, of
the programs we have underway at present, we
anticipate additional restructuring charges of $1.7
million in the fourth quarter and $1.2 million in
early 2005.
Operational margins for the quarter were 17.4%, and
that's up 40 basis points compared to 17.0% in the
2003 quarter. Operating margins based on sales
excluding precious metals were 19.7%. That's up 30
basis points from 19.4% last year. And if you look at
it on the same basis and exclude the restructuring
charges in 2004, operating margins as a percent of
sales ex precious metals improves significantly to
20.3% for the quarter compared to 19.4% in the prior
year quarter.
Other expenses in the quarter were $5.5 million which
is up $1.3 million compared to the prior year third
quarter. The 2003 quarter included two things of
significance. The first was an exchange gain of $1
million, and the second was a gain on the valuation
of the PracticeWorks warrants of $900,000. So we had
about $1.9 million of unusual gains in the third
quarter last year.
In the current quarter we had a $100,000 exchange
loss, and of course we have no corresponding item for
PracticeWorks as that investment was sold in the
fourth quarter of 2003.
Looking at the tax rate, the rate for the quarter was
26% compared to 32.4% in the third quarter of '03. I
think it's best to look at the tax rate really in two
components: the first is what I'd like to call the
operational rates, which for the quarter was 30.5%,
bringing the cumulative operational rate for the year
to 31.2%. This 31.2%, which is our year to date
operational rate, reflects our best estimate of the
full year tax rate at this point.
The other component of the rate relates to resolution
of certain tax matters that relate to prior periods
which resulted in a reduction of tax this quarter of
approximately $2.9 million. As you know, the
accounting treatment for tax contingency items often
results in the reporting of a matter in a period of
resolution. Thus, these items can skew the reported
rate in any one period.
Accordingly we're going to continue to describe to
you what the operational rate is and it's because we
believe that's more indicative of the long term tax
rate. So for the full year, we expect a normal
operational tax rate to be in the 31% to 31.5% range,
excluding those one-time items. And at present, our
best estimate is 31.2%.
So earnings from continuing operations were $46.3
million, or 57 cents per diluted share. That's a 14%
increase over the third quarter of '03. And year to
date earnings from continuing operations are $1.73
per share and that's up 14.6% compared to $1.51 for
'03.
As Gary commented earlier, for the full year, again
we've increased our guidance from the $2.28 to $2.33
range up to the $2.33 to $2.35 range for earnings per
share from continuing operations. This reflects the
results through the first nine months of $1.73 from
continuing operations and our expectations of
earnings in the fourth quarter excluding any
restructuring charges or non-operational tax rate
adjustment.
For the fourth quarter, we do expect to have both
restructuring charges and further non-operational tax
adjustments. And in total, on a net basis, we expect
them to be either neutral or slightly positive. Those
adjustments, though, are not reflected in our
earnings assessment of $2.33 to $2.35.
Also looking at the fourth quarter for purposes of
your modeling, I'd like to remind you that the fourth
quarter of 2003 included approximately $5.8 million
in pre-tax gains on our sale of our investment in
PracticeWorks, which was, of course, the transaction
that was completed in the fourth quarter and we
recorded the gain in the fourth quarter of '03.
Switching gears to the balance sheet and cash flow.
Cash flow continued to be very strong in the third
quarter, with operating cash flows of approximately
$73 million and capital expenditures of approximately
$11.4 million, yielding free cash flow of about $61.6
million in the quarter. On a year to date basis, our
operating cash flows are approximately $185 million,
compared to $167 million for the first nine months of
'03, so we've seen a substantial improvement in cash
flow this year.
Other cash flow items that are often of interest - in
the current year we have depreciation and
amortization year to date of $37 million, and capital
expenditures year to date of $37 million.
Inventory days were 93 at the end of September and
receivable days stood at 57 at the end of September
'04.
The balance sheet continued to strengthen during the
quarter. At the end of September we had $407 million
in cash and long term debt of $782 million.
That concludes our prepared remarks. We'd be glad to
take any questions you have at this time. Melanie,
can you open the line for questions?
Operator: At this time I would like to remind everyone, if you
would like to ask a question, press star then the
number 1 on your telephone keypad. We'll pause for
just a moment to compile the Q&A roster.
Your first question comes from Derek Leckow with
Barrington Research.
Derek Leckow: Thank you. Good morning, and congratulations on a
strong profitability here despite the temporary
slowdown from your markets. I just had a question on
the operating margin outlook for next year. Obviously
you're still spending a significant amount for these
development projects and also on the construction and
validation of your anesthetic plant.
Can you talk to us a little bit about your outlook
for operating margins for the coming years?
Bret Wise: Yeah, Derek, thanks very much. This is Bret. For next
year, we're still targeting a 50 basis point
improvement in the operating margin. The significant
challenges we have are the ones that you mentioned,
and that is that the Pharma plant start up which now
is probably late December or early January, and thus
we'll absorb next year probably somewhere in the
range of $5 to $6 million in start up costs related
to the Pharma plant.
But despite that, we're still targeting a 50 basis
point improvement over the long term every year. And
that's where we stand at this point.
Derek Leckow: And is that 50 basis points - it's probably going
to be an additional increase on the gross margin as
well, isn't that right?
Bret Wise: Yeah, it will be split between gross margin and SG&A.
You know, normally we would say that most of it comes
from gross margin and less from SG&A. Next year that
may be split a little differently because, of course,
we'll be absorbing those Pharma start-up costs in
cost of sales and thus, we might have a little bit
better improvement in the SG&A line than in the gross
margin line, would be my guess at this point.
Derek Leckow: Okay. That's helpful. And then also on the cash
flow - you've got significant cash flow here and
you're building a giant war chest on your balance
sheet. I wonder if you could talk a little bit about
the outlook for acquisitions. It's been a little bit
slower here, it seems to me, in the last year since
Degussa, but what do you see out there? Can you talk
a little bit more broadly about what your
opportunities are on the acquisition front?
Gary Kunkle: I will Derek. I mean, obviously it was lower for some
very good reasons, and we were integrating the three
large acquisitions we made in 2001, and we needed to
get our debt down. But we couldn't be more aggressive
today than we are. I mean, we are very aggressively
pursuing very specific targets. The three areas that
were our focus first of all would be share in
categories in which we already compete. We're really
not targeting any dental products from categories in
which we don't compete.
The second one would be geographic expansion. And the
third would be technology. If we had to say at this
point which ones we were closer to, we'd be closer to
consummating some kind of activity in share and
technology, and less so in geography. But just to
reiterate what I said earlier, we have very specific
targets, we are very aggressive with it, and we truly
look forward to making some announcements possibly
before the end of the year, but certainly in early
2005 at the latest.
Derek Leckow: Gary, looking at share and technology type
acquisitions, does that imply that you would consider
doing a diluted acquisition or would your historical
criteria of, you know, accretive within the first
year, would that still apply at this point?
Gary Kunkle: Well, yeah, our criteria hasn't changed. We would
still target for it to be neutral to accretive within
the first 12 months. But having said that, as you
know, we've made two that were diluted. They were
Degussa and Friadent and we would do those again
today because they have been very, you know,
favorable to our business and they are very
strategically important to us.
Derek Leckow: Those were sort of, you know, some pretty large
acquisitions though. I wouldn't expect to see that
type of opportunity come along. I would expect, and I
guess I want to ask if you agree, that we would see
more of a plug-in type acquisition that would perhaps
be integrated more rapidly going forward.
Gary Kunkle: Well obviously I can't comment on that unless I talk
specifically about what we're targeting. But I can
just reiterate what I said before, is that our target
would be for it to be neutral to accretive in the
first twelve months. And it would truly have to be a
strategic exception to deviate from that guidance.
Derek Leckow: Okay. Looking at the analyst estimates that are
out there right now for next year, you've got a
consensus of around $2.62, which is roughly 10 or 11%
above the upper end of your range for the fourth
quarter of 2004. Could you comment at all about how
you feel about those estimates, and whether or not,
you know, there could be some upside related to
acquisition activity?
Gary Kunkle: Actually I can't, Derek. I mean, at this point, we
are in the middle of our budget process for 2005, and
we normally comment on the guidance for the next year
at the conclusion of the fourth quarter conference
call.
Derek Leckow: Is it fair to say that on a longer term basis you
would still expect earnings to grow above 10%, or
what sort of a long term earnings growth goal do you
guys internally have?
Gary Kunkle: I think that's fair.
Derek Leckow: Okay, great. Congratulations. Thanks a lot.
Gary Kunkle: Thank you.
Operator: Your next question comes from Dax Vlassis with Gates
Capital Management.
Dax Vlassis: Yes, I was just curious to what you thought
depreciation and amortization would come in for the
year, and then CAPEX expenditures for this year and
next year.
Bret Wise: Derek - or Dax, sorry. I think that the run rate we
have for depreciation, we're at $37 million after
three quarters is a good indication that the run rate
will continue for the rest of the year. I don't see
anything that will move that a whole lot.
CAPEX this year stands at $37 million. I think it
will be in the 55, kind of the mid-50s range for the
full year. And we're just, as Gary mentioned, we're
just setting our budget process for next year so
we're not ready to put forward a number for next year
at this point. But I would say that it will be in the
normal range of $55 to $65 million probably.
Dax Vlassis: Okay. And then as far as the, you know, your impact
from the hurricanes. Did you notice that on a
distributor basis? Did you talk to distributors and
say that people in the same sort of impact in those
markets as you did?
Gary Kunkle: Well, we did two things. First of all, as I said
earlier, we looked at our direct business, which you
get the immediate feedback on that because we can
look at it on a daily basis. And we didn't look so
much at dealer purchases as we looked at dealer
sales, which they report to us to look at trends.
Having said that, we talked to two dealers that have
a higher concentration of business in the Southeast,
both of which reported that during that period a
minus 12 and a minus 15% respective compared to their
comparable period the previous year.
Operator: Your next question comes from Suey Wong with Robert
Baird.
Suey Wong: Thank you. Gary you gave a lot of good detail on the
hurricane impact in the Southeast whether it was
direct or whether it was through distributors. Is
there a way of looking at the July numbers here and
talk about an impact on internal growth overall?
Gary Kunkle: For the period?
Suey Wong: Yes.
Gary Kunkle: Actually there are two factors that kept me from
doing that, Suey. First of all, in looking at the
impact I wanted to look at the trend going into it.
And obviously trying to isolate July is not a trend,
so that made it tough for the quarter. So I looked at
year to date trends and then the impact in July and
August.
The second thing is the data I gave you, 50% of our
business in the U.S., which is, I should back up, 60%
globally, is distributor, 40% is direct. In the
United States, it's 50/50.
Obviously the direct business is very easy to read.
The dealer business I gave was what they sold of
ours. The purchases were very different from that in
that I'm certain they saw that the demand was
dropping and purchases didn't necessarily follow that
trend. So trying to see what impact it had on the
quarter is very difficult, because you can't
anticipate what purchases would have been by the
dealer under, you know, under these conditions.
Suey Wong: Included the internal growth was negatively impacted
by the hurricane weather in third quarter. Did I hear
you right when you said that it would still be an
impact in the fourth? Or should I think about
procedure volume shifting, or due to dental business
shifting third quarter to the fourth quarter and then
potentially being a positive impact?
Gary Kunkle: No, I think you're going to see some carryover into
October. I mean, obviously there's no more
hurricanes, but people are still recovering from it.
And so you're going to see some impact into the
fourth. And I don't see this as a catch up. I mean,
dentists today are very busy. It's not like they have
a lot of extra time to put on additional procedures.
So I think everything gets pushed, and I don't see a
lot of catch up with this. I just think everything
gets pushed out.
Suey Wong: Okay. Gary, how should we think about the performance
of Germany in the fourth quarter? Should there be an
improvement in Germany?
Gary Kunkle: I don't anticipate it. You know, if a dentist has an
opportunity to push a procedure into a quarter where
he can get a higher reimbursement, he can do it. And
we've only seen this one time historically and, you
know, that would suggest they're going to move the
business into 2005.
Having said that, obviously 2005 will start very
strong in Germany for the first six months. You have
to look at the comparisons, because as you recall, we
had a double digit increase in the first quarter in
Europe this year followed by, I think it was, 2.5% in
the second quarter. So you need to look at it over
the six month period.
Suey Wong: Given the impact of the hurricane and also Germany,
should we expect to see internal growth being
somewhat similar to the range in the third quarter?
Gary Kunkle: Well, it's going to be low single digits. I certainly
hope it's above the third quarter, but I still think
it's going to be low single digits.
Suey Wong: Okay. In Europe, did you see any impact in the
consolidation of distributors?
Gary Kunkle: We have not to date.
Suey Wong: Okay. Then last question - could you give us an
update on the lab business please?
Gary Kunkle: Yes. I assume you're talking particularly about the
United States, since that's what we focused on before.
Suey Wong: Correct.
Gary Kunkle: Again, it had some impact because of the region. The
materials part of the United States was 2 to 3% over,
obviously impacted by the Southeast. The equipment
piece of it was negative, I think, mid teens. So
overall, with the equipment being 10, 15% of the
volume, the lab business was relatively flat for the
quarter.
Suey Wong: Okay, thank you.
Operator: Your next question comes from Michelle Starr with
York Daily Record.
Michelle Starr: Hi, good morning.
Gary Kunkle: Hi Michelle.
Michelle Starr: Recently an independent panel named Dentsply among
other companies that received Iraqi oil, and I'm
wondering if you have a comment about the company
division being named in what is being called an
alleged corruption, and have these surcharges
affected the company's earnings?
Gary Kunkle: Well, if you and I read the same article, the one I
read said that there were no allegations against the
companies that were selling. But I can give you the
details. In 1997 we sold $140,000 worth of amalgam
into Iraq and the product was supplied under the Food
for Oil program. It was supervised by the United
Nations, and all the licenses that you need to obtain
we obtained. So everything was done according to
procedure. There have been no transactions since 1997
by any Dentsply company into Iraq to my knowledge.
Michelle Starr: Thank you.
Operator: Your next question comes from Greg Halter with Great
Lakes Review.
Greg Halter: Good morning guys, and good results on the bottom
line. Just a couple of - just minor points here.
Bret, do you have any short term debts on the balance
sheet and do you have your accounts payable balance?
Bret Wise: Sure. We do have approximately $22 million in short
term debt. That's comprised of $20 million of debt
that will mature this quarter in December. It was
long term, obviously, a year ago, and $2 million of
short term borrowings in some of our international
subsidiaries. So in total that's $22 million.
Accounts payable at the end of September was roughly
$74 million.
Greg Halter: Okay, and can you give us an update on the share
re-purchase program - if you bought any and how many
you have left?
Bret Wise: Sure. To date, through September, we had repurchased
540,000 shares and obviously that means we have about
460,000 yet available under our 1 million share
authorization.
Greg Halter: Okay, and do you have a feel for what you paid on
those 540,000 shares, either per share or total?
Bret Wise: Yeah, the average price was about $46. That's for the
full year obviously.
Greg Halter: Right.
Bret Wise: So it was lower than that early in the year and
obviously higher than that later in the year.
Greg Halter: Okay, thank you.
Operator: Your next question comes from Richard Yett with
Monness.
Richard Yett: Thank you. Could you review the Doxa relationship
further? Might this product's purpose be to build
bone structure to allow implants and whatever it is?
And could you also give us an idea when a commercial
product might be available?
Gary Kunkle: Obviously for competitive reasons, I don't want to
get into too much detail. But it does not augment
bone growth.
Richard Yett: Oh shucks.
Gary Kunkle: But having said that, don't get too disappointed.
We're very excited about the technology. It really
helps in kind of bonding between the materials and
the dentition part of the bone structure, which, you
know, would lead to less leakage which leads to
better performance on the restoration.
With respect to commercialization, you know, this is
very similar to some of the projects we have going on
with Georgia Tech, and they're longer term projects,
but I wouldn't discount the possibility of a product
being available in 2006.
Richard Yett: Great. Thank you.
Operator: Your next question comes from Derek Leckow with
Barrington Research.
Derek Leckow: Yeah, Bret, I just had a follow up on the debt
structure. Could you talk a little bit about any
opportunities you might see in the - I'm not sure
about the maturity at this point, but is there an
opportunity to reduce your long term debt within the
next couple of years?
Bret Wise: Sure. As, you know, we've stated in the past, we have
a very high quality problem, and that is we have very
low coupon debt that has very high penalties to repay
it early. We have a substantial amount of a debt that
will mature in late 2006. Well, let me back up. We
have $20 million this year, we have about $70 million
next year that matures, and then we've got a sizable
piece that matures in late '06, over about $500
million actually.
We have been, obviously, increasing our cash
balances, because we've had very strong cash flow.
We've looked at opportunities to retire the debt
early, but the penalties are such that it's more
favorable for us to hold the cash even though returns
are low and pay the low coupon on the debt until
maturity. So at this point, other than the $20
million in December of this year, the $70 million
late next year, unless something changes, I don't
anticipate having an opportunity to repay the debt
early.
Derek Leckow: Okay, and in the interim, I guess, is the board
considering increasing the dividends at this point?
Bret Wise: Derek, we just had an announcement about, I guess,
two or three weeks ago that we increased the
dividend. I think it was 14 or 15% at the September
meeting, and that will be effective at the end of
this year.
Derek Leckow: I'm talking about beyond that.
Bret Wise: We have no plans at this point.
Gary Kunkle: No hard plans.
Derek Leckow: Okay, great. Thanks a lot.
Operator: Your next question comes from Dax Vlassis again with
Gates Capital Management.
Jeff Gates: Hi. Jeff Gates. How big is the anesthetic category as
a percent of your U.S. business?
Gary Kunkle: Let's see. It's going to be low single digits
percentage, Jeff.
Jeff Gates: Okay, so if it's low single digits and it was down
25%, so you're basically saying that was a half a
percentage point of your internal growth being lower?
Gary Kunkle: Yeah. I haven't done the math, but that would be
realistic. You know, it was just something that stood
out and so I felt like I needed to bring it up.
Jeff Gates: Right. But if I'm doing the math - did you have
normal growth in the Southeast in the first month of
the quarter?
Gary Kunkle: As I said, I looked at it year to date because I was
trying to establish the difference between what would
be a normal trend, and obviously July is not a trend.
So I looked at a year to date, and then I compared
August and September to that trend.
Jeff Gates: Right. Okay. But, okay. I was just trying to get to
the fact if I was doing the math right, if you were
up sort of a 3-1/2% in the first month and down four
and down four, implies that the business outside the
Southeast in the United States grew maybe 2.2% or
something like that?
Gary Kunkle: It's tough to reconstruct it, Jeff, because the one
variable is what dealers buy as opposed to the data I
was using is what they sell of our products.
Jeff Gates: Okay.
Gary Kunkle: Obviously if they saw the sale dropping off, they did
not increase their inventory. They used what they had
to sell out.
Jeff Gates: Right. But the internal growth that you cited is
actually your shipments, correct?
Gary Kunkle: It's our direct shipments, which is 50% of our
business.
Jeff Gates: Right.
Gary Kunkle: And it's what the dealer shipped of our products.
It's not what they bought of our products. And what
they bought is what, obviously, is our recorded sales.
Jeff Gates: Okay, and if I heard you correctly, you talked about
that August, September was down 4 to 5% year over
year in the Southeast, but the distributors' final
sales were down 12%. Did I hear that correctly?
Gary Kunkle: I said that we had spoken to two dealers that had
what I call a high concentration of business in the
Southeast and asked them about their business during
that same period of time.
Jeff Gates: Right.
Gary Kunkle: And they had - I mean, this is anecdotal. They didn't
give us any report, that their business was down 12
and 15% respectively, compared to August, September
of the previous year.
Jeff Gates: But does that imply that distributors built their
inventories, and therefore we should expect more of a
lingering effect until those get worked down to the
distributor level?
Gary Kunkle: Well, that wasn't intended to imply anything. It was
just some database to confirm that our business was
consistent with everyone else's in the region.
Jeff Gates: Okay. And last question is, why don't you pay down
the revolver with your growing cash balance, or do
you have cash trapped overseas. And if so, do you
plan to repatriate any on the tax holiday with the
lower tax rate?
Bret Wise: The only money we have on the revolver at this point
is about $100 million of borrowings in Japanese yen.
Jeff Gates: Okay.
Bret Wise: The coupon is 1.6%. The penalty to pay it back would
be about 3% because we had some swaps involved.
Jeff Gates: Okay.
Bret Wise: And thus, we've chosen to continue to pay the 1.6%
and earn more than that on the cash reinvestment
until maturity.
Jeff Gates: Right. And I guess as far as the rest of the U.S.
outside of the Southeast, what would you say the
growth rate would be for your business and did you
lose share, or did the overall market slow?
Gary Kunkle: Jeff, I did not look at that, and we couldn't make or
share at this point over the current quarter, because
we don't get the data that quickly.
Jeff Gates: Right. I understand. Okay, thank you very much.
Operator: Your next question comes from Greg Halter with Great
Lakes Review.
Greg Halter: Hi guys.
Gary Kunkle: Hi Greg.
Greg Halter: Just a follow-up on that swaps answer that you made,
Bret. Can you give us the amount of the positive or
negative value of those swaps?
Bret Wise: I don't have that at my fingertips, but it has been
about $60 million positive.
Greg Halter: Okay.
Bret Wise: I would guess it's still in that range. The one that
we were speaking about a moment ago, the Japanese
swap, is actually out of the money, because it was a
swap from variable rate Japanese to fixed rate
Japanese.
Greg Halter: Okay.
Bret Wise: And even though we're paying 1.6%, that's above the
variable rate today.
Greg Halter: But in total you think it's around $60 million?
Bret Wise: Yes.
Greg Halter: Okay, thanks.
Operator: At this time I would like to remind everyone if you
would like to ask a question press star then the
number 1 on your telephone keypad.
At this time there are no further questions. Mr.
Kunkle, are there any closing remarks?
Bret Wise: Operator, I'd like to go back to that last question,
because I just found the number on the derivative is
actually $42 million. It started the year at $63
million, has come down each quarter and because of
the movement in interest rates, and today it's $42
million.
Gary Kunkle: Thank you Melanie. I'd like to also thank everyone
for your participation in the call, and just
reiterate that certainly we'd like to see the
internal growth for the third and fourth quarter to
be higher, but we do see these issues affecting
growth to be temporary and not to be lingering into
2005.
We're very optimistic about next year, and we're very
pleased with our earnings despite the internal growth
issues and thank you for your support of our company.
Operator: This concludes today's Dentsply International Third
Quarter 2004 Earnings Release Conference Call. You
may now disconnect.
END