This transcript includes some company data that does not directly conform to
generally acceptable accounting principles, or GAAP. Management believes that
the presentation of some non-GAAP data provides investors with additional
insight into the ongoing operations of the business. These measures should not
be viewed as an alternative to GAAP measures of performance. Furthermore, these
measures may not be consistent with similar measures provided by other
companies. The following are reconciliation schedules that provide
reconciliations of these non-GAAP financial measures to the most closely
comparable measures determined in accordance with GAAP.
Sales Excluding PM:
Three Months Ended
September 30,
2005 2004
(in millions)
Net Sales $ 416.0 $ 390.0
Precious Metal Content of Sales (42.5) (44.8)
Net Sales Excluding Precious Metal Content $ 373.5 $ 345.2
Nine Months Ended
September 30,
2005 2004
(in millions)
Net Sales $ 1,267.8 $ 1,228.7
Precious Metal Content of Sales (124.2) (151.7)
Net Sales Excluding Precious Metal Content $ 1,143.6 $ 1,077.0
Earnings Excluding Certain One Time Impacts
Three Months Ended September 30, 2005:
Income Diluted
(Expense) Per Share
----------------- -----------------
Loss from Continuing Operations $ (60,805) $(0.77)
Charges for Unusual Items:
Impairment Charge 111,595 1.41
Dilutive Effect of Including Potential
Outstanding Shares on Earnings Per Share (a) - (0.01)
----------------- ----------------
Earnings From Continuing Operations Before Unusual Items $ 50,790 $0.63
================= ================
<FN>
<F1>(a) For the three months ended September 30, 2005, the dilutive weighted
average number of common shares outstanding excluded potential common shares
from stock options of 1,324. These shares were excluded from the GAAP
calculation of earnings per share due to their antidilutive effect resulting
from the loss from continuting operations.
</FN>
Three Months Ended September 30, 2004:
Income Diluted
(Expense) Per Share
-------------------------------------
Income from Continuing Operations $ 46,344 $0.57
Charges (Income) for Unusual Items:
Reduction of Income Taxes for Prior Period Items (2,848) (0.04)
Restructuring Charges 1,317 0.02
----------------- -----------------
Earnings From Continuing Operations Before Unusual Items $ 44,813 $0.55
================= =================
DENTSPLY INTERNATIONAL, INCORPORATED
Moderator: Gary Kunkle
October 25, 2005
7:30 am CT
Operator: Good morning. My name is (Michelle) and I will be your
conference facilitator today. At this time I would like to
welcome everyone to the DENTSPLY International Third
Quarter 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. Thank you.
I would now like to turn the call over to Mr. Gary Kunkle,
DENTSPLY's Chairman and Chief Executive Officer.
Gary Kunkle: Thank you, (Michelle). Good morning and thank you for
joining the DENTSPLY Third Quarter 2005 conference call.
My name is Gary Kunkle and I am the Chairman and Chief
Executive Officer. Also with me today are Tom Whiting, our
President and Chief Operating Officer, and Bill Jellison,
Senior Vice President and Chief Financial Officer.
I'll begin the call with some overview comments regarding
our third quarter results and our overall business. Then
before turning the call over to Bill I'll conclude with
some remarks looking at the outlook and the balance of the
year.
Bill will then go through more details of the P&L and the
balance sheet and finally we'll all be pleased to answer
any questions that you may have.
Before we get started 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 10K and its subsequent periodic
reports on form 10Q filed with the Securities and Exchange
Commission.
This conference in its entirety will be part of an 8K
filing and will be available on our Web site.
By now each of you should have received a copy of our
third quarter earnings announcement released yesterday
after the market closed. Let me first talk about the
pharmaceutical business and what led to the impairment of
the intangible asset related to the injectable anesthetic
products this quarter.
As we have said from the inception of the construction of
this facility, we expect the benefit to add considerable
profit to this segment when it's finally fully
operational. This plant currently provides products for
our UK, Australian and New Zealand markets. It is expected
to eventually be the provider of a more cost-effective
product for the U.S. and Japanese markets compared to our
current contract pricing.
It'll also be the source of production for new
formulations such as an articaine formulation alternative
to existing competition. And finally it will also house
the production for Oraqix, our non-injectable oral
anesthetic.
While we have not previously provided specific
expectations for improved profitability, I believe it's
important to point out that despite the impacts from the
adjusted assumptions and the delay in the approval of the
facility, we still believe the combined opportunities for
improvement within this business should increase the
profitability of the U.S. consumables business segment by
a minimum annual benefit of 10 cents to 12 cents per share
when it's fully implemented.
Our previous estimates called for approval in late 2005.
This actually recognized that our supply agreement with
AstraZeneca covered us for potential delays beyond that
point and also with start up costs, had us beginning to
realize the benefit of the new plant in 2007. This benefit
is now projected to begin in 2008 and Bill will address
this in more detail with his comments about the impairment
charge.
Let me now focus on the quarterly results excluding the
impairment charge. Looking at sales, our reported sales
during the third quarter were $416 million. This
represented an increase of 6.7% as reported and 8.2% if
you exclude the precious metal content. The 8.2% sales
gain for the quarter broke out as follows; base business
was 5.4%, foreign exchange was .8% and acquisitions were
2%.
The geographic-based business growth ex PM was as follows.
The United States was 7.6%, Europe was 4.7% and the
balance of the world was 1.3%.
While the dental reimbursement issues in Germany continue
to have an impact on our European and overall performance
we're pleased to see the improving trend in the German
market during the year. There are two factors however that
need to be considered as we look at the third and fourth
quarters.
As many of you may recall, on our third quarter conference
call last year Europe had virtually no growth in the
quarter as budgets for reimbursement in Germany were
running out and consequently procedures were being
postponed.
This did provide for a more favorable comparison this
quarter offsetting some of the impact of the reimbursement
changes however entering the fourth quarter of 2004 and in
anticipation of the proposed reimbursement changes coming
in 2005 and quite frankly not clearly understanding them,
consumers demanded that the German regulators lift budget
restrictions for the balance of the calendar year of 2004
resulting in a higher level of procedures during the
fourth quarter of 2004.
Of course we'll have that as a challenging comparison in
Germany as we enter the fourth quarter of 2005 under the
new reimbursement scheme.
There has been a tremendous focus on the German
reimbursement in 2005 and that's appropriate given the
fact that Germany represents 50% plus of our European
business. But it's also important to note that our base
business growth in Europe if you exclude the affected
businesses in Germany is 11% for the quarter and 8.6%
year-to-date and this is in a market that average growth
historically has been 3.5%.
So it's really this kind of performance in Europe and
other markets in the world that has provided the necessary
offset to the effects of Germany for the year. Now we also
expect that our German businesses will deliver a positive
internal growth in 2006 versus 2005 especially in the
first half of the year.
Moving on to the United States, we are extremely pleased
with the continued strong growth in the U.S. of 7.6%
overall for the quarter and 6.3% year-to-date. We had
exceptionally strong sales in our chair-side businesses.
Those are products sold to dental offices. This was led by
double-digit growth in orthodontics, implants and
anesthetics really driven by Oraqix.
The lab business had modest growth overall but had
double-digit growth in the crown and bridge category which
was really led by our Cercon all-ceramic materials.
We also recently announced the formation of DENTSPLY North
America. This is a new sales organization that effectively
combines the field and sales management functions for our
U.S. distributor business. We believe that this structure
will provide opportunities for improved cross-divisional
selling synergies. It'll provide a single point of contact
for our distributors, more consistency in customer
processes and policies and it also will expand our
cross-divisional merchandising support.
We're really excited about this change as are our field
sales organization and we think it'll provide an improved
support to our distributor partners and also deliver
improved value to our end user or customers.
I had mentioned during the last conference call that we're
seeing lab work in the U.S. move offshore to lower lab
cost areas around the world. We are addressing this in two
ways. First of all we're promoting Cercon as an
all-ceramic, more aesthetic, low labor solution. This is
being driven by our new software for Cercon that provides
a better, more efficient utilization of the Cercon block
thus making it an economically competitive alternative to
both precious and non-precious crowns and bridges.
Also we are finalizing a strategy to provide labs with a
low cost alternative to compete with offshore labs. This
alternative will also guarantee the lab that only
FDA-approved materials will be used and lab will receive
the same service and support they have always received
from our U.S. DENTSPLY Lab division.
These are advantages that currently are not offered by
offshore labs today. We expect to have this strategy
operational in the fourth quarter and available to labs in
early 2006.
Looking at the rest of the world, the balance of the world
grew internally by 1.3%. This was led by continued strong
growth in Asia but was really offset by weak quarterly
performances in Latin America and the Middle East really
due to the volatility of those regions and their
economies.
I mentioned several new products during earlier conference
calls this year that continue to perform well. Oraqix, our
new non-injectable dental anesthetic continues to perform
extremely well, BioPure, our new irrigant that's used to
disinfect the canal in root canal procedures, and Calamus
which is a very unique, simple, and user-friendly
obturation delivery system that's also used in root canal
procedures.
And the final one that I have talked about in the past is
Interactive Mystique. This is the world's first
low-friction translucent ceramic bracket. It's a clear
clip that is applied to Mystique, our new ceramic bracket,
and it engages the wire similarly to self-ligation, which
is known for its benefits of reduced appointment time and
approved oral hygiene.
Adding to these new products, there were several releases
in the third quarter; I'll discuss a few. TPH3 is a new
generation of restorative material that provides improved
handling. It provides excellent aesthetics and simplicity
of application for the dental professional.
Also, we introduced Cercon Arts which is a new software
system for Cercon that allows the technician to develop
the coping from the stone model thus eliminating
additional steps of a traditional wax up. It also provides
the lab with better utilization of the Cercon block and as
I mentioned before, this makes it a competitive
alternative to precious and non-precious metal crowns and
bridges.
Before I turn the call over to Bill I would like to make
some closing remarks. 2005 has been a challenging year for
us. We've had to deal with the German reimbursement issues
throughout the entire year and as of this quarter we're
dealing with the impairment issues associated with the
injectable anesthetic products.
However it's also important for all of us to recognize the
benefit of the critical mass of DENTSPLY and how it's
contributed to defusing the impact of such events as the
reimbursement changes in Germany and the other additional
costs associated with the pharma plant.
The breadth of our product portfolio and our geographic
diversity has allowed us to absorb the adversity of
Germany and the increased costs. This is evidenced by how
the non-German businesses are doing this year. Our
year-to-date base business growth in total is 2.5%, but if
you exclude the businesses in Germany that are impacted by
the reimbursement, our base business growth through three
quarters is 6.1%, so this is really a remarkable growth in
this segment that has historically grown 4.5%.
As we look at sales for the balance of the year we do have
a challenging comparison in Germany as I mentioned before.
We also had some of our larger divisions in the U.S.
announce price increases in September that may have
created some additional buying in that month before the
new prices go into effect.
With respect to earnings, our earnings guidance for the
year is $1.24 to $1.28 per diluted share. This is an
increase of our previous guidance excluding the impairment
charge from a previous range or $2.59 to $2.63 to a new
range of $2.61 to $2.65 per diluted share.
We are currently in our budgeting process for 2006 and
we'll provide guidance for next year during our fourth
quarter conference call. But we do expect that we will
again project internal growth of 5% to 6% which is premium
to our market growth of 4.5% and double-digit income
growth for the year.
Now that concludes my formal remarks. I will now turn the
call over to Bill.
Bill Jellison: Thanks, Gary. Good morning, everyone. Before discussing
the overall performance I would like to first provide
you with some additional comments regarding the asset
impairment charge.
During the third quarter the company recorded a pretax
charge of $131.3 million which had an after tax impact of
$111.6 million or $1.41 diluted earnings per share for the
impairment of the injectable anesthetic intangible asset
for the pharmaceutical division within our U.S. consumable
business segment.
This impairment does not impact our needle-free Oraqix
product. The carrying value of the indefinite-lived
intangible asset prior to the above mentioned impairment
charge was approximately $160 million. This amount is
primarily comprised of the two payments we made in 2001
and 2002 totaling $116.5 million to procure the dental
injectable assets from AstraZeneca adjusted for currency
fluctuations since that time as the assets were held in
our Swiss and Japanese subsidiaries.
The company received the results of the Food & Drug
Administration, FDA, pre-approval inspection in the third
quarter of 2005. During the third quarter the company then
conducted an extensive review of the items identified by
the FDA, the company's action plan to address these items,
and their impact on other assumptions.
Included in these were the expected timeline and costs for
the remedy of the FDA findings related to the
manufacturing facility, FDA reapplication and approvals,
expected ramp up costs for the U.S., European, Japanese
volumes, sales projections, and the extension of contract
manufacturing agreements to provide a supply of injectable
anesthetic products to bridge through the revised ramp up
period and the risk adjusted discount rate.
Based on this review we concluded that the injectable
anesthetic intangible asset became impaired in the third
quarter of 2005 and results in a $131.3 million pretax
charge. After recording the impairment, DENTSPLY has
approximately $120 million of long-lived assets related to
the pharmaceutical division which are not impaired based
on our current set of assumptions for the underlying
business.
These assets include the $29 million of indefinite lived
intangible assets remaining for the injectable anesthetic
business along with other assets which include the Oraqix
definite lived intangible assets and the plant and
equipment for this business.
However further negative changes in the assumptions,
including but not limited to those around sales growth,
pricing, regulatory approvals, third party supply and
product costs could require additional event-driven
impairment tests and could result in additional impairment
charges.
The manufacturing facility is not projected to begin U.S.
or Japanese production until 2007 and we do not anticipate
additional improvement until the facility is through its
ramp up of production. The impact of this business on
earnings in 2006 should not be any greater than it has
been in 2005.
We also expect that once the plant is fully operational,
the profitability change within this business should help
to improve diluted earnings per share by 10 cents to 12
cents.
Moving on, as Gary mentioned, net sales for the third
quarter of 2005 increased by 6.7% in total and increased
by 8.2% excluding precious metals. The sales increase ex
precious metals for the quarter included base growth of
5.4%, a .8% increase from FX translation and a 2% increase
from acquisitions.
The geographic mix of sales x PM in the third quarter of
2005 was as follows. The U.S. represented 46.4% of sales
compared to 46% in the third quarter of last year, Europe
was 34.1% this year compared to 34.2% in the same period
last year and the rest of the world was 19.5% of sales
compared to 19.8% in the same period last year.
DENTSPLY's U.S. sales showed more consumable products
performing well especially implants, orthodontics and
restorative products. Growth within Europe, while still
impacted by the softness in the German lab business, has
continued to improve. Germany will have a tougher
comparison in the fourth quarter of this year, but we do
expect the German business to experience easier
comparisons in 2006 especially in the first half of the
year.
Cercon, our all-ceramic product alternative, continues to
perform well in the market and we believe will make
further market share gains as the precious metals market
continues to shift.
Gross margins for the third quarter were 56% ex precious
metals or lower by 1.5 percentage points compared to the
third quarter of 2004. Margin rates were negatively
impacted in the quarter by higher cost of our new
anesthetic facility and lower precious metals sales.
While the current negative impacts of our anesthetic
facility are not expected to improve until the plant is
approved by the FDA, we do expect company-wide margin
rates will improve as we move into 2006 from improved
product mix, operating efficiencies, and new product
performance.
SG&A was $134.3 million or 36% of sales ex precious metals
this quarter versus 37.2% in the prior year's third
quarter. We have continued to improve our overhead cost
structure despite added costs from acquisitions of more
than $3 million in the quarter and the cost of the tax
study that was discussed on the second quarter call.
Operational margins for the third quarter of 2005
including the impairment charge were a negative 13.6%
compared to 17-1/2% in the same period last year.
Operating margins for the third quarter on a non-GAAP
basis excluding the impairment charge were 18% compared to
17-1/2% last year in the third quarter.
Operating margins ex precious metals for the third quarter
on a non-GAAP basis, excluding the impairment charge, were
20% compared to 19.7% in the third quarter of 2004.
Operating margins are expected to benefit from both
improved product mix, the strength of new products and
operational leverage as we move into 2006.
Net interest and other expenses in the quarter were $2.9
million which is an improvement of $2.6 million compared
to last year's third quarter. Net interest expense
improved by $2.7 million in the quarter due to both lower
borrowing levels and net investment hedges utilizing the
Japanese yen and Swiss franc. Other expenses were nearly
flat compared to the same period last year.
The corporate tax rate in the third quarter was distorted
by the impairment charge as the bulk of the charge was in
Switzerland and only received a modest tax benefit. On a
non-GAAP basis excluding the impact of the impairment, the
tax rate in the quarter was 29.3% compared to 25.8% in the
third quarter of 2004. The year-to-date operational tax
rate is 30.6%.
To better evaluate our repatriation options and
opportunities under the American Jobs Creation Act, we
began a global tax project in the third quarter using
external consultants. While this project has increased our
SG&A costs in the third and will again in the fourth
quarter, we expect it will help minimize our overall tax
exposure on any current year and/or future year
repatriation. We are also hopeful that through this
project we can reduce our operational tax rate to 30% for
the year.
The loss from continuing operations in the third quarter
of 2005 was $60.8 million or 77 cents per diluted share.
Earnings from continuing operations excluding the
impairment charge for the third quarter of 2005, which
constitutes a non-GAAP measure, would have been $50.8
million or 63 cents per diluted share in the third quarter
of 2005.
This compares to 55 cents in the third quarter of 2004
after adjusting for a benefit from a reduction of income
taxes of 4 cents per diluted share related to tax matters
from prior periods and also for a negative impact of 2
cents per diluted share related to restructuring
activities. This would represent an increase of 14.5% in
net income per share in the third quarter on a non-GAAP
adjusted basis.
Operating cash flow was $66.7 million in the third quarter
of 2005 compared to $73 million in the same period last
year. Receivables and inventory continue to run higher
than last year however both are projected to improve by
year-end. Receivable days stood at 57 days at the end of
the third quarter of both 2005 and 2004, increasing from
the 55 days at the end of the second quarter and the
record low level of 47 days achieved at year-end.
Accounts receivable days should improve to approximately
50 by year-end. Inventory days are running nearly 5 days
higher than they were at the end of the year but normally
are reduced in the fourth quarter and should end the year
close to last year's level.
Capital expenditures were $9.8 million in the third
quarter yielding free cash flow or operating cash flow
less Cap Ex of about $56.9 million in the third quarter.
Depreciation and amortization were $12.6 million and
dividends were $4.7 million this quarter.
At the end of the third quarter of 2005 we had $398
million in cash and short-term investments compared to
$506 million at the end of 2004.
Long-term debt was $685 million at the end of the quarter
compared to $780 million at the end of 2004. In addition
we had $66 million of short-term debt and a derivative
asset value of $19 million at the end of the quarter.
DENTSPLY repurchased $49 million of stock or approximately
900,000 shares at an average price of $53.10 in the third
quarter of 2005. Our total repurchases in 2005 now stand
at $163 million or 3 million shares at an average price of
$54.86.
Based on the company's increased amortization to maintain
up to 5.5 million shares of Treasury stock we still have
approximately 2-1/2 million shares available for
repurchase.
Finally, as Gary noted, our diluted earnings per share
guidance for 2005 with the impairment charge is projected
at $1.24 to $1.28. Excluding the impact of the impairment
charge we are raising our full year 2005 guidance to $2.61
to $2.65. This guidance does include the expenses
associated with our global tax project as well as the
second quarter's 2 cents per share tax benefit.
Additionally the company still anticipates taking
advantage of repatriating foreign earnings for purposes
consistent with the American Jobs Creation Act of 2004,
however the size and timing of any repatriation will not
be finalized until late November or early December. The
tax impact of this potential repatriation is not included
in our current earnings guidance for the year.
That concludes our prepared remarks and we'd be glad to
answer any questions you may have at this time.
Gary Kunkle: (Michelle)?
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 Steven Postal with Lehman
Brothers.
Steven Postal: Thanks and good morning, guys.
Gary Kunkle: Good morning, Steven.
Bill Jellison: Good morning.
Steven Postal: Can you elaborate on your comments regarding the Chicago
facility? Maybe, you know, talk if you can about any
of the items that the FDA addressed and how you're going
to go about addressing those items?
Gary Kunkle: I won't go through the specific items, Steven, but I'll
give you a comment overall. First of all I think anyone
will tell you a sterile filling facility is among the most
difficult, if not the most difficult to start up and
while the FDA did cite several areas that require
attention, it's also important to note that they describe
the plant as approvable which was a good response so we do
think we clearly understand the issues and we think we
have the corrective actions in place to address them. We
continue to communicate with the FDA as we move forward.
Steven Postal: Okay. And then can you - what is the plant operating at
in terms of staff because you're already doing some
production there?
Gary Kunkle: It's got to be less than a quarter capacity, probably more
like a fifth but that's an
estimate, Steven.
Steven Postal: Understood. And then maybe, I just wanted to drill
down to Germany a little bit. Can you talk about,
you know, the new standard of care items, how you kind
of anticipate that impact on the market more over
the long-term, you know, not necessarily
this quarter with the comparison?
Gary Kunkle: Well, I think you're going to see not so much an
impact on the number of procedures done, but a change in
the mix and it's going to be driven by the fact that
they're going to have the lower cost reimbursements.
Whether that changes going forward I don't know, but if
you assume it doesn't change, it's going to cause a mix
change and hopefully we're well positioned with the mix
change since most of it will be from precious metals to
something else and Cercon is a more economic solution and
a more aesthetic solution. So we're doing everything we
can to move people today from precious metals to Cercon.
Steven Postal: Now you talked about the positive trends in your
orthodontics business and also in dental implants. Can you
maybe just elaborate on that business a little bit how
it's trending in the U.S. and outside and then if you
think you are gaining market share in those areas?
Gary Kunkle: Well, actually we know we're gaining market share.
Our orthodontic business has grown double-digits I think
for over three years now every quarter and the market
information that we get, which is pretty good information,
says the market probably is growing in about 7% to 8% a
year. And so, we know we're gaining share.
And we're also gaining shares with the implant business,
but we need more critical mass and that's one of the few
segments that we're in where we're not number one or
number two. And we should be growing faster than the
market because of our size.
Steven Postal: In the implants market are there acquisition opportunities
that you could take advantage of or are you right
now kind of sensitive to price evaluation?
Gary Kunkle: Well, it's one area where we'd really like to
expand our presence and we'd like to do it through
acquisition. I mean clearly there hasn't been something
that's been appealing either from, you know, the appeal of
the company or the price of the company so far or we would
have made one.
Steven Postal: And just one final question from me. The sales
structure changes, can you maybe talk about how that will
change if any the relationships that you have with the
distributors?
Gary Kunkle: I can't imagine it would do anything but improve
it because today a distributor has to deal with five to
six different people to deal with these separate
divisions. Tomorrow there'll be one person who will handle
this for all the distributors and will be assigned to
specific distributors.
Tom just came back from the Dental Trade Association where
many of our distributor partners were there and had
nothing but positive feedback about this reorganization
and they were very supportive of it.
Steven Postal: Thanks a lot for the comments.
Operator: Your next question comes from Frank Pinkerton with Banc of
America Securities.
Frank Pinkerton: Hey, guys, first some color around the charge. None of
the charge is cash, correct? It's all either an
intangible or good-will?
Gary Kunkle: That's correct.
Frank Pinkerton: Okay. And then secondly, can you walk me through the cost
I guess that Astra is charging you for total
manufacturing and are there step-ups in that cost over the
next couple of years?
Gary Kunkle: We don't disclose those costs, Frank.
Frank Pinkerton: Okay. Shifting and going in another direction, can you
comment on the sales force reorganization in the United
States? Are there any I guess costs that you guys are
incurring there and then what can we expect maybe from
potential savings?
Gary Kunkle: It's actually neither. It's pretty much a neutral change
and it wasn't put in place to save money; it was put
in place to be more effective and to stimulate our growth.
So there is neither additional cost nor savings.
Frank Pinkerton: Okay, great. And then final question. You touched briefly
on some price increases. Can you just walk through, I
guess I know you do this on a rolling basis, what you're
seeing kind of overall from your product base on the
price increase side? And then you said potentially there
was a small buy in. Can you elaborate on that, you
know, what the price increase is? Thanks.
Gary Kunkle: What was the amount of the price increases, in the 3% to
4% range?
Tom Whiting: In the 3% to 4% range.
Gary Kunkle: 3% to 4% was the price increase and with respect
to trying to determine the impact, I mean it's just too
early to tell. Looking at the current month, dealers don't
buy consistently throughout the month and so until you get
the month closed out you can't see what the impact is.
Frank Pinkerton: Okay, great. Thank you.
Operator: Your next question comes from Suey Wong with Robert W.
Baird.
Suey Wong: Thank you. I have a question about the Chicago
plant. It sounds like there's going to be great upside
once the plant is realized here and I want to get a sense
of your level of confidence that by '07 everything will be
taken care of given that there's been a couple of delays.
Gary Kunkle: Well, I mean clearly we're more confident now that
we understand the issues because it was very helpful for
us to in spite of the fact that we're disappointed that we
didn't get the plant up and running.
We learned a lot through that process and we're
comfortable that we understand the issues. We're
comfortable that we have the right corrective action in
place. You know, the one variable that we don't have any
control over is the FDA and so that's the one thing I
can't offer you any assurance with. I can assure you that
we feel comfortable that we're going to do everything to
meet those dates.
Suey Wong: Gary, I just want to make sure here; there's going to be
no disruption of aesthetics while the plant is being
changed over?
Gary Kunkle: We don't foresee that, Suey.
Suey Wong: Okay. And this would have no impact on sales to the UK,
Australia and New Zealand, et cetera?
Gary Kunkle: No, it should not.
Suey Wong: Okay. Also, Gary, you mentioned it was 10 to 12 cent
annual benefit?
Gary Kunkle: That's correct.
Suey Wong: Okay, great. Then just a last question here. Could you
talk about the lab strategy and the changes there? And
also if you think that your lab customers will see this
as a competitive threat in any way?
Gary Kunkle: Yeah, I can't get too specific for competitive
reasons, but I don't think they're going to look at this
as a competitive threat because it's a service to the lab;
it's not a service to the dental office. And it offers
them an alternative. I mean they still can do business the
way they're doing business today, but there are many of
them that don't have the availability to offshore and are
feeling competitive pressure and don't have access to
offshore.
So this will offer those labs an opportunity to get
similar costs but also the reassurance that they're
getting FDA-approved product and of course they also get
the service that they've always gotten from our DENTSPLY
lab division. Both of those are not assurances that you
can get with an offshore lab.
Suey Wong: Great. Thanks, Gary.
Operator: As a reminder, to ask a question please press star then
the number 1 on your telephone keypad. Your next
question comes from Thomas Fong with Boenning &
Scattergood.
Thomas Fong: Hey, good morning, guys.
Gary Kunkle: Thomas.
Thomas Fong: Most of my questions actually have been answered. I
just had one follow up questions. With regards to the
Chicago plant, do you see the FDA expanding, I mean would
they do random spot checks on your other plants and if so,
I mean do you anticipate any issues with that?
Gary Kunkle: It's not related at all but just to give you a
little more assurance, we've had our largest facilities in
the United States inspected by the FDA I think five times
in the last three years and they have collectively gotten
zero non-conformances. And that's exceptional performance
because I think most people anticipate you at least are
going to get one or two.
Thomas Fong: Okay. All right, well that definitely reassures. That's
the only follow up question I had. Thank you.
Operator: Your next question comes from Derek Leckow with
Barrington Research.
Derek Leckow: Good morning, Gary and Bill.
Gary Kunkle: Hi, Derek.
Bill Jellison: Hi, Derek.
Derek Leckow: I've got a question here on the, it looks as if
you're seeking lower over head expenses or is that just
better leverage of SG&A costs? And does that suggest that
you have capacity to increase your R&D spending?
Bill Jellison: I think a couple of points on that. One is, you
know, we've been negatively impacted on the gross margin
mixed side of the equation on an x PM basis because of the
softer precious metal sales this year.
Vice versa on the SG&A side - we're a little bit positive
just because of the mix associated with that. But we have
specifically tried to make sure that we're making
improvements on the SG&A side especially knowing that
we've had some of the higher additional costs associated
with the anesthetic facility that we needed to make sure
that we were offsetting.
And so I think that we've really taken advantage of that
and made sure that we could deliver on the overall
improvement that we had expected.
Gary Kunkle: Derek?
Derek Leckow: Yep?
Gary Kunkle: There has been no attempt to cut our costs by cutting
projects at R&D. In fact every year we have increased R&D
double-digits and we haven't cut projects to save money.
And we will continue with that strategy.
Bill Jellison: And another thing to keep in mind in the SG&A
category that we had in both the third quarter and the
fourth quarter is the tax project that we kicked off has
been negatively impacting those periods, but as I
mentioned, we're expecting to get the benefits of that
still even in the operating rate but also in the potential
rate that we would pay associated with any repatriation of
funds.
Derek Leckow: Okay. And if I understand what's going on with the sales
force, you know, the management consolidation - that
shouldn't result in any savings either, right? That's
more of a...
Gary Kunkle: Yeah. That was not the intent. It was really to improve
our effectiveness and take advantage of the opportunity
to cross-sell.
Derek Leckow: Okay. And then finally, Gary, could you provide us an
update on your research into some of your advanced
technology dental products?
Gary Kunkle: Yes. SATIF is one that we had mentioned I think we bought
about a year ago. It was the technology we bought
from Sanofi-Aventis. It has moved from proof of principle
into product developments and we expect to have a
product hopefully by late '06 from that project.
Doxa was another technology that we acquired and if you
recall it has the potential to have an improved either
restoration material or adhesive material and that's also
in product developments. And it's probably going to be in
'07 though because it takes a little more for that
project.
We announced a relationship with IDMoS, which is a company
that makes a caries detection device that is in product
development and we also anticipate that will be an '06
launch also.
The other projects, in particular like the ones in Georgia
Tech are further out.
Derek Leckow: Gary, the caries detection product, can you explain what
that is and when do you expect to launch that?
Gary Kunkle: Yeah, it's driven by something called AC Impeded
Spectroscopy and, you know, I'll describe it from a
layman's standpoint. It basically sends the equivalent of
a current and this does not affect the patient and will
allow it to distinguish where the caries are and it will
detect it to the degree of accuracy that not only do we
think it will be better than what's currently on the
market, it'll be better than x-rays.
And I can't give you a specific time quite frankly, Derek,
because I don't know what it will be. I think it's going
to be late '06.
Derek Leckow: And do you anticipate this product getting insurance
reimbursement at the same rate as for instance, x-rays?
Gary Kunkle: Good question. I don't have the answer to that.
Derek Leckow: Thank you.
Operator: Your next question comes from Matthew Vetto with Douglas
C. Lane & Associates.
Matthew Vetto: Hi. A quick question. Bill, did I hear you
correctly or understand you correctly? It sounded like you
were alluding to the possibility of further impairment
charges in Chicago if there were further delays although
it sounds like you've done a pretty thorough review of
your timeline and everything going on there. Do you just
do that to sort of size what else is there? What sort of
likelihood would you put on the possibility of further
charges?
Bill Jellison: At this point we do not anticipate any
additional charges associated with that. However, I did
want to point out both the amount of assets that we still
have connected with that overall business and I also
wanted to discuss at least some of the assumptions that
are tied to that.
But we feel very comfortable, at this point, with the
assumptions. That's one of the reasons why Gary also
mentioned the expected improvement that we feel that we're
committing to, in that business, as we move out a couple
of years.
Matthew Vetto: Great. Thanks a lot.
Operator: Your next question comes from Steven Postal with Lehman
Brothers.
Steven Postal: I just had a couple of follow up questions. First, on the
price increases you mentioned 3% to 4%. How does that
compare historically with your price increases?
Gary Kunkle: That's pretty consistent.
Steven Postal: Okay so no meaningful change there.
Gary Kunkle: Right.
Steven Postal: And then for Oraqix, you know, you mentioned and
I'm just wondering now we're kind of a year out from when
it was launched, can you just talk about how things have
evolved over the year both in terms of the marketing of
the product and, you know, how you perceive customer
acceptance?
Gary Kunkle: Yeah, we continue getting very good feedback on
it, Steven. The United States is performing better than we
expected. We just released it in France and the launch
went extremely well. Patient feedback and professional
feedback is very good so we're pleased with it. We
continue to expand it into other markets as it gets
approved and we continue to follow up to make sure that
we're getting the proper reorders and we're satisfied with
all the feedback that we get.
Steven Postal: Great. And then one final question. Bill, I think
you mentioned days inventory increased. Is there anything
driving that other than what's going on with the
anesthetic facility?
Gary Kunkle: You mean driving it other than the anesthetics?
Bill Jellison: Yeah. It was really, you know, the comments that
we made before as well tied it to both the anesthetic
preparation on the transition as well as with some of our
German business especially with the fall off in the first
part of the year. So the fourth quarter is typically a
period where we do drive down some of that inventory
levels. We typically would also be expecting to have a few
days of improvement. This year I think that we're
expecting that we'll probably get back to close to last
year's levels.
Steven Postal: Okay, thanks very much.
Bill Jellison: Just one other comment on the question though
that you had associated with the price increases that were
mentioned. As Gary said, you know, that's typical within
the product areas that we talked about, however on average
for the overall company, you know, our prices typically
run 1% to 2% on average. And, you know, we believe that
we're probably maybe at the higher end of that at this
point.
Steven Postal: And that is because?
Gary Kunkle: Well, we don't take price increases on all products. The
ones that I just cited were two divisions that had
just taken price increases in the 3% to 4% range.
Steven Postal: I see. Okay. Thanks.
Operator: Your next question comes from Greg Halter with Great Lakes
Review.
Gary Kunkle: Hi, Greg.
Greg Halter: Hi, guys, good morning.
Gary Kunkle: Morning.
Bill Jellison: Hi, Greg.
Greg Halter: Just wondered if you could comment on the
acquisition outlook. Obviously noticed that you increased
the share repurchase potential or authorization. Should we
take that to mean that you're not finding what you expect
or think you can find at a good price?
Gary Kunkle: No, I wouldn't link that at all to the
acquisition. Our primary use for cash will always be
acquisition and there's not a lot of change in the
acquisition market from the last call. I think I had
mentioned that we're in contact with a lot of companies,
we're looking at a lot, but there are many that are
private and it just takes some time for the families to
make decisions. I think they recognize that eventually
divesting the business is the right thing to do; they're
just not ready to do it today.
Greg Halter: Okay, thank you.
Bill Jellison: I think one of the other things to point out
there, as well, is that obviously you're aware of where
our overall debt-to-cap levels are relative to what we've
stated our mandated levels are. And, we believe,
especially based on the overall acquisition growth on an
ongoing basis, that we commit to as an organization, we
think that there's at least potential out there to do both
and still have plenty of availability to do any sizable
transaction that we think is appropriate.
Greg Halter: Okay, great. Thank you.
Operator: Your next question comes from Derek Leckow with Barrington
Research.
Derek Leckow: Thank you, just one quick follow up here on the
repatriation decision and as that gets made here in the
next month or two, do you anticipate that influences your
repurchase program at all that lead perhaps to some
greater repurchase activity?
Bill Jellison: No, we really don't think that that'll be the
case. As we've got cash on our balance sheet, most of that
is overseas. The repatriation effort is really just to
bring that back.
When we talk about our overall debt to cap related levels,
we're talking about that in a net cash, net debt basis
which includes the cash side of it. So we'd just be better
utilizing the cash that we have available out there by
doing the repatriation.
Derek Leckow: Okay, thanks very much.
Operator: Again to ask a question press star then the number 1 on
your telephone keypad.
At this time there are no further questions. Gentlemen,
please proceed with any closing remarks.
Gary Kunkle: Well, thank you all for joining the call this morning and
we appreciate your continued interest in our company.
Thank you, (Michelle).
Operator: Thank you, ladies and gentlemen. This concludes today's
conference call. You may now disconnect.
END