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.
DENTSPLY INTERNATIONAL INC.
(IN THOUSANDS EXCEPT PER SHARE DATA)
Earnings Summary:
The following tables present the reconciliation of reported GAAP net income in
total and on a per share basis to the non-GAAP financial measures.
Three Months Ended June 30, 2006:
Income Diluted
(Expense) Per Share
------------- -------------
Net Income $ 59,316 $ 0.37
Restructuring Costs 1,638 0.01
Income Tax Related Adjustments 783 0.01
------------- -------------
Adjusted Non-GAAP Earnings $ 61,737 $ 0.39
============= =============
Three Months Ended June 30, 2005:
Income Diluted
(Expense) Per Share
--------------- -------------
Net Income $ 57,893 $ 0.35
Stock-Based Compensation Expense as Disclosed in Footnotes (2,775) (0.02)
Income Tax Related Adjustments (1,791) (0.01)
Restructuring Costs (185) 0.00
Rounding 0.01
------------- -------------
Adjusted Non-GAAP Earnings $ 53,142 $ 0.33
============= =============
DENTSPLY INTERNATIONAL INC.
(IN THOUSANDS EXCEPT PER SHARE DATA)
Earnings Summary:
The following tables present the reconciliation of reported GAAP net income in
total and on a per share basis to the non-GAAP financial measures.
Six Months Ended June 30, 2006:
Income Diluted
(Expense) Per Share
------------- -------------
Net Income $ 109,320 $ 0.68
Restructuring Costs 4,692 0.03
Income Tax Related Adjustments 648 0.00
------------- -------------
Adjusted Non-GAAP Earnings $ 114,660 $ 0.71
============= =============
Six Months Ended June 30, 2005:
Income Diluted
(Expense) Per Share
--------------- -------------
Net Income $ 106,942 $ 0.65
Stock-Based Compensation Expense as Disclosed in Footnotes (5,548) (0.03)
Income Tax Related Adjustments (2,108) (0.01)
Restructuring Costs (21) 0.00
------------- -------------
Adjusted Non-GAAP Earnings $ 99,265 $ 0.61
============= =============
DENTSPLY INTERNATIONAL INC.
(IN THOUSANDS)
Operating Income Summary:
The following tables present the reconciliation of reported GAAP operating
income in total and on a percentage basis to the non-GAAP financial measures.
Three Months Ended June 30, 2006:
Percentage of
Operating Sales Excluding
Income Precious Metal
(Expense) Content
------------- -------------
Operating Income $ 86,592 20.45%
Pre-Tax Restructuring Costs 2,636 0.62%
------------- -------------
Adjusted Non-GAAP Operating Margins $ 89,228 21.07%
============= =============
Three Months Ended June 30, 2005:
Percentage of
Operating Sales Excluding
Income Precious Metal
(Expense) Content
--------------- -------------
Operating Income $ 81,135 20.27%
Pre-Tax Stock-Based Compensation Expense (4,390) (1.09%)
Pre-Tax Restructuring Costs (228) (0.06%)
------------- -------------
Adjusted Non-GAAP Operating Margins $ 76,517 19.12%
============= =============
DENTSPLY INTERNATIONAL, INCORPORATED
Moderator: Gary Kunkle
July 27, 2006
7:30 am CT
Operator: Good morning ladies and gentlemen. My name is Alexandria
and I will be the conference operator today. At this time,
I would like to welcome everyone to the DENTSPLY
International Second 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 session. If you would like to ask
a question during this time, simply press star then the
number 1 on your telephone keypad. If you'd like to
withdraw your question, press the pound key.
I would now like to turn the conference over to our host,
Mr. Gary Kunkle. Mr. Kunkle, please go ahead.
Gary Kunkle: Thank you Alexandria. Good morning and thank you for
joining the DENTSPLY Second Quarter 2006 Earnings
Conference Call. My name is Gary Kunkle and I am the
Chairman and Chief Executive Officer. Also on the call
today are Bret Wise, our President and Chief Operating
Officer and Bill Jellison, Senior Vice President and
Chief Financial Officer.
Bill and I are in the headquarters here in York and Bret
is attending the Dental Trade Association meeting and is
participating on the call from that location.
I'll begin today's call with some overview comments
regarding our second quarter results and our overall
business. Bret will then update you on some of the recent
new product introductions we've had and some remarks
regarding our lab strategy. Then before turning the call
over to Bill, I will conclude with some remarks regarding
our outlook for the balance of the year. Bill will then
take you through a more detailed review 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 is 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, its subsequent periodic reports
on Form 10Q, press releases and conference call scripts
filed with the Securities and Exchange Commission. This
conference in its entirety will be part of an 8K filing
and we'll make it available on our Web Site.
I assume that by now you should have received a copy of
the second quarter 2006 earnings announcement that we
released after the market close. Our reported sales during
the second quarter were $472.4 million. This represents an
increase of 6.2% as reported. If you look at it excluding
the precious metal content, the increase was 5.8%. This
5.8% broke out as follows.
Base business was 5.2% Foreign exchange was +.3%
Acquisition was +.3%.
The geographic based business growth, and again this is ex
precious metals, was as follows. United States was 6.1%
Europe was 5% Balance of the world was 3.5%.
Looking at the total business growth of 5.2%, it was again
primarily driven by really strong double digit growth in
our orthodontic and implant businesses as well as above
market performances in our chair side consumables
business.
Looking at geographies, and starting with the United
States, as I stated before, the U.S. internal growth for
the second quarter of '06 was 6.1%. Our orthodontic
business continues to grow at double digit rates greatly
exceeding the market growth. We're also pleased to see the
chair side consumables growth return. It grew in high
single digits and it also exceeding market performance.
With respect to our lab business, our crown and bridge
materials grew at mid-single digits. This was led by a
continued strong performance from our Cercon branded
products. Bret will review the lab business in more detail
in his review.
Moving on to Europe, as I mentioned earlier Europe's base
business growth for the quarter was 5%. Europe also saw
strong double digit growth in orthodontics and implants.
The lab business in Europe continues to be somewhat of a
growth impediment in Germany. This is affecting the
overall growth of lab business in Europe. This is driven
by the reduction in the use of precious metals as a result
of two things: The reimbursement changes and the dramatic
changes in the price of gold. Users are choosing
alternatives such as non-precious metals or all ceramics.
Our all ceramic alternative, Cercon, is having dramatic
growth during this period, but in the short term has not
yet offset the decline in precious metal restorations. We
do believe over time that all ceramics will be the
alternative of choice and Cercon will clearly be the all
ceramic leader in this category.
Germany overall is really progressing as we had expected.
Its year to date internal growth is 6.2% ahead of 2005,
but this is behind 2004. We expect that it will complete
the year with positive growth for the full year and that's
pretty much the way we had expected it as we went into the
year.
As you look at the other markets, Asia continues to grow
in double digits with a 13.3% internal growth for the
quarter. This was led by really strong performances in
China, India and Thailand.
If you move on to Latin America, Latin America had a base
business growth overall of -3%. This continues to reflect
the volatility of these markets and their response to the
political and economic swings. If you recall, the first
quarter was a positive 8.5%. We don't see any influencing
factors beyond those that are either economically or
politically sensitive. The second quarter comparison last
year was 10.4% which may affect this, but I think it's
really more the sensitivity to political and economic
changes in the market place.
Some other areas of interest. As you will recall we
announced in February that we would be closing our dental
injectable anesthetic plant in Chicago. We intended to
sell the facilities and pursue long term supplier
agreements to replace the production that was scheduled
for this plant in 2008 and beyond. As a result of the
shutdown and the elimination of corresponding associated
costs with it, we increased our guidance for 2006 by 3 to
4 cents. This is calculated after the stock split. The
ultimate benefit of keeping the plant open was expected to
be between 5 and 6 cents with this benefit really not
beginning to be realized until 2008.
We do continue to believe we can accomplish that goal and
expect to show incremental improvement between now and
2008 with the ultimate goal of 5% to 6% being realized.
We've shown the facilities to several potential buyers
since announcing our intention to sell them. Since the
last call, this list has narrowed to a few select buyers.
We feel that these discussions are going well and have a
probable favorable outcome for both DENTSPLY and the buyer
and will be resolved before the end of the year.
Obviously given the fact that these discussions are
ongoing, I can't offer any further detail, but clearly
we'll keep you informed regarding this progress as we move
forward.
I'd like to now turn the call over to Bret, our President
and Chief Operating Officer, and then I'll come back on
with some comments following his remarks. Bret.
Bret Wise: Thank you Gary and good morning everyone. I'd like to
spend just a few minutes on new product introductions.
We're off to a very strong start on new product
introductions in 2006 and year to date we've introduced
over 15 new products, and of course many, many brand
extensions on top of that. And today we continue to have
a very full pipeline of products we expect to bring to
market in the next 12 to 18 months. I'd like to give you
just a brief sample of some of these new products and
services that we've introduced over the last, let's say
six to nine months.
In the endodontics market we introduced two new file
systems. The first is called MTwo, which is spelled MTwo,
which is a comprehensive nickel titanium system which has
been introduced in ten countries in Europe and several
countries in Asia. The system features a uniform file
length for the entire procedure which allows a dental
professional to find the apex of the canal at the
beginning of the procedure and then work their back up and
out of the canal, compared to a traditional crown down
procedure. This process is preferred by some dental
professionals and is a new product offering for our
endodontics business and is experiencing rapid growth in
Europe.
Also in endodontics late in the second quarter, we
introduced ProTaper Universal which is a nickel titanium
system. It was launched in Europe in the second quarter
and is planned for launch in the U.S. later this year.
This is an enhanced system which significantly expands the
range of instruments for the ProTaper line including a
complete line of finishing files.
In orthodontics, we're having a busy year with new product
introductions including one new bracket system that was
introduced in the spring and another system which is
scheduled for launch this fall.
In the spring we introduced In-Ovation L which is the
first interactive self-ligating lingual system. This
system offers both a highly aesthetic solution as the
brackets are placed on the back side of the teeth. But it
also has the high efficiency of a self-ligating system
which can reduce the treatment times by as much as 25%.
Also in orthodontics we added a line of palatal anchors
which are essentially very small implants or screws that
eliminate the need for external headgear in many
orthodontics cases. This product has proven to be very
popular even in the early stages of introduction.
In the lab segment, we introduced two significant
enhancements. in Cercon, that's our zirconia based crown
and bridge products, in the past six months. These include
Cercon Art which is added true CAD/CAM capabilities for
the design of crown and bridge units and Cercon Eye which
is a very accurate desktop scanning system that can be
used in connection with an installed Cercon unit, or it
can be used to scan a model locally and transmit the data
electronically to another site for coping and crown and
bridge production.
These enhancements have significantly boosted the adoption
of Cercon as evidenced by growth of our consumable unit in
excess of 50% this year.
These developments are particularly important as the
alloy market continues to contract due to record high gold
prices particularly in Germany. Cercon has many advantages
over precious metals including a highly aesthetic and
functional solution but is also at a cost point or a price
point to the lab which is below precious metal
restorations.
Also in lab as we mentioned in our first quarter call, we
have launched our crown and bridge production service
which is exclusively for the benefit of our U.S. lab
customers. In this service, our U.S. business unit
provides finished crown and bridge units to lab customers
in the U.S. and those are produced through one of our
international subsidiaries. The service is designed to
allow our lab customers to serve low cost market needs in
the U.S. without the need to invest themselves
internationally, yet with the assurance that the end
product meets the highest quality standards, both with
respect to the material used and the accuracy of the fit.
This service was commenced late in the second quarter and
customer volume indications today exceed our existing
capacity. And again the service is only available to our
existing lab customers in the U.S., meaning we require a
continuing customer relationship for our traditional lab
products in order to access that service.
In the consumable and small equipment area, we added
several new products this year including a new SmartLite
IQ, which is a cordless LED curing light which offers a
ten second cure with a depth of cure comparable to a high
output halogen device. We also introduced a new handpiece
called Stylus Mini which gives dramatic improved
visibility in small sites which is particularly important
in the back part of the mouth, in children, or geriatric
patients. And the head of this device is 2-1/2 millimeters
smaller than the prior version. And we were able to
accomplish that without sacrificing any power.
So this is just a small sample of product innovations
coming to market this year and again we have a very full
pipeline of products beyond this that will be launched in
the next 6 to 18 months. I'd now like to turn the call
back to Gary for additional comments. Thank you.
Gary Kunkle: Thank you Bret. Before I turn the call over to
Bill, I would like to make some closing remarks. We're
really pleased with the second quarter results and think
it represents a continued good performance for the first
half of the year. We continue to be optimistic about the
balance of the year. We'll be increasing our internal
investment and growth initiatives and these will be in
areas such as sales force expansion and increased R&D
spending. This will commence in the second half of the
year.
We're also increasing the top line top end guidance for
the full year to $1.40 to $1.44 per diluted shared. This
includes stock option expense but does not include any
restructuring charges or tax adjustments.
This concludes my remarks. I'll now turn the call over to
Bill.
Bill Jellison: Good morning everyone. As Gary mentioned net
sales for the second quarter of 2006 increased by 6.2% in
total and increased by 5.8% excluding precious metals. The
sales increase ex precious metals for the quarter included
a 5.2% increase from internal growth, an increase of .3%
from acquisitions and a negative .3% impact from foreign
exchange.
The geographic mix of sales ex precious metals in the
second quarter included the U.S. at 42.9%, Europe at 37%
and the rest of the world was 20.1%. We are pleased with
the improvements in both earnings and cashflow in the
quarter. Solid improvements and operating margins were
achieved excluding restructuring costs and including stock
option expense in both periods.
Gross margins ex precious metals for the second quarter
were 57.2% compared to 56.8% in the second quarter of
2005. Margin rates were positively impacted in the quarter
by improved product mix and improvements in leverage and
manufacturing efficiencies.
SG&A expenses were $152.9 million or 36.1% of sales ex
precious metals in the second quarter of 2006 versus 36.6%
in the prior year second quarter. The higher expense level
in the second quarter primarily resulted from the
expensing of stock options in 2006 which will continue to
impact comparisons throughout this year. If stock option
expenses were included in both periods, SG&A expenses
would have been lower than last year by 1.5% of sales ex
precious metals. This improvement is the result of our
decision to close the anesthetic plant in Chicago and
improved leverage and operating efficiencies.
Operational margins for the quarter were 18.3% compared to
18.2% in the second quarter of last year. If stock option
expense was included in 2005, operating margins would have
been 17.1% in the second quarter of last year. Operating
margins based on sales excluding precious metals were
20.4% compared to 20.3% last year in the same period. An
operating margin based on sales excluding precious metals
for comparative purposes excluding restructuring and
including stock option expenses in both periods would have
been 21.1% in the second quarter of 2006 and 19.1% in the
second quarter of 2005, or an improvement of 200 basis
points which should continue to benefit from many of the
items which are having a positive impact on operating
margins in the second half of this year. However, we also
expect to reinvest more in sales, marketing and research,
and development as we move through this year so that we
can take advantage of some current trend and opportunities
in the market.
Net interest and other expense in the second quarter was
$.5 million which is just below last year's second quarter
level of $.7 million. Net interest expense improved by
$2.7 million in the quarter. This was offset by a $2.5
million increase in other expenses. The increase in other
expense primarily resulted from a slight foreign exchange
transaction loss in the second quarter of this year versus
a gain recorded in the second quarter of last year.
We continue to expect interest expense to run favorably as
a result of our net investment hedges at our lower
borrowing levels throughout this year. The corporate tax
rate in this quarter was 31.1% compared to 28% in the
second quarter of 2005. The second quarter's operational
tax rate was 30.4% and 30.3% year to date. The quarter
also included a $.8 million negative impact from tax
adjustments compared to a positive $1.8 million adjustment
in the second quarter last year.
Net income in the second quarter of 2006 was $59.3 million
or 37 cents per diluted share compared to $57.9 million or
35 cents per diluted share in the second quarter of 2005.
On an adjusted basis, net income excluding restructuring
costs and tax adjustments but including the expensing of
stock options in both periods which constitutes a non-GAAP
measure were $61.7 million or 39 cents per diluted share
in 2006 compared to $53.1 million or 33 cents per diluted
share in the second quarter of 2005. This represents an
18.2% increase in earnings per diluted share on an
adjusted non-GAAP basis in the second quarter of 2006.
Cash flow from operating activities was $82 million in the
second quarter of 2006 compared to $40 million in the same
period last year. Cash flow increased 105% in the quarter
compared to the same period last year. Year to date cash
flow is 43% higher than last year even with the cash
outflow in 2006 for the tax payment associated with the
repatriation of foreign earnings made in the fourth
quarter of 2005.
Capital expenditures were $13 million in the quarter.
Depreciation and amortization for the second quarter of
2006 was $12 million.
Inventory days were 96 at the end of the second quarter of
2006 compared to 96 at the end of the second quarter last
year and 90 days at the end of 2005. We expect inventory
days to be near last year's level by the end of this year.
Receivable days stood at 58 days at the end of the second
quarter compared to 52 days achieved at year end. And
receivables should also improve slightly in the second
half of this year.
At the end of the second quarter of 2006 we had $475
million in cash and short term investments. Long term debt
was $413 million at the end of the second quarter and in
addition, we had $389 million of short term debt and a
derivative liability value of $32 million at the end of
the quarter.
DENTSPLY repurchased $139 million of stock approximately
$4.7 million post split shares at an average post split
price of $29.60 in the second quarter of 2006. Based on
the company's authorization to maintain up to 11 million
post split shares of treasury stock, we still have
approximately 3 million post split shares available for
repurchase.
Finally as Gary noted, we are increasing the top end of
our guidance and plan to increase our internal investments
in growth initiatives during the last half of this year.
We are comfortable with a post split diluted earnings per
share range of $1.40 to $1.44 for 2006. This guidance
includes the impact of expensing stock options but
excludes the impact of restructuring costs and tax
adjustments.
That concludes our prepared remarks and we'd be glad to
answer any questions that you may have at this time.
Operator: Ladies and gentlemen, as a reminder if you would like to
ask a question please press star followed by the number 1
on your telephone keypad at this time. If you'd like to
withdraw your question, press the pound key. We'll pause
for just a moment to compile the Q&A roster. Our first
question comes from the line of Frank Pinkerton with Bank
of America Securities.
Frank Pinkerton: Hey guys. I guess just a question. The small
company D4D I guess has been making a lot of noise
recently about launching a product. Can you run through
what these chair side systems are doing and is that a
substitution for lab work? And potentially is that an
opportunity for DENTSPLY to offer ceramics that could be
sold directly into the dentist's office?
Gary Kunkle: Well, to kind of consolidate the first two questions,
Frank, I mean any time that they're going to do that kind
of restoration chair side it is something they normally
would have done in a lab. So the answer to that question
is yes.
To comment about what we plan on doing with respect to
providing a broader product offering in the future, I
really don't want to comment on that. But we're very aware
of this technology. We're very involved in similar
technologies. It's unlikely we're going to take anything
directly to the dentist. We have brought all of our
products through the lab and if we want to have a similar
technology offering we'll probably have them, the lab,
offer it.
Frank Pinkerton: Okay great. And then just as a follow up, you
know, with all the cash building on the balance sheet,
just remind us, you know, what is the acquisition
environment look like? Do you guys still see opportunities
there and if acquisitions don't present themselves, you
know, what are the alternative uses for the capital there?
Thank you.
Gary Kunkle: Yes, the answer hasn't changed much, Frank. Our primary
target use of cash is always acquisition and it remains
so. We remain in contact with some of the targeted
acquisitions we have. As I have said in the past, the
primary targets, many of them are private and the decision
isn't necessarily always one of valuation, it's one
of timing and when the family wants to decide to divest
it. In the absence of acquisitions, we will continue
buying back stock. The degree to which we do that, really
is a timing based on how the acquisition environment
looks.
Operator: Our next question comes from the line of Anthony Ostrea
with JP Morgan Securities. Anthony.
Anthony Ostrea: Hi good morning guys. It's Anthony from JMP Securities. I
have a couple of questions. Can you give us a little
more color, you mentioned that you'd be investing a little
more in your sales force? Can you pinpoint which
areas you'd be investing in essentially?
Gary Kunkle: Yes I can comment in general. I don't want to be specific
for competitive reasons. But, obviously the areas
that we want to continue investing in, in terms of
manpower and resource to reach the customer, would be the
growth areas.
Anthony Ostrea: To orthodontics and implants.
Gary Kunkle: Orthodontics would certainly come to mind, but I wouldn't
suggest that it's limited to that.
Anthony Ostrea: And would you, how would you characterize the magnitude of
the increase in your sales force?
Gary Kunkle: Again, you know, that's information our
competitors would love to have and they probably are going
to eventually find it out. But I just don't want to make
it that easy for them.
Anthony Ostrea: Okay and then you also mentioned why Europe grew, was it
5% year on year?
Gary Kunkle: Let me check.
Anthony Ostrea: In the quarter.
Gary Kunkle: Oh yes in the quarter, right.
Anthony Ostrea: What was Germany's growth rate in the quarter?
Gary Kunkle: Just a minute I'll break that out for you. I said
year to date Germany was 6.2% for the quarter, they were
-1.5% for the 2nd quarter and if you recall last year the
first quarter was the lowest quarter because they had such
a delay in trying to get patients into the offices because
of the new reimbursement. Many of the people who wanted
procedures done in the first quarter, ended up having them
in the second. So it's really a comparison issue here.
Anthony Ostrea: Okay so we shouldn't read into that as being as sequential
decrease as being a negative.
Gary Kunkle: No.
Anthony Ostrea: Okay.
Gary Kunkle: The issue in Germany all year long was bumpy as
the quarters went through dramatic swings. So you really
have to get through a full year to get this thing to
smooth out a little bit because the comparisons will be
bumpy quarter to quarter. If you look at Europe for that
quarter and excluding Germany, Europe was up 6.4%.
Anthony Ostrea: Okay and then you also mentioned that you're at
least getting some pop in your Cercon division based on
what's happening in Germany. Can you - how much of a
difference is being made up by Cercon?
Gary Kunkle: I'd say most of the growth is coming from Cercon. It's
just tremendous double digit growth, but, you know, when
you look at it from a comparison on revenue ...
Anthony Ostrea: Yeah.
Gary Kunkle: Clearly the price of precious metals is much higher than
the price of the Cercon products.
Anthony Ostrea: But on the margin level is Cercon more profitable?
Gary Kunkle: Cercon is more profitable if you're looking at the margin
on precious metals with the precious metal in the
revenue measurement.
Anthony Ostrea: Okay.
Gary Kunkle: Obviously when you take the precious metal out of
it and look at cost of goods. The precious metal content
was a huge part of the cost of goods so it'd be a higher
percent ex precious metal but a lower dollar comparison.
Cercon would deliver more dollar margin.
Anthony Ostrea: Great. And then my last question on your China
operation. I think in your last conference call you
indicated that there's been probably more of a favorable
response than a negative response to you setting up a lab
overseas. Can you just update us on how - what your
customers are saying right now?
Gary Kunkle: Yes, I will comment on that and then if Bret wants to add
some comments. I'm not certain I said that it was
more favorable. I think there was considerable noise in
the beginning because in the beginning you probably
heard more concern rather than favoritism because they
really hadn't had an opportunity to understand it. Since
that call, the noise has dropped down considerably. In
fact we've had some people that were voicing concern in
the first quarter that are now customers or want to be
customers. And I think much of the concern has been
alleviated because they now see that this was not a
strategy to go directly to the dentists. We're continuing
to take it through the lab. I think the ones that have
used it are very happy with the quality that they've
seen and I think that will continue to grow as we
expected. Bret, do you have any additionally remarks.
Bret Wise: I would like to reemphasize that early we were
getting a negative reaction as some of these labs in Asia
ship direct to dentists and that's not our strategy at
all. Our strategy is only to provide the service
exclusively for the benefit for our U.S. lab customers and
we only sell to lab customers that buy our traditional
products.
And I think one of the earlier questions was about chair
side restoration. Some of our competitors' strategies are
to go direct to the dentist and through chair side
restorations and I think Gary pointed out earlier that,
and it's consistent with this issue, that our strategy is
to go to the lab, not the dentist. And now that that's
clear, I think that most of the noise has died down and in
fact, some of the people that opposed it at the onset are
now customers or giving us samples to become customers of
this service.
Anthony Ostrea: Okay. Thank you very much.
Operator: Our next question comes from the line of Suey Wong with
Robert Baird.
Suey Wong: Thank you. I'd like to ask a bit more on China in the lab
business there. I wanted to find out how that's
ramping up and would it have a meaningful impact on your
Asian sales?
Gary Kunkle: Yes, I'll just make some comments and again and
then ask Bret to comment since he was reviewing the lab
business. I think Bret mentioned this in his remarks that
today with the customers that we have that are using it,
if they were to use up their capacity, get to their full
potential, they would use up all of our capacity. So given
the resources we have in place today, it's fully utilized.
We're looking to continued training and space expansion.
We expect to continue ramping it up through the year.
Again I keep referring to not giving too much information
to competitors. I really don't want to tell them how fast
it's ramping up. But we will ramp it up as fast as we can.
The training probably is the bottleneck because one of the
things that we have emphasized throughout this program is
the quality of what we will deliver and we want to make
sure that these lab technicians are properly trained so
they'll deliver a quality product. Bret?
Bret Wise: Yes Suey, what I'd add to that is that this is
really quite small, the operation is really quite small.
And the way this works is a lab will give us samples.
They'll give us 50 restorations and we'll prepare those.
We'll ship them back to them. They'll see how they like
them. And that in this process, they give us an indication
of the ultimate volume they might like. They give us a
sample to see how we do and then over time, they ramp up
to that level and it's that level that they've indicated
that would exceed our capacity as Gary mentioned.
The other thing I'd make clear is that these sales won't
show up as sales in Asia, they'll show up as a sale in the
United States market because we measure that sale where
the end user is, not where the production is.
Suey Wong: Could you give an update on your lab business in the U.S.,
how much that was either up or down?
Gary Kunkle: Just let me check it to make sure. I believe it
was up about 5%, but let me just confirm that. The crown
and bridge, Suey, was up between 5% and 6%. Teeth were
negative but teeth have been negative for several years
now and it's a trend that I think everybody expects as
edentulous or toothless patients continue to decline in
the marketplace. The indicator that we always look at is
crown and bridge because that's where the growth is.
Suey Wong: That was up 5% to 6% in the U.S. ?
Gary Kunkle: Correct.
Suey Wong: Okay. I want to jump back to a comment that Bret made.
So any lab sales that come from your outsourcing
service in China, they'll be counted in U.S. revenues.
Any process sales from your outsourcing labs,
non-DENTSPLY, will be counted in your Asian sales.
Gary Kunkle: Yes, the sale - the division that's contacting the
customer in the U.S. is our Prosthetic Division in the
U.S. They get the supply from China and that is not
unique, Suey. Over 50% of the products that we sell from
any given location around the world, come from another
DENTSPLY manufacturing site. So this is pretty common for
us.
Suey Wong: Given the products that you sell the outsourcing labs
over, they're based in China. Are those in your Asian
sales?
Gary Kunkle: Yes they are.
Suey Wong: Okay. Some of the labs I believed are owned by U.S.
companies. Would they be U.S. sales or would they be Asian
sales?
Gary Kunkle: If we're selling them in Asia from Asia?
Suey Wong: Yeah.
Gary Kunkle: They're going to be Asian sales.
Suey Wong: Okay. Okay. Let me jump over to Germany here. I recognize
that your ceramic business is doing very well. How is
your non-precious metals business in Germany?
Gary Kunkle: We don't have any non-precious metal business.
Suey Wong: Okay so it's only precious metals.
Gary Kunkle: Correct.
Suey Wong: Okay and this last point. Your Ortho business has
been out pacing in America now for quite a few quarters.
You've had very strong new product introductions. Is there
any kind of secular change going on in the market? Is
there acceleration in the market? Are there competitive
forces let's say, you know, the acquisition of Ormco by
Danaher? Is there anything like that happening and they're
helping your sales?
Gary Kunkle: Well I think that particular one, Suey, is too
soon to see any indication in the marketplace about how
that would affect sales one way or the other. I clearly
think that our growth is driven by two things. One, we
have just introduced some very exciting, innovative
products in the marketplace. And two, most of those
products are upgrades from previous products so you're
getting a multiple effect by getting more dollars from
units that sell at a higher price.
Suey Wong: Good. Thank you.
Operator: Our next question comes from the line Steven Postal with
Lehman Brothers. Mr. Postal.
Steven Postal: Thanks a lot. I'm just wondering if you could talk about
your endodontics business. You mentioned some new
products there. So maybe if you could just elaborate on
the performance in the U.S. and throughout the world.
Gary Kunkle: Bret since you were covering the new products do you want
to address that?
Bret Wise: Sure. Endodontics as you know is one of our specialty
businesses. We sell a wide range of products throughout
the world in that segment. It's one of our top performing
businesses throughout the world. Growth rates kind of
high single digits right now and it's, you know, it's a
very strong business for us.
Gary Kunkle: If I can add one other thing Bret, the growth is not so
much in the number of procedures being done but people
moving to premium products like nickel titanium. And, of
course, we see higher growth for us in Europe and
other markets than in the U.S. because we introduced
nickel titanium in the U.S. earlier and have a higher
penetration in the U.S. market than others.
Steven Postal: Okay and just a couple of questions on the anesthetic
business. Could you update us on the performance of
Oraqix. I think it's been launched in some countries over
the past, you know, six months. How's it doing in the
U.S. and throughout the world?
Gary Kunkle: Well, of course, from a growth percentage, you're seeing
it higher in the newer markets because the base is
lower. We've introduced it I think since we called last
time in about ten countries in Europe and we are very
pleased with the reception. We'd like to see faster growth
in the United States. We did very well in the first
year in establishing a base line. But we would like to see
that expand to more new users and we're talking with
our distributor partner about that today to come up with
mutual programs that we can use together to stimulate
those sales.
Steven Postal: Gary, are you still pleased with the distribution
relationship there or is there a possibility that there'd
eventually be more - go to more broad line distributors?
Gary Kunkle: Well as I said, we're working with them right now to see
what we can do to stimulate the sales more in the U.S.
and I'll probably just leave it at that.
Steven Postal: Okay fair enough. And then as I recall, you talked in the
past about launching, I think it's an Articain
version, in the anesthetic business. Could you just update
us there?
Gary Kunkle: Yes. That's still something we're looking at. Obviously
our priorities in anesthetics have changed in that it
is a very immediate need for us to make sure that we
button down the supply contracts and get a buyer for the
anesthetic plant. But there are continued efforts to get
Articaine into the U.S. But I don't think you're going
to see it before 2008.
Steven Postal: Okay. And then just one clarification on cash flow. It
obviously is up significantly but I think you alluded to
basically days in inventory kind of up and then also as
I heard it maybe DSO's were also up so I was just
wondering what has driven the cash flow stance in there?
Bill Jellison: Also, earnings are stronger. Last year was lower
than a typical run rate with increased working capital for
inventories and receivables. Also accruals increased to a
more reasonable level in the first half of the year. A
negative factor within the first Q, included about $22
million roughly that was paid out for the tax payment
associated with the repatriation that was made last year.
That actually hurt us and would have made the cashflow
even better within this first Q.
Steven Postal: Okay.
Bill Jellison: We should expect cash flow from working capital,
including inventories and receivables to get better by the
end of this year.
Steven Postal: And how about payables? Will there be any change there?
Bill Jellison: No I think the payable levels that we've got in place at
this point are running at a more normalized level.
Steven Postal: Okay. Thanks a lot guys.
Operator: Our next question comes from the line of Kyle Dohdey with
Morgan Stanley.
Kyle Dohdey: Great thanks. It's two quick questions. First, I noticed
there was about a $30 million upstake in goodwill. Was
there any acquisition activity in the quarter?
Bill Jellison: No. From that perspective - a lot of the increase that
you could see there may come from some of the exchange
movements that take place but we didn't have any
additional key acquisitions within that period.
Kyle Dohdey: Okay then could you just quickly run through again the
pieces of the organic growth in the quarter.
Gary Kunkle: Yes. If you look at it around the world (Kyle) the base
business was 5.2%. This is internal growth. Foreign
exchange was +.3% and acquisition was +.3%. If you look at
it geographically, the U.S. was +6.1%, again this is
all internal growth and ex PM. Europe was +.5% and the
balance of the world was +3.5%.
Kyle Dohdey: Great. Thanks a lot.
Operator: Our next question comes from the line of Frank Pinkerton
with Bank of America Securities. Mr. Pinkerton.
Frank Pinkerton: Yeah thanks for the follow up. Can you update
us on, I know that there's litigation between some
distributors and the artificial teeth line or false teeth
line that you guys were selling into that market. Have
there been any changes in the distribution patterns there?
Have you in sourced any of that?
Gary Kunkle: We haven't seen much. The only lab product that
goes through distribution for us is artificial teeth and
they are negative, but they've been negative for three
years running. So we haven't seen a change in the trend.
Frank Pinkerton: Okay great and then just on the office of
technology initiative, I know you guys have been investing
there for the last couple of years. You know, I know
you've also been a little, you know, secretive and not
letting any of the products out, you know, before they're
ready to go. But can you update us on, you know, timeline
and maybe what the first couple of products, you know,
coming out of that could be?
Gary Kunkle: Yes I will. Satif that we got from Sanofi-Aventis is
probably the closest to introduction, Frank. I think
in the past I have said we expect that it will launch in
late `06. I think probably now it's going to be 2007
event but it clearly is in product development and it will
be a product. Doxa was another one that we made an
investment in and quite frankly, we have shut that down.
We don't think it's going to be a product that is
going to be worthy of describing it as being innovative.
So it is no longer a project. IDMoS was one of the
other ones I discussed and we continue in development with
that and expect that it will be a 2007 product
launch also.
Frank Pinkerton: Okay great. Normally, you know, when you think
of dentists here in the United States, you look at things
like interest rates that normally affect dentists'
spending patterns. I know you guys are no longer on the
software kind of equipment side in the dental office, but
with the move in interest rates, does that affect
dentists', you know, kind of consumption of consumables
and also will the rise in interest rates impact any of the
labs on the Cercon side?
Gary Kunkle: We don't see it Frank. We clearly don't see it on
the consumables and the only way it would affect the lab
would be if they're looking to buy some major piece of
equipment. And, you know, even with the downturn in the
economy or pressure from interest rates, I think we
mentioned last year, in spite of all the economic problems
they were having in Germany, German labs recognized the
benefit of getting into the Cercon business and they were
buying equipment last year. So for our particular product
line we haven't seen any impact by it.
Frank Pinkerton: Okay great and then just I want to make sure
that I heard Bill correctly. Was it the Chicago facility
going to benefit by 3 cents on an annual basis or 3 cents
in the back part of the year? Bill can you repeat that?
Bill Jellison: No sure what you're referencing. Are you talking about
the anesthetic facility for this entire year?
Frank Pinkerton: Yeah sure, the closure of the anesthesia facility. What's
the impact to that on earnings per share?
Bill Jellison: Yeah that was a comment in Gary's comments, yes.
Frank Pinkerton: Oh.
Gary Kunkle: And that was when we had raised our guidance earlier
before in 2006 as a result of that decision. So it's
already in the guidance.
Frank Pinkerton: Okay I guess I'll ask it a different way. Is it
3 cents for the back part of the - I'm trying to get, you
know, if I'm looking at, you know, kind of your model
going out into future years. What's I guess an annual
contribution from that facility closure?
Bill Jellison: When we adjusted our earnings guidance at the
beginning of this year when we announced the anesthetic
facility closure, Gary stated at that time that it was
about a 6 to 8 cent impact and kind of our overall
improvement that we were laying out there. That was on a
pre-split basis. So the number that he's throwing out
there now, 3 to 4 is on a post-split basis and that
actually is spread pretty much throughout this year. I
think that we've absolutely already had some benefit of
that in the first half, but you should continue to see
that positive impact as we move through the second half of
the year.
Frank Pinkerton: Okay great. Thanks.
Operator: Our next question is a follow up question from Anthony
Ostrea with J&P Securities.
Anthony Ostrea: Hi guys. Thanks for taking the call. Bill, can you
just walk us through, you said you had about $80 million
in cash flow from operations. The CAPEX number and then D
and A number, actually, less the CAPEX of about 12, I'm
looking at what change in $40 million quarter to quarter
in cash. Can you just walk us through how you get from the
Q1 cash number of $435 roughly to about $475?
Bill Jellison: Sure, keep in mind, Anthony that we announced
that we bought back about $139 million of stock during the
second quarter period, plus you've got different exchange
impacts. But the cash that we've got out there, the $475
million, keep in mind that the reason why that's on our
balance sheet is that we're preparing to pay down the Euro
bond debt which comes due at the end of this year. The pay
down is expected to come from the cash that we currently
have on our balance sheet and also using our revolving
credit agreement that we have as well.
Anthony Ostrea: Great. And then last question here. Gary, I think
in your last conference call you indicated that you
expected organic growth for the year to come in probably
at the high end of what you'd historically come in at
closer to 6%. You gave guidance for the bottom or bottom
line guidance for this year. How are you feeling about
your organic growth for fiscal '06?
Gary Kunkle: Yes, I did say that we expected it to be 5% to 6%
and likely on a high end and of course we're tracking that
way as we look at the second quarter. I don't think that's
an unrealistic expectation as you look at the back half of
the year with the one caveat being you've got some very
unusual comparisons.
If you think about the third quarter last year, it was the
first quarter where you saw some recovery in Germany,
though slow, but Europe was positive. And you had a 7.2%
internal growth in the U.S. and you have the flip of that
in the fourth quarter where it was a lower growth. So
while you might see it in aggregate for the second half of
the year, it's not going to be that smooth.
Anthony Ostrea: Thank you.
Operator: Once again ladies and gentlemen, if you would like to ask
a question, please press star followed by the number 1 on
your telephone keypad at this time. Gentlemen, there
appear to be no further questions at this time.
Gary Kunkle: Okay well thank you, Alexandria, and thank you all for
joining the call and your interest in our company.
Operator: Ladies and gentlemen, thank you for your participation in
today's DENTSPLY International Second Quarter
Earnings Release Conference Call. This concludes today's
call. You may now disconnect.
END