DENTSPLY SIRONA Inc (XRAY) 2002 Q4 法說會逐字稿

Good morning. My name is Jamie and I will be your conference facilitator today. At this time I would like to welcome everyone to the Dentsply fourth quarter year end results 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 one on your telephone key pad. If you would like to withdraw your question press the pound key. Thank you. Mr. Miles, you may begin your conference.

Good morning and thank you for joining Dentsply's fourth quarter 2002 conference call. My name is John Miles and I'm Dentsply's chairman and Chief Executive Officer. With me this morning is Gary Kunkle, President and COO, Bret Wise, senior vice president and chief financial officer and for this one quarter of transition Bill Jellison will be joining us for the Q&A transition in the event anyone has a historical financial question.

As is our usual format, I'll start by giving some overview comments concerning our fourth quarter results and the overall business. Bret will then go through a more detailed review of the P&L and balance sheet, and, finally we'd collectively be pleased to answer any questions you may have. I'm sure each of you have received a copy of our fourth quarter earnings announcement released yesterday after the market closed. I'm extremely pleased to report that Dentsply has achieved yet another quarter of record sales and earnings. We have now achieved 18 consecutive quarters of meeting or exceeding analysts expectation. Our reported sales for the fourth quarter were $411.8 million, an 8.6% increase over the year earlier quarter. Diluted earnings per share were 53 cents, an increase of 23.3% over the same period a year ago. The 8.6% sales gain for the quarter broke out as follows. Base business, 5.3%, foreign exchange favorable 2.8%, acquisitions divestitures net, 0.5%. I need to emphasize that growth of the base business ex precious metals was a very robust 7%.

The base business growth on a geographical basis broke out as follows. In the United States our base business growth was 11.4%, 11.3% ex precious metals. Dentsply's U.S. businesses turned in an exceptional quarter of growth, superb growth was achieved by Tulsa Endodontics division, primarily in nickel titanium files. Our GAC orthodontics division, led by their innovation and self [inaudible] bracket and their new mystique clear bracket, our Seranko division, due to Zircon, our all ceramic bridge system, Trubyte, lead by eclipse, a prosthetic [inaudible] system that facilitates the construction of both full and partial dentures by labs, And by Gendex, with there den optics and inter oral products.

This coupled with solid performance by Dentsply's broad consumable lines allowed us to achieve outstanding results. Dentists in the U.S. remain very busy, although dental labs continue to experience only modest sales growth. Dentsply continued to outpace the overall U.S. dental market and continues to gain share versus its competitors. In Europe, our base business growth was 0.4 of 1% or it was 4.3% ex precious metals. European sales continued to be lead by excellent gains across Dentsply's consumable lines, especially in Germany and France. Partially offset by continued slowness in the German dental laboratory business. Despite dental lab slowness our, Zircon, our all ceramic crown and bridge systems, sales were sensational as well as the Zeno 3, the self-adhesive bonding system that we launched throughout Europe in the fourth quarter. In Asia we achieved 3.5% growth, 6.9% ex-precious metals. Dentsply Korea and DentsplyThailand led a solid growth performance as the economies in this region continued to improve. In Latin America we had base business growth of 2.9%, 1.4% ex-precious metals. I have to say that I'm frankly pleased that Dentsply was ale to achieve positive growth in a region that continues to be plagued by numerous economic and political issues. The rest of the world we achieved 1.4% growth flat ex-precious metals and acceptable performances by Canada and Japan were offset by weaknesses throughout the mid east and African regions.

Other topics effective November 1 of last year Dentsply completed an expansion of its senior management team. The promotions of Tom Whiting to Executive Vice President, Jim Mosch and Chris Clark to senior vice president. The rotation of Bill Jellison into a line senior vice president role from his CFO position. As well as the appointment of Bret Wise as Senior Vice President Chief Financial Officer will insure continued strong performance in our company as we go forward. The expanded senior management team will ensure that Dentsply's diligent hands on management style will continue as our business has grown significantly larger and more complex as well as providing seasoning for capable executives to be able to assume even broader responsibilities in the future. The Austenal integration plans continue as projected. All U.S. operations were consolidated principally at York, Pennsylvania by year end 2002. The small Austenal operations in Europe and Japan will be integrated into their counterparts during the first half of this year. Continued progress was made on Dentsply's [inaudible] filling plant in Chicago for dental anesthetic production and startup remains planned for 2004.

Zircon [inaudible] ceramics continues to generate extremely enthusiastic responses from both dentists and dental labs. We commercialized this product early in 2002 and it's fair to say Zircon has been the most successful new product launch in Dentsply’s history. The 35 incremental U.S. field sales representatives we had previously talked about were fully trained and operating in their territories by year end 2002. As I mentioned earlier in my remarks, several of Dentsply's new product launches are going extremely well. Specifically the innovation of our self-legating orthodontic bracket as well as the mystique clear bracket, our stylist high speed hand piece, Zeno 3 which is a self-adhesive bonding system, eclipse our new resin system for labs and [inaudible] implants have turned in very strong sales performances. During the first half of this year a significant number of new products will be launched which will assist us in continuing to achieve our market share gains.

Let me conclude by thanking Dentsply's associates worldwide for yet another year of sterling performance. You may recall we started 2002 with an aggressive EPS target of $1.78 and concluded with exceptional results as we've reported of $1.85. As we look forward to 2003, we expect our business to remain strong and remain comfortable with analyst expectations of 45 to 46 cents per share for the first quarter of this year and the range of $2.04 to $2.07 for the full year. I'll now turn the conference over to Bret Wise who will take you through the P&L and balance sheet.

Thank you, John, and good morning everyone. Thank you for joining us on our year end call. I'd like to start by highlighting some of the items in the P&L and then cover briefly some balance sheet items as well as some cash flow items.

Building on John's earlier comments revenue in the fourth quarter grew 8.6% to $411.8 million, a record for the company and also the first time revenue has exceeded $400 million in a quarter. Excluding precious metals, revenue grew 10.2% during the quarter including an internal growth rate of 7% while currency added 2.6% and acquisitions added 0.6% again excluding precious metals. Gross margins were 48.6%, that's up a full 3 percentage points from 45.6% in the 2001 quarter and that reflects the benefits of mixed improvement, the new product introductions that John spoke to earlier, and the integration and restructuring benefits from the acquisitions that were completed in 2001. Excluding precious metals, gross margins were 55.3%, up 260 basis points versus the 2001 quarter. Operating margins grew to 17.9% in the quarter, up from 14.3% in 2001. And if we exclude from operating margins the restructuring items and the goodwill amortization in the 2001 quarter, operating margins would have been 15.3% in the 2001 quarter so our 17.9% this quarter is a very substantial improvement on an apples to apples basis. Operating margins excluding precious metals exceeded 20% coming in at 20.4% in the 2002 quarter. Net interest and other increased $7.9 million in the quarter compared to the 2001 quarter and the main drivers in this increase is a $2.3 million loss this year on the valuation of the practice works warrants and in looking at last year we had $500,000 in dividends from practice works as well as a $3.4 million currency gain related to the Ford contracts we had on the Degussa acquisition financing. So those three components comprised the swing in net interest and other expense for the year. Interest expense during the quarter was $7.7 million, down from $8.3 million a year earlier. Just a few comments on the practice works warrants. I want to remind you that they have a six year remaining life and at present they have a book value of $1.1 million. So at today's valuation we really have limited downside valuation risk on the security, about 1 cent per share in the aggregate and, of course, we have upside opportunity in the shares if the shares recover as we would expect them to. Net income for the quarter grew 25.1% to $42.3 million and earnings per share were up 23.3% to 53 cents per diluted share.

Looking at the full year result, sales growth for 2002 was 33.6%, exceeding $1.5 billion for the first time in our history. Sales growth for the year excluding precious metals was 22.6% driven by internal growth of 6.8%, acquisition growth of 14.6%, and a 1.2% positive effect of foreign currency translation. One item of note related to our revenue for both the year and the quarter is we conformed Degussa dentals revenue practices to Dentsply's practices in this quarter. In the past, when Degussa dental purchased scrap precious metal in two of their locations they would reduce sales by the amount of the purchase rather than treat that scrap metal as a raw material and then ultimately a sale and cost of sales when the material was shipped out. In this period we conformed that practice to Dentsply's practice which results in a re class to increase sales and cost of sales by approximately $13 million for all of 2002 or about $3 million in each quarter and also $3 million for the fourth quarter of 2001. And, again, only one quarter in 2001 reflecting the period that we held the business following the completion of the acquisition in October 2001. So this re class affects those five quarters since the transaction closed and the net difference between the years which is about $10 million, 2002 to 2001, is reflected as acquisition growth in our press release and in the percentages we've been giving you and not internal growth. I have a breakdown of that Re class by quarter for those of you that are running models and need to update your model and you can call me after the conference call and I'll give that to you.

Gross margins for the year were 48.4%, compared to 50.2% in 2001. This 1.8% reduction is due to the inclusion of Degussa dental for the full year in 2002 versus only one quarter in 2001 and, again, the heavy influence of precious metals in the Degussa dental sales. Gross margins excluding precious metals for the year grew to 55.2% compared to 52.5% in 2001, a 270 basis point improvement. The significant growth in revenue coupled with the improvement in margins resulted in an $80 million increase in operating income or about a 46% increase. Operating margins of 16.9% including precious metals and 19.3% excluding precious metals. Excluding the effects of restructuring and other charges and goodwill we saw operating margins without precious metals grow from 18.4% last year to [inaudible] in 2002 on an apples to apples basis.

The change for the full year in interest and other expenses is quite substantial. I'd like to give you some of the components of that change now. Interest expense for 2002 was $9 million higher than 2001. Also, in 2002 there was a $4.7 million swing in exchange gain and loss. In 2002 we had about a $3.5 million loss on exchange and in 2001 we had a $1.2 million gain. In 2001 we recorded the gain on the sale of InfoSoft which was $23.1 million and also there was a swing of about $4.3 million related to practice works. This year in total on Practice Works we recorded losses of $2.6 million and last year in 2001 we recorded gains and dividends in the aggregate of $1.7 million. So those components make up the large swing in interest and other expense for the two years. Effective tax rate for 2002 came in at 33.0% down from 34.4% last year and as we look forward to 2003 we see opportunities to reduce that rate further, perhaps by another percentage point or so by late 2003. Net income for the year grew 21.8% from $121.5 million in 2001 to $148 in 2002. However both periods include several nonrecurring items and I'd like to summarize those for you now.

In the current year we had only two items, one was the reversal of restructuring reserve in the first quarter and the second was an insurance settlement gain in the third quarter that in the aggregate these two items added two cents per share to earnings in 2002. So we reported $1.85 but excluding these two items we would have had $1.83 operationally. In 2001 we had numerous items and these were elaborated on in the press release for last year's earnings but I'll summarize them for you here. In 2001 we had the $23.1 million gain on the sale of Softdent. We had an $8.5 million gain on a pension settlement. $5.8 million gain on an insurance settlement. And we had charges in 2001 of about $17 million for restructuring, $2.3 million for an [inaudible] payment related to the Astra-Zeneca acquisition. In addition in 2001we were amortizing goodwill, which amounted to $17.8 million. So all these items in the aggregate in 2001 reduced earnings per share by about 3 cents a share. So excluding all those items for both years, we would have had $1.83 in earnings in 2002 and $1.57 per share in earnings in 2001 or about a 16.6% increase and that was mentioned in the press release.

Now looking at the balance sheet long-term debt increased $46 million for the year and total debt including short-term debt increased by $44 million in 2002. This increase was driven by the strengths of the Japanese yen, the Swiss franc and the Euro which we have borrowing. Currency alone added $135 million to our debt in the year. So on a constant currency basis that would have decreased, in fact our debt decreased $90 million from operating cash flows. With respect to the Euro borrowings we do have contracts in place to protect against the strengthening of the Euro and the value increased by approximately $75 million during the year. Those contracts are reflected in other long-term assets. In addition we have natural hedge positions in certain of the other currencies such that a continuing weakness of the dollar actually helps our debt to equity ratio. Relative debt to total capitalization fell from 54.5% at the beginning of the year to 48% on 12/31/02 a significant improvement. If you add to that and take into consideration the hedge contract our debt to cap would now be at 46%. Operating cash flows were approximately $170 million for 2002 while capital expenditures were roughly $57 million. Accounts receivable base ended the year at 49 down four days from the third quarter and inventory days is ended the year at just under 100. Depreciation and amortization for the year was approximately $44 million giving us an EBITDA of just under $300 million for the year.

Looking forward, we anticipate the Cap Ex in 2003 will be in the range of $70 to $75 million including expenditures for the new pharmaceutical plant in Chicago which John mentioned earlier. In addition next year we do anticipate a final settlement on the Degussa transaction. That will probably be something $10 million or less and we also have a final payment related to[inaudible] registration of $18 million and we would anticipate both those items to be cleaned up by probably mid 2003. That completes our prepared remarks and we thank you for your continuing interest in Dentsply and we will be glad to take any questions that you have at this time.

Thank you. I would like to remind everyone in order to ask a question, please press star one on your telephone key pad. And your first question comes from the line of Shannon Collins from Falcon funds.

I'd like to focus on the balance sheet a little bit. I was wondering if you could tell me versus the third quarter the increase in other current assets from $60 million to roughly $80 million, could you tell me what's included in that?

In the other current assets?

Yes.

That would be operational items like prepays and things of that sort. Nothing -- no substantial individual items that I can think of.

Okay.

Part of that, of course, would be currency as well because a lot of those assets are held overseas and the Euro strengthened pretty handsomely in the fourth quarter.

Then with regard to goodwill --.

You're talking about current Assets, not non current assets, right?

That's right. My understanding is other assets net, the long-term assets, was mostly the currency swap.

That is correct.

And I was just wondering what other current assets. But my understanding now from you is that there's no one particular item in that $20 million making that go up. It's just a host of prepaid and.

Yes.

Other things like that.

From about 20 different countries.

Okay. On the goodwill line, it looks like it went up about $22 million from the end of the third quarter to the end of the fourth quarter. Could you address that?

That's primarily currency.

Okay.

Because well over half of that goodwill is held either in Euros or Swiss franks.

I assume the same would be true for other identifiable and tangible assets?

Yes.

Okay.

I don't think -- there were no substantial payments in the fourth quarter related to the other identifiable assets.

Okay. With regard to your current liabilities, how much of that is current portion of long-term debt or short-term debt.

Fairly small piece. I'm thinking it's $4 million. I'll look that up.

Great. Okay. And then could you just reconcile the free cash flow -- the cash flow from operations for us from the -- I guess I'm particularly interested in the fourth quarter in net income plus depreciation plus deferred taxes less changes in working capital because -- my guess is that now when you run through the balance sheet numbers it looks like there was a pretty big use but I suspect a lot of that is currency translation which is down at the bottom of the cash flow statement. What was the total change relative to currency translation for the quarter?

I don't have that prepared at this point. Maybe -- perhaps you can call me offline and we can go through that.

Okay.

But we generated substantial cash flow in the fourth quarter. I think at the end of the third quarter we had operating cash flows of about $101 million and at the end of the year it was $170 million.

Right. I understand that. But as I look at the cash -- at the balance sheets, you know, the increases and assets and the decrease in liabilities, there's some kind of use there and I guess from what I'm hearing it's mostly currency related. Okay?

Currency does have a huge impact on our balance sheet because the currencies moved significantly during the fourth quarter.

Right. Great. Okay. Thank you.

Thank you.

Thank you. Your next question comes from the line of Suey Wong from Robert W. Baird.

Congratulations on the fourth quarter.

We had a great quarter. We're happy.

John, could you talk about your drivers for the acceleration of the internal growth. This quarter you finished up at 9.3% and next year you're looking at 6% or 7% for the year.

Well, we finished at 7% base business ex-precious metals and our guidance has been 7% to 8% ex-precious metals, 6% to 7% for -- including precious metals. And you're right, it was %5.3 basically because of the precious metals. I think that we're happy that our new products are showing a lot of traction, Suey, and we think that is going to propel our business forward.

Of these new products and there's certainly a lot in the pipeline and a lot that you have rolled out, which do you think are the most promises?

You know, you can't make me tell our competition what we're going to do but we will be launching several new products not only at the Chicago midwinter but of course at the IDS, the every other year major dental show in Germany at the end of March. So we have a bunch of stuff coming out of the pipeline in the first half of 2003.

The products you already rolled out it sounds like Zircon is doing very well.

The best launch we ever had in 101 years. That’s a pretty big statement.

Just a couple more questions. Could you give us and update on the orthodontic market and your GAC business?

Yes, we're very pleased with our orthodontic business and the two new orthodontic products are both red hot, innovation R and the mystique. I think the market is growing about 5, and we are absolutely in the double digit growth in orthodontics. We are doing pretty good.

John, that was double digits?

That's what I said.

Great. Can you give us your outlook for the lab market going forward this year?

That there will be modest sales growth in the U.S. And I think that it will be flat in Europe but, of course, Europe was negative in the 2002. I don't see a rebound in Germany specifically in Germany. So I think kind of flat in Germany bit it was down from its historical levels because of 2002 and improving a little bit in the U.S.

Okay. Great.

But I don't think that lab is going to grow the way consumables are growing.

Great, thanks and congratulations again.

Your next question comes from the line of Derek Leckow from Barrington research.

Good morning everybody. Congratulations on another strong year.

Thank you.

My first question is just a revenue detail question; On the consumables and equipment, could you give us the breakdown there?

Yes. Heavy equipment grew 14.7. Consumables and small equipment grew 6.5 and non dental grew 3.7 in total the business grew 7.

Okay. And then just -- you have strong results obviously in gaining market share in the U.S. markets so congratulations there. In Germany, I'm starting to get a little concerned about the lab market there. You already are up against pretty easy comparisons it seems to me. Could you give us some additional color on what is -- what is happening with that market?

Sure I can. First of all, I would disagree with your statement that we're up against easy comparisons. In 2003 I might have to agree with it but not in 2002. Because 2001 the European lab market specifically Germany was okay. I would describe our business in 2002 as very strong consumables growth. With slightly negative lab growth counting precious metals. And as I look forward to 2003 I think that our very strong consumables growth will continue because of our new products. We clearly are gaining share there and I expect that the lab business will be pretty flat which will on a comparative basis be better than it was 2002 versus 2001. That make sense?

Yeah it makes sense but I guess the flat outlook here is what I'm really focused on in Germany there. Is there anything different in terms of reimbursement rates or is this a demand issue?

It's a Germany economy issue. I think the German economy and German citizens are kind of in a funk these days and their economy is stalled and they -- the German government has recently raised taxes in order to reduce their deficits because of their EEC commitments which I think are only makes people feel worse and I think it has clearly reduced high end crown and bridge work in Germany.

You're not concerned about your market share there, your market share obviously is --.

The market share is fine and Zircon which is our all ceramic product is going great but the traditional porcelain fuse to metal with gold underneath clearly decreased in 2002 not because we lost share but because the market decreased. I think because of the German economy.

In looking at Japan,What was the revenue in Japan. Could you give us that breakout?

Yeah. About $70 million is the answer.

What's your-out look for that market? That's obviously a pretty strong growth area for you next year.

We have a lot of hopes you know, we're working hard with that group to really change its focus from really -- I'm going to call it a lab focused business in Japan to more of a lab and dental consumables focus. The two key focus products in Japan for next year are endodontics, nickel titanium files is the only country on earth that that technique hasn't really taken over the market, and also dental anesthetics. So -- yes I think we're going to see growth. The Japanese market is not growing very much but we have nothing but upside. So, yes, I think that's going to give us some growth next year.

Okay. Great. One more question here on practice works. You mentioned you have somewhat bullish outlook for the Practice Works situation. Could you give us some color there? What's behind that, John?

I'd say it the other way. I mean we only now have one cent on our risk in terms of the warrants -- in terms of our P&L so if the stock goes to nothing, I can't get hurt more than one penny. And if the stock goes up, then obviously it's a plus. I hope the stock goes up. I don't know for sure whether it will or it won't. I think the key point is we don't have much downside risk anymore and probably have a lot more upside opportunity than downside risk, vis-à-vis the Practice Works warrants.

But the reason you stayed with the warrants and stayed with that business is you just want to have some participation in that market, is that what --.

I'm look locked in for a year. That's why.

Okay. Thank you very much.

You're welcome.

Thank you. Your next question comes from the line of Boris Buchick from Pennant capital management.

Good morning, a great quarter.

Thank you.

And it sounds like that Zircon is going absolutely fantastic. I wanted to focus on some of the other growth areas, in particular [inaudible] I did notice on the FDA website a report about the product and I was concerned what your experience has been. Have you seen any issues with the product and has there been any further inquiries from the FDA regarding the product and have you continued to see the growth your competitors have seen in the market.

The answer is we had said in the last quarterly conference call there have been a lot rumors about the [inaudible] to implant in the market place. Principally led by our competitors. One of whom we've hired a lot of people from. In terms of our return rates they are at normal traditional levels. There is no FDA inquiry or information needing response. And in terms of our implant business I would say that we grew at about market in total in implants which, of course, would be both [inaudible], our newest implant product. I won't say that think we gained share but I think that we held our own and I think the reason we didn't gain share is we spent a lot of the year consolidating our implant businesses in Germany [inaudible] and the Degussa business had to be put together and here in the United States, [inaudible] was put together with our ceramic bone grafting business. So I think that took a fair amount of effort to do those two things. I think we did okay. I don't think we did great. But, no, I don't think there's a problem with [inaudible].

You continue to speak of double digit growth with that business?

That's right. I’d say the implant business is growing, you know, 10% to 12% and I'd say that's where we were as well.

Thank you very much.

Again, if you would like to ask a question, please press star one on your telephone key pad. And your next question comes from the line of Mike Karloti from Parmyer capital.

A quick question. You mentioned earlier your cash flow from operations from the fourth quarter was roughly $70 million and it looks like your Cap Ex was somewhere in the $15 to $20 million range for the quarter. I was just wondering where the rest of that capital was deployed?

I'm not sure I understand the question.

Your cash flow from operations for the fourth quarter you said was $70 million?

Right.

I would have thought that if you had that much free cash flow you would have paid down some of the debt in the fourth quarter? Was this another function of the currency?

Well, it is a function of the currency but we did have debt reduction in the fourth quarter. Through the end of the third quarter our total debt reduction for the year at that point was $35 million and for the full year it was $90 million. So there was a substantial reduction in debt on a pay down basis in the fourth quarter. However, of course the currency strengthened so there was some offset to that because of currency.

Okay. Thank you.

Thank you. Your next question comes from Bob Plesia of R.J.J.P. Inc..

Good morning.

Good morning.

I would presume the growth in the U.S. market in the fourth quarter was primarily due to new products.

Yes, that is correct. I mean I think the basic U.S. business is good. But clearly we did a lot better than good and it related to our new product launches.

What do you think the U.S. market is going to look like next year or this year, 2003?

I think probably 6%, 6.5% for U.S. growth. Consumables and you know I'm not sure about heavy equipment. It has been a little better than that, perhaps, for heavy equipment but I'm not in a whole lot of equipment. So I'd say at least that good for equipment.

Then what's the outlook for labs in the U.S.?

I would say modest growth, you know, 1%, 2%, somewhere in there would be my guess.

Why do you think of the slowdown?

I think that there has been a slowdown in some of the high end procedures. I think in terms of dental implants, you know, I indicated I think the market is going -- growing 10% to 12% but it was growing 15% to 17% a couple years ago. I think that's led by the economy because people have to pay a big ticket number out of their own wallet. I think high end crown and bridge work has slowed down as well and I think that's being reflected in the busyness of the dental labs.

Just another comment. While the market doesn't show much growth it's important to note there is a market switch from metal to non metal and of course that plays into the opportunities we have with Zircon.

Sure. The all ceramic restorations are clearly growing, not only in the United States but worldwide.

And you don't want to get into any of the specifics of your new products. Could you --.

I enumerated a whole fistful of them that we have launched in the last six months that are really going great. And I think I've implied there will be a bunch of new ones coming out in the first half of this year that our competitors are going to see at the trade shows.

I meant new products in 2003. I guess you just answered part of the question. The impact is going to be significant in the first half in terms of sales, is that your --.

No, I think the -- I think that we're going to get continued growth in 2003 from the products that were launched in the last half of 2002. Which I've talked about and which are continuing to show strong growth.

Right.

I think that the products that we're going to be launching in the first half of 2003 will obviously help propel our growth in 2003 but frankly more toward the second half of the year than the first half.

Okay. Thank you.

Yes, sir.

Your next question comes from the line of Greg Halter with LJR Great Lakes Review.

Very good quarter and year again. I'd like to get your comments on the lawsuit relative to artificial teeth and if you still expect something in the first quarter? And remind us what that business represents of the total Dentsply.

Yep, we're waiting with bated breath because we expect a decision from the judge literally any day. I mean you know that the case was concluded with final briefs filed by the end of September and the judge had indicated that she planned on rendering a decision either late last year or early this year, but exactly what date she is going to come out with a ruling I'm not sure. To refresh your memory about the case, Trubyte is about 3% of our business. And the argument with the government is over this exclusive dealing clause in our contract. What that says is that a distributor is, of course, free to carry any tooth line that they wish, but if they choose to carry a competitor's tooth line Dentsply reserves the right to withdraw its tooth line and the government feels we should not have that right and we, of course, feel that we should. So in the event that the government were to win and I have to say we feel really good about our case but if they were to win, what that would mean is that a distributor would be allowed to carry a competitive tooth line along with their Dentsply Trubyte tooth line. What that would mean for the real business is I guess is over time, perhaps, some modest share loss but not rapid because one company's tooth is not the same as another company's tooth. Our shades and our molds look different than the shades and molds of our principle competitors so one tooth can't be substituted for another. The distributor would have to go to the lab and the dentist and convince the dentist that they should make a brand shift for whatever marketing reason they would come up with. It would be kind of a dock by dock gorillacampaign, not a wholesale substitution. I guess what I'm saying in the event we were to lose, but again I don't think we will, there wouldn't really be any significant short-term impact on the business.

Okay. Great, thank you.

Your next question comes from the line of Shannon Collins.

Hi, just a follow-up question here. With regard to practice works you've talked about the warrants. Could you talk a little -- I understand there's an equity interest as well which flows right into other comprehensive income. Could you refresh my memory as to how big that is?

I think the total basis in the practice works common stock was around $14 million and today the valuation is about half of that so there's about $7 million that's gone into other comprehensive income as a charge.

Right, that is not obviously not flowed through the income statement.

That's not flowed through the income statement.

Next question, can you -- obviously your guidance for the first quarter is down a little bit from the fourth quarter. Can you explain to me the basis for the seasonality in this business?

Yeah. The second and fourth quarters are always stronger than the first and third and I guess I think in the January and February when the whether is so lousy people don't want to go outside and go to the dentist is the best explanation I have and, of course, in the summer it's because most of Europe is shutdown for their long vacation period.

Sure. Okay. Great.

And fourth is always much better than first and third. Yet on a comparative basis we are showing a significant increase, I think we're going to show a significant increase in 2003 versus 2002.

I was interested in the sequential basis but you answered my question. The last question is, is Patterson dental supply a significant customer of yours?

Certainly, absolutely.

And is it -- there seems to be a little bit of disconnect because they apparently have not been performing up to their standards where you all continue to show great improvements in all your products, particularly in North America. Is there -- are they losing share or are you all gaining share of their products that they are selling? What's the --.

I mean Patterson isn't a competitor of ours. Our products are distributed by Patterson to the dental end user the dentist, the dental hygienist, those types of people.

Exactly.

So they are a distributor of our products and of course of many other manufacturers products, too. I think Patterson dentals numbers are great. You know, I look at them every quarter and I think they are doing AOK. I think they are absolutely at least holding their own in terms of market share.

Okay. Good enough, thank you.

Thank you. At this time -- I'm sorry you do have a follow-up question from the line of Derek Leckow with Barrington Research

Thank you. John do you see any eminent acquisition opportunities out there?

I see lots of acquisition opportunities. By eminent you mean in the first quarter of 2003 I'm not so sure about that, you know that we said we were going to take 2002 off in terms of M&A to integrate the four big acquisitions from 2001 and to bring down the debt to cap level as well, which is precisely what we've done and we have also said that in 2003 we're going to be back on the M&A trail and the answer is we are, and I guess I expect that before 2003 is over we'll probably have done some transactions. Exactly when they are going to occur, you know, we'll have to wait and see.

Where do you see gaps and your product collection? Do you see opportunities to just add sort of fill-in acquisitions to your new platforms? Is that what you're primarily looking for.

I think there's both fill-in opportunities and I think there's some holes. You know, we're not in dental x-ray film, if you want me to throw one out, it’s the No. one dental consumable in the world. We're not in infection control. There's lots of holes in preventive product lines. And there's a lot of opportunities for fill-ins even in categories where we do compete but don't have a strong share position. I guess I would only say that I would envision whatever acquisitions might happen will probably be in the consumables area, not in the equipment area.

Thank you.

Thank you. Your next question comes from the line of Seth Frank with A.G. Edwards.

Hey, John, given your last comment there on the film area as one potential base, maybe that's a good segue into digital radiography and some of the happenings there. Could you elaborate a little more on hoe Gendex is doing and the competitive market there and any thoughts on the integration of [inaudible] into Practice Works, you have equity ownership obviously there. But it puts them a little more squarely as a competitor. I don't know if that raises any particular issues or not?

I don't have any comments about [inaudible] and Practice Works and you need to talk to Mr. Coleman for that. In terms of Gendex I did point out in my initial comments that they turned in an extra ordinary performance in the U.S. lead by [inaudible], which is our digital x-ray systems as well as [inaudible] an oral camera. The digital x-ray system market is still red hot, I think, not only for us but I would imagine for our competitors, as well. And I think it's going to continue to be red hot. It's the number one item on dentist survey wish lists for what new equipment they wish to purchase. Having said that, I mean you know, dental x-ray film is still a gigantic market and I think will be for years, probably decades to come.

Are there any drivers you can think about that would either accelerate or decline the rate of adaptation and the digital radiography market and how do you see pricing holding in that space right now?

Price something holding about flat. And I think the market is red hot and I think it will continue to be red hot and I think it's being driven both by new younger dentists, you know, coming into the profession and by the, you know, mid career dentists deciding to renovate their offices and go digital, perhaps the only group that isn't considering this is the older dentist that's looking forward or nearing retirement and deciding maybe he doesn't want to learn a new technology based on years he plans left to practice.

Great, appreciate the comments. Thank you.

Thank you. At this time there are no further questions.

I'd like to thank you all of you for tuning in and your interest in our company. We had a great year. Look looking forward to another great year in 2003 and thank you very much for your support.

Thank you. This concludes today's conference. You may now disconnect.