DENTSPLY SIRONA Inc (XRAY) 2003 Q1 法說會逐字稿

Good morning my name is Shatina (ph) and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the First Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press “star” then the number “1” on your telephone keypad. If you would like to withdraw your question, press the “pound” key. I would now like to turn the conference over to Mr. John Miles, Chairman and Chief Executive Officer. Thank you. Mr. Miles, you may begin your conference.

Thank you. Good morning and thank you everyone for joining DENTSPLY's First Quarter 2003 Conference Call. My name is John Miles. I'm DENTSPLY’S Chairman and Chief Executive Officer and with me this morning is Gary Kunkle, DENTSPLY's President and Chief Operating Officer; and Bret Wise, Senior Vice President and Chief Financial Officer.

As is our usual format, I'll start by giving some overview comments concerning our first quarter results, as well as the overall business. Bret will then go through a more detailed review of the profit and loss statement and the balance sheet. And finally, we'll collectively be pleased to answer any questions that you may have. Before starting, our general counsel says I need to read the following Safe Harbor statements.

In accordance with the rules of the Securities and Exchange Commission, information discussed during this conference call, including the Q&A session, will be part of an 8-K filing that will be made by the Company after the call. To the extent that during this conference call any non-GAAP financial items are discussed, the additional information required by the SEC about such non-GAAP financial matters will be available through our website by going to www.dentsply.com and going to the investor relations section and clicking on the SEC filings link, which will provide access to the 8-K filed for this conference call and further information about any non-GAAP items. This conference call may include forward-looking statements and as such, are made in accordance with the Safe Harbor provisions of the Securities Litigation Reform Act. Forward-looking statements involve risks and uncertainties which could materially affect the Company's business, and should be considered in conjunction with the risk factors and uncertainties described in the company's most recent annual report on Form 10-K.

I'm sure each of you has received a copy of our first quarter earnings announcement released yesterday after the market closed. I'm extremely pleased to report that DENTSPLY has again achieved another quarter of record sales and earnings. Our reported sales for the first quarter were $396.2m, an 11.6% increase over the year earlier quarter. On an ex-precious metal basis, sales increased 11.9%. Diluted earnings per share were $0.48, an increase of 14.3% over the year-ago period. You may recall that the first quarter of 2002 had a favorable restructuring adjustment of $0.02. So, on an apples-to-apples basis, growth was even higher than the reported 14.3%. The 11.9% sales gain, ex-precious metals for the quarter broke out as follows. Our dental based business growth was 5.5%, non-dental based business was negative 0.3%, foreign exchange was favorable 7%, and acquisitions divestitures net were unfavorable 0.3%.

Two factors negatively impacted the base business growth during the quarter. The heavy snow storms that hit the U.S. East Coast in February closing businesses, including dental offices, for two to three days and the timing of the IDS, the International Dental Show meeting, which is the huge European trade show held every other year, during the very last days of March. We believe these two events reduced base business growth in the quarter by over one full point. Current forecasts for the balance of the year remain on track with our targeted sales growth projections.

Base business growth on a geographical basis broke out as follows. Base business growth XPM in the United States was 5.6%. Solid growth was achieved by Tulsa Endodontics led by nickel-titanium files. GAC orthodontics led by In-Ovation-R and Mystique brackets, as well as excellent success with three recently launched new products, our Stylus high-speed handpiece, Eclipse, which is a revolutionary prosthetic resin system for dental labs and of course Cercon, our unique all ceramic crown and bridge system.

In Europe CIS, the dental based business growth XPM was 4.9%. European sales continued to be led by substantial growth across DENTSPLY's broad consumable lines with notable performances by endodontics, dental implants, preventive products, and again, Cercon.

In Asia, we achieved dental based business growth XPM of 17.1%. Excellent gains were achieved by DENTSPLY Taiwan, DENTSPLY Korea, and DENTSPLY Indonesia. In Latin America, the dental based business growth XPM was 5.1%. I'd say that I'm really pleased that DENTSPLY was able to achieve positive growth in a region that continues to experience numerous economic issues.

And finally, rest of the world was a favorable 2.2% base business growth XPM. Excellent performance by Canada was offset by weaknesses throughout the mid-east African region as you might expect.

Other topics I think would be of interest. First, DENTSPLY has had an exceptional first quarter for new product launches. Key new product launches during the quarter were Aquasil Ultra, a new polyvinyl siloxane impression material with unsurpassed detail reproduction coupled with excellent peer strength and good taste. As indicated in our press release, we've converted 8,000 new users since the product launch at the beginning of January, a truly spectacular result.

Cavitron Swivel handpiece, which really solves the arm-fatigue problem currently experienced by dental hygienist when they're ultra sonically scaling teeth. A new executive tooth line launched throughout Europe is a new premium tooth line that will sold by Degussa direct in Europe.

[Dugavest] SR is a new dust-free investment material used by dental labs and it solves the ongoing environmental dust problems that currently dental labs experience. We launched the Cercon giant block, which is a new Cercon consumable for the very large bridge spans and finally we launched Quick Spill, a new posterior composite that reduces the dentist's procedure time when placing that material.

Additionally, Zeno-3 bonding agents was launched in the U.S.A. in February at the Chicago meeting. You may recall, it has been launched very successfully in Europe during the fourth quarter of last year and the U.S.A. launch was delayed because of capacity issues which were solved at the beginning of the year, and Eclipse, which we had launched in the fourth quarter in the United States, was launched in Europe during March.

As on aside, several of the products launched in the second half of 2002 continue to exhibit strong growth. Namely Cercon, our all-ceramic crown and bridge system, Stylus, our high-speed handpiece, Eclipse, the prosthetic resin system, Zeno-3 bonding agent, as well as In-Ovation-R self ligating and Mystique clear orthodontic brackets. Finally, numerous new products remain in the R&D pipeline and will be commercialized as the year progresses. Frankly, I can't remember a time when we've had a fuller product pipeline.

I want to say a few words about German reimbursement. An analyst report was issued last Thursday, April 17th, dealing with the German reimbursement, which negatively impacted DENTSPLY's stock price. Unfortunately, this report contains several inaccuracies. A revised report was issued by the same firm after the market closed the same day. The facts are as follows: First, dental laboratories have a maximum price list under which they're reimbursed by the government and that maximum price list was decreased 5% effective January 1st, 2003. This price rollback affected about half of the German dental labs. The other half were in fact charging at prices less than the maximum price list and therefore, were not affected. Secondly, there were no other reimbursement changes and patients continued to have the same co-pay and benefits that they enjoyed in 2002. Finally, there is discussion in Germany about how to deal with that country's budget deficit as well as any role healthcare expenses may play in this. This discussion is at inception and changes, if any, for their timing, which may occur sometime in the future, are unknown. One must realize that this is as much a political issue as an economic issue, and one that has often surfaced during the past few years. At the very least, one should not expect a rapid consensus on this particular issue.

Progress continues on target for DENTSPLY's new sterile filling plant, just outside of Chicago, for dental anesthetic production. The initial media fills are now scheduled to occur during the third quarter of this year with FDA final approval still targeted for mid-2004.

New drug applications for [Oraquicks], our revolutionary new anesthetic, were filed in United States and Europe during the first quarter of last year, 2002. In the U.S., we received what's called an approvable letter from the FDA at the end of 2002 with a stipulation that the primary container must be redesigned to eliminate the very remote possibility Oraquicks could be injected by accident, by the dentist, thinking it was a dental anesthetic. The redesign had to be such that [Oraquicks] will not fit into a traditional dental syringe. This redesign has been completed and resubmitted to the FDA. We're now targeting FDA approval for the latter part of this year. After approval, the applicator molds will have to be made indicating a launch date of approximately mid-2004.

In Europe, we have just received approval from our member reference state, which was Sweden, without any changes to the submitted dossier. The dossier must now be translated and circulated to the other EC member states, approval is targeted for late 2003 with commercialization throughout Europe targeted for early 2004.

Let me conclude by reaffirming our guidance for 2003. We remain comfortable with an internal sales growth rate XPM of 6-8% for the balance of 2003, as well as the very high end of analyst EPS forecast currently at $2.04-$2.07. I'll now turn the conference over to Bret Wise who will take you through the P&L as well as the balance sheet.

Thank you, John, and good morning everyone. Thanks for joining us for our first quarter conference call. I have a few comments on each of earnings, the balance sheet, and cash flows for the quarter. So starting with the income statement, as John mentioned, sales increased in the quarter by 11.6%, and 11.9% without precious metals. I'd like to remind you that we do have approximately $50m of precious metals that pass through our P&L each quarter affecting sales and cost of sales in the same amount. We're not long in the metal in our balance sheet and the metals are sold to our customers at the same price at which we acquired the metal, which is predominantly the market price on the date of customer order.

And we don’t earn a spread on the metal nor are we exposed to fluctuations in the price of the metal, we report sales both with metal which is the GAAP basis and without metal which is a non-GAAP item. And this allows the readers of the financial statements to look at trends in sales and margins, excluding precious metals which we believe to be the best indicator of our profitability.

Now back to sales, internal sales growth per dental was 5.5% and currency added 7% to sales without precious metals. Obviously, the dollar has weakened considerably against many key currencies, including a 23% weakening year-over-year against the Euro and a 24% weakening year-over-year against the Swiss franc. Of course, we don't have the same currency translation impact on income, as on sales since operating margins are generally lower in Europe and a portion of what's sold in Europe is U.S. manufactured product in which profit is captured in the U.S. through inter-company transfer pricing.

Gross margins of 55.6% improved from 55.4% in the 2002 quarter. This improvement was driven by new product introductions and product mix. SG&A increased to $128m from $114.4m last year, and as a percentage of sales was roughly the same as the 2002 quarter at 32.3% of sales. The increase in SG&A in dollar terms is attributable to currency translation which increased SG&A by $13.7m versus the 2002 period.

There were no restructuring costs or benefits recorded in the first quarter of 2003. In the first quarter of 2002, you may recall, we did reverse a portion of a previously established restructuring reserve, that related to the completion of our consolidation efforts in Europe, Brazil, and North America. And that reversal boosted pretax earnings by $2m and earnings per share by approximately $0.02 in the first quarter of 2002.

Operating income grew to $62m in the 2003 quarter, and was 15.7% of sales and 18.1% of sales without precious metals. If we remove the benefit of the restructuring reserve reversal from the 2002 first quarter, operating margins would have been 18% in 2002, compared to the 18.1% that we earned in 2003. Interest and other expense are lower in 2002 for two main reasons. First, interest expense fell by approximately $1m during the period, and second, the value of our warrants and practice works rose by approximately $1.2m during the first quarter of 2003. And that compares to approximately $500,000 of preferred dividends we had from practice works in the first quarter of 2002. So on a net year-over-year basis, practice works helped us $700,000 or about a 0.5 cent per share this quarter.

Offsetting the benefit of the lower interest expense and the practice works gain was higher exchange losses of approximately 400,000 in the 2003 quarter. The effective tax rate for the first quarter was approximately 32.5% compared to 33% for all of 2002. This decrease is consistent with what we were forecasting in our year-end 2002 conference call and at this point, we believe that it's possible that rate may come down further during the year as we implement further tax saving strategies.

Net income for the period was $38.3m, a 15.6% increase over the first quarter of 2002. And diluted earnings per share was $0.48 compared to $0.42 per share in the 2002 first quarter. Again, the 2002 quarter benefited from the $0.02 per share restructuring reserve reversal and the 2003 quarter benefited about half a share from the valuation that practice works warrants compared to the dividends in the prior year. So on an apples-to-apples basis, the growth in earnings would be higher than the 15.6% reported.

Turning to the balance sheet, we did build approximately $21m in cash balances this quarter. You may recall that we have discussed the likelihood of some cash build this year due to favorable investment rates versus the carrying costs of our debt and penalties that we would incur in retiring debt at this point. Accordingly, this is a planned cash build and we would anticipate that there will be further cash build throughout the year. Late in the year, we do have approximately $20m of Japanese yen borrowings which are maturing, which will either retire or rollover depending on the cash position at that time.

In addition, we are anticipating approval of Oraquick later this year which will trigger the final $18m payment to as AstraZenica which is the final piece of that acquisition. We're also currently in arbitration with Degussa to resolve the last potential purchase price adjustment of up to $10m to close that transaction.

Moving on to working capital, our accounts receivable days were 52 days at the end of the first quarter versus 53 days for the first quarter of 2002, and 49 days at year-end. Inventories stood at 104 days at the end of the quarter versus 100 days at year-end 2002. If you look at the dollar increase in inventory from the end of year 2002, about a third of that is attributable to the currency translation and about two-thirds is attributable to this increase in the days. We are maintaining our target of 95 days by the end of 2003, and we expect to see that cash flow benefit come back to us over the balance of this year.

Goodwill rose by $20m dollars during the quarter. The contributors there were currency, which added $15-17m. And then a small [Tuckender] acquisition of a supplier which added about $2m and the remainder was the final balance sheet valuation measures on the [Optinol] acquisition that closed in the first quarter of 2002.

Other assets increased $27m during the quarter, but the notable item there was a $22m increase in the value of our Euro and interest rate swaps. You see the offsetting effect of this currency and interest rate movement in the long-term debt line.

Looking at liabilities, long-term debt rose by $28m in the quarter, $29m of that is due to the weakening of the U.S. dollars and the interest rate swaps, while we actually reduced debt by about $2m on a cash flow basis. Recall that after reducing debt, although we reduced debt, we didn't build cash by $21m. So on a net debt basis being debtless cash, excluding exchange, we saw about a $23m reduction in net debt this quarter. The exchange effect on the debt is attributable to a 4% strengthening of the Euro this quarter that affects both the principal amount of the Euro debt as well as the Euro-U.S. dollar interest swaps, a 2% strengthening in the Swiss franc and 11% strengthening in the Japanese yen. Equity in total rose $61m during the quarter. That's due to the $38m in earnings and roughly the balance is due to currency translation.

Our debt-to-total capitalization ratio fell to 47.1% at the end of the first quarter from 47.9% at year-end and on a net basis, that being net of cash balances and the value of that Euro swap, ratio now stands at 43.2% compared to 45.1% at year-end 2002 and 53% at the end of 2001. So we have seen a substantial improvement in the balance sheet ratios, both in this quarter and over the last year. You may recall that our long-term goal is to maintain debt to total capitalization of 35-40%. So at this point, net of cash and the value of the swap, we're approaching the high end of that range.

From a cash flow perspective, operating cash flows are approximately $43m for the 2003 quarter, compared to $12.4m in the first quarter of 2002. So we're off to a much stronger start in cash flow generation than in 2002.

Depreciation and amortization for the quarter was approximately $12m and working capital and other balance sheet movements consumed approximately $7m in cash this quarter. And again, we expect to make progress on inventories during the balance of this year and thus we expect some pay back of the cash used before the end of 2003.

Capital expenditures were $18m for the quarter reflecting investment in our new Pharma plant in Chicago that John mentioned. Absent that investment, CAPEX would have been about $10m for the quarter, closer to a normal run rate and as a reminder, we expect capital expenditures to be in the $70m range for all of 2003, again reflecting the investment in the Pharma plant.

That concludes our prepared remarks. I'd like to now turn the call back to the operator for questions.

At this time, I would like to remind everyone, in order to ask a question, please press “star” then the number “1” on your telephone keypad. Your first question comes from Derek Leckow.

Thank you, good morning. Congratulations on a nice quarter here. The first question concerns your comments about inventory. Seems to me you're doing a pretty good job controlling your inventory levels there. They seemed to be tracking roughly your internal growth if you adjust for a couple things. And it looks like you've said also that you expect inventory to be lower going forward and I wondered if you could sort of tie that into your full pipeline of new products. How would the inventory improvements look throughout the rest of the year?

Derek, this is Gary. While our ultimate goal is 95, I'm comfortable we'll get to there from 104. We have traditionally increased our inventories in the first quarter to accommodate just what you're talking about, new product releases. Additionally, we also moved the European lab distribution from [Ninemagan] to [Hanoi] and built additional inventory for that transition during that first quarter. So, it’s really a combination of those two. In our analysis and plans to get to 95, it also includes those inventory builds for new products. A lot of that has already been done in the first quarter.

So, you're saying you're expecting the year-over-year growth actually to kind of go down, I guess, for the next three-quarters?

I do. You might see some build in dollars. But in days, it's going to continue to reduce over the course of the next three quarters.

Great. And then, your comments on capital investment expenditures here, it seems like you're expecting that pace to accelerate in the next couple of quarters and then taper off in the fourth quarter. Is that al right?

That's probably the trend you'll see as we try to finish up the Pharma plant in Chicago. So, the next couple of quarters will be probably heavier than later in the year.

What's your expected completion date on that project?

The first part of the plant, which is really the total sterile filling area, will be completed about mid-2003. And then the second part of the plant, what I call the finishing or packaging end, by the end of 2003. But once the sterile part is complete, the first thing you do is you have to run media trials to prove that you can keep contaminants out of your products. Then you have to run stability trials to prove that the formulas that you're running in your equipment, in your plant, are in fact stable. And then ultimately you need two FDA approvals, one for products and formulas and another for CGMP, for the plant. So we, again, expect a plant startup with final approvals for probably mid-2004. But, we'll actually be filling in the plant in the third quarter of this year as we run our media bills and then move into the stability trials as the year goes on.

Okay. And then just finally, the comments on the controversy surrounding the reimbursement issues over in Germany, John, could you remind me what percentage of your sales into Germany are related to dental laboratories and so forth?

Low teens, ex-precious metals.

And is it true that you are expecting pretty flattish results out of that business in your guidance?

I think the dental lab business in Germany is flat to maybe even a little negative. I think the big fuss that we have in Europe is the launch of Cercon.

Okay and the guidance that you've talked about, it seems like you're rating it a bit to the upper end of the current range of expectations for the full year and does that include the $0.02 a share, I guess, from the one time reversal here?

No, the $0.02 was actually in 2002, not in 2003. It means that our results are -- I mean, I guess I would say on an apples to apples basis even better than they look, because 2002 got a $0.02 plus that really was a one-time event.

Got it. Okay. Thanks a lot.

There was nothing in 2003. And, yes, you're correct, we're raising our guidance towards the high end of analyst ranges for 2003 EPS.

Thank you very much.

Your next question comes from Suey Wong.

Thank you. John, could you break out the consumable sales growth and also the equipment.

Yes. Heavy equipment was -- and this is ex-currency, so no currency. 3.6. Consumables were 5.6 and non-dental was an unfavorable 5.3.

Okay. Could you talk about your projections for equipment growth in the U.S. for this year?

I think they're going -- those were worldwide numbers that I just gave you, Suey. I think that the equipment market in the U.S. is still darn hot and our sales are good in the U.S. and I think they're going to continue. Certainly being led, in our case, by digital x-ray and [intraoral] cameras, but I think even though we're not involved, I think the whole equipment category is pretty hot in the U.S.. I don't think that's true elsewhere in the world but it's certainly true in the U.S.

John, do you have a U.S. equipment number?

Not that we break out, no.

But I think it would be higher than the 3.6% for worldwide?

You can bet on that.

Can you talk about the penetration of ceramic in the crowns and bridges?

Yes. In total all ceramic is about 15% of all crowns and bridges. So 85% is still traditional porcelain fused to metal. Although there's clearly a strong trend from porcelain fused to metal, to all ceramic, because seven or eight years ago, all ceramic was basically zero. And, of course, our efforts are to accelerate that trend and at the same time convince doctors to use Cercon versus other alternatives. And the big advantage that we have with Cercon is the bridge hook. We can make the bridges. We can even make big bridges. And if you're using the system to make bridges you might as well use it to make crowns as well.

If I remember right, the ceramic is typically 4-5 times the gross profit margin?

Yes. About four times, actually. If you sell both the precious metal and the veneering ceramic for a porcelain fused to metal single crown, the manufacturer has a gross margin of about $4. But in Cercon, you have a gross margin of about $18.

So it's more than four times the gross profit dollar?

And if it were a pressable, we have a finesse all ceramic pressable. I hate to say I have a closed [inaudible] but that's a pressable, too, you margins are about eight or about twice what they would be for a porcelain fused to metal. So it's a real advantage to shift the business toward all ceramic. And of course the patient is getting a significantly more aesthetic restoration. So everybody is winning.

Good. Could you give us an update on orthodontic market and also talk about pricing trends there.

Yes. We had an absolutely spectacular quarter in orthodontics, as you can tell from my comments. Our two new lead products the In-Ovation-R, which is the very small self-ligating bracket, as well as Mystique, the clear bracket, frankly they're on fire. I think that the market in total is probably growing in the 5-6% range and I think pricing is about stable. But you know for self-ligating and clear brackets, the pricing is significantly higher than it would be for a traditional metal bracket.

Just one final question. If foreign exchange rates stay the same, what kind of impact do you see on the top line for this quarter?

Suey, we had a very impact again this quarter and a little bit less in the third quarter, and then the fourth quarter it would be substantially less. But exchange rates were still pretty low in the second quarter of last year.

Great. Thank you and congratulations.

Your next question comes from Bob Pleasier.

Good morning. The growth in the U.S. dental market at 5.5, or your growth seems to be a little below what the trend has been the last couple of years. Are you seeing some slow down and in what areas?

No, I actually think dentists remain very busy. I think the market is strong. We've indicated that the lab business is pretty flattish but it's been that way for over a year. I think what impacted our specific growth rate in the first quarter was the snow storms in February. I mean we absolutely saw it when they hit. Our sales dropped down for the better part of a week.

And obviously as you said you experienced 11% but you're forecasting less than that. Is this a conservative estimate or do you see something slowing in the dental business in the U.S. and Europe?

I'm sorry, I didn't understand that question.

First quarter sales were 11% plus [11-6].

Yes that's correct.

Your guidance is for 6-8% for the balance of the year ex-precious metals.

Internal sales growth rate, neutral currency. Or if there's currency gains, that would be on top of that, of course.

So you're forecasting a slight increase then from the first quarter?

That's correct. Yes, we believe that our internal growth rate was artificially low by at least a point, and yes we expect that to change in the second quarter and the balance of the year. If currency stays the same, then I would expect higher sales in the second quarter, that's true.

And looking at your common operating earnings, in other words earnings less all the extraneous additions, other than new products, what are the other reasons why profitability was so strong in the first quarter?

I think it was just a modest improvement in gross margins on increasing sales, because SG&A really stayed the same as a percent of total sales. So a lower tax rate and lower interest were kind of the factors.

Okay. Thank you.

Your next question comes from Richard Yett.

Hi. Can you give me a better idea, clarify your debt repayment intentions, meaning at year-end what do you think your debt-to-capitalization will be?

I think we're targeting to get down to that 35-40%.

And you think you'll get it in what time frame?

I think we'll get that over the next 12 months.

That's fabulous. Thank you.

You know, the factors that could affect that, of course, are what happens with the resolution of Astra Zeneca and yes we hope to have the FDA approval and pay the 18m to Astra Zeneca, how does the Degussa arbitration resolve itself and lastly, of course, we are in the acquisition market. There's always event risk there. But if we have some transactions to come up we would consider them at this point.

And on the Degussa negotiation, how much are we talking about?

Somewhere between zero and $10m.

Okay. That's fine. Will that go through the income statement?

No.

Okay. Terrific quarter. Thank you.

Your next question comes from Boris Vuchik.

Just to understand, could you quantify the EPS impact of currency?

I guess we haven't done that. But I have to tell you it's not very much. And it's not very much for the reasons that Brett laid out. The operating margins in Europe are lower than they are in the U.S., because SG&A expenses are higher in Europe than they are in the U.S. and secondly a lot of it has to do with where your profit shows up in inter-company transfer pricing. So part of it is the tax strategy.

Right. That's why I wanted to get it quantified because it does seem like it would be less than the top line but I just…

It's significantly less than the top line.

Okay. What was the growth rate in Europe for the quarter? I might have missed that in your initial comments.

It was 4.9% XPM for the dental business.

And lastly just on your -- it sounds like you're guiding at 204, 207 which is what you guided for at the end of last quarter. Do you feel like you pulled in some profitability into this quarter from future or what kind of change relative to your expectations at the end of last quarter?

No, I think we had a very strong quarter and I feel comfortable that we'll come in at the high-end of that range.

Okay. So you're essentially maintaining the guidance you had last quarter?

I think we're saying, instead of a range of $2.04-$2.07, we're comfortable up near the top of that range.

Okay. Thank you very much.

Your next question comes from Walter Landou.

This is Walter Landour speaking. I'm certainly impressed with your performance. I would like to hear what your plans, how important some of those large populations stakes in Asia are in your scheme of things and how you are set to increase your market share, possibly, in that field. Whether you are, say China for example, the number one factor in your industry, and what your plans are in that area. I note, for Asia, if I understood you right, it was 17.1% increase in revenues.

That's correct.

And that was materially better than in the U.S. and in Europe. These are more stable market -- more mature markets probably. But it would seem to me that some of these Asian countries have a lot more growth ahead of them and I'd like to hear your plans to exploit that.

Certainly. First of all, we believe exactly what you believe. The markets of the future are in Asia. Certainly in countries like India and China which together have 40% of the world's population. First of all, we are number one in Asia. Unquestionably, from a market share standpoint. But the Asian markets are pretty embryonic and the level of dental care in Asia is really not good. It's probably 25-30 years behind the level of dentistry in the West and the issue, of course, is economic in those countries. But as you look to the future, as these countries continue to progress economically, they're going to spend a portion of their increased per capital income on better oral health. What DENTSPLY has done is we have established our own companies in virtually every key Asian country today.

Historically the way to go to market in Asia was a manufacturer to an importer, to a dealer, to the dentist. In essence what we did is we fired the importer and used the margin that importer was making to establish our own company and also to hire our own sales force that speaks the local language and have them out calling on the university professors and the opinion leaders.

But today we have our own company in China and India. These are all 100% DENTSPLY-owned companies. In the Philippines, in Taiwan, in Vietnam, in Indonesia, in Thailand, in Korea, I don't think I’ve left any out. We also have manufacturing facilities in both India and China. And we couldn't agree more. I mean as you look out ten years, these are going to be gigantic dental markets because you can't get away from the demographics. This is where all the people are. I think we're exceptionally well positioned in Asia and as these markets evolve we're going to grow rapidly.

I see and you haven't encountered any resistance by the government in China, for instance, they're very conscious of wanting to promote their own growth and restrain foreign companies. This has been the old picture. The new picture is probably substantially more favorable. Do you have any comment on that?

Yes. The reason that we've been able to establish 100% DENTSPLY owned companies is we've agreed that we would export a portion of our factory output to other countries. It's about 20-25%, which in fact we do, primarily to other Asian countries. And with that proviso, we've been able to receive government approval for a 100% owned venture, which is pretty unique, because you're right, in the past you had to have a local partner.

Could you make a general statement about your competitive position? You were number one -- you are number one and you acquired Degussa, I guess it was two years ago or so. And they were number two, I think, worldwide. And do you feel that the acquisitions will constitute as important a factor in growth than it has in the past, or is this -- is the industry fairly mature and we can't expect as much contribution to your growth?

The industry remains highly fragmented so there are dozens, hundreds of acquisition targets. Most of them, of course, are much smaller family-owned businesses which would be product line extensions, tuck-under acquisitions for us, and as we've said in the earlier conference calls, we're aggressively on the path attempting to do M&A transactions. So I think there are absolutely a lot of opportunities. But I would not look for blockbuster acquisitions like the Degussa transaction.

I see. Am I right in my recollection that your capital structure is much more heavily indebt now than it had been a number of years ago, and I assume if true, traces to more acquisition activity and use of cash to implement that; is that right or am I --

Larger acquisition that were completed in 2001 were all done for cash and were financed using debt. And as we've indicated, the debt is decreasing rapidly because of our strong cash flows.

What is your -- do you have any idea over the next one or two years, how much you could reduce the debt position as a percentage of total?

We've indicated that we want debt-to-cap to be in the 35-40% range and as Brett said we believe we'll be in that range within the next four months.

I see.

I don't mean to cut you off Walter, but we probably need to move on to another question if we could. Thank you.

Your next question comes from Mike Carlotte.

Yes. Hi. Good morning. I was wondering if you could you comment on what your growth rate was in the U.S. for dental implants and what were the market share trends there.

We do not break out growth rates by product lines. In total, implants worldwide grew at faster than what I believe the market rate to be, which I think is in the 10-12% range.

But you can’t quantify within the U.S. or rest of the world?

It's information that we don't give out because frankly I don't want to help my friends at Strohman and Noble Biocare.

Okay. Did you see any impact of SARS in Asia during the quarter and going forward do you think that might have any impact on your business in Asia?

We did not see any in the first quarter, but frankly I expect an impact in the second quarter. I think that -- people are going crazy over there. And my guess is that fewer people are in fact going to dental practices. Having said that, I have to say that all of Asia is only 4% of our business. And only a portion of Asia is really affected by SARS. So I do not expect a material impact on our business in the second quarter because of that. But I do probably expect lower growth in Asia until this issue is resolved.

Okay. And then just back to the implant question for a second. You said your worldwide growth in implants was, I'm sorry, I didn't catch the number.

I said it was higher than market growth rate which I estimate to be 10-12% worldwide.

Okay. Thank you.

You are welcome.

You have a follow-up question from Bob Pleasier.

Yes, other than saying the pipeline is filled, any other comments on where you are with some acquisitions, will they happen in the second quarter or third quarter?

I mean I'm never sure when they're going to happen. I think all I can say about that is that we are actively involved looking for acquisitions. We have evaluated some opportunities thus far in 2003, but haven't completed the transaction for one reason or another so I am not sure when that will occur. I think it is reasonable that there will be some transactions before 2003 is over.

And another question. In Asia as you mentioned is very small, but it had a very excellent quarter. Can you go into some detail there?

I think we are really clicking in Asia and I think it is because of the way we are really structured. It is a tremendous advantage for DENTSPLY having its own business and own sales force in virtually every key Asian country and it is an advantage that my competitors do not have and in my opinion it is the principal reason that we are growing so much faster than market there.

And minor question if -- in the U.S. if equipment was so strong and you did 5.5 so consumables were under 5% growth in the first quarter?

No, I said consumables were actually 5.6% worldwide.

But in the U.S. you were 5.5 -- 5.5 dental that was worldwide?

No. Well, there are two numbers.

U.S. based right.

5.6% was the ex-precious metal dental business growth in the U.S. for all products.

And that included equipment which was much stronger than the worldwide?

The worldwide was 3.6.

Okay. Thank you.

You are welcome.

Your next question comes from Robert Yaschak.

Just wondering if you could just outline how you think about capacity for your organization in terms of where it’s at, where it is going, and then I have one follow-up.

You may recall that we organized and really augmented our senior management team in November of last year and added two senior Vice Presidents basically to manage the growth of our business. You know, our business has doubled in the last few years and we really have not augmented our total team so I am feeling really good not only about the people who are in place but, you know, the level of the supervisory oversight that we have at the level of business we enjoy today.

So is there a capacity utilization rate that you think, overall in their areas, where you think it is higher or lower or areas where you want to add capacities specifically that you could share with me?

I don’t think we have any capacity restrained if you are talking about human resources. If you are talking about manufacturing plant capacities…

Right, manufacturing.

I doubt that -- I don’t know the answer but I would doubt that we are running more than 70% capacities so I think there is significant upside capacity and you know, frankly capacity increases constantly due to cost reduction productivity programs so it is certainly is not limiting our ability to grow.

And is that 70%, are you comfortable running the business was that at 70% a year ago. Can you give me some feel for that?

I guess, I would say probably or approximately. Our sales grew last year but our capacity grew due to our process improvement. Without having firm numbers my gut reaction to that is yes probably about the same.

At this time there are no further questions. Mr. Miles will there be any closing remarks.

No. Again, thank you everyone for your support and interest and thank you for tuning in.

Thank you for participating in today's first quarter earnings release conference call. You may now disconnect.