DENTSPLY SIRONA Inc (XRAY) 2004 Q2 法說會逐字稿

Good morning. My name is Kristy (ph) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the second-quarter 2004 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. (OPERATOR INSTRUCTIONS). Mr. Kunkle, you may begin your conference.

Good morning and thank you all for joining the DENTSPLY International's second-quarter 2004 conference call. My name is Gary Kunkle, and I am the Vice Chairman and Chief Executive Officer. Also with me today are Tom Whiting, our President and Chief Operating Officer, and Bret Wise, Senior Vice President and Chief Financial Officer.

I'm going to begin today's call with some comments regarding our second-quarter and year-to-date results, and I would like to then give you an update on some of the key activities that are taking place in our business and conclude with some remarks regarding our outlook for the balance of the year. Bret will then go through a more detailed review of the P&L and balance sheet. Finally, we will all be pleased to answer any questions that you may have.

Before we begin, it's important to note that this conference call may include forward-looking statements, including risks and uncertainties. These should be considered in conjunction with the risk factors and uncertainties described in the Company's most recent annual report on Form 10-K. Also, this conference, in its entirety, will be part of an 8-K filing that will be available on our Web site.

We released our announcement of the second-quarter results after the market closed yesterday, and I'm very pleased to report that DENTSPLY had another excellent quarter. Our reported sales during the second quarter were $425.3 million. This represented an increase of 7.8 percent compared to the second quarter of 2003. If you exclude the precious metal contents, the increase was 7.3 percent for the quarter. That 7.3 percent sales gain for the quarter broke out as follows -- the base business was 4 percent; foreign exchange was 3.3 percent; and there was no impact from acquisitions and divestitures.

The geographic base business for the quarter -- this is ex-precious metals -- was as follows -- the United States was 4.3; Europe was 2.5; Asia was 14.3; Latin America was 7.8; and the rest of the world was 6.2.

Looking at specific geographies, the United States -- we are very pleased to see the improvement in our U.S. businesses. Our orthodontic business continues at a remarkable double-digit pace in the United States -- as a matter of fact, for the balance for the rest of the world included -- and leads (ph) our consumable segment for the quarter. Dental consumables also performed well for the quarter as a group.

Our U.S. lab business was up 2.8 percent overall for the quarter. It's important to note that the lab consumables, the materials, which are excluding the lab equipment, were up almost 8 percent and this really indicates the returning growth of this dental segment. So, we're very encouraged by what we see in the U.S. market and we're very pleased with our performance. We think it's a strong indicator for continued growth in the United States.

Europe had base business growth of 2.5 percent for the quarter. As you may remember, when Europe experienced an increase of 10.4 percent in their base business during the first quarter, I had mentioned that some distributors may have bought forward to protect themselves against any unforeseen transitional difficulties during the move of our European distribution operations. It appears that that may have been the case, as you look at the business segments that go through distribution. One additional influencing factor was the international dental show that is held in Europe every other year. The sales from the 2003 show are in the second quarter of 2003, which is actually a quarter in which we experienced a 10.6 percent base business growth as a result of the influence of that meeting. Obviously, it's (indiscernible) comparison for the second quarter of 2004.

Probably the important message is that Europe's base business growth year-to-date is 5.2 percent and it's performing in excess of the estimated market growth of 3.5 percent for that region. We are confident that we will continue to maintain this above-market performance for the balance of the year.

Moving onto Asia, our Asian businesses have had an exceptional quarter with an internal growth of 14.3 percent, and this is following a growth of 11.8 percent in the first quarter. The increases are in virtually every category, and it is certainly encouraging to see this market return to double-digit growth performance. We are encouraged by the trends and we expect that we will continue to see strong performance in these markets for the balance of the year.

Latin America had a base business growth for the quarter of 7.8 percent. It's been three quarters since we've had a positive growth in this region of the world. This is really, quite frankly, part and due to easier comparisons but also some economic rebound in Brazil, and that's offset by continued economic challenges in Mexico.

If you look at the balance of the world, we had internal growth of 6.2 percent, and this was led by strong performances in Canada, the Middle East, and Africa.

Just some other items of interest -- the anesthetic plant in Chicago, we continue to make progress with our validation procedures at this facility. We have successfully completed the necessary media fills and the stability runs to prepare us for production in the fourth quarter of this year. We anticipate approvals from the regulatory agencies for these stability batches probably in the September-to-October timeframe. These approvals are for the UK and the Australian markets; North America and Japanese market stability batches are scheduled following the completion of validation activities.

Just some comments on new products -- year-to-date, we've introduced new products in orthodontics, endodontics, preventive care products, restoratives, implants, hand pieces and lab. Most of these were during the second quarter of this year. The new products that we've introduced year-to-date total 13. Included in this total are not any minor line extensions. We expect to introduce at least that number in the balance of the year, and we continue to be excited about the pipeline we have of new products, and it remains an integral part of our growth strategy.

Some comments on Oraqix -- we continue with our approval process country by country. Oraqix is approved for sale in the U.S. and Sweden, and we plan to launch in those countries in the fourth quarter of this year. The approval process continues throughout Europe and Japan. Product introduction in those remaining countries will be timed based on those approvals. We're very excited about this product. There are really a few products in dentistry that alone can have a significant impact, but we certainly think that Oraqix is among those exceptions.

I do want to share some -- what I consider some very exciting news regarding our progress with our Advanced Technology Group. As you may remember, we developed a new organization within our R&D group recently to focus on pursuing technologies outside of dentistry that may have a dental application. This pursuit includes engaging with universities, medical companies, pharmaceutical companies, technology centers and others in pursuit of existing technology or emerging technologies or other industries that may have a dental application. Of course, this is an adjunct to our ongoing relationship with dental schools and dental technology centers that are pursuing exclusively advances in dentistry.

There's been considerable activity in this area and we're very excited about what we see. DENTSPLY has recently entered into a five-year, master research agreement with the Georgia Institute of Technology. Under this agreement, we are working with the Georgia Tech Research Institute; this is really the applied Research and Development arm of Georgia Technology and it's an integral part of the Dental Technology Research Center, which is a new initiative of Georgia Tech to integrate their multi-discipline engineering knowledge towards the development of significant new applications for the dental field.

Initially, we have identified several areas of interest to DENTSPLY. We have committed to Georgia Tech to pursue two of these. Others are under current evaluation with many yet to review and while, for competitive reasons, I can't discuss these specifically, they are -- quite frankly, they are exactly what we envisioned when we formulated the vision of this new Advanced Technology Group.

Most of these projects are on a timeline that are much longer than our traditional product-development projects but they do offer significant promise. We think Georgia Tech is just an outstanding institution with exceptional capabilities. We're very excited about this relationship and look forward to updating you as we proceed. Of course, we also look forward to updating you as we bring on additional partnerships and relationships as we move forward.

Our M&A group and senior executives have been very active in the pursuit of specific acquisition targets. As I have mentioned before, these targets are focused on share expansion, geographic expansion and technology. We are probably proceeding more rapidly in the areas of technology and share expansion. Acquisitions have been and remain a key part of our growth strategy and we do look forward to informing you as these activities materialize into something that's a little more formal.

Just some comments on the balance of the year -- our internal growth for the first quarter was 6 percent. That was followed by 4 percent in the second quarter, giving us approximately 5 percent for the first half of the year. While the first quarter was stronger, I'm actually more encouraged by what I see in the second quarter, as it strengthens our confidence in the market trends and, most importantly to us, it strengthens our confidence in our own direction and progress.

Our sales guidance for the year remains to achieve between 5 to 6 percent internal growth. We believe that growth will be actually probably more in the fourth quarter than the third, and this is based on consideration to the timing of future new product releases and the fact that the third quarter traditionally is a soft quarter for global dental companies, given the holidays in Europe that take place during the July and August timeframe.

Our earnings guidance for the year was initially $2.25 to $2.30. We upgraded that last quarter, citing our expectations to be at the upper side of that guidance. Today, I'd like to further improve that guidance to $2.28 to $2.33. We really are extremely pleased with our results year-to-date, and we are excited about the prospects for the balance of the year.

I would now like to turn the call over to Bret Wise and he will give you a more detailed view of our financial performance.

Thank you, Gary, and good morning, everyone. Thank you for joining us on our second-quarter conference call. I'd like to start by highlighting some items in the P&L for the quarter and then touch briefly on certain cash flow items and selected balance sheet items.

Looking first at the income statement as provided in the release, as Gary mentioned, net sales for the second quarter grew by 7.8 percent in total and 7.3 percent, excluding precious metals. The internal growth, excluding precious metals, was 4 percent and currency added 3.3 percent.

The mix of sales was fairly stable on a geographic basis versus the prior year's second quarter, with the U.S. representing 43.5 percent of sales this year -- that sales ex-PM -- compared to 44.8 percent in the prior year, So down about 130 basis points in relative mix in the U.S., and Europe representing 37.3 percent of sales this year versus 36.6 in the prior-year quarter. So in total, we saw a mix shift of about 1 percentage point as an increase in the Europe business relative to the mix and a decrease in the U.S. business relative to the total mix.

Gross margins, ex-precious metals for the quarter, were 57.0 percent. That's up just slightly from the second quarter of 2003 and is essentially the same as we reported in the first quarter of 2004. This slight improvement was accomplished despite the geographic mix shift that I noted earlier.

We did have a small restructuring charge in the quarter of 333,000. That's related to the continuing consolidation of the U.S. lab business that we first disclosed in our January call. We expect to complete this consolidation in the second half of this year and anticipate additional charges of approximately 1.5 million as we consolidate the distribution facilities, and that will primarily be in the fourth quarter.

Operating margins were 18.2 percent. That's up 50 basis points compared to 7 in the second quarter of 2003. Excluding precious metals, operating margins were 20.8 percent, up 70 basis points from 20.1 percent last year. Operating margins were also up over a full percentage point sequentially from the first quarter. The improvement in operating margins really reflects in part the benefits of the consolidation of various operations and functions that have occurred over the last two to three years much along the lines of what we're doing today with the U.S. lab business.

The tax rate for the quarter was 32.0 percent compared to 32.4 percent for the second quarter of 2003. As we look forward for the rest of the year, we expect the normal operational tax rate to be in the 31 to 31.5 percent range for the second half of the year.

So, earnings from continuing operations were 49.2 million, or 60 cents per diluted share. That's an 11.1 percent increase from the second quarter of 2003. Year-to-date earnings from continuing operations are $1.16 per diluted share, up 14.9 percent compared to the $101 for the first half of 2003.

Gary commented on earnings for the full year and again, we anticipate that we will be in the 2.28 to 2.33 range for earnings from continuing operations. The second half of the year will be impacted in part by the startup costs of the pharma plant in Chicago and one-time launch expenses for Oraqix. During the January call, we had estimated that the startup costs for the pharma plant would be approximately 5 million this year and that that would occur primarily in the second half of the year. We now anticipate the startup costs to be 2.5 to 3 million in the second half of year with most of that balance being pushed to early 2005.

In addition, as mentioned earlier, we are anticipating a fourth-quarter launch of Oraqix in the U.S. and in Sweden, and we estimate one-time launch costs of approximately $1 million in the fourth quarter associated with bringing Oraqix to market in the U.S. and in Sweden. So in total, these two items will add about 3.5 to $4 million in costs in the second half of the year, and those costs are included in the range that Gary quoted for the full-year estimates.

Also, when looking at the second half, remember that the 2003 comparison includes approximately 6.8 million in pretax gains from our investment in Practice Works, which we sold in the fourth quarter of 2003.

Switching gears now to look at the balance sheet and cash flows, cash flows continue to be very strong -- (technical difficulty) -- the quarter with approximately 50 million in free cash flow. On a year-to-date basis, operating cash flows were approximately 110 million; that's up 15 percent compared to 95 million in the first six months of 2003.

Other cash flow items for the current year include depreciation and amortization, which was 24 million for the first six months, and it is in balance with Capital Expenditures, which were also 24 million for the first six months of 2004.

Inventory days at the end of June stood at 89 days; that's a five-day improvement compared to the 94 days we had at the end of '03. Receivable days stood at 52 days at the end of June, compared to 50 days at the end of 2003.

The balance sheet continues to strengthen during the quarter. At the end of March, we had 344 million in cash and long-term debt of 771 million.

In closing, we're very pleased to report another record quarter for the second quarter of 2004.

That concludes our prepared remarks. We are now prepared to take questions. Kristy, if you could help us take questions at this time. Thank you.

(OPERATOR INSTRUCTIONS). Derek Leckow with Barrington Research.

Thank you, good morning. I had a question first of all on the operating margin. You had a nice expansion here in the first half of the year, and Bret, I think you mentioned some costs increase that are expected. Would you still expect there's an opportunity to see year-over-year operating margin improvement in the second half, or would it be more flattish?

No, we would still anticipate being able to deliver about 50 basis points operating margin improvement for the full year and in making that estimate, we've taken into account those additional costs.

Okay, great. On the $1.5 million of additional charges you've alluded to in the fourth quarter, is that included in your guidance?

Yes, that's incorporated into that 2.28 to 2.33 range that we gave you earlier.

Just finally, I wondered if I could touch on some of the new products that you're going to be launching. You mentioned Oraqix as a key product in the fourth quarter. It sounds like we're probably going to see the revenue from that product mainly in the following fiscal year, but any key products you might want to talk about in the late third quarter and fourth quarter for this year?

I can't talk about them specifically, Derek; competition is tough enough without giving a heads-up. But I can tell you categories. We certainly expect that we will introduce something in the implant area in the United States. We have new products in the restorative category that we will be introducing. One I can talk about specifically because it has been pre-announced is that we have a new delivery system for our P-15 that's more in a putty form to make it more user-friendly for some of the procedures that they are currently using our existing product for. We have a number of products in a lab and of course, I mean, the most visible one is Oraqix.

In total, there will probably be 13 to 15. I am obviously reticent to talk about them specifically other than the ones that have been announced, because the one thing you see in this business is that people immediately have some kind of a marketing program where there's 10 free with 15 and plug up the supply-chain and it postpones your launch for six months. But we are excited about what we have to offer and we will announce them to the public within a reasonable time of announcing them to our customers.

You had an encouraging improvement in the consumable part of your lab business. We still see a tough comparison on the equipment, though, in the third quarter. Is that right?

Actually, it's getting less and less, Derek. I'm not too concerned about it. We sell the equipment for one reason and one reason only, and that's to sell the consumables. While I don't like to have the comparison being negative, like it has been the last couple of quarters, I really look at the consumables to measure the impacts of this lab business. The materials are moving well; that indicates to me that eventually they will buy the equipment and the materials will continue to grow and the lab business overall will grow.

You feel that this 8 percent sort of increase on the consumables side is sustainable, especially with the new products you have coming out?

Well, the lab business overall grows pretty consistently with the dental business, 4.5 to 5.5 percent. We expect to grow faster than that, so when you put the 8 percent consumables with the equipment business once it settles down, I mean we expect to grow 6 to 7 percent, which is above the market.

Then you are also planning -- I just wanted to switch gears towards your use of cash in the second half. You talked about your acquisition program; it sounds like that is heating up a little bit. You also have a share repurchase program out there. Have you guys been buying stock after the close of the quarter?

Do you want to comment on that, Bret?

Yes. Year-to-date, we've bought just under 400,000 shares at an average price -- well, the average price for this quarter was just a little bit over $49.

So we will probably start to see the dilution from stock options and so forth kind of leveling off, so we probably would see shares outstanding staying at the current level?

I think that's right. You know, our stock option program is a 10-year program and we're just now in the 10th or 11th year, so we're starting the exercises under that. We will be able to start to mitigate that somewhat through share repurchases through the balance of this year.

Suey Wong of Robert Baird.

Thank you. Can we talk about the internal growth? With the stronger product pipeline that you have and also the rebound in the lab business, do you think we could see some acceleration (indiscernible) growth in the back half of the year from this quarter?

Our guidance is 5 to 6, and we are at 5 so obviously our expectation is that that will happen, Suey. As I said in my earlier remarks, I think you're probably going to see more of that growth in the fourth quarter than the third, and that's based on two factors. One, as we look at the timing of our new product releases, they probably will have more of an impact in the fourth quarter than the third.

Secondly, you know, the third quarter for all of us that have global businesses that expand into Europe, we are influenced by the vacation schedule in Europe, which is July and August. While you may see some percentage growth, the impact that it has on the total year is not nearly as significant as the fourth quarter would be.

Let's jump over to the lab business. Gary, could you talk about your outlook for the lab business in the U.S. versus international and specifically in Europe?

Well, I can talk about the indicators that we have seen. You know, our comparisons become more and more favorable as we move forward with the equipment side of the lab business. The consumables are very positive. I mean, we're seeing 7 to 8 percent growth in materials, and that's really what's going to drive it. So, I'm very optimistic about the lab business in the U.S. and I'm very optimistic about it worldwide for that matter.

Gary, the trends that you just talked about here, would that be both across the U.S. and across Europe?

Yes, but I think the rebound is more in the United States than it is in Europe. Europe did not suffer the decline in the lab business that the United States suffered last year.

Okay, great. Thank you.

Justin Boisseau with Gates Capital Management.

Yes, can you talk about the market growth in each of your geographic regions versus your internal growth? Secondly, can you give us the amount of short-term debt that's in current liabilities and the amount of debt change attributable to foreign currency exchange?

The amount of debt in the current liabilities is about 21 million. Most of that comes due in December, so we will pay that off when it matures.

The amount of shift in debt from foreign currencies this quarter was not very substantial, and I probably have that but I'll have to dig that out. I think that the variance through was pretty small this quarter.

I'm sorry, your question was about the market growth?

Yes, what do you figure each one of your markets grew during the quarter versus your internal growth?

Well, we talked about Europe earlier. Europe usually grows about 3.5 percent. We obviously are growing faster than the market at 5.2. The United States, if you look at it over a period of five years, has grown about 6. I would say most recently that is less and I would say we probably are growing at market, because part of that market includes the lab business, which we have a significant presence in the lab business, which has been down.

If you look at the other markets, certainly in Asia we are outgrowing the market considerably with double-digit growth. In Latin America, we are outgoing the market and the balance of the world.

So, the thing that really is affecting us in the U.S. is mix. We have a strong presence in lab; lab has been down. The market is really driven by other product categories, which have a stronger presence then we have.

Going back to the debt question, foreign currency reduced debt by about 16 million this quarter.

I'm just wondering, how hard would it be for you to provide a cash flow statement with your press release?

I don't think it would be difficult for us to do that. We could do that, but typically have not done that.

I was just curious, in an era of new transparency here, why you wouldn't do that.

We will consider it.

We would appreciate that. Thanks.

Greg Halter, LJR Great Lakes Research.

Good morning, Gary and Bret, and congratulations on a good quarter and encouraging outlook. Bret, I wondered if you could comment on the swaps you have and what your net debt is after cash and swaps?

Yes. The swaps value at the end of the quarter was 47 million, I believe, and we had 334 million of debt -- or excuse me, 344 million of cash, 771 of long-term debt. Like I said, there is about 21 million in short-term debt, so those are the components.

Okay. Do you have your Accounts Payable figure as of the end of the quarter?

Yes. Let me look that up. Accounts Payable at the end of June was 85 million.

Thank you. Finally, just to clarify, in your guidance -- talking about the $1.5 million charge for the plant consolidations, facility consolidation -- is that 1.5 million additional charge or is that the top of 1.057 through six months?

That's an additional charge in the second half.

(OPERATOR INSTRUCTIONS). Chris Passoni (ph), Eagle Asset Management.

I was wondering if you could talk a little bit about looking out into the future of dentistry. Obviously, over the past 20 years, there have been some remarkable improvements in dentistry, particularly in the area of dental materials and cosmetics, that have driven the growth rate up in the U.S. from where it was in the 80's and early '90s. If you look, going forward, can you talk even generically about some of the changes that are likely to take place as the result of new technologies in the field of dentistry?

Yes, I can. I think some of the things that you look at is regeneration of tissue, where you might have a product that serves as a restorative material but at the same time regenerates the tooth material and replaces the restoration material as more functional. You can look at pharmacological solutions to what are traditional dental solutions today; you can look at analysis and diagnosis that can take place through saliva tests; you can look at digital impressions to replace traditional impression materials. I could go on and on, but there's a lot of things that are visionary that I think, along with ourselves and other people are looking at as the future of dentistry.

I think, to your point, while there have been changes over the years, most of them have been evolutionary and there's probably more of an opportunity for revolutionary change in the future than there has been in the past.

If you look at one of the newer technologies that is gaining at least some traction, I just wanted your opinions on it, both from the standpoint of selling the equipment as well as the consumables. That's in the area of lasers, both for soft tissue and hard tissue.

Well, I'm just offering my opinion. We've looked at lasers over and over and over again, year after year after year. As you look at our product portfolio, we are not involved in it. That doesn't mean that it doesn't have an opportunity in the future but as we look at it, we obviously have not seen anything that has compelled us to make an investment.

Okay, thank you.

Frank Pinkerton, Banc of America Securities.

First of all, can you review with me quickly? I know you've got the Sweden approval. What's the timeline to kind of get the other countries online there in Europe for Oraqix? Did you also make a comment about Japan on an approval there? I think I missed that.

Actually, we did not make a comment on the timeline but I'm going to let Tom comment on the approval by country in Europe.

The process is mutual recognition in Europe. Sweden is the member country and from there, it goes out into each of the other European countries for approval process. They all have a varying degree of timeline and we would expect to see those approvals starting to come through late fourth quarter, probably about the same time -- (technical difficulty) -- 2005.

With regard to Japan, we are in the process of preparing the submission -- (technical difficulty) -- not officially submitted that submission as we work through questions with their regulatory agencies regarding clinical -- (technical difficulty).

Does that answer your question?

That's great. Also, the last couple of quarters, you've spoken from a very high-level regarding the Circon launch I guess and how that's doing. Is that part of the reason why consumables were better in the lab this quarter, or are you also seeing, from some of your other lines, consumables also accelerating?

Well, it's both but if you look at what's probably pulling it up, the area within the materials that's growing faster than the others would be the Circon consumables. But we have a large presence in materials in lab beyond Circon but certainly, we're very pleased with the material growth within Circon itself.

Great. One final question and I guess more of a kind of a macro, big-picture question here. Seeing some what I would call larger, more conglomerate-type companies, whether it's in the dental consumables space or in the equipment side, playing more in the dental market, can you speak to just competition, what you expect to see on this front in the future with larger companies coming in and taking an interest in the market? Thank you.

Yes. Beyond the people that have made -- or I should say persons or companies that have made recent entries, they were pretty open and candid about the fact that they would like to be in the equipment sector, whether it be medicine or dentistry or other areas. That's been predominantly where they have made their acquisitions. Beyond that, you know, the companies that they acquired, if they were competitors, we've competed with them before and we will continue to compete with them very aggressively in the future, so it's a point of reference and a point of something that we will track and follow but we're not particularly concerned about it.

Okay, thank you.

At this time, there are no further questions.

Okay. Well, I would just like to thank you all for joining the conference call today, and we truly do appreciate your interest in our company. Thank you very much.

Thank you. This concludes your conference. You may now disconnect.