DENTSPLY SIRONA Inc (XRAY) 2005 Q3 法說會逐字稿

Good morning. My name is Michelle and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DENTSPLY International third-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Gary Kunkle, DENTSPLY's Chairman and Chief Executive Officer.

Thank you, Michelle. Good morning and thank you for joining the DENTSPLY third-quarter 2005 conference call. My name is Gary Kunkle and I'm the Chairman and Chief Executive Officer. Also with me today are Tom Whiting, our President and Chief Operating Officer and Bill Jellison, Senior Vice President and Chief Financial Officer.

I will begin the call with some overview comments regarding our third-quarter results and our overall business and before turning the call over to Bill, I will conclude with some remarks looking at the outlook and the balance of the year. Bill will then go through a more detailed review of the P&L and the balance sheet and finally we'll all be pleased to answer any questions that you may have.

Before we get started, it is important to note that this conference call may include forward-looking statements involving risks and uncertainties. They should be considered in conjunction with the risk factors and uncertainties described in the company's most recent annual report on Form 10-K and its subsequent periodic reports on Form 10-Q filed with the Securities and Exchange Commission.

This conference in its entirety will be part of an 8-K filing and will be available on our website. By now each of you should have received a copy of our third-quarter earnings announcement released yesterday after the market closed. Let me first talk about the pharmaceutical business and what led to the impairment of the intangible asset related to the injectable anesthetic products this quarter.

As we have said from the inception of the construction of this facility, we expect the benefits to add considerable profit to this segment when it is finally fully operational. This plant currently provides products for our U.K., Australian and New Zealand markets. It is expected to eventually be the provider of a more cost effective product for the U.S. and Japanese markets compared to our current contract pricing. It will also be the source of production for new formulations such as an articane formulation alternative to existing competition and finally it will also house the production for Oraqix, our non-injectable dental anesthetic.

While we have not previously provided specific expectations for improved profitability, I believe it is important to point out that despite the impacts from the adjusted assumptions and the delay in the approval of the facility, we still believe the combined opportunities for improvement within this business should increase the profitability of the U.S. consumables business segment by a minimum annual benefit of $0.10 to $0.12 per share when it is fully implemented.

Our previous estimates called for approval in late 2005. This actually recognized that our supply agreement with AstraZeneca covered us for potential delays beyond that point and also with startup costs had us beginning to realize the benefit of the new plant in 2007. This benefit is now projected to begin in 2008. And Bill will address this in more detail with his comments about the impairment charge.

Let me now focus on the quarterly results, excluding the impairment charge. Looking at sales, our reported sales during the third quarter were $416 million. This represented an increase of 6.7% as reported and 8.2% if you exclude the precious metal content. The 8.2 sales gain for the quarter broke out as follows. Base business was 5.4; foreign exchange was 0.8 and acquisitions were 2. The geographic base business growth, ex PM, was as follows. The United States was 7.6; Europe was 4.7 and the balance of the world was 1.3.

While the dental reimbursement issues in Germany continue to have an impact on our European and overall performance, we're pleased to see the improving trend in the German market during the year. There are two factors however that need to be considered as we look at the third and fourth quarters. As many of you may recall on our third-quarter conference call last year, Europe had virtually no growth in the quarter as budgets for reimbursement in Germany were running out and consequently procedures were being postponed. This did provide for a more favorable comparison this quarter offsetting some of the impact of the reimbursement changes.

However, entering the fourth quarter of 2004 and in anticipation of the proposed reimbursement changes coming in 2005 and quite frankly not clearly understanding them, consumers demand that the German regulators lift budget restrictions for the balance of the calendar year of 2004 resulting in a higher level of procedures during the fourth quarter of 2004. Of course, we will have that as a challenging comparison in Germany as we enter the fourth quarter of 2005 under the new reimbursement scheme.

There has been a tremendous focus on the German reimbursement in 2005 and that is appropriate given the fact that Germany represents 50 plus percent of our European business. But it is also important to note that our base business growth in Europe, if you exclude the effective businesses in Germany, is 11% for the quarter and 8.6% year-to-date and this is in a market that average growth historically has been 3.5%. So it is really this kind of performance in Europe and other markets in the world that has provided the necessary offset to the effects of Germany for the year.

Now we also expect that our German businesses will deliver a positive internal growth in 2006 versus 2005 especially in the first half of the year.

Moving onto the United States, we are extremely pleased with the continued strong growth in the U.S. of 7.6% overall for the quarter and 6.3% year-to-date. We had exceptionally strong sales in our chair side businesses. Those are products sold to dental offices. This was led by double-digit growth in orthodontics, implants and anesthetics really driven by Oraqix. The lab business had modest growth overall but had double-digit growth in the crown and bridge category, which was really led by our Cercon and all ceramic materials.

We also recently announced the formation of DENTSPLY North America. This is a new sales organization that effectively combines the field and sales management functions for our U.S. distributor businesses. We believe that this structure will provide opportunities for improved cross divisional selling synergies. It will provide a single point of contact for our distributors, more consistency in customer processes and policies and it also will expand our cross divisional merchandising support. We're really excited about this change as are our field sales organizations and we think it will provide an improved support to our distributor partners and also deliver improved value to our end-user customers.

I had mentioned during the last conference call that we're seeing lab work in the U.S. move offshore to lower lab cost areas around the world. We are addressing this in two ways. First of all, we're promoting Cercon as an all ceramic, more aesthetic, low labor solution. This is being driven by our new software for Cercon that provides a better, more efficient utilization of the Cercon block thus making it an economically competitive alternative to both precious and nonprecious metal crowns and bridges.

Also, we're finalizing a strategy to provide labs with a low cost alternative to compete with offshore labs. This alternative will also guarantee the lab that only FDA approved materials will be used and the lab will receive the same service and support they have always received from our U.S. DENTSPLY lab division. These are advantages that currently are not offered by offshore labs today. We expect to have this strategy operational in the fourth quarter and available to labs in the early 2006.

Looking at the rest of the world, the balance of the world grew internally by 1.3%. This was led by continued strong growth in Asia but was really offset by weak quarterly performances in Latin America and the Middle East. It's really due to the volatility of these regions and their economies.

I mentioned several new products during earlier conference calls this year that continue to perform well. Oraqix, our new non-injectable dental anesthetic, continues to perform extremely well. BioPure, our new irrigant that is used to disinfect the canal in root canal procedures. Also Calamus, which is a very unique and simple and user-friendly obturation delivery system that is also used in root canal procedures. And the final one that I've talked about in the past is Interactive Mystique. This is the world's first low friction, translucent ceramic bracket. It is a clear clip that is applied to Mystique, our new ceramic bracket, and it engages the wire similarly to self-ligation, which is known for its benefits of reduced appointment time and improved oral hygiene.

Adding to these new products, which there were several releases in the third quarter, I will discuss a few. TPH3 is a new generation of restored material that provides improved handling. It provides excellent aesthetics and simplicity of application for the dental professional. Also we introduced Cercon Art (ph), which is a new software system for Cercon that allows the technician to develop the coping from the stone model thus eliminating additional steps of a traditional wax up. It also provides the lab with better utilization of the Cercon block and, as I mentioned before, this makes it a competitive alternative to precious and nonprecious metal crowns and bridges.

Before I turn the call over to Bill I would like to make some closing remarks. 2005 has been a challenging year for us. We have had to deal with the German reimbursement issue throughout the entire year and as of this quarter, we're dealing with the impairment issues associated with the injectable anesthetic products. However, it is also important for all of us to recognize the benefit of the critical mass of DENTSPLY and how it has contributed to diffusing the impact of such events as the reimbursement changes in Germany and the other additional costs associated with the pharma (ph) plan.

The breadth of our product portfolio and our geographic diversity has allowed us to absorb the adversity of Germany and the increased cost. This is evidenced by how the non-German businesses are doing this year. Our year-to-date base business growth total is 2.5%. But if you exclude the businesses in Germany that are impacted by the reimbursement, our base business growth through three quarters is 6.1%. So this is really a remarkable growth in this segment that has historically grown 4.5.

As we look at sales for the balance of the year, we do have a challenging comparison in Germany, as I mentioned before. We also had some of our larger divisions in the U.S. announced price increases in September that may have created some additional buying in that month before the new prices go into effect.

With respect to earnings, our earning guidance for the year is $1.24 to $1.28 per diluted share. This is an increase of our previous guidance, excluding the impairment charge, from a previous range of $2.59 to $2.63 to a new range of $2.61 to $2.65 per diluted share. We are currently in our budgeting process for 2006 and we will provide guidance for next year during our fourth-quarter conference call. But we do expect that we will again project internal sales growth of 5 to 6%, which is premium to our market growth of 4.5 and double-digit income growth for the year. That concludes my formal remarks. I will now turn the call over to Bill.

Thanks, Gary. Good morning, everyone. Before discussing the overall performance, I would like to first provide you with some additional comments regarding the asset impairment charge. During the third quarter, the company recorded a pretax charge of $131.3 million, which had an after-tax impact of $111.6 million or $1.41 diluted earnings per share with the impairment of the injectable anesthetic intangible asset for the pharmaceutical division within our U.S. consumable business segment. This impairment does not impact our needle free Oraqix product.

The carrying value of the investment-led intangible asset prior to the above-mentioned impairment charge was approximately $160 million. This amount is primarily comprised of the two payments we made in 2001 and 2002 totaling $116.5 million to procure the dental injectable assets from AstraZeneca adjusted for currency fluctuations since that time as the assets were held in our Swiss and Japanese subsidiaries.

The company received the results of the Food and Drug Administration's, FDA's, preapproval inspection in the third quarter of 2005. During the third quarter, the company then conducted an extensive review of the items identified by the FDA. The company's action plans to address these items and their impact on other assumptions. Included in these were the expected timeline and cost for the remedy of the FDA findings related to the manufacturing facility, FDA reapplication and approval, expected ramp up costs for the U.S., European, Japanese volumes, sales projections and the extension of contract manufacturing agreements to provide a supply of injectable anesthetic products to bridge through the revised ramp up period and the risk-adjusted discount rate.

Based on this review, we concluded that the injectable anesthetic intangible asset became impaired in the third quarter of 2005 and results in a $131.3 million pretax charge. After recording the impairment, DENTSPLY has approximately $120 million of long-lived assets related to the pharmaceutical division, which are not impaired based on our current set of assumptions for the underlying business. These assets include the $29 million of indefinite intangible assets remaining for the injectable anesthetic business along with other assets, which include the Oraqix definite lived intangible asset and the plant and equipment for this business.

However, further negative changes in the assumptions including but not limited to those around sales growth, pricing, regulatory approval, third party supply and product costs could require additional event driven impairment tests and could result in additional impairment charges. The manufacturing facility is not projected to begin U.S. or Japanese production until 2007 and we do not anticipate additional improvements until the facility is through its ramp up of production.

The impact of this business on earnings in 2006 should not be any greater than it has been in 2005. We also expect that once the plant is fully operational that the profitability change within this business should help to improve diluted earnings per share by $0.10 to $0.12.

Moving on, as Gary mentioned, net sales for the third quarter of 2005 increased by 6.7% in total and increased by 8.2%, excluding precious metals. The sales increase, ex precious metals, for the quarter included base growth of 5.4%, a 0.8% increase from FX translation and a 2% increase from acquisitions. The geographic mix of sales, ex PM, in the third quarter of 2005 was as follows. The U.S. represented 46.4% of sales compared to 46% in the third quarter of last year. Europe was 34.1% this year compared to 34.2% in the same period last year and the rest of the world was 19.5% of sales compared to 19.8% in the same period last year.

DENTSPLY's U.S. sales showed more consumable products performing well especially implants, orthodontics and restorative products. Growth within Europe, while still impacted by the softness in the German lab business, has continued to improve. Germany will have a tougher comparison in the fourth quarter of this year but we do expect the German business to experience easier comparisons in 2006 especially in the first half of the year.

Cercon, our all ceramic product alternative, continues to perform well in the market and we believe will make further marketshare gains as the precious metals market continues to shift. Gross margins for the third quarter were 56%, ex precious metals, or lower by 1.5 percentage points compared to the third quarter of 2004. Margin rates were negatively impacted in the quarter by higher cost of our new anesthetic facility and lower precious metals sales.

While the current negative impacts of our anesthetic facility are not expected to improve until the plant is approved by the FDA, we do expect companywide margin rates will improve as we move into 2006 from improved product mix, operating efficiencies and new product performance. SG&A was $134.3 million or 36% of sales, ex precious metals, this quarter versus 37.2% in the prior year's third quarter.

We have continued to improve our overhead cost structure despite added cost from acquisitions of more than $3 million in the quarter and the cost of the tack (ph) study that was discussed on the second-quarter call. Operational margins for the third quarter of 2005, including the impairment charge, were a -13.6% compared to 17.5% in the same period last year. Operating margins for the third quarter on a non-GAAP basis, excluding the impairment charge, were 18% compared to 17.5% last year in the third quarter.

Operating margins, ex precious metals, for the third quarter on a non-GAAP basis, excluding the impairment charge, were 20% compared to 19.7% in the third quarter of 2004. Operating margins are expected to benefit from both improved product mix, the strength of new products and operational leverage as we move into 2006.

Net interest and other expense in the quarter was $2.9 million, which is an improvement of 2.6 million compared to last year's third quarter. Net interest expense improved by 2.7 million in the quarter due to both lower borrowing levels and net investment hedges utilizing the Japanese yen and Swiss franc. Other expenses were nearly flat compared to the same period last year.

The corporate tax rate in the third quarter was distorted by the impairment charge as the bulk of the charge was in Switzerland and only received a modest tax benefit. On a non-GAAP basis, excluding the impact of the impairment, the tax rate in the quarter was 29.3% compared to 25.8% in the third quarter of 2004. The year-to-date operational tax rate is 30.6%. To better evaluate our repatriation options and opportunities under the American Jobs Creation Act, we began a global tax project in the third quarter using external consultants. While this project has increased our SG&A costs in the third and will again in the fourth quarter's, we expect it will help minimize our overall tax exposure on any current year and/or future year repatriations.

We are also hopeful that through this project we can reduce our operational tax rate to 30% for the year. The loss from continuing operations in the third quarter of 2005 was $60.8 million or $0.77 per diluted share. Earnings from continuing operations, excluding the impairment charge, for the third quarter of 2005, which constitutes a non-GAAP measure, would have been $50.8 million or $0.63 per diluted share in the third quarter of 2005. This compares to $0.55 in the third quarter of 2004 after adjusting for a benefit from a reduction of income taxes of $0.04 per diluted share related to tax matters from prior periods and also for a negative impact of $0.02 per diluted share related to restructuring activities. This would represent an increase of 14.5% in net income per share in the third quarter on a non-GAAP adjusted basis.

Operating cash flow was 66.7 million in the third quarter of 2005 compared to 73 million in the same period last year. Receivables in inventory continued to run higher than last year. However, both are projected to improve by year end. Receivable days stood at 57 days at the end of the third quarter of both 2005 and 2004 increasing from the 55 days at the end of the second quarter and the record low level of 47 days achieved at year end. Accounts receivable days should improve to approximately 50 by year end. Inventory days are running nearly five days higher than they were at the end of the year but normally are reduced in the fourth quarter and should end the year close to last year's level.

Capital expenditures were 9.8 million in the third quarter yielding free cash flow or operating cash flow, less CapEx, of about 56.9 million in the third quarter. Depreciation and amortization were 12.6 million and dividends were 4.7 million in this quarter. At the end of the third quarter of 2005, we had $398 million in cash and short-term investments compared to $506 million at the end of 2004. Long-term debt was $685 million at the end of the quarter compared to $780 million at the end of 2004.

In addition, we had $66 million of short-term debt and a derivative asset value of $19 million at the end of the quarter. DENTSPLY repurchased $49 million of stock or approximately 900,000 shares at an average price of $53.12 in the third quarter of 2005. Our total repurchases in 2005 now stand at $163 million or 3 million shares at an average price of $54.85. Based on the company's increased amortization to maintain up to 5.5 million shares of treasury stock, we still have approximately 2.5 million shares available for repurchase.

Finally, as Gary noted, our diluted earnings per share guidance for 2005 with the impairment charge is projected at $1.24 to $1.28. Excluding the impact of the impairment charge, we're raising our full-year 2005 guidance to $2.61 to $2.65. This guidance does include the expenses associated with our global tax project as well as the second quarter's $0.02 per share tax benefit.

Additionally, the company still anticipates taking advantage of repatriating foreign earnings for purposes consistent with the American Jobs Creation Act of 2004. However, the size and the timing of any repatriation will not be finalized until late November or early December. The tax impact of this potential repatriation is not included in our current earnings guidance for the year. That concludes our prepared remarks and we would be glad to answer any questions you may have at this time.

(OPERATOR INSTRUCTIONS) Steven Postal, Lehman Brothers.

Can you elaborate on your comments regarding the Chicago facility, maybe talk if you can about any of the items that the FDA addressed and how you are going to go about addressing those items?

I won't go through the specific items, Steven, but I will give you a comment overall. First of all, I think anyone will tell you a sterile filling facility is among the most difficult, if not the most difficult, to start up. While the FDA did cite several areas that require attention, it is also important to note that they described the plant as approvable, which was a good response. We do think we clearly understand the issues. We think we have the corrective actions in place to address them and we continue to communicate with the FDA as we move forward.

And then can you -- what is the plant operating at in terms of capacity because you are already doing some production there?

It has got to be less than a quarter capacity. Probably more like a fifth but that is an estimate, Steven.

Understood. And then maybe -- I just wanted to drill down to Germany a little bit. Can you talk about the new standard of care item, how you kind of anticipate that impacting the market more over the long term, not necessarily this quarter with the comparisons?

Well I think you're going to see not so much an impact on the number of procedures done but a change in the mix and it's going to be driven by the fact that they are going to have the lower cost reimbursement. Whether that change is going forward, I don't know. But if you assume that it doesn't change, it is going to cause a mix change and hopefully we are well-positioned with the mix change since most of it will be from precious metals to something else and Cercon is a more economic solution and a more aesthetic solution. So we're doing everything we can to move people today from precious metals to Cercon.

You talked about the positive trends in your orthodontics business and also in dental implants. Can you maybe just elaborate on that business a little bit, how it is trending in the U.S. and outside and then if you think you are gaining marketshare in those areas?

Well actually we know we're gaining marketshare. Our orthodontics business has grown double digit I think for over three years now every quarter and the market information that we get, which is pretty good information, says the market probably is growing in the -- about 7 to 8% per year. And so we know we are gaining share. We're also gaining share with the implant business but we need more critical mass. That is one of the few segments that we're in where we are not number one or number two and we should be growing faster than the market because of our size.

In the implants market, are there acquisition opportunities that you could take advantage of or are you right now kind of sensitive to price and valuation?

Well, it is one area where we would really like to expand our presence and we would like to do it through acquisition. I mean clearly there hasn't been something that has been appealing either from the appeal of the company or the price of the company that so far we would have made one.

Just one final question from me. The sales pressure changes, can you maybe talk about how that will change, if any, the relationships that you have with the distributors?

I can't imagine it would do anything but improve it because today a distributor has to deal with five to six different people to deal with these separate divisions. Tomorrow there will be one person who will handle this for all the distributors and will be assigned to specific distributors. Tom just came back from the Dental Trade Association where many of our distributor partners were there and had nothing but positive feedback about this reorganization and they were very supportive of it.

Thanks a lot for the comments.

Frank Pinkerton, Banc of America Securities.

First, some color around the charge. None of the charge is cash, correct? It's all either in intangible or goodwill?

That's correct.

And then secondly, can you walk me through the costs I guess that Astra is charging you for toll manufacturing and are there step ups in that cost over the next couple of years?

We don't disclose those costs, Frank.

Okay. Shifting and going in another direction, can you, on the sales force, I guess the reorganization in the United States, are there any I guess costs you guys are incurring there and then what can we expect maybe from potential savings?

It's actually neither. It's pretty much a neutral change and it wasn't put in place to save money; it was put in place to be more effective and to stimulate our growth. So there it's neither an additional cost or savings.

Great. And final question, you touched briefly on some price increases. Can you just walk through I guess -- I know you do those on a rolling basis, what you are seeing kind of overall from your product base on the price increase side and then you said potentially there was a small buy-in. Can you elaborate on that with the price increases? Thanks.

What were the amounts of the price increases? In the three to four range?

Just over three.

3 to 4% was the price increase and with respect to trying to determine the impact, I mean it is just too early to tell. Looking at the current month, dealers don't buy consistently throughout the month and so until you get the month closed out you can't see what the impact is.

Great. Thank you.

Suey Wong, Robert W. Baird.

I have a question about the Chicago plant. It sounds like there's going to be great upside once the plant is realized there. I want to get a sense of your level of confidence that by '07 everything will be taken care if given that there has been a couple of delays?

Well, I mean, clearly we are more confident now that we understand the issues. It was very helpful for us, in spite of the fact that we're disappointed that we didn't get the plant up and running, we learned a lot through that process and we are comfortable and we understand the issues. We're comfortable that we have the right corrective action in place. The one variable that we don't have any control over is the FDA and so that is the one thing I can't offer you any assurance with. I can assure you that we feel comfortable that we're going to do everything to meet those days.

I just want to make sure here. There's going to be no disruption of aesthetics (ph) while the plant is being changed over?

We don't foresee that, Suey.

And this would have no impact on sales to the U.K., Australia, New Zealand, etc.

No, it should not.

Also, Gary, you mentioned it was $0.10 to $0.12 annual benefit.

That's correct.

Then just a last question here. Can you talk about the lab strategy and the changes there and also if you think that your lab customers will see this as a competitive threat in anyway?

I can't get too specific for competitive reasons but I don't think they're going to look at this as a competitive threat because it is a service to the lab. It is not a service to the dental office. And it offers them an alternative. They still have -- they can do business the way they're doing business today but there's many of them that don't have the availability to offshore and are feeling competitive pressure and don't have access to offshore. This will offer those labs an opportunity to get similar cost but also the reassurance that they're getting FDA approved products and of course they also get the service that they have always gotten from our DENTSPLY lab division. Both of those are not assurances that you can get with an offshore lab.

(OPERATOR INSTRUCTIONS) Thomas Fong (ph), Boenning & Scattergood.

Most of my questions actually have been answered. I just had one follow-up question. With regards to the Chicago plant, do you see the FDA expanding -- would they do random spot checks at your other plants and if so, do you anticipate any issues with that?

No, it is not related at all. But just to give you a little more assurance, we have had our largest facilities in the United States inspected by the FDA I think five times in the last three years and they have collectively gotten zero nonconformances. And that is exceptional performance because I think most people anticipate you're at least going to get one or two.

Thomas Fong. That seems to reassure us. That's the only follow-up question I had. Thank you.

Derek Leckow, Barrington Research.

I have got question here on the -- it looks like your (indiscernible) lower overhead expenses or is that just better leverage of SG&A costs? And does that suggest that you have capacity to increase your R&D spending?

I think a couple points on that. One is that we have been negatively impacted on the gross margin mix side of the equation on an ex PM basis because of the softer precious metal sales this year. Vice versa on the SG&A side, we are a little bit positive just because of the mix associated with that. But we have specifically tried to make sure that we're making improvements on the SG&A side especially knowing that we have had some of the higher additional cost associated with the anesthetic facility that we needed to make sure that we were offsetting. And so I think that we have really taken advantage of that and made sure that we could deliver on the overall improvements that we had expected.

Derek, there has been no attempt to cut our cost by cutting projects at R&D. In fact, every year, we have increased R&D double-digit and we haven't cut projects to save money and we will continue with that strategy.

One of the things to keep in mind in the SG&A category that we had in both the third quarter and the fourth quarter is the tax project that we kicked off. It has been negatively impacting those periods. But as I mentioned, we are expecting to get the benefits of that still even in the operating rate but also in the potential rate that we would pay associated with any repatriation of funds.

Okay. And if I understand what is going on with the sales force, the management consolidation, that shouldn't result in any savings either, right? That is more of a --.

That was not the intent. It was really to improve our effectiveness and take advantage of the opportunity to cross-sell.

And then finally, Gary, could you provide us an update on your research into some of your advanced technology dental products?

Yes. (indiscernible) is one that we had mentioned -- I think we bought about a year ago. It was the technology we brought from Sanofi-Aventis. It has moved from proof of principal into product developments and we expect to have a product hopefully by late '06 from that project. Doxa was another technology that we acquired and if you recall, it has the potential to have an improved either restoration material or adhesive material and that is also in product developments. And it is probably going to be in '07 though because it takes a little more for that project. We announced a relationship with Idmoss (ph), which is a company that makes a caries detection device and that is in product development and we also anticipate that that will be an '06 launch also. The other projects in particular like the ones from Georgia Tech are further out.

Gary, the product -- the caries detection product, can you explain what that is and when do you expect to launch that?

It is driven by something called AC impedance spectroscopy and I will describe it from a layman's standpoint. It basically sends the equivalent of a current, and this does not affect the patient, and will allow it to distinguish where the cary is and will detect it to the degree of accuracy that not only do we think it will be better than what is currently on the market, it will be better than x-rays. I can't give you a specific time quite frankly, Derek, because I don't know when it will be. I think it is going to be late '06.

Do you anticipate this product getting insurance reimbursement at the same rate as, for instance, x-rays?

Good question. I don't have the answer to that.

Matthew Vetto, Douglas C. Lane & Associates.

A quick question. Bill, did I hear you correctly or understand you correctly, it sounded like you were alluding to the possibility of further impairment charges in Chicago if there were -- for the delays. Although it sounds like you have done a pretty thorough review of your timeline and everything going on there. Are you just doing that to sort of size what else is there? What sort of likelihood would you put on the possibility of further charges?

At this point, we do not anticipate any additional charges associated with that. However, I did want to point out both the amount of assets that we do have connected with that overall business and I also wanted to discuss at least some of the assumptions that are tied to that. But we feel very comfortable at this point in the assumptions that we have got out there associated with that, which is one of the reasons why Gary also mentioned the expected improvement that we feel that we are committing to in the turn of that business as we move out a couple of years.

Great. Thanks a lot.

Steven Postal, Lehman Brothers.

I just had a couple of follow-up question. First, on the price increases, you mentioned 3 to 4%. How does that compare historically with the price increases?

That's pretty consistent.

Okay. So no meaningful change there?

Right.

And then for Oraqix, you mentioned that -- I'm just wondering now we are kind of a year out from when it was launched, can you just talk about how things evolved over the year both in terms of the marketing of the product and how you foresee its customer acceptance?

We continue getting very good feedback on it, Steven. The United States is performing better than we expected. We just released it in France and the launch went extremely well. Patient feedback and professional feedback is very good. So we're pleased with it; we continue to expand it into other markets as it gets approved and we continue to follow-up to make sure that we're getting the proper reorders and we're satisfied with all the feedback that we get.

Great. One final question. Bill, I think you mentioned days of inventory increased. Is there anything driving that other than what is going on with the anesthetic facility?

Other than anesthetic?

Yes. It was really -- the comments that we made before as well tied it to both the anesthetic preparation on the transition as well as with some of our German business especially with the fall off in the first part of the year. So the fourth quarter is typically a period where we do drive down some of that inventory levels. We typically would also be expecting to have a few days of improvement. This year, I think that we are expecting that we will probably get back to close to last year's levels.

Okay. Thanks very much.

Just one other comment on the question though that you had associated with the price increases that were mentioned. As Gary said, that is typical within the product areas that we talked about. However, on average for the overall company, our prices typically run 1.5 to 2% on average and we believe that we are at probably maybe at the higher end of that at this point.

And that is because --?

Well we don't take price increases on all products. The ones that I just cited were two divisions that had just taken price increases in the three to four range.

I see. Okay. Thanks.

Greg Halter, Great Lakes Review.

Just wondered if you could comment on the acquisition outlook, obviously noticed that you increased the share repurchase potential or authorization. Should we take that to mean that you are not finding what you expect or think you can find a good price?

No, I wouldn't link that at all to the acquisition. Our primary use for cash will always be acquisition and there's not a lot of change in the acquisition market from the last call. I think I had mentioned that we are in contact with a lot of companies. We're looking at a lot but there are many that are private. And it just takes some time for the families to make decisions. This is -- I think they recognize that eventually that divesting the business is the right thing to do. They are just not ready to do it today.

I think one of the other things to point out there as well too is that obviously you're aware of kind of where our overall debt to cap levels are relative to what we have stated are our mandate levels. And we believe that, especially based on the overall acquisition growth on an ongoing basis, that we kind of commit to as an organization that we think that there is at least potential out there to do both and still have plenty of availability to do any sizable transaction that we think is appropriate.

Derek Leckow, Barrington Research.

Just one quick follow-up here on the repatriation decision. And as that gets made here in the next month or two, do you anticipate that influences your repurchase program at all that lead perhaps to some greater repurchase activity?

No, we really don't think that that will be the case tied to it. We, obviously, as we've got cash on our balance sheet, most of that is overseas. The repatriation effort is really just to bring that down. When we talk about our overall debt to cap related levels, we are talking about that on a net net cash, net debt basis, which includes the cash side of it. So we just be better utilizing the cash that we have available out there by doing the repatriation.

(OPERATOR INSTRUCTIONS.) At this time, there are no further questions. Gentleman, please proceed with any closing remarks.

Thank you all for joining the call this morning and we appreciate your continued interest in our company. Thank you, Michelle.

Thank you. Ladies and gentleman, this concludes today's conference call. You may now disconnect.