DENTSPLY SIRONA Inc (XRAY) 2006 Q2 法說會逐字稿

Good morning ladies and gentlemen. My name is Alexandria and I will be the conference operator today. At this time, I would like to welcome everyone to the DENTSPLY International second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] I'd now like to turn the conference over to our host, Mr. Gary Kunkle. Mr. Kunkle, please go ahead.

Thank you, Alexandria. Good morning, and thank you for joining the DENTSPLY second quarter 2006 earnings conference call. My name is Gary Kunkle and I am the Chairman and Chief Executive Officer. Also on the call today are Bret Wise, our President and Chief Operating Officer; and Bill Jellison, Senior Vice President and Chief Financial Officer. Bill and I are in the headquarters here in York, and Brett is attending the dental trade association meeting and is participating on the call from that location.

I will begin today's call with some overview comments regarding our second quarter results and our overall business. Bret will then update you on some of the recent new product introductions we've had and some remarks regarding our lab strategy. Then before turning the call over to Bill, I will conclude with some remarks regarding our outlook for the balance of the year.

Bill will then take you through a more detailed review of the piano and the balance sheet and finally we will all be pleased to answer any questions you may have. Before we get started, it's important to note that this conference call may include forward-looking statements involving risks and uncertainties. These should be considered in conjunction with the risk factors and uncertainties described in the Company's most recent Annual Report that report on Form 10-K, it's subsequent periodic reports on Form 10-Q, press releases and conference call scripts filed with the Securities and Exchange Commission.

This conference in its entirety will be part of an 8-K filing and we'll make it available on our website. I assume that by now each of you should have received a copy of the second quarter 2006 earnings announcement that we released after the market closed [INAUDIBLE AUDIO DIFFICULTY] during the second quarter were $472.4 million. This represents an increase of 6.2% as reported.

If you look at it on -- excluding the precious metal content, the increase was 5.8%. This 5.8% broke out as follows. Base business was 5.2%. Foreign exchange was plus 0.3%. Acquisition was plus 0.3%. The geographic base business growth and, again, this is without precious metals was as follows. The United States was 6.1%. Europe was 5%. And the balance of the world was 3.5%. Looking at the total business growth of 5.2%, it was again primarily driven by really strong double-digit growth in our orthodontic and implant businesses, as well as above market performances in our chair side consumables business.

Looking at geographies and starting with the United States, as I stated before, the U.S. internal growth for the second quarter of '06 was 6.1. Our orthodontic business continues to grow at double-digit rates, greatly exceeding the market growth. We're also pleased to see the chair side consumables growth return. It grew in high single digits and that's also exceeding market performance. With respect to our lab business, our crown and bridge materials grew at mid-single digits.

This was led by continued strong performance from our Cercon branded products and Bret will really review this lab business in more detail in his review.

Moving on to Europe, as I mentioned earlier Europe's base business growth for the quarter was 5%. Europe also saw strong double-digit growth in orthodontics and implants. The lab business in Europe continues to be somewhat of a growth impediment in Germany, thus affecting the overall growth of lab business in Europe. This is driven by the reduction in the use of precious metals as a result of two things, the reimbursement changes and the dramatic changes in the price of gold. The users are choosing alternatives such as non-precious metals or all ceramics.

Our all ceramic alternative Cercon is just having dramatic growth during this period, but in the short term has not yet offset the decline in precious metal restorations. But we do believe over time that all ceramics will be the alternative of choice and Cercon will clearly be the all ceramic leader in this category.

Germany overall is really progressing as we had expected. Its year-to-date internal growth is 6.2%, ahead of 2005, but this is behind 2004. We expect that it will complete the year with positive growth for the full year, and that's pretty much the way we had expected it as we went into the year. As you look at the other markets, Asia continues to grow in double digits with a 13.3% internal growth for the quarter. This was led by really strong performances in China, India, and Thailand.

If you move on to what Latin America, Latin America had a base business growth overall of minus 3%. This continues to reflect the volatility of these markets and their response to the political and economic swings. If you recall, the first quarter was a positive 8.5%. And we really don't see any influencing factors beyond those that are either economic or politically sensitive.

The second quarter comparison last year was 10.4%, which may affect this, but I think it's really more the sensitivity of the political and economic swings.

To some other areas of interest. As you will recall, we announced in February that we would be closing our dental injectable anesthetic plant in Chicago. We intended to sell the facilities and pursue long-term supply agreements to replace the production that was scheduled for this plant in 2008 and beyond. As a result of the shutdown and the elimination of corresponding associated costs with it, we increased our guidance for 2006 by $0.03 to $0.04. This is calculated after the stock split. The ultimate benefit of keeping the plant open was expected to be between $0.05 and $0.06, with this benefit really not beginning to be realized until 2008.

We do continue to believe we can accomplish that goal and expect to show incremental improvement between now and 2008 with the goal of 5% to 6% being realized. We have shown the facilities to several potential buyers since announcing our intentions to sell them. Since the last call, this list has narrowed to a few select buyers. We feel that these discussions are going well and have a probable favorable outcome for both DENTSPLY and the buyer and will be resolved before the end of the year.

Obviously, given the fact that these discussions are ongoing, I can't offer any further detail. But clearly, we'll keep you informed regarding this progress as we move forward. I'd like to now turn the call over to Bret, our President and Chief Operating Officer, and then I'll come back on with some comments following his remarks. Bret?

Take you, Gary, and good morning everyone. I'd like to spend just a few minutes on new product introductions. We're off to a very strong start on new product introductions in 2006 and year-to-date we have introduced over 15 new products. And, of course, many, many brand extensions on top of that. And today we continue to have a very full pipeline of products we expect to bring to market in the next 12 to 18 months. I'd like to give you just a brief sample of some of these new products and services that we have introduced over the last 6 to 9 months.

In the endodontics market we introduced two new file systems. The first is called MTWO, which is spelled MTWO, which is a comprehensive nickel titanium system which has been introduced in 10 countries in Europe and several countries in Asia. The system features a uniform file length for the entire procedure, which allows the dental professional to find the apex of the canal at the beginning of the procedure and then work their way back up and out of the canal and this compares to a traditional crown down procedure.

This process is preferred by some dental professionals and is a new product offering for our endodontics business and is experiencing rapid growth in Europe. Also in endodontics, late in the second quarter we introduced ProTaper Universal, which is a nickel titanium system. It was launched in Europe in the second quarter and is planned for launch in the U.S. later this year. This is an enhanced system which significantly expands the range of instruments for the ProTaper line including a complete line of finishing files.

In orthodontics, we're having a busy year with new product introductions, including one new bracket system that was introduced in the spring and another system which is scheduled for launch this fall. In the spring we introduced into In-Ovation-L which is the first interactive self-ligating lingual system. This system offers both a highly aesthetic solution as the brackets are placed on the back side of the teeth, but it also has the high efficiency of a self-ligating system, which can reduce the treatment times by as much as 25%.

Also in orthodontics, we added a line of palatable anchors, which are essentially very small implants or screws that eliminate the need for external head gear in many orthodontics cases. And this product has proven to be very popular, even in the early stages of introduction.

In the lab segment, we introduced two significant enhancements to Cercon, that's our Zirconia-based crown and bridge product in the past six months. These include Cercon Art, which has added true CAD/CAM capabilities for the design of crown and bridge units, and Cercon I, which is a very accurate desktop scanning system that can be used in connection with an installed Cercon unit or it can be used to scan a model locally and transmit the data electronically to another site for coping and crown bridge production.

These enhancements have significantly boosted the adoption of Cercon as evidenced by growth of our consumable unit in excess of 50% this year. Hello?

Yes, we're here.

Hello? Also in lab, well, stepping back these developments are particularly important in the alloy market. The alloy market continues to contract due to record high gold prices, particularly in Germany. Cercon has many advantages over precious metals, including a highly aesthetic and functional solution, but it's also at a cost point, or a price point, to the lab, which is below precious metal restorations.

Also in lab, as we mentioned in our first quarter call, we have launched our crown and bridge production service, which is exclusively for the benefit of our U.S. lab customers. In this service, our U.S. business unit provides finished crown and bridge units to lab customers in the U.S., and those are produced through one of our international subsidiaries. The service is designed to allow our lab customers to serve really low-cost market needs in the U.S. without the need to invest themselves internationally. Yet with the assurance that the end product meets with the highest quality standards both the respect to the material used and the accuracy of the fit. This service was commenced late in the second quarter and customer volume indications today exceed our existing capacity.

And again the service is only available to our existing lab customers in the U.S., meaning we require a continuing customer relationship for our traditional lab products in order to access that service.

In the consumable and small equipment area, we added several new products this year including a new small SmartLite IQ, which is a cordless LED curing light which offers a 10-second cure with a depth of cure comparable to a high output halogen device. We also introduced a new handpiece. It's called a Stylus Mini, which gives dramatic improved visibility in small sites, that's particularly important in the back part of the mouth or in children or geriatric patients, and the head of this device is 2.5-millimeters smaller than the prior version. And were able to accomplish that without sacrificing any power.

So this is just a small sample of product innovations coming to market this year and, again, we have a very full pipeline of products beyond this that will be launched in the next 6 to 18 months. I'd now like to turn the call back to Gary for additional comments. Thank you.

Thank you, Bret. Before I turn the call over to Bill, I would like to make some closing remarks. We're really pleased with the second quarter results and think it represents a continued good performance for the first half of the year. We continue to be optimistic about the balance of the year. We will be increasing our internal investment and growth initiatives and these would be things such as a sales force expansion, increased R&D spending in certain areas, and this will commence in the second half of the year.

We're also increasing our top line, top end of our guidance for the full year to $1.40 to $1.44 per diluted share. This includes stock option expense, but does not include any restructuring charges or tax adjustments. So that concludes my remarks. I'll now turn the call over to Bill.

Good morning, everyone. As Gary mentioned, net sales for the second quarter of 2006 increased by 6.2% in total, an increase by 5.8% excluding precious metals. The sales increase, excluding precious metals for the quarter included a 5.2% increase from internal growth, an increase of 0.3% from acquisitions, and a negative 0.3% impact from foreign exchange. The geographic mix of sales, excluding precious metals in the quarter included the U.S. at 42.9%, Europe at 37%, and the rest of the world was 20.1%. We are pleased with the improvements in both earnings and cash flow in the quarter. Solid improvements in operating margins were achieved excluding restructuring costs and including stock-option expense in both periods.

Gross margins excluding precious metals for the quarter were 57.2% compared to 56.8% in the second quarter of 2005. Margin rates were positively impacted in the quarter by improved product mix and improvements in leverage and manufacturing efficiencies. SG&A expenses were $152.9 million, or 36.1% of sales excluding precious metals in the second quarter of 2006 versus 36.6% in the prior year second quarter.

The higher expense level in the second quarter primarily resulted from the expensing of stock options in 2006 which will continue to impact comparisons throughout this year. If stock-option expenses were included in both periods, SG&A expenses would have been lower than last year by 1.5% of sales excluding precious metals. This improvement is the result of our decision to close the anesthetic plant in Chicago and improved leverage in operating efficiencies.

Operational margins for the quarter were 18.3% compared to 18.2% in the second quarter of last year. If stock-option expense was included in 2005, operating margins would have an 17.1% in the second quarter of last year. Operating margins based on sales excluding precious metals were 20.4% compared to 20.3% last year in the same period. And operating margins based on sales excluding precious metals for comparative purposes, excluding restructurings and including stock-option expenses in both periods, would have been 21.1% in the second quarter of 2006 and 19.1% in the second quarter of 2005 or an improvement of 200 basis points, which has continued to benefit from many of the items which are having a positive impact on operating margins in the second half of this year, however, we also expect to reinvest more in sales, marketing, and research and development as we move through this year so that we can take advantage of some current trends and opportunities in the market.

Net interest and other expense in the second quarter was $0.5 million, which is just below last year's second quarter level of $0.7 million. Net interest expense improved by $2.7 million in the quarter. This was offset by a $2.5 million increase in other expenses. The increase in other expense primarily resulted from a slight foreign exchange transaction loss in the second quarter of this year versus a gain recorded in the second quarter of last year.

We continue to expect interest expense to run favorably as a result of our net investment hedges and our lower borrowing levels throughout this year. The corporate tax rate in this quarter was 31.1% compared to 28% in the second quarter of 2005. The second quarter's operational tax rate was 30.4% and 30.3% year-to-date. The quarter also included a $0.8 million negative impact from tax adjustments compared to a positive $1.8 million adjustment in the second quarter last year.

Net income in the second quarter of 2006 was $59.3 million, or $0.37 per diluted share compared to $57.9 million, or $0.35 per diluted share in the second quarter of 2005. On an adjusted basis, net income excluding restructuring costs and tax adjustments, but including the expensing of stock options in both periods, which constitutes a non-GAAP measure, were $61.7 million, or $0.39 per diluted share in 2006 compared to $53.1 million, or $0.33 per diluted share in the second quarter of 2005. This represents an 18.2% increase in earnings per diluted share on an adjusted non-GAAP basis in the second quarter of 2006.

Cash flow from operating activities was $82 million in the second quarter of 2006 compared to $40 million in the same period last year. Cash flow increased 105% in the quarter compared to the same period last year. Year-to-date cash flow is 43% higher than last year, even with the cash outflow in 2006 for the tax payment associated with the repatriation of foreign earnings made in the fourth quarter of 2005.

Capital expenditures were $13 million in the quarter, depreciation and amortization for the second quarter of 2006 was $12 million. Inventory days were 96 at the end of second quarter of 2006 compared to 96 at the end of the second quarter last year and 90 days at the end of 2005. We expect inventory days to be near last year's level by the end of this year. Receivable days stood at 58 days at the end of the second quarter, compared to 52 days achieved at year-end, and receivables should also improve slightly in the second half of this year.

At the end of the second quarter of 2006, we had $475 million in cash and short-term investments. Long-term debt was $413 million at the end of the second quarter, and in addition, we had $389 million of short-term debt and a derivative liability value of $32 million at the end of the quarter. DENTSPLY repurchased $139 million of stock, approximately 4.7 million post-split shares at an average post-split price of $29.60 in the second quarter of 2006. Based on the Company's current authorization to maintain up to 11 million post-split shares of treasury stock, we still have approximately 3 million post-split shares available for repurchase.

Finally, as Gary noted, we are increasing the top end of our guidance and plan to increase our internal investments in growth initiatives during the last half of this year. We are comfortable with a post-split diluted earnings per share range of $1.40 to $1.44 for 2006. This guidance includes the impact of expensing stock options, but excludes the impact of restructuring costs and tax adjustments. That concludes our prepared remarks, and we'd be glad to answer any questions that you may have at this time.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Frank Pinkerton, with Banc of America Securities.

Hey, guys. I guess just a question. The small company, E4D, has been making a lot of noise recently about launching a product. Can you run through what these chair side systems are doing and is that a substitution for lab work and potentially, is that an opportunity for DENTSPLY to offer ceramics that could be sold directly into the dentist's office?

To kind of consolidate the first two questions, Frank, any time they're going to do that kind of restoration chair side, is something they normally would have done in a lab. So the answer to that question is, yes. To comment about what we plan on doing with respect to offering, broadening our product offering in the future, I really don't want to comment on that. But we're very aware of this technology. We're very involved in similar technologies. It's unlikely we're going to take anything directly to the dentist. We have provided all of our products through the lab, and if they want to have a similar technology offering, we'll probably have them offer it.

Okay, great. And just as a follow-up, with all the cash building on the balance sheet, just remind us, you know, what is the acquisition environment look like? Do you guys still see opportunities there, and if acquisitions don't present themselves, what are the alternative uses for the capital there? Thank you.

The answer hasn't changed much, Frank. Our primary and targeted use of cash is always acquisition, and it remains active. We remain in contact with some of the targeted acquisitions we have. As I have said in the past, the primary targets, many of them are private and the decision isn't necessarily always one of valuation, it's one of timing and when the family wants to decide to divest it. In the absence of acquisitions, we will continue buying back stock. The degree to which we do that really is a timing thing based on how the acquisition environment looks.

Our next question comes from the line of Anthony Ostrea with J.P. Morgan Securities. Anthony?

Hi, good morning guys. It's Anthony from JMP Securities. Had a couple of questions. Can you give us a little more color? You mentioned that you would be investing a little more in your sales force. Can you pinpoint which areas you'd be investing in essentially?

Yes, I can be general, I don't want to be specific for competitive reasons, but, obviously, the areas that we want to continue investing in the terms of manpower and resources to reach the customer would be the growth areas.

Orthodontics?

Orthodontics would certainly come to mind, but I would'nt suggest that it is limited to that.

And how would you characterize the magnitude of the increase in your sales force?

Again, you know, that's information our competitors would love to have and they're probably going to eventually find it out, but I just don't want to make it that easy for them.

Okay. And then you also mentioned, well, Europe grew, was it at 5% year-on-year? In the quarter?

Yes, in the quarter, right.

What was Germany's growth rate in the quarter?

Just a minute. I'll break that out for you. I said year-to-date Germany was 6.2%. For the quarter they were minus 1.5%. And if you recall last year, the first quarter was the lowest one because they had such a delay in trying to get patients into the offices because of the new reimbursement. A lot of the people, even though the entire year was low, many of the people who wanted procedures done in the first quarter ended up doing them in the second. So it's really a comparison issue here.

Okay, so we shouldn't read into that as being, sequential decrease as being a negative?

No. The issue in Germany all year long was bumpy as the quarters went through. So you really have to get through a full year to get this thing to smooth out a little bit because the comparisons will be bumpy. The comparisons will, obviously, be bumpy because of how unsmooth it was last year. If you look at Europe for that quarter and exclude Germany, Europe was up 6.4%.

Okay. And you also mentioned that you are at least getting some pop in your Cercon division based on what's happening in Germany. How much of a -- how much of a difference is being made up by Cercon?

I'd say most of the growth is coming from Cercon. It's just tremendous double-digit growth. But when you look at it from a comparison on revenue, clearly the price of precious metals is much higher than the price of the Cercon product.

But on a margin level, is Cercon more profitable?

Cercon is more profitable if you're looking at the margin on precious metals with the precious metal in it.

Okay.

Obviously, when you look at the take the precious metal out of it and look at the cost of goods, the precious metal content is a huge part of the cost of goods. So it would be a higher percent excluding precious metal, but a higher dollar comparison, Cercon would deliver more dollar margin.

Great. And my last question, on your China operation, I think in the last conference call you indicated that there's been probably a more favorable response than a negative response to use [INAUDIBLE] lab overseas, can you update us on what your customers are saying right now?

Yes, I will comment on that and then if Bret wants to add some comments. I'm not certain I said they were more favorable. I think there was considerable noise in the beginning because in the beginning you probably heard more concern over it rather than favoritism because they really hadn't had an opportunity to use it. Since that call, the noise has dropped down considerably.

In fact, we've had some people that were voicing concern in the first quarter that are now customers or want to be customers. And I think much of the concern has been alleviated because they now see that this was not a strategy to go directly to the dentist, that we're continuing to take it through the lab. I think the ones that have used it are very happy with the quality that they have seen and I think that will continue to grow as we expected. Bret, do you have any additional remarks?

No, I just would reemphasize the fact that I think early on where we were getting and negative reaction was that some of these labs in Asia shipped direct to dentists. And that's not our strategy at all. Our strategy is only to provide the service and exclusively for the benefit of our U.S. lab customers and we only sell this to customers that buy our traditional products. And I think in the face of, one of the earlier questions was about chair side restoration, some of our competitors' strategies are to go direct to the dentist and allow chair side restorations. I think Gary pointed out earlier, and it's consistent with this issue, that our strategy is to go to the lab, not the dentist, and now that that's clear I think most of the noise has died down. And, in fact, some of people that opposed it at the onset are now customers or giving us samples to become customers of this service.

Great. Thank you very much

Our next question comes from the line of Suey Wong with Robert Baird.

Thank you. I'd like to ask a bit more on China and the lab business there. I want to find out how that's ramping up and when it will have a meaningful impact on your Asian sales?

Yes, I'd just make some comments again ask Bret to comment since he was reviewing the lab. I think Bret mentioned this in his remarks that today with the customers that we have that are using it, if they were to use up all of their capacity, get to their full potential, they would use up all our capacity. So given the resources that we have in place today, it's fully utilized.

We're looking for continuing training and space expansion. We expect to continue ramping it up through the year to quantify that, Suey, again I keep referring to not giving too much information to competitors. I really don't want to tell them how fast this is ramping up, but we'll ramp it up as fast as we can. The training probably is the bottleneck because one of the things we have emphasized throughout this program is the quality of what we deliver. And we want to make sure these lab technicians are properly trained so they will deliver a quality product. Bret?

Yes, Suey, what I'd add to that is this is really quite small. The operation is really quite small. And the way this works is a lab will give us samples, they will give us 50 restorations, and we'll prepare those, we'll ship them back to them, they'll see how they like them. And that's why this process of, they give us an indication of the ultimate volume they might like, they give us a sample to see how we do, and over time they ramp up to that level. And if that level they've indicated would exceed our capacity, as Gary mentioned. The other thing I'd make clear is that these sales won't show up as sales in Asia. They will show up as a sale in the United States market because we measure that -- that sale comes to where the end user is, not where the production is.

Could you give an update on your lab business in the U.S.? How much that was either up or down?

Just let me check it to make sure. I believe it was up about 5%, but let me just confirm that . The crown and bridge, Suey, was up between 5% and 6%. Teeth were negative, but teeth been negative for several years now and that's a trend that I think everybody expects as edentulous, or toothless, patients continue to decline in the marketplace. So the indicator that we always look at is crown and bridge because that's where the growth is.

That was up 5% to 6% in the U.S.?

Yes. Correct.

I want to jump back to a comment that Bret made. So any lab sales that come from your outsourcing service in China, that will be counted in U.S. revenues. Any products you sell to outsourcing labs, obviously, not DENTSPLY, would be counted in your Asian sales?

The division that's contacting the customer in the U.S. is our prosthetic division in the U.S. They get the supply from China. And it's unique, Suey. Over 50% of the products that we sell from any given location around the world come from another DENTSPLY manufacturing site. So this is pretty common for us.

Gary, the products that you sell to outsourcing labs based in China, are those in your Asian sales?

Yes, they are.

Okay. Some of those labs, I believe, are owned by U.S. companies. Would they be U.S. sales or would they be Asian sales?

If we're selling them in Asia from Asia? They're going to be Asian sales.

Okay. Okay. Let me jump over to Germany here. I recognize that your ceramic business is doing very well. How is your non-precious metals business in Germany?

We don't have any non-precious metals business.

So it's only precious metals?

Correct.

Okay, and this is the last point. Your ortho business has been outpatient in America now for quite a few quarters. You've had been very strong product introductions. Is there any kind of secular change going on in the market? Is there any acceleration in the market? Are there competitive forces, let's say, the acquisition of Form Cobite, Danaher? Anything like that happening, or helping your sales?

I think that particular one, Suey, is too soon to see any indication in the marketplace about how that would affect sales, one way or the other. I mean, I clearly think our growth is driven by two things. One, we have just introduced some very exciting, innovative products in the marketplace. And two, most of those products are upgrades from previous products, you're getting kind of a multiple effect of getting more units and units that sell at a higher price.

Good, thank you.

Yes.

Our next question comes from the line of Steven Postal with Lehman Brothers. Mr. Postal?

Thanks a lot. I'm just wondering if you could talk about your endodontics business. You mentioned some new products there. But maybe if you could just elaborate on the performance in the U.S. and throughout the world?

Bret, since you were covering the new products do you want to address that?

Sure. Endodontics, as you know, is one of our specialty businesses. We sell a wide range of products throughout the world in that segment. It's one of our top performing businesses throughout the world. Our growth rates are kind of high-single digits right now and it's very strong business for us.

Just make one other, if I can add one other thing, Bret. The growth is not so much in the number of procedures being done, but people moving to premium products like nickel titanium. And, of course, we probably see higher growth for us in Europe and other markets than the U.S. because we introduced nickel titanium in the U.S. a long time ago and have a higher penetration in the U.S. market than others.

Okay. And just a couple questions on the anesthetics business. Can you update us on the performance of Oraqix? I think it's been launched in some countries over the last six months. How is it doing in the U.S. and throughout the world?

Of course from a growth percentage you're seeing it higher in the newer markets because the base is lower. We've introduced it, I think, since the last call last time in about 10 countries in Europe and they're very pleased with the reception. We'd like to see faster growth in the United States. We did very well in the first year in establishing a base line, but we would like to see that expand to more new users, and we're talking with our distributor partner about that today to come up with mutual programs that we can use together to stimulate those sales.

Are you still pleased with the distribution relationship there or is there a possibility that could eventually be more -- go to more broad line distributors?

Well, as I said, we're working with them right now to see what we can do to stimulate the sales more in the U.S. And I'll probably just leave it at that.

Okay, fair enough. And then, as I recall, you've talked in the past about launching, I think, it's an ardicaine version in the anesthetics business? Can you just update us there?

Yes, that's still something we're looking at. Obviously, our priorities in anesthetic have changed somewhat in that this immediate need for us to make sure that we kind of button-down the supply contracts and get a buyer for the anesthetic plant. But there's continued negotiations with trying to get this ardicaine into the U.S. But I don't think you're going to see that until 2008.

Okay. And then just one clarification on cash flow. It, obviously, was up significantly, but I think you alluded to basically days in inventory kind of up, and also as I heard maybe DSOs were also up. I'm just wondering what kind of has driven the cash flow expansion there?

Some of it is in the mix of where those products are actually occurring. But also from a just an accrual and a payable perspective, I think that those have been beneficial. The one piece that you've got negatively impacting it this year in the first Q we had about $22 million, roughly, that was paid out for the tax payment associated with the repatriation that was made last year. That actually hurt us and would have made the numbers even better within this first quarter and also some of the benefits that were done with really the restructuring activities at the end of last year.

Okay.

We should expect on a cash flow basis especially on the working capital area like inventories receivables, that both of those categories should get better by the end of this year.

And how about payables? Will there be any change there?

No, I think the payable levels that we've got in place at this point are running at a kind of normalized expectation.

Okay. Thanks a lot, guys.

Yes.

Our next question comes from the line of [Kyle Dopke] with Morgan Stanley.

Great. Thanks. Two quick questions. First, I noticed there was about a $30 million uptick in goodwill. Was there any acquisition activity in the quarter?

No. From that perspective, a lot of the increase that you could see there, as well too, is going to come from some of the exchange movements that take place. But we didn't have any additional acquisitions within that period.

Okay. Then could you just quickly run through again the pieces of the organic growth in the quarter?

Yes. If you look at it around the world, Kyle, the base business was 5.2 -- this is internal growth -- foreign exchange was plus 0.3, and acquisition was plus 0.3. If you look at it geographically, the U.S. was plus 6.1, again, this is all internal growth, and excluding precious metals, and Europe was plus 0.5 and the balance of the world was plus 3.5.

Great. Thanks a lot.

Our next question comes from the line of Frank Pinkerton with Banc of America Securities. Mr. Pinkerton?

Yes. Thanks for the follow-up. Could you update us on, I know that there's litigation between some distributors and the artificial teeth line, or false teeth line that you guys were selling into that market. Have there been any changes in the distribution patterns there? Have you in-sourced any of that?

We haven't seen much, you know, as I said, the only one that goes through distribution for us is artificial teeth, and they are negative, but they've been negative for three years running. So we haven't seen a change in the trend, no.

Okay, great. And just on the Office of Technology initiative, I know you guys have been investing in there for the last couple of years, I know you've also been a little secretive in not letting any of the products out, you know, before they're ready to go, but can you update us on timeline, and maybe what the first couple of products, you know, coming out of that could be?

Yes, I will. [INAUDIBLE] is probably the closest, Frank, and that's the technology we got from Sanofi-Aventis. I think in the past I have said we expected that might be late '06. I think probably now it is going to be an '07 event. But it clearly is in product development and it will be a product. [Daxa] was another one that we made an investment in and, quite frankly, we have shut that down. We don't think it's going to be a product that is going to be worthy of describing it as being innovative. So it's no longer a project. [Itmas] was one of the other ones I discussed, and we continue in development with that and expect that it will be at '07 product also.

Okay, great. Normally when you think of dentists here of the United States, you look at things like interest rates that normally affected dentists spending patterns. I know you guys are no longer on the software kind of equipment side of the dental office, but with the move in interest rates, does that affect dentists, you know, kind of consumption of consumables and also will the rise in interest rates impact any of the labs of the Cercon side?

We don't see it, Frank. We clearly don't see it on the consumables. And the only way it would affect the lab would be if they're looking to buy some major piece of equipment. And, you know, even with a downturn in the economy or pressure from interest rates, I think we mentioned last year in spite of all of the economic problems they're having in Germany, German labs recognized the benefit of getting into the Cercon business and they were buying equipment last year. So for our particular product line, we haven't seen any impact by it.

Okay, great. And I just want to make sure that I heard Bill correctly. Was it the Chicago facility going to benefit by $0.03 on an annual basis or $0.03 in the back part of the year? Bill, could you repeat that?

Not sure what you're referencing. Are you talking about the anesthetic facility for this entire year?

Sure. The closure of the anesthesia facility. What's the impact to that on earnings per share?

Yes. That was the comment in Gary's comments. Yes.

And that was, we had raised our guidance earlier before in 2006 as a result of that decision. So it's already in the guidance.

Okay. I guess I'll ask it a different way. Is it $0.03 for the back part of the year? I'm trying to get, you know, if I'm looking at kind of your model going out into future years. What's, I guess, an annual contribution from that facility closure?

When we adjusted our earnings guidance at the beginning of this year, when we announced the anesthetic facility closure, Gary stated at that time that it was about a $0.06 to $0.08 impact and kind of our overall improvement that we were laying out there.

That was on a pre-split basis, so the number that he's throwing out there now of 3 to 4 is on a post-split basis, and that is actually spread pretty much throughout this year.

I think that we've absolutely already had some benefit of that in the first half, but you should continue to see that positive impact as we move through the second half of the year.

Okay, great. Thanks.

Our next question is a follow-up question from Anthony Ostrea with JMP Securities.

Hi, guys. Thanks for taking the follow-up. Bill, can you just walk us through, you said you had about $80 million in cash flow from operations. The CapEx number and the DNA number less the CapEx of about 12. I'm looking at what, a change in $40 million quarter-to-quarter in cash. Can you just walk us through how you get from the Q1 cash number of 435, roughly, to about 475?

Sure. I mean keep in mind in general, Anthony, that we announced that we had bought back about $139 million of stock during this second quarter period, as well, too. Plus you've got different exchange impacts on that figure. But the cash that we've got out there, that 475, keep in mind that the reason why that's on our balance sheet is that, you know, we're preparing to pay down the euro bond debt which comes due at the end of this year.

And that paydown is expected to come from the past that we currently have on our balance sheet and also using our revolving credit agreement that we have, as well.

Great. And then last question here, Gary, I think in your last conference call you indicated that you expected organic growth for the year to come in probably at the high end of what you've historically come in at, closer to 6%. You raised guidance for the bottom, or bottom line guidance for this year. How are you feeling about the organic growth for fiscal '06?

Yes, I did say that we expected it to be 5 to 6 and likely on the high and, of course, we're pretty much tracking that way as you look at the second quarter. I don't think that's an unrealistic expectation as you look at the back half of the year with the one caveat being you've got some very unusual comparisons. If you think about the third quarter last year, it was the first quarter were you saw some recovery in Germany. It goes slow, but Europe was positive and you had a 7.2% internal growth in the U.S. And you have the flips of that in the fourth quarter where it was a lower growth. So while you might see it in aggregate for the second half of the year, it's not going to be that smooth.

Great, thank you.

[OPERATOR INSTRUCTIONS] Gentleman, there appear to be no further questions at this time.

Okay, well thank you, Alexandria and thank you all for joining the call and your interest in our Company.

Ladies and gentlemen, thank you for your participation in today's DENTSPLY International second quarter earnings release conference call. This concludes today's call. You may now disconnect.