DENTSPLY SIRONA Inc (XRAY) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to today's DENTSPLY International's first quarter 2007 earnings release conference call. As a reminder, today's call is being recorded.

For opening remarks and introductions, I would now like to turn the conference over to Mr. Bret Wise, Chairman and Chief Executive Officer. Please go ahead, sir.

Okay, thank you Matt, and good morning everyone. Thank you for joining us on our first quarter earnings conference call. This is Bret Wise, and also with me today are Chris Clark, our Executive Vice President and Chief Operating Officer, and Bill Jellison, our Senior Vice President and Chief Financial Officer. I'd like to begin the call today with some overview comments regarding our results for the first quarter and also provide a brief update on several strategic initiatives we have underway. Chris Clark is going to follow my comments with an update on our new product pipeline, and Bill Jellison will then take you through a more detailed review of our financial results. Following our formal remarks, of course, we'll be pleased to answer any questions you may have.

Before we get started, it's important to note that this conference call may involve 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 on form 10-K, our periodic reports on form 10-Q, our press releases and conference call transcripts, all of which are filed with the SEC. This conference call in its entirety will be part of an 8-K filing later this week and will be available on our Web site. By now, each of you should have received a copy of our first quarter earnings announcement, which was released last night after the market closed. If for some reason you haven't received that, it is available on our Web site.

We're very pleased to report a strong and improved performance in both sales and earnings for the first quarter. Reported sales for the quarter were $472.9 million, which is a 9.7% increase compared to the 2006 quarter and excluding precious metal content, sales were $423.3 million, which is a 10.4% increase versus the 2006 quarter. The 10.4% increase in sales excluding precious metals was comprised of internal or organic growth of 6.4% and foreign exchange of 4.0%. The internal growth rate was led by both our implant and our orthodontics businesses, which both had double digit growth in the first quarter. Our worldwide implant internal growth rate was in excess of 20%, and in total, including currency effect, the implant business grew by over 30% during the quarter. Our orthodontics business also had a growth rate in the low teens for the first quarter, and this was helped by strong demand for our new self-ligating ceramic bracket called In-Ovation C.

The geographic breakdown of internal growth for the quarter, again excluding precious metals was 4.7% in the U.S., 8.2% in Europe, and 6.6% for the balance of the world. We're pleased to see a steep recovery in the U.S. internal growth rate following the implementation of our U.S. Strategic Partnership Program in the fourth quarter last year. U.S. growth was strong in our chairside consumables. Our crown and bridge product line, including Cercon, our all-ceramic crown and bridge products, and in orthodontics.

Growth in Europe continued to be very strong at 8.2%, led by double digit performance in all of our specialty businesses, including orthodontics, endodontics, and implants. In the rest of the world category, we delivered double digit growth in Asia, Africa, and Australia and high single digit growth in Japan. The performance in Japan really builds upon some of the improvements we made in 2006 in that region and we believe our first quarter performance is well in excess of market rates. Just a couple of specific points that impacted growth this period.

As we discussed on our year-end call, the International Dental Show, which is referred to as IDS, was held in the third week of March in Cologne, Germany. This show is held every other year, and is by far the largest dental forum in Europe. This year, over 1700 companies attended and exhibited at the show and estimates are that over 100,000 dental professionals attended. We had a strong presence at the IDS and we were very encouraged by the optimism of the dentists attending and the bullish sentiment towards new products coming out and new technologies that are being developed. We think this is a bullish sign for the industry and the dental profession in total. Those attending our exhibit showed a strong interest in many of our new and existing products and Chris Clark is going to elaborate on some of those later in the call this morning. Overall, we are very encouraged and the show certainly aided our European sales growth in the quarter.

Moving to the U.S. market, as you may recall, we merged our endodontics and our implant businesses in the U.S. effective January 1. This new combined unit now has a very unique product offering and a value proposition. The business has been very active in bringing the combined sales force up to speed on both of these very technical disciplines of dentistry, and the feedback we have from the field reps and the customers is very encouraging and we're pleased with our progress in both of these areas. We believe that this will continue to build over time as the reps become more comfortable and proficient, particularly in the implant area.

Just a brief update on our U.S.-based strategic partnership program with our U.S. distributors. Sales growth rebounded in the first quarter with our chairside consumables that go through that channel. As we indicated in the fourth quarter, we've remained heavily focused on end user promotions, in both the fourth quarter and the first quarter this year, to drive end user demand during this implementation of the initiative. This contributed somewhat to higher expenses, but it's been very successful in driving growth, particularly as dentists that source from discontinued dealers need to look to chain distributors for our products during this period of transition.

Late in the quarter, we also became aware that there's been an influx of our products being sold into the U.S. market from offshore through the discontinued dealers that now can't source the product directly from us. This is problematic as the offshore product is often labeled differently than is required for the U.S. market and in many instances has a different formulation from what we sell in the U.S. market. So we're very active in trying to track down these channels of supply and hope to make continuous progress in closing them down throughout the year. Although these channels do not really impact our overall growth rate, it can skew our regional growth indicators as sales outside the U.S. end up coming back into the U.S. market and could replace what we report as U.S. sales. So we're going to stay on top of this, we're going to monitor it very closely for the next couple quarters to close down those channels, and also understand what impact it has on our regional growth rate. I would say in the first quarter it did not have a material affect on our growth rate in the U.S.

Overall, I think at this point the Strategic Partnership Program has met or exceeded the expectations that we had going into the initiative. Our relationship with our continuing dealer partners is very strong and our field reps are rapidly learning to work effectively with the new sales tools we have coming out of this process. From an earnings perspective, we generated $0.38 per share in the quarter, which is up 22.6% from the prior year's first quarter. If you remove the restructurings from both periods, earnings improved 15% year over year and Bill will provide you more details on the earnings performance during his comments.

I think it's fair to say at this point we're off to a strong start for 2007. We remain optimistic as to the outlook for the year with the first quarter results giving us increased confidence. We're reconfirming this morning our internal growth rate estimate of 5 to 6% for the full year and again we remain comfortable in the upper half of that range at this point. If the dollar remains weak, of course, currency growth will add to that. Additionally, as always, we continue to pursue potential acquisition opportunities that we think can enhance the business. The strong start also gives us confidence in our earnings guidance of $1.56 to $1.61 per share for the full year. Again, that excludes restructuring charges and any one-time tax issues, again reflecting double digit earnings growth for the full year. Given the strong start in the first quarter, we're now more comfortable towards the upper end of that range, and we expect to revisit our earnings guidance for the full year following our second quarter.

At this time I would like to turn the call over to Chris Clark, our Chief Operating Officer, who will provide you with an update on our new product pipeline. Chris?

Thank you, Bret. Good morning, everyone. Thank you for joining us on our call this morning. I'd like to take a few moments to provide you an update of our innovation efforts and really to highlight some of the key new product introductions both from late last year as well as the first quarter of 2007. Starting first with an update of one of our key late 2006 introductions, we continue to be very excited about the performance of In-Ovation C, our new revolutionary ceramic orthodontic bracket system. This is the first and only self-ligating bracket on the market, combining the benefits of an interactive bracket system with the strong aesthetics of the ceramic brackets. We've expanded production capacity to keep up with customer demand, and it's very clear we're gaining both momentum and incremental sales through trading existing customers up to In-Ovation C as well as through customer conversions from competitive bracket systems.

We continue to be active on the innovation front in the first quarter with the introduction of seven new products during the period. This includes an improvement to the software supporting the Cercon system, called Cercon Art, which provides the laboratory with expanded capabilities in the design of Cercon copings and substructures for crowns and bridges. This includes the ability now to manually edit the preparation line and gives the labs expanded capabilities to design frameworks according to the natural anatomical shape of the tooth. Our Degu Dent division to Europe also expanded their manufacturing support services to Cercon customers to now include fabricating six-unit bridge frames, which continues to expand the capabilities of our Cerconia system. Cercon continues to be a significant contributor to our overall growth, with total Cercon sales growth in the quarter well into double digits.

Moving to the implant side, our Friadent division showed a guided surgery system at the IDS. This solution offers maximum safety and economy in implant planning and as a special drill and guidance system for more convenient drilling and implant placement. This innovative system really leverages some of the software development from Materialize Dental, in whom we bought an equity position last year, and it uses a unique sleeve-on drilling system that provides improved drill access in posterior regions in the mouth. As I mentioned, we demonstrated the system at the IDS, and anticipate the initial shipments in Europe during the second quarter.

During the first quarter, we also introduced SmartSen which is a new resin cement specifically designed to address customer needs in the Japanese market. This product has desirable adhesive strength and has easy removal of excess cement during placement, and SmartSen really demonstrates our continued commitment to expand our market position in the key Japanese market.

Finally, I'd also like to provide you a brief update on on our work with INMOS PLC. You may recall that this is a company with whom we're developing a line of detection and monitoring products based on their extensive work in the electrical impedance area. We're continuing on our collaboration with INMOS, and the technology has now been refined to a point where we're focusing our areas on claims definition and support. This is a critical step prior to initiating regulatory filings and marketing the product. As we look at the second quarter and beyond, we continue to have a full pipeline of new products and we anticipate-- that we anticipate bringing to market over the balance of the year and we remain very optimistic about the anticipated impact of our innovation efforts.

I would now like to turn the call over to Bill Jellison, our Chief Financial Officer, to review the financial results for the quarter in more detail. Bill?

Thanks, Chris. Good morning, everyone. As Bret mentioned, net sales for the first quarter of 2007 increased by 9.7% in total and increased by 10.4%, excluding precious metals. The sales increase, ex precious metals from foreign exchange translation. The geographic mix of sales ex precious metals for the quarter included a 6.4% increase from internal growth and a 4% increase from foreign exchange translation. The geographic mix of sales, ex precious metal in the the first quarter of 2007 included the U.S. at 40.5%, Europe CIS represented 40.6% this year, and the rest of the world was 18.9% of sales.

European sales as a percent of total sales increased as Europe continued to grow faster than the U.S. throughout 2006 and in the first quarter of 2007 and due to the weakening of the U.S. dollar versus the European currencies. The stronger Euro in the first quarter compared to last year not only benefited sales growth, but also had a slight positive impact on earnings in the period.

Gross margins for the first quarter were 58.2%, that's ex precious metals, compared to 57.4% in the first quarter of 2006. Margin rates were positively impacted in the quarter, not only by improved product mix, including the launch of new products, but also from improved manufacturing efficiencies. Gross margin rates are expected to continue to run at an improved level throughout 2007.

SG&A expenses were $164.1 million or 38.8% of sales ex precious metals in the first quarter of 2007 versus 37.9% in the prior year's first quarter. The higher expense level in the first quarter primarily resulted from the costs associated with the IDS, the International Dental Show, which is held in Germany every two years, increased selling and marketing expenses to support and strengthen the combination of our U.S. endodontic and implant businesses, the cost of additional sales reps, and expenses were also negatively impacted by a stronger euro in the period.

Operational margins for the quarter were 17.2% compared to 16.2% in the first quarter of last year. Operating margins based on sales excluding precious metals were 19.2%, compared to 18.3% last year in the same period. And operating margins based on sales, excluding precious metals for comparative purposes, excluding restructurings in both periods, would have been 19.4% in the first quarter of 2007 and 19.5% in 2006. While this quarter reflects a slight decrease in operating margins, excluding restructuring costs and based on sales excluding precious metals, we continue to believe that these operating margins will be favorable for the whole year when compared to 2006 by approximately 30 to 50 basis points. Net interest and other income in the first quarter of $2.3 million, which is an improvement of $1.1 million compared to last year's first quarter. Net interest income improved by $1.3 million in the quarter and other income decreased by $0.2 million, primarily as a result of lower foreign exchange transaction gain in the first quarter. As we move through this year, we currently expect net interest to continue to run favorably as a result of our net investment hedges and our lower borrowing levels.

The corporate tax rate in the quarter was 29.9% compared to 29.8% in the first quarter of 2005. The first quarter's operational tax rate was 30.2%. In the second quarter of 2007, Germany is expected to ratify a change in their corporate tax rate to be effective January 1, 2008. We expect this to result in a positive adjustment to our deferred taxes and the adjustment will be treated as a one-time tax benefit in the second quarter of 2007. We also expect a future operational benefit beginning in 2008, which will better assess -- which we will better assess later on this year.

Net income in the first quarter of 2007 was $58.5 million or $0.38 per diluted share compared to $50 million or$0.31 per diluted share in the first quarter of 2006. On a pro forma basis, net income excluding restructuring charges and one-time tax benefits, which constitutes a non-GAAP measure, were $58.9 million or $0.38 per diluted share in 2007 compared to $52.9 million or $0.33 per diluted share in the first quarter of 2006. This represents a 15.2% increase in earnings per diluted share on an adjusted or pro forma basis in the first quarter of 2007.

Let's now look at the cash flows and a few of the balance sheet items. Cash flow from operating activities was $41.8 million in the first quarter of 2007 compared to $11.4 million in the same period last year. The first quarter of 2006, however, included $23 million of cash outflow for the tax payment associated with the repatriation of foreign earnings made in the fourth quarter of 2005. Adjusting for this cash outflow in 2006, operating cash flow would have increased by 21.5% in this period. Capital expenditures were $11 million in the first quarter while depreciation and amortization were $13 million in the period.

Inventory days were 101 at the end of the first quarter of 2007 compared to 96 days at the end of the first quarter last year and also at the end of 2006. Inventory was built to support the IDS and new product launches and we expect them to improve to the low to mid-90-day range by year end. Receivable days were 59 days at the end of the first quarter in 2007 compared to 57 days at the end of the first quarter of 2006. We do not expect improvement in AR days become -- or we do expect, sorry -- improvement in AR days back to the mid-50s at the end of this year.

At the end of the first quarter of 2007, we had $137 million in cash and short-term investments. Total debt was $423 million at the end of the first quarter. DENTSPLY has repurchased $21 million of stock or approximately 667,000 shares at an average price of $32.22 so far in 2007. Based on the company's current authorization to maintain up to $14 million, shares of treasury stock, we still have approximately 3 million shares available for repurchase. Finally, as Bret noted, we remain comfortable with a diluted earnings per share range of $1.56 to $1.61 for 2007, and this guidance excludes the impact of restructuring costs or one-time tax adjustments. That concludes our prepared remarks. Thanks for your support and we'd be glad to answer any questions that you may have at this time.

Thank you. (OPERATOR INSTRUCTIONS). We'll go first to Derek Leckow with Barrington Research.

Thank you, good morning.

Good morning, Derek.

Just a question on SG&A expenses. You mentioned there were two components there that were sort of one-time in nature and I wondered how much of that will be flowing into the future quarters here in the quarter -- in the year?

The two components, Derek, that we talked about. One is really kind of a one-time in nature, that's the IDS component. Obviously, that happens every two years. The other piece was really because of the additional cost that we've invested into the combination of the U.S. implant and endodontic businesses. While that's an increase over where we were last year, I think that's an ongoing investment that we're investing in that area because we think that the continued potential for growth is very solid, so those two areas, though, were probably equivalent to around 3 to $4 million in the first Q.

3 to $4 million, okay. Looking at your gross profit margin, that was a little bit higher than we expected, by 100 basis points. That's a lot higher than your typical improvement year to year. Is that a reflection of what's happening with the endodontic and implant businesses or where is that coming from?

One, we're seeing a number of positive benefits. Two primary areas, both implants as well as orthodontics. Orthodontics with the In-Ovation C product that we've talked about a number of times in the past. In-Ovation C is the self-ligating ceramic brackets. Those brackets typically have a price point in the $13 to $15 a bracket level, compared to a stainless steel bracket might only be in the 3 to $4 a bracket and work your way up to clear brackets and self-ligating stainless steel brackets kind of in the middle there. That continual trend on the ortho side bodes well for both our business, because it's the first and only bracket out there that covers that and also because of the margin rates we can get on that business. Also, as implants continue to grow, as Bret mentioned, implant internal growth was in excess of 20%, total implant growth with the exchange was in excess of 30%. Obviously, those things help us to deliver improved margin rates.

Derek, this is Bret. I would add to that that some of the things we're doing on the manufacturing side are also having an impact. We initiated a pretty broad program last year, we called it Demand Manufacturing Planning, which is basically a lean initiative across a number of our plants and we're expanding that this year. And that's having an impact on our overall cost structure, as well, which is helping those margins.

Okay. So we should probably model in a 100-basis point improvement for the year, does that sound reasonable?

I would model in some improvement for the year.

Okay. The issue you raised about the gray market goods coming into the U.S. market. How important is that issue? And what can you do to combat that?

It's important for a couple reasons. One is a regulatory reason, and that being that the labeling of that product may not be -- may not meet the FDA's requirement. It may be labeled differently and usually is labeled differently for these foreign markets. And sometimes the formulation is different than the formulation we use in the U.S. It's important from a regulatory standpoint, certainly. It's also important to us because as we sell offshore, this might be product going into Asia or Latin America at lower price points and then being brought back into this market to sell through distributors who can no longer source the product from us, so it can skew our regional growth rates. That's why we're watching it very closely. It won't change our overall growth rate, because it's still our product, just not product that's designed and labeled for the U.S. market. The way we track that is, if we can get our hands on the product, we can via the lot numbers, we can tell where it was sold to and shut those buyers down, is about our only recourse.

That takes a little bit time to gather that information, though, and confront the suspected party, I guess, right?

Yes. That's why we're going to monitor it very closely here for the next several quarters. We raised it because it's been brought to our attention from a number of our continuing dealers, but interestingly enough, it's been brought to our attention by our discontinued dealers. It's important, it's not going to affect the overall growth rate in any way, but it could skew growth rates modestly. That's why we've commented on it today.

Appreciate it.

You bet.

We'll go next to Jon Wood with Banc of America.

Good morning. You commented on the endodontic growth -- excuse me, the implant growth in total, but any sense on what that grew in the U.S. in the quarter, or are we too early in that strategy?

I think we're probably too early in that strategy. I'll tell you that the internal growth rate in the first quarter '07 was better than the growth rate in '06. I think that this will be a progressive improvement as implants as a very technical and technique-sensitive product line and it takes a while for the reps to become really proficient and comfortable with it. What we see today, some of our reps have embraced it and jumped right into the water with it and are doing a good job selling it, others, it takes them longer to get them up to speed and get them comfortable. The internal growth rate for the U.S. did accelerate this quarter over what we had seen in the first quarter of last area, but I think it will be a progressive investment for us probably over this year.

Okay, great. You commented on the plan materialized launch in Europe in the second quarter of '07. Any sense on when that product will be ready to roll out in the U.S.?

We try not to give real specific timing on new product launches. We mentioned the product in Europe because it was actually shown at the IDS, so we're already seeing demand for that. And it will be rolled out probably this quarter. The U.S. will come later, I suspect. I don't know it will be an '07 or '08 launch, but will trail the European launch for some time.

One for Bill. The balance sheet looks pretty overcapitalized here. Can you comment broadly on the acquisition pipeline? I know it's difficult given the timing, but what are you seeing in deals out there?

First of all, let me comment on -- what we saw at the IDS was very encouraging. There were 1700 companies at the IDS. It's kind of a good indicator of how fragmented this business is. Most of those companies are small, family-owned businesses. Sometimes they're undercapitalized. Usually they have a pretty narrow product mix, but they may have one or two very good technologies that have the capacity to grow in the market. When we see those kind of companies, that's where we like to acquire that company or sometimes it's partnering with that company, like we are with Materialize, to give them access to our global sales channel to help them grow more rapidly. So we're encouraged by what we see in the industry. There's always timing risks with respect to acquisitions, but we're very active in that area and it's a key part of our strategy. So we'll keep you updated on that as we go through the year.

Okay, great. Thanks a lot.

We'll go next to Anthony Ostrea with JMP Securities.

Hi, good morning, guys. Thanks for --

Good morning.

A few questions. Bill, you had mentioned on the operating expense line, a couple things. One was the Idea show, and two was the costs related to the endo and implant sales force combination. The second piece, did I hear you say that was an ongoing expense, or is that really a one-time?

The second piece is really a more ongoing investment that we've made by ramping up a number of the costs, both the sales rep cost, advertising, marketing, training-related costs associated with that business to support that combination and also because we believe that there's additional growth opportunities in there. So that's an investment that should continue for that group.

So 3 to $4 million that you called out for both of those items, what was just the show piece?

I think, Anthony, we'd like to to not be too precise on that, on either one of those two. The other thing I'd elaborate on this, we're investing in sales and marketing in those businesses and they're beginning to grow faster, but the level of investment we have today supports a higher sales level. Those ratios will normalize when we get the sales growth coming out of those investments. That can take a period of time, especially when you're talking about training new reps in a pretty technique-sensitive area of dentistry?

Was there also an impact on the end user marketing that you spoke for Q1 for the U.S.?

Yes. The Strategic Partnership Program that we have in the U.S., we had commented in the fourth quarter and and confirmed it again today that both in the fourth quarter and first quarter we've been very focused on end user marketing, particularly during this period of transition from our -- from discontinued dealers to our continuing dealers. That has played a role as well.

And when might we expect that to ease up?

I would say later this year. I would think we'll be continuing to do that in the second quarter, probably the third quarter. At some point we'll be able to back off on that.

Then turning to the U.S., is there -- I know you had mentioned, Bret, in your prepared remarks, that you saw an acceleration in internal growth in your consumables. Can you quantify the numbers?

It was high single digits.

Okay.

In the U.S.

High single digits in the quarter?

Yes.

Okay. Then on new products, was that seven in Q1, how many are slated for the rest of the year?

We anticipate year-in, year-out, we set a target in the 25 range, we're comfortable with that, general guidance, probably actually hope to exceed that. So you've got seven in the first quarter, I think you'll continue to see, roughly that rate moving forward. Obviously, some quarters might be a little light and some quarters might be a little heavy, but we're comfortable with the guidance for 25 for the year.

Lastly on just Germany specific specifically, how much did Germany grow?

Germany grew a little bit below the European rate. We were at 8.2% at all of Europe and Germany was modestly below that.

Great. Thanks for taking the questions.

We'll go next to Jeff Johnson with Robert Baird.

Good morning, guys. Thanks for taking the question.

Good morning.

Wondering if we can start on the centralized manufacturing initiatives in Europe. Are we still on track to see nonprecious metals in the third quarter, I think, is when that was rolling in. And if you can can compare and contrast the strategy in Europe on a centralized manufacturing plan versus the [Prident] strategy, who are the different customers you're targeting with each and how are those two strategies different?

Okay. That's a lot to answer. Let me kind of walk through that. Centralized manufacturing in Europe for the rest of the people on the call, what he's referring to is that our Degu Dent business unit in Germany now offers milling of a variety of substructures for sale to the lab, not the dentist, but to the lab. That business was launched at the IDS and spoke about. Today we're doing one substrate through that product and we'll be adding more substrates as we go through the year, one of which is nonprecious metal. Jeff, I'm a little reluctant to predict what the launch date of that is, but I think it's fair to say to say that Degu Dent expects to launch it sometime in '07, I'm not sure what quarter.

And that market or that strategy compares with Prident, which was also mentioned, which is a lab we own in China, which today supports the U.S. lab market only. Where an impression is taken to the U.S., is sent to our lab in China and is turned around in, I think it's seven days or -- is that the turnaround or quicker? Okay, it might be five to seven days. The substructure or the full crown is built by our lab in China. We guarantee the metal that's used in the substrate, we guarantee the fit, we guarantee the service. That's sold back to the U.S. lab who sometimes finishes the product and the lab sells it directly to the dentist. We launched Prident in early '06, it's going well for us, and we're launching really right now the centralized manufacturing in Europe.

Great. That's helpful, Bret. Thank you. Looking at guidance for the year and this quarter's organic growth. Obviously a solid number this quarter, but maintaining the upper end of that 5 to 6% range somewhat implies organic growth could fall off as we go throughout the year, although it seems like U.S. trends are moving in the right direction, obviously there's some good things going on in Europe. Is this just conservatism on your part or is there some falloff later in the year?

One, we only have a quarter behind us and we would like to see one more quarter before we begin raising that guidance. Two, we know that our comparisons are going to be somewhat tough in the third quarter and then not tough in the fourth quarter. We would expect to see a little bit lower organic growth in the third quarter and higher organic growth in the fourth quarter. How that averages out is not real clear at this point, but it's fair to say that given the start we had for the year, we're confident in the 5 to 6 range and towards the high end of that and we'd like to see one more quarter come in before we start moving that range in any direction.

Great. Last question would be -- what, I just lost it. I'll come back in if I need to. Thanks.

Thanks, Jeff.

We'll go next to Steven Postal with Lehman Brothers.

Thanks. Good morning, guys.

Good morning.

First, just a clarification. The tax rate adjustment in 2Q, is that excluded from guidance?

Yes. That's excluded from guidance. That's a one-time adjustment in our deferred taxes.

Okay. Then a question about Oraqix. I believe some months ago you changed the distribution strategy there. Can you just update us on how sales of that product are going and perspectives on the change strategy?

Sure. What Steven is referring to is that in the -- when we initiated the U.S. Strategic Partnership Program in the fourth quarter of last year, we also changed our distribution strategy for Oraqix, which prior to that was sold only through one distributor in the U.S. As part of the U.S. Strategic Partnership Program, we've made that product now available to all of our continuing dealers, so there's 28 continuing dealers that have that product in the bag. I'd say that the broader-based distribution strategy is working very well. There's broad appeal for that product and frankly, it's helping us by having many more feet on the streets that are carrying that product going through the 28 continuing dealers to reach more dentists and specialists with the products, so I think it's going very well. It was a modest change for us fourth quarter last year and we're seeing the benefits of it now.

Okay. Can you give us some perspectives on what you think the impact of economic growth is on the business? It certainly seems like you've got strong economic growth in Europe. Do you think that had an impact on the performance in that part of the world?

I think it plays a part, particularly in the confidence of the end user, the dentist in this case. I think the improved economic situation in Europe is helping. I think that was evident at the IDS. People were very upbeat there. They were looking at and investing in new technologies and I think that bodes well for the continued growth in that market. It does play a role. It does play a role. It doesn't -- the consumption of dental products is more driven by reimbursement than it is by gross economics. So as people become employed, they get dental insurance or if the government -- if people have confidence in the government's reimbursement scheme, that tends to drive dentistry as well.

Fair enough. Final question. I think you previously talked about seeing a positive impact in the margins from the closure of the Chicago pharmaceutical facility. You just update us on that? Is the positive impact there been completed and maybe just your Pharma initiatives post the closure?

At least as far as the plant the concerned, we were already getting the benefits of that closure last year. The numbers that we're reporting now takes full account of the benefits of closing the facility down. As we continue to move out with some of our suppliers in the future, that there may be some other smaller opportunities there, but I think that the majority of that is behind us.

Okay. Thanks a lot.

We'll go next to Matt Buten with Sapphire Capital.

Congratulations on a nice quarter. You gave a bit of pacing for the organic growth for the back half. What should we think about for next quarter given the idea, is that a net positive or is there a little bit of a hangover post that?

We tend to shy away from specific quarterly guidance on internal growth, just because it's difficult to predict. We're staying with the 5 to 6% in the upper half of that for the full year. We had a reasonable quarter last year in the second quarter so we don't have necessarily a tough comp or an easy comp. The IDS this year fell in the third week of March, which means that we had shipments from the IDS demand both in the third week of March and the fourth week of March. We did come into the second quarter with some backlogs, because the IDS, but it was pretty modest at this point.

Okay. Then on the balance sheet, the sequential growth in receivables and inventory relative to revenue growth, what caused that and what are you going to do -- or how are you going to get them back in line as you discussed?

Sure. The first one is on inventories. Of the increase in inventories, probably almost three full days of that is really just because of the exchange rates with the higher exchanges in the European areas. Inventory still crept up. Part of that was in preparation for the IDS show and to make sure that we had enough product to cover the requirements from that show and also from a couple of the new product launch categories that we've got, especially around the Cercon-related products. Our expectation is to probably have that inventory day level drop-off as we move through the year back down into the, probably around the mid-90-day range, maybe into the low 90-day range, but we should be able to get back into the mid-90-day range by year end.

And on the receivable side?

On the receivable side, we crept up a couple days there. Maybe a day reflected the currency side of it. Part of it was around the Cercon-related products, because we want equipment out in the hands of some of those users because the equipment is absolutely going to drive the consumable base and our consumable base, Chris mentioned, we grew well into the double digits, our consumable base well was above those levels. That continues to show a strong performance within that category. As we move through this year, I think our receivables will improve probably into that mid-50 range.

Okay. On the same topics of FX, what do you think the total -- you mentioned there was a slight benefit from FX on the bottom line. What do you think the total was in terms of operating margin or net EPS impact?

Sure. I think from an overall perspective, if you -- roughly on average, every 5% growth in general, especially in the European currencies, that probably equates to somewhere around $0.005 or $0.01 per share. That's probably consistent in this quarter as well as moving forward. On a topline sales perspective, you could see how much the euro strengthened within the period and we actually picked up the 4 percentage points. If you look and compare kind of the euro currencies from last year against where they're running at today, I think you should also expect, especially on the sales side, that we'll continue to see positive FX sales growth probably in the 2 to 3-plus range over each of the next two to three quarters.

Great. Thank you very much.

We'll take a follow-up question from Jeff Johnson with Robert Baird.

I remembered my other question. As far as the IDS, Bret, you kind of explained this, I think, near the end there, but, back in the Gendex days, we used to think of IDS having a one or two quarter lagging affect. Now it seemed like on the consumables it had a Q1 primary impact. Was there any risk of pull forward into Q1 out of Q2 that we should think about as we model Q2?

That's always possible. You're right that in equipment sale, there's a delay often in equipment sales, whereas consumable sales's actions are much quicker. There could be a moderate impact of end users that bought new equipment or consumables, but I wouldn't expect it to be material.

That's helpful. Thanks, guys.

That does conclude today's question-and-answer session. I'm going to turn the call back over to Bret Wise for any closing or additional remarks.

Thank you again for joining us today for our first quarter report. We feel good about a strong start to the year and are confident about our prospects. Dentistry remains a very interesting segment of the overall healthcare market, and we believe that DENTSPLY is uniquely positioned to serve and succeed in this environment, and we look forward to updating you on our progress as we progress here through the year, so thank you again, and we'll talk to you at the end of the second quarter. Bye.

That does conclude today's conference call. That you for your participation and you may disconnect at this time.