DENTSPLY SIRONA Inc (XRAY) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the DENTSPLY International 2008 second quarter earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Bret Wise, the Chairman, Chief Executive Officer and President. Please go ahead, sir.

Thank you, Nicky, and good morning everyone. Thank you for joining us on our second quarter earnings call. This is Bret Wise, Chairman and Chief Executive Officer. With us also today is Chris Clark, Executive Vice President and Chief Operating Officer, and also Bill Jellison, Senior Vice President and Chief Financial Officer. I'd like to begin today's call with just a few overview comments regarding resulting for the second quarter. I'm going to then ask Chris Clark to provide you with some insights on certain of the items of operational focus that we have, and then Bill Jellison will give you more detailed insights on the financial results. And of course following our prepared remarks we are glad to answer any questions that 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 on Form 10-K, our periodic reports on Form 10-Q, and our press releases and conference call transcripts, all of which have been filed with the SEC. And of course this call in its entirety will be part of an 8-K filing that will be available on our website.

Last night we were very pleased to announce very strong results for our second quarter with both sales and earnings increasing substantially. This reflects a continuation of the trends we've experienced in 2007 and earlier in 2008 and is satisfying as we strive to find the most value out of global platform and our broad consumable product portfolio.

In the second quarter our sales rose 17.2% to $595 million and gained 17.3%m excluding precious metals to $542 million. This sales growth again reflects our very diversified portfolio and was comprised of internal growth of 5.9%, acquisition growth of 3.1%, and translation of 8.3%. Overall we continue to experience strong global demand across many of our businesses and in our specialty businesses in particular.

On a geographic basis internal growth was once again strongest outside the US with Europe growing over 10% internally. The rest of world adding approximately 8% on a internal basis while the US was softer at 1% organic growth.

In Europe we continue to see the benefits of a very strong growth in most categories and in particular all three of our specialty businesses and in many of our consumable categories. We've made some key investments in this territory this year and last and believe that we're really starting to see the benefits of those investments emerge.

Rest of world growth was led by double-digit growth in Asia-Pacific, Latin America, the Middle East and Australia. We also experienced continued above-market growth in Japan. We're very happy that the global platform that we've developed is producing these results and we view this as a strategic advantage for us in the global marketplace.

As I mentioned, internal growth in the US was approximately 1% and we saw some softness across many of the platforms we have. Our results in the US were influenced by two items of particular note. The first was lower sales in our anesthetic products; as last year we substantially cleared a large backlog that had built up in these products following a prolonged period when there was a shortage. This very high comp from the prior year created a deficit in sales this year on a year-over-year basis.

The second item to note is that we showed a new handpiece at the California Dental Show early in the quarter. This handpiece is really unique for an air-powered system. It has many of the benefits of an electric system, but also the benefits of an air-powered system including a light profile and a very small head. And this really only became available to ship very late in the quarter and, in fact, is shipping now here in the third quarter.

We believe that dentists may have delayed purchases anticipating this new product, and likewise dealers probably worked to reduce inventories of the legacy models anticipating this launch.

So excluding these two items internal growth in the US was in the low to mid 3% range, which is better than we reported, obviously, on a GAAP basis, but still slow by our standards. We did also continue to see some weakness in the specialty markets in the US, where we've talked for some time that we believe these markets are most vulnerable to slowing economic circumstances.

The exceptions for us in the US would have been dental implants that grew 20% organically in the US in the quarter. And also in the orthodontic category our self-ligating products including Innovation C and our new lingual offering which is called LMTM, lingual minor tooth movement, grew quite nicely during the quarter.

I think in the US the total market is growing in the low to mid single-digits probably and is consistent with what we might expect in an economy that's growing 1% or less.

At this point we do know that many of our competitors have implemented mid-year price increases, which may be boosting their growth modestly, even as volume slows a bit. We're planning our price increases October 1, which is consistent with our past practice and we would expect to see some benefit from price begin to emerge in the fourth quarter.

At this point we would expect market conditions to remain where they are, perhaps a bit slower than historical levels in the US for another quarter or two. Although we see an opportunity to increase our US growth rate in the second half given the Company-specific issues that we had this quarter.

Earnings for the quarter were $0.52 per share on a GAAP basis, a 23.8% increase from the prior-year quarter, reflecting both strong sales growth and also operating margin expansion. And on a non-GAAP basis, which Bill will speak to in more detail, earnings in the quarter were $0.52 in the second quarter versus $0.44 in the prior year, or an 18.2% improvement. And also on a year-to-date basis non-GAAP earnings have risen 18.3%.

So it's rewarding to see our strong operating earnings trend despite a difficult economic environment in the US and again, we believe this is the value of our global operating platform and it's demonstrated by a 60 basis point expansion in our operating margins year to date, absent restructurings.

Given our current strong performance and the position we're in we've decided to reinvest part of our first half earnings improvement in expansion of sales and marketing resources in certain markets in the back half of this year. This investment, beyond what was contemplated at the start of the year, will require resources equal to about $0.01 per share in the back half. We're very encouraged to be a position to both deliver on strong earnings growth and to also accelerate some of our investments to better position us for future years.

So at mid year we're well positioned to do deliver on the targets we set at the beginning of 2008. Despite our beliefs that it'll take a few more quarters to see a meaningful improvement in the US dental market we are increasing our earnings target for this year.

Our original guidance, as you probably know, for 2008 was for earnings ex-restructuring and one-time tax items to be in the range of $1.83 to $1.88. Today we're increasing this guidance to $1.86 to $1.91 per share for the full year. And of course that does take into account the expanded investment in sales and marketing in the second half that I mentioned earlier.

At this time I'd like to ask Chris Clark to give you some more insights into our plans for investment over the remainder of the year, as well as comment on our new product introductions in our 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 and provide some added color on some of the additional investments that we're making to the business to drive on-going growth and also provide an update on our innovation efforts.

As Bret mentioned, we are continuing to make investments in the business in order to drive growth. Part of that one area we decided to invest in is in increased sales representation in certain specialty businesses, as well as in certain faster-growing geographic regions. In certain businesses the increase in sales representation may be as large as 15% to 30% for that business. And we believe that adding sales reps is a very effective growth strategy for many of our businesses and we're pleased to be in a position to be able to make these investments for the future.

On the innovation front, we continue to focus on leveraging the impact of new products that we've introduced in the past few quarters, as well as on introducing new technologies that provide clear advantages to the dentist and the hygienist, or the dental laboratory.

In orthodontics we continue to be very pleased, as Bret mentioned, with customer reaction to our self-ligating line of brackets in general, and specifically to Innovation C, our all-ceramic self-ligating bracket, as well as Innovation LMTM, our new lingual minor tooth movement system that we introduced just last quarter.

Self-ligating bracket sales are up over 20% over prior year behind both the Innovation C and the Innovation LMTM technologies.

As Bret mentioned as well, in the second quarter we introduced the Midwest ATC, or Air Torque Control handpiece. This product combines really the best of both worlds, if you will, in terms of air and electric handpiece technologies by delivering the constant cutting speed of electrics with really the smaller profile and lighter weight of air handpieces, and we do anticipate a boost in our handpiece sales in the second half of the year behind this new technology.

During the quarter we also introduced the [Intera] In-Office night guard, which combines an advanced [light cure] resin material with a impressionalist technique that really lets the dentist make custom night guards and splints directly in the oral cavity during a single patient visit.

Intera builds on our successful Eclipse technology platform and this has served as a -- this provides an extensive application in the fabrication of various prosthetic appliances, so it extends that platform, as well.

In addition, our restoratives business introduced [Smart Sim II] self-adhesive cement in the quarter. This product is a two-component,[dual-cure], high-strength self-adhesive which releases fluoride. It combines aesthetic shading with a self-edge adhesive, which makes it suitable for use with a wide range of permanent restorations and restorative materials.

This business also introduced the [Calm-It] desensitizer during the period. This product's designed to treat and prevent patient hypersensitivity to both hot and cold liquids, which is a common and painful side effect for many restorative procedures.

Calm-It forms a physiological seal within the dentinal tubules of the tooth, helping to form an effective barrier to prevent sensitivity and it can be used on a wide range of procedures, ranging from crowns and composites to inlays and onlays.

So in short we continue to be very pleased with the breath and the impact of our innovation efforts and we've got a robust pipeline of new launches that we anticipate bringing to market during the third and fourth quarters of 2008.

And now I'd 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?

Good morning, everyone. Net sales for the second quarter of 2008 increased by 17.2%, in total and increased by 17.3%, excluding precious metals. The sales increase, ex-precious metals for the quarter, included a 5.9% increase from internal growth, 3.1% from acquisitions and an 8.3% increase from foreign exchange translation.

One thing I would like to point out is that this quarter the Company slightly modified its methodology for computing internal growth. This change better reflects organic growth in an environment where exchange rates have moved significantly from prior periods.

The impact of this change for both the quarter and on a year-to-date basis was to reduce the internal growth calculation from what it would have been under the prior method. We chose to change the calculation now as it potential inflated the internal growth number and we were seeking the most accurate measure. We have checked prior years and there was little or no effect.

Our year-to-date increase in sales, ex-precious metals, is 17.3% and includes internal growth now of 5.8%, acquisition growth of 3.1%, and an increase from foreign exchange translation of 8.3%. The geographic mix of sales, ex-precious metals, in the second quarter of 2008 included the US at 37%, Europe represented 41%, and the rest of the world was 21% of sales.

European and rest of the world sales increased as a percent of total sales, as our international businesses continue to grow at a rapid pace and as the dollar continued to be weak compared to most other currencies. The weaker US dollar in the second quarter compared to last year, benefited sales growth but had little impact on earnings in the period.

Net purchase price variances caused by the weak dollar and higher interest expenses from our net investment hedges are once again nearly offsetting the favorable foreign exchange translation benefits on income in the period.

Gross margins as a percent of sales, ex-precious metals in the second quarter, were 58.2%, consistent with the second quarter of 2007. Margin rates, while flat with last year's second quarter, were negatively impacted in the quarter compared to the same period last year due to a negative mix impact from last year's acquisition and purchase price variances caused by the weaker dollar. The negative impacts, however, were offset in the quarter, as we benefited from additional implant sales mix and improved operating efficiencies.

Beginning in the third quarter the negative mix impact from acquisitions for prior-year comparisons will be reflected in both current and prior-year periods, eliminating the impact on margin rates when comparing two prior periods.

SG&A expenses were $200.9 million or 37% of sales, ex-precious metals, in the second quarter of 2008 versus 37.2% in last year's second quarter. SG&A expenses as a percent of sales were slightly lower in the period, as we were able to better leverage expenses with the strong sales growth in the period, despite having the expense of the biannual Friadent Symposium in the quarter.

Operational margins for the quarter were 19% compared to 18.4% in the second quarter of last year. Operating margins based on sales, excluding precious metals, were 20.9% compared to 20.2% last year in the same period. On a non-GAAP basis, excluding restructurings and other costs in both periods, operating margins based on sales, excluding precious metals, for comparative purposes were 21.1% in the second quarter of 2008 and 20.9% in 2007.

Even compared to a solid operating margin in the second quarter of 2007 we were able to improve the operating margin rate in the period as we benefited from a positive mix despite the impact of recent acquisitions, and also benefited from the lower rate of SG&A expenses.

Net interest and other expenses in the second quarter were $3.2 million compared to income of $2.1 million in the second quarter last year. Higher net interest expense was the cause of the entire increase. The sharp divergence of lower US dollar interest rates versus increased euro and Swiss frank rates, combined with weaker US dollar, were the primary causes of this change.

The impact of the Company's net investment hedges typically move in the opposite direction of currency moves, reducing some of the volatility caused by movement in exchange rates on the Company's income and equity. This increase in net interest expense is expected to continue throughout this year, with the US dollar weaker compared to last year, and US interest rates below European rates.

Additionally, the Company recorded income of $1.8 million, for the provisions of SFAS 157, fair value measurements. This is a new accounting standard impacting this year and we have excluded this benefit from our non-GAAP earnings this period.

The corporate tax rate in the quarter was 28.5% compared to 31.6% in the second quarter of 2007. The year-to-date operational tax rate is approximately 27.5%. This rate reduction includes the benefits of both a lowering of the German corporate tax rate, which became affective as of January 1, 2008, and the benefits of a global business and tax reorganization, which was recently completed. We believe we will be able to keep the full-year 2008 and next year rate at or below this level.

Net income in the second quarter of 2008 was $78.6 million, or $0.52 per diluted share, compared to $65.4 million, or $0.42 per diluted share in the second quarter in 2007.

Earnings, excluding restructuring and other costs, income tax-related adjustments and the interest income from the fair value measurement adjustment, which constitute a non-GAAP measure, were $79.4 million, or $0.52 per diluted share in 2008, compared to $68 million, or $0.44 per diluted share in the second quarter of 2007. This represents a 18.2% increase in earnings per diluted share on a adjusted non-GAAP basis for the second quarter of 2008.

Cash flow from operating activities was $139 million in the first half of 2008 compared to $155 million in the same period last year. The cash flow in the first half of 2008 was lower than last year due to both a lower tax payment outflow in the first half last year, and accounts receivable days starting out at a much lower level at the beginning of 2008 versus the beginning of 2007. Year-to-date tax outflows in 2008 were approximately $25 million higher than the first half of 2007.

Capital expenditures were $37 million in the first half of 2008, while depreciation and amortization were $23 million in the period. Inventory days were 97 at the end of the second quarter compared to 101 days at the end of the second quarter of last year and 95 days at the end of 2007. Inventory is typically increased in the second half with a reduction in the fourth quarter. We currently expect them to improve to at least the mid 90 day range, if not a little better by year end.

Receivable days were 56 days at the end of the second quarter of 2008 compared to 57 days at the end of the second quarter and year end of 2007.

At the end of the second quarter of 2008 we had $423 million in cash and short-term investments. Total debt was $581 million at the end of the second quarter. DENTSPLY has repurchased $100 million of stock, or approximately 2.5 million shares, at an average price of $39.58 so far in 2008. Based on the Company's recently-increased authorization to maintain up to 17 million shares of treasury stock, we still have approximately 2.8 million shares available for repurchase.

Finally, as Bret noted we are pleased to be able to increase our earnings guidance for the year to $1.86 to $1.91 per diluted share, excluding income tax-related adjustments, restructuring and other costs and the benefit from the provisions of SFAS 157.

That concludes our prepared remarks and thanks for your support, and we'd be glad to answer any questions that you may have at this time.

Thank you. (OPERATOR INSTRUCTIONS) And we'll take our first question from Jon Wood from Banc of America Securities -- oh, I'm sorry, Banc of America. Please go ahead.

Thank you. Morning.

Morning, Jon, how are you doing?

Good. Bret, ex the anesthetic and handpiece effect, how did the dealer business do in the US in the first quarter?

In the second quarter you mean?

I'm sorry, yes, second.

It did -- I think it was probably at market in most categories and maybe slightly under market in some other categories. It's difficult for us to tell actually whether the dealers are reducing inventories. There's been discussion of that in the marketplace -- we're not sure if it's true or not -- but if true it would mean that you would expect our growth to be a little bit lower than theirs.

And the data point that we'll get for that will be when the two large dealers announce their results and I'd ask you to keep in mind they usually grow above market because they've been capturing market share. So we think we have some room to improve that broad consumable category that goes through dealers, particularly when we implement our price increase October 1.

Okay. And I know this is probably hard for you to tell, but has there been any change in the mix of what a general practitioner is doing, meaning could there be higher-valued procedures moving from a specialist back to general practitioners if general practice visits are softening a bit. Can you see any effect like that in your numbers?

I would be really surprised if that happened because of economics -- and I think that's what you're alluding to -- because the amount of training and the practice risks of doing the specialties in a general practitioner environment -- you know, they don't change very quickly. So for a GP to start holding back procedures he used to refer, or she used to refer because they either weren't comfortable with them or hadn't had the requisite training would be inappropriate and that trend would take a long time to emerge.

So frankly we don't have very good data points on that, but intuitively I would not think it would happen. If it happened it wouldn't happen very fast.

Okay, great. And then, Bret, can you just comment on the M&A environment? Has the mix -- the pipeline -- the M&A pipeline changed all, evaluations changed at all? Just any comments you'd be willing to offer would be great. Thanks.

Okay, fine. Well, we're very active on the business development front and obviously we can't comment on really any specific targets or activity, although we did close a small deal in July, kind of a tuck-under acquisition for one of our specialty businesses. I would characterize the environment as there's lots of activity. I don't think there's been a whole lot of change in valuation perspective. Sometimes a weaker market, of course, brings forth companies that might not otherwise be in the market. We haven't seen that in particular dynamic yet, but it remains a very fragmented market and a robust market and one that we're very active in, very busy in. We're very interested in expanding through deploying capital and it's one of those things where timing is always a risk, so we'll just have to update you as we go through the year and next year.

Okay, thanks a lot, and then one last one. Bill, the change in the organic growth methodology, you said the first quarter was revised down to around 5.8%, is that right?

The first quarter would have been just a little bit below that. We actually had better performance on internal growth if you compared apples-to-apples in each of the periods.

Okay. All right, thanks a lot.

Our next question is from Jeff Johnson with Robert Baird. Please go ahead.

Good morning, guys, nice quarter.

Morning, Jeff, how you doing?

I'm doing well, thanks. So a few things here. Bill, going back to organic growth, could you guys update your guidance for the year? Now with the change do we still think in that 5.5%, 6.5% range, is that how we should be thinking about it?

Yes, Jeff, we -- this is Bret, actually. Our guidance on internal growth is still 5.5% to 6.5% for the full year and I think as Bill said, we're at 5.8% year to date under this new methodology --

Right, and --

-- and we're still comfortable with that.

Okay, great. And, Bill, could you give us a little insight just on how you changed it, what the change was?

Sure. The primary difference in the change, Jeff, is that the base period included translation impacts before, so base growth translation would have been calculated in the past from the base period straight up and then you would've also had the difference on acquisitions taken away from that, which ultimately left the base growth number, but the base growth number then in effect had translation benefits in that.

So in a rapidly-moving FX environment, especially with strong international sales, it began to distort what that internal growth number really was and it hurt you in negative periods and it helped you in the other periods. It's been a method that we've used for the last few decades, but from -- in this kind of environment we felt that it was necessary to make the change.

All right, fair enough. But it sounds like going forward, especially if FX tailwinds or headwinds aren't huge in any quarter it doesn't really change the way we think about it too much?

Oh, and correct. And the way that it's calculated here there's absolutely no impact from FX in either type of environment.

All right, great. And then if we could mover over to Europe for a second, another strong quarter there. And frankly I think I've been underestimating some of your European opportunities. But how is it staying so strong? What do you think sustainability over the back half of the year and as we get into '09?

And then obviously economic headwinds have been building, especially in Germany. It seems like consumer confidence has been falling pretty hard there just over the last few months. Any concerns there or am I maybe just wrong in thinking that could be an issue?

Well, I think, Jeff -- this is Bret -- we're executing extraordinarily well in Europe and I think we're clearly growing above market. Predicting what's going to happen to the European economy in total is very difficult for us. If it were to slow a little bit I think the dental markets would slow a little bit with it.

So as we look at the dynamics of our growth we think we've got probably opportunities to accelerate growth in the US and that's an upside potential for us. And if markets slow in Europe, we think we'll execute just as well in slightly slower markets as we're executing today. So we're not overly concerned with it, although it's a reality.

And the main drivers, Bret, again, are we talking mainly -- not mainly, but [Compartus] at this point in some of your specialty businesses?

Well actually what I commented on in my earlier comments was it's all the specialty businesses that are really performing well, but also the consumable categories. The chair-side consumables are performing extraordinarily well.

Yes, okay.

So those are the categories that I think are really driving growth there.

Okay. Any update then on Compartus there, how is that as it ramps up?

Oh, it's ramping up fine. It's a different business model for us. It is growing rapidly, you brought that up. It's part of the broader laboratory category, which I think is one of the slower growth categories within Europe. But we're experiencing rapid growth in that centralized manufacturing service offering to the dental labs in the European environment and also in the US environment.

And, Jeff, it's Chris. I guess I'd also add that we continue to expand the applications and now Compartus also includes the centralized manufacturing of precious metals (inaudible), as well, so that's a real big plus, as well.

Okay, so now we're at nonprecious and precious metals?

Correct, plus zirconium.

That's right, that's right. And the last question, Bret, I think it was in your prepared remarks when you talk about dental implants staying north 20% in the US, ortho -- orthodontics had some positives there. Was your comments on orthodontics, was that as a category it was up or any growth rates you can give us on orthodontics in the US and outside the US?

Well, our global orthodontics business is doing quite well, but it's stronger outside the US than within the US. I would say -- I'd characterize the ortho market as being kind of like it was in the first quarter really. I don't think it's accelerated from there.

And what we're seeing is that we're rapid growth in the newer technologies in ortho and we mentioned some of those. Self-ligating, Innovation C, LMTM is a new product for us and is doing quite nice. And we've got some nice product offerings coming in the second quarter.

I'd say the traditional brackets, the older lines, kind of the things I wore as a kid, are growing [much] slowly. As people move up the value chain and the market, I think the orthodontic market in total has probably slowed a bit in the United States this year, as we predicted it would. But our business in total in orthodontics is mid single-digits, it's doing fine.

Okay. And outside the US even better than that?

And outside the U.S even better than that.

All right, great. Thanks, guys.

Okay, thank you.

Our next question is from David Veal with Morgan Stanley. Please go ahead.

Hey, Bret, I wonder if you could help us think the through the price increase issues. We've seen broader medical products manufacturers raising prices fairly aggressively due to the rising price of oil, I just wondered if given what you've seen from competitors so far this year are the price increases in line with what you expected or a little ahead of that and then what would that mean for your October 1st price increase?

That's good question, David. I would say there are two things about the price increases we've seen from competitor. One is we've seen them accelerate them from when they normally have been or take multiple price increases in a single period -- a single year, and that in the aggregate the price increases seem to be above what they've been historically. I don't know that it's really driven by the price of ail as much as it is other inflation or other impacts on costs, but I think it's fair to say that the price increases we're looking at for the fourth quarter will probably be above what they've historically been.

Okay, that's helpful, and just one other question. Could you talk to any particular trends that you might have seen in a quarter on a monthly basis? I guess what I'm trying to get to is did the quarter end on a high note, low note, about the same.

I think it's about the same. I'd really -- we try not to put a whole lot of emphasis on months, because for instance, if there's one extra shipping day in a month it's significant. It can be a 5% to 7% swing versus a month where you've got one less shipping day. So we don't look at that as much as we look at shipments per day, for instance, in one business or another and I would say June was pretty reflective of what we saw for the quarter.

Okay, that's very helpful. Thank you very much.

Okay.

(OPERATOR INSTRUCTIONS) We'll take our next question from Derek Leckow with Barrington research. Please go ahead.

Thanks. Good morning and congratulations on a great quarter.

Thanks, Derek.

This 5.5% to 6.5% internal growth guidance does that assume that the US market stays around that 3% level, excluding the anesthetic backlog last year?

I'd like to not be that specific, although we see opportunities for us to do a little bit better in the US markets, certainly. Certainly we should be able to do better than our year-to-date growth rate that we've seen the US market because of some of the Company-specific issues that you commented on. So we see a little bit of upside in the US market and that's -- we see some and we're kind of bouncing that off as we watch Europe to make sure it doesn't slow. So whether that's baked into 5.5% to 6.5% it's a little difficult to tell, but we certainly have a number of dynamics we're watching very closely and in total they give us comfort that we can be in that range.

Does this a sales and marketing resource expansion involve any addition sales reps in the US?

It does.

In which categories specifically?

Well, we think our competitors would like to know that and we'd like not for them to know that, so we're going to decline to answer that. But it's not only in the US. There's some other areas outside the US where we'll be adding some sales resources, but I will confirm that some of those resources are for US businesses.

And would these be in the faster-growing parts of your business or would they also be in a basic consumables area?

They'll be in both.

Okay. All right and if we look at strong throughout the world and European growth, could you characterize that growth based on the newest products, the products that launched in the last 12 months versus your existing portfolio?

That's really difficult to do. What I would characterize it as is that those specialty businesses are growing really rapidly in all territories outside the US. They are some of our fastest-growing categories.

And of course, when you drill down within those categories -- we have 300,000 SKU's. So there's a lot of moving parts. But when you drill down within those categories, for instance we talked about orthodontics, the newer products are growing much faster than what we'll call the legacy products. So I think it's reasonable for you to assume that, but the level of detail you'd have to get into to really understand and model that would be immense.

Okay. And then just looking at the operating margin trends here. It looks like a 21.1% operating margin is a new record. Do you guys anticipate that to be a sustainable number, 21% or better? Or do you think that with these investments we might see that notch down a little bit over the back half of the year?

Well, it's interesting because you have to look by quarter because our margins tend to be the highest in the second quarter and the fourth quarter, and you're right, the 21.1% is a record for us.

We looked at that as an opportunity to take some of the first-half earnings and reinvest for growth in the future and so that's what we're doing. And thus I think it would be a little bit harder for us to achieve that in the second half than what we had in the first half -- or excuse me, compared to what we had in the second quarter. Although we'll confirm we expect to have margin expansion for the full year in line with targets we've established.

Okay, great. Thank you very much.

Okay, thank you.

Our next question is from Larry Marsh with Lehman Brothers. Please go ahead.

Well, thanks. Good morning. Hey, Bret and Bill, I hadn't interacted in a while. I just wanted to get a couple of clarifications, if I could. And pardon me if you've gone through this but, Bill, you're saying that the methodology of calculating internal growth gives you 5.8% year to date. So you're saying the first quarter would be a little bit below the second quarter, is that right?

That's a true statement, yes.

Okay. And then with that change are you then giving us what the calculated internal growth rates would be by region?

The regional growth rates we gave you today are the new ones under the new calculation.

For the second quarter or that's -- those are --?

Those are for the second quarter and in the first quarter the impact would have all been on Europe and rest of the world because it had no impact on US growth rates, this little anomaly we had in that calculation.

Oh, I'm sorry. So the calculated growth rates would be -- okay, got it. And again you're confirming a full-year internal growth rates 5.5% to 6.5%. So then in the US market you're saying excluding the two call-outs roughly 3%, which you highlight focuses a bit on the specialty business. You're calling out orthodontics and implants is growing nicely. So do we -- are we led to believe then your endodontics business is what's seeing the biggest impact there or am I misreading that?

No, I think that the rest of the categories -- the broad consumable category, which we answered a question on earlier, is a little bit slower, endo's a little bit slower. So there are numerous categories that would fall in that area.

Okay. And just anecdotally then, again it sounds like you're saying you don't see a big change in behavior, but based on what you had anticipated it's just a little bit longer of a selling cycle or just a little bit more cautious of purchasing in certain categories based on the feedback you're getting from customers?

Well, the feedback we're getting in just the US market is that dealers are probably cautious with their inventory levels. We think that dentists, including the specialists, are probably more cautious about their inventory levels and anecdotally we think dental visits have slowed just a little bit. So we think the market's still in pretty good shape. Our guess is that the market's growing maybe three points faster than GDP, or four ex-GDP, let's say, which is kind of reflective of what you normally see in the dental markets. We think it's still a good market, and it's one we're going to invest in here in the second half. So we're happy with that.

Right. So based on your knowledge of the market, you're saying that the consumer behavior is not, so far as you can tell, is not any different than what you would have expect in past economic slowdowns. And you haven't gotten any real call-outs even by region where you've seen any real change in behavior versus your expectations, is that a fair assessment?

I would confirm that, that's correct, yes.

Okay, all right. And then just to follow with Jeff's earlier question about Europe where you continue to see robust growth. You've told us before and confirming that you're taking share in that market, but it sounds like you're basically say -- well, am I hearing you correct in saying that the market growth, excluding your share gains, is still pretty good in all of the markets you're tracking over in Europe, is that right?

It is, yes. It's true.

So it doesn't sound like you are overly cautious to think that there's going to be a big change in that growth rate similar to the caution you had given us six months ago in the US market. Is that right or do you really think there could be a slowdown in Europe?

Again predicting what's going to happen in the economy in Europe is really -- we rely on the experts from your firm for that, actually.

Yes, good luck.

But we do -- and then Europe doesn't operate really as one community. Within the community we're watching very closely what's happening in the German economy, we've heard things about the Spanish economy, et cetera, et cetera. But in total our business is really performing quite well there and we don't have blinders on. We're watching it very closely to see what emerges and we can react to it if we see changes, but at this point we don't see many changes occurring.

Right. It's fair to say that in some of the markets it's based more on government reimbursement as opposed to big changes in consumer behavior or is that -- I guess it's very market specific?

It's very market specific, yes.

Okay. And then finally, rest of the world, in Japan, again, good growth there so is it fair to say that in all other markets no change in trend as you can tell or no change in trend anticipated based on all feedback you've gotten?

Yes, we had a great quarter in those markets and I would say we're quite optimistic.

Okay. All right, very good, thank you.

Okay, thank you, Larry.

And there are no further questions at this time. I would like to turn the conference back over to Mr. Wise for any additional or closing remarks.

Thank you, Nicky, and thank you all this morning for joining us on our call. We're confident and satisfied with the direction of the Company and believe we have the right strategies in place to further capitalize on what to us is a very attractive global dental market. And we're particularly pleased to be raising earnings guidance for 2008, reflecting both the strong first half of the year for us and our expectations for the second half. We look forward to updating you on our progress as we move through the back half of 2008. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.