DENTSPLY SIRONA Inc (XRAY) 2008 Q3 法說會逐字稿

Good day, and welcome to the DENTSPLY International's 2008 third 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.

All right. Thank you, and good morning, everyone. Thank you for joining us on our third quarter conference call.

This is Bret Wise, Chairman and Chief Executive Officer; and also with us today are Chris Clark, our Executive Vice President and Chief Operating Officer; and Bill Jellison, our Senior Vice President and Chief Financial Officer. I would like to begin today's call with some overview comments regarding our results for the quarter, and then Bill Jellison will provide you with some more detailed insights on the financial results. And then following our formal remarks, the three of us will be pleased to answer any questions that you may have. Before we get started, it is important to note that this conference call may include forward-looking statements involving risks and uncertainties. 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 our conference call transcripts, all of which have been filed with the SEC. This conference call in its entirety will be part of an 8-K filing that will be available on our website later this week. Last night, we very pleased to announce record results for our third quarter, with sales increasing almost 10% and earnings increasing double digits.

Given the instability in the world financial markets this quarter and the fact that we now know that many of the economic markets we participate in probably contracted in Q2 and perhaps again in Q3, we believe these results are a strong indicator of the sustainability of our business model. For the third quarter, our sales rose 8.6% to 530 million, and gained 9.6%, excluding precious metals, to 488 million. This sales growth reflects both a very broad dental consumable mix, but also a balanced global portfolio, both of which we view as key strengths of our Company. Internal growth for the quarter ex-PM was 5.4%, while acquisitions added 1% and currency added 3.2%. So on a constant currency basis, our growth was about 6.4, 6.5%. On a reasonable basis, the U.S. internal growth improved to 4.1%, while Europe continued to have strong internal growth of 6.8, albeit slower than we had seen earlier this year. And the rest of the world internal growth was 5.7, led by continued strong performance in Asia and Australia. Growth in the U.S. was very balanced, with mid-single digit growth in each of our consumables, specialty products and lab product categories, with negative growth in our non-dental business.

As discussed in our second quarter call, we did implement price increases in our chair side consumable lines -- these are the lines that sell through distributors -- as planned on October 1. These increases were slightly higher than historical levels, and we did see increased demand by many of our dealers to buy ahead of these increases. Accordingly, in those categories we believe we had increased sales in the third quarter that will likely come out of the fourth quarter sales. Overall, with we saw strong growth in our global implant business, which had internal growth in the low double digits. Our orthodontic business continued a very strong string of results and had high-single digit internal growth, and we also saw some improvement in our global chair side consumables lines. Speaking of market trends, I think it's fair to say we have seen early signs of some markets slowing in Europe, probably similar to the market reaction we saw in the U.S. earlier in the year, but less severe at this point. In the U.S., it is clear that high end discretionary procedures have slowed. In our view, that will continue to lag for the next several quarters.

We believe that office visits have probably slowed somewhat in the U.S., in addition to some downgrading of procedures to lower cost alternatives. For us, I think this means a couple of things. First, we would expect the near term growth trends for the industry to slow a point or two, off the historical 4 to 5% global benchmark that we have, at least for the next couple of quarters. I think we are probably seeing that now; however it is important to note that we expect the market to continue to grow throughout the economic cycle, just a bit slower than we have seen for the last couple of years. Second, we would expect a slowing in the growth of specialty procedures to continue. However, in our own case, we expect that we can continue the take some share, which should mitigate that some -- to some extent. Of course, we have taken these matters into account in our forecasting, and it is reflected in the outlook statements that we will make today. Earnings for the quarter were very strong at $0.44 on a GAAP basis. This quarter, there are a number of moving parts in the income statement, which Bill will cover in detail.

However, removing the restructuring and other charges and the favorable tax adjustments, our non-GAAP earnings came in at $0.46 a share, which is an 18% improvement over the third quarter last year. We had very strong margin growth at both the gross margin and operating line. Operating margins on a non-GAAP improved 80 basis points for the quarter and 70 basis points year-to-date. I think it is fair to say we are managing the business conservatively given the unknown circumstances in the global economy, resulting in strong operating leverage through our income statement. From a capital perspective, late in the quarter we were please to announce our Board had approved an 11% increase in our annual dividend. This reflects both, you know, the strong operating performance we've had, plus continued confidence in the business. Also, late in the quarter, we did suspend temporarily our share buy back program to avoid -- really to avoid putting further stress on our banks.

Today, we have approximately 600 million in immediate liquidity, including cash balances and available credit lines; so we think we have ample liquidity, which should allow us to take advantage of any situations that arise. We continue to have about 3 million shares available under our authorization, and we expect to reinstitute that program when the financial markets become more stable. We are very pleased with our performance through 2008 to date. We've recorded internal growth of 5.7, total growth of 14.7, and earnings per share on a non-GAAP basis were up 18.2 to $1.43 per share despite some pretty difficult economic circumstances. Looking forward, our current forecast for internal growth for the full year is now 5 to 5.5%. This guidance reflects the matters we've covered today, including the price increase pre-buy activity, which probably moved some sales from Q4 to Q3, particularly in the U.S. and Europe.

In addition, late in the third quarter, our contract manufacturer or our injectable anesthetic for the U.S. market only informed us of a planed outage that has extended into the fourth quarter. At this point, it is not certain that we will have product necessary to meet demand in the fourth quarter, which may reduce our total internal growth rate in the quarter by as much as 3/4 of a percentage point. We believe this is a temporary situation and would expect to be back in full supply either late in the quarter or by year end; however, it is likely to suppress our internal growth rate in Q4, again especially in the U.S.. So all told, we believe the growth in the global dental industry is developing probably about as we would expect it to in an economic slow down as we have seen. It is highly resistant in many ways, but not completely immune. With lower consumer spending in the next couple of quarters, we would expect the growth in the dental demand would slow but remain positive. In addition, rapid swings in international currency markets will continue to have an impact on our results.

Our earnings performance thus far this year has been quite strong. Our outlook continues to be favorable. Accordingly, we are reconfirming our full year earnings guidance of $1.86 to $1.91 per diluted share. We started the year with guidance of $1.83 to $1.88 are pleased to now be looking towards the upper end of that range, or perhaps even higher. Just as a reminder, our guidance is on a non-GAAP basis, so it excludes restructuring, tax adjustments and gains we expect to recognize this year on the adoption of FAS 157, which we did recognize in fact in the second quarter. We are currently in our planning cycle for 2009; and as we have done in the past, we will announce our earnings guidance for next year on our year-end call, which is in early February. So at this time, I would like to turn the call over to Bill, who will provide you with some additional insights on our reported results; and then of course, the three of us will be glad to answer any questions you may have. Bill?

Good morning, everyone. Net sale for the quarter of 2008 increased by 8.6% in total and increased by 9.6% excluding precious metals. The sales increase ex-precious metals for the quarter included a 5.4% increase from internal growth, 1% from acquisitions, and a 3.2% increase from foreign exchange translation. Our year-to-date increase in sales ex-precious metals is 14.7% and includes internal growth of 5.7%, acquisition growth of 2.4%, and increase from foreign exchange translation of 6.6%. The year-to-date geographic mix of sales ex-precious metals in 2008 included the U.S. at 39%, Europe represented 41% and the rest of the world was 20%. The U.S. dollar, while recently strengthening, was still weaker in third quarter compared to last year. This continued to benefit sales growth and also slightly benefited earnings in the period.

Net purchase price variances caused by the weak dollar and higher interest expense from our net investment hedges are once again offsetting most of the favorable foreign exchange translation benefits on income in the period. Gross margins as a percent of sales ex-precious metals in the third quarter were 57.4%, an improvement of 60 basis points over the third quarter of 2007. Margin rates compared to last year's third quarter were positivity impacted in the quarter compared to the same period last year due to a positive product line mix, as we benefited from strong implant and restorative product growth, and improving efficiencies offset somewhat by negative purchase price variances caused by a weaker dollar in the third quarter. SG&A expenses were $180.7 million or 37% of sales ex-precious metals in the third quarter of 2008 versus 37.2% in last year's third 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. While additional recent investments have been made in SG&A to continue to drive future sales growth, we remain vigilant in controlling our expenses, especially during more volatile economic periods.

During the third quarter of 2008, we also incurred $18.5 million of restructuring and other costs, primarily associated with litigation costs, including the settlement of two suits related to our Anti-Trust litigation on our tooth distribution. Operational margins for the quarter were 15.3% compared to 16.9% in the third quarter of last year. Operating margins based on sales excluding precious metals were 16.6% compared to 18.5% last year in the same period. But 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 20.4% in the third quarter of 2008 and 19.6% in 2007, an 80 basis point improvement. DENTSPLY's operating margins benefited from a positive product line mix and also benefited from the lower rate of SG&A expenses. Net interest and other expense in the third quarter of 2008 was $5.7 million compared to an expense of $.7 million in the third quarter of last year. Higher net interest expense had the largest impact; however, we also had a loss on exchange in the period as well. The sharp divergence of lower U.S. dollar interest rates versus relatively higher Euro and Swiss franc rates, combined with the weaker U.S. dollar, were once again 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. Net interest expense is expected to continue to run higher in the fourth quarter, but would be reduced in the future if the gap between European and U.S. rates narrowed. Recently, foreign exchange rates have been very volatile. The dollar has strengthened, the yen has strengthened further; and most other currencies, including the Euro and Swiss rates have weakened, some quite significantly. Based on these rapid movements and the fact that U.S. and European interest rates have not yet narrowed, we could be faced with a negative exchange rate impact of as much as $0.02 to $0.03 per share the fourth quarter. The corporate tax rate in the quarter was 12.2% compared to 19.7% in the third quarter of 2007. The tax rate this quarter includes the benefit of the resolution of both state and federal tax items. The year-to-date operational tax rate is approximately 27.1%.

This rate reduction includes the benefits of both a lowering of the German corporate tax rate, which became effective as of January 2008, and further 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 tax rate at or below this level. Net income in the third quarter of 2008 was $66 million or $0.44 per diluted share compared to $65.7 million or $0.42 per diluted share the third quarter of 2007. Earnings excluding the restructuring and other costs and income tax related adjustments were $69.3 million or $0.46 per diluted share in 2008, compared to $61 million or $0.39 per diluted share in the third quarter of 2007. This represents a 17.9% increase in earnings per diluted share on an adjusted non-GAAP basis for the third quarter of 2008.

Cash flow from operating activities were $236 million in the first nine months of 2008 compared to $257 million in the same period last year. The cash flow for the first nine months of 2008 was lower than last year due to both a lower tax payment outflow in 2007 and accounts receivable days starting out at a much lower level at the beginning of 2008 versus the beginning of 2007. Without the lower tax payment outflow in 2007, cash flow would have increased slightly in 2008 year-to-date. Capital expenditures were $55 million in the first nine months of 2008, while depreciation and amortization were $43 million in the period. Inventory days were 94 at the end of the third quarter of 2008 compared to 106 days at the end of the third quarter last year, and 95 days at the end of 2007. Inventory is well-positioned at the end of the third quarter, and they should improve a little further by year end. Receivable days were 59 days at the end of the third quarter in 2008; which again is slightly better compared to 60 days at the end of the third quarter last year, but higher than the low 51 day level at the end of 2007.

At the end of the third quarter of 2008, we had $245 million in cash and short term investments. Total debt was $404 million at the end of the third quarter. DENTSPLY has repurchased $100 million of stock, or approximately 2.5 million shares, at an average price of $39..57 so far thin is 2008. In the third quarter, we had some repurchase activity early in the quarter; however, late in the quarter when the financial crisis occurred, we suspended our repurchase activity to maintain liquidity and avoid drawing additional amounts on our bank loan in support of our banking partners. The Company has current authorization to maintain up to 17 million shares of treasury stock under this authorization. We still have approximately 3 million shares available for repurchase. We will continue to monitor the financial markets; and when conditions improve, we expect to resume our repurchase activity. Finally, as Bret noted, we are reconfirming our 2008 full-year guidance of $1.86 to $1.91 for earnings per diluted share.

Guidance for 2008 excludes income tax related adjustments, restructuring and other costs, and the benefit from the provisions of SFAS 157. That concludes our prepared remarks. Thanks for your support, and we'd be glad to answer any questions you may have at this time.

Thank you very much. (OPERATOR INSTRUCTIONS). Our first question will come from Eric Lowe of Merrill Lynch. Please go ahead.

Good morning, guys.

Morning, Eric.

I wanted to talk about Q4, and perhaps even 2009. I know you aren't giving guidance right now, but if organic growth were to slow faster than expected, how quickly do you think you guys could realign this cost structure to maintain profitability?

Well, history has shown we can adapt pretty quickly. I must say that what's happened the last 30 days in the financial markets has been extraordinary, and we would not have anticipated that. So -- as well as the currency market. So things are moving rapidly, but you know, past experience would tell us we can adjust reasonably quickly to preserve earnings power of the Company. The one caveat I would have on that is the currency movements, which Bill described, which are a little bit hard to adjust to as fast as they have moved.

Would the focus be on top line growth next year or would it be on bottom line profitability and bottom line earnings growth?

Well, when we do our call in February -- early February -- we will give you our guidance for 2009. You know, obviously at that point we will have a much better view of the market that we are going to participate in next year, and I think it is probably premature to try to set forth goals for next year at this point.

You guys have a large restructuring charge in Q3, about -- a little over $18 million. What was that related to specifically?

Well, I think as Bill commented, that was primarily the settlement of two lawsuits that we had that related to the antitrust matter that first arose in the early 90s.

Okay. So it was all settlement charges as opposed to cost reductions from SG&A or from the business?

It was primarily those settlements.

Okay. Great. And I know you guys were investing in additional sales people in the quarter. Can you comment on what type of impact that had specifically on SG&A this quarter? How many basis points was it, about?

Well, what we had said was that we thought the sales force and marketing expansion plan for the last half of the year would be about $0.01 per share. We did start that hiring in the third quarter -- of course, you know, it's not like turning on a light switch. You have got to go out and find those people, hire them, bring them in and train them. So I would say more of that impact will hit in the fourth quarter than hit in the third quarter at this point.

Okay. Great. Just a couple more questions. One on, you know, one of the reasons why U.S. growth was slow in Q2 was related to the delayed launch of the ATC handpiece. Can you comment on how that product has been doing and how much of a benefit you think it had to your Q3 numbers?

Sure. Why don't I let Chris Clark comment on that?

Eric, we are pleased at this point with the dentist reaction to ATC. We've had strong shipments, particularly in September, and the product really is gaining momentum out in the field. Yes, it really is the best of both worlds, if you will, in terms of offering the best of both air driven and electric driven platforms. And you know, at this point, you know, we are pleased with the momentum we have at this stage.

You guys typically have launched about 25, 30 products a year. Do you guys plan to continue doing that over the next 12 to 18 months, or would you slow down your product launches?

Well, let me respond to that, Eric, and then perhaps we should let someone else in the queue ask a question. Our product launches have actually accelerated over the last couple of years. I think to date, this year we've have launched 22 new products. So we are probably going to get close to the high end of the range of 25 to 30. And we have been expanding our investment in R&D in our last several budget cycles. I expect to do that again this year, which is all driven towards better solutions for the dentist, and we hope better invasions that we can take to market. So I think that continues to be an area of heavy emphasis for us.

Great. Thanks, guys. I will get back in queue.

Okay, Eric. Thanks.

And our next question is from Jon Wood of Banc of America Securities. Please go ahead.

Thanks a lot. Thanks for letting me in the queue here.

Good morning, Jon, how are you doing?

How are you doing?

Pretty good. Bill, first on the balance sheet, the DSOs, is it reasonable to assume those continue to -- I guess flattish. Would you view it as reasonable that we model that metric up in the fourth quarter, or do you expect there's some more room for improvement.

You know, I don't know that I would say to model it up, Eric in the 4Q, because generally we see a little improvement in that period; but I think it is realistic based on kind of the economic realities in the world to have an impact. Thanks, Jon. Sorry.

Okay. Secondarily, Bret, can you talk about the M&A environment? I think you were active in the acquisition market this quarter. Can you just describe how the pipeline has changed over the last few months, both in terms of size or opportunities as well as valuation?

Sure. Let me, let me expand on your comment there first, which is we did actually acquire two companies this quarter. Both are in Europe. One is a sales and marketing organization for orthodontics in Europe, and the other is a -- kind of a start up with some really good technology for precision-milled implant bridges. So although they're both rather small from a revenue impact, I think they're both important strategically. Outside that, we are in discussions with numerous parties. I would say the reaction to the financial crisis is significantly different depending on which party it is. Some people are trying to retrench and -- with the view that their results will be better if they just wait a year and then transact -- do a transaction. Others, I think, that are more concerned about liquidity, I think are more interested in continuing to pursue transactions.

So there's a number of discussions going on. I don't think that valuations have changed dramatically yet, although they seem to have changed dramatically for the public companies. But for the private companies, I don't think expectations have changed that dramatically. Because like our business -- the business feels about the same as it did before the crisis. It doesn't feel dramatically different, although it is a little bit slower but not dramatically slower. So I think there's still some good opportunities for us there. As I mentioned on the -- in my earlier comments, we have got about $600 million of immediate liquidity available to us, and of course we could get more if we needed to. So we are going to continue the discussions, and if there are good deals for us to do, we are going to do them.

Very good. And then going back to FX, Bill, I mean, have you bought options for 2009? Can you comment on the degree to which you are hedged for 2009 at this point?

Well, we don't make specific comments on some of those things, Jon; but in general, because of where we are manufacturing products -- and we manufacture products obviously all over the world, including, you know, throughout the U.S., throughout Europe, throughout Latin America and even in Asia. So we are selling products back and forth between our different entities as well, and that does provide for some natural hedges associated with that. Where we don't have hedges in different areas with -- from a natural basis, we do selectively put in hedges from time to time between a couple of different country locations. But then one of the other kind of offsetting balances that we generally have in place is the net investment hedges. And if you see U.S. and European rates begin to narrow as we move forward -- because obviously the European rates are much higher today than the U.S. rates -- that actually has also an offsetting positive balance for us.

What was the actual loss from the net investment hedge in the quarter?

Interest expense impact.

Yes, the interest expense impact.

Oh, well, the bulk of the 5.7 million that we have got there versus last year of .7, you have both the exchange offsetting movement and the rate offsetting movement and that in comparison to last year. So the bulk of that change would actually be from those net investment hedges.

Okay. Thanks a lot.

All right. Thanks, Jon.

We will take our next question from Derek Leckow of Barrington Research. Please go ahead.

Thank you. Good morning, everyone. Congratulations on a great quarter.

Good morning, Derek. Thanks.

Thanks, Derek.

Just looking at the operating margin here, you're up up 80 basis points in the quarter. That's way above your long-term trend. I mean, is it safe to assume you've got some room there for next year to invest more heavily in R&D, for example, or what are you going to do with all of the extra margin there?

That's a great question. I think, one, we are very pleased with how we have done thus far this year. We are going into the fourth quarter, where we think we have got a pretty good chance for good margin expansion -- again although currency movements kind of create some risks for that. As we look at '09, I think that it -- you know, it is a little early to predict because we haven't done our budgeting and our planning cycle yet. But we're -- we feel really good about this 30 to 50 basis points per year target that we have put out there, and we would expect to -- I mean, at this early stage we would expect to be able to continue to perform in that range, absent some dramatic move in the business or in currencies.

And is the price increase something that would help you next quarter as well, or how does that factor in?

The price increases will help us next quarter, although, as we commented in our prepared remarks, there was some buying ahead of those price increases in Q3. So we probably won't feel the full impact in Q4; but as we move into next year, of course, we will feel that impact. So that will be a positive for us.

Were those price increases confined to any one area, or were they pretty broad across the consumables products areas or --

They were reasonably broad. They're not uniform though; meaning, some brands we can increase prices more than others. So that's -- you know, on average, they were more than last year and I would expect -- I would say they affected most of those consumable lines, but not in all countries. Primarily a European and a U.S. phenomenon at this point.

All right. And then just one more question on the acquisitions here. Using your own history as a guide, whenever you have seen the internal growth rate slow -- you said you probably expected it to slow by a percentage point or so -- acquisitions tend to become more important, or they become, you know, more available, I guess, because valuations should come down during a period of time like that as well. So, you know, can you comment any further than you already have on acquisitions, and you know, the ability to finance acquisitions? You guys obviously have plenty of cash available -- just wanted to kind of get a better sense for what we will see in 2009 from -- you know, growth from acquisitions.

Yes, I think, you know, our view there continues to be we would like to be acquisitive in the market. The dental market is a very fragmented industry, and generally we see great synergy potential when we acquire companies in this market. Usually, it's an ability to help them grow faster through our network, but also leverage their cost structure better than they could do on their own. So because of those synergies, I think that we can pay reasonable valuations for transactions. As you pointed out, we have got plenty of liquidity, and we would be very interested in companies that come to market. Although, we are not desperate to do deals -- we're going to do deals if they're good for us.

And so as far as valuations are concerned, are you actually seeing that? Are you seeing a discount out there, or are sellers still kind of -- what's the impediment right now? The biggest impediment in your view to doing deals?

We see discounts only if the other party has a level of desperation -- you know, either they're facing liquidity crisis or generational change and they don't know how to deal with it. Desperation is too strong of a word. We see people being more reasonable about price in those cases; but again, for most companies that are operating in dental, although they're not completely immune to the economic cycle, it just doesn't hit them as hard as it would many other businesses in the broader business community. So I don't think that expectations from private companies have changed a whole lot unless they're in one of those circumstances which drive them to really need a transaction now. And that's kind of how we see it at this point.

Let me stop there. Good luck.

All right, Derek. Thanks.

We will now hear from David Veal of Morgan Stanley. Sir, your line is open.

Yes, one thing that you said that was fairly counterintuitive to me was that with the decline in your stock price and the volatility in the markets, you have actually decreased your share repurchase to support your banks. I mean, it seems to me that with your stock price down 30% just in the last month or two this would be the time to be ramping up your share repurchase. I am wondering if you can just reconcile that for me.

Sure. I think what we did was in late September or mid-September, when the financial crisis hit, we saw a lot of financial names that, you know, we had always viewed as rock solid kind of in trouble. We did have availability of our line, but the stock was still trading at that point probably in the upper 30s, maybe even low 40s. At that point, we suspended our share repurchase program because we didn't want to have to draw down our line to do share repurchases at that point. And then of course, we entered into our quite period -- or our blackout period -- where we can't buy shares now. That period is going to expire three days after this announcement. And in our view, the financial markets have stabilized somewhat -- certainly the commercial paper markets -- better than it was. I don't think it is back to where it was six months ago, but it's better than it was. And in our prepared remarks, our comment there, David, was an indication that at these valuation levels we view it fairly compelling, we think the credit markets have stabilized somewhat, and we would expect to probably reinstitute that program here in the fourth quarter.

Okay. So the message is you were sort of holding your breath for a couple of weeks there, but where we are today you can see a path of being more aggressive?

Yes, we can.

Okay, great. Thank you very much.

Jeff Johnson with Robert Baird, please go ahead.

Thank you. Good morning, guys.

Good morning, Jeff.

A few things here, if I could. Bret, just going back to your comments on organic growth guidance for the year, if do the math, can you just confirm here kind of 3 to 5% is where we should be looking for Q4?

Yes, I they that there's a chance that it could be that -- in that range. And Jeff, the implications for us, or the things we are looking at today, is where is the market at today. Still pretty good demand. Certainly positive growth, although it is a little bit difficult to tell how positive. And then, we have got a couple of head winds. We've got the fact that we are going to be out of the dental anesthetic market in the U.S. in the fourth quarter -- it looks like completely out of that market -- which could cost us up to 3/4 of a point of growth globally on our global growth rate. And we do believe -- although it is hard to tell with precision -- we do believe that the dealer buying activity (inaudible) price increase was heavier this year than last year, which would also indicate some sales from Q4 probably moved into Q3. So we did actually lower our internal growth guidance for the year. We were at 5.5 to 6.5, and we lowered it to 5 to 5.5 -- although we are at 5.7 through nine months. And I think that's indicative of those two issues I just commented on, and the fact that we believe it could be in the range you are talking about for Q4.

Yes. No, fair enough. And I think in this environment we all expect a little slowing, and that's fine. I guess my question is, if we see a little slowing in Q4, you have got these couple of issues here -- the anesthetic issue, the buy forward issue -- I think you'll have to hurdle. As you get into 2009 -- and trying to stay very qualitatively, as I know you don't want to guide. But I would assume as those head winds go away, but you potentially face maybe growing macro head winds, it's hard for me to imagine '09 much below kind of Q4 levels on an annual basis then?

Yes. I know where you are going with that. It is -- I think the way that I'd think about that is how we have seen the dental market react in previous economic slowdowns, and it does tend to come off a point or two off its normal global growth rate which is -- if normal is 4.5 to 5, and you come off a couple of points, then you are kind of at 2 to 3 or maybe 3.5. I don't think that's an unreasonable assumption, at least at this early point. If the economy stays as it is now, which looks pretty bleak, that dentistry's growth would slow but remain growing, probably in those low-single digit ranges that we are talking about.

Yes, fair enough. And then you made a comment, Bret, on the guidance -- or when you were discussing guidance -- about the high end. Now, is that the high end of your original guidance? The high end of where you are today with EPS guidance for the year? And then, Bill, you made a comment about a potential $0.02 to $0.03 impact due to some below the line noise there on the fourth quarter. Is that somewhat kind of in the guidance, or how should we think about that?

No, everything we commented on today is in our guidance, sure. No, my comment was -- you know, we started out the year I think at $1.83 to 1.88, and now we are at $1.86 to $1.91. So even at the low end of our guidance, we are at the high end of what we started with, and perhaps even above that if we get to the high end of our own guidance. So the comments we made are in the annual guidance that we are giving you, and my earlier comment is that we are pleased to be at or above the high end of where we were when we started the year.

Yes, fair enough. That's how I thought I heard it. And then, Bill, I didn't hear geography -- or percentage of revenues by geography for the quarter. I know you did year-to-date, but that gets a little messy backing out. Can you give me the Q3 numbers?

Yes, hang on a second, Jeff. In the quarter itself, U.S. was about 41% of the total, Europe about 37%, and then the rest of the world was the other 22%.

22%. Great. And then last question. Just as we think about M&A here in this environment, Bret, what is your stomach, I guess, for a dilutive deal if there were a techie deal out there, or if there were an area you needed to get into, whether it was digital impressions or anything else, how do you think about dilutive deals as far as near term, and then the long term benefit they could bring?

Well, we have commented before that we would accept some mild dilution if it were for the right transaction with good -- perhaps a good technology base or preeminent market position; but we would expect to be able to get that neutral to accretive shortly thereafter. So I think that's still where we are. The point you raised about buying new technologies, particularly if they're not quite ready for launch, is by definition thee dilutive for a time. And we have done that before with new technologies, and absorbed that dilution until we could get some new product to market. So I think we would have an appetite for that if it were good strategically and only had mild dilution.

All right. Fair enough. Thanks, guys. I appreciate it.

Okay, thank you.

Our next question is from Greg Halter with Great Lakes Review.

Hi, good morning, guys.

Hi, Greg.

Hi, Greg.

I know you talked about the receivables and your days, and so forth. Just wondering if you can comment on your bad debt reserve and how your customers are looking in terms of payments and so forth on a go forward basis from what you can tell?

Sure. You know, we actually took a pretty good look at that at the end of the third Q to see and to decide, based on kind of the environment, whether, you know, anything additional is needed, and we felt that kind of the reserve level is pretty good. We did actually have included in the third quarter numbers about a $1.2 million -- or million Euro additional bad debt impact reserve that we took. But that is -- that was actually in our numbers that we had. But from an overall reserve perspective, we were very pleased at the 59 days, which is a little bit below last year's levels. And again, as we move forward here, our general expectation is that we would actually improve typically; but I think at this point in time, we are still comfortable with kind of the ranges that out there right now, and as we, you know, continue to move forward, we are obviously, you know, making sure that each of our different divisions are taking a hard look at limits and terms and everything else just to make sure that we are prudent in looking at that risk factor.

Okay. And I know you commented about the implant side of things in terms of the growth there. Just wondering if you think you are still continuing to gain share from, I guess, a lower base --at least in the U.S. -- and what the prospects are in that business going forward?

I think that we are pleased with the performance we had. Not all of our competitors haven't reported yet. Several of them have, which kind of indicates we are towards the up end or perhaps at the very top end of kind of the larger implant companies' organic sales growth ranges. In the U.S., of course, your comment is valid that we have got very small market share here, so we view that as a good opportunity; although the U.S. -- I think the U.S. implant market itself is growing probably low-single digits right now. And we think we are well-positioned there. We have got two great brands, we've got a good sales force and some good technologies coming out, both Q3 -- or Q4 and then next year. So we feel pretty good about our prospects in that market.

Okay. And you still expect your capital spending this year to be about $75 million, and any early thoughts for '09 -- at least directionally up and down over that?

Yes, right now that's a reasonable level of expectation for the -- for this year in total. And I would say that as we move forward, we would expect kind of a normal increase off of that base, at least at this point. But as I mentioned, you know, we are just going through our budget review process over the next kind of month and a half here.

Okay, great. Thanks a lot.

Thank you.

(OPERATOR INSTRUCTIONS). We will take our next question from Larry Marsh with Barclays Capital. Please go ahead.

Good morning. It's Adam [Prusard] calling in for Larry. Just curious, you guys mentioned ortho growth, I think in the high-single digits. (Inaudible) how did that break down by region?

It was actually pretty balanced this quarter. Ortho was high-single digits in the world, and I think it was high single digits in both the U.S. and Europe, which is primary markets, of course, that we are in. So I think it was a very balanced growth profile for us.

And then how did -- what about [Indo] for the quarter?

Indo, I think worldwide was mid-single digits growth.

I am just curious, I guess, just on your small equipment, I guess, what would you characterize as, I guess, the highest price point in some of those products? So what is the average, I guess?

Well, I mean, it is a range of products. You have got everything from systems, Adam, that may sale up to 4,500 or $5,000, to the dentist -- you have got hand pieces -- individual hand pieces -- that will be lower than that. So small equipment for us is probably anything in that 500 to $5,000 range to the dentist.

And I guess on the upper end of that, that's typically not financed by a dentist; right?

Typically not. Typically anything under $5,000, general rule of thumb, they're going to put on their credit card.

That's what I thought. Thanks a lot, guys.

All right, thank you.

As there are no other questions in queue at this time, I would like to turn the conference back over to Mr. Bret Wise, Chairman, Chief Executive Officer, and President. Please go ahead, sir.

All right. Well, thank you, again, for joining us this morning; and of course, for your interest in DENTSPLY. We are very pleased with our approximate performance thus far in '08 and believe we are very well-positioned to round out a very good year again here in the quarter. And we look forward to updating you on our progress for both the fourth quarter and our expectations for next year when we talk to you in early February. Thank you.

Ladies and gentlemen, this concludes today's DENTSPLY International conference call. Thank you for joining us, and have a wonderful day. You may now disconnect.