DENTSPLY SIRONA Inc (XRAY) 2009 Q3 法說會逐字稿

Good day, everyone. Welcome to the DENTSPLY International 2009 third quarter earnings conference call. Today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Bret Wise, the Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, John, and good morning, everyone. Thank you for joining us on our third quarter call. This is Bret Wise, Chairman and CEO. Also with us today are Chris Clark, our President and COO, and Bill Jellison, our Senior Vice President and CFO. I'd like to begin today's call with some overview comments on our results, and also how we see the state of the dental market. I've asked Chris Clark to follow with some insights on our gross margin performance. And then, as usual, Bill Jellison will follow with more details on the financial results. As usual, following our formal remarks, we'll be pleased to answer any questions that you may have.

Before we get started, it's important to note that this conference call will include forward-looking statements. Those involve risks and uncertainties, and they should be considered in conjunction with the risk factors and uncertainties we've described in our most recent annual report on Form 10-K and our other periodic filings with the SEC. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call, and a recording of this conference call in its entirety will be available on our Web site.

Last night, we announced our financial results for the third quarter, and we're pleased to announce improved sales performance, a solid overall earnings result, and as we'll discuss today, excellent free cash flow generation. These results continue to suggest that we may have seen the trough in the global dental market with some signs of gradual recovery as we move forward. Total sales, including precious metals, were up 0.2% in the quarter, and sales excluding precious metals increased 1.1% in the quarter. And that's a significant improvement from the minus 5.6% and minus 6.2% we experienced in the first two quarters of this year. Internal growth was a minus 1.5% in Q3, and that's also a strong improvement over the minus 3.8% that we had experienced June year-to-date. Acquisition growth was 4.0% in the quarter resulting in constant currency growth of 2.5% for the period, and the currency impact, while still negative at a minus 1.4%, represented a significantly smaller headwind in the quarter than we had seen in the first half of the year. Further, if rates remain where they are today, currency will turn into a positive tailwind in the fourth quarter.

Our dental business delivered basically flat internal growth. It was a minus 0.3% in the quarter, and that also is a significant improvement over our June year-to-date performance which was a minus 3.0% for the dental-only portion of our business. In total, these results are encouraging, indicating at least a stabilizing if not a strengthening of the underlying dental market as well as continued strong execution, I think, on the part of our business units. Encouragingly, our Q3 internal growth improved across all three geographic regions. The US internal growth for the quarter was a minus 2.6%, and that compares favorably to minus 3.5% that we had seen in June year-to-date. And that was driven by stronger consumable sales and also solid double digit implant growth in the U.S. Internal growth in Europe was a minus 1.1%; and again, that compares favorably to the minus 2.5% we had seen June year-to-date. And I think it's also important to note that European growth was positive in the low single digits if you exclude CIS. And that was led by particularly strong growth in our specialty products where all three were positive on an internal growth and, of course, a constant currency growth basis in the quarter. Rest of world sales also strengthened in the quarter delivering flat internal growth in Q3, and that compares favorably to a minus 1.9% that we had seen through June. So I think these geographic results reflect meaningful improvement over what we had seen in the first half of the year, providing some comfort that the stability of recovery is not limited to one region or one geography, but it's more widespread, at least at this time.

Looking at the performance of the various product areas of the business, our specialty businesses, as a group, again reported low single digit internal sales growth in the third quarter, had mid-single digit constantly currency growth. This is consistent with the trend we've seen all year as our specialty businesses in the aggregate have grown on an internal growth basis and each quarter in 2009. In the specialty category, both orthodontics and endodontics had positive internal growth while implants were essentially flat on an internal growth basis during period. And all three businesses were positive constant currency. I think it's interesting in this segment is that our implant business now appears to be very close to or perhaps even tied for the number three global position for the implant market. You may recall that just a few years ago, we were number five in the world in the implant market, and I think that's an indicator that we have made substantial progress in this marketplace across a variety of geographies.

Moving to the dental consumables category, it was flat during the quarter on an internal growth basis and positive mid-single digits on a constant currency basis. I'd add that this is a pretty substantial improvement over what we saw in the first half of the year for the dental consumables that go through distribution. Sales and lab segment were negative mid-single digits on internal basis and low single digits on a constant currency basis, and I think this demonstrates a continuation of what we've seen, which is that the lab segment is the area under the most pressure as we work our way through the economic downturn, and that's due in part to patients downgrading to lower cost procedures. Overall, we believe these results are stronger than what is probably a slightly improved underlying market indicating that we've probably taken market share during this period.

Earnings per share in the third quarter were $0.45 on a GAAP reported basis, and that's up 2.3% from the $0.44 we reported last year. On a non-GAAP basis, so excluding restructuring and other charges and tax adjustments, earnings were $0.44 a share in the third quarter this year, down 4.3% from the $0.46 we reported last year. I would remind you that in the first three quarters of this year, we've been going up against very strong results in the prior year. Actually, record results in most of the quarters. Q3 2008 was no exception as we had internal growth last year of 5.4%, and non-GAAP earnings per share growth of almost 18% in Q3 last year. So given this rather high hurdle of a comparison, I think that the performance we saw in the current environment was very solid.

Our business continues to experience some gross margin pressure due to currency translation, mix, and lower cost absorption across our plants. However, we've done a good job of controlling discretionary costs to somewhat offset that impact on the operating margin line. During today's conference call, both Bill and Chris have further discussion of margins in their prepared remarks.

Given the economic pressures that we've faced year-to-date, we've been very focused on cash flow generation. During the third quarter, our operating cash flow was very strong at $130 million, which is a substantial improvement over the $98 million in cash flow generation -- that's operating cash flow generation in last year's Q3. Furthermore year-to-date, our operating cash flow is up now approximately 4% compared to first three quarters of 2008. I think that this is a good indicator that our businesses are being very diligent. They are paying a lot of attention to the fundamentals of the business as we work our way through the global recession.

Looking ahead, we continue to be cautiously optimistic about the market recovery. However, we need to recognize that the recovery will likely be a slow and steady process with both forward and backward steps along the way. The implications for our business is that we expect to remain very focused on controlling costs and prioritizing specific focus programs that will accelerate our growth as the recovery emerges. Given some of the positive opportunities that we are seeing at this time, we do expect to start some additional investments in the fourth quarter that will likely add about $0.01 per share to our costs in that period.

As we look at the fourth quarter, we see an opportunity to meet or exceed last year's fourth quarter performance both in terms of sales and our non-GAAP earnings per share. We expect to have positive internal growth and positive impacts from both our already completed acquisitions, as well as currency. As we mentioned, we do expect some continued gross margin pressure. And again, Bill and Chris are going to talk to that further. And we are going to be making some investments in the fourth quarter in sales and marketing. And again, that's to the extent of about $0.01 a share.

Based on these expectations, we're narrowing our full year guidance to $1.81 to $1.86 per diluted share. And again, that is measured on a non-GAAP basis. This implies EPS gains in the fourth quarter from 2% to 13%. Again, our assessment is that the overall dental market has stabilized and in some cases has begun to improve. Our sales and earnings expectations that we're expressing here are based on our belief that these trends will continue as we move through the remainder of 2009. I'd like to now turn the call over to Chris Clark. Chris?

Thank you, Bret. Good morning, everyone. I'd like to take a few moments and give you some additional insights into our performance and actions in the gross margin area, as well as an update on a couple of key new product introductions that should provide us solid growth platforms as we move forward. Our gross profit in the quarter was 55.3%, about 200 basis points below our rate in the third quarter of 2008. This rate reduction is being caused by three primary issues. First, foreign exchange transactions are roughly a third of the variance, primarily as a result of the strong Japanese yen and also from changes in European rates. As you will recall, we source a significant amount of product out of Japan and Europe for other markets. Second, unfavorable mix, partially offset by unfavorable price, created approximately one half of the year-on-year margin rate gap. Mix from recent acquisitions caused roughly one quarter of this net unfavorable mix. And third, reduced manufacturing volume and absorption contributed approximately one quarter of the year-on-year impact. This is the result of lower production during the period, which drove inventories down in the quarter by over $8 million in constant currency, compared to a build of $15 million last year. However, it also resulted in lower overhead absorption and higher unit costs in the period, as well as in higher product costs captured in inventory at the end of the quarter which should roll off in the fourth quarter.

Providing a bit more color on each of these factors, currency is obviously the most unpredictable issue and difficult to manage in the short-term. With respect to the mix in price impact, we believe our non-acquisition mix issues will improve as the economy improves, and our specialty businesses in certain regional areas grow at a faster place. I would also emphasize that our analysis continues to indicate that we have realized favorable net pricing over prior year at least equal to our normal rate of increases even after any incremental promotional efforts that have been implemented during the current climate. Finally, as we look to our manufacturing variances and our recent underabsorption of overhead, we believe this should also improve as the dental market strengthens. As I've mentioned on the last couple of conference calls, we have been actively reducing our fixed cost basis while tightly controlling our variable expenses. We've initiated multiple restructuring efforts this year at many of our locations, including a number of our manufacturing plants. Our approach in this area, however, has been balanced, as we've been careful not to remove infrastructure that will be needed to respond to increased demand as the economic situation stabilizes and improves. As such, our Q3 results reflect the positive impact of many of the savings efforts we have initiated earlier this year but also reflect our decision to maintain our ability to accelerate production in the coming months to respond to any increased demand. We continue to be confident in this balanced, prudent approach, and we believe that this impact on our margin will be minimized as the dental market improves and production levels increase, allowing our capital to be more fully utilized.

I'd also like to highlight early results from a couple of key new product introductions, as innovation continues to be a solid growth driver for us. On last quarter's call, I briefly mentioned our August introduction of SureFil SDR posterior Bulk Fill flowable composite. This product allows for excellent cavity adaptation and bulk fill placements up to 4 millimeters in depth, and results in up to 30% less placement time for the dentist. Importantly, this unique chemistry employs a new, stress-decreasing resin system that addresses one of the primary causes of procedural failures for composites, namely stress accumulation during curing. In the first two months, over 5,000 US dentists have purchased the product, which reflects an extremely strong level of early adoption. We're very encouraged by customer reaction to the technology and continue to believe that this will really begin to redefine the direction of the key category of composite restorations. Again, based on the importance of stress reduction.

I'd also like to comment briefly on the European launch of the Cercon brain expert, which is our next generation Cercon CAD-CAM system that has expanded applications and also improved operating efficiencies for the lab. Shipments of this product also began in August. We're very encouraged by initial results. As we look to the fourth quarter, we anticipate expanding the launch to include the US, Canadian, and Japanese markets as well. I'd now like to turn the call over to Bill Ellison, our Chief Financial Officer, to discuss the third quarter financial results in greater detail. Bill?

Good morning, everyone. Net sales for the third quarter of 2009 increased by 0.2% in total and increased by 1.1% excluding precious metals. The sales increase ex precious metals for the quarter included a constant currency increase of 2.5%, which includes a 1.5% decrease from internal growth and a 4% increase from acquisitions. The quarter was also negatively impacted 1.4% from foreign exchange translation. The geographic mix of sales, ex precious metals, in the third quarter of 2009 included the US at 40.2%. Europe represented 38.3%, and the rest of the world was 21.5% of sales. Our non-dental business had a negative impact on internal growth once again of approximately 1.2 percentage point in the period. We also believe that our internal growth in the quarter was negatively impacted by approximately 0.5 to 1 percentage point from dealers buying less product ahead of our price increases this year compared to last year.

Currency rates had less of an impact on sales and earnings in the quarter than they did in the first half of this year as the dollar weakened further in the period against most currencies. Based on current currency rates, foreign exchange will have a positive impact on sales in the fourth quarter. Gross profit margins as a percentage of sales ex precious metal content in the third quarter of 2009 were 55.3% compared to 57.4% for the third quarter of 2008. The rate was negatively impacted in the quarter compared to the same period last year by a number of factors, as Chris discussed in detail. We expect that many of these factors will continue to impact margins in the fourth quarter, as will the higher costs captured in our inventory, which are expected to roll off in that period.

SG&A expenses were $178.8 million dollars, or 36.2% of sales, ex precious metals in the third quarter of 2009, versus 37% in the prior year's third quarter. These expenses were not only lower than those in last year's third quarter on a constant currency basis, despite acquisitions, but they were also lower when measured as a percent of sales. In fact, on a constant currency basis, ex acquisitions, these expenses were down in the mid-single digit range. Expenses continue to be tightly controlled as we work to not only to bring down discretionary costs but also to reduce various fixed expenses to maintain an appropriate balance in a difficult economic environment.

Operational margins for the quarter were 17.5%, compared to 15.3% in the third quarter of last year. Operating margins on sales, excluding precious metals, were 18.8%, compared to 16.6% last year in the period. Operating margins based on sales, excluding precious metals for comparative purposes, excluding the recent acquisition-related activities and restructuring and other costs in both periods, would have been 19.1% in the third quarter of 2009 and 20.4% in 2008. Approximately one third of the rate reduction in the period is from the impact of recent acquisitions. The remaining impact is primarily resulting from lower production volumes, negative FX impacts, and a negative product mix as Chris commented on in more detail earlier.

Net interest and other expense in the third quarter was $5.1 million, compared to $5.6 million last year in the third quarter. Net interest expense was essentially flat in the period as lower interest income and investments was offset by lower interest expense from the lower rates and borrowing levels. Other expenses were reduced slightly also in the period. The corporate tax rate in the quarter was approximately 26%, and we expect this to be a reasonable assumption for an operational tax rate for 2009. And this year's rate is approximately the same as 2008's full year operational tax rate. Keep in mind, however, that the operational tax rate in the fourth quarter of last year was only 22%, so it will be a headwind of approximately $0.02 to $0.03 per share for us in the fourth quarter.

DENTSPLY's net income in the third quarter of 2009 was $67.5 million, or $0.45 per diluted share, compared to $66 million, or $0.44 per diluted share in the third quarter of 2008. Net income on an adjusted non-GAAP basis, excluding acquisition-related costs, restructuring and other costs, interest income from the initial fair value measurement adjustment and income tax related adjustments was $65.9 million, or $0.44 per diluted in 2009, compared to $69.3 million, or $0.46 per diluted share in the third quarter of 2008.

Cash flow from operating activities in the third quarter was $130 million, compared to $98 million in the third quarter of last year. Cash flow from operating activities for the first nine months of 2009 was $245 million, and cash flow improved over last year as working capital needs were less this year, and inventory was actually reduced on a constant currency basis in the first nine months of this year. Capital expenditures were $43 million in the first nine months of the year two depreciation and amortization at $49 million in the first nine months. Inventory days were 106 at the end of the third quarter of 2009, generating $23 million of a positive cash flow swing in the quarter as inventories were reduced compared to the same quarter last year. Inventory decreased in the period through some solid efforts, and we see further opportunities to reduce them further. Accounts receivable days were 61 days at the end of the third quarter of 2009, compared to 59 days at the end of the third quarter of 2008 and 54 days at the end of 2008. We continue to believe our accounts receivables are in good shape considering the global economy, and we remain focused on them.

At the end of the third quarter of 2009, we had $333 million in cash and short-term investments. Total debt was $395 million at the end of the third quarter. We also have recently completed a $250 million private placement note to be funded no later than January 19th of 2010, with an average maturity of five years and a final maturity of six years at a fixed interest rate of 4.11%. This note was entered into to take advantage of low fixed-rate financing in this environment, to have some specific funds to pay off a $150 million private placement note that comes due in the first quarter of 2010 and to have additional flexibility as we renew our revolving credit facility next year. At the end of the third quarter, the liabilities under the $150 million private placement note and $63 million of borrowing under the revolver are classified as current maturities as those instruments expire in March of 2010 and May of 2010, respectively. However, the new private placement note will replace these borrowings upon their retirement, and of course, we will renew the revolver prior to its expiration. Year-to-date, we have repurchased approximately $21 million of our stock, or approximately 700,000 shares, at an average price of roughly $29. Based on the Company's authorization to [main] up to 17 million shares of treasury stock, we now have approximately 2.6 million shares still available for repurchase.

Finally as Bret noted, our 2009 full year earnings per diluted share guidance of $1.81 to $1.86 on a non-GAAP basis, excluding restructuring and other costs, recent acquisition-related activities, and income tax-related adjustments. 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) We'll take our first question from Derek Leckow from Barrington Research.

Thank you. Good morning.

Good morning.

I have a question on the internal growth commentary. Want to make sure I've got these numbers right. I think you said that the implant business, it was positive outside the US but negative inside the US? Is that the right interpretation of that?

No. I'm sorry if that's how it came across, but the implant business on an internal growth basis was essentially flat worldwide. It was positive in the US -- very strong in the US actually.

That was that double digits that you commented on, right?

Yes, double digits. It was positive in Europe, including CIS. But of course, it was more positive excluding CIS. And thus, because it was flat for the full world, you can imply from that in the rest of the world's regions, it was negative. Particularly the developing countries.

Is that something market-related, do you think? Are you still gaining market share in those markets?

I think we're clearly gaining market share in the US and in Europe. There's not real great data on the rest of the world locations because we really don't get sales by country from competitor filings, nor do they get it from us. So I think -- it's hard to tell in the rest of the world, which comprises about 20% of the market. But I think, clearly in the developed countries, we're still taking share.

Okay. And then, I have a question here on the gross margin pressure. It sounds like you did take a price increase, but it wasn't as large as last year. Is that right?

That's correct.

Was it about a 2% increase, or what was the average?

It was in that neighborhood, Derek, pretty consistent with what we have historically taken. The price increase we took last fall was above that, but this is much more in the line with what historical norms would be.

So is it fair to infer that perhaps we saw some delayed purchases that would have otherwise been occurring in this quarter that may wind up actually occurring in the fourth quarter this year?

Well, I think -- I don't know that it's delayed purchases, Derek, as much as it is our dealers probably didn't buy into inventory at as high a rate this year as they did last year. Meaning they still bought ahead, to get the pre-buy discount, meaning the 2% or 1.5% -- whatever it is. It varies by product. But their buy-ahead let's call it, was less robust than it was last year.

And last year, you had a pretty strong gross margin period in the fourth quarter so I'm wondering, should we expect to see some lift from that activity in the fourth quarter?

On a gross margin basis, I don't expect that. I think the gross margin -- last year's fourth quarter got a lift from mix more than anything. So I think, as Bill commented on in gross margins and so did Chris, we expect that the fourth quarter will probably still be under pressure on a gross margin basis, particularly because of the higher cost sitting in inventory.

And then Bret, your comments about the investments in sales and marketing. Normally, we see companies make those comments when they have pretty good visibility that things are improving. And obviously, that must be the reason why you decided this was the right time to make those investments. Can you tell us what you're seeing out there, and what your expectations are? Any early, preliminary comments on 2010?

With respect to the investments, I think these are Company-specific opportunities more so than they are broad market changes that are driving us to. And I don't want to telegraph in too much detail what we're contemplating. But for the Company, there are some markets or some opportunities that we think we need need to take advantage of, and that's going to require some additional sales and marketing investments that we're going to make in the fourth quarter. As far as 2010 goes, I think it's too early to comment on it. We are going to start our planning cycle in the next week or so, and it runs through December. And so our intention, at this point, is to give you guidance on 2010 on what will probably be an early February call when we cover the fourth quarter.

And these investments, are they personnel, primarily?

They are personnel primarily.

And any particular geographies for that?

Yes, but I don't want to comment.

Okay. Fair enough. Thanks a lot. Appreciate it.

We will take our next question from Jeff Johnson with Robert Baird.

Thank you. Good morning.

Good morning, Jeff.

Just wondering a few things here. Bret, you made the comment early in the call that you expect Q4 organic growth positive, which against those comps -- I think we were all hoping it would be. Is the expectation though -- just to [tamp] our expectations down a little bit here? Should it be in the low single digit range? And I know you don't give guidance around that, but it's pretty easy to look at those comps and think we could be back to a 5% growth rate in the fourth quarter.

That's a good question, Jeff, and you're probably not going to be satisfied with the answer. We have avoided doing internal growth guidance this year because of the uncertainty in the market. And that's proven to be prudent, I think, up through the third quarter. But as we look at the fourth quarter, we do see an opportunity to have positive internal growth given what we see today. And, that's a pretty big turnaround compared to what we've seen so far this year. So we're not going to characterize it further than that. Other than to say, I think, it is an indication that our confidence level about moving through the fourth quarter has improved slightly versus the visibility we would have had earlier in the year.

Okay. So somewhat satisfying -- I guess, answer. If I think about organic growth then in my mind where I've got it in 2%, 3%, 4% somewhere in there. Bill, it sound to me like gross margin and operating margin in the fourth quarter still have to be down close to what they were down today? Is that the balance to be thinking anyway? Whatever organic growth is up a few points, then margins are going to have to be down 50 to 100 steps again?

Keep in mind, Jeff, that we've reiterated that a number of the drags that Chris highlighted as well are still going to continue in the fourth quarter. Plus we also stated that there are some costs that are captured in our inventory levels at this point that are ultimately going to roll off in the fourth quarter as well. So I think that you will absolutely have some additional margin pressures in that period.

And Bret, just bigger picture -- kind of conceptually. I talked to you about this a month or so ago, but want to go back to it. If we can to 2010 organic growth in the low single digits whether that's 2%, 3% somewhere in there. You still feel comfortable that 20 to 30 basis points of market expansion you can deliver with a modicum of organic growth next year?

Again, we're pretty early in our planning cycle for next year. However, I will say based on historic models of the Company when we can get organic growth in that range or slightly above, we do a pretty good job at getting drop-through. And thus, that's why we have that 20 to 40 or 20 to 50 basis points for the year target. At this point, I would say we're not moving away from that.

I'm just trying to think as I play off the yen strength, and the impact that will have on the ortho business. Is is something different fundamentally in 2010 than in past years it has been?

The yen is always an issue. The euro is going to be an issue. But there is a lot of moving parts other than those. The guidance we've given in the past would still be the guidance we have today with the one caveat that we haven't done the planning for next year yet.

Last two questions then. Europe -- a very nice bounce-back from on organic growth standpoint. My understanding is that Russia is still somewhat of a disaster over there from a dental standpoint. So when do we anniversary what I think has been down 20%, 25% for you in Russia the last couple of quarters at least? When does that anniversary? And when it does, is there any reason to think that Europe doesn't go back to positive organic growth probably even sooner than the US?

The significant pressure on the CIS started in the first quarter. So I would say it will anniversary as we enter 2010. And as I comment today that Europe, in total, was down slightly -- I think it was 1.1%. But without CIS, it was positive low single digits. So having CIS be neutral will be a significant improvement for our total European results. And I think it would imply an ability to grow organically again in Europe. So I think your thesis there is probably right.

Great. One last question on the acquisition pipeline. Obviously a dearth of deals here. Probably more on the target side, not wanting to sell at a bottom or something. But now that the economy seems to have picked up a little bit, and at least public company valuations are back up to somewhat respectable levels. Do you think that fear on the target side of not wanting to sell on the bottom is starting to ease out at all of these deals?

I think it may. It's always hard to predict -- and particularly, predict timing on these sorts of deals. We have seen a couple of deals done or one in particular on the equipment side of the business. But we don't participate in that side of the business. But I think that's an indicator that maybe things are starting to move a little bit, and we're optimistic that we'll get to participate in that industry consolidation. Although again, it's difficult to predict timing.

Can you qualify your acquisition pipeline at all at this point? Good, bad, indifferent -- relative to the last few quarters?

Good.

Thanks, guys.

We will take our next question from Adam Poussard with Barclays Capital.

Good morning.

Good morning.

I just have a question with Q4. Thinking of the US, obviously, last year it moved away from the historical trend where you saw revenues sequentially up from Q3, Q4. Would you expect maybe that historical trend to return this year?

I think there's a better opportunity for that. Last year, we had a number of things that were putting pressure on the US sales, including the pre-buy which we have already mentioned. We had a problem with the anesthetic stock last year, which took us out of the market for most of the fourth quarter, actually. And given the fact that at least today, we feel like the economics underlying the dental market are going to be improving in the fourth quarter versus the third quarter -- or at least versus earlier in the year. And thus, I think there's a good opportunity that the historic trends might return.

Okay. And then, if you could comment, what are you seeing? You're seeing improvement against the small equipment side? What are you seeing there lately?

Small equipment, which was very negative in the first quarter became neutral in the second quarter, and I think it was neutral -- maybe even slightly positive on the mix in the third quarter. So that resistance to spend -- most of our small equipment is $5,000 or less -- things you would buy with a credit card. That reluctance to even spend that amount, which we saw early in the year -- first quarter. It seems to have abated a bit.

Consistent with other segments you've definitely seen some improvement there?

Yes, we have.

Okay. And, I guess, bigger picture, Bret, now. You have things -- over $300 million in cash on your balance sheet. Just remind me what your priorities are -- acquisitions, buy-backs, or increasing the dividend. Just your thoughts there.

Actually, you've got the order right. Our priority would be to reinvest in the business via either acquisitions or R&D, sales and marketing. Secondly, to -- for share repurchases, and third would be the dividend. And lastly, just a quick clarification for Bill. If we were to assume that the currency stays where it is, what would you estimate the currency contribution would be for the fourth quarter to earnings?

We don't specifically talk about the earnings side of the equation. But I think what you should be expecting if rates stay where they're at now, that you have probably got a top side that is probably in the 4% to 6% range. Positive instead of negative.

Great. Thanks for that.

Thank you.

(Operator Instructions) We will take our next question from Greg Halter, Great Lakes Review.

Good morning.

Good morning.

Following on that foreign exchange commentary there you just brought up. What kind of impact did FX have on your earnings in the third quarter?

Overall on a broad basis, it was actually fairly flat, including the translation and some of the transaction related sides of the equation. Offset a little bit by the net investment hedge swaps we got out there. So we probably had more of a drag in the first part of this year. It actually became more neutral in the third Q.

And were the number of selling days equal this third quarter versus last? And what does that look like for the fourth quarter?

Yes. They were flat in Q3, and they'll be flat in Q4.

Okay. And do you anticipate any additional restructuring charges -- costs coming up?

We do expect to have some modest restructuring charges over the next, let's say five quarters or so. And they're probably in line with the kind of size and magnitude that you've seen from us thus far. .

Okay. And I notice that your goodwill account was up about $40 million sequentially. Can you discuss the reasons behind that?

Yes. One of the things you've got to look at between the numbers you're looking at there between December of 2008 and now is about a 3% to 4% of that increase is all FX.

Okay. And, Bill, I think you had mentioned that your inventory was down, but I'm showing a $312 million versus $279 million. Am I looking at something incorrectly?

Again, you have to take a look at the FX related aspect of it. On a constant currency basis, it's down. You'll see it on our cash flow statement, as well too, that we've got about $8 million of a reduction in the quarter in comparison to a build last year of around $15 million in the quarter.

And is that the same case for receivables? The FX having an impact there?

Yes. The FX has a big impact on that as well, too. Most of those balance sheet items are impacted by somewhere in the 3% to 4% range from the end of the year until the end of the third Q.

Would that be true somewhat for cash and debt also?

Yes, it would absolutely be true for cash and a little bit on the debt side, not as much.

Okay. Thanks a lot.

We will take our next question from Chris Arndt with Select Equity Group.

Yes. Hello, gentlemen. I think you mentioned in the quarter, that the mix shift was negative. But I also -- but you also mentioned that implants were flat, and I thought you mentioned that endodontics and orthodontics were also reasonably good. So I just wanted to reconcile those two facts.

Sure.

If something was negative on the mix side, what was negative.

Keep in mind, instead of implant and endo growing significantly faster generally than our broader based market and product lines. By having it be flatter, that's actually putting a negative drag on the overall mix. We've also got mix within some of our product-line related categories as well, too. For example, sales into the CIS regions -- the Russia areas are down in comparison to some of the other regions. And then also Spain, which has an unemployment rate of close to around 20% right now, actually has a higher margin level for us. And those sales are also down.

Okay. And then, I'm sorry if I didn't hear this correctly; but in terms of the internal growth numbers, you said 2.5% ex foreign currency, ex precious metals. What was the gross? And then the acquisition contribution was 4%? Is that right?

That's right.

Okay. So the organic growth, you could say is negative 1.5%?

Correct.

You're exactly right.

Alright. Thank you.

Okay. Thank you.

This concludes our question and answer session. At this time, I'd like to to turn the conference back over to Bret Wise for any additional or closing comments.

Thank you, John, and thank you everyone for joining us this morning. And for your interest in DENTSPLY. Again, we're pleased to note that the global dental market appears to have now stabilized, and some areas have begun to improve. We expect this modest improvement to continue through the remainder of the year, and we look forward to updating you on our progress when we report our full year earnings in February next year. Thank you.

Thank you. That concludes today's conference. Thank you for your participation.