DENTSPLY SIRONA Inc (XRAY) 2013 Q2 法說會逐字稿

Good day and welcome to the DENTSPLY International second-quarter fiscal 2013 earnings call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Derek Leckow, Vice President of Investor Relations. Sir, you may begin.

Thank you, Rachelle. Good morning and thank you for joining us to discuss DENTSPLY International's second-quarter 2013 results. Joining me today are Bret Wise, Chairman and CEO; Chris Clark, President and CFO; and Jim Mosch, Executive Vice President and COO. We realize there are number of other earnings reports this morning, so in the interest of time we will keep our prepared comments brief.

I hope you had a chance to review our press release issued this morning. A copy of the press release and a set of slides to accompany this call are also available for download on our website, www.DENTSPLY.com.

I'd like to remind everyone that the Safe Harbor language and the US GAAP reconciliation contained in today's press release also pertain to this conference call. Certain statements made on this call are forward-looking statements as described on page 1 of the Company's 10-K for fiscal year ended December 31, 2012. These should be considered in conjunction with the risk factors and uncertainties that are described in our SEC filings. 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.

With that, I'd now like to turn the call over to Bret Wise. Bret?

Thank you Derek. Good morning, everyone. Thank you for joining us on our second-quarter call this morning. I have some brief comments on the market and our results and then I'm going to turn it over to Jim and Chris for a more in-depth discussion of the results.

First starting with the market, overall in Q2 we saw the global market is relatively stable, versus what we saw late last year and also in the first quarter this year. US continues to be a growth market where we are seeing reasonable volume growth at this point. Europe is essentially flat as we have seen for some time now. And the rest of the world varies with the emerging market regions really growing nicely and the developed regions in a low-growth stage at this point. Overall maybe a slight improvement in the US but no other notable change from what we reported on our first-quarter call.

With respect to our results we reported 2.5% sales growth XPM for the quarter. This was essentially all internal growth, which came in at 2.7% and currency was slightly negative. Our internal growth was robust in the US, we were up 6.2%, while Europe was positive 1.0% and that is essentially the same as what we saw in first quarter, and Rest of World was a positive 0.9%.

We've seen good uptake on new product introductions in the US and our Specialty businesses were particularly strong this quarter, confirming to us that these businesses, which are targeted at high-end procedures can really grow in a reasonable economic environment. I'd emphasize that we don't really view the US economy as strong at present, maybe it is growing 2%, yet our Specialty businesses in total notched double-digit growth for the quarter, and that was led by our Implant business.

In Europe, I think we're seeing more of the same. Probably a flat market at best and we continue to grow, although low single-digits.

In Rest of World, the reported growth was low this quarter due in part to our decision to discontinue sales to a number of dealers in the Middle East, due to increased gray market concerns on our part. Absent the Middle East, our Rest of World number would have been up mid single-digits.

On a product category basis, and this is global, our Healthcare business and our Consumable business both grew mid single-digits, while Lab and Specialty were low single-digits growth for the quarter. Of course that was greatly influenced by the slow market in Europe.

With respect to adjusted earnings, we saw good operating margin expansion this quarter. We were up 60 basis points, again that's measured on an ex-precious metal basis, and that is despite the medical excise tax in the US which is not in the 2012 baseline. We saw gross margins about flat excluding the medical excise tax and we got pretty good leverage on SG&A, including synergies from acquisitions. This and the internal growth drove earnings gains to 6.5% for the quarter to $0.66 per share, and again that is an adjusted EPS number.

On capital allocation I'm going to let Chris cover most of this, however with respect to acquisitions, we do continue to be active evaluating candidates. We had one small acquisition and one small divestiture in the quarter and they basically canceled each other out. We continue to look at other properties, however we are maintaining a disciplined approach and balancing acquisitions with share buybacks and debt reduction goals.

Looking forward, although we feel pretty good about our operational performance in the second quarter, we are balancing this with continued slow market conditions in Europe and additional currency headwinds we are now going to face in the back half of this year. Accordingly, we are going to narrow our guidance for adjusted earnings per share for the full year to the bottom half of our previous range, or $2.33 to $2.38 per share, which implies earnings growth in the back half of 7% to 12%.

That concludes my remarks. I would like to now turn the call over to Jim for further discussion of the results. Jim?

Thank you, Bret. From an operational perspective, I would like to discuss changes to our US dealer base, comment on Rest of World sales and provide an update on the implant business.

As you may be aware, in 2006 we initiated our US Strategic Partnership Program in which we consolidated our US dealer base and within associated terms of the agreement we received detailed end-user data from the strategic dealer group. We have found the end-user data to be highly effective in developing marketing and promotional programs, directing sales activities and monitoring retail versus wholesale performance.

Over time the dealer base has consolidated, leaving us with a fairly concentrated dealer presence in some regions, due to both market consolidation and also as a result of our termination of one dealer agreement at the beginning of the second quarter. In Q2 we added a net five US dealers to the program to support market and customer coverage requirements. This action restores the number of dealers and balances the coverage to a level we had when we initiated the program in 2006.

In the quarter we did receive stocking orders from the new dealers, but this was more than offset by the impact of the dealer termination, so it was a slight negative to US growth in the quarter. Going forward of course, we would expect the expansion to add growth over time as these new dealers become effective.

As Bret mentioned, our Rest of World growth slowed in Q2 to 0.9% versus prior year. As we have discussed on these calls before, on an ongoing basis we monitor potential gray market activities which are generally more prevalent in the Rest of World regions. In Q2 we completed an in-depth assessment and identified some questionable dealer activities. As there were circumstances where we cannot validate the end-user sales, we chose to discontinue sales to certain dealers in the region. The majority of these dealers were the MEA region which affects Rest of World sales.

While there was an immediate affect in Q2, our expenses is that demand remains over time if sales are recovered by our dealers. Beyond the challenges of MEA in this category, we saw good growth in Latin America, CIS, Asia-Pacific and Canada, with slower growth in Japan and Australia.

Turning to the Implant segment, DENTSPLY implants saw sales for Q2 only slightly negative on a constant-currency basis which we believe is at or above market. Regionally we saw US with double-digit growth clearly above market. As you may remember, the US was our first location to go live in the Astra Tech integration and we are now capitalizing on the attributes and synergies of the combined implant business.

Europe was down low to mid single-digits, driven heavily by continued declines in Southern Europe and lower growth rates in the rest of Europe. As reported in last quarter, our German business performed negatively to prior year in Q1, driven by the go live of the full integration our German business. They made good progress in Q2 on integration activities with respect to operational consolidation, sales effectiveness and customer transition and improved sequentially over Q1, although still negative. We are pleased with the solid sequential improvement and we believe we are on the right track as sales force confidence and execution improves.

Also in Q2 our Japan business went live as we fully integrated the DENTSPLY Implants Organization. Japan was our last location to go live, and while the overall organization's effectiveness continues to improve, DENTSPLY Implants is essentially moving to a business-as-usual state. From a high level, we are pleased with the progress of the Implant business initiatives and that our DENTSPLY Implant strategy is sound and will deliver success in the market.

I'd now like to turn the call over to Chris for some additional financial comments. Chris?

Thank you, Jim. Good morning, everyone. I'd like to elaborate on our second-quarter performance by reviewing key elements of our income statement, and also provide some additional color on our balance sheet and cash flow for the quarter.

Our sales growth, excluding precious metals, of 2.5% and our non-GAAP earnings per share growth of 6.5% for the period, reflects some volume improvements in our US businesses, increased leverage in our operating model, and also the impact of synergy benefits. Our internal growth rate of 2.7% for the quarter was negatively impacted by about 60 basis points as a result of the discontinuation of sales to certain dealers in the Middle East. Currency translation was negative 20 basis points or essentially neutral to sales growth for the quarter.

Gross profit rate on an adjusted basis in the second quarter was 58.4% of sales, excluding precious metals, which was a 20 basis-point improvement sequentially from the first quarter and 60 basis points below the strong prior-year comparison of 59.0%. We estimate that the medical device excise tax in the United States has negatively impacted gross margins by 40 to 50 basis points in the period compared to prior year. I'm pleased overall with this performance, which is actually above our trailing four-quarter average despite not having the tax impact in the half, over half at baseline.

SG&A expenses on an adjusted basis were $280.3 million or 39.2% of sales excluding precious metals. That is down 0.6% compared to the prior year, and also down about a full percentage point on a sequential basis compared to Q1.

Expenses as a percentage of sales, excluding precious metals, were down 120 basis points compared to prior year. While we believe we still have some room for further improvement, we are pleased to see some leverage and synergies across our businesses including from our ongoing integration efforts.

Operating margin for the quarter was 19.2% of sales, excluding precious metals, on an adjusted basis compared to 18.6% in the second quarter last year, reflecting the SG&A and gross margin impacts I just described. We're pleased to report the 60 basis-point improvement in our operating margin. I would point out this is, in fact, our strongest quarterly operating margin rate in the past ten quarters. Our reported tax rate for the second quarter was 20.9%, while our operating tax rate was 22.0%, which is consistent with our expectations for the year.

Net income attributable to DENTSPLY International, on an as-reported basis in the second quarter, was $87.2 million or $0.60 per diluted share compared to $80.8 million or $0.56 per diluted share in the second quarter of 2012. These results include a number of items which we've listed in the schedules in the release. On an adjusted basis earnings were $95.8 million or $0.66 per diluted share compared to $88.5 million or $0.62 per diluted share in the second quarter 2012.

Let me make an additional comment on currency exchange before I move on to cash flow and the balance sheet. Currency rates had a minimal impact on the P&L in the quarter, impacting sales, excluding precious metals, by a negative 20 basis points, and creating only a very slight headwind in earnings for the period. However, as we look ahead based on the current exchange rates, we now believe the currency headwind on earnings for the back half of the year is about $0.04 per share or between $0.05 to $0.06 negative per share for the full year. This is about $0.02 per share worse than what we were looking at on our previous call, with the change being primarily driven by a stronger US dollar compared to a basket of Asia-Pacific and Latin American currencies.

Moving on to cash flow, our operating cash flow in the quarter was $97 million, up nicely from $85 million in last year's second quarter. That brings our year-to-date operating cash flow to $132 million, a 28% increase from the prior-year period, despite some investments in working capital during the period.

Inventory now stands at 116 days, which is up five days compared to prior year and up six days from the end of March. We've strategically increased inventory as part of transition plans associated with anticipated operational changes in several businesses. We anticipate that inventory may continue to increase slightly for a couple more quarters to support these efforts and then will return to more normal levels as we move through 2014.

Accounts receivable days were 59 days at the end of June, up four days compared to prior year and flat with the level at the end of Q1. Capital expenditures were $22 million in the quarter, bringing the year-to-date level to $46 million. At this point we believe our capital spending will be in the $100 million-range for the year. Depreciation in the quarter was $21.3 million, while amortization was $11 million.

Looking at capital deployment, we continue to have a balanced approach that includes internal investments, returning cash to shareholders through share repurchases and dividends, acquisitions and also debt reduction. In the second quarter we returned $71 million of cash to our shareholders in the form of dividends and share repurchases, which is about 4.5 times the prior-year level of $15.8 million. We repurchased 1.5 million shares during the quarter at an average cost of $41.77 per share, but still have approximately 13 million shares available for repurchase based on the Company's authorization to maintain up to 34 million shares of treasury stock.

We're also pursuing opportunities on the M&A front and we're continuing to dialog and actively engage on specific business opportunities. As Bret mentioned, thus far this year we've completed one small acquisition and one small divestiture, but I would not be surprised to see more acquisitions as we move through the year. Finally as Bret stated, our 2013 earnings-per-share guidance is $2.33 to $2.38 on an adjusted basis, reflecting our assessment of continued above-market performance, but also the impacts of additional currency headwinds, continued high dealer inventories and a softer dental implant market in Europe. This guidance reflects the 3.5% adjusted earnings growth in the first half and implies earnings growth acceleration to the range of 7% to 12% for the second half of the year.

That completes our prepared remarks. We appreciate your support and we would now be glad to take any questions that you might have.

Thank you. The question-and-answer session will be conducted electronically.

(Operator Instructions)

Jeff Johnson, Robert W. Baird.

Bret, want to start with you on your assessment of Europe and looking for a little more color there. You talk about the market being pretty stable sequentially. Looks like to me, if I just for selling days, your growth may have come down 100, 150 basis points sequentially, or at least softened 100, 150 basis points. What gives you the confidence market is stable? If you could provide any more color on how you think some of the Southern European countries versus core European countries could play out over the next couple quarters, that would be helpful.

Okay, I will give that a shot. As far as our assessment of the market, it's based on both our own sales volume and then anecdotal comments from the 10 or 12 people we got in the different regions of Europe running those businesses. We haven't seen a notable change in the market environment. Our customer acquisition activity, their buying activities. There's still good uptake on new product introductions, but overall that market is not growing. In fact the economy is probably contracting and the market is perhaps stable. Maybe some volume growth in some countries, but that is offset lower volume in other countries. Overall we haven't seen a notable change to comment on for the most part.

As far as regionally, I think that what we said before, it's still contracting in the South, but I would say we are seeing a little bit of stabilization there. It seems to be bottoming out in Southern Europe. Northern Europe is a balance between some markets are growing slightly and some markets that are contracting slightly. We have a little bit of optimism that maybe by '14 some of the markets can begin to grow again. We don't really anticipate a large improvement at this point in the back half of the year. Probably entering the year we had some hope that we would see some improvement in the back half. Chris or Jim, you have anything to add to that?

No, I think that's pretty good.

Bret the mid- single-digit decline on the Dental Implant business in Europe, you feel like that is in line with market? Is there anything you can do to try to get above market at this point over the next few quarters? Should we be thinking that mid single-digit decline continues for the next couple?

I thing the mid single-digit decline, and Jim may have something to add to this, is in part due to that German integration. Although we saw a notable improvement in our performance in Q2 versus Q1, I think Jim pointed out it is still negative. Jim, do you have anything to add on the European Implant business?

Yes, Jeff, I think from our standpoint we definitely see a situation where our German business continues to improve. France as an overall market, is doing well. UK is doing well. And I think we're seeing some stabilization even in Iberia. Italy tends to still be a little bit challenging. I think overall we are seeing a stabilization and we do expect some improvement, at least from our business perspective, in that region.

That is helpful. Thanks, Jim. Last question from me. Chris, on the Rest of World and the dealers, if you lost about 300 to 500 basis points, it seems like as you chose to discontinue some of those EMEA or the MEA dealers, was there an EPS impact from that? Does that flow through to the rest of the year? It looks like to me a $0.02. I didn't hear you talk about it when you talked about the reasons for trimming the top end of the guidance range, but to me it had to have been $0.01 or $0.02 in your guidance if that is going to continue. Trying to figure that out.

I would say, Jeff, it certainly had an impact in the second quarter. As we move forward, we do think we will get a chunk of that business back through other distributors. Some of it we obviously believe was gray, and so we're going to get some of that back in the developed countries, if you will. But that will take, sometimes takes a little bit of time. There is certainly a little bit of a headwind built in.

Any way to quantify that? Was it $0.01 this quarter? $0.02 for the year or anything?

You are in the right range.

All right, thanks, guys.

Robert Willoughby, Bank of America.

Can you talk or elaborate -- sorry, this is Erin Wilson in for Robert Willoughby. Could you elaborate on the trends in the US and how sustainable they are? And is this a run rate excluding any sort of changes in selling days and such?

Sure, Erin, I will take a stab at that. I think our performance in the second quarter was really very strong in the US. It's obvious, I don't think the US market is growing 6%, and we had very strong performance in the Specialties in particular. But also in the Consumable business had pretty good growth as well. Whether 6% growth is sustainable over a long period of time or not, I am not sure. I think that would require the market itself to tick up a little bit from where it is today. But our businesses are executing pretty well and we are pleased with the uptake we are getting on new products in this market. There is volume growth in this market, which we haven't seen for some period of time. Some of the indicators we follow, like white-collar employment gains, have been pretty steady here for a while, and I think that's helpful to a business like ours.

Okay, great. Is the integration in Japan, I know you highlighted in your prepared remarks, but is that going as smoothly as initially anticipated?

Yes, absolutely. We initially integrated the operational portion of this business with the consolidation of the two businesses to one facility. That actually happened in the beginning of June. And then the sales force integration happened at the end of June. And that has gone very well. We're very pleased with the way that has occurred.

And do you have any idea when you can regain some of the lost sales due to the gray market distributor in the Middle East?

Yes, Erin, it is Chris. That's going to be gradual. Again, we have other distributors in those regions and we would expect them to pick up obviously a chunk of that initially, but that will probably increase gradually over time. In addition to that, any time we shut off a gray market source, then obviously that is less product that is getting around our normal distribution channels into the developed markets. So we would anticipate a gradual increase, or a slow impact there as well. I think again, we will see it over time. It certainly doesn't snap back in a month or necessarily fully in a quarter. But it certainly should come back over time.

Okay, great, thanks so much.

Jon Block, Stifel.

Great, guys, thanks and good morning. Bret, the US specialty market was a rally big number and it seems like it was led by your Implant division. Can you talk to the mix shift that you are witnessing in the US dental implant market versus that of what is going on in Europe? In other words, is the delta between the double-digit in the US and down mid single-digits Europe, is that all a function of market growth? Or are you seeing negative mix shift to lower-end solutions may be more pronounced in Europe versus what is going on in the US? Thanks.

Jon, this is Jim Mosch. From a standpoint of the US market, clearly one of the things that we're seeing in the Implant businesses is how the Implant business reacts when the economy improves a little bit. Obviously some of the growth we're seeing is an improved market, however we absolutely believe that as we have consolidated this organization, it's become more productive and more effective, that we are seizing customers and we are growing in this market and we are gaining market share. We definitely believe double-digit growth in North America is an increase in market share in the second quarter.

As it relates to Europe, we have definitely had some regions that are under duress and have been for a considerable period of time. We recognize that implants are not an investment that patients are making. We do not see a huge shift from premium to value. And I think one of the things that we always look at is that we do not see a situation in the marketplace where the cost of treatment to the patient is going down, which we think would be a real driver to that change. We definitely recognize that the value implants are out there. They tend to be local. We know they do a lot of swaps between each other. And we monitor that closely. But in the premium segment, we do not see major moves to value in our customer group and certainly our largest customers.

Jon, it's Chris. I might add that I think the US number underscores that in a reasonable economy, that implant segment really should be accretive and will be accretive to the dental market growth rate. That is certainly what we're seeing in the US. And then obviously as economic conditions over time improve, and I think that has us obviously feeling better in terms of the implant market globally. I would also add, as Jim mentioned, that the US market was the first market that we integrated. Again, as these integrations go on with time, we get more and more positive momentum. At least that's what we have seen and obviously we're pleased with the momentum we have in the US, as Jim mentioned.

Okay, that's very helpful. And it actually plays into the next question, which is how did Japan go on the folding together the sales forces? You mentioned a little disruption in Germany last quarter. Did you witness some disruption in Japan or was it seamless? And then, when we think about Japan being the last market to consolidate in terms of Astra Tech, what should we think about the incremental savings from here? In other words, are there still some things that you can pull down on as we exit '13 and go into '14? Thanks guys.

From a standpoint of the integration in Japan, it went very well. Obviously you get better over time with experience. The other thing is the Japan business was not nearly the size of, say, a Germany or the US, so our ability to integrate that seamlessly was very effective. We had a lot of time for those two organizations to work together, to get to know each other, to coordinate, and that process from our perspective went very, very well. Not only from a sales force perspective, but also from integration of business systems and things of that nature. That has gone very well.

As far as going forward, certainly from a standpoint we recognize synergies from the consolidations that we did. We continue to look for operational synergies as well. On an ongoing basis, I think there is an element where, as you go through an integration, you have a plan, you execute that plan, you recognize the synergies, and then you step back and you take a look at your organization and you say is this aligned with the way I see the business progressing, the strategy that I have a place? And you continue to evaluate that. From a business perspective, this is an ongoing process for us.

Okay great and one more if I can just slip it in. Chris, this one for you, cash flow related. Looks like CapEx, I think the range used to be $120 million plus. You said closer to $100 million this year. Is that something from a timing perspective of '13 versus '14, or anything that you are pulling back on from a CapEx standpoint? Thank you.

Jon, its pretty much just a timing standpoint, in terms of we've got some initiatives in place. We really haven't changed the scope of those initiatives but the timing a little bit in terms of phasing on a couple of them.

Perfect.

Matt Paxco, William Blair.

You obviously talked about in aggregate Europe is continues to be weak, but are there any specific products that you guys see that are surprising you? Thanks.

I would characterize the market in Europe, the consumable market there, meaning the everyday dentistry products, is better than the specialty businesses, which are highly discretionary and a lot of times not reimbursed. I would say the preventive products and restorative products are both doing better. We've had some nice product launches there with, I will throw out some names here, Prime&Bond Elect, a new cement we have; SmartLite, which is a new light we have; TPH Spectra is a new composite we're putting on the market; ProTaper NEXT is a new endodontics file. We're getting good uptake in a lot of these newer products. So that Everyday Dentistry segment is much more stable than the Specialty side of the business, I would say, in Europe. Matt did we lose you?

No, thanks.

(Operator Instructions)

Yi-Dan Wang, Deutsche Bank.

Thank you very much for taking my questions. First of all, on the Dental Implant business in Germany, is that recovery more or less in line with what you were expecting? Or is it progressing a bit slower than expected? Personally, coming out to the last call, I was expecting it to improve, or to start to grow in the second quarter. If you could comment on that and also when you would expect that business to return to growth, that would be helpful. And then secondly, was the Implant business affected by the disruptions that you talked about in the gray market in the Middle East? And then thirdly, can you give us the sales day adjusted growth for the US and ex-US implant business? That would be helpful. That's all, thank you.

Let me take a couple of these and then I will let Jim comment on the German business and the progression of the integration. With respect to the Middle East disruption, that was not implants, that was basic consumable products. Sales adjusted basis, we don't adjust our sales for the days, but if you want to adjust them yourself you can. I think there was an extra day in the US, an extra day in Germany, we were down a day in Sweden.

Overall about 60% of our business had an extra day.

Okay, so it was about 0.6 of a day for the global business was extra this quarter, versus last year. With respect to the implant business in Germany and the progression of the integration, Jim, do you want to take that?

Absolutely, Brett. From the standpoint of the integration in Germany, I think it's important to recognize that this was by far our largest and most complex integration. This is a very large sales force, fairly equally divided between Astra Tech and Friadent organizations. There was a fair amount of customer transition. They are also moving to a common operating system, common processes. There is an element of the business gains confidence and effectiveness over time. We certainly would have hoped that the integration would have gone smoother in the first quarter. We saw nice improvement in Q2. We have seen improvement in July.

So from my perspective, I see the competence and effectiveness of this organization improve every month. We expect it to continue to perform better each month as we go forward. As far as the overall market, the German market is probably, I think, a little more challenging than us and our competitors would have anticipated. So that recovery aspect is happening in a market that probably has a little bit of slower growth as well. But I think over time as we move through the next couple of quarters, we expect to see some good improvement in that market and that business.

When you say improvements in the next couple quarters, can we expect it to grow by that time? It's a relative gain, in that if the market is becoming more challenging then you are going against a decent headwind.

Yi-Dan, we don't really give specific guidance on specific products and specific markets, but we are happy to see that the business is improving sequentially. We expect that to continue. Predicting how one market in one country around the world is going to progress is a dangerous business and we don't believe we need to do that. But we are happy with the business. It has progressed nicely from what happened in the first quarter and we expect to see sequential improvement from here.

Okay that's helpful. Last question, on the regional gross in the Implant business, can you be a bit more precise on your US and ex-US growth? Double-digit sounds wonderful. Can you give us some indication on where you are along those lines? Whether it's low double-digit mid teens high teens? And then similarly for the ex-US business thank you?

It's low double-digits in the US and it's negative in Europe.

Okay, thank you.

Brandon Couillard, Jefferies.

Brett, curious if you would elaborate on what drove the decision to change the dealer set-up in the US market. And if you quantify the impact to the US growth rate in the second quarter. And then how should we think about that dynamic in the back half of the year?

Okay, Brandon, I will take a stab at then if Jim or Chris want to add anything they can. Right after we had done the dealer consolidation, it was late 2006, 2007, we had basically 22 dealers that were strategically picked for coverage in the market, and also the way that they transact business with us, meaning they were the most sophisticated and easiest business partners for us to do business with. They were very efficient, et cetera. Since that time, there's been consolidation of five of those dealers. So about 25% of the baseline went away through consolidation. And then in the second quarter, early in the second quarter, we terminated one of the remaining. It was 17 dealers at that point, so we were down to 16 dealers.

We felt that was a little bit too consolidated. We made the decision to go back out and find five or six other dealers that we thought would re-balance the portfolio and get us back to a number around 20, 22 dealers to cover all of the US, which we think is about the right balance for us. We expect that there can be industry consolidation, so when we consolidate, when we brought the number of dealers down before, we knew this might happen. Over the six or seven years since we implemented the program we had lost 25% of the dealers to consolidation, so we re-balanced the portfolio is simply what happened. The effect in the second quarter was that the initial orders from the new dealers, to put their inventory in, was slightly less than the sales we lost to the dealer we cut off. So it was slightly negative to the US growth rate in the quarter. As those dealers become now efficient in areas of the market that maybe we were under-represented in before, we expect it, of course, to be positive to the balance of the business and the growth of the business.

Got you. And then, Chris, any chance you could quantify the impact of absorption on the gross margin line in the second quarter? It certainly sounds like that should trend favorably in the back half of the year as you build inventories. And then perhaps if you could call out the impact of mix and currency on the gross margin line in the quarter that would be helpful.

Sure. Let me start with currency really didn't have much of an impact in the quarter. There are some gives and takes between translation transaction. From a mix standpoint, mix was slightly negative. Obviously a little bit slower implant growth and also a little bit negative product mix. I would characterize that probably in the -- it was appear to be in the about the 30 basis-point range. Again, the biggest negative impact in general for us on the gross profit line was the med device excise tax, which was between 40 and 50 basis points of headwind.

In terms of absorption, we got a little bit of a lift in absorption but not significant, necessarily, in the quarter. As we move forward, I would assume that the inventory level will come up a bit, but probably not come up to the degree as much incrementally as they have here in the second quarter. At least that would be our expectation. But I don't necessarily see them coming down as rapidly in the back half as historically we have. I would characterize it probably that way.

The only thing I might add there, Brandon, is on the currency impact. Although it was somewhat neutral in the second quarter, we saw some pretty significant weakening of both emerging markets and some developed markets against the US dollar and the Euro. The reason that is important is in those markets we typically buy the inventory in from the US or Europe, and thus we got a little bit of a headwind, or more of a headwind, than we had when we finished the first quarter with respect to some of those currencies. I don't know if Chris --

Yes, absolutely. If you look at in the quarter against the Australian dollar, US dollar strengthened 11%. Similar movement against the Brazilian real. Similar movement against the Indian rupee. Some of these are smaller organizations for us, but there's a lot of them that add up. Again, as Bret mentioned, these folks are net importers of products both US and from Europe in terms of our products. As such as their home currencies weaken, those foreign-source products become more expensive for them. Obviously their profits obviously translate to fewer US dollars as well.

Great, thank you.

Glen Santangelo, Credit Suisse.

It's actually Diego filling in for Glen. How are you? I was just wondering if we could get a quick update on the Ortho re-launch. I think where we left it last quarter, things were tracking well in line with your expectations. Any color around that would be helpful. Thank you.

Yes, I think we're pretty much still in line, Diego, relative to what we expected. I would say we characterize it as saying this next phase was going to be a street fight slugging it out, customer by customer with competition. I think that Ortho Japan together really didn't have a meaningful impact necessarily on our overall growth for the quarter, or internal growth for the quarter. We saw some solid customer gains, particularly in the US in the quarter, so we feel good about that. Again, I think that we are now beginning to run up against the prior-year re-launch. We ran up against that in the second quarter in Europe and now we are going to begin running up against that in the US, in terms of some baselines that had customer re-stocking efforts in it. Again, the way we are measuring this is at a customer level in terms of, again, that street fight. We are pleased with how our teams are doing, particularly in the US right now.

Great, thanks so much.

There are no further questions. At this time I would like to turn the conference back over to Mr. Leckow for any additional or closing remarks.

Thank you. Thanks for your interest in DENTSPLY and thanks for your participation today. That concludes our conference call. If you have other questions, I'm around today for any follow-ups. Thank you.

That will conclude today's call. We thank you for your participation.