DENTSPLY SIRONA Inc (XRAY) 2015 Q2 法說會逐字稿

Good day and welcome to DENTSPLY International second-quarter 2015 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, Aaron. Good morning everyone and thank you for joining us to discuss DENTSPLY International's second quarter 2015 results. I'm joined by Bret Wise, DENTSPLY's Chairman and Chief Executive Officer, Chris Clark, our President and Chief Financial Officer and Jim Mosch, our Executive Vice President and Chief Operating Officer. I hope you had a chance to review our press release issued earlier this morning. A copy of the release and a set of supplemental slides and information relating to the non-GAAP financials are available for download in the Investor Relations section of our website www.dentsply.com under the heading quarterly results.

And please don't forget the Safe Harbor language and US GAAP reconciliation contained in today's press release also pertain to this conference call. We may make forward-looking statements involving risks and uncertainties. These should be considered in conjunction with the risk factors and uncertainties that are described in the release and in our SEC filings. It is possible that our actual results may differ materially from the forward-looking statements that we make today. The Company undertakes no obligation to revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. With that, I would now like to turn the call over to Mr. Bret Wise. Bret?

Thank you, Derek. Good morning, everyone. Thank you for joining us here on our second-quarter call. Overall, we were very pleased with how things developed in the second quarter. Certainly, we believe the markets are showing some signs of improvement while our own results accelerated nicely both on the top line and on the bottom line.

Before we get into specifics about our performance, I would like to provide some brief comments about the regional markets. From our perspective the US remains quite healthy, stable and growing and given the job growth numbers we expect that to continue. In Europe, we also saw a notable improvement in demand sequentially. This was most notable in the southern countries but also in the UK and the Nordics. Russia, on the other hand, that continues to be a difficult market. In the rest of world, I would say there's more good news than bad. We saw the markets demonstrating good stable growth in the Pacific Rim, the Middle East, as well as in Japan and Australia.

At DENTSPLY, as you know, we've been focused on how to become more efficient internally while channeling funds back into initiatives that can drive sustainable growth above the market, irrespective of the market conditions. In that regard, we made some important strategic and operational changes that Jim will update you on in his remarks. Thus far, the program is going very well but our reinvestments have been limited. And in part, to the extent we've had reinvestments, those have been focused on actually funding the efficiency initiatives. But in certain cases where we've channeled some seed money for growth back into the business, we are getting good results, nice results and we are now entering a period where we expect to be able to generate additional savings that allow us to begin to accelerate these investments in growth on a go-forward basis.

Moving to our specific results for the quarter, overall internal growth came in at positive 3.6%. That was led by the rest of world which was up 7.9% followed by the US which was up 3.3% and Europe was a positive 1.9%. The rest of world numbers are quite good and reflects solid internal growth across most of the regions that are included in this total for us.

Japan recovered nicely in this quarter as expected given the low base from last year's Q2, and as you recall, that followed a VAT tax increase April 1, 2014. There was movement in 2014 of sales into the first quarter and now the second quarter. So the baseline for this year was rather low. However, even though Japan was strong by comparison, it was up mid-single digits, it was still slightly dilutive to the rest of world number we have here. So the 7.9% number we have for the rest of world is not really bolstered by the Japan number.

In US, with saw solid demand across most of our businesses with the exception of Lab, that was down slightly. Recall that we are discontinuing some products in the Lab business which is muting the reported growth for now. In Europe, we were up 1.9% and that's despite a continued drag from the CIS region. Ex CIS, we were up 3.1%. This reflects really nice growth in Consumables and the Specialty categories while Lab again, was negative for the same reason it was in the US. It's reflecting those discontinued products.

From an execution perspective, we are pleased with the organic growth in the top line as noted and despite the significant drag from currency, we've done pretty well bringing the earnings through the income statement. On an adjusted basis, we delivered 180 basis points of operating margin expansion to get to 21.1% for the quarter. That's our best performance in five plus years. Adjusted EPS was up 6% in the quarter and that's despite a significant drag from currency. Overall, we feel good about the results and also good about the outlook.

One other thing I wanted to comment on was the restructuring charge we took this quarter. As you know, we announced this was coming back in May when we resolved the negotiations with the Works Council in Germany and we'll now begin to implement this program in the third quarter. To date, there's been a drag on our performance from this program due to the discontinued products, which I mentioned here, but also because of the uncertainty of what the outcome would look like. Moving into the back half of the year, we should begin to see the benefits, including more efficiency, but also more focus and more clarity on which products are important to the future of this business.

Also, given our performance to date and the benefits we now see in the back half, we are in a good position to begin to accelerate our growth investments while also reaching our margin and earnings goals. We are keeping a close eye on risk from this program, of course, because there is the potential for disruption, but we are pleased to date that that disruption has been minimal and we have been able to manage through it. We expect to see more benefits from putting our shoulder more firmly behind the growth projects in the program and we believe that can begin to be impactful as we move into next year.

Based on our earnings to date, the market developments as we see them and the outlook for the net benefits coming from the efficiency program, we are adjusting our guidance range from the $2.50 to the $2.60 that we established at the beginning of the year to a new range of adjusted earnings per share for the year of $2.54 to $2.62. This reflects our confidence in our performance so far and the initiatives we have underway and also the currency drag that we expect based on the rates today. And of course, also the other points I've noted this morning. So I'd like to now turn the call over to Jim Mosch. Jim?

Thank you, Bret. I would like to provide an operational update for Q2 and also provide some further perspective on 2015 initiatives. I will then turn it over to Chris for the financial review. As Bret noted, we saw good performance across all regions in Q2. Providing some perspective to this, our Global Consumables business delivered solid mid-single digit internal growth in the quarter. New products launched in the latter part of 2014 and Q1 of 2015 in both the restorative and preventative areas are driving growth coupled with procedural selling efforts in the areas of Class II and post endodontic restorations. In addition, US retail growth appears to be stable and growing well versus prior year.

Our Dental Specialties business also performed well with mid-single digit internal growth led by our endodontic and implant businesses. Endodontic businesses have benefited from recently launched products such as WaveOne GOLD, PROTAPER NEXT NiTi files and new irrigation and root canal filling products. The Implant business continues to get strong traction from our new implant system, ASTRA TECH EV, SYMBIOS Biphasic bone graft material and additional impact platforms in our ATLANTIS customized abutment business.

The Prosthetics business was down mid-single digits on a global basis. This is driven by a challenging market conditions in traditional lab products and discontinued products as a result of the restructuring of our European Lab business.

From a geographic perspective, we saw upper mid-single digit growth in rest of world driven by Asia and Latin America. These regions certainly benefit from new products across all businesses but in addition, we have worked to stabilize these businesses, ensure dealer compliance and invested the strength in the management teams as well as expand the selling organizations.

From a new product perspective, we highlighted the products we launched at IDS. WaveOne GOLD, endodontic files, the VDW. CONNECT and X-SMART iQ, which is an iPad based endomotor, and the Cercon ht Shaded Zirconia milling disk. We saw impact from these products in Q2, however, some of these products such as the new endomotors will begin the formal launch in shipments in Q3 and we expect improved momentum throughout the year. In addition, we have a strong new product pipeline and we'll have new product launches across most of our businesses in the latter part of Q3 and Q4.

In the Q1 analyst call, we introduce the formation of three segments. The formation of these segments, and more specifically, the creation of Global Businesses, Global Product Platforms and Single Country Operating Units are part of our global efficiency and investment initiative. Our stated objective is to achieve a 20% adjusted operating margin for the full-year of 2017, while providing estimates to support the growth of the business for the long-term. In Q2, we crossed the 20% threshold at 21.1%.

Please note, that Q2 tends to be our seasonally largest and most profitable quarter. However, we are beginning to see the results from elements of our global efficiency initiative including the procurement program which Chris will address. In addition, we are proceeding with restructurings of our European Lab business as well as other restructurings related to country and global business formation process. This process will accelerate as we close 2015 and throughout 2016. We are confident that these are realizable expense improvements as we effectively align the businesses and create operational efficiency.

As indicated, an important element of this initiative is investment. To date, most of our spending has been utilized to create efficiencies. We now shift our focus to investments for long-term growth. We are planning increasing levels in investment over the coming quarters in areas of infield marketing resources, sales force expansion and expansion of clinical education through further investments in field-based programs. This investment will support two of three growth drivers, sales excellence and clinical education.

The third area, innovation, will see further investment in the future as the global businesses complete formation and alignment. Our objective will be to invest in larger R&D projects and platform technologies which have greater risk but also significant value. I would now like to turn it over to Chris for the financial results.

Thank you, Jim, and good morning, everyone. I'd like to provide some detail on our second quarter results by reviewing key elements of our income statement, balance sheet and cash flow statement. And also, by providing some additional color on capital deployment and highlight a few key related initiatives.

For the second quarter, sales excluding precious metals, declined 7.7% compared to prior year. As internal growth of 3.6% was more than fully offset by negative currency translation of 10.9%. Net acquisition growth was negative 0.4% in the quarter as the impact of several small divestitures of non-core product lines offset modest acquisition growth.

We had strong operating margin performance in the quarter as our second quarter operating margin rate of 21.1% of sales, excluding precious metals, on an adjusted basis improved by 180 basis points, over 19.3% in the prior-year quarter. This is our strongest quarterly operating margin performance in 28 quarters. This represents the impact of significant internal focus on this measure via our global efficiency improvement initiative, as well as positive benefits from price, mix and currency. Partially offset by incremental spendings to support our efficiency initiative, as well as lower absorption in the period as we brought down inventory by three days in the quarter compared to a three-day build in the second quarter last year.

Gross profit rate on an adjusted basis in the second quarter was 60.2% of sales, excluding precious metals, and this was an improvement of 170 basis points over prior year. SG&A expenses on an adjusted basis, were 39.1% of the sales, excluding precious metals, and that's down 10 basis points compared to the second quarter of 2014. The benefits of our global efficiency program are currently skewing more heavily to the gross profit line rather than the SG&A line at present, as is the currency impact.

The global efficiency program is increasingly impacting our P&L on a number of areas. I commented last quarter on the increasing momentum of our global procurement initiative and we continue to be pleased with the traction of this effort. In addition, we are realizing the expected impacts of our earlier restructuring efforts and anticipate accelerating benefits from our more recent restructuring initiatives.

In the quarter, we recorded $38.9 million of restructuring and other costs. That's largely associated with our global efficiency program. The largest impact was from the restructuring of our European Laboratory business that we announced in late May. In addition to improving the profitability of this business, this initiative allows us to realign resources on strategic growth opportunities as opposed to less profitable and lower growth non-strategic product lines. As part of the initiative, we are discontinuing some of these low margin non-core products and in the second quarter, discontinued products deflated internal growth on a global basis by approximately 35 basis points.

With respect to our return expectations on restructuring initiatives of this type, we typically look for ROIs between 20% and 40% on these initiatives. And we expect the savings associated with the European Laboratory restructuring initiative to begin to materialize in the back of the year with the savings mostly phased in by calendar 2017 with a small incremental amount carrying over into 2018.

Our reported tax rate for the second quarter was 32.2%, reflecting the temporary headwind associated with some of the restructuring efforts. Our operating tax rate for the quarter was 22.8%, up 40 basis points above our second quarter rate last year. And as projected, we're seeing a slight continued headwind on the tax rate as a result of projected unfavorable geographic earnings mix in 2015 compared to last year.

Net income attributable to DENTSPLY International on an as reported basis in the second quarter was $44.1 million or $0.31 per diluted share and that compares to $90 million or $0.62 per diluted share in the second quarter of 2014. These results include a number of items which we've listed in the schedules in the release, the most significant of which is the restructuring cost that I described earlier. On an adjusted basis, net earnings were $103.3 million in the quarter compared to $99.7 million in the prior year quarter. Adjusted EPS improved by 6% to $0.73 from last year's second quarter and currency represented a headwind to earnings in the quarter of approximately 5%.

Moving onto cash flow. Our operating cash flow for the quarter was $145.8 million, that's down $9.9 million from last year's record second quarter of $155.7 million, but it represents a 50% increase over the second quarter of 2013. We continue to be very pleased with our cash flow performance as our trailing 12 month operating cash flow was up 9% versus the previous 12 month period ending June 2014 while our free cash flow yield remains very strong at 6.5%. Moreover, our free cash flow conversion continues to be excellent as our second quarter free cash flow of $129 million represents 125% of our adjusted net income for the period.

Inventories finished at 115 days in June. That's down three days sequentially and down eight days from prior year. We traditionally see inventories creep up in the second quarter so the sequential improvement this quarter is reflective of our ongoing focus on driving working capital improvements. Accounts receivable were at 58 days in June, that's flat to prior quarter and on a sequential basis and down one day from last June. Capital expenditures were $17 million in the quarter, while depreciation was $19 million and amortization was $11 million.

During the quarter, we repurchased approximately 200,000 shares at an average cost of $51.68 per share. For the first quarter of 2015, we've now repurchased -- first half of 2015, we've repurchased 1.9 million shares and our leverage ratio, defined as net debt divided by trailing 12 month EBITDA, stood at 1.9 times at the end of June. Looking forward, our balance sheet and cash flow generation continue to provide us considerable flexibility to create shareholder value through acquisitions and share buybacks.

Looking forward, we anticipate the currency headwind to earnings to be a bit more than the $0.07 impact on our headwind that we experienced in the first half of the year. That's net of the impact of our cash flow hedges. As you may recall, these hedges helped to partially blend our FX rate over a rolling 18 month period. While they do not eliminate or reduce the long-term impact of currency changes, they do reduce the volatility by essentially gradualizing these rate changes.

Finally, as Bret indicated, based on our strong first half performance, we are raising our 2015 earnings per share guidance to $2.54 to $2.62 on an adjusted basis. This reflects the strength and momentum in internal growth and our global efficiency program as well as the additional slight headwind in currency that I just described. I would note that we have a tougher comparison in the third quarter, as that was our strongest quarterly performance last year, while that comparison eases in Q4. That completes our prepared remarks and we certainly appreciate your support and we would be now glad to take any questions that you might have.

(Operator Instructions)

Robert Jones, Goldman Sachs.

This is Nathan Rich on for Bob this morning. First, on the Lab restructuring, it sounds like you guys can see the light at the end of the tunnel. I think you said it was a 35 basis points drag on internal growth in Q2. Bret, can you update us on what you have left now that you have received the approval to move forward in Germany? And as we think about the back half of the year, should we think about internal growth being maybe higher by a similar amount to that 35 basis points as we think about our models?

I'm going to take a stab at that and then Chris may have something to add there. Just for reference purposes, we announced back in September last year that we were entering into the negotiations with the Works Council to restructure the European Lab business. Those negotiations took us out until May, so about eight months, eight or nine months, we were in a period where the market knew we were going to do something there, our employees knew we were going to do something but it wasn't resolved what exactly it would be. So the announcement in May allowed us to then move forward and implement the program.

In the interim time, there is been a slight drag on growth of this business because the market could see what the options were and started to move away from those product lines that we were likely to discontinue. Of course, there was confusion or disruption in the employee group because of that also.

So this quarter, of course we announced in May and the impact is now known which products exactly will be discontinued et cetera, and the employee base is being (technical difficulty) on the products that will go forward. I expect that drag, although I have a hard time quantifying it, I expect that drag from the discontinued products now will actually increase a little bit for a couple of quarters. And we'll probably normalize that sometime after the first quarter next year or so. I don't know. Chris?

I concur with that. I think, Nathan, I would assume that the underlying operation performance of the business would actually improve given the certainty in terms of how we are moving forward. Obviously, knowing that there is restructuring that's being negotiated that uncertain for the employees. And obviously, the ability to focus on a moving forward basis on really the new business, I think is a very much a positive moving forward.

The product lines being discontinued, however, there is now certainty on those and certainly, certainty in the marketplace and certainty with customers. I would expect that headwind to continue for the next few quarters and probably, as Bret mentioned, increase a bit in terms of the product line discontinuation, offset by the really, what I would expect to be, some improvement in the operating performance and the underlying business as the result of the restructuring known being known and moving forward

That's helpful. If I could ask one quick followup. One of the areas of reinvestment that you talked about was expanding the sales force. Can you give us any metrics on how big of a piece that is? How many reps will be added? What percent of the total that is? And can you remind us in the past, when you have invested in the sales force, what does the ramp up period look like before the new reps get up to full productivity?

Go ahead, Jim.

Yes, Nathan. We have taken a review of our global sales organization and certainly look at some of the areas that we are seeing some good performance and recognize that further investment would give us some upside. More specifically, we're looking really at the US market and selectively at some of our emerging markets. We'll make some decisions just based on deployment and current levels as to how much that will be. We are kind of finalizing that at this point in time.

From a standpoint of a pay back, it depends on, obviously, a lot of factors. Market and market segment, and obviously, quite frankly, in some of the emerging markets the actual cost of a rep which tends to be lower. But we see a ramp up period of probably 12 to 18 months. We like that to be, obviously closer, to 12 but that's a good metric that we look at overall

This is Derek, Nathan. That's talking about the earnings implications of the move, right, Jim?

Correct.

Sales implications happen much earlier than that

Sales implications happen immediately. But from a standpoint of us being able to fund the expansion, we typically see that to fully fund that expense or recover that expense is usually 1 to 1.5 year ramp up.

Have you made a decision on how many reps you are going to be adding?

Not specifically, no

Okay, thank you.

That's an ongoing program, so as we generate savings we will be deciding. Some of the savings, of course, are going to drop through in the form of margin expansion. But as we generate savings that will be part of our normal budget process and in some instances, it will be midyear adjustments, off-cycle additions. So it's hard to telegraph exactly what the numbers would be at this point

Makes sense. Thanks for the questions.

Okay.

Steve Beuchaw, Morgan Stanley.

First question is, I wonder if you could spend a minute reflecting on the 2017 margin objectives? Its always nice to hear how the thinking there is evolving and I would say particularly here, given how strong the margins were in the quarter. Of course, we appreciate that you want to continue investing in the business, but then it begs the question, if we have now more flexibility to invest in the business considering how well we are doing in terms of the efficiency initiatives, maybe that positions you to talk a little bit more about how you think about organic growth evolving over the next couple of years. How do you think about the interplay between those dynamics given the progress that you are seeing here?

Okay. Steve, this is Bret. I will take a stab at that. Certainly, we are ahead of where we thought we would be in the margin expansion program and it is beginning to gain traction now, strong traction. And that creates flexibility for us. You might remember, this is not, and you alluded to in your question, this is not just a cost-cutting exercise, this is an exercise of taking fixed costs and turning them into variable costs so that we can accelerate investments where we see growth opportunities. And thus, that is probably the most important part of the program, frankly.

But we are ahead of where our internal targets were on the margin expansion program. That's going to allow us to bring some of the investments forward and which should generate growth sooner in the program as well. I will say with respect to the 20% operating margin target in 2017, we are ahead of where we thought we would be now and I think you should view that 20% operating margin target as an interim target. And we will reassess that target with respect to where we are in the program when we get to that program.

Now we are at 19.9% for the first six months of this year so we are doing pretty well, which is what's giving us the flexibility to invest in the growth initiatives and move forward. So I don't want to get too far out in front of ourselves here on trying to describe the impact on internal growth, but of course, we would not be making those investments if we did not think it would accelerate internal growth going forward. Chris or Jim, do want to add anything?

No. I think that's accurate. Obviously, we're headed where we thought we would be. We are getting some help from FX on that line but we're also getting some good help in terms of the efficiency program. That's regaining traction and based on the moves on the initiatives in play, it looks like it's going to accelerate which is in line with our expectations.

I would also say there is transition area FX too. Obviously, as we go through this and we create new territories, we create new positions, we transition businesses, there is a time phase until those things become totally efficient.

And just one followup to a comment that was made in the prepared remarks for you, Chris. Thanks for calling out the cash flow in the business and how that relates to what's going on in net income. We've been wondering about the balance sheet and the extent to which you might, with working capital efficiency, be able to drive fast or free cash flow growth over time. Have you guys thought much about how much or how sustainable that is, the ability to drive free cash flow growth ahead of net income given what you see on the balance sheet today? Are there any parameters around that, that you could share with us?

We certainly believe that there is some sustainable improvements possible here for the next several periods. Obviously, it is going to vary quarter to quarter. I don't want to set the expectation on a quarterly basis, but I think over the next couple of years you should expect us to continue to make improvements in terms of working capital.

We are still over 115 days of inventory. That's not exactly world class. That's better than where we've been. But we've got some significant opportunities in a number of initiatives in play to drive that down both in terms of how we operate but also how we structured. Again, I think you should expect to see that gradual improvement. Again, not necessarily quarter to quarter but over time. The fact that historically, I think if you went and looked back, last year we increased the inventories in the second quarter by three days. If you go back to 2013, and I believe they went up by six days in the quarter. So to get inventory down by three days in the second quarter which is typically one of our largest build periods, I think is indicative of the traction that we're getting.

Okay. Thanks again, guys. Have a good morning.

Brandon Couillard, Jefferies.

Bret, with respect to Europe, I mean if we look back over the last two years we've seen a real sawtooth pattern in the trend there. Realize there's been several moving parts between CIS and discontinued products. Do you feel comfortable enough at this stage to say we are perhaps back on a more sustainable consistent growth trajectory in that region?

I think that's an interesting question, because the sawtooth pattern, Brandon, occurred because of different countries moving in different directions all at the same time. Whereas today, the pattern is, it's much more consistent meaning many more countries are moving in the right direction than -- before there was a balance, more moving down and more moving up, et cetera. Now there seems to be more momentum in more countries. And the results today, we still have countries where there were slight declines in sales growth but there were many, many more that had slight increases in sales growth and thus, it appears to be a more sustainable pattern to us.

Time will tell. We've been surprised before, but I think the region in total seems to be more stable today. They are still dealing with some issues in Greece, et cetera, but that doesn't seem to create any contagion to the other countries at this point. Its hard for me to make that call at that point other than to say what we see right now would tell us that it looks to be more sustainable.

Thanks, that's helpful. Maybe one for Jim. I did not hear you mention the ortho business. Has their been any change in the ASP environment there? And any update you could give us on where you are with MTM in terms of the rollout and the traction you are seeing there would be helpful. Thanks.

Certainly. From the standpoint of the ortho business, I would say the pattern is pretty similar to what we've seen in the past few quarters. The market is a still very competitive. I would say that we are seeing some improvement in our North American business. Europe and the rest of the world still reads very, very competitive.

From a standpoint of our MTM business, obviously that is a smaller business but we are seeing some excellent growth. We are pleased at the case uptake that we see in that business. A lot of it is going to be our continued investment in the clinical education program and our sales efforts to ensure we get continued adoption and increased case volume. We are pleased with the performance of the MTM business.

Thank you.

Jon Block, Stifel.

This is Ethan Roth on for Jon Block. Maybe first, on the margin expansion. It's been critical to the story and you can see to the 2017 goal of 20% in the quarter which is allowing you to reinvest a portion of the savings, fund growth initiatives. I know that you mentioned that you were ahead of plan, but looking beyond 2017, what do you consider to be the peak operating margin for the overall business?

Clearly this business can and has produced operating margins about 20% and that's why we continue to describe the 20% target as an interim target and a net target. Meaning it's net of the reinvestment. And it is an interim target which we would expect to meet on the time frames we've established. As we get closer to that timeframe, we will be able to update that target and the guidance based on the maturity of our efficiency program and what we see the reinvestments generating in returns. So I don't want to put a stake in the ground at what the maximum operating margins are for this business but it's above that 20% target that we have today.

Okay, great. I know you mentioned that momentum has picked up in the business and the Q2 internal stack growth stepped up a bit sequentially. But your comps get more difficult in the back half of the year. Do you think it's realistic to think you can maintain this 3% plus internal growth just given the momentum of the business?

We don't publish an internal growth target for the year, although the reason I went through what we see in the regional markets was to give you some indication of what we see the underlying conditions to be. So at this point, we see stable to improving results in both the US and Europe and that is 80% of our sales base so that is a big factor. The wild card has always been the rest of the world countries and there is 120 countries in that category so it's a little bit more difficult to make a firm call on that. Based on the underlying trends that we see in the markets today, we feel pretty good about growth prospects for the back half of the year and I don't think -- we're not too concerned about what the baseline is in making those kinds of calls at this point.

Great. Thank you very much.

Okay. Thank you.

John Kreger, William Blair.

This is Matt. I have a question specifically related to the US market. You've seen a little bit of acceleration there, is that coming from patient traffic spend per visit or some of the other specialty products? Thanks

Okay, Matt. That's difficult for us to know what those underlying trends are at the dentist office themselves. We buy surveys and so forth and some of those show that patient traffic is improving. From our perspective, the General Consumables, the products we sell through distributors, are really the strongest category we have right now and those products really don't move other than through patient traffic.

So that tells us, if we had to guess, we would say there has been an acceleration of patient visits and these patients are getting back into the office. And generally when that happens, then you see the specialty business pick up on a little bit of a trailing basis. So if we had to guess, patient traffic trends have improved for where they were, for instance, a year ago. And with the job growth coming, we would think that that would continue. Do you guys have anything to add on that?

No, I think that's correct.

If I could ask a followup relative to margin in the quarter. You said price mix and currency were some of the reasons as to why you got some expansion. Have you guys broken that out as to the contribution?

Yes, if you look at the 180 basis points in the quarter, a bit over half is currency. Again, recognizing that with the cash flow hedges, the impact on our bottom line is less than the translation impact headwind on the top line. About one-third of it, a little over a third on a gross basis, is the efficiency program. And price and mix are helpful, but then we add headwinds from reinvestments and then also, headwinds from absorption, as I mentioned earlier; where again, last year we built inventories by three days and this year we brought it down.

Okay Great, thank you

Thank you

(Operator Instructions)

Jeff Johnson, Baird.

Congratulations on a very good quarter here. I just want to ask on organic growth. I want to make sure I understand. Bret, are you saying that you're going to absorb some of those inefficiencies as you shutdown some of these Lab stuff and that's just going to get absorbed into organic growth? You're not going to drop that out to any discontinued operations or anything where you would ex that out of your organic growth rate?

Jeff, we did not intend to do that. As those products come out, it does create a slight drag on internal growth. Our plan was to report internal growth to you each quarter and then let you know what the drag was. But we were not going to attempt to normalize it for a product dropping out here or there. And we've kind of quantified the range of that drag going forward here. And of course, that is a temporary drag. Once we anniversary those discontinuances then that's going to drop out.

But also, new products being launched in that business as well.

That's helpful. I just want to make sure so I've got my model set up. And then in the US, the 3.9% organic growth. I mean this is going to sound like a very picky comment in the context of a very good quarter. So, it's not meant to be. But a little bit slower than last quarter's 4.5% and market seemed to be getting better. Is that normal fluctuation? Anything to think about there in the US number?

Jeff, that's a very picky question. (Laughter).

I know it is.

I think it fluctuates around. A lot of things can affect that. Dealer inventories can affect that and so forth, by 50 basis points here to 100 basis points. We are not troubled by the -- it's slightly stronger in the first quarter. It's a little bit, just a little bit weaker here, but overall this year, we are up around 4% organically in the US and probably a little bit above the market. If we had to guess on the market, we would say between somewhere between 3% and 3.5% is what the market is growing. We will know a lot more than that as we see more distributors report, et cetera. But we feel pretty good about the number. We feel good about the momentum, the execution is good and the seed investments we have put in are bearing results here. So I don't think we are overly troubled by that US number.

Understood and then last question for me. Just Jim, anything you can give us by geography on maybe the dental implant numbers? We still see some nice pickup in North America and maybe you already talked about this. I've been jumping between calls. Just any geographic details on the dental implant? And then, maybe I didn't hear you say anything about the medical business this quarter.

I will take implants and then you can comment on medical. Implant unit growth was pretty nice for us in US in the second quarter. If I had to characterize it regionally, I would say the rest of the world was our strongest region and that was followed by Europe and the US. The trends seem to be favorable there. It varies by technology at this point but we think we are picking up momentum on implant unit placements. And that is being driven by the new product that we've been talking about for the last year or so on these calls, ASTRA TECH EV. You want to comment?

Jeff, as it relates to the medical business, we're seeing really good mid-single digit growth in that business. We are pleased with the performance. We are seeing some nice growth in our US market and in addition, we have some fairly significant new products coming in the coming quarters. We look for continued improvement in that business.

Bret, with EV being the main driver and pricing on that product has to be pretty good at this point. You refer to unit growth and I can understand why you might for Asia-Pac, but I would assume in US and even in Europe, unit growth doesn't differ a whole lot from dollar growth?

Well yes, the unit growth does differ a little bit, meaning the point that you raise is important and that is that the price is higher on EV than some of the legacy products. So as the mix shifts to EV, the effect on revenue is a little bit higher than the effect on unit growth. I am using unit growth here to give you a perspective on what is happening to the number of our own dental implant screws that are being placed irrespective of which brand it is.

All right. That's helpful. Thank you

(Operator Instructions)

At this time there are no additional questions. I would like to turn the program back over to our presenters.

Thank you very much, everyone. That concludes our conference call today. I will be around for follow-ups this afternoon. Have a nice day.

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